**SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

 

**FORM 10-K**

 

**For Annual and TransitionReports Pursuant toSections 13 or 15(d) of the Securities Exchange Act of 1934**

 

**(Mark One)**

 
| ý | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|-------------------------------------------------------------------------------------------|

 

### **Forthe fiscal year ended December 31, 2002**

 
| o | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|-----------------------------------------------------------------------------------------------|

 

**For the transition period from                                   to**

 

### **Commissionfile number 000-21705**

 

**SANCHEZCOMPUTER ASSOCIATES, INC.**(Exact Name of Registrant as Specified in Its Charter)

 
| **Pennsylvania**                                                |   | **23-2161560**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |
|                                                            |   |                                  |
| **40  Valley Stream Parkway, Malvern, PA**                      |   | **19355**                             |
| (Address of  Principal Executive Offices)                       |   | (Zip Code)                            |
|                                                            |   |                                  |
| **www.sanchez.com**                                             |   |                                  |
| (Company’s Web  site)                                      |   |                                  |

 

Registrant’stelephone number, including area code: **(610)296-8877**

 

Securitiesregistered pursuant to Section 12(b) of the Act:     **NONE**

 

Securitiesregistered pursuant to Section 12(g) of the Act:

 

**Title of Each Class**Common Stock, no par value

 

        Indicateby check mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý          No o

 

        Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

 

        Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).  Yes o    No ý

 

        Theaggregate market value of shares of Common Stock held by non-affiliates (basedon the closing price on NASDAQ) on June 30, 2002 was approximately $63.8million.

 

        Thenumber of shares of registrant’s Common Stock outstanding as of March 21, 2003was 26,774,802 shares.

 

### **DocumentsIncorporated by Reference**

 

        Portionsof registrant’s Proxy Statement relating to the annual meeting of shareholdersof registrant to be held on May 22, 2003 are incorporated by reference intoItems 10, 11, 12 and 13 of Part III of this Form 10-K. Registrant expects tofile the Proxy Statement within 120 days after the end of the year covered bythis Form 10-K. Such Proxy Statement, except for the parts therein which havebeen specifically incorporated by reference, shall not be deemed “filed” forthe purposes of this Form 10-K.

 

 

 

 

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**SANCHEZ COMPUTER ASSOCIATES, INC.INDEX TO FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2002**

** **
| **Item  No.**   |                                                                                        | **.**  |
|-----------------|---------------------------------------------------------------------------------------------|--------|
| **Part  I**     |
|            |                                                                                        |   |
|    1. | Business                                                                                    | 3      |
|    2. | Properties                                                                                  | 17     |
|    3. | Legal Proceedings                                                                           | 17     |
|    4. | Submission of Matters to  a Vote of Security Holders                                        | 17     |
| 4A.             | Executive Officers  of the Registrant                                                       | 18     |
|            |                                                                                        |   |
| **Part  II**    |
|            |                                                                                        |   |
|    5. | Market  for Registrant’s Common Equity and Related Stockholder Matters                 | 20     |
|    6. | Selected Financial  Data                                                                    | 21     |
|    7. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 22     |
| 7A.             | Quantitative  and Qualitative Disclosures About Market Risk                                 | 30     |
|    8. | Financial  Statements and Supplementary Data                                                | 31     |
|    9. | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure       | 50     |
|            |                                                                                        |   |
| **Part  III**   |
|            |                                                                                        |   |
| 10.             | Directors and Executive  Officers of the Registrant                                         | 50     |
| 11.             | Executive Compensation                                                                      | 50     |
| 12.             | Security Ownership of  Certain Beneficial Owners and Management                             | 50     |
| 13.             | Certain Relationships and Related  Transactions                                             | 50     |
| 14.             | Controls and  Procedures                                                                    | 51     |
|            |                                                                                        |   |
| **Part  IV**    |
|            |                                                                                        |   |
| 15.             | Exhibits, Financial Statement  Schedules and Reports on Form 8-K                            | 51     |
|            |                                                                                        |   |

 

2

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**PART I**

 

**Item 1.  Business.**

 

        SanchezComputer Associates Inc. (Sanchez or the Company) is publicly traded on theNasdaq Stock Exchange under the symbol SCAI. The Company is a global leader in developing and marketing scalable andintegrated software and services that provide banking, customer integration,brokerage, wealth management and outsourcing solutions to approximately 400financial institutions in 21 countries. Sanchez’s corporate headquarters is located in Malvern,Pennsylvania.  The Company’s outsourcingdata and operations service center is located in Seven Fields,Pennsylvania.  On July 3, 2002, Sanchezcompleted an acquisition of Spectra Securities Software, Inc., of Toronto,Canada (Spectra or Wealth Management), a leading provider of comprehensivewealth management solutions.  Spectraand its products now carry the Sanchez brand and operate as the Company’sWealth Management Division.  Thisdivision is based in Toronto, Canada. Sanchez also maintains services and sales offices in San Ramon,California; Sydney, Australia; New York, New York; Amsterdam, the Netherlands;Warsaw, Poland; Chester, the United Kingdom; and Singapore.  Beginning with the first quarter of 2003,Sanchez organized into divisions and initiated new segment reporting based onthose divisions.  Sanchez’s divisionalsegments are Banking Solutions, Wealth Management, Outsourcing and GlobalServices.  Each division has individualprofit and loss responsibilities and is responsible for advancing the Company’srole as the industry’s leading “value innovator.”  Whether through products, methodologies, services, customsoftware enhancements or systems consulting engagements, each division istasked to significantly lower clients’ ongoing operations and technology costs,reduce their technology risk, and improve their enterprise customermanagement.  The divisions were createdto provide the innovation and focus necessary to ensure clients’ business planssucceed.  The Company believes thisadditional focus for all of its products and services will help the Companypursue new, or previously under-served revenue opportunities.  In addition, it is believed the divisionswill allow the Company to become more nimble and respond more quickly to awider variety of client requirements and needs.

 

*Sanchez’sIntegrated Banking and Wealth Management Platforms*

 

        The Sanchez integratedbanking platform empowers financial institutions to accelerate businesstransformation and achieve a competitive advantage by lowering operating costs,reducing technology risks and improving customer management.  The Sanchez integrated banking platform hasmulti-currency and multi-language capabilities, and can scale to the retail andcommercial requirements of the world’s largest banks.

 

        An institution purchases aSanchez banking solution by licensing one or more of Sanchez’s applicationsoftware products.  Those productsinclude: Sanchez ProfileTMcore banking and transaction processingapplication; Sanchez XpressTM, an enterprise customer andtransaction management system; Sanchez WebclientTM, a Web-based,Internet customer front-end processor; Sanchez WebCSRTM, abrowser-based customer and account servicing application used in aninstitution’s branches and call centers and Sanchez FMSTM, theFinancial Management System, which is an online, real-time cost center-basedaccounting system with complete multi-company and multi-currency support.  In addition, Sanchez offers Profile forWindows®, the 32-bit, Windows-based, graphical user interfacedesigned as the front-end to Sanchez Profile’s core banking application, whichis used by tellers, branch and call center personnel. Sanchez CRMTM,a Web-based customer relationship management system, is available as astand-alone application or integrated with Sanchez’ banking platform.

 

        SanchezWealthwareTM is Sanchez’swealth management product line, which was acquired in July 2002 through theacquisition of Spectra.  SanchezWealthware is a comprehensive, multi-channel wealth management solution thathelps financial institutions manage investor assets online by providing acollaborative, holistic client-view of assets and holdings based on real-timeinformation.  The product line includesaggregation and Information Management, AIMR-Compliant Portfolio Management,Market Data Management and Order Management with Straight Through Processing(STP) for equities, options, fixed income and mutual funds.

 

## *ApplicationProduct Overview — Sanchez Profile*

 

        SanchezProfile is an online, customer-centric, multi-currency, multi-channel strategiccore processing system for deposits and loans. Profile is designed to support the needs of both retail and commercialfinancial institutions and is capable of delivering significant operationalefficiencies as well as reductions in the operations and technology costsavings to the enterprise.  Profile isengineered for high speed and high volume transaction processing throughput,(published benchmarks support real-time transaction processing at a rate of1,900TPS) providing full ACID (Atomic, Consistent, Isolated, Durable)properties as well as logical dual site operation functionality for true 24x365operation.  Profile is also designed tobe platform and operating system independent. Through the use of Sanchez Profile’s automatic code generation tools,provided by DATA-QWIKTM, the financial institution’s business userscan construct custom financial products, without writing any code.

 

 

3

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## *ApplicationProduct Overview — Sanchez Xpress*

 

        SanchezXpress is an enterprise integration solution that provides customer and accountaggregation, financial product distribution, and supports the real-time integrationof all customer delivery channels to an institution’s internal and externalproduct processing systems.  SanchezXpress provides a product distribution engine that manages and coordinatesbusiness processes and transactions across an institution’s internal andthird-party product processing systems. This capability also provides several services including messaging,application integration, transaction monitoring, directory services andauthorization and authentication functions. These capabilities utilize various J2EE application server componentssuch as the Java Naming and Directory Interface (JNDI), as well as messagingcomponents such as IBM’s WebSphere MQ, Hewlett Packard’s Application Server orBEA Systems WebLogic.

 

        Sanchez Xpress also acts asmessage-oriented middleware in that the messaging components natively assumeXML is used as a standard protocol and data description language.  These features support various industrystandards, such as Open Financial Exchange (OFX).  This also provides an easy mechanism to support Wireless MarkupLanguage (WML) and Wireless Application Protocol (WAP).  These types of components are readilyavailable from various third-party application vendors and application servervendors such as IBM.

 

## *Application ProductOverview—Sanchez Webclient*

 

        SanchezWebclient is a Web-enabled Internet banking application that provides aninstitution’s customers with a single access point to their financialinformation by creating a personalized financial services portal for alltransactions and products.  Webclientintegrates a financial institution’s retail customer’s financial products intoa content rich Web site where the customer can view account information andperform transactions.

 

        Sanchez Webclient providesa dynamic page-publishing framework that allows an institution to retaincontrol over the appearance, navigational elements and content of the Website.  Sanchez Webclient also works withthird-party applications to drive content presentation; e.g., Sanchez Webclientsupports download capabilities to popular personal finance packages such asMicrosoft Money® and Quicken®.  The software provides a mechanism for targeting banner ads andmarketing messages, according to predefined customer information.  From this data, Sanchez Webclient appliesuser-defined business rules to influence the content presented tocustomers  This functionality supportsone-to-one marketing campaigns and allows for cross selling of differentproducts, based on customer buying behaviors. All customer information is fully protected in a secureenvironment.  For customer loginsecurity, Sanchez Webclient supports password as well as certificateauthentication schemes.  Data encryptiontechniques are applied to ensure sensitive financial data is safeguarded.

 

        To achieve maximumscalability and flexibility, the Webclient application is built on the SanchezXpress platform.  The application alsotakes advantage of the advanced features of Sanchez Xpress including the UniversalCustomer System (UCS) for customer aggregation, events, alerts andcorrespondence management, security and authentication, customer prospectingand personalization. It also utilizes the Sanchez Xpress financial productdistribution facility to allow the institution to provide one-to-one customerproduct personalization and packaging, regardless of the host systems involved.

## * *

## *ApplicationProduct Overview — Sanchez WebCSR*

 

        SanchezWebCSR is a browser-based customer and account servicing application used by aninstitution’s service representatives to respond to customer inquiries andrequests.  It is built on a pure Java platformfollowing the Java 2 Platform Enterprise Edition (J2EE) specifications.  It employs the use of standard HTML,JavaServer Page (JSP) technology and JavaServlet technology for user interfacecomponents of the application. Following these standards allows the applicationto be deployed using any HTTP Web server such as IBM’s HTTP Server forWebSphereMQ, or the Apache HTTP Server for maximum portability and scalability.

 

        SanchezWebCSR is built on the Sanchez Xpress platform providing servicerepresentatives with an aggregated view of the customer’s relationship with theinstitution.  It provides a completecustomer and account origination process that includes customer authenticationand credit checking as well as customer servicing capabilities.

## * *

 

 

4

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*ApplicationProduct Overview — Sanchez CRM*

 

        SanchezCRM is a Java-based CRM solution that allows an institution to leverageexisting customer information in order to better measure customer value to theorganization, provide improved customer service, improve sales efforts andimprove business intelligence.  Sanchez CRMprovides the ability for the entire organization to effectively identify,acquire, foster and retain loyal, profitable relationships.

 

*Wealth Management Application Products — Overview*

 

        SanchezWealthwareTM, an integrated wealth management platform, empowersfinancial institutions to effectively manage investor assets online and achievea competitive advantage by lowering costs/improving ROI, reducing technologyrisks and improving customer service. Sanchez Wealthware has multi-currency and multi-language capabilities,and can accommodate the wealth management requirements of financial serviceinstitutions with global transaction requirements.  Sanchez Wealthware is available as separate modules andapplications.  Each module can beimplemented individually or integrated for a customized, seamless wealthmanagement solution.

 

*ApplicationProduct Overview**—Information Management*

 

*SanchezInformation Server*

 

        Wealthmanagement solutions need to gather aggregated information about the accountswithin a financial institution, their relationship to one another and theactivity they produce.  SanchezInformation Server and its related suite of products perform the informationmanagement function within the Sanchez Wealth Management offering.  At the core of Sanchez Information Server isa client-centric data model deployed using standard and open technology, whichprovides financial institutions with the ability to manage executive levelrisks and opportunities.  SanchezInformation Server supports multiple sources of data, multiple currencies,multiple business models and provides hierarchical dimensions in the data toallow for ease of reporting.

 

## *SanchezCorrespondent Ledger*

 

        SanchezCorrespondent Ledger, powered by Sanchez Information Server, assists clearingfirms with managing their clearing relationships.  This is done via the ability to track unique billingarrangements, miscellaneous charges, and distributing information to the correspondentclients.  On a daily basis the clearingfirm and their correspondent clients can see exactly how much is owed to thecorrespondent firm. Sanchez Correspondent Ledger is an accounting basedsystem.  This allows for a completeaudit trail of journal entries that affect the correspondent balance.

 

*SanchezCommission Ledger*

 

Sanchez Commission Ledger, powered by SanchezInformation Server, provides information for Registered Representative (RR)commission payouts and detailed management reporting.  Sanchez Commission Ledger, a multi-host and multi-currencysystem, provides profitability reporting to broker/dealers and payoutstatements to registered representatives and branch managers. Using thegraphical user interface, users can easily create and manage multiple complexcommission contracts and set up breakpoints based on trade volumes or grosscommissions.  Through the use ofefficient, concise rule-based engines, commissions are calculated automaticallytaking into consideration several levels of complexity including rates,breakpoints, sharing, and currencies. The calculated commissions may be entered into a firm’s payroll systemor accounts payable system for payment processing, and are stored historicallyfor future reference.

 

## *Application Product Overview — Investor Management*

 

*Sanchez Account Inquiry*

 

        SanchezAccount Inquiry is an intranet/extranet application that allows investors,advisors, and groups across the organization to access client, account,holding, and historical transaction information from an operational datastore.  It supports access via any webor wireless Graphical User Interface (GUI) or Interactive Voice Response (IVR)interface.  A single, XML client APIenables a common, brand-able user interface to be provided.

 

 

5

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## *SanchezPortfolio*

 

        SanchezWealth Management has a 20 percent ownership stake in Croesus Finansoft (CF), aCanadian portfolio management software firm. Sanchez Wealth Management has a non-exclusive agreement with CF tomarket and sell the product under the brand of Sanchez Portfolio.  Sanchez Portfolio is a feature-rich portfolioand contact management application that assists financial advisors in managingtheir business.

 

## *Application Product Overview — Order Management*

## * *

## *SanchezEquities*

 

## *        SanchezEquities is a full-featured order management system for online, real-time equitiestrading.  This software managessophisticated order routing for all exchange-listed instruments, linkingclients and the sales force with the trade desk, exchange floors and automatedexecution systems.  The browser-basedfront-end allows users to connect through the Internet, branch office, orintranet.*

## * *

        The Sanchez Equities application is composed of three sets ofprimary services, a security service, and client components that run as ActiveXcomponents in a browser.  The threeprimary services for Sanchez Equities are:

 

•       Query and Notification

•       Order Entry and Edit

•       Order Management and Routing

 

        Additional services provided by Sanchez Equities includeapplication maintenance, nightly reconciliation and process monitoring.

 

## *Sanchez Bonds*

 

Sanchez Bonds is amulti-functional, online application that provides a real-time display of priceand inventory information for fixed income trading. It can be implemented in asingle or multi-dealer environment. Configurable filtering capabilities allow advisors to find suitableproducts from thousands of available offerings.  A robust pricing engine capable of re-pricing thousands of lineitems as needed to support large-scale operations also allows for flexiblepricing modeling including curve and matrix pricing, hand pricing and pricenegotiation.  As an order is placed,Sanchez Bonds immediately calculates price, commission, cost and yield.  Sanchez Bonds also validates order detailsto ensure that data has been entered correctly.  Sanchez Bonds ensures trading rules are enforced for eachparticipant and also keeps price and inventory levels current, allowing firmsto offer a wider variety of products while minimizing the risk of complianceviolations.  Sanchez Bonds serves thefull breadth of fixed-income securities including strips, mortgage-backedsecurities, corporates and governments.

 

## *Sanchez Funds*

## * *

## *        SanchezFunds is a complete mutual fund solution that automates the purchase and saleof mutual funds straight from the client to the mutual fund companies.  Available in a Windows or a Web-basedfront-end version.  Sanchez Fundsautomates activities relating to buys, sells, exchanges, and internal transfersincluding changes and cancels on trade date. Sanchez Funds supports extensive fee logic, back office data edits,external order sources and multi-currency trading.  Automated trade and bookkeeping operations also update backoffice systems.  Sanchez Funds editsorders in real-time for fund code, commission rates, client account format andorder size.  Based on the client accountnumber and fund code, the system automatically retrieves address data, SocialInsurance Number (SIN), Social Security Number (SSN) or equivalent, positioninformation and the fund account number from Sanchez Information Server, or afirm’s equivalent data store.  If theorder passes all edits, it is automatically sent to the appropriate fundcompany for processing.  The system willqueue orders if the fund company system is down and it will send the orderswhen the link is restored.  When thefund company accepts the order, it assigns a wire number, which is transmittedback to Sanchez Funds.  Upon receipt ofthe wire number, Sanchez Funds updates the order status.  Alternatively, if the fund company rejectsthe order and returns an error code, Sanchez Funds immediately updates theorder status to rejected and provides an error message for the client foraction.  Sanchez Funds delivers ordersvia NSCC and FundSERV connections or via optional direct links to the fundcompanies.*

 

 

6

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*SanchezFunds Product Suite*

 

        MutualFund Activity — automates the posting of fund company-generated transactions tothe back office; e.g., dividends and transfers.

 

        Mutual Fund Reconciliation — manages activityand reconciliation based on thresholds and filters.  The system runs unattended and facilitates on-line review ofexceptions, out-of-balance situations, and other information.  This helps securities firms increasetransaction processing while reducing costs and regulatory capitalrequirements.

 

        StandingOrder — allows a financial institution to input and query standing orders (e.g.buying the same dollar amount of the same mutual fund every month) and willautomatically generate the required transactions at the specifiedfrequency.  Standing Order generatesorders for Sanchez Funds (for standard mutual fund transactions) and EFTtransactions (for moving the required or resulting cash between accounts).

        WRAP — manages fee-based model portfolios and mutual fundholdings that belong to these model portfolios.

 

*Application Product Overview — Market Data Management*

 

*Sanchez Market Data*

 

        SanchezMarket Data simplifies GUI design and portfolio maintenance with support foralerts and reporting services.  Commonportfolio functions have been normalized into a central utility, which may beused by any Web or wireless GUI/IVR interface. This approach does not restrict the creativity of the interfacedesigner, or the number and types of supported devices.  Access to Sanchez Market Data is from anopen API that allows it to work with or extend existing middlewareproducts.  Sanchez Market Data insulatesthe API user from all detailed knowledge of existing or future market datainfrastructures.  This allows developersto focus on design, and protects their work from changes in market datasuppliers.  The single API seamlesslyaggregates all the functionality needed to maintain groups of account profiles.  Functions include the maintenance ofindividual quote lists and alerts as well as integrated access to real-time anddelayed quotes and news.  All functionsare accessed through a central Web API that aggregates simple HTTP requestsinto rich XLM responses that can be used to build any custom GUI.

 

## *Sanchez Alerts*

 

        SanchezAlerts is a generic tool that provides automated notification of criticalinformation such as news, price and volume changes, order fills, and newissues.  User-defined information, suchas baskets and alerts are entered into the advisor’s Web-enabled device andtranslated from HTTP to XML via the HTML/XML web server that loads theinformation into the Sanchez Central Alert Template where it is stored in theuser’s profile.  Market data (i.e. newsand quotes) from the client’s quote provider is received by the Sanchez Quoteand News Alert Engines and loaded into the Sanchez Central Alert Template.  Information, such as order fills from ordermanagement software like Sanchez Equities, and other information like new issuealerts from other third party systems is downloaded in XML format where it istranslated into HTTP via the HTTP/XML API and loaded into Sanchez Central AlertTemplate.  Sanchez Central AlertTemplate processes all of the information received and determines which usersare to receive alerts, or other information based on their user profiles.  This includes determining where to directnotifications (voicemail, email, etc.) for the various alert profilesdefined.  Notifications are distributedto users in HTTP format and are received on their Web-enabled device(s).

 

*Outsourcing*

 

        Sanchez also uses itsintegrated banking platform as the basis for a complete outsourced e-bankingsolution under the Sanchez e-PROFILE® brand.  Sanchez Data Systems Inc. (SDSI) provides anintegrated end-to-end operations and technology platform that enables financialservices companies to offer comprehensive on-line financial services to theircustomers.  SDSI, which includes thedata center operations portion of the e-PROFILE outsourcing solution, is awholly owned subsidiary and division of Sanchez.  The division began operations in 1999.  SDSI is a vertical services provider (“VSP”) to the financialservices industry.  This solutionintegrates products and services from the industry’s “best-in-class” vendors,including Sanchez products, and manages them under a single, outsourcedoperating umbrella.  The Companybelieves the Sanchez e-PROFILE solution is the first vendor-developed solutionthat provides the ongoing technology, the operations and the pricing structuresrequired to support an outsourced supply chain venue for on-line financialservices.  The outsourcing solution alsoprovides the Company with a distribution channel for the suite of Sanchezproducts, related technologies and services. At December 31, 2002, there were10 clients processing their direct and Internet bank accounts at SDSI.

 

 

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        As ofDecember 31, 2002, SDSI was nearing the final stages of an outsourced bankingsolution implementation for a large U.S.-based brokerage institution, which isscheduled to go live during the first half of 2003.  The Company expects to continue to add more large, brandedinstitutions and continue to build its processing revenues from clientinstitution customer account growth on the platform.  With the restructuring of the Company into strategic divisions,certain revenues which had previously been included in our reported numbers forSDSI going forward will be presented in either our Banking Solutions or GlobalServices divisions.  However, processingmargins are expected to continue to improve in 2003.  Several major process automation projects were initiated during2002 to help increase profits and reduce costs.  Service level agreement performance for timeliness and qualityimproved throughout the year and exceeded expectationsand is illustrative ofSDSI’s commitment to provide high-quality outsourcing solutions toclients.  Several existing clientsextended their processing agreements during 2002 for periods ranging between 24and 36 months.

 

        In addition to Sanchezproducts, the Sanchez e-PROFILE solution offers institutions a range of onlinefinancial capabilities including:

 
| • |   | ATM network & card  management   | • | Electronic bill payment             |
|--------|--------|--------------------------------------|--------|-------------------------------------|
| • |   | Account origination                  | • | Email management                    |
| • |   | Bank operations                      | • | Imaging                             |
| • |   | Case management &  workflow      | • | Interactive voice response          |
| • |   | Call center                          | • | Item processing/lockbox  processing |
| • |   | Check production                     | • | OFAC screening                      |
| • |   | Collection systems                   | • | Anti Money Laundering               |
| • |   | Desktop integration                  | • | Credit Cards                        |
| • |   | Document creation &  fulfillment | • | Credit Decisioning                  |
| • |   | Document archiving                   |   |                                |

 

 

# ***Revenue Generation &Recognition***

 

        TheCompany derives its revenues primarily from fees assessed on products,services, software maintenance, processing as well as from other miscellaneousfees.

