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Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
For Annual and Transition Reports Pursuant to Sections 13 or 15(d) of the
Securities Exchange Act of 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 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 000-21705
SANCHEZ COMPUTER ASSOCIATES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Pennsylvania 23-2161560
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
40 Valley Stream Parkway, Malvern, PA 19355
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (610) 296-8877
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
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Common Stock, no par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of shares of Common Stock held by non-affiliates
(based on the closing price on NASDAQ) on March 19, 1999 was approximately
$103.3 million.
The number of shares of registrant's Common Stock outstanding as of March 19,
1999 was 11,748,550 shares.
Documents Incorporated by Reference
Portions of registrant's Proxy Statement relating to the annual meeting of
shareholders of registrant to be held on May 19, 1999 are incorporated by
reference into Items 10, 11, 12 and 13 of Part III of this Form 10-K. Registrant
expects to file the Proxy Statement within 120 days after the end of the year
covered by this Form 10-K. Such Proxy Statement, except for the parts therein
which have been specifically incorporated by reference, shall not be deemed
"filed" for the purposes of this Form 10-K.
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SANCHEZ COMPUTER ASSOCIATES, INC.
INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
ITEM PAGE
NO. NO.
--------- Part I -----
1. Business................................................ 3
2. Properties.............................................. 18
3. Legal Proceedings....................................... 18
4. Submission of Matters to a Vote of Security Holders..... 18
4 A. Executive Officers of the Registrant.................... 18
Part II
Market for Registrant's Common Equity and Related
5. Stockholder Matters..................................... 21
6. Selected Financial Data................................. 22
Management's Discussion and Analysis of Financial
7. Condition and Results of Operations..................... 22
Quantitative and Qualitative Disclosures About Market
7 A. Risk.................................................... 28
8. Financial Statements and Supplementary Data............. 29
Changes in and Disagreements with Accountants on
9. Accounting and Financial Disclosure..................... 46
Part III
10. Directors and Executive Officers of the Registrant...... 46
11. Executive Compensation.................................. 46
Security Ownership of Certain Beneficial Owners and
12. Management.............................................. 46
13. Certain Relationships and Related Transactions.......... 46
Part IV
Exhibits, Financial Statement Schedules and Reports on
14. Form 8-K................................................ 47
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PART I
Item 1. Business.
Based in Malvern, Pennsylvania with offices in Warsaw, Singapore, Prague and
Chester (U.K.), Sanchez Computer Associates, Inc. ("Sanchez" or the
"Company") designs, develops, markets, implements and supports comprehensive
banking software, called PROFILE(R) ("PROFILE"), for financial services
organizations worldwide. Sanchez's highly flexible PROFILE family of products
is comprised of several integrated modules which operate on open,
client/server platforms. The principal product is PROFILE/Anyware, a highly
flexible, multi-currency bank production system which supports deposit, loan,
customer, transaction processing and bank management requirements through
multiple distribution channels, including the Internet. The comprehensive
PROFILE product family also includes: PROFILE for Windows, a native Windows
(R) client application for customer service and teller functions; PROFILE/FMS
(Financial Management System), a multi-company, multi-currency, cost
centered-based accounting system; and PROFILE/ODBC, an open connectivity
database driver. In addition, in conjunction with the purchase in early
1999 of ArTech Financial Technology Services, L.L.C., the Company announced
the addition of a significant new service offering called e-PROFILE.com
("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. The Company believes that e-PROFILE
will provide a new and significant avenue by which the PROFILE product can be
introduced to top-tier institutions with a lower initial capital hurdle,
rapid time-to-market and effectively no disruption to existing legacy
systems. The Company believes that the growth of electronic commerce will
result in a large increase in the volume of financial transactions which
occur on line, as well as a greater demand for customized products and
services. The Company believes that the widely-reported increases in the
number of shoppers buying gifts on line during the 1998 holiday season, for
example, provides ample evidence of the growing significance of e-commerce.
Furthermore, the Company believes that the capabilities of PROFILE,
particularly the e-PROFILE service offering, will provide financial services
providers with the technology to strategically respond to this consumer
banking evolution with a minimal "up-front" investment and the ability to
quickly enter the market with selected product offerings in a 30- to 90- day
time period. Under this model, the Company will be partnering with
leading-edge third party technology partners for each component in the
e-PROFILE solution. From Web browser applications to data warehousing
capabilities, financial service customers utilizing e-PROFILE will have a
choice of various technology options with each component of their customized
solution. This "menu-driven" approach will allow subscribers to tailor their
e-PROFILE environment to best suit their particular customer base and
marketing objectives. All PROFILE products utilize a development and database
technology supported by Greystone Technology Corporation. The Company
purchased Greystone in early 1998, and subsequently relocated all Greystone
employees to the Company's Malvern, Pennsylvania headquarters. The PROFILE
system is currently licensed to 37 clients in 14 countries serving in excess
of 350 financial institutions. Currently, the Company is targeting three
market segments: the Top-Tier Banking Market (defined as the top 1,000 global
banks), where the Company is seeking to build on its current client base and
establish itself as a market leader; the Direct Banking Market, where the
company looks to expand upon its prior successes and in particular looks to
win market share via its newly announced e-PROFILE offering; and the Emerging
Banking Market in which the Company seeks to expand on its current market
share, particularly relative to its market leadership role in Central Europe.
The Company's central focus will continue to be the Top-Tier Banking Market,
where the Company has made significant inroads during both 1997 and 1998. The
Top-Tier Banking Market is defined by the Company as encompassing the 1,000
largest global and regional banks in the world. The Company believes that the
systems architecture in most top-tier banks is significantly outdated, and that
many of these institutions are actively evaluating replacements for their
traditional legacy software environments. New market factors such as the growth
in electronic commerce and bank channel proliferation are helping to fuel these
evaluations. The Company believes it has the opportunity to become a leading
replacement alternative in the Top-Tier Banking Market, based upon the flexible
and integrated architecture of its PROFILE/Anyware product. Further, the newly
announced e-PROFILE service center offering will provide a new and significant
avenue by which the PROFILE product can be introduced to top-tier banks, with
the significant benefits of a limited initial capital hurdle, rapid
time-to-market, and effectively no disruption to existing "legacy" systems.
Additionally, the Company believes that its ability to provide a single core
processing system which can be utilized worldwide as opposed to supporting
different systems in each marketplace is a significant advantage for large
multi-national financial institutions.
Beginning in 1997 the Company successfully expanded its business into the Direct
Banking Market. The Company defines the Direct Banking Market as the on line
retail banking business conducted via alternate distribution channels by large
financial services institutions located throughout the world. These large
financial service institutions are not limited to traditional banks, as various
forms of "non-bank" organizations such as insurance companies, credit card
companies and brokerage firms look to retain and ultimately expand upon their
traditional client bases by offering "banking-like" products via direct banking
channels. The Company believes that more and more organizations recognize that
the emergence of electronic commerce, together with the availability and
acceptance of computer technology, will ultimately cause a dramatic change in
the consumer banking practices of many of their customers. The Company predicts
that the growth of electronic commerce will result in a large increase in the
volume of financial transactions which occur on line as well as a greater demand
for customized products and services.
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Financial service organizations in the Emerging Banking Market can generally be
characterized as being located in areas with growing consumer banking bases,
often with a large number of branches and little enterprise-wide automation.
Sanchez, through the implementation of its PROFILE products, provides these
organizations with a fully automated system which addresses all core areas of
their data processing requirements, including head office operations, domestic
and international payments, new product introduction, customer analysis,
budgeting and forecasting, branch automation and deposit and loan processing.
The PROFILE products have the ability to adapt to diverse accounting,
operational and regulatory environments and have the flexibility to support a
broad spectrum of banking products and services. Because the PROFILE products
are scalable, they can be implemented within an infrastructure that supports an
organization's current operational requirements and, thereafter, be
incrementally expanded as the client's operational requirements increase. From
1991 through 1996, the Company principally targeted banks in Central Europe;
subsequently in 1996, the Company expanded its marketing efforts to include
large global financial services organizations as well as emerging market
opportunities located in the Asia-Pacific Rim. During 1998, the Company formed a
joint venture with Capital Services, Inc., a financial services and distribution
company based in Bombay, India. The newly formed company, named Sanchez/Capital
Services will have PROFILE distribution rights throughout India and portions of
the Middle East. During 1999, the Company also expects to enter the South
American marketplace, which has recently generated significant sales prospect
activity, and in which there appears to be no dominant vendor at this time.
The Company has established and maintained strategic alliance/partnering
agreements with Compaq Computer Corporation ("Compaq", previously Digital
Equipment Corporation) since 1987, Hewlett-Packard ("Hewlett-Packard") since
1995, PricewaterhouseCoopers ("PwC") since 1996, International Business Machine
Corporation ("IBM") since 1996 and ComputerLand SA of Poland ("ComputerLand")
since 1997. In September 1998, the Company significantly expanded its
relationship with IBM by entering into a global partnership agreement. The
Company believes that the efforts and capabilities of IBM's marketing, sales and
global service organizations will greatly enhance the demand for the PROFILE
system by top-tier financial institutions worldwide. During 1997 and 1998, PwC
and the Company have engaged in various global joint marketing, training and
implementation activities, which included training of approximately 75 PwC
consultants to implement the PROFILE software solution. The Company has also
formed partnering relationships with various other domestic and international
regional service organizations during 1998, and anticipates forming additional
alliances with other complementary service organizations and systems integrators
in 1999 and beyond. The Company believes that its alliance program will
facilitate its market expansion in all target markets.
Historically, the Company has derived effectively all of its revenues from the
marketing of its PROFILE products to financial services companies. Economic
changes within the financial services industry relative to information
technology expenditures, mergers and consolidations, and other factors could
materially impact the Company's revenues and results of operations.
Industry Overview
Top-Tier Banking Market
In 1998 and 1997, the Company witnessed a considerable increase in activity
among top-tier banks, (i.e., the 1,000 largest global and regional banks in the
world), that are evaluating replacements for or supplements to their traditional
legacy software environment. During 1998, contract agreements were entered into
with Citibank N.A., New York (a subsidiary of Citigroup), The Sumitomo Bank
Ltd., Bankers Trust Company as well as InterAdvies N.V. and ING Spain (the
latter two entities being subsidiaries of ING Group N.V., with whom the Company
entered into a Global licensing agreement in 1997). The Citibank agreement
relates to the bank's new direct banking alternative.
The Company continues to believe that the systems architecture in most top-tier
banks is significantly outdated. Many of the largest banks are presently
processing their core systems using an on line memo post, batch update process
designed in the 1970s to accommodate the systems architecture restrictions of
mainframe processors. A number of factors are causing top-tier banks to consider
replacing their existing batch update systems with an on
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line, real-time system. These factors include growth in electronic transaction
volume, regulatory guidelines which now require banks to monitor all intra-day
risk, business customers wanting the ability to view all in-process transactions
as part of their cash management service, and rapid growth in transaction
processing volume levels resulting from banking industry consolidation. In
summary, many top-tier banks are now posting virtually all transactions twice
while being confronted with shorter batch processing windows to handle increased
account/transaction volume. Accordingly, transitioning to a real-time system
will benefit these banks through the elimination of double posting, reduced
nightly batch processing requirements, and lower operating costs. Further, new
market factors such as electronic commerce, banking channel proliferation and
product commoditization are putting additional pressure on these large top-tier
banks to re-evaluate their technical infrastructure.
In 1998, the Tower Group, a leading financial industry research organization,
estimated that global core processing software sales (defined as a bank's core
loan and deposit systems) would grow 15% and would surpass $5 billion with
implementation/services revenue reaching $10 billion. The world's largest 200
banks are expected to account for 80% of this technology spending.
The Company has worked toward positioning PROFILE as the best-in-class solution
that will support a large bank's business with flexibility and economy,
regardless of what strategic direction a bank may take, or how large its
business might become. The Company believes it has the opportunity to become a
leading replacement alternative in the Top-Tier Banking Market.
Direct Banking Market
The Company believes that the competitive challenges presented by the emergence
of electronic commerce and the consumer demand for greater product and service
flexibility threaten to fundamentally alter traditional retail banking practices
in North America. The Company believes that this process will be further spurred
as the speed and commercial use of the Internet increases with the development
and deployment of higher bandwidth communication (the ability to transmit more
information in a shorter time). Furthermore, expanded Internet access through a
myriad of affordable devices (such as personal computers, Internet access
terminals, televisions and personal digital assistants) will also contribute to
greater use of the Internet. As a result, consumers will be more easily and
effectively able to search for the most attractive financial products and
services, thereby, reducing the relationship value provided by banks and further
increasing the commodity nature of their products. The Company believes those
consumers who are likely to utilize electronic commerce in this fashion comprise
a significant percentage of a typical organization's highly profitable
customers.
Another market factor impacting the Direct Banking Market is the ongoing
aggregation of financial service offerings. There is a blending of industries as
insurance firms, brokerage houses, real estate firms, large retailers and other
non-banks see direct banking as the means by which they can more fully service,
retain and expand their existing customer bases. For example, in January of
1999, Bank Technology News reported that of the 57 pending applications for bank
charters on file with the Office of Thrift Supervision, 23 of them (or 46%)
represented insurance firms. Nordstrom Department Store has recently applied for
a banking charter as well, to be targeted toward their existing base of credit
card customers. The direct bank is effectively becoming the customer interface
through which non-traditional banks gather names for purposes of marketing
expanded banking type services.
In response to these market challenges, financial services organizations within
the Direct Banking Market have begun to develop direct banking services by
offering a subset of their existing products and services through electronic
channels. Services currently provided include the ability to transfer funds, pay
bills, obtain account balances and track checks and deposits via personal
computer. The ability of these organizations to offer more innovative products
and services, however, is considerably constrained by their current information
technology systems, or legacy systems. Organizations in the Direct Banking
Market are dependent upon this technology and have made enormous investments in
it and the infrastructure required to support it. For these reasons, they have
historically resisted the wholesale replacements of these legacy systems.
Rather, they have chosen to surround these systems on the front end with modern
user interfaces and on the back end with data warehouse and executive
information applications.
