<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, 1999 .
----------------------------------------
/_/ 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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
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, 1999, there were outstanding 24,147,578 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, 1999
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
CONSOLIDATED BALANCE SHEETS
June 30, 1999 (Unaudited) and December 31, 1998 3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three and Six Months Ended June 30, 1999 and 1998 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three and Six Months Ended June 30, 1999 and 1998 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5: OTHER INFORMATION 14
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>
JUNE 30, DECEMBER 31,
1999 1998
-------- --------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 21,298 $ 27,177
Receivables, less allowance of $295 12,872 2,529
Contracts in process 4,231 6,778
Prepaid and other current assets 1,903 1,624
-------- --------
Total current assets 40,304 38,108
Property and equipment
Equipment 5,430 3,945
Furniture and fixtures 917 770
Leasehold improvements 1,507 994
-------- --------
7,854 5,709
Accumulated depreciation and amortization (3,846) (3,026)
-------- --------
Net property and equipment 4,008 2,683
Capitalized software costs, net of amortization of $1,154 1,140 962
and $921, respectively
Intangible assets, net 1,216 --
Investments 1,580 1,532
-------- --------
Total assets $ 48,248 $ 43,285
-------- --------
-------- --------
LIABILITIES
Current liabilities
Current debt obligations $ 155 $ 233
Accounts payable, trade 1,901 1,535
Accrued expenses 4,900 5,984
Deferred revenue 5,068 3,266
-------- --------
Total current liabilities 12,024 11,018
Deferred income taxes 327 327
Long-term debt 11 81
Other long-term liabilities 25 87
-------- --------
Total liabilities 12,387 11,513
SHAREHOLDERS' EQUITY
Common stock, no par value 122 117
Authorized - 150,000,000 shares
Issued and outstanding 24,097,726 and 23,469,138,
respectively
Additional paid-in capital 21,967 20,172
Retained earnings 14,010 11,723
Notes due on common stock purchases (238) (240)
-------- --------
Total shareholders' equity 35,861 31,772
-------- --------
Total liabilities and shareholders' equity $ 48,248 $ 43,285
-------- --------
-------- --------
</TABLE>
3
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- --------------------
1999 1998 1999 1998
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues
Products $ 4,948 $ 6,790 $ 8,235 $ 11,127
Services 6,952 2,738 11,254 5,574
Software maintenance fees 2,011 1,525 4,078 2,980
--------- -------- -------- --------
Total revenues 13,911 11,053 23,567 19,681
Operating expenses
Product development 3,916 2,974 7,404 5,444
Product support 1,124 1,017 1,946 1,870
Services 3,064 1,747 5,204 3,733
Sales and marketing 2,072 1,539 3,924 2,739
Royalties and sublicense fees 101 224 123 412
General and administrative 1,074 1,228 1,937 2,137
--------- -------- -------- --------
Total operating expenses 11,351 8,729 20,538 16,335
--------- -------- -------- --------
Earnings from operations 2,560 2,324 3,029 3,346
Interest income, net 242 222 544 425
--------- -------- -------- --------
Earnings before income taxes 2,802 2,546 3,573 3,771
Income tax provision 1,009 840 1,286 1,232
--------- -------- -------- --------
Net earnings $ 1,793 $ 1,706 $ 2,287 $ 2,539
--------- -------- -------- --------
--------- -------- -------- --------
Basic earnings per average common share $ 0.08 $ 0.07 $ 0.10 $ 0.11
Diluted earnings per average common share $ 0.07 $ 0.07 $ 0.09 $ 0.10
Weighted-average common shares outstanding 23,731 23,080 23,622 22,748
Average common and dilutive shares outstanding 26,045 24,434 25,675 24,398
</TABLE>
4
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 2,287 $ 2,539
Adjustments to reconcile net earnings to cash
provided by operating activities
Depreciation and amortization 1,126 711
Cash provided (used) by changes in
operating assets and liabilities (9,870) 2,738
Contracts in process 2,547 (658)
Prepaid and other current assets (249) 285
Accounts payable and accrued expenses (1,539) 273
Deferred revenues 1,709 (1,704)
-------- --------
Net cash provided (used) by operating activities (3,989) 4,184
Cash used in investing activities
Investments (48) (491)
Cost of acquisition net of cash acquired (409) --
Capitalized computer software costs (499) (138)
Capital expenditures (1,919) (800)
-------- --------
Net cash used in investing activities (2,875) (1,429)
Cash flows from financing activities
Repayment of notes due on common stock purchases 2 65
Purchase of treasury stock (592) --
Principal payments under long-term debt (148) (78)
Proceeds from exercise of stock options 1,723 824
-------- --------
Net cash provided by financing activities 985 811
-------- --------
Net increase (decrease) in cash and cash equivalents (5,879) 3,566
Cash and cash equivalents at beginning of period 27,177 12,827
-------- --------
Cash and cash equivalents at end of period $ 21,298 $ 16,393
-------- --------
-------- --------
Supplemental cash flow information
Interest paid $ 9 $ 20
Income taxes paid $ 2,569 $ 995
</TABLE>
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. ("Sanchez" or 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 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, 1999 are
not necessarily indicative of results for the full year. Certain prior
period amounts have been reclassified to conform to the current
presentation.
