<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 June 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 July 31, 1998, there were outstanding 11,656,460 shares of the issuer's
Common Stock, no par value.
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
CONSOLIDATED BALANCE SHEETS
June 30, 1998 (Unaudited) and December 31, 1997............................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three and Six Months Ended June 30, 1998 and 1997........................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 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 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................13
ITEM 5: OTHER INFORMATION...................................................13
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 June 30, December 31,
1998 1997
---------------- ---------------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents............................................. $ 16,393 $ 12,827
Receivables, less allowance of $643 and $543, respectively............ 6,146 8,884
Contracts in process.................................................. 6,907 6,249
Prepaid and other current assets...................................... 1,116 1,401
---------------- ---------------
Total current assets...................................... 30,562 29,361
Property and equipment
Equipment............................................................. 3,668 3,137
Furniture and fixtures................................................ 599 579
Leasehold improvements................................................ 401 216
---------------- ---------------
4,668 3,932
Accumulated depreciation and amortization................................ (2,579) (2,113)
---------------- ---------------
Net property and equipment............................................ 2,089 1,819
Capitalized software costs, net of amortization of $1,803 at
June 30, 1998 and $1,610 at December 31, 1997.......................... 967 1,022
Investments.............................................................. 1,511 1,020
---------------- ---------------
Total assets.............................................. $ 35,129 $ 33,222
---------------- ---------------
---------------- ---------------
LIABILITIES
Current liabilities
Current debt obligations.............................................. $ 439 $ 440
Accounts payable, trade............................................... 722 1,279
Accrued expenses...................................................... 3,615 2,802
Deferred revenue...................................................... 2,883 4,240
---------------- ---------------
Total current liabilities................................. 7,659 8,761
Deferred revenue......................................................... 434 781
Long-term debt-net of current portion.................................... 15 94
Other long-term liabilities.............................................. 359 353
---------------- ---------------
Total liabilities......................................... 8,467 9,989
Commitments (Note E)
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized - 75,000,000 shares
Issued and outstanding 11,652,335 and 11,154,188 shares at
June 30, 1998 and December 31, 1997, respectively................... 117 112
Additional paid-in capital............................................... 19,589 18,769
Retained earnings........................................................ 7,228 4,689
Notes due on common stock purchases...................................... (272) (337)
---------------- ---------------
Total shareholders' equity................................ 26,662 23,233
---------------- ---------------
Total liabilities and shareholders' equity................ $ 35,129 $ 33,222
---------------- ---------------
---------------- ---------------
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues
Software license fees.................. $ 3,976 $ 2,813 $ 6,563 $ 5,222
Product enhancement fees............... 3,052 255 4,802 494
Implementation and consulting services. 2,500 1,847 5,336 3,328
Software maintenance fees.............. 1,525 1,438 2,980 2,689
------- ------- ------- -------
Total revenues...................... 11,053 6,353 19,681 11,733
Operating expenses
Product development.................... 2,954 1,825 5,424 3,313
Product support........................ 1,044 851 1,915 1,593
Implementation and consulting.......... 1,712 1,256 3,673 2,255
Sales and marketing.................... 1,539 995 2,739 1,823
Royalties and sublicense fees.......... 232 171 427 424
General and administrative............. 1,248 656 2,157 1,201
------- ------- ------- -------
Total operating expenses............ 8,729 5,754 16,335 10,609
------- ------- ------- -------
Income from operations.................... 2,324 599 3,346 1,124
Interest income, net...................... 222 240 425 457
------- ------- ------- -------
Income before income taxes................ 2,546 839 3,771 1,581
Income tax provision...................... 840 296 1,232 537
------- ------- ------- -------
Net income................................ $ 1,706 $ 543 $ 2,539 $ 1,044
------- ------- ------- -------