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The Company, however, believes that these efforts will not provide these
organizations with the necessary infrastructure to create the innovative
products and services required to preserve and expand market share. It also
believes that the current delivery cost structure of these organizations will
impair their ability to competitively price products. Due to the unique product
tailoring capability and delivery channel independence of PROFILE/Anyware, the
Company believes that it is positioned to supply the next generation of
infrastructure to these organizations. In particular, the Company believes that
its new e-PROFILE service offering will uniquely position it to provide large
financial organizations with a complete outsourcing solution that effectively
addresses all their major concerns when making a decision about establishing a
direct banking option. Most significantly, the historically large " up front"
capital investment hurdle associated with replacing or supplementing in-house
legacy systems is replaced by a monthly "pay-as-you-grow" per account processing
fee. Additionally, the e-PROFILE option will allow financial organizations the
ability to enter the market with selected product offerings in a 30-90 day time
horizon. Further, e-PROFILE will provide subscribers with a full range of
outsourcing option packages (e.g. ability to choose from among various third
party front-end teller systems - not limited to only the PROFILE native
front-end option). This "menu driven" approach will allow each subscriber to
tailor their e-PROFILE environment to best suit their particular customer base
and marketing objectives.
Within the global Direct Banking Market, the Company has been targeting
financial institutions in the U.S. and Canada with assets of $4 billion or more.
This targeted group includes the top 100 banks in the U.S. and the top 10 banks
in Canada. To date, ING DIRECT, a subsidiary of the $300 billion global bank ING
Group, and Citibank (New York) a subsidiary of Citigroup, are the Company's two
most prominent Direct Bank projects.
The e-PROFILE revenue stream derived from monthly charges based on the number
of accounts processed, represents a departure from the Company's historical
practice of selling a customer a perpetual license for a one-time, up-front,
license fee which is fully recognized during the implementation period for
each PROFILE implementation project. Although the Company will continue to
actively sell under both models, 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.
Emerging Banking Markets
Banks which comprise the Emerging Banking Market are generally located within
countries or regions which have experienced dramatic political, social and/or
economic changes during the past decade such as Central Europe, Russia, India,
the Asian-Pacific Rim, Mexico and Latin America. Many of these nations have also
aggressively embraced the privatization of industry, resulting in greater wealth
held by private citizens. As a result of such developments, financial services
organizations within the Emerging Banking Market have experienced large
increases in the demand for retail banking products. Financial services
organizations in the Emerging Banking Market, however, face significant
infrastructure impediments to meeting this increased demand. While these
organizations have often established extensive branch networks, these branches
normally operate as autonomous business units. Typically, selected customer and
transaction data are exchanged with the main office infrequently. The lack of
enterprise level integration has constrained the development and deployment of
sophisticated financial products and services, disabled the efficient
utilization of resources, and prevented bank management from acquiring
management information on a timely basis.
For these reasons, financial services organizations in the Emerging Banking
Market are faced with the necessity of modernizing their entire information and
processing infrastructure. In response, they have demonstrated a willingness to
invest in a centralized enterprise-server based solution. One of the principal
advantages of the technology contained in the Company's PROFILE product is that
it provides on line access to up-to-date customer and balance sheet data
throughout the organization. The Company also believes that an on line
enterprise-wide database is a requirement for electronic delivery channels such
as Automated Teller Machine ("ATM") networks, Point of Sale ("POS") networks,
and home banking, which are rapidly being introduced into these markets.
The global market for international retail production banking solutions, which
encompasses the Emerging Banking Market, is so diverse and fragmented that
reliable market figures are generally not available. However, The Tower Group
estimated during 1998 that spending on core banking systems worldwide will grow
at a compound annual rate of 4.2% over the next 3 to 5 years. The geographic
growth rate of this spending favors global banking system
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vendors in that the rest of the world, excluding North America, Western
Europe, Japan and Asia is projected to increase spending on core banking
systems at a 7.8% compound annual growth rate.
The Sanchez Strategy
The Company believes its most promising opportunities for growth lie in
increasing market share and broadening its scope of services in the Top-Tier,
Direct and Emerging Banking Markets. The Company plans to pursue these
objectives through the following strategic activities.
Become a Market Leader in the Direct Banking and Top-Tier Banking Markets
The Company intends to become a market leader in the Direct Banking and Top-Tier
Banking Markets by marketing its PROFILE family of products as a financial
services organization's most appropriate response to the evolution in consumer
banking spurred by the emergence of electronic commerce. In conjunction with its
newly announced e-PROFILE outsourcing alternative, the Company has more directly
positioned its PROFILE/Anyware product as part of a separate infrastructure
focused specifically on direct banking channels, but also as a potential
replacement for the existing production systems. In the Direct Banking arena,
the ability to provide 24 hour, 7 days per week availability, as well as the
ability to provide unique product offerings not typically available through
traditional "brick and mortar" banks are critical success factors which the
Company believes play directly to the strengths of PROFILE/Anyware.
The Company is continuing to establish strategic relationships with partners
whom it believes will together comprise a comprehensive banking
solution. To this end, the Company is continuing to leverage its third-party
relationships to engage in joint marketing and project implementation
activities. In addition, the Company anticipates forming additional strategic
alliances with other complementary service and application provider
organizations. Further, the Company believes the success it has had over the
past two years in terms of penetrating the Top-Tier banking market via contracts
with some of the most prestigious and well known players in this market will
greatly enhance its potential for further Top-Tier successes moving forward.
Increase Market Share in the Emerging Banking Market
The Company intends to expand its presence in the Emerging Banking Market,
principally by increasing its marketing and operational activities in Central
Europe, continuing to support a marketing presence in the Asian-Pacific Rim as
that region begins to recover economically, and also by expanding into selected
new regions such as India and South America. The Company believes that the
marketing efforts of the Company's strategic partners, such as IBM,
PricewaterhouseCoopers, Hewlett-Packard, Compaq, Sanchez/Capital Services
(India) and ComputerLand (Poland), will result in the generation of additional
sales leads for the Company, including opportunities in Emerging Banking Markets
not yet pursued directly by the Company.
The Sanchez Solution
Sanchez's PROFILE product line addresses the core processing needs of
financial services organizations in all three of the Company's target
markets, whether an organization chooses to meet those needs internally or
outsource these responsibilities to a third party. Sanchez believes that
there is a trend toward globalization of banking practices which will create
a convergence of requirements between all three target markets. The broad
range of U.S. and Western banking functionality contained in the system
enables financial services providers in the Emerging Banking Market to offer
financial products and services previously unavailable to their customers.
The multiple channel delivery architecture also provides these institutions
with the infrastructure to support the rapidly evolving service expectations
of their customer base. Using the same software application and technology,
Sanchez enables organizations within the Direct Banking Market and Top-Tier
Banking Market to effectively respond to changes in consumer banking
preferences brought on by the rapid increase in electronic commerce. In the
Top-Tier Banking Market, the Company's PROFILE/Anyware product provides a
single core processing system which can be utilized worldwide instead of
supporting different systems in each marketplace. The underlying capability
of the PROFILE product line to tailor products and services for individual
bank customers and to deliver them over a wide variety of consumer interfaces
creates the differentiation necessary for banks to compete in a modern
marketplace.
A summary of the principal benefits of the PROFILE solution include:
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Functional Benefits
o Enables financial services organizations to dynamically create new
products and services and to tailor them for individual customers ("mass
customization")
o Allows updates to the integrated on line database to occur directly,
providing real-time reporting, processing and analytic capabilities
o Supports a variety of national and international wholesale, commercial and
retail payment systems, offering multiple payment and clearing options
o Features integrated customer, deposit, loan and general ledger modules
which share a common database and software components, thus eliminating
traditional functional boundaries
o Supports a combined set of North American and international product,
service, operational and transactional requirements providing a "global"
solution
o Contains integrated data management and decision support tools, supporting
analytic, regulatory and production analysis and reporting requirements
Operational Benefits
o Runs on multiple operating systems and multiple platforms (32 and 64 bit)
o Offers a solution to both start-ups and multi-million account institutions
due to high degree of scalability
o Enables database archiving which provides permanent, low-cost, transparent
transaction storage and on line retrieval
o Runs over multiple protocols (TCP/IP, DecNet) on local area and wide area
networks
o Provides widely separated, dual-site failover capabilities for non-stop
operations, including support of rolling software upgrades
Technical Benefits
o All versions sold and installed since 1996 are fully Year 2000 compliant
o Contains a messaging architecture which provides for the rapid integration
of existing and new delivery channels
o Features standard industry application interfaces (APIs) which support
client/server model and cross application integration
o Features two-tier and three-tier client/server architecture which
optimizes performance and workload distribution
o Contains a data dictionary and other meta-data elements, including forms,
reports, documents, database triggers, procedures and interface
definitions which are managed through a tool set that the Company has
developed called DATA-QWIK, which enables the Company and its customers to
rapidly modify and extend the base application
o Makes use of tools which simplify internal development as well as
providing powerful tailoring and customization features to clients
o Features an entity/relationship data model which can be projected over
relational, key indexed and object database systems, insulating the
application from the underlying database management system
The Company's success is heavily dependent upon the proprietary architecture and
design of its PROFILE products which are protected by a combination of copyright
and trademark laws, as well as various contractual provisions. Despite these
efforts to protect its proprietary rights, there can be no assurances that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competition will not develop similar technology independently.
Similarly, while the Company is not aware that any of its products infringe upon
the proprietary rights of third-parties, there can be no assurances that
third-parties do not claim such infringement.
The Sanchez Products
The PROFILE line of products is a comprehensive software solution that addresses
the major operational requirements of commercial, retail, international and
wholesale banking and financial institutions on both an in-house and
outsourced/service bureau basis. Product revenue includes software license
fees and product enhancement fees. The PROFILE product line consists of the
following four modules: (i) the PROFILE/Anyware core banking system, (ii) the
PROFILE/FMS Financial Management System, (iii) PROFILE for Windows and (iv)
PROFILE/ODBC. While PROFILE/Anyware and PROFILE/FMS can operate independently,
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all four applications can also be integrated into a cohesive and powerful
enterprise-wide banking solution. In general, while the most important features
of PROFILE have been internally developed, the Company also relies on software
provided by certain third parties for development languages, database
environments and certain application modules for treasury and trade finance
product offerings. The Company believes, however, that if such software were no
longer available to the Company, it could obtain substitute software from other
sources.
PROFILE/Anyware
PROFILE/Anyware is a client/server application comprised of a wide-area
enterprise server providing services to varied clients, including PROFILE for
Windows. An integrated set of application code provides a full range of
customer, deposit, lending and branch functionality, which includes management
reports, decision support functions, and data analysis functions.
PROFILE/Anyware provides both on line and batch interfaces to support a bank's
transaction processing and inter/intra clearing requirements. A detailed
description of certain other key features of PROFILE/Anyware follows:
Electronic Manufacturing. The architecture of PROFILE/Anyware was developed
utilizing a product manufacturing paradigm. This is in contrast to and a
fundamental distinction from most banking software in use today which was
designed to automate accounting and transaction processing activities. In a
manufacturing environment, products are composed of subassemblies and
components. PROFILE/Anyware contains thousands of individual software components
that can be hierarchically assembled into subassemblies, products and product
packages. The components are shared across traditional business lines and
product boundaries within an institution. This is further enhanced by the
ability of PROFILE/Anyware to assemble unique products for market segments as
small as an individual customer, a concept referred to as "mass customization".
Within this "electronic factory", a financial services organization can provide
the services of a value-added intermediary and package products and services
that support the specific requirements of the individual. In a future release of
PROFILE/Anyware, the Company plans to offer software that will allow consumers
to access these capabilities through a self-directed origination component that
will be integrated into their home banking application.
Customer Oriented. PROFILE/Anyware contains all customer records, loan and
deposit account records and transactions in an integrated database. Different
customer types can be defined by the institution, and specific data can be
captured and maintained for each customer type. Customer demographics, interest
yields, profitability and transaction activity are available real-time for
inquiry or analysis. This data can be used to provide service-use-incentives,
bundled product packages and integrated reporting. The system provides the
ability to "drill down" from summary data to individual account activity, to the
source document images that support customer transactions. Customers can be
linked to each other to create affinity groups or other meaningful market
segments.
The data dictionary, along with other meta-data definitions such as triggers,
procedures and reports can be modified or extended through a tool set provided
by the Company called DATA-QWIK to support a bank's unique customer
requirements. This feature supports the integration of data from applications
and databases operated outside of PROFILE/Anyware with the customer database.
PSL, PROFILE Scripting Language, provides a powerful development environment,
abstracting the database through a set of object classes, as well as providing
other banking classes, supporting both internal development and the ability for
customers to tailor their PROFILE/Anyware solution.
Open Architecture, Channel Independent and Scalable. PROFILE/Anyware is a
client-server based application that supports a variety of industry standard
application interfaces (APIs) and message protocols. The supported APIs
currently include DLL, DDE, HTML, SQL, ODBC and JDBC. The system can operate as
either a database server (two-tier) or application server (three-tier), or both,
depending on the client application requirements. PROFILE for Windows utilizes
both models to operate efficiently and reliably over a wide area network. The
standard APIs allow PROFILE/Anyware to function as a server for best-in-class
client and desktop applications.
PROFILE/Anyware is a message-based application which allows it to be interfaced
to a wide variety of interface devices including traditional branches, ATM
networks, POS networks, kiosk devices, home banking applications on dedicated
networks and the Internet, and mobile computing devices.
PROFILE/Anyware currently runs on IBM's AIX platform, Hewlett-Packard's HP-UX
platform and Compaq's UNIX/RISC platform, as well as Compaq's Open VMS. The
Company believes that these platforms provide the
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the best price/performance ratios available for commercial applications and are
more scalable than current Intel-based platforms. PROFILE/Anyware has been
installed and operated in institutions ranging in size from startup banks with
no initial customers to universal regional banks with hundreds of branches and
over 1.5 million accounts. It has also been installed in service bureaus
operating centrally for many institutions. The Company believes that the ability
to process very large databases (50 million accounts and 10 million transactions
per day) and the ability to operate on a 24-hour, seven-days-per-week basis in
real-time mode is a requirement for its target markets and it is currently
developing technology that it believes can support these requirements.
On line, Real-time, Continuous Availability. PROFILE/Anyware accepts on line and
batch transactions from a variety of transaction sources and processes them in
real-time, ensuring the most up-to-the minute database state. Inquiries from any
client device can access the system on line and retrieve the current status of
the database. Currently, the system accepts financial transactions 24-hours a
day. The Company is currently enhancing its software to accept non-financial
activity, such as account origination and maintenance, 24-hours a day as well.
