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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, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-21705
SANCHEZ COMPUTER ASSOCIATES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
PENNSYLVANIA 23-2161560
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
40 VALLEY STREAM PARKWAY, MALVERN, PA 19355
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (610) 296-8877
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
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Common Stock, no par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of shares of Common Stock held by non-affiliates
(based on the closing price on NASDAQ) on March 16, 2001 was approximately $118
million.
The number of shares of registrant's Common Stock outstanding as of March 16,
2001 was 25,287,896 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, 2001 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, 2000
ITEM PAGE
NO. NO.
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Part I
1. Business............................................................ 3
2. Properties.......................................................... 13
3. Legal Proceedings................................................... 13
4. Submission of Matters to a Vote of Security Holders................. 13
4 A. Executive Officers of the Registrant................................ 13
Part II
5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................. 15
6. Selected Financial Data............................................. 16
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 16
7 A. Quantitative and Qualitative Disclosures About Market Risk.......... 22
8. Financial Statements and Supplementary Data......................... 23
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 41
Part III
10. Directors and Executive Officers of the Registrant.................. 41
11. Executive Compensation.............................................. 41
12. Security Ownership of Certain Beneficial Owners and Management...... 41
13. Certain Relationships and Related Transactions...................... 41
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..... 42
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PART I
ITEM 1. BUSINESS.
Sanchez Computer Associates, Inc. ("Sanchez" or the "Company") is a global
developer and integrator of financial service software systems for top-tier
financial institutions. The Company maintains its corporate headquarters in
Malvern, Pa. The Company runs its international operations from an office in
Chester in the United Kingdom. The Company also operates offices in Warsaw,
Poland; Madrid, Spain; and Singapore. Sanchez designs, develops, markets,
implements and supports the PROFILE(R) ("PROFILE") suite of integrated retail
banking and brokerage software solutions for the world's top-tier financial
institutions. Products within the suite are integrated and provide institutions
with comprehensive solutions for retail banking, brokerage and financial
services integration.
In 1999, the Company began operating e-PROFILE(TM) Inc., a majority-owned
subsidiary of Sanchez. Sanchez offers e-PROFILE as a vertical services provider
("VSP") to the financial services industry. e-PROFILE is a VSP that provides an
outsourced, integrated, end-to-end operations and technology solution that
enables top-tier financial services companies to offer on-line financial
services to their customers. This solution integrates products and services from
the industry's "best-in-class" vendors, including products from Sanchez' PROFILE
suite, and manages them under a single, outsourced operating umbrella. e-PROFILE
maintains offices in Malvern and an operations center in Seven Fields, Pa., a
suburb of Pittsburgh, Pa. 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.
While e-PROFILE provides its own value to the market as a VSP, it also provides
Sanchez with a distribution channel for the suite of PROFILE products, related
technologies and services. The integrated suite of software products has an
open, scalable, and real-time architecture that is channel independent. The
suite includes: PROFILE/ANYWARE, a highly flexible, multi-currency,
multi-language, customer-centric, enterprise banking and brokerage application
and transaction processor; PROFILE/XPRESS, a transactional customer management
system and financial product distribution application that provides real time
integration connecting all of an institution's delivery channels to its internal
and external product processing factories; PROFILE/XPRESS AE, an optional
manager of real-time authorizations for batch-based, off-line processes;
PROFILE/WEBCONSUMER, a Web-based, Internet front-end processor for retail and
commercial banking applications; PROFILE FOR WINDOWS, a native Windows(R) client
application for customer service and teller functions; PROFILE/APPLICATION
TOOLS, a set of six packaged tools to assist with developing client-side code
for various applications intended to interface with PROFILE; and PROFILE/FMS
(Financial Management System), a multi-company, multi-currency, cost
center-based accounting system. Sanchez also markets and licenses GT.M, a
high-performance database engine optimized for transaction processing, a
development platform and a compiler for the ANSI standard M language.
PROFILE solutions have multi-currency and multi-language capabilities, and they
accommodate the retail and commercial requirements of financial service
operations with global transaction requirements. PROFILE's banking solution is
currently used 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. 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 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 fastest, scalable, real-time, on-line, large-volume
transaction banking system available to financial institutions supplied by a
vendor. In addition to the real-time requirement, multi-channel banking demands
"true" 24 x 7 x 365 continuous operation. Sanchez targets its PROFILE and
e-PROFILE solutions to top-tier institutions worldwide. Top-tier institutions
include banks and non-banks with brand identity, institutions that can leverage
a large customer base. The non-banks include brokerages, insurance companies,
credit card companies, Internet portals, large retailers and Internet savvy,
well-funded entrepreneurial startups.
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, ComputerLand SA
of Poland ("ComputerLand") since 1997, Sanchez/Capital Services since 1998 and
Deloitte Consulting in 2000. The Company
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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.
In September 1998, the Company significantly expanded its relationship with IBM
by entering into a global partnership agreement. In 2000, the Company
strengthened its relationship with IBM by entering into a new strategic
agreement that positions Sanchez as one of 40 strategic alliance partners in
IBM's PartnerWorld for Developers Program worldwide. Under terms of the
agreement, the two companies will jointly market and sell banking and financial
services solutions on a worldwide basis. Specifically, Sanchez will lead with
IBM's Unix-based, pSeries servers and IBM middleware products by integrating the
PROFILE suite of applications with IBM Application Framework for e-business
technologies, including: DB2 Universal Database, WebSphere application server,
MQSeries messaging software and Tivoli systems management software. Financial
institutions are expected to benefit from IBM and Sanchez solutions that offer
integrated core banking products through an open and scaleable architecture --
enabling improved time to market, real-time transaction processing and enhanced
delivery of products and service over multiple delivery channels including
branches, ATMs, Internet, and wireless application protocols (WAP). Under the
new agreement, IBM will promote the core banking components of Sanchez' PROFILE
enterprise banking solution as part of IBM's leading e-business solutions on the
IBM pSeries servers. Additionally, IBM will provide consulting, customization
and integration services for joint IBM and Sanchez solutions. The Company
believes that the efforts and capabilities of IBM's marketing, sales and global
service organizations will enhance the demand for PROFILE solutions and
products.
Since 1997, PwC and the Company have engaged in various global joint marketing,
training and implementation activities. As of December 31, 2000, more than 75
PwC consultants were trained to implement PROFILE banking solutions. The Company
has partnering relationships with various other domestic and international
regional service organizations. In 1998, the Company formed a joint venture with
Capital Services, Inc., a financial services and distribution company based in
Bombay, India. The joint-venture company is named Sanchez/Capital Services and
has distribution rights to PROFILE solutions 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.
For institutions selecting to operate a PROFILE solution in-house, Sanchez uses
license-based pricing. For institutions licensing PROFILE products as part of
the Company's e-PROFILE offering, Sanchez ties the software license to the
consumer and commercial growth of financial service firms engaged in Internet or
direct banking. As an institution's direct or Internet bank account base grows,
Sanchez increases its revenue stream. In lieu of up-front, one-time license
fees, generally, e-PROFILE contracts generate ongoing processing fees, which
include product license and maintenance charges for Sanchez' software on a per
account/per month basis over the life of the contract after the client "goes
live" with the solution. Service revenues generated from e-PROFILE
implementation projects are subject to the Securities and Exchange Commission's
("SEC") Staff Accounting Bulletin ("SAB") No. 101 accounting rule. SAB No. 101
affects the timing of revenue and cost recognition for implementation services
performed on projects associated with e-PROFILE. Under SAB No. 101, both revenue
and cost associated with implementing an e-PROFILE solution are deferred until a
client begins processing its accounts on e-PROFILE's outsourced platform. Once a
client goes live, the deferred revenue and costs are amortized over the expected
life of the processing arrangement. At year-end 2000, the company's SAB No. 101
deferred revenue balance was $19.2 million with a deferred pre-tax earnings
balance of $6.2 million. As the e-PROFILE client base matures, the ongoing
monthly revenue stream associated with the e-PROFILE outsourcing alternative is
expected to result in more predictable quarter-to-quarter revenues.
Late in 1999 and through most of 2000, most of the Company's sales were made
through e-commerce projects associated with e-PROFILE clients. During the same
period, Sanchez directed significant efforts toward establishing its e-PROFILE
offering in the marketplace. As a result, Sanchez shifted its strategic business
focus to building e-PROFILE's infrastructure and selling e-PROFILE's annuity
revenue opportunity in the financial industry's e-commerce space. The investment
effort temporarily lowered the company's revenue and earnings expectations.
Going forward, the mix of e-PROFILE annuity contracts and PROFILE product
licenses is expected to be more balanced now that e-PROFILE has established a
base of clients.
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Clients currently processing direct and Internet bank accounts on e-PROFILE's
platform include WingspanBank.com, Juniper Bank, Morgan Stanley Dean Witter,
Lehman Brothers Bank, DeepGreen Bank and ING DIRECT USA. e-PROFILE's next wave
of Internet and direct bank clients, contains four, branded financial
institutions, which are prepared to cross-sell their new banking products to
their large, existing customer bases. As of March 1, 2000, all four clients were
in their implementation phase. Those four clients include American Express
Membership Banking, GMAC Bank and two unannounced large insurance companies. As
a result, the Company expects e-PROFILE to contribute significantly to Sanchez'
revenue expectations during 2001.
