10-Q 1 d10q.htm SUNGARD DATA SYSTEMS INC. FORM 10-Q SUNGARD DATA SYSTEMS INC. FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

      [X]
Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly
 
period ended September 30, 2001 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 1-12989

SunGard® Data Systems Inc.
(Exact name of registrant as specified in its charter)

Delaware 51-0267091
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)

1285 Drummers Lane, Wayne, Pennsylvania 19087
(Address of principal executive offices, including zip code)

(610) 341-8700
(Registrant’s telephone number, including area code)

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

There were 279,439,334 shares of the registrant’s common stock, par value $.01 per share, outstanding at September 30, 2001.

SunGard Data Systems Inc.
And Subsidiaries

Index

Part I.
Item 1.
Item 2.
Item 3.
Part II.
Item 1.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Signatures

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

SunGard Data Systems Inc.
Consolidated Balance Sheets
(In thousands, except per-share amounts)

September 30,
2001 December 31,
(Unaudited) 2000
 
Assets
Current:
Cash and equivalents
$ 505,558
$ 255,835
Short-term investments
177,025
180,234
Trade receivables, less allowance for doubtful accounts of $27,229 and $25,126
370,332
359,597
Earned but unbilled receivables
54,847
56,018
Prepaid expenses and other current assets
45,514
43,099
Deferred income taxes
16,866
16,959
 
Total current assets
1,170,142
911,742
 
 
Investment in common stock
--
9,114
Property and equipment, less accumulated depreciation of $426,867 and $377,268
249,668
208,580
Software products, less accumulated amortization of $208,890 and $179,980
144,492
150,290
Goodwill, less accumulated amortization of $111,666 and $76,352
304,706
296,864
Other tangible and intangible assets, less accumulated amortization of
   $94,422 and $90,473
130,864
127,431
Deferred income taxes
130,174
141,164
 
$ 2,130,046
$ 1,845,185
 
Liabilities and Stockholders’ Equity
Current:
Short-term and current portion of long-term debt
$ 1,488
$ 5,908
Accounts payable
33,968
20,890
Accrued compensation and benefits
92,178
109,858
Other accrued expenses
54,980
58,963
Accrued income taxes
38,149
14,314
Deferred revenues
204,204
184,837
 
Total current liabilities
424,967
394,770
 
Long-term debt
3,588
7,939
 
Commitments  
Stockholders’ equity:
Preferred stock, par value $.01 per share; 5,000 shares authorized, of which 3,200 is
   designated as Series A Junior Participating Preferred stock - -
Common stock, par value $.01 per share; 800,000 shares authorized;
   280,089 and 133,654 shares issued
2,801
1,337
Capital in excess of par value
734,631
659,404
Restricted stock plans and notes receivable for common stock
(3,296)
(941)
Retained earnings
1,005,464
820,067
Accumulated other comprehensive loss
(23,398)
(22,680)
 
1,716,202
1,457,187
Treasury stock, at cost, 650 and 325 shares
(14,711)
(14,711)
 
Total stockholders’ equity
1,701,491
1,442,476
 
 
$ 2,130,046
$ 1,845,185
 
     

The accompanying notes are an integral part of these financial statements.

SunGard Data Systems Inc.
Consolidated Statements of Income
(In thousands, except per-share amounts)
(Unaudited)

Nine Months Ended Three Months Ended
September 30, September 30,
2001 2000 2001 2000
Revenues:
Services
$ 1,219,075
$ 1,017,533
$ 411,682
$ 349,431
License and resale fees
147,181
181,437
51,588
63,778
1,366,256
1,198,970
463,270
413,209
Costs and expenses:
Cost of sales and direct operating
537,879
483,359
180,498
164,665
Sales, marketing and administration
293,753
259,565
98,469
85,021
Product development
128,937
104,089
44,956
34,879
Depreciation and amortization
72,412
65,939
25,751
23,091
Amortization of acquisition-related intangible assets
48,010
41,858
16,585
14,009
Merger costs
1,829
7,962
-
5,206
1,082,820
962,772
366,259
326,871
Income from operations
283,436
236,198
97,011
86,338
Interest income
20,557
17,132
5,934
6,498
Interest expense
(1,702)
(1,383)
(397)
(615)
Income before income taxes
302,291
251,947
102,548
92,221
Income taxes
121,810
101,419
40,301
36,889
Net income
$ 180,481
$ 150,528
$ 62,247
$ 55,332
Basic net income per common share
$ 0.66
$ 0.57
$ 0.22
$ 0.21
Diluted net income per common share
$ 0.64
$ 0.56
$ 0.22
$ 0.20
Shares used to compute net income per common share:
Basic
274,720
263,549
279,069
264,752
Diluted
284,117
269,918
287,549
271,474

The accompanying notes are an integral part of these financial statements.

