** **

**Securitiesand Exchange CommissionWashington, 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 June 30, 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.**(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Pennsylvania**                         |   | **23-2161560**                       |
|------------------------------------------|--------|--------------------------------------|
| (State or other Jurisdiction of          |   | (I.R.S. Employer Identification No.) |
| Incorporation or Organization)           |   |                                 |
|                                     |   |                                 |
| **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 AreaCode: **(610) 296-8877**

 

**N/A**

 

Former Name, Former Address and Former FiscalYear, if Changed Since Last Report

 

Indicate by check mark whether the registrant: (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý    No o

 

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

 

As of July 31, 2003, there were 26,904,362outstanding shares of the issuer’s Common Stock, no par value.

 

 

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**SANCHEZ COMPUTER ASSOCIATES, INC.INDEX TO FORM 10-QFOR THE QUARTER ENDED JUNE 30, 2003**

**PART I:   FINANCIAL INFORMATION**

 
|                           |                                                                                                 | **Page No.'s** |
|--------------------------------|------------------------------------------------------------------------------------------------------|----------------|
| ITEM 1:                        | FINANCIAL STATEMENTS                                                                                 |
|                           |                                                                                                 |
|                           | CONSOLIDATED BALANCE SHEETS  June 30, 2003 (Unaudited) and December 31, 2002                         | 3              |
|                           |                                                                                                 |           |
|                           | CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)  Three and six months ended June 30, 2003 and 2002 | 4              |
|                           |                                                                                                 |           |
|                           | CONSOLIDATED STATEMENTS OF CASH FLOWS  (Unaudited)  Six months ended June 30, 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                                          | 19             |
|                           |                                                                                                 |           |
| ITEM 4                         | CONTROLS AND PROCEDURES                                                                              | 19             |
|                           |                                                                                                 |           |
| **PART II: OTHER INFORMATION** |                                                                                                 |
|                           |                                                                                                 |           |
| ITEM 4                         | SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                 | 20             |
|                           |                                                                                                 |           |
| ITEM 6:                        | EXHIBITS  AND REPORTS ON FORM 8-K                                                                    | 20             |
|                           |                                                                                                 |           |
| SIGNATURE                      | 21                                                                                                   |
|                           |

 

2

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

 
|                                                                                                                    |   | **June 30,  2003** |    | **December 31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                                                                                    |   | **(unaudited)**    |    |                   |   |
| **ASSETS**                                                                                                              |   |               |    |                   |   |
| Current assets                                                                                                          |   |               |    |                   |   |
| Cash and cash equivalents                                                                                               |   | $                  | 31,567  |                   | $      | 32,717 |   |
| Accounts receivables, less allowances ($326 and  $979)                                                                  |   | 11,621             |    | 12,993                 |   |
| Contracts in process                                                                                                    |   | 2,802              |    | 4,851                  |   |
| Income tax refund receivable                                                                                            |   | 2,380              |    | 1,619                  |   |
| Deferred income taxes                                                                                                   |   | 2,661              |    | 2,661                  |   |
| Prepaid and other current assets                                                                                        |   | 2,732              |    | 2,812                  |   |
| Deferred expenses                                                                                                       |   | 10,783             |    | 8,343                  |   |
| Total current assets                                                                                                    |   | 64,546             |    | 65,996                 |   |
|                                                                                                                    |   |               |    |                   |   |
| Property and equipment                                                                                                  |   |               |    |                   |   |
| Equipment                                                                                                               |   | 17,344             |    | 16,532                 |   |
| Furniture and fixtures                                                                                                  |   | 2,695              |    | 2,674                  |   |
| Leasehold improvements                                                                                                  |   | 3,154              |    | 3,148                  |   |
|                                                                                                                    |   | 23,193             |    | 22,354                 |   |
| Accumulated depreciation and amortization                                                                               |   | (18,554            | )       | (16,826                | )      |
| Net property and equipment                                                                                              |   | 4,639              |    | 5,528                  |   |
|                                                                                                                    |   |               |    |                   |   |
| Goodwill                                                                                                                |   | 26,584             |    | 23,896                 |   |
| Deferred expenses                                                                                                       |   | 7,773              |    | 11,496                 |   |
| Amortizable intangibles, net                                                                                            |   | 9,282              |    | 8,454                  |   |
| Deferred income taxes                                                                                                   |   | 2,895              |    | 2,895                  |   |
| Other non-current assets                                                                                                |   | 2,678              |    | 2,832                  |   |
| Total assets                                                                                                            |   | $                  | 118,397 |                   | $      | 121,097 |   |
|                                                                                                                    |   |               |    |                   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                           |   |               |    |                   |   |
| Current liabilities                                                                                                     |   |               |    |                   |   |
| Accounts payable                                                                                                        |   | $                  | 4,187   |                   | $      | 3,771 |   |
| Accrued expenses                                                                                                        |   | 7,174              |    | 9,617                  |   |
| Deferred revenue                                                                                                        |   | 25,024             |    | 22,804                 |   |
| Total current liabilities                                                                                               |   | 36,385             |    | 36,192                 |   |
| Deferred revenue                                                                                                        |   | 10,702             |    | 18,150                 |   |
| Minority interest                                                                                                       |   | 190                |    | 209                    |   |
| Total liabilities                                                                                                       |   | 47,277             |    | 54,551                 |   |
|                                                                                                                    |   |               |    |                   |   |
| Shareholders’ Equity                                                                                               |   |               |    |                   |   |
|                                                                                                                    |   |               |    |                   |   |
| Common stock stated value of $.01 per share,  75,000 shares authorized, 26,843 and 26,689 shares issued and outstanding |   | 268                |    | 267                    |   |
| Additional paid-in capital                                                                                              |   | 49,135             |    | 48,794                 |   |
| Retained earnings                                                                                                       |   | 18,525             |    | 18,575                 |   |
| Accumulated comprehensive income (loss)                                                                                 |   | 3,192              |    | (1,090                 | )      |
| Total shareholders’ equity                                                                                         |   | 71,120             |    | 66,546                 |   |
| Total liabilities and shareholders’ equity                                                                         |   | $                  | 118,397 |                   | $      | 121,097 |   |

 

See notes to consolidated financialstatements

 

