<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 1998
-------------------------------------------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________________ to _______________________
Commission file number 0-21705
SANCHEZ COMPUTER ASSOCIATES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2161560
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
40 Valley Stream Parkway, Malvern, PA 19355
- ------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (610) 296-8877
--------------
N/A
- --------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----------- -----------
As of October 31, 1998, there were outstanding 11,710,321 shares of the issuer's
Common Stock, no par value.
<PAGE>
SANCHEZ COMPUTER ASSSOCIATES, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
CONSOLIDATED BALANCE SHEETS
September 30, 1998 (Unaudited) and December 31, 1997 3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three and Nine Months Ended September 30, 1998 and 1997 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, 1998 and 1997 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
</TABLE>
2
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
1998 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 18,509 $ 12,827
Receivables, less allowance of $313 and $543, respectively 6,873 8,884
Contracts in process 7,883 6,249
Prepaid and other current assets 1,002 1,401
------------ -----------
Total current assets 34,267 29,361
Property and equipment
Equipment 3,963 3,137
Furniture and fixtures 730 579
Leasehold improvements 403 216
------------ -----------
5,096 3,932
Accumulated depreciation and amortization (2,670) (2,113)
------------ -----------
Net property and equipment 2,426 1,819
Capitalized software costs, net of amortization of $1,910 at
September 30, 1998 and $1,610 at December 31, 1997 972 1,022
Investments 1,532 1,020
------------ -----------
Total assets $ 39,197 $ 33,222
------------ -----------
------------ -----------
LIABILITIES
Current liabilities
Current debt obligations $ 271 $ 440
Accounts payable, trade 1,044 1,279
Accrued expenses 5,292 2,802
Deferred revenue 3,025 4,240
------------ -----------
Total current liabilities 9,632 8,761
Deferred revenue 260 781
Long-term debt-net of current portion 120 94
Other long-term liabilities 362 353
------------ -----------
Total liabilities 10,374 9,989
Commitments (Note E)
SHAREHOLDERS EQUITY
Common stock, no par value
Authorized - 75,000,000 shares
Issued and outstanding 11,670,492 and 11,154,188 shares at
September 30, 1998 and December 31, 1997, respectively 117 112
Additional paid-in capital 19,642 18,769
Retained earnings 9,336 4,689
Notes due on common stock purchases (272) (337)
------------ -----------
Total shareholders equity 28,823 23,233
------------ -----------
Total liabilities and shareholders equity $ 39,197 $ 33,222
------------ -----------
------------ -----------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Operations
(in thousands, except share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues
<S> <C> <C> <C> <C>
Software license fees $ 4,113 $ 4,186 $10,676 $ 9,408
Product enhancement fees 3,384 166 8,186 659
Implementation and consulting services 2,812 2,691 8,148 5,830
Software maintenance fees 1,805 1,320 4,785 4,198
------- ------- ------- -------
Total revenues 12,114 8,363 31,795 20,095
Operating expenses
Product development 3,026 2,046 8,449 5,359
Product support 1,027 826 2,942 2,418
Implementation and consulting 1,724 1,884 5,397 4,140
Sales and marketing 1,510 1,100 4,249 2,923
Royalties and sublicense fees 268 73 695 497
General and administrative 1,624 945 3,781 2,146
------- ------- ------- -------
Total operating expenses 9,179 6,874 25,513 17,483
------- ------- ------- -------
Income from operations 2,935 1,489 6,282 2,612
Interest income, net 212 235 636 692
------- ------- ------- -------
Income before income taxes 3,147 1,724 6,918 3,304
Income tax provision 1,039 575 2,271 1,111
------- ------- ------- -------
Net income $ 2,108 $ 1,149 $ 4,647 $ 2,193
------- ------- ------- -------
------- ------- ------- -------
Basic earnings per share $ 0.18 $ 0.10 $ 0.41 $ 0.20
Diluted earnings per share $ 0.17 $ 0.10 $ 0.38 $ 0.18
Average common shares
outstanding 11,661 11,056 11,461 11,002
Average common and
dilutive shares outstanding 12,313 12,052 12,240 11,875
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities
Net income $ 4,647 $ 2,193
Adjustments to reconcile net income to cash
provided by operating activities
Depreciation and amortization 1,075 708
Bad debt expense 100
Other 26 1
Cash provided (used) by changes in
operating assets and liabilities
Accounts receivable 1,911 (513)
Contracts in process (1,634) (5,124)
Prepaid and other current assets 399 1,131
Accounts payable and accrued expenses 2,255 1,823
Deferred revenues (1,736) (835)
------ ----
