SS&C Technologies Holdings, Inc.
SS&C TECHNOLOGIES INC (Form: 10-Q, Received: 08/12/2011 16:32:38)
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-28430
SS&C TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  06-1169696
(I.R.S. Employer Identification No.)
80 Lamberton Road
Windsor, CT 06095
(Address of principal executive offices, including zip code)
860-298-4500
(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 o No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
        (Do not check if a smaller reporting company)    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
There were 1,000 shares of the registrant’s common stock outstanding as of August 11, 2011.
 
 

 

 


 

SS&C TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
         
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  EX-31.1
  EX-31.2
  EX-32
  EX-101 INSTANCE DOCUMENT
  EX-101 SCHEMA DOCUMENT
  EX-101 CALCULATION LINKBASE DOCUMENT
  EX-101 LABELS LINKBASE DOCUMENT
  EX-101 PRESENTATION LINKBASE DOCUMENT
This Quarterly Report on Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, 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”, “should”, and similar expressions are intended to identify forward-looking statements. The important factors discussed under the caption “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, 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. The Company does not undertake an obligation to update its forward-looking statements to reflect future events or circumstances.

 

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Part I. FINANCIAL INFORMATION
Item 1.   Financial Statements
SS&C TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
                 
    June 30,     December 31,  
    2011     2010  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 82,642     $ 84,843  
Accounts receivable, net of allowance for doubtful accounts of $2,423 and $1,986, respectively
    44,728       45,531  
Prepaid expenses and other current assets
    6,622       5,932  
Prepaid income taxes
    8,522       2,242  
Deferred income taxes
    1,268       1,142  
 
           
Total current assets
    143,782       139,690  
 
           
Property and equipment:
               
Leasehold improvements
    5,860       5,605  
Equipment, furniture, and fixtures
    33,629       30,407  
 
           
 
    39,489       36,012  
Less accumulated depreciation
    (25,525 )     (22,442 )
 
           
Net property and equipment
    13,964       13,570  
 
           
 
               
Deferred income taxes
    660       686  
Goodwill (Note 9)
    945,079       926,668  
Intangible and other assets, net of accumulated amortization of $172,695 and $153,123, respectively
    182,750       195,112  
 
           
Total assets
  $ 1,286,235     $ 1,275,726  
 
           
 
               
LIABILITIES AND STOCKHOLDER’S EQUITY
               
Current liabilities:
               
Current portion of long-term debt (Note 4)
  $ 1,471     $ 1,702  
Accounts payable
    4,201       3,790  
Accrued employee compensation and benefits
    9,010       16,854  
Other accrued expenses
    11,973       11,052  
Interest payable
    652       1,305  
Deferred maintenance and other revenue
    48,992       41,671  
 
           
Total current liabilities
    76,299       76,374  
 
               
Long-term debt, net of current portion (Note 4)
    202,281       289,092  
Other long-term liabilities
    13,687       12,343  
Deferred income taxes
    35,324       40,734  
 
           
Total liabilities
    327,591       418,543  
 
           
Commitments and contingencies (Note 7)
               
Stockholder’s equity (Notes 2 and 3):
               
Common stock, $0.01 par value, 1 share authorized; 1 share issued and outstanding
           
Additional paid-in capital
    814,250       745,771  
Accumulated other comprehensive income
    42,819       32,699  
Retained earnings
    101,575       78,713  
 
           
Total stockholder’s equity
    958,644       857,183  
 
           
Total liabilities and stockholder’s equity
  $ 1,286,235     $ 1,275,726  
 
           
See accompanying notes to Condensed Consolidated Financial Statements

 

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SS&C TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
Revenues:
                               
Software licenses
  $ 4,982     $ 6,074     $ 11,555     $ 11,663  
Maintenance
    19,418       17,817       38,865       35,836  
Professional services
    5,860       5,099       11,127       10,488  
Software-enabled services
    61,543       52,628       119,263       101,805  
 
                       
Total revenues
    91,803       81,618       180,810       159,792  
 
                       
Cost of revenues:
                               
Software licenses
    1,700       1,908       3,375       3,836  
Maintenance
    8,801       8,084       17,467       16,081  
Professional services
    3,981       3,260       7,551       6,618  
Software-enabled services
    31,155       27,688       61,739       53,567  
 
                       
Total cost of revenues
    45,637       40,940       90,132       80,102  
 
                       
Gross profit
    46,166       40,678       90,678       79,690  
 
                       
Operating expenses:
                               
Selling and marketing
    7,018       6,483       13,908       12,635  
Research and development
    9,053       7,860       17,025       15,619  
General and administrative
    7,200       6,546       13,743       12,226  
 
                       
Total operating expenses
    23,271       20,889       44,676       40,480  
 
                       
Operating income
    22,895       19,789       46,002       39,210  
 
                       
 
                               
Interest expense, net
    (3,474 )     (8,058 )     (8,601 )     (17,075 )
Other income (expense), net
    119       115       (168 )      
Loss on extinguishment of debt
          (5,480 )     (2,881 )     (5,480 )
 
                       
 
                               
Income before income taxes
    19,540       6,366       34,352       16,655  
Provision for income taxes
    6,512       2,004       11,490       3,272  
 
                       
Net income
  $ 13,028     $ 4,362     $ 22,862     $ 13,383  
 
                       
See accompanying notes to Condensed Consolidated Financial Statements.

 

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SS&C TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
                 
    Six Months Ended June 30,  
    2011     2010  
Cash flow from operating activities:
               
Net income
  $ 22,862     $ 13,383  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    20,990       20,297  
Amortization of loan origination costs
    1,808       2,403  
Gain on sale or disposition of property and equipment
          (2 )
Deferred income taxes
    (5,904 )     (6,090 )
Stock-based compensation expense
    5,435       5,232  
Provision for doubtful accounts
    649       454  
Changes in operating assets and liabilities, excluding effects from acquisitions:
               
Accounts receivable
    1,306       (2,423 )
Prepaid expenses and other assets
    (296 )     818  
Accounts payable
    243       (857 )
Accrued expenses and other liabilities
    (9,236 )     (10,914 )
Income taxes receivable and payable
    (3,457 )     (3,838 )
Deferred maintenance and other revenues
    6,654       4,971  
 
           
Net cash provided by operating activities
    41,054       23,434  
 
           
 
               
Cash flow from investing activities:
               
Additions to property and equipment
    (3,102 )     (2,238 )
Proceeds from sale of property and equipment
          52  
Cash paid for business acquisitions, net of cash acquired
    (14,798 )     (11,372 )
Additions to capitalized software and other intangibles
    (1,075 )     (99 )
 
           
Net cash used in investing activities
    (18,975 )     (13,657 )
 
           
 
               
Cash flow from financing activities:
               
Repayment of debt
    (87,833 )     (81,597 )
Proceeds from common stock issuance, net
    51,971       134,611  
Proceeds from exercise of stock options
    6,190       5,396  
Income tax benefit related to exercise of stock options
    4,884       3,583  
Purchase of common stock for treasury
          (1,169 )
 
           
Net cash (used in) provided by financing activities
    (24,788 )     60,824  
 
           
 
               
Effect of exchange rate changes on cash and cash equivalents
    508       (770 )
 
           
 
               
Net (decrease) increase in cash and cash equivalents
    (2,201 )     69,831  
Cash and cash equivalents, beginning of period
    84,843       19,055  
 
           
Cash and cash equivalents, end of period
  $ 82,642     $ 88,886  
 
           
 
               
Supplemental disclosure of cash paid for:
               
Interest
  $ 8,446     $ 16,826  
Income taxes, net
  $ 15,606     $ 10,861  
Supplemental disclosure of non-cash investing activities:
               
See Note 8 for a discussion of acquisitions
               
See accompanying notes to Condensed Consolidated Financial Statements.

 

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SS&C TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
SS&C Technologies, Inc., together with its subsidiaries, is referred to herein as “SS&C”, the “Company,” “we,” “our,” and “us.” SS&C Technologies Holdings, Inc., our ultimate parent company, is referred to herein as “Holdings.”
1. Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These accounting principles were applied on a basis consistent with those of the audited consolidated financial statements contained in SS&C’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on March 11, 2011 (the “2010 Form 10-K”). In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments, except as noted elsewhere in the notes to the condensed consolidated financial statements) necessary for a fair statement of its financial position as of June 30, 2011, the results of its operations for the three and six months ended June 30, 2011 and 2010 and its cash flows for the six months ended June 30, 2011 and 2010. These statements do not include all of the information and footnotes required by GAAP for annual financial statements. The financial statements contained herein should be read in conjunction with the audited consolidated financial statements and footnotes as of and for the year ended December 31, 2010, which were included in the 2010 Form 10-K. The December 31, 2010 consolidated balance sheet data were derived from audited financial statements but do not include all disclosures required by GAAP for annual financial statements. The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the expected results for the full year.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income” (“ASU 2011-05”). ASU 2011-05 intends to enhance comparability and transparency of other comprehensive income components. The guidance provides an option to present total comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. ASU 2011-05 eliminates the option to present other comprehensive income components as part of the statement of changes in stockholder’s equity. The provisions of ASU 2011-05 will be applied retrospectively for interim and annual periods beginning after December 15, 2011. Early application is permitted. The Company is currently evaluating the impact of ASU 2011-05.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement” (“ASU 2011-04”). ASU 2011-04 amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The changes are effective prospectively for interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact of ASU 2011-04.
In December 2010, the FASB issued ASU No. 2010-29, which updates the guidance in Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASU 2010-29”). The objective of ASU 2010-29 is to address diversity in practice regarding the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in ASU 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted this standard beginning January 1, 2011, and the adoption did not have a material impact on its financial position, results of operations or cash flows.
In December 2010, the FASB issued ASU No. 2010-28, Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28 modifies Step 1 of the goodwill impairment test so that for those reporting units with zero or negative carrying amounts, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not based on an assessment of qualitative indicators that goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company adopted this standard beginning January 1, 2011, and the adoption did not have a material impact on its financial position, results of operations or cash flows.

