<PAGE>
As filed with the Securities and Exchange Commission on September 27, 1996
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------
REGISTRATION STATEMENT
on Form S-1
Under
THE SECURITIES ACT OF 1933
--------------------
SANCHEZ COMPUTER ASSOCIATES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 7373-0200 23-2161560
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification
organization) Code No.)
40 Valley Stream Parkway
Malvern, Pennsylvania 19355
(610) 296-8877
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
_______________________
Mr. Michael A. Sanchez
Chairman and Chief Executive Officer
Sanchez Computer Associates, Inc.
40 Valley Stream Parkway
Malvern, Pennsylvania 19355
(610) 296-8877
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------------
Copies of all communications to:
James A. Ounsworth, Esq. N. Jeffrey Klauder, Esq. Robert H. Strouse, Esq.
Safeguard Scientifics, Inc. Morgan, Lewis & Bockius Drinker Biddle & Reath
800 The Safeguard Building LLP 1000 Westlakes Drive
435 Devon Park Drive 2000 One Logan Square Suite 300
Wayne, Pennsylvania 19087 Philadelphia, Berwyn, Pennsylvania
(610) 293-0600 Pennsylvania 19103-6993 19312-2409
(215) 963-5694 (610) 993-2213
- --------------------------------------------------------------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ X ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of earlier effective registration
statement for the same offering. [_]
- --------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ X ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Amount to Proposed Proposed maximum
Title of each class of securities be maximum offering aggregate offering Amount of
to be registered registered(1) price per unit(2) price (2) registration fee
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
no par value 3,484,500 $6.00 $20,907,000 $7,209.31
- --------------------------------------------------------------------------------------------------------------------------
Subscription Rights (3) (3) -- -- --
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 303,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933.
(3) Evidencing the rights to subscribe for 3,181,500 of the shares of Common
Stock described above.
--------------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement becomes+
+effective. This prospectus shall not constitute an offer to sell or the +
+solicitation of an offer to buy nor shall there be any sale of these securi- +
+ties in any State in which such offer, solicitation or sale would be unlawful +
+prior to registration or qualification under the securities laws of any such +
+State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated September 27, 1996
Prospectus
3,181,500 Shares
Sanchez Computer Associates, Inc.
Common Stock
(including Rights to acquire
up to 3,181,500 of such shares)
Sanchez Computer Associates, Inc. ("Sanchez" or the "Company") is granting to
holders of the outstanding common stock ("Safeguard Common Shares") of Safeguard
Scientifics, Inc. ("Safeguard") of record at the close of business on ________,
1996 (the "Record Date") rights (the "Company Rights") to purchase up to
3,030,000 common shares of Sanchez, no par value (the "Common Stock").
Safeguard and certain other selling stockholders (the "Selling Stockholders")
have agreed to sell an aggregate of 1,023,500 shares of Common Stock owned by
them upon the exercise of the Company Rights. A record holder of Safeguard
Common Shares will receive one Company Right for every ten Safeguard Common
Shares owned on the Record Date. Each Company Right will entitle the holder to
purchase one share of Common Stock at a purchase price anticipated to be between
$5.00 and $6.00 (the "Exercise Price") per share. This Prospectus also relates
to rights (the "Direct Rights") to purchase 151,500 additional shares of Common
Stock that are being granted by the Company to certain persons selected by the
Company (the "Direct Purchasers"). Each Direct Right will entitle the holder to
purchase one share of Common Stock at the Exercise Price and each Direct
Purchaser will be required to exercise such Direct Rights. The Company Rights
and the Direct Rights are sometimes collectively referred to as the "Rights."
The exercise period for the Rights will expire at 5:00 p.m., New York City time,
on ________, 199__ (the "Expiration Date"). Persons may not exercise Rights for
fewer than 50 shares of Common Stock. This minimum exercise requirement applies
to each account in which Safeguard Common Shares are held. Accordingly, persons
holding fewer than 50 Rights will not have the opportunity to exercise such
Rights unless action is taken to comply with such minimum exercise requirements.
See "The Offering--Exercise Privilege."
(Continued on next page)
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors" commencing on page 7 for certain information that should be considered
by prospective investors.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Proceeds to
Assumed Underwriting Proceeds to Selling
Exercise Price Discount (1) Company (1)(2)(3) Stockholders(1)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Min. $.165 Max. $5.335 Max. $5.335
Per Share $5.50 Max. $.385 Min. $5.115 Min. $5.115
- -------------------------------------------------------------------------------------------------
Min. $524,948 Max. $11,512,930 Max. $5,460,373
Total(3) $17,498,250 Max. $1,050,088 Min. $11,071,500 Min. $5,376,663
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) In connection with the Offering, the Underwriters will receive (a) a
financial advisory fee in an amount equal to 3% of the Exercise Price of
each share of Common Stock sold in the Offering (the "Financial Advisory
Fee"), and (b) an additional fee of 4% of the Exercise Price of each share
of Common Stock actually purchased by the Underwriters pursuant to the
Standby Underwriting Agreement or the Underwriters' exercise of Rights in
certain instances (the "Underwriting Discount" and, together with the
Financial Advisory Fee, the "Total Underwriting Discount"). If all of the
Rights granted hereby are exercised, no shares of Common Stock will be
required to be purchased by the Underwriters pursuant to the Standby
Underwriting Agreement. The "Minimum" Total Underwriting Discount assumes
(i) an Exercise Price of $5.50 per share and (ii) that no shares of Common
Stock are purchased by the Underwriters. The "Maximum" Total Underwriting
Discount assumes (i) an Exercise Price of $5.50 per share, (ii) that only
the Chairman and Chief Executive Officer of Safeguard and/or his assignees
will elect to acquire shares upon the exercise of Company Rights (for an
aggregate of approximately 343,000 shares) and that such shares will be
sold by the Selling Stockholders, (iii) that 300,000 shares of Common Stock
are sold by the Selling Stockholders to the Other Purchasers (defined
below), (iv) that 151,500 shares are sold by the Company upon the exercise
of the Direct Rights, and (v) that a total of 2,387,000 shares of Common
Stock are purchased by the Underwriters pursuant to the Standby
Underwriting Agreement. In addition, the Company has agreed under certain
circumstances, to pay to the Underwriters certain amounts as a non-
accountable expense allowance. The Company and the Selling Stockholders
have agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deduction of expenses estimated to be $600,000 and payment of a non-
accountable expense allowance to the Underwriters, both of which are
payable by the Company.
(3) The Company and Selling Stockholders have granted the Underwriters a 20-day
option commencing on the Expiration Date to purchase a maximum of 303,000
additional shares of Common Stock to cover over-allotments, if any, of
which, 151,500 would be sold by the Company and an aggregate of 151,500
would be sold by the Selling Stockholders. See "Underwriting." If such
option is exercised in full, the net incremental proceeds to the Company
and Selling Stockholders from the exercise of such option would be $774,923
and an aggregate of $774,923, respectively, and the Total Underwriting
Discount with respect to all such shares issued pursuant to such option
would be $116,655.
J. P. Morgan & Co. Wheat First Butcher Singer
_______________, 1996.
<PAGE>
(Continued from previous page)
Shares of Common Stock that are not purchased upon exercise of Rights (the
"Unsubscribed Shares") will be sold, as to the first 300,000 Unsubscribed
Shares, at the Exercise Price to certain persons selected by the Company (the
"Other Purchasers") and will be sold, as to the number of Unsubscribed Shares
exceeding the 300,000 shares of Common Stock offered to the Other Purchasers
(the "Excess Unsubscribed Shares"), at the Exercise Price (less the Total
Underwriting Discount) to J.P. Morgan Securities Inc. and Wheat, First
Securities, Inc. (the "Underwriters") pursuant to a Standby Underwriting
Agreement (the "Standby Underwriting Agreement"). See "The Offering--Sales of
Unsubscribed Shares; Standby Commitment." The Underwriters' standby
underwriting obligations are subject to certain conditions, including the
condition that the Other Purchasers have purchased the first 300,000
Unsubscribed Shares, although the Underwriters may elect to purchase all, but
not less than all, Unsubscribed Shares in the event such condition is not met.
Accordingly, the Rights Offering may be canceled if all of the Unsubscribed
Shares are not purchased. See "Underwriting." There is no assurance that the
Other Purchasers or the Underwriters will purchase any Unsubscribed Shares. See
"The Offering--Cancellation of Rights Offering."
In the event that Company Rights to purchase fewer than 3,030,000 shares of
Common Stock are granted to holders of Safeguard Common Shares, the shares of
Common Stock subject to such undistributed Company Rights (the "Undistributed
Rights") will be offered by the Company to the Other Purchasers at the Exercise
Price. The Rights Offering and the offering of Common Stock to the Other
Purchasers are collectively referred to in this Prospectus as the "Offering."
Of the shares of Common Stock offered hereby, 2,158,000 shares of Common Stock
will be sold by the Company and an aggregate of 1,023,500 shares of Common Stock
will be sold by the Selling Stockholders. The Company will receive no proceeds
from the sale of any shares by the Selling Stockholders. Warren V. Musser, the
Chairman and Chief Executive Officer of Safeguard, and/or his assignees are
expected to exercise all Company Rights distributed to them and acquire
approximately 343,000 shares of Common Stock through the Rights Offering. See
"The Offering--Agreement Concerning the Exercise of Rights." After the
completion of the Offering, the Selling Stockholders, in the aggregate, will
beneficially own approximately 58.8% of the outstanding Common Stock. See
"Principal and Selling Stockholders."
The Rights being granted in the Rights Offering are subject to cancellation if
certain conditions are not satisfied. In that event, any payments received by
ChaseMellon Shareholder Services, L.L.C., as Rights Agent, in respect of the
Exercise Price of the Rights shall be promptly returned. See "The Offering--
Cancellation of Rights Offering."
Prior to the Rights Offering, there has been no public market for the Common
Stock or the Rights. See "The Offering-- Background" for factors considered in
determining the Exercise Price of the Rights. As a consequence, there can be no
assurance that a public market will develop, although the Company has filed an
application to have the Rights and the Common Stock approved for quotation on
the Nasdaq National Market.
Prior to the Expiration Date, the Underwriters may offer shares of Common Stock
on a when-issued basis, including shares to be acquired through the purchase and
exercise of Rights, at prices set from time to time by the Underwriters. Each
such price when set will not exceed, if applicable, the highest price at which a
dealer not participating in the distribution is then offering the Common Stock
to other dealers, plus an amount equal to a dealer's concession, and an offering
price set on any calendar day will not be increased more than once during such
day. After the Expiration Date, the Underwriters may offer shares of Common
Stock, whether acquired pursuant to the Standby Underwriting Agreement, the
exercise of Rights or the purchase of Common Stock in the market, to the public
at a price or prices to be determined. The Underwriters may thus realize
profits or losses independent of the underwriting compensation specified herein.
Shares of Common Stock subject to the Standby Underwriting Agreement will be
offered by the Underwriters, subject to prior sale, when, as and if delivered to
and accepted by the Underwriters. It is expected that delivery of the shares of
Common Stock will be made against payment therefor on or about ______, 199__ at
the offices of J.P. Morgan Securities Inc., 60 Wall Street, New York, New York.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by independent certified public accountants.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
THE RIGHTS OR BOTH AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET,
OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Except as otherwise indicated, all information in this
Prospectus (i) assumes no exercise of the Underwriters' over-allotment option;
(ii) assumes an Exercise Price of $5.50; and (iii) gives effect to a 6-for-5
split of the Common Stock effected prior to the Offering. Unless the context
otherwise indicates, Sanchez Computer Associates, Inc. and its subsidiaries are
referred to collectively herein as "Sanchez" or the "Company." Technical terms
related to the Company's business are defined in the Glossary beginning on page
57 herein.
The Company
Sanchez Computer Associates, Inc. ("Sanchez" or the "Company") designs,
develops, markets, implements and supports comprehensive banking software,
called PROFILE(R) ("PROFILE"), for financial services organizations worldwide.
Sanchez's highly flexible PROFILE family of products is comprised of three
integrated modules which operate on open, client-server platforms. The primary
module, called PROFILE/Anyware, is a multi-currency bank production system which
supports deposit, loan, customer, transaction processing and bank management
requirements through multiple distribution channels, including the Internet.
The other modules are PROFILE/FMS, a multi-company, multi-currency, financial
management and accounting system, and PROFILE/ITS, a system that processes
treasury transactions including foreign exchange, money market, securities
trading (capital markets), futures, options and trade finance. The PROFILE
system is currently licensed to 23 clients in nine countries serving more than
400 financial institutions. Historically, the Company has focused its
marketing efforts in Central Europe and North America. Currently, the Company
is targeting two market segments, the Emerging Banking Market in which the
Company seeks to expand on its existing successes and increase its market share,
and the Direct Banking Market in which the Company is seeking to establish
itself as a significant participant.
Financial services organizations in the Emerging Banking Market can generally be
characterized as being located in areas with growing consumer banking bases,
often with a large number of branches and little enterprise-wide automation.
Sanchez, through the implementation of its PROFILE products, provides these
organizations with a fully automated system which addresses all core areas of
their data processing requirements, including head office operations, domestic
and international payments, new product introduction, customer analysis,
budgeting and forecasting, branch automation, treasury, trade finance and
deposit and loan processing. The PROFILE products have the ability to adapt to
diverse accounting, operational and regulatory environments and have the
flexibility to support a broad spectrum of banking products and services.
Because the PROFILE products are scalable, they can be implemented within an
infrastructure that supports an organization's current operational requirements
and thereafter be incrementally expanded as the client's operational
requirements increase. Since 1991, the Company has principally targeted banks
in Central Europe and Canada; and, in 1996, the Company expanded its marketing
efforts to include financial services organizations located in the Asian-Pacific
Rim.
Since 1987, the Company has maintained a series of strategic alliance agreements
with Digital Equipment Corporation ("Digital") and has marketed its products
principally through leads generated by the Digital sales force. In 1995, the
Company entered into an agreement with Hewlett-Packard Company ("Hewlett-
Packard") and ported its software to Hewlett-Packard's HP-UX platform. Also in
1995, the Company entered into an agreement with Oracle Corporation ("Oracle")
to port the PROFILE products to the Oracle database. These porting activities
are currently under way. In mid-1996, the Company entered into an agreement
with International Business Machines Corporation ("IBM") and ported its software
to IBM's AIX platform. The Company markets PROFILE products through alliances
with all four of these vendors as well as its own enhanced direct sales force.
The Company intends to expand its business into the Direct Banking Market. The
Company defines the Direct Banking Market as the on-line retail banking business
conducted via alternate distribution channels by large financial services
institutions located throughout the world. The Company believes that these
organizations recognize that the emergence of electronic commerce, together with
the availability and acceptance of computer technology, will ultimately cause a
dramatic change in the consumer banking practices of many of their customers.
The Company predicts that the growth of electronic commerce will result in a
large increase in the volume of financial transactions which occur on-line as
well as a greater demand for customized products and services. Because of these
factors, in early 1996, the Company determined that a significant opportunity
exists for it in the Direct Banking Market and it has subsequently
- --------------------------------------------------------------------------------
3
<PAGE>
- --------------------------------------------------------------------------------
committed substantial human and financial resources to position itself in that
market. The Company believes that the capabilities already contained in the
PROFILE product line, along with specific enhancements that it has identified,
will provide financial services organizations with the technology to
strategically respond to this consumer banking evolution.
The Company has recently engaged the electronic banking division of Price
Waterhouse LLP ("Price Waterhouse") to assist the Company in jointly defining
and developing future enhancements to PROFILE/Anyware for the Direct Banking
Market. In connection with this engagement, Price Waterhouse and the Company
are conducting joint marketing activities, including Price Waterhouse's
introduction of the Company to prospective clients. In addition, the Company
anticipates forming alliances with other complimentary service organizations in
the areas of home banking interface, network security and other consumer-based
financial applications. The Company anticipates that these alliances, along
with the alliances mentioned in the previous paragraphs, will facilitate its
entrance into the Direct Banking Market.
The Sanchez Strategy
The Company believes its most promising opportunities for growth lie in
increasing market share in the Emerging Banking Market, broadening its scope of
services in the Emerging Banking Market, and positioning itself as one of the
first production system entries in the Direct Banking Market. The Company plans
to pursue these objectives through the following strategic activities.
Increase Market Share in the Emerging Banking Market
The Company intends to expand its presence in the Emerging Banking Market,
principally by increasing its marketing activities in Central Europe and the
Asian-Pacific Rim. The Company expects to emphasize its strategic relationships
with its hardware and software company partners. In addition, the Company plans
to increase its own direct marketing efforts and has recently opened offices in
Prague, Warsaw and Jakarta in furtherance of this objective.
Broaden the Scope of Services Provided in the Emerging Banking Market
The Company believes that the reception its products and services have received
in the Emerging Banking Market, particularly in Central Europe, provides the
opportunity to expand the scope of services which the Company offers to
organizations in this market. Accordingly, the Company intends to market
additional services and products to these organizations, including more
expansive consulting services, credit bureau services, technology infrastructure
planning, and systems integration.
Become a Significant Participant in the Direct Banking Market
The Company intends to become a significant participant in the Direct Banking
Market by marketing its PROFILE family of products as a financial services
organization's most appropriate response to the evolution in consumer banking
spurred by the emergence of electronic commerce. The Company is positioning its
PROFILE/Anyware product as part of a separate infrastructure focused
specifically on the direct banking channels, as opposed to a replacement for the
existing production systems. The Company is establishing strategic
relationships with business partners in order to offer jointly with these
partners a comprehensive direct banking solution.
The Company was incorporated in Pennsylvania in 1981. The Company's principal
executive offices are located at 40 Valley Stream Parkway, Malvern, Pennsylvania
19355, and its telephone number is (610) 296-8877. Sanchez maintains a web site
on the World Wide Web. Information contained in the Company's web site shall not
be deemed to be part of this Prospectus.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The Offering
<S> <C>
Terms of Rights Offering... Holders of record at the close of business on
___, 1996 of the outstanding Safeguard Common
Shares will receive one Company Right for every
ten Safeguard Common Shares. The Direct
Purchasers will be granted the Direct Rights.
Each Right will entitle the holder to purchase
one share of Common Stock at a purchase price
anticipated to be between $5.00 and $6.00 per
share. Persons may not exercise Rights for
fewer than 50 shares of Common Stock. Holders
of Rights will have the opportunity to acquire
an aggregate of approximately 3,181,500 shares
of Common Stock upon exercise of the Rights.
Exercise Price............. Anticipated to be between $5.00 and $6.00 per
share of Common Stock.
Expiration Date for Rights. _______ __, 199__ at 5:00 p.m., New York City
time.
Rights..................... Rights will be evidenced by transferable
certificates that will be exercisable by the
holder until the Expiration Date, at which time
unexercised rights will be null and void. See
"The Offering."
Exercise by Safeguard CEO.. The Chairman and Chief Executive Officer of
Safeguard and/or his assignees are expected to
exercise all Company Rights distributed to them
and acquire approximately 343,000 shares of
Common Stock.
Sales to Other Persons..... The first 300,000 Unsubscribed Shares will be
sold by the Selling Stockholders to the Other
Purchasers, the Direct Rights will be granted by
the Company to the Direct Purchasers and the
shares of Common Stock subject to the
Undistributed Rights will be sold by the Company
to the Other Purchasers.
Standby Underwriting....... The number of Unsubscribed Shares exceeding the
300,000 shares of Common Stock to be sold by the
Selling Stockholders to the Other Purchasers
will be sold to the Underwriters and offered to
the public by the Underwriters. See "The
Offering--Sales of Unsubscribed Shares; Standby
Commitment" and "Underwriting."
Common Stock Offered:
by the Company............ 2,158,000 shares
by the Selling
Stockholders........... 1,023,500 shares
Common Stock to be
Outstanding After the
Rights Offering.......... 10,707,755 shares (1)
Use of Proceeds............ For working capital, capital expenditures, and
general corporate purposes. A portion of the
net proceeds may be used for acquisitions,
although the Company is not currently engaged in
any acquisition negotiations. See "Use of
Proceeds."
Nasdaq National
Market Symbols:
Rights................. SCAIR
Common Stock........... SCAIV (when-issued)
SCAI (thereafter)
</TABLE>
(1) Excludes (i) 722,489 shares of Common Stock issuable upon the exercise of
options outstanding as of August 31, 1996 (of which 365,753 were exercisable as
of August 31, 1996) at a weighted average exercise price of $2.55 per share, and
(ii) warrants to purchase an aggregate of 360,000 shares of Common Stock at an
exercise price of $1.39 per share. See "Management--1995 Equity Compensation
Plan."
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
Summary Consolidated Financial Information
<TABLE> <CAPTION>
---------------------------------------------------------- -----------------------
Year Ended December 31, Six Months
Ended
June 30,
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
In thousands, except per share data (Unaudited) (Unaudited)
Statement of Operations Data:
Revenues........................... $9,399 $11,881 $11,317 $15,516 $16,842 $7,264 $8,250
Income from operations............. 680 359 546 2,074 2,616 298 493
Net income......................... 542 332 463 3,038 1,587 207 377
Net income per common share........ $ .06 $ .04 $ .05 $ .33 $ .17 $ .02 $ .04
Weighted average number of
shares outstanding.............. 8,976 8,916 9,056 9,272 9,576 9,557 9,220
Other Operating Data:
Backlog:
License and services............... $8,510 $ 3,901 $ 1,576 $ 9,438 $ 5,816 $7,182 $11,126
Maintenance........................ 1,508 3,843 5,484 10,284 11,809 8,646 12,091
------- ------- ------- ------- ------- ------- -------
Total backlog...................... 10,018 7,744 7,060 19,722 17,625 15,828 23,217
Revenue per full time equivalent
employee........................ 96 88 91 121 114 96 120
</TABLE>
<TABLE> <CAPTION>
---------------------------------------
As of June 30, 1996
Actual As Adjusted(1)
------------- -----------------
In thousands (Unaudited)
Balance Sheet Data:
<S> <C> <C>
Cash and cash equivalents.............................................. $ 4,731 $ 15,078
Working capital........................................................ 5,098 15,445
Total assets........................................................... 12,596 22,943
Long-term debt, including current portion.............................. 342 342
Total stockholders' equity............................................. 5,989 16,336
</TABLE>
(1) Adjusted to give effect to the sale by the Company of 2,158,000 shares
of Common Stock and the receipt of approximately $10,346,500 in net proceeds
from the Offering, after deducting the maximum Total Underwriting Discount with
respect to such shares of approximately $797,500 and estimated offering expenses
of $725,000 (including $125,000 representing the maximum applicable non-
accountable expense allowance to the Underwriters).
- --------------------------------------------------------------------------------
6
<PAGE>
Risk Factors
In addition to the other information in this Prospectus, the following factors
should be considered carefully by prospective investors in evaluating the
Company and its business before transferring Rights or purchasing Common Stock
offered hereby.
Dependence on Financial Services Industry
The Company has in the past derived, and may in the future derive, all of its
revenues from the marketing of its PROFILE products to financial services
companies. In particular, the Company's revenues are highly dependent on
information technology expenditures by these organizations. The Company's
operations could be materially and adversely affected by certain economic
changes within the financial services industry or the reduction in information
technology expenditures in that industry. Merger and acquisition activity has
been widespread in the financial services industry in recent years and is
expected to continue in future years. As a result, the industry has experienced
consolidation on a large scale, and this consolidation has had and will continue
to have the effect of reducing the number of potential customers of the Company.
Any significant increase in the level of such consolidation could adversely
affect the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
Dependence on International Sales
The Company has in the past derived, and may in the future derive, a significant
portion of its revenues from financial services companies based in Central
Europe. Revenues derived by the Company from financial services companies based
in Central Europe accounted for approximately 23%, 29% and 51% of revenues
during 1993, 1994 and 1995, respectively. The Company in the future expects to
continue to expand its international operations, including in the Asian-Pacific
Rim. The Company's international business activities are subject to a variety
of potential risks, including political, regulatory and trade and economic
policy risks. Furthermore, the laws of a number of foreign countries do not
protect the Company's proprietary rights to as great an extent as those of the
U.S. Given the Company's relatively large concentration of international sales,
the realization by the Company of any of these risks may likely have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Intense Competition
The financial services institutions software market is intensely competitive,
rapidly evolving and subject to rapid technological change. Competitors vary in
size and in the scope and breadth of their products and services. The Company
encounters competition from a number of organizations which offer production
software to financial services companies. Some of the Company's current and
potential competitors have longer operating histories, better name recognition,
and significantly greater financial, sales, marketing, technical and other
competitive resources than the Company. As a result, they may be able to adapt
more quickly than the Company to new or emerging technologies and changes in
customer preferences or to devote greater resources than the Company to the
development, promotion and sale of products. In addition, many of the Company's
competitors have established, or may in the future establish, cooperative
relationships or strategic alliances among themselves or with third parties to
compete with the Company's products. Furthermore, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire market
share.
As many financial services companies continue to evaluate the replacement of
their existing legacy systems, the Company believes that the financial services
institutions software market will continue to attract new competitors and new
technologies, possibly involving technologies that are more sophisticated and
cost effective than the Company's technology. There can be no assurance that
the Company will be able to compete successfully against any of these
competitive pressures, any of which could result in lost orders or could compel
the Company to make significant price
7
<PAGE>
reductions. The inability of the Company to avert these pressures successfully
could result in a material adverse effect on the Company's business, operating
results and financial condition. See "Business--Competition."
Rapid Technological Change; Development of New Products; Risk of Product Errors
The client/server application software market is characterized by rapid
technological change, frequent new product introductions and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards can render existing products obsolete and
unmarketable in short periods of time. The Company expects new products and
services, and enhancements to existing products and services, to be developed
and introduced by others, which will compete with the products and services
offered by the Company. The life cycles of the Company's products are difficult
to estimate. The Company's future success will depend upon its ability to
enhance its current products and to develop and introduce new products that keep
pace with technological developments and emerging industry standards and address
the increasingly sophisticated needs of its customers. There can be no
assurance that the Company will be successful in developing and marketing new
products or produce enhancements that meet these changing demands, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products or that its
new products and product enhancements will adequately meet the demands of the
marketplace and achieve market acceptance. If the Company is unable to develop
and introduce new products or product enhancements in a timely manner, or if a
release of a new product does not achieve market acceptance, the Company's
business, operating results and financial condition will be materially adversely
affected. Software products such as those offered by the Company may contain
errors or otherwise fail to function properly when first introduced or when new
versions are released. There can be no assurance that errors will not be found
in new products or releases after commencement of commercial shipments resulting
in loss or delay in market acceptance, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
Continued Growth and Development of the Direct Banking Market
A portion of the Company's growth strategy is dependent upon the development and
expansion of the market for direct banking services (which include alternate
delivery channels such as the networks which comprise the Internet) as well as
market acceptance of the Company's products and services. The market for direct
banking services has only recently begun to develop, and market acceptance of
the Company's products and services is uncertain. The Company began marketing
its products to the Direct Banking Market in 1996 and, as of the date of this
Prospectus, the Company has not received any revenues from this market. Certain
critical issues concerning commercial use of alternate delivery channels,
including capacity, security, reliability, ease and cost of access, and quality
of service are evolving and may adversely impact the growth in the use of these
channels. Despite the implementation of security measures, the use of the
Internet remains subject to unknown security risks which may further deter
financial institutions from licensing the Company's PROFILE products and
individuals from conducting transactions via electronic commerce. Accordingly,
the Company cannot predict the size of the market for direct banking services or
the rate at which such market will grow. If the market for direct banking
services fails to grow, grows more slowly than anticipated, or becomes saturated
with competitors, the Company's prospects could be adversely affected.
Reliance on Intellectual Property and Proprietary Rights
The Company's success is heavily dependent upon the architecture and design of
its PROFILE products. The Company relies primarily on a combination of
copyright and trademark laws, trade secrets, confidentiality procedures and
contractual provisions to protect its proprietary rights. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. The Company
presently has no patents or patent applications pending. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the Company's
means of protecting its proprietary rights will be adequate or that the
Company's competitors will not develop similar technology independently.
The Company is not aware that any of its products infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim infringement by the Company with respect to current or future
8
<PAGE>
products. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or license agreements or cause the Company to
discontinue the use of the challenged tradename, service mark or technology at
potentially significant expense to the Company associated with the marketing of
a new name or the development or purchase of replacement technology, all of
which could have a material adverse effect on the Company. Such royalty or
license agreements, if required, may not be available on terms acceptable to the
Company, or at all, which could have a material adverse effect upon the
Company's operating results and financial condition.
Concentration and Mix of Revenues
Historically, a small number of customers have each accounted for at least 10%
of the Company's revenues. In 1995, four customers accounted for approximately
71% of the Company's revenues. In 1994, four customers accounted for
approximately 60% of the Company's revenues. Since the installation of a large
software application can be a complex, time intensive and costly process,
customers generally only undertake these projects on an irregular basis and the
projects often take approximately ten to 15 months to implement. As a result,
the amount of revenues derived from any given customer may vary significantly
from year to year. Accordingly, the Company expects that the identity of
customers accounting for large portions of revenues will change from year to
year. The inability of the Company from year to year to obtain large
installation engagements could have a material adverse effect on the Company's
business, operating results and financial condition.
Fluctuations in Quarterly Operating Results; Third and Fourth Quarter Operating
Results
The Company has experienced and may in the future continue to experience
fluctuations in its quarterly operating results. Factors that may cause the
Company's quarterly operating results to vary include the timing of new contract
closings, the initiation of license and service fee revenue recognition, one-
time payments from clients for license expansion rights, and the completion of
large installation projects. Certain of these factors may also affect the
Company's personnel utilization rates which may cause further variation in
quarterly operating results. Due to all of the foregoing factors, it is likely
that in some future quarters the Company's operating results will be below the
expectations of stock market analysts and investors. Regardless of the general
outlook for the Company's business, the announcement of quarterly results of
operations below analyst and investor expectations is likely to result in a
decline in the trading price of the Common Stock. Management anticipates that
net income in both the third and fourth quarters of 1996 will be less than or
equal to the comparable quarters in 1995 due to the following reasons:
(i) anticipated increases in expenses, especially in product development and
sales and marketing, which the Company believes will enhance its future growth
potential; (ii) the timing of the start of new contracts currently being
pursued; and (iii) the fourth quarter of 1995 included one-time contract
settlement totaling approximately $625,000. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation."
Reliance on Strategic Relationships
The Company has established non-exclusive partnership arrangements with several
organizations, including Hewlett-Packard, IBM, Digital, and Oracle, that it
believes are important to its sales, marketing and support activities. In
particular, the Company's relationship with Digital has been instrumental in the
Company's achievement of its historical revenue levels. The failure of the
Company to maintain these relationships could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business."
Dependence on Key Personnel
The Company believes that its continued success depends to a significant extent
upon the efforts and abilities of its senior management. In particular, the
loss of the services of Michael A. Sanchez, the Company's Chairman and Chief
Executive Officer, or Frank R. Sanchez, the Company's President and Chief
Operating Officer, or any of the Company's other executive officers or senior
managers could have a material adverse effect on the Company's business,
operating results and financial condition. The Company does not have employment
agreements with any of its executive officers other than Richard H. Jefferson.
See "Management--Employment Agreement."
9
<PAGE>
Ability to Attract and Retain Key Technical Employees
The Company believes that its future success will also depend in large part upon
its ability to attract and retain highly skilled technical, management and sales
and marketing personnel. Moreover, because the development of the Company's
software requires knowledge of computer hardware, operating system software,
system management software and application software, key technical personnel
must be proficient in a number of disciplines. Competition for such technical
personnel is intense, and the failure of the Company to hire and retain talented
technical personnel or the loss of one or more key employees could have an
adverse effect on the Company's business, operating results and financial
condition.
Future growth, if any, of the Company will require additional engineering, sales
and marketing, financial and administrative personnel, to expand customer
services and support and to expand operational and financial systems. There can
be no assurance that the Company will be able to attract and retain the
necessary personnel to accomplish its growth strategies or that it will not
experience constraints that will adversely affect its ability to satisfy
customer demand in a timely fashion. If the Company's management is unable to
manage growth effectively, the Company's business, operating results and
financial condition could be adversely affected.
Control by Principal Stockholders
After the completion of the Offering, Michael A. Sanchez, Frank R. Sanchez,
Safeguard, and Radnor Venture Partners, L.P. ("Radnor"), the four largest
stockholders of the Company (collectively, the "Principal Stockholders") and the
Selling Stockholders in the Offering, will beneficially own in the aggregate
approximately 58.8% of the outstanding Common Stock. As a result, such
stockholders will collectively have the voting power to elect the Company's
entire Board of Directors and to approve all matters requiring stockholder
approval. See "Management--Executive Officers and Directors," "Principal and
Selling Stockholders," "Certain Transactions" and "Shares Eligible for Future
Sale."
Broad Discretion in Application of Proceeds; Acquisitions
The Company intends to use the net proceeds from the Offering for working
capital, capital expenditures and general corporate purposes. In addition, a
portion of the net proceeds may be used to make acquisitions. Accordingly, the
specific uses for the net proceeds will be at the complete discretion of the
Board of Directors of the Company and may be allocated based upon circumstances
arising from time to time in the future. In addition, no assurance can be given
that acquisitions will be available on terms and conditions acceptable to the
Company. Acquisitions involve numerous risks, including, among other things,
difficulties and expenses incurred in connection with the acquisitions and the
subsequent assimilation of the operations and services of the acquired
businesses, the diversion of management's attention from other business concerns
and the potential loss of key employees of the acquired business. Acquisitions
of foreign businesses may involve additional risks, including assimilating
differences in foreign business practices, overcoming language barriers and
transacting in foreign currencies. Furthermore, the failure of the operations
of an acquired business to achieve anticipated results could be expected to have
a material adverse effect on the Company's business, results of operations and
financial condition. See "Use of Proceeds."
Dilution
As of June 30, 1996, the average price per share paid upon the original issuance
by the Company of Common Stock prior to the Offering was $.72. Purchasers of
the Common Stock of the Company offered hereby will suffer an immediate dilution
of $3.99 in the net tangible book value per share of the Common Stock from the
Exercise Price of the Rights. See "Dilution."
Requirements for Listing Securities on the Nasdaq National Market; Application
of the Penny Stock Rules
The Company has applied with the Nasdaq National Market to have the Common Stock
and Rights (the "Listed Securities") approved for listing (upon completion of
the Offering with respect to the Common Stock and from the date of this
Prospectus through the Expiration Date with respect to the Rights). If the
Company is unable to maintain the
10
<PAGE>
standards for continued listing, the Listed Securities could be subject to
delisting from the Nasdaq National Market. Trading, if any, in the Listed
Securities would thereafter be conducted on an electronic bulletin board
established for securities that do not meet the Nasdaq listing requirements or
in what is commonly referred to as the "pink sheets." As a result, an investor
may find it more difficult to dispose of, or to obtain accurate quotations as to
the price of, the Company's securities.
In addition, if the Company's securities were delisted, they would be subject to
the so-called penny stock rules that impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally defined as an investor
with a net worth in excess of $1 million or annual income exceeding $200,000,
or $300,000 together with a spouse). For transactions covered by this rule, the
broker-dealer must make a special suitability determination for the purchaser
and must have received the purchaser's written consent to the transaction prior
to sale. Consequently, delisting, if it occurs, may affect the ability of
broker-dealers to sell the Company's securities and the ability of purchasers in
the Offering to sell their securities in the secondary market.
The Securities and Exchange Commission (the "Commission") has adopted
regulations that define a "penny stock" to be any equity security that has a
market price (as defined in the regulations) of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to certain exceptions. For
any transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a disclosure schedule relating to the
penny stock market. The broker-dealer also must disclose the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and, if the broker-dealer is the sole market-
maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks. As a result, if the Common
Stock is determined to be "penny stock," an investor may find it more difficult
to dispose of the Company's Common Stock.
No Prior Market; Possible Volatility of Stock Price
Prior to the Offering, there has been no public market for the Common Stock or
the Rights, and there can be no assurance that an active public market will
develop or be sustained. The Exercise Price of the Rights and purchase price of
the Common Stock under the Standby Underwriting Agreement has been determined
solely by negotiations between the Company, the Selling Stockholders and the
Underwriters and does not necessarily reflect the price at which shares of
Common Stock may be sold in the public market during or after the Offering. See
"The Offering--Background" for a discussion of the factors considered in
determining the Exercise Price. The public markets, in general, have from time
to time experienced extreme price and volume fluctuations, which have in some
cases been unrelated to the operating performance of particular companies, and
the market for technology stocks, such as the Common Stock, can be subject to
greater price volatility than the stock market in general. In addition, factors
such as announcements of technological innovations, announcements of new
products by the Company's competitors or third parties, and market conditions in
the information technology industry may have a significant impact on the market
price of the Common Stock.
Shares Eligible for Future Sale
A substantial number of outstanding shares of Common Stock and shares of Common
Stock issuable upon exercise of outstanding stock options and warrants will
become eligible for future sale in the public market at various times. In
addition to the factors affecting the stock market in general and the market for
the Common Stock discussed above, sales of substantial amounts of Common Stock
in the public market, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock. Upon completion of the
Offering, the Company will have 10,707,755 shares of Common Stock outstanding,
excluding 1,082,489 shares of Common Stock subject to stock options and warrants
outstanding as of August 31, 1996 and any stock options or warrants granted by
the Company after August 31, 1996. Of these shares, the Common Stock sold by
the Company in the Offering and the Selling Stockholders, except for certain
shares described below, will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Act"). The
remaining 7,526,255 shares of Common Stock (the "Restricted Shares") were sold
by the Company in reliance on exemptions from the registration requirements
11
<PAGE>
of the Act and are "restricted securities" as defined in Rule 144 under the Act
("Rule 144") and may not be sold in the absence of registration under the Act
unless an exemption is available, including an exemption afforded by Rule 144 or
Rule 701 ("Rule 701") under the Act. Without considering the contractual
restrictions described below, approximately (i) 539,696 Restricted Shares are
eligible for sale in the public market in accordance with Rule 144(k) under the
Act, (ii) 257,194 Restricted Shares will be eligible for sale 90 days after the
date of this Prospectus, subject to volume and other resale conditions imposed
by Rule 701, and (iii) 6,729,365 Restricted Shares will be eligible for future
sale subject to the holding period and other conditions imposed by Rule 144.
Certain restrictions on shares of Common Stock are applicable to (i) any shares
of Common Stock purchased in the Offering by affiliates of the Company, which
may generally only be sold in compliance with the limitations of Rule 144,
except for the holding period requirements thereunder, and (ii) the shares of
Common Stock beneficially owned by the Principal Stockholders that are not being
offered hereby, all of which, together with the shares of Common Stock
beneficially owned by the seven other executive officers of the Company, each
director of the Company and Warren V. Musser and his assignees, are subject to
lock-up agreements (the "Lock-Up Agreements") and pursuant to such agreements
will not be eligible for sale or other disposition until 180 days after the
Expiration Date (the "Lock-Up Expiry Date") without the prior written consent of
the Underwriters. In addition, the Company has granted Radnor and Safeguard
certain registration rights whereby they may cause the Company to register their
shares of Common Stock. See "Shares Eligible for Future Sale."
It is anticipated that a registration statement (the "Form S-8 Registration
Statement") covering the Common Stock that may be issued pursuant to the
exercise of options awarded by the Company will be filed and become effective
prior to the Lock-Up Expiry Date, and that shares of Common Stock that are so
acquired or offered thereafter pursuant to the Form S-8 Registration Statement
generally may be resold in the public market without restriction or limitation.
Subject to the provisions of any Lock-Up Agreement, shares of Common Stock may
be resold in the public market beginning 90 days after the date of this
Prospectus pursuant to Rule 701 (i) by persons who are not affiliates of the
Company, without compliance with the public information, holding period, volume
limitation or notice provisions of Rule 144 and (ii) by affiliates of the
Company, without compliance with the holding period requirements of Rule 144.
See "Management--1995 Equity Compensation Plan," "Shares Eligible for Future
Sale--Options and Warrants" and "Underwriting."
Possible Issuances of Preferred Stock
Shares of preferred stock may be issued by the Company in the future without
stockholder approval and upon such terms as the Board of Directors may
determine. The rights of the holders of the Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding stock of the Company and potentially prevent the
payment of a premium to stockholders in an acquisition transaction. The Company
has no present plans to issue any shares of preferred stock. See "Description
of Capital Stock--Preferred Stock."
No Dividends
To date, the Company has not paid any cash dividends on its Common Stock and
does not expect to declare or pay any cash or other dividends in the foreseeable
future. See "Dividend Policy."
Cancellation of Rights Offering
If the conditions precedent to the sale to the Underwriters of the Excess
Unsubscribed Shares on the sixth business day after the Expiration Date (the
"Closing Date") are not satisfied (assuming that there are Excess Unsubscribed
Shares), the Underwriters may elect, on or before the Closing Date, to cancel
the Rights Offering and the Company and the Selling Stockholders will not have
any obligations with respect to the Rights except to return, without interest,
any payment received in respect of the Exercise Price. See "The Offering--
Cancellation of Rights Offering" and "Underwriting." The Company has been
advised by the NASD that it is likely that trades in the Rights and the when-
issued shares of Common Stock in the market would be canceled if the Rights
Offering is not consummated.
12
<PAGE>
The Offering
The Company is granting, at no cost, to the holders of Safeguard Common Shares
of record at the close of business on the Record Date, the Company Rights, on
the basis of one Company Right for every ten Safeguard Common Shares. The
Selling Stockholders have agreed with the Company to sell 1,023,500 shares of
Common Stock upon the exercise of the Company Rights and the Company will sell
the remaining 2,006,500 shares of Common Stock upon the exercise of the Company
Rights. The Company is granting, at no cost, the 151,500 Direct Rights to the
Direct Purchasers. Each Right enables the holder to purchase one share of
Common Stock at an Exercise Price anticipated to be between $5.00 and $6.00 per
share. As of the close of business on the day before the date of this
Prospectus, there were __________ Safeguard Common Shares outstanding.
Accordingly, depending on changes in the number of outstanding Safeguard Common
Shares through the Record Date (principally as a result of the exercise of
options and the conversion of convertible securities to purchase Safeguard
Common Shares), a total of approximately _________ Company Rights will be issued
to holders of Safeguard Common Shares outstanding on the Record Date. In the
event that Company Rights to purchase fewer than 3,030,000 shares of Common
Stock are issued to holders of Safeguard Common Shares, the shares of Common
Stock subject to such Undistributed Rights will be offered by the Company to the
Other Purchasers at the Exercise Price.
Background
The Company has agreed with the Selling Stockholders to make a Rights Offering
to holders of Safeguard Common Shares on the terms set forth in this Prospectus.
The Company believes that the Rights Offering offers several advantages over a
traditional initial public offering, including, the opportunity to offer its
Common Stock to investors who, as Safeguard shareholders, already have some
knowledge of the Company's business, the opportunity to achieve a broader
distribution to a more stable shareholder base and the minimization of
underwriting discounts and commissions. In addition, Safeguard has advised the
Company that it prefers the Rights Offering to a traditional initial public
offering because it allows its shareholders the opportunity to purchase shares
of Common Stock at the initial offering price before such shares are offered to
the general public by the Underwriters.
Prior to the Rights Offering, there has been no public market for the Common
Stock or the Rights. Consequently, the Exercise Price was determined by
negotiations among the Company, the Selling Stockholders and the Underwriters.
In determining the Exercise Price, the Underwriters, and the Boards of Directors
of the Company and Safeguard, Michael A. Sanchez, Frank R. Sanchez and Radnor
considered such factors as the future prospects and historical growth rate in
revenues and earnings of the Company; its industry in general and the Company's
position in its industry; revenues, earnings and certain other financial and
operating information of the Company in recent periods; market valuations of the
securities of companies engaged in activities similar to those of the Company;
and the management of the Company.
Exercise Privilege
Each Right will entitle the holder thereof to receive, upon payment of the
Exercise Price, one share of Common Stock, subject to the restrictions described
herein (the "Exercise Privilege"). Persons may not exercise Rights for fewer
than 50 shares of Common Stock. In the event that a holder of Rights meeting
the minimum exercise requirement elects to exercise in multiple transactions and
one such transaction involves less than the minimum exercise requirement, such
holder should provide to the Rights Agent a letter stating that such holder has
already exercised a sufficient number of Rights to satisfy the minimum exercise
requirement. For purposes of the Rights Offering, a person that holds Safeguard
Common Shares in multiple accounts must meet the 50 share minimum purchase
requirement in each account. Accordingly, persons holding fewer than 50 Rights
in an account should consider the advisability of consolidating the Rights in
one account, selling Rights, or purchasing additional Rights to comply with the
minimum exercise requirements of the Rights Offering. The Company has
established these minimum exercise requirements primarily to limit the costs
associated with a significant number of odd lots of the Common Stock.
13
<PAGE>
No Fractional Rights
No fractional Rights will be issued in the Rights Offering and a holder of a
number of Safeguard Common Shares not evenly divisible by ten will be entitled
to receive the next higher whole number of Rights. For purposes of this
rounding process, record holders of Safeguard Common Shares known to be acting
as nominees for beneficial holders of Safeguard Common Shares will be
disregarded, and the rounding process will take place with respect to the
aggregate holdings of Safeguard Common Shares by the beneficial holder.
Expiration Date
The Rights Offering will terminate, and the Rights will expire, at 5:00 p.m.,
New York City time, on _____, 199__, the Expiration Date. After the Expiration
Date, unexercised Rights will be null and void. Neither the Company nor any
Selling Stockholder will be obligated to honor any purported exercise of Rights
received by ChaseMellon Shareholder Services, L.L.C. (the "Rights Agent") after
the Expiration Date, regardless of when the documents relating to such exercise
were sent, except pursuant to the delayed delivery procedures described below
under "-- Method of Exercising Rights."
Method of Transferring Rights
Rights may be transferred, in whole or in part, by endorsing and delivering to
the Rights Agent, at the addresses set forth below under "-- Method of
Exercising Rights," a Rights certificate that has been properly endorsed for
transfer, with instructions to reissue the Rights, in whole or in part, in the
name of the transferee. The Rights Agent will reissue certificates for the
transferred Rights to the transferee, and will reissue a certificate for the
balance, if any, to the holder of the Rights, in each case to the extent it is
able to do so prior to the Expiration Date. Safeguard and the Company believe
that a market for the Rights may develop during the period preceding the
Expiration Date. The Company has applied with the Nasdaq National Market to
have the Rights approved for quotation and has reserved "SCAIR" as the Nasdaq
symbol under which the Rights will trade during such period. Any questions
regarding the transfer of Rights should be directed to the Rights Agent at P.O.
Box 798, Midtown Station, New York, NY 10018, Attention: Reorganization
Department, telephone number (800) 777-3674.
Because persons may not exercise Rights for fewer than 50 shares of Common
Stock, persons holding fewer than 491 Safeguard Common Shares in one account
will not be entitled to exercise Company Rights unless they consolidate Company
Rights received in multiple accounts or acquire enough additional Company Rights
in the market to satisfy the 50 share minimum exercise requirement. Such
holders should consult with their investment advisor and review various
alternatives, including acquiring additional Rights or selling or otherwise
transferring their Rights. All commissions, fees and other expenses (including
brokerage commissions and any transfer taxes) incurred in connection with the
purchase or sale of Rights are for the account of the transferor and transferee
of Rights, and none of such commissions, fees or expenses will be paid by the
Company or the Selling Stockholders.
Method of Exercising Rights
Rights may be exercised by completing and signing the election to purchase form
that appears on the back of each Rights certificate. The completed and signed
election to purchase form, accompanied by payment in full of the Exercise Price
for all shares for which the Exercise Privilege has been exercised, must be
received by the Rights Agent on or before the Expiration Date. Neither the
Company nor any Selling Stockholder will be obligated to honor any purported
exercise of Rights received by the Rights Agent after the Expiration Date,
regardless of when the documents relating to such exercise were sent, except
pursuant to the delayed delivery procedures described below. Therefore, the
Company and Safeguard suggest, for the holders' protection, that Rights be
delivered to the Rights Agent by overnight or express mail courier, or, if
mailed, by registered mail. Persons may not exercise Rights for fewer than 50
shares of Common Stock in each account.
14
<PAGE>
The Rights and Exercise Price, if any, should be mailed or delivered to the
Rights Agent as follows:
By Mail: By Hand or by Overnight/Express Mail Courier:
ChaseMellon Shareholder ChaseMellon Shareholder
Services, L.L.C. Services, L.L.C.
