Form 10-Q
Table of Contents

United States

Securities and Exchange Commission

Washington, D.C. 20549

 


FORM 10-Q

 


(Mark One)

x Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2006

OR

 

¨ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from              to             

Commission file number 1-12989

 


SunGard® Data Systems Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware   51-0267091

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

680 East Swedesford Road, Wayne, Pennsylvania 19087

(Address of principal executive offices, including zip code)

484-582-2000

(Registrant’s telephone number, including area code)

 


Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨.    Accelerated filer  ¨.    Non-accelerated filer  x.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨.    No  x.

There were 100 shares of the registrant’s common stock outstanding as of September 30, 2006.

 



Table of Contents

SUNGARD DATA SYSTEMS INC.

AND SUBSIDIARIES

INDEX

 

         PAGE

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements:

  
 

Consolidated Balance Sheets as of December 31, 2005 and September 30, 2006 (unaudited) for the Successor

   1
  Consolidated Statements of Operations (unaudited) for the period from January 1, 2005 through August 10, 2005 for the Predecessor and for the period from August 11, 2005 through September 30, 2005 and for the nine months ended September 30, 2006 for the Successor    2
  Consolidated Statements of Operations (unaudited) for the period from July 1, 2005 through August 10, 2005 for the Predecessor and for the period from August 11, 2005 through September 30, 2005 and for the three months ended September 30, 2006 for the Successor    3
  Consolidated Statements of Cash Flows (unaudited) for the period from January 1, 2005 through August 10, 2005 for the Predecessor and for the period from August 11, 2005 through September 30, 2005 and for the nine months ended September 30, 2006 for the Successor    4
 

Notes to Consolidated Financial Statements (unaudited)

   5

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   19

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

   31

Item 4.

 

Controls and Procedures

   31

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

   31

Item 1A.

 

Risk Factors

   31

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   31

Item 3.

 

Defaults upon Senior Securities

   31

Item 4.

 

Submission of Matters to a Vote of Security Holders

   31

Item 5.

 

Other Information

   32

Item 6.

 

Exhibits

   32

SIGNATURES

   33


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SunGard Data Systems Inc.

Consolidated Balance Sheets

(In millions except share and per-share amounts)

 

     Successor  
     December 31,
2005
    September 30,
2006
 
           (unaudited)  

Assets

    

Current:

    

Cash and cash equivalents

   $ 317     $ 268  

Trade receivables, less allowance for doubtful accounts of $9 and $11

     190       161  

Earned but unbilled receivables

     38       51  

Prepaid expenses and other current assets

     166       140  

Clearing broker assets

     391       457  

Retained interest in accounts receivable sold

     224       256  

Deferred income taxes

     40       47  
                

Total current assets

     1,366       1,380  

Property and equipment, less accumulated depreciation of $72 and $241

     705       738  

Software products, less accumulated amortization of $83 and $245

     1,528       1,379  

Customer base, less accumulated amortization of $68 and $215

     2,817       2,855  

Other tangible and intangible assets, less accumulated amortization of $3 and $10

     248       228  

Trade name

     1,019       1,019  

Goodwill

     6,904       6,946  
                

Total Assets

   $ 14,587     $ 14,545  
                

Liabilities and Stockholder’s Equity

    

Current:

    

Short-term and current portion of long-term debt

   $ 46     $ 44  

Accounts payable

     67       60  

Accrued compensation and benefits

     218       173  

Accrued interest expense

     161       86  

Other accrued expenses

     282       289  

Clearing broker liabilities

     360       415  

Deferred revenue

     695       720  
                

Total current liabilities

     1,829       1,787  

Long-term debt

     7,383       7,384  

Deferred income taxes

     1,803       1,832  
                

Total liabilities

     11,015       11,003  
                

Commitments and contingencies

    

Stockholder’s equity:

    

Common stock, par value $.01 per share; 100 shares authorized, issued and outstanding

     —         —    

Capital in excess of par value

     3,629       3,654  

Accumulated deficit

     (29 )     (136 )

Accumulated other comprehensive income (loss)

     (28 )     24  
                

Total stockholder’s equity

     3,572       3,542  
                

Total Liabilities and Stockholder’s Equity

   $ 14,587     $ 14,545  
                

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

 

1


Table of Contents

SunGard Data Systems Inc.

Consolidated Statements of Operations

(In millions)

(Unaudited)

 

      Predecessor     Successor  
      Period from
January 1,
2005 through
August 10,
2005
    Period from
August 11, 2005
through
September 30,
2005
    Nine Months
Ended
September 30,
2006
 

Revenue:

            

Services

   $ 2,126     $ 491     $ 2,842  

License and resale fees

     179       42       214  
                          

Total products and services

     2,305       533       3,056  

Reimbursed expenses

     66       15       79  
                          
       2,371       548       3,135  
                          

Costs and expenses:

            

Cost of sales and direct operating

     1,119       247       1,460  

Sales, marketing and administration

     456       117       659  

Product development

     154       36       191  

Depreciation and amortization

     141       33       175  

Amortization of acquisition-related intangible assets

     84       51       297  

Merger costs and other

     121       18       5  
                          
       2,075       502       2,787  
                          

Income from operations

     296       46       348  

Interest income

     9       2       10  

Interest expense and amortization of deferred financing fees

     (17 )     (88 )     (483 )

Other expense

     —         (3 )     (22 )
                          

Income (loss) before income taxes

     288       (43 )     (147 )

Provision (benefit) for income taxes

     142       (20 )     (40 )
                          

Net income (loss)

   $ 146     $ (23 )   $ (107 )
                          

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

 

2


Table of Contents

SunGard Data Systems Inc.

Consolidated Statements of Operations

(In millions)

(Unaudited)

 

      Predecessor     Successor  
      Period from
July 1, 2005
through
August 10,
2005
    Period from
August 11, 2005
through
September 30,
2005
    Three Months
Ended
September 30,
2006
 

Revenue:

      

Services

   $ 389     $ 491     $ 963  

License and resale fees

     17       42       81  
                          

Total products and services

     406       533       1,044  

Reimbursed expenses

     11       15       24  
                          
       417       548       1,068  
                          

Costs and expenses:

      

Cost of sales and direct operating

     205       247       493  

Sales, marketing and administration

     76       117       215  

Product development

     29       36       63  

Depreciation and amortization

     26       33       60  

Amortization of acquisition-related intangible assets

     15       51       99  

Merger costs and other

     103       18       2  
                          
       454       502       932  
                          

Income (loss) from operations

     (37 )     46       136  

Interest income

     3       2       4  

Interest expense and amortization of deferred financing fees

     (3 )     (88 )     (165 )

Other expense

     —         (3 )     (4 )
                          

Loss before income taxes

     (37 )     (43 )     (29 )

Provision (benefit) for income taxes

     5       (20 )     2  
                          

Net loss

   $ (42 )   $ (23 )   $ (31 )
                          

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

 

3


Table of Contents

SunGard Data Systems Inc.

Consolidated Statements of Cash Flows

(In millions)

(Unaudited)

 

      Predecessor     Successor  
      Period from
January 1, 2005
through
August 10, 2005
    Period from
August 11, 2005
through
September 30,
2005
    Nine Months
Ended
September 30,
2006
 

Cash flow from operations:

      

Net income (loss)

   $ 146     $ (23 )   $ (107 )

Reconciliation of net income (loss) to cash flow from operations:

      

Depreciation and amortization

     225       84       472  

Deferred income tax benefit

     (14 )     (24 )     (98 )

Stock compensation expense

     59       8       27  

Amortization of deferred financing costs and debt discount

     —         6       25  

Other noncash credits

     (17 )     (4 )     (36 )

Accounts receivable and other current assets

     79       105       43  

Accounts payable and accrued expenses

     106       58       (124 )

Clearing broker assets and liabilities, net

     (3 )     15       (12 )

Deferred revenue

     (10 )     32       24  
                          

Cash flow from operations

     571       257       214  
                          

Investment activities:

      

Cash paid for businesses acquired by the Company, net of cash acquired

     (419 )     (15 )     (24 )

Acquisition of SunGard by Solar Capital

     —         (11,615 )     —    

Cash paid for property and equipment and software

     (152 )     (54 )     (222 )

Other investing activities

     2       (1 )     8  
                          

Cash used in investment activities

     (569 )     (11,685 )     (238 )
                          

Financing activities:

      

Cash received from borrowings for the Transaction

     —         7,333       —    

Cash received from other borrowings, net of fees

     75       13       —    

Cash used to repay debt

     (132 )     (71 )     (37 )

Investment by Parent Companies

     —         3,450       —    

Cash received from stock option and award plans

     386       —         —    

Other financing activities

     —         —         (3 )
                          

