-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CWSu2+PXqHabFFtV0M93vFEsRohodLHpE5I7Iid9S72yKQb29KTqnVWqhKvh0DUs CoyCtU3qpKOtxYPFaDSxXw== 0000927016-99-001230.txt : 19990402 0000927016-99-001230.hdr.sgml : 19990402 ACCESSION NUMBER: 0000927016-99-001230 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SS&C TECHNOLOGIES INC CENTRAL INDEX KEY: 0001011661 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 061169696 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-28430 FILM NUMBER: 99580387 BUSINESS ADDRESS: STREET 1: 80 LAMBERTON RD STREET 2: CORPORATE PLACE CITY: WINDSOR STATE: CT ZIP: 06095 BUSINESS PHONE: 8602427887 MAIL ADDRESS: STREET 1: CORPORATE PLACE STREET 2: 705 BLOOMFIELD AVE CITY: BLOOMFIELD STATE: CT ZIP: 06002 10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________________ Commission File Number 000-28430 SS&C TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) Delaware 06-1169696 (State or other jurisdiction (I.R.S. Employer Identification Number) of incorporation or organization) 80 Lamberton Road Windsor, CT 06095 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (860) 298-4500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of March 23, 1999, the aggregate market value of the common stock held by non-affiliates of the Registrant was approximately $93,555,209 based on the closing sale price of $12.13 of the Registrant's Common Stock on the Nasdaq National Market on such date. As of March 23, 1999, 15,549,714 shares of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part of Report into Document which incorporated - ---------------------------------- ----------------------------- Portions of the Registrant's Items 6, 7, 7A & 8 of Part II 1998 Annual Report to Stockholders Items 10, 11, 12 & 13 of Part III Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held May 11, 1999 ================================================================================ SS&C TECHNOLOGIES, INC. TABLE OF CONTENTS Form 10-K Item Page - --------- ---- PART I Item 1. Business.................................................. 3 Item 2. Properties................................................ 10 Item 3. Legal Proceedings......................................... 10 Item 4. Submission of Matters to a Vote of Security Holders....... 10 Executive Officers of the Registrant...................... 10 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................... 11 Item 6. Selected Financial Data................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 12 Item 7A. Quantitative and Qualitative Disclosures about Market Risk......................................... 12 Item 8. Financial Statements and Supplementary Data............... 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 12 PART III Item 10. Directors and Executive Officers of the Registrant........................................... 13 Item 11. Executive Compensation................................... 13 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 13 Item 13. Certain Relationships and Related Transactions............................................. 13 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................................... 13 Signature page........................................... 14 FORWARD-LOOKING INFORMATION This Annual Report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. The important factors discussed under the caption "Certain Factors That May Affect Future Operating Results" in the Company's 1998 Annual Report to Stockholders and incorporated herein by reference, among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. -------------------- PTS, Macro Pricing, SKYLINE, PRO-JECT, HedgeWare and AdvisorWare are registered trademarks, SS&C, CAMRA, CAMRA 2000, LMS 2000, LMS 2000 SnapShots, Extend, PTS 2000, Total Return 2000, Antares 2000, CAMRA Debt and Derivatives 2000, Mabel, REMS and Finesse 2000 are trademarks, and SS&C Direct and Straight- Thru Processing are service marks of either SS&C Technologies, Inc., or one of its subsidiaries. All other trademarks or trade names referred to in this Annual Report are the property of their respective owners. 2 PART I ITEM 1. BUSINESS SS&C Technologies, Inc. ("SS&C" or the "Company") was organized as a Connecticut corporation in March 1986 and reincorporated in Delaware in April 1996. The Company is a leading provider of client/server-based financial software solutions, and related consulting services, designed to improve the efficiency and effectiveness of investment management, actuarial, and analytical functions across a broad range of financial institutions. The Company has developed a family of software products that provides a full range of mission-critical information management and analysis, trading, accounting, reporting, and compliance tools, to help high-level investment and actuarial professionals make informed, real-time decisions and automate many operational functions in today's increasingly complex and fast-moving financial markets. The Company's products are focused on improving the effectiveness of decision-making through open, fully integrated access to meaningful data provided on a timely basis. The Company provides products and services to more than 5,500 organizations worldwide and its customers include asset managers, insurance companies, banks, corporate treasuries, hedge funds, family offices, and government agencies, as well as real estate investment and property management. Recent Events On March 11, 1999, the Company acquired HedgeWare, Inc. ("HedgeWare"), a provider of portfolio, financial partnership, and tax accounting software and service support to hedge fund managers and traders, for an aggregate of 685,683 authorized but previously unissued shares of Common Stock of the Company. The transaction will be accounted for as a pooling of interests. Products and Services The Company offers a family of application software products designed to address the requirements of professionals in the financial services industry for flexible, scaleable, and secure analysis and reporting tools to support automation of the investment process. The Company's family of software products supports trading, accounting, reporting, and analysis requirements of a broad range of users within financial organizations, including senior executives, portfolio managers, actuaries, analysts, portfolio accountants, and traders. The following chart summarizes the Company's principal products and services and typical users:
Products and Services Typical Users - --------------------- ------------- Portfolio Management, Investment Accounting Portfolio managers and investment operations personnel CAMRA 2000 of asset managers, hedge funds, family wealth Total Return 2000 managers, investment advisory firms, insurance Mabel companies, pension funds, public funds, corporate CAMRA Debt and Derivatives 2000 treasuries, and banks HedgeWare AdvisorWare Trade Order Management Securities traders and portfolio managers of asset Antares 2000 managers, hedge funds, family wealth managers, pension funds, and other financial institutions Asset/Liability Management Life insurance company CEOs, CFOs, product managers, PTS 2000 and actuarial professionals Dynamic Financial Analysis CEOs, CFOs, and risk managers of property and casualty Finesse 2000 insurance companies and other risk-sensitive industries Loan Management Mortgage loan portfolio managers and loan service LMS 2000 businesses Real Estate Equity Management Real estate investment managers REMS SKYLINE for Windows PRO-JECT for Windows SKYLINE Enterprise Consulting Services and Outsourcing Services Asset management firms, insurance companies, pension Consulting Services funds, and banks SS&C Direct
3 The Company's software applications are compatible with Intel x86 platforms (IBM PC compatible or emulators) and a wide range of popular topologies, protocols, and network operating systems, including Ethernet, Token Ring, IPX/SPX, TCP/IP, NET BEUI, Novell Netware, Windows, Windows `95, Windows NT, Pathworks, and UNIX. The prices of the Company's software products vary depending upon the product features included and, in the case of the Company's CAMRA 2000 and LMS 2000 products, on the assets under management by the client. The Company's PTS 2000 software is available for purchase by site or as an individual CPU license. The Company's Antares 2000, Total Return 2000, Mabel system, and CAMRA Debt and Derivatives 2000 software is available for purchase by site or based on the number of concurrent users. Portfolio Management, Investment Accounting CAMRA 2000 The Company's Complete Asset Management, Reporting and Accounting ("CAMRA 2000") software supports the integrated management of asset portfolios by investment professionals operating across a wide range of institutional investment entities. CAMRA 2000 is a 32-bit, multi-user, integrated solution tailored to support the entire portfolio management function, and includes features to execute, account for, and report on all typical securities transactions. CAMRA 2000 is designed to account for all the activity of the investment operation and continually update through the processing of day-to-day securities transactions. The product accounts for both transactions and holdings and stores the results of most accounting calculations in its open relational database, thereby providing user-friendly, flexible data access as well as supporting data warehousing. In addition to storing transactions and holdings data on securities, cash, and foreign exchange forward contracts, CAMRA 2000 also stores data on custodians, brokers and broker budgets, analytical information, general ledger entries, alternative accounting basis, tax information, and other aspects of the investment operation. To facilitate further automation of such extensive stored data, the Company has developed interface capabilities for smooth information exchange with custodian banks, data providers, and analytic data services. Other CAMRA 2000 features include the following: Comprehensive Accounting and Reporting Capabilities. CAMRA 2000 supports four - ---------------------------------------------------- distinct yet interrelated accounting bases--GAAP, statutory, management, and tax--and has the flexibility to provide multiple alternative accrual methods, multiple sales methods, average cost or tax lot accounting, and multiple amortization methods. Support of Trading Transactions. CAMRA 2000 supports a wide variety of - -------------------------------- investment and accounting transactions, ranging from buy and sell to short and cover, swap, put, call, redemption, return of capital, settlement, account transfer, and portfolio transfer. All transactions are recorded on a real-time basis, permitting immediate enterprise-wide access to the most current portfolio information by authorized users. Multi-currency Processing. CAMRA 2000 automatically calculates transaction and - -------------------------- translation values in accordance with applicable accounting and industry conventions, supports calculation of market, accounting, and foreign exchange gains and losses, and provides a full foreign exchange trading capability with forward pricing, while taking into account such critical parameters as global calendars (with weekends and holidays defined by countries), multiple-based currencies, and required rounding techniques. Regulatory Compliance. CAMRA 2000 includes standard reports to meet the annual - ---------------------- and quarterly regulatory reporting requirements of insurance organizations as promulgated by the National Association of Insurance Commissioners (NAIC). CAMRA 2000 also supports regulatory reporting requirements of various other regulatory agencies such as the Securities and Exchange Commission and the Office of the Comptroller of the Currency. CAMRA 2000 is designed to facilitate seamless integration with its software modules. Modules to CAMRA 2000 are available for performance measurement using computations consistent with Association for Investment Management and Research (AIMR) standards, portfolio compliance, net asset value computations for mutual funds, optimization of 4 trading in mortgage-backed securities on a to-be-announced (TBA) basis, client fee billing, portfolio rebalancing, and interfacing with various products of Bloomberg Trade Book, Open Bloomberg, Interactive Data Corporation, and other analytic data services. Total Return 2000 Total Return 2000 is a portfolio management and partnership accounting system oriented toward the hedge fund and private wealth markets. It is a multicurrency system which, like CAMRA 2000, is designed to provide securities accounting and reporting for businesses with high transaction volumes. Partnership accounting, including the generation of tax forms 1065 and K-1, are provided through Total Return 2000's TR1065 module. Total Return 2000 also incorporates a comprehensive general ledger. Performance measurement using computations consistent with AIMR standards is also provided through a module to the system. Other modules to Total Return 2000 provide for tax reporting and trust reporting. Total Return 2000 also has interfaces with brokers, pricing services, data services, and front-end trading systems. Mabel Mabel is a portfolio management system from the Company's Netherlands-based Mabel subsidiary that is used by clients throughout Europe and the Caribbean. Mabel's functionality includes accounting and reporting, performance measurement consistent with AIMR standards, net asset value calculations for mutual funds, and support for stock brokering and custodial services. The Mabel system is designed to automatically map data to and from messages in the S.W.I.F.T. (Society for Worldwide Interbank Financial Communications) format. CAMRA Debt and Derivatives 2000 CAMRA Debt and Derivatives 2000 is a PC/LAN-based debt and derivative portfolio management system from the Company's Savid subsidiary, acquired in April 1998. CAMRA Debt and Derivatives 2000 is a modularized application designed to process and analyze all activities related to debt and derivative portfolios: swaps, caps, floors, collars, FRAs, FX, futures, and options, as well as the issuance of short-, medium-, and long-term debt. AdvisorWare AdvisorWare provides for multiple modules that process a unified flow of information, including communications, research, portfolio management, trading and operations, as well as portfolio accounting, financial accounting and tax accounting. AdvisorWare features complete report writing capabilities across all modules; seamless integration with all Microsoft Office products, the ability to retain multiple cost basis; an extensive user security system; and multi- user, client/server, Windows 95 or Windows NT operating systems. HedgeWare HedgeWare is a comprehensive data management tool from the Company's Hedgeware subsidiary specifically designed to enable Investment Partnerships to consolidate the tasks of portfolio accounting, financial (partnership) accounting, and tax accounting. HedgeWare's integrated portfolio, financial, and tax modules are designed to facilitate a seamless flow of information from trade entry, through accounting, tax preparation, and management reporting. HedgeWare's multi-user relational database architecture and purpose-built user interface provide real-time information management, significantly reducing time spent on administrative tasks. HedgeWare also allows for export to most major spreadsheet and database packages, and can provide extensive import capabilities. Trade Order Management Antares 2000 Antares 2000 is a comprehensive, real-time, event-driven trading and profit and loss reporting system designed to integrate trade modeling with trade order management. Modeling scenarios, including trader-defined formulas, can be customized and stored in a familiar spreadsheet environment. Antares 2000 is designed to transfer data seamlessly from modeling scenarios to trade orders. In Antares 2000, trades can be managed in the multiple steps of trade ordering, filling the order, and approving the trade, or recorded in a single step. Antares 2000 can also allocate trades across accounts at any step in the process. Trade blotters in Antares 2000 can be customized depending on client, product type, or trader. Full position accounting is provided across all types of securities. Antares 2000 also accepts real-time pricing updates and can display real-time positions and profit and loss statements. Portfolio rebalancing can be set to occur automatically. As Antares 2000 uses an open relational database, customized reporting is supported through its own report writing facilities, or through other third-party reporting tools. Antares 2000 also includes functionality to automate the processing of options, futures, and forward currency contracts. 5 For some financial institutions, the Antares 2000 trading system may serve as a comprehensive, stand-alone investment management system. For financial institutions with more accounting and historical reporting requirements, Antares 2000 may serve as the front-end trading system connected to CAMRA 2000, Total Return 2000, or other portfolio management investment accounting systems. Asset/Liability Management PTS 2000 PTS 2000 provides an economic model of insurance assets and liabilities, generating option-adjusted cash flows to reflect the complex sets of options and covenants frequently encountered in insurance contracts or comparable agreements. PTS 2000 includes the following features: Large-Scale Corporate Simulation Models. The Company and certain significant - ---------------------------------------- clients have implemented a number of complex models of whole-company financial performance. Unlike simpler systems, PTS 2000 maintains an internal architecture patterned after the structure of insurance companies themselves, making full- scale corporate models practical. Such corporate models are used to facilitate capital structure decisions, revealing and measuring overall financial performance, and guiding overall risk management practice. Option Pricing. The PTS 2000 option-pricing model provides option-adjusted - --------------- valuation of assets and liabilities under a consistent conceptual framework. The PTS 2000 option pricing model explicitly considers interest-sensitive embedded options, providing valid interest rate risk analysis, using price behavior curves that graphically depict asset/liability performance over shifts in the interest rate term structure. Macro Pricing. The Company's proprietary Macro-Pricing algorithm recognizes the - -------------- complex relationships within contemporary financial intermediaries and provides a matrix of possible product and production quota options in conformity with the profit expectations of the client. Dynamic Financial Analysis Finesse 2000 The Company's Finesse 2000 system is a Dynamic Financial Analysis tool designed and developed in cooperation with Ernst & Young LLP, to model operating results, gauge the effects of reinsurance and validate pricing, value business transactions such as mergers and acquisitions, measure the impact of new products, predict cash flows, analyze the impact of investment decisions, and improve strategic planning. Finesse 2000 generates iterative, computer-simulated scenarios in response to events that may have an impact on a client's business. The results of this iterative process are stored in Finesse 2000's "virtual general ledger," which mimics the financial accounting that would occur if these scenarios were to occur. All simulated results are recorded and can be easily viewed on Finesse 2000's "graphical palette," an on-line facility that visually depicts the likely occurrence of one or more specific events. Loan Management LMS 2000 LMS 2000 enables mortgage professionals to process, analyze and report on a comprehensive basis, information regarding their mortgage loan portfolios. LMS 2000 is a 32-bit, multi-user, integrated solution operating on a client/server platform, which eliminates the need for separate, independent systems within the mortgage loan area. LMS 2000, which can be integrated with data stored in the Company's CAMRA 2000 and PTS 2000 products, provides the following features: Application and Commitment Processing. LMS 2000 supports the processing of - -------------------------------------- commercial and residential mortgage loans, providing on-line access to critical evaluative information, including credit history, appraisals, ratio, broker information, duration, convexity, average life and discounted cash flow valuation, permitting loan recommendations to be generated quickly, consistently, and easily. Accounting and Servicing Support. LMS 2000 supports accurate and consistent - --------------------------------- servicing of loans, including general ledger entries at the sub-portfolio level, with a direct interface to the corporate general ledger. LMS 2000 also maintains appraisals and operating statements at the proper level to support loan and portfolio management. Comprehensive Reports. LMS 2000 generates and supports a wide range of - ---------------------- accounting, servicing, and management reports. All reports can be viewed on- line, downloaded or printed. REO. LMS 2000 provides a smooth transition from a loan to an equity asset, - ---- establishes/monitors budgets, maintains depreciation records and processes REO- specific transactions. 