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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____ to _____
Commission file number 000-21705
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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
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 No
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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 onthe closing price on NASDAQ) on March 17, 2000 was approximately
$709.7 million.
The number of shares of registrant's Common Stock outstanding as of March 17,
2000 was 24,784,977 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 24, 2000 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.
SANCHEZ COMPUTER ASSOCIATES, INC.
INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
ITEM PAGE
NO. NO.
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Part I
1. Business............................................................ 3
2. Properties.......................................................... 16
3. Legal Proceedings................................................... 16
4. Submission of Matters to a Vote of Security Holders................. 16
4 A. Executive Officers of the Registrant................................ 16
Part II
5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................. 18
6. Selected Financial Data............................................. 19
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 19
7 A. Quantitative and Qualitative Disclosures About Market Risk.......... 25
8. Financial Statements and Supplementary Data......................... 26
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 44
Part III
10. Directors and Executive Officers of the Registrant.................. 44
11. Executive Compensation.............................................. 44
12. Security Ownership of Certain Beneficial Owners and Management...... 44
13. Certain Relationships and Related Transactions...................... 44
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 45
2
PART I
ITEM 1. BUSINESS.
Based in Malvern, Pennsylvania, Sanchez Computer Associates, Inc. ("Sanchez"
or the "Company") maintains U.S. offices near San Francisco, California, and
an operations center for its e-PROFILE(TM) ("e-PROFILE") subsidiary in a
suburban Pittsburgh, Pennsylvania location. The Company also operates offices
in Warsaw, Poland; Singapore; and in London and Chester in the United
Kingdom. Sanchez designs, develops, markets, implements and supports
PROFILE(R) ("PROFILE"), a financial services systems architecture and
enterprise banking application software for the world's top-tier financial
institutions. The principal product is PROFILE/ANYWARE, a highly flexible,
integrated, on-line, real time, multi-currency, multi-language enterprise
bank production system, which operates on open, client/server platforms. The
system is comprised of several integrated modules, which support deposit,
loan, customer, transaction processing and bank management requirements
through multiple distribution channels, including the Internet. The
comprehensive PROFILE product family also includes: PROFILE/WEBLINK(TM), an
HTML-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/FMS (the Financial Management
System), a multi-company, multi-currency, cost center-based accounting
system; and PROFILE/ODBC, an open connectivity database driver. The PROFILE
system is currently licensed to approximately 1,200 institutions in 15
countries. 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. 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, Inc. e-PROFILE is designed to provide
financial services providers with the ability to offer differentiated direct
banking services to customers through a dedicated, end-to-end service utility
for outsourcing and managing financial services technologies and operations
for direct and Internet banks.
The Company believes 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 the growth of
electronic commerce will result in a large increase in the volume of
financial transactions occurring on-line, as well as a greater demand for
customized products and services. According to research published by Faulkner
& Gray, the number of U.S. on-line banking households is expected to reach
9.8 million customers in 2000. More forward-looking industry research has the
total number of on-line U.S. banking customers to reach 32 million by 2003.
Furthermore, the Company believes the capabilities of PROFILE, particularly
the e-PROFILE service offering, provide financial services providers with the
technology to respond strategically to this consumer banking evolution with a
minimal "up-front" investment and the ability to enter the market quickly
with selected product offerings in a 90 to 120-day period. Under this model,
the Company partners with leading edge, third-party technology partners for
each component in the financial services value chain. From Web browser
applications to data warehousing capabilities, financial service customers
utilizing e-PROFILE have a choice of various "best-in-class" technology
options for each component of their customized solution. This "menu" approach
allows subscribers to tailor their e-PROFILE environment to best suit their
particular customer base and marketing objectives.
Until as recently as 1999, Sanchez was primarily focused on replacing legacy
systems in the top 1,000 banks worldwide. A venture into the direct banking
market in 1997 with ING Canada proved a large success. As a result of the
Canadian success, as well as several subsequent Internet and direct bank
launches (see below), the Company and its PROFILE products found an
opportunity in the e-commerce space of financial services. The Company
believes PROFILE is a "go to" architecture for enabling financial services
and banking systems on the Internet and other direct channels. Today the
Company primarily targets top-tier, global financial services institutions
interested in marketing their products and services through direct or
Internet channels. Top-tier institutions include banks and non-banks with
brand identity, institutions that can leverage a large customer base and
typically have at least $100 million to invest in the channel. The non-banks
include brokerages, insurance companies, mono-line credit card companies,
Internet portals, large retailers and Internet savvy, well-funded
entrepreneurial startups. Within this group of bank and non-bank
institutions, Sanchez focuses on the "attacker" segment. Sanchez classifies
attacker institutions as those which are aggressive in their product and
service differentiation and who want to become the leaders in the e-financial
services marketplace. Attacker institutions aggregate financial services and
want to offer their customers a depth and breadth of differentiated products
and services. To gain efficiencies, attacker institutions establish direct
and Internet banks on outsourced, supply chain-based platforms, such as the
model offered by e-PROFILE. These institutions understand they receive no
differentiating value from owning their direct bank's technology and
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operations. The Company believes the e-PROFILE offering is the first
vendor-developed answer that provides the ongoing technology, the operations
and the pricing structures required to support an outsourced supply chain
venue for on-line financial services. Sanchez calls this model a vertical
solutions provider, or VSP. While e-PROFILE provides its own value to the
market as a VSP, it also provides Sanchez with a new distribution channel for
the suite of PROFILE products, related technologies and services.
In 1997, Sanchez successfully implemented its first direct bank solution for
ING Direct in Canada. In June 1999, Sanchez rolled out its second direct bank
for ING in Spain. ING Group, headquartered in The Netherlands, is one of the
world's largest integrated financial services providers. WingspanBank.com, a
division of First USA Bank, N.A., went live in June 1999, and was the first
client to use an e-PROFILE operational and technology outsourcing solution
for Internet banking. The solution is powered by Sanchez' PROFILE/ANYWARE,
the real-time processing and integrated enterprise banking system and
included several best-in-class Internet vendor partners. Citi f/i, the
on-line banking and borrowing service of Citibank, went live with Sanchez'
PROFILE/ANYWARE real-time processing and integrated enterprise banking system
in August 1999. PROFILE's 24 x 7 x 365 availability was enabled for the Citi
f/i initiative with the development of a logical dual site database
replication function, which supports continuous operation. The Company
believes PROFILE is the first integrated banking application to include a
database feature that supports real time continuous operation. In December
1999, X.com, an aggressive Palo Alto, Calif.-based financial services
start-up, went live with an e-PROFILE Internet bank solution. X.com, founded
by Internet entrepreneur Elon Musk, processes its bank accounts through
e-PROFILE using PROFILE/ANYWARE. In addition, e-PROFILE interfaced with
several best-in-class vendors, including X.com's proprietary consumer Web
front-end and call center.
The Company has established and maintains strategic alliance/partnering
agreements with Compaq Computer Corporation ("Compaq", previously Digital
Equipment Corporation) since 1987, 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 e-commerce-related solutions powered by
PROFILE systems among top-tier financial institutions worldwide. Since 1997,
PwC and the Company have engaged in various global joint marketing, training
and implementation activities, which have included training of approximately
75 PwC consultants to implement the PROFILE software solution. The Company
has partnering relationships with various other domestic and international
regional service organizations. The Company anticipates forming additional
alliances with other complementary service organizations and systems
integrators in the future. In 1998, the Company formed a joint venture with
Capital Services, Inc., a financial services and distribution company based
in Bombay, India. The company is now named Sanchez/Capital Services and has
distribution rights to PROFILE in India and portions of the Middle East.
Sanchez believes its alliance program facilitates its market expansion in its
target markets. In addition, Sanchez plans to expand the Company's product
distribution by contracting with its partners to market and implement PROFILE
solutions in traditional legacy replacement opportunities around the globe.
Historically, the Company has derived effectively all of its revenues from
the marketing of its PROFILE products to financial services companies on a
license-based pricing model. Late in 1999, the Company announced it was
changing its revenue model. Under the new model, a Sanchez software license
is tied to the consumer and commercial growth of financial service firms
engaged in e-commerce. As an institution's direct or Internet bank account
base grows, Sanchez increases its revenue stream. The Company's e-commerce
projects generate implementation service revenues for both Sanchez and
e-PROFILE. In addition, these projects generate ongoing processing revenue
for e-PROFILE and license revenue for Sanchez. In lieu of up-front, one-time
license fees, generally, e-commerce contracts generate license revenue for
Sanchez on a per account / per month basis over the life of the contract
after the client "goes live" with the solution. The ongoing monthly revenue
stream associated with the e-PROFILE outsourcing alternative is expected to
result in more predictable quarter-to-quarter revenues.