Cash provided by (used in) operating activities 7,043 (616)
Cash flows from investing activities
Investments (513)
Capitalized computer software costs (250) (262)
Capital expenditures (1,398) (687)
------ ----
Cash used in investing activities (2,161) (949)
Cash flows from financing activities
Repayment of notes due on common stock purchases 65 286
Borrowings under line of credit agreement 70
Principal payments under capital lease obligations (40)
Principal payments under long-term notes (142) (462)
Proceeds from exercise of stock options 877 279
------ ----
Cash provided by financing activities 800 133
------ ----
Increase (decrease) in cash and cash equivalents 5,682 (1,432)
Cash and cash equivalents at beginning of period 12,827 15,531
------ ------
Cash and cash equivalents at end of period $ 18,509 $ 14,099
-------- --------
-------- --------
Supplemental cash flow information
Interest paid $ 29 $ 51
Income taxes paid $ 1,790 $ 252
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
Sanchez Computer Associates, Inc.
Notes to Unaudited Consolidated Financial Statements
(A.) Basis of Presentation
The accompanying consolidated financial statements of Sanchez Computer
Associates, Inc. (the "Company") include the accounts of all of the
Company's wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform with
current period presentation. In February of 1998, the Company acquired
100% of the outstanding shares of Greystone Technology Corporation
("Greystone") and its wholly owned subsidiary in exchange for 84,050
shares of Sanchez common stock. The acquisition of Greystone was
accounted for using the pooling of interest method of accounting. All
prior period consolidated financial statements presented herein have
been restated to include the financial position, results of operations,
and cash flows of the acquired company. In the opinion of management,
the consolidated financial statements reflect all normal and recurring
adjustments which are necessary for a fair presentation of the
Company's financial position, results of operations, and cash flows as
of the dates and for the periods presented. The consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information. Consequently,
these statements do not include all the disclosures normally required
by generally accepted accounting principles for annual financial
statements nor those normally made in the Company's Annual Report on
Form 10-K. Accordingly, reference should be made to the Company's
Annual Report on Form 10-K for additional disclosures, including a
summary of the Company's accounting policies, which have not changed.
The consolidated results of operations for the three and nine months
ended September 30, 1998 are not necessarily indicative of results for
the full year.
(B.) Cash and Cash Equivalents
Cash and cash equivalents at September 30, 1998 included amounts on
deposit with Safeguard Scientifics, Inc. ("Safeguard"), a shareholder
of the Company, in conjunction with a note agreement dated June 12,
1997. The demand note provides for borrowings by Safeguard from the
Company of up to a maximum of $12 million on a revolving basis at
Safeguard's effective borrowing rate minus .75%. This rate is higher
than the Company is currently earning on its money market investments.
At September 30, 1998 advances to Safeguard amounted to $11.3 million.
Interest income from these advances amounted to $536,000 during the
first nine months of 1998.
(C.) Client Revenue Data
Revenue derived from customers in various geographic regions for the
three and nine month periods ended September 30, 1998 and 1997 is as
follows (in thousands):
<TABLE>
<CAPTION>
--------------------------------- ---------------------------------
Three months ended September 30, Nine months ended September 30,
--------------------------------- ---------------------------------
---------------- ---------------- ---------------- ----------------
1998 1997 1998 1997
---------------------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
U.S. and Caribbean $ 6,315 $ 2,242 $14,257 $ 3,330
Central Europe 2,484 1,861 7,823 6,450
Western Europe 2,594 857 6,142 1,641
Canada 691 2,481 2,998 6,632
Asia-Pacific Rim 30 922 575 2,042
---------------- ---------------- ---------------- ----------------
$12,114 $ 8,363 $31,795 $20,095
---------------------------- ---------------- ---------------- ---------------- ----------------
</TABLE>
6
<PAGE>
(D.) Earnings Per Share
Basic earnings per share has been calculated as net earnings divided by
weighted-average common shares outstanding, while diluted earnings per
share has been computed as net earnings divided by weighted-average
common and diluted shares outstanding. The following table provides a
reconciliation of weighted-average common shares outstanding to
weighted-average common and dilutive shares outstanding (in thousands).
