Overview

We are a leading provider of mission-critical, sophisticated software products and software-enabled services that allow financial services providers to automate complex business processes and effectively manage their information processing requirements. Our portfolio of software products and rapidly deployable software-enabled services allows our clients to automate and integrate front-office functions such as trading and modeling, middle-office functions such as portfolio management and reporting, and back-office functions such as accounting, performance measurement, reconciliation, reporting, processing and clearing. Our solutions enable our clients to focus on core operations, better monitor and manage investment performance and risk, improve operating efficiency and reduce operating costs. We provide our solutions globally to more than 5,500 clients, principally within the institutional asset management, alternative investment management and financial institutions vertical markets. In addition, our clients include commercial lenders, corporate treasury groups, insurance and pension funds, municipal finance groups and real estate property managers.

Since 2009, through a combination of strategic acquisitions and internal development of new products and services, we have expanded our presence in current markets and entered new markets, increased our contractually recurring revenues, enhanced our operating income and expanded our reach in the financial services market. Our acquisitions since 2009 have expanded our offerings for alternative investment managers, added to our portfolio management systems and provided us with new trading products for broker-dealers and financial exchanges. Our acquisitions of GlobeOp and the PORTIA Business in 2012 significantly expanded our geographic footprint, most notably in Europe and Asia, and our client base and added broader employee expertise.

Our contractually recurring revenues, which we define as our maintenance revenues and software-enabled services revenues, were $500.2 million in 2012, compared to $324.3 million and $284.5 million in 2011 and 2010, respectively. In 2012, contractually recurring revenues represented 90.6% of total revenues, compared to 87.4% and 86.5% in 2011 and 2010, respectively. We believe our high level of contractually recurring revenues provides us with the ability to better manage our costs and capital investments. Our revenues from sales outside the United States were $191.4 million in 2012, compared to $111.1 million and $104.3 million in 2011 and 2010, respectively.

As we have expanded our business, we have focused on increasing our contractually recurring revenues. Since 2009, we have seen increased demand in the financial services industry for our software-enabled services from existing and new customers. We have taken a number of steps to support that demand, such as automating our software-enabled services delivery methods and providing our employees with sales incentives. We have also acquired businesses that offer software-enabled services or have a large base of maintenance clients. Our software-enabled services revenues increased from $211.8 million in 2010 to $406.5 million in 2012. Our maintenance revenues increased from $72.7 million in 2010 to $93.8 million in 2012. Maintenance customer retention rates have continued to be in excess of 90% for our core enterprise products, and we have maintained both pricing levels for new contracts and annual price increases for existing contracts. To support the growth in our software-enabled services revenues and maintain our level of customer service, we typically have added personnel, expanded our facilities and invested in information technology. These investments and automation improvements in our software-enabled services have served to improve gross margins, although our acquisitions of GlobeOp and the PORTIA Business in 2012 have added a significant amount of amortization expense related to intangible assets, which has resulted in an initial decrease in gross margins. Gross margins have decreased from 49.6% in 2010 to 45.7% in 2012.

In connection with the acquisitions of GlobeOp and the PORTIA Business in the second quarter of 2012, we entered into a new credit agreement, which is described below in Credit Facility, to fund a portion of the purchase price and refinance amounts outstanding under our prior senior credit facility.

We generated $134.4 million in cash from operating activities in 2012, compared to $110.4 million and $75.6 million in 2011 and 2010, respectively. In 2012, we used our operating and financing cash flow and existing cash to acquire four businesses for $967.1 million, repay $165.6 million of debt, refinance $260.0 million of our prior senior credit facility, invest $17.2 million in capital equipment in our business and invest $1.1 million in internally-developed capitalized software.

Acquisitions. To supplement our growth, we evaluate and execute acquisitions that provide complementary products or services, add proven technology and an established client base, expand our intellectual property portfolio or address a highly specialized problem or a market niche. Since the beginning of 2010, we have spent approximately $1,034 million using cash and debt financing (as discussed in Notes 6 and 12 to our consolidated financial statements) to acquire ten businesses in the financial services industry.