3

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

 
|                                                     |   | **Three Months Ended****June 30,** |   | **Six Months Ended****June 30,** |   |
|----------------------------------------------------------|--------|------------------------------------|--------|----------------------------------|--------|
|                                                     |   | **2003**                           |   | **2002**                         |   | **2003** |   | **2002** |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Revenues                                                 |   |                               |   |                             |   |   |   |   |   |
| Products                                                 |   | $                                  | 6,263  |                             | $      | 2,831 |   | $ | 11,961 |   | $ | 6,681 |   |
| Services                                                 |   | 6,738                              |   | 9,179                            |   | 13,296 |   | 14,870 |   |
| Processing                                               |   | 4,641                              |   | 4,537                            |   | 9,280 |   | 9,092 |   |
| Software maintenance and other                           |   | 5,199                              |   | 4,273                            |   | 10,280 |   | 8,143 |   |
| Customer reimbusements                                   |   | 1,199                              |   | 1,512                            |   | 2,228 |   | 2,872 |   |
| Total revenues                                           |   | 24,040                             |   | 22,332                           |   | 47,045 |   | 41,658 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Operating expenses                                       |   |                               |   |                             |   |   |   |   |   |
| Product development                                      |   | 5,232                              |   | 3,886                            |   | 10,454 |   | 6,894 |   |
| Product support                                          |   | 1,688                              |   | 1,378                            |   | 3,274 |   | 2,765 |   |
| Services                                                 |   | 5,544                              |   | 5,895                            |   | 10,723 |   | 9,154 |   |
| Processing                                               |   | 4,064                              |   | 4,092                            |   | 7,741 |   | 8,148 |   |
| Sales and marketing                                      |   | 3,603                              |   | 2,630                            |   | 6,825 |   | 6,362 |   |
| General, administrative and other                        |   | 3,012                              |   | 3,148                            |   | 5,685 |   | 5,538 |   |
| Customer reimbursement expense                           |   | 1,199                              |   | 1,512                            |   | 2,228 |   | 2,872 |   |
| Restructuring charge                                     |   | 316                                |   | —                           |   | 316 |   | — |   |
| Total operating expenses                                 |   | 24,658                             |   | 22,541                           |   | 47,246 |   | 41,733 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Loss from operations                                     |   | (618                               | )      | (209                             | )      | (201 | ) | (75 | ) |
| Interest income, net                                     |   | 74                                 |   | 552                              |   | 152 |   | 742 |   |
| Gain on investment                                       |   | —                             |   | —                           |   | 156 |   | — |   |
| Foreign exchange income (loss)                           |   | 1                                  |   | —                           |   | (206 | ) | — |   |
| Earnings (loss) before income taxes                      |   | (543                               | )      | 343                              |   | (99 | ) | 667 |   |
| Income tax provision (benefit)                           |   | (160                               | )      | 113                              |   | (51 | ) | 220 |   |
| Net earnings (loss)                                      |   | $                                  | (383   | )                                | $      | 230 |   | $ | (48 | ) | $ | 447 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Basic and diluted earnings (loss) per share              |   | $                                  | (0.01  | )                                | $      | 0.01 |   | $ | 0.00 |   | $ | 0.02 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Weighted-average common shares outstanding               |   | 26,799                             |   | 26,010                           |   | 26,775 |   | 26,003 |   |
|                                                     |   |                               |   |                             |   |   |   |   |   |
| Weighted-average common and dilutive shares  outstanding |   | 26,799                             |   | 26,144                           |   | 26,775 |   | 26,146 |   |

 

Seenotes to consolidated financial statements

 

4

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

 
|                                                                                   |   | **Six Months Ended  June 30,** |   |
|----------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                   |   | **2003**                       |   | **2002** |   |
| Cash flows from operating activities                                                   |   |                           |   |   |   |
| Net earnings (loss)                                                                    |   | $                              | (48    | ) | $ | 447 |   |
| Adjustments to reconcile net earnings to cash  provided (used) by operating activities |   |                           |   |   |   |
| Depreciation and amortization                                                          |   | 2,375                          |   | 2,216 |   |
| Changes in operating assets and liabilities                                            |   |                           |   |   |   |
| Accounts receivable                                                                    |   | 1,528                          |   | (1,991 | ) |
| Contracts in process                                                                   |   | 2,067                          |   | (220 | ) |
| Income tax refund receivable/payable                                                   |   | (1,098                         | )      | (92 | ) |
| Prepaid and other current assets                                                       |   | 575                            |   | (3,014 | ) |
| Accounts payable and accrued expenses                                                  |   | (1,836                         | )      | (1,296 | ) |
| Provision for doubtful accounts receivable                                             |   | —                         |   | 1,100 |   |
| Deferred revenue                                                                       |   | (5,373                         | )      | 8,312 |   |
| Deferred expenses                                                                      |   | 1,156                          |   | (3,274 | ) |
| Other                                                                                  |   | (73                            | )      | 175 |   |
| Net cash provided (used) by operating activities                                       |   | (727                           | )      | 2,363 |   |
|                                                                                   |   |                           |   |   |   |
| Cash flows from investing activities                                                   |   |                           |   |   |   |
| Investments                                                                            |   | (75                            | )      | (500 | ) |
| Capital expenditures                                                                   |   | (840                           | )      | (967 | ) |
| Net cash used by investing activities                                                  |   | (915                           | )      | (1,467 | ) |
|                                                                                   |   |                           |   |   |   |
| Cash flows from financing activities                                                   |   |                           |   |   |   |
| Exercise of stock options                                                              |   | 122                            |   | 12 |   |
| Proceeds from the issuance of shares under the  employee stock purchase plan           |   | 187                            |   | 321 |   |
| Net cash provided by financing activities                                              |   | 309                            |   | 333 |   |
|                                                                                   |   |                           |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                  |   | (1,333                         | )      | 1,229 |   |
| Effect of foreign exchange on cash                                                     |   | 183                            |   | — |   |
| Cash and cash equivalents at beginning of period                                       |   | 32,717                         |   | 40,955 |   |
| Cash and cash equivalents at end of period                                             |   | $                              | 31,567 |   | $ | 42,184 |   |
|                                                                                   |   |                           |   |   |   |
| Supplemental cash flow information                                                     |   |                           |   |   |   |
| Interest paid                                                                          |   | $                              | — |   | $ | — |   |
| Income taxes paid                                                                      |   | $                              | 761    |   | $ | 457 |   |

 

See notes to consolidated financialstatements

 

5

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**Sanchez Computer Associates, Inc. Notes to Unaudited ConsolidatedFinancial 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 of 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 and six months ended June 30, 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  June 30,** |   | **Six months ended  June 30,** |   |
|--------------------|--------|----------------------------------|--------|--------------------------------|--------|
|               |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| U.S. and Caribbean |   | $                                | 12,268 |                           | $      | 15,830 |   | $ | 23,519 |   | $ | 27,964 |   |
| Canada             |   | 4,185                            |   | 954                            |   | 8,269 |   | 1,756 |   |
| Europe             |   | 4,062                            |   | 5,373                          |   | 9,580 |   | 11,532 |   |
| Other              |   | 3,525                            |   | 175                            |   | 5,677 |   | 406 |   |
| Total              |   | $                                | 24,040 |                           | $      | 22,332 |   | $ | 47,045 |   | $ | 41,658 |   |