THE BANKING MARKET
In the United States, the Company believes the reform of the Glass-Steagall Act
and the passage of the Gram-Leach-Bliley Act, which occurred in late 1999, are
catalysts for change in the financial services industry. As a result, the
Company believes competition will intensify in the coming years as the
differences between banks, brokerages, insurance companies and other financial
services providers continue to blur, particularly for retail consumers of
financial products and services. The Company believes the competitive challenges
presented by the emergence of electronic commerce and the consumer demand for
greater product and service flexibility are altering traditional retail banking
practices in North America. The Company also believes Europe and Asia are
predisposed to alternate financial services delivery channels including WAP,
Internet and other forms of direct banking. The Company believes this process
will accelerate as the speed and commercial use of alternate delivery channels
increase 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. Another market
factor impacting the 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.
During the last four years, next-generation technologies associated with direct
banking and Internet-based financial services exposed the weaknesses in legacy
processing environments. Legacy environments generally are not capable of
integrating products and services across the back-end; they do not link all
delivery channels on the front end; and they have little or no customer
consolidation in the middle.
Due to the unique product tailoring capability and delivery channel independence
of PROFILE solutions, the Company believes it is positioned to supply the next
generation of infrastructure to these organizations. In 2000, the Company
strengthened its position by adding two new products to its PROFILE suite -
PROFILE/XPRESS and PROFILE/WEBCONSUMER.
In response to market challenges, many institutions are turning toward
implementing a "clicks and bricks" approach to offering products and services;
i.e, an approach that integrates the Internet with an institution's other
delivery channels. Sanchez is widening this interpretation and is offering and a
more comprehensive and integrated approach to clicks and bricks with its new
products.
PROFILE/XPRESS is an innovative transactional customer management software
system. The product integrates the legacy processing environments of financial
institutions with new, best-in-class systems solutions while enabling consumers
with real-time, transactional access to all products and services across all
delivery channels. This approach allows financial institutions to meet the any
place and any time transactional demands of an emerging trend in financial
services - that of the "transactional customer."
The Company believes many institutions do not have the modern systems
infrastructure required to create the innovative products and services to
service the transactional customer. Sanchez also believes that the current
delivery cost structure of these organizations will impair their ability to
competitively price products.
PROFILE/XPRESS is a modern financial services integration engine and transaction
enabling software that solves the legacy problem by making it part of the
solution. PROFILE/XPRESS also supplies institutions with the migration map and
enables their existing infrastructures to service the requirements of the new
financial services marketplace. PROFILE/XPRESS is a multi-tiered, enterprise
integration and a new economy-enabling framework. The product utilizes a
J2Ee-compliant pure Java application server, such as IBM's WebSphere and
Bluestone Software's Sapphire/Web. The product uses standard messaging protocols
such as XML with message transports such as IBM's MQSeries, TCP/IP and Java
message services. Industry-specific messaging protocols such as the ISO8583
financial
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message standard are supported. PROFILE/Xpress was designed to use standard Java
technology. As a result, the product is portable across any hardware and
operating system platform that supports a Java virtual machine. In addition, the
product supports any JDBC- or ODBC-compliant database, such as Oracle,
Microsoft's SQLServer or IBM's DB2 - UDB. The PROFILE/XPRESS server environment
provides an added layer of integration facilities beyond message components for
Enterprise JavaBeans, CORBA servers, and Microsoft's COM/DCOM methods.
PROFILE/XPRESS is sold as a stand-alone product and as part of a PROFILE banking
or brokerage solution. The Company expects PROFILE/XPRESS will help leverage
additional license sales of other PROFILE products, specifically
PROFILE/ANYWARE. The new product's license fee is based on a tiered unit
structure and can range from $1.5 million to more than $5 million.
The Company also introduced PROFILE/WEBCONSUMER, a Web-based, front-end,
thin-client processor designed to provide the customers of financial
institutions an Internet financial services portal for account transactions and
aggregation. PROFILE/WEBCONSUMER is unlike traditional Web applications in that
the product does not use hard-coded navigation hyperlinks. Instead, the product
incorporates a database containing both Web objects and navigation components.
Through a proprietary feature called Site Map(TM), page navigation and Web
objects are registered in the application's database and are dynamically
assembled into pages at the time of customer interaction. This feature of
PROFILE/WEBCONSUMER enables institutions to control and manage the appearance
and content of their Web pages, allowing them to make seamless page updates and
initiate one-to-one marketing campaigns. PROFILE/WEBCONSUMER has an open
architecture and was developed as a pure Java application. PROFILE/WEBCONSUMER
can function independently of other PROFILE products, but leverages the
integration capabilities of PROFILE/XPRESS, which is Sanchez' transactional
customer management software. When used with PROFILE/XPRESS, PROFILE/WEBCONSUMER
enables consumers with real time, transactional access to all of an
institution's products and services, including those processed in legacy
environments as well as by third-party processors.
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. By expanding the PROFILE product suite, the company is positioned
to offer integrated solutions for retail banking and brokerage as well as a
solution that supplies transactional integration across a financial
institution's enterprise.
The Company also believes its e-PROFILE model has the opportunity to lead a VSP
category for forward-thinking institutions wanting to move out of a supply-chain
infrastructure 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. Whether institutions launch
pure Internet plays, such as WingspanBank.com, or pursue a "clicks and bricks"
approach, most of the largest institutions are engaged in an electronic strategy
for their products and services.
A summary of the principal benefits of a PROFILE banking 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. The PROFILE
banking solution contains all customer records, loan and deposit
account records and transactions in an integrated database. It also
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 Includes separate Web-enabled applications for the financial services
organization's customers as well as their system users. These
applications support the security requirements for Web-based financial
transactions.
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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 Suitable for small banks to large, international, financial
institutions, resulting from scalability from PC-class server hardware
through high-end SMP servers.
o Provides continuity of business through the optional use of unique
functionality using widely separated, logical dual-site operation with
fail over capabilities, including support of rolling software upgrades,
which the address the main obstacle to achieving "five nines"
application availability: the fact that 5 minutes per year is not
sufficient to upgrade applications, especially when database schema
changes are involved.
o Functionality such as online "hot" transaction-consistent backup and
online database reorganization (defragmentation) to allow maintenance
operations to occur while the application is fully operational.
o Enables database archiving, which provides permanent, low-cost,
transparent transaction storage and on-line retrieval.
o Supported with common functionality across a wide range of popular
server computer hardware and operating systems, and accessible via
standard networking protocols (TCP/IP, DECnet) as well as commercial
messaging middleware (e.g., MQ Series, RTR).
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 fail-over capabilities for
non-stop operations, including support of rolling software upgrades.
TECHNICAL BENEFITS
o Incorporates a messaging architecture, which provides for the easy and
rapid integration of existing and new delivery channels.
o Provides standard industry application interfaces (APIs), which support
client/server model and cross application integration.
o Fits in two-tier and three-tier client/server architectures, to
optimize 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 called DATA-QWIK. The
tool set 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.
o 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 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 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.
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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 banking solutions have 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 two 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. The PROFILE
banking solution 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' annuity-based utility pricing model will represent a growing 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 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. For institutions implementing PROFILE solutions
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 $250,000 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 generate
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. Implementation services revenues from an e-PROFILE
project vary by the size and scope of the implementation, but typically range
from $1 million 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 to 120 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.
MAINTENANCE AND SUPPORT SERVICES
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The major portion of the worldwide customer service and support is delivered
from its Malvern, Pa. headquarters. The services organization is responsible for
help desk, research, systems operations and application 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. Each client is assigned an account manager.
Account managers are located around the globe and work in conjunction with the
services organization in Malvern. The account management people are responsible
for issue resolution.
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. The Company provides local support services to clients in
Poland through its partnership with ComputerLand and in Asia with a partnership
with OpenSys.
For e-PROFILE clients, customer service is primarily supported through an
operations center located in Seven Fields, a suburb of Pittsburgh, Pennsylvania.
The e-PROFILE operations center is responsible for providing support services to
clients from implementation through production. These services include project
management and implementation support, technical support for data operations and
network issues, programming and testing, PROFILE suite application support and
vendor integration services. In addition to those services, the bank operations
departments provide call center support, maintenance, and item exception
handling. e-PROFILE has client directors assigned to each client in support of
issue management.
SALES AND MARKETING
The Company has a worldwide direct sales, sales support and marketing force of
approximately 39 people. In 2000, the Company focused its sales and marketing
attention primarily on one market segment -- the top-tier institutions. Sanchez'
sales force is now expanding its focus and is bringing a multi-solution approach
to the market. The Company believes there is a growing need for integrated
banking and brokerage among financial institutions, particularly in the United
States and Europe. To attack this market, Sanchez expanded its PROFILE suite of
integrated applications by introducing two new products, PROFILE/XPRESS and
PROFILE/WEBCONSUMER.
PRICING STRATEGY
The Company prices its software products in four 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; (iii) for e-PROFILE sales a Sanchez software license is tied to the
consumer and commercial growth of financial service firms. As an institution's
direct or Internet bank account base and account activity grows, Sanchez
increases its revenue stream. The Company's e-PROFILE 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-PROFILE
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; (iv) recurring support and software maintenance revenue.
