**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

**For Annual andTransition Reports 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** |
|------------------------|------------------------------------------------------------------------------------------------|

 

### **For the fiscal year ended December 31,2003**

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

 

**For the transition period from                  to                  **

 

### **Commission file number 000-21705**

 

**SANCHEZCOMPUTER ASSOCIATES, INC.**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **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’s telephone number, including  area code: **(610) 296-8877**           |
|                                                                                        |   |                                  |
| Securities registered pursuant to  Section 12(b) of the Act:   **NONE** |
|                                                                                        |   |                                  |
| Securities registered pursuant to  Section 12(g) of the Act:                           |

 

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

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes ý      Noo

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act). Yes ý      Noo

 

The aggregate market value of shares of Common Stock held by non-affiliates(based on the closing price on NASDAQ) on June 30, 2003 was approximately$77.3 million.

 

The number of shares of registrant’s Common Stock outstanding as ofMarch 1, 2004 was 27,039,979 shares.

 

### **Documents Incorporated by Reference**

None

 

 

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**SANCHEZ COMPUTER ASSOCIATES, INC.**

 

**INDEX TO FORM 10-KFOR THE FISCAL YEAR ENDED DECEMBER 31, 2003**

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

 

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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 provider in developing and marketing scalableand integrated software and services that provide banking, customerintegration, brokerage, wealth management and outsourcing solutions toapproximately 400 financial institutions in 22 countries.  Sanchez’s corporate headquarters is locatedin Malvern, Pennsylvania.  The Company’soutsourcing data and operations service center is located in Seven Fields,Pennsylvania.  The Company’s WealthManagement Division is based in Toronto, Canada.  Sanchez also maintains services and sales offices in San Ramon,California; Sydney, Australia; Amsterdam, the Netherlands; and Warsaw, Poland.Beginning with the first quarter of 2003, Sanchez organized into divisions andinitiated new segment reporting based on those divisions.  Sanchez’s divisional segments are BankingSolutions, Wealth Management, Outsourcing and Global Services.  Each division has individual profit and lossresponsibilities.  Whether throughproducts, methodologies, services, custom software enhancements or systemsconsulting engagements, each division’s mission is to significantly lowerclients’ ongoing operations and technology costs, reduce their technology risk,and improve their enterprise customer management.  The divisions were created to provide the innovation and focusnecessary to enable clients’ business plans to succeed.  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.

 

*Recent Developme*nts

 

TheCompany and Fidelity National Financial, Inc. (FNF) entered into an Agreementand Plan of Merger (the Merger Agreement), dated as of January 27, 2004and restated as of March 4, 2004, by and among the Company, FNF, FidelityInformation Services, Inc., a wholly-owned subsidiary of FNF (FIS), SundayMerger Corp., a wholly-owned subsidiary of FIS (Merger Corp.), and SundayMerger, LLC, a wholly-owned subsidiary of FIS (Merger LLC).  Under theterms of the Merger Agreement, the Company will become a wholly-ownedsubsidiary of FIS pursuant to a two-step merger transaction (the Merger), asmore particularly described in the Merger Agreement.

 

Inconnection with the Merger, all outstanding shares of Company common stock, nopar value per share (the Company Common Stock), will be entitled to receive$6.50 per share, one-half of which will be paid in cash and one-half of whichwill be paid in shares of FNF common stock (the FNF Common Stock) at anexchange rate based on the average closing sales prices of FNF Common Stock onthe New York Stock Exchange for the twenty consecutive trading days immediatelypreceding but not including the second trading day before the closing date ofthe merger, subject to adjustment under certain circumstances set forth in theMerger Agreement.  The Company’s shareholders will have the option toelect to receive any combination of cash and FNF Common Stock.  If theaggregate cash/stock mix is not 50%/50%, then the consideration received byeach Company shareholder will be adjusted accordingly as set forth in theMerger Agreement to meet such aggregate ratio.  Any shareholder whodesires to receive 50% FNF Common Stock and 50% cash will not have to make anelection and will receive such consideration without any adjustment.

 

FNFhas entered into voting agreements to support the transaction with Sanchezshareholders holding in excess of 40% of the common vote.  The transaction has been approved by the FNFBoard of Directors and no separate FNF shareholder approval is required.  Consummation of the Merger is expected inthe second quarter of 2004, subject to approval by Sanchez shareholders andcustomary regulatory and other conditions.

 

### ***Sanchez’s Bankingand Wealth Management Platforms***

 

TheSanchez banking 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 core 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 a Sanchez banking solution by licensing one ormore of Sanchez’s application software products.  Those products include: Sanchez ProfileÔ,the core banking and transaction processing application; Sanchez XpressÔ,an enterprise customer and transaction management system; Sanchez WebclientÔ,a Web-based, Internet consumer front-end processor; Sanchez WebCSRÔ,a browser-based customer and account servicing application used in aninstitution’s branches and call centers and Sanchez FMSÔ,the Financial Management System, which is an online, real-time costcenter-based accounting system with complete multi-company and multi-currencysupport.  In addition, Sanchez offersProfile for Windows®, the 32-bit, Windows-based, graphical user

 

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interface designed as the front-end to Sanchez Profile’s core bankingapplication, which is used by tellers, branch and call center personnel.  Sanchez CRMÔ,a Web-based customer relationship management system, is available as astand-alone application or integrated with Sanchez’s banking platform.

 

Sanchez WealthwareÔis Sanchez’s wealth management product line, which was acquired inJuly 2002 through the acquisition of Spectra Securities Software ofToronto, Canada.  Sanchez Wealthware isa comprehensive, multi-channel wealth management solution that helps financialinstitutions manage investor assets online by providing a collaborative,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.

 

*Application Product Overview — SanchezProfile*

 

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 costs ofthe enterprise.  Profile is engineeredfor high speed and high volume transaction processing throughput, (publishedbenchmarks support real-time transaction processing at a rate of 1,900TPS)providing full ACID (Atomic, Consistent, Isolated, Durable) properties as wellas logical dual site operation functionality for true 24x365 databaseoperation.  Profile is also designed tobe platform and operating system independent. Through the use of Sanchez Profile’s automatic code generation tools,provided by DATA-QWIKÔ, the financialinstitution’s business users can construct custom financial products, withoutwriting any code.

 

*Application Product Overview — Sanchez Xpress*

 

SanchezXpress is an enterprise integration solution that provides customer and accountaggregation, financial product distribution, and supports the real-timeintegration of all customer delivery channels to an institution’s internal andexternal product 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. Sanchez Xpress is J2EE-compliant and also acts as message-orientedmiddleware in that the messaging components natively assume XML is used as astandard protocol and data description language.

 

## *Application Product Overview — SanchezWebclient*

## * *

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 consumerbanking transactions and products. Webclient integrates a financial institution’s retail customer’sfinancial products into a content rich Web site where the customer can viewaccount information and perform transactions.

 

Sanchez Webclient provides a dynamic page-publishing framework thatallows an institution to retain control over the appearance, navigationalelements and content of the Web site. Sanchez Webclient also works with third-party applications to drivecontent presentation (e.g., Sanchez Webclient supports download capabilities topopular personal finance packages such as Microsoft Money® andQuicken® ).  The softwareprovides a mechanism for targeting banner ads and marketing messages, accordingto predefined customer information. From this data, Sanchez Webclient applies user-defined business rules toinfluence the content presented to customers. This functionality supports one-to-one marketing campaigns and allowsfor cross selling of different products, based on customer buyingbehaviors.  All customer information isfully protected in a secure environment. For customer login security, Sanchez Webclient supports password as wellas certificate authentication schemes. Data encryption techniques are applied to ensure sensitive financialdata is safeguarded.

 

The Webclient application is available as a direct connection toSanchez Profile or on the Sanchez Xpress platform.  The application can take advantage of the advanced features ofSanchez Xpress including the Universal Customer System (UCS) for customeraggregation, events, alerts and correspondence management, security andauthentication, customer prospecting and personalization.  It also utilizes the Sanchez Xpressfinancial product distribution facility to allow the institution to provideone-to-one customer product personalization and packaging, regardless of thehost systems involved.

 

*Application Product Overview — Sanchez WebCSR*

 

SanchezWebCSR is a browser-based customer and account servicing application used by aninstitution’s

 

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servicerepresentatives to respond to customer inquiries and requests.  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.

 

*Application Product 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.  SanchezCRM provides the ability for the entire organization to effectively identify,acquire, foster and retain loyal, profitable relationships.

 

*Wealth Management Application Products — Overview*

 

SanchezWealthwareTM, an integrated enterprise wealth management solution, empowersfinancial institutions to effectively manage investor assets online and achievea competitive advantage by lowering costs/improving ROI, reducing technologyrisks and improving customer service. Wealthware automatically aggregates and loads customer data frommultiple legacy systems and service providers to supply a single,customer-centric perspective. Wealthware also provides the desktop tools to analyze portfolios, make informedinvestment decisions and execute transactions. Sanchez Wealthware is available as separate modules andapplications.  Each module can beimplemented individually or integrated for a customized, seamless wealthmanagement solution.  Sanchez Wealthwarehas multi-currency and multi-language capabilities, and can accommodate thewealth management requirements of financial service institutions with globaltransaction requirements.

 

*Application Product Overview — InvestorManagement*

 

## *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 data store.  It supports access via any web or wirelessGraphical User Interface (GUI) or Interactive Voice Response (IVR)interface.  A single, XML client APIenables a common, brand-able user interface to be provided.

 

*Sanchez Portfolio*

 

Sanchez has a 20 percent ownership stake in Croesus Finansoft (CF), aCanadian portfolio management software firm. Sanchez has a non-exclusive agreement with CF to market and sell theproduct under the brand of Sanchez Portfolio. Sanchez Portfolio provides full-featured integrated contact and portfoliomanagement.  Advisors and clients accessthe thin-client solution over the Internet for AIMR-compliant performance, taxlots, modeling, asset allocation, householding, gain/loss, cash flowprojections and “what-if” analysis. Wireless access is also available with alerts on market data and clientportfolios.

 

* Application Product Overview — OrderManagement*

 

*Sanchez Equities*

 

SanchezEquities provides full-featured order management for online, real-time equitiesand options trading.  Advisors use SanchezEquities to request quotes and place and validate orders for the full breadthof exchange-tradable products including equities, options, rights, warrants,and debentures.  The browser-basedfront-end allows users to connect through the Internet, branch office, orintranet.  Compliance failures arereduced with pre-trade business rule validation including securityrestrictions, licensing and entitlement. Inadmissible orders are routed to authorized users for review and onlineapproval.  Acceptable orders are routedto exchanges and trading systems for execution.  Rules are configurable at the user level to enable or disabletypes of trades, set commissions or otherwise tailor the order managementexperience to the needs of the institution and client base.  Sanchez Equities maintains a complete audittrail of order changes and provides visibility of client orders throughapproval, routing, acknowledgement and confirmation.

 

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## *Sanchez Bonds*

 

Sanchez Bonds is acomprehensive solution for the retail distribution of fixed incomesecurities.  Themulti-functional, online application provides a real-time display of price andinventory information and isused by the fixed income trading desk, retail sales and investors.  The fixed income desk uses the tradingmodule to manage inventory, trading rules and pricing.  Retail sales representatives and investorsuse the sales module to search inventories for securities, review pricing,yields and other bond information, place orders and monitor their orderstatus.  The trading systemincludes a robust pricing engine capable of re-pricing thousands of line itemsin real-time to support large-scale operations.  It features real-time link interfaces to provide securities, inventoriesand pricing information in real-time from other trading systems to synchronizethe retail to the wholesale market.  Itoffers single trade, block trading and laddering/portfolio capabilities.  As an order is placed, Sanchez Bondsimmediately calculates price, commission, cost and yield.  Sanchez Bonds also validates order detailsto ensure that data has been entered correctly.  It can be implemented in a single- or multi-dealer environment tofacilitate channel pricing.  Theapplication serves the full breadth of fixed income securities includingtreasuries, municipals, strips, mortgage-backed securities, corporate andgovernment bonds.

 

## *Sanchez Funds*

## * *

SanchezFunds is an automated, mutual fund trading application that providesstraight-through processing from advisors and investors through to operationsstaff, FundSERV, mutual fund companies and shareholder management systems.  Sanchez Funds automates activities relatingto buys, sells, exchanges, and internal transfers including changes and cancelson trade date.  Sanchez Funds editsorders in real-time.  If the orderpasses all edits, it is automatically sent to the appropriate fund company forprocessing.  Sanchez Funds deliversorders via NSCC and FundSERV connections or via optional direct links to thefund companies.  Sanchez Fundsstreamlines mutual fund order processing by updating back-office systems andautomating the posting of dividends and other transactions.  Distribution to multiple channels, each withunique rules, commission structures and edits can be implemented quickly toreach more investors and offer more funds. Sanchez Funds is NSCC and FETA approved and supports seg fundprocessing, non-financial updates, and Canadian, U.S., U.K., and Europeanfunds.  The Sanchez Funds product suiteincludes:

 

•                  Mutual FundActivity — automates the posting of fund company-generated transactions to theback office (e.g., dividends and transfers).

 

•                  Mutual FundReconciliation — manages activity and reconciliation based on thresholds andfilters.  The system runs unattended andfacilitates on-line review of exceptions, out-of-balance situations, and otherinformation.  This helps securities firms increase transaction processingwhile reducing costs and regulatory capital requirements.

 

•                  Standing Order —allows a financial institution to input and query standing orders (e.g., buyingthe same dollar amount of the same mutual fund every month) and willautomatically generate the required transactions at the specified frequency.  Standing Order generates orders for SanchezFunds (for standard mutual fund transactions) and EFT transactions (for movingthe required or resulting cash between accounts).

 

•                  WRAP — managesfee-based model portfolios and mutual fund holdings that belong to these modelportfolios.

 

*Application Product Overview — Market DataManagement*

 

*Sanchez Market Data*

 

MarketData works with existing news and quote contracts to provide an open,vendor-neutral HTTP-XML API that extends the reach of real-time, reliablemarket data through the Internet.  Inaddition to quote services, Market Data provides a news database, a real-timealert engine for instant notification of news and quote changes, symbol lookupand rich option search capabilities. Using the next generation of thin-client technology, Market Data extendsthe broker workplace onto wireless networks for anytime, anywhere access toreal-time equity, option and index quotes and news.  Market Data supports stock watch lists, historical news, foreignexchange rates, complete option chains and more.  Integration with portfolio and order management systemsfacilitates “actionable alerts.”

 

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*Sanchez Mobile Broker*

 

Sanchez MobileBroker provides advisors with secure mobile access to reliable, real-time,market data integrated with client, account, and position information in asingle consolidated view.  SanchezMobile Broker is driven with data from a firm’s own back office and works withexisting news and quote contracts.  Thenext generation of thin-client technology extends the broker workplace ontowireless networks for anytime, anywhere access to real-time market data andportfolio information.  In addition toquote services, Mobile Broker provides a news database, a real-time alert enginefor instant notification of news and quote changes, symbol lookup and richoption search capabilities.

 

*Application Product Overview — InformationManagement*

 

*Sanchez Information Server*

 

Wealth management solutions need to gather aggregated information aboutthe accounts within a financial institution, their relationship to one anotherand the activity they produce. Information Server is a robust, operational data warehouse offeringlinks to established service providers such as ADP, IBM/ISM, National Financial,NSCC and FundSERV to provide a consolidated, customer-centric view of holdings.Information Server provides customer, account and position data to onlinetrading applications and maintains current and historical position, trade,bookkeeping and account balance information. Sanchez Information Server supports multiple sources of data, multiplecurrencies, multiple business models and provides hierarchical dimensions inthe data to allow for ease of reporting. The Sanchez Information Server product suite includes:

 

•                  Sanchez Correspondent Ledger— allows clearing firms to enhance relationships with correspondent clients byproviding an accurate billing infrastructure to calculate balances and generateinvoices.  Correspondent Ledger isflexible and accommodates various billing models and currencies.

 

•                  Sanchez Commission Ledger —provides accurate, timely, comprehensive payout information for advisorcommission payout arrangements and detailed management reporting. Using agraphical user interface, users can easily create and manage multiple, complex,commission contracts.

 

•                  Sanchez Compliance Reporting— provides access to real-time data optimized for compliance querying andreporting. Instant access to historical account data enables compliance officersto identify trends and quickly flag unusual gains and losses. Unusual tradingactivity can also be exposed with the ability to conduct customizable searchesof recent transactions based on a large number of criteria.

 

### **Outsourcing**

 

Sanchezalso uses its integrated banking platform as the basis for a comprehensiveoutsourced e-banking solution under the Sanchez e-PROFILE®brand.  Sanchez Data Systems Inc. (SDSI)provides an integrated end-to-end operations and technology platform thatenables financial services companies to offer comprehensive on-line financialservices to their customers.  SDSI,which includes the data center operations portion of the e-PROFILE outsourcingsolution, is a wholly owned subsidiary of Sanchez.  The subsidiary began operations in 1999.  This solution integrates products andservices from the industry’s “best-in-class” vendors, including Sanchezproducts, and manages them under a single, outsourced operating umbrella.  The Company believes the Sanchez e-PROFILEsolution is the first vendor-developed solution that provides the ongoingtechnology, the operations and the pricing structures required to support anoutsourced supply chain venue for on-line financial services.  The outsourcing solution also provides theCompany with a distribution channel for the suite of Sanchez products, relatedtechnologies and services.

 

TheCompany expects to continue to add more large, branded institutions andcontinue to build its processing revenues from client institution customeraccount growth on the platform.  Servicelevel agreement performance for timeliness and quality improved throughout 2003and continued to exceed expectations, and is illustrative of SDSI’s commitmentto provide high-quality outsourcing solutions to clients.  Several existing clients extended theirprocessing agreements during 2003 for periods ranging between 12 and 24 months.

 

Inaddition to Sanchez products, the Sanchez e-PROFILE solution offersinstitutions a range of online financial capabilities including:

 

•        ATM network& card management

•        Accountorigination

•        Bankoperations

•        Casemanagement & workflow

•        Callcenter

•        Electronicbill payment

•        Emailmanagement

•        Imaging

•        Interactivevoice response

•        Itemprocessing/lockbox processing

 

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•        Checkproduction

•        Collectionsystems

•        Desktopintegration

•        Documentcreation & fulfillment

•        Document archiving

•        OFACscreening

•        Antimoney laundering

•        Creditcards

•        Creditdecisioning

 

*Revenue Generation & Recognition*

 

The Company derives its revenues primarily from fees assessed onproducts, services, software maintenance, and processing as well as from othermiscellaneous fees.

 

Sanchez products may be licensed to a customer to run on an in-housebasis, or alternatively, 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-PROFILE 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.

 

Product fees include software license and product enhancementfees.  Service fees include clientimplementation-related services and consulting.  Processing fees consistprimarily of monthly, account-based fees for account maintenance, monthlyservicing and transaction fees associated with transaction volumes for aspecified period.  Software maintenanceand other fees primarily consist of revenue earned for ongoing softwaremaintenance and support as well as rebillable expenses.

 

For Sanchez’s banking and wealth management software license contractsfor use by the customer on an in-house basis, fees are typically paid in stagesupon the completion of defined deliverables or upon specific dates.  The Company recognizes revenue from thesefees using the percentage-of-completion contract accounting method, or whereapplicable, on a cash basis.  Servicefees are generally recognized and billed monthly on a time and materialbasis.  Maintenance fees are normallybilled annually in advance and recognized into revenue ratably during thespecified maintenance period.

 

The Company’s outsourced business can generate revenues from productlicenses, product enhancements, implementation-related services, licensemaintenance and processing.  Revenuesgenerated from our outsourced customers during implementation are largelydeferred during the implementation phase of an outsourced project in accordancewith Staff Accounting Bulletin No. 104 (SAB No. 104) “Revenue Recognition inFinancial Statements” which superceded Staff Accounting Bulletin No. 101.  Once an outsourced client begins processingits customers’ accounts on the outsourced platform, i.e., “goes live,” thedeferred revenue and related costs are amortized over the expected life of theprocessing arrangement.  In addition, oncethe client is running on an outsourced solution, processing and transactionfees are assessed.  Under this model,once account volumes exceed a certain minimum level, as a client institution’scustomer account base grows, Sanchez increases its revenue stream.  Sanchez outsourcing includes solutions forbanking and wealth management. Financial institutions selecting an outsourced solution either canpurchase licenses for Sanchez products up-front, or in lieu of up-front licensefees, institutions can opt to spread the license and accompanying maintenancefees on a per account/per month basis over the life of the processingcontract.  Assessment of these feesbegins after the client “goes live” with the solution.

 

## *Partners*

 

The Company has established and maintains strategic alliance and partneringagreements with Hewlett-Packard (H-P, previously Compaq Computer Corporation);IBM Global Services; Sun® Microsystems; ComputerLand SA of Poland(ComputerLand); Sanchez Capital Services; Datawest Solutions; DeloitteConsulting; BearingPoint and Oracle. The Company continues to establish strategic relationships with partnerswhom it believes will help deliver a comprehensive financial services solutionto clients.  To this end, the Companycontinues to leverage its third-party relationships to engage in jointmarketing and project implementation activities.

 

Sanchez Capital Services is an investee company accounted for under thecost method, which has certain distribution rights to Sanchez products in Indiaand portions of the Middle East. Sanchez believes its alliance program facilitates its market expansionin these target markets.  SanchezCapital Services also provides programming resources for the Company.

 

In September 2002, Sanchez announced that it was working with itspartner, TNIS, to replace the legacy operational systems for Krung Thai BankPcl (KTB), Thailand’s largest retail bank. TNIS’s core business is systems integration — covering a wide range ofservices from IT consultation, software development and

 

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customization, to hardware configuration, implementation, training andservice independent of manufacturers. TNIS is based in Thailand.

 

*Financial Services 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 what the Company believes are thecommonalities and differences between these two types of markets.

 

In the mature markets, generally constrained Information Technology(IT) budgets are forcing Chief Information Officers to demonstrate early returnon investment (ROI) and there is a clear trend towards the commercial andtechnology sides of the business working in partnership to ensure IT spendingbrings real and near-term benefits to the enterprise and delivers increasedshare of wallet.  The Company sees acontinued trend towards IT spending that will result in a meaningful andsustainable reduction in operations and technology costs as well as continuedefforts to support a single view of the customer across the financial servicesenterprise.

 

The latter strategy is designed to support increased share of wallet,deliver operational efficiencies and channel optimization as institutions seekto provide incentives for their customers to use low-cost delivery channelslike the Internet, and save millions of dollars by diverting service supportfrom branches and call centers. Additionally, institutions increasingly will come to find their coreprocessing infrastructures are both too expensive to maintain and too inflexibleto meet the demands of the competitive marketplace.  Given the drive for demonstrable ROI and a strategic analysis ofthe core competencies of financial services institutions, there is a renewedfocus on outsourcing as a way of delivering modern infrastructure quickly andcost effectively.

 

Financial institutions have learned from the failed infrastructureprojects of the 1980s and early 1990s and are now pursuing strategies thatmitigate the financial and technological risks.  Infrastructure change is occurring in a pragmatic fashion asnear-term business challenges in a particular area or line of business withinthe institution are being solved with IT solutions capable of supporting thewhole enterprise over time.  The Companyhas developed a Line of Business MigrationÔstrategy, which it believes will be effective in meeting the needs of financialinstitutions wishing to replace legacy processing environments with a modernarchitecture.

 

With the demise of the day trading frenzy of the late 1990s and theemergence of a mass affluent sector driven by the baby boomers, both banks andbrokerages are seeing the need for comprehensive wealth managementsolutions.  There is a drive towards theprovision of on-line advice and other fee-based services as well as a strategicmove to deliver integrated banking and wealth management services.

 

In combination, these market demands will require the deployment offeature-rich middleware solutions, modern, real-time core processing systems inthe back office and integrated wealth management solutions.  The Company’s middleware solution isdesigned to deliver enterprise customer and channel integration while thecore-processing platform is capable of supporting the needs of the world’slargest financial services institutions. Additionally the Company’s acquisition of a wealth management company in2002 affords the opportunity to provide integrated banking and wealthmanagement solutions.

 

All of thesesolutions may be deployed in-house or through the Company’s outsourcingdivision, SDSI.  Beyond providing arisk-mitigating route for the deployment of mission critical IT infrastructure,SDSI has captured a significant market share in the niche market of non-bankfinancial institutions wishing to leverage their customer and brand franchisesthrough the deployment of banking services.

 

In emerging markets, the Company sees a higher pace of change oftendriven by macro economic events; for example, Russia’s efforts to create acapitalistic economy, China’s membership in the WTO and the privatization andmodernization of 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 emergingmarkets the indigenous vendors do not have the technology or banking expertiseto support this transformation, opening up opportunities for western IT vendorsto fill the local void in product and services.

 

The Company has enjoyed considerable success over the years in marketsof this sort and believes it is well positioned to capitalize on theopportunities now becoming evident.

 

9

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*Sanchez Services*

 

The Company derives significant revenues fromits services.  Services revenues havehistorically originated from Sanchez’s license application model and itsoutsourcing model and are supplied using either a time-and-material orfixed-price basis.