 

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2. Equity and Stock-based Compensation
In February 2011, Holdings completed a follow-on public offering of its common stock at an offering price of $17.60 per share. The offering included 2,000,000 newly issued shares of common stock sold by Holdings and 9,000,000 existing shares of Holdings’ common stock sold by selling stockholders. On March 9, 2011, the underwriters of the offering purchased an additional 1,100,000 shares of Holdings’ common stock to cover over-allotments. The Company received total net proceeds from the offering, including the sale of shares to cover over-allotments, of approximately $52.0 million, none of which relates to proceeds from the sale of shares by the selling stockholders.
In March 2011, the Company’s Board of Directors established SS&C’s annual Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) target range for the Company’s 2011 fiscal year. As of that date, the Company estimated the weighted-average fair value of the performance-based options that vest upon the attainment of the 2011 EBITDA target range to be $11.41 per share. The Company used the following weighted-average assumptions to estimate the option value: expected term to exercise of 2.5 years; expected volatility of 38.0%; risk-free interest rate of 1.0%; and no dividend yield. Expected volatility is based on the historical volatility of the Company’s peer group and the Company. Expected term to exercise is based on the Company’s historical stock option exercise experience.
During the three months ended June 30, 2011, the Company recorded total stock-based compensation expense of $3.6 million, of which $2.8 million related to the performance-based options based upon management’s assessment of the probability that the Company’s EBITDA for 2011 will meet or exceed the high end of the targeted range. During the six months ended June 30, 2011, the Company recorded total stock-based compensation expense of $5.4 million, of which $3.6 million related to the performance-based options based upon management’s assessment of the probability that the Company’s EBITDA for 2011 will meet or exceed the high end of the targeted range. Time-based options represented the remaining $0.8 million and $1.8 million of compensation expense recorded during the three and six months ended June 30, 2011, respectively.
During the three months ended June 30, 2010, the Company recorded total stock-based compensation expense of $3.9 million, of which $3.0 million related to the performance-based options based upon management’s assessment of the probability that the Company’s EBITDA for 2010 would meet or exceed the high end of the targeted range. During the six months ended June 30, 2010, the Company recorded total stock-based compensation expense of $5.2 million, of which $4.1 million related to the performance-based options based upon management’s assessment of the probability that the Company’s EBITDA for 2010 would meet or exceed the high end of the targeted range. Time-based options represented the remaining $0.9 million and $1.1 million of compensation expense recorded during the three and six months ended June 30, 2010, respectively.
The amount of stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations was as follows (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
Statements of operations classification   2011     2010     2011     2010  
Cost of maintenance
  $ 79     $ 98     $ 130     $ 125  
Cost of professional services
    84       140       142       186  
Cost of software-enabled services
    668       823       1,007       1,090  
 
                       
Total cost of revenues
    831       1,061       1,279       1,401  
 
                               
Selling and marketing
    543       557       808       765  
Research and development
    336       383       487       515  
General and administrative
    1,927       1,881       2,861       2,551  
 
                       
Total operating expenses
    2,806       2,821       4,156       3,831  
 
                       
 
                               
Total stock-based compensation expense
  $ 3,637     $ 3,882     $ 5,435     $ 5,232  
 
                       

 

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A summary of stock option activity as of and for the six months ended June 30, 2011 is as follows:
         
    Shares of Common  
    Stock Underlying  
    Options  
Outstanding at January 1, 2011
    12,182,192  
Granted
    186,250  
Cancelled/forfeited
    (52,201 )
Exercised
    (1,482,107 )
 
     
Outstanding at June 30, 2011
    10,834,134  
 
     
3. Comprehensive Income
Items defined as comprehensive income, such as foreign currency translation adjustments and unrealized gains (losses) on interest rate swaps qualifying as hedges, are separately classified in the financial statements. The accumulated balance of other comprehensive income is reported separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. Total comprehensive income consists of net income and other accumulated comprehensive income disclosed in the equity section of the balance sheet.
The following table sets forth the components of comprehensive income (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Net income
  $ 13,028     $ 4,362     $ 22,862     $ 13,383  
Foreign currency translation gains (losses)
    2,139       (11,632 )     10,120       (3,190 )
Unrealized gains on interest rate swaps, net of tax
          692             1,186  
 
                       
Total comprehensive income (loss)
  $ 15,167     $ (6,578 )   $ 32,982     $ 11,379  
 
                       
4. Debt
At June 30, 2011 and December 31, 2010, debt consisted of the following (in thousands):
                 
    June 30, 2011     December 31, 2010  
Senior credit facility, term loan portion, weighted-average interest rate of 2.38% and 2.55%, respectively
  $ 137,105     $ 157,499  
11 3 / 4 % senior subordinated notes due 2013
    66,625       133,250  
Capital leases
    22       45  
 
           
 
    203,752       290,794  
Less: Short-term borrowings and current portion of long-term debt
    (1,471 )     (1,702 )
 
           
Long-term debt
  $ 202,281     $ 289,092  
 
           
Capitalized financing costs of $0.4 million and $0.6 million were amortized to interest expense during the three months ended June 30, 2011 and 2010, respectively. Capitalized financing costs of $0.9 million and $1.1 million were amortized to interest expense during the six months ended June 30, 2011 and 2010, respectively.
The estimated fair value of the Company’s senior subordinated notes due 2013 was $68.5 million and $137.8 million at June 30, 2011 and December 31, 2010, respectively. The carrying value of the Company’s senior credit facility approximates its fair value.
In February 2011, the Company issued a notice of redemption for $66.6 million in principal amount of its outstanding 11 3 / 4 % senior subordinated notes due 2013 at a redemption price of 102.9375% of the principal amount, plus accrued and unpaid interest on such amount to, but excluding, March 17, 2011, the day such redemption was completed. The Company recorded a loss on extinguishment of debt of $2.9 million in connection with the redemption, which includes the redemption premium of $2.0 million and $0.9 million relating to the write-off of capitalized financing costs attributable to the redeemed notes.

 

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5. Derivatives and Hedging Activities
The Company has utilized interest rate swap agreements to manage the floating rate portion of its debt portfolio and follows the provisions of the accounting standard for derivative instruments and hedging activities, which requires that all derivative instruments be recorded on the balance sheet at fair value.
Quarterly variable interest payments were recognized as an increase in interest expense as follows (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Interest rate swaps
  $     $ 1,135     $     $ 2,267  
Changes in the fair value of the interest rate swaps are not included in earnings but are reported as a component of accumulated other comprehensive income (“AOCI”). The change in the fair value of the interest rate swaps was as follows (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Change in fair value recognized in AOCI, net of tax
  $     $ 692     $     $ 1,186  
As of June 30, 2011, the Company had no outstanding interest rate swap agreements. As of June 30, 2010, the Company held one receive-variable/pay-fixed interest rate swap with a notional value of $100 million, which expired on December 31, 2010.
6. Fair Value Measurements
The Company follows the provisions of the accounting standard for fair value measurements with respect to the valuation of its interest rate swap agreements. The fair value measurement standard clarifies that companies are required to use a fair value measure for recognition and disclosure by establishing a common definition of fair value and a framework for measuring fair value, and that companies are required to expand disclosures about fair value measurements.
The accounting standard for fair value measurements and disclosure establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of June 30, 2011, the Company’s contingent consideration liability of $1.8 million associated with the acquisition of BenefitsXML, Inc. (“BXML”) was measured at fair value based on the potential payments of the liability associated with the unobservable input of the estimated post-acquisition financial results of BXML through February 28, 2013 and, therefore, is a Level 3 liability. See Footnote 9 for further discussion of acquisitions. There was no change in the estimated fair value from the acquisition date through June 30, 2011.
7. Commitments and Contingencies
From time to time, the Company is subject to legal proceedings and claims that arise in the normal course of its business. In the opinion of management, the Company is not involved in any litigation or proceedings by third parties that management believes could have a material adverse effect on the Company or its business.
8. Acquisitions
On March 10, 2011, the Company purchased all of the outstanding stock of BXML for approximately $15.1 million in cash, plus the costs of effecting the transaction and the assumption of certain liabilities. BXML provides technology solutions for employee benefit plan providers.
The net assets and results of operations of BXML have been included in the Company’s consolidated financial statements from March 11, 2011. The purchase price was allocated to tangible and intangible assets based on their fair value at the date of acquisition. The fair value of the intangible assets, consisting of completed technology, trade name and client contracts, was determined using the income approach. Specifically, the relief-from-royalty method was utilized for the completed technology and trade name, and the discounted cash flows method was utilized for the contractual relationships. The intangible assets are amortized each year based on the ratio that the projected cash flows for the intangible assets bear to the total of current and expected future cash flows for the intangible assets. The completed technology is amortized over approximately five years, contractual relationships are amortized over approximately five years and trade name is amortized over approximately seven years, the estimated lives of the assets. The Company has recorded a contingent consideration liability of $1.8 million, which is based on the attainment of certain revenue and EBITDA targets by the acquired business through February 28, 2013. The total possible undiscounted payments could range from zero to $3.0 million. The remainder of the purchase price was allocated to goodwill and is tax deductible (excluding the portion relating to the contingent consideration liability, which is not deductible until paid).