6 Executive Summary. LMS 2000 SnapShots captures a complete overview of a - ----------------- selected portfolio, making essential information immediately available. LMS 2000 SnapShots also exports into Microsoft Excel or Lotus. Interested Party Directory. LMS 2000's Interested Party Directory serves as a - --------------------------- common source for all business entities, providing comprehensive borrower financial exposure analysis, relationship tracking and business functionality exposure. Extend. LMS 2000's unique Extend utility allows users to customize their - ------ database by creating screens and database fields to enter, review, and report information. It attaches to over 25 areas of the system. Imaging and Mapping. LMS 2000 enables users to attach image files to multiple - ------------------- areas of the system for document and collateral imaging and tracking, and plots properties onto on-line geographic maps, facilitating analyses at both a general and a property-specific detailed level. Real Estate Equity Management Real Estate Management System (REMS) is an integrated suite of software applications, including Real Estate Financials, Property Accounting, Financial Modeling, Registry, Property Operations, and Leasing Management - designed around the functional areas of real estate organizations to provide a single solution for managing information. SKYLINE for Windows is property management software that manages all aspects of office/industrial, residential, and retail properties, even those which are decentralized geographically. SKYLINE also features detailed, informative reports. SKYLINE Enterprise is a similar system, but capable of handling larger amounts of data required for the management of a large amount of property holdings. PRO-JECT for Windows is property valuation software that calculates the value of any combination of office, industrial, retail, apartment and mixed-use property types. It can perform sophisticated sensitivity analysis on property assumptions, and produce detailed reports such as present value and consolidated cash flow reports. Consulting Services and Outsourcing Services Consulting Services Building upon the capability and flexibility of its software products, the Company offers a range of professional services to assist clients in implementing the Company's software products and meeting their portfolio management needs. To facilitate successful product implementation, the Company's consultants assist clients with initial installation of a system, conversion of the client's historical data, and ongoing training and support. The Company's team works closely with the client to ensure smooth transition and operation of the Company's systems. The Company believes its commitment of dedicated professionals to facilitate the transition process strengthens its relationship with the client, provides the Company with valuable information regarding client requirements and offers the opportunity for sales of additional Company products and services to the client. The Company's consultants have a broad range of experience in the financial services industry and include certified public accountants, chartered financial analysts, mathematicians and professionals from the asset management, real estate, investment, insurance and banking industries. In addition, the Company offers actuarial consulting services to its insurance company and other financial institution clients. The Company believes its commitment to professional services facilitates the adoption of the Company's software products across its target markets. SS&C Direct For those clients wishing to outsource certain portfolio accounting, reporting and analysis functions, the Company also provides comprehensive outsourcing services through its SS&C Direct operating unit. The Company's consultants initially work with a client to research and evaluate data sources, implement custodian and pricing interfaces and determine reporting requirements and timing. The Company provides its clients with accurate, processed data on a timely basis, enabling investment professionals to spend their time analyzing data and making investment decisions rather than managing the back-office investment operations. The features of the Company's outsourcing services include: (i) customized access rights to provide on-line access on a per-client basis; (ii) regular holdings reports, also available on-line, and complete regulatory support; (iii) disk mirroring, daily back-up of the system and other data protection measures; or; and (iv) disaster recovery hot site services. 7 Product Support The Company believes its high level of service and support is critical to its success, and an important competitive advantage. Further, the Company believes a close and active service and support relationship is important to client satisfaction, and provides the Company with important information regarding evolving client requirements. The Company provides each of its significant clients with a dedicated client support representative whose primary responsibility is to resolve questions and concerns and act as a liaison between the client and the Company. In addition, the Company provides direct telephone support during extended business hours. Additional hours are available during peak periods, and the Company uses the Internet, electronic bulletin boards and other forms of electronic data distribution that provide clients with the latest information regarding its products. The Company also provides periodic maintenance releases of licensed software to its clients, including regulatory updates, generally during the fourth quarter, to enable them to meet industry reporting obligations and other processing requirements as they evolve. The Company's service and support activities are supplemented by comprehensive training, including introductory training courses for new users. Clients The Company's clients include a wide range of financial institutions and other organizations that require a full range of information management and analysis, accounting, actuarial, reporting, and compliance software on a timely and flexible basis, and include asset managers, insurance companies, banks, corporate treasuries, hedge funds, family offices, real estate asset managers, and government agencies. The Company provides products and services to more than 5,500 organizations worldwide. Sales and Marketing The Company believes a direct sales organization is essential to the successful implementation of its business strategy, given the complexity and importance of the operations and information the Company's products are designed to manage, and the extensive regulatory and reporting requirements of its clients. The Company's dedicated direct sales and support staff, which is supplemented by extensive ongoing product and sales training, is organized by business unit and situated in the Company's various sales offices. The Company also uses telemarketing to support sales of its real estate equity products. The Company's marketing personnel are responsible for evaluating and developing market opportunities and providing sales support. The Company's marketing activities include generation of client leads, targeted direct mail campaigns, seminars, advertising, trade shows, conferences and public relations efforts. The marketing department also supports the sales force with appropriate documentation or electronic materials for use during the sales process. Product Development; Research and Development; Backlog The Company believes it must introduce new products and features into the market on a regular basis to maintain its competitive advantage. To meet these goals, the Company uses multidisciplinary teams of highly trained finance, accounting, mathematical, actuarial, software and investment personnel, and has invested heavily in developing a comprehensive product analysis process to meet rigorous requirements for product functionality and quality across its target markets. The Company's research and development engineers work closely with the Company's marketing and support personnel to assure product evolution reflects developments in the marketplace and trends in client requirements. Historically, the Company has issued a major functional release of its core products during the third quarter of each fiscal year, including functional enhancements, as well as an annual fourth quarter release to reflect evolving regulatory changes in time to meet clients' year-end reporting requirements. Although the Company historically has met its scheduled dates for product releases and enhancements, software development is characterized by unanticipated delays, and there can be no assurance that the Company will be able to maintain future scheduled release dates as planned. Further, there can be no assurance that the Company's new product releases and product enhancements will adequately address the needs of the marketplace or will not contain "bugs" which could cause delays in product introduction or shipments or, if discovered in the future, require modification of the Company's products. 8 As of December 31, 1998, the Company's research and development staff consisted of 123 employees. The Company's total expenses for research and development, excluding purchased in-process research and development, for the years ended December 31, 1996, 1997 and 1998 were $8.4 million, $10.2 million and $17.4 million, respectively. Backlog is not a significant factor in the Company's business. Competition The market for financial services software is competitive, rapidly evolving, and highly sensitive to new product introductions and marketing efforts by industry participants. The market is also highly fragmented and served by numerous firms, many of which serve only their respective local markets or specific customer types, and much of the Company's competition stems from information systems or timesharing services developed and serviced internally by the MIS departments of financial services firms. The Company currently faces direct competition in various segments of the financial services industry from Thomson Financial, SunGard Data Systems, Inc., Princeton Financial Systems (a subsidiary of State Street Bank and Trust Company), Financial Models Company Inc., DST Systems, Inc., and Advent Software, Inc. The Company believes none of its competitors currently competes against it in all of its target industry segments, although there can be no assurance that one or more may not compete against the Company in the future in additional industry segments. Many of the Company's current and potential future competitors have significantly greater financial, technical, and marketing resources, generate higher revenues, and have greater name recognition than does the Company. There can be no assurance that the Company's current or potential competitors will not develop products comparable or superior to those developed by the Company or adapt more quickly than the Company to new technologies, evolving industry trends or changing client requirements. It is also possible that alliances among competitors may emerge and rapidly acquire significant market share. Increased competition may result in price reductions, reduced gross margins and loss of market share, any of which would materially adversely affect the Company's business, financial condition, and results of operations. The Company believes the principal competitive factors in its industry include product performance and functionality, ease of use, scalability, ability to integrate external data sources and processing systems, product and company reputation, client service and support, and price. Although the Company believes it currently competes effectively with respect to such factors, there can be no assurance that the Company will be able to maintain its competitive position against current and potential competitors. Proprietary Rights The Company primarily relies on a combination of copyright, trademark, and trade secret laws and license agreements to establish and protect proprietary rights of its products. The source code for the Company's products is protected as both a trade secret and an unpublished copyrighted work. In addition, the Company generally enters into confidentiality and/or license agreements with its employees, distributors, clients, and potential clients and limits access to, and distribution of, its software, documentation, and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company's products or technology without authorization or to develop similar technology independently. In addition, effective copyright and trade protection may be unavailable or limited in certain foreign countries. In January 1996, the Company licensed the use of certain of its source code to General American Life Insurance Company and Conning Asset Management Company, affiliates of certain stockholders of the Company. Because the software development industry is characterized by rapid technological change, the Company believes factors such as technological and creative skills of its personnel, new product developments, frequent product enhancements, name recognition, and reliable service and support are more important to establishing and maintaining a leadership position than legal protections of its technology. Employees As of December 31, 1998, the Company had 462 full-time employees, consisting of 123 employees in research and development, 93 employees in consulting and services, 57 employees in sales and marketing, 58 employees in client support, 45 employees in finance and administration, and 86 employees in the Company's international operations. None of these employees is covered by any collective bargaining agreements. The Company believes its relationship with its employees is good. The future success of the Company will depend upon its ability to attract and retain qualified personnel. Competition for such personnel is often intense, and there can be no assurance that the Company will be able to attract and retain adequate numbers of qualified personnel in the future. 9 ITEM 2. PROPERTIES The Company leases its corporate offices, consisting of 54,000 square feet of office space, in Windsor, Connecticut. It relocated from a building it continues to own in Bloomfield, Connecticut during the second quarter of 1998. The initial lease term is for ten years and the Company has the right to extend the lease for one additional term of five years. The lease requires annual payments of $717,000 for each of the first five years and annual payments of $757,000 for each of the remaining five years. In support of direct sales and support operations, the Company utilizes facilities and offices in ten locations in the United States and Canada and also has offices in London, England; Amsterdam, Netherlands; and Kuala Lumpur, Malaysia. ITEM 3. LEGAL PROCEEDINGS On March 18, 1997, Elery G. Montagna and Marjory G. Montagna filed a purported class action lawsuit in the United States District Court for the Southern District of New York (the "New York Complaint") against the Company and certain of its executive officers, as well as against BT Alex. Brown Incorporated (as successor to Alex. Brown & Sons Incorporated, "Alex. Brown") and Hambrecht & Quist LLC ("Hambrecht & Quist"), the lead managers of the Company's initial public offering. On April 8, 1997, Marc A. Feiner filed a purported class action lawsuit in the United States District Court for the District of Connecticut (the "Connecticut Complaint") against the Company, its directors and certain of its executive officers, as well as against Alex. Brown and Hambrecht & Quist. On July 8, 1997, Marc A. Feiner, Joseph Aogiere, Arthur S. Davis, Theodore S. Davis, James Gregory, Brian Kreidler, Daniel Kreidler, Robert Miller, Elery Montagna, Marjory Montagna and Gilda Shapiro Trust filed a Consolidated Amended Class Action Complaint in the United States District Court for the District of Connecticut (the "Consolidated Complaint") in which the New York Complaint and the Connecticut Complaint were consolidated and amended. The Consolidated Complaint claims that the Prospectus for the Company's initial public offering allegedly made material misrepresentations in violation of Sections 11 and 12(2) of the Securities Exchange Act of 1933. The plaintiffs are seeking an undetermined amount of damages and costs and expenses of the litigation. The plaintiffs filed a motion to certify a class in this matter on May 29, 1998. The Company filed its opposition to class certification on September 25, 1998, and Alex. Brown and Hambrecht & Quist filed a separate opposition on September 29, 1998. The plaintiffs filed a reply brief on the class certification issue on October 26, 1998, and the defendants filed surreply briefs on November 10, 1998. The court has not yet ruled on the motion for class certification. The matter is now in the discovery phase. The Company believes it has meritorious defenses to the claims made in the lawsuit and intends to contest the Consolidated Complaint vigorously. Although the amounts claimed may be substantial, management cannot predict the ultimate outcome or estimate the potential loss, if any, related to these claims. Management believes that the disposition of this matter will not have a material adverse effect on the Company's consolidated financial position. However, the adverse resolution of one or more of these claims could materially affect the Company's consolidated results of operations or liquidity in any one annual or quarterly reporting period. From time to time, the Company is subject to certain legal proceedings and claims that arise in the normal course of its business. In the opinion of management, the Company is not a party to any other litigation that it believes could have a material effect on the Company or its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders during the fourth quarter of the fiscal year covered by this report. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows: Name Age Position - ---- --- -------- William C. Stone 43 President, Chief Executive Officer and Chairman of the Board of Directors Anthony R. Guarascio 45 Senior Vice President, Chief Financial Officer and Treasurer David A. Varsano 37 Senior Vice President and Chief Technology Officer Marc W. Zimmerman 44 Senior Vice President, Mergers & Alliances Steven M. Helmbrecht 36 Senior Vice President, International Michael Morini 36 Senior Vice President, Asset Management 10 William C. Stone founded the Company in 1986 and has served as Chairman of the Board of Directors and Chief Executive Officer since the Company's inception. He has also served as the Company's President from inception through April 1997 and since March 1999. Prior to founding the Company, he directed the financial services consulting practice of KPMG Peat Marwick LLP in Hartford, Connecticut and was Vice President of Administration and Special Investment Services at Advest, Inc. Anthony R. Guarascio is Senior Vice President, Chief Financial Officer and Treasurer of the Company. Mr. Guarascio joined the Company in October 1998, after serving as Vice President, Finance and Administration and Chief Financial Officer for Executone Information Systems, Inc., a company specializing in integrated voice and data communications, from January 1994 to September 1998. Prior thereto he was Vice President and Corporate Controller since January 1990. David A. Varsano is Senior Vice President and Chief Technology Officer of the Company. Mr. Varsano joined the Company in September 1995, after serving as Vice President at Dunn & Bradstreet Software, where he was responsible for the client/server platform and decision support business from March 1994 to September 1995. Marc W. Zimmerman is Senior Vice President, Mergers and Alliances of the Company. From August 1995 to March 1999, Mr. Zimmerman served as Senior Vice President, Strategic Sales of the Company. From 1993 to 1995, he served as Vice President of Market Investment Solutions, Inc., an investment software and consulting services provider. Steven M. Helmbrecht is Senior Vice President, International of the Company. From October 1997 to March 1999, Mr. Helmbrecht served as Senior Vice President, Europe, the Middle East and Africa of the Company. From November 1996 to October 1997, Mr. Helmbrecht served as Vice President, International of the Company. From July 1993 to November 1996, Mr. Helmbrecht served as a sales representative for the Company. Michael Morini is Senior Vice President, Asset Management of the Company. Mr. Morini joined the Company in September 1997, after serving as the Senior Vice President of Sales and Professional Services for Advent Software, Inc., a provider of computer software and services, from October 1994 to August 1997. From January 1994 to October 1994, he served as Vice President/General Manager of the Northeast for American Software, Inc. Each officer serves at the discretion of the Board of Directors. There are no family relationships among any of the directors and executive officers of the Company. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has been trading on the Nasdaq National Market under the symbol "SSNC" since the Company's initial public offering on May 31, 1996. The following table sets forth, for the fiscal periods indicated, the high and low sales prices per share of Common Stock as reported on the Nasdaq National Market: FISCAL 1998 FISCAL 1997 Price Range Price Range --------------- ------------- Quarter High Low High Low ------- ------ ------ ------ ------ First $19.25 $ 9.50 $ 8.00 $ 5.13 Second 24.25 14.25 7.25 5.13 Third 23.75 10.88 11.38 5.63 Fourth 14.75 8.75 12.38 9.50 There were 63 stockholders of record of the Company's Common Stock as of March 23, 1999. The number of stockholders of record may not be representative of the number of beneficial owners because many shares are held by depositories, brokers or other nominees. 