<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended JUNE 30, 2000.
-------------
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________________ to _______________________
Commission file number 0-21705
SANCHEZ COMPUTER ASSOCIATES, INC.
------------------------------------------------------[caad 234]I
(Exact Name of Registrant as Specified in Its Charter)
PENNSYLVANIA 23-2161560
------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
40 VALLEY STREAM PARKWAY, MALVERN, PA 19355
--------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (610) 296-8877
-------------
N/A
---------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
As of July 31, 2000, there were outstanding 25,009,992 shares of the issuer's
Common Stock, no par value.
<PAGE>
SANCHEZ COMPUTER ASSSOCIATES, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PAGE NO.
-------
CONSOLIDATED BALANCE SHEETS
June 30, 2000 (Unaudited) and December 31, 1999 3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three And Six Months Ended June 30, 2000 and 1999 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, 2000 and 1999 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II: OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
2
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS JUNE 30, DECEMBER 31,
2000 1999
---------------- ------------------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 28,004 $ 25,404
Receivables, less allowance of $388 and $288 respectively 20,872 12,564
Contracts in process 4,083 3,227
Deferred income taxes 567 686
Income tax refund receivable 4,762 2,948
Prepaid and other current assets 1,945 1,187
Deferred service expense 4,495 ---
-------------------- --------------------
Total current assets 64,728 46,016
Property and equipment
Equipment 9,397 7,351
Furniture and fixtures 1,861 1,784
Leasehold improvements 2,232 2,020
-------------------- --------------------
13,490 11,155
Accumulated depreciation and amortization (6,574) (5,115)
-------------------- --------------------
Net property and equipment 6,916 6,040
Deferred service expense 3,348 ---
Other non-current assets 4,395 4,339
-------------------- --------------------
Total assets $ 79,387 $ 56,395
==================== ====================
LIABILITIES
Current liabilities
Current debt obligations $ 12 $ 83
Accounts payable, trade 3,879 2,360
Accrued expenses 10,257 4,417
Deferred service revenue 6,156 ---
Deferred license and maintenance revenues 4,700 3,615
-------------------- --------------------
Total current liabilities 25,004 10,475
Deferred income taxes 482 482
Deferred service revenue 4,517 ---
-------------------- --------------------
Total liabilities 30,003 10,957
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized - 150,000,000 shares
Issued and outstanding 24,993,328 and 24,357,351 respectively 250 244
Additional paid-in capital 39,179 28,392
Retained earnings 11,158 16,894
Treasury stock (1,203) ---
Notes due on common stock purchases --- (92)
-------------------- --------------------
Total shareholders' equity 49,384 45,438
-------------------- --------------------
Total liabilities and shareholders' equity $ 79,387 $ 56,395
==================== ====================
</TABLE>
3
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------------
2000 1999 2000 1999
-------------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Revenues
Products $ 3,629 $ 4,948 $ 6,545 $ 8,235
Services 9,576 6,952 17,114 11,254
Software maintenance and other 3,089 2,011 5,941 4,078
---------------- ------------ ------------ ------------
Total revenues 16,294 13,911 29,600 23,567
Operating expenses
Product development 6,127 3,916 12,103 7,404
Product support 1,108 1,124 2,170 1,946
Services 5,739 3,064 11,137 5,204
Sales and marketing 3,277 2,072 6,592 3,924
General, administrative and other 3,408 1,175 6,633 2,060
---------------- ------------ ------------ ------------
Total operating expenses 19,659 11,351 38,635 20,538
---------------- ------------ ------------ ------------
Earnings (loss) from operations (3,365) 2,560 (9,035) 3,029
Interest income, net 435 242 861 544
---------------- ------------ ------------ -------------
Earnings (loss) before income taxes (2,930) 2,802 (8,174) 3,573
Income tax provision (benefit) (937) 1,009 (2,616) 1,286
---------------- ------------ ------------ -------------
Net earnings (loss) before cumulative effect of change in
accounting principle (1,993) 1,793 (5,558) 2,287
Cumulative effect of change in accounting principle --- --- (173) ---
---------------- ------------ ------------ -------------
Net income (loss) $ (1,993) $ 1,793 $ (5,731) $ 2,287
================ ============ ============ =============
Basic earnings (loss) per average common share before
cumulative effect of change in accounting principle $ (0.08) $ 0.08 $ (0.22) $ 0.10
Diluted earnings (loss) per average common share before