Cash provided by (used in) financing activities

     329       10,725       (40 )
                          

Effect of exchange rate changes on cash

     —         —         15  
                          

Decrease in cash and cash equivalents

     331       (703 )     (49 )

Beginning cash and cash equivalents

     675       1,006       317  
                          

Ending cash and cash equivalents

   $ 1,006     $ 303     $ 268  
                          

Supplemental information:

      

Acquired businesses:

      

Property and equipment

   $ 66     $ —       $ —    

Software products

     57       6       6  

Customer base

     160       —         5  

Goodwill

     213       7       16  

Other tangible and intangible assets

     2       1       2  

Deferred income taxes

     (53 )     1       (1 )

Purchase price obligations and debt assumed

     (21 )     (3 )     (2 )

Net current (liabilities) assets assumed

     (5 )     3       (2 )
                          

Cash paid for acquired businesses, net of cash acquired of $31, $0 and $2, respectively

   $ 419     $ 15     $ 24  
                          

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

 

4


Table of Contents

SUNGARD DATA SYSTEMS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation:

SunGard Data Systems Inc. (“SunGard” or the “Company”) was acquired on August 11, 2005 (the “Transaction”) by a consortium of private equity investment funds associated with Bain Capital Partners, The Blackstone Group, Goldman Sachs & Co., Kohlberg Kravis Roberts & Co., Providence Equity Partners, Silver Lake Partners and Texas Pacific Group (collectively, the “Sponsors”). The Transaction was accomplished through the merger of Solar Capital Corp. into SunGard with SunGard being the surviving company.

SunGard is a wholly owned subsidiary of SunGard Holdco LLC, which is wholly owned by SunGard Holding Corp., which is wholly owned by SunGard Capital Corp. II, which is a subsidiary of SunGard Capital Corp. All four of these companies were formed for the purpose of facilitating the Transaction and are collectively referred to as the “Holding Companies.”

Although SunGard continued as the same legal entity after the Transaction, the accompanying consolidated statements of operations and cash flows are presented for two periods: Predecessor and Successor, which relate to the period preceding the Transaction and the period succeeding the Transaction, respectively. The Company refers to the operations of SunGard and subsidiaries for both the Predecessor and Successor periods.

SunGard has three segments: Financial Systems (“FS”), Higher Education and Public Sector Systems (“HEPS”) and Availability Services (“AS”). The Company’s Software & Processing Solutions business is comprised of the FS and HEPS segments. The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany transactions and accounts have been eliminated. The consolidated financial statements exclude the accounts of the Holding Companies.

The accompanying interim consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), consistent in all material respects with those applied in the Successor’s Annual Report on Form 10-K for the year ended December 31, 2005. Interim financial reporting does not include all of the information and footnotes required by GAAP for complete financial statements. The interim financial information is unaudited, but reflects all normal adjustments which are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

Effect of Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 prescribes a “more likely than not” threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on other topics related to accounting for income tax assets and liabilities, interest and penalties associated with tax positions and income taxes in interim periods as well as income tax disclosures. This Interpretation is effective as of January 1, 2007. The Company is currently evaluating FIN 48 and the related impact on the Company’s consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. SFAS 157 is effective as of January 1, 2008. The Company is currently evaluating SFAS 157 and the related impact on the Company’s consolidated financial statements.

 

5


Table of Contents

2. Acquisitions and Dispositions:

Acquisition of SunGard

As discussed in Note 1, the Transaction was completed on August 11, 2005 and was financed by a combination of borrowings under the Company’s senior secured credit facilities, the issuance of senior notes due 2013 and senior subordinated notes due 2015, the funding under the Company’s receivables facilities, and the equity investment of the Sponsors, co-investors and management.

The purchase price, including transaction costs that have been allocated as debt issuance costs or included in the overall purchase price, was approximately $11.73 billion. Under business combination accounting, the total purchase price was allocated to the Company’s net tangible and identifiable intangible assets based on their estimated fair values as of August 11, 2005. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill. The allocation of the purchase price for property and equipment, intangible assets and deferred income taxes was based upon valuation data and our estimates and assumptions.

The estimated amortization expense for each of the years 2006 to 2010 has been updated primarily to reflect changes in the purchase price allocation for the Transaction. Based on amounts recorded at September 30, 2006, total estimated amortization of all acquisition-related intangible assets for the year ended December 31, 2006 and for each of the years ended December 31, 2007 to 2010 follows (in millions):

 

2006

   $  392

2007

     384

2008

     379

2009

     375

2010

     368

Acquisitions by the Company

The Company seeks to acquire businesses that broaden its existing product lines and service offerings by adding complementary products and service offerings and by expanding its geographic reach. During the nine months ended September 30, 2006, the Company completed three acquisitions in its FS segment. Cash paid, net of cash acquired and subject to certain adjustments, was $24 million.

The following table lists the businesses the Company acquired since January 1, 2006:

 

Acquired Company/Business

  

Date

Acquired

  

Description

Dataware Solutions, Inc.    3/14/2006    Employee compliance solutions for financial institutions.
Armonys    4/28/2006    Consulting and IT professional services to financial institutions in France.
ProNvest Inc.    9/18/2006    Managed investment account services to 401(k) participants and electronic signature and authentication software.
System Access Limited    10/2/2006    Universal banking solutions for retail and wholesale banking based in Singapore.

During October 2006, the Company completed 4 acquisitions in its FS segment for aggregate cash paid of approximately $96 million, of which approximately $75 million was spent on the acquisition of System Access Ltd.

Dispositions by the Company

During the nine months ended September 30, 2006, the Company sold one of its FS segment businesses for cash proceeds of approximately $9 million.

 

6


Table of Contents

Goodwill

The following table summarizes changes in goodwill by segment (in millions):

 

     FS     HEPS    AS    Total  

Balance at December 31, 2005

   $ 3,104     $ 1,794    $ 2,006    $ 6,904  

2006 acquisitions

     16       —        —        16  

2006 dispositions

     (7 )     —        —        (7 )

Adjustments related to the Transaction

     (255 )     100      141      (14 )

Effect of foreign currency translation

     11       7      29      47  
                              

Balance at September 30, 2006

   $ 2,869     $ 1,901    $ 2,176    $ 6,946  
                              

3. Stock-Based Compensation:

Successor

Statement of Financial Accounting Standards (“SFAS”) Number 123R (revised 2004), Share-Based Payment (“SFAS 123R”), supersedes Accounting Principles Board Opinion Number 25 (“APB 25”) and requires companies to expense the fair value of employee stock options over the employee requisite service period. The Company adopted SFAS 123R as of the date of closing the Transaction using the modified prospective method, which requires companies to record stock compensation expense for all unvested and new awards as of the adoption date. Accordingly, prior period amounts presented herein have not been restated. Under the fair value recognition provisions of SFAS 123R, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period. The Company recorded as a component of sales, marketing and administration expense non-cash stock compensation of $11 million, $27 million and $8 million for the three- and nine-month periods ended September 30, 2006 and for the period from August 11, 2005 through September 30, 2005, respectively.

Predecessor

Prior to the closing of the Transaction, the Company applied APB 25 in accounting for its stock option and award plans and the pro forma disclosure requirements of SFAS Number 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Accordingly, the Company recorded in merger costs a non-cash charge for stock compensation of approximately $60 million for the period from January 1, 2005 through August 10, 2005 as a result of the acceleration of vesting of all options and restricted stock in connection with the Transaction (see Note 1). Had the Company adopted the full provisions of SFAS 123, additional stock compensation expense of $102 million and $135 million, each net of tax, would have been recorded during the periods from July 1, 2005 through August 10, 2005 and January 1, 2005 through August 10, 2005, respectively, and the resulting pro forma net (loss) income would have been $(145) million and $11 million.

 

7


Table of Contents

4. Clearing Broker Assets and Liabilities:

Clearing broker assets and liabilities are comprised of the following (in millions):

 

     Successor
     December 31,
2005
   September 30,
2006

Segregated customer cash and treasury bills

   $ 42    $ 41

Securities owned

     36      53

Securities borrowed

     261      326

Receivables from customers and other

     52      37
             

Clearing broker assets

   $ 391    $ 457
             

Payables to customers

   $ 60    $ 63

Securities loaned

     272      302

Customer securities sold short, not yet purchased

     16      28

Payable to brokers and dealers

     12      22
             

Clearing broker liabilities

   $ 360    $ 415
             

Segregated customer cash and treasury bills are held by the Company on behalf of customers. Clearing broker securities consist of trading and investment securities at fair market values. Securities borrowed and loaned are collateralized financing transactions which are cash deposits made to or received from other broker/dealers. Receivables from and payables to customers represent amounts due or payable on cash and margin transactions.