11 The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain earnings, if any, to support its growth strategy and does not anticipate paying cash dividends in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Company's Board of Directors after taking into account various factors, including the Company's financial condition, operating results, current and anticipated cash needs, and plans for expansion. The following information relates to the use of proceeds from the Company's initial public offering of Common Stock (the "Offering"). The effective date of the Company's Registration Statement on Form S-1 (File No. 333-3094) (the "Registration Statement") relating to the Offering, for which the following use of proceeds information is being disclosed, was May 30, 1996. From the effective date of the Registration Statement through December 31, 1998, the Company has used the net offering proceeds to the Company as follows: Corporate move and equipment purchases $ 7,272,000 Acquisition of other business $ 5,333,000 Repayment of indebtedness $ 3,141,000 Working capital $ 5,038,000 Marketable securities $32,016,000 All of the above-listed payments were direct or indirect payments to persons other than: directors, officers, general partners of the Company or their associates; persons owning ten percent or more of any class of equity securities of the Company; or affiliates of the Company. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is contained under the caption "Selected Financial Data" appearing in the Company's 1998 Annual Report to Stockholders (the "1998 Annual Report") and is incorporated herein by this reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing in the 1998 Annual Report and is incorporated herein by this reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is contained under the caption "Market Risks" appearing in the 1998 Annual Report and is incorporated herein by this reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is contained in the Consolidated Financial Statements and related footnotes appearing in the 1998 Annual Report and is incorporated herein by this reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item 10 is set forth in the proxy statement to be provided to stockholders in connection with the Company's 1999 Annual Meeting of Stockholders (the "Proxy Statement") under the headings "Directors and Nominees for Director" and "Section 16(a) Beneficial Ownership Reporting Compliance," which information is incorporated herein by reference. The name, age and position of each executive officer of the Company is set forth under the heading "Executive Officers of the Registrant" in Part I of this Annual Report on Form 10-K, which information is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item 11 is set forth in the Proxy Statement under the headings "Compensation of Executive Officers" and "Director Compensation," which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item 12 is set forth in the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management," which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item 13 is set forth in the Proxy Statement under the heading "Certain Transactions," which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents Filed as a Part of this Form 10-K: 1. Financial Statements. The Consolidated Financial Statements are included in the 1998 Annual Report, portions of which are filed as an exhibit to this Annual Report on Form 10-K. The Consolidated Financial Statements include: Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Cash Flows, Consolidated Statements of Changes in Stockholder's Equity, and Notes to Consolidated Financial Statements. 2. Exhibits. The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed as part of this Annual Report on Form 10-K. (b) Reports on Form 8-K: The Company filed no reports on Form 8-K during the fourth quarter of 1998. 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SS&C Technologies, Inc. By: /s/ William C. Stone ---------------------- William C. Stone President, Chief Executive Officer and Chairman of the Board of Directors Date: March 31, 1999 14 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ William C. Stone President, Chief Executive March 31, 1999 - ------------------------- Officer and Chairman of William C. Stone the Board of Directors (Principal Executive Officer) /s/Anthony R. Guarascio Senior Vice President, Chief March 31, 1999 - ------------------------- Financial Officer and Treasurer Anthony R. Guarascio (Principal Financial and Accounting Officer) /s/ David L. Blankenship Director March 31, 1999 - ------------------------- David L. Blankenship Director - ------------------------- David W. Clark, Jr. /s/ Joseph H. Fisher Director March 31, 1999 - ------------------------- Joseph H. Fisher /s/ Stephen P. Reynolds Director March 31, 1999 - ------------------------ Stephen P. Reynolds /s/ Jonathan M. Schofield Director March 31, 1999 - ------------------------- Jonathan M. Schofield /s/ William W. Wyman Director March 31, 1999 - ------------------------- William W. Wyman 15 EXHIBIT INDEX Exhibit No. Description - ------- ----------- 2.1 Asset Purchase Agreement, dated as of March 20, 1998, by and among the Registrant, AEGON USA Realty Advisors, Inc. and Quantra Corporation is incorporated herein by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K, dated March 20, 1998 (File No. 000-28430) 2.2 Stock Purchase Agreement, dated as of April 9, 1998, by and among the Registrant, Savid International, Inc., The Savid Group, Inc. and Diane Cossin, is incorporated herein by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K, dated April 9, 1998 (File No. 000-28430) 3.1 Amended and Restated Certificate of Incorporation of the Registrant is incorporated herein by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1, as amended (File No. 333-3094) (the "Form S-1") 3.2 Amended and Restated By-Laws of the Registrant is incorporated herein by reference to Exhibit 3.4 to the Form S-1 4 Specimen Certificate for shares of Common Stock, $.01 par value per share, of the Registrant is incorporated herein by reference to Exhibit 4 to the Form S-1 10.1* 1993 Stock Option Plan is incorporated herein by reference to Exhibit 10.1 to the Form S-1 10.2* 1994 Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 000-28430) 10.3* 1996 Director Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 000-28430) 10.4* 1998 Stock Incentive Plan is incorporated herein by reference to Annex A to the Registrant's Definitive Schedule 14A filed April 6, 1998 (File No. 000-28430) 10.5* Employment Agreement between the Registrant and William C. Stone, dated March 28, 1996, is incorporated herein by reference to Exhibit 10.5 to the Form S-1 10.6 Stock and Note Purchase Agreement, dated September 25, 1990, as amended on September 20, 1994, among the Registrant and certain stockholders of the Registrant is incorporated herein by reference to Exhibit 10.10 to the Form S-1 10.7 Series B Preferred Stock Purchase Agreement, dated September 20, 1994, among the Registrant and certain stockholders of the Registrant is incorporated herein by reference to Exhibit 10.11 to the Form S-1 10.8 Series C Preferred Stock Purchase Agreement, dated March 31, 1995, among the Registrant and certain stockholders of the Registrant is incorporated herein by reference to Exhibit 10.12 to the Form S-1 10.9+ Software License Agreement between the Registrant and Conning Asset Management Company, dated January 27, 1996, is incorporated herein by reference to Exhibit 10.15 to the Form S-1 10.10 Reseller Agreement between the Registrant and PFX(USA), Inc., dated June 22, 1993, is incorporated herein by reference to Exhibit 10.16 to the Form S-1 10.11 Lease Agreement, dated September 23, 1997, by and between the Registrant and Monarch Life Insurance Company, as amended, is incorporated herein by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 000-28430) 13 Portions of the Registrant's 1998 Annual Report to Stockholders (which is not deemed to be "filed" except to the extent that portions thereof are expressly incorporated by reference in this Annual Report on Form 10-K) 21 Subsidiaries of the Registrant 23 Consent of PricewaterhouseCoopers LLP 27 Financial Data Schedule for the year ended December 31, 1998 _______________ * Management contract or compensatory plan or arrangement filed herewith in response to Item 14(a)(3) of the Instructions to the Annual Report on Form 10-K. + Confidential treatment previously granted as to certain portions of such document. EX-13 2 PORTIONS OF ANNUAL REPORT Exhibit 13 ---------- SS&C Technologies, Inc. and Subsidiaries Selected Financial Data
Year Ended December 31, ----------------------------------------------- 1998(1) 1997(2) 1996 1995(3) 1994 ----------------------------------------------- (in thousands, except per share data) ------------------------------------------------ Statement of Operations Data: Revenues: Software licenses $ 34,479 $22,948 $16,352 $11,983 $ 5,714 Maintenance and other recurring 19,531 10,707 7,007 4,548 2,321 revenues Professional services 15,403 8,495 8,175 6,780 4,733 ----------------------------------------------- Total revenues 69,413 42,150 31,534 23,311 12,768 ----------------------------------------------- Cost of revenues: Software licenses 3,825 1,434 1,245 784 197 Maintenance and other recurring revenues 7,444 4,620 2,257 1,248 1,125 Professional services 9,703 4,585 5,402 4,740 1,957 ----------------------------------------------- Total cost of revenues 20,972 10,639 8,904 6,772 3,279 ----------------------------------------------- ----------------------------------------------- Gross profit 48,441 31,511 22,630 16,539 9,489 ----------------------------------------------- Operating expenses: Selling and marketing 15,058 11,636 9,023 5,635 3,141 Research and development 17,440 10,245 8,414 7,720 3,388 General and administrative 8,361 8,162 5,338 3,099 1,562 Write-off of purchased in-process research and development 5,878 861 - 7,889 - ----------------------------------------------- Total operating expenses 46,737 30,904 22,775 24,343 8,091 ----------------------------------------------- Operating income (loss) 1,704 607 (145) (7,804) 1,398 Interest income, net 2,020 2,218 914 57 20 Other income 363 - 158 - - ----------------------------------------------- Income (loss) before income taxes 4,087 2,825 927 (7,747) 1,418 Provision (benefit) for income taxes 1,225 1,029 414 (3,024) 661 ----------------------------------------------- Net income (loss) $ 2,862 $ 1,796 $ 513 $(4,723) $ 757 =============================================== Basic earnings (loss) per share $ 0.20 $ 0.13 $ 0.05 $ (0.74) $ 0.13 =============================================== Basic weighted average number of common shares outstanding 14,456 13,540 10,571 6,351 5,645 =============================================== Diluted earnings (loss) per share $ 0.19 $ 0.13 $ 0.04 $ (0.74) $ 0.12 =============================================== Diluted weighted average number of common and common equivalent shares outstanding 15,406 13,937 12,617 6,351 6,307 =============================================== December 31, ----------------------------------------------- 1998 1997 1996 1995 1994 ----------------------------------------------- (in thousands) Balance Sheet Data: Cash and cash equivalents $ 12,909 $ 5,001 $36,286 $1,594 $ 3,084 Working capital 63,332 57,194 53,502 3,552 3,441 Total assets 103,997 85,308 77,613 22,788 11,912 Long-term obligations 125 250 377 2,688 472 Redeemable convertible preferred stock - - - 750 750 Stockholders' equity 82,838 67,751 64,168 9,493 5,121
(1) On March 20, 1998, the Company purchased substantially all of the assets of Quantra Corporation for an aggregate purchase price of 546,019 shares of the Company's common stock, $2.3 million in cash and the assumption of certain liabilities. On April 9, 1998, the Company acquired Savid International Inc. and The Savid Group, Inc. for a purchase price of $861,000. See Notes 2 and 13 of Notes to the Company's Consolidated Financial Statements. (2) On November 14, 1997, the Company acquired Mabel Systems BV for a purchase price of $2.5 million. On December 31, 1997, the Company purchased all the outstanding stock of Shepro Braun Systems, Inc. for 1.0 million shares of the Company's common stock. See Notes 2 and 13 of Notes to the Company's Consolidated Financial Statements. (3) On March 31, 1995, the Company purchased substantially all of the assets of Chalke Incorporated for a purchase price of $12.7 million. Page 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a leading provider of client/server-based software solutions, and related consulting services, designed to improve the efficiency and effectiveness of the investment management function within a broad range of organizations in the financial services industry. The Company was founded in 1986 to provide consulting services to support the investment management functions of financial service organizations. In 1989, as a result of a joint development arrangement, the Company introduced its first product, CAMRA ("Complete Asset Management, Reporting and Accounting"), a DOS-based program designed to address the management of asset portfolios by mid- and large-size financial institutions. In 1993, the Company released its first Windows-based version of CAMRA and has continued to enhance the level of CAMRA's functionality each year thereafter. In 1996, the Company released CAMRA 2000, a fully functional 32-bit Windows-based version of CAMRA. A majority of the Company's revenues historically have been derived from sales of the CAMRA system. In 1993, the Company introduced its FILMS ("Fully Integrated Loan Management System") product, enabling mortgage professionals to process, analyze and report on a comprehensive basis, information regarding their loan portfolios. On November 14, 1997, the Company acquired all of the outstanding capital stock of Mabel Systems BV ("Mabel"), a supplier of investment management software to the financial services industry. Mabel's software product provides accounting, reporting, performance measurement and net asset value calculations for mutual funds and support for stock brokering and custodial services. On December 31, 1997, the Company acquired all of the outstanding stock of Shepro Braun Systems, Inc. ("Shepro"), a provider of software and consulting services to the investment management and financial services marketplace. Shepro's primary product, Total Return, is a portfolio management and partnership accounting system oriented toward the hedge fund and private wealth markets. On March 20, 1998, the Company completed its acquisition of substantially all of the assets of the Quantra Corporation ("Quantra"). The Quantra products support loan and real estate management systems. On April 9, 1998, the Company acquired Savid International Inc. and The Savid Group, Inc. (together, "Savid"). The Savid products are designed to process and analyze all activities related to debt and derivative portfolios. On May 1, 1998, the Company invested approximately $2.2 million in cash plus an exclusive distribution agreement for the CAMRA product in exchange for a 24% ownership interest in Caminus Energy Ventures, LLC ("CEV"), a limited liability company organized to provide comprehensive consulting services and software technology to the power and gas trading business. The exclusive distribution agreement allows CEV to sell the Company's software products within energy-related markets over a five-year period based on certain terms and conditions. The Company commenced the reporting of its share of CEV's earnings on a two-month lag beginning in the quarter ended September 30, 1998. In the third quarter of fiscal 1998, the Company recognized a $0.5 million non- operating loss, net of taxes including its proportionate share of a write-off of in-process research and development attributable to CEV's acquisition of two companies as well as the operating results of CEV for the three-month period ended July 31, 1998. In the fourth quarter of 1998, the Company sold its interest in CEV for $2.3 million and retained a warrant to purchase 4.5% of CEV. The Company recorded a gain of $0.5 million on this sale in the fourth quarter of 1998. In addition, the Company entered into a distributor agreement with CEV. This agreement enables CEV to distribute SS&C's products to the energy markets throughout the world. The Company enters into license, maintenance and professional service contracts to provide software and services to its clients. License fees for the Company's products are priced based on either assets under management, or on a per-CPU, or per-site basis, or on the number of current users. The Company recognizes revenue from sales of software or products including proprietary software upon product shipment and upon receipt of a signed contract, provided that collection is probable and all other revenue recognition criteria of SOP 97-2 are met. Maintenance is provided on an annually renewable basis for approximately 20% of the underlying software license fee, and is recognized ratably over the life of the contract. Professional service revenues are provided on a time and materials basis and are recognized as they are performed. The Company's results of operations for 1997 reflect the acquisition of Mabel, as of November 14, 1997, for a purchase price of $475,000 in cash plus 72,816 shares of Common Stock of the Company with a value of $750,000, the assumption of liabilities of $623,000 and $661,000 due to former Mabel shareholders (the "Mabel Acquisition"). In Page 2 connection with the Mabel Acquisition, which was accounted for under the purchase method, the Company incurred a charge to operations of $0.9 million associated with the write-off of purchased in-process research and development related to Mabel products that were under development at the time of acquisition but had not yet reached technological feasibility. The balance of the purchase price was allocated to goodwill of $0.3 million, purchased completed software of $0.6 million and net operating assets of $0.7 million. The operating results of Mabel have been included in the Company's operating results since the date of acquisition. The Company's results of operations for all years presented reflect the acquisition of Shepro for 1.0 million shares of Common Stock of the Company (the "Shepro Acquisition"). In connection with the Shepro Acquisition, which was accounted for under the pooling-of-interests method, the Company has included Shepro's operating results with the Company's operating results for each period presented. The Company's results of operations for 1998 reflect the acquisitions of Quantra and Savid (the "Quantra Acquisition" and "Savid Acquisition", respectively). Both acquisitions were accounted for under the purchase method of accounting. In connection with the Quantra Acquisition, the Company paid consideration of 546,019 unregistered shares of the Company's Common Stock, valued at $8.8 million, $2.3 million in cash and the assumption of certain liabilities of approximately $4.1 million plus transaction costs. The Company incurred a charge to operations of $5.4 million (after the restatement discussed below) associated with the write-off of purchased in-process research and development related to Quantra products that were under development at the time of acquisition but had not yet reached technological feasibility. The balance of the purchase price was allocated to purchased completed software of $5.3 million and net operating assets of $4.6 million. In connection with the Savid Acquisition, the Company paid consideration of $0.7 million in cash and the assumption of certain liabilities of $0.1 million. A future cash payment $0.8 million shall be paid provided that the aggregate revenues for the period from and including April 15, 1998 through April 14, 2001 are greater than or equal to $3.0 million. The Company incurred a charge to operations of $0.5 million associated with the write-off of purchased in-process research and development related to Savid products that were under development at the time of acquisition but had not yet reached technological feasibility. The balance of the purchase price was allocated to purchased completed software of $0.3 million and net operating assets of $0.03 million. The operating results of Quantra and Savid have been included in the Company's operating results since their respective dates of acquisition. YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998 Revenues The Company's revenues are derived from software licenses and related maintenance and professional services. Software licenses include hardware and third-party software that are delivered as part of certain contracts. The hardware and third-party software account for less than 5% of software license revenues and less than 2.5% of total revenues in any year presented. Total revenues increased 34% from $31.5 million in 1996 to $42.2 million in 1997, and increased 65% to $69.4 million in 1998. The increase in 1997 revenues of $10.6 million was due primarily to an increase in sales of CAMRA 2000 both domestically and internationally, and an increase in the number of clients contracting for maintenance. The increase in 1998 revenues of $27.3 million was due partially to the acquisitions of Quantra, Savid and Mabel totaling $12.8 million, in addition to an increase in domestic and international sales of CAMRA 2000 and an increase in the number of clients contracting for maintenance. Software Licenses. Software license revenues increased 40% from $16.4 million in 1996 to $22.9 million in 1997, and increased 50% to $34.5 million in 1998. The increase from 1996 to 1997 of $6.6 million was primarily attributable to an increase in sales of CAMRA 2000 in North America, Europe and the Asia- Pacific region. The increase from 1997 to 1998 of $11.5 million was due to a $5.0 million increase in sales of CAMRA 2000 in North America, Europe and the Asia-Pacific region and sales from the Quantra, Savid and Mabel Acquisitions of $6.5 million. Maintenance and Other Recurring Revenue. Maintenance and other recurring revenue increased 53% from $7.0 million in 1996 to $10.7 million in 1997, and increased 82% to $19.5 million in 1998. The increase in maintenance and other recurring revenues from 1996 to 1997 was primarily due to the continued growth in the Company's installed base of clients. The increase in maintenance and other recurring revenues from 1997 to 1998 of $8.8 million was primarily due to $5.0 million in growth in the