SunGard Data Systems Inc.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

Nine Months Ended
September 30,
2001       2000
 
Cash flow from operations:
Net income
$ 180,481
$ 150,528
Reconciliation of net income to cash flow from operations:
Depreciation and amortization
120,422
107,797
Purchased in-process research and development
-
5,206
Other noncash credits
(8,933)
(2,963)
Deferred income tax expense (benefit)
9,201
(4,112)
Accounts receivable and other current assets
12,216
(2,589)
Accounts payable and accrued expenses
23,616
(14,301)
Deferred revenues
14,923
(10,061)
 
Cash flow from operations
351,926
229,505
 
 
Financing activities:
Cash received under employee stock plans
45,801
38,222
Cash paid to repay debt
(22,722)
(7,724)
 
Total financing activities
23,079
30,498
 
 
Investment activities:
Cash paid for acquired businesses, net of cash acquired
(30,338)
(169,651)
Cash paid for property and equipment
(86,031)
(63,182)
Cash paid for software and other assets
(29,252)
(15,767)
Cash paid for purchases of short-term investments
(173,485)
(97,853)
Cash paid for purchase of long-term investment
-
(14,087)
Cash received from sale of investment in common stock
16,057
-
Cash received from sales and maturities of short-term investments
177,767
66,784
 
Total investment activities
(125,282)
(293,756)
 
 
Increase (decrease) in cash and equivalents
249,723
(33,753)
Beginning cash and equivalents
255,835
286,990
 
Ending cash and equivalents
$ 505,558
$ 253,237
 
 
Supplemental information:
Acquired businesses:
Property and equipment
$ 15,644
$ 2,738
Software products
5,912
50,971
Purchased in-process research and development
-
5,206
Goodwill and tangible and intangible assets
34,091
135,559
Deferred income taxes
-
(849)
Purchase price obligations and debt assumed
(13,957)
(7,800)
Net current assets (liabilities) assumed
3,111
(13,675)
Common stock issued and net equity acquired in poolings of interests
(14,463)
(2,499)
 
Cash paid for acquired businesses, net of cash acquired
$ 30,338
$ 169,651
 
     

The accompanying notes are an integral part of these financial statements.

SunGard Data Systems Inc.
Notes to Consolidated Financial Statements (Unaudited)

1.      Basis of Presentation:

       The accompanying consolidated financial statements include the accounts of SunGard Data Systems Inc. and its subsidiaries (SunGard or the Company) and have been prepared in accordance with accounting principles generally accepted in the United States of America. Interim financial reporting does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All significant intercompany transactions and accounts have been eliminated. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the accompanying financial statements. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Future events could cause actual results to differ from those estimates. Operating results for the nine and three month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2000.

2.      Acquisitions:

         Pooling-of-Interests Transactions:

         During the nine months ended September 30, 2001, the Company completed one acquisition in its investment support systems business accounted for as a pooling of interests. A total of 8.2 million shares of common stock were issued in connection with this acquisition, and outstanding options to buy shares of the acquired company were converted into options to buy 1.3 million shares of the Company’s common stock.

        During the nine months ended September 30, 2000, the Company completed one acquisition in its investment support systems business accounted for as a pooling of interests. A total of 4.4 million shares of common stock were issued in connection with this acquisition, and outstanding options to buy shares of the acquired company were converted into options to buy 0.6 million shares of the Company’s common stock.

        The pooling-of-interests transactions described above were not material and have been recorded as of the beginning of the quarter in which each acquisition was completed. Except for the merger costs described below, the Company does not expect that the immaterial acquisitions, individually or in the aggregate, will have a material effect on its financial condition or results of operations.

        Purchase Transactions:

        During the nine months ended September 30, 2001, the Company completed five acquisitions accounted for as purchases. Total cash paid in connection with these acquisitions was $32.7 million, subject to certain adjustments.