P.O. Box 798 120 Broadway, 13th Floor
Midtown Station New York, NY 10271
New York, NY 10018
Payment of the Exercise Price must be made in U.S. dollars by cash, check or
money order payable to "Safeguard Escrow Account."
An exercise also will be in acceptable form if, on or before the Expiration
Date, the Rights Agent has received payment in full of the Exercise Price for
shares to be purchased pursuant to the Exercise Privilege and a letter or
telegraphic notice from a bank, trust company or member firm of the New York or
American Stock Exchanges setting forth the subscriber's name, address and
taxpayer identification number, the number of shares subscribed for pursuant to
the Exercise Privilege, and guaranteeing that a properly completed and signed
election to purchase form will be delivered to the Rights Agent within three
business days after the Expiration Date. Acceptance of subscriptions in the
foregoing manner will be subject to receipt of the duly executed election to
purchase form with respect to the Exercise Privilege within such three business
day period. No formal arrangements for the deposit of election to purchase
forms have been made with any bank, trust company or member firm.
A holder of Rights who purchases less than all the shares of Common Stock
represented by his Rights certificate will receive from the Rights Agent a new
Rights certificate representing the balance of the unsubscribed Rights, to the
extent that the Rights Agent is able to reissue a Rights certificate prior to
the Expiration Date.
Certificates representing the Common Stock purchased by exercising the Exercise
Privilege will be issued as soon as practicable after the sale of the
Unsubscribed Shares and in no event later than six business days after the
Expiration Date. See "--Sales of Unsubscribed Shares; Standby Commitment." All
funds received by the Rights Agent in payment of the Exercise Price will be
retained in escrow by the Rights Agent and will not be delivered to the Company
or the Selling Stockholders until the certificates representing Common Stock
have been issued.
Record holders of Safeguard Common Shares who hold such shares for the account
of others (e.g., brokers or depositories for securities), and who thus receive
Rights certificates representing Rights for the account of more than one
beneficial owner, should provide such beneficial owners with copies of this
Prospectus and should ascertain and execute on their behalf the intentions of
such beneficial owners as to the exercise or transfer of such Rights.
All questions as to the validity, form, eligibility (including times of receipt,
beneficial ownership and compliance with minimum exercise provisions) and
acceptance of subscription forms and the Exercise Price will be determined by
Safeguard, whose determination will be final and binding. Once made,
subscriptions are irrevocable, and no alternative, conditional or contingent
subscriptions will be accepted. Safeguard reserves the absolute right to reject
any or all purchases not properly submitted or the acceptance of which would, in
the opinion of its counsel, be unlawful. Safeguard also reserves the right to
waive any irregularities (or conditions) and Safeguard's interpretations of the
terms (and conditions) of the Rights Offering shall be final and binding. Any
irregularities in connection with purchases must be cured within five business
days of the giving of notice of defect by the Rights Agent, but no later than
three business days after the Expiration Date, unless waived by Safeguard. The
Company, the Selling Stockholders, the Underwriters and the Rights Agent are not
under any duty to give notification of defects in such subscriptions and will
not have any liability for failure to give such notifications. Exercises will
not be deemed to have been made until such irregularities have been cured or
waived and rejected exercises and the Exercise Price paid therefor will be
returned promptly by the Rights Agent to the appropriate holders of the Rights.
15
<PAGE>
Investor Information
Investors who desire additional copies of this Prospectus or additional
information should contact Jean K. Robinson at J.P. Morgan Securities Inc., 60
Wall Street, New York, New York 10260-0060, telephone number (212) 648-1889 or
Franklin M. Stokes at Wheat, First Securities, Inc., Riverfront Plaza, 901 East
Byrd Street, Richmond, Virginia 23219, telephone number (804) 782-3446.
Expectations Concerning the Exercise of Rights
Warren V. Musser, the Chairman and Chief Executive Officer of Safeguard, and/or
his assignees are expected to exercise all Rights distributed to them and
acquire approximately 343,000 shares of Common Stock through the Rights
Offering.
Sales of Unsubscribed Shares; Standby Commitment
The Unsubscribed Shares will be sold, as to the first 300,000 Unsubscribed
Shares, at the Exercise Price to the Other Purchasers (who are comprised of
persons selected by the Company) and, as to the number of Unsubscribed Shares
exceeding the 300,000 shares of Common Stock offered to the Other Purchasers
(the "Excess Unsubscribed Shares"), to the Underwriters at the Exercise Price
less the Total Underwriting Discount pursuant to the Standby Underwriting
Agreement.
The Selling Stockholders are offering the first 300,000 Unsubscribed Shares at
the Exercise Price to the Other Purchasers and expect to enter into, prior to
the Expiration Date, agreements obligating them to sell up to an aggregate of
300,000 Unsubscribed Shares to the Other Purchasers and obligating the Other
Purchasers to purchase from them up to an aggregate of 300,000 Unsubscribed
Shares. In the event that less than 300,000 Unsubscribed Shares are available
for sale to the Other Purchasers as of the Expiration Date, the number of
remaining Unsubscribed Shares will be sold to each Other Purchaser, on a
discretionary basis, as derived by multiplying the maximum number of
Unsubscribed Shares each Other Purchaser has agreed to purchase by the fraction
obtained after dividing the aggregate number of remaining Unsubscribed Shares by
300,000. In the event that the Other Purchasers fail to purchase any of the
Unsubscribed Shares which they are obligated to purchase such circumstances
would result in the failure to satisfy a condition precedent to the
Underwriters' obligation to purchase Excess Unsubscribed Shares under the
Standby Underwriting Agreement which, unless waived by the Underwriters, would
result in the termination of the Rights Offering and the return of payments
received in respect of the Exercise Price, without interest. The Underwriters
may elect to purchase all, but not less than all, Unsubscribed Shares in the
event the Other Purchasers fail to purchase any of the Unsubscribed Shares which
they are obligated to purchase. See "--Cancellation of Rights Offering" and
"Underwriting."
In accordance with the Standby Underwriting Agreement, the Underwriters (i) will
receive the Financial Advisory Fee equal to 3% of the Exercise Price of each
share of Common Stock subject to the Offering, and (ii) will purchase, within
six business days after the Expiration Date and subject to the terms and
conditions of the Standby Underwriting Agreement, the Excess Unsubscribed Shares
at a price per share equal to the Exercise Price less the Underwriting Discount
equal to 4% of the Exercise Price for each Unsubscribed Share in addition to the
Financial Advisory Fee for such share. Under certain circumstances, the
Underwriters may be entitled to receive the Underwriting Discount for shares of
Common Stock acquired by them pursuant to the exercise of Rights purchased by
them. See "Underwriting." The Excess Unsubscribed Shares acquired by the
Underwriters pursuant to the Standby Underwriting Agreement, the Common Stock
acquired by the Underwriters pursuant to the exercise of Rights and the Common
Stock acquired by the Underwriters in the market will be offered by the
Underwriters to the public at prices which may vary from the Exercise Price. If
all of the Rights are exercised, or if the number of Unsubscribed Shares is
300,000 or less, there will be no Excess Unsubscribed Shares and the
Underwriters will not be required to purchase any Common Stock pursuant to the
Standby Underwriting Agreement unless the Other Purchasers do not fulfill their
obligations to purchase the Unsubscribed Shares. The Underwriters may terminate
their obligations under the Standby Underwriting Agreement if certain events
occur, or if the Company or any Selling Stockholder fails to comply with any of
their respective obligations under the Standby Underwriting Agreement. See
"Underwriting." The Company and Selling Stockholders have granted to the
Underwriters a 20-day option commencing on the Expiration Date to purchase a
maximum of
16
<PAGE>
303,000 additional shares of Common Stock to cover over-allotments, if any, of
which 151,500 shares of Common Stock would be sold by the Company and an
aggregate of 151,500 shares of Common Stock would be sold by the Selling
Stockholders. See "Underwriting." The Company intends to supplement the
Prospectus after the Expiration Date to set forth the results of the Rights
Offering, the transactions by the Underwriters during the Exercise Period, the
number of Unsubscribed Shares purchased by the Other Purchasers, if any, the
number of Unsubscribed Shares purchased by the Underwriters, if any, and the
subsequent reoffering thereof.
Cancellation of Rights Offering
If the conditions precedent to the sale to the Underwriters of the Excess
Unsubscribed Shares on the sixth business day after the Expiration Date (the
"Closing Date") are not satisfied (assuming that there are Excess Unsubscribed
Shares), the Underwriters may elect, on or before the Closing Date, to cancel
the Offering and the Company and the Selling Stockholders will not have any
obligations with respect to the Rights except to return, without interest, any
payment received in respect of the Exercise Price. See "Underwriting." The
Company has been advised by the NASD that it is likely that trades in the Rights
and the when-issued shares of Common Stock in the market would be canceled if
the Offering is not consummated.
Federal Income Tax Consequences
The following is a summary of the material federal income tax consequences
affecting holders of Safeguard Common Shares receiving Company Rights in the
Offering. In the opinion of Morgan, Lewis & Bockius LLP, the distribution of
the Company Rights by the Company may constitute taxable income to holders of
Safeguard Common Shares under the Internal Revenue Code of 1986, as amended (the
"Code"), and may also be subject to state or local income taxes. Because of the
complexity of the provisions of the Code referred to below and because tax
consequences may vary depending upon the particular facts relating to each
holder of Safeguard Common Shares, such holders should consult their own tax
advisors concerning their individual tax situations and the tax consequences of
the Offering under the Code and under any applicable state, local or foreign tax
laws.
Safeguard has been advised by Morgan, Lewis & Bockius LLP that, under current
interpretations of case law, the Code, and applicable regulations thereunder,
the federal income tax consequences applicable to holders of Safeguard Common
Shares receiving Company Rights in the Offering generally are as follows:
Distribution of Company Rights to Holders of Safeguard Shares
The Company Rights, representing the right to acquire shares of Common Stock
from the Company or the Selling Stockholders, can be considered as constituting
"property" within the meaning of Section 317(a) of the Code. The federal income
tax consequences of a distribution by the Company of the Company Rights which
are considered "property" to holders of Safeguard Common Shares, as determined
under the Code and the regulations thereunder, are as follows: (i) each
noncorporate holder of Safeguard Common Shares will be deemed to have received a
distribution from Safeguard, generally taxable as ordinary dividend income, in
an amount equal to the fair market value (if any) of the Company Rights, as of
the date of distribution, (ii) each corporate holder of Safeguard Common Shares
(other than foreign corporations and S corporations) will be deemed to have
received a distribution from Safeguard (generally taxable as a dividend subject
to the dividends received deduction for corporations (generally 70%, but 80%
under certain circumstances)) in an amount equal to the fair market value (if
any) of the Company Rights, as of the date of distribution; and (iii) the tax
basis of the Company Rights in the hands of each holder (whether corporate or
noncorporate) of Safeguard Common Shares will be equal to the fair market value
(if any) of the Company Rights as of the date of distribution. Because of the
predominantly factual nature of determining the fair market value, if any, of
the Company Rights, Morgan, Lewis & Bockius LLP has expressed no opinion with
respect to the fair market value of the Company Rights.
Since the fair market value of the Company Rights will determine the amount of
taxable income deemed received by the holders of Safeguard Common Shares, the
determination of the fair market value of each Right as of the date of
distribution is critical. The Exercise Price was determined through arms-length
negotiations among the Company, the
17
<PAGE>
Selling Stockholders and the Underwriters. Based on these negotiations and
because Safeguard views the Company Rights as merely a mechanism that permits
the purchase of the Common Stock, Safeguard's Board of Directors believes that
the per share value of Common Stock represented by the Company Rights at the
date of the commencement of the Offering approximates the Exercise Price, and
that the Company Rights should have no value for federal income tax purposes.
However, the Internal Revenue Service is not bound by this determination. See
"--Background."
Exercise of Rights
Holders of Company Rights, whether corporate or noncorporate, will recognize
neither gain nor loss upon the exercise of the Company Rights. A holder of
Company Rights who receives shares of Common Stock upon the exercise of the
Company Rights will acquire a tax basis in such shares equal to the sum of the
Exercise Price paid under the Offering and the tax basis (if any) of the holder
of Company Rights in the Company Rights.
Transfer of Rights
The transferable nature of the Company Rights will permit a holder of Company
Rights to sell Company Rights prior to exercise. Pursuant to Section 1234 of the
Code, a Company Rights holder who sells Company Rights prior to exercise will be
entitled to treat the difference between the amount received for the Company
Rights and the adjusted tax basis (if any) of the holder of Company Rights in
the Company Rights as a short-term capital gain or capital loss, provided that
Common Stock subject to the Company Rights would have been a capital asset in
the hands of the holder had it been acquired by him. The gain or loss so
recognized will be short-term since the Company Rights will have been held for
not longer than one year.
Non-Exercise of Rights
The income tax treatment applicable to holders of Company Rights who fail to
exercise or transfer their Company Rights prior to the Expiration Date also is
set forth in Section 1234 of the Code. Holders of Company Rights who allow their
Company Rights to lapse are deemed under the Code to have sold their Company
Rights on the date on which the Company Rights expire. Since upon such lapse no
consideration will be received by a holder of Company Rights, and since the
Company Rights will have been held for not longer than one year, a short-term
capital loss equal to the tax basis (if any) in the Company Rights will be
sustained by the holder on such lapse, provided that Common Stock subject to the
Company Rights would have been a capital asset in the hands of the holder had it
been acquired by him.
18
<PAGE>
Use of Proceeds
The minimum net proceeds to the Company from the sale of the 2,158,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$10,346,500 after deducting estimated offering expenses allocable to and payable
by the Company (including the maximum applicable non-accountable expense
allowance to the Underwriters) and assuming the sale of all such shares pursuant
to the Standby Underwriting Agreement (other than the 151,500 shares upon the
exercise of Direct Rights), the payment to the Underwriters of the Total
Underwriting Discount with respect to the shares sold by the Company pursuant to
the Standby Underwriting Agreement and the payment of only the Financial
Advisory Fee with respect to the shares of Common Stock sold by the Company to
the Direct Purchasers upon the exercise of Direct Rights. In the event more of
the shares of Common Stock offered hereby are sold pursuant to the exercise of
Rights, the Company will not be obligated to pay the Underwriting Discount with
respect to such shares and will, therefore, realize an amount of net proceeds
greater than approximately $10,346,500. See "The Offering--Sales of
Unsubscribed Shares; Standby Commitment" and "Underwriting." The Company will
not receive any proceeds from the sale of Common Stock by the Selling
Stockholders.
The principal reason for the Offering is to establish a stronger capital base
for the Company to support the continued expansion of its business. The Company
intends to use the net proceeds, together with cash flow from operations, for
working capital, capital expenditures and general corporate purposes. The
Company may expand its technical and marketing capabilities through the
acquisition of other companies or businesses that are complementary to the
Company's current business. A portion of the net proceeds from the Offering may
be used in the future for such acquisitions, although the Company has no
commitments or understandings with respect to future acquisitions, nor is it
currently actively considering any particular acquisition. The Company has not
determined the amounts it intends to utilize on each of the listed uses, or the
timing of such uses. The amounts actually expended for each use may vary
significantly depending upon a number of factors, including future revenue
growth, if any, the amount of cash generated or used by the Company's operations
and the status of acquisition opportunities, if any, presented to the Company.
The Company believes that the net proceeds from the sale of the Common Stock
offered hereby, together with its current cash balances and cash flow from
future operations will be sufficient to fund its operating requirements for the
foreseeable future. Pending such uses, the net proceeds of the Offering will be
invested in short-term, investment-grade, interest-bearing securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Liquidity and Capital Resources."
Dividend Policy
To date, the Company has not paid any cash dividends on its Common Stock. The
Company currently intends to retain future earnings for use in its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. The payment of future dividends, if any, will depend, among other
things, on the Company's results of operations and financial condition and on
such other factors as the Company's Board of Directors may, in its discretion,
consider relevant.
19
<PAGE>
Capitalization
The following table sets forth the total capitalization of the Company as of
June 30, 1996, and as adjusted to reflect the sale of 2,158,000 shares of Common
Stock by the Company pursuant to the Offering and the application of the
estimated net proceeds of approximately $10,346,500 therefrom. This table
should be read in conjunction with the Consolidated Financial Statements and
related notes thereto and other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
------------------------
As of June 30, 1996
Actual As Adjusted
----------- -----------
Dollars in thousands (Unaudited)
<S> <C> <C>
Long-term debt, including current portion.............. $ 342 $ 342
Stockholders' equity:
Preferred Stock, no par value; 10,000,000 shares
authorized and no shares issued.................. -- --
Common stock, no par value; 50,000,000 shares
authorized, and 8,405,755 and 10,563,755
(as adjusted) shares issued...................... 84 106
Additional paid-in capital.......................... 6,019 16,344
Retained earnings................................... 538 538
Notes due on common stock purchases................. (652) (652)
------ -------
Total stockholders' equity.......................... 5,989 16,336
------ -------
Total capitalization................................ $6,331 $16,678
====== =======
</TABLE>
20
<PAGE>
Dilution
The net tangible book value of the Company as of June 30, 1996 was approximately
$5,609,000 or $.67 per share of Common Stock. Net tangible book value per share
of Common Stock represents the amount of the Company's tangible assets less its
total liabilities, divided by the total number of shares of Common Stock
outstanding. Without taking into account any changes in net tangible book value
after June 30, 1996, other than to give effect to the items described in Note 1
appearing immediately below the following table, the pro forma net tangible book
value of the Company as of June 30, 1996 would have been approximately
$15,955,500 or $1.51 per share. This represents an immediate increase in such
pro forma net tangible book value of $.84 per share to existing stockholders and
an immediate dilution of $3.99 per share to investors purchasing Common Stock at
the Exercise Price in the Offering. New stockholders that acquire Common Stock
from the Underwriters at a price greater than the Exercise Price will experience
greater dilution. The following table illustrates this per share dilution in
net tangible book value:
<TABLE>
<S> <C> <C>
Exercise Price.................................................. $5.50
Net tangible book value per share as of June 30, 1996......... $.67
Increase per share attributable to new stockholders(1)........ .84
Pro forma net tangible book value per share as of ----
June 30, 1996................................................. 1.51
-----
Dilution per share to new stockholders.......................... $3.99
=====
</TABLE>
- ------------------------
(1) Reflects the sale by the Company of 2,158,000 shares of Common Stock and
the receipt of approximately $10,346,500 in net proceeds from the Offering after
deducting the maximum Total Underwriting Discount with respect to such shares of
approximately $797,500 and estimated offering expenses of $725,000 (including
$125,000 representing the maximum applicable non-accountable expense allowance
to the Underwriters).
The following table sets forth, on an adjusted basis as of June 30, 1996, the
number of shares of Common Stock issued by the Company, the total consideration
paid and the average price per share paid upon original issuance to stockholders
prior to the Offering and by new investors before deducting the Underwriters'
compensation and estimated offering expenses:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
Shares Purchased(1) Total Consideration
-------------------------- ---------------------------
Average Price
Number Percentage Amount Percentage Per Share
---------- -------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 8,405,755 79.6% $ 6,046,000 33.7% $ .72
New stockholders........ 2,158,000 20.4 11,869,000 66.3 $5.50
---------- ------ ----------- ------
Total............... 10,563,755 100.0% $17,915,000 100.0%
========== ====== =========== ======
</TABLE>
- ------------------------
(1) Sales by the Selling Stockholders in the Offering will cause the number of
shares held by existing stockholders to be reduced to approximately 7,382,255
shares or 69.9% of the total shares of Common Stock to be outstanding after the
Offering, and will increase the number of shares held by new investors to
approximately 3,181,500 shares, or 30.1% of the total shares of Common Stock to
be outstanding after the Offering. See "Principal and Selling Stockholders."
The foregoing tables assume no exercise of outstanding options or warrants. As
of June 30, 1996, there were outstanding (i) options to purchase an aggregate of
873,011 shares of Common Stock (of which 495,875 were exercisable at June 30,
1996) at a weighted average exercise price of $2.41 per share and (ii) warrants
to purchase an aggregate of 360,000 shares of Common Stock at an exercise price
of $1.39 per share. As of June 30, 1996, the Company had an additional
1,343,364 shares of Common Stock available for future grants and other issuances
under its 1995 Equity Compensation Plan. See "Management--1995 Equity
Compensation Plan" and Note 8 to the Consolidated Financial Statements appearing
elsewhere in this Prospectus.
21
<PAGE>
Selected Consolidated Financial Data
The selected consolidated financial data presented below as of December 31,
1992, 1993, 1994 and 1995 and for the four-year period ended December 31, 1995
have been derived from the Company's audited consolidated financial statements.
In management's opinion, the Company's unaudited consolidated financial
statements as of December 31, 1991 and for the year then ended and as of June
30, 1995 and 1996 and for the six months then ended include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation. Consolidated operating results for the six months ended June 30,
1996 are not necessarily indicative of the results that may be expected for the
entire year. The data presented below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements and the notes thereto and
other financial information appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
---------------------------------------------------------- ----------------------
Six Months Ended
Year Ended December 31, June 30,
1991 1992 1993 1994 1995 1995 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
In thousands, except per share data (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues:
Software license fees............... $ 4,365 $ 3,755 $ 2,184 $ 6,111 $ 6,532 $2,155 $ 3,694
Product enhancement fees............ 620 2,131 2,045 1,564 1,797 772 427
Implementation and consulting
services............................ 1,990 3,394 3,729 4,347 4,496 2,141 2,045
Software maintenance fees........... 2,424 2,601 3,359 3,494 4,017 2,196 2,084
------- ------- ------- ------- ------- ------ -------
Total revenues................... 9,399 11,881 11,317 15,516 16,842 7,264 8,250
Operating expenses:
Product development................. 2,565 3,369 2,991 3,805 3,300 1,675 1,851
Product support..................... 1,597 1,923 2,509 2,315 2,515 1,345 1,443
Implementation and consulting....... 1,322 2,434 2,436 2,678 3,176 1,642 1,341
Sales and marketing................. 1,377 1,630 993 1,282 2,080 913 1,404
Royalties and sublicense fees....... 320 587 331 1,477 1,331 393 1,013
General and administrative.......... 1,538 1,579 1,511 1,885 1,824 998 705
------- ------- ------- ------- ------- ------ -------
Total operating expenses.............. 8,719 11,522 10,771 13,442 14,226 6,966 7,757
------- ------- ------- ------- ------- ------ -------
Income from operations................ 680 359 546 2,074 2,616 298 493
Interest income (expense), net........ (111) (2) (28) 6 93 47 146
------- ------- ------- ------- ------- ------ -------
Income before income taxes............ 569 357 518 2,080 2,709 345 639
Income tax provision (benefit)........ 27 25 55 (958) 1,122 138 262
------- ------- ------- ------- ------- ------ -------
Net income............................ $ 542 $ 332 $ 463 $ 3,038 $ 1,587 $ 207 $ 377
======= ======= ======= ======= ======= ====== =======
Net income per common share........... $.06 $.04 $.05 $.33 $.17 $.02 $.04
Weighted average number of shares
outstanding....................... 8,976 8,916 9,056 9,272 9,576 9,557 9,220
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------- ----------------------
As of December 31, As of June 30,
1991 1992 1993 1994 1995 1995 1996
----------- ---------- ---------- ---------- --------- ---------- -----------
(Unaudited) (Unaudited)
In thousands
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............. $ 1,007 $ 257 $ 365 $ 2,656 $ 5,546 $1,592 $4,731
Working capital....................... (1,282) (1,298) (320) 2,318 4,751 2,446 5,098
Total assets.......................... 3,622 3,868 3,593 8,530 12,147 7,726 12,596
Long-term debt, including current
portion.............................. 234 179 174 242 341 430 342
Total stockholders' equity............ (21) 284 747 3,785 5,605 4,043 5,989
</TABLE>
22
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following information should be read in connection with the information
contained in the Consolidated Financial Statements and notes thereto appearing
elsewhere in this Prospectus.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
Overview
The Company designs, develops, markets, implements and supports comprehensive
banking software, called PROFILE, for financial services organizations
worldwide. Sanchez's highly flexible PROFILE family of products is comprised of
three integrated modules which operate on open, client-server platforms. The
primary module, called PROFILE/Anyware, is a multi-currency bank production
system which supports deposit, loan, customer, transaction processing and bank
management requirements through multiple distribution channels, including the
Internet. The other modules are PROFILE/FMS, a multi-company, multi-currency,
financial management and accounting system, and PROFILE/ITS, a system that
processes treasury transactions including foreign exchange, money market,
securities trading (capital markets), futures, options and trade finance. The
PROFILE system is currently licensed to 23 clients in nine countries serving
more than 400 financial institutions.
Founded in 1979, the Company initially generated all of its revenue from U.S.
based financial institutions. In the early 1990s, the Company identified two
niches: the Canadian Credit Union marketplace and the Emerging Banking Market
in Central Europe. For the three year period ended December 31, 1995, 54% of
the Company's revenues were generated from these two markets, although in 1995,
when 62% of the Company's revenue was generated from these two markets, 51% was
from Central Europe and only 11% was from Canada. The Company anticipates that
a significant portion of its revenues in the future will be derived from the
Emerging Banking Market and the Direct Banking Market (see "Business--Industry
Overview" for descriptions of these markets). For more information about the
Company's revenues from foreign operations, see Note 4 to the Consolidated
Financial Statements.
The Company prices its software products in three primary components: (i)
license fees for PROFILE software products and from the licensing and delivery
of software of third party vendors; (ii) fees for a full range of services
which complement its software products, including product enhancement fees and
implementation, consulting, conversion, training and installation services; and
(iii) support and maintenance revenue. License, product enhancement,
implementation, consulting, conversion, training and installation fees are paid
in stages upon the completion by the Company of certain defined deliverables.
The client implementation projects generally take from ten to 15 months to
complete. The Company recognizes revenue from these fees using the percentage-
of-completion contract accounting method and recognizes revenue from maintenance
contracts ratably over the periods covered. For the three year period ended
December 31, 1995, license fees accounted for 34% of total revenues. If the
Company's strategies related to the Direct Banking Market are successful, it is
anticipated that the license fee component of total revenue will increase.
The Company's backlog at June 30, 1996 amounted to $23.2 million. The
components of the backlog were $11.1 million for software license, product
enhancement and implementation and consulting revenues and $12.1 million for
maintenance and support. The Company anticipates recognizing approximately $8.0
million of this backlog in the second half of 1996 and $9.5 million in the year
1997. At June 30, 1995, the Company's backlog amounted to $15.8 million,
consisting of $7.2 million for software license, product enhancement and
implementation and consulting revenues and $8.6 million for maintenance and
support.
23
<PAGE>
Historically, the Company's revenues were dependent upon opportunities developed
by its first hardware manufacturing partner, Digital, and by the Company 's
direct marketing efforts. Since the beginning of 1995, the Company has
established marketing agreements with IBM, Hewlett-Packard, Oracle, and most
recently, Price Waterhouse and a subsidiary of Security First Network Bank.
Although substantially all of the Company's revenue to date has been generated
in conjunction with systems running on Digital platforms, the Company is
currently in several bids with Hewlett-Packard and anticipates identifying
opportunities with all of its partners going forward. In addition, the Company
has been investing additional resources to enhance its own direct marketing
efforts.
The Company has historically experienced a certain degree of variability in its
quarterly revenue and earnings patterns. This variability is typically driven by
significant events which directly impact the recognition of project related
revenues. Examples of such events include the timing of new business contract
closings and the initiation of license and service fee revenue recognition (see
"Risk Factors--Concentration and Mix of Revenues"), "one-time" payments from
existing clients for license expansion rights (required to process a greater
number of customer accounts or expand the number of permitted users), and
completion of a significant implementation project roll out and the related
revenue recognition. Fluctuations in the timing and amounts of additional sales
and marketing and general and administrative expenses may also cause
profitability to fluctuate somewhat from one quarter to another.
The Company made a strategic decision in early 1996 to increase its investment
in technology and product development, in particular as it relates to
PROFILE/Anyware, as well as certain other projects such as the development of
its graphical user interface (GUI) client and the completion of the adaptation,
or "porting," of the Company's software to operate on different computer
systems. In addition, the Company decided to increase its investment in sales
and marketing activities, partially due to the implementation of the
PROFILE/Anyware strategy, but also as part of a focused effort to increase its
direct sales efforts in both the Emerging Banking Market and Direct Banking
Market. As indicated below, expenses in these categories increased in the six
month period ended June 30, 1996 when compared to the similar period in 1995.
Management anticipates that net income in both the third and fourth quarters of
1996 will be less than or equal to the comparable quarters in 1995 due to the
following reasons: (i) the increased expenses, described above, which the
Company believes will enhance its future growth potential; (ii) the timing of
the start of new contracts currently being pursued; and (iii) the fourth quarter
of 1995 included one-time contract settlement totaling approximately $625,000.
24
<PAGE>
Results of Operations
The following table sets forth for the periods indicated selected statements of
operations data:
<TABLE>
<CAPTION>
-------------------------------------------- -----------------------
Six months ended
Year Ended December 31, June 30,
Dollars in thousands 1993 1994 1995 1995 1996
-------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
Revenues
Software license fees.................... $ 2,184 $ 6,111 $ 6,532 $2,155 $3,694
Product enhancement fees................. 2,045 1,564 1,797 772 427
Implementation and consulting services... 3,729 4,347 4,496 2,141 2,045
Software maintenance fees................ 3,359 3,494 4,017 2,196 2,084
------- ------- ------- ------ ------
Total revenues........................ $11,317 $15,516 $16,842 $7,264 $8,250
======= ======= ======= ====== ======
Percentage Relationship to Total Revenues
Revenues
Software license fees.................... 19.3% 39.4% 38.8% 29.7% 44.8%
Product enhancement fees................. 18.1 10.1 10.7 10.6 5.2
Implementation and consulting services... 32.9 28.0 26.7 29.5 24.8
Software maintenance fees................ 29.7 22.5 23.8 30.2 25.2
------- ------- ------- ------ ------
Total revenues........................ 100.0 100.0 100.0 100.0 100.0
Operating expenses
Product development..................... 26.4 24.5 19.6 23.1 22.4
Product support......................... 22.2 14.9 14.9 18.5 17.5
Implementation and consulting........... 21.5 17.3 18.9 22.6 16.3
Sales and marketing..................... 8.8 8.3 12.4 12.6 17.0
Royalties and sublicense fees........... 2.9 9.5 7.9 5.4 12.3
General and administrative.............. 13.4 12.1 10.8 13.7 8.5
------- ------- ------- ------ ------
Total operating expenses.............. 95.2 86.6 84.5 95.9 94.0
------- ------- ------- ------ ------
Income from operations..................... 4.8 13.4 15.5 4.1 6.0
Interest income (expense), net............. (.2) -- .6 .6 1.8
------- ------- ------- ------ ------
Income before income taxes................. 4.6 13.4 16.1 4.7 7.8
Income tax provision (benefit)............. .5 (6.2) 6.7 1.9 3.2
------- ------- ------- ------ ------
Net income................................. 4.1% 19.6% 9.4% 2.8% 4.6%
======= ======= ======= ====== ======
</TABLE>
25
<PAGE>
Six months ended June 30, 1996 compared to six months ended June 30, 1995
Revenues. Revenues increased $986,000, or 13.6%, in the six month period ended
June 30, 1996 primarily due to an increase in software license fees of $1.5
million. The most significant contributor to this increase was a license fee
expansion earned from one of the Company's key European customers. Partially
offsetting this increase was a $345,000 decline in product enhancement fees, due
primarily to a higher level of funded technology development in 1995. Also
offsetting this increase was a slight decline in software maintenance fees due
to the inclusion in 1995 of a one-time settlement of $300,000 related to the
termination of a client support contract.
Product development. Product development expenses consist of costs incurred for
both funded and unfunded product development and enhancement activities. These
expenses increased $176,000, or 10.5%, in the six month period ended June 30,
1996, due to the strategic decision to increase investment in development for
various technology projects, including the development of the Company's GUI
client, the porting of its software to additional platforms and enhancements to
PROFILE/Anyware. Due primarily to the higher revenue level in the first half of
1996, the expense relationship to revenues declined slightly when compared to
the first half of 1995.
Product support. Product support expenses increased $98,000, or 7.3%, in the
six months ended June 30, 1996, primarily due to costs related to the Company's
European support offices.
Implementation and consulting. Implementation and consulting expenses declined
$301,000 or 18.3%, in the six months ended June 30, 1996, in conjunction with
the decline in related revenues. The percent relationship to related revenues
declined in 1996 to 65.6%, from 76.7% in 1995 due to a lower utilization of
more expensive third party consultants to deliver a portion of the services in
1996. The percent relationship to total revenues declined to 16.3% from 22.6%
in the 1995 period due to the lower expenses and the increased software license
fees as discussed above.
Sales and marketing. Sales and marketing expenses increased $491,000, or 53.8%,
in the 1996 period, due to the Company's continuing increased investment in this
area during 1996. The Company has historically relied primarily on Digital to
generate its client prospects. Although the Company will continue to rely on
Digital, as well as its new partners, the Company believes it is important for
it to increase its direct sales efforts. Additionally, sales and marketing
expenses increased due to the promotional and advertising campaign related to
PROFILE/Anyware. As a result, sales and marketing expense as a percent of
revenues increased to 17.0% from 12.6% in the 1995 period.
Royalties and sublicense fees. The Company is obligated to pay royalties to
Digital and to certain clients based on the collection of certain license fees.
These obligations have varying expiration terms. The Company also is obligated
to pay sublicense and maintenance fees to certain third party licensors,
primarily related to its PROFILE/ITS product and also for the M programming
language and data base. These amounts will depend on the applicable revenue
components subject to such fees. For the six months ended June 30, 1996, this
expense category increased $620,000, primarily due to an increase of $462,000 in
third party license fees due to higher third party license revenue.
General and administrative. These expenses declined $293,000, or 29.4%, due
primarily to the absence of costs associated with two executives, the former Co-
President and former Managing Director of Europe, both of whom resigned in late
1995. The Company did not replace the Co-President, but did replace the
Managing Director of Europe in May 1996.
Interest income (expense), net. Interest income (expense), net increased
$99,000 due to income earned on higher invested cash balances.
1995 Compared to 1994
Revenues. The Company's revenues increased 8.5% to $16.8 million in 1995, as
each revenue category improved over the prior year. Software license fees
increased 6.9% due primarily to a one-time payment of approximately $625,000
from a customer in conjunction with a contract termination settlement due to a
decision by this customer's management to restructure its business by
terminating its retail banking business. Product enhancement fees increased
14.9% due
26
<PAGE>
primarily to increased product enhancement work generated from the Company's
first client in Poland. Maintenance fees increased $523,000, or 15.0%, due to
the revenues generated from the increasing client base.
Product development. These costs in 1995 declined $505,000, or 13.3%, when
compared to 1994, primarily due to a reduced utilization of higher priced third
party consultants.
Product support. These costs increased $200,000, or 8.6%, in 1995, when
compared to 1994, as the Company increased its investment in this area to
support a larger customer base.
Implementation and consulting. Implementation and consulting costs increased
$498,000 or 18.6% in 1995, primarily due to a higher utilization of more
expensive third party consultants and additional staffing required to support
the higher level of revenue. The percentage relationship to the related
revenues increased in 1995 to 70.6% when compared to 61.6% in 1994 due primarily
to the utilization of higher price consultants.
Sales and marketing. Sales and marketing costs increased 62.2%, or $798,000,
as the Company increased its direct coverage in this area. This strategy is
further evidenced by the increase in sales and marketing expense from 8.3% of
revenues in 1994 to 12.4% in 1995.
Royalties and sublicense fees. During 1995, these fees declined $146,000, or
9.9%, due to lower third party sublicense fees. Royalty expense approximated
$760,000 for both 1994 and 1995. The decline in the percent relationships to
revenues from 9.5% in 1994 to 7.9% in 1995 was due to an increase in revenues in
1995 not subject to royalties.
General and administrative. These expenses declined 3.2% in 1995 when compared
to 1994, partially due to more direct involvement in sales and marketing
activities of personnel normally classified in this expense category and the
absence of year end bonuses in 1995. Similarly, general and administrative
expenses, as a percentage of sales, declined from 12.1% to 10.8% in 1995.
Interest income (expense), net. Interest income (expense), net increased
$87,000 in 1995, due primarily to interest earned on higher average invested
cash balances resulting from increasing cash flows from operations over the past
two years.
Income tax provision (benefit). Taxes in 1995 were 41.4% of income before
income taxes, when compared to a net recovery recognized in 1994. At December
31, 1994, it was determined that the Company's financial performance and
contract backlog had improved to such a degree that it was more likely than not
that the Company's previously recognized net operating losses and credits would
be available to offset future income. Therefore, the net recovery of $958,000
was recognized in 1994 as a result of the elimination of the net operating loss
valuation reserves previously established.
1994 Compared to 1993
Revenues. The Company's revenues increased 37.1% to $15.5 million in 1994 from
$11.3 million in 1993. This increase was due primarily to increased license
fees, as two large European banks chose PROFILE. Implementation and consulting
revenue increased $618,000, or 16.6%, due to services delivered in conjunction
with the previously mentioned new European clients. Partially offsetting these
increases was a $481,000, or 23.5%, decline in product enhancement revenue, due
to extensive 1993 enhancement fees for the Canadian marketplace coupled with
significant post-conversion development provided to the Company's first Central
European client throughout most of 1993.
Product development. Product development costs increased $814,000, or 27.2%, in
1994 when compared to 1993 due to increased staffing related to the
establishment of the Company's Product Management Group and also increased
consultant utilization related to the Company's new treasury product
(PROFILE/ITS) offering. Even though these expenses increased substantially on
an actual dollar basis, the expense relationship to revenues declined from 26.4%
to 24.5% primarily due to the 37.1% increase in revenues in 1994.
27
<PAGE>
Product support. Product support expenses declined $194,000, or 7.7%,
in 1994 when compared to 1993 primarily due to the phasing out of two
older product lines which had been acquired in 1989.
Implementation and consulting. The percentage relationship to the
related revenues declined from 65.3% in 1993 to 61.6% in 1994, even
though overall expenses increased $242,000, or 9.9%. This improved
percentage relationship was primarily attributable to more profitable
implementation projects in progress in 1994 versus 1993. These
increased expenses were primarily attributed to a higher utilization
of more expensive third party contractors in 1994. The decline in the
percentage relationship to total revenues was primarily attributable
to the $3.9 million increase in the software license fee revenue.
Sales and marketing. Sales and marketing expenses increased
$289,000, or 29.1%, in 1994, as the Company began to implement its
strategy of increasing its direct marketing costs. In addition,
commission expenses increased $60,000 due to the higher revenue
levels in 1994.
Royalty and sublicense fees. These fees increased $1.1 million in
1994, due primarily to the significant increase in royalty fees
incurred related to the increase in related license fee revenue
earned in 1994. Most of the license fee revenue earned in 1993 was
not subject to royalties.
General and administrative. These expenses increased $374,000, or
24.8%, in 1994, primarily due to the addition of two individuals in
the executive area to support the anticipated revenue growth in 1994
as well as the activities related to this improvement. The percent
relationship to revenue, however, declined slightly due to the
increase in revenues far exceeding the level of expense increase.
Quarterly Financial Results
Set forth below are selected unaudited statements of operations data
for the last ten fiscal quarters of the Company. In management's
opinion, the results below have been prepared on the same basis as
the audited financial statements contained herein and include all
material adjustments, consisting only of normal recurring adjustments
necessary for a fair presentation of the information for the periods
when read in conjunction with the Consolidated Financial Statements
and notes thereto contained elsewhere in this Prospectus.
Unaudited Quarterly Statements of Operations
<TABLE> <CAPTION>
--------------------------------------------- ---------------------------------------- ---------------------
1994 Quarter Ended 1995 Quarter Ended 1996 Quarter Ended
In thousands, except per Mar 31 June 30 Sept 30 Dec 31 Mar 31 June 30 Sept 30 Dec 31 Mar 31 June 30
share data ------- ------- ------- ------- ------- -------- ------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $3,051 $3,408 $4,311 $4,746 $3,829 $3,435 $4,338 $5,240 $3,477 $4,773
Income before income taxes 196 352 526 1,006 321 24 460 1,904 31 608
Net income 174 317 449 2,098 192 $ 15 272 1,108 $ 19 358
Net income per share $ 0.02 $ 0.03 $ 0.05 $ 0.22 $ 0.02 -- $ 0.03 $ 0.12 -- $ 0.04
Weighted average number of
shares outstanding 9,055 9,361 9,355 9,381 9,505 9,627 9,624 9,585 9,261 9,166
</TABLE>
The Company believes that its business is generally not seasonal;
however, the Company has historically experienced a certain degree of
variability in its quarterly revenue and earnings patterns. This
variability is typically driven by significant events which directly
impact the recognition of project related revenues. Examples of such
events include the timing of new business contract closings and the
initiation of license and service fee revenue recognition (see "Risk
Factors--Concentration and Mix of Revenues"), "one-time" payments
from existing clients relative to license expansion rights (required
to process a greater number of customer accounts or expand the number
of permitted users), and completion of a significant implementation
project roll out and the related revenue recognition. Certain of
these same factors may also cause fluctuations in terms of personnel
utilization rates as well, thereby impacting the timing and amount of
certain service fee revenues. Fluctuations in the timing and amounts
of additional sales and marketing and general and administrative
expenses may also cause profitability to fluctuate somewhat from one
quarter to another.
28
<PAGE>
Results of operations for any previous fiscal quarter are not necessarily
indicative of results for any future periods, and future quarterly results could
be adversely impacted by these, and other, factors. In addition, net income per
share calculations for each of the Company's quarters are based on the weighted
average number of shares outstanding in each quarter. Accordingly, the sum of
the net income per share for each of the quarters in a fiscal year may not equal
the actual year-to-date net income per share.
Liquidity and Capital Resources
Cash and cash equivalents were $2.7 million at December 31, 1994, $5.5 million
at December 31, 1995 and $4.7 million at June 30, 1996. Cash flow from (used
in) operations was $2.9 million in 1994, $3.2 million in 1995, and $(522,000) in
the six-month period ended June 30, 1996. The increase in 1994 and 1995 was
attributable to profitable operations and the timing of cash collections. The
negative cash flow in the 1996 period was primarily caused by the $1.4 million
increase in accounts receivable, which was related to the timing of milestone
payments and a license expansion fee billed and recognized late in the second
quarter of 1996.
The Company's business is not capital intensive and capital asset expenditures
in any given year normally are not significant. Capital expenditures amounted
to $376,000 in 1994, $458,000 in 1995 and $200,000 for the six months ended June
30, 1996. These expenditures consisted primarily of personal computers and
upgrades to the Company's network systems. The Company has financed these
additions through a combination of funds provided by a $500,000 fixed asset line
of credit ($206,000 available at June 30, 1996), a $148,000 lease purchase and
internally generated funds.
In March 1995, the Company offered its employees an opportunity to exercise
vested options granted prior to December 31, 1993 by remitting a minimum of 5%
of the exercise price in cash, with the remaining obligation due pursuant to a
ten-year note. Such notes require annual interest payments calculated at 7.75%
plus a 10% annual principal payment. In March 1996, the Company deferred the
first principal payment on the notes, but did collect interest due. The
remaining note obligations, totaling $652,000 at June 30, 1996, are reflected as
a reduction in equity. The Company has collected $234,000 in principal payments
through June 30, 1996 pursuant to this program. The notes have a provision
requiring a balloon payment to cover any amounts outstanding two years after the
consummation of the Company's initial public offering.
The Company may expand its capabilities through the acquisition of other
businesses that are complementary to the Company's business. A portion of the
net proceeds from the Offering may be used in the future for such acquisitions,
although the Company is not currently engaged in active discussions with respect
to any acquisition. See "Use of Proceeds".
The Company currently anticipates that the net proceeds received by the Company
from the Offering, together with cash generated from operations and existing
cash balances will be sufficient to satisfy its operating cash needs for the
foreseeable future and at a minimum through 1997. Should the Company's business
expand more rapidly than expected, the Company believes that additional bank
credit would be available to fund such operating and capital requirements. In
addition, the Company could consider seeking additional public or private debt
or equity financing to fund future growth opportunities.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), was issued in October 1995. SFAS 123 gives companies
the option to adopt the fair value method for expense recognition of employee
stock options and stock based awards or to continue to account for such items
using the intrinsic value method as outlined under Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), with pro
forma disclosures of net income and net income per share as if the fair value
method had been applied. The Company has adopted SFAS 123 effective January 1,
1996 by electing to continue to apply APB 25 for future stock options and stock
based awards, and, accordingly, does not anticipate that SFAS 123 will have a
material impact on its results of operations or financial position. In
accordance with the disclosure provisions of SFAS 123, the Company will
initially present the disclosure required by SFAS 123 in its financial
statements as of and for the periods ending December 31, 1996.
29
<PAGE>
Business
Sanchez Computer Associates, Inc. ("Sanchez" or the "Company") designs,
develops, markets, implements and supports comprehensive banking software,
called PROFILE(R) ("PROFILE"), for financial services organizations worldwide.
Sanchez's highly flexible PROFILE family of products is comprised of three
integrated modules which operate on open, client-server platforms. The primary
module, called PROFILE/Anyware, is a multi-currency bank production system which
supports deposit, loan, customer, transaction processing and bank management
requirements through multiple distribution channels, including the Internet.
The other modules are PROFILE/FMS, a multi-company, multi-currency, financial
management and accounting system, and PROFILE/ITS, a system that processes
treasury transactions including foreign exchange, money market, securities
trading (capital markets), futures, options and trade finance. The PROFILE
system is currently licensed to 23 clients in nine countries serving more than
400 financial institutions. Historically, the Company has focused its marketing
efforts in Central Europe and North America. Currently, the Company is targeting
two market segments, the Emerging Banking Market in which the Company seeks to
expand on its existing successes and increase its market share, and the Direct
Banking Market in which the Company is seeking to establish itself as a
significant participant.
Financial services organizations in the Emerging Banking Market can generally be
characterized as being located in areas with growing consumer banking bases,
often with a large number of branches and little enterprise-wide automation.
Sanchez, through the implementation of its PROFILE products, provides these
organizations with a fully automated system which addresses all core areas of
their data processing requirements, including head office operations, domestic
and international payments, new product introduction, customer analysis,
budgeting and forecasting, branch automation, treasury, trade finance and
deposit and loan processing. The PROFILE products have the ability to adapt to
diverse accounting, operational and regulatory environments and have the
flexibility to support a broad spectrum of banking products and services.
Because the PROFILE products are scalable, they can be implemented within an
infrastructure that supports an organization's current operational requirements
and thereafter be incrementally expanded as the client's operational
requirements increase. Since 1991, the Company has principally targeted banks
in Central Europe and Canada; and, in 1996, the Company expanded its marketing
efforts to include financial services organizations located in the Asian-Pacific
Rim.
Since 1987, the Company has maintained a series of strategic alliance agreements
with Digital Equipment Corporation ("Digital") and has marketed its products
principally through leads generated by the Digital sales force. In 1995, the
Company entered into an agreement with Hewlett-Packard Company ("Hewlett-
Packard") and ported its software to Hewlett-Packard's HP-UX platform. Also in
1995, the Company entered into an agreement with Oracle Corporation ("Oracle")
to port the PROFILE products to the Oracle database. These porting activities
are currently under way. In mid-1996, the Company entered into an agreement
with International Business Machines Corporation ("IBM") and ported its software
to IBM's AIX platform. The Company markets PROFILE products through alliances
with all four of these vendors as well as its own enhanced direct sales force.
The Company intends to expand its business into the Direct Banking Market. The
Company defines the Direct Banking Market as the on-line retail banking business
conducted via alternate distribution channels by large financial services
institutions located throughout the world. The Company believes that these
organizations recognize that the emergence of electronic commerce, together with
the availability and acceptance of computer technology, will ultimately cause a
dramatic change in the consumer banking practices of many of their customers.
The Company predicts that the growth of electronic commerce will result in a
large increase in the volume of financial transactions which occur on-line as
well as a greater demand for customized products and services. Because of these
factors, in early 1996, the Company determined that a significant opportunity
exists for it in the Direct Banking Market and it has subsequently committed
substantial human and financial resources to position itself in that market.
The Company believes that the capabilities already contained in the PROFILE
product line, along with specific enhancements that it has identified, will
provide financial services organizations with the technology to strategically
respond to this consumer banking evolution.