ENGINEERING
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 2000, 1999, and 1998 were $22.8
million, $15.7 million and $11.7 million respectively. In addition to its
internal investment, the Company generally obtains joint funding for projects
from clients and vendor partners. 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.
Engineering 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. The
9
engineering area provides PROFILE application development, technology and
platform development, maintenance programming, documentation and quality
assurance. Engineering is responsible for defining plans for new product
versions, developing PROFILE application enhancements, defining technology and
platform layer enhancements to PROFILE's architecture, evaluating and
implementing operating system ports, programming languages, database systems,
and development and productivity tools. After engineering successfully
implements a new technology component under an existing application component,
it is responsible for propagating the technology through the Company.
In late 2000, the Company selected IBM's WebSphere application server framework
as the software component to incorporate into PROFILE/XPRESS. 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, 2000, Sanchez and e-PROFILE employed 583 full-time employees
at offices in Malvern, Pa., Seven Fields, Pa., Chester, U.K; Warsaw, Poland; and
Singapore. Of the 583 Sanchez employees, 174 worked at Sanchez' e-PROFILE
subsidiary. 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). 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 efforts, and to supplement the Company's e-PROFILE
implementation teams.
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. Since 1999, with the addition of the
Company's e-PROFILE offering, Sanchez and e-PROFILE now participate in both of
these alternatives.
In the core processing software space, the Company's primary competitors
included ALLTEL (Systematics software), Fiserv, Accenture, CSC/Hogan,
Midas-Kapiti International, Temenos (Globus), Kindle Banking Systems, SAP, EDS,
Kirchman Corporation, and to a lesser extent M&I Data Systems (a subsidiary of
Marshall & Illsley Corporation), Jack Henry, Prologic, Open Solutions Inc (OSI),
London Bridge/Phoenix International. Competing with Sanchez in the direct and
Internet segment of the financial services market are many of the same vendors
listed above plus S1 Corporation, Corillian and Financial Fusion. In-house bank
legacy software systems are also considered competition.
Many of the Company's competitors have longer operating histories and greater
competitive resources than Sanchez. 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.
10
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.
11
GLOSSARY - CONTINUED
Multi-platform Processes or pieces of hardware that operate
on various hardware and software systems
without modification.
ODBC Open Database Connectivity. The Microsoft(R)
standard that provides a database independent
mechanism through which a Windows or Windows
NT(TM) application can query and update data
in a variety of relational database
management systems. The ODBC API (Application
Programming Instruction), for example, allows
a single Windows application to access
Oracle, Sybase and other databases.
Open Systems System design that allows users to take
Architecture 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.
12
ITEM 2. PROPERTIES.
The Company's headquarters and principal administrative, sales and marketing,
and application development operations are located in approximately 102,000
square feet of leased space in Malvern, Pennsylvania. These leases expire
alternately from 2003 to 2007. The Company runs it's international operations
from an office in Chester in the United Kingdom. The Company also leases office
space in Warsaw, Poland; Amsterdam, The Netherlands; and Singapore. 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 February 2001, e-PROFILE filed for arbitration in response to
1stWebbankdirect's October 2000, termination of its processing agreement in
connection with the consolidation of its e-banking platforms. e-PROFILE is
seeking payment of all outstanding receivables from this customer ($1.4 million
at December 31, 2000), as well as certain fees due for minimum processing
obligations. 1stWebbankdirect has counterclaimed and is seeking a refund of the
implementation fees they paid for the project. The Company has not recognized
implementation revenue or direct costs related to this contract through December
31, 2000, in accordance with SAB No. 101. As of this date, the Company is unable
to estimate the amount of any potential gain or loss.
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 2000.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of the Company are as follows:
----------------------------------------------------------------------------------------
NAME AGE POSITION
Michael A. Sanchez.............. 43 Chairman of the Board of Directors
Frank R. Sanchez................ 44 Chief Executive Officer and Director
Joseph F. Waterman.............. 49 President and Chief Operating Officer
Douglas J. Enns................. 51 Managing Director, International Operations
Michael D. Harris............... 40 Senior Vice President, Engineering
Todd A. Pittman................. 33 Senior Vice President, Chief Financial Officer
Daniel W. Sollis................ 42 Senior Vice President Global Sales
John H. Teaford................. 54 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. Mr. Sanchez also has served as chief executive officer of e-PROFILE
since April 1999. In addition to assisting with the strategic direction for
Sanchez, he is also responsible for the organizational growth and development of
e-PROFILE. Michael Sanchez and Frank Sanchez are brothers.
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.
In his capacity as chief executive officer, Mr. Sanchez is responsible for the
overall strategy and performance of the company, as well as the engineering,
sales and marketing departments. He was the principal architect of the PROFILE
suite of enterprise banking and financial services products and continues to be
responsible for providing the overall direction of the product suite and
technical
13
strategy. From 1980 until 1994, Mr. Sanchez was executive vice president in
charge of technology and product development.
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, as well as the client services and administrative departments.
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. for 13 years.
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. Prior to working at the Company, Mr. Enns was chief
executive officer of Pacific Coast Savings Bank in Victoria from August 1988 to
June 1999.
MICHAEL D. HARRIS joined the Company in April 2000 as a vice president
responsible for various business development projects for the suite of PROFILE
software applications. He became the Company's senior vice president in charge
of engineering in November 2000, a position in which he is responsible for
delivering and maintaining Sanchez software products including all software
development, testing and documentation activities. He manages approximately 200
staff responsible for six banking and brokerage software products. Before
arriving at Sanchez, Mr. Harris was a senior vice president for MasterCard
International where he was the head of MasterCard's global chip group.
TODD A. PITTMAN became CFO in December 2000. Previously, Mr. Pittman was the CFO
for Integrion, where he directed all financial activities, including business
planning, accounting, financial management, human resources, pricing, and
shareholder relations. Prior to Integrion, Mr. Pittman worked for Coopers and
Lybrand Consulting in their consulting practice and at Arthur Andersen in their
audit practice.
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.
14
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 price of the Company's common stock as reported by
Nasdaq.
HIGH LOW
- -----------------------------------------------------------------------
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
FISCAL YEAR 2000:
First quarter 59.563 28.750
Second Quarter 35.125 13.750
Third Quarter 23.938 14.375
Fourth Quarter $ 20.500 $ 8.000
As of March 16, 2001 the Company had outstanding 25,287,896 shares of common
stock held by approximately 12,300 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.
15
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.
- -------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE DATA
STATEMENT OF OPERATIONS DATA (1):
Revenues .......................... $ 68,407 $ 56,407 $ 44,059 $ 28,891 $ 18,513
Earnings (loss) before income taxes (8,805) 7,440 10,763 5,327 2,015
Net earnings (loss) ............... (6,072) 5,171 7,034 3,676 1,407
Basic earnings (loss) per share ... (0.24) .22 .31 .17 .08
Diluted earnings (loss) per share . $ (0.24) $ .20 $ .29 $ .15 $ .07
Weighted average common shares
outstanding .................... 24,912 23,911 23,042 22,070 17,146
Weighted average common and diluted
shares outstanding ............. 24,912 26,062 24,544 23,950 18,784
Pro forma Presentation
of SAB No. 101:
Net earnings .................. $ 4,998 $ 7,034 $ 3,676 $ 1,407
Basic earnings per share ...... .21 .31 .17 .08
Diluted earnings per share .... .19 .29 .15 .07
BALANCE SHEET DATA:
Cash and cash equivalents ......... $ 39,890 $ 25,404 $ 27,177 $ 12,827 $ 15,531
Working capital ................... 45,268 35,541 27,090 20,585 19,089
Total assets ...................... 95,320 56,395 43,285 33,222 28,551
Long-term debt, including current
portion ........................ -- 83 314 524 787
Total shareholders' equity ........ 55,352 45,438 31,772 23,233 18,714
BACKLOG:
Products and services ............. $ 28,336 $ 6,207 $ 6,667 $ 12,402 $ 8,093
Maintenance ....................... 18,795 25,490 27,253 22,300 11,704
-----------------------------------------------------
Total backlog ..................... $ 47,131 $ 31,697 $ 33,920 $ 34,702 $ 19,797
(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
OVERVIEW
Sanchez Computer Associates, Inc. ("Sanchez" or "the Company") designs,
develops, markets, implements and supports the PROFILE(R) ("PROFILE") suite of
integrated retail banking and brokerage software solutions for the world's
top-tier financial institutions. Products within the suite are integrated and
provide institutions with comprehensive solutions for retail banking, brokerage
and financial services integration. All PROFILE products utilize a development
and database technology called GT.M(TM).
The Company markets the PROFILE suite of enterprise banking and financial
services applications as integrated components to retail banking and brokerage
solutions. The integrated suite of software products has an open, scalable, and
real-time architecture that is channel independent. The suite includes:
PROFILE/ANYWARE, a highly flexible, multi-currency, multi-language,
customer-centric, enterprise banking and brokerage application and transaction
processor; PROFILE/XPRESS, a transactional customer management system and
financial product
16
distribution application that provides real time integration connecting all of
an institution's delivery channels to its internal and external product
processing factories; PROFILE/XPRESS AE, an optional manager of real-time
authorizations for batch-based, off-line processes; PROFILE/WEBCONSUMER, a
Web-based, Internet front-end processor for retail and commercial banking
applications; PROFILE FOR WINDOWS, a native Windows(R) client application for
customer service and teller functions; PROFILE/APPLICATION TOOLS, a set of six
packaged tools to assist with developing client-side code for various
applications intended to interface with PROFILE; and PROFILE/FMS (Financial
Management System), a multi-company, multi-currency, cost center-based
accounting system. Sanchez also markets GT.M, a high-performance database engine
optimized for transaction processing, a development platform and a compiler for
the ANSI standard M language.
