<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
/ / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 1997.
--------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ____________________ to _______________________
Commission file number 0-21705
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SANCHEZ COMPUTER ASSOCIATES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2161560
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
40 Valley Stream Parkway, Malvern, PA 19355
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (610) 296-8877
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N/A
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Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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As of July 31, 1997, there were outstanding 10,933,282 shares of the issuer's
Common Stock, no par value.
<PAGE>
SANCHEZ COMPUTER ASSSOCIATES, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Page No.
---------
CONSOLIDATED BALANCE SHEETS
June 30, 1997 (Unaudited) and December 31, 1996................ 3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three and Six Months Ended June 30, 1997 and 1996.............. 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 1997 and 1996........................ 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)........... 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 7
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS................................................. 13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K........................ 13
SIGNATURES....................................................... 14
2
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents.......................$ 15,902 $ 15,446
Accounts receivable, less allowance of $40...... 8,093 8,920
Prepaid and other current assets................ 1,198 2,203
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Total current assets.......................... 25,193 26,569
Property and equipment
Equipment....................................... 2,424 2,084
Furniture and fixtures.......................... 249 238
Leasehold improvements.......................... 66 64
-------- -------
2,739 2,386
Accumulated depreciation and amortization......... (1,660) (1,462)
-------- -------
Net property and equipment...................... 1,079 924
Capitalized software costs, net of amortization
of $1,422 at June 30, 1997 and $1,289
at December 31, 1996............................ 770 675
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Total assets.................................. $ 27,042 $ 28,168
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LIABILITIES
Current liabilities
Current portion of long-term debt............. $ 171 $ 224
Accounts payable, trade....................... 857 637
Accrued expenses.............................. 2,287 2,474
Deferred revenue.............................. 2,155 3,913
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Total current liabilities................. 5,470 7,248
Deferred revenue................................ 1,128 1,508
Long-term debt-net of current portion........... 163 218
Other long-term liabilities..................... 230 284
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Total liabilities......................... 6,991 9,258
Commitments (Note E)
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized--50,000,000 shares
Issued and outstanding--10,922,219 and
10,865,255 shares at June 30, 1997
and December 31, 1996, respectively........... 109 109
Additional paid-in capital...................... 18,213 18,103
Retained earnings............................... 2,150 1,236
Notes due on common stock purchases............. (421) (538)
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Total shareholders' equity.................... 20,051 18,910
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Total liabilities and shareholders' equity.... $ 27,042 $ 28,168
-------- -------
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</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Software license fees............................ $2,801 $ 2,310 $ 5,128 $ 3,694
Product enhancement fees......................... 255 324 493 427
Implementation and consulting services........... 1,782 1,115 3,193 2,045
Software maintenance fees........................ 1,369 1,024 2,544 2,084
--------- --------- --------- ---------
Total revenues................................. 6,207 4,773 11,358 8,250
Operating expenses
Product development.............................. 1,562 1,037 2,947 1,851
Product support.................................. 876 765 1,640 1,443
Implementation and consulting.................... 1,212 714 2,171 1,341
Sales and marketing.............................. 995 861 1,823 1,404
Royalties and sublicense fees.................... 318 475 718 1,013
General and administrative....................... 627 398 1,145 705
--------- --------- --------- ---------
Total operating expenses....................... 5,590 4,250 10,444 7,757
--------- --------- --------- ---------
Income from operations............................. 617 523 914 493
Interest income, net............................... 238 85 452 146
--------- --------- --------- ---------
Income before income taxes......................... 855 608 1,366 639
Income tax provision............................... 282 250 451 262
--------- --------- --------- ---------
Net income......................................... $ 573 $ 358 $ 915 $ 377
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per average common share................ $ 0.05 $ 0.04 $ 0.08 $ 0.04
Weighted average common shares outstanding......... 11,706 9,178 11,671 9,220
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities
Net income.................................................................................... $ 915 $ 377
Adjustments to reconcile net income to cash provided by (used in) operating activities
Depreciation and amortization................................................................. 429 305
Other......................................................................................... (44) (30)
Cash provided (used) by changes in operating assets and liabilities
Accounts receivable........................................................................... 827 (1,390)
Prepaid and other current assets.............................................................. 1,005 122
Accounts payable and accrued expenses......................................................... 33 547
Deferred revenues............................................................................. (2,138) (453)
--------- ---------
Net cash provided by (used in) operating activities........................................... 1,027 (522)
Cash flows from investing activities
Capitalized computer software costs........................................................... (228) (101)
Capital expenditures.......................................................................... (462) (200)
--------- ---------
Net cash used in investing activities......................................................... (690) (301)
Cash flows from financing activities
Proceeds from insurance of long-term debt..................................................... 148
Repayment of notes due on common stock purchases.............................................. 117 7
Principal payments under capital lease obligations............................................ (8) (56)
Principal payments under long-term notes...................................................... (100) (91)
Proceeds from exercise of stock options....................................................... 110
--------- ---------
Net cash provided by financing activities..................................................... 119 8
--------- ---------
Net increase (decrease) in cash and cash equivalents.......................................... 456 (815)
Cash and cash equivalents at beginning of period.............................................. 15,446 5,546
--------- ---------
Cash and cash equivalents at end of period.................................................... $ 15,902 $ 4,731
--------- ---------
--------- ---------
Supplemental cash flow information
Interest paid................................................................................. $ 19 $ 17
Income taxes paid............................................................................. $ 116 $ 228
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
Sanchez Computer Associates, Inc.