 

        Sanchezproducts may be licensed to a customer to run on an in-house basis, oralternatively, one or more Sanchez products may be used to provide anintegrated banking and technology platform that supports a complete, outsourceddirect banking solution.  Thisoutsourced solution is marketed under the Sanchez e-PROFILEÒ brand and isoperated by SDSI.  The solution providesan integrated, end-to-end bank operations and technology platform that enablesfinancial services companies to offer comprehensive, on-line financial servicesto their customers.

 

        Productfees include software license and product enhancement fees.  Service fees include clientimplementation-related services and consulting.  Processing fees consist primarily of monthly, account-based feesfor account maintenance, monthly servicing and transaction fees associated withtransaction volumes for a specified period. Software maintenance and other fees primarily consists of revenue earnedfor ongoing software maintenance and support as well as rebillable expenses.

 

For Sanchez’s banking and wealth managementsoftware license contracts, fees are typically paid in stages upon thecompletion of defined deliverables or certain dates.  The Company recognizes revenue from these fees using thepercentage-of-completion contract accounting method, or where applicable, on acash basis.  Service fees are generallyrecognized and billed monthly on a time and material basis.  Maintenance fees are normally billedannually in advance and recognized into revenue ratably during the specifiedmaintenance period.

 

        TheCompany’s outsourced business can generate revenues from product licenses,product enhancements, implementation-related services, license maintenance andprocessing.  Revenues generated from ouroutsourced customers during implementation are largely deferred during theimplementation phase of an outsourced project in accordance with StaffAccounting Bulletin No. 101 (“SAB No. 101”). Once an outsourced client begins processing its customers’ accounts onthe outsourced platform, i.e., “goes live,” the deferred revenue and costs areamortized over the expected life of the processing arrangement.  In addition, once the client is running onan outsourced solution, processing and transaction fees are assessed.  Under this model, once account volumesexceed a certain minimum level, as a client institution’s customer account basegrows, Sanchez increases its revenue stream. Sanchez outsourcing includes solutions for banking and wealthmanagement.  Financial institutionsselecting an outsourced solution either can purchase licenses for Sanchezproducts up-front, or in lieu of up-front license fees, institutions can opt tospread the license and accompanying maintenance fees on a per account/per monthbasis over the life of the processing contract.  Assessment of these fees begins after the client “goes live” withthe solution.

 

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## *Partners*

 

        TheCompany has established and maintains strategic alliance and partneringagreements with Hewlett-Packard (H-P, previously Compaq Computer Corporation),PricewaterhouseCoopers Consulting, now part of IBM (PwC), InternationalBusiness Machine Corporation (IBM), Sun® Microsystems, ComputerLandSA of Poland (ComputerLand), Sanchez Capital Services, Datawest Solutions,Deloitte Consulting and CMG.  TheCompany continues to establish strategic relationships with partners whom itbelieves will help deliver a comprehensive financial services solution toclients.  To this end, the Company iscontinuing to leverage its third-party relationships to engage in jointmarketing and project implementation activities.

 

        In1998, the Company formed a joint venture with Capital Services Inc., a financialservices and distribution company based in Mumbai, India.  The joint-venture company is named SanchezCapital Services and has certain distribution rights to Sanchez products inIndia and portions of the Middle East. Sanchez believes its alliance program facilitates its market expansionin its target markets.  Sanchez CapitalServices also provides programming resources for the Company.

 

        InSeptember 2002, Sanchez announced that it is working with its partner, TNIS, toreplace the legacy operational systems for Krung Thai Bank Pcl (KTB),Thailand’s largest retail bank.  TNIS’score business is systems integration — covering a wide range of services fromIT consultation, software development and customization, to hardwareconfiguration, implementation, training and service independent ofmanufacturers.  TNIS is based inThailand.

 

        Inaddition, Sanchez plans to expand the Company’s product distribution bycontracting with its partners to market and implement banking solutions intraditional legacy replacement opportunities around the globe.

 

*FinancialServices Market Overview*

 

        Thereare a myriad of factors at play in the financial services market, however, thisoverview focuses on trends with a direct impact on the Company’s business.  Equally, there are significant differencesin the dynamics of mature markets such as Western Europe and North America andemerging markets such as Russia, Thailand and China.  This overview addresses the commonalities and differences betweenthese two types of market.

 

        Inthe mature markets, generally constrained Information Technology (IT) budgetsare forcing CIOs to demonstrate early Return on Investment (ROI) and there is aclear trend towards the commercial and technology sides of the business workingin partnership to ensure IT spending brings real and near-term benefits to theenterprise and delivers increased share of wallet.  The Company sees a continued trend towards IT spending that willresult in a meaningful and sustainable reduction in operations and technologycosts as well as continued efforts to support a single view of the customeracross the financial services enterprise.

 

        Thelatter strategy is designed to support increased share of wallet, deliveroperational efficiencies and channel optimization as institutions seek toprovide incentives for their customers to use low-cost delivery channels likethe Internet, and save millions of dollars by diverting service support frombranches and call centers.  Additionally,institutions increasingly will come to find their core processinginfrastructures are both too expensive to maintain and too inflexible to meetthe demands of the competitive marketplace. Given the drive for demonstrable ROI and a strategic analysis of thecore competencies of financial services institutions, there is a renewed focuson outsourcing as a way of delivering modern infrastructure quickly and costeffectively.

 

        Financialinstitutions have learned from the failed infrastructure projects of the 1980sand early 1990s and are now pursuing strategies that mitigate the financial andtechnological risks.  Infrastructurechange is occurring in a pragmatic fashion as near-term business challenges ina particular area or line of business within the institution are being solvedwith IT solutions capable of supporting the whole enterprise over time.  The Company has developed a Line of BusinessMigrationä strategy,which it believes will be effective in meeting the needs of financialinstitutions wishing to replace legacy processing environments with a modernarchitecture.

 

        Withthe demise of the day trading frenzy of the late 90s and the emergence of amass affluent sector driven by the baby boomers, both banks and brokerages areseeing the need for comprehensive wealth management solutions.  There is a drive towards the provision ofon-line advice and other fee-based services as well as a strategic move todeliver integrated banking and wealth management services.

 

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        Incombination, these market demands will require the deployment of feature-richmiddleware solutions, modern, real-time core processing systems in the backoffice and integrated wealth management solutions. The Company’s middlewaresolution is designed to deliver enterprise customer and channel integrationwhile the core-processing platform is capable of supporting the needs of theworld largest financial services institutions. Additionally the Company’s recent acquisition of a wealth managementcompany affords the opportunity to provide integrated banking and wealthmanagement solutions.

 

        Allof these solutions may be deployed in-house or through the Company’soutsourcing division, SDSI.  Beyondproviding a risk-mitigating route for the deployment of mission critical ITinfrastructure, SDSI has captured a significant market share in the nichemarket of non-bank financial institutions wishing to leverage their customerand brand franchises through the deployment of banking services.

 

        Inemerging markets, the Company sees a higher pace of change often driven bymacro economic events; for example, Russia’s efforts to create a capitalisticeconomy, China’s membership in the WTO and the privatization and modernizationof the financial services industry in Thailand and India.  With the emergence of the necessary domesticcommunication networks, these countries are now in a position to sustain aninfrastructure transformation as they move from historic branch-based systemsto highly flexible, real-time centralized systems.  In many emerging markets the indigenous vendors do not have thetechnology or banking expertise to support this transformation, opening upopportunities for western IT vendors to fill the local void in product andservices.

 

        TheCompany has enjoyed considerable success over the years in markets of this sortand believes it is well positioned to capitalize on the opportunities nowbecoming evident.

 

# ***Sanchez Services***

 

        TheCompany derives significant revenues from its services.  Services revenues have historically originatedfrom Sanchez’s license application model and its outsourcing model and aresupplied using either a time-and-material or fixed price basis.

 

        Projectservices include project management, training (both standard and customized),system implementation, solution integration, custom interfaces to third-partyor in-house legacy applications, data conversion, integrated testing, customsoftware, custom output (reports, statements, notices), custom componentapplication, localization, and version upgrade services.  Trained financial service industryprofessionals deliver Sanchez services. They work primarily at client locations and follow a publishedmethodology employing proven project management and measurement techniques. Forinstitutions implementing Sanchez solutions in-house, project services areprovided during the initial implementation and also as contracted for byclients after conversion to Profile. Service revenues from an in-house implementation vary, but can rangefrom $250,000 to more than $5 million for an individual project. Typically, anin-house implementation for a top-tier institution involves moving a largevolume of customer data from existing systems onto the Sanchez platform. Inthese cases, service revenues are higher when compared against implementing ade novo solution where little or no data conversion work is required.  Project services from an in-houseimplementation also generate revenues from project management, training andcustom interface work. When an institution replaces its in-house, legacytransaction processing system with a Sanchez solution, data conversion andcustom system interface projects typically are delivered in six to 12months.  Other project servicesdelivered during the implementation period can include conversion, localizationand software customization.  Executionsupport is provided from several regional locations.  Education and Consulting Services are based in Malvern.

 

        Servicerevenues from an outsourcing project vary by the size and scope of theimplementation, but typically range from $1 million to more than $5 million perproject.  An outsourcing projecttypically involves creating an Internet bank from a clean slate and does notinvolve replacing a legacy system. Services associated with this type of project include project managementimplementation services, some data conversion, multiple system interfaces andintegrated systems testing.  Aninstitution can implement an outsourcing solution in as few as 120 days if thestandard outsourcing solution and product offering are implemented.  The Company has found, however, thatinstitutions frequently want to differentiate their direct and Internet bankofferings from the start.

 

        Aspart of the Company’s continued strategic focus on the European region, Sanchezopened its new European headquarter office in Amsterdam in October 2002.   The new office serves the Company’sEuropean customers in the region.  TheCompany has begun to grow its presence in Amsterdam and generate new sources ofrevenue.

 

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*ClientMaintenance Service*

 

        Themajor portion of the worldwide customer service and support is delivered fromthe Company’s Malvern, Pennsylvania headquarters and the Toronto, Canadalocation.  The client maintenanceservices units are responsible for help desk, research, systems operations andapplication quality assurance. A response team made up of research, qualityassurance and programming personnel is assigned when maintenance issues areidentified.  This team works together toensure that the customer issue is understood and dispatched accordingly.  All issues are tracked and measured, anddaily and weekly reports are generated for management review and action.  Each institution has a dedicated clientsupport analyst assigned to handle day-to-day issues.  Each client is also assigned a client manager.  The Company believes that service responseconsiderations play a major role in an institution’s selection of bankingsoftware products. To respond to this need, the Company continues to enhanceits ability to deliver localized customer support and installation capabilityworldwide, either directly or through third-party partners.  The Company provides local support servicesto clients in Poland through a partnership with ComputerLand, in Asia through apartnership with OpenSys, as well as in India through Sanchez Capital Services.

 

        Foroutsourcing clients, customer service is primarily supported through a data andoperations center located in Seven Fields, Pennsylvania.  The data and operations center isresponsible for providing support services to clients from implementationthrough production.  These servicesinclude project management and implementation support, technical support fordata operations and network issues, programming and testing, and Sanchezproduct application support and support for vendor integration services.  In addition to those services, the bankoperations departments provide call center support, maintenance, and itemexception handling.

 

*Sales andMarketing*

 

        TheSanchez Global Sales department is the primary sales channel for licensing theCompany’s products and solutions. Account relationship managers and Sanchez Global Services pursue serviceopportunities with existing client institutions.  The Company’s executive management team is also leveraged toincrease sales opportunities across all business lines.  In addition, the Company leverages thestrength of the distribution network of its various partners to extend ourglobal reach.

 

        TheCompany focuses its sales and marketing attention on selling banking and wealthmanagement solutions and services aimed at the world’s largest financialinstitutions, which are typically those with assets in excess of $4 billion(U.S.).  With all of its solutions,Sanchez markets its high quality and engineering excellence and seeks out thoseinstitutions in need of innovative solutions.

 

        TheCompany markets globally and prospects for sales opportunities withinstitutions in need of one or more of the following:

 

        Lineof business migration solutions — e.g., an institution has an immediate needfor a new mortgage processing solution, but also wants a migration path to moveother lines of business onto the same single, integrated processing platform.  The Company’s solution in this space isaimed at reducing operations and technology costs and providing a managed riskmigration strategy that allows a more controlled implementation schedule.  This approach permits larger institutions toutilize Sanchez solutions on a limited basis by engaging the Company to solvean immediate need.  Once successful, theCompany believes it can then grow the relationship by offering more Sanchezproducts and services.  In mature globalmarkets, the Company looks to capitalize on opportunities in the core bankingreplacement market by replacing lines of business and offering point solutions.

 

        Retaillegacy system replacement solutions — e.g., an institution needs to replace oneor more components of its legacy processing environment with a modern,integrated core banking platform.  Thisis a traditional market for Sanchez. Sanchez expects the opportunity for core replacement solutions to bestrongest in emerging world markets such as in the former Soviet republics andin Asia.  Sanchez looks to sellsolutions in these markets through partnerships established with local IT andfinancial services companies.

 

        Customerenterprise integration solutions — e.g., an institution has a need to integrateits product and service delivery channels with multiple back-office processingsystems based on a single, customer-centered platform.  With a solution featuring Sanchez Xpress,institutions tie the entire financial enterprise together through the institution’srelationship with its customers.

 

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        Outsourcingsolutions — e.g., a non-bank financial institution moves into banking andrequires a complete bank operations and technology infrastructure.  This is the Sanchez e-PROFILE outsourcing solutionoffered by Sanchez Data Systems, Inc.  ASanchez solution sale into this market segment would include most, if not allof the Sanchez integrated banking platform as well as offerings from otherbest-in-class, third-party vendors with whom the Company has establishedpartnerships.

 

        Wealthmanagement solutions — e.g., front-end servicing solutions for equities,options, fixed-income and mutual fund securities, and wrap account processingfor brokerages, bankers and insurance agents. To complement and broaden the Company’s integrated line of bankingproducts, Sanchez acquired Spectra Securities Software, of Toronto, Canada, inJuly 2002.  With the acquisition, theCompany added Spectra’s WealthwareTM brand of full-functioned,multi-channel wealth management applications. Sanchez intends to provide an integrated banking and brokerage platformfor the industry’s growing global requirements for wealth management.  To date, the majority of the Company’swealth management solutions have been sold in Canada.  Through Sanchez’s global presence, the Company intends to expandthe market reach of its wealth management solutions by introducing thosesolutions to Europe and other international markets.

 

## *Pricing Strategy*

 

        TheCompany sells software licenses for its products, offers five-year maintenanceand support agreements on licenses sold, sells processing contracts foroutsourcing, and sells a variety of professional services on both atime-and-materials basis and a fixed-priced basis.

 

        TheCompany licenses its core processing (Sanchez Profile) and middleware (SanchezXpress) software products on an account-based pricing model, which canaccommodate licenses for one or more production/processing sites.  Based on the total number of accountsrequired, an institution purchases a license for these products.  Profile for Windows, the Company’sWindows-based front-end servicing product is licensed based on the number ofLAN servers and individual workstations required.  The Company’s Web-based, bank front-end servicing products forcustomer service and teller operations in a branch or call center environment(Sanchez WebCSR and future Sanchez Webteller) are licensed on per-user basiswith discounts provided for licensing both products.  The Company’s Internet banking consumer interface (SanchezWebclient) is based on the number of customers registered with the bank’son-line service.  The Company alsolicenses its set of Profile Application Tools on an application-per-site basisor a bundle-per-site basis.  TheCompany’s products are sold directly to institutions and operated in-house orthey can be sold on an outsourced basis. The Company’s annual maintenance is billed as a percentage of licensedproducts.

 

        Inaddition to licensing Sanchez products as part of the Sanchez e-PROFILEoutsourcing solution, SDSI also contracts with clients for processing fees on aper account/per month basis.  SDSI hasmonthly minimum contracts for account processing, which are in effect until aclient generates enough activity to pass a specified processing threshold.

 

        SanchezWealth Management provides both licensing and Application Service Provider(ASP) options for deployment.  As partof the pricing structure of on-premise implementations, Sanchez WealthManagement charges a licensing fee, end user fees, implementation/professionalfees and maintenance fees.  For theoutsourced solution, there is a hosting cost to the client in addition to implementationfees and a monthly user/product charge.

 

## *Engineering*

 

        TheCompany believes that it must constantly evolve and enhance both the functionalscope and technical foundation of its products to remain competitive. In orderto accomplish this, the Company has historically incurred significant expensesrelated to development activities and may increase this investment in thefuture.  During 2002, the Companyinitiated an effort to utilize offshore development resources for routinesoftware development activities and testing. The effort was undertaken to reduce development costs and to manageresource availability more effectively.

 

        Engineeringfollows a formal software development life cycle process and as a result,Sanchez’s Software Engineering Group achieved the Level 3 rating of the SoftwareCapability Maturity Model® (CMM), developed by Carnegie MellonUniversity’s Software Engineering Institute (SEI) during 2002 for its bankingapplication products.  In support ofthis process, the Company has developed and acquired products that assist it indefining, planning, tracking, measuring and managing the developmentprocess.  The Company realizes thatlarge software projects can incur substantial cost, schedule and technicalrisk.  The engineering area providesSanchez banking application development, technology and platform development,maintenance programming, documentation, quality assurance, and applicationdeployment.  Engineering is responsiblefor defining plans for new product versions, developing 

 

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Sanchez product application enhancements,defining technology and platform layer enhancements to product architecture,evaluating and implementing operating system ports, programming languages,database systems, and development and productivity tools.  After engineering successfully implements anew technology component under an existing application component, it isresponsible for propagating the technology through the Company.  The Company’s wealth management division, insupport of the Company’s wealth management software applications, performssimilar engineering functions.

 

*Employees*

 

        Asof December 31, 2002, Sanchez employed over 600 full-time employees. Sanchezemployees are not represented by any collective bargaining agreements and theCompany has not experienced a work stoppage. The Company believes that its continued success will depend, to asignificant extent, upon the efforts and abilities of its senior management, inparticular Sanchez’s chairman, chief executive officer and its president (andchief operating officer).  Further, theCompany believes that its future success will depend in large part upon itsability to attract and retain highly skilled technical, management and salesand marketing personnel.  Competitionfor technical personnel is particularly intense, and could potentiallyconstrain the Company’s growth rate.  In2002, the Company continued to develop its off-shore development effort, andexpects to expand this effort during 2003, as required.  In addition to full-time employees, theCompany has historically utilized the services of various independentcontractors and third-party vendors, primarily for overseas implementationprojects and certain product development efforts.

 

## *Competition*

 

        For banking applicationsoftware solutions, the Company’s primary competitors are the in-housedevelopment staffs of the world’s largest financial institutions.  Other competitors are third-party developersand include Fidelity National Financial (Systematics software), Fiserv,Accenture and Alnova Technologies Corporation, CSC (Hogan software), MisysInternational Banking Systems (Kindle Banking Systems and Midas-Kapiti),Temenos (Globus), i-Flex Solutions, Fincentric (i-Wealthview), ComputerAssociates (interBiz Banking Group—Infopoint), SAP, Kirchman Corporation,Metavante (a subsidiary of Marshall & Illsley Corporation), Jack Henry,Aurum Technology, Open Solutions Inc (OSI), London Bridge International(Phoenix software) and Unisys. Competing with Sanchez in the direct and Internet segment of thefinancial services market are many of the same vendors listed above plus S1Corporation, Corillian, Sybase (Financial Fusion), InteliData (Interpose),Digital Insight and Online Resources Corporation.  For wealth management solutions, the Company’s primarycompetitors include Advent, x.eye, and Fincentric.

 

# ***Code of Conduct***

 

        TheSarbanes-Oxley Act of 2002 requires public companies to disclose whether theyhave adopted a Code of Ethics (Code). Sanchez has elected to adopt the rule early and has published a Code forall its officers, directors, employees and independent consultants.  The Code promotes honest and ethicalconduct, and addresses issues such as conflicts of interest, use of Company assetsand violations of law.  The Code ispublished on the Company’s Web site at www.sanchez.com.

 

**Investment Considerations**

 

        *Forward-lookingStatements May Prove Inaccurate.*

 

This Report and otherSanchez communications contain forward-looking statements that are subject torisks and uncertainties and that may change at any time and differ from actualresults.  Forward-looking statementsinclude information about possible or assumed future financial results ofSanchez and usually contain words such as “believes,” “intends,” “expects,”“anticipates” or similar expressions. Sanchez derives most of itsforward-looking statements from its operating budgets and forecasts, which arebased upon many detailed assumptions. While Sanchez believes that its assumptions are reasonable, it cautionsthat there are inherent difficulties in predicting certain important factors,such as:

 

•                 the effect of general economic and market conditionson processing levels and software and services buying decisions;

 

•                 the timing and magnitude of product and services sales;

 

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•                 the timing and scope of technological advances;

 

•                 the integration and performance of the recentlyacquired Spectra Securities Software, Inc. and that of future acquisitions,

 

•                 the ability to attract and retain clients and keypersonnel; and

 

•                 the overall condition of the financial servicesindustry.

 

Certain of these factorsare discussed further below.  Thesefactors, as and when applicable, and those discussed below should be consideredin evaluating Sanchez’s forward-looking statements and any investment inSanchez’s common stock.  Sanchez assumesno obligation to update any forward-looking statements, whether as a result ofnew information, future events or otherwise.

 

*RiskFactors.*

 

        Consider carefully the risks describedbelow before making any investment decision regarding Sanchez.  The risks and uncertainties described beloware not the only ones facing Sanchez. Additional risks and uncertainties not presently known to Sanchez orthat Sanchez currently deems immaterial may also impair Sanchez’s businessoperations.  If any of the events thatcreate the following risks occur, Sanchez’s business, financial condition orresults of future operations could be materially adversely affected.  In such case, the trading price of Sanchez’scommon stock could decline, and an investor in Sanchez common stock may loseall or part of his or her investment.

 

*Sanchez’sbusiness may be affected by general economic and market conditions.  If there is a general economic downturn, aweakening of the financial markets or an event that disrupts the financialservices industry, such as the terrorist attacks on September 11, 2001,Sanchez’s business and financial results may suffer.*

 

Sanchez believes thatproduct and services buying decisions and processing levels may be affectednegatively by a number of factors, including reductions in capital expendituresand information technology investment by clients, declines in on-line banking,trading volumes or asset values in the major financial markets and increasedcompetition.  These factors may, inturn, give rise to a number of trends that could slow revenue growth across thefinancial services industry, including longer sales cycles, deferral or delayof information technology projects, generally reduced expenditures for softwareand related services, and increased price competition.

 

*Sanchez’ssuccess depends in part on adapting its computer products and services tochanges in technology and in its clients’ businesses.  If Sanchez does not update its software and services or developnew products or services that are timely delivered to and well received byclients, Sanchez’s business and financial results may suffer.*

 

Sanchez’s ability tosuccessfully update and integrate its products and services and timely developand deliver new products and services required by its clients is subject to anumber of risks that could adversely affect Sanchez’s business and financialresults, including:

 

•                 Sanchez may find it difficult to update its productsand services and timely develop and deliver its new products and services in a cost-effective manner, especially when faced withrapid technological changes that are hard to predict;

 

•                 Sanchez may find it difficult to make certain aspectsof its product functionality work effectively and securely over the Internet or to integrate more of its products into efficientstraight-through processing solutions;

 

•                 Sanchez may find it difficult to update its productsand services to keep pace with business, regulatory and other developments in the financial services industry in which most ofSanchez’s clients operate;

 

•                 ongoing developments in patent law and the increasingnumber of software patents granted may make it more difficult or costly for Sanchez to add or retain important features in itsproducts and services; and

 

•                 to the extent that Sanchez’s products and servicesinvolve the storage and transmission of confidential information, security breaches could expose Sanchez to a risk of loss andpossible liability.