(B.) ACQUISITION
Effective February 1, 1999, the Company acquired ArTech Financial
Technology Services, LLC ("ArTech") in exchange for cash of $1 million,
71,428 shares of the Company's common stock and a two year warrant to
acquire 100,000 shares of the Company's stock. The acquisition of ArTech
was accounted for using the purchase method of accounting. The excess of
the purchase price over the fair value of the net assets acquired
was approximately $1.3 million. The Company is in the process of
determining the specific fair values of the identifiable assets that were
acquired in the transaction.
(C.) CLIENT REVENUE DATA
Revenue derived from customers in various geographic regions is as follows
(in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
U.S.and Caribbean $ 6,733 $ 4,550 $10,844 $ 7,942
Other Europe 3,347 2,188 5,805 3,548
Central Europe 2,641 2,582 3,688 5,338
Canada 1,019 1,411 2,744 2,308
Other 171 322 486 545
------- ------- ------- -------
$13,911 $11,053 $23,567 $19,681
------- ------- ------- -------
------- ------- ------- -------
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted-average shares outstanding 23,731 23,080 23,622 22,748
Dilutive effect of
Warrants 53 168 19 384
Options 2,261 1,186 2,034 1,266
------ ------ ------ ------
Total common and dilutive shares 26,045 24,434 25,675 24,398
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
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.) SEGMENTS
The Company has adopted the Financial Accounting Standards Board ("SFAS")
No. 131, "Disclosure About Segments of an Enterprise and Related
Information". The Company classifies its operations in two segments:
Sanchez's traditional licensing business and the E-PROFILE service bureau
business. The Company evaluates the performance of its segments and
allocates resources to them accordingly.
The table below summarizes business segment information as of and for the
six months ended June 30:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Revenues
Sanchez 21,892 19,681
e-PROFILE 1,675
------ ------
Total 23,567 19,681
------ ------
------ ------
Earnings from operations
Sanchez 3,303 3,346
e-PROFILE (274)
------ ------
Total 3,029 3,346
------ ------
------ ------
Total assets
Sanchez 44,247 35,129
e-PROFILE 4,001
------ ------
Total 48,248 35,129
------ ------
------ ------
</TABLE>
(F.) STOCK SPLIT
In May 1999, the Board of Directors declared a two-for-one stock dividend, with
a record date of June 3, 1999, 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.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Sanchez Computer Associates, Inc. ("Sanchez" or "the Company") designs,
develops, markets, implements and supports comprehensive banking software called
PROFILE(R) for financial services organizations worldwide. Sanchez's highly
flexible PROFILE family of products is comprised of four integrated modules
which operate on open, client/server platforms. The primary module, called
PROFILE/ANYWARE, is a multi-currency, multi-language, multi-bank transaction
processing system which supports deposit, loan, customer and bank management
requirements through multiple distribution channels. The other modules are
PROFILE/FMS, a multi-company, multi-currency, financial management and
accounting system; PROFILE FOR WINDOWS ("PFW"), a graphical user interface for
PROFILE/ANYWARE; and PROFILE/ODBC, an open connectivity database driver. The
PROFILE system is currently licensed to 39 clients in 14 countries serving in
excess of 850 financial institutions.
The Company derives its revenues from product fees, which include software
license and product enhancement fees, service fees, which include client
implementation and consulting fees, and software maintenance fees. Product 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. Maintenance fees are normally billed annually in advance and
recognized into revenue ratably over the period covered.