5. Debt and Derivative Instruments:

Effective January 1, 2006, the Company adopted the provisions of two technical interpretations issued by the FASB Derivatives Implementation Group (DIG) in June 2005 (commonly known as DIG Issues B38 and B39). These interpretations outline circumstances in which a put or call option embedded in debt instruments need to be separated from the debt instrument and separately valued. As of September 30, 2006, the fair value of the put option in the Company’s senior notes due 2013 and senior subordinated notes due 2015 was determined to be immaterial.

In February 2006, the Company entered into its second interest rate swap for a notional amount of $800 million. The term of the swap agreement is five years and the Company is required to pay a stream of fixed interest payments of 5.0% and, in turn, receives variable interest payments based on LIBOR (5.5% at September 30, 2006). This swap increased the hedged portion of the Company’s $4.5 billion floating rate debt to $1.6 billion. Both interest rate swaps are designated and qualify as cash flow hedges under SFAS 133, Accounting for Derivative Instruments and Hedging Activities. As of September 30, 2006, the Company recorded a cumulative unrealized gain of $1 million in Other Comprehensive Income related to the change in the market value on the swaps, which may be recognized in the statement of operations if certain terms of the senior secured credit facility change, if the loan is extinguished or if the swap agreements are terminated prior to maturity.

 

8


Table of Contents

6. Comprehensive Income (Loss):

Comprehensive income (loss) consists of net income (loss) adjusted for other increases and decreases affecting stockholder’s equity that are excluded from the determination of net income (loss). The calculation of comprehensive income (loss) follows (in millions):

 

      Predecessor     Successor  
      Period from
January 1, 2005
through
August 10, 2005
   

Period from
August 11, 2005

through
September 30, 2005

    Nine Months
Ended
September 30, 2006
 

Net income (loss)

   $ 146     $ (23 )   $ (107 )

Foreign currency translation gains (losses)

     (69 )     (12 )     50  

Unrealized gain on derivative instruments

     —         —         2  
                          

Comprehensive income (loss)

   $ 77     $ (35 )   $ (55 )
                          

 

      Predecessor     Successor  
      Period from
July 1, 2005
through
August 10, 2005
    Period from
August 11, 2005
through
September 30, 2005
    Three Months
Ended
September 30, 2006
 

Net loss

   $ (42 )   $ (23 )   $ (31 )

Foreign currency translation gains (losses)

     5       (12 )     2  

Unrealized loss on derivative instruments

     —         —         (16 )
                          

Comprehensive loss

   $ (37 )   $ (35 )   $ (45 )
                          

 

9


Table of Contents

7. Segment Information:

The Company has three segments: FS and HEPS, which together form the Company’s Software & Processing Solutions business, and AS. The operating results for each segment follow (in millions):

 

      Predecessor     Successor  
      Period from
January 1, 2005
through
August 10, 2005
    Period from
July 1, 2005
through
August 10, 2005
    Period from
August 11, 2005
through
September 30, 2005
    Nine Months
Ended
September 30, 2006
    Three Months
Ended
September 30, 2006
 

Revenue:

          

Financial systems

   $ 1,120     $ 193     $ 256     $ 1,484     $ 507  

Higher education and public sector systems

     471       83       110       644       221  
                                          

Software & processing solutions

     1,591       276       366       2,128       728  

Availability services

     780       141       182       1,007       340  
                                          
     $ 2,371     $ 417     $ 548     $ 3,135     $ 1,068  
                                          

Income (loss) from operations:

          

Financial systems

   $ 183     $ 24     $ 24     $ 143     $ 61  

Higher education and public sector systems

     76       10       15       92       35  
                                          

Software & processing solutions

     259       34       39       235       96  

Availability services

     197       38       45       201       75  

Corporate administration

     (39 )     (6 )     (20 )     (83 )     (33 )

Merger and other costs

     (121 )     (103 )     (18 )     (5 )     (2 )
                                          
     $ 296     $ (37 )   $ 46     $ 348     $ 136  
                                          

Depreciation and amortization:

          

Financial systems

   $ 39     $ 7     $ 9     $ 39     $ 13  

Higher education and public sector systems

     8       1       2       11       4  
                                          

Software & processing solutions

     47       8       11       50       17  

Availability services

     94       18       22       125       43  

Corporate administration

     —         —         —         —         —    
                                          
     $ 141     $ 26     $ 33     $ 175     $ 60  
                                          

Amortization of acquisition-related intangible assets:

          

Financial systems

   $ 39     $ 7     $ 29     $ 155     $ 52  

Higher education and public sector systems

     30       6       9       53       17  
                                          

Software & processing solutions

     69       13       38       208       69  

Availability services

     15       2       13       88       30  

Corporate administration

     —         —         —         1       —    
                                          
     $ 84     $ 15     $ 51     $ 297     $ 99  
                                          

Cash paid for property and equipment and software:

          

Financial systems

   $ 40     $ 8     $ 9     $ 59     $ 21  

Higher education and public sector systems

     15       3       3       14       6  
                                          

Software & processing solutions

     55       11       12       73       27  

Availability services

     97       18       42       149       51  

Corporate administration

     —         —         —         —         —    
                                          
 
     $ 152     $ 29     $ 54     $ 222     $ 78  
                                          

8. Related Party Transactions:

During the three- and nine-month periods ended September 30, 2006 and for the period from August 11, 2005 through September 30, 2005, in accordance with the Management Agreement between the Company and the Sponsors, the Company recorded $3 million, $10 million and $3 million, respectively, of management fees in sales, marketing and administration expenses in the statement of operations. At September 30, 2006 and December 31, 2005, $3 million and $4 million, respectively, was included in other accrued expenses on the balance sheet.

 

10


Table of Contents

9. Supplemental Guarantor Condensed Consolidating Financial Statements:

On August 11, 2005, in connection with the Transaction, the Company issued $3.0 billion aggregate principal amount of the outstanding senior notes and the outstanding senior subordinated notes. The senior notes are jointly and severally and unconditionally guaranteed on a senior unsecured basis and the senior subordinated notes are jointly and severally 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, the “Guarantors”). All other subsidiaries of the Company, either direct or indirect, do not guarantee the senior notes and senior subordinated notes (“Non-Guarantors”). The Guarantors also unconditionally guarantee the senior secured credit facilities.

The following tables present the financial position, results of operations and cash flows of the Company (Parent), the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and Eliminations as of December 31, 2005 and September 30, 2006 and for each of the nine- and three-month periods ended September 30, 2006 and for the periods from January 1, 2005 through August 10, 2005 and July 1, 2005 through August 10, 2005, to arrive at the information for SunGard Data Systems Inc. on a consolidated basis.

 

(in millions)

 

   Supplemental Condensed Consolidating Balance Sheet (Successor)
September 30, 2006
   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated

Assets

          

Current:

          

Cash and cash equivalents

   $ 16     $ (1 )   $ 253     $ —       $ 268

Intercompany balances

     (2,013 )     1,973       40       —         —  

Trade receivables, net

     —         21       191       —         212

Prepaid expenses, taxes and other current assets

     501       101       802       (504 )     900
                                      

Total current assets

     (1,496 )     2,094       1,286       (504 )     1,380

Property and equipment, net

     1       509       228       —         738

Intangible assets, net

     194       4,800       487       —         5,481

Intercompany balances

     (754 )     733       21       —         —  

Goodwill

     —         6,253       693       —         6,946

Investment in subsidiaries

     12,815       1,628       —         (14,443 )     —  
                                      

Total Assets

   $ 10,760     $ 16,017     $ 2,715     $ (14,947 )   $ 14,545
                                      

Liabilities and Stockholder’s Equity

          

Current:

          

Short-term and current portion of long-term debt

   $ 37     $ 2     $ 5     $ —       $ 44

Accounts payable and other current liabilities

     116       1,302       829       (504 )     1,743
                                      

Total current liabilities

     153       1,304       834       (504 )     1,787

Long-term debt

     7,060       2       322       —         7,384

Intercompany debt

     1       255       (130 )     (126 )     —  

Deferred income taxes

     4       1,642       186       —         1,832
                                      

Total liabilities

     7,218       3,203       1,212       (630 )     11,003
                                      

Total stockholder’s equity

     3,542       12,814       1,503       (14,317 )     3,542
                                      

Total Liabilities and Stockholder’s Equity

   $ 10,760     $ 16,017     $ 2,715     $ (14,947 )   $ 14,545
                                      

 

11


Table of Contents

(in millions)

 

   Supplemental Condensed Consolidating Balance Sheet (Successor)
December 31, 2005
   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated

Assets

          

Current:

          