 

 

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*Sanchez’sgrowth strategy depends in part on completing acquisitions.  If Sanchez is unable to acquire businesseson favorable terms or successfully integrate and manage the businessesacquired, Sanchez’s business and financial results may suffer.*

 

        Sanchez intends to grow byexpanding its existing businesses and by acquiring similar or complementarybusinesses.  This growth strategy issubject to a number of risks that could adversely affect Sanchez’s business andfinancial results, including:

 

•                 Sanchez may not be able to find suitable businesses toacquire at affordable valuations or on other acceptable terms;

 

•                 Sanchez may have to borrow money or raise money in thedebt or equity markets to finance future acquisitions; and

 

•                 changes in accounting, tax, securities or otherregulations may make it more difficult or costly for Sanchez to complete acquisitions.

 

The businesses acquiredby Sanchez, including the recently acquired Spectra Securities Software, Inc.,may perform worse than expected or may be more difficult to integrate andmanage than expected.  If that happens,Sanchez’s business and financial results may suffer for a number of reasons,including:

 

•      Sanchez may have to devote unanticipated financial andmanagement resources to the acquired businesses;

 

•      Sanchez may not be able to realize expected operatingefficiencies or product integration benefits; and

 

•      Sanchez may have to write off goodwill or other intangibleassets.

 

*Sanchez’sbusiness is dependent on attracting and retaining clients. If Sanchez is unableto attract and retain clients, Sanchez’s business and financial results maysuffer.*

 

Sanchez’s future successdepends on its ability to obtain, retain and sell additional services toclients. A variety of factors could affect Sanchez’s ability to obtain andretain clients, including demand for Sanchez’s products and services,competition (including internal client solutions), integration of acquiredbusinesses, and client budgetary constraints and selection procedures. Sanchezdoes not have a unilateral option to extend the terms of such contracts upontheir expiration. The failure of clients to renew contracts, a reduction inusage or value under any contracts or the cancellation of contracts couldadversely affect Sanchez’s business and financial results.

 

*Sanchez’sbusiness is dependent on skilled personnel. If Sanchez is unable to attract and retain skilled personnel, Sanchez’sbusiness and financial results may suffer.*

 

Sanchez’s future successdepends on the continued service and availability of skilled personnel,especially technical, sales and management personnel. Experienced personnel inthe information-technology industry are in high demand and competition existsfor their talents. There can be no assurance that Sanchez will be able tosuccessfully attract and retain the personnel that it needs. If Sanchez isunable to successfully attract and retain skilled personnel, Sanchez’s abilityto provide its products and services may be impeded. Even if Sanchez is able toattract and retain the skilled personnel it needs, Sanchez’s recruitment andcompensation expenses could grow faster than revenues, which could adverselyaffect Sanchez’s financial results.

 

*Sanchez’sbusiness is dependent largely on the financial services industry.  If the financial performance of thatindustry deteriorates, Sanchez’s business and financial results may suffer.*

 

Sanchez sells itsproducts and services to banks, mutual funds, brokers, insurance companies andother financial services firms. If the financial services industry or Sanchez’sclients in the financial services industry experience problems, Sanchez’sbusiness and financial results could be affected adversely.

 

*Forward-lookingStatements*

 

        Theinformation regarding “forward-looking statements” under Item 7.  “Management’s Discussion and Analysis ofFinancial Condition and Consolidated Financial Condition and Results ofOperations,” is incorporated herein by reference.

 

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Glossary

 
| AIMR                                          |   | Association for Investment Management and Research                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|-----------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Audit Trail                                   |   | A record of information indicating what changes were  made to an order, when, and by whom.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Back Office                                   |   | The administrative functions at a brokerage that  support the trading of securities, including trade confirmation and  settlement, recordkeeping and regulatory compliance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Clearing Firm                                 |   | Responsible for clearance and settlement  functionality for their own business (self-clearing) and that of  correspondents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Correspondent Firm / Introducing Broker       |   | Interacts with clients directly, but uses a clearing  broker to interact with the street (meaning to execute, settle and clear  transactions).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Fill                                          |   | The price at which an order is executed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| HTML                                          |   | Hypertext Markup Language.  The language used to design and display Web pages.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| Java                                          |   | A programming language for Internet and intranet  applications from Sun.  Java was  modeled after C++, and Java programs can be called from within HTML documents  or launched stand alone.  Java is an  interpreted language that uses an intermediate language.  The source code of a Java program is  compiled into “byte code,” which cannot be run by itself.  The byte code must be converted into  machine code at runtime.  This means  Java programs are not dependent on any specific hardware and will run in any  computer with the Java Virtual Machine.                                                                                                                 |
| JavaTM 2 Platform, Enterprise Edition  (J2EE) |   | Defines the standard for developing multi-tier  enterprise applications.  J2EE  simplifies enterprise applications by basing them on standardized, modular  components, by providing a complete set of services to those components, and  by handling many details of application behavior automatically, without  complex programming.                                                                                                                                                                                                                                                                                                                                                                             |
| JavaServer Pages (JSP)                        |   | Technology that allows Web developers and designers  to rapidly develop and easily maintain, information-rich, dynamic web pages  that leverage existing business systems.   As part of the Java family, JSP technology enables rapid development  of web-based applications that are platform independent.  JavaServer Pages technology separates the  user interface from content generation enabling designers to change the  overall page layout without altering the underlying dynamic content.                                                                                                                                                                                                          |
| Java Naming and Directory Interface (JNDI)    |   | A standard extension to the Java platform, providing  Java technology-enabled applications with a unified interface to multiple  naming and directory services in the enterprise.  As part of the Java Enterprise API set, JNDI enables seamless  connectivity to heterogeneous enterprise naming and directory services.  Developers can now build powerful and portable directory-enabled applications  using this industry standard.                                                                                                                                                                                                                                                                             |
| JavaServlet Technology                        |   | JavaServlet technology provides web developers with  a simple, consistent mechanism for extending the functionality of a web  server and for accessing existing business systems.  A servlet can almost be thought of as an applet that runs on  the server side — without a face.   Java servlets have made many web applications possible.  Servlets are the Java platform technology  of choice for extending and enhancing web servers.  Servlets provide a component-based, platform-independent method  for building web-based applications, without the performance limitations of  CGI programs.  Today, servlets are a  popular choice for building interactive web applications. |
| NSCC                                          |   | National Securities Clearing Corporation.  The world’s leading provider of  centralized clearance, settlement and information services to the financial  services industry.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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| Open Financial Exchange(OFX)        |   | Is a specification for the electronic exchange of  financial data between financial institutions, business and consumers via the  Internet. OFX, which enables transactional, permissive, data feed-driven Web  sites, thin clients and personal financial software, streamlines the process  financial institutions need to connect to multiple customer interfaces,  processors and systems integrators.   OFX supports a wide range of financial activities including consumer  and small business banking, consumer and small business bill payment, bill  presentment, and investments tracking, including stocks, bonds, mutual funds,  and 401(k) account details.                                                         |
|-------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Port                                |   | The process of moving a software application to a  new hardware platform, operating system, or language environment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| SSN                                 |   | Social Security Number (U.S.).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| WebSphere MQ                        |   | A range of products provides application programming  services that enable application programs to communicate with each other  using messages and queues.  This form  of communication is referred to as commercial messaging.  It provides assured, once-only delivery of  messages.  Using WebSphere MQ means  you can separate application programs, so that the program sending a message  can continue processing without having to wait for a reply from the  receiver.  If the receiver, or the communication  channel to it, is temporarily unavailable, the message can be forwarded at a  later time.  WebSphere MQ also  provides mechanisms for providing acknowledgements of messages received. |
| Wireless Application Protocol (WAP) |   | An industry wide standard for developing  applications over wireless communication networks.  The WAP Forum, originally founded by Ericsson, Motorola, Nokia,  and Unwired PlanetWML was formed to create the global wireless protocol  specification that works across differing wireless network technology types,  for adoption by appropriate industry standards bodies.                                                                                                                                                                                                                                                                                                                                                      |
| Wireless Markup Language (WML)      |   | It is a markup language based on XML, and is  intended for use in specifying content and user interface for narrowband  devices, including cellular phones and pagers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| Wrap                                |   | A fee-based account that  consists of a fund of funds.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| XML                                 |   | (E)xtensible Markup Language.  A document format for the Web that is more  flexible than HTML.  While HTML uses  only predefined tags to describe elements within the page, XML allows tags to  be defined by the developer of the page.   Thus, tags for virtually any data items can be used for specific  applications, allowing Web pages to function like database records.                                                                                                                                                                                                                                                                                                                                        |

 

 

**Item 2.  Properties.**

 

        The Company’s headquartersand principal administrative, sales and marketing, and application developmentoperations are located in approximately 102,000 square feet of leased space inMalvern, Pennsylvania.  These leasesexpire periodically between 2003 and 2007. The Company runs its international operations from an office inAmsterdam in The Netherlands.  TheCompany’s operations center is located outside of Pittsburgh, Pennsylvania inapproximately 31,000 square feet of leased space, which expires in 2004.  The Company also leases office space in NewYork, New York; Warsaw, Poland; Chester, the United Kingdom; Toronto, Canada;Sydney, Australia and Singapore.  TheCompany anticipates that it will be able to continue to obtain suitable spaceas needed.

 

**Item3.  LegalProceedings.**

 

        In the opinion ofmanagement there are no claims or actions against the Company the ultimatedisposition of which will have a material adverse effect on the Company’sresults of operations or consolidated financial position.

 

**Item 4.  Submission of Matters****to a Vote of Security Holders.**

 

        No matter was submitted toa vote of security holders, through the solicitation of proxies or otherwise,during the fourth quarter of 2002.

 

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**Item 4A.  Executive Officers of the Registrant.**

 

        The executive officers ofthe Company are as follows: 
| **Name**             |   | **Age** |   | **Position**                                     |
|----------------------|--------|---------|--------|--------------------------------------------------|
|                 |   |    |   |                                             |
| Michael A. Sanchez   |   | 45      |   | Chairman of the Board of Directors               |
|                 |   |    |   |                                             |
| Frank R. Sanchez     |   | 46      |   | Chief Executive Officer  and Director            |
|                 |   |    |   |                                             |
| Joseph F. Waterman   |   | 51      |   | President, Chief Operating  Officer and Director |
|                 |   |    |   |                                             |
| James Goodwin        |   | 59      |   | President, Sanchez Global  Services              |
|                 |   |    |   |                                             |
| Michael D. S. Harris |   | 42      |   | President, Banking  Solutions                    |
|                 |   |    |   |                                             |
| John McLeod          |   | 49      |   | President, Wealth  Management Division           |
|                 |   |    |   |                                             |
| Eric Panepinto       |   | 38      |   | President, Sanchez Data  Systems, Inc.           |
|                 |   |    |   |                                             |
| Richard Phillimore   |   | 56      |   | Senior Vice President,  Chief Marketing Officer  |
|                 |   |    |   |                                             |
| Todd A. Pittman      |   | 35      |   | Senior Vice President,  Chief Financial Officer  |
|                 |   |    |   |                                             |
| Daniel W. Sollis     |   | 44      |   | Senior Vice President  Global Sales              |

 

***        Michael A. Sanchez*** began hisentrepreneurial career more than 23 years ago when he founded Sanchez ComputerAssociates in 1979.  He served as bothchairman of the board and as the Company’s chief executive officer, a post heheld until April 1997.  He continuestoday as board chairman and remains instrumental in building successfulbusiness partnerships with leading systems integration and financial servicescompanies worldwide.  Under hisleadership, the Company has become a leading global developer, distributor andmarketer of financial services software. Mr. Sanchez guided the Company through its initial public offering inDecember 1996, and played a pivotal role in the Company’s global expansion inthe early 1990s.  Mr. Sanchez alsoserved as chief executive officer of e-PROFILE, Inc., the Company’s outsourcingdivision now called SDSI, where he was responsible for that division’s initialorganizational growth and development. Michael Sanchez is the brother of Frank Sanchez.

 

***        Frank R. Sanchez*** has been thechief executive officer since April 1999 and previously was president and chiefoperating officer of the Company since 1994. In his capacity as CEO, Mr. Sanchez is responsible for the overallstrategic direction and performance of the Company.  Mr. Sanchez also oversees a senior management team that directsthe Company’s four principal divisions — Banking Solutions, Wealth Management,Outsourcing and Global Services.  He wasthe principal architect of the Company’s integrated banking solutions andcontinues to be responsible for providing the overall direction of the productsuite and technical strategy.  From 1980until 1994, Mr. Sanchez was executive vice president in charge of technologyand product development.  Mr. Sanchez isa director of Transaction Systems Architects Inc.  Frank Sanchez is the brother of Michael Sanchez.

 

***        Joseph F. Waterman*** has served aspresident and chief operating officer of Sanchez since April 1999, and isresponsible for the operations of the Company. He leads a senior management team that directs the Company’s sales,marketing, finance, legal, human resources, investor relations and informationtechnology infrastructure.  Mr. Watermanjoined the Company in 1992 as a senior vice president and chief financialofficer.  Prior to joining Sanchez, Mr.Waterman was employed by Safeguard Scientifics, Inc. for 13 years.  Mr. Waterman began his career with ToucheRoss & Company and is a member of the American Institute of CertifiedPublic Accountants.

 

***        James Goodwin*** joined Sanchezas senior vice president for Services in May 2002.  He became president of the Company’s Global Services division inJanuary 2003, and is responsible for worldwide delivery of quality services toour customers.  Mr. Goodwin honed hisextensive management skills in the IT services arena at PricewaterhouseCoopersLLP (PwC) from 1994 through 2001, where he was a partner in theBanking/Management Consulting Services Group. As one of PwC’s financial services e-business leaders, Mr. Goodwin ledthe effort in assisting global financial service companies in defining theirInternet business strategies and providing subsequent implementation support.Prior to joining PwC, Mr. Goodwin was an associate partner with AndersonConsulting 

 

18

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LLP (1988-94); vice president, SystemsDevelopment at Burlington Northern (1986-87); and a director with Time Inc.(1969-86).  In 2001, Mr. Goodwin alsoserved as the global head of operations and technology for Patagon.com, a LatinAmerican direct banking and wealth management initiative.

 

***        Michael D. S. Harris*** joined theCompany in April 2000 as a vice president responsible for various businessdevelopment projects for the Sanchez PROFILE banking application.  He became the Company’s senior vicepresident in charge of engineering in November 2000, a position in which he wasresponsible for delivering and maintaining Sanchez software products includingall software development, testing and documentation activities.  In January 2003, he was named President ofthe Company’s Banking Solutions Division, a position in which he oversees allsoftware development and client support for the entire Sanchez suite ofintegrated banking products.  Beforearriving at Sanchez, Mr. Harris was a senior vice president for MasterCardInternational where he was the head of MasterCard’s global chip group.

 

***        Eric Panepinto*** is presidentof SDSI, Sanchez’s outsourcing division that provides financial data centerprocessing and bank support operations on an ASP basis.  The largest component to SDSI’s outsourcingis the Sanchez e-PROFILE solution, which is the complete, integrated, bankoperations and technology solution for direct bank initiatives.  With more than 20 years experience in thefinancial services industry, Mr. Panepinto has proven expertise in the areas ofmarketing, technical support, customer support, client services, sales,operations, and telecommunications. Prior to joining SDSI in 1999, Mr. Panepinto was a senior vice presidentat Citigroup’s Global Consumer Bank where his responsibilities includedcreating a world-class product offering for a new financial interactive networkthat combined personal banking and brokerage services.  Mr. Panepinto also held vice presidentpositions at Citicorp Investment Services, Inc., and Citibank-U.S. EuropeConsumer Bank.

 

***        John McLeod***served aspresident and CEO of Spectra Securities Software since founding the company in1989 until its acquisition by Sanchez in July 2002.  In January 2003, Mr. McLeod became president of the Company’sWealth Management Division.  Prior toestablishing Spectra, Mr. McLeod served on the board of directors at theCanadian brokerage firm Burns Fry Limited, where he was responsible for thefirm’s global technology requirements and the implementation of a digitaltrading floor system.  Previously, Mr.McLeod held a variety of technical and managerial positions at Peat MarwickMitchell & Co. and Wood Gundy Ltd.

 

***        Richard Phillimore*** joined theCompany as a senior vice president and the chief marketing officer in June2000.  As the chief marketing officer,he directs all facets of the Company’s marketing, public relations, andadvertising.  Previously, Mr. Phillimorewas the executive vice president of Infineer Inc., and a senior vice presidentfor MasterCard International.  AtMasterCard, prior to heading the association’s global smart card business, Mr.Phillimore was the general manager of Maestro International, MasterCard’sglobal on-line debit program.

 

***        Todd A. Pittman*** joined theCompany in December 2000 as a senior vice president and chief financialofficer.  He directs the day to dayfinancial and investor relations functions for the company.  Previously, Mr. Pittman was the chieffinancial officer for Integrion, where he directed all financial activities,including business planning, accounting, financial management, human resources,pricing, and shareholder relations. Prior to Integrion, Mr. Pittman worked for Coopers and Lybrand Consultingin their consulting practice and at Arthur Andersen in their auditpractice.  Mr. Pittman is a certifiedpublic accountant.

 

***        Daniel W. Sollis*** joined theCompany in April 1996 as vice president of North American sales.  He became senior vice president of sales inNovember 1997.  Mr. Sollis overseesworldwide sales activities and business development.  Prior to working at the Company, Mr. Sollis spent 16 years withDigital Equipment Corporation, beginning as a sales representative andconcluding his tenure there the general manager of financial service industrybusiness in Canada.

 

19

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**PART II**

 

**Item 5.  Market For Registrant’s Common Equityand Related Stockholder Matters.**

 

        TheCompany’s common stock has been listed on the National Market System of Nasdaqunder the symbol “SCAI” since it began trading on November 14, 1996.  The following table sets forth, on a pershare basis for the periods shown, the range of high and low sales price of theCompany’s common stock as reported by Nasdaq.

 
|                   |   | **High** |   | **Low** |   |
|------------------------|--------|----------|--------|---------|--------|
| **Fiscal Year 2001:**  |   |     |   |    |   |
| First Quarter          |   | $        | 17.56  |    | $      | 6.75 |   |
| Second Quarter         |   | 14.85    |   | 6.44    |   |
| Third Quarter          |   | 15.42    |   | 7.00    |   |
| Fourth Quarter         |   | 9.75     |   | 6.50    |   |
| **Fiscal  Year 2002:** |   |     |   |    |   |
| First Quarter          |   | 8.83     |   | 5.25    |   |
| Second Quarter         |   | 7.26     |   | 4.37    |   |
| Third Quarter          |   | 4.52     |   | 1.80    |   |
| Fourth Quarter         |   | $        | 4.08   |    | $      | 1.71 |   |

 

        Asof March 21, 2003 the Company had outstanding 26,774,802 shares of common stockheld by approximately 9,700 shareholders including beneficial owners of thecommon stock whose shares are held in the names of various dealers, clearingagencies, banks, brokers and other fiduciaries.

 

        Holdersof common stock are entitled to receive ratably such dividends, if any, as maybe declared by the Board of Directors out of funds legally available therefore,subject to any preferential dividend rights of outstanding PreferredStock.  To date, the Company has notpaid any cash dividends on its common stock and does not expect to declare orpay any cash dividend in the foreseeable future.

 

20

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**Item6.  Selected Financial Data**

 

        The statement ofoperations and balance sheet data presented below have been derived from theCompany’s audited consolidated financial statements.  The unaudited backlog data is derived from the Company'scontracted products, services, and maintenance agreements as well as minimumprocessing commitments from the Company's outsourcing clients.  The data presented below should be read inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations,” the Consolidated Financial Statements and the notesthereto and other financial information appearing elsewhere in this AnnualReport on Form 10-K.

 
|                                                    |   | **2002**                                |       | **2001** |   | **2000** |   | **1999** |   | **1998**      |   |
|---------------------------------------------------------|--------|-----------------------------------------|------------|----------|--------|----------|--------|----------|--------|---------------|--------|
|                                                    |   | **In Thousands, Except Per Share Data** |       |
|                                                    |   |                                    |       |     |   |     |   |     |   |          |   |
| **Statement  of Operations Data:**                      |   |                                    |       |     |   |     |   |     |   |          |   |
| Revenues                                                |   | **$**                                   | **93,018** |     | $      | 93,719   |   | $        | 74,500 |          | $      | 59,681 |   | $ | 46,018 |   |
| Earnings (loss)  before income taxes                    |   | **5,543**                               |       | 5,559    |   | (8,805   | )      | 7,440    |   | 10,763        |   |
| Net earnings  (loss)                                    |   | **3,874**                               |       | 3,879    |   | (6,072   | )      | 5,171    |   | 7,034         |   |
| Basic earnings  (loss) per share                        |   | **0.15**                                |       | 0.15     |   | (0.24    | )      | 0.22     |   | 0.31          |   |
| Diluted earnings  (loss) per share                      |   | **$**                                   | **0.15**   |     | $      | 0.15     |   | $        | (0.24  | )             | $      | 0.20 |   | $ | 0.29 |   |
| Weighted-average  common shares outstanding             |   | **26,312**                              |       | 25,707   |   | 24,912   |   | 23,911   |   | 23,042        |   |
| Weighted-average  common and diluted shares outstanding |   | **26,654**                              |       | 26,324   |   | 24,912   |   | 26,062   |   | 24,544        |   |
|                                                    |   |                                    |       |     |   |     |   |     |   |          |   |
| **Balance  Sheet Data:**                                |   |                                    |       |     |   |     |   |     |   |          |   |
| Cash and cash  equivalents                              |   | **$**                                   | **32,717** |     | $      | 40,955   |   | $        | 39,890 |          | $      | 25,404 |   | $ | 27,177 |   |
| Working capital                                         |   | **29,804**                              |       | 50,301   |   | 45,268   |   | 35,541   |   | 27,090        |   |
| Total assets                                            |   | **121,097**                             |       | 100,613  |   | 97,093   |   | 56,400   |   | 43,285        |   |
| Long-term debt,  including current portion              |   | **83**                                  |       | 314      |   |     |   |     |   |          |   |
| Total  shareholders’ equity                        |   | **$**                                   | **66,546** |     | $      | 60,130   |   | $        | 55,352 |          | $      | 45,438 |   | $ | 31,772 |   |
|                                                    |   |                                    |       |     |   |     |   |     |   |          |   |
| **Backlog:**                                            |   |                                    |       |     |   |     |   |     |   |          |   |
| Products and  services                                  |   | **$**                                   | **43,110** |     | $      | 25,908   |   | $        | 28,336 |          | $      | 6,207 |   | $ | 6,667 |   |
| Maintenance                                             |   | **40,749**                              |       | 28,371   |   | 18,795   |   | 25,490   |   | 27,253        |   |
| Minimum  processing commitments                         |   | **12,754**                              |       | 12,572   |   | 10,580   |   | 116      |   | — — |   |
| Total backlog                                           |   | **$**                                   | **96,613** |     | $      | 66,851   |   | $        | 57,711 |          | $      | 31,813 |   | $ | 33,920 |   |
|                                                         |        |                                         |            |          |        |          |        |          |        |               |        |  |  |  |  |  |  |

** **

** **

21

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**Item 7.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Overview**

 

        SanchezComputer Associates Inc. (Sanchez or the Company) is publicly traded on theNasdaq Stock Exchange under the symbol SCAI. The Company is a global leader in developing and marketing scalable andintegrated software and services that provide banking, customer integration,brokerage, wealth management and outsourcing solutions to approximately 400financial institutions in 21 countries. Sanchez corporate headquarters is located in Malvern, Pennsylvania.  The Company’s outsourcing data andoperations service center, Sanchez Data Systems, Inc. (SDSI), is located inSeven Fields, Pennsylvania.  On July 3,2002, Sanchez completed an acquisition of Spectra Securities Software, Inc., ofToronto, Canada (Spectra or Wealth Management), a leading provider ofcomprehensive wealth management solutions. Spectra and its products now carry the Sanchez brand and operate as theCompany’s Wealth Management Division. That division remains located in Toronto, Canada.  Sanchez also maintains services and salesoffices in San Ramon, California; Sydney, Australia; New York, New York;Amsterdam, the Netherlands; Warsaw, Poland; Chester, the United Kingdom; andSingapore.

 

        Beginning with the firstquarter of 2003, Sanchez organized into divisions and initiated new segmentreporting based on those divisions. Sanchez’s divisional segments are Banking Solutions, Wealth Management,Outsourcing, and Global Services. Headed by senior management executives of the company, each division hasindividual profit and loss responsibilities.