 

Project services include project management,training (both standard and customized), system implementation, solutionintegration, custom interfaces to third-party or in-house legacy applications,data conversion, integrated testing, custom software, custom output (reports,statements, notices), custom component application, localization, and versionupgrade services.  Trained financialservice industry professionals deliver Sanchez services.  They work at client locations as well asremotely and follow a published methodology employing proven project managementand measurement techniques.  Forinstitutions implementing Sanchez solutions in-house, project services are providedduring the initial implementation of Sanchez products and also as contractedfor by clients after conversion to Sanchez products.  Service revenues from an in-house implementation vary, but canrange from $250,000 to more than $5 million for an individual project.  Typically, an in-house implementation for atop-tier institution involves moving a large volume of customer data fromexisting systems onto the Sanchez platform. In these cases, service revenues are higher when compared againstimplementing a de novo solution where little or no data conversion work isrequired.  Project services from anin-house implementation also generate revenues from project management,training and custom interface work. When an institution replaces its in-house, legacy transaction processingsystem with a Sanchez solution, data conversion and custom system interfaceprojects typically are delivered in six to twelve months.  Other project services delivered during theimplementation period can include conversion, localization and softwarecustomization.  Execution support isprovided 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 and does not involve replacing alegacy system.  Services associated withthis type of project include project management implementation services, somedata conversion, multiple system interfaces and integrated systemstesting.  An institution can implementan outsourcing solution in as few as 120 days if the standard outsourcingsolution and product offering are implemented. The Company has found, however, that institutions frequently want todifferentiate their direct and Internet bank offerings from the start.

 

Aspart of the Company’s continued strategic focus on the European region, Sanchezopened its European headquarters in Amsterdam in October 2002.  The office serves the Company’s Europeancustomers in the region.  The Companyhas continued to build its presence in Amsterdam and generate new sources ofrevenue.

 

*Client Maintenance Service*

 

Themajor portion of the worldwide customer service and support is delivered fromthe Company’s Malvern, Pennsylvania headquarters and the Toronto, Canadalocation.  The Company’s ClientEngineering Group is responsible for help desk, research, systems operations,software defect resolution, and application quality assurance.  A client engineering team consists ofresearch, quality assurance and programming personnel.  Regional servicing hubs include Pittsburgh,Pa.; Malvern, Pa.; Amsterdam, the Netherlands; Warsaw, Poland; and Toronto,Canada.  A team works together to ensurethe customer issue is understood and addressed accordingly.  Each institution is assigned to a specificclient engineering team to handle day-to-day issues.  Larger clients are also assigned an account manager.  The Company believes that service responseconsiderations play a major role in an institution’s selection of bankingsoftware products.  To respond to thisneed, the Company continues to enhance its ability to deliver localizedcustomer support and installation capability worldwide, either directly orthrough third-party partners.  TheCompany provides local support services to clients in Poland through apartnership with ComputerLand, in Asia through a partnership with OpenSys, aswell as in India through Sanchez Capital Services.

 

For outsourcing clients, customer service is primarily supportedthrough SDSI’s data and operations center located in Seven Fields,Pennsylvania.  The data and operationscenter is responsible for providing support services to clients fromimplementation through production. These services include project management and implementation support,technical support for data operations and network issues, programming andtesting, and Sanchez product application support and support for vendorintegration services.  In addition tothose services, the bank operations departments provide call center support,maintenance and item exception handling.

 

## *Sales and Marketing*

## * *

The Sanchez Global Sales department is the primary sales channel forlicensing the Company’s products and solutions.  Account relationship managers and Sanchez Global Services pursueservice opportunities with existing

 

10

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client institutions.  TheCompany’s executive management team is also leveraged to increase salesopportunities across all business lines. In addition, the Company leverages the strength of the distributionnetwork of its various partners to extend its global reach.

 

The Company focuses its sales and marketing attention on sellingbanking and wealth management solutions and services aimed at the world’slargest financial institutions, which are typically those with assets in excessof $4 billion (U.S.).  With all of itssolutions, Sanchez markets its high quality and engineering excellence andseeks out those institutions in need of innovative solutions.

 

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

 

Line of business migration solutions — e.g., an institution has animmediate need for a new mortgage processing solution, but also wants amigration path to move other lines of business onto the same single, integratedprocessing platform.  The Company’s solution in this space is aimed atreducing operations and technology costs and providing a managed risk migrationstrategy 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.

 

Retail legacy system replacement solutions — e.g., an institution needsto replace its legacy processing environment with a modern, integrated corebanking platform.  This is a traditionalmarket for Sanchez.  Sanchez expects theopportunity for core replacement solutions to be strongest in emerging worldmarkets such as in the former Soviet republics, Eastern Europe and in Asia. Sanchez looks to sell solutions in these markets through partnershipsestablished with local IT and financial services companies.

 

Customer enterprise integration solutions — e.g., an institution has aneed to integrate its product and service delivery channels with multipleback-office processing systems based on a single, customer-centeredplatform.  With a solution featuringSanchez Xpress, institutions tie the entire financial enterprise togetherthrough the institution’s relationship with its customers.

 

Outsourcing solutions — e.g., a non-bank financial institution movesinto banking and requires a complete bank operations and technologyinfrastructure.  This is the Sancheze-PROFILE outsourcing solution offered by SDSI.  A Sanchez solution sale into this market segment would includemost, if not all of the Sanchez integrated banking platform as well asofferings from other “best-in-class”, third-party vendors with whom the Companyhas established partnerships.

 

Wealth management solutions — e.g., front-end servicing solutions forequities, options, fixed-income and mutual fund securities, and wrap accountprocessing for brokerages, bankers and insurance agents.  To complement and broaden the Company’sintegrated line of banking products, Sanchez acquired Spectra SecuritiesSoftware, of Toronto, Canada, in July 2002.  With the acquisition, the Company added Spectra’s Wealthwarebrand of full-functioned, multi-channel wealth management applications.  Sanchez intends to provide an integratedbanking and brokerage platform for the industry’s growing global requirementsfor wealth management.  To date, themajority of the Company’s wealth management solutions have been sold in Canada.

 

## *Pricing Strategy*

## * *

The Company sells software licenses for its products, offers an initialfive-year maintenance and support agreement on licenses sold, sells processingcontracts for outsourcing, and sells a variety of professional services on botha time-and-materials and a fixed-priced basis.

 

The Company licenses its core processing (Sanchez Profile) andmiddleware (Sanchez Xpress) software products on an account-based pricingmodel, which can accommodate licenses for one or more production/processingsites.  Based on the total number of accounts required, an institutionpurchases a license for these products. Profile for Windows, the Company’s Windows-based front-end servicingproduct is licensed based on the number of LAN servers and individualworkstations required.  The Company’sWeb-based, bank front-end servicing products for customer service and telleroperations in a branch or call center environment (Sanchez WebCSR and futureSanchez Webteller) are licensed on a per-user basis with discounts provided forlicensing both products.  The Company’sInternet banking consumer interface (Sanchez Webclient) is based on the numberof customers registered with the bank’s on-line service.  The Company also licenses its set of ProfileApplication Tools on an application-per-site basis or a bundle-per-sitebasis.  The Company’s products are solddirectly to institutions

 

11

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and operated in-house or they can be sold on an outsourced basis   The Company’s annual maintenance is billedas a percentage of licensed products.

 

In addition to licensing Sanchez products as part of the Sancheze-PROFILE outsourcing solution, SDSI also contracts with clients for processingfees on a per account/per month basis.  SDSI has monthly minimum contractsfor account processing, which are in effect until a client generates enoughactivity to pass a specified processing threshold.

 

Sanchez Wealth Management provides both licensing and ApplicationService Provider (ASP) options for deployment. As part of the pricing structure of on-premise implementations, SanchezWealth Management 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 toimplementation fees 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.  To accomplish this, the Company hashistorically incurred significant expenses related to development activitiesand may increase this investment in the future.  During 2003, the Company extended its utilization of offshoredevelopment resources for routine software development activities and testing.

 

Engineering, which is formally housed within the Company’s BankingSolutions Division (BSD) and Wealth Management, follows a formal softwaredevelopment life cycle process and as a result, BSD Engineering Group achievedthe Level 3 rating of the Software Capability Maturity Model® (CMM),developed by Carnegie Mellon University’s Software Engineering Institute (SEI)during 2002 for its banking application products.  In support of this process, the Company has developed andacquired products that assist it in defining, planning, tracking, measuring andmanaging the development process.  TheCompany realizes that large software projects can incur substantial cost,schedule and technical risk.  TheBSD Client Engineering Group provides Sanchez banking application development,technology and platform development, productivity and tools development,maintenance programming, documentation, quality assurance, and applicationdeployment directly for Sanchez clients. The Product Engineering Group and the Product Management Group, withinthe BSD is responsible for defining plans for new product versions, developingSanchez product application enhancements, defining technology and platformlayer enhancements to product architecture, evaluating and implementingoperating system ports, programming languages, database systems, anddevelopment and productivity tools. After Product Engineering successfully implements a new technologycomponent under an existing application component, it is responsible forpropagating the technology to the Client Engineering Group.  The Company’s Wealth Management Division, insupport of the Company’s wealth management software applications, performssimilar engineering functions.

 

*Employees*

 

Asof December 31, 2003, Sanchez employed approximately 560 full-timeemployees.  Sanchez employees are notrepresented by any collective bargaining agreements and the Company has notexperienced a work stoppage.  In 2003,the Company continued to develop its off-shore development effort, and expectsto expand this effort during 2004.  Inaddition to full-time employees, the Company has historically utilized theservices of various independent contractors and third-party vendors, primarilyfor overseas implementation projects and certain product development efforts.

 

## *Competition*

## * *

Forbanking application software solutions, the Company’s primary competitors arethe in-house development staffs of the world’s largest financialinstitutions.  Other competitors arethird-party developers and include Fidelity National Financial, Fiserv,Accenture and Alnova Technologies Corporation, Computer Sciences Corp. (CSC),Misys International Banking Systems, Temenos, i-Flex Solutions, SAP, KirchmanCorporation, Metavante, Jack Henry, Aurum Technology, Open Solutions Inc.,London Bridge International, 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, Digital Insightand Online Resources Corporation.  Forwealth management solutions, the Company’s primary competitors include Advent, x.eye,and Fincentric.

 

12

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# ***Code of Conduct***

 

TheSarbanes-Oxley Act of 2002 requires public companies to disclose whether theyhave adopted a Code of Ethics (Code). Sanchez has published a Code for all its officers, directors, employeesand independent consultants.  The Codepromotes honest and ethical conduct, and addresses issues such as conflicts ofinterest, use of Company assets and violations of law.   The Code is published on the Company’s Website at www.sanchez.com.

 

***InvestmentConsideration***

 

*Forward-looking Statements May Prove Inaccurate*

 

ThisReport and other Sanchez communications contain forward-looking statements thatare subject to risks and uncertainties that may change at any time and differfrom actual results.  Forward-lookingstatements include information about possible or assumed future financialresults of Sanchez and usually contain words such as “believes,” “intends,”“expects,” “anticipates” or similar expressions.  Sanchez derives most of its forward-looking statements from itsoperating budgets and forecasts, which are based upon many detailedassumptions.  While Sanchez believesthat its assumptions are reasonable, it cautions that there are inherentdifficulties in predicting certain important factors, such as:

 

• the effect of general economic and market conditions on processinglevels and software and services buying decisions;

 

• the timing and magnitudeof product and services sales;

 

• the timing and scope oftechnological advances;

 

• the integration andperformance of Spectra Securities Software, Inc., which was acquired in 2002,and that of future acquisitions,

 

• the ability to attractand retain clients and key personnel; and

 

• the overall condition ofthe financial services industry.

 

Certainof these factors are discussed further below. These factors, as and when applicable, and those discussed below shouldbe considered in evaluating Sanchez’s forward-looking statements and anyinvestment in Sanchez’s common stock. Sanchez assumes no obligation to update any forward-looking statements,whether as a result of new information, future events or otherwise.

 

*Risk Factors*

 

Considercarefully the risks described below before making any investment decisionregarding Sanchez.  The risks anduncertainties described below are not the only ones facing Sanchez.  Additional risks and uncertainties notpresently known to Sanchez or that Sanchez currently deems immaterial may alsoimpair Sanchez’s business operations. If any of the events that create the following risks occur, Sanchez’sbusiness, financial condition or results of future operations could bematerially adversely affected.  In suchcase, the trading price of Sanchez’s common stock could decline, and aninvestor in Sanchez common stock may lose all or part of their investment.

 

*FNF hasproposed to acquire Sanchez.  If suchacquisition is unsuccessful, Sanchez’s business and financial results maysuffer.*

 

Althoughthe Company executed a definitive merger agreement with FNF, the consummationof the merger is subject to various closing conditions, including approval by the shareholders ofSanchez and regulatory approval. It is possible that the merger may not becompleted in the stated timeframe or at all. If the proposed merger is not completed or is delayed, the Company’sbusiness may suffer for a number of reasons including, but not limited to,other opportunities foregone while the transaction was pending, additionalcosts incurred in support of the proposed merger, loss of employees due touncertainty surrounding the acquisition and a reduction in our cashbalances.  Even if the proposed mergeris completed, we may fail to realize the anticipated benefits of the merger.

 

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*Sanchez’s business may be affected by general economic andmarket conditions.  If there is ageneral economic downturn, a weakening of the financial markets or an eventthat disrupts the financial services industry, such as the terrorist attacks onSeptember 11, 2001, Sanchez’s business and financial results may suffer.*

 

Sanchezbelieves that product and services buying decisions and processing levels maybe affected negatively by a number of factors, including reductions in capitalexpenditures and information technology investment by clients, declines inon-line banking, trading volumes or asset values in the major financial marketsand increased competition.  Thesefactors may, in turn, give rise to a number of trends that could slow revenuegrowth across the financial services industry, including longer sales cycles,deferral or delay of information technology projects, generally reducedexpenditures for software and related services, and increased pricecompetition.

 

*Sanchez’s success depends in part on adapting its computerproducts and services to changes in technology and in its clients’businesses.  If Sanchez does not updateits software and services or develop new products or services that are timelydelivered to and well received by clients, Sanchez’s business and financialresults may suffer.*

 

Sanchez’sability to successfully update and integrate its products and services andtimely develop and deliver new products and services required by its clients issubject to a number of risks that could adversely affect Sanchez’s business andfinancial results, including:

 

• Sanchez may find itdifficult to update its products and services and timely develop and deliverits new products and services in a cost-effective manner, especially when facedwith rapid technological changes that are hard to predict;

 

• Sanchez may find itdifficult to make certain aspects of its product functionality work effectivelyand securely over the Internet or to integrate more of its products intoefficient straight-through processing solutions;

 

• Sanchez may find itdifficult to update its products and services to keep pace with business,regulatory and other developments in the financial services industry in whichmost of Sanchez’s clients operate;

 

• ongoing developments in patentlaw and the increasing number of software patents granted may make it moredifficult or costly for Sanchez to add or retain important features in itsproducts and services; and

 

• to the extent thatSanchez’s products and services involve the storage and transmission ofconfidential information, security breaches could expose Sanchez to a risk ofloss and possible liability; and

 

• the Company’s ability to protect its proprietary services andsoftware.  The Company relies upon acombination of copyright, trademark and trade secret law, confidentialityrestrictions in contracts with employees, customers and others and softwaresecurity measures.

 

*Sanchez’s growth strategy depends in part on completingacquisitions.  If Sanchez is unable toacquire businesses on favorable terms or successfully integrate and manage thebusinesses acquired, Sanchez’s business and financial results may suffer.*

 

Sanchezgrowth strategy is subject to a number of risks that could adversely affectSanchez’s business and financial results, including:

 

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

 

• Sanchez may have toborrow money or raise money in the debt or equity markets to finance future acquisitions; and

 

• changes in accounting,tax, securities or other regulations may make it more difficult or costly forSanchez to complete acquisitions.

 

Thebusinesses acquired by Sanchez, including the acquisition of Spectra SecuritiesSoftware, Inc., may perform worse than expected or may be more difficult tointegrate and manage than expected.  Ifthat happens, Sanchez’s business and financial results may suffer for a numberof reasons, including:

 

• Sanchez may have to devote unanticipated financial and managementresources to the acquired businesses;

 

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• Sanchez may not be able to realize expected operating efficiencies orproduct integration benefits; and

 

• Sanchez may have to write off goodwill or other intangible assets.

 

*Sanchez’s business is dependent on attracting and retainingclients. If Sanchez is unable to attract and retain clients, Sanchez’s businessand financial results may suffer.*

 

Sanchez’sfuture success depends on its ability to obtain, retain and sell additionalservices to clients.  A variety offactors could affect Sanchez’s ability to obtain and retain clients, includingdemand for Sanchez’s products and services, competition (including internal clientsolutions), integration of acquired businesses, and client budgetaryconstraints and selection procedures. Sanchez does not have a unilateral optionto extend the terms of such contracts upon their expiration.  The failure of clients to renew contracts, areduction in usage or value under any contracts or the cancellation ofcontracts could adversely affect Sanchez’s business and financial results.

 

*Sanchez’s business is dependent on skilled personnel.  If Sanchez is unable to attract and retainskilled personnel, Sanchez’s business and financial results may suffer.*

 

Sanchez’sfuture success depends on the continued service and availability of skilledpersonnel, especially technical, sales and management personnel.  Experienced personnel in theinformation-technology industry are in high demand and competition exists fortheir talents.  There can be noassurance that Sanchez will be able to successfully attract and retain thepersonnel that it needs.  If Sanchez isunable to successfully attract and retain skilled personnel, Sanchez’s ability toprovide its products and services may be impeded.  Even if Sanchez is able to attract and retain the skilledpersonnel it needs, Sanchez’s recruitment and compensation expenses could growfaster than revenues, which could adversely affect Sanchez’s financial results.

 

*Sanchez’s business is dependent largely on the financialservices industry.  If the financialperformance of that industry deteriorates, Sanchez’s business and financialresults may suffer.*

 

Sanchezsells its products and services to banks, mutual funds, brokers, insurancecompanies and other financial services firms. If the financial servicesindustry or Sanchez’s clients in the financial services industry experienceproblems, Sanchez’s business and financial results could be affected adversely.

 

*Forward-looking Statements*

 

The information regarding“forward-looking statements” under Item 7. “Management’s Discussion and Analysis of Financial Condition andConsolidated Financial Condition and Results of Operations,” is incorporatedherein by reference.

 

*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 |

 

15

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|                                          |   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                          |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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|   |   | 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.**

 

TheCompany’s headquarters and principal administrative, sales and marketing, andapplication development operations are located in approximately 72,000 squarefeet of leased space in Malvern, Pennsylvania. In April 2003, the Company signed an 11 year lease with itsexisting landlord in Malvern to move into a newly constructed officebuilding.  The Company expects to moveinto this new facility in the summer of 2004, at which time all other existinglease arrangements with this landlord will expire.  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 inWarsaw, Poland; Toronto, Canada; Sydney, Australia and Singapore.  The Company anticipates that it will be ableto continue to obtain suitable space as needed.

 

**Item 3. Legal Proceedings.**

 

Inthe opinion of management there are no claims or actions against the Companythe ultimate disposition of which will have a material adverse effect on theCompany’s results of operations or consolidated financial position.

 

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

 

Nomatter was submitted to a vote of security holders, through the solicitation ofproxies or otherwise, during the fourth quarter of 2003.

 

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**Executive Officers of the Registrant.**

 

Theexecutive officers of the Company are as follows: 

 
| **Name**              |   | **Age** |   | **Position**                                         |
|-----------------------|--------|---------|--------|------------------------------------------------------|
|                  |   |    |   |                                                 |
| Michael A. Sanchez    |   | 46      |   | Chairman of the Board of Directors                   |
|                  |   |    |   |                                                 |
| Frank  R. Sanchez     |   | 47      |   | Chief Executive Officer and Director                 |
|                  |   |    |   |                                                 |
| Joseph  F. Waterman   |   | 52      |   | President, Chief Operating Officer and Director      |
|                  |   |    |   |                                                 |
| James  Goodwin        |   | 60      |   | President, Sanchez Global Services                   |
|                  |   |    |   |                                                 |
| Michael  D. S. Harris |   | 43      |   | President, Banking Solutions                         |
|                  |   |    |   |                                                 |
| John  McLeod          |   | 50      |   | President, Wealth Management Division                |
|                  |   |    |   |                                                 |
| Eric  Panepinto       |   | 39      |   | President, Sanchez Data Systems, Inc.                |
|                  |   |    |   |                                                 |
| Todd  A. Pittman      |   | 36      |   | Senior Vice President, Chief Financial Officer       |
|                  |   |    |   |                                                 |
| Marcia  E. Heister    |   | 47      |   | Senior Vice President, Secretary and General Counsel |

 

***Michael A. Sanchez***began his entrepreneurial career more than 24 years ago when he founded SanchezComputer Associates in 1979.  He servedas both chairman of the board and as the Company’s chief executive officer, apost he held until April 1997.  Hecontinues today as board chairman and remains instrumental in buildingsuccessful business partnerships with leading systems integration and financialservices companies worldwide.  Under hisleadership, the Company has become a global developer, distributor and marketerof financial services software.  Mr.Sanchez guided the Company through its initial public offering in December 1996,and played a pivotal role in the Company’s global expansion in the early1990s.  Mr. Sanchez also served as chiefexecutive officer of e-PROFILE, Inc., the Company’s outsourcing division nowcalled 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 the chief executive officer since April 1999 and previously waspresident and chief operating officer of the Company since 1994.  In his capacity as CEO, Mr. Sanchez isresponsible for the overall strategic direction and performance of theCompany.  Mr. Sanchez also oversees asenior management team that directs the Company’s four principal divisions –Banking Solutions, Wealth Management, Outsourcing and Global Services.  He was the principal architect of theCompany’s integrated banking solutions and continues to be responsible forproviding the overall direction of the product suite and technicalstrategy.  From 1980 until 1994, Mr.Sanchez was executive vice president in charge of technology and productdevelopment.  Mr. Sanchez is a directorof Transaction Systems Architects Inc. Frank Sanchez is the brother of Michael Sanchez.

 

***Joseph F. Waterman***has served as president and chief operating officer of Sanchez sinceApril 1999, and is responsible for the operations of the Company.  He leads a senior management team thatdirects the Company’s sales, marketing, finance, legal, human resources,investor relations and information technology infrastructure.  Mr. Waterman joined the Company in 1992 as asenior vice president and chief financial officer.  Prior to joining Sanchez, Mr. Waterman was employed by SafeguardScientifics, Inc. for 13 years.  Mr.Waterman began his career with Touche Ross & Company and is a member of theAmerican Institute of Certified Public Accountants.

 

***James Goodwin***joined Sanchez as senior vice president for Services in May 2002.  He became president of the Company’s GlobalServices division in January 2003, and is responsible for worldwidedelivery of quality services to the Company’s customers.  Mr. Goodwin honed his extensive managementskills in the IT services arena at PricewaterhouseCoopers LLP (PwC) from 1994 through2001, where he was a partner in the Banking/Management Consulting ServicesGroup.  As one of PwC’s financialservices e-business leaders, Mr. Goodwin led the effort in assisting globalfinancial service companies in defining their Internet business strategies andproviding subsequent implementation support. Prior to joining PwC, Mr. Goodwinwas an associate partner with Anderson Consulting LLP (1988-94); vicepresident, Systems Development at Burlington Northern (1986-87); and a directorwith Time Inc. (1969-86).  In 2001, Mr.Goodwin also served as the global head of operations and technology forPatagon.com, a Latin American direct banking and wealth management initiative.

 

18

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***Michael D. S. Harris***joined the Company in April 2000 as a vice president responsible forvarious business development projects for the Sanchez PROFILE bankingapplication.  He became the Company’ssenior vice president in charge of engineering in November 2000, aposition in which he was responsible for delivering and maintaining Sanchezsoftware products including all software development, testing and documentationactivities.  In January 2003, hewas named President of the Company’s Banking Solutions Division, a position inwhich he oversees all software development and client support for the entireSanchez suite of integrated banking products. Before arriving at Sanchez, Mr. Harris was a senior vice president forMasterCard International where he was the head of MasterCard’s global chipgroup.

 

***Eric Panepinto***is president of SDSI, Sanchez’s outsourcing division that provides financialdata center processing 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***servedas president and CEO of Spectra Securities Software since founding the companyin 1989 until its acquisition by Sanchez in July 2002.  In January 2003, Mr. McLeod becamepresident of the Company’s Wealth Management Division.  Prior to establishing Spectra, Mr. McLeodserved on the board of directors at the Canadian brokerage firm Burns FryLimited, where he was responsible for the firm’s global technology requirementsand the implementation of a digital trading floor system.  Previously, Mr. McLeod held a variety oftechnical and managerial positions at Peat Marwick Mitchell & Co. and WoodGundy Ltd.

 

***Todd A. Pittman***joined the Company in December 2000 as a senior vice president and chieffinancial officer.  He directs the dayto day financial and investor relations functions for the Company.  Previously, Mr. Pittman was the chieffinancial officer for Integrion FinancialNetwork, where he directed all financial activities, including businessplanning, accounting, financial management, human resources, pricing, andshareholder relations.  Prior toIntegrion, Mr. Pittman worked for Coopers and Lybrand Consulting in theirconsulting practice and at Arthur Andersen in their audit practice.  Mr. Pittman is a certified publicaccountant.

 

***Marcia E. Heister***joined the Company in July 2003 as senior vice president, secretary andgeneral counsel.  She directs all legal,regulatory and compliance functions for the Company.  Previously, Ms. Heister was senior vice president and firstgeneral counsel for Concord EFS, Inc., and executive vice president, generalcounsel and secretary for Electronic Payment Services, Inc. 

