<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended SEPTEMBER 30, 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.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
PENNSYLVANIA 23-2161560
------------ ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
40 VALLEY STREAM PARKWAY, MALVERN, PA 19355
------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (610) 296-8877
------------------------
N/A
--------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of October 31, 2000, there were 24,989,251 outstanding shares of the issuer's
Common Stock, no par value.
<PAGE>
SANCHEZ COMPUTER ASSSOCIATES, INC.
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
PAGE NO.
--------
CONSOLIDATED BALANCE SHEETS
September 30, 2000 (Unaudited) and December 31, 1999 3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three and Nine Months Ended September 30, 2000 and 1999 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 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 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 SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- ----------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 31,097 $ 25,404
Receivables, less allowance of $739 and $288
respectively 24,306 12,564
Contracts in process 2,829 3,227
Deferred income taxes 731 686
Recoverable income taxes 4,885 2,948
Prepaid and other current assets 1,789 1,187
Deferred service expense 5,807 --
-------- --------
Total current assets 71,444 46,016
Property and equipment
Equipment 10,043 7,351
Furniture and fixtures 1,942 1,784
Leasehold improvements 2,233 2,020
-------- --------
14,218 11,155
Accumulated depreciation and amortization (7,315) (5,115)
-------- --------
Net property and equipment 6,903 6,040
Deferred service expense 4,460 --
Other non-current assets 3,800 4,339
-------- --------
Total assets $ 86,607 $ 56,395
======== ========
LIABILITIES
Current liabilities
Current debt obligations $ -- $ 83
Accounts payable, trade 3,966 2,360
Accrued expenses 9,850 4,417
Deferred service revenue 8,779 --
Deferred license and maintenance revenues 5,558 3,615
-------- --------
Total current liabilities 28,153 10,475
Deferred income taxes 66 482
Deferred service revenue 6,742 --
-------- --------
Total liabilities 34,961 10,957
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized - 150,000,000 shares
Issued and outstanding 25,003,917 and
24,357,351 respectively 251 244
Additional paid-in capital 41,856 28,392
Retained earnings 10,089 16,894
Treasury stock (550) --
Notes due on common stock purchases -- (92)
-------- --------
Total shareholders' equity 51,646 45,438
-------- --------
Total liabilities and shareholders' equity $ 86,607 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------
2000 1999 2000 1999
----------- -------- -------- ---------
<S> <C> <C> <C> <C>
Revenues
Products $ 5,096 $ 5,832 $ 11,641 $ 14,068
Services 9,682 8,587 26,796 19,841
Software maintenance and other 3,889 3,058 9,950 7,135
-------- -------- -------- --------
Total revenues 18,667 17,477 48,387 41,044
Operating expenses
Product development 5,664 4,154 17,767 11,558
Product support 1,055 959 3,226 2,748
Services 6,821 4,943 17,957 10,304
Sales and marketing 2,731 2,099 9,323 6,023
General, administrative and other 4,449 2,166 11,201 4,226
-------- -------- -------- --------
Total operating expenses 20,720 14,321 59,474 34,859
-------- -------- -------- --------
Earnings (loss) from operations (2,053) 3,156 (11,087) 6,185
Interest income, net 473 327 1,333 871
-------- -------- -------- --------
Earnings (loss) before income taxes (1,580) 3,483 (9,754) 7,056
Income tax provision (benefit) (506) 901 (3,122) 2,187
-------- -------- -------- --------
Net earnings (loss) before cumulative
effect of change in accounting principle (1,074) 2,582 (6,632) 4,869
Cumulative effect of change in
accounting principle -- -- (173) --
-------- -------- -------- --------
Net income (loss) $ (1,074) $ 2,582 $ (6,805) $ 4,869
======== ======== ======== ========
Basic earnings (loss) per average common
share before cumulative effect of change
in accounting principle $ (0.04) $ 0.11 $ (0.27) $ 0.20
Diluted earnings (loss) per average
common share before cumulative effect of
change in accounting principle $ (0.04) $ 0.10 $ (0.27) $ 0.19
Basic earnings (loss) per average common
share $ (0.04) $ 0.11 $ (0.27) $ 0.20
Diluted earnings (loss) per average
common share $ (0.04) $ 0.10 $ (0.27) $ 0.19
Weighted-average common shares
outstanding 25,006 24,155 24,845 23,787
Weighted-average common and dilutive
shares outstanding 25,006 26,397 24,845 25,987
</TABLE>
4
<PAGE>
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net earnings (loss) $ (6,805) $ 4,869
Adjustments to reconcile net
earnings to cash used by operating
activities, net of effect from
acquisition
Depreciation and amortization 2,842 1,870
Stock based compensation 2,600 336
Cash provided (used) by changes in
operating assets and liabilities
Accounts receivable (11,742) (11,102)
Contracts in process 398 2,650
Recoverable income taxes (1,937) --
Prepaid and other current assets (602) (239)
Deferred service revenue 15,521 --
Deferred service expense (10,267) --
Accounts payable and accrued
expenses 7,021 (206)
Deferred income taxes (461) --