 

            The Company’sintegrated banking platform empowers financial institutions to acceleratebusiness transformation and achieve a competitive advantage by loweringoperating costs, reducing technology risks and improving customer management.  The banking platform products include:  Sanchez ProfileÔ, the highly flexible,multi-currency, multi-language, customer-centric, core banking and transactionprocessing application; Sanchez XpressÔ, an enterprise customer andtransaction management system, which empowers CRM and delivers businessintegration; Sanchez WebclientÔ, a Web-based, Internetcustomer front-end processor; Sanchez WebCSRÔ, a browser-based integratedcustomer servicing application that can be deployed across multiple retaildelivery channels such as branches and call centers; and Sanchez CRMÔ, a Web-basedcustomer relationship management system, which is currently available as astand-alone application or integrated with Sanchez’s banking platform.

 

        SDSI also uses the Sanchezintegrated banking platform as the basis for a complete outsourced directbanking solution under the Sanchez e-PROFILE® brand.  The Sanchez e-PROFILE solution provides anintegrated end-to-end operations and technology platform that enables financialservices companies to offer comprehensive on-line financial services to theircustomers.  At December 31, 2002, SDSIwas processing accounts for 10 clients. In addition, at 2002 year-end, a significant U.S. financial servicesinstitution remained in implementation and intends to launch a direct bank onSanchez’s outsourcing platform during 2003.

 

        SanchezWealthwareTM, an integrated wealth management platform, empowersfinancial institutions to effectively manage investor assets online and achievea competitive advantage by lowering costs/improving Return on Investment (ROI),reducing technology risks and improving customer service.  Sanchez Wealthware has multi-currency andmulti-language capabilities, and can accommodate the wealth managementrequirements of financial service institutions with global transactionrequirements.  Sanchez Wealthware isavailable as separate modules and applications.  Each module can be implemented individually or integrated for acustomized, seamless wealth management solution.  The Sanchez Wealthware modules and corresponding applications areInformation Management, Investor Management, Order Management and Market DataManagement.

 

        Formore information on the company’s products and services, Sanchez maintains atWeb site, which can be accessed at http://www.sanchez.com.  In addition, the Company makes itsSecurities and Exchange Commission (SEC) filings available for download fromits Web site.

 

**CriticalAccounting Policies**

 

        Oursignificant accounting policies are described in Note 2 to the consolidatedfinancial statements included in this report. We believe our most criticalaccounting policies, judgments and estimates include revenue recognitionmatters, determining the estimated lives of our processing contracts,determining if goodwill or intangible assets have been impaired, anddetermining our allowance for doubtful accounts.

 

        ForSanchez’s software license contracts, a determination needs to be made for eachcontract regarding whether the percentage-of-completion contract accountingmethod should be used to recognize revenue or whether revenue can be recognizedwhen the software is delivered and all of the conditions of the AmericanInstitute of Certified Public Accountants, Statement of Position (SOP) 97-2,“Software Revenue Recognition,” are met. Contract accounting is required if ourservices are essential to the arrangement. In many cases, our services areessential to 

 

22

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the arrangement because they involvecustomization and interfaces, and our license fees are paid in stages based onthe completion of defined service deliverables. As a result, we typicallyrecognize revenue from these arrangements using SOP 81-1, “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts”, which generallyresults in recording revenue over a six to 18 month period of time.  In other cases, our services are notessential, such as arrangements where an unrelated third party performsimplementation services and the realization of our license fee is not dependenton the completion of such services. In these situations, we recognize licensefees when persuasive evidence of an arrangement exists, the software isdelivered, our fee is fixed or determinable and collection is probable, whichgenerally results in recording revenue earlier than when contract accounting isused. The determination of whether our services are essential involvessignificant judgment and could have a material impact on our quarterly resultsof operations to the extent that significant new contracts are not accountedfor using contract accounting.

 

        Underthe percentage-of-completion contract accounting method, the Company recognizesrevenue from the entire arrangement based on the percentage of costs incurredrelated to the implementation and development services compared to the totalcost of such services. Using the percentage-of-completion method requiresmanagement to make estimates about the future costs of services, which aresubject to change for a variety of internal and external factors. A change inthese estimates could result in a material adjustment to the amount of revenuerecorded under an arrangement.

 

        TheCompany’s outsourced projects generate both product license revenues andimplementation-related service revenues, which in accordance with StaffAccounting Bulletin (SAB) No. 101, “Revenue Recognition in FinancialStatements,” are largely deferred during the implementation phase along withthe related costs until the client begins processing its customer’s accounts onthe outsourced platform. Once a client “goes live,” the deferred revenue andcosts are amortized over the expected life of the processing arrangement. Untilwe have more historical experience related to the actual term of processingarrangements, we have determined that the expected life of the arrangementsdoes not exceed their contractual term. As it becomes apparent that a clientwill renew its processing term, the expected life is extended prospectively. Todate, the contract terms have ranged from one to three years. Should a clientterminate early, all revenue and cost would be recognized as of the terminationdate, if the amount is determinable and collection probable, which could besignificant. A change in the expected life of the contract could have amaterial impact on the timing of future revenue and margin recognized from theamortization of deferred implementation and license fees.

 

        The Company has identified that its accounting policiesregarding intangible assets and goodwill are critical to the Company’s resultsof operations and financial position. At December 31, 2002, goodwill of$23.9 million and intangible assets of $8.5 million relate primarily to theCompany's Wealth Mangagement division, which was acquired on July 3, 2002from Spectra Securities Software, Inc. Goodwill impairment is assessed pursuantto SFAS No. 142, "Goodwill and Other Intangible Assets," andimpairment of other intangible assets is assessed pursuant to SFASNo. 144, "Accounting for the Impairment or Disposal of Long-LivedAssets." The Company determined that the carrying amounts of goodwill didnot exceed their respective fair values. The Company is required to perform thegoodwill impairment test at least annually or more frequently if circumstancesindicate possible impairment. When determining fair value, the Company usesvarious assumptions, including projections of future cash flows. Given thesignificance of goodwill and other intangible asset balances, an adverse changeto the fair value could result in an impairment charge, which could be materialto the Company’s financial statements.

 

        Accountsreceivable are reduced by an allowance for amounts that may becomeuncollectible in the future. The majority of the Company’s receivables are duefrom financial service organizations located throughout the United States,Europe and Canada. From time to time, our clients dispute the amounts due to usand in other cases our clients experience financial difficulties and cannot payon a timely basis. In certain instances, these factors ultimately result inuncollectable accounts. The determination of the appropriate reserve needed foruncollectable accounts involves significant judgment. A change in the factorsused to evaluate collectability could result in a significant change in thereserve needed. Such factors include changes in the financial condition of ourcustomer as a result of industry, economic or customer-specific factors, theultimate settlement of disputes and, in certain cases, the decisions of thirdparty arbitrators or courts.

 

23

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**Results ofOperations**

 

        Thefollowing table sets forth for the periods indicated selected statement ofoperations data:

 
|                                                                            |   | **Year Ended  December 31,** |       |
|---------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                            |   | **2002**                     |       | **2001** |   | **2000** |   |
|                                                                            |   | **Dollars in  Thousands**    |       |
| Revenues                                                                        |   |                         |       |   |   |   |   |
| Products                                                                        |   | **$**                        | **18,754** | ** ** | $ | 23,958 |   | $ | 20,076 |   |
| Services                                                                        |   | **32,207**                   | ** ** | 33,928 |   | 27,294 |   |
| Processing                                                                      |   | **19,164**                   | ** ** | 14,883 |   | 8,259 |   |
| Software  maintenance fees and other                                            |   | **22,893**                   | ** ** | 20,950 |   | 18,871 |   |
| Total revenues                                                                  |   | **$**                        | **93,018** | ** ** | $ | 93,719 |   | $ | 74,500 |   |
| Percentage  relationship to total revenues                                      |   |                         | ** ** |   |   |   |   |
| Revenues                                                                        |   |                         | ** ** |   |   |   |   |
| Products                                                                        |   | **20.2**                     | **%**      | 25.5 | % | 27.0 | % |
| Services                                                                        |   | **34.6**                     | ** ** | 36.2 |   | 36.6 |   |
| Processing                                                                      |   | **20.6**                     | ** ** | 15.9 |   | 11.1 |   |
| Software  maintenance fees and other                                            |   | **24.6**                     | ** ** | 22.4 |   | 25.3 |   |
| Total revenues                                                                  |   | **100.0**                    | ** ** | 100.0 |   | 100.0 |   |
| Operating  expenses                                                             |   |                         | ** ** |   |   |   |   |
| Product  development                                                            |   | **17.2**                     | ** ** | 18.3 |   | 30.6 |   |
| Product support                                                                 |   | **6.1**                      | ** ** | 5.4 |   | 5.9 |   |
| Services                                                                        |   | **22.0**                     | ** ** | 26.8 |   | 24.7 |   |
| Processing                                                                      |   | **17.5**                     | ** ** | 14.5 |   | 9.0 |   |
| Sales and  marketing                                                            |   | **14.0**                     | ** ** | 15.4 |   | 15.7 |   |
| General, administrative  and other                                              |   | **17.2**                     | ** ** | 15.6 |   | 28.3 |   |
| Restructuring  charges                                                          |   | **0.8**                      | ** ** | — |   | — |   |
| Total operating  expenses                                                       |   | **94.8**                     | ** ** | 96.0 |   | 114.2 |   |
| Earnings (loss)  from operations                                                |   | **5.2**                      | ** ** | 4.0 |   | (14.2 | ) |
| Interest income,  net                                                           |   | **1.0**                      | ** ** | 1.9 |   | 2.4 |   |
| Loss on  investment                                                             |   | **(0.4**                     | **)**      | — |   | — |   |
| Foreign exchange                                                                |   | **0.2**                      | ** ** | — |   | — |   |
| Earnings (loss)  before income taxes                                            |   | **6.0**                      | ** ** | 5.9 |   | (11.8 | ) |
| Income tax  provision (benefit)                                                 |   | **1.8**                      | ** ** | 1.8 |   | (3.9 |   |
| Net earnings (loss) before cumulative effect of change in  accounting principle |   | **4.2**                      | ** ** | 4.1 |   | (7.9 | ) |
| Cumulative effect of change in accounting principle                             |   | **—**                   | ** ** | — |   | (0.2 | ) |
|                                                                            |   |                         | ** ** |   |   |   |   |
| Net earnings  (loss)                                                            |   | **4.2**                      | **%**      | 4.1 | % | (8.1 | )% |

 

 

24

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**Highlightsfor 2002**

 

        For the year endedDecember 31, 2002, the Company generated approximately $93million in revenue and posted net earnings of $3.9 million, or $0.15 perdiluted share.  The Company’sbacklog, including minimum processing contract obligations reached a recordlevel of approximately $96.6 million at year-end 2002, including $31.1 millionin net SAB No. 101 deferred revenue with a deferred margin balance of $11.3million.  Deferred revenue is part ofthe Company’s future revenue stream and is included in the Company’s backlog.  This, along with the recurring revenue fromprocessing, which is generated from Sanchez’s outsourcing division,unrecognized license fees, and maintenance contracts, enhances the Company’svisibility on future revenues. Sanchez’s cash position at December 31, 2002 was $32.7 million.  The Company generated cash flow fromoperations of approximately $19.8 million for the year ended December 31,2002.  The Company reduced its dayssales outstanding (DSO) as of December 31, 2002, to 61 DSO, which is asignificant improvement over the 99 DSO reported as of December 31, 2001.  From the acquisition on July 3, 2002,through December 31, 2002, the Sanchez Wealth Management Division contributedapproximately $7.7 million in revenue and $695,000 in operating earnings.  In 2002, the Company also improved itsprocessing margins to 15.0 percent from 8.8 percent recorded in 2001.

 

Additional highlights for the year included:

 

•                  Sanchez acquired SpectraSecurities Software Inc., of Toronto, Canada, a leading provider ofcomprehensive wealth management solutions, for approximately $28.9 million incash and common stock, net of cash acquired and including transaction costs.

•                  Scotiabank, one of NorthAmerica’s premier financial institutions, signed a software license agreementto utilize the Sanchez integrated banking platform to process its mortgage loanportfolio.

•                  Krung Thai Bank Pcl. (KTB),Thailand’s largest retail bank with more than 11 million accounts and 645branches, selected the Sanchez Profile banking solution to replace the bank’slegacy operational systems.

•                  MetLife Bank, the nationallychartered bank subsidiary of MetLife Inc., went live with using a Sancheze-PROFILE outsourcing solution.  Thebank also licensed Sanchez Profile, Sanchez Xpress, and Sanchez’s two Web-based,front-end customer servicing applications, Sanchez WebclientandSanchez WebCSR.

•                  Coast Capital Savings, whichis Canada’s second largest credit union, merged with Surrey Metro Savings inJune 2002, and, after an extensive review of each credit union’s processingplatform, decided to consolidate operations onto the Sanchez Profileplatform.  As a result, Coast Capitalsigned a license expansion to accommodate the increased account scope.

•                  Under terms of the Company’slong-standing global licensing agreement with ING Group N.V., Sanchez signed alicense expansion for Sanchez Profile with ING’s Postbank to facilitate newproduct offerings.  Sanchez opened anoffice in Amsterdam to better serve ING and other European clients.  Sanchez and Postbank are in the initialphases of a multi-year project, which will use Sanchez Profile as theintegrated core banking and transaction processing system for ING servicecenters.

•                  The Company signedprocessing contract extensions with two of its clients — GMAC Bank and Lehman BrothersBank FSB, the banking subsidiary of Lehman Brothers, a leading globalinvestment bank.  In addition, asignificant U.S. financial services institution remains in implementation tolaunch a direct bank on Sanchez’s outsourcing platform.

•                  Sumitomo Mitsui BankingCorporation (SMBC), the world’s third largest banking corporation, successfullymigrated its Los Angeles, California, corporate banking customer and depositoperations to a Sanchez banking solution and merged the bank’s Los Angeles andNew York account database systems into a single processing environment.  Sanchez has now replaced legacy coreprocessing components of SMBC’s international corporate banking systems in NewYork, London, Brussels and Los Angeles as part of the bank’s ongoing GlobalIntegrated System (GIS) initiative begun in 1998.

•                  Invest-BankSA of Poland acquired a license for a Sanchez core banking solution to supporta broad range of deposit and loan products. ComputerLand SA, one of Sanchez’s strategic solution partners, played anintegral role in winning this new client.

•                  Goldfish Bank Limited of theUnited Kingdom, a joint venture of Centrica plc and Lloyds TSB, went live witha Sanchez solution utilizing Sanchez Profile to support multi-channel bankingtransactions.

•                  Paymap Inc., a subsidiary ofFirst Data Corp., and a leading provider of innovative electronic paymentsolutions, successfully rolled out a Sanchez software solution to increase thecapabilities of Paymap’s high-volume, consumer electronic mortgage paymentsystem, which it operates daily on behalf of more than 40 banks.

•                  Sanchez’s SoftwareEngineering Group achieved the Level 3 rating of the Software CapabilityMaturity Model® (CMM), developed by Carnegie Mellon University’sSoftware Engineering Institute (SEI).

 

 

25

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•                  Celent Communications rankedSanchez as the top banking-focused wealth management solution vendor in its“Ranking the Vendors of Wealth Management Technology 2002:  Wealth Management Platforms” report.

•                  Sanchez licensed Java-basedcustomer relationship management (CRM) software developed by a third party,with the intent to integrate components of the technology with Sanchez’sintegrated banking platform.

 

**2002Compared to 2001**

 

REVENUES

 

        Totalrevenues decreased $701,000, or 0.7%, for the year ended December 31, 2002, ascompared to the year ended December 31, 2001.

 

        Productrevenue decreased by $5.2 million, or 21.7%, from 2001 to 2002.  The Company’s newly acquired WealthManagement Division contributed $3.6 million to product revenues in 2002.  The decrease in product revenue is primarilyattributable to fewer client product initiatives and an increase in the netlicense revenue deferrals associated with SAB No. 101 in 2002.

 

        Servicerevenues decreased $1.7 million, or 5.1%, from 2001 to 2002.  Service revenues for the year ended December31, 2002 included $3.2 million in revenue related to 1stWebbankdirect that hadbeen previously deferred in accordance with SAB No. 101.  The Company was able to recognize thisrevenue based upon the favorable arbitration ruling in respect to a disputewith 1stWebbankdirect.  Also during2002, the Company settled its outstanding receivable with an unannounced clientpreviously disclosed in the Company’s periodic filings with the SEC. As aresult, the Company recognized approximately $2.9 million in service revenue inthe third quarter, which was previously deferred pursuant to SAB No. 101.Wealth Management contributed $2.1 million to service revenues during 2002.  The increases from Wealth Management and thetwo client settlements were offset by a decrease in service revenues of $9.9million in the year ended December 31, 2002, as compared to same period in2001, due to fewer clients in implementations in 2002 and extended accretionperiods for several of our SAB No. 101 clients.

 

        Processing revenues increased by $4.3million, or 28.8%, in 2002, as compared to 2001.  The overall increase is primarily attributable to the increase inthe number of clients using the outsourcing solution and an increase in thenumber of accounts being processed on our outsourcing platform.

 

        Software maintenance andother revenue increased by $1.9 million, or 9.3%, for the year ended December31, 2002, as compared to the year ended December 31, 2001.  Annual maintenance increases, maintenance onlicense expansions and an increase in reimbursables revenues in the year endedDecember 31, 2002 contributed to this increase.  Revenues in 2001 included a one-time benefit from the settlementof a disputed maintenance charge with a former customer.  The software maintenance and other revenuefrom Wealth Management contributed $1.9 million in 2002 and offset the effectof this one-time benefit in 2001.

 

OPERATING EXPENSES

 

        Product developmentexpenses decreased $1.2 million, or 6.8%, in 2002.  This decrease is primarily attributable to the reduction in theuse of third party subcontractors.  Alsocontributing to the decrease was an increase in the net deferral, under SAB No.101, of product development costs associated with certain clients who havepurchased a license and were in the process of implementing our outsourcingsolution.  In addition, the impact ofthe reduction in force reduced product development expenses in 2002.  These expense reductions were partially offsetby the impact of the Wealth Management acquisition in July.

 

*       *Product support expenses increased by$601,000, or 11.9%, for the year ended December 31, 2002, as compared to thesame period last year.  This increasewas primarily due to expenses from the newly acquired Wealth Managementbusiness offset by lower third party support fees, as the Company was able toprovide more of the support with internal resources.

 

26

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*       *Service expenses decreased by $4.7 million,or 18.8%, during the year ended December 31, 2002, as compared to the sameperiod in 2001.  The decrease wasprimarily due to a significant reduction in the use of third party serviceproviders.  Service expenses in 2002also included the recognition of $2.9 million in expenses related to1stWebbankdirect that had been previously deferred in accordance with SAB101.  In addition, service expenses in2002 included the recognition of $1.9 million in expenses related to thesettlement of an outstanding receivable with an unannounced client, that hadalso been previously deferred in accordance with SAB No. 101.  The gross margin relative to associatedrevenues was 36.6% for the year December 31, 2002, compared to 25.9% in theprior year.  The improved marginsrealized are primarily a result of a significant reduction in the use of thirdparty service providers, higher utilization rates of our internal resources,higher margins realized on a fixed price implementation project, as well asdeferrals from SAB No. 101 of certain lower margin projects which will beaccreted in future periods.

 

*       *Processing expenses increased $2.7million, or 20.0%, in 2002, as compared to 2001.  This increase is in line with the corresponding processingrevenue increase and is attributable to third-party processing fees andincreased staffing.  The processinggross margin was 15% during 2002, as compared to 8.8% during 2001.  The 15% margin reflects the continuedimprovement in the processing operation along with continued growth in thenumber of accounts and clients using the outsourcing platform.

 

*       *Sales and marketing expenses decreased by$1.3 million, or 9.4%, in 2002 compared to 2001 due to lower marketing andcompensation costs.  Also contributingto the decrease was a reduction in travel related expenses.  These were partially offset by the newWealth Management Division expenses.

 

*       *General, administrative and otherexpenses increased by $1.4 million, or 9.6%, in 2002 compared to 2001,primarily due to an increase in bad debt expense of approximately $1.0 millionand the addition of the Wealth Management Division expenses during the secondhalf of 2002.  These increases werepartially offset by lower incentive compensation expense.

 

        Restructuringcharges during the year ended December 31, 2002, were incurred by the Companythrough a reduction in the Company’s worldwide workforce of approximately 12%to improve operational efficiency and reduce operating expenses.  The charges recorded in connection withthese actions totaled approximately $752,000, which consisted primarily ofseverance related payments.

 

INTEREST INCOME

 

        Interestincome decreased $834,000 or 46%, in 2002 compared to 2001.  This decrease is a result of lower interestrates being realized in 2002 and lower cash balances following the acquisitionof Spectra in July 2002.

 

LOSS ONINVESTMENT

 

        During 2002’s fourth quarter, Profile VenturePartners Capital Fund I L.P. (PVP), a venture fund in which Sanchez hasinvested, was restructured.  As part ofthe restructuring, Sanchez assumed the role of the fund’s general partner andthe Company’s capital commitment to the fund was reduced from $10 million to $2million, all of which has been contributed. In addition, during the year ended December 31, 2002, the Company determinedthe value of one of the investments in the fund was impaired.  Accordingly, Sanchez recorded its pro-ratashare of the loss.  The Company recordeda loss on investments of approximately $393,000 to reflect the impact of theimpairment and restructuring during the year.

 

INCOME TAX PROVISION

 

        Taxes in 2002 were 30.1%of earnings before taxes, as compared to 30.2% for the year ended December 31,2001.  The Company’s effective rate islower than the statutory rate primarily due to the benefit derived from ourextraterritorial income entity.

 

27

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**2001Compared to 2000**

 

REVENUES

 

        Revenuesincreased $19.2 million, or 25.8%, in 2001, as each revenue category increasedover 2000.  The primary reasons for theincrease were processing and service revenues.

 

        Processingrevenues increased $6.6 million in 2001, which represented an increase over2000 of 80.2%.  This increase is mainlydue to the number of clients that had gone live on our outsourcing solution, aswell as an increase in per account processing revenues due to the expandedservices selected by our clients.

 

        Servicerevenues increased $6.6 million in 2001, which represented an increase of 24.3%over 2000.  Most of the service growthwas attributable to the accretion of SAB No. 101 revenue from the clients thatwent live on the outsourcing solution in 2001 and service revenues associatedwith implementation support in our software application business.

 

        Productrevenues increased $3.9 million, or 19.3% for the year ended December 31, 2001when compared to the same period in 2000. This increase is primarily attributable to license recognition fromimplementing clients in the U.S./Caribbean market and license expansion forexisting clients.

 

        Softwaremaintenance and other revenues increased $2.1 million, or 11.0%, for the yearended December 31, 2001, as a result of an increase in the Company’s supportedclient base and a one-time settlement reached with a former customer pertainingto disputed maintenance charges partially offset by a decrease in reimbursableexpenses.

 

OPERATING EXPENSES

 

        Productdevelopment expenses decreased $5.6 million, or 24.6%, in 2001.  This decrease is primarily attributable tothe creation of a product management group that includes a number of employeespreviously assigned to the development function.  This newly created organization, a portion of which is allocatedto sales and marketing, is responsible for managing all facets of ourindividual product lines, managing product profitability and providingtechnical sales support to our internal and partner sales organizations.  Also contributing to the decrease was thedeferral, for the first time, of product expenses related to deferred SAB No.101 product revenue and lower incentive compensation.

 

*       *Product support expensesincreased by $616,000, or 13.9%, for the year ended December 31, 2001, ascompared to the same period last year. This increase was primarily due to costs required to support the largerconverted client base.

 

*       *Service expenses increasedby $6.7 million, or 36.6%, during 2001, as compared to 2000.  The increase was primarily due to theaccreted expenses associated with the SAB No. 101 revenue.  The gross margin relative to associatedrevenues was 25.9% for 2001, compared to 32.5% for 2000.  The decrease in margin is primarilyattributable to the lower margin on the accreted SAB No. 101 revenue andcontinued contribution by our third-party SDSI partners.