 

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The following summarizes the allocation of the purchase price for the acquisition of BXML (in thousands):
         
Accounts receivable
  $ 462  
Tangible assets acquired, net of cash received
    79  
Acquired customer relationships and contracts
    3,700  
Completed technology
    1,600  
Trade name
    100  
Goodwill
    10,984  
Deferred revenue
    (190 )
Other liabilities assumed
    (1,951 )
 
     
Consideration paid, net of cash received
  $ 14,784  
 
     
The fair value of acquired accounts receivable balances for BXML approximates the contractual amounts due from acquired customers.
The Company reported revenues of $1.9 million and pretax earnings of $1.1 million from BXML from the acquisition date through June 30, 2011. The following unaudited pro forma condensed consolidated results of operations are provided for illustrative purposes only and assume that the acquisition of BXML, PC Consulting d/b/a TimeShareWare (“TSW”), thinkorswim Technologies, Inc. (“TOS”) and Geller Investment Partnership Services (“GIPS”) occurred on January 1, 2010. This unaudited pro forma information (in thousands) should not be relied upon as being indicative of the historical results that would have been obtained if the acquisitions had actually occurred on that date, nor of the results that may be obtained in the future.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Revenues
  $ 91,803     $ 88,002     $ 181,818     $ 171,451  
Net income
  $ 13,028     $ 6,110     $ 23,022     $ 15,938  
9. Goodwill
The change in carrying value of goodwill for the six months ended June 30, 2011 was as follows (in thousands):
         
Balance at December 31, 2010
  $ 926,668  
Adjustments to prior acquisition
    732  
2011 acquisition
    10,984  
Income tax benefit on rollover options exercised
    (2,804 )
Effect of foreign currency translation
    9,499  
 
     
Balance at June 30, 2011
  $ 945,079  
 
     
10. Product and Geographic Sales Information
The Company operates in one reportable segment. The Company attributes net sales to an individual country based upon location of the customer. The Company manages its business primarily on a geographic basis. The Company’s geographic regions consist of the United States, Canada, Americas excluding the United States and Canada, Europe and Asia Pacific and Japan. The European region includes European countries as well as the Middle East and Africa.

 

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Revenues by geography were (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
United States
  $ 63,037     $ 54,596     $ 124,555     $ 106,711  
Canada
    13,537       12,674       26,776       24,359  
Americas excluding United States and Canada
    3,125       2,277       4,974       3,279  
Europe
    9,756       10,172       19,566       21,569  
Asia Pacific and Japan
    2,348       1,899       4,939       3,874  
 
                       
 
  $ 91,803     $ 81,618     $ 180,810     $ 159,792  
 
                       
Revenues by product group were (in thousands):
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Portfolio management/accounting
  $ 71,533     $ 65,326     $ 140,000     $ 127,551  
Trading/treasury operations
    10,621       10,240       21,151       20,160  
Financial modeling
    2,039       2,250       3,936       4,596  
Loan management/accounting
    1,990       1,082       4,363       2,031  
Property management
    3,972       1,028       7,491       2,218  
Money market processing
    1,026       1,077       2,591       1,983  
Training
    622       615       1,278       1,253  
 
                       
 
  $ 91,803     $ 81,618     $ 180,810     $ 159,792  
 
                       
11. Supplemental Guarantor Condensed Consolidating Financial Statements
On November 23, 2005, the Company issued $205.0 million aggregate principal amount of 11 3 / 4 % senior subordinated notes due 2013. The senior subordinated notes are jointly and severally and fully and unconditionally guaranteed on an unsecured senior subordinated basis, in each case subject to certain exceptions, by substantially all wholly owned domestic subsidiaries of the Company (collectively “Guarantors”). All of the Guarantors are 100% owned by the Company. All other subsidiaries of the Company, either direct or indirect, do not guarantee the senior subordinated notes (“Non-Guarantors”). The Guarantors also unconditionally guarantee the senior secured credit facilities. There are no significant restrictions on the ability of the Company or any of the subsidiaries that are Guarantors to obtain funds from its subsidiaries by dividend or loan.

 

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Condensed consolidating financial information as of June 30, 2011 and December 31, 2010 and the three and six months ended June 30, 2011 and 2010 are presented. The condensed consolidating financial information of the Company and its subsidiaries are as follows (in thousands):
                                         
    June 30, 2011  
            Total     Total Non-     Consolidating        
    SS&C     Guarantors     Guarantors     Adjustments     Total  
Cash and cash equivalents
  $ 69,680     $ 1,566     $ 11,396     $     $ 82,642  
Accounts receivable, net
    23,701       6,983       14,044             44,728  
Prepaid expenses and other current assets
    3,319       551       2,752             6,622  
Prepaid income taxes
    777             7,745             8,522  
Deferred income taxes
    933       134       201             1,268  
Property and equipment, net
    8,431       677       4,856             13,964  
Investment in subsidiaries
    248,121                   (248,121 )      
Intercompany balances
    102,837       11,417       (114,254 )            
Deferred income taxes, long-term
                660             660  
Goodwill, intangible and other assets, net
    762,328       61,481       304,020             1,127,829  
 
                             
Total assets
  $ 1,220,127     $ 82,809     $ 231,420     $ (248,121 )   $ 1,286,235  
 
                             
 
                                       
Current portion of long-term debt
  $ 1,333     $     $ 138     $     $ 1,471  
Accounts payable
    2,688       19       1,494             4,201  
Accrued expenses
    14,630       1,624       5,381             21,635  
Income taxes payable
    (9,887 )     2,639       7,248              
Deferred maintenance and other revenue
    33,618       6,091       9,283             48,992  
Long-term debt, net of current portion
    189,270             13,011             202,281  
Other long-term liabilities
    6,317             7,370             13,687  
Deferred income taxes, long-term
    23,514       3,234       8,576             35,324  
 
                             
Total liabilities
    261,483       13,607       52,501             327,591  
 
                             
Stockholder’s equity
    958,644       69,202       178,919       (248,121 )     958,644  
 
                             
Total liabilities and stockholder’s equity
  $ 1,220,127     $ 82,809     $ 231,420     $ (248,121 )   $ 1,286,235  
 
                             
                                         
    December 31, 2010  
            Total     Total Non-     Consolidating        
    SS&C     Guarantors     Guarantors     Adjustments     Total  
Cash and cash equivalents
  $ 67,256     $ 2,272     $ 15,315     $     $ 84,843  
Accounts receivable, net
    22,607       9,521       13,403             45,531  
Prepaid expenses and other current assets
    2,527       709       2,696             5,932  
Prepaid income taxes
    669             1,573             2,242  
Deferred income taxes
    731       293       118             1,142  
Property and equipment, net
    7,785       1,148       4,637             13,570  
Investment in subsidiaries
    260,411                   (260,411 )      
Intercompany balances
    98,707       414       (99,121 )            
Deferred income taxes, long-term
                686             686  
Goodwill, intangible and other assets, net
    739,417       88,463       293,900             1,121,780  
 
                             
Total assets
  $ 1,200,110     $ 102,820     $ 233,207     $ (260,411 )   $ 1,275,726  
 
                             
 
                                       
Current portion of long-term debt
  $ 1,410     $     $ 292     $     $ 1,702  
Accounts payable
    2,099       90       1,601             3,790  
Accrued expenses
    18,286       3,568       7,357             29,211  
Income taxes payable
    (1,548 )     101       1,447              
Deferred maintenance and other revenue
    29,653       3,498       8,520             41,671  
Long-term debt, net of current portion
    261,524             27,568             289,092  
Other long-term liabilities
    6,223             6,120             12,343  
Deferred income taxes, long-term
    25,280       6,181       9,273             40,734  
 
                             
Total liabilities
    342,927       13,438       62,178             418,543  
 
                             
Stockholder’s equity
    857,183       89,382       171,029       (260,411 )     857,183  
 
                             
Total liabilities and stockholder’s equity
  $ 1,200,110     $ 102,820     $ 233,207     $ (260,411 )   $ 1,275,726  
 
                             

 

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    For the three months ended June 30, 2011  
            Total     Total Non-     Consolidating        
    SS&C     Guarantors     Guarantors     Adjustments     Total  
Revenue
  $ 39,206     $ 29,489     $ 23,712     $ (604 )   $ 91,803  
Cost of revenue
    21,351       15,899       8,935       (548 )     45,637  
 
                             
Gross profit
    17,855       13,590       14,777       (56 )     46,166  
Operating expenses:
                                       
Selling & marketing
    3,392       1,778       1,904       (56 )     7,018  
Research & development
    3,756       2,975       2,322             9,053  
General & administrative
    5,826       555       819             7,200  
 
                             
Total operating expenses
    12,974       5,308       5,045       (56 )     23,271  
 
                             
Operating income
    4,881       8,282       9,732             22,895  
Interest expense, net
    (721 )     1       (2,754 )           (3,474 )
Loss on extinguishment of debt
                             
Other income (expense), net
    559       (191 )     (249 )           119  
 
                             
Income before income taxes
    4,719       8,092       6,729             19,540  
(Benefit) provision for income taxes
    2,701       1,718       2,093             6,512  
Equity in net income of subsidiaries
    11,010                   (11,010 )      
 
                             
Net income
  $ 13,028     $ 6,374     $ 4,636     $ (11,010 )   $ 13,028  
 
                             
                                         
    For the three months ended June 30, 2010  
            Total     Total Non-     Consolidating        
    SS&C     Guarantors     Guarantors     Adjustments     Total  
Revenue
  $ 36,445     $ 23,715     $ 21,814     $ (356 )   $ 81,618  
Cost of revenue
    20,081       13,103       8,112       (356 )     40,940  
 
