**Securitiesand Exchange Commission**

**Washington, D.C. 20549**

 

**FORM10-Q**

 

| **(Mark One)**                                                                                                                                                         |   |                                                                                          |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                             |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15d OF THE SECURITIES EXCHANGE ACT OF 1934**    |
|                                                                                                                                                                   |
| **For the quarterly period ended March 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 0-21705**                                                                                                                                     |

** **

**SANCHEZCOMPUTER ASSOCIATES, INC.**

(ExactName of Registrant as Specified in Its Charter)

 

| **Pennsylvania**                                                            |   | **23-2161560**                        |
|-----------------------------------------------------------------------------|--------|---------------------------------------|
| (State  or other Jurisdiction of   Incorporation or Organization)           |   | (I.R.S.  Employer Identification No.) |
|                                                                        |   |                                  |
| **40 Valley Stream Parkway, Malvern PA**                                    |   | **19355**                             |
| (Address  of Principal Executive Offices)                                   |   | (Zip  Code)                           |
|                                                                        |   |                                  |
| **www.sanchez.com**                                                         |   |                                  |
| **(**Company’s Web  site)                                              |   |                                  |
|                                                                        |
| Registrant’s Telephone Number, Including Area Code: **(610) 296-8877** |

 

**N/A**

 

Former Name, Former Address and Former Fiscal Year, if Changed SinceLast Report

 

Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  ý   No  o

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o    No ý

 

As of April30, 2003, there were 26,774,923 outstanding shares of the issuer’s CommonStock, no par value.

 

 

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**SANCHEZ COMPUTER ASSOCIATES, INC.INDEX TO FORM 10-QFOR THE QUARTER ENDED March 31, 2003**
| **PART I: FINANCIAL INFORMATION** |
|-----------------------------------|
|                              |
|                              |   | **Page No's** |
| ITEM 1:                           | FINANCIAL  STATEMENTS |   |
|                              |   |   |
|                              | CONSOLIDATED  BALANCE SHEETS  March 31, 2003 (Unaudited) and December 31, 2002 | 3 |
|                              |   |   |
|                              | CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)  Three months ended March 31, 2003 and 2002 | 4 |
|                              |   |   |
|                              | CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)  Three months ended March 31, 2003 and 2002 | 5 |
|                              |   |   |
|                              | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Unaudited) | 6 |
|                              |   |   |
| ITEM 2:                           | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 11 |
|                              |   |   |
| ITEM 3:                           | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK | 17 |
|                              |   |   |
| ITEM 4                            | CONTROLS AND PROCEDURES | 18 |
|                              |   |
| **PART II: OTHER INFORMATION**    |
|                              |   |
| ITEM 6:                           | EXHIBITS AND REPORTS ON FORM 8-K | 18 |
|                              |   |   |
| SIGNATURES                        | 19 |
|                              |   |
| CERTIFICATIONS                    | 20 |
|                                   |  |  |  |  |

 

2

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**Sanchez Computer Associates, Inc.Consolidated Balance Sheets(in thousands, except per share amounts)**

 
|                                                                                                                                                                                                          |   | **March 31,  2003** |    | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
|                                                                                                                                                                                                          |   | **(unaudited)**     |    |                   |   |
| **ASSETS**                                                                                                                                                                                                    |   |                |    |                   |   |
| Current assets                                                                                                                                                                                                |   |                |    |                   |   |
| Cash and cash equivalents                                                                                                                                                                                     |   | $                   | 30,209  |                   | $      | 32,717 |   |
| Accounts receivables, less allowances ($999 and $979)                                                                                                                                                         |   | 12,780              |    | 12,993                 |   |
| Contracts in process                                                                                                                                                                                          |   | 5,300               |    | 4,851                  |   |
| Income tax refund receivable                                                                                                                                                                                  |   | 2,006               |    | 1,619                  |   |
| Deferred income taxes                                                                                                                                                                                         |   | 2,661               |    | 2,661                  |   |
| Prepaid and other current assets                                                                                                                                                                              |   | 3,164               |    | 2,812                  |   |
| Deferred expenses                                                                                                                                                                                             |   | 8,884               |    | 8,343                  |   |
| Total current assets                                                                                                                                                                                          |   | 65,004              |    | 65,996                 |   |
|                                                                                                                                                                                                          |   |                |    |                   |   |
| Property and equipment                                                                                                                                                                                        |   |                |    |                   |   |
| Equipment                                                                                                                                                                                                     |   | 17,094              |    | 16,532                 |   |
| Furniture and fixtures                                                                                                                                                                                        |   | 2,681               |    | 2,674                  |   |
| Leasehold improvements                                                                                                                                                                                        |   | 3,152               |    | 3,148                  |   |
|                                                                                                                                                                                                          |   | 22,927              |    | 22,354                 |   |
| Accumulated depreciation and amortization                                                                                                                                                                     |   | (17,696             | )       | (16,826                | )      |
| Net property and equipment                                                                                                                                                                                    |   | 5,231               |    | 5,528                  |   |
|                                                                                                                                                                                                          |   |                |    |                   |   |
| Goodwill                                                                                                                                                                                                      |   | 24,999              |    | 23,896                 |   |
| Deferred expenses                                                                                                                                                                                             |   | 11,364              |    | 11,496                 |   |
| Amortizable intangibles, net                                                                                                                                                                                  |   | 8,779               |    | 8,454                  |   |
| Deferred income taxes                                                                                                                                                                                         |   | 2,895               |    | 2,895                  |   |
| Other non-current assets                                                                                                                                                                                      |   | 2,384               |    | 2,832                  |   |
| Total assets                                                                                                                                                                                                  |   | $                   | 120,656 |                   | $      | 121,097 |   |
|                                                                                                                                                                                                          |   |                |    |                   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                |   |                |    |                   |   |
| Current liabilities                                                                                                                                                                                           |   |                |    |                   |   |
| Accounts payable                                                                                                                                                                                              |   | $                   | 4,137   |                   | $      | 3,771 |   |
| Accrued expenses                                                                                                                                                                                              |   | 7,653               |    | 9,617                  |   |
| Deferred revenue                                                                                                                                                                                              |   | 23,230              |    | 22,804                 |   |
| Total current liabilities                                                                                                                                                                                     |   | 35,020              |    | 36,192                 |   |
| Deferred revenue                                                                                                                                                                                              |   | 16,745              |    | 18,150                 |   |
| Minority interest                                                                                                                                                                                             |   | 209                 |    | 209                    |   |
| Total liabilities                                                                                                                                                                                             |   | 51,974              |    | 54,551                 |   |
|                                                                                                                                                                                                          |   |                |    |                   |   |
| Shareholders’ Equity                                                                                                                                                                                     |   |                |    |                   |   |
| Common stock stated value of $.01 per share, 75,000 shares  authorized, 26,775 shares issued and outstanding as of March 31, 2003  and 26,689 shares issued and outstanding as of December 31, 2002 |   | 268                 |    | 267                    |   |
| Additional paid-in capital                                                                                                                                                                                    |   | 48,936              |    | 48,794                 |   |
| Retained earnings                                                                                                                                                                                             |   | 18,910              |    | 18,575                 |   |
| Accumulated comprehensive income (loss)                                                                                                                                                                       |   | 568                 |    | (1,090                 | )      |
| Total shareholders’ equity                                                                                                                                                                               |   | 68,682              |    | 66,546                 |   |
| Total liabilities and shareholders’ equity                                                                                                                                                               |   | $                   | 120,656 |                   | $      | 121,097 |   |