 

**(C.)         Business Segments**

 

Previously,our segments included Sanchez’s software licensing business, the Sanchez DataSystems, Inc. (SDSI) outsourcing business and the Wealth Management Division,which 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, and 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 onoperating earnings.  Customerreimbursement revenues and expenses are not allocated to the individualoperating divisions.  The Companycombines assets, liabilities and shareholders’ equity into one consolidatedbalance sheet and does not measure the performance of its divisions based uponbalance sheet accounts.  It is notpractical at this time to restate segment data for prior periods to conform tothe Company’s new segment reporting.  Wewill continue to also present segment information under the previous formatuntil comparative information 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 previouslyreported in 2002 (in thousands):

 

6

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

 
|                            |   | **Three months ended  June 30, 2003** |   | **Six months ended  June 30, 2003** |   |
|---------------------------------|--------|---------------------------------------|--------|-------------------------------------|--------|
| Revenues                        |   |                                  |   |                                |   |
| Banking Solutions               |   | $                                     | 9,081  |                                | $      | 17,583 |   |
| Wealth Management               |   | 2,953                                 |   | 5,659                               |   |
| Outsourcing                     |   | 5,814                                 |   | 11,805                              |   |
| Global Services                 |   | 4,993                                 |   | 9,770                               |   |
| Total segment revenue           |   | 22,841                                |   | 44,817                              |   |
| Reimbursables                   |   | 1,199                                 |   | 2,228                               |   |
| Total revenues                  |   | $                                     | 24,040 |                                | $      | 47,045 |   |
|                            |   |                                  |   |                                |   |
| Earnings (loss) from operations |   |                                  |   |                                |   |
| Banking Solutions               |   | $                                     | 1,607  |                                | $      | 3,130 |   |
| Wealth Management               |   | (690                                  | )      | (1,252                              | )      |
| Outsourcing                     |   | (353                                  | )      | (620                                | )      |
| Global Services                 |   | (1,182                                | )      | (1,459                              | )      |
| Total loss from operations      |   | $                                     | (618   | )                                   | $      | (201 | ) |

 

The tablebelow summarizes information about the business segments in the previous format(in thousands):

 
|                            |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|---------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                            |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Revenues                        |   |                             |   |                           |   |   |   |   |   |
| Sanchez                         |   | $                                | 11,798 |                           | $      | 8,913 |   | $ | 23,316 |   | $ | 18,328 |   |
| SDSI                            |   | 9,289                            |   | 13,419                         |   | 18,065 |   | 23,330 |   |
| Wealth Management               |   | 2,953                            |   | —                         |   | 5,664 |   | — |   |
| Total Revenues                  |   | $                                | 24,040 |                           | $      | 22,332 |   | $ | 47,045 |   | $ | 41,658 |   |
|                            |   |                             |   |                           |   |   |   |   |   |
| Earnings (loss) from operations |   |                             |   |                           |   |   |   |   |   |
| Sanchez                         |   | (1,555                           | )      | (428                           | )      | (1,079 | ) | (720 | ) |
| SDSI                            |   | 1,153                            |   | 219                            |   | 1,658 |   | 645 |   |
| Wealth Management               |   | (216                             | )      | —                         |   | (780 | ) | — |   |
| Total loss from operations      |   | $                                | (618   | )                              | $      | (209 | ) | $ | (201 | ) | $ | (75 | ) |

 
|              |   | **June 30,  2003** |    | **December 31,  2002** |   |
|-------------------|--------|--------------------|---------|------------------------|--------|
| Assets            |   |               |    |                   |   |
| Sanchez           |   | $                  | 93,959  |                   | $      | 97,438 |   |
| SDSI              |   | 27,644             |    | 41,000                 |   |
| Wealth Management |   | 33,992             |    | 38,655                 |   |
| Eliminations      |   | (37,198            | )       | (55,996                | )      |
| Total assets      |   | $                  | 118,397 |                   | $      | 121,097 |   |

 

7

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**(D.)         Earnings Per Share**

 

Basic earnings (loss) per share has been calculated as net earnings(loss) divided by weighted-average common shares outstanding, while dilutedearnings (loss) per share has been computed as net earnings (loss) divided byweighted-average common and diluted shares outstanding, which includes thedilutive effect of stock options.  Thefollowing table provides a reconciliation of weighted-average common sharesoutstanding to weighted-average common and diluted shares outstanding (inthousands): 

 
|                                                          |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|---------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                          |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Weighted-average shares outstanding                           |   | 26,799                           |   | 26,010                         |   | 26,775 |   | 26,003 |   |
| Dilutive effect of options                                    |   | —                           |   | 134                            |   | — |   | 143 |   |
| Total weighted average common and diluted shares  outstanding |   | 26,799                           |   | 26,144                         |   | 26,775 |   | 26,146 |   |

 

AtJune 30, 2003, total potentially dilutive common stock equivalents includeoptions to purchase 6,733,356 shares of common stock.  As of June 30, 2002, total potentially dilutive common stockequivalents included options to purchase 5,210,599 shares of common stock.   All potentially dilutive common stockequivalents were excluded from the calculations of net loss per share for the three and sixmonths ended June 30, 2003, as their effect is anti-dilutive as a result of thenet loss incurred for the periods.

 

**(E.)          Stock-Based Compensation**

 

        In December 2002,Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting forStock-Based Compensation, Transition and Disclosure,” was issued.  SFAS No. 148 amended SFAS No. 123,“Accounting for Stock-Based Compensation,” to provide alternative methods oftransition for a voluntary change to the fair-value based method of accountingfor stock-based employee compensation. In addition, SFAS No. 148 amended the disclosure requirements of SFASNo. 123 related to the disclosure about the method of accounting forstock-based 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-based awards,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 (loss) and earnings (loss)per share disclosures for employee stock option grants as if the fair valuebased method defined in SFAS No. 123 had been applied.  The Company continues to apply theprovisions of APB Opinion No. 25 and provide the pro forma disclosures inaccordance with the provisions of SFAS No. 123 and SFAS No. 148 to its stockoption plans.  Had compensation cost forthe Company’s stock option plans been determined based upon the fair value ofthe options at the date of grant, as prescribed under SFAS No. 123, theCompany’s net earnings (loss) and basic and diluted net earnings (loss) pershare would have been adjusted to the following pro forma amounts (inthousands):