Company's installed base of clients and Quantra, Savid and Mabel Acquisitions of $3.8 million. Page 3 Professional Services. Professional services revenue increased 4% from $8.2 million in 1996 to $8.5 million in 1997, and increased 81% to $15.4 million in 1998. Demand for the Company's implementation, conversion and training services has increased primarily due to the Company's increasing number of license sales and an increase in billing rates. The acquisitions of Quantra, Savid and Mabel contributed $2.2 million of the increase from 1997 to 1998. Cost of Revenues The total cost of revenues increased 19% from $8.9 million in 1996 to $10.6 million in 1997, and increased 97% to $21.0 million in 1998. The gross margin increased from 72% in 1996 to 75% in 1997, and decreased to 70% in 1998. The increase in gross margin from 1996 to 1997 was primarily due to an increase in the gross margin for maintenance. The decrease in margins from 1997 to 1998 was primarily due to amortization expense of completed technology related to the Quantra, Savid and Mabel Acquisitions. Cost of Software Licenses. Cost of software license revenues relates to royalties, the costs of product media, packaging, documentation and labor involved in the distribution of the Company's software, as well as amortization expense of completed technology. Included in the cost of software license revenues is the cost of certain hardware and third party software that are delivered as part of certain contracts. The cost of software license revenues increased from $1.2 million in 1996 to $1.4 million in 1997, to $3.8 million in 1998. The cost of software license revenues as a percentage of these revenues was 8%, 6% and 11% in 1996, 1997 and 1998, respectively. The increase in costs from 1997 to 1998 was primarily due to the $3.0 million amortization expense of completed technology related to the Quantra, Savid and Mabel Acquisitions. Cost of Maintenance and Other Recurring Revenues. Cost of maintenance and other recurring revenues primarily consists of technical customer support and development costs associated with product and regulatory updates. The cost of maintenance and other recurring revenues increased from $2.3 million in 1996 to $4.6 million in 1997, and to $7.4 million in 1998, representing 32%, 43% and 38%, respectively, of maintenance and other recurring revenues in those years. The increases in cost of maintenance and other recurring revenues were primarily due to increased headcount attributable to the development of a dedicated support infrastructure to service the existing installed client base. Cost of Professional Services. Cost of professional services revenues consists primarily of the cost related to personnel utilized to provide implementation, conversion and training services to the Company's software licensees, as well as system integration, custom programming and actuarial consulting services. The cost of professional services revenues decreased from $5.4 million in 1996 to $4.6 million and increased to $9.7 million in 1998, representing 66%, 54% and 63%, respectively, of professional services revenues in those years. The decrease in cost of professional service revenues between 1996 and 1997 was attributable to increased utilization and improved efficiencies. The increased costs from 1997 to 1998 of $5.1 million reflects the additional hiring of new consultants for implementation, particularly in its international operations of $3.1 million. In addition, the acquisitions of Mabel, Quantra and Savid contributed approximately $2.0 million to the cost increase. Operating Expenses Selling and Marketing. Selling and marketing expenses consist primarily of the cost of personnel associated with the selling and marketing of the Company's products, including salaries, commissions and travel and entertainment. Such expenses also include the cost of branch sales offices, advertising, trade shows, marketing and promotional materials. Selling and marketing expenses increased 29% from $9.0 million in 1996 to $11.6 million in 1997, and increased 29% to $15.1 million in 1998, representing 29%, 28% and 22%, respectively, of total revenues in those years. The increases in selling and marketing expenses were largely attributable to costs associated with the hiring of additional sales and marketing personnel, including recruiting fees and the expansion of international operations including a dedicated international sales and marketing operation. As the Company's revenues increase, it expects to continue to leverage these costs. Research and Development. Research and development expenses consist primarily of personnel costs attributable to the development of new software products and the enhancement of existing products. Research and development expenses increased 22% from $8.4 million in 1996 to $10.2 million in 1997, and increased 70% to $17.4 million in 1998, representing 27%, 24% and 25%, respectively, of total revenues in those years. Research and development expenses have remained relatively comparable as a percentage of revenues. The Company believes that due to the sophistication of its products, research and development spending should remain at these levels. The dollar increase year over year was mainly due to additional hiring or sub-contracted personnel required for various software releases. Page 4 General and Administrative. General and administrative expenses are primarily composed of personnel costs related to management, accounting, human resources and administration and associated overhead costs, as well as fees for professional services. General and administrative expenses increased 53% from $5.3 million in 1996 to $8.2 million in 1997 and increased 2% to $8.4 million in 1998, representing 17%, 19% and 12%, respectively, of total revenues in those years. During 1997, the Company recorded a one-time charge of $1.2 million for the closing of its Virginia office facility and the announced move of its corporate headquarters. An increase in bad debt expense from $1.0 million in 1996 to $1.6 million in 1997, additions to management and related recruiting fees and an increase in professional fees also contributed to the increase in general and administrative expenses in 1997. The expense increase from 1997 to 1998 after adjusting 1997 for the one-time charge of $1.2 million was $1.4 million. This increase was primarily due to additional personnel and related expenses necessary to support the revenue growth. Write-off of Purchased In-Process Research and Development. In the fourth quarter of 1997, the Company expensed $0.9 million of purchased in-process research and development associated with the Mabel products acquired in November 1997. In the first quarter of 1998, the Company expensed $5.2 million of purchased in-process research and development associated with the Quantra products acquired in March 1998. In the second quarter of 1998, the Company expensed $0.5 million of purchased in-process research and development associated with the Savid products acquired in April 1998. Because these products had not yet reached technological feasibility at the time of the respective acquisitions and, in the Company's judgment, there was no alternative use for the related research and development, such in-process research and development was charged to expense. Subsequent to the issuance of the Company's June 30, 1998 condensed consolidated financial statements, the Securities and Exchange Commission (the "SEC") issued new guidance on its views regarding the valuation methodology used in determining purchased in-process technology expensed at the date of acquisitions. The Company also had ongoing discussions with the SEC staff concerning the valuation of purchased in-process technology acquired in connection with the Quantra Acquisition. As a result of the SEC guidance and these discussions, the Company has modified its methods used to value the purchased in-process technology and has applied the stage of completion approach to the in-process research and development acquired through the 1998 acquisition. The effect of this estimate was to increase the allocation of the purchase price to completed technology and decrease the allocation of the purchase price to purchased in-process technology. As a result of these changes, the Company is restating its March 30, 1998, June 30, 1998 and September 30, 1998 consolidated financial statements. The write-off of purchased in-process research and development decreased by $2.1 million in the first quarter of 1998. Amortization of the completed technology increased by $0.9 million for the year ended December 31, 1998. The additional amortization expense is being recognized ratably over each of the quarters ended June 30, 1998, September 30, 1998 and December 31, 1998. For these acquisitions, the Company determined the value of the completed technologies and in-process research and development using a risk-adjusted, discounted cash flow approach. In-process research and development projects identified at the Quantra and Savid acquisition dates included the following: Quantra Mortgage Loan Management System ("MLMS"). This project involves upgrading ----------------------------------------- the loan management software from 16-bit to 32-bit architecture. MLMS is a complete software solution designed to process and provide information required by managers of mortgage loan portfolios. As of the acquisition date, the Company estimated that this project was 26% complete. The estimated cost to complete the project was approximately $2.8 million, of which an estimated $1.8 million was incurred by the Company through December 31, 1998. The Company currently expects to incur $1.0 million of additional costs in 1999. The anticipated product launch for this project is the second half of 1999, at which time the Company expects to begin to benefit economically from this project. Real Estate Management System ("REMS"). This project involves completing --------------------------------------- the development and/or upgrading of approximately half of the twenty-one modules of this integrated, modular suite of software. The software is designed to process and provide information for managers of real estate portfolios. The development effort will mostly involve the development and integration of these modules with a central data management module. As of the acquisition date, the Company estimated that the project was 34% complete. The estimated cost to complete the project was $4.9 million, of which an estimated $1.2 million Page 5 had been incurred by the Company through December 31, 1998. The Company expects to incur $3.7 million in additional costs in 1999 and beyond. The Company has already started to benefit from the acquisition of REMS as certain modules were launched in late 1998. Additional module launches are expected in 1999 and 2000. SKYLINE for Windows. This project involved the development of the property management software in a Windows platform. The product achieved technological feasibility in the third quarter of 1998 and the Company has already begun to benefit from the acquisition of this research and development. As of the acquisition date, the Company estimated that the project was 77% complete. The estimated cost to complete the project at December 31, 1998 was $0.3 million. Savid The Savid in-process research and development projects include the development of five existing debt and derivative modules in a Windows platform in addition to developing a new risk management module. As of the acquisition date, the Company estimated that the remaining cost required to achieve technological feasibility for both projects was approximately $0.2 million. Three of the five modules achieved technological feasibility in the third quarter 1998 and the Company has already begun to benefit from the acquisition of this research and development. The Company expects to benefit from the acquisition of the remaining research and development projects as the remaining modules are expected to be launched beginning in the second half of 1999. The value of in-process research and development was determined by estimating the costs to develop the in-process projects into commercially viable projects, estimating the resulting net cash flows from such projects, discounting the net cash flows back to their present values, and adjusting that result to reflect each product's stage of completion. The expected cash flows of the in-process projects were also adjusted to reflect the contribution of completed and core technologies. For the Quantra and Savid Acquisitions, the Company developed revenue projections over a five- to six-year period in three categories: license, maintenance and consulting. License revenue projections were based on expected unit sales over the projected lives of the respective product lines. The other categories of revenues were generally estimated as a percentage of total license revenues and ranged from 15% to 20% for maintenance and from 10% to 20% for consulting, depending on the product. Savid consulting revenues were projected to be insignificant. Expense assumptions were based on the imposition of the Company's cost structure on the acquired technologies and products. The discount rates for the Quantra in-process research and development projects were 23% and 28%; the discount rate for the Savid in-process research and development projects was 20%. The discount rates for these projects were higher than the Company's implied weighted average cost of capital due to the inherent uncertainties surrounding the successful development of the in-process research and development and the related risk of realizing cash flows from products that have not yet reached technological feasibility, among other factors. The Company believes that the assumptions used in the forecasts were reasonable at the date of acquisition. The Company cannot be assured, however, that the underlying assumptions used to estimate expected product sales, development costs or profitability, or the events associated with such projects, will transpire as estimated. Accordingly, actual results may vary from the projected results. All development efforts for Quantra and Savid products are proceeding as expected and management believes that technological feasibility can be achieved. If these projects are not successfully completed, the sales and profitability of the Company may be adversely affected in future periods and the value of certain related intangibles may become impaired. Interest Income (Expense). Net interest income increased from $0.9 million in 1996 to $2.2 million in 1997 and to $2.4 million in 1998. The increases were due to the interest earned on investing the proceeds from the Company's initial public offering in May 1996 and cash generated from operations. Provision for Income Taxes. The Company had effective tax rates of approximately 45%, 36% and 30% in 1996, 1997 and 1998, respectively. The decrease in the 1997 and 1998 tax rate from 1996 was primarily related to the effects of interest income that was exempt from federal income taxes. Page 6 LIQUIDITY AND CAPITAL RESOURCES During 1996, 1997 and 1998, the Company financed its operations primarily through cash flows generated from operations and from its public sales of securities. Cash used in operations was $0.2 million in 1996, and cash provided by operations in 1997 and 1998 was $9.6 million and $6.2 million, respectively. The net increase in cash provided by operations from 1996 to 1997 was primarily attributable to an increase in operating profits, improved collections on accounts receivable, and an increase in accrued expenses and deferred revenues. Total revenues increased $10.6 million from 1996 to 1997 while net accounts receivable decreased by $0.4 million. Total revenues increased $27.3 million from 1997 to 1998 while net accounts receivable increased $9.8 million. This increase in accounts receivables is primarily due to the fourth quarter increase in sales from 1997 to 1998. The improvement in accounts receivable collection can be attributed to an increased focus on resolving specific client issues, negotiating date-driven accelerated payment terms in contracts, and suspended services for nonpayment. Investing activities used cash of $52.5 million and $5.0 million in 1996 and 1997, respectively. In 1998, investing activities provided $0.8 million. Investing activities in 1996 included $50.9 million for the purchase of investments in marketable securities and $1.7 million of additions to property, equipment and capitalized software. Investing activities in 1997 included $2.8 million for the net purchase of investments in marketable securities, $2.1 million of additions to property and equipment and capitalized software, and $0.1 million to partially finance the Mabel Acquisition. Investing activities in 1998 included $11.5 million for the net sale of investments in marketable securities, $5.4 million of additions to property and equipment and capitalized software, and $5.2 million to finance the Quantra, Savid and CEV Acquisitions. Net cash of $52.1 million provided by financing activities in 1996 resulted from proceeds of $52.7 million from the issuance of Common Stock in the Company's initial public offering and proceeds of $0.8 million from the exercise of stock options, partially offset by the net repayment of $1.5 million of debt. Net cash of $0.6 million used in financing activities in 1997 included $1.9 million in net repayment of debt partially offset by the proceeds from the exercise of options and employee stock purchase plan of $0.8 million and the release of restricted cash supporting a letter of credit of $0.5 million. Net cash of $0.9 million was provided by financing activities in 1998 primarily through $3 million of proceeds from the exercise of stock options and the employee stock purchase plan, partially offset by a debt repayment of $1.0 million and a $1.2 million transfer to restricted cash relating to the Quantra Acquisition escrow agreement. As of December 31, 1998, the Company had $12.9 million in cash and cash equivalents, $42.3 million of highly liquid marketable securities and $1.2 million in restricted cash. The Company believes that its current cash balances and net cash provided by operating activities will be sufficient to meet its working capital and capital expenditure requirements for at least the next twelve months. The Share Purchase Agreement in connection with the Mabel Acquisition provides for a payment in 2001 by the Company to the former Mabel shareholders, contingent on their continued employment by the Company, and based on revenues generated by the Mabel division from 1998-2000. The payment can range from $0 to $1.9 million. The Share Purchase Agreement in connection with the Savid Acquisition provides for a further cash payment of $750,000 and shall be paid as additional consideration provided that the aggregate revenues for the period from and including April 15, 1998 through and including April 14, 2001 are greater than or equal to $3,000,000. The Company shall pay to Savid's sole stockholder an aggregate of 10% of the license fees with respect to sales and/or licensing of the Savid products during the period commencing on April 15, 1998 and ending on April 14, 2003. Year 2000 Compliance The so-called "Year 2000" problem relates to computer systems that have time-sensitive programs containing two-digit fields for the year and that may confuse the year 2000 with the year 1900. If the Company or a third party dealing with the Company uses a computer system or software application which partly or fully fails as a result of its inability to recognize the year 2000, the results could conceivably have a material adverse effect on the Company. The Company has utilized both in-house and outside consultants to test whether its products are Year 2000 compliant. Most of the Company's key products have already passed rigorous testing to be certified as Year 2000 compliant. In the event that any Year 2000-compliance issues with its supported products arise, it is the Company's intention to rectify those problems through the software support process. Costs associated with the testing and modifications to make the Company's products Year 2000 compliant have not had, and are not expected to have, a material adverse effect on the Company's business, financial condition or results of operations and cash flows. The Company is in the process of identifying anticipated costs, problems and uncertainties associated with making Page 7 its internal-use computer systems Year 2000 compliant. The Company currently utilizes a computing network comprised of a series of local-area-networks ("LANs") that are connected via a wide-area-network ("WAN"). Important computer systems used by operations include those used in developing products and in communicating with and servicing customers. Important computer systems used in financial and administrative management include general ledgers, time and project management systems and a human resource system. Substantially all operating systems, the LANs, the WAN, the general ledgers and the human resource system have either been updated to be and/or were certified by the vendor to be Year 2000 compliant. In general, the Company expects to resolve any remaining Year 2000 issues with respect to its internal-use computer systems and software applications as they arise through upgrade, conversion, modification or replacement of non-compliant systems and applications. The Company is also reviewing the possible impact of Year 2000 problems on its central and satellite office facilities and their systems. Although there can be no assurance that the utility (e.g. heat, light, power and phone system) suppliers will achieve Year 2000-compliance requirements in a timely manner, the Company presently has no reason to believe they will not. The failure of any of these key suppliers to properly address their Year 2000 problems could lead to a shutdown of the affected