------- ------- ------- -------
Basic earnings per share.................. $ 0.15 $ 0.05 $ 0.22 $ 0.10
Diluted earnings per share................ $ 0.14 $ 0.05 $ 0.21 $ 0.09
Average common shares
outstanding............................... 11,540 10,984 11,374 10,971
Average common and
dilutive shares outstanding............... 12,217 11,765 12,199 11,740
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1998 1997
-------- --------
<S> <C> <C>
Operating Activities
Net income........................................ $ 2,539 $ 1,044
Adjustments to reconcile net income to cash
provided by (used in) operating activities
Depreciation and amortization.................. 711 462
Other.......................................... 18 (49)
Cash provided (used) by changes in
operating assets and liabilities
Accounts receivable............................... 2,738 3,419
Contracts in process.............................. (658) (2,518)
Prepaid and other current assets.................. 285 1,045
Accounts payable and accrued expenses............. 255 (7)
Deferred revenues................................. (1,704) (2,195)
-------- --------
Cash provided by operating activities................ 4,184 1,201
Other Investing Activities
Investments....................................... (491)
Capitalized computer software costs............... (138) (228)
Capital expenditures.............................. (800) (491)
-------- --------
Cash used in investing activities.................... (1,429) (719)
Financing Activities
Repayment of notes due on common stock purchases.. 65 117
Principal payments under capital lease obligations (16)
Principal payments under long-term notes.......... (78) (300)
Proceeds from exercise of stock options........... 824 110
-------- --------
Cash provided by (used in) financing activities...... 811 (89)
-------- --------
Increase in cash and cash equivalents................ 3,566 393
Cash and cash equivalents at beginning of period..... 12,827 15,531
-------- --------
Cash and cash equivalents at end of period........... $ 16,393 $ 15,924
-------- --------
-------- --------
Supplemental cash flow information
Interest paid....................................... $ 20 $ 38
Income taxes paid................................... $ 995 $ 144
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
Sanchez Computer Associates, Inc.
Notes to Unaudited Consolidated Financial Statements
(in thousands, except per share amounts)
(A.) Basis of Presentation
The accompanying consolidated financial statements of Sanchez Computer
Associates, Inc. (the "Company") include the accounts of all of the
Company's wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated 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 six months
ended June 30, 1998 are not necessarily indicative of results for the
full year.
(B.) Cash and Cash Equivalents
Cash and cash equivalents at June 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 June
30, 1998 advances to Safeguard amounted to $12.0 million. Interest
income from these advances amounted to $355 during the first six months
of 1998.
(C.) Client Revenue Data
Revenue derived from customers in various geographic regions for the
three and six month periods ended June 30, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
U.S. and Caribbean............. $ 4,550 $ 518 $ 7,943 $ 1,088
Central Europe................. 2,581 2,174 5,338 4,589
Western Europe................. 2,189 484 3,549 784
Canada......................... 1,411 2,528 2,307 4,152
Asia-Pacific Rim............... 322 649 544 1,120
--------- -------------- ---------- ---------
$ 11,053 $ 6,353 $ 19,681 $ 11,733
</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.
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Common shares outstanding............... 11,540 10,984 11,374 10,971
Diluted shares outstanding
Warrants.............................. 84 290 192 289
Options............................... 593 491 633 480
------ ------ ------ ------
Total common and dilutive shares........ 12,217 11,765 12,199 11,740
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
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 June 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-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 for Windows ("PFW"), a graphical user interface for
PROFILE/Anyware. The PROFILE system is currently licensed to 34 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 second quarter and six months
ended June 30, 1998 reflected significant increases in both revenues
and net income compared to the same periods in 1997. Revenues for the
quarter ended June 30, 1998 increased 74% to $11.1 million, compared to
$6.4 million in revenues recorded for the same period in 1997. In
addition, net earnings for the quarter totaled $1.7 million or $.14 per
diluted share, compared to $543,000 or $.05 per diluted share for the
same periods in 1997. This reflects an earnings per diluted share
increase of 180% in the current quarter. For the six month period ended
June 30, 1998, the Company posted revenue of $19.7 million, a 68%
increase over revenues of $11.7 million for the same period in 1997.