THE DIRECT BANKING MARKET
In 1995-96, the first wave of on-line financial services splashed across the
early adopter PC desktops of retail and commercial users. Since then, the
financial services industry has seen an explosion of delivery channels. This
includes several types of direct banking models -- PC banking, call centers,
the Internet, and ATMs, to name a few. In a 1999 Forrester survey of
financial institutions, banks said they expected a six-fold increase in the
percentage of customers using the Web to access
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financial services by 2001. User participation in Internet and direct banking
grows daily, particularly in the United States and Canada, according to Ernst
& Young. In the United States alone, Ernst & Young forecasts one out of 10
retail banking transactions will be conducted over the Internet by 2002. The
Company believes a similar adoption pattern is developing quickly in Europe
with the United Kingdom, France, Germany and Spain taking the lead. Japan and
Australia are spearheading the on-line revolution along the Pacific Rim. In
1999, research conducted by the Tower Group found that retail banking
customers expect banks will support new channels as soon as those channels
become available. The Tower Group also said as new channels are introduced
they quickly move from ancillary to essential. ATMs, introduced in the early
1970s, became essential in mid-80s -- 15 years after introduction. The Tower
Group estimates direct banking will become an essential channel by 2005 -- 10
years after introduction. The Company believes its e-PROFILE VSP model
provides institutions with an attractive opportunity to participate in
e-commerce. The Company believes this is not only true for institutions in
North America, but for those in Europe, Central and South America, and the
Asia Pacific Rim.
The Company believes the competitive challenges presented by the emergence of
electronic commerce and the consumer demand for greater product and service
flexibility will fundamentally alter traditional retail banking practices in
North America. The Company also believes Europe and Asia are already predisposed
to alternate financial services delivery channels and may not be far behind in
adopting Internet and direct banking. The Company believes this process will
accelerate 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. 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 are
developing 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 are supporting their efforts with infrastructure
investments. 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.
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 it is positioned to supply the next generation of
infrastructure to these organizations. In particular, the Company believes its
e-PROFILE service offering is uniquely positioned to provide large financial
organizations with a complete end-to-end operations and technology outsourcing
solution. 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 enables financial organizations to enter the
market with selected product offerings in a 90- to 120-day horizon. Further,
e-PROFILE provides subscribing institutions with a full range of outsourcing
option packages.
5
THE SANCHEZ STRATEGY
Today, the Company believes its most promising opportunity for growth will come
from increasing the distribution of its PROFILE suite of products, technology
and services through the e-PROFILE model. Sanchez believes the Company has an
opportunity to become the leading vendor of financial services technology for
Internet and direct banks. The Company believes its e-PROFILE model has the
opportunity to create and lead a VSP category for forward-thinking institutions
wanting to move out of a supply-chain infrastructure, particularly for their
direct and Internet bank initiatives. Sanchez also believes the e-PROFILE model
has several growth horizons and is gearing its operational and technology
infrastructure to function across multiple financial services delivery channels,
which, the Company believes, will broaden e-PROFILE's value to top-tier, global
institutions.
The Company believes the start-up phase of Internet and direct banking is
peaking and will reach its zenith during 2000 and early 2001. A rush by
institutions to establish a presence characterized this first phase. The Company
believes the next phase of Internet growth will be characterized by the on-line
aggregators who are out to capture market share and are armed with highly
efficient retail and commercial marketing strategies. Among the large financial
services players, Sanchez is focused on providing solutions to those who want to
pursue direct models and become the leading "aggregators" of financial services
on the Web. The aggregators are institutions that offer several financial
services and provide them to customers from one location. Aggregators have, or
are building, large client bases, are brand conscious and are aggressive in
their on-line expectations. The Company believes both Sanchez and e-PROFILE are
providing the "picks and shovels" to this top-tier core of institutions as they
compete for dominance. With the work and expense of Y2K behind them, many large
institutions are now redirecting their focus and resources to their direct
channels. Whether institutions launch pure Internet plays, such as
WingspanBank.com, or pursue a "clicks and bricks" approach, much like Citibank,
most of the largest institutions are engaged in an electronic strategy for their
products and services. In addition, Sanchez and e-PROFILE will also supply the
e-infrastructures for start-up institutions whose business plans call for
aggressive, unique branding or partnering strategies aimed at securing a minimum
of a million on-line customer accounts, such as X.com, the Silicon Valley
start-up bank. There are also institutions focused on supplying on-line
financial services to commercial entities. Helping financial service entities
provide commercial products will be a growth industry for Sanchez.
As the second leg of the e-commerce race begins and institutions look to move
beyond their e-beginnings in financial services, Sanchez and e-PROFILE are
positioned to enable and supply the necessary direct banking technology and
operational infrastructure.
With the e-PROFILE offering, Sanchez has created a new financial services
vendor category called a VSP -- a vertical services provider. The Company
believes this is the first vendor-developed solution that provides the
technology, operations, management and pricing infrastructure necessary to
support an outsourced supply-chain for on-line financial services. As
institutions initiate and expand their e-commerce strategies, they need to
differentiate their products and services, reduce costs and gain
efficiencies. With an e-PROFILE VSP solution, the Company believes
institutions can move away from vertical integration and embrace a more
efficient outsourced supply chain model.
The e-PROFILE VSP offers institutions an end-to-end financial services supply
chain through a choice of best-in-class vendor partners. The VSP model
manages all vendor relationships under one operational umbrella. The
e-PROFILE VSP integrates all of the supply chain's products and services
under a single, dynamic, "plug-and-play," multi-supplier architecture. The
e-PROFILE VSP provides institutions the flexibility to deploy the supply
chain on multiple delivery platforms. The VSP model also identifies emerging
technologies in support of an institution's need to differentiate and evolve
its products and services in tandem with the velocity of the Internet. It is
the Company's goal to position e-PROFILE as the leading provider of e-banking
operations and technology for top-tier, global financial service providers.
The technology demands of Sanchez' client Internet and direct banks are
influencing the product and architectural development of PROFILE/ANYWARE. The
product functions as a banking application server, bank transaction
processor, financial data warehouse, customer relationship manager and an
architecture for financial services integration. Sanchez can also deploy
PROFILE in multiple delivery channels and across multiple operating
platforms. As direct and Internet bank institutions find success with PROFILE
solutions, Sanchez expects to leverage the product's application, channel and
platform flexibility and establish PROFILE as a "go to" banking
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platform for client institutions as they look to integrate or replace
antiquated legacy systems. This strategy allows Sanchez to focus its efforts
on e-commerce while opening doors to other revenue opportunities as the
institutions realize the power of PROFILE could be used across their entire
enterprise.
The Company continues to establish strategic relationships with partners whom it
believes will together deliver 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.
THE SANCHEZ PROFILE SOLUTION
Sanchez is a market leader in providing enterprise banking software and
integration technologies to the financial services industry. Sanchez and its
e-PROFILE subsidiary are leading providers of end-to-end e-banking technologies
for top-tier financial services institutions worldwide. Sanchez has developed
the PROFILE financial services systems architecture, which serves as the "go to"
delivery platform for traditional, direct, Internet, and emerging delivery
channels. The Company's premier product is PROFILE/ANYWARE, an enterprise
banking application which functions as a banking application server, a bank
transaction processor, a financial data warehouse and a customer relationship
manager. The e-PROFILE solution incorporates the strength of the PROFILE/ANYWARE
banking application and PROFILE architecture along with best in class vertical
applications, vendor and integration management and operations and technology
outsourcing. PROFILE/ANYWARE is an integrated, on-line, real time enterprise
banking application licensed by more than 1,200 institutions in 15 countries.
The application's customer-centric focus and flexible, electronic product
manufacturing capabilities make it an ideal system for addressing the
personalized requirements of Internet banking. New products can be created
quickly by selecting "off-the-shelf" attributes and attaching them to product
templates. In turn, products can be made available quickly to an on-line
marketplace. The software is supported on multiple operating systems and
hardware platforms. This key feature provides institutions with an
infrastructure choice. The software is also channel independent, which expands
the application's range by removing deployment limitations. 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. PROFILE/ANYWARE is a message-based application, which supports
interfaces to a wide variety of devices including traditional branches, ATM
networks, POS networks, kiosk devices, home banking applications on dedicated
networks and the Internet, and mobile computing devices
PROFILE's multi-currency and multi-language capabilities accommodate the
retail and commercial requirements of financial service operations with
global transaction requirements. PROFILE/ANYWARE is currently installed in 15
countries and in nine 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. 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 market requirements will ultimately converge and that
the qualities of North American retail products and European payment systems
will integrate. Real time transaction processing and continuous operations
are absolute requirements for Internet banks. There are some small processing
systems that claim real-time capabilities; however, they cannot scale to
accommodate the Web's large transaction volumes. There are also large systems
that can process high transaction volumes, but they are not real time and
they process in batch mode. Neither of these is acceptable for Internet
banking. The Company believes PROFILE is the only scalable, real-time,
on-line, large-volume transaction banking system. In addition to the real
time requirement, banking on the Web demands "true" 24 x 7 x 365 continuous
operation. Sanchez developed this capability within PROFILE/ANYWARE to help
launch Citibank's Citi f/i Internet bank.