 

See notes to consolidated financialstatements

 

3

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**Sanchez Computer Associates, Inc.Consolidated Statements of Operations(in thousands, except per share amounts)(unaudited)**

 
|                                                    |   | **Three Months Ended****March 31,** |   |
|---------------------------------------------------------|--------|-------------------------------------|--------|
|                                                    |   | **2003**                            |   | **2002** |   |
|                                                    |   |                                |   |   |   |
| Revenues                                                |   |                                |   |   |   |
| Products                                                |   | $                                   | 5,698  |   | $ | 3,850 |   |
| Services                                                |   | 6,558                               |   | 5,691 |   |
| Processing                                              |   | 4,639                               |   | 4,555 |   |
| Software maintenance and other                          |   | 5,081                               |   | 3,870 |   |
| Customer reimbusements                                  |   | 1,029                               |   | 1,360 |   |
| Total revenues                                          |   | 23,005                              |   | 19,326 |   |
|                                                    |   |                                |   |   |   |
| Operating expenses                                      |   |                                |   |   |   |
| Product development                                     |   | 5,222                               |   | 3,008 |   |
| Product support                                         |   | 1,586                               |   | 1,387 |   |
| Services                                                |   | 5,179                               |   | 3,259 |   |
| Processing                                              |   | 3,677                               |   | 4,056 |   |
| Sales and marketing                                     |   | 3,222                               |   | 3,732 |   |
| General, administrative and other                       |   | 2,673                               |   | 2,390 |   |
| Customer reimbursement expense                          |   | 1,029                               |   | 1,360 |   |
| Total operating expenses                                |   | 22,588                              |   | 19,192 |   |
|                                                    |   |                                |   |   |   |
| Earnings from operations                                |   | 417                                 |   | 134 |   |
| Interest income, net                                    |   | 78                                  |   | 191 |   |
| Gain on investment                                      |   | 156                                 |   | — |   |
| Foreign exchange loss                                   |   | (207                                | )      | — |   |
| Earnings before income taxes                            |   | 444                                 |   | 325 |   |
| Income tax provision                                    |   | 109                                 |   | 107 |   |
| Net earnings                                            |   | $                                   | 335    |   | $ | 218 |   |
|                                                    |   |                                |   |   |   |
| Basic and diluted earnings per share                    |   | $                                   | 0.01   |   | $ | 0.01 |   |
|                                                    |   |                                |   |   |   |
| Weighted-average common shares outstanding              |   | 26,751                              |   | 25,997 |   |
|                                                    |   |                                |   |   |   |
| Weighted-average common and dilutive shares outstanding |   | 27,165                              |   | 26,178 |   |

 

See notes to consolidated financialstatements

 

4

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**Sanchez Computer Associates, Inc.Consolidated Statements of Cash Flows(in thousands)(unaudited)**

 
|                                                                         |   | **Three Months Ended  March 31,** |   |
|------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                         |   | **2003**                          |   | **2002** |   |
| Cash flows from operating activities                                         |   |                              |   |   |   |
| Net earnings                                                                 |   | $                                 | 335    |   | $ | 218 |   |
| Adjustments to reconcile net earnings to cash used by operating  activities  |   |                              |   |   |   |
| Depreciation and amortization                                                |   | 1,172                             |   | 1,109 |   |
| Cash provided (used) by changes in operating assets and liabilities          |   |                              |   |   |   |
| Accounts receivable                                                          |   | 276                               |   | (5,365 | ) |
| Contracts in process                                                         |   | (447                              | )      | (2,622 | ) |
| Income tax refund receivable/payable                                         |   | (463                              | )      | (42 | ) |
| Prepaid and other current assets                                             |   | (331                              | )      | (2,020 | ) |
| Accounts payable and accrued expenses                                        |   | (1,370                            | )      | 1,723 |   |
| Deferred revenue                                                             |   | (1,135                            | )      | 7,861 |   |
| Deferred expenses                                                            |   | (376                              | )      | (3,722 | ) |
| Other                                                                        |   | 95                                |   | (7 | ) |
| Net cash used by operating activities                                        |   | (2,244                            | )      | (2,867 | ) |
|                                                                         |   |                              |   |   |   |
| Cash flows from investing activities                                         |   |                              |   |   |   |
| Investments                                                                  |   | —                            |   | (408 | ) |
| Capital expenditures                                                         |   | (554                              | )      | (523 | ) |
| Net cash used by investing activities                                        |   | (554                              | )      | (931 | ) |
|                                                                         |   |                              |   |   |   |
| Cash flows from financing activities                                         |   |                              |   |   |   |
| Exercise of stock options                                                    |   | 7                                 |   | 11 |   |
| Proceeds from the issuance of shares under the employee stock  purchase plan |   | 187                               |   | 321 |   |
| Net cash provided by financing activities                                    |   | 194                               |   | 332 |   |
|                                                                         |   |                              |   |   |   |
| Net decrease in cash and cash equivalents                                    |   | (2,604                            | )      | (3,466 | ) |
| Effect of foreign exchange on cash                                           |   | 96                                |   | — |   |
| Cash and cash equivalents at beginning of period                             |   | 32,717                            |   | 40,955 |   |
| Cash and cash equivalents at end of period                                   |   | $                                 | 30,209 |   | $ | 37,489 |   |
|                                                                         |   |                              |   |   |   |
| Supplemental cash flow information                                           |   |                              |   |   |   |
| Interest paid                                                                |   | $                                 | — |   | $ | — |   |
| Income taxes paid                                                            |   | $                                 | 386    |   | $ | — |   |

 

See notes to consolidated financialstatements

 

5

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**Sanchez Computer Associates, Inc.**

 

**Notes to Unaudited Consolidated Financial Statements**

 

**(A.)****                           ****Basis of Presentation**

 