Notes to Unaudited Consolidated Financial Statements
(in thousands, except per share amounts)
(A.) BASIS OF PRESENTATION
The accompanying consolidated financial statements of Sanchez
Computer Associates, Inc. (the "Company") include the accounts of all of the
Company's wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated. Certain prior period amounts
have been reclassified to conform with current period presentation. In the
opinion of management, the consolidated financial statements reflect all
normal and recurring adjustments which are necessary for a fair presentation
of the Company's financial position, results of operations, and cash flows as
of the dates and for the periods presented. The consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. Consequently, these
statements do not include all the disclosures normally required by generally
accepted accounting principles for annual financial statements nor those
normally made in the Company's Annual Report on Form 10-K. Accordingly,
reference should be made to the Company's Annual Report on Form 10-K for
additional disclosures, including a summary of the Company's accounting
policies, which have not changed. The consolidated results of operations for
the six months ended June 30, 1997 are not necessarily indicative of results
for the full year.
(B.) CASH AND CASH EQUIVALENTS
Cash and cash equivalents at June 30, 1997 included amounts on
deposit with Safeguard Scientifics, Inc. ("Safeguard"), a shareholder of the
Company, in conjunction with a note agreement dated June 12, 1997. The demand
note provides for borrowings by Safeguard from the Company of up to a maximum
of $12 million on a revolving basis at Safeguard's effective borrowing rate
minus .75%. This rate is higher than the Company is currently earning on its
money market investments. At June 30, 1997 advances to Safeguard amounted to
$9.2 million. Interest income from these advances amounted to $27 for the
first six months of 1997.
(C.) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -------------
<S> <C> <C>
Accrued compensation and related items............ $ 687 $ 715
Accrued royalties................................. 263 728
Accrued income taxes.............................. 602 210
Other............................................. 735 821
----------- ------------
$ 2,287 $ 2,474
----------- ------------
----------- ------------
</TABLE>
(D.) 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, including
common stock equivalents which would arise from the exercise of stock options
and warrants, using the treasury stock method.
Stock options and warrants granted with exercise prices below the
initial public offering price during the twelve-month period preceding the
initial filing date of the offering (September 27, 1996) 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 prior to the offering.
(E.) COMMITMENTS
Commitments at June 30, 1997 were substantially the same as those
disclosed in Note 9 of the Notes to Consolidated Financial Statements as of
December 31, 1996.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company designs, develops, markets, implements and supports
comprehensive banking software, called PROFILE-Registered Trademark-, 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 26 clients in ten countries serving more than 375
financial institutions.
The Company's operating results for the second quarter ended June 30, 1997
reflected increases in both revenues and net income compared to the same period
in 1996. Revenues increased by 30.0% to $ 6.2 million while net income increased
by 60.1% to $573,000 as compared to the quarter ended June 30, 1996. In
particular, a significant revenue contribution was derived from the licensing of
the PROFILE/Anyware product to Canada's Credit Union Central of Saskatchewan
("CUCS"). When CUCS is combined with Sanchez's existing Canadian credit union
clients, PROFILE will serve more than one million credit union members in
Canada. Additional second quarter revenue growth for 1997 as compared to 1996
was attributable to increased PROFILE implementation activity from the Emerging
Bank Market in Asia, as the Company signed its second client in this region--PT
Bank Rama in Jakarta, Indonesia.
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. The company has continued increasing its investment in these
areas, and, as indicated below, product development expenditures increased in
the second quarter of 1997 when compared to the same period in 1996. 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.