<TABLE>
<CAPTION>
------------------------------- ------------------------------
Three months ended September Nine months ended September
30, 30,
------------------------------- ------------------------------
1998 1997 1998 1997
----------------------------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Common shares outstanding 11,661 11,056 11,461 11,002
Diluted shares outstanding
Warrants 324 135 307
Options 652 672 644 566
--------------- --------------- --------------- --------------
Total common and dilutive shares 12,313 12,052 12,240 11,875
----------------------------------- --------------- --------------- --------------- --------------
</TABLE>
Average common and dilutive shares outstanding are computed using the
weighted-average number of shares of common and common equivalent
shares (stock options and warrants) for each period.
(E.) Commitments
Commitments at September 30, 1998 were substantially the same as those
disclosed in Note 8 of the Notes to Consolidated Financial Statements
as of December 31, 1997.
(F.) Recently Issued Accounting Standards
Effective January 1, 1998, the Company adopted Statement of Position
97-2, "Software Revenue Recognition," which is effective for all
transactions the Company enters into subsequent to December 31, 1997.
The adoption of this statement has not had and is not expected to have
a material effect on the Company's financial position or results of
operations.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131")
establishes new standards for reporting about operating segments and
products and services, geographic areas and major customers. Under SFAS
131, segments are to be defined consistent with the basis management
uses internally to assess performance and allocate resources.
Implementing SFAS 131 will have no impact on the consolidated amounts
reported by the Company, and the Company does not expect any
significant changes to our segment disclosures. SFAS 131 is effective
for the Company's December 31, 1998 financial statements. In addition,
several other new accounting standards become effective during 1998,
including SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
132, "Employers' Disclosure about Pensions and Other Post-retirement
Benefits". The adoption of these statements is not expected to have a
material impact on the Company's 1998 financial statement disclosures.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
The Company designs, develops, markets, implements and supports
comprehensive banking software, called PROFILE(R), for financial
services organizations worldwide. Sanchez's highly flexible PROFILE
family of products is comprised of three integrated modules which
operate on open, client/server platforms. The primary module, called
PROFILE/Anyware, is a multi-currency 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 for Windows, a
graphical user interface for PROFILE/Anyware. The PROFILE system is
currently licensed to 35 clients in 13 countries serving in excess of
350 financial institutions.
The Company derives its revenues from license fees, recurring
maintenance fees and professional services fees related to its software
products. License and service fees are paid in stages upon the
completion by the Company of certain defined deliverables. The Company
recognizes revenue from these fees using the percentage-of-completion
contract accounting method. Typically, the client implementation
projects to which these fees relate have a 10 to 15 month duration.
Recurring maintenance fees are normally billed annually in advance and
recognized into revenue ratably over the period covered.
The Company's operating results for the third quarter and nine months
ended September 30, 1998 reflected significant increases in both
revenues and net income compared to the same period in 1997. Revenues
for the quarter ended September 30, 1998 increased 45% to $12.1 million,
compared to $8.4 million recorded for the same period in 1997. In
addition, net earnings for the quarter totaled $2.1 million or $.17 per
diluted share, compared to $1.1 million or $.10 per diluted share for
the same period in 1997, an increase in earnings per diluted share of
70%. For the nine month period ended September 30, 1998, the Company
posted revenue of $31.8 million, a 58% increase over revenues of $20.1
million for the same period in 1997. Net earnings for the first nine
months totaled $4.6 million or $.38 per diluted share, compared to $2.2
million or $.18 per diluted share for the same period in 1997; earnings
per diluted share increased 111% in the first nine months of 1998.
The Company's estimated backlog at September 30, 1998 amounted to $37.1
million. The components of the backlog were $13.2 million for software
license, product enhancement and implementation and consulting revenues
and $23.9 million for maintenance and support. The Company anticipates
recognizing $18.6 million of this backlog over the next twelve months.