                             
Gross profit
    16,364       10,612       13,702             40,678  
Operating expenses:
                                       
Selling & marketing
    3,855       1,004       1,624             6,483  
Research & development
    4,099       1,794       1,967             7,860  
General & administrative
    4,496       879       1,171             6,546  
 
                             
Total operating expenses
    12,450       3,677       4,762             20,889  
 
                             
Operating income
    3,914       6,935       8,940             19,789  
Interest expense, net
    (5,359 )           (2,699 )           (8,058 )
Other income (expense), net
    381       (112 )     (154 )           115  
Loss on extinguishment of debt
    (5,480 )                       (5,480 )
 
                             
(Loss) income before income taxes
    (6,544 )     6,823       6,087             6,366  
(Benefit) provision for income taxes
    (1,468 )     1,374       2,098             2,004  
Equity in net income of subsidiaries
    9,438                   (9,438 )      
 
                             
Net income
  $ 4,362     $ 5,449     $ 3,989     $ (9,438 )   $ 4,362  
 
                             
                                         
    For the six months ended June 30, 2011  
            Total     Total Non-     Consolidating        
    SS&C     Guarantors     Guarantors     Adjustments     Total  
Revenue
  $ 78,260     $ 56,426     $ 47,281     $ (1,157 )   $ 180,810  
Cost of revenue
    42,705       30,836       17,659       (1,068 )     90,132  
 
                             
Gross profit
    35,555       25,590       29,622       (89 )     90,678  
Operating expenses:
                                       
Selling & marketing
    7,315       2,995       3,687       (89 )     13,908  
Research & development
    7,415       5,013       4,597             17,025  
General & administrative
    10,642       1,114       1,987             13,743  
 
                             
Total operating expenses
    25,372       9,122       10,271       (89 )     44,676  
 
                             
Operating income
    10,183       16,468       19,351             46,002  
Interest expense, net
    (3,188 )     20       (5,433 )           (8,601 )
Other income (expense), net
    (2,881 )                       (2,881 )
Loss from extinguishment of debt
    463       (32 )     (599 )           (168 )
 
                             
(Loss) income before income taxes
    4,577       16,456       13,319             34,352  
(Benefit) provision for income taxes
    4,499       2,848       4,143             11,490  
Equity in net income of subsidiaries
    22,784                   (22,784 )      
 
                             
Net income
  $ 22,862     $ 13,608     $ 9,176     $ (22,784 )   $ 22,862  
 
                             

 

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    For the six months ended June 30, 2010  
            Total     Total Non-     Consolidating        
    SS&C     Guarantors     Guarantors     Adjustments     Total  
Revenue
  $ 71,346     $ 45,960     $ 43,202     $ (716 )   $ 159,792  
Cost of revenue
    38,645       26,147       16,026       (716 )     80,102  
 
                             
Gross profit
    32,701       19,813       27,176             79,690  
Operating expenses:
                                       
Selling & marketing
    7,344       2,121       3,170             12,635  
Research & development
    8,206       3,400       4,013             15,619  
General & administrative
    8,498       1,425       2,303             12,226  
 
                             
Total operating expenses
    24,048       6,946       9,486             40,480  
 
                             
Operating income
    8,653       12,867       17,690             39,210  
Interest expense, net
    (11,730 )           (5,345 )           (17,075 )
Other income (expense), net
    710       (150 )     (560 )            
Loss from extinguishment of debt
    (5,480 )                       (5,480 )
 
                             
(Loss) income before income taxes
    (7,847 )     12,717       11,785             16,655  
(Benefit) provision for income taxes
    (2,038 )     2,502       2,808             3,272  
Equity in net income of subsidiaries
    19,192                   (19,192 )      
 
                             
Net income
  $ 13,383     $ 10,215     $ 8,977     $ (19,192 )   $ 13,383  
 
                             
                                         
    For the six months ended June 30, 2011  
            Total     Total Non-     Consolidating        
    SS&C     Guarantors     Guarantors     Adjustments     Total  
Cash Flow from Operating Activities:
                                       
Net income
  $ 22,862     $ 13,608     $ 9,176     $ (22,784 )   $ 22,862  
Non-cash adjustments
    (6,225 )     2,136       4,283       22,784       22,978  
Changes in operating assets and liabilities
    (7,567 )     4,361       (1,580 )           (4,786 )
 
                             
Net cash provided by operating activities
    9,070       20,105       11,879             41,054  
 
                             
Cash Flow from Investment Activities:
                                       
Intercompany transactions
    19,762       (19,954 )     192              
Cash paid for business acquisitions, net
    (14,784 )     (14 )                 (14,798 )
Additions to capitalized software and other intangibles
    (1,075 )                       (1,075 )
Additions to property and equipment
    (1,786 )     (321 )     (995 )           (3,102 )
 
                             
Net cash provided by (used in) investing activities
    2,117       (20,289 )     (803 )           (18,975 )
 
                             
Cash Flow from Financing Activities:
                                       
Net repayments of debt
    (72,331 )           (15,502 )           (87,833 )
Exercise of stock options
    6,190                         6,190  
Proceeds from common stock issuance, net
    51,971                         51,971  
Income tax benefit related to exercise of stock options
    4,884                         4,884  
 
                             
Net cash used in financing activities
    (9,286 )           (15,502 )           (24,788 )
 
                             
Effect of exchange rate changes on cash
                508             508  
 
                             
Net increase (decrease) in cash and cash equivalents
    1,901       (184 )     (3,918 )           (2,201 )
Cash and cash equivalents, beginning of period
    67,779       1,750       15,314             84,843  
 
                             
Cash and cash equivalents, end of period
  $ 69,680     $ 1,566     $ 11,396     $     $ 82,642  
 
                             

 

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    For the six months ended June 30, 2010  
            Total     Total Non-     Consolidating        
    SS&C     Guarantors     Guarantors     Adjustments     Total  
Cash Flow from Operating Activities:
                                       
Net income
  $ 13,383     $ 10,215     $ 8,977     $ (19,192 )   $ 13,383  
Non-cash adjustments
    (2,195 )     2,590       2,707       19,192       22,294  
Changes in operating assets and liabilities
    (10,970 )     1,444       (2,717 )           (12,243 )
 
                             
Net cash provided by operating activities
    218       14,249       8,967             23,434  
 
                             
Cash Flow from Investment Activities:
                                       
Intercompany transactions
    12,929       (11,512 )     (1,417 )            
Cash paid for business acquisitions, net
    (11,372 )                       (11,372 )
Proceeds from sale of property and equipment
    52                         52  
Additions to capitalized software and other intangibles
    (99 )                       (99 )
 
                             
Additions to property and equipment
    (1,358 )     (263 )     (617 )           (2,238 )
Net cash provided by (used in) investing activities
    152       (11,775 )     (2,034 )           (13,657 )
 
                             
Cash Flow from Financing Activities:
                                       
Net repayments of debt
    (74,621 )           (6,976 )           (81,597 )
Proceeds from common stock issuance, net of issuance costs
    134,611                         134,611  
Proceeds from the exercise of stock options
    5,396                         5,396  
Purchase of common stock for treasury
    (1,169 )                       (1,169 )
Income tax benefit related to exercise of stock options
    3,582             1             3,583  
 
                             
Net cash provided by (used in) financing activities
    67,799             (6,975 )           60,824  
 
                             
Effect of exchange rate changes on cash
                (770 )           (770 )
 
                             
Net increase (decrease) in cash and cash equivalents
    68,169       2,474       (812 )           69,831  
Cash and cash equivalents, beginning of period
    6,226       1,087       11,742             19,055  
 
                             
Cash and cash equivalents, end of period
  $ 74,395     $ 3,561     $ 10,930     $     $ 88,886  
 
                             

 

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
CRITICAL ACCOUNTING POLICIES
Certain of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our consolidated financial statements. In applying these policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of estimates. Those estimates are based on our historical experience, terms of existing contracts, management’s observation of trends in the industry, information provided by our clients and information available from other outside sources, as appropriate. Actual results may differ significantly from the estimates contained in our consolidated financial statements. There have been no material changes to our critical accounting estimates and assumptions or the judgments affecting the application of those estimates and assumptions since our filing of the 2010 Form 10-K. Our critical accounting policies are described in the 2010 Form 10-K and include:
  Revenue Recognition
 
  Allowance for Doubtful Accounts
 
  Long-Lived Assets, Intangible Assets and Goodwill
 
  Acquisition Accounting
 
  Income Taxes
 
  Stock-Based Compensation
Results of Operations for the Three and Six Months Ended June 30, 2011 and 2010
The following table sets forth revenues (in thousands) and changes in revenues for the periods indicated:
                                                 
    Three Months Ended             Six Months Ended        
    June 30,     %     June 30,     %  
    2011     2010     Change     2011     2010     Change  
Revenues:
                                               
Software licenses
  $ 4,982     $ 6,074       -18 %   $ 11,555     $ 11,663       -1 %
Maintenance
    19,418       17,817       9 %     38,865       35,836       8 %
Professional services
    5,860       5,099       15 %     11,127       10,488       6 %
Software-enabled services
    61,543       52,628       17 %     119,263       101,805       17 %
 
                                       
Total revenues
  $ 91,803     $ 81,618       12 %   $ 180,810     $ 159,792       13 %
 
                                       
The following table sets forth the percentage of our revenues represented by each of the following sources of revenues for the periods indicated:
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2011     2010     2011     2010  
Revenues:
                               
Software licenses
    5 %     7 %     6 %     7 %
Maintenance
    21 %     22 %     22 %     22 %
Professional services
    7 %     6 %     6 %     7 %
Software-enabled services
    67 %     65 %     66 %     64 %
 
                       
Total revenues
    100 %     100 %     100 %     100 %
 
                       
Revenues
Our revenues consist primarily of software-enabled services and maintenance revenues, and, to a lesser degree, software license and professional services revenues. As a general matter, our software license and professional services revenues fluctuate based on the number of new licensing clients, while fluctuations in our software-enabled services revenues are attributable to the number of new software-enabled services clients, the number of outsourced transactions provided to our existing clients and total assets under management in our clients’ portfolios. Maintenance revenues vary based on the rate by which we add or lose maintenance clients over time and, to a lesser extent, on the annual increases in maintenance fees, which are generally derived from the consumer price index.