The Company's backlog at June 30, 1997 amounted to $19.4 million. The
components of the backlog were $6.8 million for software license, product
enhancement and implementation and consulting revenues and $12.6 million for
maintenance and support. At December 31, 1996, the Company's backlog amounted to
$19.8 million, consisting of $8.1 million for software license, product
enhancement and implementation and consulting revenues and $11.7 million for
maintenance and support.
7
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected statement
of operations data:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
DOLLARS IN THOUSANDS 1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Software license fees................................................... $ 2,801 $ 2,310 $ 5,128 $ 3,694
Product enhancement fees................................................ 255 324 493 427
Implementation and consulting services.................................. 1,782 1,115 3,193 2,045
Software maintenance fees............................................... 1,369 1,024 2,544 2,084
--------- --------- --------- ---------
Total revenues........................................................ $ 6,207 $ 4,773 $ 11,358 $ 8,250
--------- --------- --------- ---------
--------- --------- --------- ---------
Percentage Relationship to Total Revenues
Revenues
Software license fees................................................... 45.1% 48.4% 45.2% 44.8%
Product enhancement fees................................................ 4.1 6.8 4.3 5.2
Implementation and consulting services.................................. 28.7 23.3 28.1 24.8
Software maintenance fees............................................... 22.1 21.5 22.4 25.2
--------- --------- --------- ---------
Total revenues........................................................ 100.0 100.0 100.0 100.0
Operating expenses
Product development..................................................... 25.2 21.7 25.9 22.4
Product support......................................................... 14.1 16.0 14.4 17.5
Implementation and consulting........................................... 19.6 15.0 19.1 16.3
Sales and marketing..................................................... 16.0 18.0 16.1 17.0
Royalties and sublicense fees........................................... 5.1 10.0 6.3 12.3
General and administrative.............................................. 10.1 8.3 10.1 8.5
--------- --------- --------- ---------
Total operating expenses.............................................. 90.1 89.0 91.9 94.0
Income from operations.................................................. 9.9 11.0 8.1 6.0
Interest income, net.................................................... 3.8 1.8 4.0 1.8
--------- --------- --------- ---------
Income before income taxes.............................................. 13.7 12.8 12.1 7.8
Income tax provision.................................................... 4.5 5.3 4.0 3.2
--------- --------- --------- ---------
Net income.............................................................. 9.2 7.5 8.1 4.6
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
Three Months Ended June 30, 1997, Compared to Three Months Ended June 30, 1996
REVENUES. Revenues increased $1.4 million, or 30.0%, in 1997, as license
fees, implementation and consulting and maintenance fees each improved over the
same period in the prior year. License fee revenue increased by $491,000 or
21.3%, relative to 1996 due primarily to a new client in Canada and an increased
number of client projects in process. This was partially offset by lower license
fees generated in Central Europe (since the 1996 period included a one-time
license expansion right for an existing customer of approximately $800,000).
Implementation and consulting service revenues increased by $667,000, or 59.8%
in 1997 as compared to 1996. Most of this growth is attributable to the
increased levels of PROFILE implementation activity in both Canada and the
Emerging markets of Central Europe and Asia. The number of active implementation
projects in the 1997 second quarter was approximately double the comparable
number during the 1996 period. Software maintenance fees increased by 33.7% or
$345,000, attributable primarily to ongoing growth in Central European and
Canada.
PRODUCT DEVELOPMENT. Product development expenses increased $525,000 or
50.6%, in 1997, due to the ongoing impact of the Company's strategic decision
to increase investment in development for various technology projects. The
most significant of these investments during the second quarter of 1997
continued to be the ongoing development of the Company's GUI client. Average
staffing, including subcontractors, in the product development area increased
from 40 during the second
8
<PAGE>
quarter of 1996 to 63 during the second quarter of 1997. The percent
relationship to total revenues also increased from 21.7% in 1996 to 25.2% in
1997.
PRODUCT SUPPORT. Product support expenses increased by $111,000 or 14.5%,
in the quarter ended June 30, 1997, primarily due to an increase in the average
number of employees, 43 in 1997 versus 32 in 1996, required to support the
larger converted client base in 1997 relative to 1996.
IMPLEMENTATION AND CONSULTING. Implementation and consulting expenses
increased by $498,000 or 69.7% during the second quarter of 1997, in conjunction
with a corresponding increase in implementation and consulting revenues of
$667,000 (a 59.8% increase relative to the same period in 1996). Of the $498,000
increase in expenses, $283,000 was related to increased utilization of third
party consultants and subcontractors required to support the increased revenue
levels. Many of these third party contractors provide support relative to the
Company's sub-licensed PROFILE/ITS product offering, which was being installed
at three European client sites during the 1997 quarter. The remaining increase
in expenses of $215,000 resulted from increased staffing and related overheads.