The Company believes that this real-time capability will become a requirement
for direct banking applications.
International Functionality. PROFILE/Anyware is currently operating or being
installed in 14 countries and in seven languages. It is a multi-currency system
that denominates products and accounts in their base currency. It supports and
balances multiple cash currencies and provides exchange and revaluation
functions. PROFILE/Anyware is also Euro compliant, and it is currently
processing in both "in" and "out" Euro countries. The system contains the
product components that support the combined requirements of North American and
international financial institutions. The system also supports both the U.S.
style payment system (ACH and checks) and the European style electronic payment
system (payment/collection/standing orders, GIRO and SWIFT). The Company
believes that the requirements of its target markets will ultimately converge
and that the qualities of North American retail products and European payment
systems will be integrated into the other market.
PROFILE/FMS
PROFILE/FMS is an on line, real-time, multi-company, multi-currency, cost center
based accounting system. It contains a very flexible financial reporting tool
that allows banks to develop their own portfolio of sophisticated bank
management and executive reports. This application allows users to record,
consolidate, report and plan all financial activity within an institution.
PROFILE/FMS modules include general ledger, accounts payable, fixed assets,
prepaid, accrued and deferred item processing, financial and statistical
reporting, budgeting and bank reconciliation. It is tightly integrated with
PROFILE/Anyware and shares a common database and application components.
PROFILE for Windows
PROFILE for Windows is a graphical client for the PROFILE/Anyware enterprise
server with a centralized database. This product operates in a multi-branch,
multi-user client/server environment, supporting both traditional branches and
service centers as well as call centers supporting direct banks. The application
provides banking functionality under a graphical user interface, simplifying
customer use and navigation and providing enhanced customization and support of
new product features. PROFILE for Windows includes customer, teller and branch
management utilities.
PROFILE/ODBC
PROFILE/ODBC is an open connectivity database driver which allows institutions
to incorporate third-party applications with the PROFILE database for
versatility and increased operating efficiency.
The Sanchez Services
While PROFILE software license fees represent a material portion of the
Company's revenues, the Company also derives significant revenues from services.
The Company's primary service offerings include the following:
Project Services
Project Services are services provided on a one-time basis either during the
initial implementation or as contracted for by clients after conversion to
PROFILE. Implementation service revenues can range from $500,000 to over $4
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million for an individual project, and are typically delivered over a period of
10 to 15 months. Other project services typically delivered during the
implementation period include training, conversion, localization and software
customization. These project services are staffed by professionals trained in
the financial services industry who primarily work at the clients' locations and
follow a published methodology employing proven project management and
measurement techniques.
Project services delivered after a client converts to PROFILE typically include
software customization, training or version-upgrade consulting. The Company has
a specific group of employees who are focused on delivering these types of
services, although others from within the Company may also render such services.
Historically, the Company has contracted for project services on a fixed price,
fixed scope basis. During 1997 and 1998, the Company increasingly contracted for
project services on a time and material basis, at times in conjunction with its
third-party partners. The Company anticipates that this trend will continue in
1999 and beyond, with an increased emphasis on delivery of such services through
third-party partners.
Outsourcing Services
In conjunction with the acquisition of ArTech, the Company has launched an
e-banking service center offering called "e-PROFILE". The Company's intent
is to provide differentiated direct banking services to customers at a lower
cost and with less lead time than traditionally available. The Company intends
to position e-PROFILE as the premium provider of Internet and call center
components on the front end and marketing, accounting and decision making
systems on the back end, while being fully pre-configured to operate seamlessly
with the PROFILE/Anyware core banking system. Since ArTech currently supports
PROFILE processing for several U.S. based financial institutions, e-PROFILE can
be offered effective immediately.
Maintenance and Support Services
Currently, the major portion of the Company's delivery of worldwide customer
service and support is handled by a group in its headquarters in Malvern. This
group is responsible for help desk, research and product quality assurance. A
response team made up of research, quality assurance and programming personnel
is assigned when maintenance issues are identified. This team works together to
ensure that the customer issue is understood and dispatched accordingly. All
issues are tracked and measured, and daily and weekly reports are generated for
management review and action.
The Company believes that service response considerations play a major role in
an institution's selection of banking software products. To respond to this
need, the Company is continuing to enhance its ability to deliver localized
customer support and installation capability worldwide, either directly or
through third-party partners. Currently, the Company provides direct customer
service and application support from its office in Prague, and also provides
certain local support services to clients in Poland through its partnership with
ComputerLand. At this time, the Warsaw and Chester, U.K. offices are used
primarily for sales support and they may, in the future, house application
support capabilities if new business dictates.
Sales and Marketing
Enhanced Direct Sales and Marketing Activities
The Company has a worldwide direct sales and sales support force of
approximately 15 people. The Company is actively recruiting additional resources
to increase its existing direct sales capacity, both domestically and
internationally.
During 1998, the Company launched a comprehensive marketing campaign geared
toward increasing recognition of the corporate brand in North America and
Europe. The program included a combination of print advertising, public
relations, partnering programs and an informative site on the World Wide Web.
This campaign was an extension of the successful 1996/1997 campaign that
introduced PROFILE to the North American marketplace. During 1998, the trade
media responded with increased coverage of the Company and its products,
including a number of lead articles as well as inclusion in Forbes magazine's
annual list of the "200 Best Small Companies". During 1999, the Company intends
to continue to expand its marketing efforts to build a corporate and product
brand that is
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recognized throughout the industry. In particular, this effort will focus on
building brand awareness relative to e-PROFILE.
Third-Party Relationships
As previously discussed, the Company has established and maintained strategic
alliance/partnering agreements with Compaq, Hewlett-Packard, PwC, IBM and
ComputerLand. During 1997 and 1998, the Company also partnered with CUE Datawest
Ltd., a British Columbia based service bureau for credit unions, on certain
PROFILE implementation projects. This partnering relationship is somewhat unique
in that CUE Datawest has also been a PROFILE customer since 1991. In September
1998, the Company significantly expanded its relationship with IBM by entering
into a global partnership agreement. The Company believes that the efforts and
capabilities of IBM's marketing, sales and global service organizations will
greatly enhance its competitiveness in the Direct Banking and Top-Tier Banking
Markets where IBM is the current dominant hardware vendor worldwide. The global
agreement further provides for implementation specialists from IBM to receive
training in the use of PROFILE, with the intent of subsequently assuming
responsibility for installation of the PROFILE system for joint customers
worldwide. Additionally, the Company and IBM will jointly invest in various
engineering activities related to ensuring world-class performance by the
PROFILE system on IBM platforms. The Company is currently in discussions with
IBM regarding plans to extend these joint engineering activities to the IBM
S/390 platform, which is currently the most prevalent hardware platform in the
Top-Tier Banking Market.
PROFILE/Anyware and PROFILE/FMS are currently available on hardware platforms
offered by Compaq, Hewlett-Packard, and IBM. The Company currently offers
PROFILE for Windows on 32-bit Windows platforms, using an Oracle or Microsoft
SQL Server database. The Company is currently working toward making its
PROFILE/Anyware product available on both Oracle and DB2 databases.
During 1998, in addition to expanding its IBM relationship, the Company also
formed with Capital Services, Inc., a financial services and
distribution company based in Bombay, India. The newly formed company, named
Sanchez/Capital Services will have PROFILE distribution rights throughout India
and portions of the Middle East.
Throughout 1998, the Company engaged in various joint marketing, engineering,
training and sales proposal activities with its partners. Resources from both
PwC and ComputerLand were involved with client implementation projects in North
America and Europe, respectively. Further, PwC assumed prime contractor
responsibilities on certain implementation projects. In addition to the various
partners mentioned above, the Company also established relationships with
several smaller regional entities relative to providing implementation/system
integration services. During 1998, a total of 82 third-party individuals
successfully completed Sanchez sponsored training and received PROFILE
installation certification.
While the establishment of strategic alliances with third parties has been
important to the Company's past success and are a key to its future prospects,
the Company does not believe that its written understandings with such third
parties are necessary for the delivery of its products and services.
Pricing Strategy
The Company has historically priced its software products in three primary
components: (i) one-time license fees for the software up to a usage limit (for
example, number of users or number of customer accounts), (ii) fees for a full
range of services which complement its software products, including product
enhancement fees and implementation, consulting, conversion, training and
software customization services and (iii) recurring support and software
maintenance revenue. Customers who exceed the usage limit through growth or
acquisition pay additional license fees. The Company believes that there is
opportunity in pursuing a strategy of offering a lower initial license scope and
price, thereby promoting a more favorable cost justification model for
prospective customers. This type of pricing strategy facilitates an increased
potential for the Company to subsequently derive "growth based" or expansion
type license fees as the customer's business expands over time. Software
maintenance fees are paid in advance while all other fees and services are paid
in stages upon the completion by the Company of certain defined deliverables.
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In the Direct Banking Market, the Company will begin charging an ongoing monthly
fee for its e-PROFILE offering based on use, specifically the number of customer
accounts processed, although the Company in the future may employ other pricing
models in response to market conditions.
In any given year, the Company typically has three to four customers who each
account for in excess of 10% of its total annual revenues, although in 1998,
only one customer exceeded 10% of total revenues. The inability of the Company
from year to year to obtain such large installation engagements could have a
material adverse effect on the Company's operating results.
Product Development
The Company believes that it must constantly evolve and enhance both the
functional scope and technical foundation of its products to remain competitive.
In order to accomplish this, the Company has historically incurred significant
expenses related to development activities and may increase this investment in
the future. Total development expenses for 1998, 1997 and 1996 were $11.7
million, $7.6 million and $4.9 million, respectively. In addition to its
internal investment, the Company has obtained funding from its customers and
partners for numerous projects, including the development of European payment
system and SWIFT enhancements, Treasury integration, UNIX ports and product
internationalization. This enhancement revenue is reflected in product fees.
Normally, customer or partner funding is provided in exchange for a commitment
by the Company to provide product enhancements, to support and maintain the
software, or to design the software to the client's needs. In certain cases,
however, royalty agreements have been negotiated with its customers or partners
whereby the Company pays them royalties based on the revenues received by the
Company from the licensing of specific software products to end users. These
royalty agreements ordinarily expire after a period of years and the Company is
thereafter free to license the products to end users without having to pay any
additional royalties. Based on the expiration or completion of certain
significant royalty agreements during 1998, the Company anticipates that its
royalty expense level in 1999 will be reduced relative to amounts expensed over
the past several years.
Product development follows a formal software development life cycle process.
The Company has developed and acquired products that assist it in defining,
planning, tracking, measuring and managing the development process. The Company
realizes that large software projects can incur substantial cost, schedule and
technical risk. However, to date the Company has not canceled any of its
development projects.
In order to efficiently focus on both functional and technical requirements, the
product development area is subdivided into two groups called the Product
Development Group and the Technology Development Group. The Product Development
Group is primarily responsible for defining plans for new product versions and
developing application software enhancements for the PROFILE product line. This
group is also directly involved in sales and sales support events such as
customer demonstrations and request for proposal ("RFP") responses. The Company
believes that interacting with customers and prospects during the sales process
transfers customer requirements and exposes product strengths and weaknesses
directly to the product management staff, resulting in a more competitive
offering.
The Technology Development Group is primarily responsible for defining
technology and platform layer enhancements to the PROFILE product line. This
group evaluates and implements operating system ports, programming languages,
database systems, and development and productivity tools. After this group
successfully implements a new technology component under an existing application
component, it is responsible for propagating the technology through the Company.
In late 1998, the Company announced the selection of Bluestone(R) Software,
Inc.'s Sapphire/Web(R) application server framework as the software component it
will incorporate into its PROFILE family of products to further expand its range
of electronic banking solutions. During 1999, the Company's Technology
Development Group will be utilizing Bluestone's Sapphire/Web technology in
developing a PROFILE application server designed to increase support for
e-commerce computing and enterprise-wide systems integration. This new server
technology will provide a flexible development, integration and deployment
framework that allows applications to operate independently of any delivery
systems. The Company believes that this new technology will be particularly
relevant to large, top-tier organizations seeking to support an integrated
banking environment, including the new requirements related to e-commerce, while
concurrently sustaining and transitioning existing legacy systems.
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Complex software products such as those offered by the Company can contain
undetected errors or performance problems, particularly when first introduced or
when new versions are released. The Company's products have, from time to time,
contained software errors that were discovered after commercial introduction.
There can be no assurance that performance problems or errors will not be
discovered in the Company's products in the future.
Employees
As of February 28, 1999, the Company had 307 full-time employees, 157 of whom
were engaged in product development (including 37 of whom were employed in
technology development), 21 of whom were engaged in sales and marketing, 33 of
whom were engaged in finance, administration and internal information systems
and 96 of whom were engaged in operations/client services. In addition to these
staffing figures, ArTech employs 24 full-time employees as of February 28, 1999,
and plans to aggressively add staff during the first half of 1999. The Company's
employees are not represented by any collective bargaining agreements, and the
Company has never experienced a work stoppage.
The Company believes that its continued success will depend, to a significant
extent, upon the efforts and abilities of its senior management, in particular
the Company's Chairman and its Chief Operating Officer. Further, the Company
believes that its future success will depend in large part upon its ability to
attract and retain highly skilled technical, management and sales and marketing
personnel. Competition for technical personnel is especially intense, and could
potentially constrain the Company's growth rate.
In addition to full-time employees, the Company has historically utilized the
services of various independent contractors, primarily for overseas
implementation projects and certain product development.
Competition
Financial institutions have two fundamental alternatives for obtaining data
processing capabilities: (i) in-house applications, either those that are
developed internally or those that are purchased from third party vendors and
(ii) outsourcing, either as a part of a total outsourcing solution or where a
third party acts as a service bureau. Entering 1999, the addition of the
Company's newly announced e-PROFILE offering will allow it to effectively
satisfy both of these alternatives. In the U.S. market, client/server
application software has only recently been made available to banks, but it is
gaining market acceptance and market share. In the international market, there
are a number of client/server alternatives available, as well as traditional
mainframe and mini-computer based systems.