 

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Revenues for the three months ended June 30, 2011 were $91.8 million compared to $81.6 million for the same period in 2010. The revenue increase of $10.2 million, or 12%, was primarily due to revenues from products and services that we acquired through our acquisitions of TOS in October 2010, TSW in December 2010 and BXML in March 2011, which added $5.4 million in revenues in the aggregate, and an increase of $3.4 million in revenues for businesses and products that we have owned for at least 12 months, or organic revenues. The favorable impact from foreign currency translation accounted for $1.4 million of the increase, resulting from the weakness of the U.S. dollar relative to currencies such as the Canadian dollar, the British pound, the Australian dollar and the euro. Revenues for the six months ended June 30, 2011 were $180.8 million compared to $159.8 million for the same period in 2010. The revenue increase of $21.0 million, or 13%, was primarily due to revenues from products and services that we acquired through our acquisitions of GIPS in February 2010, TOS in October 2010, TSW in December 2010 and BXML in March 2011, which added $9.7 million in revenues in the aggregate, and an increase of $8.8 million in organic revenues. The favorable impact from foreign currency translation accounted for $2.5 million of the increase, resulting from the weakness of the U.S. dollar relative to currencies such as the Canadian dollar, the British pound, the Australian dollar and the euro.
Software Licenses . Software license revenues were $5.0 million and $6.1 million for the three months ended June 30, 2011 and 2010, respectively. The decrease in software license revenues of $1.1 million, or 18%, was primarily due to a decrease of $2.2 million in organic software license revenues, partially offset by revenues from acquisitions, which contributed $1.1 million. Software license revenues were $11.6 million and $11.7 million for the six months ended June 30, 2011 and 2010, respectively. The decrease in software license revenues of $0.1 million, or 1%, was primarily due to a decrease of $1.4 million in organic software license revenues, partially offset by revenues from acquisitions, which contributed $1.2 million, and a favorable impact from foreign currency translation of $0.1 million. Software license revenues will vary depending on the timing, size and nature of our license transactions. For example, the average size of our software license transactions and the number of large transactions may fluctuate on a period-to-period basis. For the three and six months ended June 30, 2011, revenues from term licenses increased while the average size and number of perpetual license transactions decreased from those for the three and six months ended June 30, 2010. Additionally, software license revenues will vary among the various products that we offer, due to differences such as the timing of new releases and variances in economic conditions affecting opportunities in the vertical markets served by such products.
Maintenance . Maintenance revenues were $19.4 million and $17.8 million for the three months ended June 30, 2011 and 2010, respectively. The increase in maintenance revenues of $1.6 million, or 9%, was primarily due to revenue from acquisitions, which contributed $1.1 million in the aggregate, a favorable impact from foreign currency translation of $0.3 million and an increase in organic maintenance revenues of $0.2 million. Maintenance revenues were $38.9 million and $35.8 million for the six months ended June 30, 2011 and 2010, respectively. The increase in maintenance revenues of $3.1 million, or 8%, was primarily due to revenues from acquisitions, which contributed $2.4 million in the aggregate, a favorable impact from foreign currency translation of $0.4 million and an increase in organic maintenance revenues of $0.3 million. We typically provide maintenance services under one-year renewable contracts that provide for an annual increase in fees, which are generally derived from the percentage change in the consumer price index. Future maintenance revenue growth is dependent on our ability to retain existing clients, add new license clients and increase average maintenance fees.
Professional Services . Professional services revenues were $5.9 million and $5.1 million for the three months ended June 30, 2011 and 2010, respectively. The increase of $0.8 million, or 15%, was primarily due to revenues from acquisitions, which contributed $1.0 million in the aggregate, and a favorable impact from foreign currency translation of $0.1 million, partially offset by a decrease of $0.3 million in organic professional services revenues. Professional services revenues were $11.1 million and $10.5 million for the six months ended June 30, 2011 and 2010, respectively. The increase of $0.6 million, or 6%, was primarily due to revenues from acquisitions, which contributed $1.7 million in the aggregate, and a favorable impact from foreign currency translation of $0.2 million, partially offset by a decrease of $1.3 million in organic professional services revenues. Our overall software license revenue levels and market demand for professional services will continue to have an effect on our professional services revenues.
Software-Enabled Services . Software-enabled services revenues were $61.5 million and $52.6 million for the three months ended June 30, 2011 and 2010, respectively. The increase in software-enabled services revenues of $8.9 million, or 17%, was primarily due to an increase of $5.7 million in organic software-enabled services revenues, revenues from acquisitions, which contributed $2.2 million in the aggregate, and a favorable impact from foreign currency translation of $1.0 million. Software-enabled services revenues were $119.3 million and $101.8 million for the six months ended June 30, 2011 and 2010, respectively. The increase in software-enabled services revenues of $17.5 million, or 17%, was primarily due to an increase of $11.3 million in organic software-enabled services revenues, revenues from acquisitions, which contributed $4.4 million in the aggregate, and a favorable impact from foreign currency translation of $1.8 million. Future software-enabled services revenue growth is dependent on our ability to retain existing clients, add new clients and increase average fees.

 

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Cost of Revenues
Total cost of revenues was $45.6 million and $40.9 million for the three months ended June 30, 2011 and 2010, respectively. The gross margin was 50% for each of the three-month periods ended June 30, 2011 and 2010. Our costs of revenues increased by $4.7 million, or 11%, primarily as a result of an increase of $2.5 million in costs to support organic revenue growth, our acquisitions, which added cost of revenues of $1.2 million in the aggregate, an increase in costs of $0.7 million related to the unfavorable effect of foreign currency translation and an increase in amortization expense of $0.5 million, partially offset by a decrease in stock-based compensation expense of $0.2 million. Total cost of revenues was $90.1 million and $80.1 million for the six months ended June 30, 2011 and 2010, respectively. The gross margin was 50% for each of the six-month periods ended June 30, 2011 and 2010. Our costs of revenues increased by $10.0 million, or 13%, primarily as a result of an increase of $5.4 million in costs to support organic revenue growth, our acquisitions, which added cost of revenues of $2.7 million in the aggregate, an increase in costs of $1.3 million related to the unfavorable effect of foreign currency translation and an increase in amortization expense of $0.7 million, partially offset by a decrease in stock-based compensation of $0.1 million.
Cost of Software Licenses . Cost of software license revenues consists primarily of amortization expense of completed technology, royalties, third-party software, and the costs of product media, packaging and documentation. The cost of software license revenues was $1.7 million and $1.9 million for the three months ended June 30, 2011 and 2010, respectively. The decrease in cost of software licenses was primarily due to a reduction of $0.2 million in amortization expense. Cost of software license revenues as a percentage of such revenues was 34% and 31% for the three-month periods ended June 30, 2011 and 2010, respectively. The cost of software license revenues was $3.4 million and $3.8 million for the six months ended June 30, 2011 and 2010, respectively. The decrease in cost of software licenses was primarily due to a reduction of $0.4 million in amortization expense. Cost of software license revenues as a percentage of such revenues was 29% and 33% for the six-month periods ended June 30, 2011 and 2010, respectively.
Cost of Maintenance . Cost of maintenance revenues consists primarily of technical client support, costs associated with the distribution of products and regulatory updates and amortization of intangible assets. The cost of maintenance revenues was $8.8 million and $8.1 million for the three months ended June 30, 2011 and 2010, respectively. The increase in cost of maintenance revenues of $0.7 million, or 9%, was primarily due to additional amortization expense of $0.4 million, our acquisitions, which added $0.2 million in costs in the aggregate, and an increase in costs of $0.1 million related to foreign currency translation. Cost of maintenance revenues as a percentage of these revenues was 45% for each of the three-month periods ended June 30, 2011 and 2010. The cost of maintenance revenues was $17.5 million and $16.1 million for the six months ended June 30, 2011 and 2010, respectively. The increase in cost of maintenance revenues of $1.4 million, or 9%, was primarily due to additional amortization expense of $0.8 million, our acquisitions, which added $0.4 million in costs in the aggregate, and an increase in costs of $0.2 million related to foreign currency translation. Cost of maintenance revenues as a percentage of these revenues was 45% for each of the six-month periods ended June 30, 2011 and 2010.
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 our software licensees, as well as system integration, custom programming and actuarial consulting services. The cost of professional services revenues was $4.0 million and $3.3 million for the three months ended June 30, 2011 and 2010, respectively. The increase in costs of professional services revenues of $0.7 million, or 22%, was primarily related to an increase of $0.5 million in personnel costs to support projects, our acquisitions, which added $0.2 million in costs in the aggregate, and an increase in costs of $0.1 million related to foreign currency translation, partially offset by a decrease in stock-based compensation expense of $0.1 million. Cost of professional services revenues as a percentage of these revenues was 68% for the three months ended June 30, 2011 compared to 64% for the three months ended June 30, 2010. The cost of professional services revenues was $7.6 million and $6.6 million for the six months ended June 30, 2011 and 2010, respectively. The increase in costs of professional services revenues of $1.0 million, or 14%, was primarily related to our acquisitions, which added $0.6 million in costs in the aggregate, an increase in costs of $0.2 million related to foreign currency translation and an increase of $0.2 million in personnel costs to support projects. Cost of professional services revenues as a percentage of these revenues was 68% for the six months ended June 30, 2011 compared to 63% for the six months ended June 30, 2010.

