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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, 1997
[ ] 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
Common Stock, no par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of shares of Common Stock held by non-affiliates
(based on the closing price on NASDAQ) on March 20, 1998 was approximately $95.7
million.
The number of shares of registrant's Common Stock outstanding as of March 20,
1998 was 11,244,041 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 20, 1998 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.
1
SANCHEZ COMPUTER ASSSOCIATES, INC.
INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
ITEM PAGE
NO. NO.
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Part I
1. Business................................................................... 3
2. Properties................................................................. 16
3. Legal Proceedings.......................................................... 16
4. Submission of Matters to a Vote of Security Holders........................ 16
4 A. Executive Officers of the Registrant....................................... 16
Part II
5. Market for Registrant's Common Equity and Related Stockholder Matters...... 19
6. Selected Financial Data.................................................... 20
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 20
7 A. Quantitative and Qualitative Disclosures About Market Risk................. 26
8. Financial Statements and Supplementary Data................................ 27
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................. 44
Part III
10. Directors and Executive Officers of the Registrant......................... 44
11. Executive Compensation..................................................... 44
12. Security Ownership of Certain Beneficial Owners and Management............. 44
13. Certain Relationships and Related Transactions............................. 44
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............ 45
2
PART I
Item 1. Business.
Sanchez Computer Associates, Inc. ("Sanchez" or the "Company") designs,
develops, markets, implements and supports comprehensive banking software,
called PROFILE(R) ("PROFILE"), for financial services organizations worldwide.
Sanchez's highly flexible PROFILE family of products is comprised of three
integrated modules which operate on open, client/server platforms. The primary
module, called PROFILE/Anyware, is a multi-currency bank production system which
supports deposit, loan, customer, transaction processing and bank management
requirements through multiple distribution channels, including the Internet. The
other modules are PROFILE/FMS, a multi-company, multi-currency, financial
management and accounting system, and PROFILE for Windows ("PFW"),
PROFILE/Anyware's multi-branch, multi-user graphical user interface. The PROFILE
system is currently licensed to 31 clients in 11 countries serving in excess of
350 financial institutions. Historically, the Company has focused its marketing
efforts in Central Europe and North America. Currently, the Company is targeting
three market segments, the Emerging Banking Market in which the Company seeks to
expand on its current market share, the Direct Banking Market where the Company
looks to expand upon its recent successes, and the Top-Tier Bank Market in which
the Company is seeking to build on its current client base and establish itself
as a significant participant.
Financial services organizations in the Emerging Banking Market can generally be
characterized as being located in areas with growing consumer banking bases,
often with a large number of branches and little enterprise-wide automation.
Sanchez, through the implementation of its PROFILE products, provides these
organizations with a fully automated system which addresses all core areas of
their data processing requirements, including head office operations, domestic
and international payments, new product introduction, customer analysis,
budgeting and forecasting, branch automation and deposit and loan processing.
The PROFILE products have the ability to adapt to diverse accounting,
operational and regulatory environments and have the flexibility to support a
broad spectrum of banking products and services. Because the PROFILE products
are scalable, they can be implemented within an infrastructure that supports an
organization's current operational requirements and, thereafter, be
incrementally expanded as the client's operational requirements increase. Since
1991, the Company has principally targeted banks in Central Europe and Canada;
and, in 1996, the Company expanded its marketing efforts to include financial
services organizations located in the Asian-Pacific Rim.
In 1997 the Company successfully expanded its business into the Direct Banking
Market. The Company defines the Direct Banking Market as the on-line retail
banking business conducted via alternate distribution channels by large
financial services institutions located throughout the world. The Company
believes that these organizations recognize that the emergence of electronic
commerce, together with the availability and acceptance of computer technology,
will ultimately cause a dramatic change in the consumer banking practices of
many of their customers. The Company predicts that the growth of electronic
commerce will result in a large increase in the volume of financial transactions
which occur on-line as well as a greater demand for customized products and
services. The Company believes that the capabilities of PROFILE will provide
financial services organizations with the technology to strategically respond to
this consumer banking evolution.
The Company's most recent market expansion targeted the Top-Tier Bank Market
where the Company made significant inroads during 1997. The Top-Tier Bank Market
is defined by the Company as encompassing the 1,000 largest global and regional
banks in the world. The Company believes that the systems architecture in most
top-tier banks is significantly outdated, and that many of these institutions
are actively evaluating replacements for their traditional legacy software
environments. New market factors such as the growth in electronic commerce and
bank channel proliferation are helping to fuel these evaluations. The Company
believes it has the opportunity to become a leading replacement alternative in
the Top-Tier Bank Market, based upon the flexible and integrated architecture of
its PROFILE/Anyware product. Further, the Company believes that its ability to
provide a single core processing system which can be utilized worldwide as
opposed to supporting different systems in each marketplace is a significant
advantage for large multi-national financial institutions.
Since 1987, the Company has maintained a series of strategic alliance agreements
with Digital Equipment Corporation ("Digital") and has marketed its products
principally through leads generated by the Digital sales force. In 1995, the
Company entered into an agreement with Hewlett-Packard Company
("Hewlett-Packard") and ported its software to Hewlett-Packard's HP-UX platform.
Also in 1995, the Company entered into an agreement with Oracle Corporation
("Oracle"); currently, the Company partners with Oracle in conjunction with
sales of the Company's PFW product. In
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mid-1996, the Company entered into an agreement with International Business
Machines Corporation ("IBM") and ported its software to IBM's AIX platform. The
Company markets PROFILE products through alliances with all four of these
vendors as well as its own enhanced direct sales force.
In 1996, the Company entered into a strategic relationship with the electronic
banking division of Price Waterhouse LLP ("Price Waterhouse"). During 1997,
Price Waterhouse and the Company engaged in various global joint marketing
activities and over 75 Price Waterhouse consultants were trained to implement
the PROFILE software solution. In December 1997, the Company entered into a
distribution and services agreement with ELBA CSB S.A., a newly formed
Poland-based bank technology services firm which is a subsidiary of ComputerLand
Poland S.A.. The Company anticipates using ELBA CSB's resources (approximately
200 employees) to train, implement and support PROFILE in Central Europe. In
addition, the Company anticipates forming additional alliances with other
complementary service organizations and systems integrators. The Company
believes that its alliance program will facilitate its market expansion in all
target markets.
Historically, the Company has derived effectively all of its revenues from the
marketing of its PROFILE products to financial services companies. Economic
changes within the financial services industry relative to information
technology expenditures, mergers and consolidations, and other factors could
materially impact the Company's revenues and results of operations.
Industry Overview
Emerging Banking Markets
Banks which comprise the Emerging Banking Market are generally located within
countries or regions which have experienced dramatic political, social and/or
economic changes during the past decade such as Central Europe, Russia, the
Asian-Pacific Rim, Mexico and Latin America. Many of these nations have also
aggressively embraced the privatization of industry, resulting in greater wealth
held by private citizens. As a result of such developments, financial services
organizations within the Emerging Banking Market have experienced large
increases in the demand for retail banking products. Financial services
organizations in the Emerging Banking Market, however, face significant
infrastructure impediments to meeting this increased demand. While these
organizations have often established extensive branch networks, these branches
normally operate as autonomous business units. Typically, selected customer and
transaction data are exchanged with the main office infrequently. The lack of
enterprise level integration has constrained the development and deployment of
sophisticated financial products and services, disabled the efficient
utilization of resources, and prevented bank management from acquiring
management information on a timely basis.
For these reasons, financial services organizations in the Emerging Banking
Market are faced with the necessity of modernizing their entire information and
processing infrastructure. In response, they have demonstrated a willingness to
invest in a centralized enterprise-server based solution. One of the principal
advantages of the technology contained in the Company's PROFILE product is that
it provides on-line access to up-to-date customer and balance sheet data
throughout the organization. The Company also believes that an on-line
enterprise-wide database is a requirement for electronic delivery channels such
as Automated Teller Machine ("ATM") networks, Point of Sale ("POS") networks,
and home banking, which are rapidly being introduced into these markets.
Although Canada does not meet the definition of an "Emerging Market", the
Canadian credit union marketplace has, in the last few years, identified the
need to upgrade their information and processing infrastructure. The Company
entered the Canadian credit union marketplace in 1991 and as of December 31,
1996, its software is responsible for processing the majority of credit unions
in the Provinces of British Columbia and Manitoba. In May of 1997, the Company
expanded its market share by licensing PROFILE to Credit Union Central of
Saskatchewan. PROFILE now serves over one million credit union customers in
Canada. The Company is also pursuing additional opportunities in the Canadian
credit union marketplace by partnering with certain customers.
The global market for international retail production banking solutions, which
encompasses the Emerging Banking Market, is so diverse and fragmented that
reliable market figures are not available. However, The Tower Group, a leading
financial industry research organization, estimated that, at any time, 950 bank
production system selections are being contemplated within the international
retail banking systems market, and it believes that number will increase about
6% per year as more banks in developing countries seek to modernize.
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Direct Banking Market
The Company believes that the competitive challenges presented by the emergence
of electronic commerce and the consumer demand for greater product and service
flexibility threaten to fundamentally alter traditional retail banking practices
in North America. The Company believes that this process will be further spurred
as the speed and commercial use of the Internet increases with the development
and deployment of higher bandwidth communication (the ability to transmit more
information in a shorter time). Furthermore, expanded Internet access through a
myriad of affordable devices (such as personal computers, Internet access
terminals, televisions and personal digital assistants) will also contribute to
greater use of the Internet. As a result, consumers will be more easily and
effectively able to search for the most attractive financial products and
services, thereby, reducing the relationship value provided by banks and further
increasing the commodity nature of their products. The Company believes those
consumers who are likely to utilize electronic commerce in this fashion comprise
a significant percentage of a typical organization's highly profitable
customers.
In response to these market challenges, financial services organizations within
the Direct Banking Market have begun to develop direct banking services by
offering a subset of their existing products and services through electronic
channels. Services currently provided include the ability to transfer funds, pay
bills, obtain account balances and track checks and deposits via personal
computer. The ability of these organizations to offer more innovative products
and services, however, is considerably constrained by their current information
technology systems. These systems, called production or transaction processing
systems, typically consist of large mainframe computers that are based on
software technology initially developed in the 1970s. Organizations in the
Direct Banking Market are dependent upon this technology and have made enormous
investments in it and the infrastructure required to support it. For these
reasons, they have historically resisted the wholesale replacements of these
legacy systems. Rather, they have chosen to surround these systems on the front
end with modern user interfaces and on the back end with data warehouse and
executive information applications.
The Company, however, believes that these efforts will not provide these
organizations with the necessary infrastructure to create the innovative
products and services required to preserve and expand market share. It also
believes that the current delivery cost structure of these organizations will
impair their ability to competitively price products. Due to the unique product
tailoring capability and delivery channel independence of the PROFILE/Anyware
products, the Company believes that it is positioned to supply the next
generation of infrastructure to these organizations.
Within the global Direct Banking Market, the Company has been targeting
financial institutions in the U.S. and Canada with assets of $4 billion or more.
This targeted group includes the top 100 banks in the U.S. and the top 10 banks
in Canada. In 1997, the Company had its first initial success with the licensing
of PROFILE to ING DIRECT, a subsidiary of the $300 billion global bank ING
Group. The Company quickly followed this success with the announcement of a
global agreement with ING Group.
Top-Tier Banking Market
In 1997, the Company witnessed a considerable increase in activity among
top-tier banks, (i.e., the 1,000 largest global and regional banks in the
world), that are evaluating a replacement for their traditional legacy software
environment. The Company believes that the systems architecture in most top-tier
banks is significantly outdated. New market factors such as electronic commerce,
banking channel proliferation and product commoditization are now requiring
these banks to re-evaluate their technical infrastructure. The Company has
worked toward positioning PROFILE as the best-in-class solution that will
support a large bank's business with flexibility and economy, regardless of what
strategic direction a bank may take, or how large its business might become. The
Company believes it has the opportunity to become a leading replacement
alternative in the Top-Tier Bank Market. In 1997, the Company penetrated this
market by licensing PROFILE to two top-tier financial institutions, ING Group
and Citibank Canada. ING Group is a $300 billion Deutsche financial services
organization. The license to Citibank, the U.S. based $311 billion global bank,
was for their Canadian retail operation.
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The Sanchez Strategy
The Company believes its most promising opportunities for growth lie in
increasing market share and broadening its scope of services in the Emerging
Banking, Direct Banking and Top-Tier Banking Markets. The Company plans to
pursue these objectives through the following strategic activities.
Increase Market Share in the Emerging Banking Market
The Company intends to expand its presence in the Emerging Banking Market,
principally by increasing its marketing activities in Central Europe and
continuing its marketing activities in the Asian-Pacific Rim. In addition, the
Company, in concert with its Canadian Credit Union service bureau customers,
plans to expand its presence among credit unions across Canada. The Company
believes that the marketing efforts of the Company's strategic partners, such as
Hewlett-Packard, IBM, Digital, Price Waterhouse and ELBA CSB S.A., will result
in the generation of additional sales leads for the Company, including
opportunities in Emerging Banking Markets not yet pursued directly by the
Company.