 

 
|                                                                                                                                     |   |         |       | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|------------|----------------------------------|--------|--------------------------------|--------|
|                                                                                                                                     |   |         |       | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Net earnings (loss)                                                                                                                      |   | As  reported | ** ** | $                                | (383   | )                              | $      | 230 |   | $ | (48 | ) | $ | 447 | ** ** |
| Deduct:   Total stock-based employee compensation expense determined under the  fair-value based methods for all awards, net of tax |   |         |       | (1,095                           | )      | (1,170                         | )      | (2,256 | ) | (2,197 | ) |
|                                                                                                                                     |   | Pro  forma   |       | (1,478                           | )      | (940                           | )      | (2,304 | ) | (1,750 | ) |
|                                                                                                                                     |   |         |       |                             |   |                           |   |   |   |   |   |
| Basic and diluted earnings (loss) per share                                                                                              |   | As  reported |       | $                                | (0.01  | )                              | $      | 0.01 |   | $ | 0.00 |   | $ | 0.02 |   |
|                                                                                                                                     |   | Pro  forma   |       | $                                | (0.06  | )                              | $      | (0.04 | ) | $ | (0.09 | ) | $ | (0.07 | ) |

 

8

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**(F.)          Recent Accounting Pronouncements**

 

In July 2002, the Financial Accounting Standards Board (FASB) issuedSFAS No. 146 “Accounting for Costs Associated with Exit or DisposalActivities,” which addresses the financial accounting and reporting of expensesrelated to restructurings initiated after 2002, and applies to costs associatedwith an exit activity (including a restructuring) or with a disposal oflong-lived assets.  Those activities caninclude 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.  During the quarter ended June 30, 2003, theCompany incurred restructuring costs primarily related to its relocation of itsEuropean headquarters from Chester, U.K. to Amsterdam, the Netherlands.  Restructuring charges recorded in connectionwith these actions totaled approximately $316,000, which consisted primarily ofseverance related payments and severance related tax payments.  These restructuring costs were accounted forin accordance with SFAS No. 146.

 

        InJanuary 2003, the FASB issued Interpretation No. 46, "Consolidation ofVariable Interest Entities," which addresses the consolidation by businessenterprises of variable interest entities as defined in theInterpretation.  Interpretation No. 46requires that its provisions are effective immediately for all arrangementsentered into after January 31, 2003. For those arrangements entered into prior to January 31, 2003, theInterpretation 46 provisions are required to be adopted at the beginning of thefirst interim or annual period beginning after June 15, 2003.  The Company does not expect that theprovisions of Interpretation No. 46 will have a material impact on theCompany's results of operations or financial position.

 

**(G.)         Related Party Transactions**

 

On July 3, 2002, in connection with the acquisition ofSpectra, the Company loaned Mr. John McLeod, President of the Company’s WealthManagement Division, approximately $314,000. This loan is secured by the pledge of 100,000 shares of Sanchez commonstock.  The loan contains an interestrate as prescribed by the Canadian Customs and Revenue Agency (Base Rate).  This rate is adjusted quarterly to the extent such Base Rate changes.  At the time of the loan the Base Rate was3%.  The loan has a term of threeyears commencing July 3, 2002 with six semi-annual payments, the first of whichwas due on January 3, 2003.  In July2003, Mr. McLeod made the second of 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 had a balance,including interest, of approximately $116,000 as of June 30, 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 leadingprovider of comprehensive wealth management solutions.  Leading up to the acquisition, the Companyparticipated in arms length negotiations, performed due diligence, obtained a fairness opinion on the valuationof Spectra and used industry comparables to determine a purchase price.

 

9

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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 six months ended June 30, 2002 should not be relied upon asnecessarily being indicative of the historical results that would have beenobtained if this acquisition had actually occurred during that period, nor theresults that may be obtained in the future (amounts in thousands, exceptper-share amounts):

 
|                                            |   | **Six months  ended June 30,**2002 |   |
|-------------------------------------------------|--------|------------------------------------|--------|
| Pro forma revenues                              |   | $                                  | 49,817 |   |
| Pro forma net earnings                          |   | 211                                |   |
| Pro forma basic and diluted earnings per  share |   | $                                  | 0.01   |   |

 

**(I.)           ComprehensiveIncome**

 

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).  The calculation ofcomprehensive income (loss) for the three and six months ended June 30, 2003and 2002 is as follows (in thousands):

 
|                                              |   | **Three months ended  June 30,** |   | **Six months ended  June 30,** |   |
|---------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                              |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Net earnings (loss)                               |   | $                                | (383   | )                              | $      | 230 |   | $ | (48 | ) | $ | 447 |   |
| Cumulative translation adjustments                |   | 2,386                            |   | —                         |   | 4,286 |   | — |   |
| Unrealized income (loss) on marketable securities |   | 236                              |   | —                         |   | (4 | ) | — |   |
| Comprehensive income                              |   | $                                | 2,239  |                           | $      | 230 |   | $ | 4,234 |   | $ | 447 |   |

 

10

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

** **

**Overview**

** **

**Sanchez Computer Associates, Inc.(Sanchez or the Company) is publicly traded on the Nasdaq Stock Exchange underthe symbol SCAI.  The Company is aninternational provider in developing and marketing scalable and integratedsoftware and services that provide banking, customer integration, brokerage,wealth management and outsourcing solutions used by approximately 400 financialinstitutions in 22 countries.  Sanchez’scorporate headquarters is located in Malvern, Pennsylvania.  The Company’s outsourcing data andoperations service center is located in Seven Fields, Pennsylvania.  Sanchez also maintains offices in Toronto,Canada; San Ramon, California; Sydney, Australia; New York, New York; Amsterdam,the Netherlands; and Warsaw, Poland.**

** **

**Divisional Organization**

** **

**Beginning with the first quarterof 2003, Sanchez organized into divisions and initiated new segment reportingbased on those divisions.  Sanchez’sdivisional segments are Banking Solutions, Wealth Management, Outsourcing andGlobal Services.  In addition, aCorporate Support group was created to support these operating divisions.  Each division has individual profit and lossresponsibilities and is responsible for advancing the Company’s objective to bethe industry’s leading “value innovator.” Whether through software products, methodologies, services, customsoftware enhancements or solutions consulting engagements, each division istasked to significantly lower clients’ ongoing operations and technology costs,reduce their technology risk, and improve their enterprise customermanagement.  The divisions were createdto provide the innovation and focus necessary to assist clients in achieving theirbusiness plans.  The Company believesthis additional focus for all of its products and services will help theCompany pursue new and previously under-served revenue opportunities.  In addition, it is believed the divisionswill allow the Company to respond more quickly and with greater flexibility toa wider variety of client requirements and needs.  The Company markets internationally and prospects for salesopportunities with institutions in need of one or more of the followingsolutions: a bank line of business migration; a retail banking legacy systemreplacement; customer enterprise integration; bank outsourcing; or a wealthmanagement solution.**

** **

*SanchezBanking Solutions Division*

 

The Banking Solutions Division develops andsupports the Sanchez suite of integrated banking software products.  The division licenses these banking productsto financial institutions to run in-house or alternatively, on an outsourcedbasis.  The Banking Solutions Divisionderives its revenues from licenses of software products and softwaremaintenance fees, as well as from other miscellaneous fees.