The Company's major competitors in all target markets are generally larger in
size and resources. Each competitor has a specific strategy, no particular niche
in the market and most are currently in a growth by acquisition and a defensive
marketing strategy. There is only one clear U.S. market leader, and all major
competitors tend to promote the fact that they are large in both
technology/professional resources and established clientele base. The Company is
well positioned to take advantage of this situation by positioning PROFILE as a
unique solution with an architecture unlike any in the industry, with full
capability to be deployed on both an in-house and outsourced basis. The
Company's primary competitors in the Top-Tier and Direct Banking Markets have
been ALLTEL, Fiserv, M&I and CSC/Hogan. In the Emerging Banking market
competitors have been ALLTEL, Fiserv, Andersen Consulting, Baton Rouge
International and Kindel. In mid-1998, an additional new competitor emerged as
SAP AG announced that it planned to introduce a comprehensive industry specific
software solution for the banking industry. In addition, there are several UNIX
based vendors which in the future could become primary competitors as well as a
number of local software organizations.
In the Top-Tier Banking Market segment, the Company believes that the principal
competitive factors are the ability to: (i) demonstrate robust retail and
international banking functionality, (ii) operate on UNIX platforms, (iii)
service a high volume of accounts and branches, (iv) partner with a wide variety
of payment, middleware and client system vendors, (v) demonstrate a proven track
record of successful implementations and (vi) reach decision makers of the top
1,000 banks in the world.
The Company believes that the principal competitive factors in the Direct
Banking Market include the ability to: (i) position direct banking as a new
business opportunity requiring new technology, (ii) offer a comprehensive system
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outsourcing capability (minimal up-front capital investment and rapid
time-to-market), (iii) reach decision makers of financial institutions in the
U.S. and Canada with assets in excess of $4 billion, (iv) connect
PROFILE/Anyware to a wide variety of payment, middleware and client systems
including CheckFree, Visa, Security First, Edify, Intuit, Netscape and Microsoft
and (v) establish alliances and partnerships with the above named vendors.
The Company believes that the principal competitive factors in the Emerging Bank
Market include the ability to: (i) demonstrate robust retail and international
banking functionality, including multi-currency and multi-language processing,
support of local regulations, and support of local payment systems, (ii) operate
on UNIX platforms, (iii) service a high volume of accounts and branches, (iv)
demonstrate a proven track record of successful implementations, (v) develop
local presence directly or through partnerships and (vi) demonstrate the ability
to process the new European Monetary Unit.
The Company believes that none of its current competitors offer application
software that provides the level of product manufacturing flexibility and
international scope of functionality that is featured in the Company's system.
Further, the Company believes that few of its competitors currently have the
capability to offer customers the choice of full in-house installation or
third-party service bureau processing. The Company, however, expects
additional competition from other established and emerging companies as the
client/server market continues to develop and expand. In addition, competition
could increase as a result of software industry consolidations.
As mentioned above, many of the Company's competitors have longer operating
histories and greater competitive resources than the Company. These resources
may provide them with an advantage in terms of adapting to industry changes and
emerging technologies. Further, the client/server software market is
characterized by rapid technological change and frequent new product
introductions. New technologies and emerging industry standards can render
existing products and services obsolete in a very short period of time. The
Company's future success will depend upon its ability to enhance its current
products and to develop and introduce new products that keep pace with
technological developments and emerging industry standards, while addressing the
increasingly sophisticated needs of its customers.
Backlog
The Company's backlog at December 31, 1998 amounted to $33.9 million. The
components of the backlog were $6.7 million for product and services and
$27.2 million for maintenance fees. The Company anticipates recognizing
approximately $15.3 million of this backlog in the year 1999. At December 31,
1997, the Company's backlog amounted to $34.7 million, consisting of $12.4
million for product and service revenues and $22.3 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.
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Glossary
ACH Automated Clearing House. A processing and delivery system
that provides for the distribution and settlement of
electronic credits and debits among a large number of
financial institutions.
AIX IBM's implementation of the UNIX operating environment.
API Application Programming Interface. A defined calling standard
for a software module that provides a consistent, standard set
of calls to access the functions provided by the module.
Client/Server System architecture in which the server component acts as the
Architecture source of data and the client component uses the data to
perform various functions.
DCS Distributed Control System. A control system architecture
developed in the 1970s.
DDE Dynamic Data Exchange. A Microsoft(R) standard for
communicating data between two programs.
DLL Dynamic Link Library. A DLL contains a library of
machine-language procedures that can be linked to programs as
needed at run time. Programs do not need to include code to
perform common functions because that code is available in the
DLL. Changes can be made once to the DLL routine instead of
each individual program.
DecNet Digital Equipment Corporation software that provides a network
linkage between Digital computers to allow users to access
information and resources across systems.
Digital UNIX/RISC The UNIX operating system for Digital's Alpha processor. The
Alpha processor uses a Reduced Instruction Set Chip ("RISC")
architecture.
Digital OpenVMS Digital Equipment Corporation's proprietary operating system
for its VAX and AXP machines.
Dual-Site The ability to provide operational resiliency through the use
Failover of systems at widely separated sites, whereby failure of one
Capabilities system allows processing to be picked up and continued on the
surviving system.
GIRO A payment method, similar to a check, used in many European
countries.
GUI Graphical User Interface.
HP-UX Hewlett-Packard's implementation of the UNIX operating
environment.
HTML Hypertext Markup Language. The language used to design and
display web pages.
JDBC Java Database Connectivity. A defined application program
interface that provides a database independent mechanism
through which a Java-based application can query and update
data in a variety of relational database management systems.
See also ODBC.
LAN Local-Area Network. A high speed network connecting personal
computers, workstations and, in some cases, mainframe
computers.
M programming A high-level interactive computer programming language
developed for use in complex data handling operations. M is an
ANSI standard language.
Meta data The data which defines the data. For example, a relational
database table definition is data, but acts to define the
lower-level information contained within the table being
defined.
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Glossary - continued
Multi-platform Processes or pieces of hardware that operate on various
hardware and software systems without modification.
ODBC Open Database Connectivity. The Microsoft(R) standard that
provides a database independent mechanism through which a
Windows or Windows NT(TM) application can query and update
data in a variety of relational database management systems.
The ODBC API (Application Programming Instruction), for
example, allows a single Windows application to access Oracle,
Sybase and other databases.
Open Systems System design that allows users to take advantage of
Architecture applications from multiple vendors by permitting open access
to all internal components and by supporting a wide variety of
standards, operating environments and connectivity
methodologies.
Port The process of moving a software application to a new hardware
platform, operating system, or language environment.
PSL PROFILE Scripting Language. A scripting language combining the
procedural components of the M programming language, extended
by object capabilities. PSL provides a powerful development
environment for abstracting the database through a set of
object classes as well as providing other banking classes for
use in development and customization.
RDBMS Relational Database Management System. A software system that
stores data as a related set of data tables, allows the data
to be queried and updated and enforces the integrity of the
data. RDBMSs typically act as servers for multiple clients on
a network.
Real-Time Characteristic of a process that recognizes changes in dynamic
data as the changes occur, communicates those changes and
manages the resultant effects of the changes.
Relational File structure that is logically connected by one or more
Database data structures in a separate file.
SQL Structured Query Language. A standardized language used by
RDBMSs to query, update and manage a database.
SWIFT Society of Worldwide Interbank Financial Telecommunication.
SWIFT provides institutions with an automated communication
link between financial institutions.
Systems A Company that specializes in integrating products from
Integrator multiple vendors to provide an information systems solution to
a customer.
TCP/IP Transmission Control Protocol/Internet Protocol. TCP/IP
provides a low level transport mechanism, similar to DECNet,
for linking a variety of computers together in a network.
TCP/IP is the common network protocol for UNIX systems and is
used as the network for the Internet.
Turnkey Hardware and software applications that fulfill all of a
customer's predefined requirements at the time of purchase.
UNIX UNIX is a highly modular operating system or family of
operating systems that provides multi-user, multi-tasking
capabilities on a wide variety of platforms.
WAN Wide-Area Network. A network that allows communications
between locations.
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Item 2. Properties.
The Company's headquarters and principal administrative, sales and marketing,
and application development operations are located in approximately 53,000
square feet of leased space in Malvern, Pennsylvania. These leases expire in
2003. The Company also leases office space in Warsaw, Poland; Prague, Czech
Republic; Chester, U.K. and Singapore. The Company anticipates that additional
space will be required as the business expands and believes that it will be able
to obtain suitable space as needed.
Item 3. Legal Proceedings.
In the opinion of management, there are no claims or actions against the Company
the ultimate disposition of which will have a material adverse effect on the
Company's results of operations or consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the fourth quarter of 1998.
Item 4A. Executive Officers of the Registrant.
The executive officers of the Company are as follows:
- --------------------------------------------------------------------------------
Name Age Position
- --------------------------------------------------------------------------------
Michael A. Sanchez.............. 41 Chairman of the Board of Directors
Frank R. Sanchez................ 42 President, Chief Operating Officer
and Director
Ronald J. Zlatoper.............. 57 Chief Executive Officer and Director
Joseph F. Waterman.............. 47 Senior Vice President, Treasurer
and Chief Financial Officer
Stewart A. Jack................. 51 Managing Director of Europe and the
Middle East
Deborah C. Kovacs............... 36 Senior Vice President - Product
Management
Dan S. Russell.................. 48 Senior Vice President - Technology
Development
Daniel W. Sollis................ 40 Senior Vice President - Sales
John H. Teaford................. 51 Senior Vice President - Strategic
Alliances
Michael L. Turner............... 45 Senior Vice President - Business
Development
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Michael A. Sanchez founded the Company in 1979 and has been its Chairman since
its inception. He also served as Chief Executive Officer from inception until
April 1997. In addition to providing strategic direction for the Company, Mr.
Sanchez is currently responsible for overseeing Sanchez's marketing activities.
Mr. Sanchez has over 19 years' experience in financial services organization
data processing systems. Mr. Sanchez is the brother of Frank R. Sanchez, the
Company's President and Chief Operating Officer.
Frank R. Sanchez has been the President and Chief Operating Officer of the
Company since 1994 and a Director of the Company since his employment with the
Company began in 1980. In his capacity as Chief Operating Officer, Mr. Sanchez
is responsible for the sales and technology development functions of the
Company. He was the principal architect of the PROFILE integrated banking system
and continues to be responsible for developing the Company's product and
technical strategy. From 1980 until 1994, Mr. Sanchez was the Executive Vice
President in charge of Technology and Product Development. Mr. Sanchez is the
brother of Michael A. Sanchez, the Company's Chairman.
Ronald J. "Zap" Zlatoper has been the Chief Executive Officer since joining the
Company in April 1997. Mr. Zlatoper oversees the areas of finance, product
management, client services and administration. Prior to joining the Company,
Mr. Zlatoper retired from the U. S. Navy in November 1996 as a four-star admiral
after 33 years of service. He served as Commander in Chief of the U.S. Pacific
Fleet from 1994 until his retirement. From 1991 to 1994, he served as Chief of
Naval Personnel and Deputy Chief of Naval Operations for Manpower and Personnel.
Joseph F. Waterman has been a Vice President and the Chief Financial Officer of
the Company since he joined the Company in August 1992. Mr. Waterman is
generally responsible for the Company's financial, legal, human resources and
management information system areas. Prior to joining the Company, Mr. Waterman
was employed by Safeguard Scientifics, Inc. ("Safeguard") and/or certain of its
partnership companies for 13 years.
Stewart A. Jack joined the Company as Managing Director, European Operations, in
May 1996. Mr. Jack's principal responsibility is overseeing the sales,
implementation and customer support activities in Europe and the Middle East.
From 1992 through May 1996, Mr. Jack was the Managing Partner of IDOM Poland.
His principal activity in that capacity was to develop information technology
strategies and evaluate information technology options for financial
institutions.
Deborah C. Kovacs has been employed by the Company since 1988 and has been the
Senior Vice President of Product Management since August 1994. Ms. Kovacs, who
has over 10 years of experience in the design, development and implementation of
banking and trust systems, is responsible for functional enhancements to the
PROFILE product line. Upon her employment with the Company, Ms. Kovacs served as
a Product Analyst until 1992 when she was promoted to Product Manager for the
European Banking System.
Dan S. Russell has been employed by Sanchez since 1985 and has been the Senior
Vice President of Technical Development since 1994. Mr. Russell, who has over 25
years of industry experience, is generally responsible for all technology-based
development and the underlying architecture of the PROFILE product line. When
Mr. Russell joined the Company in 1985, he served as the Manager of Development
and was promoted to Vice President of Development in 1987 where he was
responsible for both product and technology development. Mr. Russell remained in
the latter position until his promotion to Senior Vice President in 1994.
Daniel W. Sollis has been employed by the Company since April 1996, serving as
Senior Vice President of Sales since November 1997. Mr. Sollis, who began his
career with the Company as vice president of North American sales, now oversees
worldwide sales activities and business development. Prior to working at the
Company, Mr. Sollis spent 16 years with Digital Equipment Corporation, beginning
as a sales representative and concluding his tenure there as general manager of
financial service industry business in Canada.
19
<PAGE>
John H. Teaford has been Senior Vice President of Strategic Alliances with the
Company since February 1998. Mr. Teaford's responsibilities include researching
and establishing third-party partnerships, joint ventures and other business
opportunities worldwide. From 1985 until February 1998, Mr. Teaford periodically
worked in a consultant capacity with the Company. During that period, he was
President of J.H. Teaford and Company, a financial advisory, marketing and
management consulting company. Mr. Teaford also has extensive experience in
sales, marketing, financial services, technology and manufacturing industries,
both domestically and internationally.
Michael L. Turner joined the Company in August 1991. He has served as Senior
Vice President of Business Development since 1994. He is responsible for
managing account relationships with Global Customers. From August 1991 to
1994, Mr. Turner served as Vice President of Services. Prior to joining the
Company, Mr. Turner held various senior management positions in various
information technology services businesses, including Vice President for
Finance and Operations of GDK Systems, Vice President, Business Management at
SEI, Inc. and as a Senior Manager with Andersen Consulting.
20
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
The Company's common stock has been listed on the National Market System of
Nasdaq under the symbol "SCAI" since it began trading on November 14, 1996. The
following table sets forth, on a per share basis for the periods shown, the
range of high and low sales prices of the Company's common stock as reported by
Nasdaq.