The percent relationship to related revenues increased in the 1997 quarter to
68% from 64% in the 1996 second quarter, due primarily to more extensive
utilization of more costly third party resources to deliver implementation
services as described above.
SALES AND MARKETING. Sales and marketing expenses increased by $134,000, or
15.6% in the 1997 period, as the Company continued to increase its direct
coverage in this area, primarily via staffing increases in selected foreign
market locations. Marketing expenses related to the promotional and advertising
campaign for PROFILE/Anyware which commenced in early 1996 remained relatively
constant in the second quarter of 1997 as compared to the same period in 1996.
Due to the fact that total corporate revenues increased 30.0%, sales and
marketing expenses as a percent of total revenues decreased from 18.0% in the
second quarter of 1996 to 16.0% for the June, 1997 quarter.
ROYALTIES AND SUBLICENSE FEES. The Company is obligated to pay royalties to
Digital Equipment Corporation 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 vary depending on
the applicable revenue components subject to such fees. For the quarter ended
June 30, 1997, these fees decreased by $157,000 or 33.1% as the result of a
$180,000 reduction in royalty expense, partially offset by a $23,000 increase in
third party license and support fees as compared to the same period in 1996. The
decrease in royalty expense for the 1997 period is in part attributable to a
lower level of license fees subject to royalty payment.
GENERAL AND ADMINISTRATIVE. These expenses increased by $229,000, or 57.5%,
due to a number of factors which include additional expenses related to being a
public company, increased staffing, and increased costs related to training of
certain third party partners, in the 1997 period as compared to 1996.
INTEREST INCOME, NET. Interest income, net, increased $153,000 in 1997 due
to income earned on higher invested cash balances, partially attributable to the
proceeds from the Company's initial public offering which were received as of
December, 1996.
INCOME TAX PROVISION. Taxes in the 1997 second quarter were 33.0% of income
before income taxes, as compared to 41.1% in the 1996 quarter. This reduced
effective rate is primarily the result of the Company's establishment of a
Foreign Sales Corporation (FSC) in late 1996, as well as certain state net
operating loss carryforwards.
Six Months Ended June 30, 1997, Compared to Six Months Ended June 30, 1996
REVENUES. Revenues increased $3.1 million, or 37.7%, in 1997, as all
revenue categories improved over the same period in the prior year. License fee
revenue increased by $1.4 million or 38.8%, relative to 1996 due to
substantially increased activity in the Canadian marketplace (including direct
banking) as well as increased activity in the Asian markets relative to the same
period in 1996. Implementation and consulting service revenues increased by $1.1
million, or 56.1% in 1997 as compared to 1996. Most of this growth is
attributable to the increased levels of PROFILE implementation activity in the
Canadian marketplace as well as in Central Europe and Asia. Software maintenance
fees increased by 22.1% or $460,000, attributable primarily to an ongoing growth
in the Central European customer maintenance base as well as increases for a
client based in Portugal tied to their final acceptance of PROFILE.
9
<PAGE>
PRODUCT DEVELOPMENT. Product development expenses increased $1.1 million or
59.2%, in 1997, due to the ongoing impact of the Company's strategic decision to
increase investment in development for various technology projects. In
particular, the Company continued to invest heavily in the development of its
GUI client, which resulted in sharply increased expenditures for technical
resources. More specifically, staffing related expenditures (both employees and
third party contractors) increased by $850,000 in the 1997 six month period as
compared to 1996. The percent relationship to total revenues also increased from
22.4% in 1996 to 25.9% in 1997.
PRODUCT SUPPORT. Product support expenses increased by $197,000 or 13.7% in
the six months ended June 30, 1997, primarily due to an increase in staffing in
1997 versus 1996, required to support the larger converted client base. Also,
the 1997 period included a higher level of overhead costs related to the Prague
support office, which was opened in April of 1996.
IMPLEMENTATION AND CONSULTING. Implementation and consulting expenses
increased by $830,000 or 61.9% during 1997, in conjunction with a corresponding
increase in implementation and consulting revenues of $1.1 million (a 56.1%
increase relative to the same period in 1996). Of the $830,000 increase in
expenses, $430,000 was related to increased utilization of third party
consultants and subcontractors required to support the increased revenue levels,
particularly related to the PROFILE/ITS product offering. Of the remaining
$400,000 increase in expenses, $213,000 resulted from increased internal
staffing. The heavier 1997 utilization of third party consultants and
subcontractors was a significant factor in the increase of the percent
relationship to related revenues, which moved from 65.6% in 1996 to 68% in 1997.