 

*Sanchez WealthManagement Division*

 

Thedivision is responsible for the development, maintenance and servicesassociated with Sanchez WealthwareTM.  Wealthware is an integrated wealth management software solutionthat helps financial institutions manage investor assets online.  Wealthware aggregates customer data toprovide a single, customer-centric perspective and provides the desktop toolsto analyze portfolios, make informed investment decisions and execute transactions.  The Wealth Management Division derives itsrevenues primarily from license, service and maintenance fees on its WealthManagement product.  The WealthManagement Division was created following the Company’s acquisition of Spectrain July 2002.

 

*SanchezOutsourcing Division*

 

Sanchez also uses its integrated bankingplatform as the basis for offering a complete outsourced direct bankingsolution called Sanchez e-PROFILE®. The Sanchez Outsourcing Divisionadministers the Sanchez e-PROFILE solution by offering an integrated end-to-endoperations and technology platform. This outsourced platform enables institutions to offer comprehensiveon-line financial services to their customers. This solution integrates products and services from what the Companybelieves are the industry’s “best-in-class” vendors, including Sanchezproducts, and manages them under a single, outsourced operating umbrella.  The solution also provides the Company witha distribution channel for the suite of Sanchez products, related technologiesand services.  At June 30, 2003, therewere nine clients processing accounts at the Company’s data and operationsservice center.  The OutsourcingDivision’s revenues are primarily generated from processing and services fees.

 

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*Sanchez GlobalServices Division*

 

The Global Services Division provides projectmanagement, training (both standard and customized), system implementation,solution integration, custom interfaces to third-party or in-house legacyapplications, data conversion, integrated testing, custom software, customoutput (reports, statements, notices), custom component application,localization, and version upgrade services to our banking customers.  While supporting the other operating units,the Global Services Division also markets its services directly to existing andprospective clients.

 

**Revenue Generation**

 

The Company’s divisions generate revenue byassessing fees on software products, services, processing and maintenance.  Fees assessed on software products includesoftware license and product enhancement fees. Typically, fees for software license contracts are paid in stages uponthe completion of defined deliverables or certain dates.  For licenses sold for in-house solutions,i.e., operated by the institutions, the Company recognizes revenue from feesunder either the percentage-of-completion contract accounting method, or whereapplicable, when the requirements of AICPA Statement of Position 97-2 “SoftwareRevenue Recognition” are met.  Financialinstitutions selecting an outsourced banking solution can purchase productlicenses upfront, or in lieu of upfront license fees, institutions can opt tospread the license and accompanying maintenance fees on a per account/per monthbasis over the life of the processing contract.  Assessment of per account/per month fees begins after the clientgoes live , i.e., client begins processing its customers’ accounts on theoutsourced platform with the solution. Software product fees and implementation fees generated from outsourcedsolutions, along with their associated costs, are largely deferred during theimplementation phase of an outsourced project in accordance with StaffAccounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (SAB101).  Once an outsourced solution goeslive, the deferred product and services revenue and costs are amortized overthe expected life of the processing arrangement and are recognized.  Other service revenue is generally recognizedwhen the services are performed or on the percentage-of-completion method,depending on the contract terms and accounting for the other elements of thearrangement.  Processing fees consistprimarily of monthly and account-based fees for servicing, as well astransaction fees associated with transaction volumes for a specifiedperiod.  Under the outsourcing model,when a client institution’s customer account base grows, and the institutionexceeds the minimum account processing levels, outsourcing revenue canincrease.  For both in-house andoutsourced license contracts, maintenance fees are normally billed annually inadvance and recognized as revenue ratably during the specified maintenanceperiod.  The Company also recognizesreimbursable client expenses as revenue in accordance with Emerging Issues TaskForce Issue No.  01-14, “IncomeStatement Characterization of Reimbursement Received for ‘Out-of-Pocket’Expenses Incurred” (EITF 01-14), which requires that the reimbursement receivedfor out-of-pocket expenses be classified as revenues and not as costreductions.

# ** **

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# **Results of Operations**

 

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

 
|                                      |   | **Three Months Ended  June 30,** |   | **Six Months Ended  June 30,** |   |
|-------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **Dollars in  thousands**                 |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| Revenues                                  |   |                             |   |                           |   |   |   |   |   |
| Products                                  |   | $                                | 6,263  |                           | $      | 2,831 |   | $ | 11,961 |   | $ | 6,681 |   |
| Services                                  |   | 6,738                            |   | 9,179                          |   | 13,296 |   | 14,870 |   |
| Processing                                |   | 4,641                            |   | 4,537                          |   | 9,280 |   | 9,092 |   |
| Software maintenance and other            |   | 5,199                            |   | 4,273                          |   | 10,280 |   | 8,143 |   |
| Customer reimbursements                   |   | 1,199                            |   | 1,512                          |   | 2,228 |   | 2,872 |   |
| Total revenues                            |   | $                                | 24,040 |                           | $      | 22,332 |   | $ | 47,045 |   | $ | 41,658 |   |
|                                      |   |                             |   |                           |   |   |   |   |   |
| Percentage Relationship to Total Revenues |   |                             |   |                           |   |   |   |   |   |
| Revenues                                  |   |                             |   |                           |   |   |   |   |   |
| Products                                  |   | 26.1                             | %      | 12.7                           | %      | 25.4 | % | 16.0 | % |
| Services                                  |   | 28.0                             |   | 41.1                           |   | 28.3 |   | 35.7 |   |
| Processing                                |   | 19.3                             |   | 20.3                           |   | 19.7 |   | 21.8 |   |
| Software maintenance and other            |   | 21.6                             |   | 19.1                           |   | 21.9 |   | 19.6 |   |
| Customer reimbursements                   |   | 5.0                              |   | 6.8                            |   | 4.7 |   | 6.9 |   |
| Total revenues                            |   | 100.0                            |   | 100.0                          |   | 100.0 |   | 100.0 |   |
|                                      |   |                             |   |                           |   |   |   |   |   |
| Operating expenses                        |   |                             |   |                           |   |   |   |   |   |
| Product development                       |   | 21.8                             |   | 17.4                           |   | 22.2 |   | 16.5 |   |
| Product support                           |   | 7.0                              |   | 6.2                            |   | 7.0 |   | 6.6 |   |
| Services                                  |   | 23.1                             |   | 26.4                           |   | 22.8 |   | 22.0 |   |
| Processing                                |   | 16.9                             |   | 18.3                           |   | 16.5 |   | 19.6 |   |
| Sales and marketing                       |   | 15.0                             |   | 11.8                           |   | 14.5 |   | 15.3 |   |
| General, administrative and other         |   | 12.5                             |   | 14.1                           |   | 12.1 |   | 13.3 |   |
| Customer reimbursement expense            |   | 5.0                              |   | 6.8                            |   | 4.7 |   | 6.9 |   |
| Restructuring charge                      |   | 1.3                              |   | 0.0                            |   | 0.7 |   | 0.0 |   |
| Total operating expenses                  |   | 102.6                            |   | 101.0                          |   | 100.5 |   | 100.2 |   |
|                                      |   |                             |   |                           |   |   |   |   |   |
| Earnings (loss) from operations           |   | (2.6                             | )      | (1.0                           | )      | (0.5 | ) | (0.2 | ) |
| Interest income, net                      |   | 0.3                              |   | 2.5                            |   | 0.3 |   | 1.8 |   |
| Gain on investment                        |   | 0.0                              |   | 0.0                            |   | 0.3 |   | 0.0 |   |
| Foreign exchange loss                     |   | 0.0                              |   | 0.0                            |   | (0.4 | ) | 0.0 |   |
| Earnings (loss) before income taxes       |   | (2.3                             | )      | 1.5                            |   | (0.3 | ) | 1.6 |   |
| Income tax provision (benefit)            |   | (0.7                             | )      | 0.5                            |   | (0.1 | ) | 0.5 |   |
| Net earnings (loss)                       |   | (1.6                             | )%     | 1.0                            | %      | (0.2 | )% | 1.1 | % |