 

*       *Processing expensesincreased $6.8 million, or 101.6%, in 2001, as compared to 2000.  This increase is attributable to third-partyprocessing fees and increased staffing. Although gross processing margin increased in the second half of 2001,the 8.8% full year margin compared to 18.5% during 2000 reflects the continuedinvestment in the processing operation in anticipation of client accountgrowth.

 

*       *Sales and marketing expensesincreased by $2.7 million, or 23.5%, due to the re-deployment of productdevelopment resources to sales and marketing and increased sales and salessupport staff.  In addition, the Companyincreased its level of external marketing expenditures in an effort to create agreater market awareness of the Company’s multi-product offerings for the financialservices industry.  These increases werepartially offset by lower consulting fees, third-party commissions andincentive compensation.

 

*       *General, administrative andother expenses decreased by $6.5 million, or 30.7%, in 2001 primarily due to adecrease in consulting fees, lower incentive compensation, costs associatedwith the sale of third-party products and the write-off in 2000 of previouslycapitalized Initial Public Offering (IPO) costs related to the previouslycontemplated SDSI IPO.

 

28

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INCOME TAX PROVISION

 

        Taxesin 2001 were 30.2% of earnings before taxes, as compared to 33.0% for the yearended December 31, 2000.  The decreasein rate was due to a better than expected benefit derived from our foreignsales corporation upon filing our 2000 tax return.

 

**Liquidityand Capital Resources**

 

        Cashand cash equivalents were $32.7 million at December 31, 2002.  Cash flows from operations for 2002 were$19.8 million, $4.9 million in 2001, and $10.1 million in 2000.  The net cash provided by operatingactivities in 2002 was primarily due to a reduction in accounts receivable, andan increase in deferred revenue.  TheCompany continues to expect a certain amount of variability in the paymenttiming for major contract milestones, which will impact cash flow fromoperations during any given period.

 

        On July 3, 2002, theCompany completed its acquisition of Spectra Securities Software Inc., aCanadian corporation existing under the Business Corporations Act (Ontario) andits subsidiaries (Spectra) using $25.9 million cash reserves in addition tocommon stock.  During the year theCompany also used $2.7 million for investing activities related to the purchaseof fixed assets and investment in the venture fund discussed below.

 

        In April of 2001, the Companyagreed to commit up to $10 million of capital contributions to a newly formedventure fund that invests in early stage technology companies.  As of December 31, 2002, the Company hasinvested $2.0 million in the fund.  Thiscommitment has since been capped at the $2.0 million contributed and no futurefunding is anticipated toward this venture.

 

        Financing activitiescontributed cash of $615,000 in 2002, primarily as a result of participation inthe employee stock purchase plan.

 

        InFebruary 2003, the board of directors approved a stock repurchase programauthorizing the Company to repurchase up to approximately 1.4 million shares,or 5 percent of Sanchez’s common stock, on the open market or throughnegotiated transactions.  No time limithas been placed on the duration of the stock repurchase program, and the timingof purchases will depend on market conditions. Repurchased shares will be accumulated by the Company and held intreasury.  The purchases will be madewith the Company’s cash.  As of March21, 2003, the Company has not repurchased any shares under this new program.

 

        The Company currentlyanticipates that cash generated from operations and existing cash balances willbe sufficient to satisfy its operating and capital cash needs for the foreseeablefuture and at a minimum through the next year. On July 3, 2002, the Company secured a $20 million revolving line ofcredit.  There have been no borrowingsunder this facility.  Should theCompany’s business expand more rapidly than expected, the Company believes thatadditional capital, if necessary, would be available to fund such operating andcapital requirements.

 

        The Company hashistorically experienced, and can be expected to continue to experience, acertain degree of variability in its quarterly revenue, earnings and cash flowpatterns.  This variability is typicallydriven by significant events, which directly impact the recognition and billingof project related revenues.  Examplesof such events include the timing of new business contract closings and theinitiation of product and service fee revenue recognition, one-time paymentsfrom existing clients relative to license expansion rights (required to processa greater number of customer accounts or expand the number of permitted users)and completion of implementation project roll outs and the related revenuerecognition. Because a high percentage of the Company’s expenses are relativelyfixed, a variation in the timing of the initiation or the completion of clientprojects, particularly at or near the end of any quarter, can cause significantvariations in operating results from quarter to quarter.  Historically, the Company achieves its bestoperational results in the fourth quarter. This is often driven by the Company’s ability to sell license expansionsto existing clients and sign new license agreements in the fourth quarter.  As a result, the Company typicallyexperiences lower revenues and earnings in the first quarter when compared tothe previous fourth quarter results. The Company believes that over the course of time the ongoing monthlyrevenue stream associated with the outsourcing operation will contribute towardmore predictable quarter-to-quarter revenues.

 

 

29

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The following table presents contracted obligationsinformation (in thousands):

 
| **Contractual  obligations** |   | **Total** |   | **Less than  1 year** |   | **1-3 Years** |   | **3-5 Years** |   | **More than  5 years** |   |
|------------------------------|--------|-----------|--------|-----------------------|--------|---------------|--------|---------------|--------|------------------------|--------|
|                         |   |      |   |                  |   |          |   |          |   |                   |   |
| Operating leases             |   | $         | 5,566  |                  | $      | 2,372         |   | $             | 2,664  |                   | $      | 530 |   | $ | — |   |
|                         |   |      |   |                  |   |          |   |          |   |                   |   |
|                              |        |           |        |                       |        |               |        |               |        |                        |        |  |  |  |  |  |

 

**Forward-looking Statements**

 

        Certainmatters discussed in this Form 10-K contain “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934, including, but not limited to, statementsconcerning the Company’s revenues, expenses and earnings, future operating andfinancial performance, growth rates, acquisition opportunities, and othersimilar forecasts and expectations.  Thewords “anticipate,” “estimate,” “believe,” “expect,” “intend,” “plan,”“project” and variations of these words and similar expressions are intended toidentify forward-looking statements. Forward-looking statements are based on operating budgets, forecasts, beliefsand assumptions of management and, as such, are subject to risks anduncertainties and are not guarantees of future performance.  Actual outcomes could differ materially fromthose expressed in any such forward-looking statement due to a variety of factorsin addition to those specifically identified herein.  These factors include, without limitation, the timely andsuccessful integration of new businesses and products of recently acquiredcompanies and the risks associated with acquisitions, changes in orinterpretations of tax laws, treaties, or regulations, governmental and publicpolicy changes, business and economic conditions, currency fluctuations,challenges the Company may face as it expands its international operations, thedevelopment of the markets or new business areas that the Company is targeting,demand for products and services in the financial services industry, the extentto which the Internet will be used for financial services and products, thepotentially adverse impact of consolidation in the financial services industry,timing of contracts and long sales cycles, competition among technologycompanies serving our industry, renewal of material contracts with clients,potential delays in, or cancellation of, the implementation of products andservices, undetected software errors or failures found in new products, thepotentially adverse effect of business interruptions beyond the Company’scontrol, such as security breaches and future acts of terrorism, maintaininggood relationships with key strategic partners, the Company’s ability toattract, hire, and retain skilled and knowledgeable employees, success of theCompany’s business model, changes in and availability of capital requirements,the Company’s ability to protect its intellectual property rights, and outcomesof pending and future litigation.  Inaddition, the Company’s operating results may fluctuate significantly and theCompany may not be able to maintain historical growth rates or meet anticipatedgrowth levels.  The Company’s stockprice fluctuates and may continue to be volatile.  The Company has investments in other companies which areinherently risky.  These risks, as wellas risks identified in the Company’s other SEC filings and publicannouncements, may impact future results. The Company undertakes no duty to publicly update any forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

**7A.  Quantitative and QualitativeDisclosures About Market Risk**

 

***Interest Rate Risk***3⁄4The Company’s exposure tomarket risk for changes in interest rates relate primarily to the Company’scash equivalents.  The Company does nothave any derivative financial instruments in its portfolio.  The Company is averse to principal loss andensures the safety and preservation of its invested funds by limiting defaultrisk, market risk and reinvestment risk. The Company does not expect any material loss with respect to its cashequivalents.

 

***Foreign Currency Risk***3⁄4The Company does not useforeign exchange forward contracts. Substantially all of the Company’s U.S. based operations contract inU.S. dollars.  For the Company’s foreignsubsidiaries, the Company generally matches local currency revenues with localcurrency costs.  The Company does havecertain inter-company relationships that may create foreign exchange gains orlosses.

 

30

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**Item 8.  Financial Statements andSupplementary Data.**

 

### **Index toConsolidated Financial Statements and Schedule**

 

 
| Reports of Independent  Auditors   |                                                                                                                                              | 32     |
|------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                               |                                                                                                                                              |   |
| CONSOLIDATED FINANCIAL  STATEMENTS |                                                                                                                                              |   |
|                               |                                                                                                                                              |   |
|                               | Consolidated Balance Sheets  as of December 31, 2002 and 2001                                                                                     | 34     |
|                               |                                                                                                                                              |   |
|                               | Consolidated  Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000                                                       | 35     |
|                               |                                                                                                                                              |   |
|                               | Consolidated  Statements of Shareholders’ Equity and Other Comprehensive Income (Loss) for  the Years Ended December 31, 2002, 2001 and 2000 | 36     |
|                               |                                                                                                                                              |   |
|                               | Consolidated  Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000                                                       | 37     |
|                               |                                                                                                                                              |   |
|                               | Notes to  Consolidated Financial Statements                                                                                                       | 38     |
|                               |                                                                                                                                              |   |
|                               | Financial Statement  Schedule:                                                                                                                    |   |
|                               |                                                                                                                                              |   |
|                               | Schedule II —  Valuation and Qualifying Accounts for the Years Ended December 31, 2002, 2001  and 2000                                       | 50     |
|                                    |                                                                                                                                                   |        |  |

 

31

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# **Report of Independent Auditors**

 

The Board of Directors and Shareholders

Sanchez Computer Associates, Inc.:

 

        Wehave audited the 2002 consolidated financial statements of Sanchez ComputerAssociates, Inc. and subsidiaries as listed in the accompanying index.  In connection with our audit of the 2002consolidated financial statements, we also have audited the 2002 consolidatedfinancial statement schedule as listed in the accompanying index.  These consolidated financial statements andconsolidated financial statement schedule are the responsibility of theCompany’s management.  Our responsibilityis to express an opinion on these consolidated financial statements andconsolidated financial statement schedule based on our audit.  The 2001 and 2000 consolidated financialstatements and consolidated financial statement schedule of Sanchez ComputerAssociates, Inc. and subsidiaries as listed in the accompanying index wereaudited by other auditors who have ceased operations.  Those auditors expressed an unqualified opinion on thoseconsolidated financial statements and consolidated financial statementschedule, before the revisions and restatement described in Note 2 to theconsolidated financial statements, in their reports dated February 5, 2002.

 

        Weconducted our audit in accordance with auditing standards generally accepted inthe United States of America.  Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

        Inour opinion, the 2002 consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of SanchezComputer Associates, Inc. and subsidiaries as of December 31, 2002, and theresults of their operations and their cash flows for the year then ended, inconformity with accounting principles generally accepted in the United Statesof America.  Also in our opinion, the related2002 consolidated financial statement schedule, when considered in relation tothe basic consolidated financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.

 

        Asdiscussed above, the 2001 and 2000 consolidated financial statements of SanchezComputer Associates, Inc. and subsidiaries as listed in the accompanying indexwere audited by other auditors who have ceased operations.  As described in Note 2, these consolidatedfinancial statements have been revised to include the transitional disclosuresrequired by Statement of Financial Accounting Standards No. 142, "Goodwilland Other Intangible Assets", which was adopted by the Company as ofJanuary 1, 2002.  In our opinion, thedisclosures for 2001 and 2000 in Note 2 are appropriate.  In addition, as described in Note 2, the2001 and 2000 consolidated financial statements were restated to recordreimbursements received for out-of-pocket expenses incurred as revenue inaccordance with Emerging Issues Task Force Issue No. 01-14, “Income StatementCharacterization of Reimbursements Received for 'Out-of-Pocket' ExpensesIncurred.”  We audited the adjustmentsthat were applied to restate the 2001 and 2000 consolidated financialstatements.  In our opinion, suchadjustments are appropriate and have been properly applied.  However, we were not engaged to audit,review, or apply any procedures to the 2001 and 2000 consolidated financialstatements of Sanchez Computer Associates, Inc. and subsidiaries other thanwith the respect to such disclosures and adjustments and, accordingly, we donot express an opinion or any other form of assurance on the 2001 and 2000consolidated financial statements taken as a whole.

 

 

 
| KPMG LLP |
|----------|

 

 

 

 

Philadelphia, Pennsylvania

February 6, 2003

 

32

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*        The following report is a copy of apreviously issued Arthur Andersen LLP (Andersen) Report, and the report has notbeen re-issued by Andersen.  The priorperiod financial statements have been revised and restated.  The Andersen report refers to theconsolidated balance sheet as of December 31, 2000 and the consolidatedstatements of operations, shareholders’ equity, and cash flows for the yearended December 31, 1999, which are no longer included in the accompanyingfinancial statements.*

 

To Sanchez Computer Associates, Inc.:

 

        We have audited theaccompanying consolidated balance sheets of Sanchez Computer Associates, Inc.(a Pennsylvania corporation) and subsidiaries as of December 31, 2001 and 2000,and the related consolidated statements of operations, shareholders’ equity andcash flows for each of the three years in the period ended December 31,2001.  These financial statements arethe responsibility of the Company’s management.  Our responsibility is to express an opinion on these financialstatements based on our audits.

 

        We conducted our audits inaccordance with auditing standards generally accepted in the UnitedStates.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

        In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Sanchez Computer Associates, Inc. andsubsidiaries as of December 31, 2001 and 2000, and the results of theiroperations and their cash flows for each of the three years in the period endedDecember 31, 2001, in conformity with accounting principles generally acceptedin the United States.

 

        As explained in Note 2 tothe financial statements, effective January 1, 2000, the Company changed itsmethod of recognizing revenue.

 

 

 

 
| Arthur Andersen  LLP |
|----------------------|

 

 

 

 

Philadelphia, Pennsylvania

February 5, 2002

 

 

 

33

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**SanchezComputer Associates, Inc.Consolidated Balance Sheets(In Thousands Except Share Data)**
|                                                                                                                                                                      |   | **December  31,** |        |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|
|                                                                                                                                                                      |   | **2002**          |        | **2001** |   |
| **ASSETS**                                                                                                                                                                |   |              |        |   |   |
| **Current assets**                                                                                                                                                        |   |              |        |   |   |
| Cash and cash equivalents                                                                                                                                                 |   | **$**             | **32,717**  | ** ** | $ | 40,955 |   |
| Accounts receivable less allowances ($979-2002; $1,219-2001)                                                                                                              |   | **12,993**        | ** **  | 21,359 |   |
| Contracts in process                                                                                                                                                      |   | **4,851**         | ** **  | 1,757 |   |
| Income tax refund receivable                                                                                                                                              |   | **1,619**         | ** **  | 1,265 |   |
| Deferred income taxes                                                                                                                                                     |   | **2,661**         | ** **  | 4,683 |   |
| Prepaid and other current assets                                                                                                                                          |   | **2,812**         | ** **  | 1,537 |   |
| Deferred expenses                                                                                                                                                         |   | **8,343**         | ** **  | 10,598 |   |
| Total current assets                                                                                                                                                      |   | **65,996**        | ** **  | 82,154 |   |
|                                                                                                                                                                      |   |              | ** **  |   |   |
| **Property and equipment**                                                                                                                                                |   |              | ** **  |   |   |
| Equipment                                                                                                                                                                 |   | **16,532**        | ** **  | 14,275 |   |
| Furniture and fixtures                                                                                                                                                    |   | **2,674**         | ** **  | 2,468 |   |
| Leasehold improvements                                                                                                                                                    |   | **3,148**         | ** **  | 3,086 |   |
|                                                                                                                                                                      |   | **22,354**        | ** **  | 19,829 |   |
| Accumulated depreciation and amortization                                                                                                                                 |   | **(16,826**       | **)**       | (12,582 | ) |
| Net property and equipment                                                                                                                                                |   | **5,528**         | ** **  | 7,247 |   |
|                                                                                                                                                                      |   |              | ** **  |   |   |
| Goodwill                                                                                                                                                                  |   | **23,896**        | ** **  | 899 |   |
| Deferred expenses                                                                                                                                                         |   | **11,496**        | ** **  | 6,305 |   |
| Amortizable intangibles,  net                                                                                                                                             |   | **8,454**         | ** **  | — |   |
| Deferred income taxes                                                                                                                                                     |   | **2,895**         | ** **  | 801 |   |
| Other non-current assets                                                                                                                                                  |   | **2,832**         | ** **  | 3,207 |   |
| Total assets                                                                                                                                                              |   | **$**             | **121,097** | ** ** | $ | 100,613 |   |
|                                                                                                                                                                      |   |              | ** **  |   |   |
| **LIABILITIES**                                                                                                                                                           |   |              | ** **  |   |   |
| **Current liabilities**                                                                                                                                                   |   |              | ** **  |   |   |
| Accounts payable                                                                                                                                                          |   | **$**             | **3,771**   | ** ** | $ | 4,929 |   |
| Accrued expenses                                                                                                                                                          |   | **9,617**         | ** **  | 7,621 |   |
| Deferred revenue                                                                                                                                                          |   | **22,804**        | ** **  | 19,303 |   |
| Total current liabilities                                                                                                                                                 |   | **36,192**        | ** **  | 31,853 |   |
| Deferred revenue                                                                                                                                                          |   | **18,150**        | ** **  | 8,630 |   |
| Minority interest                                                                                                                                                         |   | **209**           | ** **  | — |   |
| Total liabilities                                                                                                                                                         |   | **54,551**        | ** **  | 40,483 |   |
|                                                                                                                                                                      |   |              | ** **  |   |   |
| Commitments and contingencies (Note 10)                                                                                                                                   |   |              | ** **  |   |   |
|                                                                                                                                                                      |   |              | ** **  |   |   |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                             |   |              | ** **  |   |   |
| Common stock, stated value of $.01 per share, 75,000 shares  authorized, 26,689 and 25,963 shares issued and outstanding as of December  31, 2002 and 2001, respectively. |   | **267**           | ** **  | 259 |   |
| Additional paid-in capital                                                                                                                                                |   | **48,794**        | ** **  | 45,170 |   |
| Retained earnings                                                                                                                                                         |   | **18,575**        | ** **  | 14,701 |   |
| Cumulative translation adjustment                                                                                                                                         |   | **(1,090**        | **)**       | — |   |
| Total shareholders’ equity                                                                                                                                           |   | **66,546**        | ** **  | 60,130 |   |
| Total liabilities and shareholders’ equity                                                                                                                           |   | **$**             | **121,097** | ** ** | $ | 100,613 |   |

 

See notes to consolidated financial statements

 

34

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**SanchezComputer Associates, Inc.Consolidated Statements ofOperations(In Thousands, Except Per Share Amounts)**
|                                                                                                          |   | **Year Ended  December 31,** |       |
|---------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                          |   | **2002**                     |       | **2001** |   | **2000** |   |
|                                                                                                          |   |                         |       |   |   |   |   |
| **Revenues**                                                                                                  |   |                         |       |   |   |   |   |
| Products                                                                                                      |   | **$**                        | **18,754** | ** ** | $ | 23,958 |   | $ | 20,076 |   |
| Services                                                                                                      |   | **32,207**                   | ** ** | 33,928 |   | 27,294 |   |
| Processing                                                                                                    |   | **19,164**                   | ** ** | 14,883 |   | 8,259 |   |
| Software  maintenance fees and other                                                                          |   | **22,893**                   | ** ** | 20,950 |   | 18,871 |   |
| Total revenues                                                                                                |   | **93,018**                   | ** ** | 93,719 |   | 74,500 |   |
| **Operating  expenses**                                                                                       |   |                         | ** ** |   |   |   |   |
| Product  development                                                                                          |   | **16,031**                   | ** ** | 17,194 |   | 22,808 |   |
| Product support                                                                                               |   | **5,644**                    | ** ** | 5,043 |   | 4,427 |   |
| Services                                                                                                      |   | **20,428**                   | ** ** | 25,153 |   | 18,420 |   |
| Processing                                                                                                    |   | **16,294**                   | ** ** | 13,573 |   | 6,733 |   |
| Sales and  marketing                                                                                          |   | **13,056**                   | ** ** | 14,403 |   | 11,665 |   |
| General,  administrative and other                                                                            |   | **16,012**                   | ** ** | 14,603 |   | 21,074 |   |
| Restructuring  charge                                                                                         |   | **752**                      | ** ** | — |   | — |   |
| Total operating  expenses                                                                                     |   | **88,217**                   | ** ** | 89,969 |   | 85,127 |   |
|                                                                                                          |   |                         |       |   |   |   |   |
| **Earnings  (loss) from operations**                                                                          |   | **4,801**                    | ** ** | 3,750 |   | (10,627 | ) |
| Interest income,  net                                                                                         |   | **975**                      | ** ** | 1,809 |   | 1,822 |   |
| Loss on investment                                                                                            |   | **(393**                     | **)**      | — |   | — |   |
| Foreign exchange                                                                                              |   | **160**                      | ** ** | — |   | — |   |
|                                                                                                          |   |                         |       |   |   |   |   |
| **Earnings  (loss) before income taxes**                                                                      |   | **5,543**                    | ** ** | 5,559 |   | (8,805 | ) |
| Income tax  provision (benefit)                                                                               |   | **1,669**                    | ** ** | 1,680 |   | (2,906 | ) |
| **Net  earnings (loss) before cumulative effect of change in accounting principle**                           |   | **3,874**                    | ** ** | 3,879 |   | (5,899 | ) |
| Cumulative  effect of change in accounting principle, net of tax                                              |   | **—**                   | ** ** | — |   | (173 | ) |
|                                                                                                          |   |                         |       |   |   |   |   |
| **Net  earnings (loss)**                                                                                      |   | **$**                        | **3,874**  | ** ** | $ | 3,879 |   | $ | (6,072 | ) |
|                                                                                                          |   |                         | ** ** |   |   |   |   |
|                                                                                                          |   |                         |       |   |   |   |   |
|                                                                                                          |   |                         |       |   |   |   |   |
| Basic earnings  (loss) per average common share before cumulative effect of change in  accounting principle   |   | **$**                        | **0.15**   | ** ** | $ | 0.15 |   | $ | (0.24 | ) |
| Diluted earnings  (loss) per average common share before cumulative effect of change in  accounting principle |   | **0.15**                     | ** ** | 0.15 |   | (0.24 | ) |
|                                                                                                          |   |                         | ** ** |   |   |   |   |
| Basic earnings  (loss) per average common share                                                               |   | **0.15**                     | ** ** | 0.15 |   | (0.24 | ) |
|                                                                                                          |   |                         | ** ** |   |   |   |   |
| Diluted earnings  (loss) per average common share                                                             |   | **$**                        | **0.15**   | ** ** | $ | 0.15 |   | $ | (0.24 | ) |
|                                                                                                          |   |                         | ** ** |   |   |   |   |
| Weighted-average  common shares outstanding                                                                   |   | **26,312**                   | ** ** | 25,707 |   | 24,912 |   |
|                                                                                                          |   |                         | ** ** |   |   |   |   |
| Weighted-average  common and diluted shares outstanding                                                       |   | **26,654**                   | ** ** | 26,324 |   | 24,912 |   |

 

See notes to consolidatedfinancial statements

 

35

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**Sanchez Computer Associates, Inc.**