Broaden the Scope of Services provided in the Emerging Banking Market
The Company believes that the reception its products and services have received
in the Emerging Banking Market, particularly in Central Europe, provides the
opportunity to expand the scope of services which the Company provides to
organizations in this market, either directly or in conjunction with its
third-party partners. Accordingly, the Company intends to market additional
services and products to these organizations, including more expansive
consulting services, credit bureau services and technology infrastructure
planning. During 1997, the Company partnered with ComputerLand Poland. The
Company and ComputerLand believe that by combining their complimentary skills
and resources, they can jointly provide a higher level of service and support in
the Polish banking market. Further, the Company believes this alliance will
bring to the Polish market a unique mix of proven Western technology combined
with established Polish banking expertise. In late 1997, the Company and
ComputerLand entered into a joint venture and distribution agreement which
resulted in the formation of ELBA CSB S.A.. This institution intends to develop
a joint sales, marketing and service delivery strategy for the banking sector in
Poland, which may be expanded to include other Central European countries.
Become a Significant Participant in the Direct Banking and Top-Tier Banking
Markets
The Company intends to become a significant participant in the Direct Banking
and Top-Tier Banking Markets by marketing its PROFILE family of products as a
financial services organization's most appropriate response to the evolution
in consumer banking spurred by the emergence of electronic commerce. The
Company is positioning its PROFILE/Anyware product as part of a separate
infrastructure focused specifically on direct banking channels, but also as a
potential replacement for the existing production systems. The Company is
establishing strategic relationships with partners whom it believes will
together comprise a comprehensive banking solution. To this end, the Company
is continuing to leverage its third-party relationships to engage in joint
marketing and project implementation activities. In addition, the Company
anticipates forming additional strategic alliances with other complementary
service and application provider organizations.
As discussed above, a significant portion of the Company's growth strategy is
dependent upon: a) its continued success in the Emerging Bank Market of Central
Europe and b) acceptance of the Company's products and services in the more
recently targeted Top-Tier Bank and Direct Bank markets. It is important to note
that, the Top-Tier Bank Market is characterized by highly entrenched "legacy"
systems which are frequently difficult to displace, and the Direct Bank Market
is a newly developing market, whose ultimate size and growth rate is difficult
to predict.
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The Sanchez Solution
Sanchez's PROFILE product line addresses the needs of financial services
organizations in all three of the Company's target markets. Sanchez believes
that there is a trend toward globalization of banking practices which will
create a convergence of requirements between all three target markets. The broad
range of U.S. and Western banking functionality contained in the system enables
financial services providers in the Emerging Banking Market to offer financial
products and services previously unavailable to their customers. The multiple
channel delivery architecture also provides these institutions with the
infrastructure to support the rapidly evolving service expectations of their
customer base. Using the same software application and technology, Sanchez
enables organizations within the Direct Banking Market and Top-Tier Market to
effectively respond to changes in consumer banking preferences brought on by the
rapid increase in electronic commerce. In the Top-Tier Bank Market, the
Company's PROFILE/Anyware product provides a single core processing system which
can be utilized worldwide instead of supporting different systems in each
marketplace. The underlying capability of the PROFILE product line to tailor
products and services for individual bank customers and to deliver them over a
wide variety of consumer interfaces creates the differentiation necessary for
banks to compete in a modern marketplace.
A summary of the principal benefits of the PROFILE solution include:
Functional Benefits
- - Enables financial services organizations to dynamically create new
products and services and to tailor them for individual customers ("mass
customization")
- - Allows updates to the integrated on-line database to occur directly,
providing real-time reporting, processing, and analytic capabilities
- - Supports a variety of national and international wholesale, commercial and
retail payment systems, offering multiple payment and clearing options
- - Features integrated customer, deposit, loan and general ledger modules
which share a common database and software components, thus eliminating
traditional functional boundaries
- - Supports a combined set of North American and international product,
service, operational and transactional requirements providing a "global"
solution
- - Contains integrated data management and decision support tools, supporting
analytic, regulatory and production analysis and reporting requirements
Operational Benefits
- - Runs on multiple operating systems and multiple platforms (32 and 64 bit)
- - Offers a solution to both start-ups and multi-million account institutions
due to high degree of scalability
- - Enables database archiving whichprovides permanent, low-cost, transparent
transaction storage and on-line retrieval
- - Runs over multiple protocols (TCP/IP, DecNet) on local area and wide area
networks
Technical Benefits
- - Contains a messaging architecture which provides for the rapid integration
of existing and new delivery channels
- - Features standard industry application interfaces (APIs) which support
client/server model and cross application integration
- - Features two-tier and three-tier client/server architecture which
optimizes performance and workload distribution
- - Contains a data dictionary and other meta-data elements, including forms,
reports, documents, database triggers, procedures and interface
definitions which are managed through a tool set that the Company has
developed called DATA-QWIK, which enables the Company and its customers to
rapidly modify and extend the base application
- - Features an entity/relationship data model which can be projected over
relational, key indexed and object database systems, insulating the
application from the underlying database management system
The Company's success is heavily dependent upon the proprietary architecture and
design of its PROFILE products which are protected by a combination of copyright
and trademark laws, as well as various contractual provisions. Despite these
efforts to protect its proprietary rights, there can be no assurances that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competition will not develop similar technology independently.
Similarly, while the Company is not aware that any of its products infringe upon
the proprietary rights of third-parties, there can be no assurances that
third-parties do not claim such infringement.
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The Sanchez Products
The PROFILE line of products is a comprehensive software solution that addresses
the major operational requirements of commercial, retail, international and
wholesale banking institutions. The PROFILE product line consists of the
following three modules: (i) the PROFILE/Anyware core banking system, (ii) the
PROFILE/FMS Financial Management System and (iii) PROFILE for Windows. While
PROFILE/Anyware and PROFILE/FMS can operate independently, all three
applications can also be integrated into a cohesive and powerful enterprise-wide
banking solution. In general, while the most important features of PROFILE have
been internally developed, the Company also relies on software provided by
certain third parties for development languages, database environments and
certain application modules for treasury and trade finance product offerings.
The Company believes, however, that if such software were no longer available to
the Company, it could obtain substitute software from other sources.
PROFILE/Anyware
PROFILE/Anyware is a client/server application comprised of a wide-area
enterprise server and a local area, branch/department server. An integrated set
of application code provides a full range of customer, deposit, lending, and
branch functionality, which includes management reports, decision support
functions, and data analysis functions. PROFILE/Anyware provides both on-line
and batch interfaces to support a bank's transaction processing and inter/intra
clearing requirements. A detailed description of certain other key features of
PROFILE/Anyware follows:
Electronic Manufacturing. The architecture of PROFILE/Anyware was developed
utilizing a product manufacturing paradigm. This is in contrast to most banking
software in use today which was designed to automate accounting and transaction
processing activities. The Company believes that this is a fundamental
distinction. In a manufacturing environment, products are composed of
subassemblies and components. PROFILE/Anyware contains thousands of individual
software components that can be hierarchically assembled into subassemblies,
products and product packages. The components are shared across traditional
business lines and product boundaries within an institution. The electronic
manufacturing paradigm is further enhanced by the unique ability of
PROFILE/Anyware to assemble unique products for market segments as small as an
individual customer, a concept referred to as "mass customization" within this
"electronic factory", a financial services organization can provide the services
of a value-added intermediary and package products and services that support the
specific requirements of the individual. In a future release of PROFILE/Anyware,
the Company plans to offer software that will allow consumers to access these
capabilities through a self-directed origination component that will be
integrated into their home banking application.
Customer Oriented. PROFILE/Anyware contains all customer records, loan and
deposit account records and transactions in an integrated database. Different
customer types can be defined by the institution, and specific data can be
captured and maintained for each customer type. Customer demographics, interest
yields, profitability and transaction activity are available real-time for
inquiry or analysis. This data can be used to provide service-use-incentives,
bundled product packages and integrated reporting. The system provides the
ability to "drill down" from summary data to individual account activity, to the
source document images that support customer transactions. Customers can be
linked to each other to create affinity groups or other meaningful market
segments.
The data dictionary, along with other meta-data definitions such as input and
display forms, document layouts and reports can be modified or extended through
a tool set provided by the Company called DATA-QWIK to support a bank's unique
customer requirements. This feature supports the integration of data from
applications and databases operated outside of PROFILE/Anyware with the customer
database.
Open Architecture, Channel Independent, and Scalable. PROFILE/Anyware is a
client-server based application that supports a variety of industry standard
application interfaces (APIs) and message protocols. The supported APIs
currently include DLL, DDE, HTML, SQL and ODBC. 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.
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PROFILE/Anyware is a message-based application which allows it to be interfaced
to a wide variety of interface devices including traditional branches, ATM
networks, POS networks, kiosk devices, home banking applications on dedicated
networks and the Internet, and mobile computing devices.
PROFILE/Anyware currently runs on IBM's AIX platform, Hewlett-Packard's HP-UX
platform and Digital's UNIX/RISC platform, as well as Digital Open VMS. The
Company believes that these platforms provide the best price/performance ratios
available for commercial applications and are more scalable than current Intel
based platforms. PROFILE/Anyware has been installed and operated in institutions
ranging in size from startup banks with no initial customers to universal
regional banks with hundreds of branches and over 1.5 million accounts. It has
also been installed in service bureaus operating centrally for many
institutions. The Company believes that the ability to process very large
databases (50 million accounts and ten million transactions per day) and the
ability to operate on a 24-hour, seven days per week basis in real-time mode is
a requirement for its target markets and it is currently developing technology
that it believes can support these requirements.
On-line, Real-time, Continuous Availability. PROFILE/Anyware accepts on-line and
batch transactions from a variety of transaction sources and processes them in
real-time, ensuring the most up-to-the minute database state. Inquiries from any
client device can access the system on-line and retrieve the current status of
the database. Currently, the system accepts financial transactions 24-hours a
day. The Company is enhancing its software to accept non-financial activity,
such as account origination and maintenance, 24-hours a day as well. The Company
believes that this real-time capability will become a requirement for direct
banking applications.
International Functionality. PROFILE/Anyware is currently operating or being
installed in 11 countries and in six languages. It is a full 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
the requirements of its target markets will ultimately converge and that the
qualities of North American retail products and European payment systems will be
integrated into the other market.
PROFILE/FMS
PROFILE/FMS is an on-line, real-time, multi-company, multi-currency, cost center
based accounting system. It contains a very flexible financial reporting tool
that allows banks to develop their own portfolio of sophisticated bank
management and executive reports. This application allows users to record,
consolidate, report and plan all financial activity within an institution.
PROFILE/FMS modules include general ledger, accounts payable, fixed assets,
prepaid, accrued and deferred item processing, financial and statistical
reporting, budgeting and bank reconciliation. It is tightly integrated with
PROFILE/Anyware and shares a common database and application components.
PROFILE FOR WINDOWS
PROFILE for Windows is a graphical client for the PROFILE/Anyware enterprise
server with a centralized database. This product operates in a multi-branch,
multi-user client/server environment. The application provides banking
functionality under a graphical user interface, simplifying customer use and
navigation and providing enhanced customization and support of new product
features. PROFILE for Windows includes customer, teller and branch management
utilities.
The Sanchez Services
While PROFILE software license fees represent a material portion of the
Company's revenues, the Company also derives significant revenues from services.
The Company's primary service offerings include the following:
Project Services
Project Services are services provided on a one-time basis either during the
initial implementation or as contracted for by clients after conversion to
PROFILE. Implementation service revenues can range from $500,000 to over $4
million for an individual project, and are typically delivered over a period of
ten to 15 months. Other project services typically delivered during the
implementation period include training, conversion, localization and software
customization. These
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project services are staffed by professionals trained in the financial services
industry who primarily work at the clients' locations and follow a published
methodology employing proven project management and measurement techniques.
Project services delivered after a client converts to PROFILE typically include
software customization, training or version upgrade consulting. The Company has
a specific group of employees who are focused on delivering these types of
services, although others from within the Company may also render such services.
Historically, the Company has contracted for project services on a fixed price,
fixed scope basis. During 1997, the Company increasingly contracted for project
services on a time and material basis, at times in conjunction with its
third-party partners. The Company anticipates that this trend will continue in
1998 and beyond, with an increased emphasis of delivery of such services through
third-party partners.
Maintenance and Support Services
Currently, the major portion of the Company's delivery of worldwide customer
service and support is handled by a group in its headquarters in Malvern. This
group is responsible for help desk, research and product quality assurance. A
response team made up of research, quality assurance and programming personnel
is assigned when maintenance issues are identified. This team works together to
ensure that the customer issue is understood and dispatched accordingly. All
issues are tracked and measured and daily and weekly reports are generated for
management review and action.
