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Securities and Exchange Commission Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-21705
SANCHEZ COMPUTER ASSOCIATES, INC. (Exact Name of Registrant as Specified in
Its Charter)
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<S> <C>
Pennsylvania 23-2161560
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
40 Valley Stream Parkway, Malvern, PA (Address of Principal Executive 19355
Offices) (Zip) Code
Registrant's telephone number, including area code: (610) 296-8877
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
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TITLE OF EACH CLASS
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of shares of Common Stock held by non-affiliates
(based on the closing price on NASDAQ) on March 12, 1997 was approximately
$25.1 million.
The number of shares of registrant's Common Stock outstanding as of March
12, 1997 was 10,883,375 shares.
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SANCHEZ COMPUTER ASSOCIATES, INC.
INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
ITEM PAGE
NO. NO.
- - ---- ----
Part I
1. Business............................................................ 3
2. Properties.......................................................... 16
3. Legal Proceedings................................................... 16
4. Submission of Matters to a Vote of Security Holders................. 16
4A. Executive Officers of the Registrant................................ 17
Part II
5. Market for Registrant's Common Equity and Related Stockholder
Matters .......................................................... 18
6. Selected Financial Data............................................. 19
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 20
8. Financial Statements and Supplementary Data......................... 27
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.......................................... 42
Part III
10. Directors and Executive Officers of the Registrant.................. 42
11. Executive Compensation.............................................. 42
12. Security Ownership of Certain Beneficial Owners and Management...... 42
13. Certain Relationships and Related Transactions...................... 42
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 43
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's Proxy Statement relating to the annual meeting of
shareholders of registrant to be held on May 29, 1997 are incorporated by
reference into Items, 10, 11, 12 and 13 of Part III of this Form 10-K.
Registrant expects to file the Proxy Statement within 120 days after the end of
the year covered by this Form 10-K. Such Proxy Statement, except for the parts
therein which have been specifically incorporated by reference, shall not be
deemed "filed" for the purposes of this Form 10-K.
PART I
ITEM 1. BUSINESS.
Sanchez Computer Associates, Inc. ("Sanchez" or the "Company") designs,
develops, markets, implements and supports comprehensive banking software,
called PROFILE-Registered Trademark- ("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 24 clients in nine
countries serving more than 300 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
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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.
In July 1996, the Company entered into a strategic relationship with the
electronic banking division of Price Waterhouse LLP ("Price Waterhouse"). In
connection with this engagement, Price Waterhouse and the Company are conducting
joint marketing activities, and anticipate working jointly on future
implementation projects. In addition, the Company anticipates forming alliances
with other complementary 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.
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.
Although Canada does not meet the definition of an "Emerging Market", the
Canadian credit union marketplace has in the last few years identified the need
to upgrade their information and processing infrastructure. The Company entered
the Canadian credit union marketplace in 1991 and as of December 31, 1996, its
software is responsible for processing the majority of credit unions in the
Provinces of British Columbia and Manitoba. Late in 1996, the Company was
notified by another Provincial credit union Central that it had selected
PROFILE; the Company is currently negotiating a contract with this entity.
Concurrent with this selection, discussions ensued with certain of the Company's
current customers to jointly pursue additional opportunities in the Canadian
credit union marketplace. Plans will be solidified later in 1997.
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
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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 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.
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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. In addition, the Company, in concert with its Canadian Credit
Union service bureau customers, plans to expand its presence among credit unions
across Canada. 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 addition, the Company
plans to increase its own direct marketing efforts and has recently opened
offices in Prague, Warsaw and Jakarta.
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
engage in joint marketing and project implementation activities. In addition,
the Company anticipates forming alliances with other complementary service
organizations in the areas of home banking interface, network security and other
consumer-based financial applications.
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
products 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
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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
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. In general, while the most important features
of PROFILE have been internally developed, the Company currently also relies on
software provided by certain third parties for development languages, database
environments and certain application modules for PROFILE/ITS. The Company
believes, however, that if such software were no longer available to the
Company, it could obtain substitute software from other sources.
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
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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.
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 DLL, DDE, HTML and SQL (with ODBC compliance in development
and expected to be available later in 1997). 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.
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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.
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 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.
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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 offices in
Lisbon and Prague, and is in the process of staffing its new office in Warsaw to
provide similar services. Senior application support personnel from the Malvern
office have been 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, following closure of the Company's first
Asian contract in Malaysia in the fourth quarter of 1996, to create a local
application support presence in Kuala Lumpur by mid-1997.
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 strategic alliance relationship
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
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both IBM and Hewlett-Packard will increase its competitiveness in all markets
and will result in greater lead generation.
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 jointly market their respective products
and services to the Direct Banking Market. In addition, the Company anticipates
forming alliances with other complementary 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.
While the establishment of strategic alliances with third parties has been
important to the Company's past success and are a key to its future prospects,
the Company does not believe that its written understandings with such third
parties are necessary for the delivery of its products and services.
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 1996, 1995 and 1994 were $3.8
million, $3.3 million and $3.8 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.
11
<PAGE>
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 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 February 28, 1997, the Company had 148 full-time employees, 51 of whom
were engaged in product development (including 18 of whom were employed in
technology development), 12 of whom were engaged in sales and marketing, 18 of
whom were engaged in finance and administration and 67 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 twelve independent contractors, primarily for
product development, 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 FiServ, 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. In Canada, the Company is replacing technology
provided primarily by CDSL. This technology has, in certain instances, been used
by the credit unions for over twenty years. Although, the Company's main
competitiors are CDSL and Prologic, the Company has been the successful bidder
in the last three major credit union service bureau selections.