Theaccompanying consolidated financial statements of Sanchez Computer Associates,Inc. (Sanchez or the Company) include the accounts of all of the Company’smajority owned subsidiaries.  Allsignificant intercompany transactions and balances have been eliminated inconsolidation.  Certain prior periodamounts have been reclassified to conform with the current periodpresentation.  In the opinion ofmanagement, the consolidated financial statements reflect all normal andrecurring adjustments which are necessary for a fair presentation of theCompany’s financial position, results of operations, and cash flows as of thedates and for the periods presented. The consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States for interimfinancial information.  Consequently,these statements do not include all the disclosures normally required bygenerally accepted accounting principles for annual financial statements northose normally made in the Company’s Annual Report on Form 10-K.  Accordingly, reference should be made to theCompany’s Annual Report on Form 10-K for additional disclosures, including asummary of the Company’s critical accounting policies, which have not changedsince our latest Annual Report on Form 10-K as of December 31, 2002.  The consolidated results of operations forthe three months ended March 31, 2003, are not necessarily indicative ofresults for the full year.

 

**(B.)****                           ****Geographic Segments**

 

Revenuederived from customers in various geographic regions is as follows (inthousands):

 
|               |   | **Three months ended  March 31,** |   |
|--------------------|--------|-----------------------------------|--------|
|               |   | **2003**                          |   | **2002** |   |
| U.S. and Caribbean |   | $                                 | 11,253 |   | $ | 12,134 |   |
| Canada             |   | 4,084                             |   | 801 |   |
| Europe             |   | 5,516                             |   | 6,159 |   |
| Other              |   | 2,152                             |   | 232 |   |
| Total              |   | $                                 | 23,005 |   | $ | 19,326 |   |

 

**(C.)****                           ****Business Segments**

 

Previously,our segments included Sanchez’s software licensing business, the Sanchez DataSystems, Inc. (SDSI) outsourcing business and the Wealth Management Divisionwhich was created following the Company’s acquisition of Spectra SecuritiesSoftware, Inc. (Spectra) in July 2002.  Beginningwith the first quarter of 2003, the Company organized into divisions andinitiated segment reporting based on those divisions.  Sanchez’s new divisional segments are Banking Solutions, WealthManagement, Outsourcing, Global Services. In addition, a Corporate Support group was created to support theseoperating divisions.  The Companyevaluates the performance of its segments and allocates resources to themaccordingly.  Customer reimbursementrevenue and expenses are the same amount and, therefore, have no net effect on operatingincome.  Customer reimbursement revenuesand expenses are not allocated to the individual business units.  The Company combines assets, liabilities andshareholders’ equity into one consolidated balance sheet and does not measurethe performance of its divisions based upon balance sheet accounts.  It is not practical at this time to restatesegment data for prior periods to conform to the Company’s new segmentreporting.  We will continue to alsopresent segment information under the previous format until comparativeinformation about segments under the new format is available.  The tables below summarize the Company’ssegments as they are currently measured as well as how they were reported in2002 (in thousands):

 

6

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Thetable below summarizes information about the new business segments (inthousands):

 
|                            |   | **Three months ended  March 31,** |   |
|---------------------------------|--------|-----------------------------------|--------|
|                            |   | **2003**                          |   |
| Revenues                        |   |                              |   |
| Banking Solutions               |   | $                                 | 8,503  |   |
| Wealth Management               |   | 2,705                             |   |
| Outsourcing                     |   | 5,991                             |   |
| Global Services                 |   | 4,777                             |   |
| Total segment revenue           |   | 21,976                            |   |
| Reimbursables                   |   | 1,029                             |   |
| Total revenues                  |   | $                                 | 23,005 |   |
|                            |   |                              |   |
| Earnings (loss) from operations |   |                              |   |
| Banking Solutions               |   | $                                 | 1,523  |   |
| Wealth Management               |   | (562                              | )      |
| Outsourcing                     |   | (267                              | )      |
| Global Services                 |   | (277                              | )      |
| Total earnings from operations  |   | $                                 | 417    |   |

 

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

 
|                            |   | **Three months ended  March 31,** |   |
|---------------------------------|--------|-----------------------------------|--------|
|                            |   | **2003**                          |   | **2002** |   |
| Revenues                        |   |                              |   |   |   |
| Sanchez                         |   | $                                 | 11,518 |   | $ | 9,415 |   |
| SDSI                            |   | 8,776                             |   | 9,911 |   |
| Wealth Management               |   | 2,711                             |   | — |   |
| Total Revenues                  |   | $                                 | 23,005 |   | $ | 19,326 |   |
|                            |   |                              |   |   |   |
| Earnings (loss) from operations |   |                              |   |   |   |
| Sanchez                         |   | 476                               |   | (292 | ) |
| SDSI                            |   | 506                               |   | 426 |   |
| Wealth Management               |   | (565                              | )      | — |   |
| Total earnings from operations  |   | $                                 | 417    |   | $ | 134 |   |

 
|              |   | **March 31,  2003** |    | **December 31,  2002** |   |
|-------------------|--------|---------------------|---------|------------------------|--------|
| Assets            |   |                |    |                   |   |
| Sanchez           |   | $                   | 96,174  |                   | $      | 97,438 |   |
| SDSI              |   | 32,049              |    | 41,000                 |   |
| Wealth Management |   | 34,242              |    | 38,655                 |   |
| Eliminations      |   | (41,809             | )       | (55,996                | )      |
| Total assets      |   | $                   | 120,656 |                   | $      | 121,097 |   |

 

**(D.)****                           ****Earnings Per Share**

 

Basicearnings per share has been calculated as net earnings divided byweighted-average common shares outstanding, while diluted earnings per sharehas been computed as net earnings divided by weighted-average common anddiluted shares outstanding, which includes the dilutive effect of stockoptions.  The following table 

 

7

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provides a reconciliation ofweighted-average common shares outstanding to weighted-average common anddiluted shares outstanding (in thousands): 

 
|                                                         |   | **Three months ended  March 31,** |   |
|--------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                         |   | **2003**                          |   | **2002** |   |
| Weighted-average shares outstanding                          |   | 26,751                            |   | 25,997 |   |
| Dilutive effect of options                                   |   | 414                               |   | 181 |   |
| Total weighted average common and diluted shares outstanding |   | 27,165                            |   | 26,178 |   |

 

AtMarch 31, 2003, total potentially dilutive common stock equivalents includeoptions to purchase 6,482,042 shares of common stock.  As of March 31, 2002, total potentially dilutive common stockequivalents included options to purchase 5,179,278 shares of common stock. 