          During the nine months ended September 30, 2000, the Company completed eight acquisitions accounted for as purchases. Total cash paid in connection with these acquisitions was $168.3 million, subject to certain adjustments. Also during the first nine months of 2000, the Company paid $0.6 million as additional consideration based upon the performance of a business previously acquired.

          At September 30, 2000, the purchase price allocation to the assets and liabilities of the Risk and Exposure Management Business of GE Information Services, Inc. was still preliminary. The final allocation resulted in a charge of $5.2 million during the fourth quarter of 2000 for purchased in-process research and development. This charge, equal to approximately 10% of the cash paid, represented, as of the date of acquisition, the value of software products still in development but not considered to have reached technological feasibility or to have any alternative future use.

          Merger Costs:

          During the nine months ended September 30, 2001, the Company recorded net merger costs of $1.8 million ($2.7 million after-tax, or less than $0.01 per diluted share). These merger costs are associated with a pooling-of-interests transaction that generally are not deductible for income tax purposes, and costs associated with the attempted acquisition of certain assets of Bridge Information Systems, Inc. (Bridge), reduced by the $5.0 million break-up fee paid to the Company in connection with its attempted acquisition of Bridge. The costs include investment banking, legal and accounting fees.

          During the nine months ended September 30, 2000, the Company recorded merger costs of $8.0 million ($5.4 million after tax, or $0.02 per diluted share). The merger costs are associated with purchased in-process research and development in connection with the acquisition of Global Information Solutions Ltd. and investment banking, legal, accounting and printing fees in connection with pooling-of-interests transactions that generally are not deductible for income tax purposes.

3.      Common Stock Split:

          On May 11, 2001, the Company’s board of directors authorized a two-for-one stock split of the Company’s common stock. Stockholders of record as of the close of business on May 25, 2001 received one additional share of SunGard stock for every share held on that date. The effective date for the stock split was June 18, 2001. The number of shares used for purposes of calculating net income per common share and all per share data and other disclosures have been adjusted for all periods presented to reflect the stock split.

4.      Comprehensive Income:

          Comprehensive income consists of net income, adjusted for other increases and decreases affecting stockholders’ equity that are excluded from the determination of net income. The calculation of comprehensive income for the nine and three months ended September 30, 2001 and 2000 follows (in thousands):

Nine Months Ended
September 30, 		Three Months Ended
September 30,
2001 2000   2001 2000
Net income $180,481 $150,528   $62,247 $55,332
Foreign currency translation gains (losses) (5,335) (10,869)   3,716 (5,679)
Unrealized gains (losses) on marketable securities 7,103 (27,799)   544 (1,263)
Income tax benefit (expense) (2,486) 9,730   (190) 443
Comprehensive net income $179,763 $121,590   $66,317 $48,833
 
 

         The unrealized gains (losses) on marketable securities result primarily from the Company’s investment in approximately 16.5% of the common stock in Tecnomatix Technologies Ltd. (NASDAQ: TCNO). The investment, which had been classified as an investment held for sale, was sold during the second quarter of 2001. The gain on sale is included in interest income and is not material.

5.      Long-term Investments:

         As of September 30, 2001, the Company has two long-term minority investments included in other tangible and intangible assets at a cost of $14.9 million. Each investment has an operational relationship with at least one of the Company’s business units. In order to assess the recoverability of these assets, the Company regularly reviews their operating plans and budgets as compared with actual results as well as additional investments made by third parties. While neither of these companies is generating positive cash flow from operations, both continue to execute their business plans.

6.      Shares Used in Computing Net Income Per Common Share:

         The computation of shares used in computing pro forma basic and diluted net income per common share for the nine and three months ended September 30, 2001 and 2000 follows (in thousands):

Nine Months Ended
September 30, 		Three Months Ended
September 30,
2001 2000 2001 2000
Weighted average common shares outstanding 274,720 263,410 279,069 264,752
Contingent shares         -    139 - -
 
Total shares used for calculation of basic net income per common share 274,720 263,549 279,069 264,752
Employee stock options 9,397 6,369 8,480 6,722
Total shares used for calculation of diluted net income per common share 284,117 269,918 287,549 271,474
 

7.      Operating Segments:

         The Company’s three operating segments consist of its investment support systems (ISS) business, business continuity and Internet services (BCIS) business, and a third segment referred to as Other Businesses. The Company’s operating segments are groups of businesses that offer similar products and services. The segments are managed separately since each business requires different technology and marketing strategies.