12
<PAGE>
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,
FiServ, 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.
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 December 31, 1996 amounted to $19.8 million. The
components of the backlog were $8.1 million for software license, product
enhancement and implementation and consulting revenues and $11.7 million for
maintenance and support. The Company anticipates recognizing approximately $13.3
million of this backlog in the year 1997. At December 31, 1995, the Company's
backlog amounted to $17.6 million, consisting of $5.8 million for software
license, product enhancement and implementation and consulting revenues and
$11.8 million for maintenance and support.
13
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
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
Architecture component acts as 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-Registered Trademark- 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.
HTML Hypertext Markup Language. The language used
to design and display web pages.
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
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-Registered Trademark- standard that
provides a database independent mechanism
through which a Windows or Windows NT
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.
Open Systems System design that allows users to take
Architecture advantage of 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
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
ITEM 2. PROPERTIES.
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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1996.
16
<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
AGE
NAME -- POSITION
- - ----------------------------------------------------- -----------------------------------------------------
<S> <C> <C>
Michael A. Sanchez................................... Chairman of the Board of Directors and Chief
39 Executive Officer
Frank R. Sanchez..................................... 40 President, Chief Operating Officer and Director
Joseph F. Waterman................................... Senior Vice President, Treasurer and Chief Financial
45 Officer
Deborah C. Kovacs.................................... 34 Senior Vice President--Product Management
Thomas F. McAllister................................. 49 Senior Vice President--Client Services
Dan S. Russell....................................... 46 Senior Vice President--Technology Development
Michael L. Turner.................................... 43 Senior Vice President--Business Development
Stewart A. Jack...................................... 49 Managing Director of European Operations
Richard H. Jefferson................................. 40 Managing Director, Asian-Pacific Rim
</TABLE>
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's 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 technical activities. Prior to joining the Company, Mr. Waterman was
employed by Safeguard Scientifics, Inc. ("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
17
<PAGE>
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 of Client 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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the National Market System of Nasdaq
under the symbol "SCAI."
Since trading in the Common Stock began on November 14, 1996, the high and
low sale prices of the Common Stock in the quarter ended December 31, 1996 were
$22 and $6-5/8, respectively. These quotations reported by Nasdaq represent
prices between dealers and do not include retail mark-ups, mark-downs or
commissions. Such quotations may not represent actual transactions.
18
<PAGE>
As of December 31, 1996, the Company had outstanding 10,865,255 shares of
Common Stock held by approximately 8,700 shareholders including beneficial
owners of the Common Stock whose shares are held in the names of various
dealers, clearing agencies, banks, brokers and other fiduciaries.
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. 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. The Company's financing arrangements currently do not
prohibit the Company from declaring or paying dividends or making other
distributions on the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA.
The statement of operations and balance sheet data presented below have been
derived from the Company's audited consolidated financial statements. The data
presented below should be read in
19
<PAGE>
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 Annual
Report on Form 10-K.
<TABLE>
<CAPTION>
IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS 1996 1995 1994 1993 1992
- - ---------------------------------------- --------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................................ $ 17,715 $ 16,842 $15,516 $11,317 $11,881
Income before income taxes.............. 1,540 2,709 2,080 518 357
Net income.............................. 1,075 1,587 3,038 463 332
Net income per average common share..... $ .12 $ .17 $ .33 $ .05 $ .04
Weighted average common shares
outstanding........................... 9,300 9,588 9,284 9,068 8,928
Balance Sheet Data:
Cash and cash equivalents............... $ 15,446 $ 5,546 $ 2,656 $ 365 $ 257
Working capital......................... 19,321 4,902 2,318 (320) (1,298)
Total assets............................ 28,168 12,265 8,530 3,593 3,868
Long-term debt, including current
portion............................... 442 341 242 174 179
Total stockholders' equity............... 18,910 5,605 3,785 747 284
Other Operating Data:
Backlog:
License and services.................... $ 8,093 $ 5,816 $ 9,438 $ 1,576 $ 3,901
Maintenance............................. 11,704 11,809 10,284 5,484 3,843
--------- ---------- --------- --------- ---------
Total Backlog........................... $ 19,797 $ 17,625 $ 19,722 $ 7,060 $ 7,744
Revenue per full time equivalent
employee.............................. 123 114 121 91 88
</TABLE>
ITEM 7. 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 Annual Report on Form 10-K.
This Item 7 and Item 1, Business, contain 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.
20
<PAGE>
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
transaction processing system which supports deposit, loan, customer, 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 24 clients in nine
countries serving more than 300 financial institutions.
Founded in 1979, the Company initially generated all of its revenue from
U.S. based financial institutions. In the early 1990's, 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.
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 10 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, 1996, license fees accounted for 41% 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 December 31, 1996 amounted to $19.8 million. The
components of the backlog were $8.1 million for software license, product
enhancement and implementation and consulting revenues and $11.7 million for
maintenance and support. The Company anticipates recognizing approximately $13.3
million of this backlog in the year 1997. At December 31, 1995, the Company's
backlog amounted to $17.6 million, consisting of $5.8 million for software
license, product enhancement and implementation and consulting revenues and
$11.8 million for maintenance and support.
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. 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 involved in its first project on an IBM
platform, and is also in several pending bids with Hewlett-Packard. The Company
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, "one-time" payments
21
<PAGE>
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 1996 when
compared to 1995.