# ** **

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**ThreeMonths Ended June 30, 2003 Compared to Three Months Ended June 30, 2002**

 

REVENUES

 

Total revenuesincreased by $1.7 million, or 8%, in the second quarter of 2003 as compared tothe second quarter of 2002.

 

Productrevenues increased by $3.4 million, or 121%, from the second quarter of 2002 tothe second quarter of 2003.  Productrevenues increased primarily as a result of license recognition on projectscurrently being implemented with customers in Canada and Thailand.  Also contributing to the increase was therevenue generated by the Company’s recently acquired Wealth Management Divisionof approximately $1.5 million.

 

Servicerevenues decreased by $2.4 million, or 27%, in the quarter ended June 30, 2003,as compared to the quarter ended June 30, 2002.  Wealth Management contributed $550,000 to service revenues in thesecond quarter of 2003.  The decrease inservice revenues can be primarily attributed to delays in initiating serviceprojects by certain customers.

 

Processingrevenues increased $104,000, or 2%, in the second quarter of 2003 as comparedto the second quarter of 2002. Processing revenues increased only slightly as a result of a majority ofclients remaining within their monthly minimum processing volumes.  During the quarter Juniper Bank discontinuedprocessing on the outsourcing platform. The revenue generated from this client was immaterial for the threemonths ended June 30, 2003.

 

Softwaremaintenance and other revenues increased $926,000, or 22%, from the secondquarter of 2002 compared to the second quarter of 2003.  Wealth Management contributed $835,000 tosoftware maintenance and other revenues in the period ended June 30, 2003.  The remaining increase in softwaremaintenance and other revenues can be attributed to new maintenance fees fromnew clients and expanded license agreements with existing clients.

 

Customerreimbursements revenues decreased $313,000, or 21%, in the quarter ended June30, 2003, as compared to the quarter ended June 30, 2002.  The primary reason for the decrease can beattributed to less reimbursable expenses incurred as a result of fewerimplementation projects in the second quarter of 2003 as compared to the secondquarter of 2002.

 

 

OPERATING EXPENSES

 

Productdevelopment expenses increased $1.3 million, or 35%, in the second quarter of2003 compared to the same period in 2002, primarily due to the costs associatedwith our recently acquired Wealth Management Business Division.  Also contributing to the higher expenses wasan increase in the net amortization of previously deferred license costs forclients using the outsourced solution.

 

Productsupport expenses increased $310,000, or 22%, in the second quarter of 2003compared to the second quarter of 2002. This increase is directly attributable to the impact of adding theWealth Management Business Division expenses.

 

Service expenses decreased$351,000, or 6%, during the quarter ended June 30, 2003, as compared to thequarter ended June 30, 2002.  WealthManagement contributed $292,000 to service expenses in the second quarter of2003.  The primary reason for thedecrease in service expenses is reduced outside consultancy expenses in thesecond quarter of 2003 as compared to the second quarter of 2002.  Service margins in the second quarterof 2003 were 18%, compared to 36% in the second quarter of 2002.  The primary causes for the drop in theservice margin were lower utilization rates from internal resources and lowermargins on outsourcing implementation projects, for which more revenue anddirect expenses are now being amortized that were previously deferred inaccordance with SAB No. 101, when compared to the quarter ended June 30, 2002.

 

Processingexpenses decreased $28,000, or 1%, in the second quarter of 2003 as compared to2002.  This decrease is primarilyattributable to lower third party processing fees and maintenance costsassociated with outside vendors.    As aresult of these decreases the Company was able to improve its gross marginrelative to 

 

14

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processing from 10% in the second quarter of2002 to 12% in the same quarter of 2003 although revenues increased onlymodestly.

 

Sales andmarketing expenses increased by $973,000, or 37%, in the second quarter of 2003compared to the same quarter in 2002. Expenses were up primarily due to an increase in external marketingspending along with $678,000 in expenses related to the Wealth ManagementBusiness Unit.

 

General,administrative and other expenses decreased by $136,000, or 4%, in the quarterended June 30, 2003 compared to the quarter ended June 30, 2002, primarily dueto a decrease in the bad debt expense in the second quarter of 2003 compared tothe second quarter of 2002. These decreases were partially offset by the impactof the Wealth Management Business Unit.

 

During the quarterended June 30, 2003, the Company incurred restructuring costs primarily relatedto its relocation of its European headquarters from Chester, U.K. to Amsterdam,the Netherlands.  Restructuring chargesrecorded in connection with these actions totaled approximately $316,000, whichconsisted primarily of severance related payments.

 

OTHER INCOME, EXPENSE AND TAXES

 

Interestincome for the quarter ended June 30, 2003 decreased $478,000, or 87%, comparedto the quarter ended June 30, 2002. Interest income in the second quarter of 2002 included interest receivedrelated to the settlement of an outstanding receivable with a formerclient.  Other contributing factors arelower interest rates and lower cash balances following the acquisition ofSpectra in July 2002.