 

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PART II

 

**Item 5.  Market For Registrant’s Common Equity andRelated Stockholder Matters.**

 

The Company’s common stock has been listed on the National MarketSystem of Nasdaq under the symbol “SCAI” since it began trading onNovember 14, 1996.  The followingtable sets forth, on a per share basis for the periods shown, the range of highand low sales price of the Company’s common stock as reported by Nasdaq.

 
|                  |   | **High** |   | **Low** |   |
|-----------------------|--------|----------|--------|---------|--------|
| **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    |   |
| **Fiscal Year 2003:** |   |     |   |    |   |
| First Quarter         |   | $        | 4.85   |    | $      | 2.75 |   |
| Second Quarter        |   | 6.10     |   | 4.05    |   |
| Third Quarter         |   | 6.00     |   | 3.35    |   |
| Fourth Quarter        |   | 4.36     |   | 3.42    |   |

 

As of March 1, 2004 the Company had outstanding 27,039,979 sharesof common stock held by approximately 7,200 shareholders including beneficialowners of the common stock whose shares are held in the names of variousdealers, clearing agencies, banks, brokers and other fiduciaries.

 

Holders of common stock are entitled to receive ratably such dividends,if any, as may be declared by the Board of Directors out of funds legally availabletherefore, 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.

 

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**Item 6.  Selected Financial Data**

 

Thestatement of operations and balance sheet data presented below have beenderived from the Company’s audited consolidated financial statements.  The unaudited backlog data is derived fromthe Company’s contracted product, service and maintenance agreements as well asminimum processing 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.

 
|                                                    |   | **2003 (a)**                             |       | **2002 (b)** |   | **2001** |   | **2000** |   | **1999** |   |
|---------------------------------------------------------|--------|------------------------------------------|------------|--------------|--------|----------|--------|----------|--------|----------|--------|
|                                                    |   | **In Thousands,  Except Per Share Data** | ** ** |
|                                                    |   |                                     |       |         |   |     |   |     |   |     |   |
| **Statement of Operations Data:**                       |   |                                     |       |         |   |     |   |     |   |     |   |
| Revenues                                                |   | **$**                                    | **96,404** | ** **   | **$**  | 93,018   |   | $        | 93,719 |     | $      | 74,500 |   | $ | 59,681 |   |
| Earnings (loss) before income taxes                     |   | **(10,972**                              | **)**      | 5,543        |   | 5,559    |   | (8,805   | )      | 7,440    |   |
| Net earnings (loss)                                     |   | **(10,236**                              | **)**      | 3,874        |   | 3,879    |   | (6,072   | )      | 5,171    |   |
| Basic earnings (loss) per share                         |   | **(0.38**                                | **)**      | 0.15         |   | 0.15     |   | (0.24    | )      | 0.22     |   |
| Diluted earnings (loss) per share                       |   |                                     | **(0.38**  | **)**        |   | 0.15     |   |     | 0.15   |     |   | (0.24 | ) |   | 0.20 |   |
| Weighted-average common shares outstanding              |   | **26,843**                               |       | 26,312       |   | 25,707   |   | 24,912   |   | 23,911   |   |
| Weighted-average common and diluted shares  outstanding |   | **26,843**                               |       | 26,654       |   | 26,324   |   | 24,912   |   | 26,062   |   |
|                                                    |   |                                     |       |         |   |     |   |     |   |     |   |
| **Balance Sheet Data:**                                 |   |                                     |       |         |   |     |   |     |   |     |   |
| Cash and cash equivalents                               |   | **$**                                    | **28,539** | ** **   | **$**  | 31,572   |   | $        | 40,955 |     | $      | 39,890 |   | $ | 25,404 |   |
| Working capital                                         |   | **24,549**                               |       | 28,185       |   | 50,301   |   | 45,268   |   | 35,541   |   |
| Total assets                                            |   | **101,738**                              |       | 121,097      |   | 100,613  |   | 97,093   |   | 56,400   |   |
| Long-term debt, including current portion               |   | —                                   |       | —       |   | —   |   | —   |   | 83       |   |
| Total shareholders’ equity                         |   |                                     | **61,992** | ** **   |   | 66,546   |   |     | 60,130 |     |   | 55,352 |   |   | 45,438 |   |
|                                                    |   |                                     |       |         |   |     |   |     |   |     |   |
| **Backlog:**                                            |   |                                     |       |         |   |     |   |     |   |     |   |
| Products and services                                   |   | **$**                                    | **24,830** | ** **   | **$**  | 43,110   |   | $        | 25,908 |     | $      | 28,336 |   | $ | 6,207 |   |
| Maintenance                                             |   | **37,109**                               |       | 40,749       |   | 28,371   |   | 18,795   |   | 25,490   |   |
| Minimum processing commitments                          |   | **11,106**                               |       | 12,754       |   | 12,572   |   | 10,580   |   | 116      |   |
| Total backlog                                           |   | **$**                                    | **73,045** | ** **   | **$**  | 96,613   |   | $        | 66,851 |     | $      | 57,711 |   | $ | 31,813 |   |

 

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(a)     Lossfrom operations for the year ended December 31, 2003 includes a $9.5 millionimpairment change related to the Wealth Management Divisions goodwill andintangible assets.

 

(b)     Includesthe results of operations of Spectra Securities Software, Inc.  From July 3, 2002, the date of acquisition,through December 31, 2002.

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**Item 7.  Management’s Discussionand Analysis of Financial 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 provider in developing and marketing scalableand integrated software and services that provide banking, customerintegration, brokerage, wealth management and outsourcing solutions toapproximately 400 financial institutions in 22 countries.  Sanchez’s corporate headquarters is locatedin Malvern, Pennsylvania.  The Company’soutsourcing data and operations service center is located in Seven Fields,Pennsylvania.  The Company’s WealthManagement Division is based in Toronto, Canada.  Sanchez also maintains services and sales offices in San Ramon,California; Sydney, Australia; Amsterdam, the Netherlands; and Warsaw, Poland.Beginning with the first quarter of 2003, Sanchez organized into divisions andinitiated new segment reporting based on those divisions.  Sanchez’s divisional segments are BankingSolutions, Wealth Management, Outsourcing and Global Services.  Each division has individual profit and lossresponsibilities.  Whether throughproducts, methodologies, services, custom software enhancements or systemsconsulting engagements, each division’s mission is to significantly lowerclients’ ongoing operations and technology costs, reduce their technology risk,and improve their enterprise customer management.  The divisions were created to provide the innovation and focusnecessary to enable clients’ business plans to succeed.  In addition, the Company believes thedivisions will allow the Company to become more nimble and respond more quicklyto a wider variety of client requirements and needs.

 

The Sanchez banking platform empowers financial institutions toaccelerate business transformation and achieve a competitive advantage bylowering operating costs, reducing technology risks and improving customermanagement.  The Sanchez core bankingplatform has multi-currency and multi-language capabilities, and can scale tothe retail and commercial requirements of the world’s largest banks.

 

An institution purchases a Sanchez banking solution by licensing one ormore of Sanchez’s application software products.  Those products include: Sanchez ProfileÔ,the core banking and transaction processing application; Sanchez XpressÔ,an enterprise customer and transaction management system; Sanchez WebclientÔ,a Web-based, Internet consumer front-end processor; Sanchez WebCSRÔ,a browser-based customer and account servicing application used in aninstitution’s branches and call centers and Sanchez FMSÔ,the Financial Management System, which is an online, real-time costcenter-based accounting system with complete multi-company and multi-currencysupport.  In addition, Sanchez offersProfile for Windows®, the 32-bit, Windows-based, graphical userinterface designed as the front-end to Sanchez Profile’s core bankingapplication, which is used by tellers, branch and call center personnel.  Sanchez CRMÔ,a Web-based customer relationship management system, is available as astand-alone application or integrated with Sanchez’s banking platform.

 

Sanchez WealthwareÔis Sanchez’s wealth management product line, which was acquired inJuly 2002 through the acquisition of Spectra Securities Software ofToronto, Canada.  Sanchez Wealthware isa comprehensive, multi-channel wealth management solution that helps financialinstitutions manage investor assets online by providing a collaborative,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.

 

Sanchezalso uses its integrated banking platform as the basis for a comprehensiveoutsourced e-banking solution under the Sanchez e-PROFILE®brand.  Sanchez Data Systems Inc. (SDSI)provides an integrated end-to-end operations and technology platform thatenables financial services companies to offer comprehensive on-line financialservices to their customers.  SDSI,which includes the data center operations portion of the e-PROFILE outsourcingsolution, is a wholly owned subsidiary of Sanchez.  The subsidiary began operations in 1999.  This solution integrates products andservices from the industry’s “best-in-class” vendors, including Sanchezproducts, and manages them under a single, outsourced operating umbrella.  The Company believes the Sanchez e-PROFILEsolution is the first vendor-developed solution that provides the ongoingtechnology, the operations and the pricing structures required to support anoutsourced supply chain venue for on-line financial services.  The outsourcing solution also provides theCompany with a distribution channel for the suite of Sanchez products, relatedtechnologies and services.

 

The Company derives significant revenues from its services.  Services revenues have historicallyoriginated from Sanchez’s license application model and its outsourcing modeland are supplied under either a time-and-material or fixed-price basis.

 

Project services include project management, training (both standardand customized), system implementation, solution integration, custom interfacesto third-party or in-house legacy applications, data conversion, integrated

 

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testing, custom software, custom output (reports, statements, notices),custom component application, localization, and version upgrade services.  Trained financial service industryprofessionals deliver Sanchez services. They work at client locations as well as remotely and follow a publishedmethodology employing proven project management and measurementtechniques.  For institutionsimplementing Sanchez solutions in-house, project services are provided duringthe initial implementation of Sanchez products and also as contracted for byclients after conversion to Sanchez products. Service revenues from an in-house implementation vary, but can rangefrom $250,000 to more than $5 million for an individual project.  Typically, an in-house implementation for atop-tier institution involves moving a large volume of customer data from existingsystems 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 aninstitution replaces its in-house, legacy transaction processing system with aSanchez solution, data conversion and custom system interface projectstypically are delivered in six to 12 months. Other project services delivered during the implementation period caninclude conversion, localization and software customization.  Execution support is provided from severalregional locations.  Education andconsulting services are based in Malvern.

 

For more information on the Company’s products and services, Sanchezmaintains a Web 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.

 

**Critical Accounting Policies**

 

The Company’s significant accounting policies are described in Note 2to the consolidated financial statements included in this report. The Companybelieves that its most critical accounting policies, judgments and estimatesinclude revenue recognition matters, determining the estimated lives of itsprocessing contracts, determining if goodwill or intangible assets have beenimpaired, and determining the allowance for doubtful accounts.

 

For Sanchez’s software license contracts, a determination needs to bemade for each contract regarding whether the percentage-of-completion contractaccounting method should be used to recognize revenue or whether revenue can berecognized when the software is delivered and all of the conditions ofStatement of Position (SOP) 97-2, “Software Revenue Recognition,” are met.Contract accounting is required if the services to be provided by the Companyare essential to the arrangement. In many cases, the services are essential tothe arrangement because they involve customization and interfaces, and licensefees are paid in stages based on the completion of defined servicedeliverables. As a result, revenue is typically recognized from thesearrangements using SOP 81-1, “Accounting for Performance of Construction-Typeand Certain Production-Type Contracts,” which generally results in recordingrevenue over a six to eighteen month period of time.  In other cases, the services are not essential, such asarrangements where an unrelated third party performs implementation servicesand the realization of the license fee is not dependent on the completion ofsuch services. In these situations, license fees are recognized when persuasiveevidence of an arrangement exists, the software is delivered, the fee is fixedor determinable and collection is probable, which generally results inrecording revenue earlier than when contract accounting is used. Thedetermination of whether services are essential involves significant judgment andcould have a material impact on the Company’s quarterly results of operationsto the extent that significant new contracts are not accounted for usingcontract accounting.

 

Under the percentage-of-completion contract accounting method, theCompany recognizes revenue from the entire arrangement based on the percentageof costs incurred related to the implementation and development servicescompared to the total cost of such services. Using the percentage-of-completionmethod requires management to make estimates about the future costs ofservices, which are subject to change for a variety of internal and externalfactors. A change in these estimates could result in a material adjustment tothe amount of revenue recorded under an arrangement.

 

The Company’s outsourced projects generate both product licenserevenues and implementation-related service revenues, which in accordance withStaff Accounting Bulletin (SAB) No. 104, “Revenue Recognition in FinancialStatements,” which supercedes SAB No. 101, are largely deferred during theimplementation phase along with the related costs until the client beginsprocessing its customer’s accounts on the outsourced platform. Once a clientbegins processing its customer’s accounts on the outsourced platform, the deferredrevenue and related costs are amortized over the expected life of theprocessing arrangement. Until the Company has more historical experiencerelated to the actual term of processing arrangements, the Company hasdetermined that the expected life of the arrangements does not exceed thecontractual term. As it becomes apparent that a client will renew itsprocessing term, the expected life is extended prospectively. To date, thecontract terms have ranged from one to three years. Should a client terminateearly, all revenue and cost would be recognized as of the termination date, ifthe amount is determinable and collection probable, which could be significant.A change in the expected life of the contract could

 

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have a material impact on the timing of future revenue and marginrecognized from the amortization of deferred implementation and license fees.

 

TheCompany has identified that its accounting policies regarding intangible assetsand goodwill are critical to the Company’s results of operations and financialposition.  At December 31, 2003,goodwill of $22.5 million and other intangible assets of $3.5 million relateprimarily to the Company’s Wealth Management Division. Goodwill impairment isassessed pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” andimpairment of other intangible assets is assessed pursuant to SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”  During the third fiscal quarter of2003, the Company performed its annual assessment of goodwill associated withits Wealth Management reporting unit (Reporting Unit).  The Company engaged an external valuationspecialist to assist in this assessment. The market approach was used to measure the fair value of the ReportingUnit.  This approach derives marketmultiples from recent transactions or offerings of companies with similaroperations as the Reporting Unit.  Marketmultiples of publicly traded companies that were deemed comparable to the Companywere also used in the analysis.

 

Based upon this analysis, the Company determined that the carryingvalue of the Reporting Unit exceeded its fair value.  The identification of an impairment necessitated the preparationof a SFAS No. 142, Level 2 analysis to quantify the amount of the goodwillimpairment.  During this analysis, theCompany determined that there also could be an impairment of certainamortizable intangible assets associated with the Reporting Unit, primarily thecustomer relationships and acquired technology.  As a result, the Company performed an impairment analysis of thelong-lived assets in accordance with SFAS No. 144.  As a result of this analysis, the Company determined that thecarrying value of the Reporting Unit’s long-lived assets exceeded theundiscounted cash flows expected to be generated by such assets over theirremaining useful life.  Accordingly, theCompany recorded an impairment charge of approximately $5.5 million to write downthe long-lived assets to their fair value.  The fairvalue of the long-lived assets was primarily determined using the incomeapproach.  The income approach measuresthe value of an asset by calculating the present value of its future economicbenefits.  These benefits can includerevenues, cost savings, tax deductions, and proceeds from its disposition.  Value indications are developed bydiscounting expected cash flows to their present value at a rate of return thatincorporates the risk-free rate for the use of funds, trends within the industry,and risks associated with particular investments of similar type and quality asof the valuation date.  The Company thendetermined the fair value of the goodwill associated with the Reporting Unit inaccordance with SFAS No. 142, resulting in an impairment charge related togoodwill of approximately $4.0 million. The total impairment of goodwill and certain amortizableintangible assets of the Reporting Unit for the year ended December 31,2003 was $9.5 million and appears on the Consolidated Statements of Operationsas impairment charge.

 

Accounts receivable are reduced by an allowance for amounts that maybecome uncollectible in the future. The majority of the Company’s receivablesare due from financial service organizations located throughout the UnitedStates, Europe and Canada. From time to time, the Company’s clients dispute theamounts owed and in other cases they experience financial difficulties andcannot pay on a timely basis. In certain instances, these factors ultimatelyresult in uncollectable accounts. The determination of the appropriate reserveneeded for uncollectable accounts involves significant judgment. A change inthe factors used to evaluate collectability could result in a significantchange in the reserve needed. Such factors include changes in the financialcondition of the Company’s customers as a result of industry, economic,political or customer-specific factors, the ultimate settlement of disputesand, in certain cases, the decisions of third party arbitrators or courts.

 

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**Results of Operations**

 

The following table sets forth for the periods indicated selectedstatement of operations data:

 
|                                      |   | **Year Ended December 31,** |       |
|-------------------------------------------|--------|----------------------------------|------------|
|                                      |   | **2003**                         |       | **2002** |   | **2001** |   |
|                                      |   | **Dollars in Thousands**         |       |
| Revenues                                  |   |                             |       |   |   |   |   |
| Products                                  |   | **$**                            | **22,673** |   | $ | 18,728 |   | $ | 24,195 |   |
| Services                                  |   | **28,789**                       |       | 32,207 |   | 33,928 |   |
| Processing                                |   | **18,426**                       |       | 18,431 |   | 14,443 |   |
| Software maintenance fees and other       |   | **21,933**                       |       | 18,207 |   | 16,217 |   |
| Customer reimbursements                   |   | **4,583**                        |       | 5,445 |   | 4,936 |   |
| Total revenues                            |   | **$**                            | **96,404** |   | $ | 93,018 |   | $ | 93,719 |   |
| Percentage relationship to total revenues |   |                             |       |   |   |   |   |
| Revenues                                  |   |                             |       |   |   |   |   |
| Products                                  |   | **23.5**                         | **%**      | 20.1 | % | 25.8 | % |
| Services                                  |   | **29.9**                         |       | 34.6 |   | 36.2 |   |
| Processing                                |   | **19.1**                         |       | 19.8 |   | 15.4 |   |
| Software maintenance fees and other       |   | **22.7**                         |       | 19.6 |   | 17.3 |   |
| Customer reimbursements                   |   | **4.8**                          |       | 5.9 |   | 5.3 |   |
| Total revenues                            |   | **100.0**                        |       | 100.0 |   | 100.0 |   |
| Operating expenses                        |   |                             |       |   |   |   |   |
| Product development                       |   | **22.4**                         |       | 16.7 |   | 18.3 |   |
| Product support                           |   | **6.7**                          |       | 6.6 |   | 5.4 |   |
| Services                                  |   | **23.8**                         |       | 21.4 |   | 26.8 |   |
| Processing                                |   | **16.8**                         |       | 17.5 |   | 14.5 |   |
| Sales and marketing                       |   | **13.4**                         |       | 14.0 |   | 15.4 |   |
| General, administrative and other         |   | **12.2**                         |       | 11.9 |   | 10.3 |   |
| Customer reimbursements                   |   | **4.8**                          |       | 5.9 |   | 5.3 |   |
| Impairment charge                         |   | **9.9**                          |       | 0 |   | — |   |
| Restructuring charge                      |   | **1.7**                          |       | 0.8 |   | — |   |
| Total operating expenses                  |   | **111.7**                        |       | 94.8 |   | 96.0 |   |
| Earnings (loss) from operations           |   | **(11.7**                        | **)**      | 5.2 |   | 4.0 |   |
| Interest income, net                      |   | **0.3**                          |       | 1.0 |   | 1.9 |   |
| Gain (loss) on investment                 |   | **0.2**                          |       | (0.4 | ) | — |   |
| Foreign exchange                          |   | **(0.2**                         | **)**      | 0.2 |   | — |   |
| Earnings (loss) before income taxes       |   | **(11.4**                        | **)**      | 6.0 |   | 5.9 |   |
| Income tax provision (benefit)            |   | **(0.8**                         | **)**      | 1.8 |   | 1.8 |   |
| Net earnings (loss)                       |   | **(10.6**                        | **)****%** | 4.2 | % | 4.1 | % |

 

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**Highlights for 2003**

 

Forthe year ended December 31, 2003, revenues increased by $3.4million to $96.4 million from $93.0 million achieved in 2002.  The Companyalso reported a net loss of $10.2 million, or $(0.38) per share, which includeda $9.5 million impairment charge, compared to 2002’s net earnings of $3.9million, or $0.15 per share.  On January 28,2004, Sanchez announced it had signed a merger agreement with Fidelity NationalFinancial, Inc. (FNF), a Fortune 500 provider of products and outsourcedservices and solutions to financial institutions and the real estateindustry.  Pursuant to the agreement, Fidelity Information Services, Inc.,which is a subsidiary of FNF, has agreed to acquire all of Sanchez’s commonstock for an amount equal to $6.50 per share.  The consummation of themerger is subject to customary conditions, including Sanchez shareholderapproval and certain regulatory approvals.  The consideration will be paidin cash and FNF stock.

 

Additional highlights for 2003 included:

 

•                  Charles SchwabCorporation launched its direct bank, Charles Schwab Bank, N.A., on a Sanchezoutsourcing solution incorporating the full suite of Sanchez bank technologyand operations infrastructure solutions.

•                  ING Direct U.K.became the sixth ING Direct bank to launch its direct savings business on theSanchez ProfileTM real-time, transaction processing solution.

•                  Sanchez launcheda core bank processing system running in a production environment on the Linuxoperating system when First Mortgage KFT of Hungary went live with thesolution.

•                  Sumitomo MitsuiBanking Corporation (SMBC), one of the world’s largest banking institutions,migrated its Paris corporate banking operations to a Sanchez solution. The migration of the Paris operations marked SMBC’s fifth Sanchez Profileimplementation.

•                  Warsaw,Poland-based Bank DZ, formerly Bank Amerykanski w Polsce S.A., implemented aSanchez banking solution.

•                  RBC FinancialGroup, Canada’s largest financial institution and a leading North Americandiversified financial services company, went live with Sanchez Funds, acomprehensive mutual fund order management system.  Approximately 1,600RBC financial planners and relationship advisors at 1,300 domestic branches nowprovide third-party mutual fund order management services using Sanchez Funds.

 

**2003 Compared to 2002**

 

REVENUES

 

Total revenues increased $3.4 million or 3.6%, for the year endedDecember 31, 2003, as compared to the year ended December 31, 2002.

 

Product revenue increased by $3.9 million, or 21.1%, from 2002 to2003.  The inclusion of a full year ofresults from the Company’s Wealth Management Division, which was acquired onJuly 3, 2002, contributed $1.4 million of the increase in product revenuerealized by the company.  An increase inthe net license revenue accretion associated with SAB No. 104 in 2003 alsocontributed to the annual increase in product revenue.

 

Service revenues decreased $3.4 million, or 10.6%, from 2002 to2003.  Service revenues for the yearended December 31, 2002 included $6.1 million in revenue previouslydeferred in accordance with SAB No. 101, the predecessor to SAB No. 104 for twoformer clients.  The Company received afavorable arbitration ruling in respect to a dispute with1stWebbankdirect.  Also during 2002, theCompany settled its outstanding receivable with an unannounced clientpreviously disclosed in the Company’s periodic filings with the SEC. As aresult, the Company recognized all of the revenue for these two clients whichhad been previously deferred pursuant to SAB No. 101. The drop in revenue in2003 due to the two settlements realized in 2002 was partially offset by anincrease in service revenues of $2.7 million associated with new implementationprojects, on-going existing client initiatives as well as an increase in netservices revenue accretion associated with SAB No. 101.

 

Processingrevenues remained constant in 2003 when compared to 2002.  Increased revenue from a new client whichbegan processing in the Company’s outsourcing facility was offset by decreasesexperienced with other clients as those clients modified their customeroffering and as a result of pricing incentives offered to certain clientsduring contract renewal negotiations.

 

Softwaremaintenance fees and other revenue increased by $3.7 million, or 20.5%, for theyear ended December 31, 2003, as compared to the year endedDecember 31, 2002.  Annualmaintenance increases, maintenance on license expansions and new licenseagreements in the year ended December 31, 2003 contributed to thisincrease.

 

26

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Thesoftware maintenance fees and other revenue from Wealth Management contributed$1.6 million of the incremental increase in 2003 compared to 2002, as thisdivision was acquired in July 2002

 

OPERATINGEXPENSES

 

Productdevelopment expenses increased $6.0 million, or 38.6%, in 2003.  One reason for this increase was dueto the costs associated with the Wealth Management Division, which was acquiredin July 2002.  Also contributing tothe increase was an increase in the net amortization of previously deferredlicense costs for clients using the outsourced solution in 2003 compared to2002.  In 2002 the Company had a netdeferral of $2.0 million while in 2003 it had a net amortization of$775,000.  There also were higher outsideconsulting expenses resulting from an increase in external resources.

 

Productsupport expenses increased by $302,000, or 4.9%, for the year endedDecember 31, 2003, as compared to the same period last year.  This increase was primarily due tothe costs associated with the Wealth Management Division, which was acquired inJuly 2002.  Partially offsettingthis increase was lower third party support fees as the Company has begun tohandle more support matters with its own resources.

 

Serviceexpenses increased by $3.0 million, or 15.1%, during the year endedDecember 31, 2003, as compared to the same period in 2002.  The increase was primarily due to therecognition of expenses in 2003 that had been deferred in 2002 in accordancewith SAB No. 101.  The increase inexpenses was offset by a reduction in the use of third party service providers.  Also, service expenses in 2002 included therecognition of $5.3 million in expenses related to 1stWebbankdirect and anunannounced client that had been previously deferred in accordance with SAB No.101.  The gross margin relative toassociated revenues was 20.3% for the year December 31, 2003, compared to38.1% in the prior year.  The decreasedmargin is primarily a result of lower margin projects.  The lower margin projects were initiallydeferred under SAB No.101 in 2002, and then accreted in 2003.

 

Processingexpenses decreased $53,000, or 0.3%, in 2003, as compared to 2002.  This decrease is attributable tolower third party processing fees and maintenance costs related to outsidevendors.  The addition of the WealthManagement Division, which was acquired in July 2002, partially offsetthese reductions.  The gross marginrelative to processing was approximately 12% during 2003 and 2002.