         ISS designs, markets and maintains a comprehensive set of propriety software applications that are delivered to customers on license and application-service-provider bases. The fundamental purpose of these systems is to automate the complex transaction processing associated with investment operations. BCIS provides customers with business continuity services and high-availability infrastructure, enabling customers to have around-the-clock access to business-critical information. BCIS also provides Web-hosting and co-location services, as well as outsourcing and remote-access computer services. Other Businesses is comprised of a business that provides a work-flow management system, which increases efficiency and flexibility in managing healthcare insurance organizations, and an automated mailing-services business.

         The operating results for each operating segment for the nine and three months ended September 30, 2001 and 2000 follow (in thousands):

Nine Months Ended
September 30, 		Three Months Ended
September 30,
2001 2000 2001 2000
Revenues:
Investment support systems $1,003,359 $873,747 $339,252 $300,828
Business continuity and Internet services 338,868 300,643 116,186 103,701
Other businesses 24,029 24,580 7,832 8,680
$1,366,256 $1,198,970 $463,270 $413,209
Income from operations:
Investment support systems (1) $200,096 $162,263 $67,412 $58,849
Business continuity and Internet services 100,214 82,943 35,502 30,537
Other businesses 7,598 7,420 2,358 2,866
Corporate administration (24,472) (16,428) (8,261) (5,914)
$283,436 $236,198 $97,011 $86,338

(1) Includes merger costs of $1.8 million and $8.0 million during the nine months ended September 30, 2001 and 2000, respectively, and $5.2 million during the three months ended September 30, 2000. There were no merger costs during the three months ended September 30, 2001.
   

8.      Subsequent Events:
   
  On November 9, 2001, the Company announced that its $825 million cash bid to acquire the Availability Solutions business of Comdisco, Inc.  ("Comdisco") had been approved by the U.S. Bankruptcy Court for the Northern District of Illinois. Closing of the transaction will occur as soon as possible, subject to a favorable ruling by the U.S. District Court for the District of Columbia in the antitrust case filed against the Company and Comdisco by the U.S. Department of Justice. All proceedings in the antitrust case were completed on November 9, 2001, and the parties are awaiting the ruling of the U.S. District Court for the District of Columbia, expected on or before November 15, 2001.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

               Statements about the Company’s outlook for 2001, statements about the expected effects on the Company of Comdisco, Inc.'s business continuity assets (if such acquisition closes), statements about the expected timing and scope of the acquisition and all other statements in this quarterly report on Form 10-Q other than historical facts are forward-looking statements that are subject to risks and uncertainties that may change at any time and differ from actual results. Forward-looking statements include information about possible or assumed future financial results of SunGard and usually contain words such as “believes,” “intends,” “expects,” “anticipates,” or similar expressions. SunGard derives most of its forward-looking statements from its operating budgets and forecasts, which are based upon many detailed assumptions. While SunGard believes that its assumptions are reasonable, it cautions that there are inherent difficulties in predicting certain important factors, such as the ramifications of the events of September 11, 2001, and possible future acts of terrorism and war, the effect of general economic and market conditions on software and services buying decisions, the timing and magnitude of software sales, the timing and scope of technological advances, the integration and performance of acquired businesses including the availability solutions business of Comdisco, the prospects for future acquisitions, the ability to attract and retain key personnel, and the overall condition of the financial services industry. SunGard may not be able to complete the Comdisco acquisition on the terms summarized above or other acceptable terms, or at all, due to the U.S. Department of Justice lawsuit or the failure to satisfy other conditions to closing. These factors and other factors which may effect SunGard or its ability to complete the acquisition and realize the expected benefits of the acquisition, as and when applicable, are discussed in SunGard’s filings with the Securities and Exchange Commission, including its most recent Form 10-K, a copy of which may be obtained from SunGard without charge.

              During 2001 and 2000, the Company recorded merger costs associated with acquired businesses and, in 2001, costs associated with the attempted acquisition of certain assets of Bridge Information Systems, Inc. (Bridge), reduced by the $5.0 million break-up fee paid to the Company in connection with the attempted acquisition of Bridge. See Note 2 of Notes to Unaudited Consolidated Financial Statements.

        The following supplemental unaudited income statement information should be read along with the unaudited consolidated financial statements and notes thereto included in this report.