The comprehensive suite of PROFILE products also includes: PROFILE/WEBLINK(TM),
an HTML-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/FMS (the Financial Management
System), a multi-company, multi-currency, cost center-based accounting system;
and PROFILE/ODBC, an open connectivity database driver. 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 and
database environments. The
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Company believes, however, that if such software were no longer available to
the Company, it could obtain substitute software from other sources.
A summary of the principal benefits of the PROFILE/ANYWARE solution includes:
FUNCTIONAL BENEFITS
o Enables financial services organizations to dynamically create new products
and services and to tailor them for individual customers through electronic
manufacturing. Within this "electronic factory", an institution can provide
the services of a value-added intermediary and package products and services
that support the specific requirements of an individual customer. The
Company calls this feature "mass customization for a market of one."
o Delivers a customer-centric approach to financial services. PROFILE/ANYWARE
contains all customer records, loan and deposit account records and
transactions in an integrated database. Supports multiple customer types.
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. System users can "drill down" from summary data to
individual account activity, to the source document images that support
customer transactions. Customers can link to each other to create affinity
groups or other meaningful market segments.
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
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TECHNICAL BENEFITS
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. This
feature integrates data from outside applications and databases with the
PROFILE 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
solution.
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
o Provides an open architecture, supports channel independence and can scale.
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.
o Operates 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 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 and the ability to operate on a 24-hour, seven-days-per-week
basis in real-time mode is a requirement for the direct banking market.
o Supports 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. The system accepts financial
transactions, as well as account origination and maintenance, 24-hours a
day. The Company believes that this real-time capability will become a
requirement for direct banking applications.
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.
SANCHEZ SERVICES
Sanchez' new annuity-based utility pricing model will represent a significant
portion of the Company's future revenues; however, the Company also derives
significant revenues from services. The Company's primary service offerings
include the following:
PROJECT SERVICES
Sanchez provides project services for clients implementing a PROFILE solution
in-house and for clients implementing an e-PROFILE outsourced solution. Project
services include project management, training, system implementation, custom
interfaces, data conversion, integrated testing, custom software, localization,
and version
9
upgrade services. Project services are delivered by trained, financial
service industry professionals. They work primarily at client locations and
follow a published methodology employing proven project management and
measurement techniques. Implementation services revenues from an e-PROFILE
project vary by the size and scope of the implementation, but range from
$500,000 to more than $2.5 million per project. An e-PROFILE project, which
typically involves creating an Internet bank from a clean slate and does not
involve replacing a legacy system, includes project management and
implementation services, some data conversion and dozens of system interfaces
and integrated systems testing. An institution can implement an e-PROFILE
solution in as few as 90 days if a basic approach is taken to implementation.
The Company has found, however, that top-tier institutions want to
differentiate their direct and Internet bank offerings from the start. When
additional requirements are placed on a project, the implementation period
can extend beyond 120 days. For institutions implementing PROFILE in-house,
project services are provided on a one-time basis, either during the initial
implementation or as contracted for by clients after conversion to PROFILE.
Implementation service revenues from an in-house implementation vary and can
range from $1 million to more than $5 million for an individual project.
Typically, an in-house implementation for a top-tier institution involves
moving a large volume of customer data from existing systems onto the PROFILE
platform. In these cases, implementation revenues are higher when compared
against implementing a de novo solution where little or no data conversion
work is required. Project services from an in-house implementation also
generates revenues from project management and custom interface work. When an
institution replaces its in-house, legacy transaction processing system with
a PROFILE solution, data conversion and custom system interface projects
typically are delivered in 10 to 18 months. Other project services delivered
during the implementation period can include training, conversion,
localization and software customization.
MAINTENANCE AND SUPPORT SERVICES
For Sanchez clients, the major portion of the Company's delivery of worldwide
customer service and support is handled by a group in its headquarters in
Malvern. For e-PROFILE clients, customer service is primarily supported through
an operations center located in a suburb of Pittsburgh, Pennsylvania. These
groups are 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 continues 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 offices in Malvern and Pittsburgh,
Pennsylvania. The Company provides local support services to clients in
Poland through its partnership with ComputerLand.
SALES AND MARKETING The Company has a worldwide direct sales and sales
support force of approximately 21 people. Toward the latter half of 1999, the
Company focused its sales and marketing attention on one market segment --
the global, top-tier "attacker" institutions, which want to market financial
services through direct channels, particularly the Internet. (See information
already supplied earlier in this section). Within the global direct banking
market, the Company's sales force targets financial institutions around the
globe with assets of $20 billion or more and the top 250 global institutions
in terms of market capitalization.
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, to provide
implementation services on certain projects. This partnering relationship is
unique in that CUE Datawest has been a Sanchez customer since 1991. In September
1998, the Company 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 with the world's top-tier institutions 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.
10
During 1998, in addition to expanding its IBM relationship, the Company formed a
financial services and distribution company based in Bombay, India. The company,
named Sanchez/Capital Services, has PROFILE distribution rights throughout India
and portions of the Middle East.
Throughout 1999, 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. Third-party strategic alliances have been important to the
Company's success. They will continue to play a role in the Company's future
prospects.
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. Late in 1999, Sanchez announced that
the company was changing its revenue model. Under the new model, a Sanchez
software license is tied to the consumer and commercial growth of financial
service firms engaged in e-commerce. As an institution's direct or Internet bank
account base grows, Sanchez increases its revenue stream. The Company's
e-commerce projects generate implementation service revenues for both Sanchez
and e-PROFILE. In addition, these projects generate ongoing processing revenue
for e-PROFILE and license revenue for Sanchez. In lieu of up-front, one-time
license fees, e-commerce contracts, generally, generate license revenue for
Sanchez on a per account / per month basis over the life of the contract after
the client "goes live" with the solution. The ongoing monthly revenue stream
associated with the e-PROFILE outsourcing alternative is expected to result in
more predictable quarter-to-quarter revenues.
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 1999, 1998 and 1997 were $15.7
million, $11.7 million and $7.6 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, 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.
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. To focus efficiently on both functional and technical
requirements, the product development area is subdivided into two groups called
the Product Management Development Group and the Technology Development Group.
The Product Management 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.
11
In late 1998, the Company selected 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 used
Bluestone's Sapphire/Web technology to develop a PROFILE application server
designed to increase support for e-commerce computing and enterprise-wide
systems integration. This new server technology provides a flexible development,
integration and deployment framework that allows applications to operate
independently of any delivery system. The Company believes this new technology
is 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.
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 December 31,1999, Sanchez and e-PROFILE employed approximately 450
full-time employees. Of that number, Sanchez employed approximately 350 people
and e-PROFILE employed approximately 100. In February 1999, e-PROFILE employed
26 people. Neither Sanchez nor e-PROFILE's employees are represented by any
collective bargaining agreements. Neither Sanchez nor e-PROFILE have 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 Sanchez' Chairman, CEO, and its President (and COO). The same can
be said for e-PROFILE's CEO and its President (and COO). 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. In 1999, with the addition of the
Company's e-PROFILE offering, Sanchez and e-PROFILE now participate in both of
these alternatives.
Prior to 1999, before the Company shifted its business market focus from
replacing legacy processing systems to direct and Internet banking, the
Company's primary competitors included ALLTEL (Systematics software), Fiserv,
Andersen Consulting, CSC/Hogan, and Midas-Kapiti International, and to a lesser
extent M&I Data Systems (a subsidiary of Marshall & Illsley Corporation).
Competing with Sanchez in the top-tier direct and Internet segment of the
financial services market are Fiserv, Andersen Consulting, Midas-Kapiti, and to
some extent, S1 Corporation. Top-tier institutions, which chose to try to extend
and adapt their in-house legacy systems to direct or Internet banking, are also
considered competition, although they typically are not considered direct bank
market "attackers," which are the Company's key targets.
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 an end-to-end
financial services outsourcing capability (minimal up-front capital
investment and rapid time-to-market), (iii) reach decision makers of the
top-tier global financial institutions, (iv) connect PROFILE/ANYWARE to a
wide variety of payment, middleware and client systems, including Corillian,
Sybase's HFN, CheckFree, Visa, S1 (Vertical One & Edify), Intuit, Digital
Island, Deluxe, DocuCorp, eGain and BROKAT, and (v) establish alliances and
partnerships with the above named vendors.