cumulative effect of change in accounting principle $ (0.08) $ 0.07 $ (0.22) $ 0.09
Basic earnings (loss) per average common share $ (0.08) $ 0.08 $ (0.23) $ 0.10
Diluted earnings (loss) per average common share $ (0.08) $ 0.07 $ (0.23) $ 0.09
Weighted-average common shares outstanding 24,938 23,731 24,774 23,622
Weighted-average common and dilutive shares outstanding 24,938 26,045 24,774 25,675
</TABLE>
4
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
2000 1999
------------ -------------
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ (5,731) $ 2,287
Adjustments to reconcile net earnings to cash
provided by operating activities, net of effect
from acquisition
Depreciation and amortization 1,832 1,126
Stock based compensation 2,783 ---
Other (2) ---
Cash provided (used) by changes in
operating assets and liabilities
Accounts receivable (8,308) (9,870)
Contracts in process (856) 2,547
Income tax refund receivable (1,814) ---
Prepaid and other current assets (758) (249)
Deferred service revenue 10,673 ---
Deferred service expense (7,843) ---
Accounts payable and accrued expenses 7,342 (1,539)
Deferred income taxes (297) ---
Deferred license and maintenance revenues 1,085 1,709
------------ -------------
Net cash used by operating activities (1,894) (3,989)
Cash used in investing activities
Investments --- (48)
Cost of acquisition, net of cash acquired --- (499)
Capitalized computer software costs --- (409)
Proceeds from sale of fixed assets 47 ---
Capital expenditures (2,382) (1,919)
------------ -------------
Net cash used in investing activities (2,335) (2,875)
Cash flows from financing activities
Repayment of notes due on common stock purchases 92 2
Purchase of treasury stock (1,408) (592)
Principal payments under current debt (71) (148)
Proceeds from exercise of stock options 5,243 1,723
Proceeds from equity investments 2,973 ---
------------ -------------
Net cash provided (used) by financing activities 6,829 985
------------ -------------
Net increase (decrease) in cash and cash equivalents 2,600 (5,879)
Cash and cash equivalents at beginning of period 25,404 27,177
------------ -------------
Cash and cash equivalents at end of period $ 28,004 $ 21,298
============ =============
Supplemental cash flow information
Interest paid $ 2 9
Income taxes paid $ 381 2,569
</TABLE>
5
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(A.) BASIS OF PRESENTATION
The accompanying consolidated financial statements of Sanchez Computer
Associates, Inc. ("Sanchez" or the "Company") include the accounts of
all of the Company's wholly and majority owned subsidiaries. All
significant intercompany transactions and balances have been eliminated
in consolidation. Certain prior period amounts have been reclassified
to conform with current period presentation. In the opinion of
management, the consolidated financial statements reflect all normal
and recurring adjustments which are necessary for a fair presentation
of the Company's financial position, results of operations, and cash
flows as of the dates and for the periods presented. The consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information.
Consequently, these statements do not include all the disclosures
normally required by generally accepted accounting principles for
annual financial statements nor those normally made in the Company's
Annual Report on Form 10-K. Accordingly, reference should be made to
the Company's Annual Report on Form 10-K for additional disclosures,
including a summary of the Company's accounting policies, which have
not changed except as described in note F. The consolidated results of
operations for the six months ended June 30, 2000 are not necessarily
indicative of results for the full year.
(B.) CLIENT REVENUE DATA
Revenue derived from customers in various geographic regions is as
follows (in thousands):
-----------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------
U.S. and Caribbean $8,262 $6,733 $16,566 $10,844
Western Europe 5,363 3,347 8,714 5,805
Central Europe 1,989 2,641 2,946 3,688
Canada 593 1,019 1,235 2,744
Other 87 171 139 486
------- ------- ------- -------
$16,294 $13,911 $29,600 $23,567
-----------------------------------------------------------------
(C.) INCOME TAXES
Upon the closing of e-PROFILE's initial public offering, Sanchez and
e-PROFILE will file separate federal tax returns for future periods.
e-PROFILE's net operating loss from January 1, 2000 through the
initial public offering date will be included in Sanchez'
consolidated federal income tax return. However, to the extent that
this loss cannot be used to offset Sanchez' taxable income, it will
be carried forward to e-PROFILE's first separate return year. In the
quarter in which the offering is completed, the Company will be required
to evaluate its tax calculation and make an appropriate adjustment.