30
<PAGE>
The Company has recently engaged the electronic banking division of Price
Waterhouse LLP ("Price Waterhouse") to assist the Company in jointly defining
and developing future enhancements to PROFILE/Anyware for the Direct Banking
Market. In connection with this engagement, Price Waterhouse and the Company
are conducting joint marketing activities, including Price Waterhouse's
introduction of the Company to prospective clients. In addition, the Company is
engaged in discussions with Five Paces Software, a wholly owned subsidiary of
Security First Network Bank, for the purpose of integrating their banking
software with PROFILE/Anyware. The Company also anticipates forming alliances
with other complimentary service organizations in the areas of home banking
interface, network security and other consumer-based financial applications.
The Company believes that these alliances, along with the alliances mentioned in
the previous paragraphs, will facilitate its entrance into the Direct Banking
Market.
Revenues and income from operations have grown consistently since 1993 and in
the six months ended June 30, 1996. In particular, revenues increased by 13.6%
to $8.3 million for the six months ended June 30, 1996 from the same prior year
period and by 8.5% to $16.8 million from 1994 to 1995. The Company's income
from operations increased to $493,000 for the six months ended June 30, 1996
from the same prior year period and by 26.1% to $2.6 million from 1994 to 1995.
To date, the Company has not recognized any revenue as a result of its
activities in the Direct Banking Market.
Industry Overview
Emerging Banking Markets
Banks which comprise the Emerging Banking Market are generally located within
countries or regions which have experienced dramatic political, social and/or
economic changes during the past decade such as Central Europe, Russia, the
Asian-Pacific Rim, Mexico and Latin America. Many of these nations have also
aggressively embraced the privatization of industry, resulting in greater wealth
held by private citizens. As a result of such developments, financial services
organizations within the Emerging Banking Market have experienced large
increases in the demand for retail banking products. Financial services
organizations in the Emerging Banking Market, however, face significant
infrastructure impediments to meeting this increased demand. While these
organizations have often established extensive branch networks, these branches
normally operate as autonomous business units. Typically, selected customer and
transaction data are exchanged with the main office infrequently. The lack of
enterprise level integration has constrained the development and deployment of
sophisticated financial products and services, disabled the efficient
utilization of resources, and prevented bank management from acquiring
management information on a timely basis.
For these reasons, financial services organizations in the Emerging Banking
Market are faced with the necessity of modernizing their entire information and
processing infrastructure. In response, they have demonstrated a willingness to
invest in a centralized enterprise-server based solution. One of the principal
advantages of the technology contained in the Company's PROFILE/Anyware product
is that it provides on-line access to up-to-date customer and balance sheet data
throughout the organization. The Company also believes that an on-line
enterprise-wide database is a requirement for electronic delivery channels such
as Automated Teller Machine (ATM) networks, Point of Sale (POS) networks, and
home banking, which are rapidly being introduced into these markets.
The global market for international retail production banking solutions, which
encompasses the Emerging Banking Market, is so diverse and fragmented that
reliable market figures are not available. However, The Tower Group, a leading
financial industry research organization, estimates that, at any time, 950 bank
production system selections are being contemplated within the international
retail banking systems market, and it believes that number will increase about
6% per year as more banks in developing countries seek to modernize.
Direct Banking Market
The Company believes that the competitive challenges presented by the emergence
of electronic commerce and the consumer demand for greater product and service
flexibility threaten to fundamentally alter traditional retail banking practices
in North America. The Company believes that this process will be further
spurred as the speed and
31
<PAGE>
commercial use of the Internet increases with the development and deployment of
higher bandwidth communication (the ability to transmit more information in a
shorter time). Furthermore, expanded Internet access through a myriad of
affordable devices (such as personal computers, Internet access terminals,
televisions and personal digital assistants) will also contribute to greater use
of the Internet. As a result, consumers will be more easily and effectively
able to search for the most attractive financial products and services thereby
reducing the relationship value provided by banks and further increasing the
commodity nature of their products. The Company believes those consumers who
are likely to utilize electronic commerce in this fashion comprise a significant
percentage of a typical organization's highly profitable customers.
In response to these market challenges, financial services organizations within
the Direct Banking Market have begun to develop direct banking services by
offering a subset of their existing products and services through electronic
channels. Services currently provided include the ability to transfer funds, pay
bills, obtain account balances and track checks and deposits via personal
computer. The ability of these organizations to offer more innovative products
and services, however, is considerably constrained by their current information
technology systems. These systems, called production or transaction processing
systems, typically consist of large mainframe computers that are based on
software technology initially developed in the 1970s. Organizations in the
Direct Banking Market are dependent upon this technology and have made enormous
investments in it and the infrastructure required to support it. For these
reasons, they have historically resisted the wholesale replacements of these
legacy systems. Rather, they have chosen to surround these systems on the front
end with modern user interfaces and on the back end with data warehouse and
executive information applications.
The Company, however, believes that these efforts will not provide these
organizations with the necessary infrastructure to create the innovative
products and services required to preserve and expand market share. It also
believes that the current delivery cost structure of these organizations will
impair their ability to competitively price products. Due to the unique product
tailoring capability and delivery channel independence of the PROFILE/Anyware
products, the Company believes that it is positioned to supply the next
generation of infrastructure to these organizations.
Within the global Direct Banking Market, the Company has initially targeted
financial services institutions in the U.S. and Canada with assets of $4 billion
or more. This targeted group includes the top 100 banks in the U.S. and
approximately the top ten banks in Canada. After it achieves initial success
within the targeted groups, the Company intends to broaden its market scope both
internationally and to smaller institutions.
The Sanchez Strategy
The Company believes its most promising opportunities for growth lie in
increasing market share in the Emerging Banking Market, broadening its scope of
services in the Emerging Banking Market, and positioning itself as one of the
first production system entries in the new Direct Banking Market. The Company
plans to pursue these objectives through the following strategic activities.
Increase Market Share in the Emerging Banking Market
The Company intends to expand its presence in the Emerging Banking Market,
principally by increasing its marketing activities in Central Europe and the
Asian-Pacific Rim. The Company believes that the marketing efforts of the
Company's strategic partners, such as Hewlett-Packard, IBM and Digital, will
result in the generation of additional sales leads for the Company in this
market. In addition, the Company plans to increase its own direct marketing
efforts and has recently opened offices in Prague, Warsaw and Jakarta.
32
<PAGE>
Broaden the Scope of Services provided in the Emerging Banking Market
The Company believes that the reception its products and services have received
in the Emerging Banking Market, particularly in Central Europe, provides the
opportunity to expand the scope of services which the Company provides to
organizations in this market. Accordingly, the Company intends to market
additional services and products to these organizations, including more
expansive consulting services, credit bureau services, technology infrastructure
planning, and systems integration.
Become a Significant Participant in the Direct Banking Market
The Company intends to become a significant participant in the Direct Banking
Market by marketing its PROFILE family of products as a financial services
organization's most appropriate response to the evolution in consumer banking
spurred by the emergence of electronic commerce. The Company is positioning its
PROFILE/Anyware product as part of a separate infrastructure focused
specifically on direct banking channels, as opposed to as a replacement for the
existing production systems. The Company is establishing strategic
relationships with partners whom it believes will together comprise a
comprehensive direct bank solution. To this end, the Company has established a
relationship with the direct banking consulting unit of Price Waterhouse, to
fully define and develop a direct banking product and to engage in joint
marketing activities. In addition, the Company has recently engaged in
discussions with Five Paces Software, a wholly-owned subsidiary of Security
First Network Bank, to provide a fully integrated, turn-key infrastructure for
large banks planning to quickly enter the Direct Banking Market.
The Sanchez Solution
Sanchez's PROFILE product line simultaneously addresses the needs of financial
services organizations in both the Emerging Banking Market and the Direct
Banking Market. Sanchez believes that there is a trend toward globalization of
banking practices which will create a convergence of requirements between the
Emerging Banking Market and the Direct Banking Market. The broad range of U.S.
and western banking functionality contained in the system enables financial
services providers in the Emerging Banking Market to offer financial products
and services previously unavailable to their customers. The multiple channel
delivery architecture also provides these institutions with the infrastructure
to support the rapidly evolving service expectations of their customer base.
Using the same software application and technology, Sanchez will enable
organizations within the Direct Banking Market to effectively respond to changes
in consumer banking preferences brought on by the rapid increase in electronic
commerce. The underlying capability of the PROFILE product line to tailor
products and services for individual bank customers and to deliver them over a
wide variety of consumer interfaces can create the differentiation necessary for
banks to compete in a modern marketplace.
A summary of the principal benefits of the PROFILE solution include:
Functional Benefits
. Enables financial services organizations to dynamically create new pro-
ducts and services and to tailor them for individual customers ("mass
customization")
. Allows updates to the integrated on-line database to occur directly,
providing real-time reporting, processing, and analytic capabilities
. Supports a variety of national and international wholesale, commercial and
retail payment systems, offering multiple payment and clearing options
. Features integrated customer, deposit, loan and general ledger modules which
share a common database and software components, thus eliminating traditional
functional boundaries
. Supports a combined set of North American and international product, service,
operational and transactional requirements providing a "global" solution
. Contains integrated data management and decision support tools, supporting
analytic, regulatory and production analysis and reporting requirements
33
<PAGE>
Operational Benefits
. Runs on multiple operating systems and multiple platforms (32 and 64 bit)
. Offers a solution to both start-ups and multi-million account institutions
due to high degree of scalability
. Enables database archiving which provides permanent, low-cost, transaction
storage and on-line retrieval
. Runs over multiple protocols (TCP/IP, DecNet) on local area and wide area
networks
Technical Benefits
. Contains a messaging architecture which provides for the rapid integration of
existing and new delivery channels
. Features standard industry application interfaces (APIs) which support
client/server model and cross application integration
. Features two-tier and three-tier client/server architecture which optimizes
performance and workload distribution
. Contains a data dictionary and other meta-data elements, including forms,
reports, documents and interface definitions which are managed through a tool
set that the Company has developed called DATA-QWIK, which enables the
Company and its customers to rapidly modify and extend the base application
. Features the entity/relationship data model which can be projected over
relational, key indexed, and object database systems, insulating the
application from the underlying database management system
The Sanchez Products
The PROFILE line of products is a comprehensive software solution that addresses
the major operational requirements of commercial, retail, international and
wholesale banking institutions. The PROFILE product line consists of the
following three modules: (i) the PROFILE/Anyware universal banking system; (ii)
the PROFILE/FMS Financial Management System; and (iii) the PROFILE/ITS
Integrated Treasury System. While each of these applications can operate
independently, they can also be integrated into a cohesive and powerful
enterprise-wide banking solution.
PROFILE/Anyware
PROFILE/Anyware is a client/server application comprised of a wide-area
enterprise server, a local area, branch/department server, and a graphical
client. An integrated set of application codes provide a full range of
customer, deposit, lending, and branch functionality, which includes management
reports, decision support functions, and data analysis functions.
PROFILE/Anyware provides both on-line and batch interfaces to support a bank's
transaction processing and inter/intra clearing requirements. A detailed
description of certain other key features of PROFILE/Anyware follows:
Electronic Manufacturing. The architecture of PROFILE/Anyware was developed
utilizing a product manufacturing paradigm. This is in contrast to most banking
software in use today which was designed to automate accounting and transaction
processing activities. The Company believes that this is a fundamental
distinction. In a manufacturing environment, products are composed of
subassemblies and components. PROFILE/Anyware contains thousands of individual
software components that can be hierarchically assembled into subassemblies,
products, and product packages. The components are shared across traditional
business lines and product boundaries within an institution.
The electronic manufacturing paradigm is further enhanced by the unique ability
of PROFILE/Anyware to assemble unique products for market segments as small as
an individual customer, a concept referred to as "mass customization." Within
this "electronic factory," a financial services organization can provide the
services of a value added intermediary and package products and services that
support the specific requirements of the individual. In a future release of
PROFILE/Anyware, the Company plans to offer software that will allow consumers
themselves to access these capabilities through a self-directed origination
component that will be integrated into their home banking application.
34
<PAGE>
Customer Oriented. PROFILE/Anyware contains all customer records, loan and
deposit account records and transactions in an integrated database. Different
customer types can be defined by the institution, and specific data can be
captured and maintained for each customer type. Customer demographics, interest
yields, profitability and transaction activity are available real-time for
inquiry or analysis. These data can be used to provide service-use incentives,
bundled product packages and integrated reporting. The system provides the
ability to "drill down" from summary data to individual account activity, to the
source document images that support customer transactions. Customers can be
linked to each other to create affinity groups or other meaningful market
segments.
The data dictionary, along with other meta-data definitions such as input and
display forms, document layouts and reports can be modified or extended through
a tool set provided by the Company called DATA-QWIK to support a bank's unique
customer requirements. This feature supports the integration of data from
applications and databases operated outside of PROFILE/Anyware with the customer
database.
Open Architecture, Channel Independent, and Scalable. PROFILE/Anyware is a
client-server based application that supports a variety of industry standard
application interfaces (APIs) and message protocols. The supported APIs
currently include ODBC, OLE, DLL, and DDE. The system can operate as either a
database server (two-tier) or application server (three-tier), or both,
depending on the client application requirements. The PROFILE graphical client
utilizes both models to operate most efficiently and reliably over a wide area
network. The standard APIs allow PROFILE/Anyware to function as a server for
best-in-class client and desktop applications.
PROFILE/Anyware is a message based application which allows it to be interfaced
to a wide variety of interface devices including traditional branches, ATM
networks, POS networks, kiosk devices, home banking applications on dedicated
networks and the Internet, and mobile computing devices.
PROFILE/Anyware currently runs on IBM's AIX platform, Hewlett-Packard's HP-UX
platform and Digital's UNIX/RISC platform, as well as Digital Open VMS. The
Company believes that these platforms provide the best price/performance ratios
available for commercial applications and are more scalable than current Intel
based platforms. PROFILE/Anyware has been installed and operated in institutions
ranging in size from startup banks with no initial customers to universal
regional banks with hundreds of branches and over 1.5 million accounts. It has
also been installed in service bureaus operating centrally for many
institutions. The Company believes that the ability to process very large
databases (25 million accounts and ten million transactions per day), will
become a requirement for both of its target markets and is currently developing
technology that it believes can support these volume levels.
On-line, Real-time, Continuous Availability. PROFILE/Anyware accepts on-line
and batch transactions from a variety of transaction sources and processes them
in real-time, ensuring the most up-to-the minute database state. Inquiries from
any client device can access the system on-line and retrieve the current status
of the database. Currently, the system accepts financial transactions 24 hours a
day. The Company intends to enhance the software in a future release to accept
non-financial activity, such as account origination and maintenance, 24 hours a
day as well. The Company believes that this real-time capability will become a
requirement for direct banking applications.
International Functionality. PROFILE/Anyware is currently operating or being
installed in nine countries and in six languages. It is a full multi-currency
system that denominates products and accounts in their base currency. It
supports and balances multiple cash currencies and provides exchange and
revaluation functions. The system contains the product components that support
the combined requirements of North American and international financial
institutions. The system also supports both the U.S. style payment system (ACH
and checks) and the European style electronic payment system
(payment/collection/standing orders, GIRO and SWIFT). The Company believes that
the requirements of its target markets will ultimately converge and that the
qualities of North American retail products and European payment systems will be
integrated into the other market.
35
<PAGE>
PROFILE/FMS
PROFILE/FMS is an on-line, real-time, multi-company, multi-currency, cost
center based accounting system. It contains a very flexible financial reporting
tool that allows banks to develop their own portfolio of sophisticated bank
management and executive reports. This application allows users to record,
consolidate, report and plan all financial activity within an institution.
PROFILE/FMS modules include general ledger, accounts payable, fixed assets,
prepaid accrued and deferred item processing, financial and statistical
reporting, budgeting and bank reconciliation. It is tightly integrated with
PROFILE/Anyware and shares a common database and application components.
PROFILE/ITS
PROFILE/ITS provides the ability to process treasury transactions including
foreign exchange, money market, securities trading (capital markets), futures,
options and trade finance. PROFILE/ITS assists financial institutions with risk
measurement analysis and control. PROFILE/ITS is integrated with other PROFILE
modules and enables institutions to access various functions, including
sophisticated real-time monitoring of liquidity and funding needs, exchange
risk, interest sensitivity exposure and on-line portfolio pricing capabilities.
These capabilities allow an institution to monitor counterparty and country risk
limits, exposure to industry groups and nostro cash flow on-line along with the
institution's liquidity, profitability, asset and liability durations, gaps and
interest rate risk, all on an institution-wide basis.
The Sanchez Services
While PROFILE software license fees represent a material portion of the
Company's revenues, the Company also derives significant revenues from services.
The Company's primary service offerings include the following:
Project Services
Project Services are services provided on a one-time basis either during the
initial implementation or as contracted for by clients after conversion to
PROFILE. Implementation service revenues can range from $500,000 to over $4
million for an individual project, and are typically delivered over a period of
ten to 15 months. Other project services typically delivered during the
implementation period include training, conversion, localization and software
customization. These project services are staffed by professionals trained in
the financial services industry who primarily work at the clients' locations and
follow a published methodology employing proven project management and
measurement techniques.
Project services delivered after a client converts to PROFILE typically include
software customization, training or version upgrade consulting. The Company has
a specific group of employees who are focused on delivering these types of
services, although others from within the Company may also render such services.
While some project services are contracted for on a time and materials basis,
most projects are contracted on a fixed price, fixed scope basis. This approach
is more accepted by the market. Utilizing a well defined scope presents
opportunities for additional revenues resulting from change orders.
Maintenance and Support Services
Currently, the major portion of the Company's delivery of worldwide customer
service and support is handled by a group in its headquarters in Malvern. This
group is responsible for help desk, research and product quality assurance. A
response team made up of research, quality assurance and programming personnel
are assigned when maintenance issues are identified. This team works together
to ensure that the customer issue is understood and dispatched accordingly. All
issues are tracked and measured and daily and weekly reports are generated for
management review and action.
The Company believes that service response considerations play a major role in
an institution's selection of banking software products. To respond to this
need, the Company is continuing to enhance its ability to deliver localized
customer support and installation capability worldwide. Currently, the Company
provides direct customer service and application support from its office in
Lisbon, and is in the process of staffing its new offices in Prague and Warsaw
to
36
<PAGE>
provide similar services. It is contemplated that the Prague office will have
sufficient processing capability to completely service all of a client's needs
within Central Europe, independent of the Malvern location. Senior application
support personnel from the Malvern office are being temporarily relocated to
Prague to assist the transition to local support. Currently, the Jakarta office
is used for sales support and will house an application support capability as
soon as new business dictates. Additionally, plans are being drafted, pending
an anticipated new client contract closure in the fourth quarter of 1996, to
create a local application support presence in Kuala Lumpur by mid-1997.
Clients and Representative Client Engagements
The Company's 23 clients are located in nine countries and are providing
financial services to more than 400 financial institutions. All PROFILE users
are in the financial sector and reflect a broad range of financial institutions
including retail banks, commercial banks, private banks, co-operatives, credit
unions, wholesale banks, specialty financial institutions, international banks
and service bureaus. PROFILE's range of capabilities allows a financial
institution in any niche to compete in other niches as the product lines
formerly differentiating financial institutions become blurred.
The following brief descriptions summarize a few of the major projects in which
the Company has played a significant role.
Cue Data West - Vancouver, Canada
In 1991, Cue Data West ("CDW"), a Vancouver, Canada based service bureau
servicing approximately 50 clients, was searching for a system to replace its
obsolete hardware and inflexible software. These systems were of an older
generation design and could not be easily upgraded to allow the credit unions to
compete effectively. CDW selected PROFILE in order to provide its clients with
an integrated processing and financial management system that also allowed them
to design, produce and deliver new products and reports much more quickly than
their previous system permitted. The Company's installation personnel provided
project management, environmental definition, application consulting and
technical assistance throughout the implementation of the client's first three
credit unions. Additionally, the Company made certain technical modifications
to meet client and market specific needs. During the installation of the first
three credit unions, the Company successfully transferred its implementation
methodology to CDW so that it could continue its conversions of the remaining
credit unions without the Company's ongoing assistance. Today, CDW's clients
are using the system to effectively compete against the country wide banking
institutions and niche players in their markets.
Investicni Postovni Bank - Czech Republic
The Company installed PROFILE at Investicni Postovni Bank ("IPB"), the third
largest bank in the Czech Republic, during 1992 and 1993. As a result, PROFILE
became the first on-line centralized banking system to be implemented in Central
Europe. PROFILE has provided IPB with an integrated and flexible system and a
competitive advantage which has facilitated the bank's growth. IPB had fewer
than 300,000 accounts when it converted to PROFILE in 1993. Today, IPB has over
one million accounts processed by PROFILE. Additionally, the bank has recently
acquired a bank with another three million accounts which it expects to convert
to PROFILE by the end of 1997.
First Citizens Bank - Trinidad, Tobago
In 1992, Workers Bank in Trinidad, Tobago was looking for a system which would
provide this small bank with the ability to compete effectively with its much
larger competitors. In PROFILE, the bank identified a system that provided it
the opportunity to view a relationship banking model of each customer, the
ability to react quickly to market change and the flexibility to customize
products down to the individual customer level. In 1994, the National Bank
merged this bank with two larger institutions, creating First Citizens National
Bank. Because of the flexibility of PROFILE, the newly-merged bank migrated all
its accounts to the PROFILE system. The Company assisted First Citizens
National Bank in this consolidation.
37
<PAGE>
Rural Informatica - Lisbon, Portugal
The Company has been involved in a project with Rural Informatica ("RI"), in
Lisbon, Portugal since 1993 to install PROFILE to support the over 200
independent member financial institutions of this bank co-operative. RI's
headquarter operations were converted to PROFILE in 1994. The first member bank
was converted in 1995. The roll out to the other member banks commenced in 1996
and will continue through 1997. As each of these institutions, regardless of
their size, begin processing through RI's systems, they will be able to quickly
deliver customized products and services to their clients which will enable
them to compete effectively with the large metropolitan based national banking
conglomerate. In selecting PROFILE, RI focused on the system's flexibility and
its ability to combine information from the independent institutions so that
better reports and audit trails could be generated for the Central Bank in
Portugal.
Bank Przemyslowo-Handlowy and Powszechny Bank Kredytowz-Poland
The Company is currently implementing PROFILE at Bank Przemyslowo-Handlowy,
S.A. ("BPH") in Krakow, Poland and at Powszechny Bank Kredytowz, S.A. Warzawie
("PBK") in Warsaw, Poland, two of the nine largest banks in Poland. The BPH
contract was awarded to Digital and the Company in the third quarter of 1995
through the World Bank bidding process. BPH is the Company's first client in
Poland. PBK awarded the Company a contract in June 1996. Together these banks
acquired license rights to process over three million accounts. Both banks
selected PROFILE due to its flexibility, scalability, technical features and
direction, and on-line integrated processing capability.
Sales and Marketing
Enhanced Direct Sales and Marketing Activities
The Company has a direct sales force of six persons, consisting of three persons
located at the Company's offices in Malvern, Pennsylvania, two persons located
in Europe and one person located in Jakarta. The Company is actively recruiting
additional resources to increase its existing direct sales capacity, both
domestically and internationally.
The Company launched a comprehensive marketing campaign early in 1996 to develop
recognition in the Direct Banking Market for PROFILE/Anyware. The program
includes a combination of print advertising, public relations, partnering
programs, white papers, and an informative home page on the World Wide Web. The
trade media has responded with a substantial amount of coverage of the Company
and its products, including a number of lead articles. The Company's executives
also speak periodically at industry trade shows and universities both in the
U.S. and abroad. The Company intends to continue to expand its marketing
efforts as its initial investment has resulted in an increase in prospective
customers.
Third-Party Relationships
Since 1987, the Company has maintained a series of strategic alliance agreements
with Digital and has marketed its products principally through leads generated
by the Digital sales force. In 1995, the Company entered into an alliance with
Hewlett-Packard and ported its software to that platform. In mid-1996, the
Company entered into similar activities with IBM. The PROFILE product is
currently available on all three platforms.
The Company is currently engaged in joint marketing and engineering activities
with its hardware alliance partners and has recently submitted joint proposals
with both Hewlett-Packard and Digital in the Emerging Banking Market. The
Company believes that the strategic alliance that it entered into with IBM in
1996 will significantly enhance its competitiveness in the Direct Banking Market
where IBM is the current dominant hardware vendor. The Company also believes
that the recent strategic alliances with both IBM and Hewlett-Packard will
increase its competitiveness in all markets and will result in greater lead
generation.
38
<PAGE>
In 1995, the Company entered into an agreement with Oracle, the leading
relational database vendor in the world, to port the PROFILE products to the
Oracle database. The porting activities are currently underway and the two
companies are involved in joint marketing activities. The Company currently
offers its graphical branch and treasury products on the Oracle database and
plans to offer all of its PROFILE products on the Oracle database in 1997. In
the future, the Company plans to offer its PROFILE products on other commercial
relational database products as well.
The Company has recently entered into a strategic alliance with the electronic
banking division of Price Waterhouse. Pursuant to this alliance, Price
Waterhouse and the Company will collaborate in identifying and developing future
enhancements for PROFILE/Anyware and will jointly market their respective
products and services to the Direct Banking Market. In addition, the Company
has recently engaged in discussions with Five Paces Software, a wholly owned
subsidiary of Security First Network Bank. The purpose of this partnership is
to jointly offer a comprehensive solution to large banks wishing to quickly
enter the Direct Banking Market. The Company anticipates that these two
alliances, along with the relationships mentioned in the previous paragraphs,
will facilitate its entry into the Direct Banking Market.
Pricing Strategy
The Company prices its software products in three primary components: (i) one-
time license fees for the software up to a usage limit (for example, number of
users or number of customer accounts), (ii) fees for a full range of services
which complement its software products, including product enhancement fees and
implementation, consulting, conversion, training and software customization
services and (iii) recurring support and software maintenance revenue.
Customers who exceed the usage limit through growth or acquisition pay
additional license fees. Software maintenance fees are paid in advance while
all other fees and services are paid in stages upon the completion by the
Company of certain defined deliverables.
In the Direct Banking Market, the Company intends to charge an ongoing monthly
fee which will cover licensing and support for PROFILE/Anyware based on use,
specifically the number of customer accounts processed, although the Company in
the future may employ other pricing models in response to market conditions.
Product Development
The Company believes that it must constantly evolve and enhance both the
functional scope and technical foundation of its products to remain competitive.
In order to accomplish this, the Company has historically incurred significant
expenses related to development activities and may increase this investment in
the future. Total development expenses for 1993, 1994 and 1995 were $3.0
million, $3.8 million and $3.3 million, respectively. In addition to its
internal investment, the Company has obtained funding from its customers and
partners for numerous projects, including the development of European payment
system and SWIFT enhancements, Treasury integration, UNIX ports, and product
internationalization. This revenue is reflected in product enhancement fees.
Normally, customer or partner funding is provided in exchange for a commitment
by the Company to provide product enhancements, to support and maintain the
software, or to design the software to the client's needs. In certain cases,
however, royalty agreements have been negotiated with its customers or partners
whereby the Company pays them royalties based on the revenues received by the
Company from the licensing of specific software products to end users. These
royalty agreements ordinarily expire after a period of years and the Company is
thereafter free to license the products to end users without having to pay any
additional royalties.
Product development follows a formal software development life cycle process.
The Company has developed and acquired products that assist it in defining,
planning, tracking, measuring and managing the development process. The Company
realizes that large software projects can incur substantial cost, schedule and
technical risk. However, to date the Company has not canceled any of its
development projects.
In order to efficiently focus on both functional and technical requirements, the
product development area is subdivided into two groups called the Product
Development Group and the Technology Development Group. The Product
39
<PAGE>
Development Group is primarily responsible for defining plans for new product
versions and developing application software enhancements to the existing
PROFILE/Anyware and PROFILE/FMS modules. This group is also directly involved
in sales and sales support events such as customer demonstrations and request
for proposal (RFP) responses. The Company believes that interacting with
customers and prospects during the sales process transfers customer requirements
and exposes product strengths and weaknesses directly to the product management
staff, resulting in a more competitive offering.
The Technology Development Group is primarily responsible for defining
technology and platform layer enhancements to the existing PROFILE/Anyware and
PROFILE/FMS modules. This group evaluates and implements operating system
ports, programming languages, database systems, and development and productivity
tools. After this group successfully implements a new technology component
under an existing application component, it is responsible for propagating the
technology through the Company.
Employees
As of August 31, 1996, the Company had 135 full-time employees, 40 of whom were
engaged in product development (including 12 of whom were employed in technology
development), 11 of whom were engaged in sales and marketing, 15 of whom were
engaged in finance and administration and 69 of whom were engaged in
operations/client services. The Company's employees are not represented by any
collective bargaining agreements, and the Company has never experienced a work
stoppage.
In addition to full-time employees, the Company has historically utilized the
services of between eight and 12 independent contractors, primarily for European
implementation projects and sales support.
Competition
Financial institutions have two fundamental alternatives for obtaining data
processing capabilities: (i) in-house applications, either those that are
developed internally or those that are purchased from third party vendors; and
(ii) outsourcing, either as a part of a total outsourcing solution or where a
third party acts as a service bureau. Until the introduction of client/server
technology, the only in-house processing systems offered were systems running on
mainframe or minicomputer hardware. In the U.S. market, client/server
application software has only recently been made available to banks, but it is
gaining market acceptance and market share. In the international market, there
are a number of client/server alternatives available, as well as traditional
mainframe and mini-computer based systems.
To date, in the Emerging Banking Market, the Company's primary competitors in
this market have been FiServe, Inc., Baton Rouge International and ALLTEL
Information Services, Inc. In addition, there are several UNIX based vendors
which in the future could become primary competitors as well as a number of
local software organizations.
The Company believes that the principal competitive factors in the Emerging Bank
Market include the ability to (i) demonstrate robust retail and international
banking functionality, including multi-currency and multi-language processing,
support of local regulations, and support of local payment systems, (ii) operate
on UNIX platforms, (iii) service a high volume of accounts and branches, (iv)
demonstrate a proven track record of successful implementations; and (v) develop
local presence directly or through partnerships.
While the Company believes the Direct Banking Market is a totally new market, it
expects competition from the entrenched production system vendors. Hogan
Systems, Inc., Marshall & Ilsley Corp. and ALLTEL Information Services, Inc.
have the largest presence in the top 100 U.S. Banks. Kirchman Corporation,
FiServe, Inc. and Electronic Data Systems Corp. have a smaller presence,
primarily in the second 50 banks. Many of the top 100 U.S. banks are creating
strategies for direct banking and their decisions will direct the course of this
new market. As banks determine their requirements for direct banking, the six
major domestic competitors may develop alternative solutions by building or
buying web client interfaces that will fulfill the requirements.
40
<PAGE>
The Company believes that the principal competitive factors in the Direct
Banking Market include the ability to (i) position direct banking as a market
segmentation strategy versus a delivery channel, (ii) reach decision makers of
financial institutions in the U.S. and Canada with assets in excess of $4
billion, (iii) connect PROFILE/Anyware to a wide variety of payment (e.g., Check
Free and Visa), middleware (e.g., Five Paces Software and Edify) and client
systems (e.g., Netscape and Intuit), and (iv) establish alliances and
partnerships with the above named vendors.
The Company believes that none of its current competitors offers application
software that provides the level of product manufacturing flexibility and
international scope of functionality that is featured in the Company's system.
The Company, however, expects additional competition from other established and
emerging companies as the client/server market continues to develop and expand.
In addition, competition could increase as a result of software industry
consolidations.
Backlog
The Company's backlog at June 30, 1996 amounted to $23.2 million. The
components of the backlog were $11.1 million for software license, product
enhancement and implementation and consulting revenues and $12.1 million for
maintenance and support. The Company anticipates recognizing approximately $8.0
million of this backlog in the second half of 1996 and $9.5 million in the year
1997. At June 30, 1995, the Company's backlog amounted to $15.8 million,
consisting of $7.2 million for software license, product enhancement and
implementation and consulting revenues and $8.6 million for maintenance and
support.
Facilities
The Company's headquarters and principal administrative, sales and marketing,
and application development operations are located in approximately 31,000
square feet of leased space in Malvern, Pennsylvania. This lease expires in
1998. The Company also leases office space in Warsaw, Poland, Prague, Czech
Republic, Lisbon, Portugal and Jakarta, Indonesia. The Company anticipates that
additional space will be required as business expands and believes that it will
be able to obtain suitable space as needed.
Legal Proceedings
In the opinion of management, there are no claims or actions against the Company
the ultimate disposition of which will have a material adverse effect on the
Company's results of operations or consolidated financial position.
41
<PAGE>
Management
Executive Officers and Directors
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael A. Sanchez (1)....... 38 Chairman of the Board of Directors and
Chief Executive Officer
Frank R. Sanchez............. 39 President, Chief Operating Officer and
Director
Joseph F. Waterman........... 44 Senior Vice President, Treasurer and Chief
Financial Officer
Deborah C. Kovacs............ 33 Senior Vice President - Product Management
Thomas F. McAllister......... 47 Senior Vice President - Client Services
Dan S. Russell............... 46 Senior Vice President - Technology
Development
Michael L. Turner............ 42 Senior Vice President - Business
Development
Stewart A. Jack.............. 48 Managing Director of European Operations
Richard H. Jefferson......... 40 Managing Director, Asian-Pacific Rim
Warren V. Musser (1)......... 69 Director
Ira M. Lubert................ 46 Director
Lawrence Chimerine (1)(2).... 56 Director
John D. Loewenberg (1)(2).... 56 Director
Thomas C. Lynch(2)........... 54 Director
</TABLE>
- -----------------------
(1) Member of Compensation Committee (Michael A. Sanchez is a non-voting
member)
(2) Member of Audit Committee
Michael A. Sanchez founded the Company in 1979 and has been its Chairman and
Chief Executive Officer since its inception. In addition to providing strategic
direction for the Company, Mr. Sanchez is currently responsible for overseeing
Sanchez' direct banking marketing activities. Mr. Sanchez has over seventeen
years' experience in financial services organization data processing systems.
Mr. Sanchez is the brother of Frank R. Sanchez, the Company's President and
Chief Operating Officer.
Frank R. Sanchez has been the President and Chief Operating Officer of the
Company since 1994 and a Director of the Company since his employment with the
Company began in 1980. In his capacity as Chief Operating Officer, Mr. Sanchez
is responsible for the daily operations of the Company excluding the direct
banking marketing function. He is also responsible for developing the Company's
product and technical strategy. From 1980 until 1994, Mr. Sanchez was the
Executive Vice president in charge of Technology and Product Development and was
the principal architect of the PROFILE integrated banking system. Mr. Sanchez
is the brother of Michael A. Sanchez, the Company's Chairman and Chief Executive
Officer.
Joseph F. Waterman has been a Vice President and the Chief Financial Officer of
the Company since he joined the Company in August 1992. Mr. Waterman is
generally responsible for the Company's financial, legal, human resources and
internal
42
<PAGE>
technical activities. Prior to joining the Company, Mr. Waterman was employed
by Safeguard and/or certain of its partnership companies for 13 years. In
particular, from 1990 to 1992, Mr. Waterman served as Vice President of Finance
of Computer Factory (an organization that had been acquired by CompuCom Systems,
Inc. ("CompuCom")) and from 1987 to 1988, Mr. Waterman served as the Chief
Financial Officer of CompuCom.
Deborah C. Kovacs has been employed by the Company since 1988 and has been the
Senior Vice President of Product Management since August 1994. Ms. Kovacs, who
has over ten years of experience in the design, development and implementation
of banking and trust systems, is responsible for functional enhancements to the
PROFILE product line. Upon her employment with the Company, Ms. Kovacs served
as a Product Analyst until 1992 when she was promoted to Product Manager for the
European Banking System. Prior to joining the Company, from 1985 to 1988, Ms.
Kovacs was employed by Premier Systems, Inc., a developer of trust and
investment software and a Safeguard partnership company, as Manager of the
Application Team and Technical Consultant where she was responsible for
implementing scheduled system enhancements.
Thomas F. McAllister has been the Senior Vice President-Client Services since
joining the Company in August 1994. In this position he is responsible for the
Company's client management activities, including support, implementation and
training services. Prior to joining the Company, from 1987 to 1994, Mr.
McAllister was the Principal of Thomas F. McAllister and Associates where he
provided expertise in the areas of general operations, information technology
management, TQM and strategic and tactical planning. Mr. McAllister has over
26 years of banking industry experience, which included service as Senior Vice
President of Operations and MIS for First New Hampshire Banks.
Dan S. Russell has been employed by Sanchez since 1985 and has been the Senior
Vice President of Technical Development since 1994. Mr. Russell, who has over
24 years of industry experience, is generally responsible for all technology-
based development and the underlying architecture of the PROFILE product line.
When Mr. Russell joined the Company in 1985, he served as the Manager of
Development and was promoted to Vice President of Development in 1987 where he
was responsible for both product and technology development. Mr. Russell
remained in the latter position until his promotion to Senior Vice President in
1994.
Michael L. Turner joined the Company in August 1991. He has served as Senior
Vice President of Business Development since 1994. He is responsible for world-
wide sales of the Company's products and services. From August 1991 to 1994, Mr.
Turner served as Vice President Services. Prior to joining the Company, Mr.
Turner held various senior management positions in various information
technology services business, including Vice President for Finance and
Operations of GDK Systems, Vice President, Business Management at SEI, Inc. and
as a Senior Manager with Andersen Consulting.
Stewart A. Jack joined the Company as Managing Director, European Operations, in
May 1996. Mr. Jack's principal responsibility is developing opportunities in
the European marketplace. From 1992 through May 1996, Mr. Jack was the Managing
Partner of IDOM Poland. His principal activity in that capacity was to develop
information technology strategies and evaluate information technology options
for financial institutions. From 1989 to 1992, Mr. Jack was employed by
Hofflinghose, a Bermuda-based commodities trading group where he was the
Controller. Prior to his joining Hofflinghose, Mr. Jack had a 20-year career
in banking operations and information technology management at financial
institutions in Saudi Arabia, the United Arab Emirates and the United Kingdom.
Richard H. Jefferson has served as Managing Director, Asian-Pacific Rim, since
January 1996. His responsibilities include business direction and performance
for the Company in the Asian-Pacific Rim. Prior to joining the Company as an
employee, from 1989 to December 1995, Mr. Jefferson worked as an independent
consultant for the Company on various banking projects, including
internationalization of software. During this time, Mr. Jefferson was also co-
founder of two banking-related software companies. Mr. Jefferson has over 15
years of experience in system architecture and database design.
Warren V. Musser, a Director of the Company since 1987, has been Chairman of the
Board and Chief Executive Officer of Safeguard since 1953. Mr. Musser is also
the Chairman of the Board of Cambridge Technology Partners (Massachusetts),
Inc., a director of Coherent Communications Systems Corporation and CompuCom,
and a trustee of Brandywine Realty Trust. Mr. Musser also serves on a variety of
civic, educational and charitable Boards of Directors including the Board of
Overseers of The Wharton School of the University of Pennsylvania and serves as
Vice President/Development, Cradle Liberty Council,
43
<PAGE>
Boy Scouts of America, as Vice Chairman of The Eastern Technology Council, and
as Chairman of the Pennsylvania Council on Economic Education.
Ira M. Lubert, a Director of the Company since 1989, has served as a managing
director of Radnor Venture Management Company since 1988, a managing director
since 1991 and a general partner since 1995 of Technology Leaders Management
L.P. and a managing director and a general partner of Technology Leaders II
Management L.P. since 1994. Mr. Lubert is a director of CompuCom and National
Media Corporation.
Lawrence Chimerine has been a Director of the Company since 1987, the Managing
Director and Chief Economist of the Economic Strategy Institute since August
1993 and the President of Radnor Consulting Services since August 1991. From
June 1991 to March 1994, Dr. Chimerine was a Senior Economic Advisor of DRI-
McGraw/Hill. Dr. Chimerine is a director of Bank United Corp.
John D. Loewenberg became a Director of the Company in September 1996. He was
an Executive Vice President and Chief Administrative Officer of Connecticut
Mutual, a life insurance company, from May 1995 through March 1996. Prior to
joining Connecticut Mutual, Mr. Loewenberg served as Senior Vice President of
Aetna Life and Casualty, a multi-line insurer, and as Chief Executive Officer of
Aetna Information Technology, the information systems company of Aetna Life and
Casualty, from March 1989 to May 1995. Mr. Loewenberg was Chairman of Precision
Systems, Inc. until April 1996 and is a director of CompuCom.
Thomas C. Lynch became a Director of the Company in September 1996. He has been
a Senior Vice President of Safeguard since November 1995. Prior to that time,
Mr. Lynch retired from the U.S. Navy as an Admiral after 31 years, including
serving as Superintendent of the U.S. Naval Academy from 1991 through 1994 and
the Director, Navy Roles and Missions from 1994 through 1995. Mr. Lynch
currently serves as director of The Eastern Technology Council and is a member
of the Cradle Liberty Council, Boy Scouts of America and the U.S. Naval Academy
Foundation.
Compensation Committee Interlocks and Insider Participation
In 1995, decisions concerning compensation of executive officers were made by
the Compensation Committee of the Board of Directors which included Mr. Michael
A. Sanchez, the Chairman and Chief Executive Officer of the Company. Mr.
Sanchez, however, did not take part in decisions regarding his compensation.
Employment Agreement
The Company entered into a two-year employment contract effective January 1,
1996 with Richard H. Jefferson, the Managing Director of the Company's Asian-
Pacific Rim activities. This agreement provides for the payment of a base
salary plus commissions, the reimbursement of relocation expenses to Jakarta and
the payment of certain living expenses. The Company has the option to terminate
this agreement at any time, subject to a severance payment equal to three months
base salary if such termination is for any reason other than non-performance.
Certain Relationships
Radnor Venture Management Company, a general partnership, is the sole general
partner of Radnor Venture Partners, L.P., a venture capital fund. SSI
Management Company, Inc., one of the general partners of Radnor Venture
Management Company, is a wholly-owned subsidiary of Safeguard. PMG Management
Advisors, the other general partner of Radnor Venture Management Company is not
affiliated with Safeguard or the Company. Radnor Venture Management Company is
managed and controlled by its executive committee which currently consists of
seven persons including (i) Warren V. Musser and Ira M. Lubert, each of whom may
be deemed to be designees of SSI Management Company, Inc., (ii) two designees of
PMG Management Advisors, and (iii) two designees of other investors in Radnor
Venture Partners, L.P. SSI Management Company, Inc. also has the right to
designate one additional member of the executive committee. Mr. Lubert is one
of the two Managing Directors of Radnor Venture Management Company, who manage
the day-to-day operation of Radnor Venture Partners, L.P., subject to the
control and direction of the executive committee.
44
<PAGE>
Executive Compensation
The following table sets forth certain information concerning compensation paid
or accrued for the calendar year ended December 31, 1995 with respect to the
Company's Chief Executive Officer, its four other most highly compensated
executive officers at December 31, 1995 and two individuals who were no longer
executive officers of the Company on January 1, 1996 (collectively, the "Named
Officers"):
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
---------------
Annual Compensation (1) Securities All
Name and ----------------------- Underlying Other
Principal Position Year Salary Bonus Options Compensation(2)
- ------------------ ---- ------ ----- ------- ---------------
<S> <C> <C> <C> <C> <C>
Michael A. Sanchez........... 1995 $160,200 24,000 $7,956
Chairman and Chief
Executive Officer
Frank R. Sanchez............. 1995 160,200 24,000
President and Chief
Operating Officer
Michael L. Turner............ 1995 122,152 $40,000 4,800 5,797
Senior Vice President -
Business Development
Thomas F. McAllister......... 1995 137,738 20,000
Senior Vice President -
Client Services
Joseph F. Waterman........... 1995 134,167 31,200 5,375
Senior Vice President and
Chief Financial Officer
Adnan Elassad(3)............. 1995 200,250 5,607
Former Co-President
E. Miguel Rangel(4).......... 1995 171,167 5,000
Former Managing
Director of Europe
</TABLE>
-------------------------
(1) The compensation described in this table does not include medical, group
life insurance or other benefits received by the Named Officers which are
available generally to all salaried employees of the Company and certain
perquisites and other personal benefits, securities or property received
by the Named Officers which do not exceed the lesser of $50,000 or 10% of
the aggregate of any such Named Officer's salary and bonus in 1995.
(2) Represents a contribution under the Company's 401(k) plan.
(3) Mr. Elassad resigned from the Company and its Board of Directors
effective January 1, 1996 to pursue other business opportunities.
(4) Mr. Rangel resigned from the Company effective November 30, 1995 to
pursue other business opportunities.
45
<PAGE>
The following table provides information on stock options granted by the Company
in 1995 to the Named Officers. All Company option grants depicted below were
made pursuant to the 1995 Equity Compensation Plan.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Number of Percent of
Shares Total Options Realizable Potential Value at
Underlying Granted to Exercise Assumed Annual Rate of Stock
Options Employees in Price Per Expiration Price Appreciation for Option
Name Granted(1) Fiscal Year Share Date Term(2)
- ---- ---------- ------------- --------- ---------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
5% 10%
-- ---
Michael A. Sanchez...... 24,000 7.8% $3.625 10/08/05 $54,714 $138,656
Frank R. Sanchez........ 24,000 7.8 3.625 10/08/05 54,714 138,656
Joseph F. Waterman...... 31,200 10.1 3.625 10/08/05 71,128 180,252
Thomas F. McAllister.... -- -- -- -- -- --
Michael L. Turner....... 4,800 1.6 3.625 10/08/05 10,943 27,731
</TABLE>
- --------------------
(1) These options vest in equal installments over a four-year period beginning
one year after the date of grant.
(2) The amounts shown are calculated assuming that the market value of the
Common Stock was equal to the exercise price per share as of the date of grant
of the options. This value is the approximate price per share at which shares
of the Common Stock would have been sold in private transactions on or about the
date on which the options were granted. The dollar amounts under these columns
assume a compounded annual market price increase for the underlying shares of
the Common Stock from the date of grant to the end of the option term of 5% and
10%. This format is prescribed by the Commission and is not intended to
forecast future appreciation of shares of the Common Stock. The actual value,
if any, a Named Officer may realize, will depend on the excess of the market
price for shares of the Common Stock on the date the option is exercised over
the exercise price. Accordingly, there is no assurance that the value realized
by a Named Officer will be at or near the value estimated above.
The following table sets forth information concerning options exercised during
1995 and the number and the hypothetical value of certain unexercised options of
the Company held by the Named Officers as of December 31, 1995. This table is
presented solely for purposes of complying with the Commission's rules and does
not necessarily reflect the amounts the optionees will actually receive upon any
sale of the shares acquired upon exercise of the options.
Aggregated Option Exercises and
Last Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-The-Money Options at
December 31, 1995 December 31, 1995(2)
------------------------- -------------------------
Shares Acquired Value
Name on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael A. Sanchez.... 72,000 $4,800 3,600 25,800 $ 7,050 $ 3,525
Frank R. Sanchez...... 72,000 4,800 3,600 25,800 7,050 3,525
Joseph F. Waterman.... 93,600 6,240 3,600 33,000 7,050 3,525
Thomas F. McAllister.. -- -- 18,000 36,000 34,050 68,100
Michael L. Turner..... 14,400 960 90,000 6,600 176,250 3,525
</TABLE>
(1) Assumes, for presentation purposes only, a per share fair market value of
$1.73 (the exercise price of the most recently issued options at that
date).
(2) Assumes, for presentation purposes only, a per share fair market value of
$3.625 (the exercise price of the most recently issued options at that
date).
46
<PAGE>
1995 Equity Compensation Plan
The Company has adopted the 1995 Equity Compensation Plan (the "Plan") pursuant
to which it has awarded and may in the future award stock options and equity
compensation awards to its employees, officers, non-employee directors and
independent contractors.
The Plan provides for the issuance to employees, officers, non-employee
directors and independent contractors of up to 1,680,000 shares of Common Stock
pursuant to the grant of incentive stock options ("ISOs"), non-qualified stock
options ("NQSOs"), Stock Appreciation Rights ("SARs") and restricted stock
awards. The Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee"). Subject to the provisions of the Plan, the
Committee has the authority to determine to whom stock options and equity
compensation awards will be granted and the terms of the awards granted,
including the number of shares subject to each award, vesting provisions and the
duration of an award.
As of August 31, 1996, options to purchase a total of 722,489 shares of Common
Stock, at a weighted average exercise price per share of $2.55, were
outstanding. Of these options, 365,753 options were fully vested and
exercisable as of August 31, 1996. As of August 31, 1996, the Company had an
additional 1,345,764 shares of Common Stock available for future grants and
other issuances under the Plan.