 

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Cost of Software-Enabled Services . Cost of software-enabled services revenues consists primarily of the cost related to personnel utilized in servicing our software-enabled services clients and amortization of intangible assets. The cost of software-enabled services revenues was $31.2 million and $27.7 million for the three months ended June 30, 2011 and 2010, respectively. The increase in costs of software-enabled services revenues of $3.5 million, or 13%, was primarily related to an increase of $2.0 million in costs to support the growth of organic software-enabled services revenues, our acquisitions, which added $0.8 million in costs in the aggregate, an increase in costs of $0.5 million related to foreign currency translation and an increase in costs of $0.3 million related to amortization expense, partially offset by a decrease in stock-based compensation expense of $0.1 million. Cost of software-enabled services revenues as a percentage of these revenues was 51% for the three months ended June 30, 2011 compared to 53% for the three months ended June 30, 2010. The cost of software-enabled services revenues was $61.7 million and $53.6 million for the six months ended June 30, 2011 and 2010, respectively. The increase in costs of software-enabled services revenues of $8.1 million, or 15%, was primarily related to an increase of $5.2 million in costs to support the growth of organic software-enabled services revenues, our acquisitions, which added $1.8 million in costs in the aggregate, an increase in costs of $0.9 million related to foreign currency translation and an increase in costs of $0.3 million related to amortization expense, partially offset by a decrease in stock-based compensation expense of $0.1 million. Cost of software-enabled services revenues as a percentage of these revenues was 52% for the six months ended June 30, 2011 compared to 53% for the six months ended June 30, 2010.
Operating Expenses
Total operating expenses were $23.3 million and $20.9 million for the three months ended June 30, 2011 and 2010, respectively. The increase in total operating expenses of $2.4 million, or 11%, was primarily due to our acquisitions of TOS, TSW and BXML, which added $1.6 million in costs in the aggregate, an increase in costs of $0.4 million related to foreign currency translation and an increase in costs of $0.4 million to support organic revenue growth. Total operating expenses as a percentage of total revenues were 25% for the three months ended June 30, 2011 compared to 26% for the three months ended June 30, 2010. Total operating expenses were $44.7 million and $40.5 million for the six months ended June 30, 2011 and 2010, respectively. The increase in total operating expenses of $4.2 million, or 10%, was primarily due to our acquisitions of GIPS, TOS, TSW and BXML, which added $3.1 million in costs in the aggregate, an increase in costs of $0.6 million related to foreign currency translation and an increase in costs of $0.3 million related to stock-based compensation. Total operating expenses as a percentage of total revenues were 25% for each of the six-month periods ended June 30, 2011 and June 30, 2010.
Selling and Marketing . Selling and marketing expenses consist primarily of the personnel costs associated with the selling and marketing of our products, including salaries, commissions and travel and entertainment. Such expenses also include amortization of intangible assets, the cost of branch sales offices, trade shows and marketing and promotional materials. Selling and marketing expenses were $7.0 million and $6.5 million for the three months ended June 30, 2011 and 2010, respectively, representing 8% of total revenues in each of those periods. The increase in selling and marketing expenses of $0.5 million, or 8%, was primarily related to our acquisitions, which added $0.3 million in costs, and an increase in costs of $0.2 million related to foreign currency translation. Selling and marketing expenses were $13.9 million and $12.6 million for the six months ended June 30, 2011 and 2010, respectively, representing 8% of total revenues in those periods. The increase in selling and marketing expenses of $1.3 million, or 10%, was primarily related to our acquisitions, which added $0.9 million in costs and an increase in costs of $0.4 million related to foreign currency translation.
Research and Development . Research and development expenses consist primarily of personnel costs attributable to the enhancement of existing products and the development of new software products. Research and development expenses were $9.1 million and $7.9 million for the three months ended June 30, 2011 and 2010, respectively, representing 10% of total revenues in each of those periods. The increase in research and development expenses of $1.2 million, or 15%, was primarily related to our acquisitions, which added $1.0 million in costs in the aggregate, and an increase in costs of $0.2 million related to foreign currency translation. Research and development expenses were $17.0 million and $15.6 million for the six months ended June 30, 2011 and 2010, respectively, representing 9% and 10% of total revenues in those periods, respectively. The increase in research and development expenses of $1.4 million, or 9%, was primarily related to our acquisitions, which added $1.6 million in costs in the aggregate, and an increase in costs of $0.3 million related to foreign currency translation, partially offset by a decrease in costs of $0.5 million as more costs were eligible for capitalization in 2011 compared to 2010.
General and Administrative . General and administrative expenses consist primarily of personnel costs related to management, accounting and finance, information management, human resources and administration and associated overhead costs, as well as fees for professional services. General and administrative expenses were $7.2 million and $6.5 million for the three months ended June 30, 2011 and 2010, respectively, representing 8% of total revenues in each of those periods. The increase in general and administrative expenses of $0.7 million, or 10%, was primarily related to our acquisitions, which added $0.3 million in costs in the aggregate, an increase of $0.3 million in costs to support organic revenue growth and an increase in costs of $0.1 million related to foreign currency translation. General and administrative expenses were $13.7 million and $12.2 million for the six months ended June 30, 2011 and 2010, respectively, representing 8% of total revenues in each of those periods. The increase in general and administrative expenses of $1.5 million, or 12%, was primarily related to our acquisitions, which added $0.6 million in costs in the aggregate, an increase of $0.5 million in costs to support organic revenue growth, an increase in costs of $0.3 million related to stock-based compensation and an increase in costs of $0.1 million related to foreign currency translation.

 

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Interest Expense, Net. Net interest expense for the three months ended June 30, 2011 and 2010 was $3.5 million and $8.1 million, respectively. Net interest expense for the six months ended June 30, 2011 and 2010 was $8.6 million and $17.1 million, respectively. Net interest expense is primarily related to interest expense on debt outstanding under our senior credit facility and 11 3 / 4 % senior subordinated notes due 2013. The decrease in interest expense of $4.6 million for the three-month period and $8.5 million for the six-month period reflects the lower average debt balance resulting from net repayments of debt, including the partial redemptions of our senior subordinated notes in April 2010 and March 2011 (discussed further in Liquidity and Capital Resources ).
Other Income (Expense), Net . Other income, net for the three months ended June 30, 2011 and 2010 consisted primarily of foreign currency gains. Other expense, net for the six months ended June 30, 2011 consisted of foreign currency losses and fees associated with the redemption of our 11 3 / 4 % senior subordinated notes due 2013, which is discussed further in Liquidity and Capital Resources , partially offset by a refund of facilities charges.
Loss on Extinguishment of Debt . Loss on extinguishment of debt for the six months ended June 30, 2011 consisted of $2.0 million in note redemption premiums and $0.9 million from the write-offs of deferred financing costs associated with the redemption of $66.6 million of our 11 3 / 4 % senior subordinated notes due 2013, which is discussed further in Liquidity and Capital Resources . Loss on extinguishment of debt for the three and six months ended June 30, 2010 consisted of $4.2 million in note redemption premiums and $1.3 million for the write-offs of deferred financing costs associated with the redemption of $71.75 million of our 11 3 / 4 % senior subordinated notes due 2013 during the period.
Provision for Income Taxes. We had effective tax rates of 33.3% and 31.5% for the three months ended June 30, 2011 and 2010, respectively. We had effective tax rates of 33.4% and 19.6% for the six months ended June 30, 2011 and 2010, respectively. The lower effective tax rate for the six months ended June 30, 2010 was due to the 2010 reversal of uncertain income tax positions, refunds and enacted rate changes in the three months ended March 31, 2010. Our effective tax rate includes the effect of operations outside the United States, which historically have been taxed at rates lower than the U.S. statutory rate. While we have income from multiple foreign sources, the majority of our non-U.S. operations are in Canada and the United Kingdom, where we anticipate the statutory rates to be between 26% and 28% for the year ended December 31, 2011. Additionally, the foreign effective tax rate is benefited by certain other permanent items, such as enacted rate changes. The expected effective tax rate for the year ended December 31, 2011 is forecasted to be between 33% and 34%. A future proportionate change in the composition of income before income taxes from foreign and domestic tax jurisdictions could impact our periodic effective tax rate.
Liquidity and Capital Resources
Our principal cash requirements are to finance the costs of our operations pending the billing and collection of client receivables, to fund payments with respect to our indebtedness, to invest in research and development and to acquire complementary businesses or assets. We expect our cash on hand and cash flows from operations to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending for at least the next twelve months.
Our cash and cash equivalents at June 30, 2011 were $82.6 million, a decrease of $2.2 million from $84.8 million at December 31, 2010. The decrease in cash is due primarily to net repayments of debt and cash used for an acquisition and capital expenditures, partially offset by net proceeds of $52.0 million from our follow-on public offering of common stock in February 2011 and cash provided by operations.
Net cash provided by operating activities was $41.1 million for the six months ended June 30, 2011. Cash provided by operating activities was primarily due to net income of $22.9 million adjusted for non-cash items of $23.0 million, partially offset by changes in our working capital accounts totaling $4.8 million. The changes in our working capital accounts were driven by decreases in accrued expenses and other liabilities and increases in income tax receivables and prepaid expenses and other assets, partially offset by increases in deferred revenues and accounts payable and a decrease in accounts receivable. The decrease in accrued expenses was primarily due to the payment of annual employee bonuses. The increase in deferred revenues was primarily due to the collection of annual maintenance fees. The decrease in accounts receivable was primarily due to the improvement in days’ sales outstanding.
Investing activities used net cash of $19.0 million for the six months ended June 30, 2011, primarily related to $14.8 million cash paid for our acquisition of BMXL, $3.1 million in cash paid for capital expenditures and $1.1 million in cash paid for capitalized software.