6
<PAGE>
(D.) SEGMENTS
The Company classifies its operations in two segments: Sanchez's
software business and the e-PROFILE services business. The Company
evaluates the performance of its segments and allocates resources to
them accordingly.
The table below summarizes business segments:
--------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------
Revenues
Sanchez 21,473 21,892
e-PROFILE 8,127 1,675
------------- ----------
Total 29,600 23,567
============= ==========
Earnings (loss) from operations
Sanchez (41) 3,303
e-PROFILE (8,994) (274)
------------- ---------
Total (9,035) 3,029
============= =========
Total Assets
Sanchez 47,423 49,809
e-PROFILE 31,964 6,586
------------ ---------
Total 79,387 56,395
============ =========
--------------------------------------------------------------------
(E.) EARNINGS PER SHARE
Basic earnings per share has been calculated as net earnings divided by
weighted-average common shares outstanding, while diluted earnings per
share has been computed as net earnings divided by weighted-average
common and diluted shares outstanding which includes the dilutive
effect of stock options and warrants. The following table provides a
reconciliation of weighted-average common shares outstanding to
weighted-average common and diluted shares outstanding (in thousands).
-----------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------
Weighted-average shares outstanding 24,938 23,731 24,774 23,622
Dilutive effect of
Warrants 53 19
Options 2,261 2,034
-----------------------------------
Total common and diluted shares 24,938 26,045 24,774 25,675
-----------------------------------------------------------------------
At June 30, 2000, potentially dilutive common stock equivalents include
warrants to purchase 66,000 shares of common stock and options to
purchase 2,809,440 shares of common stock. All potentially dilutive
common stock equivalents were excluded from the calculation of net loss
per share for the three and six months ended June 30, 2000 as their
effect is anti-dilutive as a result of the net loss incurred for the
periods.
7
<PAGE>
(F.) RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 expresses the views of the SEC in
applying generally accepted accounting principles to certain
transactions. SAB No. 101 is required to be adopted by no later than
the fourth quarter of the year ending December 31, 2000, however, the
Company adopted SAB No. 101 in June 2000. The Company's previous
revenue recognition policy was in accordance with generally accepted
accounting principles. In accordance with SAB No. 101, the Company
changed its revenue recognition policy to recognize revenue from
implementation services for e-PROFILE clients ratably over the expected
term of the processing contract versus recognizing such revenue when
the services were performed, due to a continuing involvement with
e-PROFILE clients. In limited circumstances, the Company has performed
implementation services for e-PROFILE clients that purchased software
licenses from Sanchez. Implementation fees related to these services
were recognized when the services were provided since these clients had
the ability to use the software internally for minimal cost or effort.
Implementation fees for e-PROFILE clients that do not ultimately
execute processing agreements are recognized in the period during which
the project is terminated. Direct costs related to implementation
services for e-PROFILE clients are deferred and recognized ratably over
the expected life of the processing agreement or expensed as incurred,
consistent with the related revenue recognition.
The impact of SAB No. 101 on 1999 results was recorded as a cumulative
effect of a change in accounting principle during the six months ended
June 30, 2000, resulting in a reduction to net income of $173,000 which
represents the net effect of deferring e-PROFILE related implementation
revenue and costs that were previously recognized in the fourth quarter
of 1999. During the six months ended June 30, 2000, the Company
recognized revenue and net income of $446,000 and $13,000,
respectively, which was previously recognized in the fourth quarter of
1999 and is part of the cumulative effect of the change in accounting
principle. In accordance with SFAS No. 3, "Reporting Accounting Changes
in Interim Financial Statements," the Company's results of operations
for the three and six months ended June 30, 2000 are in accordance with
SAB No. 101. SAB No. 101 would have no effect on the Company's results
of operations for the three and six months ended June 30, 1999 since
there were no e-PROFILE projects in process during that time that would
be impacted by SAB No. 101. The early adoption of SAB No. 101 resulted
in the Company deferring $7.3 million of revenues and $2.2 million of
earnings before income taxes from implementation services performed
during the quarter ended June 30, 2000. These amounts will be
recognized over the expected term of the processing contract. The
following table summarizes the impact of SAB No. 101 on the Company's
results of operations for the three months ended March 31, 2000 and
1999.