Cash and cash equivalents

   $ 74     $ (8 )   $ 251     $ —       $ 317

Intercompany balances

     (1,536 )     1,442       94       —         —  

Trade receivables, net

     2       46       180       —         228

Prepaid expenses, taxes and other current assets

     321       142       674       (316 )     821
                                      

Total current assets

     (1,139 )     1,622       1,199       (316 )     1,366

Property and equipment, net

     1       496       208       —         705

Intangible assets, net

     215       4,877       520       —         5,612

Goodwill

     —         6,272       632       —         6,904

Intercompany balances

     (744 )     732       12       —         —  

Investment in subsidiaries

     12,568       1,563       —         (14,131 )     —  
                                      

Total Assets

   $ 10,901     $ 15,562     $ 2,571     $ (14,447 )   $ 14,587
                                      

Liabilities and Stockholder’s Equity

          

Current:

          

Short-term and current portion of long-term debt

   $ 37     $ 3     $ 6     $ —       $ 46

Accounts payable and other current liabilities

     204       1,158       737       (316 )     1,783
                                      

Total current liabilities

     241       1,161       743       (316 )     1,829

Long-term debt

     7,078       4       301       —         7,383

Intercompany debt

     5       212       (134 )     (83 )     —  

Deferred income taxes

     5       1,617       181       —         1,803
                                      

Total liabilities

     7,329       2,994       1,091       (399 )     11,015
                                      

Total stockholder’s equity

     3,572       12,568       1,480       (14,048 )     3,572
                                      

Total Liabilities and Stockholder’s Equity

   $ 10,901     $ 15,562     $ 2,571     $ (14,447 )   $ 14,587
                                      

 

12


Table of Contents

(in millions)

 

   Supplemental Condensed Consolidating Schedule of Operations (Successor)
Nine Months Ended September 30, 2006
 
   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Total revenue

   $ —       $ 2,299     $ 944     $ (108 )   $ 3,135  
                                        

Costs and expenses:

          

Cost of sales and direct operating

     —         1,087       481       (108 )     1,460  

Sales, marketing and administration

     82       364       213       —         659  

Product development

     —         129       62       —         191  

Depreciation and amortization

     —         127       48       —         175  

Amortization of acquisition-related intangible assets

     2       246       49       —         297  

Merger costs

     5       —         —         —         5  
                                        
     89       1,953       853       (108 )     2,787  
                                        

Income (loss) from operations

     (89 )     346       91       —         348  

Net interest income (expense)

     (465 )     (8 )     —         —         (473 )

Other income (expense)

     160       51       (17 )     (216 )     (22 )
                                        

Income (loss) before income taxes

     (394 )     389       74       (216 )     (147 )

Provision (benefit) for income taxes

     (287 )     228       19       —         (40 )
                                        

Net income (loss)

   $ (107 )   $ 161     $ 55     $ (216 )   $ (107 )
                                        

(in millions)

 

   Supplemental Condensed Consolidating Schedule of Operations (Predecessor)
Period from January 1 through August 10, 2005
 
   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Total revenue

   $ —       $ 1,755     $ 694     $ (78 )   $ 2,371  
                                        

Costs and expenses:

          

Cost of sales and direct operating

     —         847       350       (78 )     1,119  

Sales, marketing and administration

     39       271       146       —         456  

Product development

     —         104       50       —         154  

Depreciation and amortization

     —         103       38       —         141  

Amortization of acquisition-related intangible assets

     —         58       26       —         84  

Merger costs

     119       2       —         —         121  
                                        
     158       1,385       610       (78 )     2,075  
                                        

Income (loss) from operations

     (158 )     370       84       —         296  

Net interest income (expense)

     (11 )     —         3       —         (8 )

Other income (expense)

     286       62       —         (348 )     —    
                                        

Income (loss) before income taxes

     117       432       87       (348 )     288  

Provision (benefit) for income taxes

     (29 )     146       25       —         142  
                                        

Net income (loss)

   $ 146     $ 286     $ 62     $ (348 )   $ 146  
                                        

 

13


Table of Contents

(in millions)

 

   Supplemental Condensed Consolidating Schedule of Operations (Successor)
Period from August 11, 2005 through September 30, 2005
 
   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Total revenue

   $ —       $ 413     $ 150     $ (15 )   $ 548  
                                        

Costs and expenses:

          

Cost of sales and direct operating

     —         187       75       (15 )     247  

Sales, marketing and administration

     20       64       33       —         117  

Product development

     —         22       14       —         36  

Depreciation and amortization

     —         25       8       —         33  

Amortization of acquisition-related intangible assets

     —         41       10       —         51  

Merger costs

     14       —         4       —         18  
                                        
     34       339       144       (15 )     502  
                                        

Income (loss) from operations

     (34 )     74       6       —         46  

Net interest income (expense)

     (82 )     (2 )     (2 )     —         (86 )

Other income (expense)

     37       (6 )     (2 )     (32 )     (3 )
                                        

Income (loss) before income taxes

     (79 )     66       2       (32 )     (43 )

Provision (benefit) for income taxes

     (58 )     29       9       —         (20 )
                                        

Net income (loss)

   $ (21 )   $ 37     $ (7 )   $ (32 )   $ (23 )
                                        

(in millions)

 

   Supplemental Condensed Consolidating Schedule of Operations (Successor)
Three Months Ended September 30, 2006
 
   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Total revenue

   $ —       $ 782     $ 313     $ (27 )   $ 1,068  
                                        

Costs and expenses:

          

Cost of sales and direct operating

     —         353       167       (27 )     493  

Sales, marketing and administration

     29       117       69       —         215  

Product development

     —         43       20       —         63  

Depreciation and amortization

     —         43       17       —         60  

Amortization of acquisition-related intangible assets

     1       82       16       —         99  

Merger costs

     2       —         —         —         2  
                                        
     32       638       289       (27 )     932  
                                        

Income (loss) from operations

     (32 )     144       24       —         136  

Net interest income (expense)

     (157 )     (1 )     (3 )     —         (161 )

Other income (expense)

     5       17       (3 )     (23 )     (4 )
                                        

Income (loss) before income taxes

     (184 )     160       18       (23 )     (29 )

Provision (benefit) for income taxes

     (153 )     155       —         —         2  
                                        

Net income (loss)

   $ (31 )   $ 5     $ 18     $ (23 )   $ (31 )
                                        

 

14


Table of Contents

(in millions)

 

  

Supplemental Condensed Consolidating Schedule of Operations (Predecessor)

Period from July 1 through August 10, 2005

 
   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
   Eliminations     Consolidated  

Total revenue

   $ —       $ 307     $ 124    $ (14 )   $ 417  
                                       

Costs and expenses:

           

Cost of sales and direct operating

     —         154       65      (14 )     205  

Sales, marketing and administration

     7       37       32      —         76  

Product development

     —         20       9      —         29  

Depreciation and amortization

     —         19       7      —         26  

Amortization of acquisition-related intangible assets

     —         10       5      —         15  

Merger costs

     102       1       —        —         103  
                                       
     109       241       118      (14 )     454  
                                       

Income (loss) from operations

     (109 )     66       6      —         (37 )

Net interest income (expense)

     —         (4 )     4      —         —    

Other income (expense)

     65       8       —        (73 )     —    
                                       

Income (loss) before income taxes

     (44 )     70       10      (73 )     (37 )

Provision (benefit) for income taxes

     (2 )     5       2      —         5  
                                       

Net income (loss)

   $ (42 )   $ 65     $ 8    $ (73 )   $ (42 )
                                       

 

15


Table of Contents
     Supplemental Condensed Consolidating Schedule of Cash Flows (Successor)  

(in millions)

 

   Nine Months Ended September 30, 2006  
   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flow From Operations

          

Net income (loss)

   $ (107 )   $ 161     $ 55     $ (216 )   $ (107 )

Non cash adjustments

     (105 )     194       85       216       390  

Changes in operating assets and liabilities

     (271 )     235       (33 )     —         (69 )
                                        

Cash flow provided by (used in) operations

     (483 )     590       107       —         214  
                                        

Investment Activities

          

Intercompany transactions

     462       (395 )     (67 )     —         —    

Cash paid for businesses acquired by the Company, net of cash acquired

     —         (24 )     —         —         (24 )

Cash paid for property and equipment and software

     —         (169 )     (53 )     —         (222 )

Other investing activities

     (6 )     8       6       —         8  
                                        

Cash provided by (used in) investment activities

     456       (580 )     (114 )     —         (238 )
                                        

Financing Activities

          

Net borrowings (repayments) of long-term debt

     (28 )     (3 )     (6 )     —         (37 )

Cash advances to Parent

     (3 )     —         —         —         (3 )
                                        

Cash provided by (used in) financing activities

     (31 )     (3 )     (6 )     —         (40 )
                                        