At December 31, 1997, the Company's estimated backlog amounted to $34.7
million, consisting of $12.4 million for software license, product
enhancement and implementation and consulting revenues and $22.3 million
for maintenance and support.
During the quarter, the Company announced the signing of a Global
Partnership Agreement with International Business Machines Corp. ("IBM")
The agreement provides for joint sales and marketing efforts, with IBM
personnel undergoing training in the use of Sanchez's products. In
addition, implementation specialists from IBM will assume responsibility
for the installation of the PROFILE system for certain joint customers
worldwide, as well as provide technical support to clients.
8
<PAGE>
Results of Operations
The following table sets forth for the periods indicated selected statement of
operations data:
<TABLE>
<CAPTION>
----------------------------------- ------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
----------------------------------- ------------------------------------
Dollars in thousands 1998 1997 1998 1997
----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Revenues
Software license fees $ 4,113 $ 4,186 $ 10,676 $ 9,408
Product enhancement fees 3,384 166 8,186 659
Implementation and consulting
services 2,812 2,691 8,148 5,830
Software maintenance fees 1,805 1,320 4,785 4,198
----------------- ----------------- ----------------- ------------------
Total revenues $ 12,114 $ 8,363 $ 31,795 $ 20,095
----------------- ----------------- ----------------- ------------------
----------------- ----------------- ----------------- ------------------
Percentage Relationship to Total
Revenues
Revenues
Software license fees 34.0% 50.0% 33.6% 46.8%
Product enhancement fees 27.9 2.0 25.8 3.3
Implementation and consulting
services 23.2 32.2 25.6 29.0
Software maintenance fees 14.9 15.8 15.0 20.9
----------------- ----------------- ----------------- ------------------
Total revenues 100.0 100.0 100.0 100.0
Operating expenses
Product development 25.0 24.4 26.6 26.7
Product support 8.5 9.9 9.2 12.0
Implementation and consulting 14.2 22.5 17.0 20.6
Sales and marketing 12.5 13.2 13.3 14.5
Royalties and sublicense fees 2.2 .9 2.2 2.5
General and administrative 13.4 11.3 11.9 10.7
----------------- ----------------- ----------------- ------------------
Total operating expenses 75.8 82.2 80.2 87.0
Income from operations 24.2 17.8 19.8 13.0
Interest income, net 1.8 2.8 2.0 3.4
----------------- ----------------- ----------------- ------------------
Income before income taxes 26.0 20.6 21.8 16.4
Income tax provision 8.6 6.9 7.1 5.5
----------------- ----------------- ----------------- ------------------
Net income 17.4% 13.7% 14.7% 10.9%
----------------- ----------------- ----------------- ------------------
----------------- ----------------- ----------------- ------------------
</TABLE>
Three Months Ended September 30, 1998, Compared to Three Months Ended
September 30, 1997
Revenues. Revenues increased $3.8 million, or 44.9%, in the third quarter of
1998 as compared to the third quarter of 1997. The most significant growth was
in the product enhancement category, which increased by $3.2 million in the 1998
September quarter. The majority of this increase was driven by funded
development work for Citibank, N.A. and a Western European financial
institution. License fee revenues decreased by $73,000 or 1.7%, relative to the
third quarter of 1997. The decrease in license fee revenues was primarily the
result of the reduced 1998 license fees from the Canadian marketplace due to the
completion of a project in that region during 1997. The decrease in Canada was
offset by an increase in license fees in Central and Western Europe as well as
in the U.S. Implementation and consulting service revenues increased by
$121,000, or 4.5% in 1998 as compared to 1997. This increase was due to there
being 12 active PROFILE implementation projects in process
during the third quarter of 1998, as compared to 10 during the 1997 third
quarter. There were significant increases in this category in both the U.S. and
Western Europe, totaling $1.2 million, which were partially offset by lower
revenues in the Asia-Pacific Rim, Canada and Central Europe. Software
maintenance fees increased by 36.7% or $485,000 in the 1998 third quarter, due
to an overall increase in the Company's supported client base.