-------------------------------------------------------------------
QTR ENDED QTR ENDED
3/31/00 3/31/99
-------------------------------------------------------------------
Net Sales As Reported 14,877 9,655
Pro forma 13,306 9,655
------------------------
Net Income As Reported (3,291) 493
Pro forma (3,570) 493
------------------------
Basic Earning/(loss) As Reported (0.13) .02
Common Share Pro forma (0.14) .02
------------------------
Diluted Earnings/(loss) As Reported (0.13) .02
Common Share Pro forma (0.14) .02
------------------------------------------------------------------
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Sanchez Computer Associates, Inc. ("Sanchez" or "the Company") designs,
develops, markets, implements and supports comprehensive banking software called
PROFILE(R) for financial services organizations worldwide. Sanchez's highly
flexible PROFILE family of products is comprised of five integrated modules that
operate on open, client/server platforms. The primary module, called
PROFILE/ANYWARE, is a multi-currency, multi-language, customer centric
enterprise banking application and transaction processor for deposit and loan
processing. The other modules are PROFILE/WEBCONSUMER, a Web-based, Internet
front-end processor for retail and commercial banking applications; PROFILE/FMS,
a multi-company, multi-currency, cost center-based accounting system; PROFILE
FOR WINDOWS ("PFW"), a native Windows(R) client application for
PROFILE/ANYWARE's customer service and teller functions; and PROFILE/Web tools,
a set of six packaged tools to assist with developing client-side code for
various applications intended to interface with PROFILE.
In order to expand its core competency as a product-oriented development company
for financial services and to take advantage of opportunities in the financial
services marketplace resulting from rapid technological changes and adoption of
the Internet, the Company acquired ArTech Financial Technology Services, LLC, a
banking technology service center located outside of Pittsburgh, Pennsylvania in
the first quarter of 1999. In conjunction with the purchase, the Company
announced the formation of a new subsidiary - e-PROFILE, Inc. ("e-PROFILE"), to
provide integrated end-to-end operations and technology solutions that enable
top tier financial services companies to offer internet based financial services
to their customers. e-PROFILE provides customers with several advantages,
including: a single point of contact for managing and integrating a
comprehensive solution; rapid implementation; a choice of best-in-class
technology; flexible, customized solutions; reduced capital expenditures and
usage based pricing. As of June 30, 2000, e-PROFILE was processing in excess of
570,000 accounts at its bank operations and data center for three clients.
The Company derives its revenues from product fees, which include software
license and product enhancement fees, service fees that include client
implementation, processing and consulting fees, and software maintenance
fees. For Sanchez' traditional software license contracts, product 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 or where applicable on a
cash basis. Service fees are generally recognized and billed monthly on a
time and material basis. Maintenance fees are normally billed annually in
advance and recognized into revenue ratably over the period covered. The
Company's e-commerce projects generate implementation related service
revenues for both Sanchez and e-PROFILE which are largely deferred during the
implementation phase along with the related costs until the client begins
processing its accounts on e-PROFILE's outsourced platform. Once a client
"goes live", the deferred revenue and costs are amortized over the expected
life of the processing contract. In addition, these projects will generate
on-going processing fee related services revenue for e-PROFILE. In lieu of
up-front, one-time license fees, e-commerce contracts will generate license
and maintenance revenue for Sanchez on a per account/per month basis over the
life of the processing contract after the client "goes live" with the
solution. Under this model, as a client institution's e-commerce account base
grows, Sanchez increases its revenue stream.