The Company believes that service response considerations play a major role in
an institution's selection of banking software products. To respond to this
need, the Company is continuing to enhance its ability to deliver localized
customer support and installation capability worldwide, either directly or
through third-party partners. Currently, the Company provides direct customer
service and application support from its offices in Lisbon and Prague, and is in
the process of staffing its new office in Warsaw to provide similar services. At
this time, the Jakarta and Chester, U.K. offices are used for sales support and
they may, in the future, house application support capabilities if new business
dictates.
Sales and Marketing
Enhanced Direct Sales and Marketing Activities
The Company has a worldwide direct sales and sales support force of
approximately 15 people. The Company is actively recruiting additional resources
to increase its existing direct sales capacity, both domestically and
internationally.
The Company began developing a comprehensive marketing campaign in late 1997 in
an effort to increase recognition of the corporate brand in North America and
Europe. This campaign is an extension of the successful 1996 campaign that
introduced PROFILE to the North American marketplace. This new campaign is to be
launched in early 1998. The program includes a combination of print advertising,
public relations, partnering programs, white papers, and an informative home
page on the World Wide Web. Throughout 1996 and 1997, the trade media responded
with coverage of the Company and its products, including a number of lead
articles. The Company's executives also participated in speaking engagements at
industry trade shows and universities both in the U.S. and abroad. The Company
intends to continue to expand its marketing efforts to build a corporate and
product brand that is recognized throughout the industry.
Third-Party Relationships
Since 1987, the Company has maintained a strategic alliance relationship with
Digital and has marketed its products principally through leads generated by the
Digital sales force. In 1995, the Company entered into an alliance with
Hewlett-Packard and ported its software to that platform. In mid-1996, the
Company entered into similar activities with IBM. The PROFILE product is
currently available on all three platforms.
The Company is currently engaged in joint marketing and engineering activities
with its hardware alliance partners and has, to date, submitted joint proposals
with Hewlett-Packard, Digital and IBM. The Company believes that the strategic
alliance that it entered into with IBM in 1996 will significantly enhance its
competitiveness in the Direct Banking and Top-Tier Banking Markets where IBM is
the current dominant hardware vendor. The Company also believes that the recent
strategic alliances with both IBM and Hewlett-Packard will increase its
competitiveness in all markets and will result in greater lead generation.
10
In 1995, the Company entered into an agreement with Oracle, the leading
relational database vendor in the world. The two companies are involved in joint
marketing activities. The Company currently offers PROFILE for Windows on the
Oracle database and plans to offer all of its PROFILE products on the Oracle
database in 1999. In the future, the Company plans to offer its PROFILE products
on other commercial relational database products as well.
The Company's strategic alliance with Price Waterhouse expanded significantly in
1997. The alliance continues to increase worldwide PROFILE delivery capacity and
joint sales and marketing activities have increased the Company's exposure
around the world, allowing the Company to build upon the successes already
attained with PROFILE in the Company's target markets. In addition, the Company
anticipates forming alliances with other complementary service organizations in
the areas of third-party applications and systems integration. The Company
anticipates that its alliance program will continue to enhance its brand
recognition and increase market share in all target markets.
While the establishment of strategic alliances with third parties has been
important to the Company's past success and are a key to its future prospects,
the Company does not believe that its written understandings with such third
parties are necessary for the delivery of its products and services.
Pricing Strategy
The Company prices its software products in three primary components: (i)
one-time license fees for the software up to a usage limit (for example, number
of users or number of customer accounts), (ii) fees for a full range of services
which complement its software products, including product enhancement fees and
implementation, consulting, conversion, training and software customization
services and (iii) recurring support and software maintenance revenue. Customers
who exceed the usage limit through growth or acquisition pay additional license
fees. Software maintenance fees are paid in advance while all other fees and
services are paid in stages upon the completion by the Company of certain
defined deliverables.
In the Direct Banking Market, the Company may charge an ongoing monthly fee
which will cover licensing and support for PROFILE/Anyware based on use,
specifically the number of customer accounts processed, although the Company in
the future may employ other pricing models in response to market conditions.
In any given year, the Company typically has three to four customers who each
account for in excess of 10% of its total annual revenues. The inability of the
Company from year to year to obtain such large installation engagements could
have a material adverse effect on the Company's operating results.
Product Development
The Company believes that it must constantly evolve and enhance both the
functional scope and technical foundation of its products to remain competitive.
In order to accomplish this, the Company has historically incurred significant
expenses related to development activities and may increase this investment in
the future. Total development expenses for 1997, 1996 and 1995 were $7.0
million, $4.4 million and $3.8 million, respectively. In addition to its
internal investment, the Company has obtained funding from its customers and
partners for numerous projects, including the development of European payment
system and SWIFT enhancements, Treasury integration, UNIX ports and product
internationalization. This revenue is reflected in product enhancement fees.
Normally, customer or partner funding is provided in exchange for a commitment
by the Company to provide product enhancements, to support and maintain the
software, or to design the software to the client's needs. In certain cases,
however, royalty agreements have been negotiated with its customers or partners
whereby the Company pays them royalties based on the revenues received by the
Company from the licensing of specific software products to end users. These
royalty agreements ordinarily expire after a period of years and the Company is
thereafter free to license the products to end users without having to pay any
additional royalties.
Product development follows a formal software development life cycle process.
The Company has developed and acquired products that assist it in defining,
planning, tracking, measuring and managing the development process. The Company
realizes that large software projects can incur substantial cost, schedule and
technical risk. However, to date the Company has not canceled any of its
development projects.
In order to efficiently focus on both functional and technical requirements, the
product development area is subdivided into two groups called the Product
Development Group and the Technology Development Group. The Product
11
Development Group is primarily responsible for defining plans for new product
versions and developing application software enhancements to the existing
PROFILE/Anyware and PROFILE/FMS modules. This group is also directly involved in
sales and sales support events such as customer demonstrations and request for
proposal ("RFP") responses. The Company believes that interacting with customers
and prospects during the sales process transfers customer requirements and
exposes product strengths and weaknesses directly to the product management
staff, resulting in a more competitive offering.
The Technology Development Group is primarily responsible for defining
technology and platform layer enhancements to the existing PROFILE/Anyware and
PROFILE/FMS modules. This group evaluates and implements operating system ports,
programming languages, database systems, and development and productivity tools.
After this group successfully implements a new technology component under an
existing application component, it is responsible for propagating the technology
through the Company.
Complex software products such as those offered by the Company can contain
undetected errors or performance problems, particularly when first introduced or
when new versions are released. The Company's products have, from time to time,
contained software errors that were discovered after commercial introduction.
There can be no assurance that performance problems or errors will not be
discovered in the Company's products in the future.
Employees
As of February 28, 1998, the Company had 241 full-time employees, 106 of whom
were engaged in product development (including 32 of whom were employed in
technology development), 26 of whom were engaged in sales and marketing, 22 of
whom were engaged in finance and administration and 87 of whom were engaged in
operations/client services. The Company's employees are not represented by any
collective bargaining agreements, and the Company has never experienced a work
stoppage.
The Company believes that its continued success will depend, to a significant
extent, upon the efforts and abilities of its senior management, in particular
the Company's Chairman and its Chief Operating Officer. Further, the Company
believes that its future success will depend in large part upon its ability to
attract and retain highly skilled technical, management and sales and marketing
personnel. Competition for technical personnel is especially intense, and could
potentially constrain the Company's growth rate.
In addition to full-time employees, the Company has historically utilized the
services of various independent contractors, primarily for overseas
implementation projects and certain product development.
Competition
Financial institutions have two fundamental alternatives for obtaining data
processing capabilities: (i) in-house applications, either those that are
developed internally or those that are purchased from third party vendors and
(ii) outsourcing, either as a part of a total outsourcing solution or where a
third party acts as a service bureau. Until the introduction of client/server
technology, the only in-house processing systems offered were systems running on
mainframe or minicomputer hardware. In the U.S. market, client/server
application software has only recently been made available to banks, but it is
gaining market acceptance and market share. In the international market, there
are a number of client/server alternatives available, as well as traditional
mainframe and mini-computer based systems.
The Company's major competitors in all target markets are generally larger in
size and resources. Each competitor has a specific strategy, no particular niche
in the market and most are currently in a growth by acquisition and a defensive
marketing strategy. There is only one clear U.S. market leader, and all major
competitors tend to promote the fact that they are large in both
technology/professional resources and established clientele base. The Company is
well positioned to take advantage of this situation by positioning PROFILE as a
unique solution with an architecture unlike any in the industry. The Company's
primary competitors in the Top-Tier and Direct Bank Markets have been ALLTEL,
Fiserv, M&I and Hogan. In the Emerging Banking market competitors have been
ALLTEL, Fiserv, Anderson Consulting, Baton Rouge International and Kindel. In
addition, there are several UNIX based vendors which in the future could become
primary competitors as well as a number of local software organizations. In
Canada, the Company is replacing technology provided primarily by CDSL. This
technology has, in certain instances, been used by the credit unions for over
twenty years.
12
The Company believes that the principal competitive factors in the Emerging Bank
Market include the ability to: (i) demonstrate robust retail and international
banking functionality, including multi-currency and multi-language processing,
support of local regulations, and support of local payment systems, (ii) operate
on UNIX platforms, (iii) service a high volume of accounts and branches, (iv)
demonstrate a proven track record of successful implementations, (v) develop
local presence directly or through partnerships and (vi) demonstrate the ability
to process the new European Monetary Unit.
The Company believes that the principal competitive factors in the Direct
Banking Market include the ability to: (i) position direct banking as a market
segmentation strategy versus a delivery channel, (ii) reach decision makers of
financial institutions in the U.S. and Canada with assets in excess of $4
billion, (iii) connect PROFILE/Anyware to a wide variety of payment (e.g., Check
Free and Visa), middleware (e.g., Security First Technologies and Edify) and
client systems (e.g., Netscape and Intuit) and (iv) establish alliances and
partnerships with the above named vendors.
In the Top-Tier Bank Market segment, the Company believes that the principal
competitive factors are the ability to: (i) demonstrate robust retail and
international banking functionality, (ii) operate on UNIX platforms, (iii)
service a high volume of accounts and branches, (iv) partner with a wide variety
of payment, middleware and client system vendors, (v) demonstrate a proven track
record of successful implementations and (vi) reach decision makers of the top
1,000 banks in the world.
The Company believes that none of its current competitors offer application
software that provides the level of product manufacturing flexibility and
international scope of functionality that is featured in the Company's system.
The Company, however, expects additional competition from other established and
emerging companies as the client/server market continues to develop and expand.
In addition, competition could increase as a result of software industry
consolidations.
As mentioned above, many of the Company's competitors have longer operating
histories and greater competitive resources than the Company. These resources
may provide them with an advantage in terms of adapting to industry changes and
emerging technologies. Further, the client/server software market is
characterized by rapid technological change and frequent new product
introductions. New technologies and emerging industry standards can render
existing products and services obsolete in a very short period of time. The
Company's future success will depend upon its ability to enhance its current
products and to develop and introduce new products that keep pace with
technological developments and emerging industry standards, while addressing the
increasingly sophisticated needs of its customers.
Backlog
The Company's backlog at December 31, 1997 amounted to $34.7 million. The
components of the backlog were $12.4 million for software license, product
enhancement and implementation and consulting revenues and $22.3 million for
maintenance and support. The Company anticipates recognizing approximately $15.5
million of this backlog in the year 1998. At December 31, 1996, the Company's
backlog amounted to $19.8 million, consisting of $8.1 million for software
license, product enhancement and implementation and consulting revenues and
$11.7 million for maintenance and support.
13
Glossary
ACH Automated Clearing House. A processing and
delivery system that provides for the
distribution and settlement of electronic credits
and debits among a large number of financial
institutions.
AIX IBM's implementation of the UNIX operating
environment.
API Application Programming Interface. A defined
calling standard for a software module that
provides a consistent, standard set of calls to
access the functions provided by the module.
Client/Server System architecture in which the server
Architecture component acts as the source of data and
the client component uses the data to perform
various functions.
DCS Distributed Control System. A control system
architecture developed in the 1970s.
DDE Dynamic Data Exchange. A Microsoft-Registered
Trademark- 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.
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.
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.
Multi-platform Processes or pieces of hardware that operate on
various hardware and software systems without
modification.
ODBC Open Database Connectivity. The
Microsoft-Registered Trademark- 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.
14
Glossary (continued)
Open Systems System design that allows users to take advantage
Architecture 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.
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.
Turnkey Hardware and software applications that fulfill
all of a customer's predefined requirements at
the time of purchase.
UNIX UNIX is a highly modular operating system or
family of operating systems that provides
multi-user, multi-tasking capabilities on a wide
variety of platforms.