9
<PAGE>
Product development. Product development expenses increased $980,000 or 47.9% in
the third quarter of 1998, due to costs associated with increased staffing ,
expanded facilities and other associated overhead costs. During the 1998 third
quarter, there were approximately 132 full time equivalents employed in this
area, as compared to approximately 92 full time equivalents in the 1997 third
quarter. The substantial growth in staffing in this area is due to the ongoing
impact of the Company's strategic decision to increase investment in development
for various technology projects. The most significant of these investments
during the third quarter of 1998 related to enhancement projects for Citibank,
N.A., as discussed above in the revenue section. Despite the significant
increased investment in this category, the percent relationship to total
revenues increased only slightly from 24.4% in the third quarter of 1997 to
25.0% in the third quarter of 1998, due to the significant growth in revenues in
the 1998 period as compared to 1997.
Product Support. Product support expenses increased by $201,000, or 24.3%, in
the quarter ended September 30, 1998, primarily due to an increase in the
average number of employees required to support the larger converted client base
in 1998 relative to 1997. Due to the sharp increase in quarterly revenues,
product support expenses as a percentage of total revenues dropped to 8.5% in
the 1998 third quarter vs. 9.9% in the 1997 third quarter.
Implementation and consulting. Implementation and consulting expenses decreased
by $160,000, or 8.5% during the third quarter of 1998 despite the fact that
associated implementation and consulting revenue increased by $121,000. The
expense decrease was attributable to lower non-billable travel expenses and also
decreased use of third-party consultants billed through Sanchez. These expense
decreases were partially offset by increases due to additional staffing. The
gross margin relative to associated revenues increased to 38.7% for the 1998
third quarter as compared to 30.0% for the 1997 third quarter due to the 1998
expense reductions described above as well as more favorable billing rates
achieved in the 1998 third quarter.
Sales and marketing. Sales and marketing expenses increased by $410,000, or
37.3% in the 1998 period, as the Company continued to increase its direct
coverage in this area, primarily via staffing increases in selected foreign
market locations. Despite the increased investment in this area, sales and
marketing expenses as a percent of total revenues decreased from 13.2% in the
third quarter of 1997 to 12.5% for the same period in 1998, due to increased
total revenues.
General and administrative. These expenses increased by $679,000, or 71.9% in
1998, due to a number of factors related to the growth of the business including
increased staffing and recruiting costs, increased incentive accruals, and
additional costs associated with adding a second office facility in Malvern,
Pennsylvania. As a percentage of total revenues, general and administrative
expenses increased from 11.3% in the September, 1997 quarter to 13.4% in the
September, 1998 quarter.
Income tax provision. Taxes in the 1998 third quarter were 33.0% of income
before income taxes, as compared to 33.4% in the 1997 quarter. The Company's
effective tax rate may vary from period to period based on the Company's
expansion into areas of varying country, state and local statutory income tax
rates.
10
<PAGE>
Nine Months Ended September 30, 1998, Compared to Nine Months Ended September
30, 1997
Revenues. Revenues increased $11.7 million, or 58.2%, during the nine months
ended September 30, 1998, as all revenue categories improved over the same
period in 1997. Product enhancement fee revenues increased by $7.5 million due
primarily to funded pre-contract evaluation/development work for Citibank, N.A.
and a Western European financial institution. License fee revenue increased by
$1.3 million or 13.5%, relative to the first nine months of 1997 due to
increased project activity in the U.S., Western Europe and Central Europe, as
well as account-based license expansion fees in Western Europe. These increases
were partially offset by a $4.1 million decrease in license fee revenues from
the Canadian marketplace, due to completion of certain active projects in that
region during the first nine months of 1997. Implementation and consulting
service revenues increased by $2.3 million, or 39.8% in 1998 as compared to
1997. Most of this growth is attributable to the increased levels of PROFILE
implementation and funded pre-contract evaluation activity in the U.S.
marketplace, including Citibank, N.A., The Sumitomo Bank, Ltd. and Federal Home
Loan Bank of Pittsburgh. Software maintenance fees increased by 14.0% or
$587,000, attributable primarily to an ongoing growth in the customer
maintenance base.