 

**(E.)****                              Stock-Based Compensation—**InDecember 2002, Statement of Financial Accounting Standards (SFAS) No. 148,“Accounting for Stock-Based Compensation, Transition and Disclosure” wasissued.  SFAS No. 148 amended SFAS No.123, “Accounting for Stock-Based Compensation,” to provide alternative methodsof transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  In addition, SFAS No. 148 amends the disclosure requirements ofSFAS No. 123 related to the disclosure about the method of accounting for stockbased employee compensation and the effect of the method used on reportedresults.  The disclosure provisions ofSFAS No. 148 are applicable to interim or annual periods that end afterDecember 15, 2002, and, as such, have been incorporated below.  SFAS No. 123, as amended by SFAS No. 148,permits companies to (i) recognize as expense the fair value of stock-basedawards, or (ii) continue to apply the provisions of Accounting Principles Board(APB) Opinion No. 25, “Accounting For Stock Issued to Employees,” and relatedinterpretations, and provide pro forma net earnings and earnings per sharedisclosures for employee stock option grants as if the fair value based methoddefined in SFAS No. 123 had been applied. The Company continues to apply the provisions of APB Opinion No. 25 andprovide the pro forma disclosures in accordance with the provisions of SFAS No.123 and SFAS No. 148 to its stock option plans.  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):

 
|                                                                                                                                     |   |        |       | **Three months ended  March 31,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|------------|-----------------------------------|--------|
|                                                                                                                                     |   |        |       | **2003**                          |   | **2002** |   |
| Net earnings                                                                                                                             |   | As reported | ** ** | **$**                             | 335    | ** ** | **$** | 218 | ** ** |
| Deduct:   Total stock-based employee compensation expense determined under the  fair-value based methods for all awards, net of tax |   |        |       | (1,702                            | )      | (1,533 | ) |
|                                                                                                                                     |   | Pro forma   |       | (1,367                            | )      | (1,315 | ) |
|                                                                                                                                     |   |        |       |                              |   |   |   |
| Basic and diluted earnings (loss) per share                                                                                              |   | As reported |       | $                                 | 0.01   |   | $ | 0.01 |   |
|                                                                                                                                     |   | Pro forma   |       | $                                 | (0.05  | ) | $ | (0.05 | ) |

 

8

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**(F.)****                             ****Recent AccountingPronouncements**

 

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

 

InNovember 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees andOther,” which elaborates on the disclosures to be made by a guarantor in itsinterim and annual financial statements about its obligations under guaranteesissued.  The Interpretation alsoclarifies that a guarantor is required to recognize, at inception of aguarantee, a liability for the fair value of the obligation undertaken.  The initial recognition and measurementprovisions of the Interpretation are applicable to guarantees issued ormodified after December 31, 2002.  Wehave not issued any guarantees for performance of third parties.  Accordingly, adoption of this standard didnot have a material effect on the Company’s consolidated financial statements.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidationof Variable Interest Entities,” which addresses the consolidation by businessenterprises of variable interest entities as defined in theInterpretation.  The Interpretationapplies immediately to variable interests in variable interest entities createdafter January 31, 2003, and to variable interests in variable interest entitiesobtained after January 31, 2003, whereas it is otherwise effective June 15,2003 for variable interest entities acquired before February 1, 2003.  The adoption of this Interpretation is notexpected to have a material effect on the Company’s consolidated financialstatements.

 

**(G.)****                           ****Related Party Transactions**

 

On July 3, 2002, in connection with the acquisition of Spectra , theCompany loaned Mr. John McLeod, President of the Company’s Wealth ManagementDivision, approximately $314,000.  Thisloan is secured by the pledge of 100,000 shares of Sanchez common stock.  The loan contains an interest rate asprescribed by the Canadian Customs and Revenue Agency (Base Rate).  This rate is adjusted quarterly to the extentsuch Base Rate changes.  At the time ofthe loan the Base Rate was 3%. The loan has a term of three years commencing July 3, 2002 with sixsemi-annual payments, the first of which was due on January 3, 2003.  In January 2003, Mr. McLeod made the firstof his six semi-annual payments.  

 

During 2001, the Company loaned $130,000 to Mr. Todd Pittman, theCompany’s Chief Financial Officer, for the purchase of Company stock. Thethree-year loan, for which Mr. Pittman is personally liable, is secured by theCompany stock purchased by Mr. Pittman, and bears interest at a rate of 4.63%per annum.  Mr. Pittman made a paymentof approximately $6,000 in February 2003 and had a balance, including interestof approximately $116,000 as of March 31, 2003.

 

In accordance with the Sarbanes-Oxley Act of 2002, the Company hasadopted a policy not to grant any new loans or materially modify or extend anyexisting loans to officers or directors of the Company and the audit committeemust review and approve any related party transactions involving officers ordirectors.

 

**(H.)****                           ****Acquisitions**

 

On July 3, 2002, Sanchez announced that it had completed itsacquisition, by way of a plan of arrangement, of all of the outstanding commonshares of Spectra, a leading provider of comprehensive wealth managementsolutions.  Leading up to theacquisition, the Company participated in arms length negotiations, performeddue diligence, obtained afairness opinion on the valuation of Spectra and used industry comparables todetermine a purchase price.  With the acquisition of Spectra, the Companyhas positioned itself to be able to provide a complete banking and brokerageplatform that satisfies the industry’s growing global requirements for anintegrated banking and wealth management solution.

 

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The following unaudited pro forma combined results of operations isprovided for illustrative purposes only and assumes that the Spectraacquisition had occurred as of the beginning of the period presented.  The following unaudited pro formainformation for the three months ended March 31, 2002 should not be relied uponas necessarily being indicative of the historical results that would have beenobtained if this acquisition had actually occurred during that period, nor theresults that may be obtained in the future (amounts in thousands, exceptper-share amounts):

 
|                                            |   | **Three  months ended  March 31,** |   |
|-------------------------------------------------|--------|------------------------------------|--------|
|                                            |   | **2002**                           |   |
| Pro forma revenues                              |   | $                                  | 23,296 |   |
| Pro forma net earnings                          |   | 310                                |   |
| Pro forma basic and diluted earnings per  share |   | 0.01                               |   |
|                                                 |        |                                    |        |  |

 

**(I.)****                                 ComprehensiveIncome**

 

Comprehensive income consists of netearnings, adjusted for other increases and decreases affecting stockholders’equity that are excluded from the determination of net earnings.  The calculation of comprehensive income for thethree months ended March 31, 2003 and 2002 is as follows (in thousands):

 
|                                      |   | **Three months ended****March 31,** |   |
|-------------------------------------------|--------|-------------------------------------|--------|
|                                      |   | **2003**                            |   | **2002** |   |
| **Net earnings**                          |   | $                                   | 335    |   | $ | 218 |   |
| Cumulative translation  adjustments       |   | 1,897                               |   | — |   |
| Unrealized loss on  marketable securities |   | (239                                | )      | — |   |
| Comprehensive income                      |   | $                                   | 1,993  |   | $ | 218 |   |

 

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Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

SanchezComputer Associates Inc. (Sanchez or the Company) is publicly traded on theNasdaq Stock Exchange under the symbol SCAI. The Company is a global leader in developing and marketing scalable andintegrated software and services that provide banking, customer integration,brokerage, wealth management and outsourcing solutions to approximately 400financial institutions in 22 countries. Sanchez’s corporate headquarters is located in Malvern,Pennsylvania.  The Company’s outsourcingdata and operations service center is located in Seven Fields,Pennsylvania.  Sanchez also maintainsoffices in Toronto, Canada; San Ramon, California; Sydney, Australia; New York,New York; Amsterdam, the Netherlands; Warsaw, Poland; Chester, the UnitedKingdom; and Singapore.