Effect of exchange rate changes on cash

     —         —         15       —         15  
                                        

Increase (decrease) in cash and cash equivalents

     (58 )     7       2       —         (49 )

Beginning cash and cash equivalents

     74       (8 )     251       —         317  
                                        

Ending cash and cash equivalents

   $ 16     $ (1 )   $ 253     $ —       $ 268  
                                        

 

16


Table of Contents
     Supplemental Condensed Consolidating Schedule of Cash Flows (Predecessor)  

(in millions)

 

   Period from January 1 through August 10, 2005  
   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flow From Operations

          

Net income (loss)

   $ 146     $ 286     $ 62     $ (348 )   $ 146  

Non cash adjustments

     (225 )     72       58       348       253  

Changes in operating assets and liabilities

     39       139       (6 )     —         172  
                                        

Cash flow provided by (used in) operations

     (40 )     497       114       —         571  
                                        

Investment Activities

          

Intercompany transactions

     (137 )     78       59       —         —    

Cash paid for businesses acquired by the Company, net of cash acquired

     —         (419 )     —         —         (419 )

Cash paid for property and equipment

     7       (111 )     (48 )     —         (152 )

Other investing activities

     —         2       —         —         2  
                                        

Cash provided by (used in) investment activities

     (130 )     (450 )     11       —         (569 )
                                        

Financing Activities

          

Net repayments of long-term debt

     —         (43 )     (14 )     —         (57 )

Other financing activities

     386       —         —         —         386  
                                        

Cash provided by (used in) financing activities

     386       (43 )     (14 )     —         329  
                                        

Increase in cash and equivalents

     216       4       111       —         331  

Beginning cash and equivalents

     396       5       274       —         675  
                                        

Ending cash and equivalents

   $ 612     $ 9     $ 385     $ —       $ 1,006  
                                        

 

17


Table of Contents
     Supplemental Condensed Consolidating Schedule of Cash Flows (Successor)  

(in millions)

 

   Period from August 11, 2005 through September 30, 2005  
   Parent
Company
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flow From Operations

          

Net income (loss)

   $ (21 )   $ 37     $ (7 )   $ (32 )   $ (23 )

Non cash adjustments

     7       47       16       —         70  

Changes in operating assets and liabilities

     (11 )     298       (109 )     32       210  
                                        

Cash flow provided by (used in) operations

     (25 )     382       (100 )     —         257  
                                        

Investment Activities

          

Intercompany transactions

     552       (324 )     (228 )     —         —    

Cash paid for businesses acquired by the Company, net of cash acquired

     —         (15 )     —         —         (15 )

Acquisition of SunGard

     (11,615 )     —         —         —         (11,615 )

Cash paid for property and equipment and software

     —         (49 )     (5 )     —         (54 )

Other investing activities

     —         (1 )     —         —         (1 )
                                        

Cash provided by (used in) investment activities

     (11,063 )     (389 )     (233 )     —         (11,685 )
                                        

Financing Activities

          

Cash received from borrowings for the Transaction

     7,333       —         —         —         7,333  

Investment by Parent Companies

     3,450       —         —         —         3,450  

Net borrowings (repayments) of long-term debt

     (244 )     (5 )     191       —         (58 )
                                        

Cash provided by (used in) financing activities

     10,539       (5 )     191       —         10,725  
                                        

Increase (decrease) in cash and cash equivalents

     (549 )     (12 )     (142 )     —         (703 )

Beginning cash and cash equivalents

     612       9       385       —         1,006  
                                        

Ending cash and cash equivalents

   $ 63     $ (3 )   $ 243     $ —       $ 303  
                                        

 

18


Table of Contents

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

Introduction

The following discussion and analysis supplements the management’s discussion and analysis in the Successor’s Annual Report on Form 10-K for the year ended December 31, 2005 and presumes that readers have read or have access to the discussion and analysis in our Annual Report. The following discussion and analysis includes historical and certain forward-looking information that should be read together with the accompanying Consolidated Financial Statements, related footnotes, and the discussion below of certain risks and uncertainties that could cause future operating results to differ materially from historical results or from the expected results indicated by forward-looking statements.

Although SunGard Data Systems Inc. continued as the same legal entity after the Transaction, the accompanying consolidated statements of operations, cash flows and stockholder’s equity are presented for two periods: Predecessor and Successor, which relate to the period preceding the Transaction and the period succeeding the Transaction, respectively. The Company refers to the operations of SunGard and subsidiaries for both the Predecessor and Successor periods. We have prepared our discussion of the results of operations by comparing the mathematical combination of the Successor and Predecessor periods in the nine months and three months ended September 30, 2005 to the nine- and three-month periods ended September 30, 2006. Although this presentation does not comply with generally accepted accounting principles (“GAAP”), we believe that it provides a meaningful method of comparison. The combined operating results have not been prepared as pro forma results under applicable regulations and may not reflect the actual results we would have achieved absent the Transaction and may not be predictive of future results of operations.

Results of Operations:

Nine Months Ended September 30, 2006 Compared To Nine Months Ended September 30, 2005

The following table sets forth, for the periods indicated, certain amounts included in our Consolidated Statements of Operations, the relative percentage that those amounts represent to consolidated revenue (unless otherwise indicated), and the percentage change in those amounts from period to period.

 

19


Table of Contents
      Predecessor     Successor     Combined (1)     Successor        

(in millions)

 

   Period from
January 1, 2005
through
August 10, 2005
   

Period from
August 11, 2005

through
September 30, 2005

   

Nine months ended
September 30,

2005

   

Nine months ended
September 30,

2006

    Percent
Increase
(Decrease)
 
           2006 vs. 2005  
                     percent of
revenue
          percent of
revenue
       

Revenue

              

Financial systems (FS)

   $ 1,120     $ 256     $ 1,376     47 %   $ 1,484     47 %   8 %

Higher education and public sector systems (HEPS)

     471       110       581     20 %     644     21 %   11 %
                                        

Software & processing solutions

     1,591       366       1,957     67 %     2,128     68 %   9 %

Availability services (AS)

     780       182       962     33 %     1,007     32 %   5 %
                                        
     $ 2,371     $ 548     $ 2,919     100 %   $ 3,135     100 %   7 %
                                        
   

Costs and Expenses

              

Cost of sales and direct operating

   $ 1,119     $ 247     $ 1,366     47 %   $ 1,460     47 %   7 %

Sales, marketing and administration

     456       117       573     20 %     659     21 %   15 %

Product development

     154       36       190     7 %     191     6 %   1 %

Depreciation and amortization

     141       33       174     6 %     175     6 %   1 %

Amortization of acquisition- related intangible assets

     84       51       135     5 %     297     9 %   120 %

Merger and other costs

     121       18       139     5 %     5     —   %   (96 )%
                                        
     $ 2,075     $ 502     $ 2,577     88 %   $ 2,787     89 %   8 %
                                        

Operating Income

              

Financial systems (2)

   $ 183     $ 24     $ 207     15 %   $ 143     10 %   (31 )%

Higher education and public sector systems (2)

     76       15       91     16 %     92     14 %   1 %
                                        

Software & processing solutions (2)

     259       39       298     15 %     235     11 %   (21 )%

Availability services (2)

     197       45       242     25 %     201     20 %   (17 )%

Corporate administration

     (39 )     (20 )     (59 )   (2 )%     (83 )   (3 )%   41 %

Merger and other costs

     (121 )     (18 )     (139 )   (5 )%     (5 )   —   %   (96 )%
                                        
     $ 296     $ 46     $ 342     12 %   $ 348     11 %   2 %
                                        

(1) As described above, our combined results for the nine months ended September 30, 2005 represent the sum of the amounts for the Predecessor period from January 1, 2005 through August 10, 2005 and for the Successor period from August 11, 2005 through September 30, 2005. This combination does not comply with GAAP or with the rules for pro forma presentation, but is presented because we believe it enables a meaningful comparison of our results.
(2) Percent of revenue is calculated as a percent of revenue from FS, HEPS, Software & Processing Solutions, and AS, respectively.

The following table sets forth, for the periods indicated, certain supplemental revenue data, the relative percentage that those amounts represent to total revenue and the percentage change in those amounts from period to period.