SunGard Data Systems Inc.
Supplemental Income Statement Information
(In thousands)
(Unaudited)

Nine Months Ended
September 30, 		Three Months Ended
September 30,
2001 2000 2001 2000
Revenues:
Investment support systems $1,003,359 $873,747 $339,252 $300,828
Business continuity and Internet services 338,868 300,643 116,186 103,701
Other businesses 24,029 24,580 7,832 8,680
$1,366,256 $1,198,970 $463,270 $413,209
 
Income from operations:
Investment support systems $201,925 $170,225 $67,412 $64,055
Business continuity and Internet services 100,214 82,943 35,502 30,537
Other businesses 7,598 7,420 2,358 2,866
Corporate administration (24,472) (16,428) (8,261) (5,914)
285,265 244,160 97,011 91,544
Merger costs (1,829) (7,962) - (5,206)
$283,436 $236,198 $97,011 $86,338
 
Operating margin (excluding merger costs):        
Investment support systems 20.1% 19.5% 19.9% 21.3%
 
Business continuity and Internet services 29.6% 27.6% 30.6% 29.4%
 
Other businesses 31.6% 30.2% 30.1% 33.0%
 
Total 20.9% 20.4% 20.9% 22.2%
 

Income from Operations:

         The Company sells a significant portion of its products and services to the financial services industry and could be affected directly by the overall condition of that industry. The Company expects that the consolidation trend in the financial services industry will continue, but it is unable to predict what effect, if any, this trend may have on the Company.

         Certain of the Company’s investment support systems (ISS) businesses derive a significant portion of revenues from software sales. Since there are inherent difficulties in predicting the timing and magnitude of software sales, there is the potential for fluctuations in quarterly revenues and income.

         The ISS business is comprised of groups of related businesses that sell software and related services to the financial services industry. The business continuity and Internet services (BCIS) business provides business continuity, Web-hosting, co-location, outsourcing and remote-access computer services. Typically, these businesses in the aggregate have met or exceeded expectations. During the three months ended September 30, 2001, overall results did not meet expectations due primarily to the disruption in normal business patterns caused by the events of September 11, which led to delays in closing software sales and lost processing revenue due to the shutdown of financial markets in the United States. The Company does not expect the current economic environment to improve over the balance of the year and has revised its outlook accordingly.

         The Company expects that the full year 2001 operating margin before merger costs will approximate the full year 2000 operating margin before merger costs. In addition to the ongoing impact of the events of September 11, the most important factors affecting the operating margin continue to be the timing and magnitude of software sales, the operating margins of newly acquired businesses, the rate of new contract signings and contract renewals, the level of product development spending, and the timing and magnitude of equipment and facilities expenditures.

         Investment Support Systems (ISS):

         The ISS operating margin is 20.1% and 19.9% for the nine and three month periods ended September 30, 2001, respectively, compared to 19.5% and 21.3% for the comparable periods in 2000. The operating margin increased during the nine month period due primarily to increases in recurring revenues with relatively low incremental costs in the brokerage and execution systems and investor accounting systems businesses and cost controls, offset in part by a $32.0 million decline in software license and resale fees. The decline in the operating margin during the three month period is due to lower revenue growth and an $11.0 million decline in software license and resale fees, offset in part by cost controls.

        In addition to the ongoing impact of the events of September 11, the most important factors affecting the operating margin continue to be the timing and magnitude of software sales, the operating margins of newly acquired businesses, and the level of product development spending.

         Business Continuity and Internet Services (BCIS):

         The BCIS operating margin is 29.6% and 30.6% for the nine and three month periods ended September 30, 2001, respectively, compared to 27.6% and 29.4% for the comparable periods in 2000. The operating margin increased during 2001 due primarily to increases in revenues and the timing of equipment upgrades. While BCIS successfully supported 30 disaster declarations resulting from the terrorist attacks of September 11, fees related to disaster declarations are immaterial and had little incremental impact on the financial results.

         The most important factors affecting the BCIS operating margin are the rate of new contract signings and contract renewals, the timing and magnitude of equipment and facilities expenditures and the benefit derived from the general industry trend of lower per-unit costs for technology. During the second quarter 2001, the Company completed the expansion of its Web-hosting and co-location services facility in Philadelphia, PA.

Revenues:

         Total revenues for the nine and three month periods ended September 30, 2001 increased $167.3 million, or 14%, and $50.1 million, or 12%, respectively, compared to the corresponding periods in 2000. Excluding acquired businesses, revenues increased approximately 9% and 4% during the nine and three month periods ended September 30, 2001, compared to 10% and 14% during the nine and three month periods ended September 30, 2000. The lower rate of revenue growth during the three months ended September 30, 2001 is due primarily to the slowing economy and to the disruption in normal business patterns caused by the events of September 11.