### **Consolidated Statements of Shareholders**’Equity and Other Comprehensive Income (Loss)

**(In Thousands)**
|                                      |   | **Common  Stock** |   | **Treasury  Stock Amount** |   | **Additional  Paid-in Capital** |   | **Retained  Earnings** |   | **Notes Due  on Common Stock Purchases** |   | **Accumulated  other comprehensive income/(loss)** |   | **Total** |   |
|-------------------------------------------|--------|-------------------|--------|----------------------------|--------|---------------------------------|--------|------------------------|--------|------------------------------------------|--------|----------------------------------------------------|--------|-----------|--------|
|                                      |   | **Shares**        |   | **Amount**                 |   |                            |   |                   |   |                                     |   |
| Balances at December 31, 1999             |   | 24,357            |   | $                          | 244    |                            |   |                   | $      | 28,392                                   |   | $                                                  | 16,894 |      | $      | (92 | ) |   |   | $ | 45,438 |   |
| Net loss                                  |   |              |   |                       |   |                            |   |                   |   | (6,072                                   | )      |                                               |   |      |   | (6,072 | ) |
| Purchase of common stock                  |   | (122              | )      |                       |   | $                               | (2,023 | )                      |   |                                     |   |                                               |   |      |   |   | (2,023 | ) |
| Exercise of stock options and warrants    |   | 771               |   | 6                          |   | 1,450                           |   | 4,388                  |   |                                     |   |                                               |   |      |   | 5,844 |   |
| Tax benefit from stock options exercised  |   |              |   |                       |   |                            |   | 2,823                  |   |                                     |   |                                               |   |      |   | 2,823 |   |
| Stock-based compensation expense          |   | 182               |   | 2                          |   |                            |   | 2,784                  |   |                                     |   |                                               |   |      |   | 2,786 |   |
| Employee stock purchase plan              |   | 23                |   |                       |   | 420                             |   | 44                     |   |                                     |   |                                               |   |      |   | 464 |   |
| Stock option loan repayments              |   |              |   |                       |   |                            |   |                   |   |                                     |   | 92                                                 |   |      |   | 92 |   |
| Equity investments                        |   |              |   |                       |   |                            |   | 6,000                  |   |                                     |   |                                               |   |      |   | 6,000 |   |
|                                      |   |              |   |                       |   |                            |   |                   |   |                                     |   |                                               |   |      |   |   |   |
| Balances at December 31, 2000             |   | 25,211            |   | 252                        |   | (153                            | )      | 44,431                 |   | 10,822                                   |   | 0                                                  |   |      |   | 55,352 |   |
| Net earnings                              |   |              |   |                       |   |                            |   |                   |   | 3,879                                    |   |                                               |   |      |   | 3,879 |   |
| Exercise of stock options                 |   | 115               |   | 1                          |   | 153                             |   | 586                    |   |                                     |   |                                               |   |      |   | 740 |   |
| Tax benefit from stock options exercised  |   |              |   |                       |   |                            |   | 353                    |   |                                     |   |                                               |   |      |   | 353 |   |
| Employee stock purchase plan              |   | 117               |   | 1                          |   |                            |   | 811                    |   |                                     |   |                                               |   |      |   | 812 |   |
| Exchange of subsidiary stock              |   | 520               |   | 5                          |   |                            |   | (5                     | )      |                                     |   |                                               |   |      |   | 0 |   |
| Repurchase of subsidiary stock            |   |              |   |                       |   |                            |   | (1,006                 | )      |                                     |   |                                               |   |      |   | (1,006 | ) |
|                                      |   |              |   |                       |   |                            |   |                   |   |                                     |   |                                               |   |      |   |   |   |
| Balances at December 31, 2001             |   | 25,963            |   | 259                        |   | 0                               |   | 45,170                 |   | 14,701                                   |   | 0                                                  |   |      |   | 60,130 |   |
| Comprehensive income:                     |   |              |   |                       |   |                            |   |                   |   |                                     |   |                                               |   |      |   |   |   |
| Net earnings                              |   |              |   |                       |   |                            |   |                   |   | 3,874                                    |   |                                               |   |      |   |   |   |
| Cumulative translation adjustments        |   |              |   |                       |   |                            |   |                   |   |                                     |   |                                               |   | $         | (1,090 | ) |   |   |
| Total comprehensive income                |   |              |   |                       |   |                            |   |                   |   |                                     |   |                                               |   |      |   | 2,784 |   |
| Exercise of stock options                 |   | 16                |   | 1                          |   |                            |   | 39                     |   |                                     |   |                                               |   |      |   | 40 |   |
| Tax benefit from stock options exercised  |   |              |   |                       |   |                            |   | 7                      |   |                                     |   |                                               |   |      |   | 7 |   |
| Stock-based compensation expense          |   | 15                |   |                       |   |                            |   | 45                     |   |                                     |   |                                               |   |      |   | 45 |   |
| Employee stock purchase plan              |   | 111               |   | 1                          |   |                            |   | 574                    |   |                                     |   |                                               |   |      |   | 575 |   |
| Issuance of common stock for acquisitions |   | 584               |   | 6                          |   |                            |   | 2,959                  |   |                                     |   |                                               |   |      |   | 2,965 |   |
|                                      |   |              |   |                       |   |                            |   |                   |   |                                     |   |                                               |   |      |   |   |   |
| Balances at December 31, 2002             |   | 26,689            |   | $                          | 267    |                            | $      | 0                      |   | $                                        | 48,794 |                                               | $      | 18,575    |   | $ | 0 |   | $ | (1,090 | ) | $ | 66,546 |   |

See notes to consolidated financial statements

 

36

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**Sanchez Computer Associates, Inc. Consolidated Statements of Cash Flows**

**(In Thousands)**
|                                                                                              |   | **Year Ended  December 31,** |   |
|---------------------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                                              |   | **2002**                     |   | **2001** |   | **2000** |   |
| **Cash flows from operating activities**                                                          |   |                         |   |   |   |   |   |
| Net earnings (loss)                                                                               |   | $                            | 3,874  |   | $ | 3,879 |   | $ | (6,072 | ) |
| Adjustments to reconcile net earnings (loss) to cash provided (used)  by operating activities     |   |                         |   |   |   |   |   |
| Depreciation and amortization                                                                     |   | 5,175                        |   | 4,700 |   | 4,157 |   |
| Stock based compensation                                                                          |   | 45                           |   | — |   | 2,786 |   |
| Deferred income taxes                                                                             |   | 464                          |   | (1,205 | ) | (4,075 | ) |
| Equity in loss of venture fund                                                                    |   | 837                          |   | 462 |   | — |   |
| Provision for doubtful accounts receivable                                                        |   | 1,138                        |   | 100 |   | 790 |   |
| Other                                                                                             |   | (110                         | )      | — |   | (2 | ) |
| Cash provided (used) by changes in operating assets and liabilities  net of effect of acquisition |   |                         |   |   |   |   |   |
| Accounts receivable                                                                               |   | 8,756                        |   | (3,553 | ) | (6,132 | ) |
| Contracts in process                                                                              |   | (3,081                       | )      | 684 |   | 786 |   |
| Income taxes receivable/payable                                                                   |   | 326                          |   | 3,314 |   | 1,519 |   |
| Prepaid and other current assets                                                                  |   | (722                         | )      | (108 | ) | (242 | ) |
| Accounts payable and accrued expenses                                                             |   | (3,649                       | )      | (2,202 | ) | 7,989 |   |
| Deferred revenue                                                                                  |   | 9,696                        |   | 944 |   | 23,374 |   |
| Deferred expense                                                                                  |   | (2,936                       | )      | (2,098 | ) | (14,805 | ) |
| Net cash provided by operating activities                                                         |   | 19,813                       |   | 4,917 |   | 10,073 |   |
|                                                                                              |   |                         |   |   |   |   |   |
| **Cash flows from investing activities**                                                          |   |                         |   |   |   |   |   |
| Capital expenditures                                                                              |   | (2,173                       | )      | (3,148 | ) | (5,665 | ) |
| Investments                                                                                       |   | (500                         | )      | (1,250 | ) | (267 | ) |
| Proceeds from sale of fixed assets                                                                |   | —                       |   | — |   | 51 |   |
| Cost of acquisitions, net of cash acquired                                                        |   | (25,917                      | )      | — |   | — |   |
| Net cash used in investing activities                                                             |   | (28,590                      | )      | (4,398 | ) | (5,881 | ) |
|                                                                                              |   |                         |   |   |   |   |   |
| **Cash flows from financing activities**                                                          |   |                         |   |   |   |   |   |
| Repayment of notes due on common stock purchases                                                  |   | —                       |   | — |   | 92 |   |
| Purchase of common stock for treasury                                                             |   | —                       |   | (1,006 | ) | (2,023 | ) |
| Principal payments under long-term notes                                                          |   | —                       |   | — |   | (83 | ) |
| Proceeds from equity investments                                                                  |   | —                       |   | — |   | 6,000 |   |
| Issuance of common stock                                                                          |   | 40                           |   | 740 |   | 5,844 |   |
| Proceeds from issuance of shares under the employee stock purchase  plan                          |   | 575                          |   | 812 |   | 464 |   |
| Net cash provided by financing activities                                                         |   | 615                          |   | 546 |   | 10,294 |   |
|                                                                                              |   |                         |   |   |   |   |   |
| Effect of foreign exchange on cash                                                                |   | (76                          | )      | — |   | — |   |
|                                                                                              |   |                         |   |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                                              |   | (8,238                       | )      | 1,065 |   | 14,486 |   |
| Cash and cash equivalents at beginning of year                                                    |   | 40,955                       |   | 39,890 |   | 25,404 |   |
|                                                                                              |   |                         |   |   |   |   |   |
| **Cash and cash equivalents at end of year**                                                      |   | $                            | 32,717 |   | $ | 40,955 |   | $ | 39,890 |   |
|                                                                                              |   |                         |   |   |   |   |   |
| Supplemental cash flow information                                                                |   |                         |   |   |   |   |   |
| Interest paid                                                                                     |   | $                            | — |   | $ | — |   | $ | 3 |   |
| Income taxes paid                                                                                 |   | 772                          |   | $ | 1,216 |   | $ | 597 |   |
|                                                                                              |   |                         |   |   |   |   |   |
| See notes to consolidated financial statements                                                    |   |                         |   |   |   |   |   |

** **

**37**

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** **

**Sanchez Computer Associates,Inc.**

**Notes to ConsolidatedFinancial Statements**

** **

 

**(1)           Description of Business**

 

        SanchezComputer Associates Inc. is a global leader in developing and marketingscalable and integrated software and services that provide banking, customerintegration, brokerage, wealth management and outsourcing solutions toapproximately 400 financial institutions in 21 countries.  Sanchez’s corporate headquarters is locatedin Malvern, Pennsylvania.  The Company’soutsourcing data and operations service center is located in Seven Fields,Pennsylvania.  Beginning with the firstquarter of January 2003, Sanchez organized into divisions and initiated newsegment reporting based on those divisions. Sanchez’s divisional segments are banking solutions, wealth management,outsourcing and global services.  TheCompany’s products include an integrated banking platform.  The banking platform products include:  Sanchez Profile, the highly flexible, multi-currency,multi-language, customer-centric, core banking and transaction processing application;Sanchez Xpress, an enterprise customer and transaction management system, whichempowers CRM and delivers business integration; Sanchez Webclient, a Web-based,Internet customer front-end processor; Sanchez WebCSR, a browser-basedintegrated customer servicing application that can be deployed across multipleretail delivery channels such as branches and call centers; and Sanchez CRM, aWeb-based customer relationship management system, available as a stand-aloneapplication or integrated with Sanchez’s banking platform.  The Company’s outsoucing offering isoperated by Sanchez Data Systems, Inc. (SDSI), which uses the Sanchezintegrated banking platform as the basis for a complete outsourced directbanking solution under the Sanchez e-PROFILE brand.  The Sanchez e-PROFILE solution provides an integrated end-to-endoperations and technology platform that enables financial services companies tooffer comprehensive on-line financial services to their customers.  The Company also offers Sanchez Wealthware,a group of integrated, full-functioned, multi-channel wealth managementapplications that satisfy the real-time, straight through processingrequirements of brokers, bankers and insurance agents.  The product includes application solutionsfor equities, options, fixed-income securities, mutual fund securities and wrapaccount processing.

 

**(2)           Significant Accounting Policies**

 

        **Principles of Consolidation**—Theconsolidated financial statements include the accounts of the Company and itssubsidiaries.  All significantintercompany accounts and transactions have been eliminated in consolidation.

 

        **Use of Management Estimates**—The preparationof consolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to continuouslymake estimates and assumptions that affect the reported amounts of certainassets, liabilities, and disclosure of contingent assets and liabilities at thedate of the financial statements and the reported revenues and expenses duringthe period.  Actual results could differfrom these estimates.  The mostsignificant estimates are the measurement of the percentage-of-completion forrevenue recognition, estimated lives of processing relationships, the valuationof goodwill and intangibles and allowance for doubtful accounts.

 

        **Revenue Recognition**—The Company generallyrecognizes product revenues, which include software license fees and productenhancement fees, using the percentage-of-completion method over a period oftime that commences with the execution of the license agreement and ends withthe completion of the enhancements or implementation.  If the customer does not request enhancements and orimplementation services, the Company generally recognizes the license fee fromthese products upon delivery, provided that the other undelivered services arenot essential to the functionality of the software.  The Company does not recognize any license fees unless persuasiveevidence of an arrangement exists, the license amount is fixed and determinableand collectability is probable.  TheCompany’s software licensing agreements generally provide for a warrantyperiod.  If a warranty period is providedto a customer, the portion of the license fee associated with the warranty periodis unbundled from the license fee and is recognized ratably over the warrantyperiod.

 

        Servicerevenues, which include client implementation and consulting fees, aretypically recognized when the services are performed or on thepercentage-of-completion method, depending on the contract terms.  In accordance with Securities and ExchangeCommission (SEC) SAB No. 101 “Revenue Recognition in Financial Statements,”revenue from implementation services and initial product licenses sold upfrontfor outsourced clients are recognized ratably over the expected term of theprocessing contract, ranging from 1 to 4 years.  Implementation fees for SDSI clients that do not ultimatelyexecute processing agreements are recognized in the period during which theproject is terminated, the amount determinable and collection probable.  Direct costs related to implementationservices for SDSI clients are deferred and recognized ratably over the expectedlife of the processing arrangement or expensed as incurred, consistent with therelated revenue recognition.  Revenuefrom software maintenance contracts is recognized ratably over the term of themaintenance contract.

 

38

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        EffectiveJanuary 1, 2002, the Company adopted Emerging Issues Task Force (EITF) IssueNo. 01-14, “Income Statement Characterization of Reimbursements Received for‘Out of Pocket’ Expenses Incurred,” which requires that customer reimbursementsreceived for direct costs paid to third parties and related expenses becharacterized as revenue.  Comparativefinancial statements for 2001 and 2000 have been reclassified to provideconsistent presentation.  In accordancewith EITF No. 01-14, the Company has presented customer reimbursement revenueand expenses of $5.4 million, $4.9 million and $6.1 million for the years endedDecember 31, 2002, 2001 and 2000, respectively.  Also as a result of the adoption of EITF No. 01-14, the Companyhas presented deferred revenue and expense balances of $2.3 million and $1.8million on its December 31, 2002 and 2001, balance sheets, respectively.  Customer reimbursements primarily representdirect costs paid to third parties primarily for travel, postage and datacommunication costs.  The adoption ofEITF No. 01-14 did not impact the Company’s financial position, operatingincome or net income.

 

**        Cashand Cash Equivalents**—Cashand cash equivalents consist of cash and highly liquid investments withmaturities of three months or less from the date of purchase and whose carryingamount approximates market value due to the short maturity of theinvestments.  The Company maintains acentralized cash management program whereby its excess cash balances areinvested in high quality short-term money market instruments.  Cash balances in the Company’s accounts mayexceed federally insured limits.

 

**        AccountsReceivable**—Themajority of the Company’s receivables are due from financial serviceorganizations located throughout the United States, Europe and Canada.  The Company determines the allowances basedon a specific review of its accounts receivable.  From time to time, our clients dispute the amounts due to us andin other cases our clients experience financial difficulties and cannot pay ona timely basis.  In certain instances,these factors ultimately result in uncollectable accounts.  The determination of the appropriate reserveneeded for uncollectable accounts involves significant judgment.  A change in the factors used to evaluatecollectability could result in a significant change in the reserve need.  Such factors include changes in thefinancial condition of our customers as a result of industry, economic orcustomer-specific factors, the ultimate settlement of disputes and, in certaincases, the decisions of third party arbitrators or courts.

 

        **Contracts in Process—**Contracts in process represent revenuesrecognized in excess of amounts invoiced, primarily related to contractsaccounted for using the percentage of completion method in the accompanyingconsolidated balance sheets.

 

**        Investments**—The Company has certain investments intechnology service firms which are accounted for on the cost method as theCompany does not have significant influence over its investees.  Through December 31, 2002, the Company hasinvested $2.0 million in a newly formed venture fund that invests in earlystage technology companies.  The Companyaccounts for its investment in the fund using the consolidation method wherebythe Company includes the profits and losses, and balance sheet of the fund, andthen records a minority interest to reduce the Company’s interest due tooutside limited partners.

 

**        Propertyand Equipment**—Propertyand equipment is carried at cost, except for assets under capital leases, whichare recorded at the present value of future lease payments.  Expenditures for major renewals,improvements and betterments are capitalized and minor repairs and maintenanceare charged to expense as incurred. When assets are sold, the related cost and accumulated depreciation areremoved from the accounts and any gain or loss from such disposition isincluded in operations.

 

**        Depreciationand Amortization**—Depreciationand amortization are provided over the estimated useful lives of the relatedassets using the straight-line method. Equipment and furniture and fixtures typically have useful lives ofthree and five years, respectively.  Theuseful life of leasehold improvements is the lesser of the lease term or 5years.

 

**        CapitalizedSoftware Costs**—Certaindevelopment costs of the Company’s software products are capitalized subsequentto the establishment of technological feasibility and up to the time theproduct becomes available for general release. Amortization is provided on a product-by-product basis at the greater ofthe amount computed using (a) the ratio of current revenues for a product tothe total of current and anticipated future revenues or (b) the straight-linemethod over the remaining estimated economic life of the product.  Generally, an original estimated economiclife of four years is assigned to capitalized software development costs. Allcosts of software program maintenance are charged to expense as incurred.

 

39

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        There were no capitalizedsoftware costs during 2002, 2001 and 2000. Accumulated amortization was $2.7 million and $2.4 million as ofDecember 31, 2002 and 2001, respectively. Amortization of capitalized softwarecosts amounted to $315,000, $442,000 and $592,000 in 2002, 2001, and 2000,respectively. All capitalized software costs are written down to net realizablevalue when the carrying amount is in excess thereof.  No write-downs were required for 2002, 2001 or 2000.  At December 31, 2002 and 2001, the netcapitalized software balance was $144,000 and $459,000, respectively and isincluded in other non-current assets.

 

**        Impairment of Long-Lived Assets**—The Companyfollows the provisions of Statement of Financial Accounting Standards (SFAS)No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”,which requires that an impairment loss to write down long-lived assets,including intangible assets, to their fair value should be recorded whenindications of impairment are present and the undiscounted cash flows estimatedto be generated by those assets are less than the assets’ carrying amount.  Management believes that no long-livedassets were impaired as of December 31, 2002 and 2001.

 

**        Intangible Assets**—Intangible assets consist of customerlists, acquired technology, and other assets which are primarily related to theacquisition of Spectra (Note 3), and are accounted for under SFAS No. 142,“Goodwill and Other Intangible Assets”.

 

**        Goodwill—**Effective January 1, 2002,the Company adopted the provisions of SFAS No. 143, “Goodwill and OtherIntangible Assets.”  SFAS No. 142addresses the financial accounting and reporting for acquired goodwill andother intangible assets and supercedes APB Opinion No. 17, “IntangibleAssets.”  Under SFAS No. 142, goodwilland other intangible assets with indefinite lives are not amortized but aresubject to tests for impairment at least annually.  In accordance with the provisions of SFAS No. 142, the Companyceased the amortization of goodwill effective January 1, 2002.  Prior to the adoption of SFAS No. 142, theCompany amortized goodwill over 10 years. Amortization expense was $127,000 for each of the years ended December31, 2001 and 2000.

 

        Thefollowing table illustrates adjusted net earnings (loss) and basic and dilutedearnings (loss) per share as if SFAS No. 142 was adopted as of January 1, 2000(in thousands except per share amounts):

 
|                                                                |   | **For the  year ended December 31,** |   |
|---------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                |   | **2002**                             |   | **2001** |   | **2000** |   |
| Net earnings (loss):                                                |   |                                 |   |   |   |   |   |
| Net earnings (loss)                                                 |   | $                                    | 3,874  |   | $ | 3,879 |   | $ | (6,072 | ) |
| Add: goodwill amortization, net of tax                              |   | —                               |   | 89 |   | 85 |   |
| Adjusted net earnings (loss)                                        |   | $                                    | 3,874  |   | $ | 3,968 |   | $ | (5,987 | ) |
|                                                                |   |                                 |   |   |   |   |   |
| Basic and diluted earnings (loss) per average common share:         |   |                                 |   |   |   |   |   |
| Reported                                                            |   | $                                    | 0.15   |   | $ | 0.15 |   | $ | (0.24 | ) |
| Goodwill amortization, net of tax                                   |   | —                               |   | — |   | — |   |
| Adjusted basic and diluted earnings (loss) per average common share |   | $                                    | 0.15   |   | $ | 0.15 |   | $ | (0.24 | ) |

 

        AtDecember 31, 2002, goodwill consists of $899,000 from the Company’s acquisitionof SDSI in 1999 and $23.0 million from the Company’s acquisition of Spectra inJuly 2002 (Note 3).  In accordance withthe provisions of SFAS No. 142, the Company was required to perform atransitional goodwill impairment test by June 30, 2002.  In addition, SFAS No. 142 requires that theCompany perform an impairment test annually or more frequently if events orcircumstances indicate that the value of goodwill might be impaired.  The Company performs its annual impairmenttest as of September 30.  No goodwillimpairments were recorded as a result of the SFAS No. 142 transitional orannual impairment test.

 

        Whenit is determined that the carrying value of goodwill may not be recoverable,measurement of any impairment will be based on a projected discounted cash flowmethod using a discount rate commensurate with the risk inherent in the currentbusiness model.

 

        **Deferred Revenue**—Deferred revenuesrepresent amounts collected from or invoiced to customers in excess of revenuerecognized.  Deferred revenues consistof prepaid maintenance and license milestone amounts which are typically expectedto be recognized within one year.  Inaddition, a substantial amount of the fees invoiced during the implementationphase related to our outsourcing customers are deferred, along with theirassociated costs, in accordance with SAB 101. These amounts are recognized over the expected life of the outsourcingrelationship.

 

40

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**        Comprehensive Income**—Comprehensiveincome consists of net earnings, adjusted for other increases and decreasesaffecting stockholders’ equity that are excluded from the determination of netearnings.

 

**        Income Taxes**—The Companyaccounts for income taxes following the provisions of SFAS No. 109, “Accountingfor Income Taxes.”  SFAS No. 109requires deferred tax assets or liabilities to be recognized for the estimatedfuture tax effects of net operating loss and credit carryforwards as well astemporary differences between the financial reporting and tax basis of assetsand liabilities based on the enacted tax law and statutory tax rates applicableto the periods in which the temporary differences are expected to affecttaxable income.  Additionally, thebenefits of utilizing the Company's deferred tax assets are recognized to theextent management of the Company believes that it is more likely than not thatthe benefits will be realized in future periods.

 

**        Earnings Per Share**—The Companyfollows SFAS No. 128, “Earnings per Share,” which requires presentation of twoamounts, basic and diluted earnings (loss) per share.

 

        Basicearnings (loss) per share has been calculated as net earnings (loss) divided byweighted-average common shares outstanding, while diluted earnings (loss) pershare has been computed as net earnings (loss) divided by weighted-averagecommon and diluted shares outstanding which includes the dilutive effect ofstock options.

 

        Thefollowing table provides a reconciliation of weighted average common sharesoutstanding to weighted-average common and diluted shares outstanding (inthousands):

 
|                                |   | **Year Ended  December 31,** |   |
|-------------------------------------|--------|------------------------------|--------|
|                                |   | **2002**                     |   | **2001** |   | **2000** |   |
| Weighted-average shares outstanding |   | 26,312                       |   | 25,707 |   | 24,912 |   |
| Dilutive effect of options          |   | 342                          |   | 617 |   | — |   |
| Total common and diluted shares     |   | 26,654                       |   | 26,324 |   | 24,912 |   |

 

        AtDecember 31, 2002 and 2001, potentially dilutive common stock equivalentsinclude options to purchase 6,093,707 and 4,050,795 shares of common stockrespectively.  All potentially dilutivecommon stock equivalents were excluded from the calculation of net loss pershare for the year ended December 31, 2000 as their effect was anti-dilutive asa result of the net loss incurred for the period.