In 1999, Sanchez acquired Artech Financial Technology Services, LLC, a banking
technology service center located outside Pittsburgh, Pennsylvania. In
conjunction with the purchase, the Company announced the formation of
e-PROFILE(TM) Inc. and began offering e-PROFILE as a product solution. e-PROFILE
is a vertical services provider ("VSP") for the financial services industry that
provides integrated end-to-end operations and technology solutions that enable
top-tier financial services companies to offer on-line financial services to
their customers. This solution integrates products and services from the
industry's "best-in-class" vendors and manages them under one operating
umbrella. e-PROFILE maintains offices in Malvern and an operations center in
Seven Fields, PA., a suburb of Pittsburgh, PA. 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. While
e-PROFILE provides its own value to the market as a VSP, it also provides
Sanchez with a distribution channel for the suite of PROFILE products, related
technologies and services. As of January 31, 2001, e-PROFILE was processing in
excess of 170,000 accounts at its bank operations and data center for six
clients.
The Company derives its revenues from product fees, service fees and software
maintenance fees. Product fees include software license and product enhancement
fees. Service fees include client implementation-related services, processing
and consulting fees. For Sanchez' software license contracts, product fees are
paid in stages upon the completion, by the Company, of certain defined dates and
deliverables. The Company recognizes revenue from these fees using the
percentage-of-completion contract accounting method, or where applicable, on a
cash basis. Service fees are generally recognized and billed monthly on a time
and material basis. Maintenance fees are normally billed annually in advance and
recognized into revenue ratably over the period covered. The Company's
e-commerce projects generate implementation related service revenues for both
Sanchez and e-PROFILE, which are largely deferred during the implementation
phase along with the related costs until the client begins processing its
accounts on e-PROFILE's outsourced platform. Once a client "goes live", the
deferred revenue and costs are amortized over the expected life of the
processing arrangement. In lieu of up-front, one-time license fees, e-PROFILE
contracts generate on-going processing fees, which include license and
maintenance charges for Sanchez' software on a per account/per month basis over
the life of the processing contract after the client "goes live" with the
solution. In addition, these projects generate on-going processing fee related
services revenue for e-PROFILE. Under this model, as a client institution's
e-commerce account base grows, Sanchez increases its revenue stream.
HIGHLIGHTS FOR 2000
Revenues for the year ended December 31, 2000 increased 21.3% to $68.4
million, compared to $56.4 million recorded for the same period in 1999. Net
loss for 2000 totaled $(6.1) million or $(0.24) per diluted share, compared
to net earnings of $5.2 million or $.20 per diluted share for 1999. The
adoption of the Securities and Exchange Commission ("SEC") Staff Accounting
Bulletin (" SAB") No. 101 "Revenue Recognition in Financial Statements"
effective January 1, 2000, resulted in the Company deferring $19.2 million in
revenue and $6.2 million in pre-tax profit during 2000.
The e-PROFILE segment generated revenues of $20.2 million and a pretax loss of
$(16.7) million. As previously announced, e-PROFILE's registration statement for
a proposed public offering of common stock was withdrawn in December 2000.
During 2000, Sanchez expanded its product offering by adding PROFILE/XPRESS, an
innovative transactional customer management software system, which integrates
the legacy processing environments of financial institutions with new,
"best-in-class" systems solutions while enabling consumers with real-time,
transactional access to all products and services across all delivery channels.
Sanchez also launched PROFILE/WEBCONSUMER, a Web-based,
17
front-end, thin-client processor designed to provide the customers of financial
institutions an Internet financial services portal for account transactions and
aggregation.
Lloyds TSB Bank plc, one the 25 largest and most highly rated financial services
groups in the world selected the PROFILE/ANYWARE solution for its stand-alone,
pan-European Internet bank - evolvebank.com. Sanchez and ING Group N.V., the
multinational Dutch financial services company, continued to build on past
successes by adding ING DIRECT France and ING DIRECT USA to the global list of
ING direct banks using a PROFILE banking solution. Also during the year,
Patagon.com Inc., a Miami-based Internet provider of financial services and
media components, licensed Sanchez' suite of PROFILE products including
PROFILE/XPRESS. Patagon is a financial services Internet site that will allow
clients to buy and sell stocks, options and mutual funds. Prowszechny Bank
Kredytowy, the fourth largest bank in Poland, implemented a PROFILE banking
solution for approximately 1.5 million accounts.
Morgan Stanley Dean Witter, Lehman Brothers Bank, ING DIRECT USA, DeepGreen
Bank, and Juniper went live on e-PROFILE's outsourced technology and operations
platform. By June 30, 2001, the Company expects American Express Membership
Banking, GMAC Bank and 2 large unannounced insurance companies to be processing
as well.
Sanchez continued to build on its existing relationship with IBM by forming a
global strategic alliance to provide retail online banking and legacy
replacement solutions to large and mid-size banks worldwide. The agreement
positions Sanchez as one of 40 strategic alliance partners in IBM's PartnerWorld
for Developers Program worldwide. As a result of efforts conducted through
Sanchez' global product distribution and partnership channels, a PROFILE banking
solution was licensed to Vysya Bank, one of India's largest and leading private
sector banks. The undertaking was the first and largest technology upgrade
launched by a private sector bank in India.
18
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected statement of
operations data:
------------------------------------
Year Ended December 31,
DOLLARS IN THOUSANDS 2000 1999 1998
------------------------------------
Revenues
Products .......................................... $ 20,313 $ 19,131 $ 25,854
Services .......................................... 35,129 27,157 11,571
Software maintenance fees and other ............... 12,965 10,119 6,634
--------- --------- ---------
Total revenues .................................. $ 68,407 $ 56,407 $ 44,059
========= ========= =========
Percentage Relationship to Total Revenues
Revenues
Products .......................................... 29.7% 33.9% 58.7%
Services .......................................... 51.4 48.2 26.2
Software maintenance fees and other ............... 18.9 17.9 15.1
--------- --------- ---------
Total revenues .................................. 100.0 100.0 100.0
Operating expenses
Product development ............................... 33.3 27.9 26.5
Product support ................................... 6.5 6.8 8.7
Services .......................................... 35.9 28.2 15.9
Sales and marketing ............................... 17.0 14.6 14.5
General, administrative and other ................. 22.8 11.3 12.1
--------- --------- ---------
Total operating expenses ........................ 115.5 88.8 77.7
Earnings (loss) from operations ...................... (15.5) 11.2 22.3
Interest income, net ................................. 2.6 2.0 2.2
--------- --------- ---------
Earnings (loss) before income taxes .................. (12.9) 13.2 24.5
Income tax provision (benefit) ....................... (4.3) 4.0 8.5
--------- --------- ---------
Net earnings (loss) before cumulative effect of change
in accounting principle .............................. (8.6) 9.2 16.0
Cumulative effect of change in accounting principle .. (0.3) 0.0 0.0
--------- --------- ---------
Net earnings (loss) .................................. (8.9)% 9.2% 16.0%
========= ========= =========
2000 COMPARED TO 1999
REVENUES. Revenues increased $12.0 million, or 21.3%, in 2000. The primary
reason for the increase was service revenues, which increased by $8.0 million,
or 29.4%, for the year ended December 31, 2000. The service revenues increase
was driven by additional implementation activity associated with e-banking
projects and processing revenues from e-PROFILE, which increased by $6.5 million
in 2000. For the year ended December 31, 2000, product revenues increased $1.2
million, or 6.2%, compared to the year ended December 31, 1999. The increase in
product revenues was the result of new license sales and one-time license
expansions by existing customers. Software maintenance and other revenues
increased $2.8 million, or 28.1%, for the year ended December 31, 2000,
primarily due to an increase in the Company's supported client base and higher
sales of third-party products.
PRODUCT DEVELOPMENT. Product development expenses increased $7.1 million, or
44.9%, for 2000, due to costs associated with increased staffing to support the
expansion of our new product offerings, e-PROFILE consulting fees related to
product strategy development, expanded facilities and other overhead costs.
Staffing increased 17% for this area of the Company primarily due to the
Company's focus on extending its technology into areas that are targeted to
become new revenue sources. The percent relationship to total revenue increased
from 27.9% in 1999 to 33.3% in 2000.
PRODUCT SUPPORT. Product support expenses increased by $599,000, or 15.6%, in
the year ended December 31, 2000, due to cost required to support the larger
converted client base.
19
SERVICES. Services expenses increased by $8.6 million, or 54.2%, during 2000, in
conjunction with a corresponding increase in service revenues. The increase was
primarily due to additional staffing and related overhead costs for both Sanchez
and e-PROFILE needed to support the increased services delivered, including an
additional $4.9 million related to the cost of processing. The gross margin
relative to associated revenues for the year ended December 31, 2000 was 30.1%,
compared to 41.4% for the year ended December 31, 1999. The decrease was
primarily attributable to low margins on processing and the increased use of
outside consultants while the Company continues to build internal capabilities.