The following table lists the businesses we have acquired since January 1, 2010:

                                Acquisition
Acquired Business               Date                Acquired Capabilities, Products and Services
Hedgemetrix LLC                 October 2012      Expanded fund administration services in
Gravity                         September 2012    southwest USA
GlobeOp                         June 2012         Expanded fund administration services in
                                                  northeast USA
                                                  Expanded fund administration services in hedge
                                                  fund and other asset management sectors
The PORTIA Business             May 2012          Added portfolio management software and
                                                  outsourcing services for institutional managers
Acquisition of Teledata         December 2011     Added background search and credit retrieval
Communications, Inc. Software                     software-as-a-service
Ireland Fund Admin              September 2011
BenefitsXML                     March 2011        Expanded fund administration services to UCITS
TimeShareWare                   December 2010     funds
                                                  Added employee benefits administration solutions
                                                  Added shared ownership property management
                                                  platform to real estate offering
thinkorswim Technologies        October 2010      Added electronic OMS/EMS offering in
                                                  broker-dealer market
GIPS                            February 2010     Expanded fund administration services to private
                                                  equity market

The discussion in this Part II, Item 7 of this Annual Report on Form 10-K includes the above operations for the respective time periods each were owned by SS&C.

Results of Operations

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, fluctuations in our software-enabled services revenues are attributable to the number of new software-enabled services clients as well as total assets under management in our clients' portfolios and the number of outsourced transactions provided to our existing clients, while our software license and professional services revenues tend to fluctuate based on the number of new licensing clients. 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 tied to the consumer price index.

The following table sets forth the percentage of our total revenues represented by each of the following sources of revenues for the periods indicated:

                                               Year Ended December 31,
                                           2012         2011         2010
              Revenues:
              Software-enabled services        74 %         67 %         65 %
              Software licenses                 4            6            7
              Maintenance                      17           21           22
              Professional services             5            6            6

Total revenues 100.0 % 100.0 % 100.0 %

The following table sets forth revenues (dollars in thousands) and percent change in revenues for the periods indicated:

                                                                            Percent Change
                                                                              from Prior
                                      Year Ended December 31,                   Period
                                 2012          2011          2010         2012          2011
   Revenues:
   Software-enabled services   $ 406,477     $ 246,007     $ 211,792          65 %         16 %
   Software licenses              22,466        23,507        23,683          (4 )         (1 )
   Maintenance                    93,760        78,266        72,703          20            8
   Professional services          29,139        23,048        20,727          26           11

   Total revenues              $ 551,842     $ 370,828     $ 328,905          49           13

Fiscal 2012 versus Fiscal 2011. Our revenues increased in 2012 as compared to 2011 primarily due to revenues related to the acquisitions of GlobeOp and the PORTIA Business, which contributed $168.1 million in revenues, as well as a continued increase in demand for our hedge fund and private equity services from alternative investment managers. These increases were partially offset by the unfavorable impact from foreign currency translation of $0.9 million, resulting from the strength of the U.S. dollar relative to currencies such as the Canadian dollar, Euro and the British pound. Our maintenance and professional services revenues experienced substantial increases due to revenues related to the PORTIA Business, which contributed $16.4 million and $3.1 million, respectively. Additionally, professional services revenues experienced an increase in product implementation projects.

Fiscal 2011 versus Fiscal 2010. Our revenues increased in 2011 as compared to 2010 primarily due to an increase in demand for our software-enabled services from alternative asset managers, revenues for businesses and products that we acquired through our acquisitions and the favorable impact from foreign currency translation of $3.5 million, resulting from the weakness of the U.S. dollar relative to currencies such as the Canadian dollar and the Australian dollar. Our maintenance revenues increased due to revenues from acquisitions and annual increases in fees, which is generally tied to the percentage change in the consumer price index. Overall, our professional services revenues increased due to revenues from acquisitions.

Cost of Revenues

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. Cost of software license revenues consists primarily of amortization of completed technology, royalties, third-party software, and the costs of product media, packaging and documentation. 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. 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 and custom programming consulting services.