Revenues for the quarter ended June 30, 2000 increased 17.1% to $16.3 million,
compared to $13.9 million recorded for the same period in 1999. Net loss for the
quarter totaled ($2.0) million or ($.08) per share, compared to net income of
$1.8 million or $.07 per share for the same period last year. The early adoption
of the SEC's SAB No. 101 resulted in the Company deferring $7.3 million in
revenue and $2.2 million in pre-tax profit in the second quarter of 2000. As of
August 14, 2000, the Company is engaged in 10 e-commerce projects worldwide.
The e-PROFILE business segment generated revenues of $4.6 million and a pre-tax
loss of $4.7 million in the quarter ended June 30, 2000. On August 7, 2000,
e-PROFILE filed a registration statement with the Securities and Exchange
Commission ("SEC") for an initial public offering of its common stock. Sanchez
also announced it has established a Sanchez Subscription Program (SSP), which
permits Sanchez shareholders to participate in a portion of the initial public
offering of e-PROFILE. A record date, which determines who will be eligible to
receive an
9
<PAGE>
offer to purchase shares of e-PROFILE, will be set by the Sanchez board of
directors at any time before the registration statement is declared effective
by the SEC. A news release announcing the record date will be issued by
Sanchez not less than 10 days prior to the record date. The number of shares
to be sold in the offering and the number of shares to be offered to Sanchez
shareholders has not been determined.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected statement of
operations data:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------------------------------------------------------------------
DOLLARS IN THOUSANDS 2000 1999 2000 1999
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Products $ 3,629 $ 4,948 $ 6,545 $ 8,235
Services 9,576 6,952 17,114 11,254
Software maintenance and other 3,089 2,011 5,941 4,078
---------------------------------------------------------------------
Total revenues $ 16,294 $ 13,911 $ 29,600 $ 23,567
---------------------------------------------------------------------
Percentage Relationship to Total Revenues
Revenues
Products 22.3% 35.6% 22.1% 34.9%
Services 58.8 50.0 57.8 47.8
Software maintenance and other 18.9 14.4 20.1 17.3
---------------------------------------------------------------------
Total revenues 100.0 100.0 100.0 100.0
Operating expenses
Product development 37.6 28.2 40.9 31.4
Product support 6.8 8.1 7.3 8.3
Services 35.3 22.0 37.6 22.1
Sales and marketing 20.1 14.9 22.3 16.6
General, administrative and other 20.9 8.4 22.4 8.7
---------------------------------------------------------------------
Total operating expenses 120.7 81.6 130.5 87.1
Earnings (loss) from operations (20.7) 18.4 (30.5) 12.9
Interest income, net 2.7 1.7 2.9 2.3
---------------------------------------------------------------------
Earnings (loss) before income taxes (18.0) 20.1 (27.6) 15.2
Income tax provision (benefit) (5.8) 7.2 (8.8) 5.5
---------------------------------------------------------------------
Net earnings (loss) before cumulative
effect of change in accounting principle (12.2) 12.9 (18.8) 9.7%
---------------------------------------------------------------------
Cumulative effect of change in
accounting principle --- --- (0.6) ---
---------------------------------------------------------------------
Net earnings (loss) (12.2%) 12.9% (19.4%) 9.7%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000, COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues increased $2.4 million, or 17.1%, in the second quarter of
2000 as compared to the second quarter of 1999. Service revenues increased $2.6
million or 37.7%. Most of the service growth is attributable to the increased
levels of Sanchez and e-PROFILE implementation activity associated with
e-banking projects and processing revenue from e-PROFILE. Product revenue
decreased by $1.3 million or 26.7% from the second quarter of 1999 to the second
quarter of 2000 reflecting the Company's switch in its pricing model to
usage-based pricing versus one-time license fees to lower the initial investment
for potential customers. Sales efforts have been more focused on this pricing
model versus the Company's traditional one-time license fee model. This focus,
and the resulting lower closure of one-time license fee contract revenue, also
contributed to the decline in product revenues. Software maintenance and other
revenue increased by $1.1 million, or 53.6%, in the second quarter of 2000, due
primarily to an increase in the Company's supported client base.
10
<PAGE>
PRODUCT DEVELOPMENT. Product development expenses increased $2.2 million, or
56.5%, in the second quarter of 2000, due to costs associated with increased
staffing, e-PROFILE consulting fees related to product strategy development,
expanded facilities and other overhead costs. Staffing increased 23% for this
area of the Company primarily due to the Company's continued development
commitment to invest in leveraging its existing technologies.