 

The Company’seffective tax rate in the second quarter of 2003 was 29% of earnings comparedto 33% in the second quarter of 2002. The primary reason for this decrease was the effect of the tax benefitderived from the loss incurred this quarter in the Company’s foreignsubsidiary.

 

 

**Six Months Ended June30, 2003 Compared to Six Months Ended June 30, 2002**

 

REVENUES

 

Total revenuesincreased by $5.4 million, or 13%, in the six months ended June 30, 2003 ascompared to the six months ended June 30, 2002.

 

Productrevenues increased by $5.3 million, or 79%, from the six months ended June 30,2002 to the six months ended June 30, 2003.   The increase in product revenue is primarily attributable to the licenserevenue realized from two of the Company’s major implementation projects inCanada and Thailand.  The Company’srecently acquired Wealth Management Division contributed $2.8 million toproduct revenues in the six months ended June 30, 2003.

 

Servicerevenues decreased by $1.6 million, or 11%, in the six months ended June 30,2003, as compared to the six months ended June 30, 2002.  The decrease in service revenues can beattributed to delays in initiating service projects by certain customers.  These decreases were partially offset by theinclusion of the recently acquired Wealth Management Division which contributed$1.0 million to service revenues in the six months ended June 30, 2003.

 

Processingrevenues increased $188,000, or 2%, in the six months ended June 30, 2003 ascompared to the six months ended June 30, 2002.  Processing revenues increased only slightly as a result of amajority of clients remaining within their monthly minimum processingvolumes.  During the six months endedJune 30, 2003, Juniper Bank discontinued processing on the outsourcingplatform.  The revenue generated fromthis client was immaterial for the six months ended June 30, 2003.

 

Softwaremaintenance and other revenues increased $2.1 million, or 26%, from the sixmonths ended June 30, 2002 to the six months ended June 30, 2003.  Wealth Management contributed $1.8 millionto software maintenance and other revenues in the six months ended June 30,2003.  The remaining increase can beprimarily attributed to the commencement of maintenance for a significant U.S.customer in mid-2002, as well as the one-time termination fee from a U.S.customer recognized in the six months ended June 30, 2003.

 

Customerreimbursements revenues decreased $644,000, or 22%, in the six months endedJune 30, 2003, as compared to the six months ended June 30, 2002.  The primary reason for the decrease can beattributed to less 

 

15

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travel required for implementation projectsin the six months ended June 30, 2003 as compared to the six months ended June30, 2002.

 

OPERATING EXPENSES

 

Productdevelopment expenses increased $3.6 million, or 52%, in the first six months of2003 compared to the six months ended June 30, 2002, primarily due to the costsassociated with our Wealth Management Division.   Also contributing to the increase was an increase in the netamortization of previously deferred license costs for clients using theoutsourced solution in 2003 compared to 2002.

 

Productsupport expenses increased by $509,000, or 18%, for the six months ended June30, 2003.  This increase is primarily aresult of the Wealth Management Division expenses, partially offset by lowerthird party support fees as the Company has begun to handle more support issueswith its own resources.

 

Service expenses increased$1.6 million, or 17%, during the six months ended June 30, 2003, as compared tothe six months ended June 30, 2002. Wealth Management contributed $642,000 to service expenses in the firstsix months of 2003.  The primary reasonfor the increase in service expenses is due to less deferral of expenses inaccordance with SAB No. 101 as a result of clients going live with theCompany’s outsourcing solution.  Servicemargins for the six months ended June 30, 2003 were 19%, compared to 38% in thesix months ended June 30, 2002.   Theprimary causes for the drop in the service margin were lower utilization ratesfrom internal resources, higher than anticipated use of third-party resources,and lower margins on outsourcing implementation projects, for which more revenueand direct expenses are now being amortized that were previously deferred inaccordance with SAB No. 101 when compared to the same period ended June 30,2002.

 

Processingexpenses decreased $407,000, or 5%, in the first six months of 2003, as comparedto the same period in 2002.  Thisdecrease is attributable to lower third party processing fees and maintenancecosts related to outside vendors.  TheWealth Management Division expenses partially offset these reductions.  The gross margin relative to processing was17% during the six months ended June 30, 2003, as compared to 10% during thesame period in 2002.

 

Sales andmarketing expenses increased by $463,000, or 7%, in the six months ended June30, 2003 compared to 2002.  Thisincrease is primarily due to the impact of the Wealth Management Divisionexpenses offset by lower commissions paid to third party partners as well aslower travel expenses.

 

General,administrative and other expenses increased by $147,000, or 3%, in 2003primarily due to the Wealth Management Division expenses in the first sixmonths of 2003 which were partially offset by a decrease in bad debt and legalexpense in the first six months of 2003 compared to the same period in 2002.

 

During theperiod ended June 30, 2003, the Company incurred restructuring costs primarilyrelated to its relocation of its European headquarters from Chester, U.K. toAmsterdam, the Netherlands. Restructuring charges totaled approximately $316,000, which consistedprimarily of severance related payments.

 

OTHER INCOME, EXPENSE AND TAXES

 

Interestincome for the six months ended June 30, 2003 decreased $591,000 or 80.0%compared to the same period in 2002. Interest income in 2002 included interest received related to thesettlement of an outstanding receivable with a former client.   Also contributing to the decrease are lowerinterest rates in 2003 and lower cash reserves following the acquisition ofSpectra Software in July 2002.

 

During 2003’sfirst six months, the Company recognized a net gain of $156,000 on thesettlement of an investment in a partner company in Poland.

 

The Companyincurred a foreign exchange loss of $206,000 during the first six months of2003, primarily as a result of a weakening U.S. dollar against the Canadiandollar.  The Company’s foreign exchangeexposure is primarily related to intercompany activity that was not designatedas permanent in the first quarter of 2003.

 

The Company’seffective tax rate in the first six months of 2003 was 51% of earnings comparedto 33% in the same period of 2002.  Theprimary reason for this increase was the impact of taxes on a foreignsubsidiary.