 

Salesand marketing expenses decreased by $101,000, or 0.8%, in 2003 compared to2002.  This decrease is primarilydue to lower commissions paid to third party partners as well as lower travelexpenses.  These were partially offsetby the impact of the Wealth Management Division expenses.

 

General,administrative and other expenses increased by $743,000, or 6.7%, in 2003compared to 2002, primarily due to the Wealth Management Divisionexpenses.  These were partially offsetby a decrease in bad debt and legal expense in 2003 compared to 2002.

 

In 2003, the Company recorded an impairment charge of $9.5 million.  During the third quarter the Companyperformed an assessment of the goodwill associated with the Company’s WealthManagement Division.  The Companyengaged an external valuation specialist to assist in this assessment.  Based upon this assessment, the Companydetermined that the carrying value of the Wealth Management reporting unit(Reporting Unit) exceeded its fair value.  Whileperforming the goodwill realizability analysis, the Company determined thatthere also was an impairment to certain amortizable intangible assetsassociated with the Reporting Unit, primarily the customer relationships andacquired technology, resulting in an impairment charge of approximately $5.5million to write down the asset group to its fair value.  The Company then determined the fair value ofthe goodwill associated with the Reporting Unit in accordance with SFAS No.142, resulting in an impairment charge related to goodwill of approximately$4.0 million.

 

Restructuring charges during the year ended December 31, 2003 wereincurred by the Company through a reduction in the Company’s worldwideworkforce to improve operational efficiency and reduce operating expenses.  The charges recorded in connection withthese actions totaled approximately $1.6 million, which consisted primarily ofseverance related payments.  In 2002 theCompany incurred $752,000 in restructuring charges.

 

OTHER INCOME, EXPENSE AND TAXES

 

Interest income for 2003 decreased $695,000, or 71.3%, compared to thesame period in 2002.  Interest income in2002 included interest received related to the settlement of an outstandingreceivable with a former client.  Alsocontributing to the decrease were lower interest rates in 2003 and lower cashreserves following the acquisition of Spectra Software in July 2002.

 

27

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During 2003, the Company recognized a net gain of $156,000 on thesettlement of an investment in a partner company in Poland.  In 2002, the Company recorded a loss oninvestments of approximately $393,000 to reflect the impact of the impairmentand restructuring during the year from the Company’s pro-rata share in aventure fund.

 

The Company incurred a foreign exchange loss of $154,000 during 2003compared to a gain of $160,000 in 2002, primarily as a result of a weakeningU.S. dollar against the Canadian dollar. The Company’s foreign exchange exposure is primarily related tointercompany activity.

 

The Company’s effective tax rate in 2003 was 6.7% compared to 30.1% in2002.  The primary reason for this decreasewas due to the impairment charge related to the Wealth Management Division,which is not deductible for income tax purposes.

 

**2002 Compared to 2001**

 

REVENUES

 

Total revenues decreased $701,000, or 0.7%, for the year endedDecember 31, 2002, as compared to the year ended December 31, 2001.

 

Product revenue decreased by $5.5 million, or 22.6%, from 2001 to2002.  The Company’s Wealth ManagementDivision 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.

 

Service revenues decreased $1.7 million, or 5.1%, from 2001 to2002.  Service revenues for the yearended December 31, 2002 included $3.2 million in revenue related to1stWebbankdirect that had been previously deferred in accordance with SAB No.101.  The Company was able to recognizethis revenue based upon the favorable arbitration ruling in respect to adispute with 1stWebbankdirect.  Alsoduring 2002, the Company settled its outstanding receivable with an unannouncedclient previously disclosed in the Company’s periodic filings with the SEC. Asa result, the Company recognized approximately $2.9 million in service revenuein the third quarter, which was previously deferred pursuant to SAB No. 101.Wealth Management contributed $2.1 million to service revenues during2002.  The increases from WealthManagement and the two client settlements were offset by a decrease in servicerevenues of $9.9 million in the year ended December 31, 2002, as comparedto same period in 2001, due to fewer clients in implementations in 2002 andextended accretion periods for several of the Company’s outsourcing clients.

 

Processingrevenues increased by $4.0 million, or 27.6%, in 2002, as compared to2001.  The overall increase is primarilyattributable to the increase in the number of clients using the outsourcingsolution and an increase in the number of accounts being processed on the outsourcingplatform.

 

Softwaremaintenance fees and other revenue increased by $2.0 million, or 12.3%, for theyear ended December 31, 2002, as compared to the year endedDecember 31, 2001.  Annualmaintenance increases and maintenance on license expansions contributed to thisincrease.  Revenues in 2001 included aone-time benefit from the settlement of a disputed maintenance charge with aformer customer.  The software maintenanceand other revenue from Wealth Management contributed $1.9 million in 2002 andoffset the effect of this one-time benefit in 2001.

 

OPERATINGEXPENSES

 

Productdevelopment expenses decreased $1.6 million, or 9.5%, in 2002.  This decrease is primarily attributable tothe reduction in the use of third party subcontractors.  Also contributing to the decrease was anincrease in the net deferral, under SAB No. 101, of product development costsassociated with certain clients who have purchased a license and were in theprocess of implementing an outsourced solution.  In addition, the impact of the reduction in force reduced productdevelopment expenses in 2002.  Theseexpense reductions were partially offset by the impact of the Wealth Managementacquisition in July 2002.

 

Productsupport expenses increased by $1.1 million, or 21.9%, for the year endedDecember 31, 2002, as compared to the same period last year.  This increase was primarily due to expensesfrom Wealth Management offset by lower third party support fees, as the Companywas able to provide more of the support with internal resources.

 

28

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Serviceexpenses decreased by $5.2 million, or 20.8%, during the year endedDecember 31, 2002, as compared to the same period in 2001.  The decrease was primarily due to asignificant reduction in the use of third party service providers.  Service expenses in 2002 also included therecognition of $2.9 million in expenses related to 1stWebbankdirect that hadbeen previously deferred in accordance with SAB 101.  In addition, service expenses in 2002 included the recognition of$1.9 million in expenses related to the settlement of an outstanding receivablewith an unannounced client, that had also been previously deferred inaccordance with SAB No. 101.  The grossmargin relative to associated revenues was 36.6% for the year December 31,2002, compared to 25.9% in the prior year. The improved margins realized were primarily a result of a significantreduction in the use of third party service providers, higher utilization ratesof the Company’s internal resources, higher margins realized on a fixed priceimplementation project, as well as deferrals from SAB No. 101 of certain lowermargin projects which will be accreted in future periods.

 

Processingexpenses increased $2.7 million, or 20.0%, in 2002, as compared to 2001.  This increase is in line with thecorresponding processing revenue increase and is attributable to third-partyprocessing fees and increased staffing. The processing gross margin was 11.6% during 2002, as compared to 8.8%during 2001.  The 11.6% margin reflectsthe continued improvement in the processing operation along with continuedgrowth in the number of accounts and clients using the outsourcing platform.

 

Salesand marketing expenses decreased by $1.3 million, or 9.4%, in 2002 compared to2001 due to lower marketing and compensation costs.  Also contributing to the decrease was a reduction in travelrelated expenses.  These were partiallyoffset by the new Wealth Management Division expenses.

 

General,administrative and other expenses increased by $1.4 million, or 14.2%, in 2002compared to 2001, primarily due to an increase in bad debt expense ofapproximately $1.0 million and the addition of the Wealth Management Divisionexpenses during the second half of 2002. These increases were partially offset by lower incentive compensationexpense.

 

Restructuring charges during the year ended December 31, 2002 wereincurred by the Company through a reduction in the Company’s worldwideworkforce of approximately 12% to improve operational efficiency and reduceoperating expenses.  The chargesrecorded in connection with these actions totaled approximately $752,000, whichconsisted primarily of severance related payments.

 

INTEREST INCOME

 

Interest income decreased $834,000, or 46%, in 2002 compared to2001.  This decrease is a result oflower interest rates being realized in 2002 and lower cash balances followingthe acquisition of Spectra in July 2002.

 

LOSS ON INVESTMENT

 

During 2002’s fourth quarter, Profile Venture Partners Capital Fund IL.P. (PVP), a venture fund in which Sanchez has invested, wasrestructured.  As part of therestructuring, Sanchez assumed the role of the fund’s general partner and theCompany’s capital commitment to the fund was reduced from $10 million to $2 million,all of which has been contributed.  Inaddition, 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.

 

INCOMETAX PROVISION

 

Taxesin 2002 were 30.1% of earnings before taxes, as compared to 30.2% for the yearended December 31, 2001.  TheCompany’s effective rate is lower than the statutory rate primarily due to thebenefit derived from the extraterritorial income exclusion.

 

**Liquidity and Capital Resources**

 

Cashand cash equivalents were $28.5 million at December 31, 2003, a decreaseof $3.0 million from December 31, 2002. Cash used by operating activities for 2003 was $1.5 million compared tocash provided by operating activities of $18.7 million for the comparable 2002period.  Contributing to the use of cashby operating activities was an increase in the net amortization of deferredrevenues and expenses during 2003 compared to 2002.  This increase in net amortization is primarily attributable tofewer implementation projects in process related to outsourcing clients whereassociated revenues and direct costs are deferred.  During 2003, the Company used $2.3

 

29

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millionfor the purchase of property and equipment, while financing activitiescontributed $600,000 of cash during 2003, principally from the proceedsfrom the employee stock purchase plan and the issuance of common stock.

 

InApril of 2001, the Company agreed to commit up to $10 million of capitalcontributions to a newly formed venture fund that invests in early stagetechnology companies.  As ofDecember 31, 2002, the Company had invested $2.0 million in the fund.  This commitment has since been capped at the$2.0 million contributed and no future funding is anticipated toward thisventure.

 

In February 2003, the board of directors approved a stockrepurchase program authorizing the Company to repurchase up to approximately1.4 million shares, or 5 percent of Sanchez’s common stock, on the open marketor through negotiated transactions.  Notime limit has been placed on the duration of the stock repurchase program, andthe timing of purchases will depend on market conditions.  Repurchased shares will be accumulated bythe Company and held in treasury.    Asof March 1, 2004, the Company has not repurchased any shares under thisprogram.

 

TheCompany currently anticipates that cash generated from operations and existingcash balances will be sufficient to satisfy its operating and capital cashneeds for the foreseeable future and, at a minimum, through the next year.  The Company had a line of credit of $20million secured from its primary banker. The Company’s line of credit was secured with the Company’s primarybanker and had a term of three years, which was to expire on July 2,2006.  As of year end, the Company hadnot drawn on this line of credit and currently has no debt outstanding.  In February 2004, the Companyterminated its line of credit.

 

TheCompany has historically experienced, and can be expected to continue toexperience, a certain degree of variability in its quarterly revenue, earningsand cash flow patterns.  Thisvariability is typically driven by significant events, which directly impactthe recognition and billing of project related revenues.  Examples of such events include the timingof new business contract closings and the initiation of product and service feerevenue recognition, one-time payments from existing clients relative tolicense expansion rights (required to process a greater number of customeraccounts or expand the number of permitted users) and completion ofimplementation project roll outs and the related revenue recognition. Because ahigh percentage of the Company’s expenses are relatively fixed, a variation inthe timing of the initiation or the completion of client projects, particularlyat or near the end of any quarter, can cause significant variations inoperating results from quarter to quarter.

 

Thefollowing table presents contracted obligations information (in thousands):

 
| **Contractual obligations** |   | **Total** |   | **Less than  1  year** |   | **1-3 Years** |   | **3-5 Years** |   | **More than  5 years** |   |
|-----------------------------|--------|-----------|--------|------------------------|--------|---------------|--------|---------------|--------|------------------------|--------|
|                        |   |      |   |                   |   |          |   |          |   |                   |   |
| Operating leases            |   | $         | 17,948 |                   | $      | 1,737         |   | $             | 2,829  |                   | $      | 2,884 |   | $ | 10,498 |   |
|                             |        |           |        |                        |        |               |        |               |        |                        |        |  |  |  |  |  |

 

**Forward-looking Statements**

 

Certain matters discussed in this Form 10-K contain “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934, including,but not limited to, statements concerning the Company’s revenues, expenses andearnings, future operating and financial performance, growth rates, acquisitionopportunities, and other similar forecasts and expectations.  The words “anticipate,” “estimate,”“believe,” “expect,” “intend,” “plan,” “project” and variations of these wordsand similar expressions are intended to identify forward-lookingstatements.  Forward-looking statementsare based on operating budgets, forecasts, beliefs and assumptions ofmanagement and, as such, are subject to risks and uncertainties and are notguarantees of future performance. Actual outcomes could differ materially from those expressed in any suchforward-looking statement due to a variety of factors in addition to thosespecifically identified herein.  Thesefactors include, without limitation, the timely and successful integration of newbusinesses and products of recently acquired companies and the risks associatedwith acquisitions, changes in or interpretations of tax laws, treaties, orregulations, governmental and public policy changes, business and economicconditions, currency fluctuations, challenges the Company may face as itexpands its international operations, the development of the markets or newbusiness areas that the Company is targeting, demand for products and servicesin the financial services industry, the extent to which the Internet will beused for financial services and products, the potentially adverse impact ofconsolidation in the financial services industry, timing of contracts and longsales cycles, competition among technology companies serving our industry,renewal of material contracts with clients, potential delays in, or

 

30

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cancellationof, the implementation of products and services, undetected software errors orfailures found in new products, the potentially adverse effect of businessinterruptions beyond the Company’s control, such as security breaches andfuture acts of terrorism, maintaining good relationships with key strategicpartners, the Company’s ability to attract, hire, and retain skilled andknowledgeable employees, success of the Company’s business model, changes inand availability of capital requirements, the Company’s ability to protect itsintellectual property rights, and outcomes of pending and futurelitigation.  In addition, the Company’soperating results may fluctuate significantly and the Company may not be ableto maintain historical growth rates or meet anticipated growth levels.  The Company’s stock price fluctuates and maycontinue to be volatile.  The Companyalso has investments in other companies, which are inherently risky.  These risks, as well as risks identified inthe Company’s other SEC filings and public announcements, may impact futureresults.  The Company undertakesno duty to publicly update any forward-looking statements, whether as a resultof new information, future events or otherwise.

 

**7A.****  Quantitativeand Qualitative Disclosures About Market Risk**

 

***Interest Rate Risk***3⁄4TheCompany’s exposure to market risk for changes in interest rates relateprimarily to the Company’s cash equivalents. The Company does not have any derivative financial instruments in itsportfolio.  The Company is averse toprincipal loss and ensures the safety and preservation of its invested funds bylimiting default risk, market risk and reinvestment risk.  The Company does not expect any materialloss with respect to its cash equivalents.

 

***Foreign CurrencyRisk***3⁄4The Company doesnot use foreign 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.

 

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**Item 8.  Financial Statements and Supplementary Data.**

 

### **Index to Consolidated Financial Statementsand Schedule**

 
| Reports of Independent Auditors   |                                                                                                                                                   |
|-----------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
|                              |                                                                                                                                                   |   |
| CONSOLIDATED FINANCIAL STATEMENTS |                                                                                                                                                   |
|                              |                                                                                                                                                   |   |
|                              | Consolidated Balance Sheets as of December 31, 2003 and 2002                                                                                      |   |
|                              |                                                                                                                                                   |   |
|                              | Consolidated Statements of Operations for  the Years Ended December 31, 2003, 2002 and 2001                                                       |   |
|                              |                                                                                                                                                   |   |
|                              | Consolidated  Statements of Shareholders’ Equity and Other Comprehensive Income (Loss) for  the Years Ended December 31, 2003, 2002 and 2001 |   |
|                              |                                                                                                                                                   |   |
|                              | Consolidated Statements of Cash Flows for  the Years Ended December 31, 2003, 2002 and 2001                                                       |   |
|                              |                                                                                                                                                   |   |
|                              | Notes to Consolidated Financial Statements                                                                                                             |   |
|                              |                                                                                                                                                   |   |
|                              | Schedule II  — Valuation and Qualifying Accounts for the Years Ended December 31,  2003, 2002 and 2001                                  |   |

 

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# **Report of IndependentAuditors**

 

The Board of Directors and ShareholdersSanchez Computer Associates, Inc.:

 

We have audited the 2003 and 2002 consolidated financial statements ofSanchez Computer Associates, Inc. and subsidiaries as listed in theaccompanying index.  In connection withour audits of the 2003 and 2002 consolidated financial statements, we also haveaudited the 2003 and 2002 financial statement schedule as listed in theaccompanying index.  These consolidatedfinancial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedfinancial statements and financial statement schedule based on ouraudits.  The 2001 consolidated financialstatements and 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 financial statement schedule, before therevisions and restatement described in Note 2 to the consolidated financialstatements, in their reports dated February 5, 2002.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the 2003 and 2002 consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Sanchez Computer Associates, Inc. and subsidiaries as ofDecember 31, 2003 and 2002, and the results of their operations and theircash flows for the years then ended, in conformity with accounting principlesgenerally accepted in the United States of America.  Also in our opinion, the related 2003 and 2002 financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

 

As discussed above, the 2001 consolidated financial statements ofSanchez Computer Associates, Inc. and subsidiaries as listed in theaccompanying index were audited by other auditors who have ceasedoperations.  As described in Note 2,these consolidated financial statements have been revised to include thetransitional disclosures required by Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets,” which was adopted bythe Company as of January 1, 2002. In our opinion, the disclosures for 2001 in Note 2 are appropriate.  In addition, as described in Note 2, the2001 consolidated financial statements were restated to record reimbursementsreceived for out-of-pocket expenses incurred as revenue in accordance withEmerging Issues Task Force Issue No. 01-14, “Income Statement Characterizationof Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred.”  We audited the adjustments that were appliedto restate the 2001 consolidated financial statements.  In our opinion, such adjustments areappropriate and have been properly applied. However, we were not engaged to audit, review, or apply any proceduresto the 2001 consolidated financial statements of Sanchez Computer Associates,Inc. and subsidiaries other than with the respect to such disclosures andadjustments and, accordingly, we do not express an opinion or any other form ofassurance on the 2001 consolidated financial statements taken as a whole.

 

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

 

 

Philadelphia, Pennsylvania

January 30, 2004

 

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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 consolidated financial statements have been revised and restated.  The Andersen report refers to theconsolidated balance sheet as of December 31, 2001 and 2000 and the consolidatedstatements of operations, shareholders’ equity, and cash flows for the yearsended December 31, 2000 and 1999, which are no longer included in theaccompanying consolidated financial statements.*

 

To Sanchez Computer Associates, Inc.:

 

Wehave audited the accompanying consolidated balance sheets of Sanchez ComputerAssociates, Inc. (a Pennsylvania corporation) and subsidiaries as ofDecember 31, 2001 and 2000, and the related consolidated statements ofoperations, shareholders’ equity and cash flows for each of the three years inthe period ended December 31, 2001. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States.  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial 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.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Sanchez Computer Associates, Inc.and subsidiaries as of December 31, 2001 and 2000, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2001, in conformity with accounting principles generallyaccepted in the United States.

 

Asexplained in Note 2 to the financial statements, effective January 1,2000, the Company changed its method of recognizing revenue.

 

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

 

 

Philadelphia,Pennsylvania

February 5,2002

 

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**SanchezComputer Associates, Inc.Consolidated Balance Sheets(In Thousands Except per Share Amounts)**

 
|                                                                                                                                                                           |   | **December 31,** |        |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|-------------|
|                                                                                                                                                                           |   | **2003**              |        | **2002** |   |
| **ASSETS**                                                                                                                                                                     |   |                  | ** **  |   |   |
| **Current assets**                                                                                                                                                             |   |                  | ** **  |   |   |
| Cash and cash equivalents                                                                                                                                                      |   | **$**                 | **28,539**  | ** ** | $ | 31,572 | ** ** |
| Accounts receivable less allowances ($340 – 2003;  $979 – 2002)                                                                                                      |   | **12,715**            | ** **  | 14,138 |   |
| Contracts in process                                                                                                                                                           |   | **3,244**             | ** **  | 4,851 |   |
| Deferred income taxes                                                                                                                                                          |   | **2,553**             | ** **  | 2,661 |   |
| Prepaid and other current assets                                                                                                                                               |   | **2,360**             | ** **  | 2,812 |   |
| Deferred expenses                                                                                                                                                              |   | **10,252**            | ** **  | 8,343 |   |
| Total current assets                                                                                                                                                           |   | **59,663**            | ** **  | 64,377 |   |
|                                                                                                                                                                           |   |                  | ** **  |   |   |
| **Property and equipment**                                                                                                                                                     |   |                  | ** **  |   |   |
| Equipment                                                                                                                                                                      |   | **18,944**            | ** **  | 16,532 |   |
| Furniture and fixtures                                                                                                                                                         |   | **2,668**             | ** **  | 2,674 |   |
| Leasehold improvements                                                                                                                                                         |   | **3,178**             | ** **  | 3,148 |   |
|                                                                                                                                                                           |   | **24,790**            |        | 22,354 |   |
| Accumulated depreciation and amortization                                                                                                                                      |   | **(20,597**           | **)**       | (16,826 | ) |
| Net property and equipment                                                                                                                                                     |   | **4,193**             | ** **  | 5,528 |   |
|                                                                                                                                                                           |   |                  | ** **  |   |   |
| Goodwill                                                                                                                                                                       |   | **22,474**            | ** **  | 23,896 |   |
| Deferred expenses                                                                                                                                                              |   | **3,004**             | ** **  | 11,496 |   |
| Amortizable intangibles, net                                                                                                                                                   |   | **3,479**             | ** **  | 8,454 |   |
| Deferred income taxes                                                                                                                                                          |   | **6,391**             | ** **  | 4,514 |   |
| Other non-current assets                                                                                                                                                       |   | **2,534**             | ** **  | 2,832 |   |
| Total assets                                                                                                                                                                   |   | **$**                 | **101,738** | ** ** | $ | 121,097 | ** ** |
|                                                                                                                                                                           |   |                  | ** **  |   |   |
| **LIABILITIES**                                                                                                                                                                |   |                  | ** **  |   |   |
| **Current liabilities**                                                                                                                                                        |   |                  | ** **  |   |   |
| Accounts payable                                                                                                                                                               |   | **$**                 | **3,687**   | ** ** | $ | 3,771 | ** ** |
| Accrued expenses                                                                                                                                                               |   | **7,682**             | ** **  | 9,617 |   |
| Deferred revenue                                                                                                                                                               |   | **23,745**            | ** **  | 22,804 |   |
| Total current liabilities                                                                                                                                                      |   | **35,114**            | ** **  | 36,192 |   |
| Deferred revenue                                                                                                                                                               |   | **3,878**             | ** **  | 18,150 |   |
| Other non-current liabilities                                                                                                                                                  |   | **521**               | ** **  | — |   |
| Minority interest                                                                                                                                                              |   | **233**               | ** **  | 209 |   |
| Total liabilities                                                                                                                                                              |   | **39,746**            | ** **  | 54,551 |   |
|                                                                                                                                                                           |   |                  | ** **  |   |   |
| Commitments and contingencies (Note 11)                                                                                                                                        |   |                  | ** **  |   |   |
|                                                                                                                                                                           |   |                  | ** **  |   |   |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                                  |   |                  | ** **  |   |   |
|                                                                                                                                                                           |   |                  |        |   |   |
| Common stock, stated value of $.01 per share,  75,000 shares authorized, 26,954 and 26,689 shares issued and outstanding as  of December 31, 2003 and 2002, respectively. |   | **270**               | ** **  | 267 |   |
| Additional paid-in capital                                                                                                                                                     |   | **49,575**            | ** **  | 48,794 |   |
| Retained earnings                                                                                                                                                              |   | **8,339**             | ** **  | 18,575 |   |
| Accumulated comprehensive income (loss)                                                                                                                                        |   | **3,808**             | ** **  | (1,090 | ) |
| Total shareholders’ equity                                                                                                                                                |   | **61,992**            | ** **  | 66,546 |   |
| Total liabilities and shareholders’ equity                                                                                                                                |   | **$**                 | **101,738** | ** ** | $ | 121,097 |   |

 

Seenotes to consolidated financial statements

 