Net earnings for the first six months totaled $2.5 million or $.21
diluted share, compared to $1 million or $.09 per diluted share for the
same period in 1997; earnings per diluted share increased 133% in the
first half of 1998.
The Company's estimated backlog at June 30, 1998 amounted to $35.3
million. The components of the backlog were $11.7 million for software
license, product enhancement and implementation and consulting revenues
and $23.6 million for maintenance and support. The Company anticipates
recognizing $15.2 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. As the result of certain contract
closings during the month of July 1998, the Company's estimated backlog
as of July 31, 1998 increased to $44.1 million, consisting of $18.4
million for software license, product enhancement and implementation
and consulting revenues and $25.7 million for maintenance and support.
The Company anticipates recognizing $22.5 million of this backlog from
August 1998 to July 1999.
8
<PAGE>
Results of Operations
The following table sets forth for the periods indicated selected statement of
operations data:
<TABLE>
<CAPTION>
Quarter Ended June 30, Six Months Ended June 30,
Dollars in thousands 1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues
Software license fees ........ $ 3,976 $ 2,813 $ 6,563 $ 5,222
Product enhancement fees .... 3,052 255 4,802 494
Implementation and consulting 2,500 1,847 5,336 3,328
services ...................
Software maintenance fees ... 1,525 1,438 2,980 2,689
-------- ------- -------- --------
Total revenues ............ $ 11,053 $ 6,353 $ 19,681 $ 11,733
-------- ------- -------- --------
-------- ------- -------- --------
Percentage Relationship to Total
Revenues
Revenues
Software license fees ....... 36.0% 44.3% 33.4% 44.5%
Product enhancement Fees .... 27.6 4.0 24.4 4.2
Implementation and consulting 22.6 29.1 27.1 28.4
services ...................
Software maintenance fees ... 13.8 22.6 15.1 22.9
----- ----- ----- -----
Total revenues ............ 100.0 100.0 100.0 100.0
Operating expenses
Product development ......... 26.7 28.7 27.5 28.2
Product support ............. 9.5 13.4 9.7 13.6
Implementation and consulting 15.5 19.8 18.7 19.2
Sales and marketing ......... 13.9 15.7 13.9 15.6
Royalties and sublicense .... 2.1 2.7 2.2 3.6
fees
General and administrative .. 11.3 10.3 11.0 10.2
----- ----- ----- -----
Total operating expenses .. 79.0 90.6 83.0 90.4
Income from operations ...... 21.0 9.4 17.0 9.6
Interest income, net ........ 2.0 3.8 2.2 3.9
Income before income taxes .. 23.0 13.2 19.2 13.5
Income tax provision ....... 7.6 4.7 6.3 4.6
----- ----- ----- -----
Net income .................. 15.4% 8.5% 12.9% 8.9%
</TABLE>
Three Months Ended June 30, 1998, Compared to Three Months Ended June 30, 1997
Revenues. Revenues increased $4.7 million, or 74.0%, in 1998, as each revenue
category improved over the same period in the prior year. The most significant
growth was in the product enhancement category, which increased by $2.8 million
in the 1998 June quarter. The majority of this increase was driven by funded
pre-contract evaluation/development work for Citibank, N.A. which culminated in
the signing of a limited use license agreement for PROFILE/Anyware in July,
1998. License fee revenues increased by $1.2 million or 41.3%, relative to 1997
due primarily to increased revenues generated from clients based in Western and
Central Europe, including a significant account-based license expansion fee for
one of the Company's converted clients in Western Europe. The increased license
fee revenues from European clients was partially offset by reduced 1998 license
fee recognition from the Canadian marketplace, due to the 1997 completion of
several projects in that region. Implementation and consulting service revenues
increased by $653,000, or 35.4% in 1998 as compared to 1997. There were 14
active PROFILE implementation projects in process throughout the world during
the second quarter of 1998, as compared to nine during the 1997 second quarter.