operations and could delay or halt both development of Company products and provision of Company services. There can be no assurance that the systems of other parties upon which the Company's business relies directly or indirectly will be Year 2000 compliant. The costs of becoming Year 2000 compliant, or the failure thereof by the Company or other parties, could have a material adverse effect on the Company's business, financial condition or results of operations. Given the possibility of system failure as a result of the century change, the Company is currently in the process of formulating one or more contingency plans, which it anticipates implementing during 1999. The foregoing shall be considered a Year 2000 readiness disclosure to the maximum extent allowed under the Year 2000 Information and Readiness Disclosure Act. Conversion to Euro On January 1, 1999, 11 of the 15 members of the European Union established fixed conversion rates between their existing currencies and the "euro." The euro will trade on currency exchanges and the legacy currencies will remain legal tender for a transition period between January 1, 1999 and January 1, 2002. During the transition period, goods and services may be paid for using the euro or the participating country's legacy currency. Participating countries no longer control their own monetary policies by directing independent interest rates for their legacy currencies. Instead, the authority to direct monetary policy, including money supply and official interest rates, will be exercised by the new European Central Bank. No later than July 1, 2002, the legacy currencies of the participating countries will no longer be legal tender for any transaction, making conversion to the euro complete. The Company has established plans and has begun developing the necessary modifications for the technical adaptation of its internal information technology and other systems to accommodate euro-denominated transactions. The Company expects that it will be able to process euro-denominated transactions on a timely basis. The Company is also assessing the business implications of the conversion to the euro, including long-term competitive implications and the effect of market risk with respect to financial instruments. The Company is currently unable to determine the ultimate financial impact of these matters, if any, on its business, financial condition and results of operations. However, the Company will continue to assess the impact of euro conversion issues as the applicable accounting, tax, legal and regulatory guidance evolves. Page 8 CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS Fluctuations in Quarterly Performance. The Company's revenues and operating results historically have varied substantially from quarter to quarter. The Company's quarterly operating results may continue to fluctuate due to a number of factors, including the timing, size, and nature of the Company's individual license transactions; the timing of the introduction and the market acceptance of new products or product enhancements by the Company or its competitors; the relative proportions of revenues derived from license fees, maintenance, consulting, and other recurring revenues and professional services; changes in the Company's operating expenses; personnel changes; and fluctuations in economic and financial market conditions. The timing, size, and nature of individual license transactions are important factors in the Company's quarterly operating results. Many such license transactions involve large dollar amounts, and the sales cycles for these transactions are often lengthy and unpredictable. There can be no assurance that the Company will be successful in closing large license transactions on a timely basis or at all. Dependence on Financial Services Industry. The Company's clients include a range of organizations in the financial services industry, and the success of such clients is intrinsically linked to the health of the financial markets. In addition, because of the capital expenditures required in connection with an investment in the Company's products, the Company believes that demand for its products could be disproportionately affected by fluctuations, disruptions, instability, or downturns in the financial markets, which may cause clients and potential clients to exit the industry or delay, cancel, or reduce any planned expenditures for investment management systems and software products. Any resulting decline in demand for the Company's products could have a material adverse effect on the Company's business, financial condition, and results of operations. Product Concentration. To date, substantially all of the Company's revenues have been attributable to the licensing of its CAMRA, PTS, FILMS, REMS, MLMS, Telesales, Antares and Total Return software and the provision of maintenance and consulting services in connection therewith. The Company currently expects that the licensing of CAMRA, PTS, FILMS, REMS, MLMS, Telesales, Antares and Total Return software products, as well as certain other products acquired by the Company in connection with recent acquisitions and the provision of related services, will account for a substantial portion of its revenues for the foreseeable future. As a result, factors adversely affecting the pricing of or demand for such products and services, such as competition or technological change, could have a material adverse effect on the Company's business, financial condition, and results of operations. Management of Growth. The Company's business has grown significantly in size and complexity over the past several years. The growth in the size and complexity of the Company's business as well as its client base has placed and is expected to continue to place a significant strain on the Company's management and operations. The Company's ability to compete effectively and to manage future growth, if any, will depend on its ability to continue to implement and improve operational, financial, and management information systems on a timely basis and to expand, train, motivate, and manage its work force. There can be no assurance that the Company's personnel, systems, procedures, and controls will be adequate to support the Company's operations. If the Company's management is unable to manage growth effectively, the quality of the Company's products and its business, financial condition, and results of operations could be materially adversely affected. Integration of Operations. The Company's success is dependent in part on its ability to complete its integration of the operations of its recent acquisitions, including HedgeWare, in an efficient and effective manner. The successful integration in a rapidly changing financial services industry may be more difficult to accomplish than in other industries. The combination of these acquired companies will require, among other things, integration of the acquired companies' respective product offerings and coordination of their sales and marketing and research and development efforts. There can be no assurance that such integration will be accomplished smoothly or successfully. The difficulties of such integration may be increased by the necessity of coordinating geographically separated organizations. The integration of certain operations will require the dedication of management resources that may temporarily distract attention from the day-to-day business of the combined Company. The inability of management to successfully integrate the operations of acquired companies could have a material adverse effect on the business, financial condition, and results of operations of the Company. Page 9 Competition. The market for financial service software is competitive, rapidly evolving, and highly sensitive to new product introductions and marketing efforts by industry participants. Although the Company believes that none of its competitors currently competes against the Company in all of the industry segments served by the Company, there can be no assurance that such competitors will not compete against the Company in the future in additional industry segments. In addition, many of the Company's current and potential future competitors have significantly greater financial, technical and marketing resources, generate higher revenues, and have greater name recognition than does the Company. Rapid Technological Change. The market for the Company's products and services is characterized by rapidly changing technology, evolving industry standards, and new product introductions. The Company's future success will depend in part upon its ability to enhance its existing products and services and to develop and introduce new products and services to meet changing client requirements. The process of developing software products such as those offered by the Company is extremely complex and is expected to become increasingly complex and expensive in the future with the introduction of new platforms and technologies. There can be no assurance that the Company will successfully complete the development of new products in a timely fashion or that the Company's current or future products will satisfy the needs of the financial markets. Dependence on Database Supplier. The relational database design in many of the Company's software products incorporates PFXplus, a "C"-based database management system licensed to the Company by POWERflex Corporation Proprietary Limited, an Australian vendor ("Powerflex"). If Powerflex were to increase its fees under the license agreement, the Company's results of operations could be materially adversely affected. Moreover, if Powerflex were to terminate the license agreement, the Company would have to seek an alternative relational database for its software products. While the Company believes that it could migrate its products to an alternative database, there can be no assurance that the Company would be able to license in a timely fashion a database with similar features and on terms acceptable to the Company. Dependence on Proprietary Technology. The Company's success and ability to compete is dependent in part upon its proprietary technology. The Company relies on a combination of trade secret, copyright, and trademark law, nondisclosure agreements and technical measures to protect its proprietary technology. There can be no assurance that the steps taken by the Company to limit access to its proprietary technology will be adequate to deter misappropriation or independent third-party development of such technology. Product Defects and Product Liability. The Company's software products are highly complex and sophisticated and could, from time to time, contain design defects or software errors that could be difficult to detect and correct. Errors, bugs, or viruses may result in loss of or delay in market acceptance or loss of client data. Although the Company has not experienced material adverse effects resulting from any software defects or errors, there can be no assurance that, despite testing by the Company and its clients, errors will not be found in new products, which errors could result in a delay in or inability to achieve market acceptance and thus could have a material adverse impact upon the Company's business, financial condition, and results of operations. Key Personnel. The Company's success is dependent in part upon its ability to attract, train, and retain highly skilled technical, managerial, and sales personnel. The loss of services of one or more of the Company's key employees could have a material adverse effect on the Company's business, financial condition and results of operations. The Company continues to hire a significant number of additional sales, service, and technical personnel. Competition for the hiring of such personnel in the software industry is intense. Locating candidates with the appropriate qualifications, particularly in the desired geographic location, can be difficult. Although the Company expects to continue to attract and retain sufficient numbers of highly skilled employees for the foreseeable future, there can be no assurance that the Company will do so. Risks Associated with International Operations. The Company intends to continue to expand its international sales activity as part of its business strategy. To accomplish such continued expansion, the Company must establish additional foreign operations and hire additional personnel requiring significant management attention and financial resources that could materially adversely affect the Company's business, financial condition, or results of operations. An increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and, therefore, potentially less competitive in those foreign markets. A portion of the Company's international sales is denominated in foreign currency. The Company occasionally hedges some of this risk; however, significant fluctuations in the value of foreign currencies could have an adverse effect on the earnings of the Company. In addition, the Company's international business may be subject to a variety of risks, including difficulties in obtaining U.S. export licenses, potentially longer payment cycles, increased costs Page 10 associated with maintaining international marketing efforts, the introduction of non-tariff barriers and higher duty rates, and difficulties in enforcement of contractual obligations and intellectual property rights. There can be no assurance that such factors will not have a material adverse effect on the Company's business, financial condition, or results of operations. Because of these and other factors, past financial performance should not be considered an indication of future performance. The Company's quarterly operating results may vary significantly, depending on factors such as the timing, size, and nature of licensing transactions and new product introductions by the Company or its competitors. Investors should not use historical trends to anticipate future results and should be aware that the trading price of the Company's common stock may be subject to wide fluctuations in response to quarterly variations in operating results and other factors, including those discussed above. Market Risk The Company purchases from time to time forward contracts to attempt to minimize the impact of exchange rate gains or losses from foreign currency transactions. The Company generally places its marketable security investments in high credit quality instruments, primarily U.S. Government and Federal Agency obligations, tax-exempt municipal obligations and corporate obligations. The Company does not expect any material loss from its marketable security investments and therefore believes that its potential interest rate exposure is not material. The Company invoices customers primarily in U.S. dollars and in local currency in those countries in which the Company has branch and subsidiary operations. The Company is exposed to foreign exchange rate fluctuations from when customers are invoiced in local currency until collection occurs. Through December 31, 1998, foreign currency fluctuations have not had a material impact on the Company's financial position or results of operation, and therefore the Company believes that its potential foreign currency exchange rate exposure is not material. The foregoing risk management discussion and the effect thereof are forward-looking statements. Actual results in the future may differ materially f from these projected results due to actual developments in global financial markets. The analytical methods used by the Company to assess and mitigate risk discussed above should not be considered projections of future events or losses. Subsequent Events On March 11, 1999, the Company acquired HedgeWare, a provider of portfolio, financial partnership and tax accounting software and service support to hedge fund managers and traders, for an aggregate of 685,683 authorized but previously unissued shares of Common Stock of the Company. The transaction will be accounted for as a pooling-of-interests. Page 11 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS SS&C Technologies, Inc. Consolidated Financial Statements Page ---- Report of Independent Accountants................................... 13 Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1998 and 1997........................................ 14 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996............................ 15 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.................................. 16 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996.................. 17 Notes to Consolidated Financial Statements.......................... 18 Page 12 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of SS&C Technologies, Inc. and Subsidiaries In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of SS&C Technologies, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Hartford, Connecticut March 2, 1999, except for Note 13, for which the date is March 24, 1999. Page 13 SS&C Technologies, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except par value)
December 31, ------------------------------ 1998 1997 ------------------------------ ASSETS Current assets: Cash and cash equivalents $ 12,909 $ 5,001 Restricted cash 1,230 - Investments in marketable securities (Note 3) 42,263 53,717 Accounts receivable, net of allowance for doubtful accounts of $3,269 and $2,236, respectively (Note 4) 23,603 13,063 Note receivable (Note 15). 2,250 - Prepaid expenses and other current assets 1,677 1,563 Refundable income taxes - 384 Deferred income taxes (Note 7) 434 773 ---------- ---------- Total current assets 84,366 74,501 ---------- ---------- Property and equipment: Land 106 106 Building and leasehold improvements 2,728 1,324 Equipment, furniture and fixtures 9,949 6,448 ---------- ---------- 12,783 7,878 Less accumulated depreciation (5,283) (3,860) ---------- ---------- Net property and equipment 7,500 4,018 ---------- ---------- Accounts receivable (Note 4) 549 1,248 Deferred income taxes (Note 7) 6,266 3,205 Goodwill, net of accumulated amortization of $1,412 and $1,000, respectively (Notes 2 and 13) 722 1,134 Intangible and other assets, net of accumulated amortization of $3,665 and $655, respectively (Notes 2 and 13) 4,594 1,202 ---------- ---------- Total assets $103,997 $ 85,308 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (Note 5) $ 125 $ 981 Accounts payable 1,907 1,440 Taxes payable 848 164 Accrued employee compensation and benefits 3,430 2,606 Other accrued expenses 2,270 2,970 Deferred maintenance and other revenues 12,454 9,146 ---------- ---------- Total current liabilities 21,034 17,307 ---------- ---------- Long-term debt (Note 5) 125 250 ---------- ---------- Total liabilities 21,159 17,557 ---------- ---------- Commitments and contingencies (Notes 8, 9 and 14) Stockholders' equity: (Note 6) Common stock, $0.01 par value, 25,000 shares authorized; 14,786 and 13,745 shares issued and outstanding, respectively 148 137 Additional paid-in capital 81,424 69,089 Cumulative translation adjustment (121) - Retained earnings (accumulated deficit) 1,387 (1,475) ---------- ---------- Total stockholders' equity 82,838 67,751 ---------- ---------- Total liabilities and stockholders' equity $103,997 $85,308 ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. Page 14 SS&C Technologies, Inc. and Subsidiaries Consolidated Statements of Operations (in thousands, except for per share data)
Year Ended December 31, -------------------------------------- 1998 1997 1996 ----------- --------- -------- Revenues: Software licenses $34,479 $22,948 $16,352 Maintenance and other recurring revenue 19,531 10,707 7,007 Professional services 15,403 8,495 8,175 ----------- --------- -------- Total revenues 69,413 42,150 31,534 ----------- --------- -------- Cost of revenues: Software licenses 3,825 1,434 1,245 Maintenance and other recurring revenue 7,444 4,620 2,257 Professional services 9,703 4,585 5,402 ----------- --------- -------- Total cost of revenues 20,972 10,639 8,904 ----------- --------- -------- Gross profit 48,441 31,511 22,630 ----------- --------- -------- Operating expenses: Selling and marketing 15,058 11,636 9,023 Research and development 17,440 10,245 8,414 General and administrative 8,361 8,162 5,338 Write-off of purchased in-process research and development (Note 13) 5,878 861 - ----------- --------- -------- Total operating expenses 46,737 30,904 22,775 ----------- --------- -------- Operating income (loss) 1,704 607 (145) Interest income, net 2,020 2,218 914 Other income (Note 15) 363 - 158 ----------- --------- -------- Income before income taxes 4,087 2,825 927 Provision for income taxes (Note 7) 1,225 1,029 414 ----------- --------- -------- Net income $ 2,862 $ 1,796 $ 513 =========== ========= ======== Basic earnings per share $ 0.20 $ 0.13 $ 0.05 =========== ========= ======== Basic weighted average number of common shares outstanding 14,456 13,540 10,571 =========== ========= ======== Diluted earnings per share $ 0.19 $ 0.13 $ 0.04 =========== ========= ======== Diluted weighted average number of common and common equivalent shares outstanding 15,406 13,937 12,617 =========== ========= ========
The accompanying notes are an integral part of the consolidated financial statements. Page 15 SS&C Technologies, Inc. and Subsidiaries Consolidated Statements of Cash Flows (in thousands)