WAN Wide-Area Network. A network that allows
communications between locations.
15
Item 2. Properties.
The Company's headquarters and principal administrative, sales and marketing,
and application development operations are located in approximately 46,000
square feet of leased space in Malvern, Pennsylvania. These leases expire in
2003. The Company also leases office space in Warsaw, Poland; Prague, Czech
Republic; Lisbon, Portugal; Chester, U.K. and Jakarta, Indonesia. The Company
anticipates that additional space will be required as the business expands and
believes that it will be able to obtain suitable space as needed.
Item 3. Legal Proceedings.
In the opinion of management, there are no claims or actions against the Company
the ultimate disposition of which will have a material adverse effect on the
Company's results of operations or consolidated financial position.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the fourth quarter of 1997.
Item 4A. Executive Officers of the Registrant.
The executive officers of the Company are as follows:
- --------------------------------------------------------------------------------
Name Age Position
- --------------------------------------------------------------------------------
Michael A. Sanchez...... 40 Chairman of the Board of Directors
Frank R. Sanchez........ 41 President, Chief Operating Officer and Director
Ronald J. Zlatoper...... 56 Chief Executive Officer and Director
Joseph F. Waterman...... 46 Senior Vice President, Treasurer and Chief
Financial Officer
Stewart A. Jack......... 50 Managing Director of European Operations
Richard H. Jefferson.... 41 Managing Director, Asian-Pacific Rim
Deborah C. Kovacs....... 35 Senior Vice President - Product Management
Thomas F. McAllister.... 50 Senior Vice President - Client Services
Dan S. Russell.......... 47 Senior Vice President - Technology Development
Daniel W. Sollis........ 39 Senior Vice President - Sales
John H. Teaford......... 50 Senior Vice President - Strategic Alliances
Michael L. Turner....... 44 Senior Vice President - Business Development
16
Michael A. Sanchez founded the Company in 1979 and has been its Chairman since
its inception. He also served as Chief Executive Officer from inception until
April 1997. In addition to providing strategic direction for the Company, Mr.
Sanchez is currently responsible for overseeing Sanchez's marketing activities.
Mr. Sanchez has over 18 years' experience in financial services organization
data processing systems. Mr. Sanchez is the brother of Frank R. Sanchez, the
Company's President and Chief Operating Officer.
Frank R. Sanchez has been the President and Chief Operating Officer of the
Company since 1994 and a Director of the Company since his employment with the
Company began in 1980. In his capacity as Chief Operating Officer, Mr. Sanchez
is responsible for the sales and technology development functions of the
Company. He was the principal architect of the PROFILE integrated banking system
and continues to be responsible for developing the Company's product and
technical strategy. From 1980 until 1994, Mr. Sanchez was the Executive Vice
President in charge of Technology and Product Development. Mr. Sanchez is the
brother of Michael A. Sanchez, the Company's Chairman.
Ronald J. "Zap" Zlatoper has been the Chief Executive Officer since joining the
Company in April 1997. Mr. Zlatoper oversees the areas of finance, product
management, client services and administration. Prior to joining the Company,
Mr. Zlatopher retired from the U. S. Navy in November 1996 as a four-star
admiral after 33 years of service. He served as Commander in Chief of the U.S.
Pacific Fleet from 1994 until his retirement. From 1991 to 1994, he served as
Chief of Naval Personnel and Deputy Chief of Naval Operations for Manpower and
Personnel.
Joseph F. Waterman has been a Vice President and the Chief Financial Officer of
the Company since he joined the Company in August 1992. Mr. Waterman is
generally responsible for the Company's financial, legal, human resources and
management information system areas. Prior to joining the Company, Mr. Waterman
was employed by Safeguard Scientifics, Inc. ("Safeguard") and/or certain of its
partnership companies for 13 years. In particular, from 1990 to 1992, Mr.
Waterman served as Vice President of Finance of Computer Factory (an
organization that had been acquired by CompuCom Systems, Inc. ("CompuCom")) and
from 1987 to 1988, Mr. Waterman served as the Chief Financial Officer of
CompuCom.
Stewart A. Jack joined the Company as Managing Director, European Operations, in
May 1996. Mr. Jack's principal responsibility is developing opportunities in the
European marketplace. From 1992 through May 1996, Mr. Jack was the Managing
Partner of IDOM Poland. His principal activity in that capacity was to develop
information technology strategies and evaluate information technology options
for financial institutions. From 1989 to 1992, Mr. Jack was employed by
Hofflinghose, a Bermuda-based commodities trading group where he was the
Controller. Prior to his joining Hofflinghose, Mr. Jack had a 20-year career in
banking operations and information technology management at financial
institutions in Saudi Arabia, the United Arab Emirates and the United Kingdom.
Richard H. Jefferson has served as Managing Director, Asian-Pacific Rim, since
January 1996. His responsibilities include business direction and performance
for the Company in the Asian-Pacific Rim. Prior to joining the Company as an
employee, from 1989 to December 1995, Mr. Jefferson worked as an independent
consultant for the Company on various banking projects, including
internationalization of software. During this time, Mr. Jefferson was also
co-founder of two banking-related software companies. Mr. Jefferson has over 15
years of experience in system architecture and database design.
Deborah C. Kovacs has been employed by the Company since 1988 and has been the
Senior Vice President of Product Management since August 1994. Ms. Kovacs, who
has over 10 years of experience in the design, development and implementation of
banking and trust systems, is responsible for functional enhancements to the
PROFILE product line. Upon her employment with the Company, Ms. Kovacs served as
a Product Analyst until 1992 when she was promoted to Product Manager for the
European Banking System. Prior to joining the Company, from 1985 to 1988, Ms.
Kovacs was employed by Premier Systems, Inc., a developer of trust and
investment software and a Safeguard partnership company, as Manager of the
Application Team and Technical Consultant where she was responsible for
implementing scheduled system enhancements.
17
Thomas F. McAllister has been the Senior Vice President-Client Services since
joining the Company in August 1994. In this position he is responsible for the
Company's client management activities, including support, implementation and
training services. Prior to joining the Company, from 1987 to 1994, Mr.
McAllister was the Principal of Thomas F. McAllister and Associates where he
provided expertise in the areas of general operations, information technology
management, TQM and strategic and tactical planning. Mr. McAllister has over 27
years of banking industry experience, which included service as Senior Vice
President of Operations and MIS for First New Hampshire Banks.
Dan S. Russell has been employed by Sanchez since 1985 and has been the Senior
Vice President of Technical Development since 1994. Mr. Russell, who has over 25
years of industry experience, is generally responsible for all technology-based
development and the underlying architecture of the PROFILE product line. When
Mr. Russell joined the Company in 1985, he served as the Manager of Development
and was promoted to Vice President of Development in 1987 where he was
responsible for both product and technology development. Mr. Russell remained in
the latter position until his promotion to Senior Vice President in 1994.
Daniel W. Sollis has been employed by the Company since April 1996, serving as
Senior Vice President of Sales since November 1997. Mr. Sollis, who began his
career with the Company as vice president of North American sales, now oversees
worldwide sales activities and business development. Prior to working at the
Company, Mr. Sollis spent 16 years with Digital Equipment Corporation, beginning
as a sales representative and concluding his tenure there as general manager of
financial service industry business in Canada.
John H. Teaford has been Senior Vice President of Strategic Alliances with the
Company since February 1998. Mr. Teaford's responsibilities include researching
and establishing third-party partnerships, joint ventures and other business
opportunities worldwide. From 1985 until February 1998, Mr. Teaford periodically
worked in a consultant capacity with the Company. During that period, he was
President of J.H. Teaford and Company, a financial advisory, marketing and
management consulting company. Prior to that, Mr. Teaford served as President,
Chief Operating Officer and Director of Aloette Cosmetics, Inc., a franchiser,
manufacturer, marketer and distributor of cosmetics and skin care products. Mr.
Teaford also has extensive experience in sales, marketing, financial services,
technology and manufacturing industries, both domestically and internationally.
Michael L. Turner joined the Company in August 1991. He has served as Senior
Vice President of Business Development since 1994. He is responsible for
managing account relationships with Global Customers. From August 1991 to 1994,
Mr. Turner served as Vice President Services. Prior to joining the Company, Mr.
Turner held various senior management positions in various information
technology services businesses, including Vice President for Finance and
Operations of GDK Systems, Vice President, Business Management at SEI, Inc. and
as a Senior Manager with Andersen Consulting.
18
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
The Company's Common Stock has been listed on the National Market System of
Nasdaq under the symbol "SCAI" since it began trading on November 14, 1996. The
following table sets forth, on a per share basis for the periods shown, the
range of high and low sales prices of the Company's Common Stock as reported by
Nasdaq.
High Low
--------- ---------
Fiscal Year 1996:
Fourth quarter $ 22 $ 6 5/8
Fiscal Year 1997:
First quarter 9 5/8 3 9/16
Second quarter 10 3/8 5
Third quarter 19 1/4 9 1/8
Fourth quarter 29 7/8 14 1/2
As of March 20, 1998, the Company had outstanding 11,244,041 shares of Common
Stock held by approximately 8,600 shareholders including beneficial owners of
the Common Stock whose shares are held in the names of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
Holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of outstanding Preferred
Stock. To date, the Company has not paid any cash dividends on its Common Stock
and does not expect to declare or pay any cash or other dividends in the
foreseeable future. The Company's financing arrangements currently do not
prohibit the Company from declaring or paying dividends or making other
distributions on the Common Stock.
The Company made its initial public offering through a registration statement on
Form S-1 (File #333-12863) which was declared effective on November 13, 1996.
The net offering proceeds to the Company from the offering amounted to
$11,752,265 after deducting expenses. From the effective date of the
registration through December 31, 1997, the Company has utilized the net
offering proceeds for the following purposes:
Purchases of equipment and leasehold improvements $ 1,306,000
Product development 7,017,434
Sales and marketing 3,428,831
----------------------
Total expenditures $ 11,752,265
19
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.
1997 1996 1995 1994 1993
-------------- ---------- ------------ --------------- ----------
In thousands, except per share data
Statement of Operations Data:
Revenues................................ $ 28,302 $ 17,715 $ 16,842 $ 15,516 $ 11,317
Income before income taxes.............. 5,004 1,540 2,709 2,080 518
Net income.............................. 3,453 1,075 1,587 3,038 463
Basic earnings per share................ $ .32 $ .13 $ .19 $ .39 $ .06
Diluted earnings per share.............. $ .29 $ .12 $ .17 $ .33 $ .05
Weighted average common shares outstanding
10,951 8,489 8,279 7,846 7,846
Weighted average common and dilutive
shares outstanding................... 11,883 9,300 9,588 9,284 9,068
Balance Sheet Data:
Cash and cash equivalents............... $ 12,799 $ 15,446 $ 5,546 $ 2,656 $ 365
Working capital......................... 20,601 19,321 4,902 2,318 (320)
Total assets............................ 33,046 28,168 12,265 8,530 3,593
Long-term debt, including current portion
524 442 341 242 174
Total shareholders' equity.............. 23,200 18,910 5,605 3,785 747
Other Operating Data:
Backlog:
License and services.................... $ 12,402 $ 8,093 $ 5,816 $ 9,438 $ 1,576
Maintenance............................. 22,300 11,704 11,809 10,284 5,484
----------- ------------ ------------- ------------- ---------------
Total backlog........................... $ 34,702 $ 19,797 $ 17,625 $ 19,722 $ 7,060
Revenue per full time equivalent employee
$ 139 $ 123 $ 114 $ 121 $ 91
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following information should be read in connection with the information
contained in the Consolidated Financial Statements and notes thereto appearing
elsewhere in this Annual Report on Form 10-K.
This Item 7 and Item 1, Business, contain forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements.
Overview
The Company designs, develops, markets, implements and supports comprehensive
banking software, called PROFILE, for financial services organizations
worldwide. Sanchez's highly flexible PROFILE family of products is comprised of
three integrated modules which operate on open, client/server platforms. The
primary module, called PROFILE/Anyware, is a multi-currency transaction
processing system which supports deposit, loan, customer and bank management
requirements through multiple distribution channels, including the Internet. The
other modules are PROFILE/FMS, a multi-company, multi-currency, financial
management and accounting system and PROFILE for Windows ("PFW"), a graphical
user interface for PROFILE/Anyware. The PROFILE system is currently licensed to
31 clients in 11 countries serving in excess of 350 financial institutions.
20
The Company derives its revenues from license fees, recurring maintenance fees
and professional services fees related to its software products. License and
service fees are paid in stages upon the completion by the Company of certain
defined deliverables. The Company recognizes revenue from these fees using the
percentage-of-completion contract accounting method. Typically, the client
implementation projects to which these fees relate have a 10 to 15-month
duration. Recurring maintenance fees are normally billed annually in advance and
recognized into revenue ratably over the period covered.