The Company acquired ArTech Financial Technology Services, LLC, a banking
technology service center located outside of Pittsburgh, Pennsylvania in the
first quarter of 1999. In conjunction with the purchase, the Company
announced the formation of a new outsourcing subsidiary - e-PROFILE, Inc.
("e-PROFILE"), designed to provide financial services providers with the
ability to offer differentiated direct banking services to customers through
a dedicated e-banking service utility with a lower initial capital hurdle,
rapid time-to-market and minimal, if any, disruption to existing legacy
systems.
Revenues for the quarter ended June 30, 1999 increased 25.9% to $13.9 million,
compared to $11.1 million recorded for the same period in 1998. Net earnings for
the quarter totaled $1.8 million or $.07 per diluted share, compared to $1.7
million or $.07 per diluted share for the same period in 1998.
During the quarter, the Company played the lead role in project integration and
management for the initiation of WingspanBank.com. This is a new online banking
and financial services network powered by some of the internet industry's
leading providers of financial solutions, products and services, including
Sanchez; IBM; Edify Corporation; E-Loan, Inc.; InsWeb; and M&I Data Services,
creating a new category in online banking and financial services In addition,
the Company's e-PROFILE subsidiary is providing data-center and back office
operations for WingspanBank.com. Other significant activities during the quarter
included the signing of a global software license agreement with Citibank. N.A.,
and a license agreement with the Irish League of Credit Unions to use
PROFILE/Anyware as the core-processing engine for its more than 500 affiliated
financial institutions. Additionally, the company extended its relationship with
global partner IBM, becoming an advanced member of IBM's Solution Developer
Program. Finally, late in the second quarter, the Company's Board of Directors
approved a 2-for-1 split of its common shares. The stock split increased the
number of outstanding shares from approximately 12 million to approximately 24
million shares.
8
<PAGE>
The Company has had preliminary discussions with certain technology and
service partners regarding potential investments in e-PROFILE. The Company
intends to explore various additional options to raise equity capital to fund
this business depending on market conditions and other factors.
The Company's estimated backlog at June 30, 1999 amounted to $35.6 million. The
components of the backlog were $10.3 million for product and service revenues
and $25.3 million for maintenance fees. The Company anticipates recognizing
$19.3 million of this backlog over the next twelve months. At December 31, 1998,
the Company's estimated backlog amounted to $33.9 million, consisting of $6.7
million for product and service revenues and $27.2 million for maintenance fees.
The Company's business/financial model is evolving, however, and the Company
ultimately expects to derive a greater proportion of its revenue stream from
variable sources rather than fixed-fee contracts, both in its traditional
licensing business and in the e-PROFILE service bureau business described above.
Over time, the Company believes that this evolution will make its fixed
contractual backlog figure a less meaningful measure of future revenue
potential.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected statement of
operations data:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
DOLLARS IN THOUSANDS 1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Products $ 4,948 $ 6,790 $ 8,235 $ 11,127
Services 6,952 2,738 11,254 5,574
Software maintenance fees 2,011 1,525 4,078 2,980
--------- --------- --------- ---------
Total revenues $ 13,911 $ 11,053 $ 23,567 $ 19,681
--------- --------- --------- ---------
--------- --------- --------- ---------
Percentage Relationship to Total Revenues
Revenues
Products 35.6% 61.4% 34.9% 56.5%
Services 50.0 24.8 47.8 28.4
Software maintenance fees 14.4 13.8 17.3 15.1
--------- --------- --------- ---------
Total revenues 100.0 100.0 100.0 100.0
Operating expenses
Product development 28.2 26.9 31.4 27.7
Product support 8.1 9.2 8.3 9.5
Services 22.0 15.8 22.1 19.0
Sales and marketing 14.9 14.0 16.6 13.9
Royalties and sublicense fees 0.7 2.0 0.5 2.1
General and administrative 7.7 11.1 8.2 10.8
--------- --------- --------- ---------
Total operating expenses 81.6 79.0 87.1 83.0
Earnings from operations 18.4 21.0 12.9 17.0
Interest income, net 1.7 2.0 2.3 2.2
--------- --------- --------- ---------
Earnings before income taxes 20.1 23.0 15.2 19.2
Income tax provision 7.2 7.6 5.5 6.3
--------- --------- --------- ---------
Net earnings 12.9% 15.4% 9.7% 12.9%
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
9
<PAGE>
THREE MONTHS ENDED JUNE 30, 1999, COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues increased $2.9 million, or 25.9%, in the second quarter of
1999 as compared to the second quarter of 1998. The most significant growth
was in service revenue, which increased by $4.2 million, or 154%, in the 1999
June quarter. Most of the service growth is attributable to the increased
levels of Sanchez and e-PROFILE implementation activity in the U.S.
marketplace. Sanchez implementation efforts in Western and Central Europe
also contributed to the significant service increase. Product revenues
decreased by $1.8 million, or 27.1%, relative to the second quarter of 1998.