SALES AND MARKETING. Sales and marketing expenses increased by $3.4 million, or
41.3%, in the 2000 period due to costs associated with increased staffing,
third-party commissions and consulting fees related to developing sales
strategies and marketing plans.
GENERAL, ADMINISTRATIVE AND OTHER. These expenses increased by $9.2 million, or
145.0%, due to increased e-PROFILE staffing and subsequent one-time charges
related to integrating certain portions of e-PROFILE back into Sanchez, the
write-off of e-PROFILE initial public offering costs and higher bad debt
reserves.
INCOME TAX PROVISION. Taxes in 2000 were 33.0% of income before income taxes, as
compared to 30.5% for the year ended December 31, 1999. The 2000 rate is lower
than statutory rates as a result of not recording a state tax benefit related to
e-PROFILE's loss. The 1999 year was lower than historical rates due to a tax
benefit realized from the recalculation of the impact of the Company's foreign
sales corporation.
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 focus on the e-PROFILE pricing model. The e-PROFILE model
offers utility-based pricing versus a one-time license fee to lower the initial
investment for e-PROFILE clients. The e-PROFILE model, and the 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.
SERVICES. Services expenses increased by $8.9 million, or 127.8%, during 1999,
as a result of the increase in service revenues. 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 41.4%, 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 $1.9 million, or
29.4%, 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.
GENERAL, ADMINISTRATIVE AND OTHER. These expenses increased by $1.0 million or
18.9%, 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
20
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $39.9 million at December 31, 2000. Cash flows
from operations for 2000 were $10.1 million, $2.3 million in 1999 and $15.9
million in 1998. The increase in net cash provided by operating activities in
2000 was primarily due to a net increase in accounts payable, accrued
expenses and the deferred profit associated with SAB No. 101. This increase
in cash was partially offset by the results of funding operations, the
increase in accounts receivable due to the increase in billable revenues and
the increase in deferred taxes due to the timing of the realization of the
tax benefit created by the year 2000 net loss. The 74 days sales outstanding
(pre-SAB No.101 deferral) as of December 31, 2000 is lower than our
historical average. The receivable balance will continue to be significantly
impacted by the timing of contract milestones and time and material billings.
Capital asset expenditures for 2000 amounted to $5.7 million as compared to $5.2
million in 1999. The increase in capital expenditures during 2000 is
attributable to purchases of equipment related to the growth in employees and
facilities.
Financing activities contributed cash of $10.3 million in 2000, compared to $2.9
million in 1999. The primary reason for the increase was $6.0 million of
investment in e-PROFILE from two external sources, which can be converted to
Sanchez stock, as well as the exercise of stock options which accounted for $3.3
million. These increases were partially offset by the purchase of treasury stock
for $2.0 million.
The Company currently anticipates that cash generated from operations and
existing cash balances will be sufficient to satisfy its operating and capital
cash needs for the foreseeable future and at a minimum through the next year.
Should the Company's business expand more rapidly than expected, the Company
believes that additional capital, 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.
The Company believes that over the course of time the ongoing monthly revenue
stream associated with the e-PROFILE outsourcing alternative will contribute
toward more predictable quarter-to-quarter revenues.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis contains "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, but not limited to,
statements concerning the company's revenues, expenses and earnings, future
profitability, which have been derived from its operating budgets and forecasts
which are based on detailed assumptions about many important factors. The words
"anticipate," "estimate," "expect," "intend," "plan," "project" and variations
of these words and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties. Actual
outcomes could differ materially from those expressed in any such
forward-looking statement due to a variety of factors in addition to those
specifically identified above. These factors include, but are not limited to,
the demand for products and services in the financial services industry,
competition among software and technology companies serving that industry, the
timing of new contract closings, potential delays in the implementation of
products and services, the success of the Company's e-PROFILE business model,
the extent to which the Internet will be used for financial services and
products, the development of the top-tier and direct banking
21
markets, market acceptance of the Company's products and services, the Company's
ability to protect its intellectual property rights, the potential adverse
impact of security breaches, and the Company's ability to continue to improve
its products and services.
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.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.............................................................24
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 2000 and 1999....................................25
Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998......26
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2000, 1999 and 1998 .............................................................27
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998......28
Notes to Consolidated Financial Statements......................................................29
Schedule II - Valuation and Qualifying Accounts for the Years Ended
December 31, 2000, 1999 and 1998..............................................................40
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sanchez Computer Associates, Inc.:
We have audited the accompanying consolidated balance sheets of Sanchez Computer
Associates, Inc. (a Pennsylvania corporation) and subsidiaries as of December
31, 2000 and 1999, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. 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 auditing standards generally accepted
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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
As explained in Note 2 to the financial statements, effective January 1, 2000,
the Company changed its method of recognizing revenue.
Arthur Andersen LLP
Philadelphia, Pennsylvania
February 8, 2001
24
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
--------------------
ASSETS 2000 1999
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 39,890 $ 25,404
Accounts receivable less allowances ($1,197-2000; $288-1999) 17,906 12,564
Contracts in process 2,441 3,227
Income tax refund receivable 4,226 2,948
Deferred income taxes 3,521 686
Prepaid and other current assets 1,429 1,187
Deferred service expense 9,187 --
--------------------
Total current assets 78,600 46,016
PROPERTY AND EQUIPMENT
Equipment 11,469 7,351
Furniture and fixtures 2,346 1,784
Leasehold improvements 2,866 2,020
--------------------
16,681 11,155
Accumulated depreciation and amortization (8,451) (5,115)
--------------------
Net property and equipment 8,230 6,040
Deferred service expense 3,845 --
Deferred income taxes 758 --
Other non-current assets 3,887 4,339
--------------------
Total assets $ 95,320 $ 56,395
====================
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 2,819 $ 2,360
Accrued expenses 11,933 4,417
Current debt obligations -- 83
Deferred revenue 6,032 3,615
Deferred service revenue 12,548 --
--------------------
Total current liabilities 33,332 10,475
Deferred income taxes -- 482
Deferred service revenue 6,636 --
--------------------
Total liabilities 39,968 10,957
Commitments and contingencies (Note 9)
SHAREHOLDERS' EQUITY
Common stock, stated value of $.01 per share, 75,000
authorized, 25,221 shares issued and 25,211 shares
outstanding as of December 31, 2000 and 24,357 shares
issued and outstanding December 31, 1999 252 244
Additional paid-in capital 44,431 28,392
Retained earnings 10,822 16,894
Treasury stock (10 shares) (153) --
Notes due on common stock purchases -- (92)
--------------------
Total shareholders' equity 55,352 45,438
--------------------
Total liabilities and shareholders' equity $ 95,320 $ 56,395
====================
See notes to consolidated financial statements
25
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
-------------------------------
2000 1999 1998
-------- -------- --------
REVENUES
Products $ 20,313 $ 19,131 $ 25,854
Services 35,129 27,157 11,571
Software maintenance fees and other 12,965 10,119 6,634
-------------------------------
Total revenues 68,407 56,407 44,059
OPERATING EXPENSES
Product development 22,808 15,737 11,677
Product support 4,427 3,828 3,863
Services 24,553 15,923 6,989
Sales and marketing 11,665 8,253 6,376
General, administrative and other 15,581 6,359 5,347
-------------------------------
Total operating expenses 79,034 50,100 34,252
-------------------------------
EARNINGS (LOSS) FROM OPERATIONS (10,627) 6,307 9,807
Interest income, net 1,822 1,133 956
-------------------------------
EARNINGS (LOSS) BEFORE INCOME TAXES (8,805) 7,440 10,763
Income tax provision (benefit) (2,906) 2,269 3,729
-------------------------------
NET EARNINGS (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (5,899) 5,171 7,034
Cumulative effect of change in accounting principle, net of tax (173)
-------------------------------
NET EARNINGS (LOSS) $ (6,072) $ 5,171 $ 7,034
===============================
Basic earnings (loss) per average common share before
cumulative effect of change in accounting principle $ (.24) $ .22 $ .31
Diluted earnings (loss) per average common share before
cumulative effect of change in accounting principle (.24) .20 .29
Basic earnings (loss) per average common share (.24) .22 .31
Diluted earnings (loss) per average common share $ (.24) $ .20 $ .29
Weighted-average common shares outstanding 24,912 23,911 23,042
Weighted-average common and diluted shares outstanding 24,912 26,062 24,544
Pro forma presentation for change in accounting principle:
Net earnings $ 4,998 $ 7,034
Basic earnings per average common share .21 .31
Diluted earnings per average common share .19 .29
See notes to consolidated financial statements
26
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
NOTES DUE ON
TREASURY ADDITIONAL COMMON
COMMON STOCK STOCK PAID-IN RETAINED STOCK
SHARES AMOUNT AMOUNT CAPITAL EARNINGS PURCHASES
------ ------ -------- ---------- -------- ------------
BALANCES AT DECEMBER 31, 1997 22,308 $ 223 $ 18,658 $ 4,689 $ (337)
Net earnings 7,034
Exercise of stock options & warrants 1,130 1,139
11
Employee stock purchase plan 31 258
Stock option loan repayments 97
-----------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1998 23,469 234 20,055 11,723 (240)
-----------------------------------------------------------------------------
Net earnings 5,171
Purchase of common stock (60) $ (592)
Exercise of stock options 858 8 1,149 1,627
Cashless stock option exercise using treasury stock (20) (557) 557
Tax benefit from stock options exercised 4,189
Stock-based compensation expense 551
Employee stock purchase plan 38 1 750
Stock option loan repayments 148