SALES AND MARKETING. Sales and marketing expenses increased by $419,000, or
29.8% in the 1997 period, as the Company continued to increase its direct
coverage in this area by a combination of increased staffing as well as the use
of third party consultants in selected foreign market locations. Further, the
increased staffing in these areas coupled with the increased corporate revenue
levels for the quarter resulted in increases in both travel related expenses and
sales commission expense in the 1997 period as compared to 1996. Due to the fact
that total corporate revenues increased 37.7%, sales and marketing expenses as a
percent of total revenues decreased from 17.0% in 1996 to 16.1% for 1997.
ROYALTIES AND SUBLICENSE FEES. For the six months ended June 30, 1997, these
fees decreased by $295,000 or 29.1%, mainly as a result of a $252,000 reduction
in royalty expense in 1997 as compared to the same period in 1996. The 1997
period decrease in royalty expense is due to a lower level of license fees
subject to royalty payment.
GENERAL AND ADMINISTRATIVE. These expenses increased by $440,000, or 62.4%,
due to a number of factors which include additional expenses related to being a
public company, as well as increased staffing and related overheads in the 1997
period as compared to 1996.
INTEREST INCOME, NET. Interest income, net, increased $306,000 in 1997 due
to income earned on higher invested cash balances, which averaged approximately
$16.5 million for the six months ended June 1997 as compared to approximately
$5.5 million in 1996.
INCOME TAX PROVISION (BENEFIT). Taxes in 1997 were 33.0% of income before
income taxes, as compared to 41.0% in the 1996 six month period. This reduced
effective rate is primarily the result of the Company's establishment of a
Foreign Sales Corporation (FSC) in late 1996, as well as certain state net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $15.9 million at June 30, 1997. During
December of 1996, the Company raised $11.8 million (net of direct expenses) from
its initial public offering. Cash flow from operations for the six months ended
June 30, 1997 was $1.0 million as compared to ($522,000) in 1996. The increased
rate of cash flow in the 1997 period was primarily attributable to receipts
during the period of several significant contract milestone payments, some of
which had been billed in late 1996. The Company continues to expect a certain
amount of variability in the timing of major contract milestone payments which
will impact cash flow from operations during any given quarter.
The Company's business is not capital intensive and capital asset
expenditures for the 1997 six month period amounted to $462,000 as compared to
$200,000 during the same period in 1996. These expenditures consisted primarily
of personal computers and upgrades to the Company's network systems. The Company
is currently in the process of evaluating the possibility of leasing a second
office facility in the vicinity of its Malvern, Pennsylvania headquarters. In
the event such a
10
<PAGE>
lease agreement is in fact entered into during the second half of the year,
it could result in a short-term increase in the Company's capital asset
expenditures.
Effective June 12, 1997, the Company entered into a demand note agreement
with Safeguard Scientifics, Inc. ("Safeguard"), a major shareholder of the
Company. The note provides for borrowings by Safeguard from the Company of up to
a maximum of $12 million on a revolving basis at Safeguard's effective borrowing
rate less .75%. At June 30, 1997, advances to Safeguard under this note amounted
to $9.2 million, which is included in "Cash and Cash Equivalents" on the
accompanying balance sheet.
Additionally, in early July 1997, the Company both renewed and restructured
its bank borrowing agreements. Under the revised agreement, the Company
converted approximately $300,000 outstanding under its revolving credit facility
for capital equipment purchases to a 24 month term loan. In conjunction with
this, a new $500,000 revolving credit facility for capital purchases was
established. The amounts shown in the accompanying June 30, 1997 balance sheet
have been adjusted to reflect this new agreement.
The Company currently anticipates that 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 the next 12 months. 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.
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,
"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. The timing of revenues is difficult to
forecast because the Company's sales cycle is relatively long in the case of new
clients and may depend on factors such as the size and scope of the project,
length of contract negotiations, and general economic conditions in a particular
sales prospect's country of origin. Because a high percentage of the Company's
expenses are relatively fixed, a variation in the timing of the initiation or
the completion of client projects, particularly at or near the end of any
quarter, can cause significant variations in operating results from quarter to
quarter.
The Company's forward-looking statements about its revenues, earnings, and
business development have been derived from its operating budgets and forecasts,
which are based upon detailed assumptions about many important factors. Several
important factors may cause the Company's actual results to differ materially
from those contemplated by any forward-looking statements made by the Company.