         Recurring revenues, derived from application processing services, business continuity and Internet services, professional services, software maintenance, and software and hardware rentals, increased 20% during the nine month period ended September 30, 2001, to $1,219.1 million, or 89% of total revenues, compared to $1,017.5 million, or 85% of total revenues, during the comparable period in 2000. The increases are due primarily to increases in recurring revenues from acquired companies, brokerage and execution systems, BCIS businesses and investor accounting systems. During the three month period ended September 30, 2001, recurring revenues increased 18% to $411.7 million, or 89% of total revenues, compared to $349.4 million, or 85% of total revenues, during the comparable period in 2000. The increases are due primarily to increases in recurring revenues from acquired businesses, BCIS and investor accounting systems businesses.

         Professional services revenues are $251.6 million and $82.0 million during the nine and three month periods ended September 30, 2001, respectively, compared to $204.9 million and $70.2 million during the comparable periods in 2000. The increases are due primarily to increases in revenues from brokerage and execution systems and asset management systems businesses and acquired businesses.

         Nonrecurring revenues, derived from software licenses and resales of third-party software and hardware, are $147.2 million and $51.6 million during the nine and three month periods ended September 30, 2001, respectively, compared to $181.4 million and $63.8 million during the comparable periods in 2000. Software license revenues included in license and resale fees are $125.3 million and $44.3 million

during the nine and three month periods ended September 30, 2001, respectively, compared to $157.6 million and $56.6 million during the comparable periods in 2000. The Company expects that license fees in the fourth quarter of 2001 will be lower than in the fourth quarter of 2000.

         Investment Support Systems:

        ISS revenues increased $129.6 million, or 15%, and $38.4 million, or 13%, during the nine and three month periods ended September 30, 2001, respectively, compared to the corresponding periods in 2000. Excluding acquired businesses, ISS revenues increased approximately 8% and 2% during the nine and three month periods ended September 30, 2001. The revenue growth during 2001 is due primarily to increases in revenues from brokerage and execution systems, investment management systems and asset management systems, although the rates of increase have slowed throughout 2001 and are expected to continue to decline for the balance of the year. Revenue growth from brokerage and execution systems has declined during 2001 and is expected to be lower for the balance of the year compared with 2000.

        During the nine month period ended September 30, 2001, recurring ISS revenues increased $161.6 million, or 23%, while nonrecurring ISS revenues decreased $32.0 million, or 19%. During the three month period, recurring ISS revenues increased $49.5 million, or 20%, while nonrecurring ISS revenues decreased $11.0 million, or 19%. The increase in recurring revenues is due primarily to acquired businesses and growth in investor accounting systems and, during the nine month period, growth in brokerage and execution systems. The decrease in nonrecurring revenues is due primarily to lower software license revenues during 2001 and a contract cancellation fee in 2000.

        Business Continuity and Internet Services:

        BCIS revenues increased $38.2 million, or 13%, and $12.5 million, or 12%, during the nine and three month periods ended September 30, 2001, respectively, compared to the corresponding periods in 2000. The increases are due primarily to higher revenues from new contract signings and contract renewals and continued growth in demand for midrange platforms and work-group recovery, partially offset by lower termination fees during the nine month period.

Costs and Expenses:

        Cost of sales and direct operating expenses for the nine and three month periods ended September 30, 2001 increased $54.5 million, or 11%, and $15.8 million, or 10%, respectively, compared to the corresponding periods in 2000. The increases are due primarily to acquired businesses and equipment upgrades.

        Sales, marketing and administration expenses for the nine and three month periods ended September 30, 2001 increased $34.2 million, or 13%, and $13.4 million, or 16%, respectively, compared to the corresponding periods in 2000. The increases are due primarily to acquired businesses and the Company’s new global account management and corporate marketing programs, partially offset by lower sales and marketing costs in certain ISS businesses.

        Product development expenses for the nine and three month periods ended September 30, 2001 increased $24.8 million, or 24%, and $10.1 million, or 29%, compared to the corresponding periods in 2000.