Issuance of stock related to acquisition 72 1 663
-----------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 1999 24,357 244 0 28,392 16,894 (92)
-----------------------------------------------------------------------------
Net loss (6,072)
Purchase of common stock (122) (2,023)
Exercise of stock options & warrants 771 6 1,450 4,388
Tax benefit from stock options exercised 2,823
Stock-based compensation expense 182 2 2,784
Employee stock purchase plan 23 420 44
Stock option loan repayments 92
Equity investments 6,000
-----------------------------------------------------------------------------
BALANCES AT DECEMBER 31, 2000 25,211 $ 252 $ (153) $ 44,431 $ 10,822 $ 0
=============================================================================
See notes to consolidated financial statements
27
SANCHEZ COMPUTER ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
--------------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) $ (6,072) $ 5,171 $ 7,034
Adjustments to reconcile net earnings to cash provided
(used) by operating activities
Depreciation and amortization 4,157 2,765 1,544
Stock based compensation 2,786 551 --
Deferred income taxes (4,075) 198 (401)
Deferred service revenue 19,184 -- --
Deferred service expense (13,032) -- --
Provision for doubtful accounts receivable 790 -- 100
Other (2) (9) 16
Cash provided (used) by changes in operating assets and
liabilities
Accounts receivable (6,132) (9,561) 6,255
Contracts in process 786 3,551 (529)
Income taxes receivable/payable 1,519 (322) 1,248
Prepaid and other current assets (242) (262) 157
Accounts payable and accrued expenses 7,989 (22) 2,175
Deferred revenues 2,417 262 (1,668)
--------------------------------
Net cash provided by operating activities 10,073 2,322 15,931
CASH USED IN INVESTING ACTIVITIES
Capital expenditures (5,665) (5,214) (2,011)
Investments (267) (161) (512)
Proceeds from sale of fixed assets 51 -- --
Capitalized computer software costs -- (1,081) (353)
Cost of acquisitions, net of cash acquired -- (499) --
--------------------------------
Net cash used in investing activities (5,881) (6,955) (2,876)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of notes due on common stock purchases 92 148 97
Purchase of common stock for treasury (2,023) (592) --
Principal payments under long-term notes (83) (231) (210)
Proceeds from equity investments 6,000 -- --
Issuance of common stock 5,844 2,784 1,150
Proceeds from issuance of shares under the employee stock
purchase plan 464 751 258
--------------------------------
Net cash provided by financing activities 10,294 2,860 1,295
Net increase (decrease) in cash and cash equivalents 14,486 (1,773) 14,350
Cash and cash equivalents at beginning of year 25,404 27,177 12,827
--------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 39,890 $ 25,404 $ 27,177
================================
Supplemental cash flow information
Interest paid $ 3 $ 14 $ 37
Income taxes paid $ 597 $ 3,060 $ 2,481
See notes to consolidated financial statements
28
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 the PROFILE(R) ("PROFILE")
suite of integrated retail banking and brokerage software solutions for
financial services organizations worldwide. The integrated suite of
software products has an open, scalable, and real-time architecture that
is channel independent. The suite includes: PROFILE/ANYWARE, a highly
flexible, multi-currency, multi-language, customer-centric, enterprise
banking and brokerage application and transaction processor;
PROFILE/XPRESS, a transactional customer management system and financial
product distribution application that provides real-time integration
connecting all an institution's delivery channels to its internal and
external product processing factories; PROFILE/XPRESS AE, an optional
manager of real-time authorizations for batch-based, off-line processes;
PROFILE/WEBCONSUMER, a Web-based, Internet front-end processor for retail
and commercial banking applications; PROFILE for Windows, a native
Windows(R) client application for customer service and teller functions;
PROFILE/Application Tools, a set of six packaged tools to assist with
developing client-side code for various applications intended to interface
with PROFILE; and PROFILE/FMS (Financial Management System), a
multi-company, multi-currency, cost center-based accounting system.
Sanchez markets GT.M, a high-performance database engine optimized for
transaction processing, a development platform and a compiler for the ANSI
standard M language. Sanchez offers e-PROFILE, a majority-owned
subsidiary, as a product solution. e-PROFILE is a vertical services
provider ("VSP") for the financial services industry that provides
integrated end-to-end operations and technology solutions that enable
top-tier financial services companies to offer on-line financial services
to their customers. This solution integrates products and services from
the industry's "best-in-class" vendors and manages them under one
operating umbrella.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries, and have been prepared in accordance
with accounting principles generally accepted in the United States. All
significant inter-company accounts and transactions have been eliminated
in consolidation.
USE OF MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 estimates
are the percentage-of-completion method for revenue recognition and the
estimated lives of processing relationships.
REVENUE RECOGNITION
The Company generally recognizes product revenues, 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 agreement 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
undelivered 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 typically recognized when the services are performed or on the
percentage-of-completion method, depending on the contract terms. In
accordance with
29
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(2) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin
("SAB") No. 101 "Revenue Recognition in Financial Statements", revenue
from implementation services for e-PROFILE clients are recognized ratably
over the expected term of the processing contract, ranging from 1 to 3
years. In limited circumstances, the Company has performed implementation
services for e-PROFILE clients that purchased software licenses from
Sanchez. In these instances, implementation fees are recognized when the
services are provided since these clients had the ability to use the
software internally for minimal cost or effort. Implementation fees for
e-PROFILE clients that do not ultimately execute processing agreements are
recognized in the period during which the project is terminated. Direct
costs related to implementation services for e-PROFILE clients are
deferred and recognized ratably over the expected life of the processing
arrangement or expensed as incurred, consistent with the related revenue
recognition. Revenue from software maintenance contracts is recognized
ratably over the term of the maintenance contract.
Contracts in process in the accompanying consolidated balance sheets
represent revenues recognized in excess of amounts collected or invoiced;
deferred revenues represent license and maintenance amounts collected from
or invoiced to customers in excess of revenue recognized and deferred
service revenues represents amounts deferred in accordance with SAB No.
101.
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.
INVESTMENTS
The Company has certain investments in technology service firms which are
accounted for on the cost method as the Company does not have significant
influence over its investees. Investments were $1.9 million and $1.7
million as of December 31, 2000 and 1999, respectively, and are included
in other non-current assets.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost, except for assets under capital
leases, which are recorded at the present value of future lease payments.
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.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed of" which requires impairment
losses to be recorded on long-lived assets used in operations when
indications of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. Management believes that there were no long-lived assets
that were impaired as of December 31, 2000 and 1999. Accordingly, there
were no adjustments to carrying values of fixed and intangible assets as
of December 31, 2000 and 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided over the estimated useful lives
of the related assets using the straight-line method. 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.
30
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.
There were no capitalized software costs during 2000. Total costs
capitalized in 1999 and 1998 were $1,081 and $353, respectively.
Accumulated amortization was $1,951 and $1,359 as of December 31, 2000 and
1999, respectively. Amortization of capitalized software costs amounted to
$592, $551 and $413 in 2000, 1999 and 1998, 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 2000, 1999
or 1998.
INCOME TAXES
The Company accounts for income taxes following the provisions of SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 requires deferred tax
assets or liabilities to be recognized for the estimated future tax
effects of temporary differences between the financial reporting and tax
basis of assets and liabilities based on the enacted tax law and statutory
tax rates applicable to the periods in which the temporary differences are
expected to affect taxable income. 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.
EARNINGS PER SHARE
The Company follows SFAS No. 128, "Earnings per Share", which requires
presentation of two amounts, basic and diluted earnings (loss) per share.
Basic earnings (loss) per share has been calculated as net earnings (loss)
divided by weighted average common shares outstanding, while diluted
earnings (loss) per share has been computed as net earnings (loss) 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,
--------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------
Weighted-average shares outstanding 24,912 23,911 23,042
Dilutive effect of
Warrants -- 41 208
Options -- 2,110 1,294
---------------------------------
Total common and diluted shares 24,912 26,062 24,544
---------------------------------
31
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(2) SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
At December 31, 2000, potentially dilutive common stock equivalents
include warrants to purchase 66,000 shares of common stock and options to
purchase 2,625,654 shares of common stock. All potentially dilutive common
stock equivalents were excluded from the calculation of net loss per share
for the year ended December 31, 2000, as their effect is anti-dilutive as
a result of the net loss incurred for the period. Additionally, for the
year ended December 31, 2000, the Company excluded e-PROFILE common stock,
which is convertible into shares of Sanchez common stock, due to the net
loss for the period. For the years ended December 31, 1999 and 1998, there
were no anti-dilutive common stock equivalents.
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. At January 1, 2001 the impact of SFAS No. 133 was not
material.
In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements." SAB No. 101 was required to be adopted by no later
than the fourth quarter of the year ending December 31, 2000; however, the
Company adopted SAB No. 101 in June 2000, effective January 1, 2000. The
Company's previous revenue recognition policy was in accordance with
generally accepted accounting principles. In accordance with SAB No.