Year Ended December 31, ------------------------------- 1998 1997 1996 ------------------------------- Cash flows from operating activities: Net income $ 2,862 $ 1,796 $ 513 -------- ------- -------- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 4,942 2,002 1,923 Deferred income taxes (2,722) (44) (610) Income tax benefit related to exercise of stock options 482 221 161 Purchased in-process research and development 5,878 861 - Provision for doubtful accounts 1,591 1,592 1,027 Changes in operating assets and liabilities, excluding effects from acquisitions: Accounts receivable (7,378) (933) (4,620) Prepaid expenses and other current assets (51) (563) (267) Refundable income taxes 384 (31) (722) Accounts payable (1,038) 879 114 Accrued expenses 15 1,959 644 Taxes payable 684 - - Deferred maintenance and other revenues 557 1,874 1,622 -------- ------- -------- Total adjustments 3,344 7,817 (728) -------- ------- -------- Net cash provided by (used in) operating activities 6,206 9,613 (215) -------- ------- -------- Cash flows from investing activities: Additions to property and equipment, net (4,598) (1,767) (1,537) Acquisition of Quantra, net of cash received (Note 13) (2,282) - - Acquisition of Savid, net of cash received (Note 13) (739) - - Acquisition of Mabel, net of cash received (Note 13) - (72) - Additions to capitalized software and other intangibles (795) (359) (115) Cash paid for CEV acquisition (Note 15) (2,226) - - Purchases of marketable securities (89,127) (8,453) (50,887) Sales of marketable securities 100,581 5,623 - -------- ------- -------- Net cash provided by (used in) investing activities 814 (5,028) (52,539) -------- ------- -------- Cash flows from financing activities: Repayment of debt (981) (1,959) (1,489) Proceeds from notes payable - 75 125 Issuance of common stock 651 269 52,666 Exercise of options 2,448 547 837 Transfer of cash (to) from restricted cash (1,230) 505 - -------- ------- -------- Net cash provided by (used in) financing activities 888 (563) 52,139 -------- ------- -------- Net increase (decrease) in cash and cash equivalents 7,908 4,022 (615) Cash and cash equivalents, at beginning of year 5,001 979 1,594 -------- ------- -------- Cash and cash equivalents, at end of year $ 12,909 $ 5,001 $ 979 ======== ======= ======== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 9 $ 152 $ 257 ======== ======= ======== Income taxes 2,013 677 1,586 ======== ======= ========
Supplemental disclosure of non-cash investing activities: As more fully described in Note 13, effective March 20, 1998, the Company purchased substantially all the assets of Quantra Corporation for $15.3 million. As more fully described in Note 13, effective April 9, 1998, the Company purchased all the stock of Savid International Inc. and The Savid Group, Inc. for $0.9 million. As more fully described in Note 13, effective November 14, 1997, the Company purchased all the outstanding stock of Mabel Systems BV for $2.5 million. As more fully described in Note 13, effective December 31, 1997, the Company purchased all the outstanding stock of Shepro Braun Systems, Inc. for 1.0 million shares of the Company's common stock. As more fully described in Note 15, the Company sold its investment in Caminus Energy Ventures, LLC for a $2.3 million note receivable. The accompanying notes are an integral part of the consolidated financial statements. Page 16 SS&C Technologies, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity For the Years ended December 31, 1996, 1997 and 1998 (in thousands)
Series B Convertible Series C Convertible Preferred Stock Preferred Stock Common Stock ------------------------------------------------------------------------ Additional Number of Number of Number of Paid-in Shares Amount Shares Amount Shares Amount Capital ---------------------------------------------------------------------------------------- Balance, at December 31, 1995 153 $ 31 155 $ 31 8,080 $ 81 $15,287 Exercise of options - - - - 267 3 834 Conversion of Series B and C preferred stock to common stock (153) (31) (155) (31) 3,079 31 31 Conversion of Series A preferred stock to common stock - - - - 248 2 748 Issuance of common stock - - - - 3,065 31 52,635 Income tax benefit related to exercise of stock options - - - - - - 161 Retirement of treasury stock - - - - (1,351) (14) (2,391 Net income - - - - - - - ---------------------------------------------------------------------------------------- Balance, at December 31, 1996 - - - - 13,388 134 67,305 Exercise of options - - - - 230 2 545 Issuance of common stock - - - - 127 1 1,018 Income tax benefit related to exercise of stock options - - - - - - 221 Net income - - - - - - - ---------------------------------------------------------------------------------------- Balance, at December 31, 1997 - - - - 13,745 137 69,089 Exercise of options - - - - 428 4 2,444 Issuance of common stock - - - - 613 7 9,409 Income tax benefit related to exercise of stock options - - - - - - 482 Foreign exchange translation adjustment - - - - - - - Net income - - - - - - - ------------------------------------------------------------------------------------------ Balance, at December 31, 1998 - $ - - $ - 14,786 $148 $81,424 =========================================================================================== Treasury Stock -------------------------- Retained Accumulated Earnings Other Total (Accumulated Comprehensive Number of Stockholders' Deficit) Income Shares Cost Equity -------------------------------------------------------------------------------- Balance, at December 31, 1995 $(3,784) $ - 1,351 $(2,405) $ 9,241 Exercise of options - - - - 837 Conversion of Series B and C preferred stock to common stock - - - - - Conversion of Series A preferred stock to common stock - - - - 750 Issuance of common stock - - - - 52,666 Income tax benefit related to exercise of stock options - - - - 161 Retirement of treasury stock - - (1,351) 2,405 - Net income 513 - - - 513 -------------------------------------------------------------------------------- Balance, at December 31, 1996 (3,271) - - - 64,168 Exercise of options - - - - 547 Issuance of common stock - - - - 1,019 Income tax benefit related to exercise of stock options - - - - 221 Net income 1,796 - - - 1,796 -------------------------------------------------------------------------------- Balance, at December 31, 1997 (1,475) - - - 67,751 Exercise of options - - - - 2,448 Issuance of common stock - - - - 9,416 Income tax benefit related to exercise of stock options - - - - 482 Comprehensive Income Net income 2,862 - - - 2,862 Foreign exchange translation adjustment - (121) - - (121) -------------------------------------------------------------------------------- Balance, at December 31, 1998 $ 1,387 (121) - $ - $82,838 ================================================================================
The accompanying notes are an integral part of the consolidated financial statements. Page 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization SS&C Technologies, Inc. and Subsidiaries (''SS&C'' or the ''Company'') is a leading provider of client/server-based software solutions, and related consulting services, designed to improve the efficiency and effectiveness of a broad range of organizations in the financial services industry. The Company has developed a family of software products that provides a full-range of mission- critical information management and analysis, accounting, reporting and compliance tools to help high-level investment professionals make informed real- time decisions and automate many operational functions in today's increasingly complex and fast-moving financial markets. The Company's products are focused on improving the effectiveness of decision making through open, fully integrated access to the quantitative analysis of transactions-based data, allowing investment professionals to manage and analyze large amounts of data in the aggregate and in detail on a timely basis. The Company operates in one business segment and currently derives substantially all of its revenue from the licensing of its CAMRA, PTS, FILMS, REMS, MLMS, Telesales, Antares and Total Return applications software to the financial services industry and the provision of related maintenance, consulting and training services in the areas of investments, investment accounting and software development. The Company expects that the licensing of these products and the related services will account for a substantial portion of its revenues in the future. The Company's clients include a range of organizations that manage investment portfolios, including asset managers, insurance companies, banks, mutual funds, public and private pension funds, hedge funds, corporate treasuries, property managers, real estate investment trusts and government agencies. The success of many of the Company's clients is intrinsically linked to the health of the financial markets. Demand for its products could be affected by fluctuations or downturns in the financial markets, which may cause clients and potential clients to exit the industry or delay, cancel or reduce any planned expenditures for investment management systems and software products. 2. Summary of Significant Accounting Policies Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, SS&C Ventures, Inc., SS&C Technologies, Limited, SS&C Pacific, Inc., SS&C Technologies, Sdn. Bhd., Shepro Braun Systems, Inc. and Mabel Systems BV. Also included are the 1998 acquisitions of Quantra Corporation, Savid International, Inc. and The Savid Group, Inc. and the investment in and sale of CEV Energy Ventures. All intercompany activity has been eliminated in preparing the consolidated financial statements. The Company's 1998 investment in CEV Energy Ventures is accounted for under the equity method. (See Note 15). Revenue Recognition Effective January 1, 1998, the Company adopted the guidelines of Statement of Position (SOP) No. 97-2, "Software Revenue Recognition" ("SOP 97-2"), which provides guidance on applying generally accepted accounting principles in recognizing revenue on software transactions. SOP 97-2 requires that revenue recognized from software transactions be allocated to each element of the transaction based on the relative fair values of the elements, such as software products, specific upgrades, enhancements, post contract customer support, installation or training. The determination of fair value is based upon vendor specific objective evidence. Under SOP 97-2, the Company recognizes software license revenue allocated to software products, specified upgrades and enhancements generally upon delivery of each of the related products, upgrades or enhancements. Revenue allocated to post contract customer support is generally recognized ratably over the term of the support, and revenue allocated to service elements is generally recognized as the services are performed. Page 18 The Company recognizes revenue from sales of software or products including proprietary software upon product shipment and upon receipt of a signed contract, provided that collection is probable and all other revenue recognition criteria of SOP 97-2 are met. The Company's products generally do not require significant modification or customization of software. Installation of the products is generally routine and is not essential to the functionality of the product. In 1997, the Company recognized revenue in accordance with AICPA Statement of Position (SOP) No. 91-1, "Software Revenue Recognition". The Company occasionally enters into license agreements requiring significant customization of the Company's software. The Company accounts for these agreements on a percentage of completion basis. This method requires estimates to be made for costs to complete the agreement utilizing an estimate of development man-hours remaining. Due to uncertainties inherent in the estimation process, it is at least reasonably possible that completion costs may be revised. Such revisions are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are determined on a contract-by-contract basis, and are made in the period in which such losses are first estimated or determined. The Company's software license agreements include a short-term, generally six-month, warranty period that the Company does not consider to be a cancellation privilege. The Company records accounts receivable and related deferred revenues upon the execution of contracts for license and licensed lease agreements and upon billing for maintenance agreements. Revenues from maintenance agreements are recognized ratably over the term of the agreement. Unbilled accounts receivable principally reflect revenues recognized pursuant to license agreements for which such amounts are not contractually billable. Unbilled accounts receivable, including those related to lease agreements, which are not contractually billable in one year have been classified as noncurrent. Professional services revenues include consulting and training provided to customers, generally on a time and materials basis. Professional service revenues are recognized as the services are performed. The Company records an allowance for doubtful accounts based on individual customer analyses. Write-offs of accounts receivable were $558,000, $822,000 and $69,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Research and Development Research and development costs associated with computer software are charged to expense as incurred. In accordance with Statement of Financial Accounting Standards ("SFAS") #86, capitalization of internally developed computer software costs begins upon the establishment of technological feasibility based on a working model. Capitalized software costs of $999,000 and $454,000 are included in the December 31, 1998 and 1997 balance sheets, respectively, under "Intangible and other assets." The Company's policy is to amortize these costs upon a product's general release to the customer. Amortization of capitalized software costs is calculated by the greater of (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated economic life of the product including the period being reported on, typically two to six years. It is reasonably possible that those estimates of anticipated future gross revenues, the remaining estimated economic life of the product, or both could be reduced significantly due to competitive pressures. Amortization expense related to capitalized software for 1998 was $36,000. There was no amortization expense related to capitalized software in 1997 and 1996. Cash and Cash Equivalents and Marketable Securities The Company considers all highly liquid debt instruments with original maturities of three months or less at the date of acquisition to be cash equivalents. Debt securities with original maturities of more than three months at the date of acquisition are classified as marketable securities. The Company classifies its entire investment portfolio, consisting of preferred stock and debt securities issued by state and local governments of the United States and corporations, as available for sale securities. The cost basis, using the specific identification method, approximates fair market value and no unrealized gain or loss has been recognized. Page 19 Restricted Cash The Company entered into an escrow agreement as a result of the Quantra acquisition (See Note 13). This agreement states that $1.2 million will be held in escrow pending final settlement of certain acquisition costs and breaches of representations, warranties and covenants, if any, by Quantra. The agreement expires on March 20, 1999. Hedging Transactions The Company purchases from time to time forward contracts to attempt to minimize the impact of exchange rate gains or losses from foreign currency transactions. The forward contracts entered into are for periods of less than six months. The Company had one forward contract outstanding at December 31, 1997 which liquidated in February 1998. There were no outstanding forward contracts at December 31, 1998. Property and Equipment Property and equipment are stated at cost. Depreciation of property and equipment is calculated using a combination of straight-line and accelerated methods over the estimated useful lives of the assets as follows:
Description ------------------------ Building 31.5 years Equipment 3-5 years Furniture and fixtures 7-10 years Leasehold improvements shorter of lease term or estimated useful life
Maintenance and repairs are expensed as incurred. The costs of sold or retired assets are removed from the related asset and accumulated depreciation accounts and any gain or loss is included in operations. Goodwill and Intangible Assets Goodwill resulting from acquisitions is amortized on a straight-line basis over its estimated life of five years. The carrying amount of goodwill is evaluated for future recoverability on a periodic basis, relying on a number of factors, including the estimated life of the customer base under the annual maintenance agreements, operating results for each division, business plans, budgets and economic projections and undiscounted cash flows. In addition, the Company's evaluation considers non-financial data such as market trends, product development cycles and changes in management's market emphasis. Amortization expense associated with goodwill was $412,000, $369,000 and $361,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Other intangible assets, excluding complete technology, are being amortized on a straight-line basis over their estimated lives of two to three years. Complete technology is amortized over approximately two to four years based on the ratio that current gross revenues of the product bear to the total of current and anticipated future gross revenues of the product or on a straight- line method, whichever is shorter. Amortization expense associated with complete technology for the years ended December 31, 1998, 1997 and 1996 was $2,974,000, $290,000 and $243,000, respectively. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, marketable securities and trade receivables. The Company invests its cash in deposits with commercial banks or in municipal bond and bond funds with broker/dealers. Concentrations of credit risk, with respect to trade receivables, are limited due to the large number of customers comprising the Company's customer base and their dispersion across many geographies. As of December 31, 1998 and 1997, the Company had no significant concentrations of credit risk and the carrying value of these assets approximates fair value. Page 20 Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS 109, an asset and liability approach is used to recognize deferred tax assets and liabilities for the future tax consequences of items that have already been recognized in its financial statements and tax returns. A valuation allowance is established against net deferred tax assets if, based on the weight of available evidence, it is more likely than not that some or all of the net deferred tax assets will not be realized. International Operations and Foreign Currency The functional currency of each foreign subsidiary is the local currency. Accordingly, assets and liabilities of foreign subsidiaries are translated to U.S. dollars at period end exchange rates and stockholders' equity is at historical rates. Revenues and expenses are translated using the average rates during the period. The resulting translation adjustments are excluded from net earnings and accumulated as a separate component of equity. Foreign currency transaction gains and losses are included in the results of operations in the periods in which they occur and are immaterial for all periods presented. Foreign revenue including export sales totaled $10.6 million, $5.4 million and $0.5 million in 1998, 1997 and 1996, respectively. Basic and Diluted Earnings Per Share Earnings per share is calculated in accordance with SFAS No. 128, "Earnings Per Share". The standard requires the presentation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and common equivalent shares outstanding during the period. Common equivalent shares consist of stock options using the treasury stock method. Common equivalent shares from stock options are excluded from the computation if their effect is antidilutive. For 1996, all preferred stock is considered to be a common stock equivalent based on its terms and conditions. Income available to stockholders is the same for basic and diluted earnings per share. A reconciliation of the shares outstanding is as follows (in thousands):
1998 1997 1996 ---- ---- ---- Basic weighted average shares outstanding 14,456 13,540 10,571 Weighted average common stock equivalents--options 950 397 660 Weighted average preferred stock - - 1,386 ------ ------ ------ Diluted weighted average shares outstanding 15,406 13,937 12,617 ====== ====== ======
Options to purchase 297,500 and 1,000,000 shares were outstanding at December 31, 1998 and 1997, respectively, but were not included in the computation of diluted earnings per share because the effect of including the options would be antidilutive. Comprehensive Income The Company adopted Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive Income, effective January 1, 1998. SFAS 130 requires that items defined as comprehensive income, such as foreign currency translation adjustments and unrealized gains (losses) on marketable securities, be separately classified in the financial statements and that the accumulated balance of other comprehensive income be reported separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. For the year ended December 31, 1998, total comprehensive income was $2.7 million and was composed of net income of $2.9 million and foreign currency translation of ($0.1 million). There were no differences between net income and comprehensive income for the year ended December 31, 1997 and 1996. Reclassification Certain amounts in the 1997 consolidated financial statements have been reclassified to be comparable with the 1998 presentation. These classifications have had no effect on net income, working capital or net equity. Page 21 3. Marketable Securities The following table summarizes marketable securities and their contractual maturities at December 31 (in thousands):
1998 1997 Marketable Securities Cost Cost --------------------- ---- ---- Preferred Stock $ 5,469 $ - Municipal Bonds due within 1 year 20,546 40,622 Municipal Bonds due within 1-5 years 15,044 13,095 Municipal Bonds due over 5 years 1,204 - ------- ------- Total Marketable Securities $42,263 $53,717 ======= =======