 

Beginning withthe first quarter of 2003, Sanchez organized into divisions and initiated newsegment reporting based on those divisions. Sanchez’s divisional segments are Banking Solutions, Wealth Management,Outsourcing and Global Services.  Inaddition, a Corporate Support group was created to support these operatingdivisions.  Each division has individualprofit and loss responsibilities and is responsible for advancing the Company’sobjective to be the industry’s leading “value innovator.”  Whether through software products,methodologies, services, custom software enhancements or solutions consultingengagements, each division is tasked to significantly lower clients’ ongoingoperations and technology costs, reduce their technology risk, and improvetheir enterprise customer management. The divisions were created to provide the innovation and focus necessaryto assist clients in achieving their business plans.  The Company believes this additional focus for all of itsproducts and services will help the Company pursue new and previouslyunder-served revenue opportunities.  Inaddition, it is believed the divisions will allow the Company to become morenimble and respond more quickly to a wider variety of client requirements andneeds.  The Company markets globally andprospects for sales opportunities with institutions in need of one or more ofthe following solutions: a bank line of business migration; a retail bankinglegacy system replacement; customer enterprise integration; bank outsourcing;or a wealth management solution.

 

**SanchezBanking Solutions Division**

 

The BankingSolutions Division is responsible for the development and maintenance of theSanchez suite of integrated banking software products.  The division licenses the banking productsto financial institutions to run in-house, or alternatively, on an outsourcedbasis.  The Banking Solutions Divisionderives its revenues from fees assessed on software products and softwaremaintenance as well as from other miscellaneous fees.  The Sanchez suite of integrated banking products hasmulti-currency and multi-language capabilities, and can scale to the retail andcommercial requirements of the world’s largest banks.  Products included in the Sanchez suite are: Sanchez ProfileTM,the core banking and transaction processing application; Sanchez XpressTM,an enterprise customer and transaction management system; Sanchez WebclientTM,a Web-based, customer front-end processor for Internet banking; Sanchez WebCSRTM,a Web-based customer and account servicing application used in an institution’sbranches and call centers; and Sanchez FMSTM, the FinancialManagement System, which is an online, real-time, cost center-based accountingsystem with complete multi-company and multi-currency support.  In addition, Sanchez offers Profile forWindows®, a 32-bit, Windows-based, graphical user interface designedas the front-end to the Sanchez Profile core banking application, which is usedby tellers, branch and call center personnel. The company also licenses Sanchez CRMTM, a Web-based customerrelationship management system, which is available as a stand-alone applicationor integrated with Sanchez’s banking suite of applications.

 

**SanchezOutsourcing Division**

 

Sanchez alsouses its integrated banking platform as the basis for offering a completeoutsourced direct banking solution called Sanchez e-PROFILE®.  The Sanchez Outsourcing Division administersthe Sanchez e-PROFILE solution by providing an integrated end-to-end operationsand technology platform.  Thisoutsourced platform enables institutions to offer comprehensive on-linefinancial services to their customers. Sanchez began offering outsourcing solutions in 1999 and has grown itscapabilities to become a vertical service provider (VSP) for the industry.  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 solution also provides the Company witha distribution channel for the suite of Sanchez products, related technologiesand services.  At March 31, 2003, therewere nine clients processing accounts at the Company’s data and operationsservice center.  Outsourcing segmentrevenues are primarily generated from processing and services fees.

 

### **Sanchez Wealth Management Division**

 

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This divisionis responsible for the development, maintenance and services associated withSanchez WealthwareTM, a wealth management product line.  Wealthware is a comprehensive, multi-channelwealth management solution that helps financial institutions manage investorassets online by providing a collaborative, holistic client-view of assets andholdings based on real-time information. The product line suite includes, Information Management, Investor Management,Order Management and Market Data Management tools.  The Sanchez Wealth Management Division generates revenuesprimarily through product, maintenance, services and outsourcing fees.

 

### **Sanchez Global Services Division**

 

The GlobalServices Division provides project management, training (both standard andcustomized), system implementation, solution integration, custom interfaces tothird-party or in-house legacy applications, data conversion, integratedtesting, custom software, custom output (reports, statements, notices), customcomponent application, localization, and version upgrade services to ourbanking customers.  Trained financialservice industry professionals deliver Sanchez services on both a time-and-materialsor fixed-price basis.  They work primarilyat client locations and follow a published methodology employing proven projectmanagement and measurement techniques. For institutions implementing Sanchez solutions in-house, projectservices are provided during the initial implementation and also as contractedfor by clients after conversion to a Sanchez solution.  Typically, an in-house implementation for atop-tier institution involves moving a large volume of customer data fromexisting systems onto the Sanchez platform. When an institution replaces its in-house, legacy transaction processingsystem with a Sanchez banking solution, data conversion and custom systeminterface projects typically are delivered in six to 12 months  Execution support is provided from severalregional locations.  An outsourcingproject typically involves a de-novo bank but in certain instances the Companyhas customers converting from another platform.  Services associated with these types of projects include projectmanagement, implementation services, some data conversion, multiple systeminterfaces and integrated systems testing. An institution can implement an outsourcing solution in as few as 120days if the standard outsourcing solution and product offering are implemented.  The Company has found, however, thatinstitutions frequently want to differentiate their direct and Internet bankofferings from the start and therefore, outsourcing implementation projectsgenerally take six to twelve months.