The Board of Directors generally may amend or revise the terms of the Plan in
any respect whatsoever, provided, that certain amendments to the Plan are
subject to shareholder approval. Unless sooner terminated, the Plan will
terminate in 2005.
47
<PAGE>
Certain Transactions
Pursuant to an Administrative Services Agreement between the Company and
Safeguard, the Company paid Safeguard $100,000 in each of 1993, 1994 and 1995 in
consideration for certain general management, financial management, human
resources management and legal services provided by Safeguard. The Company
expects to pay Safeguard a similar amount in 1996 for such services.
In 1995, the Company paid Oaktree Systems, Inc, approximately $111,000 in
consideration for certain consulting services and the Company expects to pay
such entity in excess of $60,000 in 1996 in consideration of additional
consulting services from this entity. The owner of Oaktree Systems, Inc. is
the father of Michael A. Sanchez and Frank R. Sanchez.
On March 1, 1995 the Company made loans to each of Michael A. Sanchez, Frank R.
Sanchez and Joseph F. Waterman in the amounts of $114,000, $114,000 and
$148,200, respectively. The Company made these loans to provide these executive
officers with funding to exercise certain stock options for the purchase of
Common Stock as part of a Company-wide program enabling all employees who had
been granted options prior to December 31, 1993 to exercise similar options. As
of the date hereof, the outstanding principal balances of these loans were
$114,000, $114,000 and $0 for Michael A. Sanchez, Frank R. Sanchez and Joseph F.
Waterman, respectively. Michael A. Sanchez is expected to retire his loan upon
the consummation of the Offering. See Note 8 to the Consolidated Financial
Statements.
During 1994, 1995 and January 1996, Safeguard and the Company entered into
certain arrangements whereby the Company would lend to Safeguard its excess cash
and receive a negotiated interest rate which was higher than the rate the
Company might realize by independently investing the funds, but which was less
than Safeguard's cost of funds. The applicable interest rates charged by the
Company during the periods covered by these arrangements ranged between five and
seven percent. The highest principal balance of these borrowings during the
period covered by these arrangements was $3,500,000.
In 1993, Safeguard made a short-term advance to the Company in the amount of
$400,000 at a rate of seven percent. In 1995, Safeguard made a 29 day advance
to the Company in the amount of $600,000 which did not bear interest.
48
<PAGE>
Principal and Selling Stockholders
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of the date of this Prospectus and as adjusted
to reflect the sale of the shares offered hereby (i) by each person who is known
by the Company to own beneficially more than 5% of the outstanding shares of
Common Stock, (ii) by each director of the Company, (iii) by each Named Officer,
(iv) by each Selling Stockholder, and (v) by all directors and executive
officers of the Company as a group. Unless otherwise indicated below, to the
knowledge of the Company, all persons listed below have sole voting and
investment power with respect to their shares of Common Stock, except to the
extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
Number of Shares
Beneficial Ownership to be Sold in Beneficial Ownership
Prior to the Offering (1) the Offering After the Offering(1)
------------------------- --------------- ---------------------------
Number of Number of
Name and Address Shares Percentage Shares Percentage
---------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Safeguard Scientifics, Inc. (2)........... 3,829,482 43.0 714,272 3,115,210 28.1
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Michael A. Sanchez (3)................... 1,976,848 23.1 87,106 1,889,742 17.6
40 Valley Stream Parkway
Malvern, PA 19355,
Radnor Venture Partners L.P.(4)........... 886,384 10.4 178,568 707,816 6.6
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087
Frank R. Sanchez (3)..................... 849,600 9.9 43,554 806,046 7.5
40 Valley Stream Parkway
Malvern, PA 19355
Joseph F. Waterman (5).................... 105,000 1.2 -- 105,000 1.0
Thomas F. McAllister (6)................. 36,000 * -- 36,000 *
Michael L. Turner (7)..................... 105,600 1.2 -- 105,600 1.0
Warren V. Musser (8)..................... 144,000 1.7 -- 144,000 1.3
Ira M. Lubert (9)......................... 89,042 1.0 -- 89,042 *
Lawrence Chimerine........................ 72,000 * -- 72,000 *
John D. Loewenberg........................ -- * -- -- *
Thomas C. Lynch (8)...................... -- * -- -- *
All executive officers and directors as
a group (14 persons) (10)................ 3,508,624 40.2 130,660 3,377,964 31.0
</TABLE>
__________________________
* Less than 1% of the outstanding Common Stock
(1) Solely for the purpose of the percentage ownership calculation for each
beneficial owner depicted herein, the number of shares of Common Stock
deemed outstanding prior to the Offering (i) assumes 8,549,755 shares of
Common Stock outstanding as of the date of this Prospectus; (ii) assumes
10,707,755 shares of Common Stock will be outstanding upon the successful
completion of the Offering; and (iii) includes additional shares issuable
pursuant to options or warrants held by such owner which may be exercised
within 60 days after the date of this Prospectus ("presently exercisable
options"), as set forth below. The beneficial ownership after the
Offering does not account for the exercise of Rights by such stockholders
in the Offering.
(2) Includes a warrant exercisable for 360,000 shares of Common Stock. The
shares and warrant are held of record by Safeguard Scientifics
(Delaware), Inc., a wholly-owned subsidiary of Safeguard. Excludes shares
beneficially owned by Radnor, in which Safeguard has a beneficial
interest. See "Management--Certain Relationships" for a description of
the relationships between Safeguard and Radnor.
49
<PAGE>
(3) Includes 9,600 shares of Common Stock issuable pursuant to presently
exercisable options.
(4) See "Management--Certain Relationships" for a description of the
relationships between Safeguard and Radnor.
(5) Includes 11,400 shares of Common Stock issuable pursuant to presently
exercisable options.
(6) Consists of 36,000 shares of Common Stock issuable pursuant to presently
exercisable options.
(7) Includes 91,200 shares of Common Stock issuable pursuant to presently
exercisable options.
(8) Does not include 3,829,482 shares beneficially owned by Safeguard. Mr.
Lynch serves as the Senior Vice President of Safeguard and Mr. Musser
serves as Chairman and Chief Executive Officer of Safeguard. See
"Management--Executive Officers and Directors." Messrs. Lynch and Musser
disclaim beneficial ownership of such shares.
(9) Does not include 886,384 shares beneficially owned by Radnor. See
"Management--Certain Relationships" for a description of the relationship
between Mr. Lubert and Radnor. Mr. Lubert disclaims beneficial ownership
of such shares.
(10) Includes, in the aggregate, 183,625 shares of Common Stock issuable
pursuant to presently exercisable options.
50
<PAGE>
Description of Capital Stock
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, no par value, and 10,000,000 shares of Preferred Stock, no par
value.
Common Stock
As of August 31, 1996, there were 8,549,755 shares of Common Stock outstanding
and held of record by approximately 45 stockholders. After giving effect to
the issuance of the 2,158,000 shares of Common Stock offered by the Company
hereby, there will be 10,707,755 shares of Common Stock outstanding.
Holders of Common Stock are entitled to one vote for each share held of record
on all matters submitted to a vote of stockholders and do not have cumulative
voting rights. The election of directors is determined by a plurality of the
votes cast and, except as otherwise required by law, all other matters are
determined by a majority of the votes cast. Accordingly, holders of a majority
of the shares of Common Stock entitled to vote in any election of directors may
elect all of the directors standing for election. See "Risk Factors--Control by
Principal Stockholders." Holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor, subject to any preferential dividend rights
of outstanding Preferred Stock. Upon the liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to receive ratably the
net assets of the Company available after the payment of all debts and other
liabilities. Holders of the Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of Common Stock are,
and the shares offered by the Company in the Offering will be, when issued and
paid for, fully paid and nonassessable. The rights, preferences and privileges
of holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future. See "--Preferred Stock."
Rights
The Company is granting on the date hereof the Company Rights to the holders of
Safeguard Common Shares and the Direct Rights to the Direct Purchasers. The
Rights, subject to minimum exercise requirements, are each exercisable for one
share of Common Stock at an exercise price of $____ per share. Persons may not
exercise Rights for fewer than 50 shares of Common Stock. For purposes of the
Offering, a person that holds Safeguard Common Shares in multiple accounts must
meet the 50 share minimum purchase requirement in each account. Accordingly,
persons holding fewer than 50 Rights in an account should consider the
advisability of consolidating the Rights in one account, selling Rights, or
purchasing additional Rights to comply with the minimum exercise requirements of
the Offering. Rights may be transferred, in whole or in part, by endorsing and
delivering to the Rights Agent a Rights certificate that has been properly
endorsed for transfer, with instructions to reissue the Rights, in whole or in
part, in the name of the transferee. The Rights Agent will reissue certificates
for the transferred Rights to the transferee, and will reissue a certificate for
the balance, if any, to the holder of the Rights, in each case to the extent it
is able to do so prior to the Expiration Date. The Offering will terminate and
the Rights will expire at 5:00 p.m., New York City time, on the Expiration Date,
which is ______, 199__. After the Expiration Date, unexercised Rights will be
null and void. For more information about the Rights and the Offering process,
reference should be made to "The Offering" and to "Risk Factors-- Cancellation
of the Offering."
Preferred Stock
The Company, by resolution of the Board of Directors and without any further
vote or action by the stockholders, has the authority, subject to certain
limitations prescribed by law, to issue from time to time up to an aggregate of
10,000,000 shares of Preferred Stock in one or more classes or series and to
determine the designation and the number of shares of any class or series as
well as the voting rights, preferences, limitations and special rights, if any,
of the shares of any such class or series, including the dividend rights,
dividend rates, conversion rights and terms, voting rights, redemption rights
and terms, and liquidation preferences. The issuance of Preferred Stock may
have the effect of delaying, deferring or preventing a change of control of the
Company. As of the date of this Prospectus, there are no shares of Preferred
Stock outstanding, and the Company has no plans to issue any shares of Preferred
Stock.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is ChaseMellon Shareholder
Services, L.L.C., 85 Challenger Road, Overpeck Centre, Ridgefield Park, New
Jersey 07660.
51
<PAGE>
Shares Eligible for Future Sale
Upon completion of the Offering, the Company will have 10,707,755 shares of
Common Stock outstanding, excluding 1,082,489 shares of Common Stock subject to
stock options and warrants outstanding as of August 31, 1996 and any stock
options or warrants granted by the Company after August 31, 1996. Of these
shares, the Common Stock sold in the Offering, except for certain shares
described below, will be freely tradeable without restriction or further
registration under the Act. The remaining 7,526,255 shares of Common Stock (the
"Restricted Shares") were sold by the Company in reliance on exemptions from the
registration requirements of the Act and are "restricted securities" as defined
in Rule 144 and may not be sold in the absence of registration under the Act
unless an exemption is available, including an exemption afforded by Rule 144 or
Rule 701. See "Risk Factors--Shares Eligible for Future Sale."
In general, under Rule 144 as currently in effect, if three years have elapsed
since the date of acquisition of restricted securities from the Company or any
affiliate and the acquiror or subsequent holder is not deemed to have been an
affiliate of the Company for at least 90 days prior to a proposed transaction,
such person would be entitled to sell such shares under Rule 144(k) without
regard to the limitations described below. If two years have elapsed since the
date of acquisition of restricted securities from the Company or any affiliate,
the acquiror or subsequent holder thereof (including persons who may be deemed
affiliates of the Company) is entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then-outstanding
shares of Common Stock or the average weekly trading volume in the Common Stock
on the Nasdaq National Market during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain provisions regarding the
manner of sale, notice requirements and the availability of current public
information about the Company. Without considering the contractual restrictions
described below, approximately (i) 539,696 Restricted Shares will be eligible
for sale in the public market in accordance with Rule 144(k) under the Act, (ii)
257,194 Restricted Shares will be eligible for sale 90 days after the date of
this Prospectus, subject to manner of sale and other resale conditions imposed
by Rule 701, and (iii) 6,729,365 Restricted Shares will be eligible for future
sale subject to the holding period and other conditions imposed by Rule 144.
Certain restrictions apply to any shares of Common Stock purchased in the
Offering by affiliates of the Company, which may generally only be sold in
compliance with the limitations of Rule 144, except for the holding period
requirements thereunder. See "Risk Factors--Shares Eligible for Future Sale."
Rule 144A under the Act provides a nonexclusive safe harbor exemption from the
registration requirements of the Act of specified resales of restricted
securities to certain institutional investors. In general, Rule 144A allows
unregistered resales of restricted securities to a "qualified institutional
buyer," which generally includes an entity, acting for its own account or for
the account of other qualified institutional buyers, that in the aggregate owns
or invests at least $100 million in securities that, when issued, were of the
same class as securities listed on a national securities exchange or quoted on
Nasdaq. The shares of Common Stock outstanding as of the date of this
Prospectus would be eligible for resale under Rule 144A because such shares,
when issued, were not of the same class as any listed or quoted securities.
Options and Warrants
As of August 31, 1996, there were outstanding (i) options to purchase an
aggregate of 722,489 shares of Common Stock (of which 365,753 were exercisable
at August 31, 1996) at a weighted average exercise price of $2.55 per share and
(ii) warrants to purchase an aggregate of 360,000 shares of Common Stock at an
exercise price of $1.39 per share. As of August 31, 1996, the Company had an
additional 1,345,764 shares of Common Stock available for future grants and
other issuances under the Plan. The holders of options and warrants to purchase
a total of 691,903 shares are subject to Lock-Up Agreements, which restrict,
until after the Lock-Up Expiry Date (without the Underwriters' prior written
consent), the holders' ability to sell or otherwise dispose of Common Stock
acquired upon the exercise of such options and warrants. See "Management--1995
Equity Compensation Plan."
The Company issued options and underlying shares of Common Stock to employees of
the Company who were not executive officers and directors of the Company
pursuant to Rule 701. Under Rule 701, such employees of the Company who prior
to the Offering purchased shares pursuant to the Plan are entitled to sell such
shares without having
52
<PAGE>
to comply with the public information, holding period, volume limitation or
notice provisions of Rule 144 commencing 90 days after the date of this
Prospectus. Rule 701 also permits the shares subject to unexercised options
under such Plan to be sold upon exercise without having to comply with such
provisions of Rule 144. As of August 31, 1996, (i) approximately 257,194 shares
of Common Stock will be eligible for sale under Rule 701 by Company employees,
commencing 90 days after the date of this Prospectus, and (ii) approximately
390,586 shares of Common Stock subject to unexercised options will be eligible
for sale under Rule 701 by Company employees (subject to applicable vesting
provisions).
It is anticipated that a Form S-8 Registration Statement covering the Common
Stock that may be issued pursuant to the exercise of options after the
effectiveness of the Form S-8 Registration Statement will be filed and declared
effective prior to the Lock-Up Expiry Date and that shares of Common Stock that
are so acquired and offered thereafter pursuant to the Form S-8 Registration
Statement generally may be resold in the public market without restriction or
limitation, except in the case of affiliates of the Company, which generally may
only resell such shares in compliance with Rule 144, except for the holding
period requirements thereunder.
Lock-Up Agreements
The Principal Stockholders, who will own 6,139,614 shares of Common Stock after
the completion of the Offering and will be deemed to beneficially own an
additional 379,200 shares of Common Stock, each other Named Officer, each
director of the Company and Warren V. Musser and his assignees have agreed with
the Underwriters that they will not sell or otherwise dispose of any shares of
Common Stock (other than shares of Common Stock sold in the Offering) until
after the Lock-Up Expiry Date without the prior written consent of the
Underwriters.
Registration Rights
The Company has granted certain registration rights to Radnor and Safeguard. In
particular, under certain circumstances and subject to certain limitations,
Radnor can require the Company to register under the Act (i) a minimum of 25% of
the aggregate number of the shares of Common Stock held by Radnor or its
transferees, provided that the Company is not obligated to effect more than one
such registration and (ii) on Form S-3 such number of shares of Common Stock
having a market value of at least $100,000, provided that the Company is not
required to effect more than one such registration during any twelve-month
period. Radnor and Safeguard were granted certain "piggy-back" registration
rights whereby under certain circumstances and subject to certain conditions,
they may include shares of Common Stock in any registration of shares of Common
Stock under the Act.
53
<PAGE>
Underwriting
The Company, the Selling Stockholders and the Underwriters have entered into the
Standby Underwriting Agreement on the date hereof, pursuant to which the
Underwriters are required, subject to certain terms and conditions (all of which
are summarized below), to purchase the Excess Unsubscribed Shares in accordance
with the percentages set forth below. If all of the Rights are exercised, or if
the number of Unsubscribed Shares is 300,000 or less, there will be no Excess
Unsubscribed Shares and the Underwriters will not be required to purchase any
shares of Common Stock.
<TABLE>
<CAPTION>
Underwriters % of Shares
------------
<S> <C>
J.P. Morgan Securities Inc................................... 50%
Wheat, First Securities, Inc................................. 50%
</TABLE>
The Underwriters have agreed, severally and not jointly, subject to the
condition that the Company and the Selling Stockholders comply with their
respective obligations under the Standby Underwriting Agreement and subject to
the Underwriters' right to terminate their obligations under the Standby
Underwriting Agreement (as specified below), to purchase all of the Excess
Unsubscribed Shares. The Company and the Selling Stockholders will pay the
Underwriters the Financial Advisory Fee equal to 3% per share for each share of
Common Stock included in the Offering. The Financial Advisory Fee is for
services and advice rendered in connection with the structuring of the Offering,
valuation of the business of the Company, and financial advice to the Company
and the Selling Stockholders before and during the Offering. An additional fee
of 4% per share will be paid to the Underwriters (i) for each share of Common
Stock purchased by the Underwriters pursuant to the Standby Underwriting
Agreement and (ii) for each share of Common Stock purchased upon the
Underwriters' exercise of Rights if such Rights were purchased by the
Underwriters at a time when the Common Stock was trading (on a "when issued"
basis) at a per share price of less than $______ or if the Underwriters purchase
such Rights with the Company's prior acknowledgment that it would be entitled to
receive the Underwriting Discount for Common Stock purchased pursuant to the
exercise of such Rights. In addition, the Company has agreed to pay the
Underwriters a non-accountable expense allowance in the aggregate amount of
$125,000, provided, however, such non-accountable expense allowance shall be
reduced to $50,000 or zero if, on the Expiration Date, the closing price for the
Common Stock traded on a "when issued" basis is at least $10.00 per share or
greater than $12.00 per share, respectively. The Company and the Selling
Stockholders have granted to the Underwriters a 20-day option commencing on the
Expiration Date to purchase a maximum of 303,000 additional shares of Common
Stock at a per share price equal to the Exercise Price less the Total
Underwriting Discount. The Underwriters may exercise such option in whole or in
part only to cover over-allotments made in connection with the sale of shares of
Common Stock by the Underwriters.
Prior to the Expiration Date, the Underwriters may offer shares of Common Stock
on a when-issued basis, including shares to be acquired through the purchase and
exercise of Rights, at prices set from time to time by the Underwriters. Each
such price when set will not exceed, if applicable, the highest price at which a
dealer not participating in the distribution is then offering the Common Stock
to other dealers, plus an amount equal to a dealer's concession, and an offering
price set on any calendar day will not be increased more than once during such
day. After the Expiration Date, the Underwriters may offer shares of Common
Stock, whether acquired pursuant to the Standby Underwriting Agreement, the
exercise of the Rights or the purchase of Common Stock in the market, to the
public at a price or prices to be determined. The Underwriters may thus realize
profits or losses independent of the Underwriting Discount and the Financial
Advisory Fee. Shares of Common Stock subject to the Standby Underwriting
Agreement will be offered by the Underwriters when, as and if sold to, and
accepted by, the Underwriters and will be subject to their right to reject
orders in whole or in part.
54
<PAGE>
In connection with the solicitation of Rights exercises, unless the Underwriters
are granted an exemption by the Commission from Rule 10b-6, the Underwriters
will be prohibited from engaging in any market making activities with respect to
the Company's when-issued Common Stock and Common Stock until the Underwriters
have completed their participation in the distribution of the shares offered
hereby. As a result, the Underwriters may be unable to provide a market for the
Company's when-issued Common Stock and Common Stock should it desire to do so,
during certain periods while the Rights are exercisable.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities arising out of or based upon
misstatements or omissions in this Prospectus or the Registration Statement of
which this Prospectus is a part and certain other liabilities, including
liabilities under the Act, and to contribute to certain payments that the
Underwriters may be required to make.
The Underwriters may terminate their obligations under the Standby Underwriting
Agreement if (i) any calamitous domestic or international event or act or
occurrence has disrupted or, in the Underwriters' opinion, will in the immediate
future materially disrupt, the general securities market in the U.S.; (ii)
trading in the Common Stock (on a when-issued basis) shall have been suspended
by the Commission or Nasdaq; (iii) trading on the New York Stock Exchange, the
American Stock Exchange or the Nasdaq National Market or in the over-the-counter
market shall have been suspended, or minimum or maximum prices for trading shall
have been fixed, or maximum ranges for prices for securities shall have been
required on the over-the-counter market by the NASD or by order of the
Commission or any other government authority having jurisdiction; (iv) the U.S.
shall have become involved in a war or major hostilities which, in the
Underwriters' opinion, will affect the general securities market in the U.S.;
(v) a banking moratorium has been declared by a New York, Pennsylvania, Virginia
or federal authority; (vi) a moratorium in foreign exchange trading has been
declared; (vii) the Company shall have sustained a loss material to the Company
by fire, flood, accident, hurricane, earthquake, theft, sabotage or other
calamity or malicious act, whether or not such loss shall have been insured, or
from any labor dispute or any legal or governmental proceeding; (viii) there
shall be such material adverse market conditions (whether occurring suddenly or
gradually between the date of this Prospectus and the closing of the Offering)
affecting markets generally or technology issues particularly as in the
Underwriters' reasonable judgment would make it inadvisable to proceed with the
offering, sale or delivery of the shares of Common Stock offered hereby; (ix)
there shall have been such material adverse change, or any development involving
a prospective material adverse change (including a change in management or
control of the Company), in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company since December 31,
1995; or (x) the Other Purchasers fail to purchase their aggregate allotment of
Unsubscribed Shares. The Underwriters, however, may elect to purchase all, but
not less than all, Unsubscribed Shares in the event the Other Purchasers fail to
purchase any of the Unsubscribed Shares which they are obligated to purchase.
The Company has agreed that, without the prior written consent of the
Underwriters, it will not offer, sell, grant any option for the sale of, or
otherwise dispose of any shares of Common Stock (or securities convertible into
shares of Common Stock) (collectively, the "Securities") acquired in the
Offering or held by it as of the date hereof until after the Lock-Up Expiry
Date, other than (i) Common Stock to be sold in the Offering, (ii) Company
option issuances and sales of Common Stock pursuant to the Stock Option Plan and
(iii) Securities issued as consideration for an acquisition if the party being
issued the Securities agrees not to transfer, sell, offer for sale, contract or
otherwise dispose of such Securities until after the Lock-Up Expiry Date. The
Principal Stockholders, who will own 6,139,614 shares of Common Stock after the
completion of the Offering and will be deemed to beneficially own an additional
379,200 shares of Common Stock, each executive officer, each director of the
Company and Warren V. Musser and his assignees have agreed to certain
restrictions concerning the sale of Common Stock pursuant to Lock-Up Agreements.
See "Management--1995 Equity Compensation Plan" and "Shares Eligible for Future
Sale."
55
<PAGE>
Legal Matters
The validity of the shares of Common Stock and the Rights offered hereby will be
passed upon for the Company by Morgan, Lewis & Bockius LLP, Philadelphia,
Pennsylvania. Certain legal matters in connection with the Offering are being
passed upon for the Underwriters by Drinker Biddle & Reath, Philadelphia,
Pennsylvania.
Experts
The consolidated financial statements of Sanchez Computer Associates, Inc. as of
December 31, 1994 and 1995 and for each of the years in the three year period
ended December 31, 1995 included in this Prospectus and elsewhere in the
Registration Statement have been included herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given upon the authority of
that firm as experts in accounting and auditing.
Additional Information
The Company has filed with the Commission a Registration Statement on Form S-1
(including all amendments thereto, the "Registration Statement") under the Act
with respect to the Common Stock and Rights offered hereby. As permitted by the
rules and regulations of the Commission, this Prospectus omits certain
information contained in the Registration Statement. For further information
with respect to the Company and the Common Stock and Rights offered hereby,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed therewith. Statements contained in this Prospectus regarding
the contents of any agreement or other document filed as an exhibit to the
Registration Statement are not necessarily complete, and in each instance
reference is made to the copy of such agreement filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and
schedules thereto, may be inspected at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, DC 20549,
and copies of all or any part thereof may be obtained from such office upon
payment of the prescribed fees. In addition, registration statements and
certain other filings made with the Commission through its Electronic Data
Gathering, Analysis and Retrieval ("EDGAR") systems are publicly available
through the Commission's site on the Internet's World Wide Web, located at
http://www.sec.gov. The Registration Statement, including all exhibits thereto
and amendments thereof, has been filed with the Commission through EDGAR.
56
<PAGE>
Glossary
ACH Automated Clearing House. A processing and delivery system
that provides for the distribution and settlement of
electronic credits and debits among a large number of
financial institutions.
AIX IBM's implementation of the UNIX operating environment.
API Application Programming Interface. A defined calling
standard for a software module that provides a consistent,
standard set of calls to access the functions provided by
the module.
Client/Server System architecture in which the server component acts as
Architecture the source of data and the client component uses the data
to perform various functions.
DCS Distributed Control System. A control system architecture
developed in the 1970s.
DDE Dynamic Data Exchange. A Microsoft(R) standard for
communicating data between two programs.
DLL Dynamic Link Library. A DLL contains a library of machine-
language procedures that can be linked to programs as
needed at run time. Programs do not need to include code to
perform common functions because that code is available in
the DLL. Changes can be made once to the DLL routine
instead of each individual program.
DecNet Digital Equipment Corporation software that provides a
network linkage between Digital computers to allow users to
access information and resources across systems.
Digital UNIX/RISC The UNIX operating system for Digital's Alpha processor.
The Alpha processor uses a Reduced Instruction Set Chip
(RISC) architecture.
Digital OpenVMS Digital Equipment Corporation's proprietary operating
system for its VAX and AXP machines.
GIRO A payment method, similar to a check, used in many European
countries.
GUI Graphical User Interface.
HP-UX Hewlett-Packard's implementation of the UNIX operating
environment.
LAN Local-Area Network. A high speed network connecting
personal computers, workstations and, in some cases,
mainframe computers.
M programming A high-level interactive computer programming language
developed for use in complex data handling operations. M is
an ANSI standard language.
Meta data The data which defines the data. For example, a relational
database table definition is data, but acts to define the
lower-level information contained within the table being
defined.
Multi-platform Processes or pieces of hardware that operate on various
hardware and software systems without modification.
ODBC Open Database Connectivity. The Microsoft(R) standard that
provides a database independent mechanism through which a
Windows or Windows NT(TM) application can query and update
data in a variety of relational database management
systems. The ODBC API (Application Programming
Instruction), for example, allows a single Windows
application to access Oracle, Sybase and other databases.
OLE Object Linking and Embedding. A Microsoft standard that
allows programs to share data and features seamlessly.
57
<PAGE>
Open Systems System design that allows users to take advantage of
Architecture applications from multiple vendors by permitting open
access to all internal components and by supporting a wide
variety of standards, operating environments and
connectivity methodologies.
Port The process of moving a software application to a new
hardware platform, operating system, or language
environment.
RDBMS Relational Database Management System. A software system
that stores data as a related set of data tables, allows
the data to be queried and updated and enforces the
integrity of the data. RDBMSs typically act as servers for
multiple clients on a network.
Real-Time Characteristic of a process that recognizes changes in
dynamic data as the changes occur, communicates those
changes and manages the resultant effects of the changes.
Relational Database File structure that is logically connected by one or more
data structures in a separate file.
SQL Structured Query Language. A standardized language used by
RDBMSs to query, update and manage a database.
SWIFT Society of Worldwide Interbank Financial Telecommunication.
SWIFT provides institutions with an automated communication
link between financial institutions.
Systems Integrator A Company that specializes in integrating products from
multiple vendors to provide an information systems solution
to a customer.
TCP/IP Transmission Control Protocol/Internet Protocol. TCP/IP
provides a low level transport mechanism, similar to
DECNet, for linking a variety of computers together in a
network. TCP/IP is the common network protocol for UNIX
systems and is used as the network for the Internet.
Turnkey Hardware and software applications that fulfill all of a
customer's predefined requirements at the time of purchase.
UNIX UNIX is a highly modular operating system or family of
operating systems that provides multi-user, multi-tasking
capabilities on a wide variety of platforms.
WAN Wide-Area Network. A network that allows communications
between locations.
58
<PAGE>
<TABLE>
<CAPTION>
Sanchez Computer Associates, Inc.
Index to Consolidated Financial Statements
<S> <C>
Report of Independent Accountants.......................................... F-2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1994 and 1995......... F-3
Consolidated Statements of Operations for the years ended
December 31, 1993, 1994 and 1995................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1993, 1994 and 1995............... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995................................... F-6
Notes to Consolidated Financial Statements........................... F-7
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of June 30, 1996....................... F-16
Consolidated Statements of Operations for the six months
ended June 30, 1995 and 1996....................................... F-17
Consolidated Statements of Cash Flows for the six months
ended June 30, 1995 and 1996....................................... F-18
Notes to Consolidated Financial Statements........................... F-19
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Stockholders and Board of Directors
Sanchez Computer Associates, Inc.
We have audited the accompanying consolidated balance sheets of Sanchez Computer
Associates, Inc. as of December 31, 1994 and 1995, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sanchez Computer
Associates, Inc. as of December 31, 1994 and 1995, and the consolidated results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 2, 1996, except as to information in Note 13,
for which the date is September 11, 1996
F-2
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Balance Sheets
December 31, 1994 and 1995
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1994 1995 LIABILITIES 1994 1995
---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets Current liabilities
Cash and cash equivalents............ $2,656 $ 5,546 Current portion of long-term debt.... $ 82 $ 168
Accounts receivable, net of Accounts payable, trade.............. 340 345
allowance for doubtful
accounts of $40.................... 3,120 4,360 Accrued expenses..................... 1,558 1,258
Deferred income taxes................ 742 587 Income taxes payable................. 339 401
Prepaid and other current assets..... 253 490 Deferred revenue..................... 2,134 4,060
------ ------- ------- -------
Total current assets.............. 6,771 10,983 Total current liabilities.................... 4,453 6,232
Long-term debt - net of current portion...... 160 173
Deferred rent................................ 132 137
------- -------
Property and equipment Total liabilities................ 4,745 6,542
Equipment............................ 1,176 1,497 Commitments (Note 10)
Furniture and fixtures............... 345 221 STOCKHOLDERS' EQUITY
Leasehold improvements............... 61 61 Common stock, no par value
------ -------
1,582 1,779 Authorized-15,000,000 shares
Issued-8,061,853 and 8,409,356 shares in
Accumulated depreciation and amortization... (830) (976) 1994 and 1995, respectively.......... 81 84
------ -------
Net property and equipment........... 752 803 Additional paid-in capital................... 5,250 6,024
Retained earnings (deficit).................. (1,426) 161
Deferred income taxes....................... 636 -- Notes due on common stock purchases.......... -- (664)
Treasury stock, at cost (216,000 shares)..... (120) --
------- -------
Computer software costs, net of accumulated
amortization of $844 in 1994 and $1,071
in 1995.................................... 371 361 Total stockholders' equity................... 3,785 5,605
------ ------- ------- -------
Total assets...................... $8,530 $12,147 Total liabilities and stockholders' equity... $ 8,530 $12,147
====== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Operations
for the years ended December 31, 1993, 1994, and 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- -------
<S> <C> <C> <C>
Revenues
Software license fees $ 2,184 $ 6,111 $ 6,532
Product enhancement fees 2,045 1,564 1,797
Implementation and consulting services 3,729 4,347 4,496
Software maintenance fees 3,359 3,494 4,017
------- ------- -------
Total revenues 11,317 15,516 16,842
Operating Expenses
Product development 2,991 3,805 3,300
Product support 2,509 2,315 2,515
Implementation and consulting 2,436 2,678 3,176
Sales and marketing 993 1,282 2,080
Royalties and sublicense fees 331 1,477 1,331
General and administrative 1,511 1,885 1,824
------ ------- -------
Total operating expenses 10,771 13,442 14,226
------- ------- -------
Income from operations 546 2,074 2,616
Interest income (expense), net (28) 6 93
------- ------- -------
Income before income taxes 518 2,080 2,709
Income tax provision (benefit) 55 (958) 1,122
------- ------- -------
Net income $ 463 $ 3,038 $ 1,587
======= ======= =======
Net income per common share $.05 $.33 $.17
Weighted average number of shares outstanding 9,056 9,272 9,576
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1993, 1994, and 1995
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------ Notes Due --------------
Additional Retained on common
paid-in earnings stock
Shares Amount capital (deficit) purchases Shares Amount
------- ------ ------- --------- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1993 8,061,853 $81 $5,250 $(4,927) -- 216,000 $ (120)
Net income -- -- -- 463 -- -- --
--------- --- ------ ------- -------- -------- ------
Balances at December 31, 1993 8,061,853 81 5,250 (4,464) -- 216,000 (120)
Net income -- -- -- 3,038 -- -- --
--------- --- ------ ------- -------- -------- ------
Balances at December 31, 1994 8,061,853 81 5,250 (1,426) -- 216,000 (120)
Net income -- -- -- 1,587 -- -- --
Exercise of stock options 347,503 3 774 -- $(892) (216,000) 120
Stock option loan repayments -- -- -- -- 228 -- --
--------- --- ------ ------- -------- -------- ------
Balances at December 31, 1995 8,409,356 $84 $6,024 $ 161 $(664) -- $ --
========= === ====== ======= ======== ======== ======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Cash Flows
for the years ended December 31, 1993, 1994, and 1995
(in thousands)
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 463 $ 3,038 $ 1,587
Adjustments to reconcile net income to cash provided by operating
activities:
Deferred taxes -- (1,378) 791
Depreciation and amortization 691 557 605
Other 13 56 39
Cash provided (used) by changes in
operating assets and liabilities:
Accounts receivable (29) (1,250) (1,240)
Prepaid and other current assets (26) (177) (237)
Accounts payable, accrued expenses and income taxes payable 290 1,211 (233)
Deferred revenues (955) 804 1,926
Other liabilities 78 -- --
----- ------- -------
Net cash provided by operating activities 525 2,861 3,238
Cash flows from investing activities:
Capitalized computer software costs (180) (113) (217)
Capital expenditures (41) (376) (458)
Other 5 -- --
----- ------- -------
Net cash used in investing activities (216) (489) (675)
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- -- 244
Repayment of notes due on common stock purchases -- -- 228
Borrowings under line of credit agreement 200 -- --
Repayments under line of credit agreement (350) -- --
Principal payments under capital lease obligation (8) (38) (51)
Principal payment under long-term notes (43) (43) (94)
----- ------- -------
Net cash provided (used) by financing activities (201) (81) 327
----- ------- -------
Net increase in cash and cash equivalents 108 2,291 2,890
Cash and cash equivalents at beginning of year 257 365 2,656
----- ------- -------
Cash and cash equivalents at end of year $ 365 $ 2,656 $ 5,546
===== ======= =======
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share related data)
1. Description of Business
Sanchez Computer Associates, Inc. ("Sanchez" or the "Company") designs,
develops, markets, implements and supports comprehensive banking software,
called PROFILE(R), for financial services organizations worldwide. Sanchez's
highly flexible PROFILE family of products is comprised of three integrated
modules which operate on open, client-server platforms. The primary module,
called PROFILE/Anyware, is a multi-currency bank production system which
supports deposit, loan, customer, transaction processing and bank management
requirements through multiple distribution channels, including the Internet.
The other modules are PROFILE/FMS, a multi-company, multi-currency,
financial management and accounting system and PROFILE/ITS, a treasury
system that includes a sophisticated set of asset and liability tools.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Sanchez Software Ltd. and Sanchez
Computer Associates International, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to continuously make
estimates and assumptions that affect the reported amounts of certain
assets, liabilities, revenues and expenses at the date of the financial
statements and during the reporting period. Actual results could differ
from these estimates. The most significant estimates are the percentage-of-
completion method for revenue recognition.
Revenue Recognition
The Company recognizes revenue from client implementation projects,
customized software development, and software license fees using the
percentage-of-completion contract accounting method. Revenue is deferred to
the extent of cash received or fees billed prior to satisfying such
percentage completion criteria. Losses on contracts are recognized when
determinable.
Revenue from software maintenance contracts is recognized ratably over the
term of the maintenance contract.
Warranties
The Company's products are warranted by the Company against design defects
for a period generally not to exceed ninety days after customer conversion.
Provision for future claims has been recorded based on historical
experience, which to date has not been significant.
Cash and Cash Equivalents
The Company's policy is to maintain its uninvested cash at minimal levels.
Cash and cash equivalents include amounts on deposit with Safeguard
Scientifics, Inc. ("Safeguard"), the Company's major shareholder, in
conjunction with demand promissory notes dated July 1994 and December 1995.
The July 1994 note provided
F-7
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share related data)
2. Summary of Significant Accounting Policies, continued
for interest at prime minus 2% throughout 1995, and the December 1995 note
bears interest at Safeguard's effective borrowing rate minus 1%. At
December 31, 1994 and 1995, advances to Safeguard under these demand notes
amounted to $2,250 and $3,500 respectively. Interest income from these
advances amounted to $49 in 1994 and $81 in 1995. The advances to Safeguard
were repaid fully in the first quarter of 1996.
Property and Equipment
Property and equipment is carried at cost, except for assets under capital
leases which are recorded at the lower of the present value of future lease
payments or the fair value of the equipment at the inception of the lease.
Expenditures for major renewals, improvements and betterments are
capitalized and minor repairs and maintenance are charged to expense as
incurred. When assets are sold, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss from such
disposition is included in operations.
Computer Software
Certain costs of software developed internally, including program
enhancements, are capitalized subsequent to the establishment of
technological feasibility and up to the time the product becomes available
for general release. Capitalized costs are amortized on the straight-line
method over the lesser of (a) four years or (b) the expected life of the
product based upon an analysis of the product's current and anticipated
revenue stream. Costs of software program maintenance are charged to
expense as incurred.
All capitalized software costs are written down to net realizable value
when the carrying amount is in excess thereof.
Total costs capitalized for the years ended 1993, 1994 and 1995 were
approximately $180, $113 and $217, respectively. Amortization of
capitalized software costs amounted to $469, $306 and $227 in 1993, 1994
and 1995, respectively.
Taxes on Income
Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Deferred income taxes are recognized for all temporary differences between
the tax and financial reporting bases of the Company's assets and
liabilities based on currently enacted tax laws and statutory rates.
Additionally, the benefits of utilizing net operating loss carryforwards
and credit carryforwards are recognized to the extent management of the
Company believes that it is more likely than not that the benefits will be
realized in future periods.
Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful life
of the related assets using a combination of accelerated and straight line
depreciation methods.
F-8
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share related data)
2. Summary of Significant Accounting Policies, continued
Net Income Per Share
Net income per share is computed using the weighted average number of
shares of common and common equivalent shares (stock options and warrants)
outstanding. As required by a Staff Accounting Bulletin issued by the
Securities and Exchange Commission, common and common equivalent shares
issued by the Company during the twelve-month period preceding the Offering
have been included in the calculation as if they were outstanding for all
periods presented (using the treasury stock method and assuming an initial
public offering price of $5.50 per share).
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS 123), was issued in October 1995. SFAS 123 gives
companies the option to adopt the fair value method for expense recognition
of employee stock options and stock based awards or to continue to account
for such items using the intrinsic value method as outlined under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), with pro forma disclosures of net income and net income
per share as if the fair value method had been applied. The Company has
adopted SFAS 123 effective January 1, 1996 by electing to continue to apply
APB 25 for future stock options and stock based awards, and, accordingly,
does not anticipate that SFAS 123 will have a material impact on its
results of operations or financial position. In accordance with the
disclosure provisions of SFAS 123, the Company will initially present the
disclosure required by SFAS 123 in its financial statements as of and for
the periods ending December 31, 1996.
3. Additional Cash Flow Statement Information
The Company's non-cash investing and financing activities and cash payments
for interest and income taxes are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Equipment additions by capital lease $46 $148 --
Cash paid during the year for interest 30 29 $ 38
Cash paid during the year for income taxes 4 134 273
</TABLE>
4. Client Revenue Data
Revenue derived from certain software implementation projects comprises a
substantial portion of the Company's total annual revenues. For the year
ended December 31, 1993, three customers accounted for approximately 42% of
total revenues; for the year ended December 31, 1994, four customers
accounted for approximately 60% of total revenues; and for the year ended
December 31, 1995, four customers accounted for approximately 71% of total
revenues. At December 31, 1994 and 1995, the same four customers in each
year accounted for $1,557 (or 50%)
F-9
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share related data)
4. Client Revenue Data, continued
and $2,719 (or 62%) of total receivables, respectively. The Company does
not require its customers to provide collateral relative to accounts
receivable balances.
The Company classifies its operations into one industry segment, licensing
and servicing of software products to the financial services industry.
Revenue derived from customers in various geographic regions for each of
the three years ended December 31, 1995 is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Canada $ 3,144 $ 2,789 $ 1,802
Central Europe 2,652 4,463 8,569
Other European 963 3,355 4,048
U.S. and Caribbean 4,558 4,909 2,423
------- ------- -------
$11,317 $15,516 $16,842
======= ======= =======
</TABLE>
5. Accounts Receivable
Accounts receivable balances as reported include unbilled receivables which
amounted to approximately $515 and $2,150 at December 31, 1994 and 1995,
respectively.
Unbilled receivables on fixed-price contracts arise as revenues are
recognized under the percentage of completion method. These amounts are
billable at specified dates, when deliveries are made or at contract
completion, which is expected to occur within one year. All amounts
included in unbilled receivables are related to long-term contracts and are
reduced by appropriate progress billings.
The Company has not experienced any significant bad debts during the three
years ended December 31, 1995. A reserve for doubtful accounts, totaling
$40, was reflected on each of the year end balance sheets during that same
three year period.
6. Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Accrued compensation and related items $ 945 $ 390
Accrued royalties 257 264
Other 356 604
------ ------
$1,558 $1,258
====== ======
</TABLE>
F-10
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share related data)
7. Long-Term Debt
Long-term debt at December 31, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
1994 1995
----- -----
<S> <C> <C>
Bank term note at 11% payable through October 1996........... $ 86 $ 43
Bank Term Notes at prime + 1% payable through June 1998...... -- 194
Capital leases at 12% to 12.4% payable through March 1999.... 156 104
----- -----
242 341
Less current portion......................................... 82 168
----- -----
$ 160 $ 173
===== =====
</TABLE>
The 11% bank note relates to an acquisition in 1989 and is guaranteed by a
third party.
The bank notes at prime + 1% were issued in conjunction with a $500
revolving credit facility for capital equipment purchases.
Future maturities of long-term debt at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Year Ending Amount
----------- ------
<S> <C>
1996 $168
1997 127
1998 40
1999 6
----
$341
====
</TABLE>
8. Stock Options
The 1995 Equity Compensation Plan was approved by the Company's board of
directors in October 1995. The plan provides for the issuance of a maximum
of 1,680,000 shares of Common Stock upon the exercise of stock options,
stock appreciation rights, and/or restricted stock awards. There will be no
further options granted under the previously in-place 1988 Incentive Stock
Option Plan for Key Employees.
F-11
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share related data)
8. Stock Options, continued
A summary of stock options outstanding under the 1995 and 1988 Plans at
December 31, 1993, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Shares under option, beginning of year 1,120,950 901,656 1,614,658
Options granted -- 786,600 308,436
Options exercised -- -- (563,503)
Options canceled (219,294) (73,598) (135,215)
--------- --------- ---------
Shares under option, end of year 901,656 1,614,658 1,224,376
========= ========= =========
Options exercisable 661,802 1,026,058 668,735
Shares available for future grants 448,344 365,342 1,388,364
</TABLE>
The options are exercisable at prices ranging from $1.00 to $3.63 per
share. Generally, outstanding options vest over a two to four year period
after the date of grant and expire ten years after the date of grant.
For options exercised in early 1995, 5% of the exercise price was paid upon
exercise, with the remaining obligation evidenced by a note with a maximum
term of ten years. Such optionees executed full recourse interest-bearing
notes, with such notes being reported as "Notes due on common stock
purchases" in the accompanying balance sheet. In 1995, interest income
earned on these notes amounted to $43. In conjunction with the issuance of
shares pursuant to these option exercises, the Company utilized 216,000
shares previously held as treasury shares.
In addition to the stock options outstanding pursuant to the 1988 and 1995
plans, the Company has issued 144,000 non-qualified stock options to two
non-employee directors which are exercisable at $1.67 per share. These
options are fully vested and expire as of June 30, 1997.
F-12
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share related data)
9. Income Taxes
The Company utilized net operating loss carryforwards to offset current and
deferred tax liabilities for the years ended December 31, 1993, 1994 and
1995. The components of the income tax provision (benefit) for the years
ended December 31, 1993, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Current taxes:
Federal $10 $ 70 $ 60
State 45 200 113
Foreign -- 150 158
--- ------ ------
55 420 331
Deferred taxes -- (1,378) 791
--- ------ ------
Total provision (benefit) $55 $ (958) $1,122
=== ====== ======
</TABLE>
A reconciliation of the tax provision (benefit) based on the federal
statutory tax rate to the effective tax rate is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory tax provision (34%) $176 $707 $921
Decrease in valuation allowance
for deferred tax assets, net (27) (1,927) --
State income taxes, net
of federal income tax benefit 30 132 75
Foreign income taxes, net
of federal income tax benefit -- 100 104
Change in tax credit carryforward, net (91) (42) 69
Other, net (33) 72 (47)
---- ------ ------
$ 55 $ (958) $1,122
==== ====== ======
</TABLE>
F-13
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share related data)
9. Income Taxes, continued
The tax effects of loss carryforwards, credit carryforwards, and temporary
differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31, 1994 and 1995 are
presented below.
<TABLE>
<CAPTION>
1994 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Tax loss carryforwards $ 742 --
Tax credit carryforwards 513 $ 444
Accrued liabilities 219 212
Other 30 49
------ -----
Total deferred tax assets 1,504 705
Deferred tax liabilities:
Capitalized software costs (126) (118)
------ -----
Net deferred tax assets $1,378 $ 587
====== =====
</TABLE>
The Company provided a valuation allowance equal to all of its net deferred
tax assets of $1,954 as of December 31, 1992 in conjunction with its
initial adoption of Statement of Financial Accounting Standards (SFAS) No.
109 "Accounting for Income Taxes." The net change in the valuation
allowance during the year ended December 31, 1993 was a decrease of $27,
due primarily to the benefit of operating loss carryforwards utilized
during 1993 of $157, partially offset by increases in the credit
carryforward component of the Company's deferred tax assets. In the year
ended December 31, 1994, the valuation reserve for deferred tax assets was
entirely eliminated, with $588 of the decrease in the allowance resulting
from utilization of net operating loss carryfowards in 1994, and the
remaining decrease in the allowance of $1,339 related to the full reversal
of the remaining valuation allowance. The $1,339 reversal of the remaining
valuation allowance resulted from management's determination that the
Company's ongoing profitability and contracted backlog made it more likely
than not that the remaining operating loss and credit carryforwards would
be utilized.
Utilization of net operating loss carryforwards amounted to $741 in 1993,
$2,388 in 1994 and $2,146 in 1995. Also, at December 31, 1995, the Company
has approximately $444 in income tax credit carryforwards available to
offset regular federal income taxes payable, expiring between the years
2002 and 2010.
10. Commitments
The Company leases office facilities subject to operating leases. Future
minimum lease payments under non-cancelable operating leases with initial
or remaining terms of one year or more at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996 $326
1997 381
1998 202
----
$909
====
</TABLE>
F-14
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share related data)
10. Commitments, continued
Rent expense for the years ended December 31, 1993, 1994 and 1995 was
approximately $417, $357 and $364, respectively.
The Company is also party to certain software customization agreements,
primarily with Digital, whereby funding has been provided to the Company to
facilitate product development targeted at specific geographic markets.
Under the terms of these agreements, the Company retains ownership of the
products developed, and has agreed to pay royalties to Digital, contingent
upon the subsequent achievement of certain contractually defined product
license fee sales.