The Company believes that none of its current competitors offer a total VSP
solution for direct and Internet banking (as described earlier in the "Business"
section). Other vendors offer pieces of the solution; e.g., S1 offers a
Web-
12
based front-end processor and a processing center, but no one currently
offers an end-to-end, ongoing operations and technology outsourced utility
for financial services. The e-PROFILE model owns and manages the entire
operations and technology infrastructure, provides "best-in-class" vendor
partners, and provides a competitive pricing structure. Under one roof,
e-PROFILE supports an outsourced supply chain venue for on-line financial
services. In addition, e-PROFILE uses the PROFILE financial services
architecture and the PROFILE/ANYWARE enterprise banking system as the basis
for its technology infrastructure. Using a system such as PROFILE that is
fully integrated, open and scalable, and can operate continuously, is
advantageous when deploying a direct or Internet bank. Further, the Company
believes that very few of its competitors currently have the capability to
offer top-tier institutions 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.
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, 1999 amounted to $31.7 million. The
components of the backlog were $6.2 million for product and services and
$25.5 million for maintenance fees. The Company anticipates recognizing
approximately $18.4 million of this backlog in the year 2000. At December 31,
1998, the Company's backlog amounted to $33.9 million, consisting of $6.7
million for product and service revenues and $27.2 million for maintenance
fees. The Company's business/financial model is evolving, however, and the
Company ultimately expects to derive a greater proportion of its revenue
stream from variable sources rather than fixed fee contracts, both in its
traditional licensing business and in the e-PROFILE vertical services
provider model 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.
13
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
Architecture component acts as the source of data and
the client component uses the data to
perform various functions.
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 Failover The ability to provide operational
Capabilities resiliency through the use of systems at
widely separated sites, whereby failure of
one 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.
14
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 Architecture System design that allows users to take
advantage of 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 Database File structure that is logically connected
by one or more 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 Integrator A Company that specializes in integrating
products from 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.
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.
15
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 San Francisco; Warsaw, Poland;
London and Chester , U.K. and Singapore. e-PROFILE's lease of approximately
6,000 square feet for its headquarters and principal administrative operations
in Malvern expires on September 30, 2000. e-PROFILE's operations center is
located outside of Pittsburgh, Pennsylvania in approximately 28,000 square feet
of leased space, which expires in 2004. 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 1999.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company are as follows:
------------------------------------------------------------------------------------------------------------------
Name Age Position
------------------------------------------------------------------------------------------------------------------
Michael A. Sanchez.................................. 42 Co-Chairman of the Board of Directors
Ronald J. Zlatoper.................................. 58 Co-Chairman of the Board of Directors
Frank R. Sanchez.................................... 43 Chief Executive Officer and Director
Joseph F. Waterman.................................. 48 President and Chief Operating Officer
Douglas J. Enns .................................... 50 Managing Director - International Operations
Deborah C. Kovacs................................... 37 Senior Vice President - Product Management
Thomas F. McElwee .................................. 43 Senior Vice President and Chief Financial
Officer
Dan S. Russell...................................... 49 Senior Vice President - Technology Development
Daniel W. Sollis.................................... 41 Senior Vice President - Sales
John H. Teaford..................................... 52 Senior Vice President - Strategic Alliances
MICHAEL A. SANCHEZ founded the Company in 1979 serving as chief executive
officer from inception until April 1997, as well as its chairman since
inception until April 1999 when he was named Co-Chairman of Sanchez along
with Mr. Zlatoper and named chief executive officer of e-PROFILE. In
addition to assisting with the strategic direction for Sanchez, he is also
responsible for the organizational growth and development of e-PROFILE. Mr.
Sanchez is a director of e-PROFILE. Mr. Sanchez is the brother of Frank R.
Sanchez, the Company's Chief Executive Officer.
RONALD J. "ZAP" ZLATOPER has been the Co-Chairman since April 1999 and
previously served as Chief Executive Officer beginning in April 1997. Prior
to joining the Company, Mr. Zlatoper retired from the U. S. Navy in
16
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
FRANK R. SANCHEZ has been the Chief Executive Officer since April 1999, and
previously was President and Chief Operating Officer of the Company since
1994 and a Director of the Company since his employment began in 1980. In his
capacity as Chief Executive Officer, Mr. Sanchez is responsible for the
overall strategy and performance 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 Co-Chairman.
JOSEPH F. WATERMAN has served as President and Chief Operating Officer of
Sanchez since April 1999 and is responsible for the day to day operation of
the company. Previously, he was Senior Vice President and Chief Financial
Officer from 1992 when he joined the company. Prior to joining Sanchez, Mr.
Waterman was employed by Safeguard Scientifics, Inc. and/or certain of its
partnership companies for 13 years. Mr. Waterman is a director of e-PROFILE.
DOUGLAS J. ENNS has been employed by the Company since July 1999, serving as
Managing Director, International Operations. Mr. Enns has over 20 years of
experience in the banking industry. He chaired the Board of Governors of the
University of Victoria, and was appointed an Honorary Colonel of the Canadian
Air Force. Prior to working at the Company, Mr. Enns was Chief Executive
Officer of Pacific Coast Savings Bank from August 1988 to June 1999.
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.
THOMAS F. MCELWEE has been Senior Vice President and Chief Financial Officer
since joining the Company in October 1999. Mr. McElwee has more than 20 years
of financial and operational experience primarily in the information
technology industry. From 1986 to 1996, he served in several senior financial
management and business development positions with Bell Atlantic
Corporation's software, system integration and information technology
services divisions. Subsequently, Mr. McElwee was the Chief Financial Officer
for a privately held, San Francisco-based international retailer.
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.
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. Mr. Teaford
is a director of e-PROFILE.
17
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 1998:
First quarter 17.313 8.875
Second quarter 12.625 6.875
Third quarter 15.938 7.688
Fourth quarter 16.500 8.000
Fiscal Year 1999:
First quarter 16.375 9.531
Second quarter 41.250 10.813
Third quarter 52.750 30.750
Fourth quarter 51.375 20.875
As of March 17, 2000 the Company had outstanding 24,784,977, shares of common
stock held by approximately 13,300 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
therefore, 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.
18
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.
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE DATA
STATEMENT OF OPERATIONS DATA (1):
Revenues........................... $ 56,407 $ 44,059 $ 28,891 $ 18,513 $ 18,497
Earnings before income taxes....... 7,440 10,763 5,327 2,015 2,136
Net earnings....................... 5,171 7,034 3,676 1,407 1,220
Basic earnings per share........... .22 .31 .17 .08 .07
Diluted earnings per share......... .20 .29 .15 .07 .06
Weighted average common shares
outstanding..................... 23,911 23,042 22,070 17,146 16,726
Weighted average common and
diluted shares outstanding...... 26,062 24,544 23,950 18,784 19,360
BALANCE SHEET DATA:
Cash and cash equivalents.......... $ 25,404 $ 27,177 $ 12,827 $ 15,531 $ 5,690
Working capital.................... 35,541 27,090 20,585 19,089 4,441
Total assets....................... 56,395 43,285 33,222 28,551 12,873
Long-term debt, including current
portion......................... 83 314 524 787 947
Total shareholders' equity......... 45,438 31,772 23,233 18,714 5,078
OTHER OPERATING DATA:
Backlog:
Products and services.............. $ 6,207 $ 6,667 $ 12,402 $ 8,093 $ 5,816
Maintenance........................ 25,490 27,253 22,300 11,704 11,809
---------------------------------------------------------------------------------
Total backlog...................... $ 31,697 $ 33,920 $ 34,702 $ 19,797 $ 17,625
Revenue per full time equivalent
employee........................ $ 130 $ 152 $ 136 $ 121 $ 117
(1) The financial statements for 1998, and all prior 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 highly flexible PROFILE
family of products is comprised of four integrated modules which operate on
open, client/server
19
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/WEBLINK(TM), an
HTML-based, Internet front-end processor for retail and commercial banking
applications; PROFILE/FMS, a multi-company, multi-currency, financial
management and accounting system; PROFILE FOR WINDOWS ("PFW"), a native
Windows(R) client application for PROFILE/ANYWARE's customer service and
teller functions; and PROFILE/ODBC, an open connectivity database driver. The
PROFILE system is currently licensed to 41 clients in 15 countries serving in
excess of 1,200 financial institutions.
The Company acquired ArTech Financial Technology Services, LLC, a banking
technology service center located outside of Pittsburgh, Pennsylvania in the
first quarter of 1999. In conjunction with the purchase, the Company announced
the formation of a new outsourcing subsidiary - e-PROFILE, Inc. ("e-PROFILE"),
designed to provide financial services providers with the ability to offer
differentiated direct banking services to customers through a dedicated
e-banking service offering with a lower initial capital hurdle, rapid
time-to-market and minimal, if any, disruption to existing legacy systems.
The Company derives its revenues from product fees, which include software
license and product enhancement fees, service fees, which include client
implementation, processing and consulting fees, and software maintenance fees.