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**SanchezComputer Associates, Inc.Consolidated Statements ofOperations(In Thousands, Except Per Share Amounts)**

 
|                                                    |   | **Year Ended December 31,** |        |
|---------------------------------------------------------|--------|----------------------------------|-------------|
|                                                    |   | **2003**                         |        | **2002** | ** ** | **2001** | ** ** |
| **Revenues**                                            |   |                             | ** **  |   |   |   |   |
| Products                                                |   | **$**                            | **22,673**  | ** ** | $ | 18,728 |   | $ | 24,195 |   |
| Services                                                |   | **28,789**                       | ** **  | 32,207 |   | 33,928 |   |
| Processing                                              |   | **18,426**                       | ** **  | 18,431 |   | 14,443 |   |
| Software maintenance fees and other                     |   | **21,933**                       | ** **  | 18,207 |   | 16,217 |   |
| Customer reimbursements                                 |   | **4,583**                        | ** **  | 5,445 |   | 4,936 |   |
| Total revenues                                          |   | **96,404**                       | ** **  | 93,018 |   | 93,719 |   |
| **Operating expenses**                                  |   |                             | ** **  |   |   |   |   |
| Product development                                     |   | **21,563**                       | ** **  | 15,555 |   | 17,194 |   |
| Product support                                         |   | **6,451**                        | ** **  | 6,149 |   | 5,043 |   |
| Services                                                |   | **22,935**                       | ** **  | 19,923 |   | 25,153 |   |
| Processing                                              |   | **16,241**                       | ** **  | 16,294 |   | 13,573 |   |
| Sales and marketing                                     |   | **12,955**                       | ** **  | 13,056 |   | 14,403 |   |
| General, administrative and other                       |   | **11,786**                       | ** **  | 11,043 |   | 9,667 |   |
| Customer reimbursements                                 |   | **4,583**                        | ** **  | 5,445 |   | 4,936 |   |
| Impairment charge                                       |   | **9,500**                        | ** **  | — |   | — |   |
| Restructuring charge                                    |   | **1,644**                        | ** **  | 752 |   | — |   |
| Total operating expenses                                |   | **107,658**                      | ** **  | 88,217 |   | 89,969 |   |
|                                                    |   |                             | ** **  |   |   |   |   |
| **Earnings (loss) from operations**                     |   | **(11,254**                      | **)**       | 4,801 |   | 3,750 |   |
| Interest income, net                                    |   | **280**                          | ** **  | 975 |   | 1,809 |   |
| Gain (loss) on investment                               |   | **156**                          | ** **  | (393 | ) | — |   |
| Foreign exchange gain (loss)                            |   | **(154**                         | **)**       | 160 |   | — |   |
| **Earnings (loss) before income  taxes**                |   | **(10,972**                      | **)**       | 5,543 |   | 5,559 |   |
| Income tax provision (benefit)                          |   | **(736**                         | **)**       | 1,669 |   | 1,680 |   |
| **Net earnings (loss)**                                 |   | **$**                            | **(10,236** | **)** | $ | 3,874 |   | $ | 3,879 |   |
|                                                    |   |                             | ** **  |   |   |   |   |
| Basic earnings (loss) per average common share          |   | **$**                            | **(0.38**   | **)** | $ | 0.15 |   | $ | 0.15 |   |
| Diluted earnings (loss) per average common share        |   | **$**                            | **(0.38**   | **)** | $ | 0.15 |   | $ | 0.15 |   |
|                                                    |   |                             | ** **  |   |   |   |   |
| Weighted-average common shares outstanding              |   | **26,843**                       | ** **  | 26,312 |   | 25,707 |   |
| Weighted-average common and diluted shares  outstanding |   | **26,843**                       | ** **  | 26,654 |   | 26,324 |   |

 

See notes to consolidated financial statements

 

36

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**Sanchez Computer Associates, Inc.**

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

**(In Thousands)**

 
|                                     |   | **Common Stock** |   | **Treasury** |   | **Additional  Paid-in** |   | **Retained** |   | **Accumulated  Other  Comprehensive** |   |              |   |
|------------------------------------------|--------|------------------|--------|--------------|--------|-------------------------|--------|--------------|--------|---------------------------------------|--------|-------------------|--------|
|                                     |   | **Shares**       |   | **Amount**   |   | **Stock Amount**        |   | **Capital**  |   | **Earnings**                          |   | **Income (Loss)** |   | **Total** |   |
| **Balances at January 1, 2001**          |   | 25,211           |   | $            | 252    |                    | $      | (153         | )      | $                                     | 44,431 |              | $      | 10,822 |   | $ |   |   | $ | 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                                |   |              |   | 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 acquisition |   | 584              |   | 6            |   |                    |   | 2,959        |   |                                  |   |              |   | 2,965 |   |
|                                     |   |             |   |         |   |                    |   |         |   |                                  |   |              |   |   |   |
| **Balances at December 31, 2002**   |   | 26,689           |   | 267          |   | 0                       |   | 48,794       |   | 18,575                                |   | (1,090            | )      | 66,546 |   |
| Comprehensive loss:                      |   |             |   |         |   |                    |   |         |   |                                  |   |              |   |   |   |
| Net loss                                 |   |             |   |         |   |                    |   |         |   | (10,236                               | )      |              |   |   |   |
| Cumulative translation adjustments       |   |             |   |         |   |                    |   |         |   |                                  |   | 4,898             |   |   |   |
| Total comprehensive loss                 |   |             |   |         |   |                    |   |         |   |                                  |   |              |   | (5,338 | ) |
| Exercise of stock options                |   | 105              |   | 1            |   |                    |   | 255          |   |                                  |   |              |   | 256 |   |
| Tax benefit from stock options exercised |   |             |   |         |   |                    |   | 86           |   |                                  |   |              |   | 86 |   |
| Stock-based compensation expense         |   | 28               |   | 1            |   |                    |   | 125          |   |                                  |   |              |   | 126 |   |
| Employee stock purchase plan             |   | 132              |   | 1            |   |                    |   | 344          |   |                                  |   |              |   | 345 |   |
| Other                                    |   |             |   |         |   |                    |   | (29          | )      |                                  |   |              |   | (29 | ) |
|                                     |   |             |   |         |   |                    |   |         |   |                                  |   |              |   |   |   |
| **Balances at December 31, 2003**   |   | 26,954           |   | $            | 270    |                    | $      | 0            |   | $                                     | 49,575 |              | $      | 8,339 |   | $ | 3,808 |   | $ | 61,992 |   |
|                                          |        |                  |        |              |        |                         |        |              |        |                                       |        |                   |        |  |  |  |  |  |  |  |  |  |

 

Seenotes to consolidated financial statements

 

37

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**SanchezComputer Associates, Inc. Consolidated Statements of Cash Flows**

**(In Thousands)**

 
|                                                                                                 |   | **Year Ended December 31,** |    |
|------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|
|                                                                                                 |   | **2003**                         |    | **2002** |   | **2001** |   |
|                                                                                                 |   |                             |    |   |   |   |   |
| **Cash flows from operating  activities**                                                            |   |                             |    |   |   |   |   |
| Net earnings (loss)                                                                                  |   | $                                | (10,236 | ) | $ | 3,874 |   | $ | 3,879 | ** ** |
| Adjustments to reconcile net earnings (loss) to  cash provided (used) by operating activities        |   |                             |    |   |   |   |   |
| Depreciation and amortization                                                                        |   | 4,898                            |    | 5,175 |   | 4,700 |   |
| Impairment charge                                                                                    |   | 9,500                            |    | — |   | — |   |
| Deferred income taxes                                                                                |   | (1,544                           | )       | 464 |   | (1,205 | ) |
| Equity in loss of venture fund                                                                       |   | —                           |    | 837 |   | 462 |   |
| Non-cash gain on investment                                                                          |   | (156                             | )       | — |   | — |   |
| Provision for doubtful accounts receivable                                                           |   | —                           |    | 1,138 |   | 100 |   |
| Other                                                                                                |   | —                           |    | (65 | ) | — |   |
| Cash provided by (used in) changes in operating  assets and liabilities net of effect of acquisition |   |                             |    |   |   |   |   |
| Accounts receivable                                                                                  |   | 1,565                            |    | 7,611 |   | (3,553 | ) |
| Contracts in process                                                                                 |   | 1,632                            |    | (3,081 | ) | 684 |   |
| Income taxes receivable/payable                                                                      |   | —                           |    | 326 |   | 3,314 |   |
| Prepaid and other current assets                                                                     |   | 839                              |    | (722 | ) | (108 | ) |
| Accounts payable and accrued expenses                                                                |   | (1,393                           | )       | (3,649 | ) | (2,202 | ) |
| Deferred revenue                                                                                     |   | (13,024                          | )       | 9,696 |   | 944 |   |
| Deferred expense                                                                                     |   | 6,438                            |    | (2,936 | ) | (2,098 | ) |
| Net cash provided by (used in) operating activities                                                  |   | (1,481                           | )       | 18,668 |   | 4,917 |   |
|                                                                                                 |   |                             |    |   |   |   |   |
| **Cash flows from investing  activities**                                                            |   |                             |    |   |   |   |   |
| Capital expenditures                                                                                 |   | (2,348                           | )       | (2,173 | ) | (3,148 | ) |
| Investments                                                                                          |   | (75                              | )       | (500 | ) | (1,250 | ) |
| Cost of acquisition, net of cash acquired                                                            |   | —                           |    | (25,917 | ) | — |   |
| Net cash used in investing activities                                                                |   | (2,423                           | )       | (28,590 | ) | (4,398 | ) |
|                                                                                                 |   |                             |    |   |   |   |   |
| **Cash flows from financing  activities**                                                            |   |                             |    |   |   |   |   |
| Purchase of common stock for treasury                                                                |   | —                           |    | — |   | (1,006 | ) |
| Issuance of common stock                                                                             |   | 255                              |    | 40 |   | 740 |   |
| Proceeds from issuance of shares under the employee  stock purchase plan                             |   | 345                              |    | 575 |   | 812 |   |
| Net cash provided by financing activities                                                            |   | 600                              |    | 615 |   | 546 |   |
|                                                                                                 |   |                             |    |   |   |   |   |
| Effect of foreign exchange on cash                                                                   |   | 271                              |    | (76 | ) | — |   |
| Net increase (decrease) in cash and cash  equivalents                                                |   | (3,033                           | )       | (9,383 | ) | 1,065 |   |
| Cash and cash equivalents at beginning of year                                                       |   | 31,572                           |    | 40,955 |   | 39,890 |   |
|                                                                                                 |   |                             |    |   |   |   |   |
| **Cash and cash equivalents at end  of year**                                                        |   | $                                | 28,539  |   | $ | 31,572 |   | $ | 40,955 | ** ** |
|                                                                                                 |   |                             |    |   |   |   |   |
| Supplemental cash flow information                                                                   |   |                             |    |   |   |   |   |
| Interest paid                                                                                        |   | $                                | —  |   | $ | — |   | $ | — | ** ** |
| Income taxes paid                                                                                    |   | 810                              |    | 772 |   | $ | 1,216 | ** ** |

 

See notes to consolidated financial statements

 

38

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**SanchezComputer Associates, Inc.**

**Notes to Consolidated Financial Statements**

 

**(1)****                                 Description of Business**

 

Sanchez Computer Associates, Inc.(Sanchez or the Company) is a global provider in developing andmarketing scalable and integrated software and services that provide banking, customerintegration, brokerage, wealth management and outsourcing solutions toapproximately 400 financial institutions in 22 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 initiatednew segment reporting based on those divisions.  Sanchez’s divisional segments are Banking Solutions, WealthManagement, Outsourcing and Global Services. The Company’s products include an integrated banking platform. The banking platform products include: Sanchez Profile, a multi-currency, multi-language, customer-centric,core banking and transaction processing application; Sanchez Xpress, anenterprise customer and transaction management system, which empowers customerrelationship management (CRM) and delivers business integration; SanchezWebclient, a Web-based, Internet customer front-end processor; Sanchez WebCSR,a browser-based integrated customer servicing application that can be deployedacross multiple retail delivery channels such as branches and call centers; andSanchez CRM, a Web-based customer relationship management system, available asa stand-alone application or integrated with Sanchez’s banking platform.  The Company’s outsourcing offering isoperated by Sanchez Data Systems, Inc. (SDSI), a wholly owned subsidiary, whichuses the Sanchez integrated banking platform as the basis for an outsourceddirect banking 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.  The Company alsooffers Sanchez Wealthware, a group of integrated, full-functioned,multi-channel wealth management applications that satisfy the real-time,straight through processing requirements of brokers, bankers and insuranceagents.  The product includesapplication solutions for equities, options, fixed-income securities, mutualfund securities and wrap account processing.

 

**(2)****                                 SignificantAccounting Policies**

 

**Principles ofConsolidation**—The consolidated financial statementsinclude the accounts of the Company and its subsidiaries.  All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

**Use of ManagementEstimates**—The preparation of consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to continuously make estimates andassumptions that affect the reported amounts of certain assets, liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported revenues and expenses during the period.  Actual results could differ from theseestimates.  The most significantestimates are the measurement of the percentage-of-completion for revenuerecognition, estimated lives of processing relationships, the valuation ofgoodwill and intangibles and allowance for doubtful accounts.

 

**Revenue Recognition**—The Company’s divisions generate revenue by assessing fees on softwareproducts, services, processing and maintenance.  Fees assessed on software products include software license andproduct enhancement fees.  Typically,fees for software license contracts are paid in stages upon the completion ofdefined deliverables or at certain dates. For licenses sold for in-house solutions, i.e., operated by theinstitutions, the Company recognizes revenue **using**either the percentage-of-completion contract accounting method, or whereapplicable when the requirements ofAICPA Statement of Position 97-2 “Software Revenue Recognition” are met.  Financial institutions selecting anoutsourced banking solution can purchase product licenses upfront, or in lieuof upfront license fees, institutions can opt to spread the license andaccompanying maintenance fees on a per account/per month basis over the life ofthe processing contract.  Assessment ofper account/per month fees begins after the client goes live, i.e., clientbegins processing its customers’ accounts on the outsourced platform with the solution.  Software product fees and implementationfees generated from outsourced solutions, along with their associated costs,are deferred during the implementation phase of an outsourced project inaccordance with Staff Accounting Bulletin (SAB) No. **104*,***“Revenue Recognition in Financial Statements,*”***which supercededSAB No. 101**.  Once an outsourced solution goes live, thedeferred product and services revenue and the related costs are recognized overthe expected life of the processing arrangement.  Other service revenue is generally recognized when the servicesare performed or on the percentage-of-completion method, depending on thecontract terms and the other elements of the arrangement.  Processing fees consist primarily of monthlyand account-based fees for servicing, as well as transaction fees associatedwith transaction volumes for a specified period.  Under the outsourcing model, when a client institution’s customeraccount base grows, and the institution exceeds the minimum account processing levels,outsourcing revenue can increase.  Forboth in-house and outsourced license

 

39

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contracts, maintenance fees are normally billed annually in advance andrecognized as revenue ratably during the specified maintenance period.   For customer reimbursements the Companyfollows Emerging Issues Task Force (EITF) Issue No. 01-14, “Income StatementCharacterization of Reimbursements Received for ‘Out of Pocket’ ExpensesIncurred,” which requires that customer reimbursements received for direct costspaid to third parties and related expenses be characterized as revenue.  Customer reimbursements primarily representtravel, postage and data communication costs.

 

**Cash and Cash Equivalents**—Cash and cash equivalents consist of cashand highly liquid investments with maturities of three months or less from thedate of purchase and whose carrying amount approximates market value due to theshort maturity of the investments.  TheCompany maintains a centralized cash management program whereby its excess cashbalances are invested in high quality short-term money market instruments.  Cash balances in the Company’s accounts mayexceed federally insured limits.

 

**Accounts Receivable**—The majority of the Company’s receivablesare due from financial service organizations located throughout the UnitedStates, Europe, Asia and Canada.  TheCompany determines the allowance based on a specific review of its accountsreceivable.  From time to time, theCompany’s clients dispute the amounts owed and in other cases they experiencefinancial difficulties and cannot pay on a timely basis.  In certain instances, these factorsultimately result in uncollectable accounts. The determination of the appropriate reserve needed for uncollectableaccounts involves significant judgment. A change in the factors used to evaluate collectability could result ina significant change in the reserve need. Such factors include changes in the financial condition of the Company’scustomers 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.

 

**Contracts in Process—**Contracts in process in the accompanyingconsolidated balance sheets represent revenues recognized in excess of amountsinvoiced, primarily related to contracts accounted for using the percentage ofcompletion method.

 

**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, 2003, the Companyhad invested $2.0 million in a venture fund that it formed to invest 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 inits consolidated financial statements, and then records a minority interest toreflect the interest owned by outside limited partners.

 

**Property and Equipment**—Property and equipment is carried at cost,except for assets under capital leases, which are recorded at the present valueof future lease payments.  Expendituresfor major renewals, improvements and betterments are capitalized and minorrepairs and maintenance are charged to expense as incurred.  When assets are sold, the related cost andaccumulated depreciation are removed from the accounts and any gain or lossfrom such disposition is included in operations.

 

**Depreciation and Amortization**—Depreciation and amortization are providedover the estimated useful lives of the related assets using the straight-linemethod.  Equipment and furniture andfixtures typically have useful lives of three and five years, respectively.  The useful life of leasehold improvements isthe lesser of the lease term or five years.

 

**Capitalized Software Costs**—Certain development costs of the Company’ssoftware products are capitalized subsequent to the establishment oftechnological feasibility and up to the time the product becomes available forgeneral release.  Amortization isprovided on a product-by-product basis at the greater of the amount computedusing (a) the ratio of current revenues for a product to the total of currentand anticipated future revenues or (b) the straight-line method over theremaining estimated economic life of the product.  Generally, an original estimated economic life of four years isassigned to capitalized software development costs. All costs of software programmaintenance are charged to expense as incurred.

 

There were no capitalized software costs during2003, 2002 and 2001.  Accumulatedamortization was $2.8 million and $2.7 million as of December 31, 2003 and2002, respectively. Amortization of capitalized software costs amounted to$133,000, $315,000 and $442,000 in 2003, 2002, and 2001, respectively. Allcapitalized software costs are written down to net realizable value when thecarrying amount is in excess thereof. No write-downs were required for 2003, 2002 or 2001.  At December 31, 2003 and 2002, the netcapitalized software balance was $10,000 and $144,000, respectively, and isincluded in other assets.

 

**Impairment of LongLived Assets—**In accordance with Statement of FinancialAccounting Standards (SFAS) No. 142, “Goodwill and Other Intangibles,” theCompany no longer amortizes goodwill but instead

 

40

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performs an annual test to determine if the Company’s goodwill isimpaired.  During the third fiscalquarter of 2003, the Company performed its annual assessment of goodwillassociated with its Wealth Management reporting unit (Reporting Unit) andrecorded an impairment charge. (see Note 4.)

 

**Intangible Assets**—Intangible assets consist of customer lists,acquired technology, and other assets which are primarily related to theacquisition of Spectra Securities Software, Inc. (see Note 3), and areaccounted for under SFAS No. 142, and assessed for impairment under SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

 

**Goodwill—**EffectiveJanuary 1, 2002, the Company adopted the provisions of SFAS No. 142, whichaddresses the financial accounting and reporting for acquired goodwill andother intangible assets and supercedes Accounting Principle Board (APB) OpinionNo. 17, “Intangible Assets.”  Under SFASNo. 142, goodwill and other intangible assets with indefinite lives are notamortized but are subject to tests for impairment at least annually.  In accordance with the provisions of SFASNo. 142, the Company ceased the amortization of goodwill effectiveJanuary 1, 2002.  Prior to theadoption of SFAS No. 142, the Company amortized goodwill over ten years.  Amortization expense was $127,000 for theyear ended December 31, 2001.

 

The following table illustrates adjusted net earnings(loss) and basic and diluted earnings (loss) per share as if SFAS No. 142 wasadopted as of January 1, 2001 (in thousands except per share amounts):

 
|                                                                 |   | **For the year ended December 31,** |    |
|----------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                                 |   | **2003**                                 |    | **2002** |   | **2001** |   |
| Net earnings (loss):                                                 |   |                                     |    |   |   |   |   |
| Net earnings (loss)                                                  |   | $                                        | (10,236 | ) | $ | 3,874 |   | $ | 3,879 |   |
| Add: goodwill amortization, net of tax                               |   | —                                   |    | — |   | 89 |   |
| Adjusted net earnings (loss)                                         |   | $                                        | (10,236 | ) | $ | 3,874 |   | $ | 3,968 |   |
|                                                                 |   |                                     |    |   |   |   |   |
| Basic and diluted earnings (loss) per averageCommon share:           |   |                                     |    |   |   |   |   |
| Reported                                                             |   | $                                        | (0.38   | ) | $ | 0.15 |   | $ | 0.15 |   |
| Goodwill amortization, net of tax                                    |   | —                                   |    | — |   | — |   |
| Adjusted basic and diluted earnings (loss) per  average common share |   | $                                        | (0.38   | ) | $ | 0.15 |   | $ | 0.15 |   |

 

At December 31, 2003, goodwill consistsof $899,000 from the Company’s acquisition of SDSI in 1999 and $21.6 millionfrom the Company’s acquisition of Spectra in July 2002 (see Note 3).

 

41

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**Deferred Revenue**—Deferredrevenues represent amounts collected from or invoiced to customers in excess ofrevenue recognized.  Deferred revenuesconsist of prepaid maintenance and license milestone amounts which aretypically expected to be recognized within one year.  In addition, a substantial amount of the fees invoiced during theimplementation phase related to our outsourcing customers are deferred, alongwith their associated costs, in accordance with SAB No. 104.  These amounts are recognized over theexpected life of the outsourcing relationship, which is generally one to threeyears.

 

**Comprehensive Income(Loss)**—Comprehensive income (loss) consists of netearnings (loss), adjusted for other increases and decreases affectingshareholders’ equity that are excluded from the determination of net earnings(loss).

 

**Income Taxes**—TheCompany accounts for income taxes following the provisions of SFAS No. 109,“Accounting for Income Taxes”  (SFAS No.109) requires deferred tax assets or liabilities to be recognized for theestimated future tax effects of net operating loss and credit carryforwards aswell as temporary differences between the financial reporting and tax basis ofassets and liabilities based on the enacted tax law and statutory tax ratesapplicable to the periods in which the temporary differences are expected toimpact taxable income.  Additionally,the benefits of utilizing the Company’s deferred tax assets are recognized tothe extent management of the Company believes that it is more likely than notthat the benefits will be realized in future periods.

 

**Earnings Per Share**—TheCompany follows SFAS No. 128, “Earnings per Share,” which requires presentationof two amounts, basic and diluted earnings (loss) per share.

 

Basic earnings (loss) per share has beencalculated as net earnings (loss) divided by the weighted-average common sharesoutstanding, while diluted earnings (loss) per share has been computed as netearnings (loss) divided by the weighted-average common and diluted sharesoutstanding which includes the dilutive effect of stock options.

 

The following table provides a reconciliationof weighted average common shares outstanding to weighted-average common anddiluted shares outstanding (in thousands):

 
|                                |   | **Year Ended December 31,** |   |
|-------------------------------------|--------|----------------------------------|--------|
|                                |   | **2003**                         |   | **2002** |   | **2001** |   |
| Weighted-average shares outstanding |   | **26,843**                       |   | 26,312 |   | 25,707 |   |
| Dilutive effect of options          |   | **—**                       |   | 342 |   | 617 |   |
|                                |   |                             |   |   |   |   |   |
| Total common and diluted shares     |   | **26,843**                       |   | 26,654 |   | 26,324 |   |

 

All potentially dilutive common stockequivalents were excluded from the calculation of net loss per share for theyear ended December 31, 2003 since their effect was anti-dilutive as aresult of the net loss incurred for the period.  At December 31, 2003, 2002 and 2001, potentially dilutivecommon stock equivalents include options to purchase 6,627,915, 6,093,707 and4,050,795 shares of common stock, respectively.

 

**Translation ofForeign Financial Statements—**Assets and liabilities ofthe Company’s foreign subsidiaries are translated at the exchange rate as ofthe end of each reporting period.  Theincome statement is translated at the average exchange rate for theperiod.  Gains or losses fromtranslating foreign currency financial statements are accumulated in a separatecomponent of shareholders’ equity.

 

**Stock-BasedCompensation—**The Company applies APB Opinion No. 25,“Accounting for Stock Issued to Employees,” and related interpretations forstock options and other stock-based awards while disclosing pro forma netearnings (loss) and net earnings (loss) per share as if the fair value methodhad been applied in accordance with SFAS No. 123, “Accounting for Stock-BasedCompensation.” Had compensation cost for the Company’s stock options plans beendetermined based upon the fair value of the options at the date of grant, asprescribed under SFAS No. 123, the Company’s net earnings (loss) and basic anddiluted net earnings (loss) per share would have been adjusted to the followingpro forma amounts (in thousands except per share amounts):

 

42

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|                                                                                                                                     |   | **Year Ended  December 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                                                                     |   |                              |       | **2003** |   | **2002** | ** ** | **2001** | ** ** |
| Net earnings (loss)                                                                                                                      |   | As  reported                      | ** ** | **$** | **(10,236** | **)** | $ | 3,874 |   | $ | 3,879 |   |
|                                                                                                                                     |   |                              |       |   |   |   |   |   |   |
| Deduct:   Total stock-based employee compensation expense determined under the  fair-value based methods for all awards, net of tax |   |                              |       | **(3,048** | **)** | (8,522 | ) | (3,889 | ) |
| Net earnings (loss)                                                                                                                      |   | Pro forma                         |       | **$** | **(13,284** | **)** | $ | (4,648 | ) | $ | (10 | ) |
|                                                                                                                                     |   |                              |       |   |   |   |   |   |   |
| Basic earnings (loss) per share                                                                                                          |   | As  reported                      | ** ** | **$** | **(0.38** | **)** | $ | 0.15 |   | $ | 0.15 |   |
|                                                                                                                                     |   | Pro forma                         |       | **(0.49** | **)** | (0.17 | ) | 0.00 |   |
|                                                                                                                                     |   |                              |       |   |   |   |   |   |   |
| Diluted earnings (loss) per share                                                                                                        |   | As  reported                      | ** ** | **$** | **(0.38** | **)** | $ | 0.15 |   | $ | 0.15 |   |
|                                                                                                                                     |   | Pro forma                         |       | **(0.49** | **)** | (0.17 | ) | 0.00 |   |

 

The per share weighted-average fair value ofstock options issued by the Company during 2003, 2002 and 2001 was $2.69, $3.69and $4.96, respectively, on the date of grant using the Black-Scholesoption-pricing model.  The Company usedthe following weighted-average assumptions to determine the fair value of stockoptions granted: 2003—expected dividend yield of 0%, risk-free interest rate of2.32% to 3.45%, expected volatility of 90%, and an average expected life of fiveyears.  2002—expected dividend yield of0%, risk-free interest rate of 2.63% to 4.50%, expected volatility of 95%, andan average expected life of five years. 2001—expected dividend yield of 0%, risk-free interest rate of 3.97% to4.99%, expected volatility of 75%, and an average expected life of five years.