 

20


Table of Contents
     Predecessor    Successor    Combined (1)     Successor  

(in millions)

 

  

Period from
January 1, 2005
through
August 10,

2005

   Period from
August 11, 2005
through
September 30,
2005
  

Nine months ended
September 30,

2005

   

Nine Months Ended
September 30,

2006

   

Percent
Increase
(Decrease)

2006 vs. 2005

 
            
                   percent of
revenue
         Percent of
revenue
       

Financial Systems

                         

Services

   $ 968    $ 222    $ 1,190    41 %   $ 1,312    42 %   10 %

License and resale fees

     99      23      122    4 %     112    4 %   (8 )%
                                       

Total products and services

     1,067      245      1,312    45 %     1,424    45 %   9 %

Reimbursed expenses

     53      11      64    2 %     60    2 %   (6 )%
                                       
   $ 1,120    $ 256    $ 1,376    47 %   $ 1,484    47 %   8 %
                                       

Higher Education and Public Sector Systems

                         

Services

   $ 393    $ 90    $ 483    17 %   $ 537    17 %   11 %

License and resale fees

     70      18      88    3 %     97    3 %   10 %
                                       

Total products and services

     463      108      571    20 %     634    20 %   11 %

Reimbursed expenses

     8      2      10    —   %     10    —   %   —   %
                                       
   $ 471    $ 110    $ 581    20 %   $ 644    21 %   11 %
                                       

Software & Processing Solutions

                         

Services

   $ 1,361    $ 312    $ 1,673    57 %   $ 1,849    59 %   11 %

License and resale fees

     169      41      210    7 %     209    7 %   —   %
                                       

Total products and services

     1,530      353      1,883    65 %     2,058    66 %   9 %

Reimbursed expenses

     61      13      74    3 %     70    2 %   (5 )%
                                       
   $ 1,591    $ 366    $ 1,957    67 %   $ 2,128    68 %   9 %
                                       

Availability Services

                         

Services

   $ 765    $ 179    $ 944    32 %   $ 993    32 %   5 %

License and resale fees

     10      1      11    —   %     5    —   %   (55 )%
                                       

Total products and services

     775      180      955    33 %     998    32 %   5 %

Reimbursed expenses

     5      2      7    —   %     9    —   %   29 %
                                       
   $ 780    $ 182    $ 962    33 %   $ 1,007    32 %   5 %
                                       

Total Revenue

                         

Services

   $ 2,126    $ 491    $ 2,617    90 %   $ 2,842    91 %   9 %

License and resale fees

     179      42      221    8 %     214    7 %   (3 )%
                                       

Total products and services

     2,305      533      2,838    97 %     3,056    97 %   8 %

Reimbursed expenses

     66      15      81    3 %     79    3 %   (2 )%
                                       
   $ 2,371    $ 548    $ 2,919    100 %   $ 3,135    100 %   7 %
                                       

(1) As described above, our combined results for the nine months ended September 30, 2005 represent the sum of the amounts for the Predecessor period from January 1, 2005 through August 10, 2005 and for the Successor period from August 11, 2005 through September 30, 2005. This combination does not comply with GAAP or with the rules for pro forma presentation, but is presented because we believe it enables a meaningful comparison of our results.

Income from Operations:

Our total operating margin was 11% for the nine months ended September 30, 2006, compared to 12% for the nine months ended September 30, 2005, due primarily to $143 million of incremental amortization of acquisition-related intangible assets resulting from the Transaction (“incremental amortization”), a $19 million increase in non-cash stock compensation cost and a $10 million decrease in software license fees, partially offset by a $134 million reduction in merger costs, a $12 million increase in revenue related to purchase accounting adjustments in 2005 recorded in connection with the Transaction (the “deferred revenue adjustment”) and an $11 million one-time charge related to the relocation of

 

21


Table of Contents

an AS facility in the prior year period. The negative impact on the total operating margin of the incremental amortization, the increase in stock compensation cost and the decrease in software license fees were 460, 60 and 30 basis points, respectively, while the reduction in merger costs, the 2005 deferred revenue adjustment and the one-time facility relocation cost improved the operating margin by 460, 40 and 40 basis points, respectively (one hundred basis points equals one percentage point).

Financial Systems:

The FS operating margin was 10% and 15% for the nine months ended September 30, 2006 and 2005, respectively. The lower margin in 2006 was due primarily to $73 million of incremental amortization (490 basis points) and a $10 million decrease in software license fees (60 basis points).

Higher Education and Public Sector Systems:

The HEPS operating margin was 14% and 16% for the nine months ended September 30, 2006 and 2005, respectively. The lower margin in 2006 was due primarily to $11 million of incremental amortization (170 basis points) and a $2 million decrease in software license fees (30 basis points), partially offset by the effect of the 2005 deferred revenue adjustment of $3 million (50 basis points).

Availability Services:

The AS operating margin was 20% and 25% for the nine months ended September 30, 2006 and 2005, respectively. The lower margin in 2006 was due primarily to $59 million of incremental amortization (590 basis points). The operating margin in 2005 was reduced by 120 basis points because of an $11 million one-time charge related to the relocation of an AS facility and the effect of $6 million by the 2005 deferred revenue adjustment (40 basis points).

Revenue:

Total revenue increased $216 million for the nine months ended September 30, 2006 compared to the first nine months of 2005. The increase in total revenue in 2006 is due primarily to internal revenue growth. Internal revenue growth was approximately 5% and 6% for the first nine months of 2006 and 2005, respectively. Internal revenue is defined as revenue for businesses owned for at least one year and further adjusted for the effects of businesses sold in the previous twelve months and the $12 million deferred revenue adjustment in 2005.

For the nine months ended September 30, 2006, services revenue increased to $2,842 million from $2,617 million during the first nine months of 2005. Services revenue represented approximately 91% and 90% of total revenue in the first nine months of 2006 and 2005, respectively. The $225 million increase was due to internal revenue growth of $164 million across all segments and acquired revenue in FS and HEPS.

Professional services revenue was $542 million and $469 million for the nine months ended September 30, 2006 and 2005, respectively. The increase was due primarily to internal revenue growth in FS and HEPS.

Revenue from license and resale fees was $214 million and $221 million for the nine months ended September 30, 2006 and 2005, respectively, and included software license revenue of $155 million and $164 million, respectively. The decrease in software license revenue was mostly from FS, with a smaller decline in HEPS, and primarily reflects the impact of $17 million of software license backlog at December 31, 2004 which was recognized as revenue in the first quarter of 2005.

Financial Systems:

FS revenue increased $108 million in 2006. Internal revenue growth was 5% during each of the first nine months of 2006 and 2005. FS services revenue increased $122 million and FS license and resale fees decreased $10 million. The increase in services revenue is due primarily to internal revenue growth, and, to a lesser degree, to acquired businesses, partially offset by the deferred revenue adjustment of $3 million in the prior year period. Software license fees were $103 million in the nine months ended September 30, 2006, a decrease of $10 million. The decrease in software license fees was across the segment and primarily reflects the impact of $9 million of software license backlog at December 31, 2004 which was recognized as revenue in the first quarter of 2005, partially offset by a deferred revenue adjustment of $1 million in the prior year period.

 

22


Table of Contents

Higher Education and Public Sector Systems:

Revenue from HEPS increased $63 million for the nine months ended September 30, 2006 compared to the corresponding period in 2005 due to both internal revenue growth and a business acquired in the first quarter of 2005, partially offset by a $3 million deferred revenue adjustment in the prior year period. HEPS services revenue increased $54 million and license and resale fees increased $9 million. Software license fees were $49 million in the nine months ended September 30, 2006, a decrease of $3 million, which primarily reflects the impact of $8 million of software license backlog at December 31, 2004 which was recognized as revenue in the first quarter of 2005. Resale fees increased $12 million compared to the prior year period due primarily to a business acquired in the first quarter of 2005. HEPS internal revenue growth was approximately 6% and 11% for the nine months ended September 30, 2006 and 2005, respectively.

Availability Services:

AS revenue increased $45 million in 2006 or 5%. AS internal revenue increased approximately 5% in 2006, reflecting the effect of the disposition of a U.K.-based value-added reseller. This compares to internal revenue growth of approximately 4% during the first nine months of 2005.

Costs and Expenses:

The increase of $210 million in total costs and expenses was due primarily to increased expenses across all segments, incremental amortization of $143 million and to acquired businesses, offset by a $134 million decrease in merger costs. Costs and expenses in 2005 includes the impact of a one-time charge of $11 million related to the relocation of a leased AS facility in North Bergen, New Jersey.

Cost of sales and direct operating expenses as a percentage of total revenue were consistent at 47% in each of the nine-month periods ended September 30, 2006 and 2005. Cost of sales and direct operating expenses increased $94 million due primarily to increases across all segments and the increase from acquired businesses, offset in part by a one-time charge of $11 million related to the relocation of an AS facility in 2005.

Sales, marketing and administration expenses increased as a percentage of total revenue to 21% for the nine months ended September 30, 2006 compared to 20% in 2005. The increase in sales, marketing and administration expenses of $86 million was due primarily to increases in all segments, mostly FS, to the increase in non-cash stock compensation of $19 million and to acquired businesses.