Product and service fees are paid in stages upon the completion, by the Company,
of certain defined deliverables. The Company recognizes revenue from these fees
using the percentage-of-completion contract accounting method. 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. In addition, these
projects will generate on-going processing fee related services revenue for
e-PROFILE and license revenue for Sanchez. In lieu of up-front, one-time license
fees, e-commerce contracts will generate license revenue for Sanchez on a per
account/per month basis over the life of the 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.
As of December 31, 1999, between Sanchez and e-PROFILE, Sanchez was engaged in
projects with six new e-commerce clients worldwide. Non-disclosure agreements
prevent Sanchez from specifically identifying these new e-commerce clients until
they are fully operational.
Revenues for the year ended December 31, 1999 increased 28.0% to $56.4 million,
compared to $44.1 million recorded for the same period in 1998. Due to a
transition from a license revenue model to utility pricing, as well as strategic
investments required to accommodate the growth connected with the Company's
e-commerce initiatives, net earnings for 1999 totaled $5.2 million or $.20
per diluted share, compared to $7.0 million or $.29 per diluted share for 1998.
Service revenues increased 134.7% from 1998 to 1999 primarily due to several
e-commerce initiatives undertaken by the Company and e-PROFILE.
The newly formed e-PROFILE segment of our business generated revenues of $7.3
million and a pretax loss of $3.7 million. As previously announced, e-PROFILE
plans to file a registration statement with the Securities and Exchange
Commission in the coming months for a proposed public offering of common stock.
The timing and size of the offering are dependent on market conditions and other
factors.
During 1999, the Company led Bank One/First USA's WingspanBank.com project
integration and implementation for a team of 30 vendors in helping to establish
the bank in 123 days. The on-line bank uses Sanchez' PROFILE/ANYWARE enterprise
banking system and outsources operations management to e-PROFILE. The Company
also helped launch Citi/fi, Citibank's on-line banking and investing service
using Sanchez' PROFILE/ANYWARE enterprise banking system and Silicon Valley
start-up Internet bank X.com. X.com, one of the fastest growing Internet banks
in the U.S., outsources technology and operations management to e-PROFILE.
During the year, the Company continued its strong relationship with the Dutch
financial services company ING Group by implementing the PROFILE solution for
ING Bank Hungary, ING Direct Spain and ING Group subsidiary Interadvies. Other
significant contract signings were the Irish League of Credit Unions licensing a
PROFILE solution to service approximately two million members in a service
bureau environment and NCR Corporation selecting PROFILE to provide back-office
processing to their outsourcing centers. With 350 community banks as customers,
NCR is among the largest providers of complete banking services to the U.S.
community banking market. Federal Home Loan Bank of Pittsburgh went live as the
Company's first PROFILE FOR WINDOWS client.
20
During 1999, Sanchez also completed a management restructuring with Michael A.
Sanchez and R.J. "Zap" Zlatoper becoming Co-Chairmen. Frank R. Sanchez was named
CEO and Joseph F. Waterman became President and COO. At e-PROFILE, Michael A.
Sanchez was named CEO and Greg Derkacht joined as President and COO.
Additionally, Sanchez extended its relationship with global partners IBM and
Compaq Computer Corporation, becoming an advanced member of IBM's Solution
Developer Program and signing a global marketing and distribution agreement with
Compaq Computer Corporation during 1999. e-PROFILE was also active in forging
formal relationships by partnering with Home Financial Network Inc., Corillian
Corporation and DocuCorp International as best-in-class providers for end-to-end
e-banking.
Finally, the Company's Board of Directors approved a 2-for-1 split of its common
shares in June. The stock split increased the number of outstanding shares to
approximately 23.6 million shares at that time.
The Company's backlog at December 31, 1999 amounted to $31.7 million. The
components of the backlog were $6.2 million for product and service revenues
and $25.5 million for maintenance fees. The Company anticipates recognizing
approximately $18.4 million of this backlog in 2000. At December 31, 1998,
the Company's backlog amounted to $33.9 million, consisting of $6.7 million
for product and service revenues and $27.2 million for maintenance fees. The
Company's business/financial model is evolving, however, and the Company
ultimately expects to derive a greater proportion of its revenue stream from
variable sources rather than fixed-fee contracts, both in its traditional
licensing business and in the e-PROFILE vertical services provider model
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.
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. The
Company is still in the process of analyzing the impact of SAB No. 101 on its
consolidated financial statements and related disclosures.
21
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected statement of
operations data:
----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
DOLLARS IN THOUSANDS 1999 1998 1997
----------------------------------------------------------------
Revenues
Products........................................ $ 19,131 $ 25,854 $ 15,581
Services........................................ 27,157 11,571 7,904
Software maintenance fees and other............. 10,119 6,634 5,406
-------------------- ----------------- ------------------
Total revenues................................ $ 56,407 $ 44,059 $ 28,891
==================== ================= ==================
Percentage Relationship to Total Revenues
Revenues
Products........................................ 33.9% 58.7% 53.9%
Services........................................ 48.2 26.2 27.4
Software maintenance fees and other............. 17.9 15.1 18.7
-------------------- ----------------- ------------------
Total revenues................................ 100.0 100.0 100.0
Operating expenses
Product development............................. 27.9 26.5 26.1
Product support................................. 7.9 8.7 11.1
Services........................................ 27.1 15.9 19.5
Sales and marketing............................. 14.6 13.0 14.0
Royalties and sublicense fees................... 0.9 1.9 2.7
General, administrative and other............... 10.4 11.7 11.2
-------------------- ----------------- ------------------
Total operating expenses...................... 88.8 77.7 84.6
Earnings from operations........................... 11.2 22.3 15.4
Interest income, net............................... 2.0 2.2 3.0
-------------------- ----------------- ------------------
Earnings before income taxes....................... 13.2 24.5 18.4
Income tax provision............................... 4.0 8.5 5.7
==================== ================= ==================
Net earnings....................................... 9.2% 16.0% 12.7%
==================== ================= ==================
1999 COMPARED TO 1998
REVENUES. Revenues increased $12.3 million, or 28.0%, in 1999. The primary
reason for the increase was service revenue, which increased by $15.6 million,
or 134.7%, for the year ended December 31, 1999. The service revenues increase
was driven by additional implementation activity for Sanchez and e-PROFILE in
the U.S. marketplace. Sanchez implementation efforts in Western and Central
Europe also contributed to the service revenues increase. For the year ended
December 31, 1999, product revenues decreased by $6.7 million, or 26.0%,
compared to the year ended December 31, 1998. The decrease in product revenue
was principally the result of successful conversions, lower license expansion
from a converted client in 1999, the delay of a project in Central Europe, as
well as, the Company recently changing its pricing model. The new model offers
utility-based pricing versus a one-time license fee to lower the initial
investment for potential customers, especially for e-PROFILE clients. 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
$3.5 million, or 52.5%, for the year ended December 31, 1999, primarily due to
an increase in the Company's supported client base.
PRODUCT DEVELOPMENT. Product development expenses increased $4.1 million, or
34.8%, for 1999, due to costs associated with increased staffing,
expanded facilities and other overhead costs. Staffing increased 39% for this
area of the Company primarily due to the Company's strategic decision to
increase product functionality and performance to better serve the future needs
of its clients and the dynamic requirements of e-banking. The percent
relationship to total revenue increased from 26.5% in 1998 to 27.9% in 1999.
22
PRODUCT SUPPORT. Product support expenses increased by $609,000, or 15.8%, in
the year ended December 31, 1999, due to cost required to support the larger
converted client base.
SERVICES. Services expenses increased by $8.3 million, or 118.6%, during 1999,
in conjunction with a corresponding increase in service revenues of $15.6
million. The increase was primarily due to additional staffing and related
overhead costs for both Sanchez and e-PROFILE. The gross margin relative to
associated revenues increased for the year ended December 31, 1999 to 43.7%, as
compared to 39.6% for the year ended December 31, 1998, and was primarily due to
more favorable rates achieved on time and material projects during 1999.
SALES AND MARKETING. Sales and marketing expenses increased by $2.5 million, or
44.1%, in the 1999 period due to costs associated with increased staffing,
third-party commissions and international travel related expenses as well as
e-PROFILE warrants issued to a client.
ROYALTIES AND SUBLICENSE FEES. For the year ended December 31, 1999, these
fees decreased by $ 368,000 or 43.6%. The decrease is mostly attributable to
a lower level of product revenues subject to royalty payments.
GENERAL, ADMINISTRATIVE AND OTHER. These expenses increased by $732,000 or
14.2%, due to increased staff for e-PROFILE and costs associated with a hardware
sale, partially offset by lower incentive pay and the collection of a bad debt
previously written off.
INCOME TAX PROVISION. Taxes in 1999 were 30.5% of income before income taxes, as
compared to 34.6% for the year ended December 31, 1998. The 1999 decrease is
primarily due to a tax benefit from the recalculation of the impact of the
Company's foreign sales corporation on its tax rate for prior years as well as
the year ended December 31, 1999.