Most of the 1998 growth in this category is attributable to the increased levels
of pre-contract funded evaluation activity in the U.S. marketplace, as well as
implementation fees associated with the successful conversion of Citibank Canada
during the 1998 quarter. Partially offsetting these 1998 increases in
implementation and consulting revenues was a $414,000 decline in such revenues
derived from the Central European marketplace. Software maintenance fees
increased by 6.1% or $87,000 in the 1998 second quarter, with most of the growth
attributable to the Canadian marketplace.
9
<PAGE>
Product development. Product development expenses increased $1.1 million or
61.9% in 1998, due to costs associated with increased staffing , expanded
facilities and other associated overhead costs. During the 1998 quarter, there
were approximately 127 full time equivalents employed in this area, as compared
to approximately 85 full time equivalents in the 1997 second 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 second
quarter of 1998 related to various funded pre-contract development/enhancement
projects for Citibank, N.A. as discussed above in the revenue section. Despite
the increased investment in this category, the percent relationship to total
revenues actually decreased from 28.7% in 1997 to 26.7% in 1998, due to the
significant growth in revenues in the 1998 period as compared to 1997.
Product Support. Product support expenses increased by $193,000 or 22.7%, in the
quarter ended June 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, as well as increased facility costs and other associated
overheads. Due to the sharp increase in quarterly revenues, product support
expenses as a percentage of total revenues dropped to 9.5% in 1998 vs. 13.4% in
the 1997 quarter.
Implementation and consulting. Implementation and consulting expenses increased
by $456,000 or 36.3% during the second quarter of 1998, in conjunction with a
corresponding increase in implementation and consulting revenues of $653,000. Of
the $456,000 increase in expenses, $244,000 was related to increased utilization
of third party consultants and subcontractors required to support the increased
revenue levels. The remaining increase in expenses resulted from increased
staffing and related overheads. The gross margin relative to associated revenues
was relatively constant in both periods, calculating at 31.5% for the 1998
quarter and 32.0% for the 1997 quarter.
Sales and marketing. Sales and marketing expenses increased by $544,000, or
54.7% 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. Marketing expenses related to the promotional and advertising
campaign for PROFILE/Anyware increased significantly as well during the 1998
period, with the goal of increasing corporate brand awareness of both Sanchez
and PROFILE/Anyware. Despite the increased investment in this area, sales and
marketing expenses as a percent of total revenues decreased from 15.7% in the
second quarter of 1997 to 13.9% for the June, 1998 quarter, due to the fact that
total revenues increased by 74%.
Royalties and sublicense fees. The Company is obligated to pay royalties 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 treasury
and trade finance product offerings. These amounts will vary depending on the
applicable revenue components subject to such fees. The $61,000 increase in this
expense caption for the 1998 period compared to 1997 is primarily attributable
to increased royalty expenses associated with various license fee revenues.
General and administrative. These expenses increased by $592,000, or 90.2% 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 10.3% in the June, 1997 quarter to 11.3% in the June,
1998 quarter.
Income tax provision. Taxes in the 1998 second quarter were 33.0% of income
before income taxes, as compared to 35.3% in the 1997 quarter. The effective tax
rate for first quarter of 1998 was 32.0%. 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. The 1997 effective
rate of 35.3% quoted above was also more significantly impacted in 1997 versus
1998 by the pooling transaction relative to the acquisition of Greystone
Software Technology.
10
<PAGE>
Six Months Ended June 30, 1998, Compared to Six Months Ended June 30, 1997
Revenues. Revenues increased $7.9 million, or 67.7%, in 1998, as all revenue
categories improved over the same period in the prior year. Product enhancement
fee revenues increased by $4.3 million due primarily to funded pre-contract
evaluation/development work for Citibank, N.A. License fee revenue increased by
$1.3 million or 25.7%, relative to 1997 due to increased project activity in
both Western and Central Europe, including a significant account-based license
expansion fee for one of the Company's converted clients in Western Europe.