The Company posted the strongest operating results in its history for the year
ended December 31, 1997. During 1997, 10 contracts, valued at more than $40
million, were executed with banking organizations in seven countries. Revenues
for 1997 increased by 60% to $28.3 million compared to $17.7 million in 1996,
reflecting increased demand for the Company's products and services,
particularly in the United States and Canada. Net income for the year ended
December 31, 1997, increased to $3.5 million, or $.29 per diluted share,
compared to $1.1 million, or $.12 per diluted share, in 1996, an increase of
142% in earnings per share.
The Company's backlog at December 31, 1997 amounted to $34.7 million. The
components of the backlog were $12.4 million for software license, product
enhancement and implementation and consulting revenues and $22.3 million for
maintenance and support. The Company anticipates recognizing approximately $15.5
million of this backlog in 1998. At December 31, 1996, the Company's backlog
amounted to $19.8 million, consisting of $8.1 million for software license,
product enhancement and implementation and consulting revenues and $11.7 million
for maintenance and support.
Historically, the Company's revenues were dependent upon opportunities developed
by its first hardware manufacturing partner, Digital, and by the Company 's
direct marketing efforts. Since the beginning of 1995, the Company has
established marketing agreements with IBM, Hewlett-Packard, Oracle, Price
Waterhouse and most recently, via a joint venture agreement, with ELBA CSB S.A.,
Poland's largest bank technology services firm. Although substantially all of
the Company's revenues prior to 1997 have been generated in conjunction with
systems running on Digital platforms, the Company completed its first project on
an IBM platform in 1997, and also expects to complete its first installation on
a Hewlett-Packard platform during 1998. The Company intends to continue to work
with all of its various partners to identify future opportunities. In addition,
the Company has been investing additional resources to enhance its own direct
sales and marketing efforts.
The Company made a strategic decision in early 1996 to increase its investment
in technology and product development, in particular as it relates to
PROFILE/Anyware, as well as certain other projects such as the development of
its PFW graphical user interface client and the completion of the adaptation, or
"porting," of the Company's software to operate on different hardware platforms.
As a direct result of these investments, the Company currently has two clients
in "live" operation on UNIX platforms (one IBM-based, the other Digital-based),
and is actively working toward an initial conversion for its first PFW client in
1998. The Company has continued increasing its investment in these areas and, as
indicated below, product development expenditures increased significantly on a
dollar basis in both 1997 and 1996.
Further, the Company continues to increase its investment in sales and marketing
activities. In addition to its continuing efforts in the Emerging Bank Market,
Direct Bank Market, and Canadian Credit Union Market, the Company initiated
certain sales and marketing efforts (during 1997) geared toward the Top-Tier
Banking Market, (defined as the 1,000 largest global and regional banks in the
world). The Company has concluded that the flexible and integrated architecture
of its PROFILE/Anyware product makes it an excellent fit for international
financial institutions seeking a single core processing system which can be
utilized worldwide vs. supporting different systems in each marketplace. Also,
the market for Direct Bank products is frequently a sub-component of the larger
Top-Tier Bank Market.
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 and
earnings patterns. This variability is typically driven by significant events
which directly impact the recognition of project-related revenues. Examples of
such events include the timing of new business contract closings and the
initiation of license 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 a significant implementation project roll out and the related
revenue recognition. The timing of revenues is difficult to forecast because the
Company's sales cycle is relatively long in the case of new clients and may
depend on factors such as the size and scope of the project, length of contract
negotiations and general economic conditions in a particular sales
21
prospect's country of origin. Because a high percentage of the Company's
expenses are relatively fixed, a variation in the timing of the initiation or
the completion of client projects, particularly at or near the end of any
quarter, can cause significant variations in operating results from quarter to
quarter.
The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 software failures. Accordingly, the Company has
been actively evaluating the impact of the Year 2000 on both its PROFILE product
line as well as its internal systems and hardware. Relative to the PROFILE
product line, all versions of PROFILE sold and installed since late 1996 are
believed to be Year 2000 compliant. Further, due to system retrofits performed
for the Company's Canadian credit union clients during 1997 and early 1998, the
Company believes that these systems are also Year 2000 compliant. The cost to
the Company of the Canadian version retrofits was approximately $200,000. All
other clients using software installed prior to late 1996 are entitled to
receive upgraded Year 2000 compliant software as part of their software support
agreements with the Company, and they have been encouraged to upgrade. To the
extent the Company gets directly involved in any such upgrade process, the
client pays for professional services and expenses. Further, the Company
believes that its recently acquired Greystone-M database product (see notes to
the consolidated financial statements) is fully Year 2000 compliant.
Accordingly, the Company believes it will not be materially impacted by the Year
2000 situation relative to any of its product offerings.
As to its own internal software systems and hardware, the Company has identified
and reviewed all key areas, and has concluded that there is no significant
exposure to the Year 2000 issue. The cost of upgrading or replacing certain
non-compliant hardware and software is estimated to be less than $100,000.
The Company's forward-looking statements about its revenues, earnings and
business development have been derived from its operating budgets and forecasts,
which are based upon detailed assumptions about many important factors. Several
important factors may cause the Company's actual results to differ materially
from those contemplated by any forward-looking statements made by the Company.
These factors include the course of business in the financial services industry,
competition among software companies serving that industry, the Company's
management of the long sales cycle for its products, the timing of new contract
closings and other significant events of revenue recognition affecting the
Company's quarterly results, the development of the Direct, Emerging and
Top-Tier Banking Markets and market acceptance of the Company's products within
these markets and the Company's ability to continue to improve its products.
22
Results of Operations
The following table sets forth for the periods indicated selected statement of
operations data:
----------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------------------
Dollars in thousands 1997 1996 1995
Revenues
Software license fees.......................... $ 13,999 $ 7,793 $ 6,532
Product enhancement fees....................... 1,478 868 1,797
Implementation and consulting services......... 7,701 4,762 4,496
Software maintenance fees...................... 5,124 4,292 4,017
----------------- --------------------- ---------------------
Total revenues.............................. $ 28,302 $ 17,715 $ 16,842
================= ===================== =====================
Percentage Relationship to Total Revenues
Revenues
Software license fees.......................... 49.5% 44.0% 38.8%
Product enhancement fees....................... 5.2 4.9 10.7
Implementation and consulting services......... 27.2 26.9 26.7
Software maintenance fees...................... 18.1 24.2 23.8
----------------- --------------------- ---------------------
Total revenues.............................. 100.0 100.0 100.0
Operating expenses
Product development............................ 24.8 25.1 22.8
Product support................................ 10.8 12.1 11.7
Implementation and consulting.................. 19.5 17.2 18.9
Sales and marketing............................ 14.2 17.4 12.4
Royalties and sublicense fees.................. 4.9 12.7 7.9
General and administrative..................... 11.2 8.6 10.8
----------------- --------------------- ---------------------
Total operating expenses.................... 85.4 93.1 84.5
Income from operations............................ 14.6 6.9 15.5
Interest income, net.............................. 3.1 1.8 .6
----------------- --------------------- ---------------------
Income before income taxes........................ 17.7 8.7 16.1
Income tax provision.............................. 5.5 2.6 6.7
----------------- --------------------- ---------------------
Net income........................................ 12.2% 6.1% 9.4%
================= ===================== =====================
1997 Compared to 1996
Revenues. The Company's revenues increased by $10.6 million, or 59.8%, to $28.3
million in 1997, as each revenue category improved over 1996. Software license
fees increased by $6.2 million, or 79.6%, primarily due to new contracts closed
during the year in the Canadian and U.S. markets. Implementation and consulting
service fees increased by $2.9 million, or 61.7%, in 1997 over 1996, with most
of the growth being derived from implementation projects in Canada, the United
States and Asia. Product enhancement fees increased by $610,000, or 70.3%, over
1996 levels due to funded enhancement work associated with the Company's entry
into certain new geographic markets. Software maintenance fees increased by
$832,000, or 19.4%, over 1996 levels, primarily due to the larger installed
client base in 1997.
Product development. The Company's product development is primarily internally
funded. The Company, however, periodically is able to obtain partial funding for
certain development from its partners or clients. Such fees are included in
product enhancement fee revenues. Product development expenses increased by $2.6
million, or 57.8%, in 1997, due to the ongoing impact of the Company's strategic
decision to increase investment in development for various technology projects,
including the porting of its software to additional platforms and enhancements
to PROFILE/Anyware. In particular, there were significant staffing additions in
this area throughout 1997, as well as an increase in utilization of third-party
programming resources relative to 1996 levels.
23
Product support. Product support expenses increased by $908,000, or 42.3%, in
the year ended December 31, 1997, primarily due to substantial increases in
staffing levels in 1997 required to support the larger converted client base, as
well as the impact of having a full year of expenses for the Prague, Czech
Republic support office, which was opened during 1996.
Implementation and consulting. Implementation and consulting expenses increased
by $2.5 million, or 81.3%, in the year ended December 31, 1997, primarily due to
a corresponding increase in implementation and consulting revenues of $2.9
million (a 61.7% increase relative to the 1996 year). The primary components of
this cost increase were the increased utilization of third-party consultants and
subcontractors required to support the increased revenue levels, increased
internal staffing and related overhead, and certain non-reimbursable project
travel costs. The gross margin relative to associated revenues decreased in 1997
to 28.3% from 36.1% in 1996, due primarily to more extensive utilization of more
costly third-party resources as well as higher costs with respect to two
fixed-fee client implementation projects.
Sales and marketing. Sales and marketing expenses increased by $948,000, or
30.7%, in the 1997 year, as the Company continued to increase its direct
coverage in this area, primarily via staffing increases in selected foreign
market locations. In conjunction with the increased 1997 staffing and revenue
levels, both travel and commission expense increased significantly in 1997
relative to 1996 levels. Although the Company will continue to encourage sales
prospects generated through its various third-party partners, management also
believes it is important for the Company to continue to increase its own direct
sales efforts.
Royalties and sublicense fees. The Company is obligated to pay royalties based
on the collection of certain license fees. These obligations have varying terms.
The Company is also obligated to pay sublicense and maintenance fees to certain
third-party licensors, primarily related to treasury and trade finance product
offerings and also for the M programming language and database. These amounts
will vary depending upon the applicable revenue components subject to such fees.
For the year ended December 31, 1997, this expense category declined by
$866,000, or 38.4%, relative to the 1996 level. The primary reason for this
decline is a $735,000 decrease in royalty expense in the 1997 period,
attributable to a lower level of license fees subject to royalty payment.
General and administrative. These expenses increased during the year ended
December 31, 1997 by $1.6 million, or 107.5%, due primarily to a $500,000 bad
debt allowance which was established during the fourth quarter. This reserve is
required primarily due to an implementation contract in the Asian marketplace
which has been suspended pending the resolution of the financial and currency
crisis in that region. Absent the impact of this reserve, general and
administrative expenses would have increased by $1.1 million, or 74.8%, relative
to 1996 levels. The $1.1 million increase is attributable to a number of factors
which include additional expenses related to being a public company, as well as
increased costs related to the growth of the business including increased
staffing, increased costs related to employee recruitment and training costs for
certain third-party partners.
Interest income, net. Interest income, net, increased by $552,000 in 1997 due to
income earned on higher invested cash balances, primarily attributable to the
$11.8 million of net proceeds generated by the Company's initial public offering
in December 1996.
Income tax provision. Taxes in 1997 were 31% of income before income taxes, as
compared to 30.2% in 1996. During 1997, the Company's tax rate was lower than
the statutory rate of 34%, primarily due to the utilization of its foreign sales
corporation.
24
1996 Compared to 1995
Revenues. Revenues increased $873,000, or 5.2%, in 1996 primarily due to an
increase in software license fees of $1.3 million. The most significant
contributors to this increase were two major implementation projects underway in
the Polish marketplace, along with a license fee expansion earned from one of
the Company's key European customers. Partially offsetting this increase was a
$929,000 decline in product enhancement fees, due primarily to a higher level of
third-party funded technology development in 1995. Implementation and consulting
services fees increased by 5.9% in 1996, and software maintenance fees increased
by 6.8%, despite the inclusion in 1995 of a one-time settlement payment
resulting from the termination of a client software maintenance contract.
Adjusting for the effect of this one-time item, software maintenance fees would
have increased 15.5% in 1996 relative to 1995, with most of the increase being
derived from clients in the Central European region.
Product development. Product development expenses increased $599,000, or 15.6%,
in 1996, due to the strategic decision to increase investment in development for
various technology projects. Additionally, capitalized software development
costs increased by $346,000 in 1996, due primarily to capitalization of costs
related to the PFW project.
Product Support. Product support expenses increased by $174,000, or 0.9%, in the
year ended December 31, 1996, primarily due to incremental costs related to the
Company's establishment of a European support office in 1996.