Because AS product development costs are insignificant, it is more meaningful to measure product development expenses as a percentage of revenue from Software and Processing Solutions. For each of the nine-month periods ended September 30, 2006 and 2005, product development costs were 9% and 10%, respectively, of revenue from Software and Processing Solutions.

Depreciation and amortization was consistent as a percentage of total revenue at 6% for the nine months ended September 30, 2006 and 2005.

Amortization of acquisition-related intangible assets was 9% of total revenue during the first nine months of 2006, compared to 5% in 2005. Amortization of acquisition-related intangible assets increased $162 million, of which $143 million is incremental amortization resulting from the Transaction with the balance from recent acquisitions.

Merger and other costs decreased $134 million during the nine months ended September 30, 2006 compared to the prior year period. The nine-month period ended September 30, 2005 included costs associated with the Transaction.

Interest income was $10 million and $11 million, respectively, for the nine-month periods ended September 30, 2006 and 2005. Interest expense was $483 million and $105 million for the nine months ended September 30, 2006 and 2005, respectively. The increase was due to the debt incurred in connection with the Transaction and includes amortization of debt issuance costs and debt discounts of $19 million.

 

23


Table of Contents

Other expense was $22 million for the nine months ended September 30, 2006 from $3 million for the prior year period. The increase is primarily due to losses incurred related to our accounts receivable securitization program.

Three Months Ended September 30, 2006 Compared To Three Months Ended September 30, 2005

The following table sets forth, for the periods indicated, certain amounts included in our Consolidated Statements of Operations, the relative percentage that those amounts represent to consolidated revenue (unless otherwise indicated), and the percentage change in those amounts from period to period.

 

      Predecessor     Successor     Combined (1)     Successor    

Percent
Increase
(Decrease)

2006 vs. 2005

 
      Period from
July 1, 2005
through
August 10,
2005
    Period from
August 11, 2005
through
September 30,
2005
   

Three months ended
September 30,

2005

   

Three months ended
September 30,

2006

   
          
(in millions)                      percent of
revenue
          percent of
revenue
       

Revenue

              

Financial systems (FS)

   $ 193     $ 256     $ 449     47 %   $ 507     47 %   13 %

Higher education and public sector systems (HEPS)

     83       110       193     20 %     221     21 %   15 %
                                        

Software & processing solutions

     276       366       642     67 %     728     68 %   13 %

Availability services (AS)

     141       182       323     33 %     340     32 %   5 %
                                        
     $ 417     $ 548     $ 965     100 %   $ 1,068     100 %   11 %
                                        

Costs and Expenses

              

Cost of sales and direct operating

   $ 205     $ 247     $ 452     47 %   $ 493     46 %   9 %

Sales, marketing and administration

     76       117       193     20 %     215     20 %   11 %

Product development

     29       36       65     7 %     63     6 %   (3 )%

Depreciation and amortization

     26       33       59     6 %     60     6 %   2 %

Amortization of acquisition- related intangible assets

     15       51       66     7 %     99     9 %   50 %

Merger and other costs

     103       18       121     13 %     2     —   %   (98 )%
                                        
     $ 454     $ 502     $ 956     99 %   $ 932     87 %   (3 )%
                                        

Operating Income

              

Financial systems (2)

   $ 24     $ 24     $ 48     11 %   $ 61     12 %   27 %

Higher education and public sector systems (2)

     10       15       25     13 %     35     16 %   40 %
                                        

Software & processing solutions (2)

     34       39       73     11 %     96     13 %   32 %

Availability services (2)

     38       45       83     26 %     75     22 %   (10 )%

Corporate administration

     (6 )     (20 )     (26 )   (3 )%     (33 )   (3 )%   27 %

Merger and other costs

     (103 )     (18 )     (121 )   (13 )%     (2 )   —   %   (98 )%
                                        
     $ (37 )   $ 46     $ 9     1 %   $ 136     13 %   1411 %
                                        

(1) As described above, our combined results for the three months ended September 30, 2005 represent the sum of the amounts for the Predecessor period from July 1, 2005 through August 10, 2005 and for the Successor period from August 11, 2005 through September 30, 2005. This combination does not comply with GAAP or with the rules for pro forma presentation, but is presented because we believe it enables a meaningful comparison of our results.
(2) Percent of revenue is calculated as a percent of revenue from FS, HEPS, Software & Processing Solutions, and AS, respectively.

 

24


Table of Contents

The following table sets forth, for the periods indicated, certain supplemental revenue data, the relative percentage that those amounts represent to total revenue and the percentage change in those amounts from period to period.

 

     Predecessor    Successor    Combined (1)     Successor  
    

Period from
July 1, 2005

through
August 10,
2005

   Period from
August 11, 2005
through
September 30,
2005
  

Three months ended
September 30,

2005

   

Three Months Ended
September 30,

2006

    Percent
Increase
(Decrease)
 
             2006 vs. 2005  
(in millions)                    percent of
revenue
         percent of
revenue
       

Financial Systems

                         

Services

   $ 174    $ 222    $ 396    41 %   $ 448    42 %   13 %

License and resale fees

     10      23      33    3 %     40    4 %   21 %
                                       

Total products and services

     184      245      429    44 %     488    46 %   14 %

Reimbursed expenses

     9      11      20    2 %     19    2 %   (5 )%
                                       
   $ 193    $ 256    $ 449    47 %   $ 507    47 %   13 %
                                       

Higher Education and Public Sector Systems

                         

Services

   $ 75    $ 90    $ 165    17 %   $ 178    17 %   8 %

License and resale fees

     6      18      24    2 %     39    4 %   63 %
                                       

Total products and services

     81      108      189    20 %     217    20 %   15 %

Reimbursed expenses

     2      2      4    —   %     4    —   %   —   %
                                       
   $ 83    $ 110    $ 193    20 %   $ 221    21 %   15 %
                                       

Software & Processing Solutions

                         

Services

   $ 249    $ 312    $ 561    58 %   $ 626    59 %   12 %

License and resale fees

     16      41      57    6 %     79    7 %   39 %
                                       

Total products and services

     265      353      618    64 %     705    66 %   14 %

Reimbursed expenses

     11      13      24    2 %     23    2 %   (4 )%
                                       
   $ 276    $ 366    $ 642    67 %   $ 728    68 %   13 %
                                       

Availability Services

                         

Services

   $ 140    $ 179    $ 319    33 %   $ 337    32 %   6 %

License and resale fees

     1      1      2    —   %     2    —   %   —   %
                                       

Total products and services

     141      180      321    33 %     339    32 %   6 %

Reimbursed expenses

     —        2      2    —   %     1    —   %   (50 )%
                                       
   $ 141    $ 182    $ 323    33 %   $ 340    32 %   5 %
                                       

Total Revenue

                         

Services

   $ 389    $ 491    $ 880    91 %   $ 963    90 %   9 %

License and resale fees

     17      42      59    6 %     81    8 %   37 %
                                       

Total products and services

     406      533      939    97 %     1,044    98 %   11 %

Reimbursed expenses

     11      15      26    3 %     24    2 %   (8 )%
                                       
   $ 417    $ 548    $ 965    100 %   $ 1,068    100 %   11 %
                                       

(1) As described above, our combined results for the three months ended September 30, 2005 represent the sum of the amounts for the Predecessor period from July 1, 2005 through August 10, 2005 and for the Successor period from August 11, 2005 through September 30, 2005. This combination does not comply with GAAP or with the rules for pro forma presentation, but is presented because we believe it enables a meaningful comparison of our results.

 

25


Table of Contents

Income from Operations:

Our total operating margin was 13% for the three months ended September 30, 2006 compared to 1% for the three months ended September 30, 2005, due primarily to a decrease of $119 million in merger costs, a $12 million deferred revenue adjustment in the prior year period and a decrease of $9 million in software license fees, partially offset by $27 million of incremental amortization and $3 million of increased stock compensation cost. The impact on the total operating margin of the decrease in merger costs, the deferred revenue adjustment and the decrease in license fees was 1,240, 120 and 70 basis points, respectively, while the incremental amortization and the stock compensation cost reduced the operating margin by 250 and 30 basis points, respectively.

Financial Systems:

The FS operating margin was 12% and 11% for the three months ended September 30, 2006 and 2005, respectively. The higher margin in 2006 was due primarily to improved performance of the businesses in the segment, a $6 million increase in license fees (110 basis points) and the $3 million effect of the 2005 deferred revenue adjustment (60 basis points), partially offset by $11 million of incremental amortization (220 basis points).

Higher Education and Public Sector Systems:

The HEPS operating margin was 16% and 13% for the three months ended September 30, 2006 and 2005, respectively. The higher margin in 2006 was due primarily to strong performance in the quarter across all businesses in the segment and the net effect of 160 basis points related to the 2005 deferred revenue adjustment, a $2 million increase in license fees and $2 million of incremental amortization.