Product development. Product development expenses increased $3.1 million or
57.7%, in the first nine months of 1998, due to costs associated with increased
staffing, expanded facilities, and other associated overhead costs. The
substantial growth in staffing in this area is due to the ongoing impact of the
Company's strategic decision to increase investment in development for various
technology projects. During the first nine months of 1998, development resources
were heavily engaged in various funded evaluation activities for Citibank N.A.,
as well as certain system performance improvement projects. More specifically,
staffing related expenditures increased by $2.4 million in the 1998 nine month
period as compared to 1997. Despite the increased investment in this category,
the percent relationship to total revenues increased only slightly from 26.7% in
1997 to 26.6% in 1998, due to the significant growth in revenues for the first
nine months of 1998 as compared to the first nine months of 1997.
Product Support. Product support expenses increased by $524,000 or 21.7% in the
nine months ended September 30, 1998, primarily due to an increase in staffing
in 1998 versus 1997 required to support the larger converted client base. Due to
the significant increase in total revenues during the 1998 nine-month period
compared to 1997, product support expenses as a percentage of total revenues
decreased to 9.2% in 1998 from 12.0% for the same period of 1997.
Implementation and consulting. Implementation and consulting expenses increased
by $1.3 million or 30.4% during the first nine months of 1998, in conjunction
with a corresponding increase in implementation and consulting revenues of $2.3
million. Of the $1.3 million increase in expenses, $873,000 was related to
increased utilization of third party consultants and subcontractors required to
support the increased revenue levels. Of the remaining increase in expenses,
$230,000 resulted from increased internal staffing. The gross margin relative to
associated revenues increased in the 1998 nine month period to 33.8%, as
compared to 29.0% for the same period of 1997, due to more favorable billing
rates achieved in 1998.
Sales and marketing. Sales and marketing expenses increased by $1.3 million, or
45.4% in the first nine months of the 1998 period, as the Company continued to
increase its direct coverage in this area by various staffing increases and
increased spending relative to the brand awareness advertising and promotion
campaign for PROFILE/Anyware. Due to the increase in total revenues in the 1998
period, however, sales and marketing expenses as a percent of total revenues
decreased from 14.5% in 1997 to 13.3% for 1998.
General and administrative. These expenses increased by $1.6 million, or 76.2%,
due to a number of factors related to the growth of the business including:
increased staffing, increased incentive accruals, and additional costs
associated with adding a second office facility in Malvern, Pennsylvania during
the third quarter of 1997.
Income tax provision. Taxes in 1998 were 32.8% of income before income taxes, as
compared to 33.6% in the 1997 nine month period. The Company's effective tax
rate may vary from period to period based on the Company's expansion into areas
of varying country, state and local statutory income tax rates.
11
<PAGE>
Year 2000
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 failures. Accordingly, the Company has been
actively evaluating the impact of the Year 2000 on both its PROFILE product line
as well as its internal systems and hardware. Relative to the PROFILE product
line, all versions of PROFILE sold and installed since late 1996 are Year 2000
compliant upon completion of installation and testing by the clients. Further,
due to system retrofits provided for the Company's Canadian credit union clients
during 1997 and early 1998, the Company believes that these systems will be Year
2000 compliant upon completion of installation and testing by the clients.. The
cost to the Company of the Canadian version retrofits was approximately
$200,000. All other clients using software installed prior to late 1996 are
entitled to receive upgraded Year 2000 compliant software as part of their
software support agreements with the Company, and they have been encouraged to
upgrade. For the most part, these clients have upgraded (or otherwise
remediated) or are scheduled to upgrade in a timely manner. To the extent the
Company gets directly involved in any such upgrade process, the client pays for
professional services and expenses. Accordingly, the Company believes it will
not be materially impacted by the Year 2000 situation relative to any of its
product offerings.
As to its own internal software systems and hardware (including IT and non-IT
systems), the Company has identified and reviewed all key areas, and believes
that there is no significant exposure to the Year 2000 issue. The cost of
upgrading or replacing certain non-compliant hardware and software (for the
remaining non-critical functions) is estimated to be less than $100,000. These
upgrades and replacements should be completed by early 1999.
In light of the above information, the Company does not anticipate any serious
Year 2000 problems. The Company will, however, continue to assess this situation
and develop contingency plans as necessary. The Company's expectations with
respect to these Year 2000 issues are based on the assumption that there will be
no general failure of external systems (including power, communications,
transportation, or financial systems) necessary for the ordinary conduct of
business.