Implementation and consulting. Implementation and consulting expenses declined
$132,000, or 4.2%, in the year ended December 31, 1996, despite a $266,000
increase in related revenues. The gross margin relative to related revenues
increased in 1996 to 36.1% from 29.4% in 1995, due to a lower utilization of
more expensive third-party consultants to deliver a portion of the services in
1996.
Sales and marketing. Sales and marketing expenses increased by $1 million, or
48.3%, in the 1996 period, due to the Company's continuing increased investment
in this area during the year. Additionally, sales and marketing expenses
increased due to the promotional and advertising campaign related to
PROFILE/Anyware. As a result, sales and marketing expenses as a percent of
revenues increased to 17.4% from 12.4% in 1995.
Royalties and sublicense fees. For the year ended December 31,1996, this expense
category increased $924,000, primarily due to an increase of $587,000 in
third-party license fees due to higher third-party license revenues.
General and administrative. These expenses declined $297,000, or 16.3%, due
primarily to the absence of costs associated with two executives, the former
Co-President and former Managing Director of Europe, both of whom resigned in
late 1995. The Company did not replace the Co-President, but did replace the
Managing Director of Europe in May 1996. Additionally, one senior executive was
transferred into sales and marketing effective January 1996.
Interest income (expense) net. Interest income, net, increased $231,000, due to
income earned on higher invested cash balances.
Income tax provision (benefit). Taxes in 1996 were 30.2% of income before income
taxes, as compared to 41.4% in 1995. This reduced effective rate is primarily
the result of certain state net operating loss carryforwards as well as foreign
tax credits.
Liquidity and Capital Resources
Cash and cash equivalents were $12.8 million at December 31, 1997. Operations
used $286,000 in cash flows in 1997 and $1.3 million in 1996, and generated $3.2
million in cash flows in 1995. The Company primarily funded its uses of cash in
1997 and 1996 from the $11.8 million of net proceeds received from its December
1996 initial public offering. The use of cash in operations in 1997 and 1996 was
primarily the result of increases in both contracts in process (unbilled
receivables) and accounts receivable, partially offset in 1997 by increased
income from operations and in both years by increases in accounts payable and
accrued expenses. In 1997, the Company experienced significant growth in
receivables late in the year, primarily due to three new contracts which closed
in December, coupled with the achievement of several significant milestones on
other contracts, resulting in significant billings late in the year. Contracts
in process also increased from $2.8 million at December 31, 1996 to $6.2 million
at December 31, 1997. The increase in contracts in process is the result of the
Company's revenue growth in 1997 relative to 1996, as well as a 1997
25
contract amendment executed with a significant customer, which effectively
deferred certain payment milestones on their implementation project until the
later stages of the project. This customer accounts for approximately 68% of the
December 31, 1997 balance of contracts in process. The Company continues to
expect a certain amount of variability in the timing of payment of major
contract milestones which will impact cash flow from operations during any given
period.
The Company's business is generally not capital intensive. Capital asset
expenditures for 1997 amounted to $1.6 million as compared to $630,000 in 1996.
The increase in capital expenditures during 1997 is attributable to the
significant growth in employees during the year as well as the addition of a
second office facility lease (15,000 square feet) adjacent to its Malvern,
Pennsylvania headquarters.
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 12
months. Should the Company's business expand more rapidly than expected, the
Company believes that additional bank credit, if necessary, would be available
to fund such operating and capital requirements. In addition, the Company could
consider seeking additional public or private debt or equity financing to fund
future growth opportunities.
Prospective Accounting Standards
Statement of Position 97-2, "Software Revenue Recognition", was issued in
October 1997, and is effective for all transactions the Company enters into
subsequent to December 31, 1997. The Company does not believe the effect of
adopting this standard will be material. Also in 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" and No. 131, "Disclosures About Segments of an
Enterprise and Related Information." Both statements are effective for the
Company beginning January 1, 1998. Both statements are disclosure-related and
are not expected to materially impact the Company's financial reporting
disclosures.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable pursuant to General Instruction 1 to Item 305 of Regulation
S-K.
26
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Report of Independent Accountants.....................................................................28
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1997 and 1996.......................................29
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995.........30
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996, and 1995................................................................31
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.........32
Notes to Consolidated Financial Statements.........................................................33
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 1997, 1996 and 1995...................................................................43
27
Report of Independent Accountants
To the Shareholders and Board of Directors
Sanchez Computer Associates, Inc.
We have audited the accompanying consolidated balance sheets of Sanchez Computer
Associates, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sanchez Computer
Associates, Inc. as of December 31, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 6, 1998
28
Sanchez Computer Associates, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
December 31,
-------------------- -----------------
ASSETS 1997 1996
---- ----
Current assets $ 12,799 $ 15,446
Receivables less allowances ($540 - 1997; $40 - 1996) 8,853 6,112
Contracts in process 6,249 2,808
Deferred income taxes 349 744
Prepaid and other current assets 975 1,459
----------------------- -----------------------
Total current assets 29,225 26,569
Property and equipment
Equipment 3,038 2,084
Furniture and fixtures 579 238
Leasehold improvements 216 64
----------------------- -----------------------
3,833 2,386
Accumulated depreciation and amortization (2,054) (1,462)
----------------------- -----------------------
Net property and equipment 1,779 924
Capitalized software costs, net of amortization of
$1,610 in 1997 and $1,289 in 1996 1,022 675
Investment in joint venture 1,020
----------------------- -----------------------
Total assets $ 33,046 $ 28,168
======================= =======================
LIABILITIES
Current liabilities
Current debt obligations $ 436 $ 224
Accounts payable, trade 1,275 637
Accrued expenses 2,681 2,474
Deferred revenue 4,232 3,913
----------------------- -----------------------
Total current liabilities 8,624 7,248
Deferred revenue 781 1,508
Deferred income taxes 348 230
Long-term debt-net of current portion 88 218
Deferred rent 5 54
----------------------- -----------------------
Total liabilities 9,846 9,258
Commitments (Note 8)
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized - 50,000,000 shares
Issued and outstanding - 11,070,138 and 10,865,255
shares in 1997 and 1996, respectively 111 109
Additional paid-in capital 18,702 18,103
Retained earnings 4,689 1,236
Notes due on common stock purchases (302) (538)
----------------------- -----------------------
Total shareholders' equity 23,200 18,910
----------------------- -----------------------
Total liabilities and shareholders' equity $ 33,046 $ 28,168
======================= =======================
See notes to consolidated financial statements
29
Sanchez Computer Associates, Inc.
Consolidated Statements of Operations
(in thousands, except per share amounts)
Years Ended December 31,
--------------------- -------------------- ---------------------
1997 1996 1995
---- ---- ----
Revenues
Software license fees $ 13,999 $ 7,793 $ 6,532
Product enhancement fees 1,478 868 1,797
Implementation and consulting services 7,701 4,762 4,496
Software maintenance fees 5,124 4,292 4,017
--------------------- -------------------- ---------------------
Total revenues 28,302 17,715 16,842
Operating expenses
Product development 7,010 4,442 3,843
Product support 3,054 2,146 1,972
Implementation and consulting 5,519 3,044 3,176
Sales and marketing 4,033 3,085 2,080
Royalties and sublicense fees 1,389 2,255 1,331
General and administrative 3,169 1,527 1,824
--------------------- -------------------- ---------------------
Total operating expenses 24,174 16,499 14,226
--------------------- -------------------- ---------------------
Income from operations 4,128 1,216 2,616
Interest income, net 876 324 93
--------------------- -------------------- ---------------------
Income before income taxes 5,004 1,540 2,709
Income tax provision 1,551 465 1,122
--------------------- -------------------- ---------------------
Net income $ 3,453 $ 1,075 $ 1,587
===================== ==================== =====================
Earnings per average common share - basic $ .32 $ .13 $ .19
Earnings per average common share - diluted $ .29 $ .12 $ .17
Weighted-average common shares outstanding 10,951 8,489 8,279
Weighted-average diluted shares outstanding 11,883 9,300 9,588
See notes to consolidated financial statements
30
Sanchez Computer Associates, Inc.
Consolidated Statements of Shareholders' Equity
(in thousands, except share amounts)
Notes Due
Common Stock Additional Retained on Common Treasury Stock
-------------------- Paid-in Earnings Stock ----------------
Shares Amount Capital (Deficit) Purchases Shares Amount
------ ------ ------- --------- --------- ------ ------
Balances at December 31, 1994 8,061,853 $ 81 $ 5,250 $ (1,426) 216,000 $ (120)
Net income 1,587
Exercise of stock options 347,503 3 774 $ (892) (216,000) 120
Stock option loan repayments 228
---------------- ----------- --------------- -------------- ------------- ---------- --------------
Balances at December 31, 1995 8,409,356 84 6,024 161 (664) 0 0
Net income 1,075
Public stock offering, net 2,309,500 23 11,729
Exercise of stock options 146,399 2 350
Stock option loan repayments 126
---------------- ----------- --------------- -------------- ------------- ----------- -------------
Balances at December 31, 1996 10,865,255 109 18,103 1,236 (538) 0 0
Net income 3,453
Exercise of stock options 204,883 2 599 (111)
Stock option loan repayments 347
---------------- ----------- --------------- -------------- ------------- ---------- --------------
Balances at December 31, 1997 11,070,138 $ 111 $ 18,702 $ 4,689 $ (302) 0 $ 0
================ =========== =============== ============== ============= =========== =============
See notes to consolidated financial statements
31
Sanchez Computer Associates, Inc.
Consolidated Statements of Cash Flows
(in thousands)
----------------- ------------------ ------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities
Net income $ 3,453 $ 1,075 $ 1,587
Adjustments to reconcile net income to cash provided (used) by
operating activities
Deferred taxes 512 74 791
Depreciation and amortization 1,043 727 605
Provision for doubtful accounts receivable 500
Other (33) (77) 39
Cash provided (used) by changes in operating assets and liabilities
Contracts in process (3,441) (658) (1,635)
Accounts receivable (3,241) (3,957) 395
Prepaid and other current assets 484 (914) (237)
Accounts payable and accrued expenses 845 1,107 (233)
Deferred revenues (408) 1,361 1,926
----------------- ------------------ ------------------
Net cash provided (used) by operating activities (286) (1,262) 3,238
Cash flows from investing activities
Investment in joint venture (1,020)
Capitalized computer software costs (668) (532) (217)
Capital expenditures (1,591) (630) (458)
----------------- ------------------ ------------------
Net cash used in investing activities (3,279) (1,162) (675)
Cash flows from financing activities
Borrowings under revolving credit facility 285 354 244
Repayment of notes due on common stock purchases 347 121 228
Principal payments under capital lease obligation (23) (80) (51)
Principal payments under long-term notes (180) (173) (94)
Proceeds from exercise of stock options 489 350
Net proceeds from initial public offering 11,752
----------------- ------------------ ------------------
Net cash provided by financing activities 918 12,324 327
Net increase (decrease) in cash and cash equivalents (2,647) 9,900 2,890
Cash and cash equivalents at beginning of year 15,446 5,546 2,656
----------------- ------------------ ------------------
Cash and cash equivalents at end of year $ 12,799 $ 15,446 $ 5,546
================= ================== ==================
Supplemental cash flow information
Interest paid $ 34 $ 35 $ 38
Income taxes paid $ 694 $ 528 $ 273
See notes to consolidated financial statements
32
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(1.) Description of Business
Sanchez Computer Associates, Inc. ("Sanchez" or the "Company") designs,
develops, markets, implements and supports comprehensive banking
software, called PROFILE(R), for financial services organizations
worldwide. Sanchez's highly flexible PROFILE family of products is
comprised of three integrated modules which operate on open,
client/server platforms. The primary module, called PROFILE/Anyware, is a
multi-currency transaction processing system which supports deposit,
loan, customer and bank management requirements through multiple
distribution channels, including the Internet. The other modules are
PROFILE/FMS, a multi-company, multi-currency, financial management and
accounting system and PROFILE for Windows, a graphical user interface for
PROFILE/Anyware.
(2.) Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Sanchez Software Ltd., Sanchez
Computer Associates International, Inc., Sanchez Computer Associates
Polska Sp. z o.o and Sanchez FSC, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to continuously make
estimates and assumptions that affect the reported amounts of certain
assets, liabilities, revenues and expenses at the date of the financial
statements and during the reporting period. Actual results could differ
from these estimates. The most significant estimate is the
percentage-of-completion method for revenue recognition.
Revenue Recognition
The Company recognizes revenue from client implementation projects,
customized software development and software license fees using the
percentage-of-completion contract accounting method. Revenue is deferred
to the extent of cash received or fees billed prior to satisfying such
percentage completion criteria. Losses on contracts are recognized when
determinable. Revenue from software maintenance contracts is recognized
ratably over the term of the maintenance contract. Statement of Position
97-2, "Software Revenue Recognition," was issued in October 1997, and is
effective for all transactions the Company enters into subsequent to
December 31, 1997. The Company does not believe the effect of adopting
this standard will be material.