The decrease in product revenues was primarily due to successful conversions,
higher license expansion from a converted client in 1998 and the delay of a
project in Central Europe. Also, the Company recently changed its pricing
model to offer utility-based pricing versus a one-time license fee to lower
the initial investment for potential customers, especially for e-PROFILE
prospects. Sales efforts have been more focused on this pricing model versus
the Company's traditional one-time license fee model. This focus, and the
resulting lower closure of one-time license fee contract revenue, also
contributed to the decline in product revenues. Software maintenance fees
increased by $486,000 or 31.9%, in the 1999 second quarter, due to an overall
increase in the Company's supported client base and additional maintenance
generated by license expansion fees.
PRODUCT DEVELOPMENT. Product development expenses increased $942,000, or
31.7%, in the second quarter of 1999, due to costs associated with increased
staffing, expanded facilities and other overhead costs. Staffing increased
41% for this area of the Company primarily due to the Company's strategic
decision to increase product flexibility to better serve the future needs of
our customers and the requirements of e-banking. The increased investment in
this category caused the percent relationship to total revenue to increase
from 26.9% in the second quarter 1998 to 28.2% in the second quarter of 1999.
PRODUCT SUPPORT. Product support expenses increased by $107,000, or 10.5%, in
the quarter ended June 30, 1999, primarily due to third-party support fees.
These fees relate to third-party partners and vendors who provide frontline
support in certain foreign countries or whose software has been sublicensed. As
a percentage of total revenues, product support expenses dropped to 8.1% in the
1999 second quarter vs. 9.2% in the 1998 second quarter.
SERVICES. Service expenses increased by $1.3 million, or 75.4%, during the
second quarter of 1999. The increase was primarily due to the additional
staffing and subcontractors needed to support the increased service revenue
for Sanchez and e-PROFILE. The gross margin relative to associated revenues
increased to 55.9% for the 1999 second quarter as compared to 36.2% for the
1998 second quarter due to more services being delivered by the Company's
increased direct staff versus more costly third parties, plus more favorable
rates achieved on time and material projects during the 1999 period.
SALES AND MARKETING. Sales and marketing expenses increased by $533,000, or
34.6%, in the 1999 period due to the costs associated with commissions,
increased staffing, travel related expenses and spending relative to the
brand awareness advertising and promotion campaign for PROFILE/Anyware and
e-PROFILE. Sales and marketing expenses as a percent of total revenues
increased from 14.0% in the second quarter of 1998 to 14.9% for the same
period in 1999.
ROYALTIES AND SUBLICENSE FEES. For the quarter ended June 30, 1999, these
fees decreased by $123,000, or 54.9%. The decrease is attributable to a lower
level of product revenues subject to royalty payments.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by
$154,000, or 12.5%, in 1999. Although there were staff added primarily due to
e-PROFILE, this expense increase was offset by the collection of a bad debt
and lower incentive pay. Due to this, general and administrative expenses
decreased as a percentage of revenue from 11.1% in the June 1998 quarter to
7.7% in the June 1999 quarter.
INCOME TAX PROVISION. Taxes in the 1999 second quarter were 36.0% of income
before income taxes, as compared to 33.0% in the 1998 second quarter. The 1999
increase is primarily due to the Company's increased U.S. revenues, resulting in
higher state income taxes.
SIX MONTHS ENDED JUNE 30, 1999, COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues increased $3.9 million, or 19.7%, in 1998. The primary
reason for the increase was service revenue, which increased by $5.7, million
or 102%, for the six months ended June 30, 1999. The service increase was
driven by additional implementation activity for Sanchez and e-PROFILE in the
U.S. marketplace. Implementation efforts from Sanchez in Western and Central
Europe also contributed to the service increase. For the six months ended
June 30, 1999, product revenues decreased by $2.9 million, or 26.0%, compared
to the six months ended June 30, 1998. The decrease in product revenue was
the result of fewer implementing clients due to successful conversions,
higher license expansion from a converted client in 1998 and the delay of a
project in Central Europe. Also, the Company recently changed its pricing
model to offer utility-based pricing versus a one-time license fee to lower
the initial investment for potential customers, especially
10
<PAGE>
for e-PROFILE prospects. Sales efforts have been more focused on this pricing
model versus the Company's traditional one-time license fee model. This
focus, and the resulting lower closure of one-time license fee contract
revenue, also contributed to the decline in product revenues. Software
maintenance fees increased by $1.1 million, or 36.8%, for the six months
ended June 30, 1999, due to an increase in the Company's supported client
base and additional maintenance generated by license expansion fees.