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.
PRODUCT DEVELOPMENT. Product development expenses increased $4.1 million, or
54.5%, 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 $648,000, or 20.2%, 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.
SERVICES. Service expenses increased by $1.4 million, or 24.1%, 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 39.6% 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.
23
SALES AND MARKETING. Sales and marketing expenses increased by $1.7 million, or
42.0%, 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.
GENERAL ADMINISTRATIVE AND OTHER. These expenses increased during the year ended
December 31, 1998 by $1.9 million, or 58.6%. 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 31.0% 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $25.4 million at December 31, 1999. Cash flows
from operations for 1999 were $2.3 million, $15.9 million in 1998 and $22,000
in 1997. The decrease in net cash provided by operating activities in 1999
was primarily due to a net increase in accounts receivable and contracts in
process as compared to the 1998 period. The accounts receivable increase in
1999 is primarily due to the December 31, 1998 balance being significantly
lower than usual as a result of the collection of approximately $9 million in
contract payments during the month of December 1998. The 93 days sales
outstanding as of December 31, 1999 is in line with our historical days sales
outstanding. The receivable balance will continue to be significantly
impacted by the timing of contract milestones and time and material billings.
Capital asset expenditures for 1999 amounted to $5.2 million as compared to $2.0
million in 1998. The increase in capital expenditures during 1999 is
attributable to purchases of equipment related to the significant growth in
employees as well as the creation of the e-PROFILE service center.
Financing activities contributed cash of $2.9 million in 1999, compared to $1.3
million in 1998. The primary reason for the increase was the exercise of stock
options and participation in the employee stock purchase plan, which accounted
for $3.5 million, partially offset by the purchase of treasury stock for
$592,000.
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.
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 outsourcing alternative
will result in more predictable quarter-to-quarter revenues.
24
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. Several of the foregoing factors could also
effect the market predictions of the Company and those set forth in industry
reports discussed above.
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 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.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.......................................................................27
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1999 and 1998..............................................28
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997................29
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997........................................................................30
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997................31
Notes to Consolidated Financial Statements................................................................32
Schedule II - Valuation and Qualifying Accounts for the Years Ended
December 31, 1999, 1998 and 1997..........................................................................43
26
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, 1999 and 1998, and the related consolidated statements of operations,
shareholders' equity and cash flows for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. 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 audits provide 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
Arthur Andersen LLP
Philadelphia, Pennsylvania
February 7, 2000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Sanchez Computer Associates, Inc.
We have audited the accompanying consolidated statement of operations, of
shareholders' equity and of cash flows for the year ended December 31, 1997.
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 consolidated results of operations and cash flows
of Sanchez Computer Associates, Inc. and subsidiaries for the year ended in
conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 6, 1998
27
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
-------------------------------------------------
ASSETS 1999 1998
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 25,404 $ 27,177
Receivables less allowances ($288-1999; $295-1998) 12,564 2,529
Contracts in process 3,227 6,778
Income tax refund receivable 2,948
Deferred income taxes 686 729
Prepaid and other current assets 1,187 895
-------------------------------------------------
Total current assets 46,016 38,108
PROPERTY AND EQUIPMENT
Equipment 7,351 3,945
Furniture and fixtures 1,784 770
Leasehold improvements 2,020 994
-------------------------------------------------
11,155 5,709
Accumulated depreciation and amortization (5,115) (3,026)
-------------------------------------------------
Net property and equipment 6,040 2,683
Capitalized software costs, net 1,493 962
Intangible assets, net 1,153
Investments 1,693 1,532
-------------------------------------------------
Total assets $ 56,395 $ 43,285
=================================================
LIABILITIES
CURRENT LIABILITIES
Current debt obligations $ 83 $ 233
Accounts payable, trade 2,360 1,535
Accrued expenses 4,417 5,984
Deferred revenue 3,615 3,266
-------------------------------------------------
Total current liabilities 10,475 11,018
Deferred income taxes 482 327
Deferred revenue 87
Long-term debt 81
-------------------------------------------------
Total liabilities 10,957 11,513
Commitments (Note 10)
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized - 150,000,000 shares
Issued and outstanding - 24,357,351 and 23,469,138
shares in 1999 and 1998, respectively 244 234
Additional paid-in capital 28,392 20,055
Retained earnings 16,894 11,723
Notes due on common stock purchases (92) (240)
-------------------------------------------------
Total shareholders' equity 45,438 31,772
-------------------------------------------------
Total liabilities and shareholders' equity $ 56,395 $ 43,285
=================================================
See notes to consolidated financial statements
28
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
----------------------------------------------------
1999 1998 1997
---- ---- ----
REVENUES
Products $ 19,131 $ 25,854 $ 15,581
Services 27,157 11,571 7,904
Software maintenance fees and other 10,119 6,634 5,406
----------------------------------------------------
Total revenues 56,407 44,059 28,891
OPERATING EXPENSES
Product development 15,737 11,677 7,556
Product support 4,472 3,863 3,215
Services 15,279 6,989 5,632
Sales and marketing 8,253 5,728 4,033
Royalties and sublicense fees 477 845 765
General, administrative and other 5,882 5,150 3,248
----------------------------------------------------
Total operating expenses 50,100 34,252 24,449
----------------------------------------------------
EARNINGS FROM OPERATIONS 6,307 9,807 4,442
Interest income, net 1,133 956 885
----------------------------------------------------
EARNINGS BEFORE INCOME TAXES 7,440 10,763 5,327
Income tax provision 2,269 3,729 1,651
----------------------------------------------------
NET EARNINGS $ 5,171 $ 7,034 $ 3,676
====================================================
Basic earnings per average common share $ .22 $ .31 $ .17
Diluted earnings per average common share $ .20 $ .29 $ .15
Weighted-average common shares outstanding 23,911 23,042 22,070
Weighted-average common and diluted shares outstanding 26,062 24,544 23,950
See notes to consolidated financial statements
29
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands, except share amounts)
TREASURY ADDITIONAL NOTES DUE ON
COMMON STOCK STOCK PAID-IN RETAINED COMMON STOCK
SHARES AMOUNT AMOUNT CAPITAL EARNINGS PURCHASES
------ ------ -------- --------- --------- ---------
BALANCES AT DECEMBER 31, 1996 21,898,610 $ 219 $ $ 18,021 $ 1,013 $ (538)
Net earnings 3,676
Exercise of stock options 409,766 4 637 (146)
Stock option loan repayments 347
------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1997 22,308,376 223 18,658 4,689 (337)
Net earnings 7,034
Exercise of stock options & warrants 1,129,966 11 1,139
Employee stock purchase plan 30,796 258
Stock option loan repayments 97
------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1998 23,469,138 234 20,055 11,723 (240)
Net earnings 5,171
Purchase of common stock (60,000) (592)
Exercise of stock options 858,325 8 1,149 1,627
Cashless stock option exercise using treasury stock (19,736) (557) 557
Tax benefit from stock options exercised 4,189
Stock-based compensation expense 551
Employee stock purchase plan 38,196 1 750
Stock option loan repayments 148
Issuance of stock related to acquisition 71,428 1 663
------------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 24,357,351 $ 244 $ 0 $ 28,392 $ 16,894 $ (92)
==============================================================================
See notes to consolidated financial statements
30
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
------------------------------------------------------
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 5,171 $ 7,034 $ 3,676
Adjustments to reconcile net earnings to cash provided (used)
by operating activities
Depreciation and amortization 2,765 1,544 1,092
Stock based compensation 551
Deferred taxes 198 (401) 512
Provision for doubtful accounts receivable 100 500
Other (9) 16 8
Cash provided (used) by changes in operating assets and
liabilities
Accounts receivable (9,561) 6,255 (3,441)
Contracts in process 3,551 (529) (3,171)
Income taxes receivable/payable (322) 1,248 254
Prepaid and other current assets (262) 157 510
Accounts payable and accrued expenses (22) 2,175 641
Deferred revenues 262 (1,668) (559)
------------------ ---------------- ------------------
Net cash provided (used) by operating activities 2,322 15,931 22
CASH USED IN INVESTING ACTIVITIES
Investment in joint venture (161) (512) (1,020)
Capitalized computer software costs (1,081) (353) (668)
Cost of acquisitions, net of cash acquired (499)
Capital expenditures (5,214) (2,011) (1,626)
------------------ ---------------- ------------------
Net cash used in investing activities (6,955) (2,876) (3,314)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving credit facility 285
Repayment of notes due on common stock purchases 148 97 347
Purchase of treasury stock (592)
Principal payments under capital lease obligation (40)
Principal payments under long-term notes (231) (210) (500)
Proceeds from exercise of stock options and warrants 2,784 1,150 496
Proceeds from issuance of shares under the employee stock
purchase plan 751 258
------------------ ---------------- ------------------
Net cash provided by financing activities 2,860 1,295 588
Net increase (decrease) in cash and cash equivalents (1,773) 14,350 (2,704)
Cash and cash equivalents at beginning of year 27,177 12,827 15,531
------------------ ---------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,404 $ 27,177 $ 12,827
================== ================ ==================
Supplemental cash flow information
Interest paid $ 14 $ 37 $ 51
Income taxes paid $ 3,060 $ 2,481 $ 730
See notes to consolidated financial statements
31
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/WEBLINK(TM), an HTML-based,
Internet front-end processor for retail and commercial banking
applications; 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. Sanchez
also provides e-PROFILE, a dedicated, end-to-end e-banking service
offering for outsourcing direct and Internet bank technology and
operations.