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected statement
of operations data:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
DOLLARS IN THOUSANDS 1996 1995 1994
- - ------------------------------------------------------------------------------- ----------- --------- ---------
Revenues
Software license fees.......................................................... $ 7,793 $ 6,532 $ 6,111
Product enhancement fees....................................................... 868 1,797 1,564
Implementation and consulting services......................................... 4,762 4,496 4,347
Software maintenance fees...................................................... 4,292 4,017 3,494
----------- --------- ---------
Total revenues................................................................. $ 17,715 $ 16,842 $ 15,516
----------- --------- ---------
----------- --------- ---------
Percentage Relationship to Total Revenues
Revenues
Software license fees.......................................................... 44.0% 38.8% 39.4%
Product enhancement fees....................................................... 4.9 10.7 10.1
Implementation and consulting services......................................... 26.9 26.7 28.0
Software maintenance fees...................................................... 24.2 23.8 22.5
----------- --------- ---------
Total revenues................................................................. 100.0 100.0 100.0
Operating expenses
Product development............................................................ 21.3 19.6 24.5
Product support................................................................ 15.9 14.9 14.9
Implementation and consulting.................................................. 17.2 18.9 17.3
Sales and marketing............................................................ 17.4 12.4 8.3
Royalties and sublicense fees.................................................. 12.7 7.9 9.5
General and administrative..................................................... 8.6 10.8 12.1
----------- --------- ---------
Total operating expenses....................................................... 93.1 84.5 86.6
Income from operations......................................................... 6.9 15.5 13.4
Interest income, net........................................................... 1.8 .6
----------- --------- ---------
Income before income taxes..................................................... 8.7 16.1 13.4
Income tax provision (benefit)................................................. 2.6 6.7 (6.2)
----------- --------- ---------
Net income..................................................................... 6.1% 9.4% 19.6%
----------- --------- ---------
----------- --------- ---------
</TABLE>
1996 Compared to 1995
23
<PAGE>
Revenues. Revenues increased $873,000, or 5.2%, in 1996 primarily due to an
increase in software license fees of $1.3 million. The most significant
contributors to this increase were two major implementation projects underway in
the Polish marketplace, along with a license fee expansion earned from one of
the Company's key European customers. Partially offsetting this increase was a
$929,000 decline in product enhancement fees, due primarily to a higher level of
third party funded technology development in 1995. Implementation and consulting
services fees increased by 5.9% in 1996, and software maintenance fees increased
by 6.8%, despite the inclusion in 1995 of a one-time settlement payment
resulting from the termination of a client software maintenance contract.
Adjusting for the effect of this one-time item, software maintenance fees would
have increased 15.5% in 1996 relative to 1995, with most of the increasing being
derived from clients in the Central European market.
Product development. Most of the Company's product development is internally
funded. The Company, however, periodically is able to obtain partial funding for
certain development from its partners or clients. Such fees are included in
revenues, entitled product enhancement fees.
Product development expenses increased $470,000 or 14.2%, in 1996, due to
the strategic decision to increase investment in development for various
technology projects, including the porting of its software to additional
platforms and enhancements to PROFILE/Anyware. Additionally, capitalized
software development costs increased by $346,000 in 1996, due primarily to
capitalization of costs related to the GUI client project.
Product Support. Product support expenses increased by $303,000 or 12.0%,
in the year ended December 31, 1996, primarily due to incremental costs related
to the Company's establishment of European support offices in 1996, as well as
increases in the total number of employees required to support the larger
converted client base during the year.
Implementation and consulting. Implementation and consulting expenses
declined $132,000 or 4.2%, in the year ended December 31, 1996, despite a
$266,000 increase in related revenues. The percent relationship to related
revenues declined in 1996 to 63.9% from 70.6% 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 17.2% from 18.9%
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 by $1.0
million, or 48.3% in the 1996 period, due to the Company's continuing increased
investment in this area during the year. 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 substantially due to the promotional and
advertising campaign related to PROFILE/Anyware. As a result, sales and
marketing expenses as a percent of revenues increased to 17.4% from 12.4% in
1995.
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 vary depending on the applicable
revenue components subject to such fees. For the year ended 1996, this expense
category increased $924,000, primarily due to an increase of $587,000 in third
party license fees due to higher third party license revenue, primarily
associated with the PROFILE/ ITS product.
General and administrative. These expenses declined $297,000, or 16.3%, 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
24
<PAGE>
replace the Managing Director of Europe in May 1996. Additionally, one senior
executive was transferred into sales and marketing effective January 1996.
Interest income (expense) net. Interest income, net, increased $231,000 due
to income earned on higher invested cash balances.
Income tax provision (benefit). Taxes in 1996 were 30.2% of income before
income taxes, as compared to 41.4% in 1995. This reduced effective rate is
primarily the result of certain state net operating loss carryforwards as well
as foreign tax credits. For 1997, the Company anticipates an effective tax rate
of approximately 35%.
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 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%, as
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, as 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.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $15.4 million at December 31, 1996, and $5.5
million at December 31, 1995. During 1996, the Company raised $11.8
million (net of direct expenses) from its initial public offering. Cash flow
from operations was ($1.3) million in 1996, $3.2 million in 1995, and $2.9
million in 1994. The reduced rate of cash flow in 1996 was primarily caused
by significant growth in receivables late in the year (due to variability in the
timing of major contract milestone payments) as well as the strategic decisions
to increase expenditures in 1996 in both sales and marketing and certain
development activities. More specifically, receivables at December 31, 1996
increased by $4.6 million (to $8.9 million in total) relative to the
December 31, 1995 balance. The majority of this increase relates to
significant billings and bookings generated during December of 1996 for two
major implementation projects in the Polish marketplace, coupled with a three
year in advance support contract billing for one of these same customers.