PRODUCT SUPPORT. Product support expenses decreased by $16,000, or 1.4%, in the
quarter ended June 30, 2000, primarily due to lower consulting fees as well as
the Company's ability to leverage it's existing workforce to support the
expanded client base.
SERVICES. Service expenses increased by $2.7 million, or 87.3%, during the
second quarter of 2000. The increase was primarily due to the additional
resources needed to support the increased services delivered by Sanchez and
e-PROFILE. The gross margin relative to associated revenues was 40.1% for the
second quarter of 2000, compared to 55.9% in the same period last year. This
decrease is due largely to the lower margins associated with processing
revenues.
SALES AND MARKETING. Sales and marketing expenses increased by $1.2 million, or
58.2%, in the 2000 period due to the costs associated with increased staffing,
and consulting fees at e-PROFILE related to sales strategies and marketing
plans.
GENERAL, ADMINISTRATIVE AND OTHER. These expenses increased by $2.2 million, or
190.0%, in 2000 due to increased e-PROFILE staffing and building the management
team as well as incurring consulting fees related to developing e-PROFILE's
pricing and business models and higher incentive pay.
INCOME TAX PROVISION. Taxes in the second quarter of 2000 were 32.0% of income
before income taxes, as compared to 36.0% in the same quarter last year. The
decrease is primarily due to the tax benefit derived from the foreign sales
corporation.
SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues increased $6.0 million, or 25.6%, in the first six months of
2000 over the same period in 1999. Service revenues increased $5.9 million or
52.1%. Most of the service growth is attributable to the increased levels of
Sanchez and e-PROFILE implementation activity associated with e-banking projects
and processing revenue from e-PROFILE. Product revenue decreased by $1.7 million
or 20.5% from the first six months of 1999 to the first six months of 2000
reflecting the Company's transition from a license fee model to a usage-based
pricing model. Sales efforts have been more focused on this pricing model versus
the Company's traditional one-time license fee model. This focus, and the
resulting lower closure of one-time license fee contract revenue, also
contributed to the decline in product revenues. Software maintenance and other
revenue increased by $1.9 million, or 45.7%, in the first six months of 2000,
due primarily to an increase in the Company's supported client base.
PRODUCT DEVELOPMENT. Product development expenses increased $4.7 million, or
63.5%, in the first six months of 2000, due to costs associated with increased
staffing, e-PROFILE consulting fees related to product strategy development,
expanded facilities and other overhead costs. Staffing increased 27% for this
area of the Company primarily due to the Company's focus on extending its
technology into areas that are targeted to become new revenue sources.
PRODUCT SUPPORT. Product support expenses increased by $224,000, or 11.5%, for
the six months ended June 30, 2000, primarily due to the increased staffing in
this area. This increase was partially offset by lower consulting fees.
SERVICES. Service expenses increased by $5.9 million, or 114.0%, during the six
months ended June 30, 2000 as compared to the same period in 1999. The increase
was primarily due to the additional resources needed to support the increased
services delivered by Sanchez and e-PROFILE. The gross margin relative to
associated revenues was 34.9% for the first six months of 2000, compared to
53.8% in the same period last year. This decrease was primarily due to lower
margins associated with processing revenues.
SALES AND MARKETING. Sales and marketing expenses increased by $2.7 million, or
68.0%, in the 2000 period due to the costs associated with increased staffing,
and e-PROFILE consulting fees related to sales strategies and marketing plans.
GENERAL, ADMINISTRATIVE AND OTHER. These expenses increased by $4.6 million, or
222.0%, in 2000 due to increased e-PROFILE staffing and building the
management team as well as incurring consulting fees related to developing
e-PROFILE's pricing and business models and higher incentive pay.