Availability Services:

The AS operating margin was 22% and 26% for the three months ended September 30, 2006 and 2005, respectively. The lower margin in 2006 was due primarily to $14 million of incremental amortization (400 basis points).

Revenue:

Total revenue increased $103 million for the three months ended September 30, 2006 compared to the third quarter of 2005. The increase in total revenue in 2006 is primarily due to internal revenue growth, which was approximately 8%, compared to a 4% increase in the third quarter of 2005.

For the three months ended September 30, 2006, services revenue increased to $963 million from $880 million in the third quarter of 2005. Services revenue represented approximately 90% and 91% of total revenue in the third quarter of 2006 and 2005, respectively. The $83 million increase was due primarily to increases in internal revenue in all three segments.

Professional services revenue was $189 million and $160 million for the three months ended September 30, 2006 and 2005, respectively.

Revenue from license and resale fees was $81 million and $59 million for the three months ended September 30, 2006 and 2005, respectively, and included software license revenue of $53 million and $42 million, respectively. The increase in software license revenue was primarily due to the internal revenue growth and the impact of acquired FS businesses.

Financial Systems:

FS revenue increased $58 million in 2006. FS services revenue increased $52 million, due primarily to internal revenue growth, $9 million from acquired businesses and $3 million as a result of the deferred revenue adjustment in the prior year period. License and resale fees increased $7 million to $40 million. Internal revenue growth was 9% in the third quarter of 2006 compared to 3% in the third quarter of 2005. FS professional services revenue increased $23 million from both internal revenue growth and from acquired businesses.

 

26


Table of Contents

Higher Education and Public Sector Systems:

Revenue from HEPS increased $28 million, $3 million of which is related to the deferred revenue adjustment in the prior year period. The balance of the increase is due to 12% internal revenue growth in the third quarter of 2006. Internal revenue grew 5% in the third quarter of 2005.

Availability Services:

AS revenue increased $17 million in 2006 or 5%. AS internal revenue increased approximately 4% in 2006, reflecting the effect of the disposition of a U.K.-based value-added reseller and the $6 million deferred revenue adjustment in the prior year period. This compares to internal revenue growth of approximately 6% in the third quarter of 2005.

Costs and Expenses:

Total costs and expenses as a percentage of revenue for the three months ended September 30, 2006 decreased to 87% from 99% in 2005. This decrease is due primarily to the decrease in merger and other costs of $119 million, partially offset by increased expenses across all segments, incremental amortization of $27 million, incremental stock compensation expense of $3 million and to acquired businesses.

Cost of sales and direct operating expenses as a percentage of total revenue were 46% and 47% during the three-month periods ended September 30, 2006 and 2005, respectively. Cost of sales and direct operating expenses increased $41 million due primarily to increased expenses across all segments and from acquired businesses.

Sales, marketing and administration expenses as a percentage of total revenue remained unchanged at 20% for each of the three months ended September 30, 2006 and 2005. The increase in sales, marketing and administration expenses of $22 million was due primarily to internal growth of costs in FS to support the increase in business activity, to acquired businesses and to non-cash stock compensation of $3 million.

Because AS product development costs are insignificant, it is more meaningful to measure product development expenses as a percentage of revenue from software and processing solutions. For the three months ended September 30, 2006 and 2005, product development costs were 9% and 10%, respectively, of revenue from software and processing solutions.

Depreciation and amortization remained unchanged as a percentage of total revenue at 6% for each of the three months ended September 30, 2006 and 2005.

Amortization of acquisition-related intangible assets was 9% of total revenue in the third quarter of 2006, compared to 7% in 2005. Amortization of acquisition-related intangible assets increased $33 million, of which $27 million is incremental amortization with the balance from acquired businesses.

Merger and other costs decreased $119 million in the three months ended September 30, 2006 compared to the three months ended September 30, 2005, which included costs associated with the Transaction.

Interest income was $4 million and $5 million for the three months ended September 30, 2006 and 2005, respectively. Interest expense was $165 million and $91 million for the three months ended September 30, 2006 and 2005, respectively. The increase was due to the debt incurred in connection with the Transaction, and includes amortization of debt issuance costs and debt discounts of $2 million.

Provision for income taxes was $2 million for the three months ended September 30, 2006 compared to a $15 million benefit in the prior year period due to the income tax benefit resulting from the loss before income taxes being offset by a limitation on the use of foreign tax credits.

Liquidity and Capital Resources:

At September 30, 2006, cash and equivalents were $268 million, a decrease of $49 million from December 31, 2005. Cash flow from operations was $214 million in the nine months ended September 30, 2006 compared to cash flow from operations of $828 million in the nine months ended September 30, 2005. The decrease in cash flow from operations is due primarily to the increased interest payments in 2006 related to the debt incurred as a result of the Transaction and from the 2005 impact of the sale of accounts receivable under our long-term receivables facility.

 

27


Table of Contents

Net cash used in investing activities was $238 million in the nine months ended September 30, 2006, comprised primarily of cash paid for property and equipment and other assets. During the nine months ended September 30, 2006, we spent $24 million (net of cash acquired) on three acquisitions and received approximately $9 million of cash proceeds from the sale of one business. Net cash used in investing activities was $12.25 billion in the nine months ended September 30, 2005. During the nine months ended September 30, 2005, we spent $11.62 billion in connection with the Transaction, $434 million (net of cash acquired) on eight acquisitions and $206 million for property and equipment and other assets.

Net cash used in financing activities was $40 million for the nine months ended September 30, 2006, primarily related to repayment of borrowings. At September 30, 2006, there were no borrowings outstanding under our revolving credit facility. Net cash provided by financing activities was $11.05 billion for the nine months ended September 30, 2005, of which $11.11 billion was Transaction-related financing activities, including $7.33 billion of debt and $3.45 billion of equity contributions by SunGard Holdco LLC, the Company’s parent.

At September 30, 2006, contingent purchase price obligations that depends upon the operating performance of two acquired businesses total $41 million, which we currently do not expect to pay. We also have outstanding letters of credit and bid bonds that total approximately $42 million.

As a result of the Transaction, we are highly leveraged and our debt service requirements are significant. At September 30, 2006, we have outstanding $7.4 billion in aggregate indebtedness, with additional borrowing capacity of $977 million under our revolving credit facility (after giving effect to outstanding letters of credit). Also, at September 30, 2006, $371 million was outstanding under our $450 million off-balance sheet receivables securitization facility.

We expect our cash flows from operations, combined with availability under our revolving credit facility and receivables facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending for a period that includes the next 12 months.

Covenant Compliance

Adjusted EBITDA is used to determine our compliance with certain covenants contained in the indentures governing the senior notes due 2013 and senior subordinated notes due 2015 and in our senior secured credit facilities. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under the indentures and our senior secured credit facilities. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors to demonstrate compliance with our financing covenants.

The breach of covenants in our senior secured credit facilities that are tied to ratios based on Adjusted EBITDA could result in a default under that agreement and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under our indentures. 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 Adjusted EBITDA.

 

28


Table of Contents

Adjusted EBITDA is calculated as follows:

 

      Predecessor     Successor        
     

Period from
January 1, 2005
through
August 10,

2005

   Period from
July 1, 2005
through
August 10,
2005
    Period from
August 11,
2005 through
September 30,
2005
    Nine Months
Ended
September 30,
2006
    Three Months
Ended
September 30,
2006
    Last Twelve
Months
September 30,
2006
 

Net income (loss)

   $ 146    $ (42 )   $ (23 )   $ (107 )   $ (31 )   $ (113 )

Interest expense, net

     8      —         86       473       161       629  

Taxes

     142      5       (20 )     (40 )     2       (53 )

Depreciation and amortization

     225      41       84       472       159       624  
                                                 

EBITDA

     521      4       127       798       291       1,087  

Purchase accounting adjustments (a)

     —        —         12       2       —         9  

Non-cash charges (b)

     61      60       8       28       10       50  

Unusual or non-recurring charges (c)

     61      43       19       16       5       18  

Restructuring charges or reserves (d)

     12      1       —         —         —         —    

Acquired EBITDA, net of disposed EBITDA (e)

     17      —         1       3       2       2  

Other (f)

     2      —         1       14       3       21  
                                                 

Adjusted EBITDA - senior secured credit facilities

     674      108       168       861       311       1,187  

Loss on sale of receivables (g)

     —        —         4       20       7       34  
                                                 

Adjusted EBITDA - senior notes due 2013 and senior subordinated notes due 2015

   $ 674    $ 108     $ 172     $ 881     $ 318     $ 1,221