The Company did not have any material realized gains or losses during 1998 and 1997. 4. Accounts Receivable Accounts receivable are as follows (in thousands):
December 31, ------------------ Current 1998 1997 ------- ---- ---- Accounts receivable, net of allowance for doubtful accounts of $2,616 and $1,558, respectively $16,387 $ 7,591 Unbilled accounts receivable, net of allowance for doubtful accounts of $653 and $ 678, respectively 7,216 5,472 ------- ------- Total current accounts receivable 23,603 13,063 Noncurrent ---------- Unbilled accounts receivable 549 1,248 ------- ------- Total accounts receivable $24,152 $14,311 ======= =======
The above balances include amounts receivable from related parties of $474,000. Page 22 5. Long-Term Debt Long-term debt consists of the following (in thousands):
December 31, 1998 1997 ---- ---- Note payable to former Mabel shareholders, at no interest, due in three equal annual installments $ 250 $ 375 Due to former Mabel shareholders, paid in full in December 1998 - 286 9% notes payable to former Shepro shareholders, paid in full in January 1998 - 257 Variable note payable to a bank, due July 1998, interest paid monthly at the prime rate plus 0.75%, paid in full in January 1998 - 200 Variable note payable to a bank due in 36 equal installments of principal, interest paid monthly at the prime rate plus 0.75%, due December 1998, paid in full in January 1998 - 108 9.5% note payable to a bank, due June 1998, paid in full in January 1998 - 5 ----- ------ 250 1,231 Less current portion (125) (981) ----- ------ Long-term debt $ 125 $ 250 ===== ======
The note payable to former Mabel shareholders was issued in connection with the Company's acquisition of Mabel Systems BV ("Mabel") (See Note 13). The terms of the purchase agreement are for the Company to pay $375,000 in three equal installments of $125,000 on the first, second and third anniversary of the closing date of the acquisition. Each payment is conditional on the continued employment of the former shareholders with the Company as of the date of the payment. The 9% notes payable to former Shepro shareholders represent loans made to Shepro by certain former shareholders of Shepro. The loans were paid in full in January 1998. 6. Capital Stock During 1994, the Company authorized the issuance of 152,778 shares of Series B convertible preferred stock (the "Series B stock") and issued 152,778 shares of Series B stock at $40.00 per share, before transaction costs. During 1995, the Company authorized the issuance of 155,132 shares of a new series of preferred stock, Series C convertible preferred stock (the "Series C stock") and issued the 155,132 shares of Series C stock at $47.50 per share, before transaction costs. In connection with the issuance of the Series C stock, holders of outstanding warrants exercised their rights to purchase 900,000 shares of common stock for $1,401,000. At the time of issuance of the Series C stock, the authorized shares of common stock were increased from 10,224,720 to 11,673,400. At December 31, 1995, 3,326,600 shares of the common stock were reserved for issuance upon the conversion of the Series A, Series B and Series C stock. At December 31, 1998, 1997 and 1996, 3,990,000, 2,985,000 and 2,920,000 shares, respectively, were reserved for the stock option and Employee Stock Purchase plans. Page 23 On April 25, 1996, the Company reincorporated in the State of Delaware and exchanged each outstanding share of common stock for ten shares of common stock, $.01 par value, and exchanged each outstanding share of preferred stock Series A, Series B and Series C for one share of preferred stock Series A, Series B and Series C, respectively. Effective with the reincorporation, all the treasury stock was extinguished. Holders of outstanding options were entitled, upon exercise, to purchase ten times the number of common stock shares provided in each option, at an exercise price per share of one-tenth the price per share provided in the option. The outstanding preferred stock was converted into ten shares of common stock for each share of preferred stock. The Company authorized a total of 25,000,000 shares of common stock, $.01 par value, and a total of 1,000,000 shares of preferred stock, $.01 par value. The outstanding Series A, Series B and Series C preferred stock was subsequently converted into common stock on June 5, 1996, the closing date of the Company's initial public offering. As of December 31, 1997 and 1998, there was no preferred stock outstanding. The Company consummated an initial public offering of 3,750,000 shares of common stock on June 5, 1996, of which 723,750 shares were sold by selling stockholders. The Company received proceeds from the offering of approximately $52,639,000, net of offering expenses. All shares, options and par values have been restated in the financial statements and footnotes to reflect the effects of the split of the Company's common stock. 7. Income Taxes The sources of income (loss) before income taxes were as follows:
Year Ended December 31, 1998 1997 1996 ---- ---- ---- (in thousands) US $ 1,959 $3,599 $1,527 Foreign 2,128 (774) (600) ------ ------ ------ Income from consolidated companies before taxes $ 4,087 $2,825 $ 927 ====== ====== ======
The income tax provision (benefit) for the years ended December 31, 1998, 1997 and 1996 consist of the following:
Year Ended December 31, 1998 1997 1996 ---- ---- ---- (in thousands) Current: Federal $ 2,192 $1,080 $ 736 Foreign 1,026 63 - State 729 283 202 Deferred: Federal (2,161) (280) (427) State (561) (117) (97) ------- ------ ----- Total $ 1,225 $1,029 $ 414 ======= ====== =====
The effective tax rates were 30.0%, 36.4% and 44.7% for the years ended December 31, 1998, 1997 and 1996, respectively. The reconciliation between the effective tax rates and the expected tax expense is computed by applying the U.S. Federal corporate income tax rate of 34% to income before income taxes as follows: Page 24
Year Ended December 31, (in thousands) ---------------------------------- 1998 1997 1996 ---- ---- ---- Computed "expected" tax expense $1,389 $ 960 $ 302 Increase (decrease) in income taxes resulting from: State income taxes (net of Federal income tax benefit) 103 110 70 Tax exempt interest income (680) (553) (327) Foreign operations rate differential 324 326 306 Meals and entertainment 75 50 61 Other 14 136 2 ------ ------ ----- Income tax expense $1,225 $1,029 $ 414 ====== ====== ====
The components of the net deferred tax asset at December 31, 1998 and 1997 are as follows:
December 31, (in thousands) ------------------------------- 1998 1997 Deferred tax assets $ 7,807 $ 5,375 Deferred tax liabilities (1,107) (1,397) Net deferred tax asset $ 6,700 $ 3,978 ===============================
The components of deferred income taxes at December 31, 1998 and 1997 are as follows:
December 31, (in thousands) ---------------------------------------------------- 1998 1997 ---------------------------------------------------- Deferred Deferred Deferred Tax Deferred Tax Tax Assets Liabilities Tax Assets Liabilities ---------- ----------- ---------- ----------- Purchased in-process research and development $4,747 $ - $2,810 $ - Accounting method change-cash to accrual 26 - - 305 Accounting method change-advance payments 293 - 441 - Capitalized software - 398 - 181 Acquired technology 1,329 - 461 - Accrued expenses 228 118 582 118 Accounts receivable 1,104 591 1,081 793 Other 80 - - - ------ ------ ------ ------ Total $7,807 $1,107 $5,375 $1,397 ====== ====== ====== ======
The effective tax rates were 30.0%, 36.4% and 44.7% for the years ended December 31, 1998, 1997 and 1996, respectively. The reconciliation between the effective tax rates and the expected tax expense is computed by applying the U.S. Federal corporate income tax rate of 34% to income before income taxes as follows: 8. Leases The Company is obligated under noncancelable operating leases for office space and office equipment. Total rental expense for the years ended December 31, 1998, 1997 and 1996 was $2,155,000, $1,203,000 and $1,064,000, respectively. The Corporate facility in Windsor, Connecticut has an initial lease term of ten years and the Company has the right to extend the lease for an additional term of five years. Future minimum lease payments under these operating leases are as follows (in thousands): Page 25
Year ending December 31, ------------------------ 1999 $ 2,054 2000 1,687 2001 1,577 2002 1,140 2003 1,114 Thereafter 3,093 ------- $10,665 =======
The Company leases a portion of its building and subleases other office space to unrelated parties under noncancelable leases. The Company received rental income under these leases of $212,000, $99,000 and $54,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Minimum future lease receipts under these leases are as follows (in thousands):
Year ending December 31, ------------------------ 1999 $ 595 2000 540 2001 557 2002 190 2003 136 Thereafter 631 ------- $ 2,649 =======
9. Relocation Expenses The Company closed its Virginia office facility in October 1997 and relocated certain employees to its corporate headquarters. The Company expensed $0.5 million related to the office facility closing and severance packages. The amount accrued but unpaid as of December 31, 1997 was $0.2 million, primarily for unoccupied lease fees under the current lease. All amounts were paid by December 31, 1998. Under the lease, the Company is obligated to continue making payments through February 2, 2002. The Company has sublet this facility through February, 2002. In 1997, the Company announced plans to relocate its corporate facilities. In connection with the relocation, and in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS No. 121) and EITF No. 94-3, the Company recognized in general and administrative expense an impairment loss on the building and furniture it previously occupied and uses of $0.5 million for the year ended December 31, 1997. 10. License and Royalty Agreements The Company is a party to a royalty agreement as a result of the joint development of Finesse 2000. Under the terms of the agreement, the joint developer will receive a 10% royalty on all software license revenues of Finesse 2000 until $349,000 has been paid. Total royalty expense for 1998 and 1997 was $38,000 and $54,000, respectively. No royalty expense was recorded in 1996. The Company also has non-exclusive rights to integrate certain third party software into certain of the Company's products. Under the terms of the agreement, the licenser of the software is paid minimum monthly royalties and additional royalties based on a percentage of the related license fee revenues collected by the Company. Payments typically range between 20% and 43% of sales of the related software products. The Company also entered into an agreement in 1996 which allows the Company to integrate software into one of its products. Under this agreement, the licenser is paid $1,500 for the first 200 clients that purchase the Company's product containing this software and a maintenance agreement for that product. The fee is reduced to $1,000 per client for each client thereafter. The Company is obligated to pay on a cumulative basis at Page 26 least $25,000 per quarter. The total royalty expense under these agreements for the years ended December 31, 1998, 1997 and 1996 was $527,000, $425,000 and $452,000, respectively. In connection with the Shepro acquisition, the Company was a party to a development and royalty agreement with an unrelated third party. The agreement called for a royalty of 20% on all software license sales for the core modules developed during the project, up to a full recovery of all costs incurred by the third party on this project. The total royalty expense under this agreement for the years ended December 31, 1997 and 1996 was $184,000 and $195,000, respectively. No expense was incurred in 1998 and the agreement between the two parties has expired. In connection with the Savid acquisition, the Company has agreed to pay 10% of license fees with respect to sales and/or licensing of the Savid system during the period commencing on April 15, 1998 and ending on April 14, 2003. Royalty expense for the year ended December 31, 1998 was $44,650. In 1998, the Company entered into a royalty agreement for the use of an interface utility in the Company's Skyline for Windows product. The royalty is paid based on annual guaranteed total unit sales of the product at a rate of $15 per user. Royalty expense for the period ended December 31, 1998 was $19,166. 11. Defined Contribution Plans The Company has a 401(k) Profit Sharing Plan and Trust (the "Plan"), which covers substantially all employees. Each employee may elect to contribute to the Plan, through payroll deductions, up to 15% of his or her salary, subject to certain limitations. The Plan provides for a Company match of employees' contributions in an amount equal to 50% of an employee's contributions up to $1,000, in addition to discretionary contributions as determined by the Board of Directors. In connection with the acquisition of Shepro, the Company assumed the pre- existing deferred compensation plan for Shepro employees, which was established in January 1995. Under the plan, each eligible employee may elect to contribute to the plan up to 15% of his or her salary, subject to certain limitations. This plan provides for a Company match in an amount equal to 25% of an employee's contributions up to 6%. During the years ended December 31, 1998, 1997 and 1996, the Company incurred $286,000, $158,000 and $102,000, respectively, of expenses related to these plans. 12. Stock Option and Purchase Plans During 1993, the Board of Directors approved an employee stock option plan ("1993 Plan") and reserved 1,000,000 shares of common stock for issuance under this plan. As of December 31, 1997, 25,500 options were outstanding and fully vested under the 1993 Plan. No options were granted in 1997 or 1998, and all outstanding options had been exercised as of December 31, 1998. In accordance with the 1993 Plan document, the 1993 Plan terminated in 1998. During 1994, the Board of Directors approved a new plan ("1994 Plan"), effective January 1, 1995, for which 1,000,000 shares of common stock were reserved. The 1994 Plan was amended in October 1995 and April 1996 to reserve additional shares of common stock for issuance under the plan, bringing the total shares of common stock reserved for issuance to 3,000,000. Options under the 1994 Plan generally vest ratably over four years and expire ten years subsequent to the grant. At December 31, 1998 and 1997, there were shares available for option grants of 165,243 and 432,208, respectively. The Board of Directors, as of April 30, 1998, decided that no further options shall be granted under the 1994 plan. There were options to purchase 2,110,719 and 2,231,700 shares of common stock outstanding as of December 31, 1998 and 1997, respectively. Options to purchase 856,709, 515,236 and 353,916 shares of common stock were exercisable as of December 31, 1998, 1997 and 1996, respectively. In April 1996, the Company adopted the 1996 Director Stock Option Plan, which provides for non-employee directors to receive options to purchase common stock of the Company at an exercise price equal to the fair market value of the common stock at the date of grant. The Company has reserved a total of 150,000 shares of common stock for issuance under this plan. Page 27 Options under the 1996 Director Stock Option Plan are fully vested after one year and expire ten years from the grant date. At December 31, 1998 and 1997, there were 90,000 and 120,000 shares, respectively, available for director option grants. There were options to purchase 45,000 and 30,000 shares of common stock outstanding as of December 31, 1998 and 1997, respectively. Options to purchase 15,000 shares of common stock were exercisable as of December 31, 1998. There were no options exercisable as of December 31, 1997 and 1996. During 1998, the Board of Directors approved the 1998 Stock Incentive Plan ("1998 Plan"), which has 1,500,000 shares of common stock reserved for issuance. Generally, options under the 1998 Plan vest ratably over four years and expire ten years subsequent to the grant. Shares available for option grants under the 1998 Plan were 1,204,542 at December 31, 1998. There were options to purchase 295,458 shares of common stock outstanding at December 31, 1998, of which options to purchase 1,583 shares were exercisable. The following table summarizes stock option transactions for the years ended December 31, 1998, 1997 and 1996.
Weighted Average Exercise Shares Price ------ ----- Outstanding at December 31, 1995 1,476,500 $ 3.75 Granted 217,000 8.31 Canceled (152,500) 5.13 Exercised (266,792) 3.14 --------- ------ Outstanding at December 31, 1996 1,274,208 4.49 Granted 1,526,500 8.60 Canceled (283,208) 5.12 Exercised (230,300) 2.38 --------- ------ Outstanding at December 31, 1997 2,287,200 7.37 Granted 1,360,500 14.30 Canceled (768,077) 8.96 Exercised (428,446) 4.87 --------- ------ Outstanding at December 31, 1998 2,451,177 $10.97 =============================
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable - --------------------------------------------------------------------------------- --------------------------------------- Weighted Average Remaining Range of Exercise Number Outstanding Contractual Life Weighted Average Number Exercisable Weighted Average Prices at 12/31/98 (years) Exercise Price at 12/31/98 Exercise Price ------ ----------- ------- -------------- ----------- -------------- $4.00 - $6.00 540,845 6.8 $ 4.89 408,270 $ 4.69 6.38 - 9.50 361,353 8.1 $ 8.10 170,835 $ 8.05 9.63 - 14.00 765,500 9.2 $10.63 144,188 $10.29 14.58 - 19.00 594,500 5.5 $14.97 150,000 $14.58 21.88 - 23.63 188,979 9.4 $23.04 - -
The exercise price for each of the above grants was determined by the Board of Directors of the Company to be equal to the fair market value of the Company's common stock on the date of grant. In reaching this determination at the time of such grants prior to the initial public offering (see Note 6), the Board considered a broad range of factors, including the illiquid nature of an investment in the Company's common stock, the Company's historical financial performance, the preferences (including liquidation) of the Company's outstanding convertible preferred stock and the Company's future prospects. Exercise prices for grants issued subsequent to the initial public offering are determined by the closing sale price of the stock on the Nasdaq National Market on the date of the grant. Page 28 In April 1996, the Company adopted the 1996 Employee Stock Purchase Plan which permits employees of the Company to purchase shares of common stock pursuant to payroll deductions at a price equal to 85% of the fair market value of the Company's common stock on either the first or last day of the purchase period, whichever is lower. The Company has adopted semiannual purchase periods of October through March and April through September. As of December 31, 1998, employees had deposited with the Company, through payroll deductions, $228,000 to purchase shares through the stock purchase plan at March 31, 1999. The Company reserved an aggregate of 200,000 shares of common stock for issuance under this plan. Stock-based compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations in accounting for its stock options. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans and employee stock purchase plan. Had compensation cost for the Company's stock option plans and employee stock purchase plan been determined consistent with SFAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been adjusted to the pro forma amounts (in thousands, except per share data) indicated in the table below:
1998 1997 1996 Net income as reported $ 2,862 $1,796 $ 513 Net income(loss) pro forma $(1,635) $ 764 $ 24 Basic earning per share, as reported $ 0.20 $ 0.13 $0.05 Basic earning (loss) per share, pro forma $ (0.11) $ 0.06 $0.00 Diluted earnings per share, as reported $ 0.19 $ 0.13 $0.04 Diluted earnings (loss) per share, pro forma $ (0.11) $ 0.05 $0.00
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996: dividend yield of 0%; expected volatility of 70%, 66% and 80% in 1998, 1997 and 1996, respectively; risk-free interest rate of 5.4%, 6.1% and 6.1% in 1998, 1997 and 1996, respectively; and expected lives of 5 years for 1998 and 1997, and 5.5 years for 1996. The compensation cost for the stock option plans was $4,284,000, $978,000 and $472,000 for 1998, 1997 and 1996, respectively. The weighted-average fair value of options granted using this option-pricing model in 1998, 1997 and 1996 was $8.65, $3.91 and $5.87, respectively. The fair value of each estimated stock grant under the employee stock purchase plan is based on the price of the stock at the beginning of the offering period using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield of 0%; expected volatility of 70%, 66% and 80%; risk-free interest rate of 4.81%, 5.33% and 5.32% in 1998, 1997 and 1996, respectively and expected lives of six months. The compensation cost for the employee stock purchase plan was $213,000, $54,000 and $17,000 for 1998, 1997 and 1996, respectively. 13. Acquisitions: On December 31, 1997, the Company acquired all of the outstanding stock of Shepro Braun Systems, Inc. ("Shepro"), a provider of software and consulting services to the investment management and financial services marketplace, for 1,000,000 shares of Common Stock of the Company in a business combination accounted for as a pooling-of-interests. Accordingly, the financial statements for all periods prior to the combination have been restated to reflect the combined operations. The results Page 29 of operations presented below for the years ended December 31, 1996 and 1997 present the Company and Shepro as stand-alone entities. There were no intercompany transactions and no adjustments to net assets of the combining companies to adopt the same accounting practices.