High Low
---- ---
Fiscal Year 1997:
First quarter 9 5/8 3 9/16
Second quarter 10 3/8 5
Third quarter 19 1/4 9 1/8
Fourth quarter 29 7/8 14 1/2
Fiscal Year 1998:
First quarter 34 5/8 17 3/4
Second quarter 25 1/4 13 3/4
Third quarter 31 7/8 15 3/8
Fourth quarter 33 16
As of March 19, 1999 the Company had outstanding 11,748,550 shares of common
stock held by approximately 7,800 shareholders including beneficial owners of
the common stock whose shares are held in the names of various dealers,
clearing agencies, banks, brokers and other fiduciaries.
Holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of outstanding Preferred
Stock. To date, the Company has not paid any cash dividends on its common stock
and does not expect to declare or pay any cash or other dividends in the
foreseeable future.
21
<PAGE>
Item 6. Selected Financial Data.
The statement of operations and balance sheet data presented below have been
derived from the Company's audited consolidated financial statements. The data
presented below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Consolidated
Financial Statements and the notes thereto and other financial information
appearing elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------
In thousands, except per share data
<S> <C> <C> <C> <C> <C>
Statement of Operations Data (1):
Revenues ........................ $44,059 $28,891 $18,513 $18,497 $16,618
Earnings before income taxes .... 10,763 5,327 2,015 2,136 2,029
Net earnings .................... 7,034 3,676 1,407 1,220 3,071
Basic earnings per share ........ .61 .33 .16 .15 .39
Diluted earnings per share ...... $ .57 $ .31 $ .15 $ .13 $ .33
Weighted average common shares
outstanding ................... 11,521 11,035 8,573 8,363 7,930
Weighted average common and
dilutive shares outstanding ... 12,272 11,975 9,392 9,680 9,376
Balance Sheet Data:
Cash and cash equivalents ....... $27,177 $12,827 $15,531 $ 5,690 $ 2,667
Working capital ................. 27,090 20,585 19,089 4,441 1,944
Total assets .................... 43,285 33,222 28,551 12,873 9,463
Long-term debt, including
current portion ............... 314 524 787 947 687
Total shareholders' equity ...... 31,772 23,233 18,714 5,078 3,625
Other Operating Data:
Backlog:
Products and services ........... $ 6,667 $12,402 $ 8,093 $ 5,816 $ 9,438
Maintenance ..................... 27,253 22,300 11,704 11,809 10,284
-----------------------------------------------
Total backlog ................... $33,920 $34,702 $19,797 $17,625 $19,722
Revenue per full time
equivalent employee ........... $ 152 $ 136 $ 121 $ 117 $ 120
</TABLE>
(1) The financial statements for all periods have been restated to reflect the
pooling with Greystone Technology Corporation on February 5, 1998.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following information should be read in conjunction with the information
contained in the Consolidated Financial Statements and notes thereto appearing
elsewhere in this Annual Report on Form 10-K.
This Item 7 and Item 1, Business, contain "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including, among others, statements containing
the words "believes," "anticipates," "estimates," "expects" and words of similar
import. Such statements are subject to certain risks and uncertainties, which
include but are not limited to those important factors discussed in cautionary
statements throughout the section below and elsewhere in this document, and are
qualified in their entirety by those cautionary statements.
Overview
Sanchez Computer Associates, Inc. ("The Company") designs, develops, markets,
implements and supports comprehensive banking software called PROFILE(R) for
financial services organizations worldwide. Sanchez's
22
<PAGE>
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 37 clients in 14 countries serving in
excess of 350 financial institutions.
The Company derives its revenues from product fees, which include software
license fees and product enhancement fees, service fees, which include client
implementation and consulting fees and recurring maintenance fees related to
its software products. 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. Recurring
maintenance fees are normally billed annually in advance and recognized into
revenue ratably over the period covered.
The Company posted the strongest operating results in its history for the
year ended December 31, 1998. During 1998, eight contracts valued at more
than $35 million were executed with banking organizations in five countries.
Revenues for 1998 increased by 52.5% to $44.1 million, compared to $28.9
million in 1997, reflecting increased demand for the Company's products and
services, particularly in the United States and Western Europe. Net earnings
for the year ended December 31, 1998 increased to $7 million, or $.57 per
diluted share, compared to $3.7 million, or $.31 per diluted share, in 1997,
an increase of 84% in earnings per share.
Effective February 1, 1999 the company acquired ArTech Financial Technology
Services, L.L.C., a banking technology service center located outside of
Pittsburgh, Pennsylvania. In conjunction with the purchase the Company
announced the addition of a significant new service offering called
e-PROFILE.com ("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. The Company believes that
e-PROFILE will provide a new and significant avenue by which the PROFILE
product can be introduced to top-tier institutions with a lower initial
capital hurdle, rapid time-to-market and effectively no disruption to
existing legacy systems. The Company believes that the growth of electronic
commerce will result in a large increase in the volume of financial
transactions which occur on line, as well as a greater demand for customized
products and services. The Company believes that the widely-reported
increases in the number of shoppers buying gifts on line during the 1998
holiday season, for example, provides ample evidence of growing significance
of e-commerce. Furthermore, the Company believes the the capabilities of
PROFILE, particularly the e-PROFILE service offering, will provide financial
services providers with the technology to strategically respond to this
consumer banking evolution with a minimal "up-front" investment and the
ability to quickly enter the market with selected product offerings in a
30-to 90-day time period. Under this model, the Company will be partnering
with leading-edge third party technology partners for each component in the
e-PROFILE solution. From Web browser applications to data warehousing
capabilities, financial service customers utilizing e-PROFILE will have a
choice of various technology options with each component of their customized
solution. This "menu-driven" approach allows subscribers to tailor their
e-PROFILE environment to best suit their particular customer base and
marketing objectives.
The Company's backlog at December 31, 1998 amounted to $33.9 million. The
components of the backlog were $6.7 million for product and service revenues
and $27.2 million for maintenance fees. The Company anticipates recognizing
approximately $15.3 million of this backlog in 1999. At December 31, 1997,
the Company's backlog amounted to $34.7 million, consisting of $12.4 million
for product and service revenues and $22.3 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.
Historically, the Company's revenues were dependent upon opportunities developed
by its first hardware manufacturing partner, Compaq Computer Corporation
("Compaq" ) - formerly Digital Equipment Corporation - and by the Company's
direct marketing efforts. In recent years, the Company has established marketing
agreements with IBM Corporation ("IBM"), Hewlett-Packard Company
("Hewlett-Packard"), PricewaterhouseCoopers, LLP and via joint venture
agreements, with ELBA CSB S.A., a Polish technology services firm and Direct
Capital Services (P) Ltd., an Indian technology services firm. Although
substantially all of the Company's revenues prior to 1997 were generated in
conjunction with systems running on Compaq platforms, the Company now has
converted clients to IBM and Hewlett-Packard platforms. The Company intends to
continue its efforts with all of its various partners to identify future
opportunities. In addition, the Company has been investing additional resources
to enhance its own direct sales and marketing efforts.
23
<PAGE>
Results of Operations
The following table sets forth for the periods indicated selected statement of
operations data:
-----------------------------------
Year Ended December 31,
Dollars in thousands 1998 1997 1996
-----------------------------------
Revenues
Products .............................. $ 25,854 $ 15,581 $ 8,832
Services .............................. 11,571 7,904 5,086
Software maintenance fees ............. 6,634 5,406 4,595
--------- --------- ---------
Total revenues ...................... $ 44,059 $ 28,891 $ 18,513
========= ========= =========
Percentage Relationship to Total Revenues
Revenues
Products .............................. 58.7% 53.9% 47.7%
Services .............................. 26.2 27.4 27.5
Software maintenance fees ............. 15.1 18.7 24.8
--------- --------- ---------
Total revenues ...................... 100.0 100.0 100.0
Operating expenses
Product development ................... 26.5 26.1 26.6
Product support ....................... 8.7 11.1 12.4
Implementation and consulting ......... 15.7 19.5 17.3
Sales and marketing ................... 13.0 14.0 16.7
Royalties and sublicense fees ......... 2.1 2.7 9.1
General and administrative ............ 11.7 11.2 8.8
--------- --------- ---------
Total operating expenses ............ 77.7 84.6 90.9
Earnings from operations ................ 22.3 15.4 9.1
Interest income, net .................... 2.2 3.0 1.8
--------- --------- ---------
Earnings before income taxes ............ 24.5 18.4 10.9
Income tax provision .................... 8.5 5.7 3.3
========= ========= =========
Net earnings ............................ 16.0% 12.7% 7.6%
========= ========= =========
1998 Compared to 1997
Revenues. The Company's revenues increased by $15.2 million, or 52.5%, to $44.1
million in 1998, as each revenue category improved over 1997. Product revenues
increased by $10.3 million, or 65.9%, primarily due to increased activity during
the year in the United States and Western Europe markets, as well as
account-based license expansion fees in Western Europe. Service revenues
increased by $3.7 million, or 46.4%, in 1998 over 1997. Most of the growth is
attributable to the increased levels of PROFILE projects in-process and funded
pre-contract evaluation activity in the U.S. marketplace. The significant
contributors to the growth of products and services in the U.S. were Citigroup
Inc., The Sumitomo Bank, Ltd. and Federal Home Loan Bank of Pittsburgh. ING
subsidiary Interadvies N.V. was the largest contributor in Western Europe.
Software maintenance fees increased by $1.2 million, or 22.7%, over 1997 levels,
primarily due to the larger installed client base in 1998.
24
<PAGE>
Product development. Product development expenses increased $4.1 million, or
54.3%, in 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.
Staffing increased 69% in 1998 for this area of the Company to assist with
various evaluation activities for Citigroup Inc., as well as certain
system performance improvement projects. More specifically, staffing-related
expenditures increased by $3.3 million in 1998 as compared to 1997. Despite the
increased investment in this category, the percent relationship to total
revenues increased only slightly, from 26.1% in 1997 to 26.5% in 1998.
Product support. Product support expenses increased by $659,000, or 20.6%, for
the year ended December 31, 1998, primarily due to increases in staffing levels
in 1998 required to support the larger converted client base, as well as the
impact of market adjustment salary increases.
Implementation and consulting. Implementation and consulting expenses increased
by $1.3 million, or 23%, for the year ended December 31, 1998, primarily due to
costs related to the corresponding increase in services revenue of $3.7 million
(a 46.4% increase relative to the 1997 year). The primary components of this
cost increase were the increased utilization of third-party consultants and
subcontractors required to support the increased revenue levels, increased
staffing and related overhead and certain non-reimbursable project travel costs.
The gross margin relative to associated revenues increased in 1998 to 40.1% from
28.7% in 1997, due to more favorable billing rates based on increased time and
material projects in 1998 versus the fixed-fee projects that were more prevalent
in prior years.
Sales and marketing. Sales and marketing expenses increased by $1.7 million, or
42%, for the 1998 year, as the Company continued to increase its direct coverage
in this area with additional staffing and increased spending relative to the
brand awareness advertising and promotion campaign for PROFILE/Anyware. Due to
the increase in total revenues in 1998, however, sales and marketing expenses as
a percent of total revenues decreased from 14% in 1997 to 13% for 1998. Although
the Company will continue to encourage sales prospects generated through its
various third-party partners, management also believes that it is important for
the Company to continue to increase its own direct sales and marketing efforts.
General and administrative. General and administrative expenses increased during
the year ended December 31, 1998 by $1.9 million, or 59.2%. The $1.9 million
increase is attributable to a number of cost-related growth factors, including
increased staffing, increased incentive pay 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 34.6% of income before income taxes, as
compared to 31% in 1997. The 1998 increase is primarily due to the Company's
increased U.S. revenues, resulting in higher state income taxes, as well as a
reduction in benefit derived from our foreign sales corporation.
1997 Compared to 1996
Revenues. The Company's revenues increased by $10.4 million, or 56.1%, to $28.9
million in 1997, as each revenue category improved over 1996. Product fees
increased by $6.7 million, or 76.4%, primarily due to new contracts closed
during the year in the Canadian and U.S. markets and funded enhancement work
associated with the Company's entry into new geographic markets. Service revenue
increased by $2.8 million, or 55.4%, in 1997 over 1996, with most of the growth
being derived from implementation projects in Canada, the United States and
Asia. Software maintenance fees increased by $811,000, or 17.6%, over 1996
levels, primarily due to the larger installed client base in 1997.
Product development. Product development expenses increased by $2.6 million, or
53.2%, in 1997, due to the ongoing impact of the Company's strategic decision to
increase investments in development for various technology projects, including
the porting of its software to additional platforms and enhancements to
PROFILE/Anyware. In particular, there were significant staffing additions in
this area throughout 1997, as well as an increase in utilization of third-party
programming resources relative to 1996 levels.
Product support. Product support expenses increased by $903,000, or 39.4%, in
the year ended December 31, 1997, primarily due to substantial increases in
staffing levels in 1997 required to support the larger converted client
25
<PAGE>
base, as well as the impact of having a full year of expenses for the Prague,
Czech Republic support office, which was opened during 1996.
Implementation and consulting. Implementation and consulting expenses increased
by $2.4 million, or 75.6%, in the year ended December 31, 1997, primarily due to
a corresponding increase in service revenues of $2.8 million, a 55.4% increase
relative to the 1996 year. The primary components of this cost increase were the
increased utilization of third-party consultants and subcontractors required to
support the increased revenue levels, increased staffing and related overhead
and certain non-reimbursable project travel costs. The gross margin relative to
associated revenues decreased in 1997 to 28.7% from 36.9% in 1996, due primarily
to more extensive utilization of more costly third-party resources as well as
higher costs with respect to two, fixed-fee client implementation projects.
Sales and marketing. Sales and marketing expenses increased by $948,000, or
30.7%, in the 1997 year, as the Company continued to increase its direct
coverage in this area, primarily via staffing increases in selected foreign
market locations. In conjunction with the increased 1997 staffing and revenue
levels, both travel and commission expenses increased significantly in 1997
relative to 1996 levels.
Royalties and sublicense fees. The Company is obligated to pay royalties based
on the collection of certain license fees. These obligations have varying terms.
The Company is also obligated to pay sublicense and maintenance fees to certain
third-party licensors, primarily related to treasury and trade finance product.
These amounts will vary depending upon the applicable revenue components subject
to such fees. For the year ended December 31, 1997, this expense category
declined by $891,000, or 53.1%, relative to the 1996 level. The primary reason
for this decline is a $735,000 decrease in royalty expense in the 1997 period,
attributable to a lower level of product revenues subject to royalty payment.