When applicable, such royalty amounts typically equate to 15% to 20% of the
Company's software license fees, subject to various exceptions and
limitations. Royalty expense relative to these agreements amounted to $167
in 1993, $761 in 1994 and $762 in 1995.
11. Other Related Party Transactions
Safeguard holds warrants to purchase 360,000 shares of the Company's common
stock at an exercise price of $1.39 per share, subject to certain terms and
restrictions. These warrants are currently exercisable and expire April 30,
1998.
The Company has entered into an administrative services agreement with
Safeguard, which provides for payment, subject to achieving certain sales
levels, of a maximum fee of $25 per quarter. The Company expensed $100 in
each of the years ended December 31, 1993, 1994 and 1995.
The Company has entered into a consulting contract with the principal of
Oaktree Systems, Inc., a stockholder of the Company. During the years ended
December 31, 1993, 1994 and 1995, the Company incurred expenses under this
agreement of $157, $225 and $111, respectively.
12. Profit Sharing Trust Plan
The Company maintains a Profit Sharing Trust Plan (the Plan) which permits
eligible participating members to contribute up to fifteen percent of their
gross earnings. The Company will typically make a contribution equal to
100% of the first 3% which an employee contributes and may also make
additional voluntary contributions. The Company expensed $78, $103 and $148
related to the Plan during the years ended December 31, 1993, 1994 and
1995, respectively.
13. Subsequent Events
On September 11, 1996, the Board of Directors declared a six-for-five stock
dividend which has been accounted for as a stock split. All references to
the number of shares and per share amounts have been restated to reflect
the effect of the split.
Also on September 11, 1996, the Company's Board of Directors authorized the
filing of a Registration Statement on Form S-1 covering 3,181,500 shares of
common stock to be sold in the initial public offering transaction. The
majority of shares (2,158,000) are being offered by the Company and the
remainder (1,023,500) by selling stockholders. This offering will be
conducted as a rights offering to Safeguard's stockholders.
F-15
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Balance Sheets
June 30, 1996
(Unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS LIABILITIES
<S> <C> <C> <C>
Current assets Current liabilities
Cash and cash equivalents.......................... $ 4,731 Current portion of long-term debt.............. $ 180
Accounts receivable, net of allowance for Accounts payable, trade........................ 479
doubtful accounts of $40.......................... 5,715 Accrued expenses............................... 1,636
Deferred income taxes.............................. 587 Income taxes payable........................... 435
Prepaid and other current assets................... 403 Deferred revenue............................... 3,608
------- -------
Total current assets......................... 11,436 Total current liabilities.................. 6,338
Long-term debt - net of current portion........... 162
Deferred rent..................................... 107
-------
Total liabilities................................. 6,607
Property and equipment Commitments (Note 4)
Equipment.......................................... 1,697
Furniture and fixtures............................. 221
Leasehold improvements............................. 61 STOCKHOLDERS' EQUITY
-------
1,979 Common stock, no par value
Authorized - 15,000,000 shares
Accumulated depreciation and amortization............ (1,199) Issued - 8,405,755 shares....................... 84
------- Additional paid-in capital...................... 6,019
Retained earnings............................... 538
Net property and equipment........................... 780 Notes due on common stock purchases............. (652)
-------
Total stockholders' equity...................... 5,989
Computer software costs, net of accumulated -------
amortization of $1,153............................. 380
------- Total liabilities and stockholders' equity........ $12,596
=======
Total assets................................. $12,596
=======
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Operations
for the six months ended June 30, 1995 and 1996
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Revenues
Software license fees............................ $2,155 $3,694
Product enhancement fees......................... 772 427
Implementation and consulting services........... 2,141 2,045
Software maintenance fees........................ 2,196 2,084
------ ------
Total revenues.............................. 7,264 8,250
Operating Expenses
Product development.............................. 1,675 1,851
Product support.................................. 1,345 1,443
Implementation and consulting.................... 1,642 1,341
Sales and marketing.............................. 913 1,404
Royalties and sublicense fees.................... 393 1,013
General and administrative....................... 998 705
------ ------
Total operating expenses
6,966 7,757
------ ------
Income from operations............................. 298 493
Interest income (expense), net..................... 47 146
------ ------
Income before income taxes......................... 345 639
Provision for income taxes......................... 138 262
------ ------
Net income......................................... $ 207 $ 377
====== ======
Net income per common share........................ $.02 $.04
Weighted average number of shares outstanding...... 9,557 9,220
</TABLE>
See notes to consolidated financial statements
F-17
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Cash Flows
for the six months ended June 30, 1995 and 1996
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 207 $ 377
Adjustments to reconcile net income to cash used in operating
activities:
Deferred taxes..................................................................... 108
Depreciation and amortization...................................................... 330 305
Other.............................................................................. 6
Cash provided (used) by changes in operating
assets and liabilities:
Accounts receivable................................................................ (188) (1,355)
Prepaid and other current assets................................................... (78) 87
Accounts payable, accrued expenses and income taxes payable........................ (628) 517
Deferred revenues.................................................................. (622) (453)
------- -------
Net cash used in operating activities............................................... (865) (522)
Cash flows from investing activities:
Capitalized computer software costs................................................ (108) (101)
Capital expenditures............................................................... (325) (200)
------- -------
Net cash used in investing activities............................................... (433) (301)
Cash flows from financing activities:
Proceeds from issuance of long-term debt........................................... 244 148
Repayment of notes due on common stock purchases................................... 46 7
Principal payments under capital lease obligation.................................. (25) (56)
Principal payments under long-term notes........................................... (31) (91)
------- -------
Net cash provided by financing activities........................................... 234 8
------- -------
Net decrease in cash and cash equivalents........................................... (1,064) (815)
Cash and cash equivalents at beginning of period.................................... 2,656 5,546
------- -------
Cash and cash equivalents at end of period.......................................... $ 1,592 $ 4,731
======= =======
</TABLE>
See notes to consolidated financial statements
F-18
<PAGE>
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except share related data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Sanchez Computer
Associates, Inc. (the "Company") have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principals have been condensed or
omitted.
The financial statements as of June 30, 1996 and for the six months ended June
30, 1995 and 1996 are unaudited; however, in the opinion of management, such
statements include all adjustments, consisting solely of normal recurring
adjustments, necessary for a fair presentation of the results for the periods
presented.
The interim financial statements should be read in conjunction with the
financial statements for the fiscal year ended December 31, 1995 and notes
thereto included in the Company's audited consolidated financial statements
included elsewhere herein.
The results of operations for the interim periods are not necessarily indicative
of the results that might be expected for the future interim periods or for the
full year ended December 31, 1996.
2. Additional Cash Flow Statement Information
The Company's non-cash investing and financing activities and cash payments for
interest and income taxes were as follows:
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Cash paid during the year for interest.............. $ 19 $ 17
Cash paid during the year for income taxes.......... 216 228
</TABLE>
3. Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<S> <C>
Accrued compensation and related items...................... $ 618
Accrued royalties........................................... 459
Other....................................................... 559
------
$1,636
======
</TABLE>
F-19
<PAGE>
Notes to Consolidated Financial Statements (Unaudited)
(in thousands, except share related data)
4. Commitments
Commitments as of June 30, 1996 were substantially the same as those disclosed
in Note 10 of the Notes to Consolidated Financial Statements as of December 31,
1995.
5. Net Income Per Share
Net income per common share was computed by dividing income by the weighted
average number of shares outstanding during each period, after giving
retroactive effect to the six-for-five stock split effective September 1996,
including common stock equivalents which would arise from the exercise of stock
options and warrants.
Stock options and warrants granted with exercise prices below the proposed
offering price during the twelve-month period preceding the initial filing date
of the offering have been included in the calculation of common stock
equivalents using the treasury stock method, assuming an offering price of $5.50
per share, as if they were outstanding for all periods presented.
6. Initial Public Offering
In late 1996, the Company proposes to commence an initial public stock offering
for the sale of 2,158,000 shares of its common stock, based upon an assumed
offering price of $5.50 per share. The estimated net proceeds to be raised by
the Company is $10.3 million.
F-20
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the Offering made hereby, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company, the Selling Stockholders or any Underwriters. This
Prospectus does not constitute an offer to sell, or a solicitation of an offer
to buy, any security other than the securities covered by this Prospectus, nor
does it constitute an offer or solicitation by anyone in any jurisdiction in
which such offer or solicitation is not authorized, or in which the person
making such an offer or solicitation is not qualified to do so or to any person
to whom it is unlawful to make such an offer or solicitation. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the dates as of which information is furnished or
the date hereof.
----------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.......................................................... 3
Risk Factors................................................................ 7
The Offering................................................................ 13
Use of Proceeds............................................................. 19
Dividend Policy............................................................. 19
Capitalization.............................................................. 20
Dilution.................................................................... 21
Selected Consolidated Financial Data........................................ 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 23
Business.................................................................... 30
Management.................................................................. 42
Certain Transactions........................................................ 48
Principal and Selling Stockholders.......................................... 49
Description of Capital Stock................................................ 51
Shares Eligible for Future Sale............................................. 52
Underwriting................................................................ 54
Legal Matters............................................................... 56
Experts..................................................................... 56
Additional Information...................................................... 56
Glossary.................................................................... 57
Index to Consolidated Financial Statements.................................. F-1
</TABLE>
----------------------------------------------
Until , 1997 (25 days after the expiration date of the offering), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a Prospectus
when acting as Underwriters and with respect to unsold allotments or
subscriptions.
================================================================================
================================================================================
3,181,500 Shares
Sanchez Computer
Associates, Inc.
[LOGO]
Common Stock
(no par value)
J.P. Morgan & Co.
Wheat First Butcher Singer
, 1996
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses (other than underwriting discounts and commissions and
underwriters' non-accountable expense allowance) payable in connection with the
offering of the Rights and the sale of the Common Stock offered hereby are as
follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee..................$7,209.31
NASD filing fee......................................................$2,590.70
Nasdaq filing fee...................................................$50,000.00
Printing and engraving expenses............................................. *
Legal fees and expenses..................................................... *
Accounting fees and expenses................................................ *
Blue Sky fees and expenses (including legal fees)........................... *
Transfer agent and rights agent and registrar fees
and expenses............................................................... *
Miscellaneous............................................................... *
Total..............................................................$600,000.00
</TABLE>
* To be filed by amendment.
The foregoing, except for the Securities and Exchange Commission
registration fee, the NASD filing fee, and the Nasdaq filing fee, are estimates.
All of the foregoing expenses will be borne by the Registrant.
Item 14. Indemnification of Directors and Officers
The Registrant's Articles and By-laws require the Registrant to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed proceeding by reason of the fact that he
is or was a director or officer of the Registrant or any other person designated
by the Board of Directors (which may included any person serving at the request
of the Registrant as a director, officer, employee, agent, fiduciary or trustee
of another corporation, partnership, joint venture, trust, employee benefit plan
or other entity or enterprise), in each case, against certain liabilities
(including, damages, judgments, amounts paid in settlement, fines, penalties and
expenses (including attorneys' fees and disbursements)), except where such
indemnification is expressly prohibited by applicable law, where such person has
engaged in willful misconduct or recklessness or where such indemnification has
been determined to be unlawful. Such indemnification as to expenses is
mandatory to the extent the individual is successful on the merits of the
matter. Pennsylvania law permits the Registrant to provide similar
indemnification to employees and agents who are not directors or officers. The
determination of whether an individual meets the applicable standard of conduct
may be made by the disinterested directors, independent legal counsel or the
stockholders. Pennsylvania law also permits indemnification in connection with
a proceeding brought by or in the right of the Registrant to procure a judgment
in its favor. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act") may be permitted to directors,
officers, or persons controlling the Registrant pursuant to the foregoing
provisions, the Registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in that Act and is therefore unenforceable. The Registrant expects
to obtain a directors and officers liability insurance policy prior to the
effective date of this Registration Statement.
The Standby Underwriting Agreement provides that the Underwriters are
obligated, under certain circumstances, to indemnify directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under
II-1
<PAGE>
the Act. Reference is made to Section __ of the form of Standby Underwriting
Agreement which will be filed by amendment as Exhibit 1.1 hereto.
Item 15. Recent Sales of Unregistered Securities
In the three years preceding the filing of this registration
statement, the Registrant has issued the following securities that were not
registered under the Act:
Since September 11, 1993 and pursuant to the Registrant's stock option
plans, the Registrant has issued an aggregate of 563,503 shares of Common Stock
and has granted options to purchase a total of 1,204,236 shares of Common Stock
to its employees and directors at exercise prices ranging from $1.67 to $5.50
per share. See "Management--1995 Equity Compensation Plan" in this Registration
Statement. In granting the options and selling the underlying securities upon
option exercise, Registrant has relied on exemptions to registration set forth
in Rule 701 under, and Section 4(2) of, the Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number
--------------
Description
-----------
<C> <S>
1.1 Form of Standby Underwriting Agreement.#
3.1 Amended and Restated Articles of Incorporation of the Company.#
3.2 Amended and Restated By-laws of the Company.#
4.1 Specimen stock certificate representing the Common Stock.#
4.2 Specimen rights certificate representing the Rights.#
5.1 Opinion of Morgan, Lewis & Bockius LLP.#
8.1 Opinion of Morgan, Lewis & Bockius LLP regarding tax matters.#
10.1 1995 Equity Compensation Plan.#
10.2 Common Stock, Warrants and Rights Agreement dated February 26, 1987 among Sanchez
Computer Associates, Inc., Michael A. Sanchez, Frank R. Sanchez, Safeguard Scientifics
(Delaware), Inc., and Safeguard Scientifics, Inc.*
10.3 Common Stock Purchase Agreement dated September 30, 1989 among Sanchez Computer
Associates, Inc., Radnor Venture Partners, L.P., and Safeguard Scientifics (Delaware), Inc.*
10.4 Common Stock Purchase Agreement dated December 1, 1989 among Sanchez Computer
Associates, Inc., Radnor Venture Partners, L.P., and Safeguard Scientifics (Delaware), Inc.*
11.1 Statement Regarding Computation of Earnings Per Share.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Coopers & Lybrand L.L.P.*
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 5.1).
23.3 Consent of Morgan, Lewis & Bockius LLP (to be included in Exhibit 8.1).
24.1 Power of Attorney (included as part of the signature page).
27.1 Financial Data Schedule*
- ----------------
</TABLE>
II-2
<PAGE>
* Filed herewith.
# To be filed by amendment.
(b) Financial Statement Schedules
All information for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission is either included in the
financial statements or is not required under the related instructions or are
inapplicable, and therefore have been omitted.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement; and
(iv) To reflect the results of the Offering.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the registrant
pursuant to provisions described in Item 14 above, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the standby underwriting agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Act, the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was declared
effective; and (3) that for the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to supplement the
prospectus, after the expiration of the subscription period, to set forth the
results of the subscription offer, the transactions by the underwriters during
the subscription period, the amount of unsubscribed securities to be purchased
by the underwriters, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriters is to be made on terms differing from those
set forth on the cover page of the prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in Malvern,
Pennsylvania, on September 27, 1996.
SANCHEZ COMPUTER ASSOCIATES, INC.
By: /s/ Michael A. Sanchez
-----------------------------------------
Michael A. Sanchez
Chairman and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael A. Sanchez and Joseph F.
Waterman, or either of them acting alone, his or her true and lawful attorney-
in-fact and agent, with full power of substitution and revocation, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
Registration Statement and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, full power and authority to do
and perform each and every act and thing requisite and necessary to be done as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the registration statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title (s) Date
---------- --------- ----
<S> <C> <C>
/s/ Michael A. Sanchez Chief Executive Officer September 27, 1996
--------------------------- (Principal Executive Officer)
Michael A. Sanchez and Chairman
/s/ Frank R. Sanchez President and Chief Operating September 27, 1996
--------------------------- Officer
Frank R. Sanchez
/s/ Joseph F. Waterman Senior Vice President and
--------------------------- Chief Financial Officer
Joseph F. Waterman (Principal Financial and
Accounting Officer) September 27, 1996
/s/ Lawrence Chimerine Director September 27, 1996
---------------------------
Lawrence Chimerine
/s/ John D. Loewenberg Director September 27, 1996
---------------------------
John D. Loewenberg
/s/ Ira M. Lubert Director September 27, 1996
---------------------------
Ira M. Lubert
/s/ Thomas C. Lynch Director September 27, 1996
---------------------------
Thomas C. Lynch
/s/ Warren V. Musser Director September 27, 1996
---------------------------
Warren V. Musser
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Description Page No.
- -------------- ----------- --------
<C> <S> <C>
1.1 Form of Standby Underwriting Agreement.#
3.1 Amended and Restated Articles of Incorporation of the Company.#
3.2 Amended and Restated By-laws of the Company.#
4.1 Specimen stock certificate representing the Common Stock.#
4.2 Specimen rights certificate representing the Rights.#
5.1 Opinion of Morgan, Lewis & Bockius LLP.#
8.1 Opinion of Morgan, Lewis & Bockius LLP regarding tax matters.#
10.1 1995 Equity Compensation Plan.#
10.2 Common Stock, Warrants and Rights Agreement dated
February 26, 1987 among Sanchez Computer Associates, Inc.,
Michael A. Sanchez, Frank R. Sanchez, Safeguard Scientifics
(Delaware), Inc., and Safeguard Scientifics, Inc.*
10.3 Common Stock Purchase Agreement dated September 30, 1989
among Sanchez Computer Associates, Inc., Radnor Venture
Partners, L.P., and Safeguard Scientifics (Delaware), Inc.*
10.4 Common Stock Purchase Agreement dated December 1, 1989
among Sanchez Computer Associates, Inc., Radnor Venture
Partners, L.P., and Safeguard Scientifics (Delaware), Inc.*
11.1 Statement Regarding Computation of Earnings Per Share.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Coopers & Lybrand L.L.P.*
23.2 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 5.1).
23.3 Consent of Morgan, Lewis & Bockius LLP (to be included in
Exhibit 8.1).
24.1 Power of Attorney (included as part of the signature page).
27.1 Financial Data Schedule*
- ---------------
</TABLE>
* Filed herewith.
# To be filed by amendment.
<PAGE>
Exhibit 10.2
COMMON STOCK, WARRANTS AND RIGHTS AGREEMENT
AMONG
SANCHEZ COMPUTER ASSOCIATES, INC.,
MICHAEL A. SANCHEZ,
FRANK R. SANCHEZ,
SAFEGUARD SCIENTIFICS (DELAWARE), INC., AND
SAFEGUARD SCIENTIFICS, INC.
February 26, 1987
COMMON STOCK, WARRANTS
AND RIGHTS AGREEMENT
--------------------
<PAGE>
Agreement, made this 26th day of February, 1987, by and among
Sanchez Computer Associates, Inc., a Pennsylvania corporation ("SCA"), Michael
A. Sanchez, a Pennsylvania resident ("MAS"), Frank R. Sanchez, a Pennsylvania
resident ("FRS"), Safeguard Scientifics (Delaware), Inc., a Delaware corporation
("Safeguard"), and Safeguard Scientifics, Inc., a Pennsylvania corporation
("SSI").
Background
----------
A. On January 23, 1987, SCA granted to Safeguard an option (the "Option")
to purchase 706,666 shares (the "Shares") of the Common Stock, no par value , of
SCA ("SCA Common Stock") pursuant to the terms of an option purchase agreement
of the same date (the "Option Agreement") and in consideration for a Safeguard
loan to SCA in the principal amount of $250,000, as evidenced by a Promissory
Note of the same date (the "Note").
B. The parties desire to supersede the Option by this Agreement to provide
for the purchase and sale of the Shares by SCA and the issuance of warrants by
MAS and FRS to purchase an additional 141,334 shares of SCA Common Stock
according to the terms contained herein.
C. In partial consideration of the purchase of the Shares by Safeguard,
SCA desires to grant rights to purchase additional shares of SCA Common Stock,
no par value, in the amount described in Section 2.1, such to rights become
effective upon an offering of such rights by SSI to holders of the Common Stock,
par value $.10 per share, of SSI.
Now, Therefore, in consideration of the above, the covenants contained
herein and intending to be legally bound hereby, the parties agree as follows:
Section 1. SALE OF SHARES AND ISSUANCE OF WARRANTS.
---------------------------------------
1.1 Sale of Shares and Issuance of Warrants. Subject to the terms and
---------------------------------------
conditions herein set forth:
- -2-
<PAGE>
(a) SCA agrees to issue and sell and Safeguard agrees to purchase the
Shares for a purchase price of Two Million Five Hundred Thousand Dollars
($2,500,000) at the Closing (as defined in Section 1.2); and
(b) MAS and FRS agree to issue to Safeguard warrants representing the
right to purchase an aggregate of 141,334 shares of SCA Common Stock (the
"Warrants"), in consideration of Safeguard's purchase of the Shares, at the
Closing.
1.2 Closing. The closing of the sale and purchase of the Shares and the
-------
issuance of the Warrants (the "Closing") shall be held immediately following the
execution and delivery of this Agreement on February ____, 1987 (the "Closing
Date") at the offices of Safeguard at 3411 Silverside Road, Wilmington, Delaware
or at such other time or such other location as the parties may agree.
1.3 Delivery. At the Closing:
--------
(a) Sanchez shall issue and deliver to Safeguard a certificate registered
in the name of Safeguard and representing the Shares against delivery by
Safeguard of payment of $2,500,000 (minus the amount of all principal and other
indebtedness of SCA under the Note, which shall be cancelled at that time) by
Safeguard's check;
(b) MAS shall issue and deliver to Safeguard a single Warrant (as
described in Section 1.4) representing the right to purchase 101,478 shares of
SCA Common Stock registered in the name of Safeguard; and
(c) FRS shall issue and deliver to Safeguard a single Warrant (as
described in Section 1.4) representing the right to purchase 39,856 shares of
SCA Common Stock, registered in the name of Safeguard.
1.4 Description of Warrants. The Warrants, which are represented by the
-----------------------
Warrants attached as Exhibit A1 and A2, shall
- -3-
<PAGE>
represent the right to purchase in the aggregate up to 141,334 shares of SCA
Common Stock ("Warrant Shares") at an exercise price of $7.08 per share, subject
to adjustment and the conditions specified therein. Notwithstanding the
provisions of 1.3(b) and (c) above, MAS and FRS, at their sole discretion, shall
have the right, prior to or at the time the Warrants are exercised, to
substitute shares of SCA common stock held by third parties for those subject to
the Warrants to Safeguard under the same terms and conditions as contained
therein, thereby reducing, on a pro rata basis, the number of shares required to
be transferred to Safeguard by MAS and FRS upon exercise of the Warrants.
Section 2. RIGHTS
------
2.1 (a) Rights. In consideration of Safeguard's purchase of the Shares,
------
SCA shall grant to Safeguard at the Closing rights (the "Rights") to purchase
from SCA such number of shares of SCA Common Stock as shall equal one-third of
all shares of SCA common stock issued and outstanding or reserved for issuance
as of the date SSI notifies SCA as set forth in this section to commence the
Rights Offering (as described below), minus such shares as shall be covered by
the underwriters overallotment option for the Rights Offering. The per share
exercise price for the Rights shall be determined by dividing $20,000,000 by the
sum of all shares of SCA Common Stock issued and outstanding or reserved for
issuance as provided above plus the number of shares of SCA Common Stock covered
by the Rights ("Rights Exercise Price"). The Rights may be exercised only after
they have been transferred to SSI and granted by SSI to holders of SSI Common
Stock in a rights offering (the "Rights Offering"). Each Right shall be
exercisable for a period of no greater than 60 days after the commencement of
the Rights Offering and shall be transferable by the holder thereof during that
period. SCA shall also issue
- -4-
<PAGE>
such additional shares of SCA Common Stock at the Rights Exercise Price as shall
be necessary to grant a customary underwriters' overallotment option or as SCA
and Safeguard shall agree to facilitate the Rights Offering, and use its best
efforts to cause its shareholders to execute and deliver to the underwriter such
share transfer restriction agreements as the underwriter may reasonably request.
In the event Safeguard and SCA agree that the proceeds of the Rights Offering as
contemplated above will exceed the capital requirements of SCA, SCA shall have
the right to substitute such number of shares of SCA Common Stock held by its
shareholders as are agreed to by Safeguard for the corresponding number of
shares to be issued by SCA on exercise of the Rights. It shall be a condition
precedent to any such substitution that the appropriate SCA shareholders execute
and deliver to Safeguard such agreements and undertakings as Safeguard deems
necessary or desirable in order to effect the Rights Offering as contemplated by
this Agreement.
(b) SCA shall have the right to request SSI to commence the Rights
Offering at the time and in the event that (i) in Safeguard's reasonable
judgment, the fair market value of SCA, assuming the exercise of the Rights and
the completion of the Rights Offering, equals $20,000,000 and (ii) Safeguard is
satisfied that such valuation is reasonable in respect to an initial public
offering of SCA Common Stock.
(c) The Rights shall expire on April 30, 1992 unless a registration
statement relating to the Rights Offering has been filed with the Securities and
Exchange Commission by such date, in which case the Rights shall not expire
until 150 days after the date such filing was made. Notwithstanding the above,
in the event that the net income of SCA determined in accordance with generally
accepted accounting principles consistently applied, prior to the deduction of
taxes, for any four consecutive fiscal quarters period
- -5-
<PAGE>
ending prior to December 31, 1991 equal or exceed $3,500,000, and within the 60
days following such four quarter period SCA notifies SSI in writing that the
Rights shall so expire (unless extended, as provided below) and delivers to SSI
financial statements which reflect such net income, the Rights shall expire
unless a registration statement relating to the Rights Offering has been filed
with the Securities and Exchange Commission within 180 days of the date of
delivery of such notice and financial statements, and thereafter unless such
registration statement becomes effective within 270 days of such delivery. Such
expiration dates are based on the agreements of SCA in respect to the Rights
Offering as provided in this Agreement. The financial statements delivered to
SSI shall be certified by a "Big 8" accounting firm, in accordance with
generally accepted accounting principles consistently applied to all periods
covered.
2.2 Stock Split. After SSI has notified SCA of its intention to commence
-----------
the Rights Offering, SCA shall, prior to the filing of the Registration
Statement as provided in Section 2.4 (or at such earlier date as agreed to by
SCA and SSI), take all such actions as shall be necessary to cause a split of
its common stock in such ratio as is designated by Safeguard at that time.
2.3 Registration Statement. Upon notice by SSI to SCA of its intention to
----------------------
commence the Rights Offering, SCA shall promptly prepare a Registration
Statement on Form S-1 or applicable form to register, under the Securities Act
of 1933, as amended (the "1933 Act"), the Rights and the shares of SCA Common
Stock issuable upon exercise of the Rights (the "Rights Shares"). SCA covenants
that such Registration Statement and the Prospectus included therein shall be in
form reasonably satisfactory to Safeguard, shall comply in all respects with the
1933 Act and the rules and regulations of the Securities and Exchange Commission
promulgated thereunder, and shall not contain any untrue statement of material
fact or omit to
- -6-
<PAGE>
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
2.4 Registration Process. SCA shall use its best efforts to cause such
--------------------
Registration Statement to be filed with the Securities and Exchange Commission
and to become effective as promptly as practicable. SCA shall prepare and file
with the Securities and Exchange Commission promptly upon SSI's request, any
amendments or supplements to the Registration Statement or Prospectus that, in
SSI's opinion, may be necessary or advisable in connection with the Rights
Offering, subject to the reasonable approval of counsel for SCA. SCA shall not
file any amendment or supplement to the Registration Statement or Prospectus
unless (i) it has furnished SSI with a copy of such amendment or supplement a
reasonable time prior to filing and (ii) SSI has not reasonably objected to such
amendment or supplement by notice to SCA. SCA shall not issue any solicitation
material such as advertisements, press releases, mailings, or other such
solicitation material of which SSI reasonably disapproves by prompt written
notice to SCA after receiving reasonable notice thereof. SCA shall comply with
the 1933 Act and the rules and regulations thereunder in connection with the
Rights Offering and, until the termination of the Rights Offering, SCA shall use
its best efforts to qualify the Rights Shares under the securities laws of all
jurisdictions in which qualification is required and there are holders of SSI
Common Stock and to continue such qualifications in effect during the exercise
period of the Rights. At the time of mailing the Prospectus relating to the
Rights Offering and at the time of the closing of the Rights Offering, SSI shall
be entitled to receive (i) from SCA such certificates and documents evidencing
compliance with such representations and warranties of SCA as SSI shall
reasonably request, and (ii) from SCA's counsel and independent accountants
- -7-
<PAGE>
such opinions and documents as SSI would have been entitled to obtain under
Section 10.3 (vi) hereof as if it were applicable to the Rights Offering.
2.5 Use of Proceeds. SCA shall apply all proceeds of the Rights Offering
---------------
first to the payment of the expenses of the Rights Offering, and thereafter to
general working capital purposes or such other reasonable purposes as shall be
determined by Board of Directors of SCA and described in the Prospectus.
2.6 Registration Services.
---------------------
(a) Services. SSI shall diligently and in a timely fashion assist SCA in
--------
structuring the Rights Offering, in preparing the necessary Registration
Statement and related disclosure documentation, in clearing the Rights Offering
with the Securities and Exchange Commission and applicable state securities
commissions and shall provide such other services and assistance in connection
with the Rights Offering as SCA shall reasonably request; provided, however,
that nothing contained herein shall require SSI to provide to SCA any services
or assistance which, if rendered by SSI, would require SSI to register as a
broker-dealer under Section 15 of the Securities Exchange Act of 1934, as
amended (the "1934 Act"), or as an investment adviser under the Investment
Advisor Act of 1940, as amended.
(b) Working Group. SCA shall cause its counsel and auditors and SCA's
-------------
employees to render such assistance in consummating the Rights Offering, at
SCA's expense, as is customary in the consummation by a company of its initial
public offering. In addition, in rendering services under this Section 2.6, SSI
may engage special legal counsel, one or more rights agents, registrar and
transfer agents, and such other consultants as SSI may reasonably deem
reasonably necessary or desirable in connection with the Rights Offering, the
reasonable expenses of which shall be paid by SCA. In addition, SSI may require
SCA to engage a
- -8-
<PAGE>
registered broker-dealer of SSI's designation to provide such services in
connection with the Rights Offering as SSI may deem reasonably necessary or
desirable, including without limitation, to effect or underwrite the offering of
the Rights or the Rights Shares in states in which applicable state law requires
that a registered broker-dealer effect such offering.
(c) Compensation. For all services rendered by SSI under this Section
------------
2.6, SSI shall have earned a fee of $100,000 on the date the Registration
Statement is filed, payable by SCA not later than 90 days thereafter.
2.7 Indemnification. (a) SCA shall indemnify and hold harmless Safeguard
---------------
and SSI, their executive officers, directors and controlling persons (within the
meaning of the 1933 Act) and each person who participates as an underwriter or
controlling person of an underwriter (within the meaning of the 1933 Act) with
respect to the Rights Offering against any loss, claims, damages or liabilities
to which any of them may become subject under the 1933 Act or otherwise insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
which arise out of or are based upon any untrue statement or allegedly untrue
statement of any material fact contained in the registration statement filed
under the 1933 Act with respect to the Rights Offering, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse any of them for any
legal or other expenses reasonably incurred by any of them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that SCA shall not be liable hereunder in any such case if
any such loss, claim, damage, or liability arises out of or is based upon any
untrue
- -9-
<PAGE>
statement or allegedly untrue statement or omission or alleged omission made in
such registration statement, prospectus or amendment or supplement thereto in
reliance upon and in conformity with written information furnished to SCA for
such purpose by Safeguard or SSI or by their special legal counsel, rights,
registrar and transfer agents and such other consultants engaged by SSI pursuant
to Section 2.6 (b) or by any underwriter on behalf of such holder.
(b) Safeguard and SSI shall indemnify and hold harmless SCA, its executive
officers, directors, and controlling persons (within the meaning of the 1933
Act) and each person who participates as an underwriter or controlling person of
an underwriter (within the meaning of the 1933 Act) with respect to the
registration statement and the Rights Offering against any losses, claims,
damages or liabilities (or actions in respect thereof) which arise out of or are
based upon any untrue statement or allegedly untrue statement or omission or
alleged omission made in such registration statement or omission or alleged
omission made in such registration statement, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereto, in
reliance upon and in conformity with written information furnished to SCA by
Safeguard or SSI, or any agent of either, and will reimburse any of them for any
legal or other expenses reasonably incurred by them in connection with
investigating or defending, any such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under this Section 2.7
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party, notify the
indemnifying party in writing of the commencement thereof and the indemnifying
party shall have the right to participate in and to assume the defense thereof
with counsel mutually satisfactory to the parties. The
- -10-
<PAGE>
failure to notify any indemnifying party promptly of the commencement of any
such action, if prejudicial to the ability to defend such action, shall relieve
such indemnifying party of any liability to the indemnified party under this
Section 2.7, but the omission to so notify the indemnifying party will not
relieve such party of any liability that such party may have to any indemnified
party other than under this Section 2.7.
Section 3. REPRESENTATIONS AND WARRANTIES OF SCA.
-------------------------------------
SCA, MAS and FRS (as to MAS and FRS, to the best of their knowledge) jointly and
severally represent and warrant to Safeguard and SSI the following, except as
accurately and fully disclosed on a written document attached hereto and titled
as a schedule corresponding to the number of the appropriate Section. All
representations and warranties are effective as of the simultaneous execution,
delivery and closing of this Agreement by SCA, MAS and FRS:
3.1. Organization and Standing of SCA. SCA is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has all requisite power and authority to own
and lease its properties and assets and to conduct its business, to enter into
this Agreement and all additional agreements and instruments to be executed and
delivered by SCA at the Closing (the "Closing Documents" including a Shareholder
Agreement, the Warrants, and an Administrative Service Agreement (the "Closing
Agreements"), to authorize and issue the Shares subject to the appropriate state
and federal registration of securities, and to conduct the Rights Offering and
to comply with the provisions hereof. SCA is duly qualified, licensed or
domesticated as a foreign corporation in good standing in each jurisdiction
wherein the nature of its activities or its properties owned or leased makes
such qualification, licensing or
- -11-
<PAGE>
domestication necessary.
3.2 Authorization. SCA has all requisite power and authority to execute
-------------
and deliver this Agreement and the Closing Agreements and to carry out and
consummate the transactions contemplated in the same. The execution, delivery
and performance of this Agreement and the Closing Agreements by SCA have been
duly authorized by all requisite corporate action, this Agreement has been duly
executed and delivered by SCA and the Closing Agreements shall be duly executed
and delivered at the Closing, and all such agreements constitute or shall
constitute valid and binding obligations of SCA, enforceable against SCA in
accordance with their respective terms.
3.3 No Conflict with Law or Documents. The execution, delivery and
---------------------------------
performance of this Agreement and the Closing Agreements by SCA (and, where
appropriate, by MAS and FRS) will not violate any provision of law, any rule or
regulation of any governmental authority, or any judgment, decree or order of
any court binding on SCA, and will not conflict with or result in any breach of
any of the unwaived terms, conditions or provisions or constitute a default
under, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties, assets or outstanding shares of SCA
under its Articles of Incorporation or By-Laws or any indenture, mortgage,
lease, agreement or other instrument to which SCA is a party or by which it or
any of its properties is bound or affected, except as disclosed on Schedule 3.3.
3.4 Capital Stock. The authorized capital stock of SCA consists solely of
-------------
5,000,000 shares of SCA Common Stock, no par value. Schedule 3.4 hereto
discloses: (i) all shares which have been duly and validly issued and are
currently outstanding, fully paid and nonassessable and (ii) any shares which
have been previously reserved for issuance upon the exercise of options
- -12-
<PAGE>
previously granted. Except as disclosed on Schedule 3.4 and the options referred
to in clause (ii), there are no outstanding subscriptions, warrants, options or
other rights or commitments of any character to subscribe for or purchase from
SCA, or obligating SCA to issue, any shares of any class of SCA's capital stock
or any securities convertible into or exchangeable for such shares; no shares of
SCA Common Stock, other than those reserved for issuance pursuant to such
options, have been reserved by SCA for issuance; and except as disclosed on
Schedule 3.4 there are no preemptive or similar rights to purchase or otherwise
acquire any shares of any class of SCA's capital stock pursuant to any provision
of law or the Articles of Incorporation or By-Laws of SCA or otherwise. The
number of shares of SCA Common Stock reserved for issuance upon the exercise of
the options referred to in clause (ii) above is not subject to adjustment by
reason of the issuance and sale of the Shares hereunder.
3.5 Consents and Approvals. Except for filings under Federal and
----------------------
applicable state securities laws permitted to be made after the Closing, no
permit, consent, approval or authorization of, or declaration to or filing with,
any governmental or regulatory authority or other person (except as disclosed on
any Schedule) not made or obtained, is required in connection with the execution
or delivery of this Agreement by SCA, the offer, issuance, sale or delivery of
the Shares, the Rights and the Rights Shares or the carrying out by SCA of the
other transactions contemplated hereby.
3.6 Private Offering. Neither SCA nor anyone acting on behalf of SCA has
----------------
offered any of the Shares for sale to, or solicited offers to buy from, any
individuals or entities in connection with the sale of the Shares other than
Safeguard and SSI. Assuming the accuracy of representations contained in
Section 4A hereof, the offer, issuance and delivery of the Shares are exempt
from registration under the 1933 Act and all action required
- -13-
<PAGE>
to be taken prior to the offer or sale of the Shares has been taken under
applicable state securities laws. No representation or warranty made by SCA in
this Agreement or in any document delivered to Safeguard or SSI in connection
with the transactions contemplated by this Agreement contains an untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements, in light of the circumstances in which they were
made, not misleading.
3.7 Articles of Incorporation and By-Laws. SCA has delivered to Safeguard
-------------------------------------
true and complete copies of its Articles of Incorporation and By-Laws as
currently in effect.
3.8 Subsidiaries. SCA has no subsidiaries and does not own any
------------
interest, directly or indirectly, in any other corporation, partnership, joint
venture or other enterprise or entity, except as disclosed on Schedule 3.8.
3.9 Shareholders. (a) Set forth on Schedule 3.4 hereto is the name
------------
of each holder of SCA Common Stock (Common Stock being the only authorized
capital stock of SCA), together with the number of shares of SCA Common Stock
beneficially owned by such holder and the purchase price therefor, and of each
holder of outstanding options, warrants or other rights to purchase SCA Common
Stock granted by SCA, the number of shares issuable upon the exercise of such
holders' options and the exercise price of such options.
(b) There is no outstanding indebtedness of any director or officer of SCA
to SCA. Except for expense reimbursements and accrued salaries in the amount of
approximately $298,000 which may be owing from SCA to officers and employees of
SCA, there is no outstanding indebtedness of SCA to any of its directors,
officers or stockholders or to any holder of options, warrants or rights to
purchase Common Stock granted by SCA.
3.10 Litigation. Except as set forth in Schedule 3.10, and except for law
----------
suits involving Equibank and Rockland Credit Union,
- -14-
<PAGE>
there is no pending or, to the knowledge of SCA, threatened suit, action or
litigation, or administrative, arbitration or other proceeding or governmental
inquiry or investigation questioning the validity of this Agreement or the
transactions contemplated hereby, or affecting SCA or its business, nor is there
any basis for any such suit, action, litigation, proceeding, inquiry or
investigation.
3.11 Compliance with Laws. To the knowledge of MAS and FRS after due
--------------------
inquiry, SCA is in compliance with all material laws, ordinances, and rules and
regulations of governmental authorities applicable to or affecting it, its
properties or its business, and SCA has not received notice of any claimed
violation or default with respect to any of the foregoing.
3.12 Financial Statements. The draft audited balance sheet of SCA as at
--------------------
June 30, 1986, the related statements of operations, changes in financial
position and stockholders' equity of SCA for the year ended June 30, 1986, and
the related notes thereto (the "Financial Statements") as submitted to SCA by
Coopers & Lybrand, copies of all of which have heretofore been furnished to
Safeguard, have been prepared in conformity with generally accepted accounting
principles, consistently applied, and fairly present the financial position of
SCA at such dates and the results of its operations and changes in its financial
position for the periods then ended. The internally prepared balance sheet and
statement of operations for SCA as at December 31, 1986 for the six month period
then ended have been prepared on a basis consistent with the Financial
Statements.
3.13 No Material Adverse Change. Except as set forth on Schedule 3.13,
--------------------------
there has been no material adverse change in the business, properties, assets,
earnings or condition (financial or otherwise) of SCA since June 30, 1986.
3.14 Absence of Undisclosed Liabilities. Except as set forth
----------------------------------
- -15-
<PAGE>
on Schedule 3.14, SCA does not have any material liabilities or obligations of
any nature, whether absolute, accrued, contingent or otherwise, other than (i)
the liabilities and obligations reflected or reserved against on its balance
sheet at June 30, 1986 under any contracts and agreements of SCA (whether or not
required to be disclosed in this Agreement) and (ii) liabilities covered by
insurance.
3.15 Assets. SCA has good marketable title to all of its properties and
------
assets reflected on the balance sheet as at June 30, 1986, except as sold or
otherwise disposed of in the ordinary course of business since that date, and
such properties and assets are not subject to any liens, mortgages, security
interests, pledges, encumbrances or charges of any kind except liens, if any,
for current taxes and assessments not yet due, and those disclosed on Schedule
3.15 hereto.
3.16 Dividends and Other Distributions. Since June 30, 1986, SCA has not
---------------------------------
declared, set aside, or made any payment of a dividend or made any other
distribution in respect of any class of its shares, repurchased or redeemed any
of such shares, or made any other payments to any stockholder, other than salary
paid to such stockholder for services to SCA as an officer or employee or fees
paid to a consultant or director.
3.17 Tax Matters. SCA has filed all Federal, state and other tax returns
-----------
which are required to be filed and all federal, state and local taxes required
to be paid with respect to the periods covered by such returns have been paid or
accrued. SCA's Federal income tax returns have not been audited by the Internal
Revenue Service.
3.18 Agreements Affecting Equity Securities. Except as set forth in
--------------------------------------
Schedule 3.4 hereto, there are no agreements, written or oral, between SCA and
any holder of any of its equity securities, or, to the knowledge of the officers
of SCA, among any holders of
- -16-
<PAGE>
its equity securities, relating to the acquisition, disposition or voting of any
securities of SCA.
3.19 Patents and Other Intangible Assets. Except as disclosed on Schedule
-----------------------------------
3.19: (a) SCA (i) owns or has the right to use, free and clear of all liens,
claims and restrictions, all patents, trademarks, service marks, trade names,
copyrights, licenses and rights with respect to the foregoing, used in the
conduct of its business as now conducted or proposed to be conducted without, to
the knowledge of the officers of SCA, infringing upon or otherwise acting
adversely to the right or claimed right of any person under or with respect to
any of the foregoing and (ii) is not obligated or under any liability whatsoever
to make any payments by way of royalties, fees or otherwise to any owner of,
licensor of, or other claimant to, any patent, trademark, trade name, copyright
or other intangible asset, with respect to the use thereof or in connection with
the conduct of its business or otherwise.
(b) SCA owns or has the unrestricted right to use all trade secrets,
including know-how, inventions, designs, processes, computer programs and
technical data required for or incident to the development, manufacture,
operation and sale of all products and services sold or proposed to be sold by
SCA, free and clear of any rights, liens, or claims of others; provided,
however, the possibility exists that other persons, completely independently of
SCA or its past or present employees or agents, may have developed trade secrets
or items of technical information similar or identical to those of SCA. SCA is
not aware of any such development or identical trade secrets or technical
information by others.
(c) SCA has taken reasonable security measures to protect the secrecy,
confidentiality and value of the trade secrets and other items of technical
information referred to in paragraph (b) of this
- -17-
<PAGE>
Section 3.19.
(d) Except for (i) licenses to use SCA's software and hardware products
granted to SCA's customers in the ordinary course of SCA's business; (ii) a
license to
Sanchez Software Ltd., a wholly-owned subsidiary of SCA, and (iii) rights
granted by SCA in the ordinary course of its business to distributors and OEMs
to market SCA's software and hardware products to end-users, SCA has not
licensed, sold, transferred, assigned or subjected to any lien, any trade
secret, know-how, invention, design, process or technical data necessary or
useful for the manufacture, use or sale of any product or service presently
under development or manufacture or rendered or to be manufactured or rendered
by SCA.
3.20 Registration Rights. Other than under this Agreement, SCA has not
-------------------
agreed to register under the 1933 Act any of its authorized or outstanding
securities.
3.21 Insurance. SCA has in full force and effect, and is the sole owner
---------
of, policies of insurance of the types and in the amounts listed on Schedule
3.21 hereto.
3.22 Pension and Profit Sharing Plans. SCA has no pension, profit-sharing
--------------------------------
or other employee pension or welfare plan subject to the Employee Retirement
Income Security Act of 1974, as amended (ERISA), other than group insurance
plans. SCA has no bonus or other compensation plan for its officers, directors
or employees not subject to ERISA other than those listed on Schedule 3.22.
3.23 Contracts and Agreements. Except as provided in the next sentence,
------------------------
set forth in Schedule 3.23 hereto is a list of all leases, employment contracts,
loan agreements and other instruments, agreements and contracts to which SCA is
a party or by which it is bound, true and correct copies of which have
previously been delivered to Safeguard. Schedule 3.23 does not include (i)
contracts with SCA's suppliers entered into in the ordinary course
- -18-
<PAGE>
of business and (ii) other "non-essential" contracts entered into in the
ordinary course of SCA's business which do not obligate SCA to pay more than
$5,000 in the aggregate ($25,000 in the case of any one such contract) or to
perform any material non-monetary obligation. For the purposes of this Section,
a contract is "non-essential" if upon its expiration or sooner termination, SCA
can obtain the goods or services furnished to it thereunder from other parties
on the same or better terms.
3.24 No Defaults. Except as disclosed on Schedule 3.24, SCA is not (i) in
-----------
default under any lease, employment contract, loan agreement, or other
instrument, agreement or contract, (ii) in violation of its Articles of
Incorporation or By-Laws or any applicable law or governmental regulation, or
(iii) in default with respect to any order, writ, injunction or decree of any
court or governmental agency binding on SCA and no event has occurred which with
notice or lapse of time, or both, would create such a default or violation.
3.25 Employees. To SCA's knowledge, no executive or key employee of SCA
---------
has any plans to terminate his or her employment with SCA. To SCA's knowledge,
no employee of SCA is a party to or is otherwise bound by any agreement or
arrangement (including, without limitation, licenses, covenants or commitments
of any nature), or subject to any judgment, decree, or order of any court or
administrative agency, (i) that would conflict with such employee's obligation
diligently to promote and further the interests of SCA, or (ii) that would
conflict with SCA's business as now conducted or as proposed to be conducted.
3.26 Labor Relations. SCA's employees are not represented by any labor
---------------
union or other collective bargaining unit, and to the knowledge of SCA there is
no union campaign being conducted to solicit cards from any employees to
authorize the union to request an NLRB Certification election with respect to
those employees.
- -19-
<PAGE>
There is no labor trouble, dispute, grievance, controversy or strike pending or
threatened against SCA and SCA does not know of any basis for any such matter.
3.27 Absence of Certain Developments. Except as disclosed on Schedule
-------------------------------
3.27 attached hereto, and except for the loan evidenced by the Note, since June
30, 1986, SCA has not (a) issued any equity securities or other securities, (b)
borrowed any amount or incurred or become subject to any other liabilities
(absolute or contingent) except current liabilities incurred, and liabilities
under contracts entered into, in the ordinary course of business, (c) discharged
or satisfied any lien or encumbrance or paid any obligation or liability
(absolute or contingent) other than current liabilities shown on its balance
sheet as at June 30, 1986 or current liabilities incurred since those dates in
the ordinary course of business, (d) reclassified its shares, (e) mortgaged,
pledged or subjected to lien, charge or any other encumbrance any of its assets,
tangible or intangible, except liens on real or personal property for taxes not
yet due and payable, (f) sold, assigned or transferred any of its tangible
assets or cancelled any debts or obligations except in the ordinary course of
business, (g) sold, assigned or transferred any patents, trademarks, trade
names, copyrights, trade secrets or other intangible assets, (h) suffered any
extraordinary losses, or waived any rights of business, (i) made any changes in
officer or employee compensation except in the ordinary course of business and
consistent with past practice, or (j) entered into any transaction other than in
the ordinary course of business except as disclosed, permitted or required by
this Agreement or the Closing Agreements.