101, the Company changed its revenue recognition policy to recognize
revenue from implementation services for e-PROFILE clients ratably over
the expected term of the processing arrangement versus recognizing such
revenue when the services were performed, due to a continuing
involvement with e-PROFILE clients. In limited circumstances, the
Company has performed implementation services for e-PROFILE clients
that purchased software licenses from Sanchez. Implementation fees
related to these services were recognized when the services were
provided since these clients have the ability to use the software
internally for minimal cost or effort.
The adoption of SAB No. 101 on 1999 results was recorded as a cumulative
effect of a change in accounting principle during the year ended December
31, 2000, resulting in an increase to net loss of $173, which represents
the net effect of deferring implementation revenue and costs that were
previously recognized in the fourth quarter of 1999. During the year ended
December 31, 2000, the Company recognized revenue and net earnings of $1.8
million and $173, respectively, which was previously recognized in 1999
and is part of the cumulative effect of the change in accounting
principle. The adoption of SAB No. 101 resulted in the Company deferring
$19.2 million of revenues and $6.2 million of earnings before income taxes
from implementation services performed during the year ended December 31,
2000. These amounts will be recognized over the expected term of the
processing contract. Pro forma disclosure for the years ended December 31,
1999 and 1998, present net income and earnings per share as if SAB No. 101
was in effect for all periods presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the fair value of its financial instruments,
which include cash and cash equivalents, accounts receivable and accounts
payable, approximate fair value.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current 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 goodwill, which is being
amortized over 10 years and is included in other non-current assets at
December 31, 2000 and 1999. Amortization expense was $127 and $117 for the
years ended December 31,
32
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(3) ACQUISITIONS - CONTINUED
2000 and 1999, respectively. Accumulated amortization was $244 and $117 as
of December 31, 2000 and 1999, respectively.
The following table displays the net non-cash assets and liabilities that
were acquired in 1999 in connection with the acquisition of ArTech:
Accounts receivable $ 474
Prepaid expenses 30
Property and equipment 232
Goodwill 1,270
Accounts payable and accrued expenses (843)
-------
1,163
Issuance of common stock (664)
-------
Net cash paid $ 499
=======
(4) CLIENT REVENUE DATA AND CONCENTRATION OF CREDIT RISK
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 2000 1999 1998
--------------------------------------------------------------------
A 11% * *
B * 12% *
C * 10% *
D * * 28%
* Less than 10%
At December 31, 2000 and 1999, the significant clients listed above
accounted for $760 (or 4%) and $3,262 (or 21%) 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,
------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------
U.S. and Caribbean $35,179 $26,898 $21,560
Western Europe 16,482 14,882 8,800
Central Europe 9,466 9,643 9,077
Canada 4,362 4,186 4,011
Other 2,918 798 611
---------------------------------------
$68,407 $56,407 $44,059
---------------------------------------
(5) SEGMENTS
The Company follows SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information". The Company classifies its operations
in two segments: Sanchez's software licensing business, including related
service and maintenance, and the e-PROFILE outsourcing business. The
Company evaluates the performance of its segments and allocates resources
to them accordingly.
33
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(5) SEGMENTS - CONTINUED
The table below summarizes the Company's business segments:
Year ended December 31,
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Revenues
Sanchez $ 53,530 $ 50,622
e-PROFILE 20,190 7,293
Eliminations (5,313) (1,508)
----------------------
Total 68,407 56,407
----------------------
Earnings (loss) from operations
Sanchez 4,807 9,979
e-PROFILE (15,434) (3,672)
----------------------
Total $(10,627) $ 6,307
----------------------
December 31,
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Total Assets
Sanchez $ 85,267 $ 57,699
e-PROFILE 35,784 6,586
Eliminations (25,731) (7,890)
----------------------
Total $ 95,320 $ 56,395
----------------------
(6) ACCRUED EXPENSES
Year ended December 31,
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Accrued compensation and related items $ 4,790 $ 1,573
Accrued subcontractors 2,204 1,105
Other 4,939 1,739
----------------------
$ 11,933 $ 4,417
----------------------
(7) SHAREHOLDERS' EQUITY
In May 1998, the Company's Shareholders approved and amended the articles
of incorporation to increase the number of the Company's authorized shares
of common stock from 50,000,000 to 75,000,000 shares.
The Board of Directors is authorized, subject to certain limitations and
without Shareholder approval, to issue up to an aggregate of 10,000,000
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, 2000, there are 1,081,046 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,
2000, 91,985 shares have been purchased under the ESPP.
34
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(7) SHAREHOLDERS' EQUITY - CONTINUED
The Company applies APB 25 and related interpretations in accounting for
option grants to employees and directors under its various stock option
plans. The company follows the disclosure requirements of SFAS. 123, "
Accounting for Stock-Based Compensation." Had compensation cost been
recognized consistent with SFAS No. 123, the Company's net earnings (loss)
and earnings (loss) per share would have been as follows:
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) As reported $ (6,072) $ 5,171 $ 7,034
Pro forma (9,625) 2,545 5,470
Basic earnings (loss) per share As reported (.24) .22 .31
Pro forma (.39) .11 .24
Diluted earnings (loss) per share As reported (.24) .20 .29
Pro forma (.39) .10 .22
The per share weighted-average fair value of stock options issued by the
Company during 2000, 1999 and 1998 was $8.66, $10.70, and $4.88,
respectively, on the date of grant using the Black-Scholes option-pricing
model. The Company used the following assumptions to determine
the fair value of stock options granted: 2000 - expected dividend yield
of 0%, risk free interest rate of 4.97% to 6.31%, expected volatility
of 50%, and an average expected life of five years; 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.
A summary of stock option activity is as follows:
Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning of year 2,876,035 9.75 3,218,830 6.12 2,078,922 2.75
Options granted 727,200 16.94 577,400 21.18 1,660,042 9.30
Options exercised (737,229) 5.84 (858,325) 3.89 (409,966) 1.41
Options cancelled (240,352) 17.35 (61,870) 8.99 (110,168) 7.95
--------------------------------------------------------------------------------------
Outstanding at end of year 2,625,654 12.14 2,876,035 9.75 3,218,830 6.12
--------------------------------------------------------------------------------------
Options exercisable 1,215,738 1,014,075 953,542
Shares available for future grants 1,081,046 1,567,894 83,424
35
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(7) SHAREHOLDERS' EQUITY - CONTINUED
The following summarizes information about the Company's stock options
outstanding as of December 31, 2000:
- -------------------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------------
Number Weighted Av. Weighted Av. Number Weighted Av.
Outstanding as Remaining Exercise Exercisable at Exercise
Range of Exercise Prices of 12/31/00 Contractual Life Price 12/31/00 Price
- -------------------------------------------------------------------------------------------------------------------------------
$0.835 to $3.375 297,821 5.27 $ 2.261 267,471 $ 2.135
$6.438 to $8.063 613,614 5.38 $ 7.757 422,608 $ 7.629
$9.844 to $13.313 915,701 4.69 $ 10.571 429,036 $ 10.391
$15.563 to $19.094 553,900 6.37 $ 15.635 $ 15.563
5,000
$27.000 to $42.375 244,618 5.44 $ 33.129 91,623 $ 31.555
--------------------------------------------------------------------------------------------
$0.835 to $42.375 2,625,654 5.34 $ 12.141 1,215,738 $ 9.231
--------------------------------------------------------------------------------------------
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.
The Company granted options in its e-PROFILE subsidiary to Sanchez and
e-PROFILE employees to purchase 262,050 and 946,200 shares of e-PROFILE's
common stock during the year 2000 and 1999, respectively. The exercise
prices range from $15 to $27.62 (weighted-average of $22.95) in 2000 and
$10 to $15 (weighted-average of $12.87) in 1999. The options vest over 2
to 3 years and expire 5 to 8 years after grant date.
The Company entered into a consulting agreement effective November 8, 1999
under which the Company was required to pay a total of $3.3 million for
consulting services, plus expenses. The services related to the
development of the e-PROFILE business, including designing a model to
scale the business, analyzing and prioritizing target client segments and
markets, analyzing the Company's pricing model and designing performance
metrics and measurement process, providing management support and vendor
assessments and certain marketing and other business development services.
The fee was payable in cash plus e-PROFILE common stock. The number of
shares to be issued was based on the initial public offering price of the
e-PROFILE common stock, however, e-PROFILE's initial public offering was
not consummated by November 1, 2000 and, as a result, the consultant
exercised its right to require Sanchez to pay for the stock-based portion
of the fee in shares of Sanchez common stock. Accordingly, in November
2000, the company issued 181,483 shares of its common stock to the
consultant with a fair value of $2,786. Total expenses under this
agreement, including the cash portion, were allocated ratably to sales and
marketing, product development and general and administrative expense
based on the services performed under the agreement and the areas that
benefited from the services.
During the year ended December 31, 1999, the Company recorded expenses
totaling $551 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 $14.32). 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.