PRODUCT DEVELOPMENT. Product development expenses increased $2.0 million, or
36.0%, in 1999. The increase is due to costs associated with increased
staffing, expanded facilities and other overhead costs. Staffing increased
41% for this area primarily due to the Company's strategic decision to
increase product flexibility, as well as, the requirements of e-banking. Due
to the increased investment in this category, the percent relationship to
total revenue increased from 27.7% for the six months ended June 30, 1998 to
31.4% for the six months ended June 30, 1999.
PRODUCT SUPPORT. Product support expenses increased by $76,000, or 4.1%, in
the six months ended June 30, 1999. This is primarily due to third-party
support fees. These fees relate to third-party partners and vendors who
provide frontline support in certain foreign countries or whose software has
been sublicensed. Despite the slight increase, product support expenses as a
percentage of total revenues decreased to 8.3% for the six months ended June
30, 1999 from 9.5% for the six months ended June 30, 1998, due to the higher
total revenue.
SERVICES. Services expenses increased by $1.5 million, or 39.4%, during 1999,
in conjunction with a corresponding increase in services revenues of $5.7
million. The increase was primarily due to additional staffing and related
overhead costs. The increased staff was needed to support the significant
increase in service revenues for Sanchez and e-PROFILE. The gross margin
relative to associated revenues increased for the six months ended June 30,
1999 to 53.8%, as compared to 33.0% for the six months ended June 30, 1998,
due to the ability to deliver services with Sanchez' direct staff versus more
costly third parties and more favorable rates achieved on time and material
projects during 1999.
SALES AND MARKETING. Sales and marketing expenses increased by $1.2 million,
or 43.3%, in the 1999 period due to the cost associated with increased
staffing, commissions and spending relative to the brand awareness
advertising and promotion campaign for PROFILE/ANYWARE and e-PROFILE. As a
percent of total revenues, sales and marketing expenses increased from 13.9%
in 1998 to 16.6% for 1999.
ROYALTIES AND SUBLICENSE FEES. For the six months ended June 30, 1999, these
fees decreased by $ 289,000, or 70.1%. The decrease is attributable to a
lower level of product revenues subject to royalty payments.
GENERAL AND ADMINISTRATIVE. These expenses decreased by $200,000, or 9.4%.
Despite increased staff due to e-PROFILE, the collection of a bad debt
previously written off and lower incentive pay caused this area to decrease for
the six months ended June 30, 1999. As a result, general and administrative
expenses decreased as a percentage of revenue from 10.8% for the six months
ended June 30, 1998 to 8.2% for the six months ended June 30, 1999.
INCOME TAX PROVISION. Taxes in 1999 were 36.0% of income before income taxes, as
compared to 32.7% in the 1998 six month period. The 1999 increase is
attributable to the Company's increased U.S revenues, resulting in higher state
income taxes.
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 product line as well
as its internal systems and hardware. Relative to the product line, all software
versions 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. All other
clients using software installed prior to late 1996 are entitled to receive a
version of the software which is Year 2000 compliant, 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 is 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. In light of the
above information, the Company does not anticipate any significant 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
11
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $21.3 million at June 30, 1999. Cash used by
operating activities for the six months ended June 30, 1999 was $4.0 million
as compared to $4.2 million provided by operating activities during the same
period in 1998. Net cash used by operating activities in 1999 was primarily
due to an increase in accounts receivable and decreases in accounts payable
and accrued expenses. The receivable increase in 1999 is primarily due to the
December 31, 1998 balance being significantly lower than usual as a result of
the collection of approximately $9 million in contract payments during the
month of December. The 110 days sales outstanding as of June 30, 1999 is in
line with our historical days sales outstanding. The receivable balance will
continue to be significantly impacted by the timing of contract milestones,
and time and material billings. Accounts payable and accrued expenses
decreased primarily due to large income tax payments. Partially offsetting
the cash used was a reduction in contracts in process and an increase in
deferred revenues as a result of the annual in advance maintenance billings.