Total Company Shepro Company ------- ------ ------- (in thousands) 1996 Revenues $26,407 $5,127 $31,534 Net Income $ 473 $ 40 $ 513 1997 Revenues $36,485 $5,665 $42,150 ======= ====== ======= Net income (loss) $ 1,917 $ (121) $ 1,796 ======= ====== =======
Shepro had elected to be treated as a Subchapter S Corporation for income tax purposes and, as such, no income taxes have been provided related to the results of Shepro's operations in the statement of operations presented. On November 14, 1997, the Company acquired all of the outstanding stock of Mabel for $2.5 million, which included $100,000 of direct costs associated with the acquisition. The purchase was paid in the form of cash for $475,000, 72,816 shares of common stock of the Company valued at $750,000, $375,000 due in three equal annual installments of $125,000 on the anniversary date of the transaction, $286,000 of notes payable to the former Mabel shareholders, and the assumption of liabilities of $623,000. The agreement also calls for a contingent payment to be made in 2001. The payment is contingent on the continued employment of the former Mabel shareholders and is based on the revenues generated by the Mabel division. The payment can range from $0.2 million for revenues generated over $6 million in the three-year period of 1998-2000 to $1.9 million for revenues over $12 million. The acquisition was accounted for as a purchase and, accordingly, the net assets and results of operations of Mabel have been included in the consolidated financial statements from the acquisition date. The purchase price was first allocated to tangible assets based on their net realizable value or fair market value on the date of the acquisition. The remaining portion of the purchase price was allocated to identified intangible assets, goodwill and in-process research and development. On March 20, 1998, the Company completed its acquisition (the "Quantra Acquisition") of substantially all of the assets of Quantra Corporation ("Quantra") pursuant to an Asset Purchase Agreement, among the Company, Quantra and AEGON USA Realty Advisors, Inc., the sole stockholder of Quantra. The purchase price for the Quantra Acquisition consisted of 546,019 shares of the Company's common stock valued at $8.8 million, $2.3 million in cash and the assumption of certain liabilities of Quantra of approximately $4.1 million, plus the costs of effecting the transaction. The Company and Quantra also entered into an Escrow Agreement pursuant to which an additional $1.2 million will be held in escrow to reimburse the Company in connection with certain acquisition costs and breaches of representations, warranties and covenants, if any, by Quantra (see Note 2). The acquisition was accounted for as a purchase and, accordingly, the net assets and results of operations of Quantra have been included in the consolidated financial statements from the acquisition date. The purchase price was allocated to tangible and intangible assets and liabilities based on their fair market value on the date of the acquisition. On April 9, 1998, the Company completed its acquisition (the "Savid Acquisition") of the outstanding shares of Savid International Inc. and The Savid Group, Inc. (together "Savid") pursuant to a Stock Purchase Agreement between the Company, Savid and the sole stockholder ("Stockholder") of Savid. The purchase price of the Savid acquisition consisted of $739,000 in cash, net of cash received of $82,500, and the assumption of certain liabilities of Savid of $118,000, plus the costs of effecting the transaction. A further cash payment of $750,000 shall be paid as additional consideration provided that the aggregate revenues for the period from and including April 15, 1998 through and including April 14, 2001 are greater than or equal to $3,000,000. The Company shall pay to the Stockholder an aggregate of 10% of the license fees with respect to sales and/or licensing of the Savid product during the period commencing on April 15, 1998 and Page 30 ending on April 14, 2003. The acquisition was accounted for as a purchase and, accordingly, the net assets and results of operations of Savid have been included in the consolidated condensed financial statements from the acquisition date. The purchase price was allocated to tangible and intangible assets, liabilities, and in-process research and development based on their fair market value on the date of the acquisition. For the Mabel, Quantra and Savid acquisitions, the allocation to complete technology is based on future risk-adjusted discounted cash flows. Complete technology has been capitalized and included within Intangible and other assets. Amortization expense associated with complete technology for the Mabel, Quantra and Savid acquisitions for the year ended December 31, 1998 was $2,973,000. The Company believes that the amounts recorded as in-process research and development (IPR&D) charges at the dates of the acquisitions of Quantra and Savid were measured in a manner consistent with widely recognized appraisal practices that were being utilized at the time of the acquisitions. Subsequent to the acquisitions, in a letter dated September 15, 1998 to the American Institute of Certified Public Accountants, the Chief Accountant of the Securities and Exchange Commission (SEC) expressed views of the SEC staff that took issue with certain appraisal practices employed in the determination of the fair value of IPR&D that was the basis of the Company's measurement of its IPR&D charge. Accordingly, the Company has resolved to adjust the amount originally allocated to acquired IPR&D in a manner to reflect the SEC staff's. This revised allocation was completed March 24, 1999. The effect of this revised allocation was to increase the allocation of the purchase price to completed technology and decreased the allocation of the purchase price to purchased in-process technology as reported in the table below.
As As Reported Restated -------- -------- (in thousands) Tangible net assets $ 4,667 $ 4,667 Purchased in-process research and development 7,980 5,878 Purchased complete technology 3,505 5,607 ------- ------- $16,152 $16,152 ======= =======
Other factors considered in the allocation of the purchase price to in-process research and development include the estimated net cash flows generated from such projects, discounting the net cash flows back to their present values, and adjusting values to reflect the contribution of completed and core technologies. For the Quantra and Savid acquisitions, the Company developed revenue projections over a five to six year period in three categories: license, maintenance and consulting. License revenue projections were based on expected unit sales over the projected lives of the respective product lines. The other categories of revenue were generally estimated as a percentage of total license revenues and ranged from 15% to 20% for maintenance and from 10% to 30% for consulting, depending on the product. Savid consulting revenues were projected to be insignificant. Expense assumptions were based on the imposition of the Company's cost structure on the acquired technologies and products. The discount rates for the Quantra in-process research and development projects were 23% and 28%; the discount rate for the Savid in-process research and development projects was 20%. For the Mabel acquisition, the Company developed revenue projections based on unit sales estimates over the projected lives of the Mabel product lines. Expense assumptions were based on Mabel's past experience and had not been adjusted for expected cost synergies with SS&C. The discount rate for the Mabel in-process research and development was 22%. The following summarizes the allocation of the purchase price (in thousands) for the Mabel, Quantra and Savid acquisitions.
1997 1998 ---- ---- Cash $ 403 $ - Accounts receivable 260 1,481 Unbilled accounts receivable - 2,694 Other assets 46 63 Equipment and furniture 21 429 Complete technology 588 5,607 Incomplete technology 861 5,878 Goodwill 330 - ------ ------- $2,509 $16,152 ====== =======
Page 31 The unaudited pro forma condensed consolidated results of operations presented below for the years ended December 31, 1997 and 1998, assumes the Mabel, Quantra and Savid acquisitions occurred at the beginning of 1997. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1998 excludes the $5.9 million write-off of purchased in- process research and development related to the Quantra and Savid acquisitions. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1997 excludes the $861,000 write-off of purchased in- process research and development related to the Mabel acquisition.
1998 1997 ------------------ (in thousands, except per share data) ------------------ Total revenues $72,118 $ 55,571 Operating income (loss) 4,365 (23,226) Net income (loss) 3,380 (13,704) Basic earnings per share .23 (.97) Diluted earnings per share .22 (.97)
These pro forma results are not necessarily indicative of results of operations that would have actually occurred had the acquisition taken place at the beginning of each period, or of future operations of the combined companies. 14. Commitments and Contingencies On March 18, 1997, Elery G. Montagna and Marjory G. Montagna filed a purported class action lawsuit in the United States District Court for the Southern District of New York (the "New York Complaint") against the Company and certain of its executive officers, as well as against BT Alex. Brown Incorporated (as successor to Alex. Brown & Sons Incorporated, "Alex. Brown") and Hambrecht & Quist LLC ("Hambrecht & Quist"), the lead managers of the Company's initial public offering. On April 8, 1997, Marc A. Feiner filed a purported class action lawsuit in the United States District Court for the District of Connecticut (the "Connecticut Complaint") against the Company, its directors and certain of its executive officers, as well as against Alex. Brown and Hambrecht & Quist. On July 8, 1997, Marc A. Feiner, Joseph Aogiere, Arthur S. Davis, Theodore S. Davis, James Gregory, Brian Kreidler, Daniel Kreidler, Robert Miller, Elery Montagna, Marjory Montagna and Gilda Shapiro Trust filed a Consolidated Amended Class Action Complaint in the United States District Court for the District of Connecticut (the "Consolidated Complaint") in which the New York Complaint and the Connecticut Complaint were consolidated and amended. The Consolidated Complaint claims that the Prospectus for the Company's initial public offering allegedly made material misrepresentations in violation of Sections 11 and 12(2) of the Securities Act of 1933. The plaintiffs are seeking an undetermined amount of damages and costs and expenses of the litigation. The plaintiffs filed a motion to certify a class in this matter on May 29, 1998. The Company filed its opposition to class certification on September 25, 1998, and Alex. Brown and Hambrecht & Quist filed a separate opposition on September 29, 1998. The plaintiffs filed a reply brief on the class certification issue on October 26, 1998, and the defendants filed surreply briefs on November 10, 1998. The court has not yet ruled on the motion for class certification. The matter is now in the discovery phase. The Company believes it has meritorious defenses to the claims made in the lawsuit and intends to contest the Consolidated Complaint vigorously. Although the amounts claimed may be substantial, management cannot predict the ultimate outcome or estimate the potential loss, if any, related to these claims. In management's opinion, the disposition of this matter will not have a material adverse effect on the Company's consolidated financial position. However, it is possible that the adverse resolution of one or more of these claims could materially affect the Company's financial position, results of operations or liquidity in any one annual or quarterly reporting period. From time to time, the Company is subject to certain legal proceedings and claims that arise in the normal course of its business. In the opinion of management, the Company is not a party to any other litigation that it believes could have a material effect on the Company or its business. 15. Related Party Transactions: In 1996, the Company licensed its CAMRA and FILMS applications software and certain other programs to a related party for a total purchase price of $2,055,000, including a five-year maintenance program beginning in February 1996. The purchase price was allocated to license fees of $1,544,000, maintenance fees over the five-year period of $375,000 and deferred interest of $136,000 resulting from an extended payment plan. Terms include $900,000 payable upon execution of the agreement and quarterly installments of $53,000 for five years. All outstanding receivables and payables between the parties as of January 27, 1996 were forgiven, resulting in an additional $105,000 allocated to the Page 32 purchase price. Interest was imputed at 9% for payments on the license fee. The amount collected from the related party during the year ended December 31, 1998 was $160,000, including sales tax and other products not related to this agreement. The Company has long-term debt with the former Mabel shareholders. (see Note 5) In 1996, the Company settled an agreement and a note payable with a related party for $138,000. This settlement is included in other income on the accompanying 1996 statement of operations. On May 1, 1998, the Company invested approximately $2.2 million in cash plus an exclusive distribution agreement for the CAMRA product in exchange for a 24% ownership interest in Caminus Energy Ventures, LLC ("CEV"), a limited liability company organized to provide comprehensive consulting services and software technology to the power and gas trading business. The exclusive distribution agreement allows CEV to sell the Company's software products within energy- related markets over a five-year period based on certain terms and conditions. The Company commenced the reporting of its share of CEV's earnings on a two- month lag beginning in the quarter ended September 30, 1998. In the third quarter of fiscal 1998, the Company recognized a $0.5 million non-operating loss, net of taxes, for its proportionate share of a write-off of in-process research and development attributable to CEV's acquisition of two companies, as well as the operating results of CEV for the three-month period ended July 31, 1998. In the fourth quarter of 1998, the Company sold its interest in CEV for $2,250,000 and retained a warrant to purchase 4.5% of CEV at a price of $2.3 million and the Company recorded a gain of $0.5 million on this sale. In addition, the Company entered into a distributor agreement with CEV. This agreement enables CEV to distribute the Company's products to the energy markets throughout the world. The distributor agreement requires CEV to purchase a minimum of $3.4 million of software licenses through the fourth quarter of 2000. 16. Subsequent Events: On March 11, 1999, the Company acquired Hedge Ware, Inc. ("Hedgeware"), a provider of portfolio, financial, partnership and tax accounting software and service support to hedge fund managers and traders, for an aggregate of 685,683 shares of authorized but previously unissued shares of Common Stock of the Company. The transaction will be accounted for as a pooling-of-interests. 17. Selected Quarterly Financial Data (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands, except per share data) 1998 ---- Revenue $11,528 $18,119 $18,357 $21,409 Operating income (loss) (4,561) 503 1,873 3,889 Net income (loss) (2,581) 687 779 3,916 Basic earnings (loss) per share (.19) .05 .05 .27 Diluted earnings (loss) per share (.19) .04 .05 .26 1997 ---- Revenue $ 7,530 $10,505 $10,536 $13,579 Operating income (loss) (546) 664 (184) 673 Net income (loss) (167) 902 192 869 Basic earnings (loss) per share (.01) .07 .01 .06 Diluted earnings (loss) per share (.01) .07 .01 .06
The first quarter of 1998 includes the write-off of purchased in-process research & development expenses of $5.2 million related to the Quantra acquisition. The second quarter of 1998 includes write-off of purchased in- process research and development expenses of $0.7 million related to the Quantra and Savid acquisitions. The third quarter of 1998 includes a non-operating loss of $0.5 million, net of taxes, for the Company's proportionate share of a write- off of in-process research and development attributable to CEV's acquisitions. The fourth quarter of 1998 includes a gain of $0.5 million related to the sale of the Company's equity interest in CEV. The third quarter of 1997 includes $1.2 million related to office closings and relocations. The fourth quarter of 1997 includes a write-off of purchased in-process research and development expenses of $0.9 million related to the Mabel acquisition. Page 33 EX-21 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Subsidiary Name Jurisdiction of Organization - --------------- ---------------------------- SS&C Ventures, Inc. Connecticut SS&C Pacific, Inc. Delaware SS&C Technologies Limited United Kingdom SS&C Technologies Sdn. Bhd. Malaysia Mabel Systems B.V. Netherlands Shepro Braun Systems, Inc. Illinois Financial Automatrion, Ltd. Illinois Quantra Software Corporation Delaware Savid International Inc. New Jersey The Savid Group, Inc. New York HedgeWare, Inc. Delaware EX-23 4 CONSENT OF PRICEWATERHOUSECOOPERS LLP CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of SS&C Technologies, Inc. on Form S-8 (File numbers 333-07205, 333-07207, 333-07211, 333-07213, 333-52295) and on Form S-3 (File number 333-57469) of our report dated March 2, 1999, except for Note 13, for which the date is March 24, 1999, on our audits of the consolidated financial statements of SS&C Technologies, Inc. and Subsidiaries as of December 31, 1998 and 1997, and for the years ended December 31, 1998, 1997, and 1996, which report is incorporated by reference from the 1998 Annual Report to Stockholders in this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Hartford, CT March 31, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FINANCIAL STATEMENTS INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STAEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 12,909 42,263 24,152 3,269 0 84,366 12,783 5,283 103,997 21,084 0 0 0 148 82,690 103,997 69,413 69,413 0 20,972 46,737 386 0 4,087 1,225 2,862 0 0 0 2,862 .20 .19
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