Initial contract billings for the Company's first client contract in the Asian
marketplace also contributed to the substantial year-end growth in receivables
at December 31, 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 $630,000 in 1996, and $458,000 in 1995. 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 ($81,000
available at December 31, 1996), and internally generated funds.
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 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.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants......................................28
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1995.........29
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994....................................30
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994................31
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994....................................32
Notes to Consolidated Financial Statements...........................33
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders 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, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity and
cash flows for each of the years in the three-year period ended December
31, 1996. 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, 1996 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, 1996, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 3, 1997
28
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
ASSETS 1996 1995
--------- --------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 15,446 $ 5,546
Accounts receivable, less allowance of $40 8,920 4,305
Deferred income taxes 744 705
Prepaid and other current assets 1,459 545
--------------------
Total current assets 26,569 11,101
Property and equipment
Equipment 2,084 1,497
Furniture and fixtures 238 221
Leasehold improvements 64 61
--------------------
2,386 1,779
Accumulated depreciation and amortization (1,462) (976)
--------------------
Net property and equipment 924 803
Capitalized software costs, net of amortization of
$1,289 in 1996 and $1,071 in 1995 675 361
--------------------
Total assets $28,168 $12,265
--------------------
--------------------
LIABILITIES
Current liabilities
Current portion of long-term debt $ 224 $ 168
Accounts payable, trade 637 345
Accrued expenses 2,474 1,659
Deferred revenue 3,913 4,027
--------------------
Total current liabilities 7,248 6,199
Deferred revenue 1,508 33
Deferred income taxes 230 118
Long-term debt-net of current portion 218 173
Deferred rent 54 137
--------------------
Total liabilities 9,258 6,660
Commitments (Note 9)
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized - 50,000,000 shares
Issued and outstanding - 10,865,255 and 8,409,356
shares in 1996 and 1995, respectively 109 84
Additional paid-in capital 18,103 6,024
Retained earnings 1,236 161
Notes due on common stock purchases (538) (664)
--------------------
Total shareholders' equity 18,910 5,605
--------------------
Total liabilities and shareholders' equity $28,168 $12,265
--------------------
--------------------
</TABLE>
See notes to consolidated financial statements
29
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Revenues
Software license fees $ 7,793 $ 6,532 $ 6,111
Product enhancement fees 868 1,797 1,564
Implementation and consulting services 4,762 4,496 4,347
Software maintenance fees 4,292 4,017 3,494
-----------------------------
Total revenues 17,715 16,842 15,516
Operating expenses
Product development 3,770 3,300 3,804
Product support 2,818 2,515 2,315
Implementation and consulting 3,044 3,176 2,678
Sales and marketing 3,085 2,080 1,282
Royalties and sublicense fees 2,255 1,331 1,477
General and administrative 1,527 1,824 1,886
-----------------------------
Total operating expenses 16,499 14,226 13,442
-----------------------------
Income from operations 1,216 2,616 2,074
Interest income, net 324 93 6
-----------------------------
Income before income taxes 1,540 2,709 2,080
Income tax provision (benefit) 465 1,122 (958)
-----------------------------
Net income $ 1,075 $ 1,587 $ 3,038
-----------------------------
-----------------------------
Net income per average common share $ .12 $ .17 $ .33
Weighted average common shares outstanding 9,300 9,588 9,284
</TABLE>
See notes to consolidated financial statements
30
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except share amounts)
<TABLE>
<CAPTION>
NOTES DUE
COMMON STOCK ADDITIONAL RETAINED ON COMMON TREASURY STOCK
------------------- PAID-IN EARNINGS STOCK -------------------
SHARES AMOUNT CAPITAL (DEFICIT) PURCHASES SHARES AMOUNT
---------- ------ ---------- ----------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
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) 0 0
Net income 1,075
Net proceeds from
public stock offering 2,309,500 23 11,729
Exercise of stock options 146,399 2 350
Stock option loan repayments 126
---------------------------------------------------------------------------
Balances at December 31, 1996 10,865,255 $109 $18,103 $ 1,236 $(538) 0 $ 0
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements
31
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,075 $ 1,587 $ 3,038
Adjustments to reconcile net income to cash
provided by (used in) operating activities
Deferred taxes 74 791 (1,378)
Depreciation and amortization 727 605 557
Other (77) 39 56
Cash provided (used) by changes in
operating assets and liabilities
Accounts receivable (4,615) (1,240) (1,250)
Prepaid and other current assets (914) (237) (177)
Accounts payable and accrued expenses 1,107 (233) 1,211
Deferred revenues 1,361 1,926 804
----------------------------------
Net cash provided by (used in) operating activities (1,262) 3,238 2,861
Cash flows from investing activities
Capitalized computer software costs (532) (217) (113)
Capital expenditures (630) (458) (376)
----------------------------------
Net cash used in investing activities (1,162) (675) (489)
Cash flows from financing activities
Proceeds from issuance of long-term debt 354 244
Repayment of notes due on common stock purchases 121 228
Principal payments under capital lease obligation (80) (51) (38)
Principal payment under long-term notes (173) (94) (43)
Proceeds from exercise of stock options 350
Net proceeds from initial public offering 11,752
----------------------------------
Net cash provided by (used in) financing activities 12,324 327 (81)
Net increase in cash and cash equivalents 9,900 2,890 2,291
Cash and cash equivalents at beginning of year 5,546 2,656 365
----------------------------------
Cash and cash equivalents at end of year $15,446 $ 5,546 $ 2,656
----------------------------------
----------------------------------
Supplemental cash flow information
Interest paid $ 35 $ 38 $ 29
Income taxes paid $ 528 $ 273 $ 134
</TABLE>
See notes to consolidated financial statements
32
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(1.) Description of Business
Sanchez Computer Associates, Inc. ("Sanchez" or 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 transaction processing system which supports deposit, loan,
customer, 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 processes treasury transactions
including foreign exchange, money market, securities trading (capital
markets), futures, options and trade finance.