 

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Financing activities used net cash of $24.8 million for the six months ended June 30, 2011, representing $87.8 million in net repayments of debt, partially offset by $52.0 million in net proceeds from Holdings’ follow-on public offering of common stock in February 2011, proceeds of $6.2 million from stock option exercises and income tax windfall benefits of $4.8 million related to the exercise of such stock options. The repayment of debt during the period reflects our use of proceeds from Holdings’ follow-on offering and available cash to redeem $66.6 million in principal amount of our outstanding 11 3 / 4 % senior subordinated notes due 2013 at a redemption price of 102.9375% of principal amount.
We have made a permanent reinvestment determination in certain non-U.S. operations that have historically generated positive operating cash flows. At June 30, 2011, we held approximately $10.6 million in cash and cash equivalents at non-U.S. subsidiaries where we had made such a determination and in turn no provision for U.S. income taxes had been made. As of June 30, 2011, we believe we have sufficient foreign tax credits available to offset tax obligations associated with repatriation of these funds.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Senior Credit Facilities
Our borrowings under the senior credit facilities bear interest at either a floating base rate or a Eurocurrency rate plus, in each case, an applicable margin. In addition, we pay a commitment fee in respect of unused revolving commitments at a rate that is adjusted based on our leverage ratio. We are obligated to make quarterly principal payments on the term loan totaling $1.4 million per year. Subject to certain exceptions, thresholds and other limitations, we are required to prepay outstanding loans under the senior credit facilities with the net proceeds of certain asset dispositions and certain debt issuances and 50% of our excess cash flow (as defined in the agreements governing the senior credit facilities), which percentage will be reduced if we reach certain leverage ratio thresholds.
The obligations under our senior credit facilities are guaranteed by Holdings and all of our existing and future material wholly-owned U.S. subsidiaries, with certain exceptions as set forth in the credit agreement. The obligations of the Canadian borrower are guaranteed by Holdings, us and each of our U.S. and Canadian subsidiaries, with certain exceptions as set forth in the credit agreement. The obligations under the senior credit facilities are secured by a perfected first priority security interest in all of our capital stock and all of the capital stock or other equity interests held by Holdings, us and each of our existing and future U.S. subsidiary guarantors (subject to certain limitations for equity interests of foreign subsidiaries and other exceptions as set forth in the credit agreement) and all of Holdings and our tangible and intangible assets and the tangible and intangible assets of each of our existing and future U.S. subsidiary guarantors, with certain exceptions as set forth in the credit agreement. The Canadian borrower’s borrowings under the senior credit facilities and all guarantees thereof are secured by a perfected first priority security interest in all of our capital stock and all of the capital stock or other equity interests held by Holdings, us and each of our existing and future U.S. and Canadian subsidiary guarantors, with certain exceptions as set forth in the credit agreement, and all of Holdings and our tangible and intangible assets and the tangible and intangible assets of each of our existing and future U.S. and Canadian subsidiary guarantors, with certain exceptions as set forth in the credit agreement.
The senior credit facilities contain a number of covenants that, among other things, restrict, subject to certain exceptions, our (and our restricted subsidiaries’) ability to incur additional indebtedness, pay dividends and distributions on capital stock, create liens on assets, enter into sale and lease-back transactions, repay subordinated indebtedness, make capital expenditures, engage in certain transactions with affiliates, dispose of assets and engage in mergers or acquisitions. In addition, under the senior credit facilities, we are required to satisfy and maintain a maximum total leverage ratio and a minimum interest coverage ratio. We were in compliance with all covenants at June 30, 2011.
11 3 / 4 % Senior Subordinated Notes due 2013
The 11 3 / 4 % senior subordinated notes due 2013 are unsecured senior subordinated obligations that are subordinated in right of payment to all existing and future senior debt, including the senior credit facilities. The senior subordinated notes will be pari passu in right of payment to all future senior subordinated debt.

 

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The senior subordinated notes are redeemable in whole or in part, at our option, at any time at varying redemption prices that generally include premiums, which are defined in the indenture governing the senior subordinated notes. In addition, upon a change of control, we are required to make an offer to redeem all of the senior subordinated notes at a redemption price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest. In March 2011, we redeemed $66.6 million in principal amount of the outstanding 11 3 / 4 % senior subordinated notes due 2013 at a redemption price of 102.9375% of the principal amount, plus accrued and unpaid interest on such amount to, but excluding, March 17, 2011, the date of redemption.
The indenture governing the senior subordinated notes contains a number of covenants including, among others, covenants that restrict, subject to certain exceptions, our ability and the ability of our restricted subsidiaries to incur additional indebtedness, pay dividends, make certain investments, create liens, dispose of certain assets and engage in mergers or acquisitions.
Covenant Compliance
Under the senior credit facilities, we are required to satisfy and maintain specified financial ratios and other financial condition tests. As of June 30, 2011, we were in compliance with the financial and non-financial covenants. Our continued ability to meet these financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will continue to meet these ratios and tests. A breach of any of these covenants could result in a default under the senior credit facilities. Upon the occurrence of any event of default under the senior credit facilities, the lenders could elect to declare all amounts outstanding under the senior credit facilities to be immediately due and payable and terminate all commitments to extend further credit.
Consolidated EBITDA is a non-GAAP financial measure used in key financial covenants contained in the senior credit facilities, which are material facilities supporting our capital structure and providing liquidity to our business. Consolidated EBITDA is defined as earnings before interest, taxes, depreciation and amortization (EBITDA), further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under the senior credit facilities. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Consolidated EBITDA is appropriate to provide additional information to investors to demonstrate compliance with the specified financial ratios and other financial condition tests contained in the senior credit facilities.
Management uses Consolidated EBITDA to gauge the costs of our capital structure on a day-to-day basis when full financial statements are unavailable. Management further believes that providing this information allows our investors greater transparency and a better understanding of our ability to meet our debt service obligations and make capital expenditures.
A breach of any of the covenants in the senior credit facilities that are tied to ratios based on Consolidated EBITDA could result in a default under that agreement, in which case the lenders could elect to declare all amounts borrowed due and payable and to terminate any commitments they have to provide further borrowings. Any such acceleration would also result in a default under the indenture governing the 11 3 / 4 % senior subordinated notes due 2013. Any such default and subsequent acceleration of payments under our debt agreements would have a material adverse effect on our results of operations, financial position and cash flows. Additionally, under our debt agreements, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Consolidated EBITDA.
Consolidated EBITDA does not represent net income or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Further, the senior credit facilities require that Consolidated EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.
Consolidated EBITDA is not a recognized measurement under GAAP, and investors should not consider Consolidated EBITDA as a substitute for measures of our financial performance and liquidity as determined in accordance with GAAP, such as net income, operating income or net cash provided by operating activities. Because other companies may calculate Consolidated EBITDA differently than we do, Consolidated EBITDA may not be comparable to similarly titled measures reported by other companies. Consolidated EBITDA has other limitations as an analytical tool, when compared to the use of net income (loss), which is the most directly comparable GAAP financial measure, including:
    Consolidated EBITDA does not reflect the provision of income tax expense in our various jurisdictions;
    Consolidated EBITDA does not reflect the significant interest expense we incur as a result of our debt leverage;
    Consolidated EBITDA does not reflect any attribution of costs to our operations related to our investments and capital expenditures through depreciation and amortization charges;
    Consolidated EBITDA does not reflect the cost of compensation we provide to our employees in the form of stock option awards; and
    Consolidated EBITDA excludes expenses that we believe are unusual or non-recurring, but which others may believe are normal expenses for the operation of a business.

 

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The following is a reconciliation of net income to Consolidated EBITDA (in thousands) as defined in the senior credit facilities.
                                         
                                    Twelve  
    Three Months Ended     Six Months Ended     Months Ended  
    June 30,     June 30,     June 30,  
    2011     2010     2011     2010     2011  
Net income
  $ 13,028     $ 4,362     $ 22,862     $ 13,383     $ 41,892  
Interest expense (1)
    3,474       13,538       11,482       22,555       24,819  
Income taxes
    6,512       2,004       11,490       3,272       20,252  
Depreciation and amortization
    10,612       10,184       20,990       20,297       41,421  
 
                             
EBITDA
    33,626       30,088       66,824       59,507       128,384  
Purchase accounting adjustments (2)
    (102 )     (60 )     (204 )     (37 )     (405 )
Unusual or non-recurring charges (3)
    123       (267 )     659       84       250  
Acquired EBITDA and cost savings (4)
                443       192       2,856  
Stock-based compensation
    3,638       3,882       5,435       5,232       13,457  
Capital-based taxes
    2       228       154       454       791  
Other (5)
    116       (45 )     86       161       (36 )
 
                             
Consolidated EBITDA
  $ 37,403     $ 33,826     $ 73,397     $ 65,593     $ 145,297  
 
                             
     
(1)   Interest expense includes loss from extinguishment of debt shown as a separate line item on our Statement of Operations.
 