These increases were partially offset by a $2.4 million decrease in license fee
revenues from the Canadian marketplace, due to completion of certain active
projects in that region during 1997. Implementation and consulting service
revenues increased by $2.0 million, or 60.3% 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 10.8% or $291,000,
attributable primarily to an ongoing growth in the customer maintenance base.
Product development. Product development expenses increased $2.1 million or
63.7%, in 1998, due to costs associated with increased staffing, expanded
facilities, and other associated overheads. 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 six 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 (both employees and third party contractors) increased by $1.8
million in the 1998 six month period as compared to 1997.
Product Support. Product support expenses increased by $322,000 or 20.2% in the
six months ended June 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 six-month period compared
to 1997, product support expenses as a percentage of total revenues decreased to
9.7% in 1998 from 13.6% in 1997.
Implementation and consulting. Implementation and consulting expenses increased
by $1.4 million or 62.9% during 1998, in conjunction with a corresponding
increase in implementation and consulting revenues of $2.0 million. Of the $1.4
million increase in expenses, $960,000 was related to increased utilization of
third party consultants and subcontractors required to support the increased
revenue levels. Of the remaining increase in expenses, $213,000 resulted from
increased internal staffing. The gross margin relative to associated revenues
decreased slightly in the 1998 six month period to 31.2%, as compared to 32.2%
in 1997, due to increased utilization of more costly third party resources,
although this impact was somewhat offset by more favorable billing rates
achieved during the 1998 period.
Sales and marketing. Sales and marketing expenses increased by $916,000, or
50.2% in the 1998 period, as the Company continued to increase its direct
coverage in this area by various staffing increases and also increased spending
relative to the brand awareness advertising and promotion campaign for
PROFILE/Anyware. Due to the fact that total corporate revenues increased 67.7%
in the 1998 period, however, sales and marketing expenses as a percent of total
revenues decreased from 15.6% in 1997 to 13.9% for 1998.
Royalties and sublicense fees. For the six months ended June 30, 1998, these
fees increased nominally by $ 3,000. Royalty expense increased by $149,000
during the 1998 six month period whereas third party sublicense fees decreased
by $146,000 in 1998 relative to 1997.
General and administrative. These expenses increased by $956,000, or 79.6%, 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.
Income tax provision. Taxes in 1998 were 32.7% of income before income taxes, as
compared to 34.0% in the 1997 six 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>
Liquidity and Capital Resources
Cash and cash equivalents were $16.4 million at June 30, 1998. Cash flow from
operations for the six months ended June 30, 1998 was $4.2 million as compared
to $1.2 million 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 (unbilled receivables) was 106 days at June 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 six month period amounted to $800,000 as compared to $491,000
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 a significant implementation project roll
out and the related revenue recognition. The timing of revenues is difficult to
forecast because the Company's sales cycle is relatively long in the case of new
clients and may depend on factors such as the size and scope of the project,
length of contract negotiations, and general economic conditions in a particular
sales prospect's country of origin. Because a high percentage of the Company's
expenses are relatively fixed, a variation in the timing of the initiation or
the completion of client projects, particularly at or near the end of any
quarter, can cause significant variations in operating results from quarter to
quarter.
The Company's forward-looking statements about its revenues, earnings, and
business development have been derived from its operating budgets and forecasts,
which are based upon detailed assumptions about many important factors. Several
important factors may cause the Company's actual results to differ materially
from those contemplated by any forward-looking statements made by the Company.
These factors include the course of business in the financial services industry,
competition among software companies serving that industry, the Company's
management of the long sales cycle for its products, the timing of new contract
closings and other significant events of revenue recognition affecting the
Company's quarterly results, the development of the Direct, Emerging and
Top-tier Banking Markets and market acceptance of the Company's products within
these markets, and the Company's ability to continue to improve its products.