Warranties
The Company's products are warranted by the Company against defects from
specifications for a period generally not to exceed 90 days following
initial installation of the software, or customer conversion. Provision
for future claims has been recorded based on historical experience, which
to date has not been significant.
33
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(2.) Significant Accounting Policies, continued
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
with maturities of three months or less from the date of purchase and
whose carrying amount approximates market value due to the short maturity
of the investments. The Company maintains a centralized cash management
program whereby its excess cash balances are invested in high quality
short-term money market instruments through high credit quality financial
institutions. At times, cash balances in the Company's accounts may
exceed federally insured limits. Cash and cash equivalents at December
31, 1997 also include amounts on deposit with Safeguard Scientifics, Inc.
("Safeguard"), a shareholder of the Company, in conjunction with a note
agreement dated June 12, 1997. The demand note provides for borrowings by
Safeguard from the Company of up to a maximum of $12 million on a
revolving basis at Safeguard's effective borrowing rate minus .75%. This
rate is higher than the Company is currently earning on its money market
investments. At December 31, 1997 advances to Safeguard amounted to $11.1
million. Interest income from these advances amounted to $272 in 1997.
Accounts Receivable and Contracts in Process
Accounts receivable represent only amounts billed and currently due from
customers. Accrued contractual revenues related to implementation
contracts which have been recognized under the percentage of completion
method, but which have not yet been billed (unbilled receivable), are
reported as contracts in process. These amounts are billable at specified
dates, at contractual milestones or at contract completion, which is
generally expected to occur within one year.
Investment in Joint Venture
In December 1997, the Company entered into a Shareholder and Joint
Venture Agreement with ELBA CSB S.A., a newly formed Polish bank
technology services firm which is a subsidiary of ComputerLand Poland
S.A. Under the agreement, the Company paid $1 million for a 10% equity
interest in ELBA, which is accounted for under the cost method. The
Company anticipates making certain additional investments in the joint
venture, which could increase its equity position to 20%. Concurrent with
the Joint Venture Agreement, the Company and ELBA also entered into a
distribution and services agreement, which gives ELBA certain limited
exclusive and non-exclusive PROFILE marketing rights in Poland and
Central Europe.
Property and Equipment
Property and equipment are carried at cost, except for assets under
capital leases which are recorded at the lower of the present value of
future lease payments or the fair value of the equipment at the inception
of the lease. Expenditures for major renewals, improvements and
betterments are capitalized and minor repairs and maintenance are charged
to expense as incurred. When assets are sold, the related cost and
accumulated depreciation are removed from the accounts and any gain or
loss from such disposition is included in operations. The Company reviews
its assets for impairment whenever circumstances indicate that the
carrying amount may not be recoverable.
Capitalized Software Costs
Certain development costs of the Company's software products are
capitalized subsequent to the establishment of technological feasibility
and up to the time the product becomes available for general release.
Amortization is provided on a product-by-product basis at the greater of
the amount computed using (a) the ratio of current revenues for a product
to the total of current and anticipated future revenues or (b) the
straight-line method over the remaining estimated economic life of the
product. Generally, an original estimated economic life of
34
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(2.) Significant Accounting Policies, continued
four years is assigned to capitalized software development costs. Costs
of software program maintenance are charged to expense as incurred.
All capitalized software costs are written down to net realizable value
when the carrying amount is in excess thereof.
Total costs capitalized in 1997, 1996 and 1995 were approximately $668,
$532 and $217 respectively. Amortization of capitalized software costs
amounted to $321, $218 and $227 in 1997, 1996 and 1995, respectively.
Taxes on Income
Deferred income taxes are recognized for all temporary differences
between the tax and financial reporting bases of the Company's assets and
liabilities based on currently enacted tax laws and statutory rates.
Additionally, the benefits of utilizing net operating loss carryforwards
and credit carryforwards are recognized to the extent management of the
Company believes that it is more likely than not that the benefits will
be realized in future periods.
Depreciation and Amortization
Depreciation and amortization are provided over the estimated useful
lives of the related assets using a combination of accelerated and
straight-line depreciation methods.
Earnings Per Share
Effective December 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings per Share," which
simplifies the requirements for computing earnings per share and requires
presentation of two amounts, basic and diluted earnings per share.
Earnings per share information for all periods presented has been
restated in accordance with the new standard.
Basic earnings per share has been calculated as net earnings divided by
weighted-average common shares outstanding, while diluted earnings per
share has been computed as net earnings divided by weighted-average
common and diluted shares outstanding. The following table provides a
reconciliation of weighted-average common shares outstanding to
weighted-average common and dilutive shares outstanding.
1997 1996 1995
---- ---- ----
Common shares outstanding 10,951 8,489 8,279
Diluted shares outstanding
Warrants 321 277 269
Options 611 534 1,040
-------- -------- -------
Total common and dilutive shares 11,883 9,300 9,588
------- ------- -------
Shares outstanding are computed using the weighted-average number of
shares of common and common equivalent shares (stock options and
warrants) for each period.
35
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(2.) Significant Accounting Policies, continued
Reclassification of Financial Statement Amounts
Certain prior period amounts have been reclassified to conform to the
1997 presentation. These reclassifications had no effect on shareholders'
equity or net income.
(3.) Client Revenue Data
Revenue derived from certain software implementation projects comprises a
substantial portion of the Company's total annual revenues. The following
table summarizes the percentage of revenues from the Company's
significant clients (listing those clients that exceed 10% in the
applicable year):
-------------- --------------- ------------
Client 1997 1996 1995
-------------------------- -------------- --------------- ------------
A 14% 22% *
B 14% * *
C 12% * *
D * 28% 21%
E * 13% 22%
F * 12% 10%
G * * 18%
--------------------------
* Less than 10%
At December 31, 1997 and 1996, the significant clients listed above
accounted for $7,119 (or 47%) and $6,153 (or 69%) 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.
The Company classifies its operations into one industry segment,
licensing and servicing of software products to the financial services
industry. Revenue derived from customers in various geographic regions
for each of the three years ended December 31, 1997 is as follows:
----------------- --------------- -----------------
1997 1996 1995
---- ---- ----
Canada $ 7,443 $ 1,527 $ 1,802
Central Europe 10,440 11,193 8,569
Other European 2,343 2,547 4,048
U.S. and Caribbean 5,338 1,478 2,423
Asia-Pacific Rim 2,738 970
----------------- --------------- -----------------
$ 28,302 $ 17,715 $ 16,842
36
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(4.) Accrued Expenses
Accrued expenses consist of the following:
--------------- --------------
1997 1996
---- ----
Accrued compensation and related items $ 873 $ 715
Accrued royalties 117 728
Accrued income taxes 464 210
Other 1,227 821
--------------- --------------
$ 2,681 $ 2,474
(5.) Debt
Debt obligations consist of the following:
-------------------- -------------------
1997 1996
---- ----
Revolving capital equipment credit facility at prime $ 285
Bank term notes at prime payable through July 1999 239 $ 419
Capital leases at 12% to 12.4% payable through July 1997 23
-------------------- -------------------
524 442
Less current debt obligations 436 224
-------------------- -------------------
Long-term debt $ 88 $ 218
In July 1997, the Company both renewed and restructured its bank
borrowing agreements. Under the revised agreement, the Company converted
approximately $300 outstanding under its revolving credit facility for
capital equipment purchases to a 24-month term loan. In conjunction with
this, a new $500 revolving credit facility for capital purchases was
established. The Company has available approximately $215 under this
revolving facility as of December 31, 1997. Contingent upon renewal of
the bank borrowing agreements as of June 30, 1998, the Company will have
the option to convert the then outstanding balance on the revolving
credit facility to a 36-month term loan.
Future maturities of corporate debt at December 31, 1997 are as follows:
Year Ending
-----------
1998 $ 436
1999 88
---------------------
$ 524
(6.) Shareholders' Equity
On December 27, 1996, the Company completed an initial public offering
for the sale of 2,309,500 shares of its common stock at a price of $5.50
per share. The Company received approximately $11.8 million in net
proceeds after deducting expenses related to the offering.
In November 1996, 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 15,000,000 to 50,000,000 shares.
The accompanying consolidated financial statements reflect such amendment
for all periods presented.
On September 11, 1996, the Company's Board of Directors declared a
six-for-five stock dividend 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.
37
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(6.) Shareholders' Equity, continued
The Board of Directors is authorized, subject to certain limitations and
without Shareholder approval, to issue up to an aggregate 10,000,000
shares in one or more series and to fix the rights and preferences of the
shares in each series. No shares of preferred stock have been issued.
The 1995 Equity Compensation Plan provides for the issuance of a maximum
of 1,680,000 shares of Common Stock upon the exercise of stock options,
stock appreciation rights, and/or restricted stock awards. There will be
no further options granted under the previously in-place 1988 Incentive
Stock Option Plan for Key Employees.
The Company applies APB 25 and related interpretations in accounting for
its various stock option plans. Had compensation cost been recognized
consistent with SFAS 123 (Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation), the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
1997 1996 1995
---- ---- ----
Net income As reported $ 3,453 $ 1,075 $ 1,587
Pro forma 3,220 1,023 1,579
Earnings per share - diluted As reported .29 .12 .17
Pro forma .27 .11 .17
Earnings per share - basic As reported .32 .13 .19
Pro forma .29 .12 .19
The per share weighted-average fair value of stock options issued by the
Company during 1997, 1996 and 1995 was $4.07, $1.11 and $0.84
respectively on the date of grant using the Black Scholes option-pricing
model. The Company used the following weighted-average assumptions to
determine the fair value of stock options granted: 1997--expected
dividend yield 0%, risk free interest rate, 5.86% to 6.38%, expected
volatility of 40%, and an average expected life of five years;
1996--expected dividend yield 0%, risk-free interest rate of 6.36% to
6.48%, expected volatility of 0%, and average expected lives of three
years to five years; 1995--expected dividend yield 0%, risk-free interest
rate 5.39%, expected volatility of 0%, and an average expected life of
five years.
Pro forma net income reflects only options granted in 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected
over the options' vesting period and compensation cost for options
granted prior to January 1, 1995 is not considered.
38
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(6.) Shareholders' Equity, continued
A summary of stock option activity under the 1995 and 1988 Plans at
December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995
--------------------------- --------------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------- ----------- ---------------- ---------------- ---------------- -------------
Outstanding at beginning of year 808,568 $ 2.81 1,224,376 $ 2.13 1,614,658 $ 1.64
Options granted 454,500 8.73 143,600 4.37 308,436 3.63
Options exercised (204,883) 2.20 (6,000) 1.67 (563,503) 1.60
Options canceled (18,724) 4.26 (553,408) 1.70 (135,215) 1.94
--------------- ----------- ---------------- ---------------- ---------------- -------------
Outstanding at end of year 1,039,461 $ 5.50 808,568 $ 2.81 1,224,376 $ 2.13
--------------- ----------- ---------------- ---------------- ---------------- -------------
Options exercisable 415,274 430,149 668,735
Shares available for future grants 816,649 1,252,964 1,388,364
The following summarizes information about the Company's stock options
outstanding as of December 31, 1997:
Options Outstanding Options Exercisable
----------------------------------------------------------- -------------------------------------
Number Outstanding Weighted Av. Weighted Av. Number Exercisable Weighted Av.
as of 12/31/97 Remaining Exercise at 12/31/97 Exercise
Range of Exercise Prices Contractual Life Price Price
- ---------------------------- --------------------- --------------------- --------------------- --------------------- ---------------
$ 1.00 to $ 1.67 227,086 4.32 $ 1.67 227,086 $ 1.67
$ 3.63 to $ 6.75 635,875 8.42 4.38 188,188 3.83
$ 12.88 to $ 13.75 151,500 9.70 13.64
$ 18.00 to $ 19.75 25,000 9.84 19.33
--------------------- --------------------- --------------------- --------------------- ---------------
1,039,461 7.74 $ 5.50 415,274 $ 2.65
Generally, outstanding options vest over a two to four year period after
the date of grant and expire 10 years after the date of grant.
For options exercised in early 1995, 5% of the exercise price was paid
upon exercise, with the remaining obligation evidenced by a note with a
maximum term of 10 years, although the note also contains provisions for
a balloon payment due two years after the Company's initial public
offering. Such optionees executed full recourse interest-bearing notes,
with such notes being reported as "Notes due on common stock purchases"
in the accompanying balance sheet. During 1997, one additional stock
option-related loan was made to an officer of the Company in the amount
of $111. This loan is also supported by a full recourse demand note which
bears interest at 5.81%. In 1997, 1996 and 1995, interest income earned
on these notes amounted to $34, $40 and $43, respectively. In conjunction
with the issuance of shares pursuant to the 1995 option exercises, the
Company utilized 216,000 shares previously held as treasury shares.