In March 2000, the Company sold 108,590 shares of e-PROFILE common stock
for $27.62 per share to an accredited investor for cash of $3 million. In
July 2000, the Company sold 108,980 shares of e-PROFILE common stock to a
customer for cash of $3 million, which represented the fair value of the
stock based on cash transactions in the same
36
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(7) SHAREHOLDERS' EQUITY - CONTINUED
class of stock with unrelated third-party financial investors. The Company
also issued a warrant to the customer, which enabled the customer to
purchase additional shares of e-PROFILE common stock in the event of an
e-PROFILE public offering. There was no accounting for the warrant because
there was no measurement date prior to an e-PROFILE public offering. Under
the terms of the stock purchase agreement with the investor and the
customer, the parties have the right to require the Company to issue
shares of common stock equal to the purchase price divided by the average
market price of the Company's common stock for 15 days prior to the
anniversary of the closing. The investor exercised their conversion rights
in the first quarter of 2001 whereby the Company issued 285,827 shares of
its common stock in exchange for all of the shares of e-PROFLIE common
stock held by the parties. None of the e-PROFILE loss for the year ended
December 31, 2000 was allocated to the minority stockholders because of
their conversion rights
(8) INCOME TAXES
The components of the income tax provision (benefit) are as follows:
Year Ended December 31,
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Current taxes
Federal $ 580 $ 1,587 $ 3,460
State 152 346 652
Foreign 437 138 18
-----------------------------
1,169 2,071 4,130
Deferred taxes (4,075) 198 (401)
-----------------------------
Total provision $(2,906) $ 2,269 $ 3,729
-----------------------------
A reconciliation of the tax provision (benefit) based on the federal
statutory tax rate to the effective tax rate is as follows:
Year Ended December 31,
- --------------------------------------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Statutory tax provision (benefit) $(2,994) $ 2,529 $ 3,667
State income taxes, net of federal income tax
benefit 101 228 430
Foreign income taxes 437 138 18
Federal income tax credits -- (138) (18)
Foreign sales corporation (536) (510) (430)
Other, net 86 22 62
-----------------------------
$(2,906) $ 2,269 $ 3,729
-----------------------------
The tax effects of loss carryforwards, credit carryforwards, and temporary
differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities are presented below:
December 31,
- --------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities)
Accounts receivable allowances $ 241 $ 64
Accrued liabilities 1,619 548
Deferred service revenue 6,523 --
Deferred service expense (4,431) --
Capitalized software costs and intangibles (306) (482)
Net operating loss carryforward 566 --
Other 67 74
--------------------
Net deferred tax asset $ 4,279 $ 204
--------------------
37
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
At December 31, 2000, the Company has a federal net operating loss
carryforward of approximately $1.7 million, which expires in 2020.
(9) COMMITMENTS AND CONTINGENCIES
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, 2000 are as
follows:
2001 $ 2,031
2002 2,047
2003 1,682
2004 876
2005 735
Thereafter 1,156
----------
$ 8,527
----------
Rent expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $2,279, $1,566 and $869, respectively.
In February 2001, e-PROFILE filed for arbitration in response to
1stWebbankdirect's October 2000, termination of its processing agreement
in connection with the consolidation of its e-banking platforms. e-PROFILE
is seeking payment of all outstanding receivables from this customer ($1.4
million at December 31, 2000), as well as certain fees due for minimum
processing obligations. 1stWebbankdirect has counterclaimed and is seeking
a refund of the implementation fees they paid for the project. The Company
has not recognized implementation revenue or direct costs related to this
contract through December 31, 2000, in accordance with SAB No. 101. As of
this date, the Company is unable to estimate the amount of any potential
gain or loss.
(10) RELATED PARTY TRANSACTIONS
In April 1998, Safeguard Scientifics, Inc., ("Safeguard") a shareholder of
the Company 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's administrative services agreement with Safeguard, which
provided for payment, subject to achieving certain sales levels, of a
maximum fee of $25 per quarter was terminated as of April 1, 2000. The
Company expensed $25, $100 and $100 for the years ended December 31, 2000,
1999 and 1998, respectively.
The Company entered into an agreement in 1999, with Devon Air Services,
a charter airline company owned by Michael Sanchez, the Sanchez
chairman of the board. During the years ending December 31, 2000 and 1999,
the company incurred expenses under this agreement of $131 and $44,
respectively.
(11) PROFIT SHARING TRUST PLAN
The Company maintains a Profit Sharing Trust Plan (the "Plan") which
permits eligible participating members to contribute up to 20% of their
gross earnings. The Company will typically make a contribution equal to
100% of the first 3%, which an employee contributes, subject to a
statutory cap and may also make additional voluntary contributions. The
Company expensed $531, $371 and $258 related to the Plan during the years
ended December 31, 2000, 1999 and 1998, respectively.
38
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(12) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents the unaudited quarterly financial information
for the years 2000 and 1999:
- ---------------------------------------------------------------------------------------------------------------------------------
2000 QUARTER ENDED 1999 Quarter Ended
- ------------------------------------------------------------------------------------- ------------------------------------------
MAR 31 JUNE 30 SEPT 30 DEC 31 Mar 31 June 30 Sept 30 Dec 31
- ---------------------------------------------------------------------------------------------------------------------------------
Quarterly results per 10-Q:
Revenues $ 14,877 $ 16,414 $ 18,667 $ 20,020 $ 9,655 $ 13,911 $ 17,477 $ 15,364
Earnings (loss) before income taxes (4,839) (2,930) (1,580) 949 770 2,802 3,483 385
Net earnings (loss) (3,291) (2,166) (1,074) 733 493 1,793 2,582 303
Basic earnings (loss) per share (0.13) (0.08) (0.04) 0.03 0.02 0.08 0.11 0.01
Diluted earnings (loss) per share (0.13) (0.08) (0.04) 0.03 0.02 0.07 0.10 0.01
Net impact of SAB No.101:
Revenues $ (1,571)
Earnings (loss) before income taxes (405)
Net earnings (loss) (279)
Basic earnings (loss) per share (0.01)
Diluted earnings (loss) per share (0.01)
Revised quarterly results:
Revenues $ 13,306 $ 16,414 $ 18,667 $ 20,020 $ 9,655 $ 13,911 $ 17,477 $ 15,364
Earnings (loss) before income taxes (5,244) (2,930) (1,580) 949 770 2,802 3,483 385
Net earnings (loss) (3,565) (2,166) (1,074) 733 493 1,793 2,582 303
Basic earnings (loss) per share (0.14) (0.08) (0.04) 0.03 0.02 0.08 0.11 0.01
Diluted earnings (loss) per share (0.14) (0.08) (0.04) 0.03 0.02 0.07 0.10 0.01
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.
39
SCHEDULE II
Sanchez Computer Associates, Inc.
Valuation and Qualifying Accounts
For the years ended December 31, 2000, 1999 and 1998
Allowance for Balance at Charged to Costs Balance at
Doubtful Accounts Beginning of Year and Expenses Deductions End of Year
----------------- ----------------- ------------ ---------- -----------
Year ended December 31, 1998 $543,000 $ 100,000 $ 348,000 $ 295,000
Year ended December 31, 1999 295,000 -- 7,000 288,000
Year ended December 31, 2000 288,000 909,000 1,197,000
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 24 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 8, 2001
40
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, 2001 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, 2001 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, 2001 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, 2001" in its
definitive Proxy Statement relative to its May 24, 2001 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,
2001 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.
41
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 23)
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the years ended December 31, 2000,
1999 and 1998
Consolidated Statements of Shareholders' Equity for the years ended December
31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998
Notes to Consolidated Financial Statements
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years ended December 31,
2000, 1999 and 1998
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, 2000.
(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)
42
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 *
* 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.
43
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.
Dated: April 2, 2001 By: /s/ FRANK R. SANCHEZ
--------------------------------------
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: APRIL 2, 2001 /s/ MICHAEL A. SANCHEZ
------------------------------------------------
Michael A. Sanchez, Chairman of the Board
of Directors
Dated: APRIL 2, 2001 /s/ FRANK R. SANCHEZ
------------------------------------------------
Frank R. Sanchez, Chief Executive Officer and
Director (Principal Executive Officer)
Dated: APRIL 2, 2001 /s/ TODD A. PITTMAN
------------------------------------------------
Todd A. Pittman, Senior Vice President and CFO
(Principal Financial and Accounting Officer)
Dated: APRIL 2, 2001 /s/ JOSEPH F. WATERMAN
------------------------------------------------
Joseph F. Waterman, President, Chief Operating
Officer and Director
Dated: APRIL 2, 2001 /s/ LAWRENCE A. CHIMERINE
------------------------------------------------
Lawrence A. Chimerine, Director
Dated: APRIL 2, 2001 /s/ FREDERICK J. GRONBACHER
------------------------------------------------
Frederick J. Gronbacher, Director
Dated: APRIL 2, 2001 /s/ ALEX W. HART
------------------------------------------------
Alex W. Hart, Director
Dated: APRIL 2, 2001 /s/ KAILASH C. KHANNA
------------------------------------------------
Kailash C. Khanna, Director
Dated: APRIL 2, 2001 /s/ JOHN D. LOEWENBERG
------------------------------------------------
John D. Loewenberg, Director
Dated: APRIL 2, 2001 /s/ THOMAS C. LYNCH
------------------------------------------------
Thomas C. Lynch, Director
Dated: APRIL 2, 2001 /s/ JAMES R. STOJAK
------------------------------------------------
James R. Stojak, Director
Dated: APRIL 2, 2001 /s/ GARY C. WENDT
------------------------------------------------
Gary C. Wendt, Director
44
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 *
* 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.
45