 

16

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**Liquidityand Capital Resources**

 

Cashand cash equivalents were $31.6 million at June 30, 2003, a decreaseof $1.2 million from December 31, 2002. Cash used by operating activities for the six months ended June 30,2003, was $727,000.  Contributing to theuse of cash by operating activities was an increase in the net amortization ofdeferred revenues and expenses during the six months ended June 30, 2003compared to the same period in 2002. This increase in net amortization is primarily attributable to fewerimplementation projects related to outsourcing clients where associatedrevenues and direct costs were deferred. Partially offsetting this use of cash was the decrease in accountsreceivable and contracts in process of $3.6 million in the six months ended June 30, 2003 compared to anincrease of $2.2 million in the same period of 2002.  The decrease in 2003 can be primarily attributed to accountsreceivable management as further evidenced by the Company’s days salesoutstanding (DSO) of 54 DSO at June 30, 2003 compared to 98 DSO at June 30,2002.  During the first six months of2003, the Company used $840,000 for the purchase of property and equipment,while financing activities contributed $309,000 of cash during the six monthsended June 30, 2003, principally from the proceeds from theemployee stock purchase plan.

 

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.Should the Company’s business expand more rapidly than expected, the Companyhas a line of credit of $20 million available for its use.  The Company’s line of credit is secured withthe Company’s primary banker and has a term of three years expiring on July 2,2005.  Outstanding amounts shall bear aninterest rate per annum from one of the following two options; (1) a Base Rateoption that is equal to the Bank’s prime rate or one quarter of one(.25) percentage point above the Federal Funds Rate, (2) a LIBOR Rate Option equal to the sum of (i) LIBOR plus (ii)150 basis points (the “LIBOR-Based Rate”).   At the current time the Company has notdrawn on this line of credit and has no debt outstanding.

 

TheCompany believes that its business is generally not seasonal; however, theCompany has historically experienced, and can be expected to continue toexperience, a certain degree of variability in its quarterly revenue, earningsand cash flow patterns. This variability is typically driven by significantevents, which directly impact the recognition and billing of project-relatedrevenues. Examples of such events include the timing of new business contractclosings and the initiation of product and service fee revenue recognition,one-time payments from existing clients relative to license expansion rights(required to process a greater number of customer accounts or expand the numberof permitted users) and completion of implementation project rollouts and therelated revenue recognition. Because a high percentage of the Company’sexpenses are relatively fixed, a variation in the timing of the initiation orthe completion of client projects, particularly at or near the end of anyquarter, can cause significant variations in operating results from quarter toquarter. The Company believes that over the course of time the ongoing monthlyrevenue stream associated with the outsourcing operations will contributetoward more predictable quarter-to-quarter revenues.

 

**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.

 

In January 2003, the FASBissued Interpretation No. 46, "Consolidation of Variable InterestEntities," which addresses the consolidation by business enterprises ofvariable interest entities as defined in the Interpretation.  Interpretation No. 46 requires that itsprovisions are effective immediately for all arrangements entered into afterJanuary 31, 2003.  For thosearrangements entered into prior to January 31, 2003, Interpretation No. 46provisions are required to be adopted at the beginning of the first interim orannual period beginning after June 15, 2003. The Company does not expect that the provisions of Interpretation No. 46will have a material impact on the Company's results of operations or financialposition.

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In January 2003,the FASB issued Interpretation No. 46, “Consolidation of Variable InterestEntities,” which addresses the consolidation by business enterprises ofvariable interest entities as defined in the Interpretation.  Interpretation No. 46 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 Interpretation No. 46 did not have an effect onthe 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.

 

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**ITEM 3.****  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

**InterestRate Risk**

 

The Company’s exposure tomarket risk for changes in interest rates relate primarily to the Company’s cashequivalents. The Company does not have any derivative financial instruments inits portfolio. The Company is averse to principal loss and ensures the safetyand preservation of its invested funds by limiting default risk, market riskand reinvestment risk. The Company does not expect any material loss withrespect to its cash equivalents.

** **

**ForeignCurrency Risk**

 

The Company does not use foreign exchange forward contracts.  Substantially all of the Company’s U.S.based operations contract in U.S. dollars.  For the Company’s foreign subsidiaries, the Company generallymatches local currency revenues with local currency costs.  The Company does have certain inter-companyrelationships that may create foreign exchange gains or losses.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

**The Company’s Chief ExecutiveOfficer and Chief Financial Officer have evaluated the effectiveness of thedesign and operation of its disclosure controls and procedures as of June 30,2003, and based on their evaluation, the Chief Executive Officer and ChiefFinancial Officer have concluded that these disclosure controls and proceduresare effective.**

** **

**The evaluation referred to abovedid not identify any changes in the Company’s internal control over financialreporting that occurred during the quarter ended June 30, 2003 that hasmaterially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.**

 

**Audit Process and Auditors**

 

Under the Sarbanes-Oxley Act, auditors are prohibited from providingnon-audit services to audit clients without the advance approval of the auditcommittee.  At the May 22, 2003 AuditCommittee meeting, Sanchez received approval from the Audit Committee for theCompany’s auditors to perform various attest and non-attest services.    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 three Audit Committee members in between meetings,subject to subsequent ratification by the full Audit Committee.

 

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**PART II****—OTHER INFORMATION**

 

**ITEM4:  SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

On May 22, 2003, the Annual Meeting of Shareholders of the Company washeld at which the following matter was submitted to and the requisite number ofshares of Common Stock of the Company were voted on by the stockholders, withthe results set forth below:

 

The following persons were elected to the Board of Directors to serveas directors until the next annual meeting of shareholders in 2004, and untiltheir respective successors are duly elected and qualified.  Each person received the number of votes setforth next to their names below:

 

PROPOSAL I - ELECTION OF DIRECTORS

 
|                     |   | **For**    |   | **Withheld** |   |
|--------------------------|--------|------------|--------|--------------|--------|
| Michael A. Sanchez       |   | 22,868,465 |   | 615,663      |   |
| Frank R. Sanchez         |   | 23,397,290 |   | 86,838       |   |
| Joseph F. Waterman       |   | 23,397,340 |   | 86,788       |   |
| Lawrence Chimerine       |   | 23,167,958 |   | 316,170      |   |
| William M. Fenimore, Jr. |   | 23,161,148 |   | 322,980      |   |
| Frederick J. Gronbacher  |   | 22,611,929 |   | 872,199      |   |
| Alex W. Hart             |   | 23,360,238 |   | 123,890      |   |
| Thomas C. Lynch          |   | 23,166,252 |   | 317,876      |   |
| James R. Stojak          |   | 22,651,548 |   | 832,580      |   |
| Gary C. Wendt            |   | 20,990,954 |   | 2,493,174    |   |

 

 

**ITEM 6:****  EXHIBITS AND REPORTS ON FORM8-K**

 
| a) |   | Exhibit  31.1.  Section 302 CEO Certification.                                                                                                                  |
|----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| b) |   | Exhibit  31.2.  Section 302 CFO Certification.                                                                                                                  |
| c) |   | Exhibit 32.1.  CEO-CFO  Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |

 

 

No other applicable items.

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be 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  August 14, 2003 |                                                |   |

 

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