 

**RevenueGeneration**

 

The Company’sdivisions generate revenue by assessing fees on software products, services,processing and maintenance.  Feesassessed on software products include software license and product enhancementfees.  Typically, fees for softwarelicense contracts are paid in stages upon the completion of defineddeliverables or certain dates.  Forlicenses sold for in-house solutions, i.e., operated by the institutions, theCompany recognizes revenue from fees using either the percentage-of-completioncontract accounting method, or where applicable, when the requirements ofStatement 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 ofthese fees begins after the client “goes live” with the solution.  Software product fees and implementationfees generated from outsourced solutions, along with their associated costs,are largely deferred during the implementation phase of an outsourced projectin accordance with  Staff AccountingBulletin SAB No. 101 “Revenue Recognition in Financial Statements”.  Once an outsourced client begins processingits customers’ accounts on the outsourced platform, i.e., “goes live,” thedeferred product and services revenue and costs are amortized over the expectedlife of the processing arrangement and are reported.  Other service revenue is generally recognized when the servicesare performed or on the percentage of completion method, depending on thecontract terms and accounting for the other elements of the arrangement.  Processing fees consist primarily of monthlyand account-based fees for servicing, transaction fees associated withtransaction volumes for a specified period. Outsourcing generates on-going, processing revenues.  Under this model, as a client institution’scustomer account base grows, the Outsourcing Division increases its revenuestream.  The Company also recognizesreimbursable client expenses as revenue in accordance with EmergingIssues Task Force Number 01-14, “Income Statement Characterization ofReimbursement Received for ‘Out-of-Pocket’ Expenses Incurred” (EITF 01-14),which requires that the reimbursement received for out-of-pocket expenses beclassified as revenues and not as cost reductions.  For both in-house and outsourced license contracts,maintenance fees are normally billed annually in advance and recognized asrevenue ratably during the specified maintenance period.

 

For moreinformation on the Company’s products and services, Sanchez maintains a Website, 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.

 

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**Highlights**

 

Comparing2002’s first quarter over 2003’s first quarter, the Company’s revenues rose 19percent from $19.3 million to $23.0 million. Revenuecontributions were recognized from across the client base and included thesales of Sanchez software licenses to two new banking clients – one, athird-party sale of a Sanchez banking solution to Bank Amerykański wPolsce SA in Poland, and the other, a sale of a Sanchez banking solution to aHungarian mortgage institution.  Revenuewas also recognized from work generated from implementing two significantcontracts signed last year with Krung Thai Bank in Thailand and Scotiabank inCanada.  In addition the first quarterof 2003 include the results of the Wealth Management Division, which wasacquired on July 3, 2002.

 

Comparing theCompany’s key revenue lines, product revenues increased approximately 48percent from $3.9 million in 2002’s first quarter to $5.7 million in 2003’sfirst quarter; services revenues increased approximately 15 percent from $5.7million to $6.6 million first quarter over comparative first quarter; andsoftware maintenance and other increased approximately 31 percent from $3.9million to $5.1 million first quarter over comparative first quarter.  Processing revenues were flat at $4.6million first quarter over comparative first quarter.

 

Earnings fromoperations rose from $134,000, achieved in the first quarter 2002, to $417,000,reached in the first quarter 2003.  Netearnings increased from $218,000 to $335,000, first quarter over comparativefirst quarter, while earnings per share were flat at $0.01 for the samecomparative period.  During 2003’s firstquarter, the Company recognized a net gain of $156,000 on an investment in apartner company in Poland.  In addition,the Company incurred a foreign exchange charge of $207,000, primarily as aresult of a weakening U.S. dollar against the Canadian dollar.

 

The Company’sbusiness backlog continued to grow during 2003’s first quarter reaching arecord $97.2 million.  For 2003’s firstquarter, the Company had a balance of $29.8 million in net SAB No. 101 deferredproduct and services revenue, and a deferred margin balance of $9.6million.  Deferred product and servicesrevenue is part of the Company’s future revenue stream and is included in theCompany’s backlog of business.  Deferredrevenue, along with recurring revenue from processing, which is generated fromSanchez’s Outsourcing Division, unrecognized license fees, and maintenancecontracts, enhances the Company’s visibility on future revenues.

 

Sanchez’s cashposition at March 31, 2003, remained strong at $30.2 million.  The Company’s days sales outstanding (DSO)as of March 31 was 71 DSO, which was in line with the Company’s expectations.

 

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# **Results of Operations**

 

The following table setsforth, for the periods indicated, selected statement of operations data: 

 
| **Dollars in thousands**                  |   | **2003** |       | **2002** |       |
|-------------------------------------------|--------|----------|------------|----------|------------|
|                                      |   |     | ** ** |     | ** ** |
| Revenues                                  |   |     |       |     |       |
| Products                                  |   | $        | 5,698      |     | $          | 3,850 |   |
| Services                                  |   | 6,558    |       | 5,691    |       |
| Processing                                |   | 4,639    |       | 4,555    |       |
| Software maintenance and other            |   | 5,081    |       | 3,870    |       |
| Customer reimbursements                   |   | 1,029    |       | 1,360    |       |
| Total revenues                            |   | $        | 23,005     |     | $          | 19,326 |   |
|                                      |   |     |       |     |       |
| Percentage Relationship to Total Revenues |   |     |       |     |       |
| Revenues                                  |   |     |       |     |       |
| Products                                  |   | 24.8     | %          | 19.9     | %          |
| Services                                  |   | 28.5     |       | 29.5     |       |
| Processing                                |   | 20.2     |       | 23.6     |       |
| Software maintenance and other            |   | 22.1     |       | 20.0     |       |
| Customer reimbursements                   |   | 4.4      |       | 7.0      |       |
| Total revenues                            |   | 100.0    |       | 100.0    |       |
|                                      |   |     |       |     |       |
| Operating expenses                        |   |     |       |     |       |
| Product development                       |   | 22.7     |       | 15.6     |       |
| Product support                           |   | 6.9      |       | 7.2      |       |
| Services                                  |   | 22.6     |       | 16.8     |       |
| Processing                                |   | 16.0     |       | 21.0     |       |
| Sales and marketing                       |   | 14.0     |       | 19.3     |       |
| General, administrative and other         |   | 11.6     |       | 12.4     |       |
| Customer reimbursement expense            |   | 4.4      |       | 7.0      |       |
| Total operating expenses                  |   | 98.2     |       | 99.3     |       |
|                                      |   |     |       |     |       |
| Earnings from operations                  |   | 1.8      |       | 0.7      |       |
| Interest income, net                      |   | 0.3      |       | 1.0      |       |
| Gain on investment                        |   | 0.7      |       | 0.0      |       |
| Foreign exchange loss                     |   | (0.9     | )          | 0.0      |       |
| Earnings before income taxes              |   | 1.9      |       | 1.7      |       |
| Income tax provision                      |   | 0.5      |       | 0.6      |       |
| Net earnings                              |   | 1.4      | %          | 1.1      | %          |

 

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**ThreeMonths Ended March 31, 2003 Compared to Three Months Ended March 31,2002**

 

REVENUES

 

Total revenuesincreased by $3.7 million, or 19.0%, in the first quarter of 2003 as comparedto the first quarter of 2002.    