Deferred license and maintenance
revenues 1,943 1,054
-------- --------
Net cash used by operating activities (1,489) (768)
Cash used in investing activities
Investments -- (136)
Cost of acquisition, net of cash acquired -- (499)
Capitalized computer software costs -- (645)
Proceeds from sale of fixed assets 51 --
Capital expenditures (3,203) (3,778)
-------- --------
Net cash used in investing activities (3,152) (5,058)
Cash flows from financing activities
Repayment of notes due on common stock purchases 92 148
Purchase of common stock for treasury (1,631) (592)
Issuance of common stock for stock options 5,983 2,247
Principal payments under current debt (83) (196)
Proceeds from equity investments 5,973 --
-------- --------
Net cash provided by financing activiies 10,334 1,607
-------- --------
Net increase (decrease) in cash and
cash equivalents 5,693 (4,219)
Cash and cash equivalents at beginning
of period 25,404 27,177
-------- --------
Cash and cash equivalents at end of
period $ 31,097 $ 22,958
======== ========
Supplemental cash flow information
Interest paid $ -- $ 13
Income taxes paid $ -- $ 2,849
</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 E. The consolidated
results of operations for the nine months ended September 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):
<TABLE>
<CAPTION>
-----------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------
2000 1999 2000 1999
------------------ --------------------
<S> <C> <C> <C> <C>
U.S. and Caribbean 10,354 8,081 27,040 18,925
Western Europe 2,721 5,287 11,436 11,093
Central Europe 2,595 3,240 5,541 6,928
Canada 788 732 2,023 3,475
Other 2,209 137 2,347 623
------------------------------------------
$ 18,667 $17,477 $48,387 $41,044
-------------------------------------------------------------------
</TABLE>
6
<PAGE>
(C.) 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 the business segments:
<TABLE>
<CAPTION>
-----------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
-----------------------
<S> <C> <C>
Revenues
Sanchez 32,840 36,070
e-PROFILE 15,547 4,974
------------------------
Total 48,387 41,044
========================
Earnings (loss) from
operations
Sanchez 2,329 6,741
e-PROFILE (13,416) (556)
------------------------
Total (11,087) 6,185
========================
Total Assets
Sanchez 53,154 45,351
e-PROFILE 33,453 7,107
-----------------------
Total 86,607 52,458
=======================
</TABLE>
(D.) EARNINGS PER SHARE
Basic earnings per share has been calculated as net earnings divided by
weighted-average common shares outstanding, while diluted earnings per
share has been computed as net earnings divided by weighted-average common
and diluted shares outstanding 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).
<TABLE>
<CAPTION>
---------------------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------
2000 1999 2000 1999
---------------------------------------------
<S> <C> <C> <C> <C>
Weighted-average shares outstanding 25,006 24,155 24,845 23,787
Dilutive effect of
Warrants 66 35
Options 2,176 2,165
---------------------------------------------
Total common and diluted shares 25,006 26,397 24,845 25,987
---------------------------------------------
</TABLE>
At September 30, 2000, potentially dilutive common stock equivalents
include warrants to purchase 66,000 shares of common stock and options to
purchase 2,765,484 shares of common stock. All potentially dilutive common
stock equivalents were excluded from the calculation of net loss per share
for the three and nine months ended September 30, 2000 as their effect is
anti-dilutive as a result of the net loss incurred for the periods.
7
<PAGE>
(E.) 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 nine months ended
September 30, 2000, resulting in a reduction to net income of $173,000
which represents the net effect of deferring related implementation
revenue and costs that were previously recognized in the fourth quarter of
1999. During the nine months ended September 30, 2000, the Company
recognized revenue and net income of $1.6 million and $167,000
respectively, which was previously recognized in 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 nine
months ended September 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 nine months ended September 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 $4.8 million of revenues and $2.4 million of earnings before
income taxes from implementation services performed during the quarter
ended September 30, 2000. These amounts will be recognized over the
expected term of the processing contract.
(F.) CONTINGENCIES
In September 2000, X.com provided notice for the termination of its
processing relationship with e-PROFILE in connection with its exit from
the e-banking marketplace. The parties are currently negotiating the terms
of a settlement of the processing contract, including a dispute over
certain processing fees incurred. During the three months ended September
30, 2000, the Company recorded a $500,000 reserve related to this matter
through an adjustment to revenue. However, the Company believes that the
customer's claims for any credit are without merit and, if a reasonable
compromise is not reached, it intends to vigorously pursue collection of
all remaining amounts due from this customer.