General and administrative. General and administrative expenses increased during
the year ended December 31, 1997 by $1.6 million, or 99.1%, due primarily to a
$500,000 bad debt allowance which was established during the fourth quarter.
This reserve was required primarily due to an implementation contract in the
Asian marketplace which has been suspended pending the resolution of the
financial and currency crisis in that region. The receivables related to this
project were written off against this reserve in 1998. Absent the impact of this
reserve, general and administrative expenses would have increased by $1.1
million, or 68.4%, relative to 1996 levels. The $1.1 million increase is
attributable to a number of factors which include additional expenses related to
being a public company, growth of the business costs such as increased staffing,
costs related to employee recruitment and training costs for certain third-party
partners.
Interest income, net. Interest income, net, increased by $561,000 in 1997 due to
income earned on higher invested cash balances, primarily attributable to the
$11.8 million of net proceeds generated by the Company's initial public offering
in December 1996.
Income tax provision. Taxes in 1997 were 31% of income before income taxes, as
compared to 30.2% in 1996. During 1997, the Company's tax rate was lower than
the statutory rate of 34%, primarily due to the utilization of its foreign sales
corporation.
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 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
26
<PAGE>
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. 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 mid 1999.
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
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 $27.2 million at December 31, 1998. Cash flow
from operations for 1998 was $15.9 million, $22,000 in 1997 and ($1.0
million) in 1996. Net cash provided by operating activities in 1998 were
primarily due to a reduction in accounts receivable (days sales outstanding
decreased from 155 days at December 31, 1997 to 68 days at December 31, 1998)
and increases in accounts payable, accrued expenses and income from
operations. The significant receivable reduction in 1998 is due to
approximately $9.0 million in contract payments received in December. In
addition, the receivable balance at December 1997 was unusually high due to 3
new contracts closing and the achievement of several milestones on other
contracts, resulting in significant billings late in the year. Partially
offsetting these sources of funds was the decrease in deferred revenues. The
cash provided by operations in 1997 from net earnings and non-cash expenses
were offset by increases in accounts receivable and contracts in process. Net
cash used in operating activities during 1996 was mainly attributable to
increases in contracts in process and accounts receivable, partially offset
by net earnings and increases in accounts payable and deferred revenues. 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.
The Company's business is generally not capital intensive. Capital asset
expenditures for 1998 amounted to $2.0 million as compared to $1.6 million in
1997. The increase in capital expenditures during 1998 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. The Company's initial public offering in
December 1996 generated net proceeds of $11.8 million.
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 and at a minimum through 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 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.
27
<PAGE>
Forward-looking Statements
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, 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.
Item 7A. 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.
28
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Report of Independent Public Accountants.....................................30
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998 and 1997.............31
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.......................................32
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1998, 1997, and 1996......................................33
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996....................................................34
Notes to Consolidated Financial Statements...............................35
Schedule II - Valuation and Qualifying Accounts for the Years Ended
December 31, 1998, 1997 and 1996.........................................45
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sanchez Computer Associates, Inc.:
We have audited the accompanying consolidated balance sheet of Sanchez Computer
Associates, Inc. (a Pennsylvania corporation) and subsidiaries as of December
31, 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sanchez Computer Associates,
Inc. and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Arthur Andersen, LLP
Philadelphia, Pennsylvania
February 5, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Sanchez Computer Associates, Inc.
We have audited the accompanying consolidated balance sheet of Sanchez Computer
Associates, Inc. and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sanchez Computer Associates,
Inc. and subsidiaries as of December 31, 1997, and the consolidated results of
their operations and their cash flows for the years ended December 31, 1997 and
1996, in conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 6, 1998
30
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
December 31,
-----------------------------
ASSETS 1998 1997
---- ----
Current assets
Cash and cash equivalents $ 27,177 $ 12,827
Receivables less allowances ($295-1998;
$543-1997) 2,529 8,884
Contracts in process 6,778 6,249
Deferred income taxes 729 349
Prepaid and other current assets 895 1,052
-----------------------------
Total current assets 38,108 29,361
Property and equipment
Equipment 3,945 3,137
Furniture and fixtures 770 579
Leasehold improvements 994 216
-----------------------------
5,709 3,932
Accumulated depreciation and amortization (3,026) (2,113)
-----------------------------
Net property and equipment 2,683 1,819
Capitalized software costs, net of
amortization of $ 921 in 1998
and $ 689 in 1997 962 1,022
Investments 1,532 1,020
-----------------------------
Total assets $ 43,285 $ 33,222
=============================
LIABILITIES
Current liabilities
Current debt obligations $ 233 $ 440
Accounts payable, trade 1,535 1,279
Accrued expenses 5,984 2,817
Deferred revenue 3,266 4,240
-----------------------------
Total current liabilities 11,018 8,776
Deferred income taxes 327 348
Deferred revenue 87 781
Long-term debt 81 84
-----------------------------
Total liabilities 11,513 9,989
Commitments (Note 9)
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized - 75,000,000 shares
Issued and outstanding - 11,734,569 and
11,154,188 shares in 1998 and 1997,
respectively 117 112
Additional paid-in capital 20,172 18,769
Retained earnings 11,723 4,689
Notes due on common stock purchases (240) (337)
-----------------------------
Total shareholders' equity 31,772 23,233
-----------------------------
Total liabilities and
shareholders' equity $ 43,285 $ 33,222
=============================
See notes to consolidated financial statements
31
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
Year Ended December 31,
-----------------------------
1998 1997 1996
---- ---- ----
Revenues
Products $25,854 $15,581 $ 8,832
Services 11,571 7,904 5,086
Software maintenance fees 6,634 5,406 4,595
-----------------------------
Total revenues 44,059 28,891 18,513
Operating expenses
Product development 11,656 7,556 4,931
Product support 3,853 3,194 2,291
Implementation and consulting 6,929 5,632 3,207
Sales and marketing 5,728 4,033 3,085
Royalties and sublicense fees 916 786 1,677
General and administrative 5,170 3,248 1,631
-----------------------------
Total operating expenses 34,252 24,449 16,822
-----------------------------
Earnings from operations 9,807 4,442 1,691
Interest income, net 956 885 324
-----------------------------
Earnings before income taxes 10,763 5,327 2,015
Income tax provision 3,729 1,651 608
-----------------------------
Net Earnings $ 7,034 $ 3,676 $ 1,407
=============================
Basic earnings per average common share $ .61 $ .33 $ .16
Diluted earnings per average common share $ .57 $ .31 $ .15
Weighted-average common shares outstanding 11,521 11,035 8,573
Weighted-average common and diluted shares
outstanding 12,272 11,975 9,392
See notes to consolidated financial statements
32
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Shareholders' Equity
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Retained Notes Due on
-------------------- Paid-in Earnings Common Stock
Shares Amount Capital (Deficit) Purchases
------ ------ ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 8,493,406 $ 85 $ 6,051 $ (394) $ (664)
Net earnings 1,407
Public stock offering, net 2,309,500 23 11,729
Exercise of stock options 146,399 2 350
Stock option loan repayments 126
---------------------------------------------------------------
Balances at December 31, 1996 10,949,305 110 18,130 1,013 (538)
Net earnings 3,676
Exercise of stock options 204,883 2 639 (146)
Stock option loan repayments 347
---------------------------------------------------------------
Balances at December 31, 1997 11,154,188 112 18,769 4,689 (337)
Net earnings 7,034
Exercise of stock options & warrants 564,983 5 1,145
Employee stock purchase plan 15,398 258
Stock option loan repayments 97
---------------------------------------------------------------
Balances at December 31, 1998 11,734,569 $ 117 $ 20,172 $ 11,723 $ (240)
===============================================================
</TABLE>
See notes to consolidated financial statements
33
<PAGE>
Sanchez Computer Associates, Inc.
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 7,034 $ 3,676 $ 1,407
Adjustments to reconcile net earnings to cash
provided (used) by operating activities
Deferred taxes (401) 512 74
Depreciation and amortization 1,544 1,092 797
Provision for doubtful accounts receivable 100 500
Other 16 8 (85)
Cash provided (used) by changes in operating
assets and liabilities
Contracts in process (529) (3,171) (658)
Accounts receivable 6,255 (3,441) (3,721)
Prepaid and other current assets 157 510 (1,019)
Accounts payable and accrued expenses 3,423 895 1,016
Deferred revenues (1,668) (559) 1,157
--------------------------------
Net cash provided (used) by operating activities 15,931 22 (1,032)
Cash used in investing activities
Investment in joint ventures (512) (1,020)
Capitalized computer software costs (353) (668) (532)
Capital expenditures (2,011) (1,626) (665)
--------------------------------
Net cash used in investing activities (2,876) (3,314) (1,197)
Cash flows from financing activities
Borrowings under revolving credit facility 285 404
Repayment of notes due on common stock purchases 97 347 121
Principal payments under capital lease obligation (40) (80)
Principal payments under long-term notes (210) (500) (333)
Proceeds from exercise of stock options and
warrants 1,150 496 350
Proceeds from issuance of shares under the
employee stock purchase plan 258
Net proceeds from initial public offering 11,752
--------------------------------
Net cash provided by financing activities 1,295 588 12,214
Net increase (decrease) in cash and cash
equivalents 14,350 (2,704) 9,985
Cash and cash equivalents at beginning of year 12,827 15,531 5,546
--------------------------------
Cash and cash equivalents at end of year $ 27,177 $ 12,827 $ 15,531
================================
Supplemental cash flow information
Interest paid $ 37 $ 51 $ 103
Income taxes paid $ 2,481 $ 730 $ 529
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(1) Description of Business
Sanchez Computer Associates, Inc. ("Sanchez" or the "Company") designs,
develops, markets, implements and supports comprehensive banking software,
called PROFILE(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 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; PROFILE for
Windows, a native Windows(R) client application for PROFILE/Anyware's
customer service and teller functions; and PROFILE/ODBC, an open
connectivity database driver.
(2) Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant inter-company accounts
and transactions have been eliminated in consolidation.
Use of Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to continuously make
estimates and assumptions that affect the reported amounts of certain
assets, liabilities, revenues and expenses at the date of the financial
statements and during the reporting period. Actual results could differ
from these estimates. The most significant estimate is the
percentage-of-completion method for revenue recognition.
Revenue Recognition
The Company generally recognizes product revenue, which includes
software license fees and product enhancement fees, using the
percentage-of-completion method over a period of time that commences
with the execution of the license and ends with the completion of the
enhancements or implementation. If the customer does not request
enhancements and implementation, the Company generally recognizes the
license fee from these products upon delivery, provided that the other
services are not essential to the functionality of the software. The
Company does not recognize any license fees unless persuasive evidence
of an arrangement exists, the license amount is fixed and determinable
and collectability is probable. The Company's software licensing
agreements provide for a warranty period. The portion of the license fee
associated with the warranty period is unbundled from the license fee
and is recognized ratably over the warranty period.
Service revenues, which include client implementation and consulting
fees, are recognized when the services are performed or on the
percentage-of-completion method, depending on the contract terms.
Revenue from software maintenance contracts is recognized ratably over
the term of the maintenance contract.
Unbilled revenue in the accompanying balance sheets represent revenues
recognized in excess of amounts collected or invoiced and deferred
revenues represent amounts collected from or invoiced to customers
in excess of revenue recognized.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
with maturities of three months or less from the date of purchase and
whose carrying amount approximates market value due to the short maturity
of the investments. The Company maintains a centralized cash management
program whereby its excess cash balances are invested in high quality
short-term money market instruments through high credit quality financial
institutions. At times, cash balances in the Company's accounts may exceed
federally insured limits. Cash and cash equivalents at December 31, 1998
and 1997 include 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 December 31, 1998 and 1997 advances to Safeguard amounted
to $12 million and $11.1 million respectively. Interest income from these
advances amounted to $723 and $272 in 1998 and 1997, respectively.
35
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(2) Significant Accounting Policies - continued
Accounts Receivable and Contracts in Process
Accounts receivable represent amounts billed and due from customers.
Accrued contractual revenues related to implementation contracts which
have been recognized under the percentage of completion method, but which
have not yet been billed, are reported as contracts in process. These
amounts are billable at specified dates, at contractual milestones or at
contract completion, which is generally expected to occur within one year.
Investments
In December 1997, the Company entered into an agreement with ELBA CSB
S.A. ("ELBA"), a newly formed subsidiary of ComputerLand Poland S.A.,
a Polish bank technology services firm which is also a public company.
Concurrent with the ComputerLand agreement, the Company and ELBA also
entered into a distribution and services agreement, which gives ELBA
certain limited exclusive and non-exclusive PROFILE marketing rights
in Poland and Central Europe. In conjunction with the agreement, the
Company paid $1 million for a 10% equity interest in ELBA, which is
accounted for under the cost method. During 1998, the Company made
additional investments increasing its equity position to 12%. In
February 1999, the shareholders of ELBA agreed to merge ELBA into
ComputerLand; the Company will own approximately 1% of ComputerLand.
In June 1998, the Company entered into an agreement with Direct Capital
Services (P) Ltd., an Indian technology services firm. Under the
agreement, the Company paid $250 for a 10% equity interest in
Sanchez/Capital Services (P) Ltd., which is accounted for under the
cost method. Concurrent with the agreement, the Company and
Sanchez/Capital Services also entered into a distribution, agency and
services agreement, which gives Sanchez/Capital Services limited
exclusive marketing rights in India and certain middle-eastern
countries.
Property and Equipment
Property and equipment is carried at cost, except for assets under capital
leases which are recorded at the lower of the present value of future
lease payments or the fair value of the equipment at the inception of the
lease. Expenditures for major renewals, improvements and betterments are
capitalized and minor repairs and maintenance are charged to expense as
incurred. When assets are sold, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss from such
disposition is included in operations. The Company reviews its assets for
impairment whenever circumstances indicate that the carrying amount may
not be recoverable.
Capitalized Software Costs
Certain development costs of the Company's software products are
capitalized subsequent to the establishment of technological feasibility
and up to the time the product becomes available for general release.
Amortization is provided on a product-by-product basis at the greater of
the amount computed using (a) the ratio of current revenues for a product
to the total of current and anticipated future revenues or (b) the
straight-line method over the remaining estimated economic life of the
product. Generally, an original estimated economic life of four years is
assigned to capitalized software development costs. Costs of software
program maintenance are charged to expense as incurred.