(2.) Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Sanchez Software Ltd., Sanchez
Computer Associates International, Inc., and Sanchez FSC, 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 estimate is 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 defects
from specifications for a period generally not to exceed 90 days
following initial installation of the software, or customer conversion.
Provision for future claims has been recorded based on historical
experience, which to date has not been significant.
33
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(2.) Significant Accounting Policies, continued
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid
investments with maturities of three months or less from the date of
purchase and whose carrying amount approximates market value due to the
short maturity of the investments. The Company maintains a centralized
cash management program whereby its excess cash balances are invested in
high quality short-term money market instruments through high credit
quality financial institutions. At times, cash balances in the Company's
accounts may exceed federally insured limits. Cash and cash equivalents
at December 31, 1995 also included amounts on deposit with Safeguard
Scientifics, Inc. ("Safeguard"), a major shareholder of the Company. The
note earned interest at Safeguard's effective borrowing rate minus 1%. At
December 31, 1995 advances to Safeguard under this demand note amounted
to $3,500. No amounts were on deposit with Safeguard at December 31,
1996. Interest income from these advances to Safeguard amounted to $20 in
1996 and $81 in 1995.
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.
Capitalized Software Costs
Certain development costs of the Company's software products are
capitalized subsequent to the establishment of technological feasibility
and up to the time the product becomes available for general release.
Amortization is provided on a product-by-product basis at the greater of
the amount computed using (a) the ratio of current revenues for a product
to the total of current and anticipated future revenues or (b) the
straight-line method over the remaining estimated economic life of the
product. Generally, an original estimated economic life of four years is
assigned to capitalized software development costs. 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 in 1996, 1995, and 1994 were approximately
$532, $217 and $113, respectively. Amortization of capitalized software
costs amounted to $218, $227 and $306 in 1996, 1995 and 1994,
respectively.
Taxes on Income
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.
34
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(2.) Significant Accounting Policies, continued
Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful
lives of the related assets using a combination of accelerated and
straight line depreciation methods.
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 12 month period preceding the
initial public offering of the Company's common stock (see Note 7) have
been included in the calculation as if they were outstanding for all
periods presented (using the treasury stock method and an initial public
offering price of $5.50 per share).
Reclassification of Financial Statement Amounts
Certain 1995 amounts have been reclassified to conform to the 1996
presentation.
(3.) Client Revenue Data
Revenue derived from certain software implementation projects
comprises a substantial portion of the Company's total annual revenues.
The following table summarizes the percentage of revenues from the
Company's significant clients (listing those clients that exceed 10% in
the applicable year):
CLIENT 1996 1995 1994
------------------------------------------------------------------
A * * 11%
B 12% 10% *
C * * 15%
D * 18% 16%
E 13% 22% 18%
F 28% 21% *
G 22% * *
------------------------
* Less than 10%
At December 31, 1996 and 1995, the same four customers in each
year accounted for $6,153 (or 69%) and $2,719 (or 63%) of net accounts
receivable, respectively. The Company does not require its customers to
provide collateral relative to accounts receivable balances.
35
<PAGE>
SANCHEZ COMPUTER ASSOCIATES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(3.) Client Revenue Data, continued
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, 1996 is as follows:
1996 1995 1994
--------- --------- ---------
Canada $ 1,527 $ 1,802 $ 2,789
Central Europe 11,193 8,569 4,463
Other European 2,547 4,048 3,355
U.S. and Caribbean 1,478 2,423 4,909
Asia Pacific Rim 970
--------- --------- ---------
$ 17,715 $ 16,842 $ 15,516
(4.) Accounts Receivable
Accounts receivable balances include unbilled receivables which
amounted to approximately $2,808 and $2,150 at December 31, 1996 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.
(5.) Accrued Expenses
Accrued expenses consist of the following:
1996 1995
--------- ---------
Accrued compensation and related items $ 715 $ 390
Accrued royalties 728 264
Accrued income taxes 210 401
Other 821 604
--------- ---------
$ 2,474 $ 1,659
(6.) Long-Term Debt
Long-term debt consists of the following:
1996 1995
----- -----
Bank term notes at prime + 1% payable through December 1999 $ 419 $ 194
Capital leases at 12% to 12.4% payable through July 1997 23 104
Bank term note at 11% payable through October 1996 43
----- -----
442 341
Less current portion 224 168
----- -----
$ 218 $ 173
36
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(6.) Long-Term Debt, continued
The bank notes at prime + 1% were issued in conjunction with a $500
revolving credit facility for capital equipment purchases established as
of March 1995. The Company had available approximately $81 under this
facility as of December 31, 1996. All advances under the facility are
amortized over a 36 month term.
Future maturities of long-term debt at December 31, 1996 are as follows:
YEAR ENDING
-------------
1997 $ 224
1998 149
1999 69
---------
$ 442
(7.) Shareholders' Equity
On December 27, 1996, the Company completed an initial public
offering for the sale of 2,309,500 shares of its common stock at a price
of $5.50 per share. The Company received approximately $11.8 million in
net proceeds after deducting expenses related to the offering.