(2)   Purchase accounting adjustments include (a) an adjustment to increase revenues by the amount that would have been recognized if deferred revenue were not adjusted to fair value at the date of acquisitions and (b) an adjustment to increase rent expense by the amount that would have been recognized if lease obligations were not adjusted to fair value at the date of acquisitions.
 
(3)   Unusual or non-recurring charges include foreign currency gains and losses, severance expenses, proceeds from legal and other settlements and other expenses, such as expenses associated with the bond redemption, acquisitions and facility refund.
 
(4)   Acquired EBITDA and cost savings reflects the EBITDA impact of significant businesses that were acquired during the period as if the acquisition occurred at the beginning of the period and cost savings to be realized from such acquisitions.
 
(5)   Other includes management fees and related expenses paid to The Carlyle Group and the non-cash portion of straight-line rent expense.
The covenant restricting capital expenditures for the year ending December 31, 2011 limits expenditures to $23.7 million. Actual capital expenditures through June 30, 2011 were $3.1 million. The covenant requirements for total leverage ratio and minimum interest coverage ratio and the actual ratios for the twelve months ended June 30, 2011 are as follows:
                 
    Covenant     Actual  
    Requirements     Ratios  
 
               
Maximum consolidated total leverage to Consolidated EBITDA ratio (1)
    5.50 x     1.20 x
Minimum Consolidated EBITDA to consolidated net interest coverage ratio
    2.25 x     7.24 x
     
(1)   Calculated as the ratio of funded debt, less cash on hand up to a maximum of $30.0 million, to Consolidated EBITDA, as defined by the senior credit facility, for the period of four consecutive fiscal quarters ended on the measurement date. Funded debt is comprised of indebtedness for borrowed money, notes, bonds or similar instruments, and capital lease obligations. This covenant is applied at the end of each quarter.

 

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Recent Accounting Pronouncements
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income” (ASU 2011-05). ASU 2011-05 intends to enhance comparability and transparency of other comprehensive income components. The guidance provides an option to present total comprehensive income, the components of net income and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. ASU 2011-05 eliminates the option to present other comprehensive income components as part of the statement of changes in shareowners’ equity. The provisions of ASU 2011-05 will be applied retrospectively for interim and annual periods beginning after December 15, 2011. Early application is permitted. We are currently evaluating the impact of ASU 2011-05.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement” (ASU 2011-04). ASU 2011-04 amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. The changes are effective prospectively for interim and annual periods beginning after December 15, 2011. We are currently evaluating the impact of ASU 2011-04.
In December 2010, the FASB issued ASU No. 2010-29, which updates the guidance in ASC Topic 805, Business Combinations (ASU 2010-29). The objective of ASU 2010-29 is to address diversity in practice regarding the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations. The amendments in ASU 2010-29 specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective for business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. We adopted this standard beginning January 1, 2011, and the adoption did not have a material impact on our financial position, results of operations or cash flows.
In December 2010, the FASB issued ASU No. 2010-28, Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (ASU 2010-28). ASU 2010-28 modifies Step 1 of the goodwill impairment test so that for those reporting units with zero or negative carrying amounts, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not based on an assessment of qualitative indicators that goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. ASU 2010-28 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. We adopted this standard beginning January 1, 2011, and the adoption did not have a material impact on our financial position, results of operations or cash flows.
Item 3.   Quantitative and Qualitative Disclosures About Market Risk
We do not use derivative financial instruments for trading or speculative purposes. We have invested our available cash in short-term, highly liquid financial instruments, having initial maturities of three months or less. When necessary, we have borrowed to fund acquisitions.
At June 30, 2011, excluding capital leases, we had total debt of $203.7 million, including $137.1 million of variable interest rate debt.
At June 30, 2011, $13.1 million of our debt was denominated in Canadian dollars. We expect that our foreign denominated debt will be serviced through our Canadian operations.
During the six months ended June 30, 2011, approximately 31% of our revenues were from clients located outside the United States. A portion of the revenues from clients located outside the United States is denominated in foreign currencies, the majority being denominated in the Canadian dollar. While revenues and expenses of our foreign operations are primarily denominated in their respective local currencies, some of our subsidiaries do enter into certain transactions in currencies other than their functional currency. These transactions consist primarily of cross-currency intercompany balances and trade receivables and payables. As a result of these transactions, we have exposure to changes in foreign currency exchange rates that result in foreign currency transaction gains or losses, which we report in other income (expense). These outstanding amounts were reduced during 2010, and we do not believe that our foreign currency transaction gains or losses will be material during 2011. The amount of these balances may fluctuate in the future as we bill customers and buy products or services in currencies other than our functional currency, which could increase our exposure to foreign currency exchange rates in the future. We continue to monitor our exposure to foreign currency exchange rates as a result of our foreign currency denominated debt, our acquisitions and changes in our operations. We do not enter into any market risk sensitive instruments for trading purposes.
The foregoing risk management discussion and the effect thereof are forward-looking statements. Actual results in the future may differ materially from these projected results due to actual developments in global financial markets. The analytical methods used by us to assess and minimize risk discussed above should not be considered projections of future events or losses.

 

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Item 4.   Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer (our principal executive officer and principal financial officer, respectively), evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2011, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1A.   Risk Factors
There have been no material changes to our Risk Factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 6.   Exhibits
The exhibits listed in the Exhibit Index immediately preceding such exhibits are filed as part of this Report.

 

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SIGNATURE
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.
         
  SS&C TECHNOLOGIES, INC.
 
 
Date: August 12, 2011  By:   /s/ Patrick J. Pedonti    
    Patrick J. Pedonti   
    Senior Vice President and Chief Financial Officer
(Duly Authorized Officer, Principal Financial and
Accounting Officer) 
 

 

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Exhibit Index
         
Exhibit    
Number   Description
       
 
  10.1    
Assumption Agreement, dated as of April 14, 2011, by PC Consulting, Inc. in favor of JP Morgan Chase Bank is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on April 14, 2011 (File No. 000-28430) (the “April 14, 2011 Form 8-K”)
       
 
  10.2    
Assumption Agreement, dated as of April 14, 2011, by BenefitsXML, Inc. in favor of JP Morgan Chase Bank is incorporated herein by reference to Exhibit 10.2 to the April 14, 2011 Form 8-K
       
 
  10.3    
Fifth Supplemental Indenture, dated as of April 14, 2011, among SS&C Technologies, Inc., PC Consulting, Inc. and Wells Fargo Bank, National Association is incorporated herein by reference to Exhibit 10.3 to the April 14, 2011 Form 8-K
       
 
  10.4    
Sixth Supplemental Indenture, dated as of April 14, 2011, among SS&C Technologies, Inc., BenefitsXML, Inc. and Wells Fargo Bank, National Association is incorporated herein by reference to Exhibit 10.4 to the April 14, 2011 Form 8-K
       
 
  10.5    
Note Guarantee by PC Consulting, Inc. is incorporated herein by reference to Exhibit 10.5 to the April 14, 2011 Form 8-K
       
 
  10.6    
Note Guarantee by BenefitsXML, Inc. is incorporated herein by reference to Exhibit 10.6 to the April 14, 2011 Form 8-K
       
 
  10.7    
Amended and Restated Stock Option Agreement, dated May 24, 2011, between SS&C Technologies Holdings, Inc. and William C. Stone is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on May 27, 2011 (File No. 000-28430)
       
 
  31.1    
Certification of the Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
 
  31.2    
Certification of the Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
       
 
  32    
Certification of the Registrant’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
       
 
101 .INS  
XBRL Instance Document.**
       
 
101 .SCH  
XBRL Taxonomy Extension Schema Document.**
       
 
101 .CAL  
XBRL Taxonomy Calculation Linkbase Document.**
       
 
101 .LAB  
XBRL Taxonomy Label Linkbase Document.**
       
 
101 .PRE  
XBRL Taxonomy Presentation Linkbase Document.**
       
 
     
**   submitted electronically herewith
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010, (ii) Condensed Consolidated Balance Sheets at June 30, 2011 and December 31, 2010, (iii) Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2011 and 2010 and (iv) Notes to Condensed Consolidated Financial Statements.
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, is deemed not filed for purposes of section 18 of the Exchange Act, and otherwise is not subject to liability under these sections.

 

26

Exhibit 31.1
CERTIFICATION
I, William C. Stone, certify that:
  1.   I have reviewed this quarterly report on Form 10-Q of SS&C Technologies, Inc.;
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
  4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: August 12, 2011  /s/  William C. Stone  
  William C. Stone   
  Chairman of the Board and Chief Executive Officer (Principal Executive Officer)   
 

 

 

Exhibit 31.2
CERTIFICATION
I, Patrick J. Pedonti, certify that:
  1.   I have reviewed this quarterly report on Form 10-Q of SS&C Technologies, Inc.;
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
  4.   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: August 12, 2011  /s/ Patrick J. Pedonti  
  Patrick J. Pedonti   
  Senior Vice President and Chief Financial Officer (Principal Financial Officer)   
 

 

 

Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-Q of SS&C Technologies, Inc. (the “Company”) for the period ended June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned officers of the Company hereby certify to their knowledge, pursuant to 18 U.S.C. Section 1350, that:
  (1)   the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
  (2)   the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
         
     
Date: August 12, 2011  By:   /s/ William C. Stone  
    William C. Stone   
    Chairman of the Board and Chief Executive Officer
(Principal Executive Officer) 
 
 
         
     
Date: August 12, 2011  By:   /s/ Patrick J. Pedonti  
    Patrick J. Pedonti   
    Senior Vice President and Chief Financial Officer (Principal Financial Officer)