These factors include the course of business in the financial services industry,
competition among software companies serving that industry, the Company's
management of the long sales cycle for its products, the timing of new contract
closings and other significant events of revenue recognition affecting the
Company's quarterly results, the development of the Direct Banking Market and
market acceptance of the Company's products within that market, the Company's
ability to continue to improve its product, and the Company's ability to manage
the concentration of sales to financial service companies in foreign markets
(particularly Central Europe and Asia).
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share." This Statement establishes standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held common
stock or potential common stock (as defined). This Statement is effective for
financial statements issued for periods ending after December 15, 1997. Earlier
application is not permitted. This Statement requires restatement of all
prior-period EPS data presented. The Company has calculated both basic and
diluted earnings per share, as such terms are defined in SFAS NO. 128, for
the periods presented herein, and has determined that both such calculated
amounts are identical to the earnings per common share amounts as currently
reported on Exhibit 11.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
to establish standards for reporting and display of comprehensive income and its
components in financial statements. The new standard requires an entity to a)
classify items of other comprehensive income by their nature in a financial
statement and b) display the accumulated balance
11
<PAGE>
of other comprehensive income separately from retained earnings and
additional paid in capital in the equity section of a statement of financial
position. The new standard is effective for fiscal years beginning after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" to establish standards for
reporting information about operating segments in annual financial statements
and require reporting of selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographical
areas and major customers. The new standard is effective for fiscal years
beginning after December 15, 1997. Adoption of SFAS No. 131 will not affect
the Company's financial condition or results of operations and the Company is
evaluating the impact on its disclosure requirements.
12
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. An annual meeting of shareholders was held on May 29,
1997 at the corporate offices in Malvern, Pennsylvania.
b. The meeting involved the election of eight directors to hold
office until the next Annual Meeting of Stockholders and until
their successors are elected and qualified. Those elected are:
Votes For Votes Withheld
------------ ---------------
Michael A. Sanchez................... 10,390,176 15,562
Frank R. Sanchez..................... 10,390,176 15,562
Warren V. Musser..................... 10,389,836 15,902
Lawrence Chimerine................... 10,390,516 15,222
Kailash C. Khanna.................... 10,388,916 16,822
John D. Loewenberg................... 10,388,596 17,142
Ira M. Lubert........................ 10,390,356 15,382
Thomas C. Lynch...................... 10,388,556 17,182
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10.1--Safeguard Scientifics, Inc. Revolving Note Agreement
Dated June 12, 1997
Exhibit 11--Computation of net income per share
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K
NONE
No other applicable items.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SANCHEZ COMPUTER ASSOCIATES, INC.
/S/ Joseph F. Waterman
---------------------------------
Joseph F. Waterman
Senior Vice-President & Chief Financial Officer
Date: August 12, 1997
14
<PAGE>
Exhibit 10.1
- ------------
REVOLVING NOTE
(Safeguard Scientifics, Inc.)
Wayne, Pennsylvania
$12,000,000 June 12, 1997
FOR VALUE RECEIVED, Safeguard Scientifics, Inc., a Pennsylvania
corporation (the "Borrower"), having an office at 800 The Safeguard Building,
435 Devon Park Drive, Wayne, Pennsylvania 19087, hereby promises to pay to
the order of Sanchez Computer Associates, Inc., a Pennsylvania corporation,
or its registered assigns (the "Lender"), at the Lender's office located at
40 Valley Stream Parkway, Malvern, Pennsylvania 19355, or at such other place
in the continental United States as the Lender may designate in writing, UPON
DEMAND, in lawful money of the United States, and in immediately available
funds, the principal sum of up to Twelve Million and no/100 Dollars
($12,000,000), or so much thereof as shall have been advanced by the Lender
to the Borrower as hereinafter set forth and then be outstanding, and to pay
interest thereon monthly in arrears on the first business day of each
calendar month at an annual rate equal to the Borrower's effective cost of
borrowing less .75%. All amounts advanced hereon, but not to exceed
$12,000,000 at any one time outstanding in the aggregate, shall be so
advanced upon the request of the Borrower, and may be repaid and reborrowed,
from time to time, in whole or in part, so long as no event of default has
occurred and is continuing. All amounts so advanced hereon and all payments
made on account of the principal hereof shall be recorded in the books of the
Lender, which records shall be final and binding in the absence of manifest
error, but failure to do so shall not release the Borrower from any of its
obligations hereunder.