On September 11, 1996, the Company's 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.
In November 1996, the Company's shareholders approved and amended the
articles of incorporation to increase the number of the Company's
authorized shares of common stock from 15,000,000 to 50,000,000 shares.
The accompanying consolidated financial statements reflect such amendment
for all periods presented.
The Board of Directors is authorized, subject to certain limitations
and without shareholder approval, to issue up to an aggregate 10,000,000
shares in one or more series and to fix the rights and preferences of the
shares in each series. No shares of preferred stock have been issued.
The 1995 Equity Compensation 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.
The Company applies APB 25 and related interpretations in accounting
for its various stock option plans. Had compensation cost been recognized
consistent with SFAS 123 (Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation), the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
1996 1995
------- -------
Net income As reported $ 1,075 $ 1,587
Pro forma 1,023 1,579
Net income per average As reported .12 .17
common share Pro forma .11 .17
37
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(7.) Shareholders' Equity, continued
The per share weighted-average fair value of stock options issued by
the Company during 1996 and 1995 was $1.11 and $0.84 respectively on the
date of grant using the Black Scholes option-pricing model. The Company
used the following weighted-average assumptions to determine the fair
value of stock options granted: 1996--expected dividend yield 0%,
risk-free interest rate of 6.36% to 6.48%, expected volatility of 0%, and
average expected lives of three years to five years; 1995--expected
dividend yield 0%, risk-free interest rate 5.39%, expected volatility of
0%, and an average expected life of five years.
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period and compensation costs for options granted prior
to January 1, 1995 is not considered.
A summary of stock option activity under the 1995 and 1988 Plans at
December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,224,376 $ 2.13 1,614,658 $ 1.64 901,656 $ 1.59
Options granted 143,600 4.37 308,436 3.63 786,600 1.68
Options exercised (6,000) 1.67 (563,503) 1.60
Options canceled (553,408) 1.70 (135,215) 1.94 (73,598) 1.46
--------- -------- --------- -------- --------- --------
Outstanding at end of year 808,568 $ 2.81 1,224,376 $ 2.13 1,614,658 $ 1.64
--------- -------- --------- -------- --------- --------
Options exercisable 430,149 668,735 1,026,058
Shares available for future grants 1,252,964 1,388,364 365,342
</TABLE>
The following summarizes information about the Company's stock options
outstanding as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
NUMBER WEIGHTED AV. WEIGHTED AV. NUMBER WEIGHTED AV.
OUTSTANDING AS REMAINING EXERCISE EXERCISABLE AT EXERCISE
RANGE OF EXERCISE PRICES OF 12/31/96 CONTRACTUAL LIFE PRICE 12/31/96 PRICE
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <S> <C> <C> <C>
$1.00 to $1.73 381,533 5.5 years $ 1.63 336,533 $ 1.62
$3.63 to $4.75 427,035 8.8 3.87 93,616 3.63
------- -------
808,568 7.2 $ 2.81 430,149 $ 2.06
</TABLE>
38
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(7.) Shareholders' Equity, continued
Generally, outstanding options vest over a two to four year period
after the date of grant and expire 10 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 10 years, although the note also contains provisions for a
balloon payment due two years after the Company's initial public offering.
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 1996 and 1995 interest income earned on
these notes amounted to $40 and $43, respectively. 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 issued 144,000 non-qualified stock options to two
non-employee directors which were exercisable at $1.67 per share. These
options were fully exercised in 1996.
(8.) Income Taxes
The Company utilized net operating loss carryforwards and tax credit
carryforwards to offset current and deferred tax liabilities for the years
ended December 31, 1996, 1995 and 1994. The components of the income tax
provision (benefit) for each of the three years ended December 31, 1996
are as follows:
1996 1995 1994
------- ------- --------
Current taxes
Federal $ 206 $ 60 $ 70
State 10 113 200
Foreign 175 158 150
---------------------------
391 331 420
Deferred taxes 74 791 (1,378)
---------------------------
Total provision (benefit) $ 465 $1,122 $ (958)
A reconciliation of the tax provision (benefit) based on the federal
statutory tax rate to the effective tax rate is as follows:
1996 1995 1994
------- ------- --------
Statutory tax provision (34%) $ 524 $ 921 $ 707
Decrease in valuation allowance for deferred
tax assets, net (1,927)
State income taxes, net of federal income tax
benefit 7 75 132
Foreign income taxes 175 104 100
Federal income tax credits (175)
Adjustment of tax credit carryforwards and
accruals (77) 69 (42)
Foreign sales corporation (12)
Other, net 23 (47) 72
---------------------------
$ 465 $1,122 $ (958)
39
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(8.) 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, 1996 and
1995 are presented below:
1996 1995
--------- ---------
Deferred tax assets
Tax credit carryforwards $ 539 $ 444
Accrued liabilities 179 212
Other 26 49
--------------------
Total deferred tax assets 744 705
Deferred tax liabilities
Capitalized software costs (230) (118)
--------------------
Net deferred tax assets $ 514 $ 587
Utilization of net operating loss carryforwards and tax credit
carryforwards amounted to $150 in 1996, $2,149 in 1995 and $2,388 in 1994.
Also, at December 31, 1996, the Company has approximately $539 in income
tax credit carryforwards available to offset regular federal income taxes
payable, expiring between the years 1997 and 2011.
(9.) Commitments
The Company leases office facilities subject to operating leases.
Future minimum lease payments under noncancelable operating leases with
initial or remaining terms of one year or more at December 31, 1996 are as
follows:
1997 $ 422
1998 207
---------
$ 629
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $436, $364, and $357, respectively.