The following table sets forth each of the following cost of revenues as a percentage of their respective revenue source for the periods indicated:

                                                  Year Ended December 31,
                                              2012            2011        2010
         Cost of revenues:
         Cost of software-enabled services        58 %            52 %       53 %
         Cost of software licenses                28              29         33
         Cost of maintenance                      43              45         45
         Cost of professional services            65              67         67
         Total cost of revenues                   54              50         50
         Gross margin percentage                  46              50         50

The following table sets forth cost of revenues (dollars in thousands) and percent change in cost of revenues for the periods indicated:

                                                                                           Percent Change
                                                                                             from Prior
                                                      Year Ended December 31,                  Period
                                                 2012          2011          2010         2012         2011
Cost of revenues:
Cost of software-enabled services              $ 234,214     $ 126,921     $ 111,516         85 %         14 %
Cost of software licenses                          6,336         6,825         7,750         (7 )        (12 )
Cost of maintenance                               40,394        34,993        32,712         15            7
Cost of professional services                     18,973        15,549        13,954         22           11

Total cost of revenues                         $ 299,917     $ 184,288     $ 165,932         63           11

Fiscal 2012 versus Fiscal 2011. Our gross margin decreased in 2012 primarily due to amortization expense related to intangible assets acquired in the acquisitions of GlobeOp and the PORTIA Business. Our total cost of revenues increased in 2012 primarily as a result of costs associated with acquired businesses. These increases were partially offset by a decrease in stock-based compensation expense due to the final vesting of performance-based stock options in 2011 and in costs of $0.7 million related to the favorable effect of foreign currency translation. Additionally, cost of software-enabled services revenues increased to support the increased demand for our hedge fund and private equity services from alternative investment managers.

Fiscal 2011 versus Fiscal 2010. Our gross margin was unchanged from 2010 to 2011. Our total cost of revenues increased in 2011 primarily as a result of an increase in costs to support the increase demand for services from alternative asset managers, our acquisitions, an increase in costs of $1.8 million related to the unfavorable effect of foreign currency translation and an increase in amortization expense, partially offset by a decrease in stock-based compensation expense.

Operating Expenses

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. Research and development expenses consist primarily of personnel costs attributable to the enhancement of existing products and the development of new software products. 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. Transaction costs consist primarily of legal, third-party valuation and other fees related to our acquisitions of GlobeOp and the PORTIA Business.

The following table sets forth the percentage of our total revenues represented by each of the following operating expenses for the periods indicated:

                                               Year Ended December 31,
                                           2012            2011        2010
             Operating expenses:
             Selling and marketing              6 %             8 %        8 %
             Research and development           8              10         10
             General and administrative         6               8          8
             Transaction costs                  3              -          -
             Total operating expenses          23              25         25

The following table sets forth operating expenses (dollars in thousands) and percent change in operating expenses for the periods indicated:

                                                                            Percent Change
                                                                              from Prior
                                       Year Ended December 31,                  Period
                                   2012          2011         2010         2012         2011
    Operating expenses:
    Selling and marketing        $  33,858     $ 28,892     $ 25,229           17 %        15 %
    Research and development        45,779       35,650       31,442           28          13
    General and administrative      34,797       28,221       26,462           23           7
    Transaction costs               14,275           -            -           100          -

    Total operating expenses     $ 128,709     $ 92,763     $ 83,133           39          12

Fiscal 2012 versus 2011. The increase in total operating expenses in 2012 was primarily due to our acquisitions and the transaction costs associated with our acquisitions of GlobeOp and the PORTIA Business, partially offset by a decrease in stock-based compensation expense and a decrease of $0.4 million related to the favorable effect of foreign currency translation.

Fiscal 2011 versus 2010. The increase in total operating expenses in 2011 was primarily due to the acquisition of TimeShareWare and BenefitsXML, Inc., or BXML, an increase in professional fees associated with of those acquisitions, an increase in costs of $1.0 million related to the unfavorable effect of foreign currency translation and an increase in costs related to stock-based compensation.

Comparison of Fiscal 2012, 2011 and 2010 for Interest, Taxes and Other

Interest income and interest expense. We had interest expense of $32.9 million in 2012 compared to $14.7 million in 2011 and $30.6 million in 2010. The increase in interest expense in 2012 reflects the higher average debt balance resulting from the new credit facility, which was entered into in connection with the acquisitions of GlobeOp and the PORTIA Business, and the related amortization of an original issue discount. The decrease in interest expense in 2011 reflects the lower average debt balance resulting from net repayments of debt of $191.1 million during 2011, which includes the redemptions of our 11 3/4% senior subordinated notes due 2013 in March and December 2011 and the full repayment of the senior credit facility under our then-existing credit agreement, which we refer to as the Prior Facility. These facilities are discussed further in "Liquidity and Capital Resources".