All payments made on this Note (including, without limitation,
prepayments) shall be applied, at the option of the Lender, first to late
charges and collection costs, if any, then to accrued interest and then to
principal. Interest payable hereunder shall be calculated for actual days
elapsed on the basis of a 360-day year. Accrued and unpaid interest shall be
due and payable upon maturity of this Note. After maturity or in the event
of default, interest shall continue to accrue on the Note at the rate set
forth above and shall be payable on demand of the Lender.
The outstanding principal amount of this Note may be prepaid by the
Borrower upon notice to the Lender in whole at any time or in part from time to
time without any prepayment penalty or premium; provided, that upon such payment
any interest due to the date of such prepayment on such prepaid amount shall
also be paid.
Notwithstanding anything in this Note, the interest rate charged
hereon shall not exceed the maximum rate allowable by applicable law. If any
stated interest rate herein exceeds the maximum allowable rate, then the
interest rate shall be reduced to the maximum allowable rate,
<PAGE>
and any excess payment of interest made by the Borrower at any time shall be
applied to the unpaid balance of any outstanding principal of this Note.
An event of default hereunder shall consist of:
(i) a default in the payment by the Borrower to the Lender of
principal or interest under this Note as and when the same shall become
due and payable;
(ii) an event of default by the Borrower under any other obligation,
instrument, note or agreement for borrowed money, beyond any applicable
notice and/or grace period;
(iii) institution of any proceeding by or against the Borrower under
any present or future bankruptcy or insolvency statute or similar law and,
if involuntary, if the same are not stayed or dismissed within sixty (60)
days, or the Borrower's assignment for the benefit of creditors or the
appointment of a receiver, trustee, conservator or other judicial
representative for the Borrower or the Borrower's property or the
Borrower's being adjudicated a bankrupt or insolvent.
Upon the occurrence of any event of default, interest shall accrue on the
outstanding balance of this Note at the rate of interest otherwise payable
hereunder plus three percent (3%), the entire unpaid principal amount of this
Note and all unpaid interest accrued thereon shall, at the sole option of the
Lender, without notice, become immediately due and payable, and the Lender shall
thereupon have all the rights and remedies provided hereunder or now or
hereafter available at law or in equity.
Any action, suit or proceeding where the amount in controversy as to at
least one party, exclusive of interest and costs, exceeds $1,000,000 ("Summary
Proceeding"), arising out of or relating to this Agreement, or the breach,
termination or validity thereof, shall be litigated exclusively in the Superior
Court of the State of Delaware (the "Delaware Superior Court") as a summary
proceeding pursuant to Rules 124-131 of the Delaware Superior Court, or any
successor rules (the "Summary Proceeding Rules"). Each of the parties hereto
hereby irrevocably and unconditionally (i) submits to the jurisdiction of the
Delaware Superior Court for any Summary Proceeding, (ii) agrees not to commence
any Summary Proceeding except in the Delaware Superior Court, (iii) waives, and
agrees not to plead or to make, any objection to the venue of any Summary
Proceeding in the Delaware Superior Court, (iv) waives, and agrees not to plead
or to make, any claim that any Summary Proceeding brought in the Delaware
Superior Court has been brought in an improper or otherwise inconvenient forum,
(v) waives, and agrees not to plead or to make, any claim that the Delaware
Superior Court lacks personal jurisdiction over it, (vi) waives its right to
remove any Summary Proceeding to the federal courts except where such courts are
vested with sole and exclusive jurisdiction by statute and (vii) understands and
agrees that it shall not seek a jury trial or punitive damages in any Summary
Proceeding based upon or arising out of or otherwise related to this Agreement
waives any and all rights to any such jury trial or to seek punitive damages.
<PAGE>
In the event any action, suit or proceeding where the amount in controversy
as to at least one party, exclusive of interest and costs, does not exceed
$1,000,000 (a "Proceeding"), arising out of or relating to this Agreement or the
breach, termination or validity thereof is brought, the parties to such
Proceeding agree to make application to the Delaware Superior Court to proceed
under the Summary Proceeding Rules. Until such time as such application is
rejected, such Proceeding shall be treated as a Summary Proceeding and all of
the foregoing provisions of this Section relating to Summary Proceedings shall
apply to such Proceeding.