 

        **Translation of Foreign Financial Statements—**Assetsand liabilities of the Company’s foreign subsidiaries are translated at theexchange rate as of the end of each reporting period.  The income statement is translated at the average exchange ratefor the period.  Gains or losses fromtranslating foreign currency financial statements are accumulated in a separatecomponent of shareholders’ equity.

 

**        Stock-Based Compensation—**The Company appliesAPB Opinion No. 25, “Accounting for Stock Issued to Employees,” and relatedinterpretations for stock options and other stock-based awards while disclosingpro forma net earnings (loss) and net earnings (loss) per share as if the fairvalue method had been applied in accordance with SFAS No. 123, “Accounting forStock-Based Compensation.”  Hadcompensation cost for the Company’s stock options plans been determined basedupon the fair value of the options at the date of grant, as prescribed underSFAS No. 123, the Company’s net earnings (loss) and basic and diluted netearnings (loss) per share would have been adjusted to the following pro formaamounts (in thousands):

 

41

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|                                                                                                                               |   |        |   | **Year Ended  December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|------------------------------|------------|
|                                                                                                                               |   |        |   | **2002**                     |       | **2001** |   | **2000** |   |
| Net earnings (loss)                                                                                                                |   | As reported |   | **$**                        | **3,874**  | ** ** | $ | 3,879 |   | $ | (6,072 | ) |
|                                                                                                                               |   | Pro forma   |   | **(4,648**                   | **)**      | (10 | ) | (9,625 | ) |
|                                                                                                                               |   |        |   |                         | ** ** |   |   |   |   |
| Deduct: Total stock-based  employee compensation expense determined under the fair-value based methods  for all awards, net of tax |   |        |   | **(8,522**                   | **)**      | (3,889 | ) | (3,553 | ) |
|                                                                                                                               |   |        |   |                         |       |   |   |   |   |
| Basic earnings (loss) per share                                                                                                    |   | As reported |   | **0.15**                     | ** ** | 0.15 |   | (0.24 | ) |
|                                                                                                                               |   | Pro forma   |   | **(0.17**                    | **)**      | 0.00 |   | (0.39 | ) |
|                                                                                                                               |   |        |   |                         | ** ** |   |   |   |   |
| Diluted earnings (loss) per share                                                                                                  |   | As reported |   | **0.15**                     | ** ** | 0.15 |   | (0.24 | ) |
|                                                                                                                               |   | Pro forma   |   | **(0.17**                    | **)**      | 0.00 |   | (0.39 | ) |
|                                                                                                                                    |        |             |        |                              |            |  |  |  |  |  |  |  |

 

**        RecentAccounting Pronouncements**—In July 2002, the FASB issued SFAS No. 146 which addresses thefinancial accounting and reporting of expenses related to restructuringsinitiated after 2002, and applies to costs associated with an exit activity(including a restructuring) or with a disposal of long-lived assets.  Those activities can include eliminating orreducing product lines, terminating employees and contracts, and relocating plantfacilities or personnel.  Under SFAS No.146, a company will record a liability for a cost associated with an exit ordisposal activity when the liability is incurred and can be measured at fairvalue.  The provisions of SFAS No. 146are effective prospectively for exit or disposal activities initiated afterDecember 31, 2002.

 

**       **In December 2002, the FASB issued SFASNo. 148, which amends SFAS No. 123, to provide alternative methods oftransition for a voluntary change to the fair method of accounting forstock-based employee compensation.  Inaddition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 torequire prominent disclosures in both annual and interim financialstatements.  Certain of the disclosuremodifications are required for fiscal years ending after December 15, 2002.

 

        TheEITF recently reached a consensus on EITF Issue No. 00-21, which providesaccounting guidance for customer solutions where delivery or performance ofproducts, services and/or performance may occur at different points in time orover different periods of time. Companies are required to adopt this consensus for fiscal periodsbeginning after June 15, 2003.  TheCompany believes the adoption of EITF Issue No. 00-21 will not have a materialimpact on the Company’s financial position, results of operations, orliquidity.

 

**        Fair Value of Financial Instruments**—The Companybelieves that the fair value of its financial instruments, which include cashand cash equivalents, accounts receivable and accounts payable, approximatefair value.

 

**        Reclassifications**—Certain priorperiod amounts have been reclassified to conform to the current presentation.

 

**(3)**   **Acquisitions and Intangible Assets**

 

Acquisitions

 

        OnJuly 3, 2002, Sanchez completed its acquisition, by way of a plan ofarrangement (the Arrangement), of all of the outstanding common shares ofSpectra, a leading provider of comprehensive wealth management solutions.  Under the terms of the Arrangement, Sanchezacquired all of the common shares of Spectra and Eclipse VII Holdings Inc., anentity whose only asset of which was Spectra common shares, for approximately$25.9 million in cash net of cash acquired and including transaction costs,plus 583,813 shares of Sanchez common stock with a fair value of approximately$3.0 million.  Leading up to theacquisition, the Company participated in arms length negotiations, performeddue diligence, obtained a fairness opinion on the valuation ofSpectra and used industry comparables to determine a purchase price.  With the acquisition ofSpectra, the Company has positioned itself to be able to provide a completebanking and brokerage platform that satisfies the industry’s growing globalrequirements for an integrated banking and wealth management solution.  The Company’s results of operations for theyear ended December 31, 2002 include the results of operations for Spectra fromJuly 3, 2002, the date of acquisition, through December 31, 2002.

 

42

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| The purchase price for this acquisition was allocated as follows: (in  thousands) |   |   |   |
|-----------------------------------------------------------------------------------|--------|--------|--------|
| Cash paid, net of cash acquired of $1,849                                         |   | $      | 25,159 |   |
| Direct transaction costs                                                          |   | 759    |   |
| Fair value of stock issued                                                        |   | 2,965  |   |
| Liabilities assumed:                                                              |   |   |   |
| Accounts payable and accruals                                                     |   | 4,320  |   |
| Deferred revenues                                                                 |   | 3,452  |   |
| Total liabilities assumed                                                         |   | 7,772  |   |
| Total purchase price                                                              |   | 36,655 |   |
| Assets acquired:                                                                  |   |   |   |
| Accounts receivable                                                               |   | 1,601  |   |
| Prepaid expenses                                                                  |   | 642    |   |
| Income tax refund receivable                                                      |   | 344    |   |
| Deferred income taxes                                                             |   | 551    |   |
| Property and equipment                                                            |   | 344    |   |
| Intangible assets                                                                 |   |   |   |
| Goodwill                                                                          |   | 23,827 |   |
| Intangibles                                                                       |   | 9,346  |   |
| Total assets acquired:                                                            |   | 36,655 |   |
|                                                                                   |        |        |        |  |

 

        Thefollowing unaudited pro forma combined results of operations is provided forillustrative purposes only and assumes that the Spectra acquisition hadoccurred as of the beginning of the period presented.  The following unaudited pro forma information for the years endedDecember 31, 2002 and December 31, 2001 should not be relied upon asnecessarily being indicative of the historical results that would have beenobtained if this acquisition had actually occurred during that period, nor theresults that may be obtained in the future. Included in the pro forma results below for the years ended December 31,2002 and 2001 are the effects of certain non-recurring items from the Spectrahistorical results.  The non-recurringitems include the writedown of goodwill, restructuring charges and thewrite-off of certain long term investments totaling approximately $4.8 millionin the year ended December 31, 2001 and approximately $400,000 for restructuringcharges in 2002  (in thousands, exceptper share amounts):

 
|                                               |   | **Year Ended  December 31,** |    |
|----------------------------------------------------|--------|------------------------------|---------|
|                                               |   | **2002**                     |    | **2001** |   |
| Pro forma revenues                                 |   | $                            | 101,172 |   | $ | 102,564 |   |
| Pro forma net earnings (loss)                      |   | 3,644                        |    | (7,830 | ) |
|                                               |   |                         |    |   |   |
| Pro forma basic earnings (loss) per common share   |   | 0.14                         |    | (0.30 | ) |
|                                               |   |                         |    |   |   |
| Pro forma diluted earnings (loss) per common share |   | 0.13                         |    | (0.30 | ) |
|                                                    |        |                              |         |  |  |  |  |

 

Intangible assets

 

        Intangible assets are comprised of the following, at December 31, 2002 (in thousands):

** **
|                   | **Useful   Life** |   | **Gross  Carrying Amount** |   | **Accumulated  Amortization** |   | **Net Book  Value** |   |
|------------------------|-------------------|--------|----------------------------|--------|-------------------------------|--------|---------------------|--------|
| Customer base          | 10 years          |   | $  6,628                   |   | $  331                        |   | $  6,297            |   |
| Intellectual  property | 10 years          |   | 1,979                      |   | 99                            |   | 1,880               |   |
| Other                  | 2 years           |   | 369                        |   | 92                            |   | 277                 |   |
| Total                  |              |   | $  8,976                   |   | $  522                        |   | $  8,454            |   |

 

**       **Amortization expense was$527,000 for the year ended December 31, 2002. Amortization expense for each of the five succeeding years is expectedto be approximately $1.1 million per year.

 

43

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**(4)           Restructuring charge**

 

        Duringthe year ended December 31, 2002, the Company initiated restructuring actionsby reducing its worldwide workforce by approximately 12% to improve operationalefficiency and reduce operating expenses. Charges related to these restructuring actions were accrued in thequarter ended September 30, 2002, the same period that executive managementcommitted to execute such actions.

 

        Restructuringcharges recorded in connection with these actions totaled approximately$752,000, which consisted primarily of severance related payments.  Of these restructuring charges,approximately $670,000 was paid during the year ended December 31, 2002, andthe remainder will be paid during the three month period ending March 31, 2003.

 

**(5)           Client Revenue Data and Concentrationof Credit Risk**

 

        Thefollowing table summarizes the percentage of revenues from the Company’ssignificant clients (listing those clients that exceed 10% in the applicableyear):

 
|       |   | **Year Ended  December 31,** |   |
|------------|--------|------------------------------|--------|
| **Client** |   | **2002**                     |   | **2001** |   | **2000** |   |
| A          |   | 11                           | %      | 16 | % | * |   |
| B          |   | *                            |   | 10 | % | * |   |
| C          |   | *                            |   | * |   | 11 | % |

 

* Less than 10%

 

***       ***At December 31,2002 and 2001, the significant clients listed above accounted for $0 (or 0%)and $2.5 million (or 10%) of combined net accounts receivable and contracts inprocess, respectively.  The Company doesnot require its customers to provide collateral relative to accounts receivablebalances.

 

        Revenue derived fromcustomers in various geographic regions is as follows (in thousands):

 
|               |   | **Year Ended  December 31,** |   |
|--------------------|--------|------------------------------|--------|
|               |   | **2002**                     |   | **2001** |   | **2000** |   |
| U.S. and Caribbean |   | $                            | 54,822 |   | $ | 61,758 |   | $ | 41,272 |   |
| Europe             |   | 22,438                       |   | 26,880 |   | 25,948 |   |
| Canada             |   | 11,043                       |   | 3,736 |   | 4,362 |   |
| Other              |   | 4,715                        |   | 1,345 |   | 2,918 |   |
|               |   | $                            | 93,018 |   | $ | 93,719 |   | $ | 74,500 |   |

 

 

44

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**(6)           Segments**

 

        The Company classifies its operations in three segments:Sanchez’s software licensing business, the SDSI outsourcing business and its Wealth Management Division,which was created following the Company’s acquisition of Spectra in July 2002(see Note 3).  The Company evaluates theperformance of its segments and allocates resources to them accordingly.  Beginning with the first quarter of 2003,the Company organized into business units and will initiate segment reportingbased on those business units. Sanchez's new business unit segments are banking solutions, wealthmanagment, outsourcing and global services. It is impractical at this time to restate segment data for prior periodsto conform to the Company's new segment reporting.  The tables below summarize the Company’s segments  (in thousands):

 
|                            |   | **Year Ended  December 31,** |       |
|---------------------------------|--------|------------------------------|------------|
|                            |   | **2002**                     |       | **2001** |   | **2000** |   |
| Revenues                        |   |                         |       |   |   |   |   |
| Sanchez                         |   | **$**                        | **45,869** |   | $ | 61,293 |   | $ | 53,530 |   |
| SDSI                            |   | **45,896**                   |       | 39,164 |   | 26,283 |   |
| Wealth Management               |   | **7,725**                    |       | — |   | — |   |
| Eliminations                    |   | **(6,472**                   | )          | (6,738 | ) | (5,313 | ) |
| Total                           |   | **93,018**                   |       | 93,719 |   | 74,500 |   |
|                            |   |                         |       |   |   |   |   |
| Earnings (loss) from operations |   |                         |       |   |   |   |   |
| Sanchez                         |   | **1,015**                    |       | 8,228 |   | 4,807 |   |
| SDSI                            |   | **3,091**                    |       | (4,478 | ) | (15,434 | ) |
| Wealth Management               |   | **695**                      |       | — |   | — |   |
| Total                           |   | **$**                        | **4,801**  |   | $ | 3,750 |   | $ | (10,627 | ) |
|                            |   |                         |       |   |   |   |   |
|                            |   |                         |       | **December 31,** |   |
|                            |   |                         |       | **2002** |   | **2001** |   |
| Total Assets                    |   |                         |       |   |   |   |   |
| Sanchez                         |   |                         |       | **$** | **97,438** |   | $ | 84,940 |   |
| SDSI                            |   |                         |       | **41,000** |   | 36,488 |   |
| Wealth Management               |   |                         |       | **38,655** |   | — |   |
| Eliminations                    |   |                         |       | **(55,996** | ) | (20,815 | ) |
| Total                           |   |                         |       | **$** | **121,097** |   | $ | 100,613 |   |

 

**(7)           AccruedExpenses**

** **
| **(In thousands)**                     |   | **Year Ended December 31,** |   |
|----------------------------------------|--------|-----------------------------|--------|
|                                   |   | **2002**                    |   | **2001** |   |
| Accrued compensation and related items |   | **$**                       | 3,206  |   | $ | 2,144 |   |
| Accrued subcontractors                 |   | 514                         |   | 548 |   |
| Other                                  |   | 5,897                       |   | 4,929 |   |
| Total                                  |   | **$**                       | 9,617  |   | $ | 7,621 |   |

 

**(8)           Shareholders’ Equity**

 

        TheBoard of Directors is authorized, subject to certain limitations and withoutShareholder approval, to issue up to an aggregate of 10,000,000 shares ofpreferred stock in one or more series and to fix the rights and preferences ofthe shares in each series.  No shares ofpreferred stock have been issued.

 

        The1995 Equity Compensation Plan provides for the issuance of a maximum of9,360,000 shares of common stock upon the exercise of stock options, stockappreciation rights, and/or restricted stock awards.  As of December 31, 2002, there are 1,468,900 shares available forfuture grant.

 

        InMay 1998, the Company’s shareholders approved an Employee Stock Purchase Plan(ESPP). Under the ESPP, employees of the Company can purchase common stockthrough payroll deductions.  A maximumof 600,000 shares are authorized for issuance under the ESPP.  As of December 31, 2002, a total of 320,727shares have been purchased under the ESPP.

 

45

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        Theper share weighted-average fair value of stock options issued by the Company during2002, 2001 and 2000 was $3.69, $4.96 and $8.66, respectively, on the date ofgrant using the Black-Scholes option-pricing model.  The Company used the following weighted-average assumptions todetermine the fair value of stock options granted: 2002—expected dividend yieldof 0%, risk-free interest rate of 2.63% to 4.50%, expected volatility of 95%,and an average expected life of five years. 2001—expected dividend yield of 0%, risk-free interest rate of 2.63% to4.50%, expected volatility of 95%, and an average expected life of fiveyears.  2000—expected dividend yield of0%, risk-free interest rate of 4.97% to 6.31%, expected volatility of 50%, andan average expected life of five years.

 

        Generally,outstanding options vest over a two-to-four-year period after the date of grantand expire six to 10 years after the date of grant.

 

        Asummary of stock option activity is as follows:

 
|                               |   | **Year Ended  December 31,** |   |
|------------------------------------|--------|------------------------------|--------|
|                               |   | **2002**                     |   | **2001** |   | **2000** |   |
|                               |   | **Shares**                   |   | **Weighted-Average  Exercise Price** |   | **Shares** |   | **Weighted-Average  Exercise Price** |   | **Shares** |   | **Weighted-Average  Exercise Price** |   |
| Outstanding at beginning of year   |   | 4,050,795                    |   | $ | 10.20 |   | 2,625,654 |   | $ | 12.14 |   | 2,876,035 |   | $ | 9.75 |   |
| Options granted                    |   | 2,472,678                    |   | 4.47 |   | 1,774,835 |   | 7.70 |   | 727,200 |   | 16.94 |   |
| Options exercised                  |   | (16,140                      | )      | 4.17 |   | (127,953 | ) | 7.05 |   | (737,229 | ) | 5.84 |   |
| Options cancelled                  |   | (413,626                     | )      | 12.28 |   | (221,741 | ) | 14.94 |   | (240,352 | ) | 17.35 |   |
| Outstanding at end of year         |   | 6,093,707                    |   | $ | 7.75 |   | 4,050,795 |   | $ | 10.20 |   | 2,625,654 |   | $ | 12.14 |   |
|                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Options exercisable                |   | 2,887,703                    |   |   |   | 1,928,696 |   |   |   | 1,215,738 |   |   |   |
|                               |   |                         |   |   |   |   |   |   |   |   |   |   |   |
| Shares available for future grants |   | 1,468,900                    |   |   |   | 1,527,952 |   |   |   | 1,081,046 |   |   |   |

 

        Thefollowing summarizes information about the Company’s stock options outstandingas of December 31, 2002:

 
|                         |   |                                   |   | **Options  Outstanding**                         |   | **Options  Exercisable**             |   |
|------------------------------|--------|----------------------------------------|--------|--------------------------------------------------|--------|--------------------------------------|--------|
| **Range of Exercise Prices** |   | **Number  Outstanding as of 12/31/02** |   | **Weighted-Average  Remaining Contractual Life** |   | **Weighted-Average  Exercise Price** |   | **Number  Exercisable at 12/31/02** |   | **Weighted-Average    Exercise Price** |   |
| $0.835                       | to     | 6.740                                  |   | 2,652,184                                        |   | 5.80                                 |   | $ | 4.259 |   | 589,594 |   | $ | 2.528 |   |
| 6.875                        | to     | 8.690                                  |   | 2,009,095                                        |   | 4.71                                 |   | 7.681 |   | 1,053,875 |   | 7.758 |   |
| 9.844                        | to     | 13.313                                 |   | 861,710                                          |   | 2.79                                 |   | 10.575 |   | 832,544 |   | 10.569 |   |
| 15.563                       | to     | 19.094                                 |   | 447,784                                          |   | 4.40                                 |   | 15.634 |   | 299,033 |   | 15.633 |   |
| 31.625                       | to     | 42.375                                 |   | 122,934                                          |   | 3.76                                 |   | 35.802 |   | 112,657 |   | 35.883 |   |
| $0.835                       | to     | $42.375                                |   | 6,093,707                                        |   | 4.87                                 |   | $ | 7.753 |   | 2,887,703 |   | $ | 9.413 |   |
|                              |        |                                        |        |                                                  |        |                                      |        |  |  |  |  |  |  |  |  |  |  |

 

        The Company entered into aconsulting agreement effective November 8, 1999 under which the Company wasrequired to pay a total of $3.3 million for consulting services, plusexpenses.  The services related to thedevelopment of the SDSI business, including designing a model to scale thebusiness, analyzing and prioritizing target client segments and markets,analyzing the Company’s pricing model and designing performance metrics andmeasurement processes, providing management support and vendor assessments andcertain marketing and other business development services. The fee was payablein cash plus SDSI common stock.  Thenumber of shares to be issued was based on the initial public offering price ofthe SDSI common stock, however, SDSI’s initial public offering was notconsummated by November 1, 2000 and, as a result, the consultant exercised itsright to require Sanchez to pay for the stock-based portion of the fee inshares of Sanchez common stock. Accordingly, in November 2000, the Company issued 181,483 shares of itscommon stock to the consultant with a fair value of $2.8 million.  Total expenses under this agreement,including the cash portion, were allocated ratably to sales and marketing,product development and general and administrative expense based on theservices performed under the agreement and the areas that benefited from theservices.

 

46

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        InMarch 2000, the Company sold 108,590 shares of SDSI common stock for $27.62 pershare to an accredited investor for cash of $3 million.  In July 2000, the Company sold 108,980shares of SDSI common stock to an SDSI customer for cash of $3 million, whichrepresented the fair value of the stock based on cash transactions in the sameclass of stock with unrelated third-party financial investors.  The Company also issued a warrant to thecustomer, which enabled the customer to purchase additional shares of SDSIcommon stock in the event of an SDSI public offering.  There was no accounting for the warrant because there was nomeasurement date prior to an SDSI public offering.  Under the terms of the stock purchase agreements with theinvestor and the customer, the parties had the right to require the Company toissue shares of common stock equal to the purchase price divided by the averagemarket price of the Company’s common stock for 15 days prior to the anniversaryof the closing.  The investor exercisedtheir conversion rights in the first quarter of 2001 whereby the Company issued285,827 shares of its common stock in exchange for all of the shares of SDSIcommon stock held by the parties.  Thecustomer exercised their conversion rights in the second quarter of 2001whereby the Company issued 233,973 shares of its common stock in exchange forall of the shares of SDSI common stock held by the parties.  None of the SDSI loss for the year endedDecember 31, 2000 was allocated to the minority stockholders because of theirconversion rights.

 

**(9)           Income Taxes**

 

        Thecomponents of the income tax provision (benefit) are as follows (in thousands):

 

|            |   | **Year Ended  December 31,** |      |
|-----------------|--------|------------------------------|-----------|
|            |   | **2002**                     |      | **2001** |   | **2000** |   |
| Current taxes   |   |                         |      |   |   |   |   |
| Federal         |   | **$**                        | **956**   |   | $ | 3,053 |   | $ | 580 |   |
| State           |   | **— —**            |      | (31 | ) | 152 |   |
| Foreign         |   | **249**                      |      | (137 | ) | 437 |   |
|            |   | **1,205**                    |      | 2,885 |   | 1,169 |   |
| Deferred taxes  |   | **464**                      |      | (1,205 | ) | (4,075 | ) |
| Total provision |   | **$**                        | **1,669** |   | $ | 1,680 |   | $ | (2,906 | ) |

 

        Thecomponents of the earnings (loss) before income taxes are as follows:

 

|     |   | **Year Ended  December 31,** |      |
|----------|--------|------------------------------|-----------|
|     |   | **2002**                     |      | **2001** |   | **2000** |   |
| Domestic |   | **$**                        | **4,965** |   | $ | 5,559 |   | $ | (8,805 | ) |
| Foreign  |   | **607**                      |      | —  — |   | —  — |   |
| Total    |   | **$**                        | **5,543** |   | $ | 5,559 |   | $ | (8,805 | ) |

 

 

        A reconciliation of thetax provision based on the federal statutory tax rate to the effective tax rateis as follows (in thousands):

 
|                                                   |   | **Year Ended  December 31,** |      |
|--------------------------------------------------------|--------|------------------------------|-----------|
|                                                   |   | **2002**                     |      | **2001** |   | **2000** |   |
| Statutory tax  provision (benefit)                     |   | **$**                        | **1,885** |   | $ | 1,890 |   | $ | (2,994 | ) |
| State income  taxes, net of federal income tax benefit |   | **— —**            |      | (20 | ) | 101 |   |
| Foreign income  taxes                                  |   | **42**                       |      | (137 | ) | 437 |   |
| EIE/Foreign  sales corporation                         |   | **(414**                     | )         | (148 | ) | (536 | ) |
| Other, net                                             |   | **156**                      |      | 95 |   | 86 |   |
| Total                                                  |   | **$**                        | **1,669** |   | $ | 1,680 |   | $ | (2,906 | ) |

 

        Thetax effects of loss carryforwards, credit carryforwards, and temporarydifferences that give rise to significant portions of the deferred tax assetsand deferred tax liabilities are presented below exclusive of items for whichthere is a full valuation allowance, as described below. (in thousands):

 

47

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|                                       |   | **December  31,** |      |
|--------------------------------------------|--------|-------------------|-----------|
|                                       |   | **2002**          |      | **2001** |   |
| Deferred tax assets (liabilities)          |   |              |      |   |   |
| Accounts receivable allowances             |   | **$**             | **238**   |   | $ | 443 |   |
| Accrued liabilities                        |   | **991**           |      | 738 |   |
| Deferred revenue                           |   | **10,571**        |      | 6,933 |   |
| Deferred expenses                          |   | **(6,746**        | )         | (4,972 | ) |
| Capitalized software costs and intangibles |   | **(49**           | )         | (82 | ) |
| Net operating loss carryforward            |   | **551**           |      | 2,424 |   |
| Net deferred tax asset                     |   | **$**             | **5,556** |   | $ | 5,484 |   |

 

At December 31, 2002, the Company has a U.S.federal net operating loss carry forward of $1.6 million, which is limited dueto certain ownership changes which occurred in the past three years.  Additionally, the Company has net foreigndeferred tax assets of approximately $4.6 million at December 31, 2002, whichare comprised mainly of a net operating loss in Canada, for which a fullvaluation allowance is recorded.  To theextent that these amounts are used to reduce future taxable income, suchamounts will reduce goodwill.  TheCompany also has net state deferred tax assets of approximately $1.6 millionfor which a full valuation allowance is recorded as of December 31, 2002 basedon the Company's estimates about future state taxable income.