In October 2000, 1stWebbankdirect terminated its processing agreement with
e-PROFILE in connection with the consolidation of its e-banking platforms.
The parties are currently negotiating the terms of a settlement of the
processing agreement, as well as client claims under the agreement with
respect to disputed implementation fees. The Company intends to vigorously
pursue collection of all outstanding receivables from this customer
($770,000 at September 30, 2000), as well as certain fees due for minimum
processing obligations. The Company has not recognized any implementation
revenue or direct costs related to this contract through September 30,
2000, in accordance with SAB No. 101. As of this date, the Company is
unable to estimate the amount of any potential gain or loss.
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 PROFILE suite of products is
comprised of PROFILE/ANYWARE, a highly flexible, multi-currency,
multi-language, customer-centric, enterprise banking application and
transaction processor for deposit and loan processing;
PROFILE/XPRESS, a transactional customer management system and
financial product distribution application that provides real time
integration connecting all of an institution's delivery channels to
its internal and external product processing factories;
PROFILE/XPRESS AE, an optional manager of real-time authorizations
batch-based, off-line processes; PROFILE/WEBCONSUMER, a Web-based,
Internet front-end processor for retail and commercial banking
applications; PROFILE FOR WINDOWS a native Windows(R) client
application for customer service and teller functions;
PROFILE/APPLICATION TOOLS, a set of six packaged tools to assist with
developing client-side code for various applications intended to
interface with PROFILE; and PROFILE/FMS (Financial Management
System), a multi-company, multi-currency, cost center-based
accounting system.
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 September 30,
2000, e-PROFILE was processing in excess of 600,000 accounts at its
bank operations and data center for six 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 generate on-going processing fee related services revenue for
e-PROFILE. In lieu of up-front, one-time license fees, e-commerce
contracts 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 September 30, 2000 increased 6.8% to
$18.7 million, compared to $17.5 million recorded for the same period
in 1999. Net loss for the quarter totaled ($1.1) million or ($0.04)
per share, compared to net income of $2.6 million or $0.10 per share
for the same period last year. The early adoption of the SEC's SAB
No. 101 resulted in the Company deferring $4.8 million in revenue and
$2.4 million in pre-tax profit in the third quarter of 2000.
The e-PROFILE business segment generated revenues of $7.4 million and
a pre-tax loss of $3.6 million in the quarter ended September 30,
2000. On August 7, 2000, e-PROFILE filed a registration statement
with the Securities and Exchange Commission ("SEC") for an initial
public offering ("IPO") of its common stock. On September 21, 2000,
the Company announced that it had placed a hold on its IPO of e-PROFILE
common stock.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected statement of
operations data:
<TABLE>
<CAPTION>
----------------------------------------------------------
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------
DOLLARS IN THOUSANDS 2000 1999 2000 1999
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenues
Products $ 5,096 5,832 11,641 14,068
Services 9,682 8,587 26,796 19,841
Software maintenance and other 3,889 3,058 9,950 7,135
---------- ------- --------- -------
Total revenues $ 18,667 $17,447 $ 48,387 $41,044
========== ======= ========= =======
Percentage Relationship to Total
Revenues
Revenues
Products 27.3% 33.4% 24.0% 34.3%
Services 51.9 49.1 55.4 48.3
Software maintenance and other 20.8 17.5 20.6 17.4
---------- ------ --------- ------
Total revenues 100.0 100.0 100.0 100.0
Operating expenses
Product development 30.3 23.8 36.7 28.1
Product support 5.7 5.5 6.7 6.7
Services 36.5 28.2 37.1 25.1
Sales and marketing 14.6 12.0 19.3 14.7
General, administrative and other 23.8 12.4 23.1 10.3
---------- ------ --------- ------
Total operating expenses 110.9 81.9 122.9 84.9
Earnings (loss) from operations (10.9) 18.1 (22.9) 15.1
Interest income, net 2.5 1.9 2.8 2.1
---------- ------ --------- ------
Earnings (loss) before income taxes (8.4) 20.0 (20.1) 17.2
Income tax provision (benefit) (2.7) 5.2 (6.5) 5.3
---------- ------ --------- ------
Net earnings (loss) before
cumulative effect of change in
accounting principle (5.7) 14.8 (13.6) 11.9
---------- ------ --------- ------
Cumulative effect of change in
accounting principle -- -- (0.4) --
---------- ------ --------- ------
Net earnings (loss) (5.7%) 14.8% (14.0%) 11.9%
---------- ------ --------- ------
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES. Revenues increased $1.2 million, or 6.8%, in the third quarter of 2000
as compared to the third quarter of 1999. Service revenues increased $1.1
million or 12.8%. 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 $736,000 or 12.6% from the third quarter of 1999 to the third
quarter of 2000 reflecting the Company's switch in its pricing model to
usage-based, annuity 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 $831,000 or 27.2%, in the third quarter of 2000, due
primarily to an increase in the Company's supported client base and higher sales
of third-party products by e-PROFILE.