The increases are due primarily to acquired businesses and various ISS product development initiatives. Gross development costs capitalized during the nine and three month periods ended September 30, 2001 are $8.7 million and $3.4 million, respectively, compared to $7.2 million and $3.1 million during the comparable periods in 2000. During the nine and three month periods ended September 30, 2001, amortization of previously capitalized development costs, included in depreciation and amortization, are $4.9 million and $1.7 million, respectively, compared to $4.4 million and $1.5 million during the comparable periods in 2000.

        Depreciation and amortization for the nine and three month periods ended September 30, 2001 increased $6.5 million, or 10%, and $2.7 million, or 12%, respectively, compared to the corresponding periods in 2000. The increases are due primarily to equipment purchases and acquired businesses.

        Amortization of all acquisition-related intangible assets for the nine and three month periods ended September 30, 2001 are $48.0 million and $16.6 million, respectively ($0.11 and $0.04 per diluted share, respectively), compared to $41.9 million and $14.0 million during the comparable periods in 2000, respectively ($0.10 and $0.03 per diluted share, respectively). The increases are due to recently acquired businesses. Amortization of goodwill for the nine and three month periods ended September 30, 2001 totaled $16.0 million and $5.7 million, respectively ($0.05 and $0.02 per diluted share, respectively), compared to $12.3 million and $4.4 million during the comparable periods in 2000, respectively ($0.04 and $0.01 per diluted share, respectively).

        Interest income for the nine month period ended September 30, 2001 increased $3.4 million, or 20%, and declined for the three month period $0.6 million, or 9%, compared to the corresponding periods in 2000. The increase in the nine month period is due to higher average cash and short-term investment balances and a gain on sale of an equity investment, partially offset by lower interest rates. The decrease in the three month period is due to a decline in interest rates, despite higher average cash and short-term investment balances.

        The Company’s effective income tax rate was 40.3% for the nine month period ended September 30, 2001. Excluding merger related costs, the Company’s effective income tax rate was 39.8% for the nine months ended September 30, 2001, compared to 40.0% during the nine months ended September 30, 2000.

Liquidity and Capital Resources:

        At September 30, 2001, cash and short-term investments are $682.6 million, an increase of $246.5 million from December 31, 2000. Cash flow from operations increased $122.4 million, reaching $351.9 million during the first nine months of 2001. The Company has only $5.1 million of short- and long-term debt, while stockholders’ equity exceeds $1.7 billion at September 30, 2001.

        The Company expects that its existing cash resources and cash generated from operations for the foreseeable future will be sufficient to meet its operating requirements, contingent payments in connection with business acquisitions and ordinary capital spending needs. Furthermore, the Company has a $150.0 million credit agreement and believes that it has the capacity to secure additional credit or issue equity to finance additional capital needs.

Item 3.      Quantitative and Qualitative Disclosures about Market Risk:

                   The Company has not recently used derivative financial instruments to manage risk exposures or for trading or speculative purposes. The Company invests available cash in short-term, highly liquid financial instruments, with a substantial portion of such investments having initial maturities of three months or less. While declines in interest rates could decrease the Company’s interest income, the Company does not consider the interest rate risk for these investments to be material.

                   While approximately 20% of the Company’s revenues come from sales to customers located outside of the United States, approximately one-half of those revenues are U.S. dollar-denominated sales by U.S.-based operations. For the Company’s foreign operations, the Company generally matches local currency revenues with local currency costs. For these reasons, the Company does not believe that it has a material exposure to changes in foreign currency exchange rates.                            

Part II.   Other Information: 
   
Item 1. Legal Proceedings:  None.
       
Item 2. Changes in Securities and Use of Proceeds:  None.
       
Item 3. Defaults Upon Senior Securities:  None.
       
Item 4. Submission of Matters to a Vote of Security Holders:  None.
       
Item 5.
Other Information:  None.
       
Item 6. Exhibits and Reports on Form 8-K:  
       
  (a)   Exhibits:  None.
       
  (b)   Reports on Form 8-K: 
       
 

Form 8-K filed on October 19, 2001 relating to the Company's announcement of results for the quarter ended September 30, 2001 and revised outlook for the full-year 2001.

 

          

          

          

           

 

SIGNATURES

         Pursuant to the requirements 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.

 
SUNGARD DATA SYSTEMS INC.
 
 
 
Date:    November 14, 2001
By:
 
 /s/ Michael J. Ruane
     
 
Michael J. Ruane
 
Senior Vice President-Finance and Chief Financial Officer
 
(Principal Financial Officer)