The Company is also party to certain software customization
agreements, primarily with Digital Equipment Corporation (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
$1,099 in 1996, $762 in 1995, and $761 in 1994.
40
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(10.) 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, 1996, 1995 and 1994.
The Company has entered into a consulting contract with the principal
of Oaktree Systems, Inc., a shareholder of the Company. During the years
ended December 31, 1996, 1995 and 1994, the Company incurred expenses
under this agreement of $46, $111 and $225, respectively.
(11.) Profit Sharing Trust Plan
The Company maintains a Profit Sharing Trust Plan (the "Plan") which
permits eligible participating members to contribute up to 15% 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, $174 , $148 and
$110 related to the Plan during the years ended December 31, 1996, 1995,
and 1994, respectively.
(12.) Quarterly Financial Information (Unaudited)
The following table presents the unaudited quarterly financial
information for the years 1996 and 1995:
<TABLE>
<CAPTION>
1996 QUARTER ENDED 1995 QUARTER ENDED
MAR 31 JUNE 30 SEPT 30 DEC 31 MAR 31 JUNE 30 SEPT 30 DEC 31
------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $3,477 $4,773 $4,546 $4,919 $3,829 $3,435 $4,338 $5,240
Income before income
taxes 31 608 428 473 321 24 460 1,904
Net income 19 358 307 391 192 15 272 1,108
Net income per average
common share 0.04 0.03 0.04 0.02 0.03 0.12
</TABLE>
Net income per average 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 net income per
share for each of the quarters in a fiscal year may not equal the actual
year-to-date net income per average common share.
41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The Company incorporates by reference the information contained under the
caption "ELECTION OF DIRECTORS" in its definitive Proxy Statement relative
to its May 29, 1997 annual meeting of shareholders, to be filed within 120
days after the end of the year covered by this Form 10-K pursuant to
Regulation 14A under the Securities Act of 1934, as amended.
Disclosure of Delinquent Filers Pursuant to Item 405 of Regulation S-K
The Company incorporates by reference the information contained under the
caption "SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in its
definitive Proxy Statement relative to its May 29, 1997 annual meeting of
shareholders, to be filed within 120 days after the end of the year covered
by this Form 10-K pursuant to Regulation 14A under the Securities Exchange
Act of l934, as amended.
ITEM 11. EXECUTIVE COMPENSATION.
The Company incorporates by reference the information contained under the
captions "Directors' Compensation," "Compensation Committee Interlocks and
Insider Participation" and "EXECUTIVE COMPENSATION" in its definitive Proxy
Statement relative to its May 29, 1997 annual meeting of shareholders, to
be filed within 120 days after the end of the year covered by this Form
10-K pursuant to Regulation 14A under the Securities Exchange Act of l934,
as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company incorporates by reference the information contained under the
caption "SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT"
in its definitive Proxy Statement relative to its May 29, 1997 annual
meeting of shareholders, to be filed within 120 days after the end of the
year covered by this Form 10-K pursuant to Regulation 14A under the
Securities Exchange Act of l934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company incorporates by reference the information contained under the
captions "Compensation Committee Interlocks and Insider Participation" and
"CERTAIN TRANSACTIONS" in its definitive Proxy Statement relative to its
May 29, 1997 annual meeting of shareholders, to be filed within 120 days
after the end of the year covered by this Form 10-K pursuant to Regulation
14A under the Securities Exchange Act of l934, as amended.
42
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements and Schedules
The financial statements and schedules listed below are filed as part of
this Form 10-K.
Financial Statements (See Item No. 8, page 27)
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1996.
(c) Exhibits
The following is a list of exhibits required by Item 601 of Regulation S-K
filed as part of this Form 10-K. Where so indicated by footnote, exhibits
which were previously filed are incorporated by reference. For exhibits
incorporated by reference, the location of the exhibit in the previous
filing is indicated in parentheses.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ----------- -----------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company.
(2) (Exhibit 3.1)
3.2 Amended and Restated By-laws of the Company. (2) (Exhibit 3.2)
4.1 Specimen stock certificate representing the Common Stock. (2)
(Exhibit 4.1)
10.1 # 1995 Equity Compensation Plan. (2) (Exhibit 10.1)
10.2 Common Stock, Warrants and Rights Agreement dated
February 26, 1987 among Sanchez Computer Asociates, Inc.,
Michael A. Sanchez, Frank R. Sanchez, Safeguard Scientifics
(Delaware), Inc., and Safeguard Scientifics, Inc. (1)
(Exhibit 10.2)
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. (1) (Exhibit 10.3)
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. (1) (Exhibit 10.4)
43
<PAGE>
10.5 Form of Rights Agent Agreement dated November 13, 1996 among
ChaseMellon Shareholder Services, L.L.C., Mellon Bank, N.A.,
Sanchez Computer Associates, Inc., Safeguard Scientifics, Inc.,
Radnor Venture Partners, L.P., Michael A. Sanchez and Frank R.
Sanchez. (2) (Exhibit 10.5)
10.6 Administrative Services Agreement dated February 26, 1987 by and
between Safeguard Scientifics, Inc. and Sanchez Computer
Associates, Inc. (2) (Exhibit 10.6)
10.7 # Employment Agreement effective January 1, 1996 between
Richard H. Jefferson and Sanchez Computer Associates, Inc.
(2) (Exhibit 10.7)
11.1 Statement Regarding Computation of Earnings Per Share. *
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Coopers & Lybrand L.L.P. *
27.1 Financial Data Schedule *
</TABLE>
* Filed herewith.