 

**Fair Value ofFinancial Instruments**—The Company believes that thefair value of its financial instruments, which include cash and cashequivalents, accounts receivable and accounts payable, approximate fair value.

 

**Reclassifications**—Certainprior period amounts have been reclassified to conform to the currentpresentation.

 

43

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**(3)****                                 Acquisition,Goodwill and Intangible Assets**

 

*Acquisition*

 

On July 3, 2002, Sanchez completed its acquisition, by way of aplan of arrangement (the Arrangement), of all of the outstanding common sharesof Spectra, a leading provider of comprehensive wealth managementsolutions.  Under the terms of theArrangement, Sanchez acquired all of the common shares of Spectra and EclipseVII Holdings Inc., an entity whose only asset was Spectra common shares, forapproximately $25.9 million in cash, net of cash acquired and includingtransaction costs, plus 583,813 shares of Sanchez common stock with a fairvalue of approximately $3.0 million. Leading up to the acquisition, the Company participated in arms lengthnegotiations, performed due diligence, obtained a fairness opinion on the valuationof Spectra and used industry comparables to determine a purchase price.  With the acquisition of Spectra, theCompany has positioned itself to be able to provide a complete banking andbrokerage platform that satisfies the industry’s growing global requirementsfor 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 Spectrafrom July 3, 2002, the date of acquisition, through December 31,2002.

 

                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 |   |

## * *

*Goodwill*

 

The following is a summary of changes in thecarrying amount of goodwill by segment:

 
|                             |   | **Wealth Management** |   | **Outsourcing** |   | **Total** |   |
|----------------------------------|--------|-----------------------|--------|-----------------|--------|-----------|--------|
| Balance, January 1,  2002        |   | $                     | — |            | $      | 899       |   | 899 |   |
| Acquisition of Spectra           |   | 23,827                |   | —          |   | 23,827    |   |
| Foreign currency  translation    |   | (608                  | )      | —          |   | (608      | )      |
| Other                            |   | (222                  | )      | —          |   | (222      | )      |
| Balance,  December 31, 2002 |   | 22,997                |   | 899             |   | 23,896    |   |
| Foreign currency  translation    |   | 3,267                 |   | —          |   | 3,267     |   |
| Impairment charge                |   | (4,000                | )      | —          |   | (4,000    | )      |
| Other                            |   | (689                  | )      | —          |   | (689      | )      |
| Balance, December 31, 2003       |   | $                     | 21,575 |            | $      | 899       |   | $ | 22,474 |   |
|                                  |        |                       |        |                 |        |           |        |  |  |  |  |  |

 

44

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*Intangible assets*

 

Intangible assets with definite useful lives areamortized over their respective estimated useful lives to their estimatedresidual values. The following table provides a summary of the Company’sintangible assets with definite useful lives, which relates primarly to theacquistion of Spectra:

 

### ** **

|                   |   | **December 31,  2003** |   |
|------------------------|--------|-----------------------------|--------|
|                   |   | **Useful  Life**            |   | **Gross Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net Book Value** |   |
| Customer relationships |   | 10 Years                    |   | $ | 3,581 |   | $ | 1,001 |   | $ | 2,580 |   |
| Acquired technology    |   | 5 Years                     |   | 1,205 |   | 384 |   | 821 |   |
| Other                  |   | 2 Years                     |   | 386 |   | 308 |   | 78 |   |
| Total                  |   |                        |   | $ | 5,172 |   | $ | 1,693 |   | $ | 3,479 |   |

 
|                   |   | **December 31  2002** | ** ** |
|------------------------|--------|----------------------------|------------|
|                   |   | **Useful Life**            |       | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Customer relationships |   | 10 Years                   |       | $ | 6,628 |   | $ | 331 |   | $ | 6,297 |   |
| Acquired technology    |   | 5 Years                    |       | 1,979 |   | 99 |   | 1,880 |   |
| Other                  |   | 2 Years                    |       | 369 |   | 92 |   | 277 |   |
| Total                  |   |                       |       | $ | 8,976 |   | $ | 522 |   | $ | 8,454 |   |

 

Amortization expense was $969,000 and$527,000 for the years ended December 31, 2003 and 2002,respectively.  Amortization expense for2004 through 2008 is expected to be approximately $607,000, $530,000, $530,000,$415,000 and $299,000 respectively.

 

**(4)****                                 ImpairmentCharge**

 

During the third fiscal quarter of 2003, theCompany performed its annual assessment of goodwill associated with its WealthManagement reporting unit (Reporting Unit). The Company engaged an external valuation specialist to assist in thisassessment.  The market approach wasused to measure the fair value of the Reporting Unit.  This approach derives market multiples from recent transactionsor offerings of companies with similar operations as the Reporting Unit.  Market multiples of publicly tradedcompanies that were deemed comparable to the Company were also used in theanalysis.  Based upon this analysis, theCompany determined that the carrying value of the Reporting Unit exceeded itsfair value.  The identification of animpairment necessitated the preparation of a SFAS No. 142 Level 2 analysis toquantify the amount of the goodwill impairment.  During this analysis, the Company determined that there alsocould be an impairment to certain amortizable intangible assets associated withthe Reporting Unit, primarily the customer relationships and acquiredtechnology.  As a result, the Companyperformed an impairment analysis of the long-lived assets in accordance withSFAS No. 144. As a result of this analysis, the Company determined that thecarrying value of the Reporting Unit’s long-lived assets exceeded theundiscounted cash flows expected to be generated by such assets over theirremaining useful life.  Accordingly, theCompany recorded an impairment charge of approximately $5.5 million to writedown the long-lived assets to their fair value.  The fair value of the long-lived assets was primarily determined usingthe income approach.  The incomeapproach measures the value of an asset by calculating the present value of itsfuture economic benefits.  Thesebenefits can include revenues, cost savings, tax deductions, and proceeds fromits disposition.  Value indications aredeveloped by discounting expected cash flows to their present value at a rateof return that incorporates the risk-free rate for the use of funds, trendswithin the industry, and risks associated with particular investments ofsimilar type and quality as of the valuation date.  The Company then determined the fair value of the goodwillassociated with the Reporting Unit in accordance with SFAS No. 142, resultingin an impairment charge related to goodwill of approximately $4.0 million.  The total impairment to goodwill and certainamortizable intangible assets of the Reporting Unit for the year endedDecember 31, 2003 was $9.5 million and appears on the ConsolidatedStatements of Operations as impairment charge.

 

**(5)****                                 RestructuringCharge**

 

In an effort to improve future operatingmargin performance, during 2003 the Company took steps to reduce its costbase.  As part of this process, the Company reduced its workforce andimplemented broad-based salary reductions.  As a result, the Company tooka restructuring charge of approximately $1.3 million in 2003 primarily

 

45

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related to employee severance costs.   Of these restructuring charges, approximately $669,000 was paidduring the year ended December 31, 2003 and the remainder will be paid outduring the first six months of 2004.

 

During the year ended December 31, 2002,the Company initiated restructuring actions by reducing its worldwide workforceby approximately 12% to improve operational efficiency and reduce operatingexpenses.  Charges related to theserestructuring actions were accrued in the quarter ended September 30,2002, the same period that executive management committed to execute suchactions.  Restructuring charges recordedin connection with these actions totaled approximately $752,000, whichconsisted primarily of severance related payments.  Of these restructuring charges, approximately $670,000 was paidduring the year ended December 31, 2002, and the remainder was paid duringthe three month period ended March 31, 2003.

 

**(6)****                                 Concentrationof Credit Risk and Geographic Segment Data**

 

The following table summarizes the percentageof revenues from the Company’s significant clients (listing those clients thatexceed 10% in the applicable year):

 
|       |   | **Year Ended December 31,** |   |
|------------|--------|----------------------------------|--------|
| **Client** |   | **2003**                         |   | **2002** |   | **2001** |   |
| A          |   | **11**                           | **%**  |   | ***** |   | ***** |
| B          |   | **10**                           | **%**  |   | ***** |   | ***** |
| C          |   |                             | *****  | 11 | % | 16 | % |
| D          |   |                             | *****  |   | * | 10 | % |

 

                

----

*Less than 10%

 

At December 31, 2003 and 2002, thesignificant clients listed above accounted for $4.1 million (or 26%) and$231,000 (or 1%) of combined net accounts receivable and contracts in process,respectively.  The Company does notrequire its customers to provide collateral relative to accounts receivablebalances.

 

Revenue derived from customers in various geographicregions is as follows (in thousands):

 
|               |   | **Year Ended December 31,** |       |
|--------------------|--------|----------------------------------|------------|
|               |   | **2003**                         |       | **2002** |   | **2001** |   |
| U.S. and Caribbean |   | **$**                            | **50,640** | ** ** | $ | 54,822 |   | $ | 61,758 |   |
| Europe             |   | **19,209**                       |       | 22,438 |   | 26,880 |   |
| Canada             |   | **15,504**                       |       | 11,043 |   | 3,736 |   |
| Asia and other     |   | **11,051**                       |       | 4,715 |   | 1,345 |   |
|               |   | **$**                            | **96,404** |   | $ | 93,018 |   | $ | 93,719 |   |

 

**(7)****                                 Segments**

 

Beginning with the first quarter of 2003, theCompany organized into divisions and initiated segment reporting based on thosedivisions.  Sanchez’s new divisionalsegments are Banking Solutions, Wealth Management, Outsourcing and Global Services.  The Company evaluates the performance of itssegments and allocates resources to them accordingly.  Prior to 2003, the Company classified its operations into threesegments: Sanchez’s software licensing business, the SDSI outsourcing business and the Wealth Management Division,which was created following the Company’s acquisition of Spectra inJuly 2002 (see Note 3).    It isnot practicable at this time to restate segment data for prior periods toconform to the Company’s new segment reporting.  As a result, the Company will continue to present segmentinformation under the previous format until comparative information isavailable under the new segment reporting. The table below summarizes the Company’s segments (in thousands):

 

46

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|                            |   | **Year Ended  December 31, 2003** |    |
|---------------------------------|--------|----------------------------------------|---------|
| Revenues                        |   |                                   |    |
| Banking Solutions               |   | $                                      | 36,507  |   |
| Wealth Management               |   | 10,395                                 |    |
| Outsourcing                     |   | 23,713                                 |    |
| Global Services                 |   | 21,206                                 |    |
| Total segment revenue           |   | 91,821                                 |    |
| Customer reimbursements         |   | 4,583                                  |    |
| Total revenues                  |   | $                                      | 96,404  |   |
|                            |   |                                   |    |
| Earnings (loss) from operations |   |                                   |    |
| Banking Solutions               |   | $                                      | 6,906   |   |
| Wealth Management               |   | (13,548                                | )       |
| Outsourcing                     |   | (2,513                                 | )       |
| Global Services                 |   | (2,099                                 | )       |
| Total loss from operations      |   | $                                      | (11,254 | ) |

 

The table below summarizes information about the business segments inthe previous format (in thousands):

 
|                            |   | **Year Ended December 31,** |        |
|---------------------------------|--------|----------------------------------|-------------|
|                            |   | **2003**                         |        | **2002** |   | **2001** |   |
| Revenues                        |   |                             | ** **  |   |   |   |   |
| Sanchez                         |   | **$**                            | **48,211**  | ** ** | $ | 39,397 |   | $ | 54,555 |   |
| SDSI                            |   | **37,788**                       | ** **  | 45,896 |   | 39,164 |   |
| Wealth Management               |   | **10,405**                       | ** **  | 7,725 |   | — |   |
| Total                           |   | **$**                            | **96,404**  | ** ** | $ | 93,018 |   | $ | 93,719 |   |
|                            |   |                             | ** **  |   |   |   |   |
| Earnings (loss) from operations |   |                             | ** **  |   |   |   |   |
| Sanchez                         |   | **$**                            | **(4,339**  | **)** | $ | 1,015 |   | $ | 8,228 |   |
| SDSI                            |   | **4,249**                        | ** **  | 3,091 |   | (4,478 | ) |
| Wealth Management               |   | **(11,164**                      | **)**       | 695 |   | — |   |
| Total                           |   | **$**                            | **(11,254** | **)** | $ | 4,801 |   | $ | 3,750 |   |

 
|              |   |   |       | **December 31,** | ** **  |
|-------------------|--------|--------|------------|-----------------------|-------------|
|              |   |   |       | **2003**              |        | **2002** | ** ** |
| Total assets      |   |   | ** ** |                  |        |   |   |
| Sanchez           |   |   |       | **$**                 | **92,696**  | ** ** | $ | 97,438 |   |
| SDSI              |   |   |       | **25,038**            | ** **  | 41,000 |   |
| Wealth Management |   |   |       | **24,618**            | ** **  | 38,655 |   |
| Eliminations      |   |   |       | **(40,614**           | **)**       | (55,996 | ) |
| Total             |   |   |       | **$**                 | **101,738** | ** ** | $ | 121,097 |   |

 

47

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**(8)****                                 AccruedExpenses**

 
|                                   |   | **Year Ended December 31,** |      |
|----------------------------------------|--------|----------------------------------|-----------|
| **(In thousands)**                     |   | **2003**                         |      | **2002** |   |
| Accrued compensation and related items |   | $                                | **2,785** | ** ** | **$** | 3,206 | ** ** |
| Other                                  |   | **4,897**                        |      | 6,411 |   |
| Total                                  |   | $                                | **7,682** | ** ** | **$** | 9,617 | ** ** |

 

**(9)****                                 Shareholders’Equity**

 

The Board of Directors is authorized, subjectto certain limitations and without Shareholder approval, to issue up to anaggregate of 10,000,000 shares of preferred stock in one or more series and tofix the rights and preferences of the shares in each series.  No shares of preferred stock have beenissued.

 

The 1995 Equity Compensation Plan providesfor the issuance of a maximum of 9,360,000 shares of common stock upon theexercise of stock options, stock appreciation rights, and/or restricted stockawards.  As of December 31, 2003,there are 786,891 shares available for future grant.

 

In May 1998, the Company’s shareholdersapproved an Employee Stock Purchase Plan (ESPP).  Under the ESPP, employees of the Company can purchase commonstock through payroll deductions.  Amaximum of 600,000 shares are authorized for issuance under the ESPP.  As of December 31, 2003, a total of452,607 shares have been purchased under the ESPP.

 

Generally, outstanding options vest over atwo-to-four-year period after the date of grant and expire six to ten yearsafter the date of grant.

 

A summary of stock option activity is asfollows:

 
|                               |   | **Year Ended December 31,** |   |
|------------------------------------|--------|----------------------------------|--------|
|                               |   | **2003**                         |   | **2002** |   | **2001** |   |
|                               |   | **Shares**                       |   | **Weighted-  Average  Exercise  Price** |   | **Shares** |   | **Weighted-  Average  Exercise  Price** |   | **Shares** |   | **Weighted-  Average  Exercise  Price** |   |
| Outstanding at beginning of year   |   | 6,093,707                        |   | $ | 7.75 |   | 4,050,795 |   | $ | 10.20 |   | 2,625,654 |   | $ | 12.14 |   |
| Options granted                    |   | 1,503,414                        |   | 3.73 |   | 2,472,678 |   | 4.47 |   | 1,774,835 |   | 7.70 |   |
| Options exercised                  |   | (104,620                         | )      | 2.33 |   | (16,140 | ) | 4.17 |   | (127,953 | ) | 7.05 |   |
| Options cancelled                  |   | (864,586                         | )      | 6.88 |   | (413,626 | ) | 12.28 |   | (221,741 | ) | 14.94 |   |
| Outstanding at end of year         |   | 6,627,915                        |   | 7.04 |   | 6,093,707 |   | 7.75 |   | 4,050,795 |   | 10.20 |   |
|                               |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Options exercisable                |   | 3,723,690                        |   |   |   | 2,887,703 |   |   |   | 1,928,696 |   |   |   |
|                               |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Shares available for future grants |   | 786,891                          |   |   |   | 1,468,900 |   |   |   | 1,527,952 |   |   |   |
|                                    |        |                                  |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

48

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The following summarizes information aboutthe Company’s stock options outstanding as of December 31, 2003:

 
|                         |   | **Options Outstanding**           |   | **Options Exercisable**                                          |   |
|------------------------------|--------|-----------------------------------|--------|------------------------------------------------------------------|--------|
| **Range of Exercise Prices** |   | **Number  Outstanding  12/31/03** |   | **Weighted-  Average  Remaining  Contractual  Life (in  years)** |   | **Weighted-  Average  Exercise  Price** |   | **Number  Excercisable  12/31/03** |   | **Weighted-  Average  Exercise  Price** |   |
| $                            | 0.835  | to                                | $      | 6.740                                                            |   | 1,952,201 |   | 5.18 |   | $ | 2.627 |   | 700,984 |   | $ | 2.149 |   |
| 6.875                        | to     | 8.690                             |   | 1,635,520                                                        |   | 5.33 |   | 5.775 |   | 389,354 |   | 6.633 |   |
| 9.844                        | to     | 13.313                            |   | 1,522,235                                                        |   | 3.69 |   | 7.587 |   | 1,184,185 |   | 7.621 |   |
| 15.563                       | to     | 19.094                            |   | 1,393,759                                                        |   | 2.65 |   | 11.624 |   | 1,324,967 |   | 11.791 |   |
| 31.625                       | to     | 42.375                            |   | 124,200                                                          |   | 2.82 |   | 34.738 |   | 124,200 |   | 34.738 |   |
| $                            | 0.835  | to                                | $      | 42.375                                                           |   | 6,627,915 |   | 4.30 |   | $ | 7.037 |   | 3,723,690 |   | $ | 8.876 |   |

 

**(10)         IncomeTaxes**

 

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

 
|            |   | **Year Ended December 31,** |       |
|-----------------|--------|----------------------------------|------------|
|            |   | **2003**                         |       | **2002** |   | **2001** |   |
| Current taxes:  |   |                             |       |   |   |   |   |
| Federal         |   | **$**                            | **—** | ** ** | $ | 956 |   | $ | 3,053 |   |
| State           |   | **368**                          | ** ** | — |   | (31 | ) |
| Foreign         |   | **440**                          | ** ** | 249 |   | (137 | ) |
|            |   | **808**                          |       | 1,205 |   | 2,885 |   |
| Deferred taxes: |   |                             |       |   |   |   |   |
| Federal         |   | **(1,278**                       | )          | 464 |   | (1,205 | ) |
| State           |   | **(368**                         | )          | — |   | — |   |
| Foreign         |   | **102**                          |       | — |   | — |   |
|            |   | **(1,544**                       | )          | 464 |   | (1,205 | ) |
| Total provision |   | **$**                            | **(736**   | **)** | $ | 1,669 |   | $ | 1,680 |   |

 

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

 
|     |   | **Year Ended December 31,** |        |
|----------|--------|----------------------------------|-------------|
|     |   | **2003**                         |        | **2002** |   | **2001** |   |
| Domestic |   | **$**                            | **319**     | ** ** | $ | 4,936 |   | $ | 5,559 |   |
| Foreign  |   | **(11,291**                      | **)**       | 607 |   | — |   |
| Total    |   | **$**                            | **(10,972** | **)** | $ | 5,543 |   | $ | 5,559 |   |

 

A reconciliation of the tax provision based on thefederal statutory tax rate to the effective tax rate is as follows (inthousands):

 
|                                                      |   | **Year Ended December 31,** |       |
|-----------------------------------------------------------|--------|----------------------------------|------------|
|                                                      |   | **2003**                         |       | **2002** |   | **2001** |   |
| Statutory tax provision (benefit)                         |   | **$**                            | **(3,731** | **)** | $ | 1,885 |   | $ | 1,890 |   |
| Non-deductible impairment charge                          |   | **3,230**                        | ** ** | — |   | — |   |
| State income taxes, net of federal income tax  benefit    |   | **—**                       | ** ** | — |   | (20 | ) |
| Foreign income taxes                                      |   | **—**                       | ** ** | 42 |   | (137 | ) |
| EIE/Foreign sales corporation                             |   | **(1,484**                       | **)**      | (414 | ) | (148 | ) |
| Increase in valuation allowance related to foreign  taxes |   | **1,151**                        | ** ** | — |   | — |   |
| Other, net                                                |   | **98**                           | ** ** | 156 |   | 95 |   |
| Total                                                     |   | **$**                            | **(736**   | **)** | $ | 1,669 |   | $ | 1,680 |   |

 

49

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The tax effects of loss carryforwards, creditcarryforwards, and temporary differences that give rise to significant portionsof the deferred tax assets and deferred tax liabilities are presented belowexclusive of items for which there is a full valuation allowance, as describedbelow (in thousands):

 
|                                                  |   | **December 31,** |       |
|-------------------------------------------------------|--------|-----------------------|------------|
|                                                  |   | **2003**              |       | **2002** |   |
|                                                  |   |                  |       |   |   |
| Deferred  tax assets:                                 |   |                  |       |   |   |
| Federal  net operating loss carryforwards and credits |   | **4,247**             | ** ** | 551 |   |
| State  net operating loss carryforwards and credits   |   | **1,264**             |       | 1,133 |   |
| Foreign  net operating losses                         |   | **5,209**             |       | 4,600 |   |
| Foreign  tax credits                                  |   | **2,371**             |       | 1,931 |   |
| Deferred revenue                                      |   | **6,895**             |       | 11,598 |   |
| Accrued Expenses and other                            |   | **1,364**             |       | 1,348 |   |
| Gross deferred tax assets                             |   | **21,350**            |       | 21,161 |   |
| Valuation allowance                                   |   | **(7,462**            | **)**      | (6,533 | ) |
| Deferred  tax assets                                  |   | **13,888**            |       | 14,628 |   |
|                                                  |   |                  |       |   |   |
| Deferred  tax liabilities:                            |   |                  |       |   |   |
| Deferred  costs                                       |   | **(4,944**            | **)**      | (7,400 | ) |
| Other                                                 |   | **—**            |       | (53 | ) |
| Deferred  tax liabilities                             |   | **(4,944**            | **)**      | (7,453 | ) |
| Net deferred tax assets                               |   | **$**                 | **8,944**  |   | $ | 7,175 |   |
|                                                       |        |                       |            |  |  |  |  |

 

At December 31, 2003, the Company has aU.S. federal net operating loss carryforward of $1.6 million, included in thetable above, which is limited due to certain ownership changes which occurredin the past three years.

 

50

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**(11)****                         ****Commitments andContingencies**

 

The Company leases office facilities subject tooperating leases. Future minimum lease payments at December 31, 2003  under non-cancelable operating leases withinitial terms of one year or more are as follows (in thousands):

 
| 2004       |   | $      | 1,737  |   |
|------------|--------|--------|--------|--------|
| 2005       |   | 1,444  |   |
| 2006       |   | 1,385  |   |
| 2007       |   | 1,422  |   |
| 2008       |   | 1,462  |   |
| Thereafter |   | 10,498 |   |
|       |   | $      | 17,948 |   |

 

Rent expense for the years endedDecember 31, 2003, 2002 and 2001 was approximately $2.8 million, $2.9million, and $2.9 million respectively.

 

In February 2001, SDSI filed for arbitration inresponse to 1stWebbankdirect’s October 2000 termination of itsprocessing agreement in connection with the consolidation of its e-bankingplatforms.  SDSI was seeking payment of all outstanding receivables fromthis customer.  1stWebbankdirectcounterclaimed and was seeking a refund of the implementation fees they paidfor the project. During the year ended December 31, 2002, the Companyprevailed in its arbitration claim with 1stWebbankdirect and wasawarded $1.7 million.  As a result ofthis settlement, the Company recognized approximately $3.2 million in revenuesand $2.9 million in costs, previously deferred in accordance with SAB No. 101,related to this client during year ended December 31, 2002.

 

Also during the year ended December 31,2002, the Company settled an outstanding receivable dispute with an unannouncedclient that had been previously disclosed in the Company’s periodicfilings.  As a result of thissettlement, the Company recognized approximately $3.1 million in revenue andapproximately $2.3 million in costs previously deferred in accordance with SABNo. 101 related to this client during the year ended December 31, 2002.

 

In the opinion of management there are no claims oractions against the Company the ultimate disposition of which will have amaterial adverse effect on the Company’s results of operations or consolidatedfinancial position.

 

John McLeod, the President of Sanchez’sWealth Management subsidiary, has a three-year employment agreement with thesubsidiary, beginning on July 3, 2002. Mr. McLeod’s annual salary is $233,750 (CAD) and he is entitled toreceive twenty months of base salary if he is terminated for some reason otherthan cause.  The employment contractalso contains typical confidentially, non-compete and non-solicitationterms.  Such employment agreements are acommon practice for senior executives in Canada and the severance obligationsare consistent with Canadian statutory and common law obligations.

 

Marcia Heister, the General Counsel of theCompany has a two-year employment agreement beginning June 12, 2003.  Ms. Heister’s salary is $174,250 and she isentitled to receive six months of base salary if due to a merger or acquisitionher position is eliminated; if her responsibilities and/or compensation arediminished and she decides to leave the company; or if the continuation of herposition would be dependent on a relocation and she decided not to move.