(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.
Contracts in process 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.
32
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(2) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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. At times, cash balances in the
Company's accounts may exceed federally insured limits. Cash and cash
equivalents at December 31, 1999 and 1998 include $0 and $12 million 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. Interest income from
advances to Safeguard amounted to $277 and $723 in 1999 and 1998,
respectively.
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.
("ComputerLand"), 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; as
a result, the Company owns 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. During 1999, the company
increased its investment by $161 bringing its equity interest to 16%.
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.
33
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(2) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
Total costs capitalized in 1999, 1998 and 1997 were approximately $1,081,
$353, and $668 respectively. Accumulated amortization was $1,359 and $921
as of December 31, 1999 and 1998, respectively. Amortization of
capitalized software costs amounted to $551, $413, and $321 in 1999, 1998
and 1997, respectively. All capitalized software costs are written down to
net realizable value when the carrying amount is in excess thereof. No
write-downs were required for 1999, 1998 or 1997.
INCOME TAXES
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 typically have
useful lives of three and five years, respectively. The useful life of
leasehold improvements is the lesser of the lease term or 5 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.
34
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(2) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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):
Year Ended December 31,
---------------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------------------------
Weighted-average shares outstanding 23,911 23,042 22,070
Dilutive effect of
Warrants 41 208 640
Options 2,110 1,294 1,240
--------------------------------------------------------
Total common and diluted shares 26,062 24,544 23,950
--------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
In 1999, the Financial Accounting Standards Board issued SFAS No. 137,
which deferred the effective date for SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" to fiscal years beginning
after June 15, 2000. The Company does not believe the effect of adopting
this standard will be material. 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. The Company is still in the process
of analyzing the impact of SAB No. 101 on its consolidated financial
statements and related disclosures.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the 1999
presentation.
(3) ACQUISITIONS
Effective February 1, 1999, the Company acquired ArTech Financial
Technology Services, LLC ("ArTech") in exchange for cash of $1 million,
71,428 shares of the Company's common stock and a two-year warrant to
acquire 100,000 shares of the Company's stock. The acquisition of ArTech
was accounted for using the purchase method of accounting. The excess of
the purchase price over the fair value of the net assets acquired was
approximately $1.3 million and was recorded as an intangible asset, which
is being amortized over 10 years. Accumulated amortization and
amortization expense was $117 as of December 31, 1999 and for the year
then ended, respectively.
The following table displays the net non-cash assets and liabilities
that were acquired in 1999 in connection with the acquistion of ArTech:
Accounts receivable $ 474
Prepaid expenses 30
Property and equipment 232
Intangible assets 1,270
Accounts payable and accrued expenses (843)
------------------------
1,163
Issuance of common stock (664)
========================
Net cash paid $ 499
========================
35
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(3) ACQUISITIONS - CONTINUED
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 168,100 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 period 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 .16 .01 .17
Earnings per share - diluted .14 .01 .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 1999 1998 1997
------------------------------------------------------------------------------------------
A 12% * *
B 10% * *
C * 28% *
D * * 14%
E * * 12%
F * * 12%
* Less than 10%
At December 31, 1999 and 1998, the significant clients listed above
accounted for $3,262 (or 21%) and $598 (or 6%) 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.
Revenue derived from customers in various geographic regions is as
follows:
Year Ended December 31,
-------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------
U.S. and Caribbean $ 26,898 $ 21,560 $ 5,927
Western Europe 14,882 8,800 2,343
Central Europe 9,643 9,077 10,440
Canada 4,186 4,011 7,443
Asia Pacific Rim 798 611 2,738
----------------------------------------------------------
$ 56,407 $ 44,059 $ 28,891
----------------------------------------------------------
(5) SEGMENTS
36
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
The Company has adopted the Financial Accounting Standards Board ("SFAS")
No. 131, "Disclosure About Segments of an Enterprise and Related
Information". The Company classifies its operations in two segments:
Sanchez's traditional licensing business and the e-PROFILE outsourcing
business. The Company evaluates the performance of its segments and
allocates resources to them accordingly.
The table below summarizes the Company's business segments:
Year ended December 31,
--------------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------------
Revenues
Sanchez 49,114 44,059
e-PROFILE 7,293 --
-----------------------------------
Total 56,407 44,059
-----------------------------------
Earnings from operations
Sanchez 9,979 9,807
e-PROFILE (3,672) --
-----------------------------------
Total 6,307 9,807
-----------------------------------
December 31,
--------------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------------
Total Assets
Sanchez 49,809 43,285
e-PROFILE 6,586 --
-----------------------------------
Total 56,395 43,285
-----------------------------------
(6) ACCRUED EXPENSES
December 31,
--------------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------------
Accrued compensation and related items $ 1,573 $ 2,346
Accrued income taxes 150 1,712
Other 2,694 1,926
-----------------------------------
$ 4,417 $ 5,984
-----------------------------------
(7) DEBT
December 31,
--------------------------------------------------------------------------------------
1999 1998
--------------------------------------------------------------------------------------
Bank term notes at prime payable through July 2000 $ 83 $ 314
Less current debt obligations 83 233
-----------------------------------
Long term debt $ 0 $ 81
-----------------------------------
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 did not renew the
revolving credit facility in 1999.
Future maturities of long-term debt at December 31, 1999 are $83 which are
to be paid in the year 2000.
37
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(8) 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 100,000,000 to 150,000,000 shares.
The Board of Directors is authorized, subject to certain limitations and
without Shareholder approval, to issue up to an aggregate 20,000,000
shares of preferred stock 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 5,360,000 shares of common stock upon the exercise of stock options,
stock appreciation rights, and/or restricted stock awards. As of December
31, 1999, there are 1,567,894 shares available for future grant.
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 600,000
shares are authorized for issuance under the ESPP. As of December 31,
1999, 68,992 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,
-----------------------------------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------------------------------
Net earnings As reported $ 5,171 $ 7,034 $ 3,676
Pro forma 2,545 5,470 3,443
Basic earnings per share As reported .22 .31 .17
Pro forma .11 .24 .16
Diluted earnings per share As reported .20 .29 .15
Pro forma .10 .22 .14
The per share weighted-average fair value of stock options issued by the
Company during 1999, 1998 and 1997 was $10.70, $4.88, and $2.04,
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: 1999- expected dividend
yield of 0%, risk free interest rate of 5.25% to 6.55%, expected
volatility of 50%, and average expected life of five years; 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.
38
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(8) SHAREHOLDERS' EQUITY - CONTINUED
A summary of stock option activity is as follows:
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of year 3,218,830 6.12 2,078,922 2.75 1,617,136 1.41
Options granted 577,400 21.18 1,660,042 9.30 909,000 4.37
Options exercised (858,325) 3.89 (409,966) 1.41 (409,766) 1.10
Options cancelled (61,870) 8.99 (110,168) 7.95 (37,448) 2.13
--------------------------------------------------------------------------------------
Outstanding at end of year 2,876,035 9.75 3,218,830 6.12 2,078,922 2.75
--------------------------------------------------------------------------------------
Options exercisable 1,014,075 953,542 830,548
Shares available for future grants 1,567,894 83,424 1,633,298
The following summarizes information about the Company's stock options
outstanding as of December 31, 1999:
- --------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------------
Number Weighted Av. Weighted Av. Number Weighted Av.
Outstanding as Remaining Exercise Exercisable at Exercise
Range of Exercise Prices of 12/31/99 Contractual Life Price 12/31/99 Price
- --------------------------------------------------------------------------------------------------------------------------
$0.835 to $3.375 692,252 6.01 $ 2.071 467,652 $ 1.829
$3.375 to $8.063 781,607 6.35 $ 7.724 287,071 $ 7.519
$9.000 to $13.313 1,136,576 5.60 $10.450 232,685 $10.201
$27.000 to $32.000 175,600 6.21 $29.603 26,667 $27.000
$38.375 to $42.375 90,000 6.47 $38.735 0 $ 0.000
------------------------------------------------------------------------------------------
$0.835 to $42.375 2,876,035 5.97 $ 9.747 1,014,075 $ 6.023
------------------------------------------------------------------------------------------
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.