3.28 Contracts with Insiders. Except as set forth on Schedule 3.28, no
-----------------------
shareholder, officer, or director of SCA is or has been a party to any
transaction, or is a party to any contract, agreement or arrangement, providing
for SCA's employment of,
- -20-
<PAGE>
furnishing of services to SCA by, the rental of real or personal property by SCA
from, or otherwise requiring payments by SCA, to any such person, or any member
of such person's family, or any corporation, partnership or other entity in
which such person, or any member of his family, has an interest or of which such
person, or any member of his family, is an officer, director, trustee, or
beneficiary.
Section 4. REPRESENTATIONS AND WARRANTIES OF SAFEGUARD AND SSI.
---------------------------------------------------
Safeguard and SSI represent and warrant to SCA as follows:
4.1 Organization and Standing. Safeguard is a corporation duly organized,
-------------------------
validly existing and in good standing under the laws of the State of Delaware,
SSI is a corporation duly organized validly existing and in good standing under
the laws of the Commonwealth of Pennsylvania and each has all requisite power
and authority to enter into this Agreement and to comply with the provisions
hereof.
4.2 Authorization. Safeguard and SSI have all requisite power and
-------------
authority to execute and deliver this Agreement and to carry out and consummate
the transactions contemplated hereby. The execution, delivery and performance
of this Agreement by Safeguard and SSI have been duly authorized by all
necessary corporate action. This Agreement constitutes the legal, valid and
binding obligation of Safeguard and of SSI enforceable against Safeguard and SSI
in accordance with its terms. Safeguard will present at Closing an opinion from
its counsel, satisfactory in form and substance, to the effect that the subject
matters of the representations and warranties of Sections 4.1 and 4.2 are true.
Section 4A. SAFEGUARD'S SECURITIES LAW REPRESENTATIONS AND WARRANTIES.
---------------------------------------------------------
Safeguard hereby expressly acknowledges that the Shares, Warrants, Warrant
Shares, Rights and shares of SCA Common Stock which may be
- -21-
<PAGE>
purchased upon exercise of the Rights (the "Securities"), have not been
registered under the 1933 Act pursuant to the exemption provided in Section 4(2)
of the 1933 Act inasmuch as no public offering of any of the Securities has been
made. Safeguard further acknowledges that SCA, MAS and FRS have relied upon the
availability of such exemption based upon, among other things, Safeguard's
representations, warranties, covenants and acknowledgements as set forth in this
Agreement.
4.3 Non-Distribution. Safeguard hereby represents and warrants to SCA,
----------------
MAS and FRS that unless and until any of the Securities are registered under the
1933 Act, the Securities are being acquired by Safeguard solely for its own
account and not with a view toward fractionalization or distribution, except as
provided in this Agreement. Safeguard hereby represents and warrants that none
of the Securities can be transferred, sold or otherwise disposed of in the
absence of registration under the 1933 Act, or, in the opinion of counsel to
SCA, such registration is unnecessary and acknowledges that the transfer records
relating to the Securities maintained by SCA or its authorized agent will bear a
"stop-transfer" notation.
4.4 Restrictions on Transfer. Safeguard (i) hereby acknowledges that none
------------------------
of the Securities has been registered under the 1933 Act and, therefore,
Safeguard must bear the investment risk thereof for an indefinite period of
time, (ii) is aware that any routine sales of any of the Securities made
pursuant to Rule 144 under the 1933 Act ("Rule 144") may be made only in limited
amounts and in accordance with the terms and conditions of Rule 144, (iii) is
aware that Rule 144 is not presently available for use by Safeguard with respect
to the sale of any of the Securities, and (iv) SCA is the only person that may
register any of the Securities under the 1933 Act and except as otherwise
provided in Section 10 hereof, SCA is not obligated to so register any of the
- -22-
<PAGE>
Securities.
4.5 Sophistication; Access to Information. (a) Safeguard represents and
-------------------------------------
warrants to SCA, MAS and FRS that it is well-versed in financial matters, has
had extensive dealings over the years in securities, including "restricted
securities," within the meaning of subparagraph (a) (3) of Rule 144, and is
fully capable of understanding the type of investment being made pursuant to
this Agreement and the risks involved in connection therewith.
(b) Safeguard confirms that SCA has made available to it the opportunity
to ask questions of and receive answers from SCA's officers and directors
concerning the the business and financial condition of SCA, to inspect and make
copies of agreements, contracts and records including those set forth in the
schedules attached hereto, and Safeguard has received to its satisfaction such
additional information about the business and financial condition of SCA and the
terms and conditions of the offering as it has requested.
4.6 Pennsylvania Blue Sky Requirements. Safeguard understands that the
----------------------------------
Shares are being acquired by it, and that any Warrant Shares will be acquired by
it, on the basis of the exemption from registration afforded by Section 203(d)
of the Pennsylvania Securities Act of 1972. SSI and Safeguard represent and
warrant to SCA, MAS and FRS that SSI has been in existence for at least eighteen
(18) months, Safeguard is a wholly-owned subsidiary of SSI, and that SSI has a
tangible net worth, on a consolidated basis, as reflected in its most recent
audited financial statement, of ten million dollars ($10,000,000) or more.
Section 5. DOCUMENTS DELIVERED TO SAFEGUARD AND OTHER ACTIONS TAKEN BY SCA
---------------------------------------------------------------
PRIOR TO CLOSING.
- ----------------
Safeguard's purchase of the Shares at the Closing, to occur immediately
following the execution and delivery of this Agreement
- -23-
<PAGE>
by the parties, shall be made in reliance on and in consideration of the
execution and delivery of the following documents at Closing and the completion
of the following actions prior to Closing:
5.1 Opinion of Counsel to SCA. An opinion from Lipton & Famiglio dated
-------------------------
the date of Closing, addressed to Safeguard and satisfactory in form and
substance to Safeguard, to that effect that:
(a) SCA is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Pennsylvania and has all
requisite power and authority to own and lease its properties and assets and to
conduct its business.
(b) SCA is duly qualified, licensed or domesticated as a foreign
corporation in good standing in each jurisdiction wherein the nature of its
activities owned or leased makes such qualification, licensing or domestication
necessary.
(c) SCA has all requisite power and authority to execute and deliver this
Agreement and the Closing Agreements and to carry out the transactions
contemplated by the same. The execution, delivery and performance of this
Agreement and the Closing Agreements by SCA have been duly authorized by all
requisite corporate action. This Agreement and the Closing Agreements have been
duly executed and delivered by SCA and constitute valid and binding obligations
of SCA (and, where appropriate, of MAS and FRS) enforceable against such parties
in accordance with their respective terms, subject as to enforcement of remedies
applicable to bankruptcy, insolvency, reorganization or similar laws affecting
generally the enforcement of creditors' rights and the relief of debtors.
(d) The authorized capital stock of SCA consists solely of 5,000,000
shares of SCA Common Stock, no par value. Prior to the authorization and
issuance of any of the Shares pursuant to this Agreement, Schedule 3.4 hereto
discloses (i) all shares which have
- -24-
<PAGE>
been duly and validly issued and are currently outstanding, fully paid and non-
assessable and (ii) all shares which have been duly reserved for issuance upon
the exercise of options previously granted and to be granted under the SCA's
incentive stock option plan and non-qualified stock option plan for its
directors, officers and employees.
(e) Except for those specifically identified in Schedule 3.4 or in
paragraph (d) above, there are no outstanding subscriptions, warrants, options
or other rights or commitments of any character to subscribe for or purchase
from SCA, or obligating SCA to issue, any shares of any class of SCA or any
securities convertible into or exchangeable for such shares; and there are no
preemptive or similar rights to purchase or otherwise acquire any shares of any
class of SCA pursuant to any provision of law or the Articles of Incorporation
or By-Laws of SCA.
(f) The issuance, sale and delivery of the Shares, the Warrant and the
Warrant Shares to Safeguard in accordance with this Agreement, and the Rights to
holders of SSI Common Stock upon the exercise of Rights as contemplated hereby,
have been duly authorized by all necessary corporate action, and the Shares, the
Warrants and the Warrant Shares when so issued, sold and delivered against
payment of the purchase price therefor, will be duly and validly issued, fully
paid and nonassessable, free of all preemptive or similar rights.
(g) Except as described herein and except for (i) the filing of a
Registration Statement on Form S-1 with the Securities and Exchange Commission
with respect to the Rights Offering, and (ii) appropriate filings under state
blue sky or securities laws, no permit, consent, approval or authorization of,
or declaration to, or filing with, any governmental or regulatory authority or
other person, not made or obtained, is required in connection with the execution
or delivery of this Agreement by SCA or the carrying out
- -25-
<PAGE>
and consummation by SCA of the transactions contemplated hereby.
(h) Based on the representations of SCA in the first sentence of Section
3.6 and of Safeguard contained in Section 4A of this Agreement, it is not
presently necessary, under the circumstances contemplated by this Agreement, to
register the Securities.
(i) The execution, delivery and performance of this Agreement and the
Closing Agreements by SCA (and, where appropriate, MAS and FRS) will not violate
any provision of law, any rule or regulation of any governmental authority, or
any judgment, decree or order of any court binding on SCA, and will not conflict
with or result in any breach of any of the unwaived terms, conditions or
provisions of, or constitute a default under, or result in the creation of any
lien, security interest, charge or encumbrance upon any of the properties,
assets or outstanding shares of SCA under its Articles of Incorporation or By-
Laws, or any indenture, mortgage, lease, agreement or other instrument known to
such counsel to which SCA is a party or by which it, or any of its properties,
is bound or affected.
(j) To the knowledge of such counsel, there is no action, suit or
litigation, administrative, arbitration, or other proceeding or governmental
inquiry or investigation pending or threatened against SCA or any of its
properties or assets, except as disclosed in Schedule 3.10 to this Agreement.
(k) As to such other matters incident to the transactions contemplated by
this Agreement as Safeguard may reasonably request.
5.2 Certain Amended SCA/Third Party Agreements. The Consulting Agreement
------------------------------------------
between SCA and Warren Sanchez has been amended to provide for the payment of
$2,500 per month for a 3 year term, in return for which Warren Sanchez will
provide 2.5 working days per month to SCA, with unused time to be accumulated
towards future services, and has waived all of his rights to SCA's proprietary
software.
- -26-
<PAGE>
5.3 Shareholder Agreement. The Shareholders Agreement in the form attached
---------------------
hereto as Exhibit B ("Shareholder Agreement"), which, among other things,
obligates each of MAS and FRS to vote all of the voting securities of SCA held
by him (including those voting securities in respect to which he has been
granted a proxy) to elect two Safeguard designees as members of the Board of
Directors of SCA.
5.4 Authorization of Additional Directors. SCA and MAS will amend SCA's
-------------------------------------
by-laws to increase the authorized number of members of its Board of Directors
to seven members and MAS will elect Warren V. Musser, Ira Lubert, (the initial
Safeguard designates under the Shareholder Agreement) ("Safeguard Designated
Directors") as directors of SCA, in addition to MAS and FRS.
5.5 Amended By-Laws. Amendments to the By-Laws of SCA to provide that (i)
---------------
before SCA may take any of the actions described in Section 7.8 of this
Agreement, such action must be approved by a majority of the directors then in
office, which majority shall include the two Safeguard Designated Directors, and
(ii) any change in the By-Laws setting forth the foregoing requirement shall
require the approval of a majority of the directors then in office, which
majority shall include such designees. Such amendments shall also provide for
the rights, duties and obligations of the Chief Operating Officer to be hired by
SCA as provided in Section 7.1. and shall effect such technical amendments as
are listed on Schedule 5.5 to this Agreement in respect to indemnity of
Directors and special shareholder and Board meetings.
5.6 Administrative Services Agreement. The administrative services
---------------------------------
contract in the form attached hereto as Exhibit C (the "Administrative Services
Agreement")
5.7 Actions Taken. (i) The salaries of MAS and FRS have been fixed at
-------------
$75,000 each, with bonus provisions to be subsequently determined, (ii) SCA
shall take the following actions immediately
- -27-
<PAGE>
following closing:
(a) write off Equibank receivables;
(b) write off Rockland Credit Union receivables;
(c) establish reserve in the amount of $ in respect to the litigation
----
disclosed in Section 3.10.
Section 6. GRANT OF IRREVOCABLE PROXY.
--------------------------
As present and future holders of the majority of issued and outstanding SCA
Common Stock, (in that FRS will not become a shareholder of SCA until after the
Closing as indicated on Schedule 3.4), and as key officers of SCA having
responsibility for its performance, each of MAS and FRS (for the purposes of
this Section 6, a "Stockholder") hereby grant to Safeguard an irrevocable proxy,
in compliance with and subject to the following:
6.1. Condition to Operation. The proxy granted in Section 6.2 of this
----------------------
Agreement (the "Proxy") shall not be operative unless and until the following
occurs:
(a) SCA fails to achieve, for two consecutive fiscal quarters, 80% of the
Minimum Target Earnings for such quarters, and
(b) SCA fails to achieve, within the four consecutive fiscal quarters
consisting of the two above-described quarters and the two preceding quarters,
90% of the Minimum Target Earnings for such four quarter period.
Upon the occurrence of such event, at Safeguard's option, this proxy shall
immediately become operative and shall continue to remain operative until SCA
achieves at least 80% of Minimum Target Earnings for two consecutive quarters.
"Minimum Target Earnings" shall be those described in the annual operating plan
of SCA for each fiscal year commencing July 1, 1987, as the same shall be
approved in advance of such fiscal year by a majority of the Board of Directors,
with any subsequent amendments. The failure of
- -28-
<PAGE>
Safeguard to exercise this Proxy in respect to any such event or events shall
not be deemed a waiver of its then existing or prospective rights under this
Agreement, which shall continue to be effective notwithstanding any exercises
hereof or events allowing the exercise hereof until termination as provided in
Section 6.5.
6.2. Grant of Irrevocable Proxy. The Stockholder hereby irrevocably
--------------------------
constitutes and appoints Safeguard, or its president, any vice president or its
treasurer, as attorney, agent and proxy of the Stockholder, with full power of
substitution, for and in the names, place and stead of the Stockholder, to call
a meeting or meetings of the shareholders of SCA and to vote upon all shares in
SCA now or hereafter owned by him either of record or beneficially, all shares
in SCA in which he now or hereafter may have any legal or beneficial interest,
and all shares in SCA with respect to which he is now or hereafter may be the
agent or proxy of the record or beneficial owner by authorization or
substitution, as fully and with the same effect as the Stockholder could do if
present at such meeting or meetings, solely for the following purposes:
(a) To elect not more than three individuals selected by Safeguard as
directors of SCA, and in that connection to take such actions and to execute and
deliver any documents, papers or other instruments which may be necessary or
required to permit the same; and
(b) To transact such other business necessary to give effect to Section
6.2(a) above as may come before such meeting, including without limitation, such
amendment of the by-laws of SCA as may be necessary or desirable in order to
accomplish the foregoing.
6.3. Proxy Coupled with Interest. The Proxy is being given simultaneously
---------------------------
with the purchase of the Shares by Safeguard pursuant to this Agreement. It is
understood and agreed by the Stockholder that this proxy is being given as a
material part of
- -29-
<PAGE>
the consideration for the consummation of such transaction. For this reason,
the Stockholder acknowledges and declares the Proxy hereby granted is
irrevocable, except as otherwise expressly provided, until the termination
hereof as provided in Section 6.5, and that the Proxy granted hereby is coupled
with an interest.
6.4. Limitation of Liability. In acting with respect to this Proxy,
-----------------------
Safeguard shall assume no responsibility and shall incur no liability because of
any act which Safeguard shall take or fail to take while acting in good faith.
6.5. Termination. This Proxy shall terminate upon the earliest of (i) the
-----------
closing date of the Rights Offering; (ii) the expiration of the Rights, if the
Rights Offering does not occur, or (iii) three years from the date of execution
of this Agreement.
Section 7. COVENANTS OF SCA.
----------------
7.1 Addition of Chief Operating Officer. SCA, with the assistance of
-----------------------------------
Safeguard, shall identify one or more qualified candidates for the position as
Chief Operating Officer ("COO") by September 30, 1987. The completion of this
undertaking shall be incorporated into the bonus provision for MAS for the
fiscal year commencing July 1, 1987. The Board of Directors of SCA shall be
responsible for the selection of the COO, and upon such selection, MAS shall be
elected as Chairman and Chief Executive Officer of SCA. In the event the Board
fails to hire the COO as specified above by September 30, 1987, Safeguard shall
have the right to hire the COO on behalf of SCA.
7.2 Rule 144. SCA covenants that (i) at all times after SCA first becomes
--------
subject to the reporting requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934 (the "1934 Act"), SCA will use its best efforts to
comply with the current public information requirements of Rule 144 (c) (1)
under the 1934 Act; (ii) if prior to becoming subject to such reporting
- -30-
<PAGE>
requirements an over-the-counter market develops for the Common Stock of SCA,
SCA will use its best efforts to make publicly available the information
required by Rule 144 (c) (2); and (iii) at all such times as Rule 144 is
available for use by the holders of the Shares, SCA will furnish each such
holder upon request with all information within the possession of SCA required
for the preparation and filing of Form 144.
7.3 Financial Statements. Until such time as SCA is required to register
--------------------
its common stock pursuant to Section 12 (g) of the 1934 Act, SCA shall furnish
to its Board of Directors:
(a) Within 90 days after the end of each fiscal year, an audited balance
sheet, and related audited statements of income, changes in financial position,
and changes in stockholders' equity of SCA as at the end of and for such fiscal
year prepared in accordance with generally accepted accounting principles,
consistently applied, and accompanied by the opinion of the firm of independent
public accountants regularly employed by SCA to audit its financial statements,
or if no such firm is so regularly employed, another so called "Big 8" firm of
independent public accountants selected by SCA for the purpose of conducting
such an audit;
(b) Within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, a balance sheet and statements of income, changes
in financial position and changes in stockholders' equity of SCA as at the end
of and for such quarter and the year to date and as at the end of and for the
corresponding periods of the preceding fiscal year and for the budget for the
current fiscal year, and
(c) Within 30 days after the end of each month, a balance sheet and a
profit and loss statement for SCA as of the end of such month.
The interim quarterly and monthly statements described above shall
- -31-
<PAGE>
be unaudited, shall be prepared in accordance with generally accepted accounting
principles (except that they need not be accompanied by notes) and shall contain
a statement that all adjustments necessary for a fair statement of the results
for the period covered by such interim statements have been included.
7.4 Payment of Expenses. SCA shall pay its own expenses, including the
-------------------
fees and expenses of SCA's counsel, incurred by it in connection with the
issuance and sale of the Shares and the execution, delivery and performance of
this Agreement.
7.5 Transfer Taxes. SCA will pay, and hold the holders thereof harmless
--------------
against liability for the payment of, any transfer or similar taxes payable in
connection with the issuance and sale of the Shares and the Rights Shares
pursuant hereto.
7.6 Satisfaction of Indebtedness to Hamilton Bank. SCA shall promptly
---------------------------------------------
following the Closing, take all such actions as are necessary to satisfy all
indebtedness of SCA to Hamilton Bank. SCA covenants and agrees that the
appropriate portion of its proceeds from the sale of the Shares shall be used to
satisfy such obligations.
7.7 Representations and Warranties. Except as contemplated hereby, SCA,
------------------------------
MAS and FRS shall use their best efforts to cause the representations and
warranties contained in Section 3 hereof (except Sections 3.4, 3.8 - 3.10, 3.12,
3.14 - 3.16, 3.18, 3.21 (second sentence only), 3.22 and 3.27) to be true and
correct as of the effective date of the Registration Statement relating to the
Rights Offering and as of the closing of the Rights Offering with the same
effect as though such representations and warranties were made on and as of such
dates. SCA, MAS and FRS shall disclose in such Registration Statement or in
writing to Safeguard all respects in which such representations and warranties
(including those excluded above) are not so true and correct.
- -32-
<PAGE>
7.8 Negative Covenants. SCA shall not take any of the actions listed
------------------
below without the prior approval of the two Safeguard Designated Directors:
(i) contracts (including all amendments thereto) and other transactions
between SCA and its officers or directors, members of their immediate families,
or corporations or partnerships or other entities controlled by any of them;
(ii) the issuance of any equity securities or the awarding of any options,
warrants or rights to purchase any equity securities, to any officer or director
of SCA or to any holder of more than 5% of SCA's Common Shares then outstanding,
except as specifically permitted under this Agreement.
(iii) any amendment of any shareholders agreement to which SCA is a party
or any modification, amendment or termination of any agreement with a subsidiary
or affiliate.
(iv) changes in the Articles of Incorporation or By-Laws of SCA;
(v) the sale of all or substantially all of the assets of SCA, the merger
or consolidation of SCA with or into another company, or the dissolution and
liquidation of SCA;
(vi) the payment of dividends or other distributions on SCA's shares or
the repurchase by SCA of any of its securities.
The right of the two Safeguard director designees to approve such actions
shall terminate on the earlier of the closing of the Rights Offering or the
termination of the Rights.
7.9 "Key Man" Insurance. SCA shall maintain in effect, for such period as
-------------------
Safeguard shall require, not less than $1,000,000 of key man life insurance on
each of the Founding Shareholders. The proceeds of this insurance shall not be
used to purchase any securities of SCA owned by either such person or his
executor, personal representatives, heirs or assigns, pursuant to any
shareholders or other agreement with such person or otherwise.
- -33-
<PAGE>
Section 7A. EVENTS OF DEFAULT.
-----------------
7.10 Events of Default. An Event of Default shall have occurred under
-----------------
this Agreement if Safeguard, SSI, SCA, MAS or FRS fails to observe or perform
any material covenant or agreement on the part of SCA required to be observed or
performed by it or him pursuant to the terms of this Agreement or any of the
Closing Agreements, and such failure shall remain unremedied for ten (10) days
after written notice thereof shall have been given to the defaulting party,
provided that if the nature of the default is such that it cannot be cured by
the payment of money and cannot be cured by other appropriate action of the
defaulting party within ten (10) days, no Event of Default shall be deemed to
have occurred so long as the defaulting party diligently and in good faith takes
all necessary action to cure the default.
7.11 Remedies. If any Event of Default shall occur, or if any
--------
representation or warranty made by or on behalf of one party to this Agreement,
or in a report or other instrument delivered under or pursuant to any term
hereof shall be untrue or incorrect in any material respect as of the date of
this Agreement or as of the Closing or as of the date it was made, furnished or
delivered, the injured party may proceed to protect and enforce its rights by
suit in equity or action at law, whether for the specific performance of any
term contained in this Agreement or for an injunction against the breach of any
such term or in aid of the exercise of any power granted in this Agreement, or
to enforce any other legal or equitable right of such holder of any such
securities, or to take any one or more of such actions.
7.12 Cumulative Remedies. None of the rights, powers or remedies
-------------------
conferred upon a party hereto shall be mutually exclusive, and each such right,
power or remedy shall be cumulative and in addition to every other right, power
or remedy, whether conferred hereby, by the Closing Agreements or now or
hereafter available at
- -34-
<PAGE>
law, in equity, by statute or otherwise.
7.13 No Implied Waiver. Except as expressly provided in this Agreement,
-----------------
no course of dealing between SCA, MAS or FRS and Safeguard or SSI and no delay
in exercising any right, power or remedy conferred hereby or now or hereafter
existing in law, in equity, by statute or otherwise shall operate as a waiver
of, or otherwise prejudice, any such right, power or remedy.
Section 8. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS
------------------------------------------------------
Notwithstanding any investigation made by or on behalf of Safeguard or SCA, all
agreements, representations and warranties made herein and in the documents
delivered pursuant hereto shall survive the execution and delivery of this
Agreement and the issuance and sale of the Shares, the Warrants and the Warrant
Shares and the consummation of the Rights Offering hereunder.
Section 9. COMPLIANCE WITH 1933 ACT; RESTRICTIONS ON TRANSFERABILITY OF
------------------------------------------------------------
SECURITIES.
- ----------
9.1 Compliance with 1933 Act. The Securities shall not be transferable,
------------------------
except upon the conditions specified in this Section 9 or as otherwise set forth
in this Agreement, which conditions are intended to insure compliance with the
provisions of the 1933 Act in respect of the transfer of any of the Securities.
9.2 Restrictive Legend. Each certificate representing the Shares, the
------------------
Warrant Shares and any shares or other securities issued in respect of such
shares upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall, (unless otherwise permitted by the
provisions of Section 9.4 below) be stamped or otherwise imprinted with the
following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH
SECURITIES MAY NOT BE
- -35-
<PAGE>
TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF, IN THE ABSENCE OF SUCH
REGISTRATION OR, IN THE OPINION OF COUNSEL TO THE ISSUER, SUCH REGISTRATION
IS NOT NECESSARY."
9.3 Restrictions on Transferability. Safeguard shall not transfer, sell
-------------------------------
or otherwise dispose of any of the Securities and SCA shall not be required to
recognize any purported transfer of the Securities unless SCA shall have been
provided with an opinion of counsel to SCA with respect to any such purported
transfer to the effect that registration under the 1933 Act or any applicable
state securities law is not required in connection with such transaction. Each
certificate for any of the Securities issued upon any such transfer shall bear
the legend set forth herein unless such opinion of counsel is to the further
effect that such legend is not required. SCA shall bear the cost of its own
counsel.
9.4 Termination of Restriction on Transferability. The conditions
---------------------------------------------
precedent imposed by this Section 9 upon the transferability of the Securities
shall cease and terminate as to any of such shares when (i) such securities
shall have been registered under the 1933 Act and sold or otherwise disposed of
in accordance with the intended method of disposition by the seller or sellers
thereof set forth in the registration statement covering such securities, (ii)
at such time as an opinion of counsel shall have been rendered as required
pursuant to the last sentence of Section 9.3 to the effect that the restrictive
legend on the certificate for such securities is no longer required, or (iii)
when such securities are transferrred in accordance with the provisions of Rule
144. Whenever the conditions imposed by this Section 9 shall terminate as
hereinabove provided, the holder of any Securities bearing the legend set forth
in this Section 9 as to which such conditions shall have terminated shall be
entitled to
- -36-
<PAGE>
receive from SCA, without expense (except for the payment of any applicable
transfer tax) and as expeditiously as possible, new stock certificates not
bearing such legend.
Section 10. REGISTRATION RIGHTS.
-------------------
10.1 Piggyback Registration. (a) If SCA proposes for any reason to
----------------------
register any of its securities under the 1933 Act for sale to the public, it
shall each such time promptly give written notice to the holders of the Shares,
the Warrants and the Warrant Shares then outstanding of its intention to do so,
and, upon the written request, given within 30 days after receipt of any such
notice, of a holder to register any of its Eligible Securities (as defined in
Section 10.2), SCA shall use its best efforts to cause all Eligible Securities
with respect to which holders shall have so requested registration to be
registered under the 1933 Act promptly upon receipt of the written request of
such holders for such registration, all to the extent required to permit the
sale or other disposition by the holders of the Shares or the Warrant Shares so
registered in the manner contemplated by such holders.
(b) In the event that any registration pursuant to this Section 10.1 shall
be, in whole or in part, an underwritten offering of securities of SCA, SCA
shall arrange for the Eligible Securities requested to be registered pursuant to
this Section 10.1 to be included in the underwriting on the same terms and
conditions as the comparable securities, if any, otherwise being sold through
underwriters under such registration, or on terms and conditions comparable to
those normally applicable to offerings of such securities in reasonably similar
circumstances in the event that no securities comparable to the Eligible
Securities are being sold through underwriters under such registration;
provided, however, that if the managing underwriter reasonably determines and
advises in writing that the inclusion of all Eligible Securities covered by
- -37-
<PAGE>
the requests for registration made under this Section 10.1 would interfere with
the successful marketing of the securities being sold by SCA for its own account
in such registration, then the requisite number of Eligible Securities specified
by the managing underwriter (which may be all of the Eligible Securities) shall
be excluded from the underwritten portion of the public offering, on a pro-rata
basis among the holders of the Eligible Securities requesting such registration,
and such excluded Eligible Securities shall be withheld from the market by the
holders thereof for a period, not to exceed 90 days, which the managing
underwriter reasonably determines is necessary in order to effect the
underwritten portion of the public offering.
(c) If in addition to the securities to be sold for its own account, SCA
proposes to include in such underwritten public offering any securities (other
than the Eligible Securities) owned by any shareholder of SCA (such securities,
"Additional Securities") and the managing underwriter reasonably determines and
advises in writing that the inclusion in the offering of all of the securities
to be sold for SCA's account, the Eligible Securities covered by the requests
for registration made under this Section 10.1 and the Additional Securities
would interfere with the successful marketing of the securities to be sold for
SCA's account, then the requisite number of Eligible Securities and Additional
Securities shall be excluded from the underwritten portion of the public
offering, on a basis pro rata among the holders of the Eligible Securities and
Additional Securities requesting such registration, and such excluded Eligible
Securities and Additional Securities shall be withheld from the market by the
holders thereof for a period, not to exceed 90 days, which the managing
underwriter reasonably determines is necessary in order to effect the
underwritten portion of the public offering.
10.2 Definition. The term "Eligible Securities" shall mean
----------
- -38-
<PAGE>
(i) the Shares, (ii) the Warrant Shares (iii) plus all common stock or other
securities of SCA issued in respect of such Shares by way of a stock split,
stock dividend, recapitalization, merger or consolidation, (iv) but exclusive of
any shares described in clause (i), (ii) or (iii) sold in a public offering
registered under the 1933 Act or sold pursuant to Rule 144.
10.3 Registration Procedures. If and whenever SCA is under an obligation
-----------------------
pursuant to the provisions of Section 10.1 to use its best efforts to effect the
registration of any Eligible Securities, SCA shall, as expeditiously as
practicable:
(i) prepare and file with the Securities and Exchange Commission a
registration statement with respect to such Eligible Securities and use its best
efforts to cause such registration statement to become and remain effective no
longer than 90 days;
(ii) prepare and file with the Securities and Exchange Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective and current for the requisite period to comply with the
provisions of the 1933 Act with respect to the sale or other disposition of all
Eligible Securities covered by such registration statement;
(iii) furnish to each selling shareholder such numbers of copies of each
prospectus (including each preliminary prospectus) in conformity with the
requirements of the 1933 Act, and such other documents as are normally requested
by selling shareholders to facilitate the public offering of their Eligible
Securities;
(iv) use its best efforts to register or qualify the Eligible Securities
covered by such registration statement under the securities or blue sky laws of
such jurisdictions as each such seller shall reasonably request (provided that
SCA shall not be required to consent to general service of process for all
purposes in any jurisdiction where it is not then qualified to do business)
- -39-
<PAGE>
and do any and all other acts or things which may be necessary or advisable to
enable such seller to consummate the public sale or other disposition in such
jurisdictions of such Eligible Securities;
(v) notify each seller of the Eligible Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act within the appropriate period
mentioned in clause (ii) of this Section 10.3, of the happening of any event as
a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing, and at the request of any such seller prepare and furnish to such
seller a reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as amendment of such prospectus as may
be necessary so that, as thereafter delivered to the purchasers of such Eligible
Securities, such prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in the light of the circumstances
then existing; and
(vi) furnish, at the request of any holder or holders of the Eligible
Securities requesting registration pursuant to this Section 10, on the date that
any Eligible Securities are delivered to the underwriters for sale pursuant to
such registration or, if such Eligible Securities are not being sold through
underwriters, on the date that the registration statement with respect to such
Eligible Securities becomes effective, (a) an opinion, dated such date, of the
independent counsel representing SCA for the purposes of such registration,
addressed to the underwriters, if any, and to
- -40-
<PAGE>
the holder or holders making such request, stating that such registration
statement has become effective under the 1933 Act and that (1) to the best of
the knowledge of such counsel, no stop order suspending the effectiveness
thereof has been issued and no proceedings for that purpose have been instituted
or are pending or contemplated under the 1933 Act; (2) the registration
statement, the related prospectus, and each amendment or supplement thereto,
comply as to form in all material respects with the requirements of the 1933 Act
and the applicable rules and regulations of the Securities and Exchange
Commission thereunder (except that such counsel need express no opinion as to
financial statements contained therein); (3) such counsel has no reason to
believe that either the registration statement or the prospectus, or any
amendment or supplement thereto, contains any untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; (4) the description in
the registration statement or the prospectus, or any amendment or contracts and
other legal documents or instruments are accurate and fairly present the
information required to be shown; (5) such counsel does not know of any legal or
governmental proceedings, pending or contemplated, required to be described in
the registration statement or prospectus, or any amendment or supplement
thereto, which are not described as required, nor of any contracts or documents
or instruments of a character required to be described in the registration
statement or prospectus, or any amendment or supplement thereto, or to be filed
as exhibits to the registration statement which are not described and filed as
required, and (6) such other legal matters with respect to such registration as
any such underwriter or holder or holders requesting such opinion may reasonably
request if independent counsel for an issuer is normally requested to opine on
such matter in a public offering of
- -41-
<PAGE>
securities; and (b) a letter, dated such date, from the independent certified
public accountants of SCA, addressed to the underwriters, if any, and to the
holder or holders making such request, stating that they are independent
certified public accountants within the meaning of the 1933 Act, and that in the
opinion of such accountants, the financial statements and other financial data
of SCA included in the registration statement or the prospectus, or any
amendment or supplement thereto, comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act, and covering such other
financial matters (including information as to the period ending not more than
five business days prior to the date of such letter) with respect to such
registration as such holder or holders requesting such letter may reasonably
request.
10.4 Information to be Furnished by Holders of Eligible Securities. Each
-------------------------------------------------------------
prospective seller of Eligible Securities registered or to be registered under
any registration statement shall furnish to SCA such information and execute
such documents regarding the Eligible Securities held by such seller and the
intended method of disposition thereof as SCA shall reasonably request and shall
be requested in connection with the action to be taken by SCA.
10.5 Expenses of Registration. (a) All expenses incurred by SCA in
------------------------
complying with Section 10.3 (other than the underwriter's discounts and
commissions and fees and expenses of special counsel to the sellers of Eligible
Securities, if any), including, without limitation, all registration and filing
fees (including all expenses incident to filing with the National Association of
Securities Dealers, Inc.), fees and expenses of complying with securities and
blue sky laws, expense allowances of the underwriters, printing expenses, fees
and disbursements of counsel, and of the independent public accountants, but
excluding the
- -42-
<PAGE>
compensation of regular employees of SCA and the fees and expenses of SCA, are
herein called "Registration Expenses." All underwriting discounts and
commissions applicable to the Eligible Securities and the Additional Securities
covered by any such registration, and all fees and expenses of special counsel
to the holders thereof, are herein called "Selling Expenses."
(b) Subject to paragraph (c) below, SCA shall pay all Registration
Expenses in connection with each registration pursuant to Section 10.1. All
Selling Expenses in connection with each registration pursuant to Section 10.1
shall be borne by the seller or sellers therein in proportion to the number of
Eligible Securities included by each in such registration or in such other
proportions as they may agree upon.
(c) If the allocation of the expenses of registration provided for in this
Section 10.5 shall result in SCA being unable to register or qualify its
securities covered by the Registration Statement for sale in any particular
state in which sales of securities are proposed to be made, then (i) in the case
where Eligible Securities are being included in the Registration Statement
pursuant to Section 10.1, the holders of the Eligible
Securities to be included in the Registration Statement shall either (A) bear
pro rata with all other holders of Additional Securities such amount of those
expenses which would otherwise be borne by SCA hereunder as shall be required by
state law to permit the securities included in the Registration Statement to be
registered or qualified for sale in such state, or (B) shall withdraw their
Eligible Securities from the Registration Statement.
10.6 Indemnification. SCA shall indemnify and hold harmless each holder
---------------
of Eligible Securities, its executive officers, directors and controlling
persons (within the meaning of the 1933 Act) and each person who participates as
an underwriter or controlling person of an underwriter (within the meaning of
the
- -43-
<PAGE>
1933 Act) with respect to a registration statement pursuant to Section 10.1
against any loss, claims damages or liabilities to which any of them may become
subject under the 1933 Act or otherwise insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or allegedly untrue statement of any material fact
contained in a registration statement including Common Shares of SCA owned by
such holder, any preliminary prospectus or final prospectus contained therein,
or any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse any of them for legal or other expenses reasonably incurred by
any of them in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that SCA shall not be liable
hereunder in any such case if any such loss, claim, damage, or liability arises
out of or is based upon any untrue statement or allegedly untrue statement or
omission or alleged omission made in such registration statement, prospectus or
amendment or supplement thereto in reliance upon and in conformity with written
information furnished by SCA for such purpose by such holder or by its
representative or by any underwriter on behalf of such holder.
(b) Each holder of Eligible Securities joining in any registration
statement of SCA pursuant to Section 10.1 shall indemnify and hold harmless SCA,
its executive officers, directors, and controlling persons (within the meaning
of the 1933 Act) and each person who participates as an underwriter or
controlling person of an underwriter (within the meaning of the 1933 Act) with
respect to a registration statement pursuant to Section 10.1 against any losses,
claims, damages, or liabilities (or actions in respect thereof) which arise out
of or are based upon any untrue
- -44-
<PAGE>
statement or allegedly untrue statement or omission or alleged omission made in
such registration statement, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereto, in reliance upon and
in conformity with written information furnished by SCA to such holder or by its
representative or by any underwriter on behalf of such holder, and will
reimburse any of them for any legal or other expenses reasonably incurred by
them in connection with investigating or defending, any such loss, claim,
damage, liability or action.
(c) Promptly after receipt by an indemnified party under this Section 10.6
of notice of the commencement of any action, such indemnified party will, if a
claim in respect therein is to be made against any indemnifying party, notify
the indemnifying
party in writing of the commencement thereof and the indemnifying party shall
have the right to participate in and to assume the defense thereof with counsel
mutually satisfactory to the parties. The failure to notify an indemnifying
party promptly of the commencement of any such action, if prejudicial to the
ability to defend such action, shall relieve such indemnifying party of any
liability to the indemnified party under this Section 10.6, but the omission to
so notify the indemnifying party will not relieve such party of any liability
that such party may have to any indemnified party other than under this Section
10.6.
10.7 Underwriting Agreement. If Eligible Securities are sold pursuant to
----------------------
a registration statement in an underwritten offering pursuant to Section 10.1
SCA agrees to enter into an underwriting agreement containing customary
representations and warranties with respect to the business and operations of an
issuer of the securities being registered and customary covenants and agreements
to be performed by such issuer, including, without limiting the generality of
the foregoing, customary provisions with respect to the indemnification by SCA
of the underwriters of such offering.
- -45-
<PAGE>
The holders of Eligible Securities included in the Registration Statement shall
also join in any such underwriting agreement to the extent customarily required
by underwriters, but such holders shall not be required to make any
representations and warranties with respect to the business and operations of
SCA.
Section 11. MISCELLANEOUS.
-------------
11.1 Assignment. No party may assign its rights or delegate its duties
----------
under this Agreement without the consent of the other; provided, however that
Safeguard may assign its rights and delegate its duties to SSI or any of its
wholly-owned subsidiaries which agrees to be bound by the terms of this
Agreement.
11.2 Broker or Finder. Each party to this Agreement represents and
----------------
warrants that, to the best of its knowledge, no broker or finder has acted for
such party in connection with this Agreement or the transactions contemplated by
this Agreement and that no broker or finder is entitled to any broker's or
finder's fee or other commission in respect thereof based in any way on
agreements, arrangements or understandings made by such party. SCA shall
indemnify Safeguard against, and hold it harmless from, any claim, liability
cost, or expense (including reasonable attorneys' fees and expenses) resulting
from any agreement, arrangement, or understanding made by Safeguard, with any
third party for brokerage or finders' fees or other commissions in connection
with this Agreement or any of the transactions contemplated hereby.
11.3 Governing law. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the Commonwealth of Pennsylvania.
11.4 Notice. Any notice or other communication required or permitted
------
hereunder shall be sufficiently given only if sent by registererd or certified
mail, postage prepaid, addressed as follows or to such other address or
addresses as may hereafter be
- -46-
<PAGE>
furnished in writing by notice similarly given by one party to the other:
To SCA: Sanchez Computer Associates, Inc.
R.D. #1, Phoenixville Pike & Charlestown Road
Malvern, PA 19355
Attn: President
To MAS: Michael A. Sanchez
Same address as SCA
To FRS: Frank R. Sanchez
Same address as SCA
To Safeguard: Safeguard Scientifics (Delaware), Inc.
and SSI: Safeguard Scientifics, Inc.
630 Park Avenue
King of Prussia, PA 19406
Attn: President
11.6 Full Agreement. This Agreement and the Schedules and Exhibits hereto
--------------
set forth the entire understanding of the parties with respect to the
transactions contemplated hereby, and shall not be modified or amended except by
written agreement of all parties hereto.
11.7 Amendment. This Agreement may only be amended in writing by SCA,
---------
Safeguard and SSI.
11.8 Execution. This Agreement shall not be binding on any person until
---------
it has been signed by each person identified on the signature page hereto as
being a signatory hereto and delivered by such person to the other persons
identified as signatories hereto. The circulation of unsigned drafts or copies
of this Agreement by any party to another shall not create any inference that a
legally binding contract to proceed with the transactions contemplated by
- -47-
<PAGE>
this Agreement has been entered into, it being the intention of the parties that
such a contract shall arise only upon the execution and delivery of this
Agreement by all parties as aforesaid.
11.9 Headings. The headings of the Sections of this Agreement are
--------
inserted for convenience of reference only and shall not be considered a part
hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
intending to be legally bound, as of the date first set forth above.
SAFEGUARD SCIENTIFICS
(DELAWARE), INC.
By_____________________________________
Attest: _____________________________________
SAFEGUARD SCIENTIFICS, INC.
By___________________________________
Attest: _____________________________________
SCA COMPUTER ASSOCIATES, INC.
- -48-
<PAGE>
By___________________________________
Attest: _____________________________________
_____________________________________________
Michael A. Sanchez
_____________________________________________
Frank R. Sanchez
- -49-
<PAGE>
Exhibit 10.3
COMMON STOCK PURCHASE
AGREEMENT
AMONG
SANCHEZ COMPUTER ASSOCIATES, INC.,
RADNOR VENTURE PARTNERS, L.P.
AND
SAFEGUARD SCIENTIFICS (DELAWARE), INC.
September 30, 1989
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION> PAGE
----
<S> <C> <C>
1. SALE OF SHARES..................................................... 1
1.1 Sale of Shares to Radnor 1
1.2 Sale of Shares to Safeguard. 1
1.3 Closing1
1.4 Delivery1
1.5 Use of Proceeds 2
2. REPRESENTATIONS AND WARRANTIES OF SCA.............................. 2
2.1 Organization and Standing of SCA 2
2.2 Authorization 2
2.3 No Conflict with Law or Documents 2
2.4 Capital Stock 2
2.5 Consents and Approvals 3
2.6 Private Offering 3
2.7 Articles of Incorporation and By-Laws 3
2.8 Financial Statements 4
2.9 No Material Adverse Change 4
2.10 Absence of Undisclosed Liabilities 4
2.11 Litigation 4
2.12 Compliance with Laws 4
2.13 Other Representations and Warranties 4
3. REPRESENTATIONS AND WARRANTIES OF RADNOR........................... 5
3.1 Authorization 5
3.2 No Registration 5
3.3 Non-Distribution 5
3.4 Restrictions on Transfer 5
3.5 Sophistication; Access to Information 5
3.6 Pennsylvania Blue Sky Requirements 6
4. REPRESENTATIONS AND WARRANTIES OF SAFEGUARD........................ 6
4.1 Organization and Standing 6
4.2 Authorization 6
4.3 No Registration 6
4.4 Non-Distribution 6
4.5 Restrictions on Transfer 6
4.6 Sophistication; Access to Information 7
4.7 Pennsylvania Blue Sky Requirements 7
5. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PURCHASERS.............. 7
5.1 Representations and Warranties 7
5.2 Performance 7
5.3 Opinion of Counsel to SCA 7
5.4 Third Party Approvals 9
5.5 Authorization and Issuance of the Purchased Shares 9
6. CONDITIONS PRECEDENT TO SCA'S OBLIGATIONS.......................... 9
6.1 Representations and Warranties 10
6.2 Performance 10
7. REGISTRATION RIGHTS................................................ 10
7.1 Piggyback Registration 10
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
7.2 Definitions 11
7.3 Registration Procedures 12
7.4 Information to be Furnished by Holders of Eligible Securities 14
7.5 Expenses of Registration 14
7.6 Indemnification 15
7.7 Underwriting Agreement 16
7.8 Reports Under Securities Exchange Act of 1934 16
7.9 Form S-3 Registration 17
7.10 Request for Registration. 18
7.11 Assignment of Registration Rights 19
7.12 Limitations on Subsequent Registration Rights 20
7.13 Amendment of Registration Rights 20
7.14 Market Stand-off Agreement 20
8. EVENTS OF DEFAULT................................................. 21
8.1 Events of Default 21
8.2 Remedies 21
8.3 Cumulative Remedies 21
8.4 No Implied Waiver 21
9. COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON TRANSFERABILITY OF
SECURITIES......................................................... 21
9.1 Compliance with 1933 Act 21
9.2 Restrictive Legend 21
9.3 Restrictions on Transferability 22
9.4 Termination of Restriction on Transferability 22
10. SCA COVENANTS...................................................... 22
10.1 Financial Statements 22
10.2 Payment of Expenses 23
10.3 Transfer Taxes 23
11. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS............. 23
12. MISCELLANEOUS...................................................... 23
12.1 Assignment 23
12.2 Broker or Finder 24
12.3 Governing law 24
12.4 Notice24
12.5 Full Agreement 25
12.6 Amendment 25
12.7 Execution 25
12.8 Headings 25
</TABLE>
<PAGE>
COMMON STOCK PURCHASE AGREEMENT
Agreement made as of September 30, 1989, by and among Sanchez Computer
Associates, Inc., a Pennsylvania corporation ("SCA"), Radnor Venture Partners,
L.P., a Delaware limited partnership ("Radnor"), and Safeguard Scientifics
(Delaware), Inc., a Delaware corporation ("Safeguard"). Radnor and Safeguard
are collectively referred to below as the "Purchasers."
Background
----------
SCA desires to sell to the Purchasers 196,078 shares of the Common
Stock, no par value, of SCA (such class of stock, "SCA Common Stock"), and
Radnor and Safeguard desire to purchase such shares from SCA, upon the terms and
conditions set forth in this Agreement.
Agreements
----------
Now, therefore, in consideration of the above, the mutual covenants
contained herein and intending to be legally bound hereby, the parties agree as
follows:
1. SALE OF SHARES.
--------------
1.1 Sale of Shares to Radnor. Subject to the terms and conditions
------------------------
herein set forth, SCA agrees to issue and sell, and Radnor agrees to purchase
from SCA, at the Closing (as defined below) 117,647 shares ("Radnor Purchased
Shares") of SCA Common Stock at a price of $5.10 per share, for an aggregate
purchase price of Six Hundred Thousand Dollars ($600,000).
1.2 Sale of Shares to Safeguard. Subject to the terms and conditions
---------------------------
herein set forth, SCA agrees to issue and sell, and Safeguard agrees to purchase
from SCA, at the Closing 78,431 shares ("Safeguard Purchased Shares") of SCA
Common Stock at the price of $5.10 per share, for an aggregate purchase price of
Four Hundred Thousand Dollars ($400,000). The Radnor Purchased Shares and the
Safeguard Purchased Shares are collectively referred to below as the "Purchased
Shares."
1.3 Closing. The closing ("Closing") of the purchase and sale of the
-------
Purchased Shares shall be held within five business days following notice by SCA
of its demand for such closing, but shall occur no later than December 31, 1989
("Closing Date"). The Closing shall be held at 10:00 AM at the offices of
Radnor at 630 Park Avenue, King of Prussia, PA 19406 or at such other location
as the parties may agree.
1.4 Delivery. At the Closing, SCA shall issue and deliver (a) to
--------
Radnor a certificate registered in the name of Radnor representing 117,647
shares of SCA Common Stock against delivery to SCA by Radnor of payment of
$600,000 and (b) to Safeguard a certificate registered in the name of Safeguard
representing 78,431 shares of SCA Common Stock against delivery to SCA by
Safeguard of payment of $400,000. The aggregate amount of any such funds as
Radnor or Safeguard, or both, may advance (at their election) to SCA subsequent
to the effective date of this Agreement and prior to Closing shall be deducted
against the purchase price to be paid at Closing by such purchaser on a dollar
for dollar basis at
<PAGE>
Closing. Payments to SCA at the Closing shall be made in cash by confirmed
federal funds wire transfer.