 

**(12)****                          RelatedParty Transactions**

 

The Company entered into an agreement in 1999with Devon Air Services, a charter airline company owned by Mr. MichaelSanchez, the Company’s Chairman of the Board. During the years ended December 31, 2002 and 2001 the Companyincurred expenses under this agreement of $120,000 and $191,000, respectively. No expense was incurred by the Company in 2003 related to thisagreement.

 

On August 13, 2002, Mr. Michael Sanchezrepaid 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  interest at a rate of 3.58% per annum and2.73% per annum.  The Company wasadvised that Mr. Sanchez used a portion of the loan proceeds to partially repaycertain indebtedness obtained for personal purposes and secured by his sharesof Company stock.  Mr. Sanchez’s loansfrom the Company were ratified and approved by the Company’s board ofdirectors, with Mr. Michael Sanchez and Mr. Frank Sanchez abstaining in suchactions.  Both loans were full recourseloans.

 

On July 3, 2002, in connection with theacquisition of Spectra, the Company loaned Mr. John McLeod, President of theCompany’s Wealth Management Division, approximately $314,000.  This loan is currently secured by the pledgeof 80,000 shares of Sanchez common stock. The interest rate on the loan is set at the interest rate as prescribedby the Canadian Customs and Revenue Agency (Base Rate).  This rate is adjusted quarterly to the extentsuch Base Rate changes.  At the time ofthe loan the Base Rate was 3%. The current rate is 4%.  The loanhas a term of three years commencing July 3, 2002 with six semi-annualpayments.  Mr. McLeod has made all threeof his scheduled payments on the loan through January 2004.  During 2003, Mr. McLeod repaid $118,000 inprincipal and interest and has a balance, including interest, of $252,000 as ofDecember 31, 2003.  The highestoutstanding balance in 2003 was $301,000.

 

51

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During 2001, the Company loaned $130,000 toMr. Todd Pittman, the Company’s Chief Financial Officer, for the purchase ofCompany 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.  During 2003, Mr. Pittman repaid $6,000 inprincipal and has a balance, including interest, of $120,000 as of December 31,2003.  The highest outstanding balance in2003 was $121,000.

 

In accordance with the Sarbanes-Oxley Act of2002 and NASDAQ rules, the Company has adopted a policy not to grant any newloans or materially modify or extend any existing loans to officers ordirectors of the Company and the audit committee must review and approve anyrelated party transactions involving SEC reporting officers.

 

Sanchez Capital Services is an investeecompany accounted for under the cost method which has certain distributionrights to Sanchez products in India and portions of the Middle East.  Sanchez Capital Services also providesprogramming resources for the Company. The Company paid $1,503,000, $681,000 and $454,000 to Sanchez Capital Servicesfor services during the years ended 2003, 2002, and 2001 respectively.

 

**(13)****                         ****Profit Sharing Trust Plan**

 

The Company maintains a profit sharing trust plan(the Plan) which permits eligible participating members to contribute up to 20%of their gross earnings.  The Companywill typically make a contribution equal to 100% of the first 3% which anemployee contributes, subject to a statutory cap, and may also make additionalvoluntary contributions.  During thelast five months of 2002, the Company temporarily reduced its contributions to100% of the first 1.5% which an employee contributes.  The Company expensed $881,000, $584,000 and $649,000 related tothe Plan during the years ended December 31, 2003, 2002, and2001respectively.

 

**(14)****                         ****Revolving Line of Credit**

 

On July 3, 2002, the Company secured a $20million revolving line of credit.  Therehave been no borrowings under this facility through December 31,2003.  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.  In February 2004, theCompany terminated the revolving line of credit.

 

**(15)****                          QuarterlyFinancial Information (Unaudited)**

 

The following table presents the unaudited quarterlyfinancial information for 2003 and 2002 (in thousands, except for per sharedata):

 
|                                |   | **2003  Quarter Ended** |       | **2002  Quarter Ended** |   |
|-------------------------------------|--------|-------------------------|------------|-------------------------|--------|
|                                |   | **31-Mar**              |       | **30-Jun**              |   | **30-Sep** |   | **31-Dec** |   | **31-Mar** |   | **30-Jun** |   | **30-Sep** |   | **31-Dec** |   |
|                                |   |                    |       |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenues                            |   | **$**                   | **23,005** | ** **              | **$**  | **24,040** | ** ** | **$** | **25,159** | ** ** | **$** | **24,200** | ** ** | $ | 19,326 |   | $ | 22,332 |   | $ | 25,215 |   | $ | 26,145 |   |
| Earnings (loss) before income taxes |   | **444**                 | ** ** | **(543**                | **)**  | **(9,359** | **)** | **(1,515** | **)** | 325 |   | 343 |   | 1,723 |   | 3,152 |   |
| Net earnings (loss)                 |   | **335**                 | ** ** | **(383**                | **)**  | **(9,433** | **)** | **(756** | **)** | 218 |   | 230 |   | 1,314 |   | 2,112 |   |
| Basic earnings (loss) per share     |   | **0.01**                | ** ** | **(0.01**               | **)**  | **(0.35** | **)** | **(0.03** | **)** | 0.01 |   | 0.01 |   | 0.05 |   | 0.08 |   |
| Diluted earnings (loss) per share   |   | **0.01**                | ** ** | **(0.01**               | **)**  | **(0.35** | **)** | **(0.03** | **)** | 0.01 |   | 0.01 |   | 0.05 |   | 0.08 |   |
|                                     |        |                         |            |                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Earnings (loss) per average common sharecalculations for each of the Company’s quarters are based on theweighted-average number of shares outstanding in each quarter. Accordingly, thesum of the net earnings (loss) per share for each of the quarters in a fiscalyear may not equal the actual year-to-date net earnings (loss) per share.

 

**(16)****                          SubsequentEvent**

 

On January 28, 2004, Sanchez announcedit had signed a merger agreement with Fidelity National Financial, Inc. (FNF),a Fortune 500 provider of products and outsourced services and solutions tofinancial institutions and the real estate industry.  Pursuant to theagreement, Fidelity Information Services, Inc., which is a subsidiary of FNF,has agreed to acquire all of Sanchez’s common stock for an amount equal to$6.50 per share.  The consummation of

 

52

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the merger is subject to customary conditions, including Sanchezshareholder approval and certain regulatory approvals.  The considerationwill be paid in cash and FNF stock. This merger is expected to close sometime in the second quarter of2004.  The Company is required to pay atermination fee of $7.0 million to FNF if the merger agreement with FNF isterminated in certain circumstances that are set forth in more detail in themerger agreement.

 

53

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**Schedule II**

**Sanchez Computer Associates, Inc.Valuation and Qualifying AccountsFor the years ended December 31, 2003, 2002, and 2001**

** **
| **Allowance for Doubtful Accounts** |   | **Balance at  Beginning  of Year** |      | **Charged  to Costs  and  Expenses** |   | **Deductions** |   | **Balance at  End of  Year** |   |
|-------------------------------------|--------|------------------------------------|-----------|--------------------------------------|--------|----------------|--------|------------------------------|--------|
| 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                      |   |
| Year ended December 31, 2003   |   | 979,000                            |      | —                               |   | 639,000        |   | 340,000                      |   |
|                                     |        |                                    |           |                                      |        |                |        |                              |        |  |  |  |  |

 

54

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*The following report is a copy of apreviously issued Arthur Andersen LLP (Andersen) report on the consolidatedschedule of valuation and qualifying accounts and the report has not beenre-issued.  The Andersen report pertainsto the 2001 and 2000 information in the consolidated schedule of valuationand qualifying accounts.*

 

**REPORT OFINDEPENDENT PUBLIC ACCOUNTANTS**

** **

**To Sanchez Computer Associates, Inc.**

 

**Our report on the consolidated financial statements of Sanchez ComputerAssociates, Inc. and subsidiaries is included on page 33 of this Form10-K.  Our audits were made for thepurpose of forming an opinion on the basic financial statements taken as a whole.  The above schedule is presented forpurposes of complying with the Securities and Exchange Commission rules and isnot part of the basic financial statements. This schedule has been subjected to the auditing procedures appliedin our audit of the basic financial statements 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.**

** **

**Arthur Andersen LLP**

** **

**Philadelphia, Pennsylvania**

**February 5, 2002**

 

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**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 our independent accountant was recommendedand approved by the Audit Committee of our Board of Directors.  Andersen’s reports on our financialstatements for the two most recent fiscal years prior to its dismissal did notcontain an adverse opinion or disclaimer of opinion and were not qualified ormodified as to uncertainty, audit scope or accounting principles.

 

During2001 and the period from the end of 2001 through June 27, 2002, there wereno disagreements with Andersen on any matter of accounting principles orpractices, financial statement disclosure, or auditing scope or procedure,which disagreements, if not resolved to the satisfaction of Andersen, wouldhave caused it to make reference to the subject matter of the disagreements inconnection with its report and there were no reportable events as defined inItem 304(a)(1)(v) of Regulation S-K.

 

56

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During2001 and the period from the end of 2001 through June 27, 2002, we did notconsult KPMG LLP with respect to the application of accounting principles to aspecified transaction either completed or proposed, or the type of auditopinion that might be rendered on our consolidated financial statements, or anyother matters or reportable events as set forth in Items 304(a)(2)(i) and (ii)of Regulation S-K.

 

**Item 9A.  Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

Under the supervision and with the participation of our management, theCompany’s principal executive officer and principal financial officer haveconcluded that the Company’s disclosure controls and procedures (as defined inExchange Act Rule 13a-14(c)), based on their evaluation of such controls andprocedures conducted as of the end of the period covered by this report, areeffective to ensure that information required to be disclosed by the Company inthe reports it files under the Securities Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the Securities and Exchange Commission and that suchinformation is accumulated and communicated to the Company’s management,including its principal executive officer and principal financial officer, asappropriate to allow timely decisions regarding required disclosure.

 

**Evaluationof Internal Controls**

 

There were no significant changes in the Company’s internal controls orin other factors that could significantly affect the Company’s disclosure controlsand procedures during the last fiscal quarter covered by this report, nor anyknown significant deficiencies or material weaknesses in such disclosurecontrols and procedures requiring corrective actions. As a result, nocorrective actions were taken.

 

57

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**PART III**

 

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

 

**Directors**

 
| **MICHAEL  A. SANCHEZ** | Director  since 1979 |   |
|-------------------------|----------------------|--------|
| Age 46                  |                 |   |

 

MichaelSanchez founded Sanchez Computer Associates in 1979.  Under his leadership, the Company has become a leading globaldeveloper, distributor and marketer of financial services software to financialinstitutions in 22 countries.  Mr.Sanchez guided the Company through its initial public offering inDecember 1996, and played a pivotal role in the Company’s global expansionin the early 1990s.  In 1999, Mr.Sanchez established Sanchez Data Systems Inc. (SDSI), a wholly owned subsidiaryof Sanchez and now the Company’s outsourcing division.  Mr. Sanchez serves on the board of directorsfor the Pennsylvania State University at Great Valley, Pa. and eMoney Advisor,developers of Web-enabled financial planning systems.  Mr. Sanchez also serves as chairman of the board of SanchezCapital Services Inc., a joint venture between Capital Services Group of Indiaand Sanchez Computer Associates.  Mr.Sanchez holds two U.S. and foreign patents on technologies relating to computerinterconnectivity.  Mr. Sanchez is thebrother of Frank R. Sanchez.

 
| **FRANK R.  SANCHEZ** | Director  since 1980 |   |
|-----------------------|----------------------|--------|
| Age 47                |                 |   |

 

Mr.Frank Sanchez has been the chief executive officer since April 1999 andpreviously was president and chief operating officer of the Company since1994.  In his capacity as chiefexecutive officer, Mr. Sanchez is responsible for the overall strategic directionand performance of the Company.  Mr.Sanchez also oversees a senior management team that directs the Company’s fourprincipal business units – Banking Solutions, Wealth Management, Outsourcingand Global Services.  He was theprincipal architect of the Company’s integrated banking solutions and continuesto be responsible for providing the overall direction of the product suite andtechnical strategy.  From 1980 until1994, Mr. Sanchez was executive vice president in charge of technology andproduct development.  Mr. Sanchez is adirector of Transaction Systems Architects Inc.  Mr. Sanchez is the brother of Michael A. Sanchez.

 
| **JOSEPH F.  WATERMAN** | Director  since 2000 |   |
|-------------------------|----------------------|--------|
| Age 52                  |                 |   |

 

Mr.Waterman has served as president and chief operating officer of Sanchez sinceApril 1999 and is responsible for the internal operations of theCompany.  He leads a senior managementteam that directs the Company’s sales, marketing, finance, legal, humanresources, investor relations and information technology infrastructure.  Mr. Waterman joined the Company in 1992 as asenior vice president and chief financial officer.  Prior to joining Sanchez, Mr. Waterman was employed by SafeguardScientifics, Inc. for 13 years.

 
| **LAWRENCE  CHIMERINE** | Director  since 1987 |   |
|-------------------------|----------------------|--------|
| Age 63                  |                 |   |

 

Dr.Chimerine is president of Radnor International Consulting, Inc., an economicconsulting company.  He served aschairman, chief executive officer and chief economist of Chase Econometrics andthe WEFA Group between 1979 and 1990. Prior to that, he was chief U.S. economist for The IBM Corporation.  He also served as managing director of theEconomic Strategy Institute in Washington, D.C. between 1993 and 1999.  Dr. Chimerine is a director of Franklin Bankand Murex Investments, and is a partner with Strategic Capital Advisors.  He is also a co-founder and director ofGrandparents.com.

 
| **WILLIAM  M. FENIMORE, JR.** | Director  since 2001 |   |
|-------------------------------|----------------------|--------|
| Age 60                        |                 |   |

 

Mr.Fenimore is the president of Fenimore and Associates, a consulting firm.  Mr. Fenimore was the chief executive officerof Integrion Financial Network, a developer and provider of electronic bankingtechnologies and services for a consortium of large banks in the UnitedStates.  Previously, he was the groupexecutive vice president, chief technology and strategic planning officer ofMeridian Bancorp.  Mr. Fenimore heldseveral senior management positions during his career of 29 years withCoreStates Financial Corp.  Mr. Fenimoreserves on the Audit Committee, has been designated a financial expert by theCompany’s board of directors and is independent in accordance with SECregulations.

 

58

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| **FREDERICK  J. GRONBACHER** | Director  since 2001 |   |
|------------------------------|----------------------|--------|
| Age 62                       |                 |   |

 

Priorto retiring in January 2000, Mr. Gronbacher was the chief executiveofficer of PNC Consumer Bank.  He alsoserved as chief executive officer of PNC Credit Card, PNC National Bank and PNCInsurance.  In September 1993, hejoined the Management Committee as executive vice president of PNC BankCorp.  Mr. Gronbacher serves as chairpersonof the Audit Committee.

 
| **ALEX W.  HART** | Director  since 1998 |   |
|-------------------|----------------------|--------|
| Age 63            |                 |   |

 

Since1998, Mr. Hart has served as an independent consultant.  Before 1998, Mr. Hart served as chiefexecutive officer of Advanta Corp., a consumer and small business service companythat he joined in March 1994. Before joining Advanta Corp., Mr. Hart had been president and chiefexecutive officer of MasterCard International, Inc., a worldwide association ofover 29,000 member financial institutions. Mr. Hart is a director of Fair Isaac Corporation, Silicon ValleyBancshares and Global Payments, Inc..

 
| **THOMAS C.  LYNCH** | Director  since 1996 |   |
|----------------------|----------------------|--------|
| Age 62               |                 |   |

 

Mr.Lynch is employed by The Staubach Company as senior vice president.  Prior to joining The Staubach Company, Mr.Lynch served for two years as president and chief operating officer of CompuComSystems located in Dallas, Texas, and four years as senior vice president ofSafeguard Scientifics.   In 1995, heretired from a 31-year career of Naval Service with the rank of RearAdmiral.  Naval service includedcommander of the Eisenhower Battle Group during Desert Shield andsuperintendent of the U.S. Naval Academy. Mr. Lynch is a director of Basic Engineering Concepts &Technologies, Inc. (BecTech), Mikros Systems Corporation, Telkonet, Inc. and atrustee of the U.S. Naval Academy Foundation.

 
| **JAMES R.  STOJAK** | Director  since 1999 |   |
|----------------------|----------------------|--------|
| Age 57               |                 |   |

 

Since2000, Mr. Stojak has served as an independent consultant.  Before 2000, Mr. Stojak served as anexecutive vice president of Citigroup, where he led Citigroup’s global consumeroperations and technology.  From 1990through 1996, Mr. Stojak was senior vice president and chief operating officerof Citibank’s Europe/North America credit card business.  He also served as chairman of Citibank(South Dakota), N.A. and as a director of Citibank (Nevada), N.A.  Prior to Citigroup, Mr. Stojak heldexecutive positions with Wells Fargo Bank and Continental Illinois NationalBank.  Mr. Stojak is a member of theAudit Committee.

 
| **GARY C.  WENDT** | Director  since 1999 |   |
|--------------------|----------------------|--------|
| Age 62             |                 |   |

 

Mr.Wendt has served as chairman of Conseco, Inc. since 2000.  He served as the chief executive officer ofConseco from June 2000 until September 2002  (Conseco filed for Chapter 11 bankruptcy inDecember 2002).  Mr. Wendt is theformer president, chairman and chief executive officer of GE CapitalServices.  During his 15-year tenure asGE Capital’s leader, the company became General Electric’s largest businessactivity.  Mr. Wendt is an advisorydirector of Internet Capital Group, Inc. He is a member of the National Board of Governors Boys & Girls Clubsof America and is active in many other charitable organizations.

 

The Board of Directors has determined that each of Messrs. Chimerine,Fenimore, Gronbacher, Lynch, Stojak and Wendt are independent within themeaning of the National Association of Securities Dealers’ listing standards.

 

Sanchez has a separately designated standing audit committeeestablished in accordance with Section 3(a)(58)(A) of the Exchange Act.

 

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**Disclosure of Delinquent Filers Pursuant toItem 405 of Regulation S-K**

 

**Section 16(a)Beneficial Ownership Reporting Compliance:**  Section 16(a) of the SecuritiesExchange Act of 1934 requires the Company’s directors and executive officers,and persons who own more than ten percent of a registered class of theCompany’s equity securities, to file with the SEC initial reports of ownershipand reports of changes in ownership of common stock of the Company.  Reporting persons are required by SECregulation to furnish the Company with copies of all Section 16(a) formsthey file.

 

To the Company’s knowledge, based solely on a review of the copies ofsuch reports furnished to the Company and written representations of personsrequired to file such reports that no other reports were required to be filedduring the fiscal year ended December 31, 2003, all applicableSection 16(a) filing requirements were complied with.

 

Information concerning the Company’s code of conduct, appearing under thecaption “Business - Code of Conduct” in Part I of this Form 10-K, isincorporated herein by reference in response to this Item 10.

 

**Item11.  ExecutiveCompensation.**

 

**BoardCompensation**

**CashCompensation for Sanchez Board of Directors**

 

An annual retainer of $10,000 is paid to theoutside directors at the beginning of each year (such year to begin on the dateof their election to the board).

 

A meeting fee of $1,500 is paid to theoutside directors for attendance at each board meeting.  A telephone meeting fee of $500 is paid tothe outside directors for participating in each board meeting.

 

A meeting fee of $1,000 is paid to theoutside directors for attendance at each committee meeting.  A telephone meeting fee of $500 is paid tothe outside directors for participating in each committee meeting.

 

In lieu of cash, each outside Sanchezdirector may elect to receive the retainer and meeting fees in restrictedSanchez stock, such election to be made on an annual basis and in accordancewith the August 7, 2002 Board Compensation Plan.

 

**Equity Compensation for Sanchez Boardof Directors**

 

The outside directors also are granted 10,000options on the date of their election or re-election to the board.

 

**CashCompensation for SDSI Board of Directors**

 

A meeting fee of $1,500 is paid to theoutside directors for attendance at each meeting.  A telephone meeting fee of $500 is paid to the outside directorsfor participating in each board meeting.

 

In lieu of cash, each outside SDSI directormay elect to receive the meeting fees in restricted Sanchez stock, suchelection to be made on an annual basis and in accordance with theAugust 7, 2002 Board Compensation Plan.

 

**Expenses**

 

Directors receive reimbursement ofout-of-pocket expenses incurred in connection with attendance at meetings orother Company business.

 

**ExecutiveCompensation**

 

**Cash and Non-Cash Compensation Paid toCertain Officers**

 

**The following table sets forth, with respect to services renderedduring fiscal years 2003, 2002, and 2001, the total compensation paid by theCompany to the Company’s chief executive officer and the four highest paidexecutive officers other than the chief executive officer whose total annualsalary and bonus exceeded $100,000 during 2003.**

 

60

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**SummaryCompensation Table**

 
|                                              |   |          |       |                                 |    |                              |   |                                           |   | **Long-Term  Compensation**          |    |    |   |
|---------------------------------------------------|--------|---------------|------------|--------------------------------------|---------|-----------------------------------|--------|------------------------------------------------|--------|--------------------------------------|---------|---------|--------|
| **Awards**                                        |
| **Name and Principal Position**                   |   | **Year**      | ** ** | **Annual  Compensation (1)**         |    | **Restricted  Stock  Awards ($)** |   | **Securities  Underlying  Options/  SARS (#)** |   | **All Other  Compensation  ($) (4)** |    |
| **Salary ($)**                                    |   | **Bonus ($)** |       | **Other  Annual  Compensation  ($)** |
| Michael A. Sanchez  Chairman                      |   | 2003          |       | $                                    | 341,250 |                              | $      | —                                         |   | $                                    | —  |    | $      | — |   | 61,000 |   | $ | 6,000 |   |
|                                              | 2002   |          | 322,174    |                                 | —  |                              | 68,133 | (2)                                            | — |                                 | 112,500 |    | 6,000  |   |
|                                              | 2001   |          | 332,694    |                                 | —  |                              | — |                                           | — |                                 | 61,500  |    | 5,100  |   |
|                                              |   |          |       |                                 |    |                              |   |                                           |   |                                 |    |    |   |   |   |
| Frank R. Sanchez  Chief Executive Officer         |   | 2003          |       | $                                    | 341,250 |                              | $      | —                                         |   | $                                    | —  |    | $      | — |   | 71,000 |   | $ | 6,000 |   |
|                                              | 2002   |          | 320,833    |                                 | —  |                              | 68,133 | (2)                                            | — |                                 | 150,000 |    | 6,000  |   |
|                                              | 2001   |          | 331,248    |                                 | —  |                              | — |                                           | — |                                 | 76,500  |    | 5,100  |   |
|                                              |   |          |       |                                 |    |                              |   |                                           |   |                                 |    |    |   |   |   |
| Joseph F. Waterman  President and COO             |   | 2003          |       | $                                    | 243,750 |                              | $      | —                                         |   | $                                    | —  |    | $      | — |   | 45,500 |   | $ | 6,000 |   |
|                                              | 2002   |          | 234,375    |                                 | —  |                              | 36,500 | (2)                                            | — |                                 | 75,000  |    | 5,414  |   |
|                                              | 2001   |          | 242,500    |                                 | —  |                              | — |                                           | — |                                 | 50,000  |    | 5,100  |   |
|                                              |   |          |       |                                 |    |                              |   |                                           |   |                                 |    |    |   |   |   |
| James B. Goodwin  President, Global Services      |   | 2003          |       | $                                    | 243,750 |                              | $      | —                                         |   | $                                    | 37,690  | (7)     | $      | — |   | 35,000 |   | $ | — |   |
| Division (5)                                      |   | 2002          |       | 161,130                              |    | —                            |   | 31,968                                         | (6)    | —                               |    | 125,000 |   | — |   |
|                                              |   |          |       |                                 |    |                              |   |                                           |   |                                 |    |    |   |   |   |
| Eric Panepinto,  President, Outsourcing  Division |   | 2003          |       | $                                    | 219,808 |                              | $      | —                                         |   | $                                    | 1,506   | (3)     | $      | — |   | 33,500 |   | $ | 4,854 |   |
|                                              | 2002   |          | 208,750    |                                 | —  |                              | 21,900 | (2)                                            | — |                                 | 45,100  |    | 3,426  |   |
|                                              | 2001   |          | 193,077    |                                 | —  |                              | — |                                           | — |                                 | 70,000  |    | 4,708  |   |

 

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(1) Includes compensation that has beendeferred by the top five officers under defined contribution plans.

(2) These amounts were accrued/paid pursuant to the 2002 VariableCompensation Plan.

(3) These amounts were accrued/paid pursuant to the 2003 VariableCompensation Plan.

(4) Represents a contribution under the Company’s 401(k) plan.

(5) Mr. Goodwin’s employment commenced in May 2002.

(6) Includes $7,300 paid pursuant to the 2002 Variable CompensationPlan, and $24,700 paid for living expenses for Mr. Goodwin.

(7) Includes $1,100 paid pursuant to the 2003 Variable CompensationPlan, and $36,600 paid for living expenses for Mr. Goodwin.