The Company continues to expect a certain amount of variability in the timing
of payment of major contract milestones which will impact cash flow from
operations during any given period.
During the six months ended June 30, 1999 the Company used $2.9 million for
investing activities, which included part of the ArTech purchase price. The
Company's business is generally not capital intensive. Capital asset
expenditures for the six months ended June 30, 1999 amounted to $1.9 million as
compared to $800,000 during the same period of 1998. The increase in capital
expenditures during 1999 is attributable to purchases of equipment and furniture
required by the significant growth in employees during the year, as well as the
leasehold improvements completed to accommodate the additional staff. This
included the creation of the e-PROFILE service center.
Financing activities contributed $985,000 in cash during the six month period
ended June 30, 1999. The primary reason was the exercise of stock options, which
accounted for $1.7 million. This was offset by the purchase of 60,000 shares of
treasury stock.
As mentioned above, the Company intends to raise capital to finance the
development of e-PROFILE, assuming market conditions and other factors
permit. The Company currently anticipates that cash generated from operations
and existing cash balances will be sufficient to satisfy its operating and
capital cash needs for the foreseeable future. Should the Company's business
expand more rapidly than expected, or conditions cause a delay in raising
capital, the Company believes that additional bank credit, if necessary,
would be available to fund operating and capital requirements.
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 product 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. As noted earlier, however, the Company believes that over the course of
time the ongoing monthly revenue stream associated with the e-PROFILE
outsourcing alternative will result in more predictable quarter-to-quarter
revenues.
FORWARD-LOOKING STATEMENTS
The Company's forward-looking statements about its revenues, earnings,
business development, financing and liquidity 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, the
success of the Company's E-PROFILE business model and other significant
events of revenue recognition affecting the Company's quarterly results, the
development of the top-tier, direct and emerging banking markets, market
acceptance of the Company's products within these markets and the Company's
ability to continue to improve its products.
12
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's cash equivalents. The Company does not have any
derivative financial instruments in its portfolio. The Company is adverse to
principal loss and ensures the safety and preservation of its invested funds by
limiting default risk, market risk and reinvestment risk. The Company does not
expect any material loss with respect to its cash equivalents.
FOREIGN CURRENCY RISK
The Company does not use foreign exchange forward contracts. All contractual
arrangements with international customers are denominated in U.S. dollars.
13
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 19, 1999, 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 2000, 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 21,380,412 27,222
Frank R. Sanchez 21,380,532 27,102
Ronald J. Zlatoper 21,369,732 37,902
Warren V. Musser 21,375,452 32,182
Lawrence Chimerine 21,386,692 20,942
Alex W. Hart 21,388,732 18,902
Kailash C. Khanna 21,388,772 18,862
John D. Loewenberg 21,388,492 19,142
Thomas C. Lynch 21,375,812 31,822
</TABLE>
PROPOSAL II - PROPOSAL TO ADOPT AMENDMENTS TO THE 1995 EQUITY COMPENSATION PLAN
b) The shareholders approved and adopted the amendments to the 1995 Equity
Compensation Plan ("the Plan") and as a result of the adoption of the Plan.
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 16,011,028 737,136 28,940
</TABLE>
ITEM 5: OTHER INFORMATION
Mr. Gary Wendt and Mr. Jim Stojack became members of the board of directors
effective July 31,1999 and August 11, 1999, respectively.
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
President, Chief Operating Officer
and acting Chief Financial Officer
Date: August 16, 1999
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 21,298
<SECURITIES> 0
<RECEIVABLES> 13,167
<ALLOWANCES> 295
<INVENTORY> 0
<CURRENT-ASSETS> 40,304
<PP&E> 7,854
<DEPRECIATION> 3,846
<TOTAL-ASSETS> 48,248
<CURRENT-LIABILITIES> 12,024
<BONDS> 0
0
0
<COMMON> 122
<OTHER-SE> 35,739
<TOTAL-LIABILITY-AND-EQUITY> 48,248
<SALES> 0
<TOTAL-REVENUES> 23,567
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 20,538
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (544)
<INCOME-PRETAX> 3,573
<INCOME-TAX> 1,286
<INCOME-CONTINUING> 2,287
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,287
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.09
</TABLE>