If a Summary Proceeding is not available to resolve any dispute hereunder,
the controversy or claim shall be settled by arbitration conducted on a
confidential basis, under the U.S. Arbitration Act, if applicable, and the then
current Commercial Arbitration Rules of the American Arbitration Association
(the "Association") strictly in accordance with the terms of this Agreement and
the substantive law of the State of Delaware. The arbitration shall be
conducted at the Association's regional office located closest to the Borrower's
principal place of business by three arbitrators, at least one of whom shall be
knowledgeable in general business matters and one of whom shall be an attorney.
Judgment upon the arbitrators' award may be entered and enforced in any court of
competent jurisdiction. Neither party shall institute a proceeding hereunder
unless at least 60 days prior thereto such party shall have given written notice
to the other party of its intent to do so.
Neither party shall be precluded hereby from securing equitable remedies in
courts of any jurisdiction, including, but not limited to, temporary restraining
orders and preliminary injunctions to protect its rights and interests but shall
not be sought as a means to avoid or stay arbitration or Summary Proceedings.
The Borrower hereby waives presentment, demand, protest and notice of
dishonor and protest, and also waives all other exemptions; and agrees that
extension or extensions of the time of payment of this Note or any installment
or part thereof may be made before, at or after maturity by agreement by the
Lender. Upon default hereunder the Lender shall have the right to offset the
amount owed by the Borrower against any amounts owed by the Lender in any
capacity to the Borrower, whether or not due, and the Lender shall be deemed to
have exercised such right of offset and to have made a charge against any such
account or amounts immediately upon the occurrence of an event of default
hereunder even though such charge is made or entered on the books of the Lender
subsequent thereto. The Borrower shall pay to the Lender, upon demand, all
costs and expenses, including, without limitation, attorneys' fees and legal
expenses, that may be incurred by the Lender in connection with the enforcement
of this Note.
Notices required to be given hereunder shall be deemed validly given (i)
three business days after sent, postage prepaid, by certified mail, return
receipt requested, (ii) one business day after sent, charges paid by the sender,
by Federal Express Next Day Delivery or other guaranteed delivery service, (iii)
when sent by facsimile transmission, or (iv) when delivered by hand:
If to the Lender: Sanchez Computer Associates, Inc.
40 Valley Stream Parkway
<PAGE>
Malvern, Pennsylvania 19355
Attn: Joseph F. Waterman
Chief Financial Officer
If to the Borrower: Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, Pennsylvania 19087
Attn: Michael W. Miles
Chief Financial Officer
or to such other address, or in care of such other person, as the holder or the
Borrower shall hereafter specify to the other from time to time by due notice.
Any failure by the Lender to exercise any right hereunder shall not be
construed as a waiver of the right to exercise the same or any other right at
any time. No amendment to or modification of this Note shall be binding upon
the Lender unless in writing and signed by it. Any provision hereof found to be
illegal, invalid or unenforceable for any reason whatsoever shall not affect the
validity, legality or enforceability of the remainder hereof. This Note shall
apply to and bind the successors of the Borrower and shall inure to the benefit
of the Lender, its successors and assigns.
This Note shall be governed by and interpreted in accordance with the laws
of the State of Delaware.
IN WITNESS WHEREOF, the Borrower, by its duly authorized officer intending
to be legally bound hereby, has duly executed this Revolving Note as of the date
first written above.
________________________________
Michael W. Miles
Chief Financial Officer
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
--------- --------- --------- ---------
Net Earnings................................................................. $ 573 $ 358 $ 915 $ 377
--------- --------- --------- ---------
Average common shares outstanding............................................ 11,190 8,406 11,176 8,406
Average common share equivalents............................................. 516 772 495 814
--------- --------- --------- ---------
Average number of common shares and common share equivalents outstanding..... 11,706 9,178 11,671 9,220
--------- --------- --------- ---------
Earnings per common share (1)................................................ $ 0.05 $ 0.04 $ 0.08 $ 0.04
--------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Primary and fully diluted income per share are the same for both periods
presented.
(2) Earnings per common 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 earnings per share for each of the
quarters in a fiscal year (or period) may not equal the actual year-to-date
earnings per share.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 15,902
<SECURITIES> 0
<RECEIVABLES> 8,133
<ALLOWANCES> 40
<INVENTORY> 0
<CURRENT-ASSETS> 25,193
<PP&E> 2,739
<DEPRECIATION> 1,660
<TOTAL-ASSETS> 27,042
<CURRENT-LIABILITIES> 5,470
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 19,942
<TOTAL-LIABILITY-AND-EQUITY> 27,042
<SALES> 0
<TOTAL-REVENUES> 11,358
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,444
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (452)
<INCOME-PRETAX> 1,366
<INCOME-TAX> 451
<INCOME-CONTINUING> 915
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 915
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>