 

Productrevenues increased by $1.8 million, or 48.0%, from the first quarter of 2002 tothe first quarter of 2003.  TheCompany’s newly acquired Wealth Management Division contributed $1.3 million toproduct revenues in the period ended March 31, 2003.  The increase in product revenue is primarily attributable to theproduct revenue realized from the newly acquired Wealth Management Division,with other significant contributions coming from license recognition onprojects currently being implemented with customers in Canada, Europe andThailand.

 

Servicerevenues increased by $867,000, or 15.2%, in the period ended March 31, 2003,as compared to the period ended March 31, 2002.  Wealth Management contributed $460,000 to service revenues in thefirst quarter of 2003.  The remaining increasein service revenues can be attributed to work generated from the ongoing implementationof existing customers, offset by lower accreted revenue previously deferred inaccordance with SAB No. 101 for implementation fees associated with outsourcingclients .  This lower accretion is aresult of certain contract extensions with the Company’s existing customer base..

 

Processingrevenues increased $84,000, or 1.8%, in the first quarter of 2003 as comparedto the first quarter of 2002.  WealthManagement contributed $62,000 to processing revenues in the current period.  Processing revenues remained flat primarilyas result of a majority of clients remaining within their monthly minimumprocessing volumes.

 

Softwaremaintenance and other revenues increased $1.2 million, or 31.3%, from the firstquarter of 2002 to the first quarter of 2003. Wealth Management contributed $926,000 to software maintenance and otherrevenues in the period ended March 31, 2003. The remaining increase in software maintenance and other revenues can beattributed to start of maintenance for a significant U.S. customer in mid-2002as well as the one-time termination fee of a U.S. customer recognized in thefirst quarter of 2003.

 

Customerreimbursements revenues decreased $331,000, or 24.3%, in the period ended March31, 2003, as compared to the period ended March 31, 2002.  The primary reason for the decrease can beattributed to less travel required by the implementation projects in the firstquarter of 2003 as compared to the first quarter of 2002.

 

EXPENSES

 

Product development expensesincreased $2.2 million, or 73.6%, in the first quarter of 2003 as comparedto the same period in 2002, primarily due to a larger deferral of developmentcosts in accordance with SAB No. 101 in 2002 versus 2003 for clients usingthe outsourced solution. The revenue associated with these license costs wasalso deferred in accordance with SAB No. 101. Also contributing to thehigher expenses was an increase in outside consulting expense in 2003 versus2002 along with the costs associated with our Wealth Management Division as aresult of the Spectra Software acquisition in July 2002.

 

Product Support expensesincreased $199,000, or 14.3%, in the first quarter of 2003 versus the firstquarter of 2002.  This increase isdirectly attributed to the impact of adding the Wealth Management Divisionexpenses, offset by lower third party maintenance costs.

 

Service expenses increased$1.9 million, or 58.9%, during the period ended March 31, 2003, as compared tothe period ended March 31, 2002.  WealthManagement contributed $350,000 to service expenses in the first quarter of2003.  Other significant contributionsto the increase in service expenses can be attributed to less deferred serviceexpenses related to outsourcing clients as a result of customers going live inmid-2002, offset by reduced consultancy expenses as compared to the firstquarter of 2002.  Service marginsin the first quarter of 2003 were 21% compared to 42.7% in the first quarter of2002.  The primary causes for the dropin margin were lower utilization rates from internal resources as well ashigher than anticipated use of third-party resources.

 

Processing expensesdecreased $379,000, or 9.3%, in the first quarter of 2003 versus the firstquarter of 2002. This decrease is primarily attributable to lower third partyprocessing fees. The gross margin relative to processing was 20.7% in the firstquarter of 2003 compared to 11.0% in the same quarter last year, despiterevenues being flat year to year.    Thelower costs were achieved while also including the Wealth Management Divisionexpenses.  This business line is stillin its early stages and therefore margins are subject to some variability.

 

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Sales and marketing expensesdecreased by $510,000, or 13.7%, in the 2003 period as compared to the sameperiod in 2002. Expenses were down due to lower compensation and lowermarketing costs, partially offset by the addition of the Wealth ManagementDivision's expenses.

 

General, administrative andother expenses increased by $283,000, or 11.8%, in 2003. The increase wasprimarily a result of expenses associated with the Wealth Management unit.  These costs were offset slightly by lowerlegal costs and tighter controls on discretionary expenditures.

 

Interest income decreased$113,000 or 59% in the first quarter of 2003 when compared to the first quarterof 2002.  This decrease is a result oflower interest rates in 2003 and lower cash balances following the acquisitionof Spectra in July 2002.

 

During 2003’sfirst quarter, the Company recognized a net gain of $156,000 on an investmentin a partner company in Poland.

 

The Companyincurred a foreign exchange loss of $207,000, primarily as a result of aweakening U.S. dollar against the Canadian dollar.  The Company’s foreign exchange exposure is primarily related tointercompany activity.

 

The Company’seffective tax rate in the first quarter of 2003 was 24.5% of earnings comparedto 33.0% in the first quarter of 2002. The primary reason for this decrease was the effect of the tax benefitderived from the loss incurred at the Company’s Canadian subsidiary.

 

**Liquidityand Capital Resources**

 

Cash and cash equivalentswere $30.2 million at March 31, 2003, a decrease of $2.5 million fromDecember 31, 2002. Cash used by operating activities for the three months endedMarch 31, 2003, was $2.2 million. As of March 31, 2003, the Companyhad no debt outstanding.  During thefirst three months of 2003, the Company used $554,000 for the purchase ofproperty and equipment while financing activities contributed $194,000 of cashduring the three months ended March 31, 2003, principally from theproceeds from the employee stock purchase plan. 

 

As of March31, 2003, the Company has invested $2.0 million in a venture fund.  This commitment has since been capped at the$2.0 million contributed and no future funding is anticipated toward thisventure.

 

The Company currentlyanticipates that cash generated from operations and existing cash balances willbe sufficient to satisfy its operating and capital cash needs for theforeseeable future and, at a minimum, through the next year. Should theCompany’s business expand more rapidly than expected, the Company has a line ofcredit of $20.0 million available for its use. At the current time, the Company has not drawn on this line. 