Notes due on common stock purchases are interest bearing, full recourse
demand notes. As of February 4, 2000, all stock option loans have been
paid in full.
In May 1999, the Board of Directors declared a two-for-one stock dividend,
with a record date of June 3, 1999, which has been accounted for as a
stock split. All references to the number of shares and per share amounts
have been restated to reflect the effect of the split.
39
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(8) SHAREHOLDERS' EQUITY - CONTINUED
During the year ended December 31, 1999, the Company's e-PROFILE
subsidiary issued options to Sanchez and e-PROFILE employees to purchase
946,200 shares of e-PROFILE's common stock at exercise prices ranging from
$10 to $15 (weighted-average of $12.87). The options vest over 2 to
3 years and expire 5 to 8 years after grant date.
The company recorded stock-based compensation expense of $551 for the year
ended December 31, 1999 for the fair value of warrants issued to customers
and service providers to purchase 185,000 of e-PROFILE's common stock at
exercise prices ranging from $10 to $15 (weighted-averaged of $14.324).
The warrants are exercisable immediately on the grant date and have a term
of 3 to 4 years. The fair value of the warrants was determined using the
Black-Scholes option pricing model using volatility of 50%, the risk free
interest rate on the date of the grant and the contractual term of the
warrant
(9) INCOME TAXES
The components of the income tax provision are as follows:
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Current taxes
Federal $ 1,587 $ 3,460 $ 673
State 346 652 95
Foreign 138 18 371
----------------------- ----------------------- -----------------------
2,071 4,130 1,139
Deferred taxes 198 (401) 512
----------------------- ----------------------- -----------------------
Total provision $ 2,269 $ 3,729 $ 1,651
----------------------- ----------------------- -----------------------
A reconciliation of the tax provision based on the federal statutory tax
rate to the effective tax rate is as follows:
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Statutory tax provision $ 2,529 $ 3,667 $ 1,811
State income taxes, net of federal income tax
benefit 228 430 63
Foreign income taxes 138 18 371
Federal income tax credits (138) (18) (371)
Foreign sales corporation (510) (430) (286)
Other, net 22 62 63
----------------------------------------------------------------------
$ 2,269 $ 3,729 $ 1,651
----------------------------------------------------------------------
40
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(9) INCOME TAXES - CONTINUED
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:
Year Ended December 31,
- -----------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------
Deferred tax assets
Accounts receivable allowances $ 64 $ 65
Accrued liabilities 548 655
Other 74 9
-----------------------------------------
Total deferred tax assets $ 686 $ 729
-----------------------------------------
Deferred tax liabilities
Capitalized software costs and intangibles $ 482 $ 327
Utilization of federal and state net operating loss carryforwards and
tax credit carryforwards amounted to $257 in 1998 and $326 in 1997.
(10) 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, 1999 are as
follows:
2000 1,416
2001 1,443
2002 1,471
2003 1,093
2004 274
------------------
5,697
------------------
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $1,566, $869 and $625, respectively.
(11) OTHER RELATED PARTY TRANSACTIONS
In April 1998, Safeguard exercised warrants to purchase 720,000 shares of
the Company's common stock at an exercise price of $.69 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, 1999, 1998 and 1997.
In conjunction with the previously described agreement with Computerland,
Computerland paid $500 to the Company, for certain limited exclusive and
non-exclusive PROFILE marketing rights in Poland and Central Europe. The
Company also has entered into maintenance and consulting contracts with
Computerland. During the year ended December 31, 1999, and 1998, the
Company incurred expenses of $240 and $119, respectively under these
contracts.
41
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(11) OTHER RELATED PARTY TRANSACTIONS - CONTINUED
In conjunction with the previously described agreement, Direct Capital
Services (P) Ltd. paid $250 to the Company for certain limited exclusive
PROFILE marketing rights in India and certain Middle Eastern countries.
(12) 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 $371, $258, and
$202 related to the Plan during the years ended December 31, 1999, 1998,
and 1997, respectively.
(13) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the unaudited quarterly financial information
for the years 1999 and 1998:
- -----------------------------------------------------------------------------------------------------------------------------
1999 QUARTER ENDED 1998 Quarter Ended
- ----------------------------------------------------------------------------- ----------------------------------------------
MAR 31 JUNE 30 SEPT 30 DEC 31 Mar 31 June 3 Sept 30 Dec 31
- -----------------------------------------------------------------------------------------------------------------------------
Revenues $ 9,655 $13,911 $17,477 $15,364 $ 8,628 $11,053 $ 12,114 $12,264
Earnings before income
taxes 770 2,802 3,483 385 1,225 2,546 3,147 3,845
Net earnings 493 1,793 2,582 303 833 1,706 2,108 2,387
Basic earnings per share 0.02 0.08 0.11 0.01 0.04 0.07 0.09 0.10
Diluted earnings per share 0.02 0.07 0.10 0.01 0.03 0.07 0.09 0.10
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.
42
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
SCHEDULE II
Sanchez Computer Associates, Inc.
Valuation and Qualifying Accounts
For the years ended December 31, 1999, 1998 and 1997
Allowance for Balance at Charged to Costs Balance at
Doubtful Accounts Beginning of Year and Expenses Deductions End of Year
----------------- ----------------- ------------ ---------- -----------
Year ended December 31, 1997 $ 43,000 $ 500,000 $ - $ 543,000
Year ended December 31, 1998 543,000 100,000 348,000 295,000
Year ended December 31, 1999 295,000 - 7,000 288,000
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 27 of this Form 10-K. Our
audits were 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 Commission 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 7, 2000
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 27 of this Form 10-K. In
connection with our audit of such financial statements, we have also audited the
related financial statement schedule for the year ended December 31, 1997, 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 L.L.P.
Philadelphia, PA
February 6, 1998
43
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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 24, 2000 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 24, 2000 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 24, 2000 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 20, 2000" in its
definitive Proxy Statement relative to its May 24, 2000 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 24,
2000 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.
44
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
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 31)
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31, 1999,
1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999,
1998 and 1997
Notes to Consolidated Financial Statements
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years ended December 31,
1999, 1998 and 1997
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
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1999.
(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)
45
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
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)
10.10 Amended and restated 1995 Equity Compensation Plan
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Arthur Andersen LLP *
23.2 Consent of PricewaterhouseCoopers LLP *
27.1 Financial Data Schedule *
* 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.
5) Filed as an exhibit to the Company's Schedule 14A dated April 23, 1999.
46
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
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.
SANCHEZ COMPUTER ASSOCIATES, INC.
By: /s/ FRANK R. SANCHEZ
Dated: March 29 , 2000 --------------------------------
---- Frank R. Sanchez, Chief Executive Officer
and Director
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 29 , 2000 /s/ MICHAEL A. SANCHEZ
------ -----------------------------------------------------------
Michael A. Sanchez, Co-Chairman of the Board of Directors
Dated: March 29 , 2000 /s/ RONALD J. ZLATOPER
------ -----------------------------------------------------------
Ronald J. Zlatoper, Co-Chairman of the Board of Directors
Dated: March 29 , 2000 /s/ FRANK R. SANCHEZ
------ -----------------------------------------------------------
Frank R. Sanchez, Chief Executive Officer and Director
(Principal Executive Officer)
Dated: March 29 , 2000 /s/ THOMAS F. MCELWEE
------ -----------------------------------------------------------
Thomas F. McElwee, Senior Vice President and CFO
(Principal Financial and Accounting Officer)
Dated: March 29 , 2000 /s/ WARREN V. MUSSER
------ -------------------------------------------------------------
Warren V. Musser, Director
Dated: March 29 , 2000 /s/ LAWRENCE A. CHIMERINE
------ -------------------------------------------------------------
Lawrence A. Chimerine, Director
Dated: March 29 , 2000 /s/ ALEX W. HART
------ -------------------------------------------------------------
Alex W. Hart, Director
Dated: March 29 , 2000 /s/ KAILASH C. KHANNA
------ -------------------------------------------------------------
Kailash C. Khanna, Director
Dated: March 29 , 2000 /s/ JOHN D. LOEWENBERG
------ -------------------------------------------------------------
John D. Loewenberg, Director
Dated: March 29 , 2000 /s/ THOMAS C. LYNCH
------ -------------------------------------------------------------
Thomas C. Lynch, Director
Dated: March 29 , 2000 /s/ JAMES R. STOJAK
------ -------------------------------------------------------------
James R. Stojak, Director
Dated: March 29 , 2000 /s/ GARY C. WENDT
------ -------------------------------------------------------------
Gary C. Wendt, Director
47
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
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)
10.10 Amended and restated 1995 Equity Compensation Plan
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Arthur Andersen LLP *
23.2 Consent of PricewaterhouseCoopers LLP *
27.1 Financial Data Schedule *
* 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.
5) Filed as an exhibit to the Company's Schedule 14A dated April 23, 1999.
48