 

**(10)         Commitmentsand Contingencies**

 

        The Company leases officefacilities subject to operating leases. Future minimum lease payments undernon-cancelable operating leases with initial or remaining terms of one year ormore at December 31, 2002 are as follows (in thousands):

 

| 2003       |   | $     | 2,372  |   |
|------------|--------|-------|--------|--------|
| 2004       |   | 1,356 |   |
| 2005       |   | 682   |   |
| 2006       |   | 626   |   |
| 2007       |   | 530   |   |
| Thereafter |   | 0     |   |
|       |   | $     | 5,566  |   |

 

        Rentexpense for the years ended December 31, 2002 and 2001 and 2000 wasapproximately $2.9 million, $2.9 million, and $2.2 million, respectively.

 

        Duringthe year ended December 31, 2002, the Company prevailed in its arbitrationclaim with 1stWebbankdirect and was awarded $1.7 million.  In February 2001, SDSI filed for arbitration in response to 1stWebbankdirect’sOctober 2000, termination of its processing agreement in connection with theconsolidation of its e-banking platforms. SDSI was seeking paymentof all outstanding receivables from this customer. 1stWebbankdirectcounterclaimed and was seeking a refund of the implementation fees they paidfor the project. As a result of this settlement, the company recognizedapproximately $3.2 million in revenues and $2.9 million in cost, previouslydeferred in accordance with SAB No. 101 related to this client during yearended December 31, 2002.

 

        Alsoduring the year ended December 31, 2002, the Company settled an outstandingreceivable dispute with an unannounced client that had been previouslydisclosed in the Company’s periodic filings. As a result of this settlement, the Company recognized approximately$3.1 million in revenue and approximately $2.3 million in costs previously deferredin accordance with SAB No. 101 related to this client during the year endedDecember 31, 2002.

 

**(11)         Related Party Transactions**

 

        TheCompany entered into an agreement in 1999 with Devon Air Services, a charterairline company owned by Michael Sanchez, the Sanchez Chairman of the Board.  During the years ending December 31, 2002,2001 and 2000, the Company incurred expenses under this agreement of $120,000,$191,000 and $131,000, respectively.

 

        OnAugust 13, 2002, Mr. Michael Sanchez, the Company’s Chairman of the Board,repaid two loans and interest in full that were previously outstanding with theCompany.  During 2001 and the firstquarter of 2002, the Company had made two loans to Mr. Sanchez which totaled$1.1 million.  Mr. Sanchez waspersonally liable for these loans, which were secured by collateral.  The loans to Mr. Sanchez bore an interest ata rate of 3.58% per annum and 2.73% per annum. We were advised that Mr. Sanchez used a portion of the loan proceeds topartially repay certain indebtedness obtained for personal purposes and securedby his shares of Company stock.  Mr.

 

48

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Sanchez’s loans from the Company wereratified and approved by our board of directors, with Mr. Michael Sanchez andMr. Frank Sanchez abstaining in such actions. Both loans were full recourse loans.

 

        OnJuly 3, 2002, in connection with the acquisition of Spectra, the Company loanedMr. John McLeod, President of the Company’s Wealth Management Division,approximately $314,000.  This loan issecured by the pledge of 100,000 shares of Sanchez common stock.  The loan contains an interest rate asprescribed by the Canadian Customs and Revenue Agency (Base Rate).  This rate shall be adjustedquarterly to the extent such Base Rate changes.  At the time of the loan the Base Rate was 3%.  The loan has a term of three yearscommencing July 3, 2002 with six semi-annual payments, the first of which wasdue on January 3, 2003.  In January2003, Mr. McLeod made the first of his six semi-annual payments.

 

        During2001, the Company loaned $130,000 to Mr. Todd Pittman, the Company’s ChiefFinancial Officer, for the purchase of Company stock. The three-year loan, forwhich Mr. Pittman is personally liable, is secured by the Company stockpurchased by Mr. Pittman, and bears interest at a rate of 4.63% per annum.  On September 30, 2002, Mr. Pittman repaidapproximately $11,000 in principal and has a balance, including interest, of$120,279 as of December 31, 2002.  Inaddition, Mr. Pittman made a payment of approximately $6,000 in February 2003.

 

        Inaccordance with the Sarbanes-Oxley Act of 2002, the Company has adopted apolicy not to grant any new loans or materially modify or extend any existingloans to officers or directors of the Company and the audit committee mustreview and approve any related party transactions involving SEC reportingofficers.

 

**(12)         ProfitSharing Trust Plan**

 

        The Company maintains aProfit Sharing Trust Plan (the Plan) which permits eligible participatingmembers to contribute up to 20% of their gross earnings.  The Company will typically make acontribution equal to 100% of the first 3% which an employee contributes,subject to a statutory cap, and may also make additional voluntarycontributions.  During the last fivemonths of 2002, the Company temporarily reduced its contributions to 100% ofthe first 1.5% which an employee contributes. The Company expensed $584,000, $649,000, and $531,000 related to thePlan during the years ended December 31, 2002, 2001 and 2000, respectively.

 

**(13)****                         ****Revolving Line of Credit**

 

        On July 3, 2002, the Company secured a$20 million revolving line of credit. There have been no borrowings under this facility through December 31,2002.  Borrowings under the facilitybear interest at either a Base Rate Option, defined as either the prime rate ora rate equal to one quarter of one percentage point above the Federal FundsRate or the LIBOR Rate Option, defined as the LIBOR Rate plus 150 basispoints.  The revolving line of creditincludes various financial and nonfinancial covenants and expires July 2, 2005.

 

**(14)         Quarterly Financial Information(Unaudited)**

 

        The following tablepresents the unaudited quarterly financial information for the years 2002 and2001 (in thousands, except for per share data):

 
|                         |   | **2002  Quarter Ended** |   | **2001  Quarter Ended** |   |
|------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                         |   | **Mar 31**              |   | **June 30**             |   | **Sept 30** |   | **Dec 31** |   | **Mar 31** |   | **June 30** |   | **Sept 30** |   | **Dec 31** |   |
| Revenues                     |   | $                       | 19,326 |                    | $      | 22,332 |   | $ | 25,215 |   | $ | 26,145 |   | $ | 22,490 |   | $ | 24,513 |   | $ | 24,850 |   | $ | 21,866 |   |
| Earnings before income taxes |   | 325                     |   | 343                     |   | 1,723 |   | 3,152 |   | 1,267 |   | 1,469 |   | 1,292 |   | 1,531 |   |
| Net earnings                 |   | 218                     |   | 230                     |   | 1,314 |   | 2,112 |   | 849 |   | 984 |   | 1,015 |   | 1,031 |   |
| Basic earnings  per share    |   | 0.01                    |   | 0.01                    |   | 0.05 |   | 0.08 |   | 0.03 |   | 0.04 |   | 0.04 |   | 0.04 |   |
| Diluted earnings  per share  |   | 0.01                    |   | 0.01                    |   | 0.05 |   | 0.08 |   | 0.03 |   | 0.04 |   | 0.04 |   | 0.04 |   |
|                              |        |                         |        |                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

        Earningsper average common share calculations for each of the Company’s quarters arebased on the weighted-average number of shares outstanding in each quarter.Accordingly, the sum of the net earnings per share for each of the quarters ina fiscal year may not equal the actual year-to-date net earnings per averagecommon share.

 

49

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**Schedule II**

**Sanchez ComputerAssociates, Inc.Valuation and Qualifying AccountsFor the years ended December 31, 2002, 2001, and 2000**

** **
| **Allowance  for Doubtful Accounts** |   | **Balance at  Beginning of Year** |    | **Charged to  Costs and Expenses** |   | **Deductions** |   | **Balance at  End of Year** |   |
|--------------------------------------|--------|-----------------------------------|---------|------------------------------------|--------|----------------|--------|-----------------------------|--------|
| Year ended December 31, 2000         |   | $                                 | 288,000 |                               | $      | 909,000        |   | $                           |   | $ | 1,197,000 |   |
| Year ended December 31, 2001         |   | 1,197,000                         |    | 100,000                            |   | 78,000         |   | 1,219,000                   |   |
| Year ended December 31, 2002         |   | 1,219,000                         |    | 1,138,000                          |   | 1,378,000      |   | 979,000                     |   |
|                                      |        |                                   |         |                                    |        |                |        |                             |        |  |  |  |

** **

**REPORT OF INDEPENDENT PUBLICACCOUNTANTS**

** **

**ToSanchez Computer Associates, Inc.**

** **

**Thefollowing report is a copy of a previously issued Arthur Andersen LLP(Andersen) report on the consolidated schedule of valuation and qualifyingaccounts and the report has not been re-issued. The Andersen report pertains tothe 2001 and 2000 information in the consolidated schedule of valuation andqualifying accounts.**

** **

**Ourreport on the consolidated financial statements of Sanchez Computer Associates,Inc. and subsidiaries is included on page 33 of this Form 10-K. Our audits weremade for the purpose of forming an opinion on the basic financial statements takenas a whole. The above schedule is presented for purposes of complying with theSecurities and Exchange Commission rules and is not part of the basic financialstatements. This schedule has been subjected to the auditing procedures appliedin our audit of the basic financial statement and, in our opinion, fairlystates in all material respects the financial data required to be set forththerein in relation to the basic financial statements taken as a whole.**

** **

**ArthurAndersen LLP**

** **

**Philadelphia,Pennsylvania**

**February 5,2002**

** **

**Item 9.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

        OnJune 27, 2002, we dismissed Arthur Andersen LLP ("Andersen"), as ourindependent accountant, and appointed KPMG LLP as our new independentaccountant.  The decision to change ourindependent accountant was recommended and approved by the Audit Committee ofour Board of Directors.  Andersen'sreports on our financial statements for the two most recent fiscal years priorto its dismissal did not contain an adverse opinion or disclaimer of opinionand were not qualified or modified as to uncertainty, audit scope or accountingprinciples.

        Duringfiscal 2000 and 2001 and the period from the end of fiscal 2001 through June27, 2002, there were no disagreements with Andersen on any matter of accountingprinciples or practices, financial statement disclosure, or auditing scope orprocedure, which disagreements, if not resolved to the satisfaction ofAndersen, would have caused it to make reference to the subject matter of thedisagreements in connection with its report and there were no reportable eventsas defined in Item 304(a)(1)(v) of Regulation S-K.

        Duringfiscal 2000 and 2001 and the period from the end of fiscal 2001 thorough June27, 2002, we did not consult KPMG LLP with respect to the application ofaccounting principles to a specified transaction either completed or proposed,or the type of audit opinion that might be rendered on our consolidatedfinancial statements, or any other matters or reportable events as set forth inItems 304(a)(2)(i) and (ii) of Regulation S-K.

** **

**PART III**

 

**Item 10. Directors and****ExecutiveOfficers of the Registrant.**

 

**        Directors**

 

        TheCompany incorporates by reference the information contained under the caption “ELECTIONOF DIRECTORS” in its definitive Proxy Statement relative to its May 22, 2003annual meeting of shareholders, to be filed within 120 days after the end ofthe year covered by this Form 10-K pursuant to Regulation 14A under theSecurities Act of 1934, as amended.

 

**        Disclosure of Delinquent Filers Pursuantto Item 405 of Regulation S-K**

 

        TheCompany incorporates by reference the information contained under the caption“SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in its definitiveProxy Statement relative to its May 22, 2003 annual meeting of shareholders, tobe filed within 120 days after the end of the year covered by this Form 10-Kpursuant to Regulation 14A under the Securities Exchange Act of 1934, asamended.

 

**Item 11. Executive****Compensation.**

 

        TheCompany incorporates by reference the information contained under the captions“Board Compensation,” “Compensation Committee Interlocks and InsiderParticipation” and “EXECUTIVE COMPENSATION AND OTHER ARRANGEMENTS” in itsdefinitive Proxy Statement relative to its May 22, 2003 annual meeting ofshareholders, to be filed within 120 days after the end of the year covered bythis Form 10-K pursuant to Regulation 14A under the Securities Exchange Act of1934, as amended.

 

**Item12.  Security Ownership****of Certain Beneficial Owners and Management.**

 

        TheCompany incorporates by reference the information contained under the caption“STOCK OWNERSHIP OF DIRECTORS AND OFFICERS AS OF MARCH 21, 2003” in itsdefinitive Proxy Statement relative to its May 22, 2003 annual meeting ofshareholders, to be filed within 120 days after the end of the year covered bythis Form 10-K pursuant to Regulation 14A under the Securities Exchange Act of1934, as amended.

 

**Item 13. Certain****Relationships and RelatedTransactions.**

 

        TheCompany incorporates by reference the information contained under the captions“Compensation Committee Interlocks and Insider Participation” and “CERTAINTRANSACTIONS” in its definitive Proxy Statement relative to its May 22, 2003annual meeting of shareholders, to be filed within 120 days after the end ofthe year covered by this Form 10-K pursuant to Regulation 14A under theSecurities Exchange Act of 1934, as amended.

 

50

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**Item14.  Controls and Procedures**

 

**        Evaluation of Disclosure Controls and Procedures**

 

        Under the supervision and with theparticipation of our management, the Company’s principal executive officer andprincipal financial officer have concluded that the Company’s disclosure controlsand procedures (as defined in Exchange Act Rule 13a-14(c)), based on theirevaluation of such controls and procedures conducted within 90 days prior tothe date hereof, are effective to ensure that information required to bedisclosed by the Company in the reports it files under the Securities ExchangeAct of 1934, as amended, is recorded, processed, summarized and reported withinthe time periods specified in the rules and forms of the Securities andExchange Commission and that such information is accumulated and communicatedto the Company’s management, including its principal executive officer andprincipal financial officer, as appropriate to allow timely decisions regardingrequired disclosure.

 

**Evaluation of Internal Controls**

 

        There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthe Company’s disclosure controls and procedures subsequent to the 90 daysprior to the filling of this report, nor any known significant deficiencies ormaterial weaknesses in such disclosure controls and procedures requiringcorrective actions. As a result, no corrective actions were taken.

 

### **PART IV**

 

**Item15. 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 partof this Form 10-K.

 

        Financial Statements (seeitem No. 8, page 31)

 

Reports of Independent AuditorsConsolidated Balance Sheets as of December 31, 2002 and 2001Consolidated Statements of Operations for the years ended December 31, 2002,2001and 2000Consolidated Statements of Shareholders’ Equity and Other Comprehensive Income(Loss) for the years ended December 31, 2002, 2001 and 2000Consolidated Statements of Cash Flows for the years ended December 31, 2002,2001 and 2000Notes to Consolidated Financial Statements

 

        Financial StatementSchedules

 

Schedule II—Valuation and Qualifying Accounts for the years endedDecember 31, 2002, 2001 and 2000

All other information for which provision is made in the applicableaccounting regulations of the Securities and Exchange Commission is eitherincluded in the financial statements or is not required under the relatedinstructions or are inapplicable, and therefore have been omitted.

 

(b)           Reports on Form 8-K

 

Form 8-K.  Related to theregistrant’s third quarter of 2002 results. Filed on November 1, 2002.

 

(c)           Exhibits

 

The following is a list of exhibits required by Item 601 of RegulationS-K filed as part of this Form 10-K. Where so indicated by footnote, exhibitswhich were previously filed are incorporated by reference. For exhibitsincorporated by reference, the location of the exhibit in the previous filingis indicated in parentheses.

 

51

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| **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)                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.3                |   | Certificate of Designation of Powers, Rights and  Preferences of Sanchez Computer Associates, Inc. of Series A  Participating Preferred Stock.  Filed  as exhibit on Form 8-K on February 23, 2003 (Exhibit 3.2)                                                                                                                                                                                                                                                            |
| 4.1                |   | Specimen stock certificate representing the Common  Stock.(2) (Exhibit 4.1)                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1                |   | Shareholder Rights Agreement, dated as of  February 28, 2003, between Sanchez Computer Associates, Inc. and  Mellon Investor Services LLC, including Form of Certificate of Designation of  Powers, Rights and Preferences of Sanchez Computer Associates, Inc.,  including Series A Participating Preferred Stock (Exhibit A  thereto) and Form of Rights Certificate (Exhibit B thereto). Filed as  exhibit on Form 8-K on February 23, 2003 (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               |   | Amended and restated 1995 Equity Compensation Plan  filed as part of Company’s proxy statement on April 20, 2001.                                                                                                                                                                                                                                                                                                                                                                     |
| 10.7               |   | Combination Agreement, dated as of May 15, 2002,  entered into by and among Sanchez, 1518356 Ontario Limited, Sanchez Software,  Ltd., Spectra, John C. McLeod and The 1998 McLeod Family Trust.  Filed as exhibit on Form 8-K filed July 3,  2002 (Exhibit 10.1)                                                                                                                                                                                                                     |
| 99.1               |   | Employment Agreement, dated July 3, 2002, between  Sanchez Computer Associates, Inc. and John C. McLeod*                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.8               |   | Loan Agreement, dated July 3, 2002, entered into by  and among Sanchez Computer Associates, Inc., Sanchez Software Ltd., Sanchez  Computer Associates Polska, SP. Z.O.O., Sanchez FSC, Inc., ePROFILE Holdings,  Inc., Sanchez Data Systems, Inc., Sanchez Computer Associates International,  Inc. and PNC Bank, National Association.   Filed as exhibit on Form 8-K filed July 3, 2002 (Exhibit 10.39)                                                                             |
| 10.9               |   | Security Agreement, dated July 3, 2002, entered into  by and Sanchez Computer Associates, Inc., Sanchez Software Ltd., Sanchez  Computer Associates International Inc., e-PROFILE Holdings, Inc., Sanchez  Data Systems, Inc. and PNC Bank, National Association.  Filed as exhibit on Form 8-K filed July 3,  2002 (Exhibit 10.40)                                                                                                                                                   |
| 21.1               |   | Subsidiaries of the Registrant.*                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 23.1               |   | Consent of Independent Public Accountants KPMG LLP*                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 99.2               |   | Certification of the Chief Executive Officer and  Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*                                                                                                                                                                                                                                                                                                        |
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

----

 

*              Filed herewith.

 

#              These exhibits relate to compensatoryplans, contracts or arrangements in which directors and/or executive officersof the registrant may participate.

52

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1)             Filed on September 27, 1996 as an exhibit to theCompany’s Registration Statement on Form S-1 (No. 333-       12863) and incorporated by reference.

 

2)             Filed on November 6, 1996 as an exhibit to AmendmentNo. 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 Form10-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 Form10-Q for the three-month period ended September 30,    1997 and incorporated by reference.

 

5)             Filed as an exhibit to the Company’sSchedule 14A dated April 23, 1999.

 

 

 

 

53

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**SIGNATURES**

 

        Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|                  |   | SANCHEZ COMPUTER ASSOCIATES, INC. |
|-----------------------|--------|-----------------------------------|
|                  |   |                              |
| Dated: March 31, 2003 | By:    |                              | /s/  FRANK R.  SANCHEZ |
|                  |   |                              | Frank R. Sanchez, *Chief  Executive Officer and Director* |
|                       |        |                                   |  |  |

 

        Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.

 
|                  |   |                                                                                             |
|-----------------------|--------|--------------------------------------------------------------------------------------------------|
| Dated: March 31, 2003 |   | /s/  MICHAEL  A. SANCHEZ                                                                    |
|                  |   | Michael A. Sanchez, *Chairman  of the Board of Directors*                                        |
|                  |   |                                                                                             |
| Dated: March 31, 2003 |   | /s/  FRANK R.  SANCHEZ                                                                      |
|                  |   | Frank R. Sanchez, *Chief  Executive Officer and Director   (Principal Executive Officer)*        |
|                  |   |                                                                                             |
| Dated: March 31, 2003 |   | /s/  TODD A.  PITTMAN                                                                       |
|                  |   | Todd A. Pittman, *Senior  Vice President and CFO   (Principal Financial and Accounting Officer)* |
|                  |   |                                                                                             |
| Dated: March 31, 2003 |   | /s/  JOSEPH  F. WATERMAN                                                                    |
|                  |   | Joseph F. Waterman, *President,  Chief Operating Officer and Director*                           |
|                  |   |                                                                                             |
| Dated: March 31, 2003 |   | /s/  LAWRENCE  A. CHIMERINE                                                                 |
|                  |   | Lawrence A. Chimerine, *Director*                                                                |
|                  |   |                                                                                             |
| Dated: March 31, 2003 |   | /s/  WILLIAM  M. FENIMORE                                                                   |
|                  |   | William M. Fenimore, *Director*                                                                  |
|                  |   |                                                                                             |
| Dated: March 31, 2003 |   | /s/   FREDERICK G. GRONBACHER                                                               |
|                  |   | Frederick G. Gronbacher, *Director*                                                              |
|                  |   |                                                                                             |
| Dated: March 31, 2003 |   | /s/  ALEX W.  HART                                                                          |
|                  |   | Alex W. Hart, *Director*                                                                         |
|                  |   |                                                                                             |
| Dated: March 31, 2003 |   | /s/  JOHN D.  LOEWENBERG                                                                    |
|                  |   | John D. Loewenberg, *Director*                                                                   |
|                  |   |                                                                                             |
| Dated: March 31, 2003 |   | /s/  THOMAS  C. LYNCH                                                                       |
|                  |   | Thomas C. Lynch, *Director*                                                                      |
|                  |   |                                                                                             |
| Dated: March 31, 2003 |   | /s/  JAMES R.  STOJAK                                                                       |
|                  |   | James R. Stojak, *Director*                                                                      |
|                  |   |                                                                                             |
| Dated: March 31, 2003 |   | /s/  GARY C.  WENDT                                                                         |
|                  |   | Gary C. Wendt, *Director*                                                                        |

 

 

54

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CERTIFICATION

 

I, Frank Sanchez, certify that:

 

1.  I have reviewed this annual report on Form 10-K of Sanchez Computer Associates, Inc.;

 

2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

     a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

     b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

     c)  presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

 

     a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

     b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 
| Dated: March 31, 2003 | /s/  FRANK R.  SANCHEZ                        |
|-----------------------|----------------------------------------------------|
|                  |  Frank R.  Sanchez, *Chief Executive Officer* |
|                  | Frank R. Sanchez                                   |
|                  | Chief Executive Officer                            |

 

 

55

 

CERTIFICATION

 

I, Todd Pittman, certify that:

 

1.   I have reviewed this annual report on Form 10-K of Sanchez Computer Associates, Inc.;

 

2.   Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

 

3.   Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

 

4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

     a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

 

     b)  evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

 

     c)  presented in annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors:

 

     a)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

     b)   any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.  The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 
| Dated: March 31, 2003 | /s/  TODD A.  PITTMAN                   |
|-----------------------|----------------------------------------------|
|                  | *Todd  A. Pittman,**Chief Financial Officer* |

 

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