 

The Company believes thatits business is generally not seasonal; however, the Company has historicallyexperienced, and can be expected to continue to experience, a certain degree ofvariability in its quarterly revenue, earnings and cash flow patterns. Thisvariability is typically driven by significant events, which directly impactthe recognition and billing of project-related revenues. Examples of suchevents include the timing of new business contract closings and the initiation ofproduct and service fee revenue recognition, one-time payments from existingclients relative to license expansion rights (required to process a greaternumber of customer accounts or expand the number of permitted users) andcompletion of implementation project roll-outs and the related revenuerecognition. Because a high percentage of the Company’s expenses are relativelyfixed, a variation in the timing of the initiation or the completion of clientprojects, particularly at or near the end of any quarter, can cause significantvariations in operating results from quarter to quarter. The Company believesthat over the course of time the ongoing monthly revenue stream associated withthe outsourcing operations will contribute toward more predictable quarter-to-quarterrevenues.

 

**RecentAccounting Pronouncements**

 

In July 2002,the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit orDisposal Activities,” which addresses the financial accounting and reporting ofexpenses related to restructurings initiated after 2002, and applies to costsassociated with an exit activity (including a restructuring) or with a disposalof long-lived assets.  Those activitiescan include eliminating or reducing product lines, terminating employees andcontracts, and relocating plant facilities or personnel.  Under SFAS No. 146, a company will record aliability for a cost associated with an exit or disposal activity when theliability is incurred and can be measured at fair value.  The provisions of SFAS No. 146 are effectiveprospectively for exit or disposal activities initiated after December 31,2002.

 

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In November 2002, the FASBissued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees and Other,” which elaborates onthe disclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under guarantees issued.  The Interpretation also clarifies that aguarantor is required to recognize, at inception of a guarantee, a liabilityfor the fair value of the obligation undertaken.  The initial recognition and measurement provisions of theInterpretation are applicable to guarantees issued or modified after December31, 2002.  We have not issued anyguarantees for performance of third parties. Accordingly, adoption of this standard did not have a material effect onthe Company’s consolidated financial Statements.

 

In January2003, the FASB issued Interpretation No. 46, “Consolidation of VariableInterest Entities,” which addresses the consolidation by business enterprisesof variable interest entities as defined in the Interpretation.  The Interpretation applies immediately tovariable interests in variable interest entities created after January 31,2003, and to variable interests in variable interest entities obtained afterJanuary 31, 2003, whereas it is otherwise effective June 15, 2003 for variableinterest entities acquired before February 1, 2003.  The adoption of this Interpretation is not expected to have amaterial effect on the Company’s consolidated financial statements.

 

**Forward-lookingStatements**

 

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

 

**ITEM 3****.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

**InterestRate Risk**

 

The Company’s exposure tomarket risk for changes in interest rates relate primarily to the Company’scash equivalents. The Company does not have any derivative financialinstruments in its portfolio. The Company is averse to principal loss andensures the safety and preservation of its invested funds by limiting defaultrisk, market risk and reinvestment risk. The Company does not expect anymaterial loss with respect to its cash equivalents.

 

**ForeignCurrency Risk**

 

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The Company does not useforeign exchange forward contracts. Substantially all of the Company’s U.S. based operations contract inU.S. dollars.  For the Company’s foreignsubsidiaries, the Company generally matches local currency revenues with localcurrency costs.  The Company does havecertain intercompany relationships that may create foreign exchange gains orlosses.

 

**ITEM 4.****  CONTROLS ANDPROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

Under thesupervision and with the participation of our management, the Company’sprincipal executive officer and principal financial officer have concluded thatthe Company’s disclosure controls and procedures (as defined in Exchange ActRule 13a-14(c)), based on their evaluation of such controls and proceduresconducted within 90 days prior to the date hereof, are effective to ensure thatinformation required to be disclosed by the Company in the reports it filesunder the Securities Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission and that such information isaccumulated and communicated to the Company’s management, including itsprincipal executive officer and principal financial officer, as appropriate toallow timely decisions regarding required disclosure.

 

**Evaluationof Internal Controls**

 

There were nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect the Company’s disclosure controls and proceduressubsequent to the date of their most recent evaluation nor any knownsignificant deficiencies or material weaknesses in such disclosure controls andprocedures requiring corrective actions. As a result, no corrective actionswere taken.

 

**AuditProcess and Auditors**

 

Under theSarbanes-Oxley Act, auditors are prohibited from providing non-audit servicesto audit clients without the advance approval of the audit committee.  At the August 7, 2002 Audit Committeemeeting, Sanchez received approval from the Audit Committee for the Company’sauditors to perform various tax return preparation, tax consultancy and SAS 70Report services.  At the April 24, 2003Audit Committee meeting, Sanchez received approval from the Audit Committee forthe Company’s auditors to perform certain sales and use tax work.  Any subsequent authorizations will bedisclosed as required.  The AuditCommittee has also put in place a procedure for approval of the permittednon-audit services by one of two Audit Committee members in between meetings,subject to subsequent ratification by the full Audit Committee.

 

**PARTII—OTHER INFORMATION**

 

**ITEM 6****:  Exhibits andreports on Form 8-K**

 

a)              Exhibit 99.1.    CEOand CFO Certification pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

b)             Form 8-K.  Item 5—Other Events.** ** Adoption of Shareholder Rights Plan.  Filed on February 28, 2003

 

No other applicable items.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 
|   | SANCHEZ COMPUTER  ASSOCIATES, INC.                                  |
|--------|---------------------------------------------------------------------|
|   |                                                                |
|   |                                                                |
|   | /s/  TODD A. PITTMAN                                           |   |
|   | Todd A. Pittman*Senior Vice President and Chief Financial  Officer* |

 

 

Date May 15, 2003

 

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CERTIFICATION

 

I, Frank Sanchez, certify that:

 

1.                    I have reviewed this quarterlyreport on Form 10-Q of Sanchez Computer Associates, Inc.;

 

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

 

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

 

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

 

a)                   designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)                  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                   presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

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

 

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

 

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

 

6.                    The registrant’s other certifyingofficer and I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Dated: May  15, 2003 | /s/  FRANK R. SANCHEZ                  |   |
|----------------------|---------------------------------------------|--------|
|                 | Frank R. Sanchez, *Chief Executive Officer* |

 

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CERTIFICATION

 

I, Todd Pittman, certify that:

 

1.                    I have reviewed this quarterlyreport on Form 10-Q of Sanchez Computer Associates, Inc.;

 

2.                    Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                    Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

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

 

a)                   designed such disclosure controlsand procedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)                  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                   presented in this quarterly reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

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

 

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

 

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

 

6.                    Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 
| Dated: May  15, 2003 | /s/  TODD A. PITTMAN                    |   |
|----------------------|----------------------------------------------|--------|
|                 | *Todd A.  Pittman,**Chief Financial Officer* |

 

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