Other (expense) income, net. Other expense, net for 2012 consists primarily of foreign currency transaction losses and a loss recorded on foreign currency contracts associated with our acquisition of GlobeOp, which is discussed further in Note 12 to our consolidated financial statements. Other (expense) income, net for 2011 and 2010 consisted primarily of changes in accrued earn-out liabilities and foreign currency transaction gains and losses.

Loss on extinguishment of debt. Loss on extinguishment of debt in 2012 consisted of write-offs of deferred financing costs associated with the repayment of our prior senior credit facility. Loss on extinguishment of debt in 2011 consisted of note redemption premiums and write-offs of deferred financing costs associated with the redemption of the remaining $133.3 million of our 11 3/4% senior subordinated notes due 2013. The redemption of our notes is discussed further in "Liquidity and Capital Resources."

Provision for Income Taxes.

The following table sets forth the provision for income taxes (dollars in
thousands) and effective tax rates for the periods indicated:



                                               Year Ended December 31,
                                            2012         2011         2010
             Provision for income taxes   $ 24,665     $ 22,918     $ 12,034
             Effective tax rate                 35 %         31 %         27 %

Our 2012, 2011 and 2010 effective tax rates differ from the statutory rate primarily due to the effect of our foreign operations. The increase in effective rate from 2011 to 2012 was primarily due to the impact of a valuation allowance recorded on deferred tax assets and non-deductible transaction costs, partially offset by the favorable impact of a rate change in the United Kingdom. The increase in effective rate from 2010 to 2011 was primarily due to benefits recorded in 2010 relating to changes in statutory rates and the release of uncertain tax positions. We had $139.7 million of deferred tax liabilities and $26.4 million of deferred tax assets at December 31, 2012.

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 the Company's non-U.S. operations are in Canada, India and the United Kingdom, where the statutory rates were 26.5%, 32.4% and 24.5%, respectively, in 2012. The statutory rates for Canada and the United Kingdom were 28.2% and 26.0%, respectively, in 2011 and 30.4% and 28.0%, respectively, in 2010. 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 December 31, 2012 were $86.2 million, an increase of $45.9 million from $40.3 million at December 31, 2011. The increase in cash is due primarily to cash provided by operations and cash received from borrowings, partially offset by cash used for acquisitions, net repayments of debt and capital expenditures.

Net cash provided by operating activities was $134.4 million in 2012. Cash provided by operating activities was primarily due to net income of $45.8 million adjusted for non-cash items of $81.2 million, partially offset by changes in our working capital accounts (excluding the effect of acquisitions) totaling $7.4 million. The changes in our working capital accounts were driven by increases in deferred revenues, accrued expenses and other liabilities and accounts payable, decreases in prepaid expenses and other assets and a change in income taxes prepaid and payable, partially offset by increases in accounts receivable. The increase in deferred revenues was primarily due to the collection of annual maintenance fees. The increase in accounts receivable was primarily due to the increase in revenue associated with our acquisitions and an increase in days' sales outstanding from 44 days at December 31, 2011 to 48 days at December 31, 2012. The change in income tax benefit related to exercise of stock options (included in the non-cash items) and income taxes prepaid and payable was primarily related to income tax prepayments in 2011.

Investing activities used net cash of $985.0 million in 2012, primarily related to $967.1 million in cash paid for our acquisitions, $17.2 million in cash paid for capital expenditures and $1.1 million in cash paid for capitalized software, partially offset by $0.4 million in proceeds from the sale of property and equipment.

Financing activities provided net cash of $894.5 million in 2012, representing $1,304.0 million in net proceeds from our credit facilities, proceeds of $14.4 million from stock option exercises and income tax windfall benefits of $3.5 million related to the exercise of stock options, partially offset by $165.6 million in repayments of debt, $260.0 million to refinance the prior senior credit facility and $1.8 million related to the payment of the BXML contingent consideration liability.

We have made a permanent reinvestment determination in certain non-U.S. operations that have historically generated positive operating cash flows. At December 31, 2012, we held approximately $49.3 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 December 31, 2012, we believe we have sufficient foreign tax credits available to offset tax obligations associated with the repatriation of funds at our Canadian operations. At December 31, 2012, we held approximately $20.3 million in cash by subsidiaries of our foreign debt holder that will be used to facilitate debt servicing of our foreign debt holder. At December 31, 2012, we held approximately $14.0 million in cash at our Indian operations that if repatriated to our foreign debt holder would incur distribution taxes of approximately $2.3 million.

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.

Contractual Obligations

. . .