12
<PAGE>
Liquidity, Capital Resources and Other
Cash and cash equivalents were $18.5 million at September 30, 1998. Cash flow
from operations for the nine months ended September 30, 1998 was $7.0 million as
compared to ($616,000) for the same period in 1997. The increased rate of cash
flow in the 1998 period was primarily attributable to variability in the timing
of major contract milestone payments as well as more timely collections on time
and material based projects. The Company's days sales in accounts receivable and
contracts in process was 110 days at September 30, 1998 as compared to 156 days
at December 31, 1997. The Company will continue to focus efforts on further
improving its receivable turnaround by involving its project management staff in
the collection process, as well as executive management when appropriate.
The Company's business is not capital intensive and capital asset expenditures
for the 1998 nine month period amounted to $1.4 million as compared to $687,000
during the same period in 1997. The increased level of 1998 expenditures is
attributable to the significant growth in the employee base as well as certain
expenditures related to the outfitting of a second Malvern, Pennsylvania office
facility which was occupied as of the last quarter of 1997.
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 for the next year. Should the
Company's business expand more rapidly than expected, the Company believes that
additional bank credit, if necessary, would be available to fund such operating
and capital requirements. In addition, the Company could consider seeking
additional public or private debt or equity financing to fund future growth
opportunities.
The Company believes that its business is generally not seasonal; however, the
Company has historically experienced, and can be expected to continue to
experience, a certain degree of variability in its quarterly revenue, earnings
and cash flow patterns. This variability is typically driven by significant
events which directly impact the recognition and billing of project related
revenues. Examples of such events include the timing of new business contract
closings and the initiation of license and service fee revenue recognition,
"one-time" payments from existing clients relative to license expansion rights
(required to process a greater number of customer accounts or expand the number
of permitted users), and completion of implementation project roll outs and the
related revenue recognition. The timing of revenues is difficult to forecast
because the Company's sales cycle is relatively long in the case of new clients
and may depend on factors such as the size and scope of the project, length of
contract negotiations, and general economic conditions in a particular sales
prospect's country of origin. Because a high percentage of the Company's
expenses are relatively fixed, a variation in the timing of the initiation or
the completion of client projects, particularly at or near the end of any
quarter, can cause significant variations in operating results from quarter to
quarter.
The Company's forward-looking statements about its revenues, earnings and
business development have been derived from its operating budgets and forecasts,
which are based upon detailed assumptions about many important factors. Several
important factors may cause the Company's actual results to differ materially
from those contemplated by any forward-looking statements made by the Company.
These factors include the course of business in the financial services industry,
competition among software companies serving that industry, the Company's
management of the long sales cycle for its products, the timing of new contract
closings and other significant events of revenue recognition affecting the
Company's quarterly results, the development of the Direct, Emerging and
Top-Tier Banking Markets, market acceptance of the Company's products within
these markets and the Company's ability to continue to improve its products.
13
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K, dated August 7, 1998, was filed during the
three months ended September 30,1998 reporting the dismissal of
auditors. This item was reported under Item 4 of such Form 8-K.
No other applicable items.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SANCHEZ COMPUTER ASSOCIATES, INC.
/s/ Joseph F. Waterman
-------------------------------------------------
Joseph F. Waterman
Senior Vice-President and Chief Financial Officer
Date: November 16, 1998
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 18,509
<SECURITIES> 0
<RECEIVABLES> 15,069
<ALLOWANCES> 313
<INVENTORY> 0
<CURRENT-ASSETS> 34,267
<PP&E> 5,096
<DEPRECIATION> 2,670
<TOTAL-ASSETS> 39,197
<CURRENT-LIABILITIES> 9,632
<BONDS> 0
0
0
<COMMON> 117
<OTHER-SE> 28,706
<TOTAL-LIABILITY-AND-EQUITY> 39,197
<SALES> 0
<TOTAL-REVENUES> 31,795
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 25,513
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (636)
<INCOME-PRETAX> 6,918
<INCOME-TAX> 2,271
<INCOME-CONTINUING> 4,647
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 4,647
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.38
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