11
<PAGE>
INCOME TAX PROVISION. Taxes in the first six months of 2000 were 32.0% of income
before income taxes, as compared to 36.0% in the first six months of 1999. The
decrease is primarily due to the tax benefit derived from the foreign sales
corporation.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $28.0 million at June 30, 2000. Cash used by
operating activities for the six months ended June 30, 2000 was $1.9 million
as compared to $4.0 million of cash used by operating activities during the
same period in 1999. This use of cash was primarily the result of funding
operations and higher accounts receivable. Accounts receivable increased by
$8.3 million in the first half of 2000 primarily as a result of increased
services related billings. The above use of the cash was partially offset by
the deferred profit associated with SAB No. 101, an increase in accounts
payable and accrued expenses and stock based compensation. The Company
continues to expect a certain amount of variability in the payment timing for
major contract milestones, which will impact cash flow from operations during
any given period.
During the first six months of 2000, the Company used $2.3 million for investing
activities primarily related to the purchase of fixed assets due to increased
staffing and equipment primarily at the e-PROFILE processing center.
Financing activities contributed $6.8 million of cash during the six months
ended June 30, 2000 principally from the exercise of options contributing $5.2
million and a $3.0 million investment in e-PROFILE from a venture capital fund.
These sources of cash were partially offset by the purchase of treasury stock
totaling $1.4 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. 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.
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. 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 services model will
result in more predictable quarter-to-quarter revenues.
FORWARD-LOOKING STATEMENTS
The Company's forward-looking statements about its revenues, earnings, market
predictions 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 demand for products
and services in the financial services industry, competition among software and
operational and technology outsourcing companies serving that industry, the
timing of new contract closings, the potential delays in the implementation of
products and services, the success of the Company's e-PROFILE business model,
e-PROFILE's limited operating history, the extent to which the Internet will be
used for financial services and products and other significant events of revenue
recognition affecting the Company's quarterly results, the development of the
top-tier and direct banking markets, market acceptance of the Company's products
and services within these markets, the Company's ability to protect its
intellectual property rights, the risks inherent in expansion, the potential
adverse impact of security breaches and the Company's ability to continue to
improve its products and services.
A registration statement relating to the common stock of e-PROFILE has been
filed with the Securities and Exchange Commission, but has not yet become
effective. These securities may not be sold nor may offers to buy be accepted
prior to the time the registration statement becomes effective. This Form
10-Q shall not constitute an offer to sell or the solicitation of an offer to
buy nor shall there be any sale of these securities in any state in which
such offer, solicitation or sale would be unlawful prior to the registration
of qualification under the securities laws of any such state. The offering
will be made only by means of a prospectus, subject to the effectiveness of
the registration statement.
12
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates relate
primarily to the Company's cash equivalents. The Company does not have any
derivative financial instruments in its portfolio. The Company is averse to
principal loss and ensures the safety and preservation of its invested funds by
limiting default risk, market risk and reinvestment risk. The Company does not
expect any material loss with respect to its cash equivalents.
FOREIGN CURRENCY RISK
The Company does not use foreign exchange forward contracts. All contractual
arrangements with international customers are denominated in U.S. dollars.
13
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
PART II - OTHER INFORMATION
Item 4: Submission of matters to a vote of security holders
On May 24, 2000, the Annual Meeting of Shareholders of the Company was
held at which the following matter was submitted to and the requisite number of
shares of Common Stock of the Company were voted on by the stockholders, with
the results set forth below:
a) The following persons were elected to the Board of Directors to serve as
directors until the next annual meeting of shareholders in 2001, and until
their respective successors are duly elected and qualified. Each person
received the number of votes set forth next to their names below:
PROPOSAL I - ELECTION OF DIRECTORS
For Withheld
--------------- ------------
Michael A. Sanchez 22,844,745 54,588
Frank R. Sanchez 22,844,745 54,588
Joseph F. Waterman 22,843,965 55,368
Warren V. Musser 22,841,295 58,038
Lawrence Chimerine 22,843,855 55,478
Alex W. Hart 22,842,065 57,268
Kailash C. Khanna 21,924,948 974,385
John D. Loewenberg 22,843,465 55,868
Thomas C. Lynch 22,844,265 55,068
James R. Stojak 22,466,925 432,408
Gary C. Wendt 22,839,425 59,908
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
No other applicable items.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SANCHEZ COMPUTER ASSOCIATES, INC.
/s/ Thomas F. McElwee
-------------------------
Thomas F. McElwee
Senior Vice President and Chief Financial Officer
Date: August 14, 2000