10
<PAGE>
PRODUCT DEVELOPMENT. Product development expenses increased $1.5 million, or
36.4%, in the third quarter of 2000, due to costs associated with increased
staffing, e-PROFILE third-party fees related to product strategy development,
expanded facilities and other overhead costs. Staffing increased 20.0% 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 increased by $96,000, or 10.0%, in the
quarter ended September 30, 2000, primarily due to costs required to support the
larger converted client base.
SERVICES. Service expenses increased by $1.9 million, or 38.0%, during the third
quarter of 2000. The increase was primarily due to the additional resources
needed to support the increased service delivered by Sanchez and e-PROFILE. The
gross margin relative to associated revenues was 29.6% for the third quarter of
2000, compared to 42.4% in the same period last year. This decrease was due
largely to the deferral of high margin services work related to e-commerce
implementations and the accretion of low margin revenues along with lower
processing revenues from one client that has decided to exit the e-banking
marketplace.
SALES AND MARKETING. Sales and marketing expenses increased by $632,000, or
30.1%, in the 2000 period due to the consulting fees related to developing sales
strategies and marketing plans and higher commissions due to third-parties.
GENERAL, ADMINISTRATIVE AND OTHER. These expenses increased by $2.3 million, or
105.4%, in 2000 due to increased e-PROFILE staffing and building the management
team, the write off of e-PROFILE's previously capitalized IPO costs, higher
costs associated with the sale of third-party products by e-PROFILE and higher
bad debt reserves.
INCOME TAX PROVISION. Taxes in the third quarter of 2000 were 32.0% of income
before income taxes, as compared to 25.9% in the same quarter last year. The
increase is the result of a tax benefit in 1999 from the recalculation of the
impact of the Company's foreign sales corporation on it's tax rate for prior
years as well as for the first six months of 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES. Revenues increased $7.3 million, or 17.9%, in the first nine months of
2000 over the same period in 1999. Service revenues increased $7.0 million or
35.1%. 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 $2.4 million
or 17.3% from the first nine months of 1999 compared to the first nine months of
2000 reflecting the Company's transition from a license fee model to a
usage-based, annuity 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 $2.8 million, or 39.5%, in the first nine months of
2000, due primarily to an increase in the Company's supported client base and
higher sales of third-party products.
PRODUCT DEVELOPMENT. Product development expenses increased $6.2 million, or
53.7%, in the first nine 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 22.0% 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 $478,000, or 17.4%, for
the nine months ended September 30, 2000, primarily due to the costs required to
support the larger converted client base.
SERVICES. Service expenses increased by $7.7 million, or 74.3%, during the nine
months ended September 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 32.9% for the first nine months of 2000, compared to
48.1% in the same period last year. This decrease was primarily due to lower
margins associated with processing revenues, the deferral of higher margin
services work related to e-commerce implementations and the accretion of low
margin revenues.
SALES AND MARKETING. Sales and marketing expenses increased by $3.3 million, or
54.8%, in the 2000 period due to the costs associated with increased staffing
and e-PROFILE consulting fees related to developing sales strategies and
marketing plans.
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GENERAL, ADMINISTRATIVE AND OTHER. These expenses increased by $7.0 million,
or 165.0%, 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, higher incentive pay, increased it's
bad debt reserve and the write off of e-PROFILE's previously capitalized IPO
costs.
INCOME TAX PROVISION. Taxes in the first nine months of 2000 were 32.0% of
income before income taxes, as compared to 30.9% in the first nine months of
1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $31.1 million at September 30, 2000. Cash used by
operating activities for the nine months ended September 30, 2000 was $1.5
million as compared to $768,000 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 $11.7 million in the first nine months of 2000
primarily as a result of increased services related billings. The above use of
cash was 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 nine months of 2000, the Company used $3.2 million for
investing activities primarily related to the purchase of fixed assets due to
increased staffing and additional equipment and facilities.
Financing activities contributed $10.3 million of cash during the nine months
ended September 30, 2000 principally from the exercise of options contributing
$6.0 million as well as $6.0 million of investment in e-PROFILE from two
external sources, partially offset by the purchase of treasury stock totaling
$1.6 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.
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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. On September 21, 2000, the Company announced that it had
placed a hold on its IPO of e-PROFILE common stock.
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.
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SANCHEZ COMPUTER ASSOCIATES, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
No other applicable items.
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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: November 14, 2000
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