All capitalized software costs are written down to net realizable value
when the carrying amount is in excess thereof. Total costs capitalized in
1998, 1997 and 1996 were approximately $353, $668, and $532 respectively.
Amortization of capitalized software costs amounted to $413, $321, and
$218 in 1998, 1997 and 1996, respectively.
36
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(2) Significant Accounting Policies, continued
Taxes on Income
Deferred income taxes are recognized for all temporary differences between
the tax and financial reporting bases of the Company's assets and
liabilities based on currently enacted tax laws and statutory rates.
Additionally, the benefits of utilizing net operating loss carryforwards
and credit carryforwards are recognized to the extent management of the
Company believes that it is more likely than not that the benefits will be
realized in future periods.
Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful lives
of the related assets using a combination of accelerated and straight line
depreciation methods. Equipment and furniture and fixtures have useful
lives of 5 and 3 years, respectively. The useful life of leasehold
improvements is the lesser of the lease term or 3 years.
Earnings Per Share
Effective December 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share", which
simplifies the requirements for computing earnings per share and requires
presentation of two amounts, basic and diluted earnings per share.
Earnings per share information for all periods presented has been restated
in accordance with the new standard.
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).
Year Ended December 31,
--------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------
Weighted-average shares outstanding 11,521 11,035 8,573
Dilutive effect of
Warrants 104 320 277
Options 647 620 542
----------------------------------
Total common and dilutive shares 12,272 11,975 9,392
----------------------------------
Diluted shares outstanding are computed using the weighted average number
of shares of common and common equivalent shares (stock options and
warrants) for each period.
Recent Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and No. 131, "Disclosures About Segments
of an Enterprise and Related Information." Both statements were required
to be adopted during fiscal year ending December 31, 1998. The Company
adopted these pronouncements in 1998. There were no adjustments to the
Company's financial position or results of operations.
Reclassifications
Certain prior period amounts have been reclassified to conform to the 1998
presentation.
37
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(3) Acquisition
On February 5, 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.
Greystone is engaged in the design, manufacture and maintenance of certain
high performance data base systems which are utilized in conjunction with
the Company's PROFILE family of products.
The merger was accounted for as a pooling of interests. Accordingly, the
historical financial statements of the Company have been restated to
include Greystone. A reconciliation of revenues, net earnings and earnings
per share for the Company and Greystone for the periods presented is as
follows:
Sanchez Greystone Pooled
---------------------------------
Year Ended December 31, 1997
Revenues $28,302 $ 589 $28,891
Net Earnings 3,453 223 3,676
Earnings per share-basic .32 .01 .33
Earnings per share-diluted .29 .02 .31
Year Ended December 31, 1996
Revenues $17,715 $ 798 $18,513
Net Earnings 1,075 332 1,407
Earnings per share-basic .13 .03 .16
Earnings per share-diluted .12 .03 .15
(4) Client Revenue Data
Revenue derived from certain software implementation projects comprises a
substantial portion of the Company's total annual revenues. The following
table summarizes the percentage of revenues from the Company's significant
clients (listing those clients that exceed 10% in the applicable year):
Year Ended December 31,
----------------------------------------------------------------
Client 1998 1997 1996
----------------------------------------------------------------
A 28% * *
B * 14% 21%
C * 12% *
D * 12% *
E * * 27%
F * * 12%
G * * 12%
* Less than 10%
At December 31, 1998 and 1997, the significant clients listed above
accounted for $598 (or 6%) and $6,757 (or 45%) of combined net accounts
receivable and contracts in process, respectively. The Company does not
require its customers to provide collateral relative to accounts
receivable balances.
38
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(4) Client Revenue Data, continued
The Company classifies its operations into one industry segment, licensing
and servicing of software products to the financial services industry.
Revenue derived from customers in various geographic regions is as follows:
Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------
U.S. and Caribbean $ 21,560 $ 5,927 $ 2,276
Central Europe 9,077 10,440 11,193
Other Europe 8,800 2,343 2,547
Canada 4,011 7,443 1,527
Asia Pacific Rim 611 2,738 970
-----------------------------------------
$ 44,059 $ 28,891 $18,513
-----------------------------------------
(5) Accrued Expenses
December 31,
------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------
Accrued compensation and related items $ 2,346 $ 912
Accrued income taxes 1,712 464
Other 1,926 1,441
--------------------------------
$ 5,984 $2,817
--------------------------------
(6) Debt
December 31,
--------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------
Bank term notes at prime payable through July 2000 $ 314 $239
Revolving capital equipment credit facility at prime 285
-------------------
314 524
Less current debt obligations 233 440
-------------------
Long term debt $ 81 $ 84
-------------------
In July 1998, the Company both renewed and restructured its bank borrowing
agreements. Under the revised agreement, the Company converted $285
outstanding under its revolving credit facility for capital equipment
purchases to a 24 month term loan and a new $500 revolving credit facility
for capital purchases was established. The Company has available $500
under this revolving facility as of December 31, 1998. Contingent upon
renewal of the bank borrowing agreements as of June 30, 1999, the Company
will have the option to convert the then outstanding balance on the
revolving credit facility to a 24 month term loan.
Future maturities of long-term debt at December 31, 1998 are as follows:
-------------------------
Year Ending
-------------------------
1999 $233
2000 81
---------
$314
---------
39
<PAGE>
Notes to Consolidate Financial Statements
(in thousands, except share and per share amounts)
(7) Shareholders' Equity
In May 1998, the Company's Shareholders approved and amended the articles
of incorporation to increase the number of the Company's authorized shares
of common stock from 50,000,000 to 75,000,000 shares.
On December 27, 1996, the Company completed an initial public offering for
the sale of 2,309,500 shares of its common stock at a price of $5.50 per
share. The Company received approximately $11.8 million in net proceeds
after deducting expenses related to the offering.
The Board of Directors is authorized, subject to certain limitations and
without Shareholder approval, to issue up to an aggregate 10,000,000
shares in one or more series and to fix the rights and preferences of the
shares in each series. No shares of preferred stock have been issued.
The 1995 Equity Compensation Plan provides for the issuance of a maximum
of 1,680,000 shares of common stock upon the exercise of stock options,
stock appreciation rights, and/or restricted stock awards.
In May 1998, the Company's shareholders approved an Employee Stock
Purchase Plan ("ESPP"). Under the ESPP, employees of the Company can
purchase common stock through payroll deductions. A maximum of 300,000
shares are authorized for issuance under the ESPP. As of December 31,
1998, 15,398 shares have been purchased under the ESPP.
The Company applies APB 25 and related interpretations in accounting for
its various stock option plans. Had compensation cost been recognized
consistent with SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company's net earnings and earnings per share would have been reduced
to the pro forma amounts indicated below:
Year Ended December 31,
--------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------
Net earnings As reported $ 7,034 $ 3,676 $ 1,407
Pro forma 5,470 3,443 1,357
Basic earnings per share As reported .61 .33 .16
Pro forma .47 .31 .16
Diluted earnings per share As reported .57 .31 .15
Pro forma .45 .29 .14
The per share weighted-average fair value of stock options issued by the
Company during 1998, 1997 and 1996 was $9.76, $4.07, and $1.11,
respectively, on the date of grant using the Black Scholes option-pricing
model. The Company used the following weighted-average assumptions to
determine the fair value of stock options granted: 1998 - expected
dividend yield of 0%, risk free interest rate of 4.39% to 5.75%, expected
volatility of 50%, and an average expected life of five years; 1997 -
expected dividend yield of 0%, risk free interest rate of 5.86% to 6.38%,
expected volatility of 40%, and an average expected life of five years;
1996 - expected dividend yield of 0%, risk-free interest rate of 6.36% to
6.48%, expected volatility of 0%, and average expected lives of three
years to five years.
Pro forma net earnings reflects only options granted in 1998, 1997, and
1996. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
earnings amounts presented above because compensation cost is reflected
over the options' vesting period and compensation cost for options granted
prior to January 1, 1995 is not considered.
40
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(7) Shareholders' Equity, continued
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,039,461 $ 5.50 808,568 $ 2.81 1,224,376 $ 2.13
Options granted 830,021 18.60 454,500 8.73 143,600 4.37
Options exercised (204,983) 2.82 (204,883) 2.20 (6,000) 1.67
Options cancelled (55,084) 15.90 (18,724) 4.26 (553,408) 1.70
-------------------------------------------------------------------------
Outstanding at end of year 1,609,415 $ 12.24 1,039,461 $ 5.50 808,568 $ 2.81
-------------------------------------------------------------------------
Options exercisable 476,771 415,274 430,149
Shares available for future grants 41,712 816,649 1,252,964
</TABLE>
The following summarizes information about the Company's stock options
outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------
Number Weighted Av.
Outstanding Remaining Weighted Av. Number Weighted Av.
as of Contractual Exercise Exercisable Exercise
Range of Exercise Prices 12/31/98 Life Price at 12/31/98 Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.67 to $ 3.63 334,166 5.76 $ 2.97 258,010 $2.77
$ 4.46 to $ 6.75 327,401 7.94 5.04 134,503 4.89
$ 12.88 to $ 16.13 443,848 7.35 15.38 38,432 13.72
$ 18.00 to $ 20.00 440,020 6.26 19.91 41,281 19.87
$ 21.38 to $ 26.63 63,980 5.74 22.98 4,545 22.00
---------------------------------------------------------------------------
1,609,415 6.78 $12.24 476,771 $5.92
---------------------------------------------------------------------------
</TABLE>
Generally, outstanding options vest over a two to four year period after
the date of grant and expire 6-10 years after the date of grant.
For options exercised in early 1995, 5% of the exercise price was paid
upon exercise, with the remaining obligation evidenced by a note with a
maximum term of 10 years, although the note also contains provisions for a
balloon payment due two years after the Company's initial public offering.
Such optionees executed full recourse interest-bearing notes, with such
notes being reported as "Notes due on common stock purchases" in the
accompanying balance sheet. During 1997, one additional stock option
related loan was made to an officer of the Company in the amount of $111.
This loan is also supported by a full recourse demand note which bears
interest at 5.81%. In 1998, 1997 and 1996, interest income earned on these
notes amounted to $30, $34 and $40, respectively.
41
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(8) Income Taxes
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current taxes
Federal $3,460 $ 673 $ 348
State 652 95 11
Foreign 18 371 175
----------------------------------------------------------
4,130 1,139 534
Deferred taxes (401) 512 74
----------------------------------------------------------
Total provision $3,729 $1,651 $ 608
----------------------------------------------------------
</TABLE>
A reconciliation of the tax provision based on the federal statutory tax
rate to the effective tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory tax provision $3,667 $1,811 $ 685
State income taxes, net of federal
income tax benefit 430 63 7
Foreign income taxes 18 371 175
Federal income tax credits (18) (371) (175)
Foreign sales corporation (430) (286) (12)
Other, net 62 63 (72)
----------------------------------------------------------
$3,729 $1,651 $ 608
----------------------------------------------------------
</TABLE>
The tax effects of loss carryforwards, credit carryforwards, and temporary
differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities are presented below:
December 31,
--------------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------------
Deferred tax assets
Accounts receivable allowances $ 65 $ 184
Accrued liabilities 655 163
Other 9 2
--------------------------------------
Total deferred tax assets $ 729 $ 349
--------------------------------------
Deferred tax liabilities
Capitalized software costs $ 327 $ 348
Utilization of federal and state net operating loss carryforwards and tax
credit carryforwards amounted to $43 in 1998 and $539 in 1997.
42
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(9) Commitments
The Company leases office facilities subject to operating leases. Future
minimum lease payments under non-cancelable operating leases with initial
or remaining terms of one year or more at December 31, 1998 are as
follows:
1999 $ 725
2000 748
2001 766
2002 785
2003 464
--------------
$3,488
--------------
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
approximately $869, $625 and $436, respectively.
(10) Other Related Party Transactions
In April 1998, Safeguard exercised warrants to purchase 360,000 shares of
the Company's common stock at an exercise price of $1.39 per share,
subject to certain terms and restrictions.
The Company has entered into an administrative services agreement with
Safeguard, which provides for payment, subject to achieving certain sales
levels, of a maximum fee of $25 per quarter. The Company expensed $100 in
each of the years ended December 31, 1998, 1997 and 1996.
In conjunction with the previously described joint venture agreement with
ELBA, ELBA paid to the Company $500 for certain limited exclusive and
non-exclusive PROFILE marketing rights in Poland and Central Europe. The
Company has entered into a consulting contract with ELBA. During 1998, the
Company incurred expenses of $119 under this agreement.
In conjunction with the previously described investment, Direct Capital
Services (P) Ltd. paid the Company $250 for certain limited exclusive
PROFILE marketing rights in India and certain Middle Eastern countries.
(11) Profit Sharing Trust Plan
The Company maintains a Profit Sharing Trust Plan (the "Plan") which
permits eligible participating members to contribute up to 20% of their
gross earnings. The Company will typically make a contribution equal to
100% of the first 3% which an employee contributes and may also make
additional voluntary contributions. The Company expensed $258, $202, and
$179 related to the Plan during the years ended December 31, 1998, 1997,
and 1996, respectively.
(12) Subsequent Event
On February 9, 1999, the Company signed a letter of intent to purchase
ArTech Financial Technology Services LLC, a banking service center
located near Pittsburgh, PA. The transaction was closed on March 17,
1999.
43
<PAGE>
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(13) Quarterly Financial Information (Unaudited)
The following table presents the unaudited quarterly financial information
for the years 1998 and 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1998 Quarter Ended 1997 Quarter Ended
- ------------------------------------------------------------------------------------------------------------
Mar 31 June 30 Sept 30 Dec 31 Mar 31 June 30 Sept 30 Dec 31
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 8,628 $11,053 $12,114 $12,264 $ 5,380 $ 6,353 $ 8,362 $ 8,796
Earnings before income
taxes 1,225 2,546 3,147 3,845 742 839 1,724 2,022
Net earnings 833 1,706 2,108 2,387 501 543 1,149 1,483
Basic earnings per .
share 0.07 0.15 0.18 0.20 0.05 0.05 0.10 0.13
Diluted earnings per
share 0.07 0.14 0.17 0.19 0.04 0.05 0.10 0.12
</TABLE>
Earnings per average common share calculations for each of the Company's
quarters are based on the weighted average number of shares outstanding in each
quarter. Accordingly, the sum of the net earnings per share for each of the
quarters in a fiscal year may not equal the actual year-to-date net earnings per
average common share.