1.5 Use of Proceeds. SCA shall apply the proceeds of the sale of the
---------------
Purchased Shares to working capital purposes only.
2. REPRESENTATIONS AND WARRANTIES OF SCA. SCA represents and
-------------------------------------
warrants to Purchasers that, except as set forth on a Schedule of Exceptions
attached as Schedule I hereto, each of which exceptions shall specifically
identify the relevant subsection hereof to which it relates and shall be deemed
to be representations and warranties as if made hereunder:
2.1 Organization and Standing of SCA. SCA is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has all requisite power and authority to own
and lease its properties and assets and to conduct its business, to enter into
this Agreement, to authorize and issue the Purchased Shares, subject to the
appropriate state and federal registration of securities, and to comply with the
provisions hereof.
2.2 Authorization. SCA has all requisite power and authority to
-------------
execute and deliver this Agreement, and to carry out and consummate the
transactions contemplated in the same. The execution, delivery and performance
by SCA of this Agreement have been duly authorized by all requisite corporate
action. This Agreement has been duly executed and delivered by SCA, and
constitutes valid and binding obligations of SCA, enforceable against SCA in
accordance with its terms.
2.3 No Conflict with Law or Documents. The execution, delivery and
---------------------------------
performance of this Agreement by SCA will not violate any provision of law, any
rule or regulation of any governmental authority, or any judgment, decree or
order of any court binding on SCA, and will not conflict with or result in any
breach of any of the unwaived terms, conditions or provisions or constitute a
default under, or result in the creation of any lien, security interest, charge
or encumbrance upon any of the properties, assets or outstanding shares of SCA
under its Articles of Incorporation or By-Laws or any indenture, mortgage,
lease, agreement or other instrument to which SCA is a party or by which it or
any of its properties is bound or affected.
2.4 Capital Stock. The authorized capital stock of SCA consists
-------------
solely of 5,000,000 shares of SCA Common Stock, of which 1,789,040 shares are
issued and are currently outstanding, 40,000 are treasury shares and 340,000
shares have been reserved for issuance upon the exercise of (i) options to
purchase shares of SCA Common Stock granted pursuant to the employee stock
option plan ("Option Plan"), for which 50,000 shares have been authorized and
reserved ("Employee Options"), (ii) options to purchase 190,000 shares of SCA
Common Stock granted outside the Option Plan ("Other Options") and (iii)
warrants to purchase 100,000 shares of SCA Common Stock previously granted to
Safeguard ("Safeguard Warrants"). Except for the Other Options, the Employee
Options and the Safeguard Warrants and except as disclosed on Schedule I, there
are no outstanding subscriptions, warrants, options or other rights or
commitments of any character to subscribe for or purchase from SCA, or
obligating SCA to issue, any shares of any class of SCA's capital stock or any
securities convertible into or exchangeable for such shares; no shares of SCA
Common Stock, other than those reserved for
<PAGE>
issuance pursuant to the Other Options, the Employee Options and the Safeguard
Warrants, have been reserved by SCA for issuance; and except as disclosed on
Schedule I there are no preemptive or similar rights to purchase or otherwise
acquire any shares of any class of SCA's capital stock pursuant to any provision
of law or the Articles of Incorporation or By-Laws of SCA or otherwise. The
number of shares of SCA Common Stock reserved for issuance upon the exercise of
the Other Options, the Employee Options and the Safeguard Warrants is not
subject to adjustment by reason of the issuance and sale of the Purchased
Shares.
2.5 Consents and Approvals. Except for any filings under Federal and
----------------------
applicable state securities laws permitted to be made after the Closing, no
permit, consent, approval or authorization of, or declaration to or filing with,
any governmental or regulatory authority or other person (except as disclosed on
any Schedule) not made or obtained, is required in connection with the execution
or delivery of this Agreement by SCA, the offer, issuance, sale or delivery of
the Purchased Shares or the carrying out by SCA of the other transactions
contemplated hereby.
2.6 Private Offering. Neither SCA nor anyone acting on behalf of SCA
----------------
has offered any of the Purchased Shares for sale to, or solicited offers to buy
from, any individuals or entities in connection with the sale of the Purchased
Shares other than the Purchasers. Assuming the accuracy of representations
contained in Sections 3 and 4 hereof, the offer, issuance and delivery of the
Purchased Shares are exempt from registration under the Securities Act of 1933
("1933 Act") and all action required to be taken prior to the offer or sale of
the Purchased Shares has been taken under applicable state securities laws. No
representation or warranty made by SCA in this Agreement or in any document
delivered to Purchasers in connection with the transactions contemplated by this
Agreement contains an untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements, in light of the
circumstances in which they were made, not misleading.
2.7 Articles of Incorporation and By-Laws. SCA has delivered to
-------------------------------------
Purchasers true and complete copies of its Articles of Incorporation and By-Laws
as currently in effect.
2.8 Financial Statements. The audited balance sheet of SCA as at
--------------------
June 30, 1989, the related statements of operations, cash flows and
stockholders' equity of SCA for the year ended June 30, 1989 (the "Financial
Statements Date"), and the related notes thereto (the "Financial Statements"),
copies of all of which have heretofore been furnished to Safeguard, have been
prepared in conformity with generally accepted accounting principles,
consistently applied, and fairly present the financial position of SCA at such
dates and the results of its operations and changes in its financial position
for the periods then ended. The internally prepared balance sheet and statement
of operations for SCA as at August 30, 1989 for the two month period then ended
have been prepared on a basis consistent with the Financial Statements.
2.9 No Material Adverse Change. There has been no material adverse
--------------------------
change in the business, properties, assets, earnings or condition (financial or
otherwise) of SCA since the Financial Statements Date.
2.10 Absence of Undisclosed Liabilities. SCA does not have any
----------------------------------
material liabilities or obligations of any nature, whether absolute, accrued,
contingent or otherwise, other than (i) the liabilities and obligations
reflected or reserved against on its Financial Statements or under any contracts
and agreements of SCA (whether or not required to be disclosed
<PAGE>
in this Agreement) and (ii) liabilities covered by insurance.
2.11 Litigation. There is no pending or, to the knowledge of SCA,
----------
threatened suit, action or litigation, or administrative, arbitration or other
proceeding or governmental inquiry or investigation questioning the validity of
this Agreement or the transactions contemplated hereby, or affecting SCA or its
business, nor is there any basis for any such suit, action, litigation,
proceeding, inquiry or investigation.
2.12 Compliance with Laws. SCA is in compliance with all material
--------------------
laws, ordinances, and rules and regulations of governmental authorities
applicable to or affecting it, its properties or its business, and SCA has not
received notice of any claimed violation or default with respect to any of the
foregoing.
2.13 Other Representations and Warranties. SCA hereby incorporates
------------------------------------
by reference its representations and warranties contained in Sections 3.15
through 3.28 of the Common Stock, Warrants and Rights Agreement dated February
26, 1987 by and between SCA, Safeguard and others ("1987 Purchase Agreement") as
if made as of the date of this Agreement. Any exceptions from such
representations and warranties (other than as noted in, or resulting from the
transactions described in the 1987 Purchase Agreement) are listed on Schedule I.
In addition, any modification or amendment to exceptions made in the 1987
Purchase Agreement required to conform to this Section has been described on
such a Schedule.
3. REPRESENTATIONS AND WARRANTIES OF RADNOR. Radnor hereby
----------------------------------------
represents and warrants to SCA that:
3.1 Authorization. This Agreement has been duly authorized by it and
-------------
constitutes its valid and legally binding obligation, enforceable in accordance
with its terms.
3.2 No Registration. Radnor is aware that the Radnor Purchased
---------------
Shares have not been registered under the 1933 Act pursuant to the exemption
provided in Section 4(2) of the 1933 Act inasmuch as no public offering of any
of the Radnor Purchased Shares has been made. Radnor further acknowledges that
SCA has relied upon the availability of such exemption based upon, among other
things, Radnor's representations, warranties, covenants and acknowledgements as
set forth in this Agreement.
3.3 Non-Distribution. Radnor hereby represents and warrants to SCA
----------------
that the Radnor Purchased Shares are being acquired by Radnor solely for its own
account and not with a view toward fractionalization or distribution, except as
permitted under the 1933 Act. Radnor hereby represents and warrants that none
of the Radnor Purchased Shares will be transferred, sold or otherwise disposed
of in the absence of registration under the 1933 Act, or, in the opinion of
counsel to SCA, such registration is unnecessary and acknowledges that the
transfer records relating to the Radnor Purchased Shares maintained by SCA or
its authorized agent will bear a "stop-transfer" notation.
3.4 Restrictions on Transfer. Radnor (i) hereby acknowledges that
------------------------
none of the Radnor Purchased Shares has been registered under the 1933 Act and,
therefore, Radnor must bear the investment risk thereof for an indefinite period
of time, (ii) is aware that any routine sales of any of the Radnor Purchased
Shares made pursuant to Rule 144 under the 1933
<PAGE>
Act ("Rule 144") may be made only in limited amounts and in accordance with the
terms and conditions of Rule 144, (iii) is aware that Rule 144 is not presently
available for use by Radnor with respect to the sale of any of the Radnor
Purchased Shares, and (iv) SCA is the only person that may register any of the
Radnor Purchased Shares under the 1933 Act and except as otherwise provided in
this Agreement, SCA is not obligated to so register any of the Radnor Purchased
Shares.
3.5 Sophistication; Access to Information. (a) Radnor represents
-------------------------------------
and warrants to SCA that it and its management is well-versed in financial
matters, has had extensive dealings over the years in securities, including
"restricted securities," within the meaning of subparagraph (a) (3) of Rule 144,
and is fully capable of understanding the type of investment being made pursuant
to this Agreement and the risks involved in connection therewith.
(b) Radnor confirms that SCA has made available to it the
opportunity to ask questions of and receive answers from SCA's officers and
directors concerning the business and financial condition of SCA, to inspect and
make copies of agreements, contracts and records including those set forth in
the schedules attached hereto, and Radnor has received to its satisfaction such
additional information about the business and financial condition of SCA and the
terms and conditions of the offering as it has requested.
3.6 Pennsylvania Blue Sky Requirements. Radnor is an "institutional
----------------------------------
investor" as that term is defined in Section 102 (k) of the Pennsylvania
Securities Act of 1972 and Section 102.111 of the Regulations of the
Pennsylvania Securities Commission as promulgated thereunder.
4. REPRESENTATIONS AND WARRANTIES OF SAFEGUARD. Safeguard represents
-------------------------------------------
and warrants to SCA that:
4.1 Organization and Standing. Safeguard is a corporation duly
-------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite power and authority to enter into this Agreement
and to comply with the provisions hereof.
4.2 Authorization. Safeguard has all requisite power and authority
-------------
to execute and deliver this Agreement and to carry out and consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by Safeguard have been duly authorized by all necessary corporate
action. This Agreement constitutes the legal, valid and binding obligation of
Safeguard enforceable against Safeguard in accordance with its terms.
4.3 No Registration. The Safeguard Purchased Shares have not been
---------------
registered under the 1933 Act pursuant to the exemption provided in Section 4(2)
of the 1933 Act inasmuch as no public offering of any of the Safeguard Purchased
Shares has been made. Safeguard further acknowledges that SCA has relied upon
the availability of such exemption based upon, among other things, Safeguard's
representations, warranties, covenants and acknowledgements as set forth in this
Agreement.
4.4 Non-Distribution. Safeguard hereby represents and warrants to
----------------
SCA that the Safeguard Purchased Shares are being acquired by Safeguard solely
for its own account and not with a view toward fractionalization or
distribution, except as provided in this Agreement. Safeguard hereby represents
and warrants that none of the Safeguard Purchased
<PAGE>
Shares can be transferred, sold or otherwise disposed of in the absence of
registration under the 1933 Act, or, in the opinion of counsel to SCA, such
registration is unnecessary and acknowledges that the transfer records relating
to the Safeguard Purchased Shares maintained by SCA or its authorized agent will
bear a "stop-transfer" notation.
4.5 Restrictions on Transfer. Safeguard (i) hereby acknowledges that
------------------------
none of the Safeguard Purchased Shares has been registered under the 1933 Act
and, therefore, Safeguard must bear the investment risk thereof for an
indefinite period of time, (ii) is aware that any routine sales of any of the
Safeguard Purchased Shares made pursuant to Rule 144 under the 1933 Act ("Rule
144") may be made only in limited amounts and in accordance with the terms and
conditions of Rule 144, (iii) is aware that Rule 144 is not presently available
for use by Safeguard with respect to the sale of any of the Safeguard Purchased
Shares, and (iv) SCA is the only person that may register any of the Safeguard
Purchased Shares under the 1933 Act and except as otherwise provided in this
Agreement, SCA is not obligated to so register any of the Safeguard Purchased
Shares.
4.6 Sophistication; Access to Information. (a) Safeguard represents
-------------------------------------
and warrants to SCA that it is well-versed in financial matters, has had
extensive dealings over the years in securities, including "restricted
securities," within the meaning of subparagraph (a) (3) of Rule 144, and is
fully capable of understanding the type of investment being made pursuant to
this Agreement and the risks involved in connection therewith.
(b) Safeguard confirms that SCA has made available to it the
opportunity to ask questions of and receive answers from SCA's officers and
directors concerning the business and financial condition of SCA, to inspect and
make copies of agreements, contracts and records including those set forth in
the schedules attached hereto, and Safeguard has received to its satisfaction
such additional information about the business and financial condition of SCA
and the terms and conditions of the offering as it has requested.
4.7 Pennsylvania Blue Sky Requirements. Safeguard understands that
----------------------------------
the Purchased Shares are being acquired by it on the basis of the exemption from
registration afforded by Section 203(c) of the Pennsylvania Securities Act of
1972. Safeguard represents and warrants to SCA that Safeguard has been in
existence for at least eighteen (18) months and has a tangible net worth, on a
consolidated basis, as reflected in its most recent audited financial statement,
of $10,000,000 or more.
5. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PURCHASERS. The
-----------------------------------------------------
obligations of Purchasers to purchase and make payment for the Purchased Shares
at the Closing shall be made in reliance on and in consideration of the
execution and delivery of the following documents at the Closing and the
completion of the following actions prior to the Closing:
5.1 Representations and Warranties. On the Closing Date, the
------------------------------
representations and warranties contained in Section 2 shall be true and correct
in all material respects with the same effect as though made on and as of the
Closing Date, and SCA shall have so certified to Purchasers in writing.
5.2 Performance. All the covenants, agreements and conditions
-----------
contained in this Agreement to be performed
<PAGE>
or complied with by SCA on or prior to the Closing shall have been performed or
complied with, and SCA shall have so certified to Purchasers in writing.
5.3 Opinion of Counsel to SCA. Purchasers shall have received at
-------------------------
Closing an opinion from Lipton & Famiglio, counsel to SCA, dated the Closing
Date, addressed to Purchasers, and satisfactory in form and substance to
Purchasers, to the effect that:
(a) SCA is a corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Pennsylvania and has all
requisite power and authority to own and lease its properties and assets and to
conduct its business .
(b) SCA has all requisite power and authority to execute and
deliver this Agreement and to carry out the transactions contemplated by the
same. The execution, delivery and performance of this Agreement by SCA have been
duly authorized by all requisite corporate action. This Agreement has been duly
executed and delivered by SCA and constitute valid and binding obligations of
SCA, enforceable against it in accordance with their respective terms, subject
as to enforcement of remedies applicable to bankruptcy, insolvency,
reorganization or similar laws affecting generally the enforcement of creditors'
rights and the relief of debtors.
(c) The authorized capital stock of SCA consists solely of
5,000,000 shares of SCA Common Stock, no par value. Prior to the authorization
and issuance of any of the Purchased Shares pursuant to this Agreement, Section
2.4 of this Agreement and Schedule I discloses (i) all shares of SCA Common
Stock which have been duly and validly issued and are currently outstanding,
fully paid and non-assessable, (ii) all shares of SCA Common Stock held as
treasury shares and (ii) all shares reserved for or otherwise subject to
issuance outstanding subscriptions, warrants, options or other rights or
commitments of any character to subscribe for or purchase from SCA, or
obligating SCA to issue, any shares of any class of SCA's capital stock or any
securities convertible into or exchangeable for such shares.
(d) Except for those specifically identified in Section 3.4 or
in paragraph (c) above, there are no outstanding subscriptions, warrants,
options or other rights or commitments of any character to subscribe for or
purchase from SCA, or obligating SCA to issue, any shares of any class of SCA or
any securities convertible into or exchangeable for such shares; and there are
no preemptive or similar rights to purchase or otherwise acquire any shares of
any class of SCA pursuant to any provision of law or the Articles of
Incorporation or By-Laws of SCA.
(e) The issuance, sale and delivery of the Purchased Shares to
Purchasers in accordance with this Agreement, have been duly authorized by all
necessary corporate action, and the Purchased Shares when so issued, sold and
delivered against payment of the purchase price therefor, will be duly and
validly issued, fully paid and nonassessable, free of all preemptive or similar
rights.
(f) Except as described herein and except for appropriate
filings under state blue sky or securities laws, no permit, consent, approval or
authorization of, or declaration to, or filing with, any governmental or
regulatory authority or other person, not made or obtained, is required in
connection with the execution or delivery of this Agreement by SCA or the
carrying out and consummation by SCA of the transactions contemplated hereby.
<PAGE>
(g) Based on the representations of SCA in the first sentence of
Section 2.6 and of Purchasers contained in Sections 3 and 4 of this Agreement,
it is not presently necessary, under the circumstances contemplated by this
Agreement, to register the Purchased Shares under the 1933 Act or state
securities laws.
(h) The execution, delivery and performance of this Agreement
and the Closing Agreements by SCA will not violate any provision of law, any
rule or regulation of any governmental authority, or any judgment, decree or
order of any court binding on SCA, and will not conflict with or result in any
breach of any of the unwaived terms, conditions or provisions of, or constitute
a default under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties, assets or outstanding shares
of SCA under its Articles of Incorporation or By-Laws, or any indenture,
mortgage, lease, agreement or other instrument known to such counsel to which
SCA is a party or by which it, or any of its properties, is bound or affected.
(i) To the knowledge of such counsel, there is no action, suit
or litigation, administrative, arbitration, or other proceeding or governmental
inquiry or investigation pending or threatened against SCA or any of its
properties or assets, except as disclosed in Schedule I or in the 1987 Purchase
Agreement.
5.4 Third Party Approvals. To the extent that the execution and
---------------------
delivery of this Agreement and the Closing Agreements by SCA, or the performance
by SCA of the transactions contemplated thereby, will conflict with, or result
in a breach of the terms, conditions or provisions of, or constitute a default
under, or result in any violation of, or require any consent, approval or other
action by or any notice to or filing with any court or administrative or
governmental body pursuant to the Articles of Incorporation or By-Laws of SCA,
any award of any arbitrator or any agreement, instrument, order, judgment,
decree, statute, law, rule or regulation to which SCA is subject, if any, SCA
will have obtained in writing prior to the Closing, the appropriate (as
determined by Purchasers) consent, waiver or approval.
5.5 Authorization and Issuance of the Purchased Shares. The
--------------------------------------------------
authorization, issuance, sale and delivery of the Purchased Shares in accordance
with the terms of this Agreement shall have been duly authorized by all
necessary corporate actions, and the Purchased Shares when so issued, sold and
delivered against payment therefore in accordance with the provisions hereof,
will be duly and validly issued, fully paid and nonassessable, free of
preemptive or similar rights.
6. CONDITIONS PRECEDENT TO SCA'S OBLIGATIONS. SCA's obligation to
-----------------------------------------
sell the Purchased Shares is subject, at SCA's option, to full satisfaction of
the following conditions prior to the Closing:
6.1 Representations and Warranties. At the Closing, the
------------------------------
representations and warranties of Purchasers contained in Sections 3 and 4
hereof shall be true and correct in all material respects with the same effect
as though made on and as of the Closing Date, and Safeguard shall have so
certified to SCA in writing.
6.2. Performance. All the covenants, agreements and conditions
-----------
contained in this Agreement to be performed or complied with by Purchasers on or
prior to the Closing shall have been performed or complied with, and Purchasers
shall have so certified to SCA in writing.
<PAGE>
7. REGISTRATION RIGHTS.
-------------------
7.1 Piggyback Registration. (a) If SCA proposes for any reason to
----------------------
register any of its securities under the 1933 Act for sale to the public [other
than a registration in respect to the Rights Offering (as defined in the 1987
Purchase Agreement) or a registration relating solely to the sale of securities
to participants in a SCA stock plan] within the seven years following the
effective date of the first registration statement for a public offering of
securities of SCA, it shall each such time promptly give written notice to each
Holder (as defined in Section 7.2 below) of the Eligible Securities (as defined
in Section 7.2 below) then outstanding of its intention to do so, and, upon the
written request, given within 30 days after receipt of any such notice, of a
Holder to register any of its Eligible Securities, SCA shall use its best
efforts to cause all Eligible Securities with respect to which Holders shall
have so requested registration to be registered under the 1933 Act promptly upon
receipt of the written request of such Holders for such registration, all to the
extent required to permit the sale or other disposition by the Holders of the
Purchased Shares so registered in the manner contemplated by such Holders.
(b) In the event that any registration pursuant to this Section 7.1
shall be, in whole or in part, an underwritten offering of securities of SCA,
SCA shall arrange for the Eligible Securities requested to be registered
pursuant to this Section 7.1 to be included in the underwriting on the same
terms and conditions as the comparable securities, if any, otherwise being sold
through underwriters under such registration, or on terms and conditions
comparable to those normally applicable to offerings of such securities in
reasonably similar circumstances in the event that no securities comparable to
the Eligible Securities are being sold through underwriters under such
registration. However, if the managing underwriter reasonably determines and
advises in writing that the inclusion of all Eligible Securities covered by the
requests for registration made under this Section 7.1 would interfere with the
successful marketing of the securities being sold by SCA for its own account in
such registration, then the requisite number of Eligible Securities specified by
the managing underwriter (which may be all of the Eligible Securities) shall be
excluded from the underwritten portion of the public offering, provided that any
Safeguard Eligible Securities (as defined below) shall be first excluded and
that exclusion of the Radnor Eligible Securities shall be made on a pro-rata
basis among the Holders of the Radnor Eligible Securities requesting such
registration. All Eligible Securities not included in such registration shall
be withheld from the market by the Holders thereof for a period, not to exceed
90 days from the effective date of the registration statement, which the
managing underwriter determines is necessary in order to effect the underwritten
portion of the public offering.
(c) If in addition to the securities to be sold for its own account,
SCA proposes to include in such underwritten public offering any securities
(other than the Eligible Securities) owned by any shareholder of SCA (such
securities, "Additional Securities") and the managing underwriter reasonably
determines and advises in writing that the inclusion in the offering of all of
the securities to be sold for SCA's account, the Eligible Securities covered by
the requests for registration made under this Section 7.1 and the Additional
Securities would interfere with the successful marketing of the securities to be
sold for SCA's account, then the requisite number of Eligible Securities and
Additional Securities shall be excluded from the underwritten portion of the
public offering, provided that any Safeguard Eligible Securities (together with
the securities of SCA defined as "Eligible Securities" in the 1987 Purchase
Agreement and any additional securities of SCA
<PAGE>
held by Safeguard) shall be first excluded and that the exclusion of the Radnor
Eligible Securities and Additional Securities shall be made on a pro rata basis
among the Holders of the Radnor Eligible Securities and Additional Securities
requesting such registration. All Eligible Securities and Additional Securities
not included in such registration shall be withheld from the market by the
Holders thereof for a period, not to exceed 90 days from the effective date of
the registration statement, which the managing underwriter determines is
necessary in order to effect the underwritten portion of the public offering.
7.2 Definitions. The term "Holder" means any person owning or having
-----------
the right to acquire the securities referenced in respect to such term or any
assignee thereof in accordance with Section 7.11. The term "Radnor Eligible
Securities" shall mean (i) the Radnor Purchased Shares (ii) plus all common
stock or other securities of SCA issued in respect of such shares by way of a
stock split, stock dividend, recapitalization, merger or consolidation, but
exclusive of any shares described in clause (i) or (ii) sold in a public
offering registered under the 1933 Act, sold pursuant to Rule 144 or permitted
to be sold by the Holder thereof pursuant to the provisions of subsection (k) of
Rule 144. The term "Safeguard Eligible Securities" shall mean (i) the Safeguard
Purchased Shares (ii) plus all common stock or other securities of SCA issued in
respect of such shares by way of a stock split, stock dividend,
recapitalization, merger or consolidation, but exclusive of any shares described
in clause (i) or (ii) sold in a public offering registered under the 1933 Act or
sold pursuant to Rule 144. The term "Eligible Securities" shall mean the Radnor
Eligible Securities and the Safeguard Eligible Securities, collectively.
7.3 Registration Procedures. If and whenever SCA is under an
-----------------------
obligation pursuant to the provisions of Section 7.1, 7.9 or 7.10 to use its
best efforts to effect the registration of any Eligible Securities, SCA shall,
as expeditiously as practicable:
(i) prepare and file with the Securities and Exchange Commission
("SEC") a registration statement with respect to such Eligible Securities and
use its best efforts to cause such registration statement to become and remain
effective at least 90 days;
(ii) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective and current for
the requisite period to comply with the provisions of the 1933 Act with respect
to the sale or other disposition of all Eligible Securities covered by such
registration statement;
(iii) furnish to each selling shareholder such numbers of copies of
each prospectus (including each preliminary prospectus) in conformity with the
requirements of the 1933 Act, and such other documents as are normally requested
by selling shareholders to facilitate the public offering of their Eligible
Securities;
(iv) use its best efforts to register or qualify the Eligible
Securities covered by such registration statement under the securities or blue
sky laws of such jurisdictions (not to exceed ten in respect to all sellers), as
each such seller shall reasonably request (provided that SCA shall not be
required to consent to general service of process for all purposes in any
jurisdiction where it is not then qualified to do business nor shall any
officer, director or affiliate of SCA be required to escrow or forfeit any SCA
securities) and do any and all other acts or things which may be necessary or
advisable to enable
<PAGE>
such seller to consummate the public sale or other disposition in such
jurisdictions of such Eligible Securities;
(v) notify each seller of the Eligible Securities covered by such
registration statement, at any time when a prospectus relating thereto is
required to be delivered under the 1933 Act within the appropriate period
mentioned in clause (ii) of this Section 7.3, of the happening of any event as a
result of which the prospectus included in such registration statement, as then
in effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing., and at
the request of any such seller prepare and furnish to such seller a reasonable
number of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as amendment of such prospectus as may be necessary so that,
as thereafter delivered to the purchasers of such Eligible Securities, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing; and
(vi) furnish, at the request of any Holder or Holders of the Eligible
Securities requesting registration pursuant to this Section 7, on the date that
any Eligible Securities are delivered to the underwriters for sale pursuant to
such registration or, if such Eligible Securities are not being sold through
underwriters, on the date that the registration statement with respect to such
Eligible Securities becomes effective, (a) an opinion, dated such date, of the
counsel representing SCA for the purposes of such registration, addressed to the
underwriters, if any, and to the Holder or Holders making such request, stating
that such registration statement has become effective under the 1933 Act and
that (1) to the best of the knowledge of such counsel, no stop order suspending
the effectiveness thereof has been issued and no proceedings for that purpose
have been instituted or are pending or contemplated under the 1933 Act; (2) the
registration statement, the related prospectus, and each amendment or supplement
thereto, comply as to form in all material respects with the requirements of the
1933 Act and the applicable rules and regulations of the SEC thereunder (except
that such counsel need express no opinion as to financial statements and
schedules contained therein); (3) such counsel has no reason to believe that
either the registration statement or the prospectus, or any amendment or
supplement thereto, contains any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; (4) the description in the registration
statement or the prospectus, or any amendment or contracts and other legal
documents or instruments are accurate and fairly present the information
required to be shown; (5) such counsel does not know of any legal or
governmental proceedings, pending or contemplated, required to be described in
the registration statement or prospectus, or any amendment or supplement
thereto, which are not described as required, nor of any contracts or documents
or instruments of a character required to be described in the registration
statement or prospectus, or any amendment or supplement thereto, or to be filed
as exhibits to the registration statement which are not described and filed as
required, and (6) such other legal matters with respect to such registration as
any such underwriter or Holder or Holders requesting such opinion may reasonably
request if counsel for an issuer is normally requested to opine on such matter
in a public offering of securities; provided, however that such opinion may
assume the accuracy of all information supplied by selling shareholders of SCA
and will not address exhibits and schedules to the registration statement; and
(b) a letter, dated such
<PAGE>
date, from the independent certified public accountants of SCA, addressed to the
underwriters, if any, and to the Holder or Holders making such request, stating
that they are independent certified public accountants within the meaning of the
1933 Act, and that in the opinion of such accountants, the financial statements
and other financial data of SCA included in the registration statement or the
prospectus, or any amendment or supplement thereto, comply as to form in all
material respects with the applicable accounting requirements of the 1933 Act,
and covering such other financial matters (including information as to the
period ending not more than five business days prior to the date of such letter)
with respect to such registration as such Holder or Holders requesting such
letter may reasonably request.
7.4 Information to be Furnished by Holders of Eligible Securities.
-------------------------------------------------------------
Each prospective seller of Eligible Securities registered or to be registered
under any registration statement pursuant to Section 7.1, 7.9 and 7.10 shall
promptly furnish to SCA such information and execute such documents regarding
such seller and the Eligible Securities held by such seller and the intended
method of disposition thereof as SCA shall reasonably request and shall be
requested in connection with the action to be taken by SCA.
7.5 Expenses of Registration. (a) All expenses incurred by SCA in
------------------------
complying with Section 7.3 (other than the underwriter's discounts and
commissions and fees and expenses of special counsel to the sellers of Eligible
Securities, if any), including, without limitation, all registration and filing
fees (including all expenses incident to filing with the National Association of
Securities Dealers, Inc.), fees and expenses of complying with securities and
blue sky laws, reasonable expense allowances of the underwriters, printing
expenses, fees and disbursements of counsel, and of the independent public
accountants, but excluding the compensation of regular employees of SCA and the
fees and expenses of SCA, are herein called "Registration Expenses." All
underwriting discounts and commissions applicable to the Eligible Securities and
the Additional Securities covered by any such registration, and all fees and
expenses of special counsel to the Holders thereof, are herein called "Selling
Expenses."
(b) Subject to paragraph (c) and (d) below, SCA shall pay all
Registration Expenses in connection with each registration pursuant to Section
7.1, 7.9 or 7.10. All Selling Expenses in connection with each registration
pursuant to Section 7.1, 7.9 or 7.10 shall be borne by the seller or sellers
therein in proportion to the number of Eligible Securities included by each in
such registration or in such other proportions as they may agree upon.
(c) If the allocation of the expenses of registration provided for in
this Section 7.5 shall result in SCA being unable to register or qualify its
securities covered by the Registration Statement for sale in any particular
state in which sales of securities are proposed to be made, then (i) in the case
where Eligible Securities are being included in the Registration Statement
pursuant to Section 7.1 or 7.10, the Holders of the Eligible Securities to be
included in the Registration Statement shall either (A) bear pro rata with all
other Holders of Additional Securities such amount of those expenses which would
otherwise be borne by SCA hereunder as shall be required by state law to permit
the securities included in the Registration Statement to be registered or
qualified for sale in such state, or (B) shall withdraw their Eligible
Securities from the Registration Statement.
(d) SCA shall not be required to pay for any expenses of any
registration proceeding begun pursuant to Section
<PAGE>
7.10 if the registration request is subsequently withdrawn at the request of the
Holders of a majority of the Radnor Eligible Securities to be registered [in
which case all Participating Radnor Holders (as defined in Section 7.10) shall
bear such expenses], unless the Holders of a majority of the Radnor Eligible
Securities agree to forfeit their right to one demand registration pursuant to
Section 7.10; provided further, however that if at the time of such withdrawal,
the Radnor Holders have learned of a material adverse change in the condition,
business, or prospects of SCA from that known to the Radnor Holders at the time
of their request, then the Radnor Holders shall not be required to pay any of
such expenses and shall retain their rights pursuant to Section 7.10.
7.6 Indemnification. (a) SCA shall indemnify and hold harmless each
---------------
Holder of Eligible Securities, its executive officers, directors and controlling
persons (within the meaning of the 1933 Act) and each person who participates as
an underwriter or controlling person of an underwriter (within the meaning of
the 1933 Act) with respect to a registration statement pursuant to Section 7.1,
7.9 or 7.10 against any loss, claims damages or liabilities to which any of them
may become subject under the 1933 Act or otherwise insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or allegedly untrue statement of any
material fact contained in a registration statement including Common Shares of
SCA owned by such Holder, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse any of them for legal or other expenses
reasonably incurred by any of them in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that SCA
shall not be liable hereunder in any such case if any such loss, claim, damage,
or liability arises out of or is based upon any untrue statement or allegedly
untrue statement or omission or alleged omission made in such registration
statement, prospectus or amendment or supplement thereto in reliance upon and in
conformity with written information furnished to SCA for such purpose by such
Holder or by its representative or by any underwriter on behalf of such Holder.
(b) Each Holder of Eligible Securities joining in any registration
statement of SCA pursuant to Section 7.1, 7.9 or 7.10 shall indemnify and hold
harmless SCA, its executive officers, directors, and controlling persons (within
the meaning of the 1933 Act) and each person who participates as an underwriter
or controlling person of an underwriter (within the meaning of the 1933 Act)
with respect to a registration statement pursuant to Section 7.1, 7.9 or 7.10
against any losses, claims, damages, or liabilities (or actions in respect
thereof) which arise out of or are based upon any untrue statement or allegedly
untrue statement or omission or alleged omission made in such registration
statement, any preliminary prospectus or final prospectus contained therein, or
any amendment or supplement thereto, in reliance upon and in conformity with
written information furnished by SCA to such Holder or by its representative or
by any underwriter on behalf of such Holder, and will reimburse any of them for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending, any such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under this Section
7.6 of notice of the commencement of any action, such indemnified party will, if
a claim in respect therein is to be made against any indemnifying party, notify
the
<PAGE>
indemnifying party in writing of the commencement thereof and the indemnifying
party shall have the right to participate in and to assume the defense thereof
with counsel mutually satisfactory to the parties. The failure to notify an
indemnifying party promptly of the commencement of any such action, if
prejudicial to the ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
7.6, but the omission to so notify the indemnifying party will not relieve such
party of any liability that such party may have to any indemnified party other
than under this Section 7.6.
7.7 Underwriting Agreement. If Eligible Securities are sold pursuant
----------------------
to a registration statement in an underwritten offering pursuant to Section 7.1,
7.9 or 7.10, SCA agrees to enter into an underwriting agreement containing
customary representations and warranties with respect to the business and
operations of an issuer of the securities being registered and customary
covenants and agreements to be performed by such issuer, including, without
limiting the generality of the foregoing, customary provisions with respect to
the indemnification by SCA of the underwriters of such offering. The Holders of
Eligible Securities included in the Registration Statement shall also join in
any such underwriting agreement to the extent customarily required by
underwriters, but such Holders shall not be required to make any representations
and warranties with respect to the business and operations of SCA.
7.8 Reports Under Securities Exchange Act of 1934. With a view to
---------------------------------------------
making available to the Holders of the Eligible Securities the benefits of Rule
144 and other rule or regulation of the SEC that may at any time permit a Holder
to sell securities of SCA to the public without registration or pursuant to a
registration on Form S-3, SCA agrees to:
(a) make and keep public information available, within the
meaning of Rule 144, at all times after 90 days after the effective date of the
first registration statement filed by SCA for the offering of its securities to
the general public;
(b) take such action, including the registration of its Common
Stock under Section 12 of the Securities Exchange Act of 1934 ("1934 Act"), as
is necessary to enable SCA to utilize Form S-3 for the sale of the Eligible
Securities, such action to be taken as soon as practicable after the end of the
fiscal year in which the first registration statement filed by SCA under the
1933 Act for the offering of its securities to the general public is declared
effective;
(c) file with the SEC in a timely manner all reports and other
documents required of SCA under the 1933 Act and the 1934 Act; and
(d) furnish to any Holder of Eligible Securities, so long as such
Holder owns any Eligible Securities, forthwith upon request (i) a written
statement by SCA as to the availability of current reporting information within
the meaning of Rule 144 (at any time after ninety (90) days after the effective
date of the first registration statement filed by SCA), the 1933 Act and the
1934 Act (at any time after it has become subject to such reporting
requirements), or as to its qualification as a registrant whose securities may
be resold pursuant to Form S-3 (at any time after it so qualifies); (ii) a copy
of the most recent annual or quarterly report of SCA and such other reports and
documents so filed by SCA; and (iii) such other information as may be reasonably
requested in availing any such Holder of any rule or regulation of the SEC that
permits the selling of any such securities without registration or pursuant to
such form.
<PAGE>
7.9 Form S-3 Registration. In case SCA shall receive from any Holder
---------------------
or Holders of the Radnor Eligible Securities ("Radnor Holder") then outstanding
a written request or requests that SCA effect a registration on Form S-3 with
respect to all or a part of the Radnor Eligible Securities owned by such Radnor
Holder or Radnor Holders, SCA will:
(a) promptly give written notice of the proposed registration,
and any related qualification or compliance, to all other Radnor Holders; and
(b) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Radnor
Holder's or Radnor Holders' Eligible Securities as are specified in such
request, together with all or such portion of the Eligible Securities of any
other Radnor Holder or Radnor Holders joining in such request as are specified
in a written request given within 15 days after the giving of such written
notice from SCA; provided, however, that SCA shall not be obligated to effect
any such registration, qualification or compliance, pursuant to this Section
7.9: (1) if Form S-3 is not available for such offering by the Radnor Holders;
(2) if the Radnor Holders, together with the Holders of any other securities of
SCA entitled to inclusion in such registration, propose to sell Eligible
Securities and such other securities (if any) at an aggregate price to the
public (net of any underwriters' discounts or commissions) of less than
$100,000; (3) if SCA shall furnish to the Radnor Holders a certificate signed by
the President of SCA stating that in the good faith judgment of the Board of
Directors of SCA, it would be detrimental to SCA and its shareholders for such
Form S-3 Registration to be effected at such time, in which event SCA shall have
the right to defer the filing of the Form S-3 registration statement for a
period of not more than 60 days after receipt of the request of the Radnor
Holder or Radnor Holders under this Section 7.9; provided, however, that SCA
shall not utilize this right more than once in any 12-month period preceding the
date of such request, already effected two registrations on Form S-3 for the
Radnor Holders pursuant to this Section 7.9; or (5) in any particular
jurisdiction in which SCA would be required to qualify to do business or to
execute a general consent to service of process in effecting such registration,
qualification or compliance.
(c) Subject to the foregoing, SCA shall file a registration
statement covering the Radnor Eligible Securities and other securities so
requested to be registered as soon as practicable after receipt of the request
or requests of the Radnor Holders.
7.10 Request for Registration.
------------------------
(a) If SCA shall receive at any time after the first anniversary of
the effective date of the first registration statement for a public offering of
securities of SCA, a written request from a Holder or Holders of at least 35% of
the Radnor Eligible Securities then outstanding that SCA file a registration
statement under the 1933 Act covering the registration of at least 25% of the
Radnor Eligible Securities then outstanding (or a lesser percent if the
anticipated aggregate offering price, net of underwriting discounts and
commissions, would exceed $1,000,000), then SCA shall, within ten days of the
receipt thereof, give written notice of such request to all Radnor Holders, and
shall, subject to the limitations of subsection 7.10(b), effect as soon as
practicable, and in any event within 150 days of the receipt of such request (or
such longer period as may be required as the result of events beyond the control
of SCA), the registration under the 1933 Act of all Radnor Eligible
<PAGE>
Securities that the Radnor Holders request to be registered within 20 days of
the mailing of such notice by SCA in accordance with Section 12.4.
(b) If the Radnor Holders initiating the registration request
hereunder ("Initiating Radnor Holders") intend to distribute the Radnor Eligible
Securities covered by their request by means of an underwriting, they shall so
advise SCA as a part of their request made pursuant to this Section 7.10, and
SCA shall include such information in the written notice referred to in
subsection 7.10(a). In such event, the right of any Holder to include its
Radnor Eligible Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Radnor Eligible Securities in the underwriting (unless otherwise mutually agreed
by a majority in interest of the Initiating Radnor Holders and such Holder) to
the extent provided herein. All Radnor Holders proposing to distribute their
securities through such underwriting shall (together with SCA as provided in
subsection 7.7) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by a majority in
interest of the Initiating Radnor Holders. Notwithstanding any other provision
of this Section 7.10, if the underwriter advises the Initiating Radnor Holders
in writing that marketing factors require a limitation of the number of shares
to be underwritten, the Initiating Radnor Holders shall so advise all Radnor
Holders whose shares would otherwise be underwritten pursuant hereto and SCA,
and the number of shares of Radnor Eligible Securities that may be included in
the underwriting shall be allocated among all Holders thereof, including the
Initiating Radnor Holders, in proportion (as nearly as practicable) to the
amount of Radnor Eligible Securities of SCA owned by each Radnor Holder.
(c) If in addition to the securities to be sold for the Participating
Radnor Holders pursuant to a registration under this Section 7.10, SCA proposes
to include in such offering securities to be offered for SCA's account or any
Additional Securities, or both (collectively "Additional Demand Securities"),
and the managing underwriter reasonably determines and advises in writing that
the inclusion in the offering of the Additional Demand Securities would
interfere with the successful marketing of the securities to be sold for the
Holders of Radnor Eligible Securities, then the requisite number of Additional
Demand Securities shall be excluded from the offering. All Additional Demand
Securities not included in such registration shall be withheld from the market
by the Holders thereof for a period, not to exceed 90 days, which the managing
underwriter determines is necessary in order to effect the underwritten portion
of the public offering.
(d) SCA is obligated to effect only one such registration pursuant to
this Section 7.10.
(e) Notwithstanding the foregoing, if SCA shall furnish to Radnor
Holders requesting a registration statement pursuant to this Section 7.10, a
certificate signed by the CEO or President of SCA stating that in the good faith
judgment of the Board of Directors of SCA, it would be seriously detrimental to
SCA and its shareholders for such registration statement to be filed and it is
therefore essential to defer the filing of such registration statements, SCA
shall have the right to defer such filing for a period of not more than 90 days
after receipt of the request of the Initiating Radnor Holders; provided,
however, that SCA may not utilize this right more than once in any twelve-month
period.
7.11 Assignment of Registration Rights. Subject to the provisions of
---------------------------------
Section 3.3, the rights to cause SCA to register Radnor Eligible Securities
pursuant to this Section 7 may be assigned by a Holder to any partner of Radnor
or a
<PAGE>
transferee or assignee of at least 50,000 shares of such securities; provided,
however, SCA is, within a reasonable time after such transfer, furnished with
written notice of the name and address of such transferee or assignee and the
securities with respect to which such registration rights are being assigned;
and provided, further, that such assignment shall be effective only if
immediately following such transfer the further disposition of such securities
by the transferee or assignee is restricted under the 1933 Act; and provided
further that registration rights may not be transferred to a competitor of SCA.
7.12 Limitations on Subsequent Registration Rights. From and after
---------------------------------------------
the date of this Agreement, SCA shall not, without the prior written consent of
the Holders of a majority of the outstanding Eligible Securities, enter into any
agreement with any Holder or prospective Holder of any securities of SCA that
would allow such Holder or prospective Holder to make a demand registration or
registrations, except for (i) a demand registration or registrations that would
occur subsequent to the demand registration described in Section 7.10 and in
which the Holders of Radnor Eligible Securities would have the right to register
without exclusion the lesser of (A) all Radnor Eligible Securities then
outstanding or (B) such number of Radnor Eligible Securities as would equal all
other SCA securities included in such registration, (ii) a Form S-3 registration
or (iii) to the extent any such agreement may be deemed to require consent under
this Section 7.12, any agreement with an underwriter or underwriters of a
registration of SCA securities under the 1933 Act in respect to the registration
and offering of such securities.
7.13 Amendment of Registration Rights. Any provision of this Section
--------------------------------
7 may be amended or the observance thereof may be waived (either generally or in
a particular instance and either retroactively or prospectively), only with the
written consent of SCA and the Holders of a majority of the Eligible Securities
then outstanding. Any amendment or waiver effected in accordance with this
Section 7.13 shall be binding upon each Holder of any securities purchased under
this Agreement at the time outstanding (including securities into which such
securities are convertible), each future Holder of all such securities, and SCA.
7.14 Market Stand-off Agreement. Any Holder of Eligible Securities
--------------------------
being registered under this Section 7 agrees, if requested by an underwriter of
such registered public offering, not to sell or otherwise transfer or dispose of
any offering, not to sell or otherwise transfer or dispose of any Common Stock
(or other securities) of SCA held by such Holder other than shares of Eligible
Securities included in the registration during a period of up to 180 days
following the effective date of the initial registration statement of SCA filed
under the Act, provided that all other persons selling securities in such
underwritten public offering and all executive officers and directors of SCA
shall enter into similar agreements. Such agreement shall be in writing in the
form satisfactory to SCA and such underwriter, and may be included in the
underwriting agreement. SCA may impose stop-transfer instructions with respect
to the securities subject to the foregoing restriction until the end of the
required stand-off period.
<PAGE>
8. EVENTS OF DEFAULT.
-----------------
8.1 Events of Default. An Event of Default shall have occurred under
-----------------
this Agreement if Purchasers fails to observe or perform any material covenant
or agreement required to be observed or performed by it pursuant to the terms of
this Agreement, and such failure shall remain unremedied for ten (10) days after
written notice thereof shall have been given to the defaulting party, provided
that if the nature of the default is such that it cannot be cured by the payment
of money and cannot be cured by other appropriate action of the defaulting party
within ten (10) days, no Event of Default shall be deemed to have occurred so
long as the defaulting party diligently and in good faith takes all necessary
action to cure the default.
8.2 Remedies. If any Event of Default shall occur, or if any
--------
representation or warranty made by or on behalf of one party to this Agreement,
or in a report or other instrument delivered under or pursuant to any term
hereof shall be untrue or incorrect in any material respect as of the date of
this Agreement or as of the Closing or as of the date it was made, furnished or
delivered, the injured party may proceed to protect and enforce its rights by
suit in equity or action at law, whether for the specific performance of any
term contained in this Agreement or for an injunction against the breach of any
such term or in aid of the exercise of any power granted in this Agreement, or
to enforce any other legal or equitable right of such Holder of any such
securities, or to take any one or more of such actions.
8.3 Cumulative Remedies. None of the rights, powers or remedies
-------------------
conferred upon a party hereto shall be mutually exclusive, and each such right,
power or remedy shall be cumulative and in addition to every other right, power
or remedy, whether conferred hereby or now or hereafter available at law, in
equity, by statute or otherwise.
8.4 No Implied Waiver. Except as expressly provided in this
-----------------
Agreement, no course of dealing between SCA and Purchasers and no delay in
exercising any right, power or remedy conferred hereby or now or hereafter
existing in law, in equity, by statute or otherwise shall operate as a waiver
of, or otherwise prejudice, any such right, power or remedy.
9. COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON TRANSFERABILITY
----------------------------------------------------------------
OF SECURITIES.
-------------
9.1 Compliance with 1933 Act. The Securities shall not be
------------------------
transferable, except upon the conditions specified in this Section 9 or as
otherwise set forth in this Agreement, which conditions are intended to insure
compliance with the provisions of the 1933 Act in respect of the transfer of any
of the Securities.
9.2 Restrictive Legend. Each certificate representing the Purchased
------------------
Shares and any shares or other securities issued in respect of such shares upon
any stock split, stock dividend, recapitalization, merger, consolidation or
similar event (for the purposes of this Section 9, "Restricted Securities"),
shall, (unless otherwise permitted by the provisions of Section 9.4 below) be
stamped or otherwise imprinted with the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH
SECURITIES MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE
<PAGE>
DISPOSED OF, IN THE ABSENCE OF SUCH REGISTRATION OR, IN THE OPINION OF
COUNSEL TO THE ISSUER, SUCH REGISTRATION IS NOT NECESSARY."
9.3 Restrictions on Transferability. Purchasers shall not transfer,
-------------------------------
sell or otherwise dispose of any of the Restricted Securities and SCA shall not
be required to recognize any purported transfer of the Restricted Securities
unless SCA shall have been provided with an opinion of counsel to SCA with
respect to any such purported transfer to the effect that registration under the
1933 Act or any applicable state securities law is not required in connection
with such transaction. Each certificate for any of the Restricted Securities
issued upon any such transfer shall bear the legend set forth herein unless such
opinion of counsel is to the further effect that such legend is not required.