39
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(7.) Income Taxes
The Company utilized net operating loss carryforwards and tax credit
carryforwards to offset current and deferred tax liabilities for the
years ended December 31, 1997, 1996 and 1995. The components of the
income tax provision for each of the three years ended December 31, 1997
are as follows:
--------------------------- --------------------------- ---------------------------
1997 1996 1995
---- ---- ----
Current taxes
Federal $ 609 $ 206 $ 60
State 59 10 113
Foreign 371 175 158
--------------------------- --------------------------- ---------------------------
1,039 391 331
Deferred taxes 512 74 791
--------------------------- --------------------------- ---------------------------
Total provision $ 1,551 $ 465 $ 1,122
A reconciliation of the tax provision based on the federal statutory tax
rate to the effective tax rate is as follows:
--------------------- ---------------------- -------------------
1997 1996 1995
---- ---- ----
Statutory tax provision (34%) $ 1,701 $ 524 $ 921
State income taxes, net of federal income tax benefit
39 7 75
Foreign income taxes 371 175 104
Federal income tax credits (371) (175)
Foreign sales corporation (286) (12)
Other, net 97 (54) 22
--------------------- ---------------------- -------------------
$ 1,551 $ 465 $ 1,122
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 at December 31, 1997 and
1996 are presented below:
--------------------------- --------------------------
1997 1996
---- ----
Deferred tax assets
Accounts receivable allowances $ 184 $ 14
Accrued liabilities 163 179
Tax credit carryforwards 539
Other 2 12
--------------------------- --------------------------
Total deferred tax assets 349 744
Deferred tax liabilities
Capitalized software costs $ 348 $ 230
Utilization of federal and state net operating loss carryforwards and tax
credit carryforwards amounted to $581 in 1997, $388 in 1996 and $2,149 in
1995.
40
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(8.) Commitments
The Company leases office facilities subject to operating leases. Future
minimum lease payments under non-cancelable operating leases with initial
or remaining terms of one year or more at December 31, 1997 are as
follows:
1998 $ 614
1999 635
2000 651
2001 668
2002 684
2003 404
-------------
$ 3,656
Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $625, $436 and $364, respectively.
The Company is also party to certain software customization agreements,
primarily with Digital Equipment Corporation (Digital), whereby funding
has been provided to the Company to facilitate product development
targeted at specific geographic markets. Under the terms of these
agreements, the Company retains ownership of the products developed, and
has agreed to pay royalties to Digital and others, contingent upon the
subsequent achievement of certain contractually defined product license
fee sales. In November 1997, the Company amended its heretofore most
significant agreement relative to customization royalties, so as to fix
and limit its future payment requirements to Digital at $1 million. The
Company believes this amendment will result in a significant reduction in
future royalties payable to Digital under this agreement in 1998 and
beyond.
When applicable, such royalty amounts typically equate to 15% to 20% of
the Company's software license fees, subject to various exceptions and
limitations. Royalty expense relative to these agreements amounted to
$365 in 1997, $1,099 in 1996 and $762 in 1995.
(9.) Other Related Party Transactions
Safeguard holds warrants to purchase 360,000 shares of the Company's
common stock at an exercise price of $1.39 per share, subject to certain
terms and restrictions. These warrants are currently exercisable and
expire April 30, 1998.
The Company has entered into an administrative services agreement with
Safeguard, which provides for payment, subject to achieving certain sales
levels, of a maximum fee of $25 per quarter. The Company expensed $100 in
each of the years ended December 31, 1997, 1996 and 1995.
In conjunction with the previously described joint venture agreement with
ELBA CSB S.A., ELBA paid to the Company $500 for certain limited
exclusive and non-exclusive PROFILE marketing rights in Poland and
Central Europe.
41
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts)
(10.) Profit Sharing Trust Plan
The Company maintains a Profit Sharing Trust Plan (the "Plan") which
permits eligible participating members to contribute up to 15% of their
gross earnings. The Company will typically make a contribution equal to
100% of the first 3% which an employee contributes and may also make
additional voluntary contributions. The Company expensed $196, $174 and
$148 related to the Plan during the years ended December 31, 1997, 1996,
and 1995, respectively.
(11.) Subsequent Event (Unaudited)
On February 5, 1998 the Company acquired 100% of the outstanding shares
of Greystone Technology Corporation ("Greystone") and its wholly owned
subsidiary in exchange for 84,050 shares of Sanchez common stock.
Greystone is engaged in the design, manufacture and maintenance of
certain high performance database systems which are utilized in
conjunction with the Company's PROFILE family of products.
The merger is expected to be accounted for as a pooling of interests. The
following unaudited pro forma data summarizes the combined operating
results of the Company and Greystone, as if the merger had occurred at
the beginning of each period presented.
1997 1996 1995
---- ---- ----
Revenue $ 28,891 $ 18,513 $ 18,497
Net income 3,499 1,410 1,160
Earnings per share-basic 0.32 0.16 0.14
Earnings per share-diluted 0.29 0.15 0.12
(12.) Quarterly Financial Information (Unaudited)
The following table presents the unaudited quarterly financial
information for the years 1997 and 1996:
1997 Quarter Ended 1996 Quarter Ended
Mar 31 June 30 Sept 30 Dec 31 Mar 31 June 30 Sept 30 Dec 31
---------- ---------- ----------- ----------- ------------- ------------- ------------- ------------
Revenues $ 5,152 $ 6,206 $ 8,228 $ 8,716 $ 3,477 $ 4,773 $ 4,546 $ 4,919
Income before income taxes
511 855 1,797 1,841 31 608 428 473
Net income 342 573 1,205 1,333 19 358 307 391
Basic earnings per share 0.03 0.05 0.11 0.12 - 0.04 0.04 0.05
Diluted earnings per share
0.03 0.05 0.10 0.11 - 0.04 0.03 0.04
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 income per share for
each of the quarters in a fiscal year may not equal the actual
year-to-date net income per average common share.
42
Schedule II
Sanchez Computer Associates, Inc.
Valuation and Qualifying Accounts
For the years ended December 31, 1997, 1996 and 1995
Allowance for Balance at Charged to Costs Balance at
Doubtful Accounts Beginning of Year and Expenses Deductions End of Year
----------------- ----------------- ------------ ---------- -----------
Year ended December 31, 1995 $ 40,000 $ - $ - $ 40,000
Year ended December 31, 1996 40,000 - - 40,000
Year ended December 31, 1997 $ 40,000 $ 500,000 $ - $ 540,000
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Sanchez Computer Associates, Inc.
Our report on the consolidated financial statements of Sanchez Computer
Associates, Inc. is included on page 28 of this Form 10-K. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedule which appears above on page 43 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 6, 1998
43
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 20, 1998 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 20, 1998 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 "Directors' Compensation," "Compensation Committee Interlocks and
Insider Participation" and "EXECUTIVE COMPENSATION" in its definitive Proxy
Statement relative to its May 20, 1998 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 "SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" in
its definitive Proxy Statement relative to its May 20, 1998 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 20,
1998 annual meeting of shareholders, to be filed within 120 days after the end
of the year covered by this Form 10-K pursuant to Regulation 14A under the
Securities Exchange Act of l934, as amended.
44
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 27)
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the
years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial
Statements
Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the years ended December 31,
1997, 1996 and 1995
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, 1997.
(c) Exhibits
The following is a list of exhibits required by Item 601 of Regulation S-K filed
as part of this Form 10-K. Where so indicated by footnote, exhibits which were
previously filed are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is indicated in
parentheses.
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation of the Company. (2)
(Exhibit 3.1)
3.2 Amended and Restated By-laws of the Company. (2) (Exhibit 3.2)
4.1 Specimen stock certificate representing the Common Stock. (2)
(Exhibit 4.1)
10.1 # 1995 Equity Compensation Plan. (2) (Exhibit 10.1)
10.2 Common Stock, Warrants and Rights Agreement dated February 26, 1987
among Sanchez Computer Associates, Inc., Michael A. Sanchez, Frank R.
Sanchez, Safeguard Scientifics (Delaware), Inc., and Safeguard
Scientifics, Inc. (1) (Exhibit 10.2)
10.3 Common Stock Purchase Agreement dated September 30, 1989 among
Sanchez Computer Associates, Inc., Radnor Venture Partners, L.P., and
Safeguard Scientifics (Delaware), Inc. (1) (Exhibit 10.3)
10.4 Common Stock Purchase Agreement dated December 1, 1989 among Sanchez
Computer Associates, Inc., Radnor Venture Partners, L.P., and
Safeguard Scientifics (Delaware), Inc. (1) (Exhibit 10.4)
10.5 Form of Rights Agent Agreement dated November 13, 1996 among
ChaseMellon Shareholder Services, L.L.C., Mellon Bank, N.A.,
Sanchez Computer Associates, Inc., Safeguard Scientifics, Inc.,
Radnor Venture Partners, L.P., Michael A.
Sanchez and Frank R. Sanchez. (2) (Exhibit 10.5)
45
10.6 Administrative Services Agreement dated February 26, 1987 by and
between Safeguard Scientifics, Inc. and Sanchez Computer Associates,
Inc. (2) (Exhibit 10.6)
10.7 # Employment Agreement effective January 1, 1996 between Richard H.
Jefferson and Sanchez Computer Associates, Inc. (2) (Exhibit 10.7)
10.8 Safeguard Scientifics, Inc. Revolving Note Agreement dated June 12,
1997 (3) (Exhibit 10.1)
10.9 Demand Note and Pledge Agreement dated September 19, 1997 by Ronald J.
Zlatoper in favor of the Company (4) (Exhibit 10)
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Coopers & Lybrand L.L.P. *
27.1 Financial Data Schedule *
27.2 Financial Data Schedules--Restated *
* Filed herewith.
# These exhibits relate to compensatory plans, contracts or arrangements in
which directors and/or executive officers of the registrant may
participate.
1) Filed on September 27, 1996 as an exhibit to the Company's Registration
Statement on Form S-1 (No. 333-12863) and incorporated by reference.
2) Filed on November 6, 1996 as an exhibit to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (No. 333-12863) and
incorporated by reference.
3) Filed as an exhibit to the Company's Report on Form 10-Q for the
three-month period ended June 30, 1997 and incorporated by reference.
4) Filed as an exhibit to the Company's Report on Form 10-Q for the
three-month period ended September 30, 1997 and incorporated by reference.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 30 , 1998 SANCHEZ COMPUTER ASSOCIATES, INC.
-----------
By: /s/ Michael A. Sanchez
--------------------------------------
Michael A. Sanchez,
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: March 30 , 1998 /s/ Michael A. Sanchez
------------- -------------------------
Michael A. Sanchez,
Chairman of the Board of Directors
Dated: March 30 , 1998 /s/ Ronald J. Zlatoper
------------ -------------------------
Ronald J. Zlatoper,
Chief Executive Officer and Director
(Principal Executive Officer)
Dated: March 30 , 1998 /s/ Joseph F. Waterman
------------ -------------------------
Joseph F. Waterman,
Senior Vice President and CFO
(Principal Financial
and Accounting Officer)
Dated: March 30 , 1998 /s/ Frank R. Sanchez
------------ -----------------------
Frank R. Sanchez, President,
Chief Operating Officer and Director
Dated: March 30 , 1998 /s/ Warren V. Musser
------------ -----------------------
Warren V. Musser, Director
Dated: March 30 , 1998 /s/ Ira M. Lubert
------------ --------------------
Ira M. Lubert, Director
Dated: March 30 , 1998 /s/ Lawrence Chimerine
------------ -------------------------
Lawrence Chimerine, Director
Dated: March 30 , 1998 /s/ Kailash C. Khanna
------------ ------------------------
Kailash C. Khanna, Director
Dated: March 30 , 1998 /s/ John D. Loewenberg
------------ -------------------------
John D. Loewenberg, Director
Dated: March 30 , 1998 /s/ Thomas C. Lynch
------------ ----------------------
Thomas C. Lynch, Director
47
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)
10.7 # Employment Agreement effective January 1, 1996 between Richard H.
Jefferson and Sanchez Computer Associates, Inc. (2) (Exhibit 10.7)
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.
Zlatopher in favor of the Company (4) (Exhibit 10)
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Coopers & Lybrand L.L.P. *
27.1 Financial Data Schedule *
27.2 Financial Data Schedules--Restated *
* Filed herewith.
# These exhibits relate to compensatory plans, contracts or arrangements in
which directors and/or executive officers of the registrant may
participate.
1) Filed on September 27, 1996 as an exhibit to the Company's Registration
Statement on Form S-1 (No. 333-12863) and incorporated by reference.
2) Filed on November 6, 1996 as an exhibit to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (No. 333-12863) and
incorporated by reference.
3) Filed as an exhibit to the Company's Report on Form 10-Q for the
three-month period ended June 30, 1997 and incorporated by reference.
4) Filed as an exhibit to the Company's Report on Form 10-Q for the
three-month period ended September 30, 1997 and incorporated by reference.
48