44
<PAGE>
Schedule II
Sanchez Computer Associates, Inc.
Valuation and Qualifying Accounts
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Allowance for Balance at Charged to Costs Balance at
Doubtful Accounts Beginning of Year and Expenses Deductions End of Year
----------------- ----------------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996 $ 43,000 $ -- $ -- $ 43,000
Year ended December 31, 1997 43,000 500,000 -- 543,000
Year ended December 31, 1998 543,000 100,000 348,000 295,000
</TABLE>
Report of Independent Public Accountants
To Sanchez Computer Associates, Inc.
Our report on the consolidated financial statements of Sanchez Computer
Associates, Inc. and subsidiaries is included on page 30 of this Form 10-K.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The above schedule is presented for
purposes of complying with the Securities and Exchange Commissions rules and
is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to
the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pennsylvania
February 5, 1999
Report of Independent Accountants
To the Shareholders and Board of Directors
Sanchez Computer Associates, Inc.
Our report on the consolidated financial statements of Sanchez Computer
Associates, Inc. and subsidiaries is included on page 30 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule for the years ended December 31, 1997
and 1996, which appears above on page 45 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
Philadelphia, PA
February 6, 1998
45
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
A report on Form 8-K/A, dated November 17, 1998, was filed during the three
months ended December 31, 1998 reporting the retention of independent public
accountants. This item was reported under Item 4 of such Form 8-K/A.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Directors
The Company incorporates by reference the information contained under the
caption "ELECTION OF DIRECTORS" in its definitive Proxy Statement relative to
its May 19, 1999 annual meeting of shareholders, to be filed within 120 days
after the end of the year covered by this Form 10-K pursuant to Regulation 14A
under the Securities Act of 1934, as amended.
Disclosure of Delinquent Filers Pursuant to Item 405 of Regulation S-K
The Company incorporates by reference the information contained under the
caption "SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in its
definitive Proxy Statement relative to its May 19, 1999 annual meeting of
shareholders, to be filed within 120 days after the end of the year covered by
this Form 10-K pursuant to Regulation 14A under the Securities Exchange Act of
l934, as amended.
Item 11. Executive Compensation.
The Company incorporates by reference the information contained under the
captions "Board Compensation," "Compensation Committee Interlocks and Insider
Participation" and "EXECUTIVE COMPENSATION AND OTHER ARRANGEMENTS" in its
definitive Proxy Statement relative to its May 19, 1999 annual meeting of
shareholders, to be filed within 120 days after the end of the year covered by
this Form 10-K pursuant to Regulation 14A under the Securities Exchange Act of
l934, as amended.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The Company incorporates by reference the information contained under the
caption "STOCK OWNERSHIP OF DIRECTORS AND OFFICERS AS OF MARCH 31, 1999" in its
definitive Proxy Statement relative to its May 19, 1999 annual meeting of
shareholders, to be filed within 120 days after the end of the year covered by
this Form 10-K pursuant to Regulation 14A under the Securities Exchange Act of
l934, as amended.
Item 13. Certain Relationships and Related Transactions.
The Company incorporates by reference the information contained under the
captions "Compensation Committee Interlocks and Insider Participation" and
"CERTAIN TRANSACTIONS" in its definitive Proxy Statement relative to its May 19,
1999 annual meeting of shareholders, to be filed within 120 days after the end
of the year covered by this Form 10-K pursuant to Regulation 14A under the
Securities Exchange Act of l934, as amended.
46
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements and Schedules
The financial statements and schedules listed below are filed as part of this
Form 10-K.
Financial Statements (see item No. 8, page 29)
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31, 1998,
1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996
Notes to Consolidated Financial Statements
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years ended December 31,
1998, 1997 and 1996
All other information for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission is either included in the
financial statements or is not required under the related instructions or are
inapplicable, and therefore have been omitted.
(b) Reports on Form 8-K
A report on Form 8-K/A, dated November 17, 1998, was filed during the three
months ended December 31, 1998 reporting the retention of independent public
accountants. This item was reported under Item 4 of such Form 8-K/A
(c) Exhibits
The following is a list of exhibits required by Item 601 of Regulation S-K filed
as part of this Form 10-K. Where so indicated by footnote, exhibits which were
previously filed are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is indicated in
parentheses.
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation of the Company. (2)
(Exhibit 3.1)
3.2 Amended and Restated By-laws of the Company. (2) (Exhibit 3.2)
4.1 Specimen stock certificate representing the Common Stock. (2)
(Exhibit 4.1)
10.1 # 1995 Equity Compensation Plan. (2) (Exhibit 10.1)
10.2 Common Stock, Warrants and Rights Agreement dated February 26, 1987
among Sanchez Computer Associates, Inc., Michael A. Sanchez, Frank
R. Sanchez, Safeguard Scientifics (Delaware), Inc., and Safeguard
Scientifics, Inc. (1) (Exhibit 10.2)
10.3 Common Stock Purchase Agreement dated September 30, 1989 among
Sanchez Computer Associates, Inc., Radnor Venture Partners, L.P.,
and Safeguard Scientifics (Delaware), Inc. (1) (Exhibit 10.3)
10.4 Common Stock Purchase Agreement dated December 1, 1989 among Sanchez
Computer Associates, Inc., Radnor Venture Partners, L.P., and
Safeguard Scientifics (Delaware), Inc. (1) (Exhibit 10.4)
10.5 Form of Rights Agent Agreement dated November 13, 1996 among
ChaseMellon Shareholder Services, L.L.C., Mellon Bank, N.A., Sanchez
Computer Associates, Inc., Safeguard Scientifics, Inc., Radnor
Venture Partners, L.P., Michael A. Sanchez and Frank R. Sanchez. (2)
(Exhibit 10.5)
47
<PAGE>
10.6 Administrative Services Agreement dated February 26, 1987 by and
between Safeguard Scientifics, Inc. and Sanchez Computer Associates,
Inc. (2) (Exhibit 10.6)
10.8 Safeguard Scientifics, Inc. Revolving Note Agreement dated June 12,
1997 (3) (Exhibit 10.1)
10.9 Demand Note and Pledge Agreement dated September 19, 1997 by Ronald
J. Zlatoper in favor of the Company (4) (Exhibit 10)
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Arthur Andersen LLP *
23.2 Consent of PricewaterhouseCoopers LLP *
27.1 Financial Data Schedule *
27.2 Financial Data Schedules - Restated *
* Filed herewith.
# These exhibits relate to compensatory plans, contracts or arrangements in
which directors and/or executive officers of the registrant may
participate.
1) Filed on September 27, 1996 as an exhibit to the Company's Registration
Statement on Form S-1 (No. 333-12863) and incorporated by reference.
2) Filed on November 6, 1996 as an exhibit to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (No. 333-12863) and
incorporated by reference.
3) Filed as an exhibit to the Company's Report on Form 10-Q for the
three-month period ended June 30, 1997 and incorporated by reference.
4) Filed as an exhibit to the Company's Report on Form 10-Q for the
three-month period ended September 30, 1997 and incorporated by reference.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 31 , 1999 SANCHEZ COMPUTER ASSOCIATES, INC.
By: /s/ Michael A. Sanchez
--------------------------------------------
Michael A. Sanchez, Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 31 , 1999 /s/ Michael A. Sanchez
----- -------------------------------------------------
Michael A. Sanchez, Chairman of the Board of
Directors
Dated: March 31 , 1999 /s/ Ronald J. Zlatoper
---- -------------------------------------------------
Ronald J. Zlatoper, Chief Executive Officer and
Director (Principal Executive Officer)
Dated: March 31 , 1999 /s/ Joseph F. Waterman
---- -------------------------------------------------
Joseph F. Waterman, Senior Vice President and CFO
(Principal Financial and Accounting Officer)
Dated: March 31 , 1999 /s/ Frank R. Sanchez
---- -------------------------------------------------
Frank R. Sanchez, President, Chief Operating
Officer and Director
Dated: March 31 , 1999 /s/ Warren V. Musser
---- -------------------------------------------------
Warren V. Musser, Director
Dated: March 31 , 1999 /s/ Lawrence Chimerine
---- -------------------------------------------------
Lawrence Chimerine, Director
Dated: March 31 , 1999 /s/ Alex W. Hart
---- -------------------------------------------------
Alex W. Hart, Director
Dated: March 31 , 1999 /s/ Kailash C. Khanna
---- -------------------------------------------------
Kailash C. Khanna, Director
Dated: March 31 , 1999 /s/ John D. Loewenberg
---- -------------------------------------------------
John D. Loewenberg, Director
Dated: March 31 , 1999 /s/ Ira M. Lubert
---- -------------------------------------------------
Ira M. Lubert, Director
Dated: March 31 , 1999 /s/ Thomas C. Lynch
---- -------------------------------------------------
Thomas C. Lynch, Director
49
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Articles of Incorporation of the Company. (2)
(Exhibit 3.1)
3.2 Amended and Restated By-laws of the Company. (2) (Exhibit 3.2)
4.1 Specimen stock certificate representing the Common Stock. (2)
(Exhibit 4.1)
10.1 # 1995 Equity Compensation Plan. (2) (Exhibit 10.1)
10.2 Common Stock, Warrants and Rights Agreement dated February 26, 1987
among Sanchez Computer Associates, Inc., Michael A. Sanchez, Frank
R. Sanchez, Safeguard Scientifics (Delaware), Inc., and Safeguard
Scientifics, Inc. (1) (Exhibit 10.2)
10.3 Common Stock Purchase Agreement dated September 30, 1989 among
Sanchez Computer Associates, Inc., Radnor Venture Partners, L.P.,
and Safeguard Scientifics (Delaware), Inc. (1) (Exhibit 10.3)
10.4 Common Stock Purchase Agreement dated December 1, 1989 among Sanchez
Computer Associates, Inc., Radnor Venture Partners, L.P., and
Safeguard Scientifics (Delaware), Inc. (1) (Exhibit 10.4)
10.5 Form of Rights Agent Agreement dated November 13, 1996 among
ChaseMellon Shareholder Services, L.L.C., Mellon Bank, N.A., Sanchez
Computer Associates, Inc., Safeguard Scientifics, Inc., Radnor
Venture Partners, L.P., Michael A. Sanchez and Frank R. Sanchez. (2)
(Exhibit 10.5)
10.6 Administrative Services Agreement dated February 26, 1987 by and
between Safeguard Scientifics, Inc. and Sanchez Computer Associates,
Inc. (2) (Exhibit 10.6)
10.8 Safeguard Scientifics, Inc. Revolving Note Agreement dated June 12,
1997 (3) (Exhibit 10.1)
10.9 Demand Note and Pledge Agreement dated September 19, 1997 by Ronald
J. Zlatoper in favor of the Company (4) (Exhibit 10)
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Arthur Andersen LLP *
23.2 Consent of PricewaterhouseCoopers LLP *
27.1 Financial Data Schedule *
27.2 Financial Data Schedules - Restated *
* Filed herewith.
# These exhibits relate to compensatory plans, contracts or arrangements in
which directors and/or executive officers of the registrant may
participate.
1) Filed on September 27, 1996 as an exhibit to the Company's Registration
Statement on Form S-1 (No. 333-12863) and incorporated by reference.
2) Filed on November 6, 1996 as an exhibit to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (No. 333-12863) and
incorporated by reference.
3) Filed as an exhibit to the Company's Report on Form 10-Q for the
three-month period ended June 30, 1997 and incorporated by reference.
4) Filed as an exhibit to the Company's Report on Form 10-Q for the
three-month period ended September 30, 1997 and incorporated by reference.
50
<PAGE>
FORM 10-K EXHIBIT 21.1
Sanchez Software Limited, a Delaware Corporation
Sanchez Computer Associates International, Inc., a Delaware Corporation
Sanchez FSC, Inc. a Barbados Corporation
Sanchez Computer Associates - Polska Sp. z o.o.
<PAGE>
Exhibit 23.1
CONSENT OF IDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports, included in this Form 10-K, into the Company's previously filed Form
S-8 Registration Statements File Nos. 333-21247 and 333-57717 and Form S-3
Registration Statement File No. 333-57567.
/s/ Arthur Andersen LLP
Philadelphia, Pa.,
March 30, 1999
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration of Sanchez
Computer Associates, Inc. and subsidiaries on Form S-8 (File No. 333-21247) of
our reports dated February 6, 1998, on our audits of the consolidated financial
statements and financial statement schedule of Sanchez Computer Associates, Inc.
as of December 31, 1997, and for the years ended December 31, 1997 and 1996
which reports are included in this Annual report on Form 10-K.
PricewaterhouseCoopers LLP
Philadelphia, PA
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 27,177
<SECURITIES> 0
<RECEIVABLES> 2,824
<ALLOWANCES> 295
<INVENTORY> 0
<CURRENT-ASSETS> 38,108
<PP&E> 5,709
<DEPRECIATION> 3,026
<TOTAL-ASSETS> 43,285
<CURRENT-LIABILITIES> 11,018
<BONDS> 0
0
0
<COMMON> 117
<OTHER-SE> 31,655
<TOTAL-LIABILITY-AND-EQUITY> 43,285
<SALES> 0
<TOTAL-REVENUES> 44,059
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 34,252
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> (956)
<INCOME-PRETAX> 10,763
<INCOME-TAX> 3,729
<INCOME-CONTINUING> 7,034
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,034
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.57
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTIANS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31 1997.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,827
<SECURITIES> 0
<RECEIVABLES> 9,427
<ALLOWANCES> 543
<INVENTORY> 0
<CURRENT-ASSETS> 29,361
<PP&E> 3,932
<DEPRECIATION> 2,113
<TOTAL-ASSETS> 33,222
<CURRENT-LIABILITIES> 8,776
<BONDS> 0
0
0
<COMMON> 112
<OTHER-SE> 23,121
<TOTAL-LIABILITY-AND-EQUITY> 33,222
<SALES> 0
<TOTAL-REVENUES> 28,891
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,449
<LOSS-PROVISION> 500
<INTEREST-EXPENSE> (885)
<INCOME-PRETAX> 5,327
<INCOME-TAX> 1,651
<INCOME-CONTINUING> 3,676
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,676
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.31
</TABLE>