SCA shall bear the cost of its own counsel.
9.4 Termination of Restriction on Transferability. The conditions
---------------------------------------------
precedent imposed by this Section 9 upon the transferability of the Restricted
Securities shall cease and terminate as to any of such shares when (i) such
securities shall have been registered under the 1933 Act and sold or otherwise
disposed of in accordance with the intended method of disposition by the seller
or sellers thereof set forth in the registration statement covering such
securities, (ii) at such time as an opinion of counsel shall have been rendered
as required pursuant to the last sentence of Section 9.3 to the effect that the
restrictive legend on the certificate for such securities is no longer required,
or (iii) when such securities are transferred in accordance with the provisions
of Rule 144. Whenever the conditions imposed by this Section 9 shall terminate
as hereinabove provided, the Holder of any Restricted Securities bearing the
legend set forth in this Section 9 as to which such conditions shall have
terminated shall be entitled to receive from SCA, without expense (except for
the payment of any applicable transfer tax) and as expeditiously as possible,
new stock certificates not bearing such legend.
10. SCA COVENANTS.
-------------
10.1 Financial Statements. Until such time as SCA is required to
--------------------
register its common stock pursuant to Section 12 (g) of the 1934 Act, SCA shall
furnish to Radnor:
(a) Within 90 days after the end of each fiscal year, an audited
balance sheet, and related audited statements of income, changes in financial
position, and changes in stockholders' equity of SCA as at the end of and for
such fiscal year prepared in accordance with generally accepted accounting
principles, consistently applied, and accompanied by the opinion of the firm of
independent public accountants regularly employed by SCA to audit its financial
statements, or if no such firm is so regularly employed, another so called "Big
8" firm of independent public accountants selected by SCA for the purpose of
conducting such an audit;
(b) Within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, a balance sheet and statements of income, changes
in financial position and changes in stockholders' equity of SCA as at the end
of and for such quarter and the year to date and as at the end of and for the
corresponding periods of the preceding fiscal year and for the budget for the
current fiscal year, and
(c) Within 30 days after the end of each month, a balance sheet and a
profit and loss statement for SCA as of the
<PAGE>
end of such month.
The interim quarterly and monthly statements described above shall be unaudited,
shall be prepared in accordance with generally accepted accounting principles
(except that they need not be accompanied by notes) and shall contain a
statement that all adjustments necessary for a fair statement of the results for
the period covered by such interim statements have been included.
10.2 Payment of Expenses. SCA shall pay its own expenses, including
-------------------
the fees and expenses of SCA's counsel, incurred by it in connection with the
issuance and sale of the Purchased Shares and the execution, delivery and
performance of this Agreement.
10.3 Transfer Taxes. SCA will pay, and hold the Purchasers harmless
--------------
against liability for the payment of, any transfer or similar taxes payable in
connection with the issuance and sale of the Purchased Shares pursuant hereto.
11. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS
------------------------------------------------------
Notwithstanding any investigation made by or on behalf of Purchasers or SCA, all
agreements, representations and warranties made herein and in the documents
delivered pursuant hereto shall survive the execution and delivery of this
Agreement and the issuance and sale of the Purchased Shares.
12. MISCELLANEOUS.
-------------
12.1 Assignment. No party may assign its rights or delegate its
----------
duties under this Agreement without the consent of the others except as
otherwise provided herein; provided, however that Safeguard may assign its
rights or any of its wholly-owned subsidiaries which agrees to be bound by the
terms of this Agreement.
12.2 Broker or Finder. Each party to this Agreement represents and
----------------
warrants that, to the best of its knowledge, no broker or finder has acted for
such party in connection with this Agreement or the transactions contemplated by
this Agreement and that no broker or finder is entitled to any broker's or
finder's fee or other commission in respect thereof based in any way on
agreements, arrangements or understandings made by such party. SCA shall
indemnify Purchasers against, and hold it harmless from, any claim, liability
cost, or expense (including reasonable attorneys' fees and expenses) resulting
from any agreement, arrangement, or understanding made by Purchasers, with any
third party for brokerage or finders' fees or other commissions in connection
with this Agreement or any of the transactions contemplated hereby.
12.3 Governing law. This Agreement shall be governed by and construed
-------------
and enforced in accordance with the laws of the Commonwealth of Pennsylvania.
12.4 Notice. Any notice or other communication required or permitted
------
hereunder shall be sufficiently given only if (i) sent by registered or
certified mail, postage prepaid, (ii) delivered personally by Federal Express or
other private service (iii) sent by facsimile transmission during regular
business hours on a regular business day (provided the facsimile is confirmed by
sending such notice by first class mail within 24 hours of such transmission)
addressed as follows:
<PAGE>
If to SCA: Sanchez Computer Associates, Inc.
40 Valley Stream Parkway
Great Valley Corporate Center
Malvern, PA 19355
Attn: President
Fax: (215) 296-7371
With a copy to: Robert S. Lipton, Esquire
Lipton & Famiglio
201 North Jackson Street
Media PA 19063
Fax: (215) 565-7624
If to Radnor: Radnor Venture Partners, L.P.
630 Park Avenue
King of Prussia, PA 19406
Attn: Robert Keith and Ira Lubert
Fax: (215) 337-8983/7176
With a copy to: Robert H. Strouse, Esquire
Drinker, Biddle & Reath
Suite 300
1000 Westlakes Drive
Berwyn, PA 19312
Fax: (215) 993-8585
If to Safeguard: Safeguard Scientifics (Delaware), Inc.
c/o Safeguard Scientifics, Inc.
630 Park Avenue
King of Prussia, PA 19406
Attn: President
Fax: (215) 337-8983/7176
With a copy to: General Counsel
Safeguard Scientifics, Inc.
630 Park Avenue
King of Prussia, PA 19406
Fax: (215) 337-8983/7176
or to such other address or addresses as may hereafter be furnished in writing
by notice similarly given by one party to the other.
12.5 Full Agreement. This Agreement and the Schedules hereto set forth
--------------
the entire understanding of the parties with respect to the transactions
contemplated hereby, and shall not be modified or amended except by written
agreement of all parties hereto.
12.6 Amendment. This Agreement may be amended only in writing by all
---------
of the parties.
12.7 Execution. This Agreement shall not be binding on any person
---------
until it has been signed by each person
<PAGE>
identified on the signature page hereto as being a signatory hereto and
delivered by such person to the other persons identified as signatories hereto.
The circulation of unsigned drafts or copies of this Agreement by any party to
another shall not create any inference that a legally binding contract to
proceed with the transactions contemplated by this Agreement has been entered
into, it being the intention of the parties that such a contract shall arise
only upon the execution and delivery of this Agreement by all parties as
aforesaid.
12.8 Headings. The headings of the Sections of this Agreement are
--------
inserted for convenience of reference only and shall not be considered a part
hereof.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
intending to be legally bound, on December 29, 1989.
SANCHEZ COMPUTER ASSOCIATES, INC.
By_____________________________________
Title:
RADNOR VENTURE PARTNERS, L.P.
By____________________________________
Title:
SAFEGUARD SCIENTIFICS
(DELAWARE), INC.
By____________________________________
Vice President
<PAGE>
Exhibit 10.4
COMMON STOCK PURCHASE
AGREEMENT
AMONG
SANCHEZ COMPUTER ASSOCIATES, INC.,
RADNOR VENTURE PARTNERS, L.P.
AND
SAFEGUARD SCIENTIFICS (DELAWARE), INC.
December 1, 1989
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. SALE OF SHARES....................................................... 1
1.1 Sale of Shares to Radnor 1
1.2 Sale of Shares to Safeguard. 1
1.3 Closing 1
1.4 Delivery 1
1.5 Use of Proceeds 2
2. REPRESENTATIONS AND WARRANTIES OF SCA................................ 2
2.1 Organization and Standing of SCA 2
2.2 Authorization 2
2.3 No Conflict with Law or Documents 2
2.4 Capital Stock 2
2.5 Consents and Approvals 3
2.6 Private Offering 3
2.7 Articles of Incorporation and By-Laws 4
2.8 Financial Statements 4
2.9 No Material Adverse Change 4
2.10 Absence of Undisclosed Liabilities 4
2.11 Litigation 4
2.12 Compliance with Laws 4
2.13 Other Representations and Warranties 4
3. REPRESENTATIONS AND WARRANTIES OF RADNOR............................. 5
3.1 Authorization 5
3.2 No Registration 5
3.3 Non-Distribution 5
3.4 Restrictions on Transfer 5
3.5 Sophistication; Access to Information 5
3.6 Pennsylvania Blue Sky Requirements 6
4. REPRESENTATIONS AND WARRANTIES OF SAFEGUARD.......................... 6
4.1 Organization and Standing 6
4.2 Authorization 6
4.3 No Registration. 6
4.4 Non-Distribution 6
4.5 Restrictions on Transfer 6
4.6 Sophistication; Access to Information 7
4.7 Pennsylvania Blue Sky Requirements 7
5. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PURCHASERS 7
5.1 Representations and Warranties 7
5.2 Performance 7
5.3 Opinion of Counsel to SCA 8
5.4 Third Party Approvals 9
5.5 Authorization and Issuance of the Purchased Shares 9
6. CONDITIONS PRECEDENT TO SCA'S OBLIGATIONS........................... 10
6.1 Representations and Warranties 10
6.2. Performance 10
7. REGISTRATION RIGHTS................................................. 10
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
8. EVENTS OF DEFAULT.................................................... 10
8.1 Events of Default 10
8.2 Remedies 11
8.3 Cumulative Remedies 11
8.4 No Implied Waiver 11
9. COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON TRANSFERABILITY OF
SECURITIES........................................................... 11
9.1 Compliance with 1933 Act 11
9.2 Restrictive Legend 11
9.3 Restrictions on Transferability 12
9.4 Termination of Restriction on Transferability 12
10. SCA COVENANTS........................................................ 12
10.1 Financial Statements 12
10.2 Payment of Expenses 13
10.3 Transfer Taxes 13
11. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS............... 13
12. MISCELLANEOUS........................................................ 13
12.1 Assignment 13
12.2 Broker or Finder 13
12.3 Governing law 14
12.4 Notice 14
12.5 Full Agreement 15
12.6 Amendment 15
12.7 Execution 15
12.8 Headings 15
</TABLE>
<PAGE>
COMMON STOCK PURCHASE AGREEMENT
Agreement made as of December 1, 1989, by and among Sanchez Computer
Associates, Inc., a Pennsylvania corporation ("SCA"), Radnor Venture Partners,
L.P., a Delaware limited partnership ("Radnor"), and Safeguard Scientifics
(Delaware), Inc., a Delaware corporation ("Safeguard"). Radnor and Safeguard are
collectively referred to below as the "Purchasers."
Background
----------
SCA desires to sell to the Purchasers 214,286 shares of the Common
Stock, no par value, of SCA (such class of stock, "SCA Common Stock"), and
Radnor and Safeguard desire to purchase such shares from SCA, upon the terms and
conditions set forth in this Agreement.
Agreements
----------
Now, therefore, in consideration of the above, the mutual covenants
contained herein and intending to be legally bound hereby, the parties agree as
follows:
1. SALE OF SHARES.
--------------
1.1 Sale of Shares to Radnor. Subject to the terms and conditions
------------------------
herein set forth, SCA agrees to issue and sell, and Radnor agrees to purchase
from SCA, at the Closing (as defined below) 128,571 shares ("Radnor Purchased
Shares") of SCA Common Stock at a price of $7.00 per share, for an aggregate
purchase price of Nine Hundred Thousand Dollars ($900,000).
1.2 Sale of Shares to Safeguard. Subject to the terms and
---------------------------
conditions herein set forth, SCA agrees to issue and sell, and Safeguard agrees
to purchase from SCA, at the Closing 85,715 shares ("Safeguard Purchased
Shares") of SCA Common Stock at the price of $7.00 per share, for an aggregate
purchase price of Six Hundred Thousand Dollars ($600,000). The Radnor Purchased
Shares and the Safeguard Purchased Shares are collectively referred to below as
the "Purchased Shares."
1.3 Closing. The closing ("Closing") of the purchase and sale of
-------
the Purchased Shares shall be held within five business days following notice by
SCA of its demand for such closing, but shall occur no later than December 31,
1989 ("Closing Date"). The Closing shall be held at 10:00 AM at the offices of
Radnor at 630 Park Avenue, King of Prussia, PA 19406 or at such other location
as the parties may agree.
1.4 Delivery. At the Closing, SCA shall issue and deliver (a) to
--------
Radnor a certificate registered in the name of Radnor representing 128,571
shares of SCA Common Stock against delivery to SCA by Radnor of payment of
$900,000 and (b) to Safeguard a certificate registered in the name of Safeguard
representing 85,715 shares of SCA Common Stock against delivery to SCA by
Safeguard of payment of $600,000. The aggregate amount of any such funds as
Radnor or Safeguard, or both, may advance (at their election) to SCA subsequent
to the effective date of this Agreement and prior to Closing shall be deducted
against the purchase price to be paid at Closing by such purchaser on a dollar
for dollar basis at
<PAGE>
Closing. Payments to SCA at the Closing shall be made in cash by confirmed
federal funds wire transfer.
1.5 Use of Proceeds. SCA shall apply the proceeds of the sale of
---------------
the Purchased Shares to working capital purposes only.
2. REPRESENTATIONS AND WARRANTIES OF SCA. SCA represents and
-------------------------------------
warrants to Purchasers that, except as set forth on a Schedule of Exceptions
attached as Schedule I hereto, each of which exceptions shall specifically
identify the relevant subsection hereof to which it relates and shall be deemed
to be representations and warranties as if made hereunder:
2.1 Organization and Standing of SCA. SCA is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has all requisite power and authority to own
and lease its properties and assets and to conduct its business, to enter into
this Agreement, to authorize and issue the Purchased Shares, subject to the
appropriate state and federal registration of securities, and to comply with the
provisions hereof.
2.2 Authorization. SCA has all requisite power and authority to
-------------
execute and deliver this Agreement, and to carry out and consummate the
transactions contemplated in the same. The execution, delivery and performance
by SCA of this Agreement have been duly authorized by all requisite corporate
action. This Agreement has been duly executed and delivered by SCA, and
constitutes valid and binding obligations of SCA, enforceable against SCA in
accordance with its terms.
2.3 No Conflict with Law or Documents. The execution, delivery and
---------------------------------
performance of this Agreement by SCA will not violate any provision of law, any
rule or regulation of any governmental authority, or any judgment, decree or
order of any court binding on SCA, and will not conflict with or result in any
breach of any of the unwaived terms, conditions or provisions or constitute a
default under, or result in the creation of any lien, security interest, charge
or encumbrance upon any of the properties, assets or outstanding shares of SCA
under its Articles of Incorporation or By-Laws or any indenture, mortgage,
lease, agreement or other instrument to which SCA is a party or by which it or
any of its properties is bound or affected.
2.4 Capital Stock. The authorized capital stock of SCA consists
-------------
solely of 5,000,000 shares of SCA Common Stock, of which 1,789,040 shares are
issued and are currently outstanding, 40,000 are treasury shares and 440,000
shares have been reserved for issuance upon the exercise of (i) options to
purchase shares of SCA Common Stock granted pursuant to the employee stock
option plan ("Option Plan"), for which 150,000 shares have been authorized and
reserved ("Employee Options"), (ii) options to purchase 190,000 shares of SCA
Common Stock granted outside the Option Plan ("Other Options"), (iii) warrants
to purchase 100,000 shares of SCA Common Stock previously granted to Safeguard
("Safeguard Warrants"), and (iv) 196,078 shares ("Prior Purchased Shares")
reserved for issuance pursuant to the Common Stock Purchase Agreement by and
between the parties to this Agreement dated as of September 30, 1989 ("Prior
Purchase Agreement"). Except for the Other Options, the Employee Options and
the Safeguard Warrants and except as provided in the Prior Purchase Agreement or
as disclosed on Schedule I, there are no outstanding subscriptions, warrants,
options or
<PAGE>
other rights or commitments of any character to subscribe for or purchase from
SCA, or obligating SCA to issue, any shares of any class of SCA's capital stock
or any securities convertible into or exchangeable for such shares; no shares of
SCA Common Stock, other those reserved for issuance pursuant to than the Other
Options, the Employee Options, the Safeguard Warrants and the Prior Purchase
Agreement, have been reserved by SCA for issuance; and except as disclosed on
Schedule I there are no preemptive or similar rights to purchase or otherwise
acquire any shares of any class of SCA's capital stock pursuant to any provision
of law or the Articles of Incorporation or By-Laws of SCA or otherwise. The
number of shares of SCA Common Stock reserved for issuance upon the exercise of
the Other Options, the Employee Options and the Safeguard Warrants and the
closing under the Prior Purchase Agreement is not subject to adjustment by
reason of the issuance and sale of the Purchased Shares.
2.5 Consents and Approvals. Except for any filings under Federal
----------------------
and applicable state securities laws permitted to be made after the Closing, no
permit, consent, approval or authorization of, or declaration to or filing with,
any governmental or regulatory authority or other person (except as disclosed on
any Schedule) not made or obtained, is required in connection with the execution
or delivery of this Agreement by SCA, the offer, issuance, sale or delivery of
the Purchased Shares or the carrying out by SCA of the other transactions
contemplated hereby.
2.6 Private Offering. Neither SCA nor anyone acting on behalf of
----------------
SCA has offered any of the Purchased Shares for sale to, or solicited offers to
buy from, any individuals or entities in connection with the sale of the
Purchased Shares other than the Purchasers. Assuming the accuracy of
representations contained in Sections 3 and 4 hereof, the offer, issuance and
delivery of the Purchased Shares are exempt from registration under the
Securities Act of 1933 ("1933 Act") and all action required to be taken prior to
the offer or sale of the Purchased Shares has been taken under applicable state
securities laws. No representation or warranty made by SCA in this Agreement or
in any document delivered to Purchasers in connection with the transactions
contemplated by this Agreement contains an untrue statement of a material fact
or omits to state a material fact necessary in order to make the statements, in
light of the circumstances in which they were made, not misleading.
2.7 Articles of Incorporation and By-Laws. SCA has delivered to
-------------------------------------
Purchasers true and complete copies of its Articles of Incorporation and By-Laws
as currently in effect.
2.8 Financial Statements. The audited balance sheet of SCA as at
--------------------
June 30, 1989, the related statements of operations, cash flows and
stockholders' equity of SCA for the year ended June 30, 1989 (the "Financial
Statements Date"), and the related notes thereto (the "Financial Statements"),
copies of all of which have heretofore been furnished to Safeguard, have been
prepared in conformity with generally accepted accounting principles,
consistently applied, and fairly present the financial position of SCA at such
dates and the results of its operations and changes in its financial position
for the periods then ended. The internally prepared balance sheet and statement
of operations for SCA as at November 30, 1989 for the three month period then
ended have been prepared on a basis consistent with the Financial Statements.
2.9 No Material Adverse Change. There has been no material adverse
--------------------------
change in the business, properties, assets, earnings or condition (financial or
otherwise) of SCA since the Financial Statements Date.
<PAGE>
2.10 Absence of Undisclosed Liabilities. SCA does not have any
----------------------------------
material liabilities or obligations of any nature, whether absolute, accrued,
contingent or otherwise, other than (i) the liabilities and obligations
reflected or reserved against on its Financial Statements or under any contracts
and agreements of SCA (whether or not required to be disclosed in this
Agreement) and (ii) liabilities covered by insurance.
2.11 Litigation. There is no pending or, to the knowledge of SCA,
----------
threatened suit, action or litigation, or administrative, arbitration or other
proceeding or governmental inquiry or investigation questioning the validity of
this Agreement or the transactions contemplated hereby, or affecting SCA or its
business, nor is there any basis for any such suit, action, litigation,
proceeding, inquiry or investigation.
2.12 Compliance with Laws. SCA is in compliance with all material
--------------------
laws, ordinances, and rules and regulations of governmental authorities
applicable to or affecting it, its properties or its business, and SCA has not
received notice of any claimed violation or default with respect to any of the
foregoing.
2.13 Other Representations and Warranties. SCA hereby incorporates
------------------------------------
by reference its representations and warranties contained in Sections 3.15
through 3.28 of the Common Stock, Warrants and Rights Agreement dated February
26, 1987 by and between SCA, Safeguard and others ("1987 Purchase Agreement") as
if made as of the date of this Agreement. Any exceptions from such
representations and warranties (other than as noted in, or resulting from the
transactions described in the 1987 Purchase Agreement) are listed on Schedule I.
In addition, any modification or amendment to exceptions made in the 1987
Purchase Agreement required to conform to this Section has been described on
such a Schedule.
3. REPRESENTATIONS AND WARRANTIES OF RADNOR. Radnor hereby
----------------------------------------
represents and warrants to SCA that:
3.1 Authorization. This Agreement has been duly authorized by it
-------------
and constitutes its valid and legally binding obligation, enforceable in
accordance with its terms.
3.2 No Registration. Radnor is aware that the Radnor Purchased
---------------
Shares have not been registered under the 1933 Act pursuant to the exemption
provided in Section 4(2) of the 1933 Act inasmuch as no public offering of any
of the Radnor Purchased Shares has been made. Radnor further acknowledges that
SCA has relied upon the availability of such exemption based upon, among other
things, Radnor's representations, warranties, covenants and acknowledgements as
set forth in this Agreement.
3.3 Non-Distribution. Radnor hereby represents and warrants to SCA
----------------
that the Radnor Purchased Shares are being acquired by Radnor solely for its own
account and not with a view toward fractionalization or distribution, except in
compliance with the 1933 Act and as provided in this Agreement. Radnor hereby
represents and warrants that none of the Radnor Purchased Shares will be
transferred, sold or otherwise disposed of in the absence of registration under
the 1933 Act, or, in the opinion of counsel to SCA, such registration is
unnecessary and acknowledges that the transfer records relating to the Radnor
Purchased Shares maintained by SCA or its authorized agent will bear a "stop-
transfer" notation.
<PAGE>
3.4 Restrictions on Transfer. Radnor (i) hereby acknowledges that
------------------------
none of the Radnor Purchased Shares has been registered under the 1933 Act and,
therefore, Radnor must bear the investment risk thereof for an indefinite period
of time, (ii) is aware that any routine sales of any of the Radnor Purchased
Shares made pursuant to Rule 144 under the 1933 Act ("Rule 144") may be made
only in limited amounts and in accordance with the terms and conditions of Rule
144, (iii) is aware that Rule 144 is not presently available for use by Radnor
with respect to the sale of any of the Radnor Purchased Shares, and (iv) SCA is
the only person that may register any of the Radnor Purchased Shares under the
1933 Act and except as otherwise provided in this Agreement, SCA is not
obligated to so register any of the Radnor Purchased Shares.
3.5 Sophistication; Access to Information. (a) Radnor represents
-------------------------------------
and warrants to SCA that it and its management is well-versed in financial
matters, has had extensive dealings over the years in securities, including
"restricted securities," within the meaning of subparagraph (a) (3) of Rule 144,
and is fully capable of understanding the type of investment being made pursuant
to this Agreement and the risks involved in connection therewith.
(b) Radnor confirms that SCA has made available to it the
opportunity to ask questions of and receive answers from SCA's officers and
directors concerning the business and financial condition of SCA, to inspect and
make copies of agreements, contracts and records including those set forth in
the schedules attached hereto, and Radnor has received to its satisfaction such
additional information about the business and financial condition of SCA and the
terms and conditions of the offering as it has requested.
3.6 Pennsylvania Blue Sky Requirements. Radnor is an "institutional
----------------------------------
investor" as that term is defined in Section 102 (k) of the Pennsylvania
Securities Act of 1972 and Section 102.111 of the Regulations of the
Pennsylvania Securities Commission as promulgated thereunder.
4. REPRESENTATIONS AND WARRANTIES OF SAFEGUARD. Safeguard
-------------------------------------------
represents and warrants to SCA that:
4.1 Organization and Standing. Safeguard is a corporation duly
-------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite power and authority to enter into this Agreement
and to comply with the provisions hereof.
4.2 Authorization. Safeguard has all requisite power and authority
-------------
to execute and deliver this Agreement and to carry out and consummate the
transactions contemplated hereby. The execution, delivery and performance of
this Agreement by Safeguard have been duly authorized by all necessary corporate
action. This Agreement constitutes the legal, valid and binding obligation of
Safeguard enforceable against Safeguard in accordance with its terms.
4.3 No Registration. The Safeguard Purchased Shares have not been
---------------
registered under the 1933 Act pursuant to the exemption provided in Section 4(2)
of the 1933 Act inasmuch as no public offering of any of the Safeguard Purchased
Shares has been made. Safeguard further acknowledges that SCA has relied upon
the availability of such exemption based upon, among other things, Safeguard's
representations, warranties, covenants and acknowledgements as set forth in this
Agreement.
<PAGE>
4.4 Non-Distribution. Safeguard hereby represents and warrants to
----------------
SCA that the Safeguard Purchased Shares are being acquired by Safeguard solely
for its own account and not with a view toward fractionalization or
distribution, except as provided in this Agreement. Safeguard hereby represents
and warrants that none of the Safeguard Purchased Shares can be transferred,
sold or otherwise disposed of in the absence of registration under the 1933 Act,
or, in the opinion of counsel to SCA, such registration is unnecessary and
acknowledges that the transfer records relating to the Safeguard Purchased
Shares maintained by SCA or its authorized agent will bear a "stop-transfer"
notation.
4.5 Restrictions on Transfer. Safeguard (i) hereby acknowledges
------------------------
that none of the Safeguard Purchased Shares has been registered under the 1933
Act and, therefore, Safeguard must bear the investment risk thereof for an
indefinite period of time, (ii) is aware that any routine sales of any of the
Safeguard Purchased Shares made pursuant to Rule 144 under the 1933 Act ("Rule
144") may be made only in limited amounts and in accordance with the terms and
conditions of Rule 144, (iii) is aware that Rule 144 is not presently available
for use by Safeguard with respect to the sale of any of the Safeguard Purchased
Shares, and (iv) SCA is the only person that may register any of the Safeguard
Purchased Shares under the 1933 Act and except as otherwise provided in this
Agreement, SCA is not obligated to so register any of the Safeguard Purchased
Shares.
4.6 Sophistication; Access to Information. (a) Safeguard represents
-------------------------------------
and warrants to SCA that it is well-versed in financial matters, has had
extensive dealings over the years in securities, including "restricted
securities," within the meaning of subparagraph (a) (3) of Rule 144, and is
fully capable of understanding the type of investment being made pursuant to
this Agreement and the risks involved in connection therewith.
(b) Safeguard confirms that SCA has made available to it the
opportunity to ask questions of and receive answers from SCA's officers and
directors concerning the business and financial condition of SCA, to inspect and
make copies of agreements, contracts and records including those set forth in
the schedules attached hereto, and Safeguard has received to its satisfaction
such additional information about the business and financial condition of SCA
and the terms and conditions of the offering as it has requested.
4.7 Pennsylvania Blue Sky Requirements. Safeguard understands that
----------------------------------
the Purchased Shares are being acquired by it on the basis of the exemption from
registration afforded by Section 203(c) of the Pennsylvania Securities Act of
1972. Safeguard represents and warrants to SCA that Safeguard has been in
existence for at least eighteen (18) months and has a tangible net worth, on a
consolidated basis, as reflected in its most recent audited financial statement,
of $10,000,000 or more.
5. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PURCHASERS. The
-----------------------------------------------------
obligations of Purchasers to purchase and make payment for the Purchased Shares
at the Closing shall be made in reliance on and in consideration of the
execution and delivery of the following documents at the Closing and the
completion of the following actions prior to the Closing:
5.1 Representations and Warranties. On the Closing Date, the
------------------------------
representations and warranties contained in
<PAGE>
Section 2 shall be true and correct in all material respects with the same
effect as though made on and as of the Closing Date, and SCA shall have so
certified to Purchasers in writing.
5.2 Performance. All the covenants, agreements and conditions
-----------
contained in this Agreement to be performed or complied with by SCA on or prior
to the Closing shall have been performed or complied with, and SCA shall have so
certified to Purchasers in writing.
5.3 Opinion of Counsel to SCA. Purchasers shall have received at
-------------------------
Closing an opinion from Lipton & Famiglio, counsel to SCA, dated the Closing
Date, addressed to Purchasers, and satisfactory in form and substance to
Purchasers, to the effect that:
(a) SCA is a corporation duly organized, validly existing and
in good standing under the laws of the Commonwealth of Pennsylvania and has all
requisite power and authority to own and lease its properties and assets and to
conduct its business.
(b) SCA has all requisite power and authority to execute and
deliver this Agreement and to carry out the transactions contemplated by the
same. The execution, delivery and performance of this Agreement by SCA have been
duly authorized by all requisite corporate action. This Agreement has been duly
executed and delivered by SCA and constitute valid and binding obligations of
SCA, enforceable against it in accordance with their respective terms, subject
as to enforcement of remedies applicable to bankruptcy, insolvency,
reorganization or similar laws affecting generally the enforcement of creditors'
rights and the relief of debtors.
(c) The authorized capital stock of SCA consists solely of
5,000,000 shares of SCA Common Stock, no par value. Prior to the authorization
and issuance of any of the Purchased Shares pursuant to this Agreement, Section
2.4 of this Agreement and Schedule I discloses (i) all shares of SCA Common
Stock which have been duly and validly issued and are currently outstanding,
fully paid and non-assessable, (ii) all shares of SCA Common Stock held as
treasury shares and (ii) all shares reserved for or otherwise subject to
issuance outstanding subscriptions, warrants, options or other rights or
commitments of any character to subscribe for or purchase from SCA, or
obligating SCA to issue, any shares of any class of SCA's capital stock or any
securities convertible into or exchangeable for such shares.
(d) Except for those specifically identified in Section 3.4 or
in paragraph (c) above, there are no outstanding subscriptions, warrants,
options or other rights or commitments of any character to subscribe for or
purchase from SCA, or obligating SCA to issue, any shares of any class of SCA or
any securities convertible into or exchangeable for such shares; and there are
no preemptive or similar rights to purchase or otherwise acquire any shares of
any class of SCA pursuant to any provision of law or the Articles of
Incorporation or By-Laws of SCA.
(e) The issuance, sale and delivery of the Purchased Shares to
Purchasers in accordance with this Agreement, have been duly authorized by all
necessary corporate action, and the Purchased Shares when so issued, sold and
delivered against payment of the purchase price therefor, will be duly and
validly issued, fully paid and nonassessable, free of all preemptive or similar
rights.
(f) Except as described herein and except for appropriate
filings under state blue sky or securities laws,
<PAGE>
no permit, consent, approval or authorization of, or declaration to, or filing
with, any governmental or regulatory authority or other person, not made or
obtained, is required in connection with the execution or delivery of this
Agreement by SCA or the carrying out and consummation by SCA of the transactions
contemplated hereby.
(g) Based on the representations of SCA in the first sentence
of Section 2.6 and of Purchasers contained in Sections 3 and 4 of this
Agreement, it is not presently necessary, under the circumstances contemplated
by this Agreement, to register the Purchased Shares under the 1933 Act or state
securities laws.
(h) The execution, delivery and performance of this Agreement
and the Closing Agreements by SCA will not violate any provision of law, any
rule or regulation of any governmental authority, or any judgment, decree or
order of any court binding on SCA, and will not conflict with or result in any
breach of any of the unwaived terms, conditions or provisions of, or constitute
a default under, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties, assets or outstanding shares
of SCA under its Articles of Incorporation or By-Laws, or any indenture,
mortgage, lease, agreement or other instrument known to such counsel to which
SCA is a party or by which it, or any of its properties, is bound or affected.
(i) To the knowledge of such counsel, there is no action, suit
or litigation, administrative, arbitration, or other proceeding or governmental
inquiry or investigation pending or threatened against SCA or any of its
properties or assets, except as disclosed in Schedule I or in the 1987 Purchase
Agreement.
5.4 Third Party Approvals. To the extent that the execution and
---------------------
delivery of this Agreement and the Closing Agreements by SCA, or the performance
by SCA of the transactions contemplated thereby, will conflict with, or result
in a breach of the terms, conditions or provisions of, or constitute a default
under, or result in any violation of, or require any consent, approval or other
action by or any notice to or filing with any court or administrative or
governmental body pursuant to the Articles of Incorporation or By-Laws of SCA,
any award of any arbitrator or any agreement, instrument, order, judgment,
decree, statute, law, rule or regulation to which SCA is subject, if any, SCA
will have obtained in writing prior to the Closing, the appropriate (as
determined by Purchasers) consent, waiver or approval.
5.5 Authorization and Issuance of the Purchased Shares. The
--------------------------------------------------
authorization, issuance, sale and delivery of the Purchased Shares in accordance
with the terms of this Agreement shall have been duly authorized by all
necessary corporate actions, and the Purchased Shares when so issued, sold and
delivered against payment therefore in accordance with the provisions hereof,
will be duly and validly issued, fully paid and nonassessable, free of
preemptive or similar rights.
6. CONDITIONS PRECEDENT TO SCA'S OBLIGATIONS. SCA's obligation to
-----------------------------------------
sell the Purchased Shares is subject, at SCA's option, to full satisfaction of
the following conditions prior to the Closing:
6.1 Representations and Warranties. At the Closing, the
------------------------------
representations and warranties of Purchasers contained in Sections 3 and 4
hereof shall be true and correct in all material respects with the same effect
as though made on and as of the Closing Date, and Safeguard shall have so
certified to SCA in writing.
6.2. Performance. All the covenants, agreements and conditions
-----------
contained in this Agreement to be performed
<PAGE>
or complied with by Purchasers on or prior to the Closing shall have been
performed or complied with, and Purchasers shall have so certified to SCA in
writing.
7. REGISTRATION RIGHTS. Section 7 of the Prior Purchase Agreement is
hereby amended as follows:
(a) The definition of the term "Radnor Eligible Securities" shall be
deemed to include (i) the Radnor Purchased Shares (as defined in this Agreement)
(ii) plus all common stock or other securities of SCA issued in respect of such
shares by way of a stock split, stock dividend, recapitalization, merger or
consolidation, but exclusive of any shares described in clause (i) or (ii) sold
in a public offering registered under the 1933 Act, sold pursuant to Rule 144,
or permitted to be sold by the holder thereof pursuant to the provisions of
subsection (k) of Rule 144.
(b) The definition of the term "Safeguard Eligible Securities" shall
be deemed to include (i) the Safeguard Purchased Shares (as defined in this
Agreement) (ii) plus all common stock or other securities of SCA issued in
respect of such shares by way of a stock split, stock dividend,
recapitalization, merger or consolidation, but exclusive of any shares described
in clause (i) or (ii) sold in a public offering registered under the 1933 Act,
sold pursuant to Rule 144, or permitted to be sold by the holder thereof
pursuant to the provisions of subsection (k) of Rule 144.
8. EVENTS OF DEFAULT.
-----------------
8.1 Events of Default. An Event of Default shall have occurred
-----------------
under this Agreement if Purchasers fails to observe or perform any material
covenant or agreement required to be observed or performed by it pursuant to the
terms of this Agreement, and such failure shall remain unremedied for ten (10)
days after written notice thereof shall have been given to the defaulting party,
provided that if the nature of the default is such that it cannot be cured by
the payment of money and cannot be cured by other appropriate action of the
defaulting party within ten (10) days, no Event of Default shall be deemed to
have occurred so long as the defaulting party diligently and in good faith takes
all necessary action to cure the default.
8.2 Remedies. If any Event of Default shall occur, or if any
--------
representation or warranty made by or on behalf of one party to this Agreement,
or in a report or other instrument delivered under or pursuant to any term
hereof shall be untrue or incorrect in any material respect as of the date of
this Agreement or as of the Closing or as of the date it was made, furnished or
delivered, the injured party may proceed to protect and enforce its rights by
suit in equity or action at law, whether for the specific performance of any
term contained in this Agreement or for an injunction against the breach of any
such term or in aid of the exercise of any power granted in this Agreement, or
to enforce any other legal or equitable right of such Holder of any such
securities, or to take any one or more of such actions.
8.3 Cumulative Remedies. None of the rights, powers or remedies
-------------------
conferred upon a party hereto shall be mutually exclusive, and each such right,
power or remedy shall be cumulative and in addition to every other right, power
or remedy, whether conferred hereby or now or hereafter available at law, in
equity, by statute or otherwise.
8.4 No Implied Waiver. Except as expressly provided in this
-----------------
Agreement, no course of dealing between SCA
<PAGE>
and Purchasers and no delay in exercising any right, power or remedy conferred
hereby or now or hereafter existing in law, in equity, by statute or otherwise
shall operate as a waiver of, or otherwise prejudice, any such right, power or
remedy.
9. COMPLIANCE WITH SECURITIES LAWS; RESTRICTIONS ON TRANSFERABILITY
----------------------------------------------------------------
OF SECURITIES.
-------------
9.1 Compliance with 1933 Act. The Securities shall not be
transferable, except upon the conditions specified in this Section 9 or as
otherwise set forth in this Agreement, which conditions are intended to insure
compliance with the provisions of the 1933 Act in respect of the transfer of any
of the Securities.
9.2 Restrictive Legend. Each certificate representing the Purchased
------------------
Shares and any shares or other securities issued in respect of such shares upon
any stock split, stock dividend, recapitalization, merger, consolidation or
similar event (for the purposes of this Section 9, "Restricted Securities"),
shall, (unless otherwise permitted by the provisions of Section 9.4 below) be
stamped or otherwise imprinted with the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES
LAWS. SUCH SECURITIES MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE
DISPOSED OF, IN THE ABSENCE OF SUCH REGISTRATION OR, IN THE OPINION
OF COUNSEL TO THE ISSUER, SUCH REGISTRATION IS NOT NECESSARY."
9.3 Restrictions on Transferability. Purchasers shall not transfer,
-------------------------------
sell or otherwise dispose of any of the Restricted Securities and SCA shall not
be required to recognize any purported transfer of the Restricted Securities
unless SCA shall have been provided with an opinion of counsel to SCA with
respect to any such purported transfer to the effect that registration under the
1933 Act or any applicable state securities law is not required in connection
with such transaction. Each certificate for any of the Restricted Securities
issued upon any such transfer shall bear the legend set forth herein unless such
opinion of counsel is to the further effect that such legend is not required.
SCA shall bear the cost of its own counsel.
9.4 Termination of Restriction on Transferability. The conditions
---------------------------------------------
precedent imposed by this Section 9 upon the transferability of the Restricted
Securities shall cease and terminate as to any of such shares when (i) such
securities shall have been registered under the 1933 Act and sold or otherwise
disposed of in accordance with the intended method of disposition by the seller
or sellers thereof set forth in the registration statement covering such
securities, (ii) at such time as an opinion of counsel shall have been rendered
as required pursuant to the last sentence of Section 9.3 to the effect that the
restrictive legend on the certificate for such securities is no longer required,
or (iii) when such securities are transferred in accordance with the provisions
of Rule 144. Whenever the conditions imposed by this Section 9 shall terminate
as hereinabove provided, the Holder of any Restricted Securities bearing the
legend set forth in this Section 9 as to which such conditions shall have
terminated shall be entitled to receive from SCA, without expense (except for
the payment of any applicable transfer tax) and as expeditiously as possible,
new stock certificates not bearing such legend.
<PAGE>
10. SCA COVENANTS.
-------------
10.1 Financial Statements. Until such time as SCA is required to
--------------------
register its common stock pursuant to Section 12 (g) of the 1934 Act, SCA shall
furnish to Radnor:
(a) Within 90 days after the end of each fiscal year, an audited
balance sheet, and related audited statements of income, changes in financial
position, and changes in stockholders' equity of SCA as at the end of and for
such fiscal year prepared in accordance with generally accepted accounting
principles, consistently applied, and accompanied by the opinion of the firm of
independent public accountants regularly employed by SCA to audit its financial
statements, or if no such firm is so regularly employed, another so called "Big
8" firm of independent public accountants selected by SCA for the purpose of
conducting such an audit;
(b) Within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, a balance sheet and statements of income, changes
in financial position and changes in stockholders' equity of SCA as at the end
of and for such quarter and the year to date and as at the end of and for the
corresponding periods of the preceding fiscal year and for the budget for the
current fiscal year, and
(c) Within 30 days after the end of each month, a balance sheet and
a profit and loss statement for SCA as of the end of such month.
The interim quarterly and monthly statements described above shall be unaudited,
shall be prepared in accordance with generally accepted accounting principles
(except that they need not be accompanied by notes) and shall contain a
statement that all adjustments necessary for a fair statement of the results for
the period covered by such interim statements have been included.
10.2 Payment of Expenses. SCA shall pay its own expenses, including
-------------------
the fees and expenses of SCA's counsel, incurred by it in connection with the
issuance and sale of the Purchased Shares and the execution, delivery and
performance of this Agreement.
10.3 Transfer Taxes. SCA will pay, and hold the Purchasers harmless
--------------
against liability for the payment of, any transfer or similar taxes payable in
connection with the issuance and sale of the Purchased Shares pursuant hereto.
11. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS
------------------------------------------------------
Notwithstanding any investigation made by or on behalf of Purchasers or SCA, all
agreements, representations and warranties made herein and in the documents
delivered pursuant hereto shall survive the execution and delivery of this
Agreement and the issuance and sale of the Purchased Shares.
12. MISCELLANEOUS.
-------------
12.1 Assignment. No party may assign its rights or delegate its
----------
duties under this Agreement without the consent of the others except as
otherwise provided herein; provided, however, that Safeguard may assign its
rights or any of its wholly-owned subsidiaries which agrees to be bound by the
terms of this Agreement.
<PAGE>
12.2 Broker or Finder. Each party to this Agreement represents and
----------------
warrants that, to the best of its knowledge, no broker or finder has acted for
such party in connection with this Agreement or the transactions contemplated by
this Agreement and that no broker or finder is entitled to any broker's or
finder's fee or other commission in respect thereof based in any way on
agreements, arrangements or understandings made by such party. SCA shall
indemnify Purchasers against, and hold it harmless from, any claim, liability
cost, or expense (including reasonable attorneys' fees and expenses) resulting
from any agreement, arrangement, or understanding made by Purchasers, with any
third party for brokerage or finders' fees or other commissions in connection
with this Agreement or any of the transactions contemplated hereby.
12.3 Governing law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the Commonwealth of
Pennsylvania.
12.4 Notice. Any notice or other communication required or permitted
------
hereunder shall be sufficiently given only if (i) sent by registered or
certified mail, postage prepaid, (ii) delivered personally by Federal Express or
other private service (iii) sent by facsimile transmission during regular
business hours on a regular business day (provided the facsimile is confirmed by
sending such notice by first class mail within 24 hours of such transmission)
addressed as follows:
If to SCA: Sanchez Computer Associates, Inc.
40 Valley Stream Parkway
Great Valley Corporate Center
Malvern, PA 19355
Attn: President
Fax: (215) 296-7371
With a copy to: Robert S. Lipton, Esquire
Lipton & Famiglio
201 North Jackson Street
Media PA 19063
Fax: (215) 565-7624
If to Radnor: Radnor Venture Partners, L.P.
630 Park Avenue
King of Prussia, PA 19406
Attn: Robert Keith and Ira Lubert
Fax: (215) 337-8983/7176
With a copy to: Robert H. Strouse, Esquire
Drinker, Biddle & Reath
Suite 300
1000 Westlakes Drive
Berwyn, PA 19312
Fax: (215) 993-8585
<PAGE>
If to Safeguard: Safeguard Scientifics (Delaware), Inc.
c/o Safeguard Scientifics, Inc.
630 Park Avenue
King of Prussia, PA 19406
Attn: President
Fax: (215) 337-8983/7176
With a copy to: General Counsel
Safeguard Scientifics, Inc.
630 Park Avenue
King of Prussia, PA 19406
Fax: (215) 337-8983/7176
or to such other address or addresses as may hereafter be furnished in writing
by notice similarly given by one party to the other.
12.5 Full Agreement. This Agreement and the Schedules hereto set
--------------
forth the entire understanding of the parties with respect to the transactions
contemplated hereby, and shall not be modified or amended except by written
agreement of all parties hereto.
12.6 Amendment. This Agreement may be amended only in writing by all
---------
of the parties.
12.7 Execution. This Agreement shall not be binding on any person
---------
until it has been signed by each person identified on the signature page hereto
as being a signatory hereto and delivered by such person to the other persons
identified as signatories hereto. The circulation of unsigned drafts or copies
of this Agreement by any party to another shall not create any inference that a
legally binding contract to proceed with the transactions contemplated by this
Agreement has been entered into, it being the intention of the parties that such
a contract shall arise only upon the execution and delivery of this Agreement by
all parties as aforesaid.
12.8 Headings. The headings of the Sections of this Agreement are
--------
inserted for convenience of reference only and shall not be considered a part
hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
intending to be legally bound, as of December 29, 1989.
SANCHEZ COMPUTER ASSOCIATES, INC.
By /s/ Michael A. Sanchez
--------------------------------------------
Title: President and Chief Executive Officer
RADNOR VENTURE PARTNERS, L.P.
<PAGE>
By /s/ Ira M. Lubert
------------------------------------
Title: Managing Director
SAFEGUARD SCIENTIFICS
(DELAWARE), INC.
By /s/ Raymond H. Krastson
------------------------------------
Vice President
<PAGE>
<TABLE>
<CAPTION>
SANCHEZ COMPUTER ASSOCIATES, INC
EXHIBIT 11-1
COMPUTATION OF PER SHARE EARNINGS
Years ended December 31, 1995, 1994 and 1993 and
Six Months ended June 30, 1996 and 1995
(In thousands, except per share data)
Year Ended Year Ended Year Ended Six Months Six Months
December 31, December 31, December 31, Ended Ended
1993 1994 1995 June 30, 1995 June 30, 1996
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Net Earnings $463 $3,038 $1,587 $207 $377
------------ ------------ ------------ ------------- -------------
Average common shares outstanding 7,846 7,846 8,279 8,168 8,406
Average common share equivalents 1,210 1,426 1,297 1,389 814
------------ ------------ ------------ ------------- -------------
Average number of common shares and
common share equivalents outstanding 9,056 9,272 9,576 9,557 9,220
------------ ------------ ------------ ------------- -------------
Earnings per common share $ 0.05 $ 0.33 $ 0.17 $ 0.02 $ 0.04
------------ ------------ ------------ ------------- -------------
</TABLE>
<PAGE>
Exhibit 21.1
Sanchez Software Limited, a Delaware Corporation
Sanchez Computer Associates International, Inc., a Delaware Corporation
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of our
reports dated February 2, 1996, except as to information in Note 13, for which
the date is September 11, 1996, on our audits of the consolidated financial
statements of Sanchez Computer Associates, Inc. as of December 31, 1994 and 1995
and for each of the years in the three-year period ended December 31, 1995.
We also consent to the reference to our firm under the caption "Experts".
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
September 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001022926
<NAME> SANCHEZ COMPUTER ASSOCIATES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,546
<SECURITIES> 0
<RECEIVABLES> 4,400
<ALLOWANCES> 40
<INVENTORY> 0
<CURRENT-ASSETS> 10,983
<PP&E> 1,779
<DEPRECIATION> 976
<TOTAL-ASSETS> 12,147
<CURRENT-LIABILITIES> 6,232
<BONDS> 0
0
0
<COMMON> 84
<OTHER-SE> 5,521
<TOTAL-LIABILITY-AND-EQUITY> 12,147
<SALES> 0
<TOTAL-REVENUES> 16,842
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,226
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (93)
<INCOME-PRETAX> 2,709
<INCOME-TAX> 1,122
<INCOME-CONTINUING> 1,587
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,587
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001022926
<NAME> SANCHEZ COMPUTER ASSOCIATES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,731
<SECURITIES> 0
<RECEIVABLES> 5,755
<ALLOWANCES> 40
<INVENTORY> 0
<CURRENT-ASSETS> 11,436
<PP&E> 1,979
<DEPRECIATION> 1,199
<TOTAL-ASSETS> 12,596
<CURRENT-LIABILITIES> 6,338
<BONDS> 0
0
0
<COMMON> 84
<OTHER-SE> 5,905
<TOTAL-LIABILITY-AND-EQUITY> 12,596
<SALES> 0
<TOTAL-REVENUES> 8,250
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,757
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (146)
<INCOME-PRETAX> 639
<INCOME-TAX> 262
<INCOME-CONTINUING> 377
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 377
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