12
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 1998, the Annual Meeting of Shareholders of the Company was
held at which the following matters were submitted to and the requisite number
of shares of Common Stock of the Company were voted on by the stockholders, with
the results set forth below:
a) The following persons were elected to the Board of Directors to serve as
directors until the next annual meeting of shareholders in 1999, and until
their respective successors are duly elected and qualified. Each person
received the number of votes set forth next to their names below:
PROPOSAL I - ELECTION OF DIRECTORS
<TABLE>
<CAPTION>
For Withheld
---------- --------
<S> <C> <C>
Michael A. Sanchez 10,475,063 8,823
Frank R. Sanchez 10,474,973 8,913
Ronald J. Zlatoper 10,475,473 8,413
Warren V. Musser 10,474,723 9,163
Lawrence Chimerine 10,474,883 9,003
Kailash C. Khanna 10,475,463 8,423
John D. Loewenberg 10,473,703 10,183
Ira M. Lubert 10,475,203 8,683
Thomas C. Lynch 10,475,305 8,581
</TABLE>
PROPOSAL II - PROPOSAL TO ADOPT THE SANCHEZ COMPUTER ASSOCIATES, INC EMPLOYEE
STOCK PURCHASE PLAN
b) The shareholders approved and adopted the Sanchez Computer Associates, Inc
Employees Stock Purchase plan ("the Plan") and as a result of the adoption
of the Plan, the Board authorized an aggregate of 300,000 shares of
authorized, unissued shares of Common Stock of the Company, no par value be
reserved for issuance. The votes cast for and against and the number of
abstentions are set forth below:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINING
---------- ---------- ----------
<S> <C> <C> <C>
Votes to Approve the Plan 10,039,619 70,110 23,901
</TABLE>
PROPOSAL III - PROPOSAL TO AMEND THE COMPANY'S ARTICLES TO INCREASE THE NUMBER
OF AUTHORIZED SHARES OF COMMON STOCK FROM 50,000,000 TO 75,000,000
c) The votes cast for and against and the number of abstentions are set forth
below:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAINING
---------- ---------- ----------
<S> <C> <C> <C>
Votes to amend the
Company's Articles 9,902,572 196,716 34,342
</TABLE>
ITEM 5: OTHER INFORMATION
Shareholders intending to present proposals at the next Annual Meeting
of Shareholders to be held in 1999 must notify the Company of the proposal no
later than December 21, 1998 if they wish to include the proposal on the
Company's proxy card and, along with any supporting statement, in the Company's
proxy statement. As to any proposal presented by a shareholder at the Annual
Meeting of Shareholders that has not been included in the Proxy Statement, the
management proxies will be allowed to use the discretionary voting authority
unless notice of such proposal is received by the Company no later than March 6,
1999.
13
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
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: August 13, 1998
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 16,393
<SECURITIES> 0
<RECEIVABLES> 13,696
<ALLOWANCES> 643
<INVENTORY> 0
<CURRENT-ASSETS> 30,562
<PP&E> 4,668
<DEPRECIATION> 2,579
<TOTAL-ASSETS> 35,129
<CURRENT-LIABILITIES> 7,659
<BONDS> 0
0
0
<COMMON> 117
<OTHER-SE> 26,545
<TOTAL-LIABILITY-AND-EQUITY> 35,129
<SALES> 0
<TOTAL-REVENUES> 19,681
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,335
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (425)
<INCOME-PRETAX> 3,771
<INCOME-TAX> 1,232
<INCOME-CONTINUING> 2,539
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,539
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.21
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 15,924
<SECURITIES> 0
<RECEIVABLES> 8,163
<ALLOWANCES> 43
<INVENTORY> 0
<CURRENT-ASSETS> 24,997
<PP&E> 2,947
<DEPRECIATION> 1,776
<TOTAL-ASSETS> 26,938
<CURRENT-LIABILITIES> 5,697
<BONDS> 0
0
0
<COMMON> 110
<OTHER-SE> 19,552
<TOTAL-LIABILITY-AND-EQUITY> 26,938
<SALES> 0
<TOTAL-REVENUES> 11,733
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,609
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (457)
<INCOME-PRETAX> 1,581
<INCOME-TAX> 537
<INCOME-CONTINUING> 1,044
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,044
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.09
</TABLE>