 

61

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**2003Stock Option/SAR Grants**

 
| **Individual  Grants(1)** |   |                                                               |   |
|---------------------------|--------|--------------------------------------------------------------------|--------|
| **Name**                  |   | **Number of  Securities  Underlying  Options/  SARs  Granted (#)** |   | **% of Total  Options/   SARS  Granted to  Employees in  Fiscal Year** |   | **Exercise  or  Base Price  ($/Sh)** |   | **Expiration  Date** | ** ** | **Potential  Realizable Value  at Assumed Annual Rates of  Stock Price Appreciation  for Option Term(2)** |   |
| **5%  ($)**               |   | **10%  ($)**                                                       |
| Michael A. Sanchez        |   | 40,000                                                             | (3)    | 3.0 | % | $ | 3.38 |   | 2/25/2011 |   | $ | 64,552 |   | $ | 154,613 |   |
|                      |   | 21,000                                                             | (4)    | 1.6 | % | 4.10 |   | 11/12/2009 |   | 29,282 |   | 66,431 |   |
| Frank R. Sanchez          |   | 50,000                                                             | (3)    | 3.8 | % | $ | 3.38 |   | 2/25/2011 |   | $ | 72,763 |   | $ | 171,311 |   |
|                      |   | 21,000                                                             | (4)    | 1.6 | % | 4.10 |   | 11/12/2009 |   | 29,282 |   | 66,431 |   |
| Joseph F. Waterman        |   | 30,500                                                             | (3)    | 2.3 | % | $ | 3.38 |   | 2/25/2011 |   | $ | 44,465 |   | $ | 104,719 |   |
|                      |   | 15,000                                                             | (4)    | 1.1 | % | 4.10 |   | 11/12/2009 |   | 20,916 |   | 47,451 |   |
| James B. Goodwin          |   | 20,000                                                             | (3)    | 1.5 | % | $ | 3.38 |   | 2/25/2011 |   | $ | 29,106 |   | $ | 68,525 |   |
|                      |   | 15,000                                                             | (4)    | 1.1 | % | 4.10 |   | 11/12/2009 |   | 20,916 |   | 47,451 |   |
| Eric Panepinto            |   | 20,000                                                             | (3)    | 1.5 | % | $ | 3.38 |   | 2/25/2011 |   | $ | 29,182 |   | $ | 68,925 |   |
|                      |   | 13,500                                                             | (4)    | 1.0 | % | 4.10 |   | 11/12/2009 |   | 18,824 |   | 42,706 |   |

 

----

(1)          All options have an exercise price equal toor greater than the fair market value of the shares subject to each option onthe grant date.  The option exerciseprice may be paid in cash, by delivery of previously acquired shares, subjectto certain conditions, or same day sales (that is, a cashless exercise througha broker).  The Compensation Committee,upon exercise of an option, may elect to pay an individual, in cash or in commonstock, the difference between the exercise price and the fair market value onthe exercise date.  The committee maymodify the terms of outstanding options, including acceleration of the exercisedate.

 

(2)          These values assume that the shares appreciateat the compounded annual rate shown from the grant date until the end of theoption term.  These values are notestimates of the Company’s future stock price growth.  Executives will not benefit unless the common stock priceincreases above the stock option exercise price.  The expiration date shown is the last date when the final vestedportion of each option may be exercised.

 

(3)          These options vest 33 1/3 % percent each yearcommencing on the first anniversary of the grant.  Each vested segment of these options has a five-year term fromthe date it first becomes exercisable.

 

(4)          These options vest 50 % six months from thedate of grant and 50% one year from the date of grant.  Each vested segment of these options has afive-year term from the date it first becomes exercisable.

 

62

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**2003Stock Option Exercises and Year-End Stock Option Values**

 
| **Name**                          |   | **Shares  Acquired on  Exercise (#)** |            | **Value  Realized  ($)** |              | **Number of  Securities   Underlying Unexercised  Options/SARs  at Fiscal Year-End (#)** |   | **Value of  Unexercised  In-The-Money  Options/SARs  at Fiscal Year-End ($)(1) (2)** |   |
|-----------------------------------|--------|---------------------------------------|-----------------|--------------------------|-------------------|------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|--------|
| **Exercisable**                   |   | **Unexercisable**                     | **Exercisable** |                     | **Unexercisable** |
| Michael A. Sanchez                |   |                                  |            |                     |              |                                                                                     |   |                                                                                 |   |   |   |   |   |
| Sanchez Options                   |   | —                                |            | —                   |              | 224,190                                                                                  |   | 150,250                                                                              |   | $ | 185,009 |   | $ | 68,881 |   |
| SDSI  Options                     |   | —                                |            | —                   |              | 33,333                                                                                   |   | —                                                                               |   | — |   | — |   |
|                              |   |                                  |            |                     |              |                                                                                     |   |                                                                                 |   |   |   |   |   |
| Frank R. Sanchez                  |   |                                  |            |                     |              |                                                                                     |   |                                                                                 |   |   |   |   |   |
| Sanchez Options                   |   | —                                |            | —                   |              | 275,135                                                                                  |   | 188,165                                                                              |   | $ | 197,353 |   | $ | 88,925 |   |
| SDSI Options                      |   | —                                |            | —                   |              | 50,000                                                                                   |   | —                                                                               |   | — |   | — |   |
|                              |   |                                  |            |                     |              |                                                                                     |   |                                                                                 |   |   |   |   |   |
| Joseph F. Waterman                |   |                                  |            |                     |              |                                                                                     |   |                                                                                 |   |   |   |   |   |
| Sanchez Options                   |   | —                                |            | —                   |              | 103,185                                                                                  |   | 107,999                                                                              |   | $ | 24,687 |   | $ | 48,922 |   |
| SDSI Options                      |   | —                                |            | —                   |              | 16,667                                                                                   |   | —                                                                               |   | — |   | — |   |
|                              |   |                                  |            |                     |              |                                                                                     |   |                                                                                 |   |   |   |   |   |
| James B. Goodwin  Sanchez Options |   | —                                |            | —                   |              | 58,334                                                                                   |   | 101,666                                                                              |   | $ | 16,460 |   | $ | 49,065 |   |
|                              |   |                                  |            |                     |              |                                                                                     |   |                                                                                 |   |   |   |   |   |
| Eric Panepinto                    |   |                                  |            |                     |              |                                                                                     |   |                                                                                 |   |   |   |   |   |
| Sanchez Options                   |   | —                                |            | —                   |              | 68,368                                                                                   |   | 80,232                                                                               |   | $ | 14,812 |   | $ | 30,888 |   |
| SDSI Options                      |   | —                                |            | —                   |              | 40,000                                                                                   |   | —                                                                               |   | — |   | — |   |

 

----

(1)   Sanchezoption value is calculated using the difference between the option exerciseprice and the year-end stock price of $4.15, multiplied by the number of sharessubject to an option.

 

(2)   SDSIoption value is calculated using the difference between the option exerciseprice and the last valuation of SDSI common stock established by the SDSI Boardof Directors during 2000, multiplied by the number of shares subject to anoption.

 

63

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**Reportof the Compensation Committee on Executive Compensation**

 

**CompensationPhilosophy**

 

We are in a highly competitive industry.  To succeed, we must be able to:

• attractand retain qualified employees,

• promoteamong them the economic benefits of stock ownership in our Company, and

• motivateand reward employees who, by their hard work, loyalty, and exceptional service,- make contributions of special importance to the success of our business.

 

**CompensationStructure**

 

The compensation of our executives consistsof:

• base pay,

• cashincentives, and

• stockoptions.

 

**BasePay**

 

Base pay is established initially for newexecutives on the basis of subjective factors, including experience, individualachievements, and the level of responsibility to be assumed.  Salary increases are awarded on an annualcycle. based on subjective factors, including:

• anexecutive’s increased level of individual responsibility,

•maintaining an appropriate scale among our executives based on relativepositions and responsibilities,

• thecompetitiveness of the labor market in the technology sector, and generallevels of inflation.

 

**Mr. Frank Sanchez’s 2003 base pay.**

 

Mr. Sanchezdid not receive an annual salary increase in 2003.  In November 2003, the Company initiated broad-based salaryreductions.  As part of this initiative,Mr. Sanchez’s compensation was reduced by 15%, effective November 1.

 

**Other highly compensated executives’ 2003 base pay.**

 

Base pay for 2003 was determined by considering the subjective factorspreviously discussed.  All highlycompensated executives were subject to the broad-based salary reductionsdiscussed above.

 

**Cash Incentives**

 

Cash incentives may be awarded at the discretion of the CompensationCommittee.  Cash incentives are intendedto motivate executives to achieve and exceed not only the targeted tasks andobjectives determined for each executive according to his or her functionalresponsibilities within the organization, but also our annual performancetargets and strategic objectives as defined in our annual strategic plan.

 

**Mr. Frank Sanchez’s 2003 cash incentive.**

 

Mr. Sanchez was awarded no cash incentive for 2003.

 

**Other highly compensated executives’ 2003 cash incentive.**

 

Typically,cash incentives are determined by considering corporate performance and othersubjective factors.  No cash incentiveswere awarded in 2003, however, the Company paid out variable compensation asdescribed below.  Cash incentives for2003 were determined by considering corporate performance other subjectivefactors.

 

##### **Variable Compensation Plan**

 

The SanchezComputer Associates, Inc. Variable Compensation Plan (the Plan) was implementedin April 2003, to provide employees with the ability to earn incentivecompensation based upon their individual performance, their business unit’sperformance and the overall performance of the corporation.  The Plan provides for individuals within theCompany to earn cash compensation based on individual performance measuredagainst

 

64

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objective criteria established by theemployee and their supervisor. Individual based incentives can be earned regardless of the overallperformance of the business units or the corporation.  Business unit and corporate objectives are established by thesenior management of the Company and reviewed by the Board of Directors.

 

**Stock Options**

 

Our Equity Compensation Plan is designed to attract, retain and rewardemployees who make significant contributions toward achievement of ourfinancial and operational objectives. Grants under the Plan align the interests of our executives andemployees with the long-term interests of our stockholders and motivateexecutives and employees to remain in our employ.  These periodic grants are awarded subjectively, based on a numberof factors, including the achievement of our financial and strategicobjectives, the individual’s contributions toward the achievement of ourfinancial and operational objectives, and the amount and term of optionsalready held by each individual.

 

**2003 Stock Option Awards.**

 

The Compensation Committee granted stock options during 2003 to certainof its new executives and employees and also granted options to certainexisting executives and employees during 2003. The relative number of options granted to new executives and employeeswas based on each person’s responsibilities and contributions.

 

**IRS Limits onDeductibility of Compensation**

 

The Compensation Committee is aware that Internal Revenue Codesection 162(m) provides that publicly held companies may not deduct in anytaxable year compensation in excess of one million dollars paid to any of theindividuals named in the compensation tables that is not “performance based” asdefined in section 162(m).  TheCompensation Committee believes that annual levels of executive compensationthat are not performance based are not likely to exceed one million dollars inthe foreseeable future.

 

**Employment Contracts**

 

John McLeod, the President of Sanchez’sWealth Management subsidiary, has a three-year employment agreement with thesubsidiary, beginning on July 3, 2002. Mr. McLeod’s annual salary is $233,750 (CAD) and he is entitled toreceive twenty months of base salary if he is terminated for some reason otherthan cause.  The employment contractalso contains typical confidentially, non-compete and non-solicitationterms.  Such employment agreements are acommon practice for senior executives in Canada and the severance obligationsare consistent with Canadian statutory and common law obligations.

 

Marcia Heister, the General Counsel of theCompany has a two-year employment agreement beginning June 12, 2003.  Ms. Heister’s salary is $174,250 and she isentitled to receive six months of base salary if due to a merger or acquisitionher position is eliminated; if her responsibilities and/or compensation arediminished and she decides to leave the company; or if the continuation of herposition would be dependent on a relocation and she decided not to move.

 

By the Compensation Committee:

 

Lawrence Chimerine, Chairman

Frederick J. Gronbacher

Thomas C. Lynch

 

65

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**Stock Performance Graph**

 

**The following graph compares the cumulative total return on our commonstock for the period December 31, 1998, through December 31, 2003,with the cumulative total return on the Nasdaq Index and the peer group indexfor the same period.  The peer groupconsists of Nasdaq companies with SIC Code 737—Computer Programming and DataProcessing Services.  The comparisonassumes that $100 was invested on December 31, 1998, in our common stockand in each of the comparison indices, and assumes reinvestment ofdividends.  We have historicallyreinvested earnings in the growth of our business and have not paid cashdividends on our common stock.**

 

 

**Item 12.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

 

**Equity Plan Compensation Information**

 

**The following table sets forth a summary of the shares availablepursuant to the Company’s 1995 Equity Compensation Plan.  All of the Company’s equity compensationplans have been approved by the shareholders.**

** **
|                                                |   | **Number of  shares to  be issued upon  exercise** |   | **Weighted-average  exercise price** |   | **Shares  available for future  issuance under equity  compensation plans** |    |
|-----------------------------------------------------|--------|----------------------------------------------------|--------|--------------------------------------|--------|-----------------------------------------------------------------------------|---------|
| Equity Compensation Plans Approved by  Stockholders |   | 6,627,915                                          |   | $                                    | 7.04   |                                                                        | 786,891 |   |
|                                                     |        |                                                    |        |                                      |        |                                                                             |         |  |

 

66

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**Stock Ownership of CertainBeneficial Owners and Management**

 

**The following table sets forth information, as of March 1, 2004,with respect to the beneficial ownership of shares of common stock of theCompany by each person who is known to the Company to be the beneficial ownerof more than five percent of the common stock of the Company, by each directoror nominee for director, by each of the executive officers named in theCompensation Table contained elsewhere in this Form 10-K and by all directorsand executive officers as a group.**

 
| **Name**                                                                                            |   | **Outstanding  Shares  Beneficially  Owned** |   | **Options  Exercisable  Within 60 Days** |   | **Shares  Beneficially  Owned Assuming  Exercise of Options** |   | **Percent of  Shares** |   |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|------------------------------------------|--------|---------------------------------------------------------------|--------|------------------------|--------|
| Safeguard Scientifics, Inc.  800 The Safeguard Building  435 Devon Park Drive  Wayne, PA 19087-1945 |   | 6,288,184                                    |   | —                                   |   | 6,288,184                                                     |   | 23.3                   | %      |
| Wellington Management Company, LLP  75 State Street  Boston, MA 02109                               |   | 2,550,670                                    |   | —                                   |   | 2,550,670                                                     |   | 9.4                    | %      |
| Michael A. Sanchez  40 Valley Stream Parkway  Malvern, PA 19355                                     |   | 3,301,989                                    |   | 257,677                                  |   | 3,559,666                                                     |   | 13.0                   | %      |
| Frank R. Sanchez  40 Valley Stream Parkway  Malvern, PA 19355                                       |   | 1,399,020                                    |   | 316,500                                  |   | 1,715,520                                                     |   | 6.3                    | %      |
| Lawrence Chimerine                                                                                  |   | 98,878                                       |   | 30,000                                   |   | 128,878                                                       |   |                   | *      |
| Frederick J. Gronbacher                                                                             |   | 10,261                                       |   | 30,000                                   |   | 40,261                                                        |   |                   | *      |
| Alex W. Hart                                                                                        |   | 14,878                                       |   | 68,800                                   |   | 83,678                                                        |   |                   | *      |
| William M. Fenimore, Jr.                                                                            |   | 5,878                                        |   | 28,334                                   |   | 34,212                                                        |   |                   | *      |
| Thomas C. Lynch                                                                                     |   | 17,534                                       |   | 30,000                                   |   | 47,534                                                        |   |                   | *      |
| James R. Stojak                                                                                     |   | 7,894                                        |   | 56,800                                   |   | 64,694                                                        |   |                   | *      |
| Gary C. Wendt                                                                                       |   | —                                       |   | 56,800                                   |   | 56,800                                                        |   |                   | *      |
| Joseph F. Waterman                                                                                  |   | 456,304                                      |   | 146,685                                  |   | 602,989                                                       |   | 2.2                    | %      |
| James B. Goodwin                                                                                    |   | —                                       |   | 65,000                                   |   | 65,000                                                        |   |                   | *      |
| Eric Panepinto                                                                                      |   | —                                       |   | 104,232                                  |   | 104,232                                                       |   |                   | *      |
| Executive officers and directors as a group                                                         |   | 5,630,596                                    |   | 1,507,979                                |   | 7,138,575                                                     |   | 25.0                   | %      |

 

----

*                 Less than 1% ofour outstanding shares of common stock

 

Each individual has the sole power to vote and to dispose of the shares(other than shares held jointly with his spouse) except as follows:

 
| Safeguard Scientifics |   | Shares are held of record by wholly owned subsidiaries of Safeguard  as follows: Safeguard Scientifics (Delaware), Inc.—5,470,584 shares;  Safeguard Delaware, Inc.—817,600 shares.                                                                                                                                |
|-----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Wellington Management |   | Wellington Management, a registered investment adviser, is the  beneficial owner as a result of acting as investment adviser to various  clients.  This disclosure is based on  information contained in a report as of December 31, 2003 on  Schedule 13G filed with the Securities and Exchange Commission. |
| Michael A. Sanchez    |   | Includes 198,000 shares held in custodial accounts for three minor  children and 90,000 shares held by his spouse.                                                                                                                                                                                                           |
| Joseph F. Waterman    |   | Includes 3,996 shares held by his spouse, 600 shares held in a  custodial account for one minor child, and 1,054 shares held in a spousal  trust.                                                                                                                                                                            |

 

67

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

 

**Relationships and Related Transactions withManagement and Others**

 

On July 3, 2002, in connection with the acquisition of Spectra,the Company loaned Mr. John McLeod, President of the Company’s WealthManagement Division, approximately $314,000. This loan is secured by the pledge of 80,000 shares of Sanchez commonstock.  The interest rate on the loan isset at the interest rate as prescribed by the Canadian Customs and RevenueAgency (Base Rate).  This rate is adjusted quarterly to the extentsuch Base Rate changes.  At the time ofthe loan the Base Rate was 3%. The current rate is 4%.  The loanhas a term of three years commencing July 3, 2002 with six semi-annualpayments.  During 2003, Mr. McLeodrepaid approximately $118,000 in principal and interest and has a balance,including interest, of approximately $252,000, as of December 31,2003.  The highest outstanding balancein 2003 was approximately $301,000.

 

During 2001, the Company loaned $130,000 to Mr. Todd Pittman, theCompany’s Chief Financial Officer, for the purchase of Company stock.  The three-year loan, for which Mr. Pittmanis personally liable, is secured by the Company stock purchased by Mr. Pittman,and bears interest at a rate of 4.63% per annum.  During 2003, Mr. Pittman repaid approximately $6,000 in principaland has a balance, including interest, of approximately $120,000 as ofDecember 31, 2003.  The highest outstandingbalance in 2003 was approximately $121,000.

 

In accordance with the Sarbanes-Oxley Act of 2002 and NASDAQ rules, theCompany has adopted a policy not to grant any new loans or materially modify orextend any existing loans to officers or directors of the Company and the auditcommittee must review and approve any related party transactions involving SECreporting officers.

 

**Item 14.  Principal Accounting Fees and Services**

 

The following table presents fees for professional services rendered byKPMG LLP for the audit of the Company's annual financial statements, review ofthe Company’s interim financial statements and fees for other services renderedin 2003 and 2002.

 

 
| **KPMG LLP**                            |   | **2003** |    | **2002** |   |
|-----------------------------------------|--------|----------|---------|----------|--------|
| Audit fees                              |   | $        | 196,500 |     | $      | 146,500 |   |
|                                    |   |     |    |     |   |
| Audit related (401K Plan audit, SAS 70) |   | 84,224   |    | 85,000   |   |
|                                    |   |     |    |     |   |
| Tax (Tax preparation and consultation)  |   | 50,000   |    | 47,000   |   |
|                                         |        |          |         |          |        |  |  |

 

**Audit Committee Pre-Approval Policies andProcedures**

 

The Company's Audit Committee has policies and procedures that requirethe pre-approval by the Audit Committee of all fees paid to, and all servicesperformed by, the Company's independent accounting firm. The Audit Committeeapproves the proposed services, including the nature, type, and scope ofservices contemplated and the related fees, to be rendered by the Company'sindependent accounting firm during the year. In addition, Audit Committee pre-approval is also required for thoseengagements that may arise during the course of the year that are outside thescope of the initial services and fees pre-approved by the Audit Committee.

 

Pursuant to the Sarbanes-Oxley Act of 2002, the fees and servicesprovided as noted in the table above were authorized and approved by the AuditCommittee in compliance with the pre-approval policies and procedures describedherein.

 

68

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### **PART IV**

 

**Item 15. Exhibits, Financial StatementSchedules and Reports on Form 8-K.**

 

(a)           Financial Statements and Schedules

 

Thefinancial statements and schedules listed below are filed as part of this Form10-K.

 

FinancialStatements (see Item No. 8, page 32)

 
| Reports  of Independent Auditors                                                                                                                       |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated  Balance Sheets as of December 31, 2003 and 2002                                                                                     |   |
| Consolidated  Statements of Operations for the years ended December 31, 2003, 2002 and  2001                                                      |   |
| Consolidated  Statements of Shareholders’ Equity and Other Comprehensive Income (Loss) for  the years ended December 31, 2003, 2002 and 2001 |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2003, 2002 and  2001                                                      |   |
| Notes  to Consolidated Financial Statements                                                                                                            |   |

 

FinancialStatement Schedules

 

Schedule II—Valuationand Qualifying Accounts for the years ended December 31, 2003, 2002 and2001 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.

 

69

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(b)           Reports on Form 8-K

 

Form8-K.  Related to the registrant’s thirdquarter of 2003 results.  Furnished onOctober 28, 2003.

Form8-K.  Related to the registrant’spre-announcement of its third quarter results. Furnished on October 17, 2003.

 

(c)           Exhibits

 

Thefollowing is a list of exhibits required by Item 601 of Regulation S-K filed aspart of this Form 10-K. Where so indicated by footnote, exhibits which werepreviously filed are incorporated by reference. For exhibits incorporated byreference, the location of the exhibit in the previous filing is indicated inparentheses.

 
| **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) |
| 4.2                 |   |            | 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) |
| 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) |
| 10.10               |   |            | Employment  Agreement, dated July 3, 2002, between Sanchez Computer Associates, Inc.  and John C. McLeod* |
| 21.1                |   |            | Subsidiaries  of the Registrant. * |
| 23.1                |   |            | Consent  of Independent Public Accountants KPMG LLP* |
| 31.1                |   |            | Certification of the Chief Executive Officer pursuant to Rule  13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 |
| 31.2                |   |            | Certification of the Chief Financial Officer pursuant to Rule  13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 |
| 32.1                |   |            | 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* |

 

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*              Filed herewith.

 

#                                         These exhibits relate to compensatory plans,contracts or arrangements in which directors and/or executive officers of theregistrant may participate.

 

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

 

(2)                                  Filed on November 6, 1996 as an exhibitto Amendment No. 1 to the Company’s Registration Statement on Form S-1 (No.333-12863) and incorporated by reference.

 

(3)                                  Filed as an exhibit to the Company’s Reporton Form 10-Q for the three-month period ended June 30, 1997 andincorporated by reference.

 

(4)                                  Filed as an exhibit to the Company’s Reporton Form 10-Q for the three-month period ended September 30, 1997 andincorporated by reference.

 

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

 

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**SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registranthas duly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                        | SANCHEZ  COMPUTER ASSOCIATES, INC. |
|-----------------------------|------------------------------------|
|                        |                               |   |
| Dated:  March 15, 2004 | By:                                | /s/  FRANK R. SANCHEZ |
|                        |                               | Frank  R. Sanchez, *Chief Executive Officer and Director* |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 

 
| Dated:  March 15, 2004 |   | /s/  MICHAEL A. SANCHEZ                                                                    |
|-----------------------------|--------|-------------------------------------------------------------------------------------------------|
|                        |   | Michael  A. Sanchez, *Chairman of the Board of Directors*                                       |
|                        |   |                                                                                            |   |
| Dated:  March 15, 2004 |   | /s/  FRANK R. SANCHEZ                                                                      |
|                        |   | Frank  R. Sanchez, *Chief Executive Officer and Director  (Principal Executive Officer)*        |
|                        |   |                                                                                            |   |
| Dated:  March 15, 2004 |   | /s/  TODD A. PITTMAN                                                                       |
|                        |   | Todd  A. Pittman, *Senior Vice President and CFO  (Principal Financial and Accounting Officer)* |
|                        |   |                                                                                            |   |
| Dated:  March 15, 2004 |   | /s/  JOSEPH F. WATERMAN                                                                    |
|                        |   | Joseph  F. Waterman, *President, Chief Operating Officer  and Director*                         |
|                        |   |                                                                                            |   |
| Dated:  March 15, 2004 |   | /s/  LAWRENCE A. CHIMERINE                                                                 |
|                        |   | Lawrence  A. Chimerine, *Director*                                                              |
|                        |   |                                                                                            |   |
| Dated:  March 15, 2004 |   | /s/  WILLIAM M. FENIMORE                                                                   |
|                        |   | William  M. Fenimore, *Director*                                                                |
|                        |   |                                                                                            |   |
| Dated:  March 15, 2004 |   | /s/  FREDERICK G. GRONBACHER                                                               |
|                        |   | Frederick  G. Gronbacher, *Director*                                                            |
|                        |   |                                                                                            |   |
| Dated:  March 15, 2004 |   | /s/  ALEX W. HART                                                                          |
|                        |   | Alex  W. Hart, *Director*                                                                       |
|                        |   |                                                                                            |   |
| Dated:  March 15, 2004 |   | /s/  THOMAS C. LYNCH                                                                       |
|                        |   | Thomas  C. Lynch, *Director*                                                                    |
|                        |   |                                                                                            |   |
| Dated:  March 15, 2004 |   | /s/  JAMES R. STOJAK                                                                       |
|                        |   | James  R. Stojak, *Director*                                                                    |
|                        |   |                                                                                            |   |
| Dated:  March 15, 2004 |   | /s/  GARY C. WENDT                                                                         |
|                        |   | Gary  C. Wendt, *Director*                                                                      |

 

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