# These exhibits relate to compensatory plans, contracts or arrangements
in which directors and/or executive officers of the registrant may
participate.
1) Filed on September 27, 1996 as an exhibit to the Company's Registration
Statement on Form S-1 (No. 333-12863) and incorporated by reference.
2) Filed on November 6, 1996 as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (No. 333-12863) and incorporated by
reference.
3) Filed on November 13, 1996 as an exhibit to Amendment No. 2 to the
Company's Registration Statement on Form S-1 (No. 333-12863) and
incorporated by reference.
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 26, 1997 SANCHEZ COMPUTER ASSOCIATES, INC.
By:/s/ Michael A. Sanchez
--------------------------------------
Michael A. Sanchez, Chairman and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Michael A. Sanchez
Dated: March 26, 1997 -------------------------------------
Michael A. Sanchez, Chairman and Chief
Executive Officer (Principal Executive
Officer)
/s/ Joseph F. Waterman
Dated: March 26, 1997 --------------------------------------
Joseph F. Waterman, Senior Vice President
and CFO
(Principal Financial and Accounting Officer)
/s/ Frank R. Sanchez
Dated: March 26, 1997 --------------------------------------
Frank R. Sanchez, President, Chief Operating
Officer and Director
/s/ Warren V. Musser
Dated: March 26, 1997 --------------------------------------
Warren V. Musser, Director
/s/ Ira M. Lubert
Dated: March 26, 1997 --------------------------------------
Ira M. Lubert, Director
/s/ Lawrence Chimerine
Dated: March 24, 1997 --------------------------------------
Lawrence Chimerine, Director
/s/ John D. Loewenberg
Dated: March 24, 1997 --------------------------------------
John D. Loewenberg, Director
/s/ Thomas C. Lynch
Dated: March 26, 1997 --------------------------------------
Thomas C. Lynch, Director
45
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ----------- -----------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company.
(2) (Exhibit 3.1)
3.2 Amended and Restated By-laws of the Company. (2) (Exhibit 3.2)
4.1 Specimen stock certificate representing the Common Stock. (2)
(Exhibit 4.1)
10.1 # 1995 Equity Compensation Plan. (2) (Exhibit 10.1)
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. (1) (Exhibit 10.2)
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. (1)(Exhibit 10.3)
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. (1) (Exhibit 10.4)
10.5 Form of Rights Agent Agreement dated November 13, 1996 among
ChaseMellon Shareholder Services, L.L.C., Mellon Bank, N.A.,
Sanchez Computer Associates, Inc., Safeguard Scientifics, Inc.,
Radnor Venture Partners, L.P., Michael A. Sanchez and
Frank R. Sanchez. (2) (Exhibit 10.5)
10.6 Administrative Services Agreement dated February 26, 1987 by and
between Safeguard Scientifics, Inc. and Sanchez Computer
Associates, Inc. (2) (Exhibit 10.6)
10.7 # Employment Agreement effective January 1, 1996 between
Richard H. Jefferson and Sanchez Computer Associates, Inc.
(2) (Exhibit 10.7)
11.1 Statement Regarding Computation of Earnings Per Share. *
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Coopers & Lybrand L.L.P. *
27.1 Financial Data Schedule *
</TABLE>
* Filed herewith.
# These exhibits relate to compensatory plans, contracts or arrangements
in which directors and/or executive officers of the registrant may
participate.
1) Filed on September 27, 1996 as an exhibit to the Company's Registration
Statement on Form S-1 (No. 333-12863) and incorporated by reference.
2) Filed on November 6, 1996 as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 (No. 333-12863) and incorporated by
reference.
3) Filed on November 13, 1996 as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 (No. 333-12863) and incorporated by
reference.
<PAGE>
EXHIBIT 11.1
COMPUTATION OF PER SHARE EARNINGS
Year Ended December 31, 1996
(In thousands, except per share data)
Year Ended
December 31,
1996
--------------
Net Earnings $ 1,075
--------------
Average common shares outstanding 8,488
Average common share equivalents 812
--------------
Average number of common shares and
common share equivalents outstanding 9,300
--------------
Earnings per common share $0.12
--------------
<PAGE>
EXHIBIT 21.1
Sanchez Software Limited, a Delaware Corporation
Sanchez Computer Associates International, Inc., a Delaware Corporation
Sanchez FSC, Inc. a Barbados Corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Sanchez Computer Associates, Inc. on Form S-8 (File No. 333-21247) of
our report dated February 3, 1997, on our audits of the consolidated
financial statements of Sanchez Computer Associates, Inc. as of December
31, 1996 and 1995, and for each of the years in the three-year period ended
December 31, 1996, which report is included (or incorporated by reference)
in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
PHILADELPHIA, PENNSYLVANIA
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,446
<SECURITIES> 0
<RECEIVABLES> 8,960
<ALLOWANCES> 40
<INVENTORY> 0
<CURRENT-ASSETS> 26,569
<PP&E> 2,386
<DEPRECIATION> 1,462
<TOTAL-ASSETS> 28,168
<CURRENT-LIABILITIES> 7,248
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 18,801
<TOTAL-LIABILITY-AND-EQUITY> 28,168
<SALES> 0
<TOTAL-REVENUES> 17,715
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,499
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (324)
<INCOME-PRETAX> 1,540
<INCOME-TAX> 465
<INCOME-CONTINUING> 1,075
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,075
<EPS-PRIMARY> 0.116
<EPS-DILUTED> 0.114
</TABLE>
