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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

For Annual and Transition Reports Pursuant to
Sections 13 or 15(d) of the Securities Exchange Act of 1934

 

(Mark One)

 

  ý

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

 

For the fiscal year ended December 31, 2003

 

  o

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

 

For the transition period from                    to                   

 

Commission file number 000-21705

 

SANCHEZ COMPUTER ASSOCIATES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Pennsylvania

 

23-2161560

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

40 Valley Stream Parkway, Malvern, PA

 

19355

(Address of Principal Executive Offices)

 

(Zip Code)

 

 

 

www.sanchez.com

 

 

(Company’s Web site)

 

 

 

 

 

Registrant’s telephone number, including area code: (610) 296-8877

 

 

 

Securities registered pursuant to Section 12(b) of the Act:   NONE

 

 

 

Securities registered pursuant to Section 12(g) of the Act:

 

Title of Each Class

Common Stock, no par value

 

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

 

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

 

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

 

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

 

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

 

Documents Incorporated by Reference

None

 

 



 

SANCHEZ COMPUTER ASSOCIATES, INC.

 

INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

 

Item
No.

 

 

Part I

 

 

 

 

1.

 

Business

 

2.

 

Properties

 

3.

 

Legal Proceedings

 

4.

 

Submission of Matters to a Vote of Security Holders

 

 

 

 

 

Part II

 

 

 

 

 

5.

 

Market for Registrant’s Common Equity and Related Stockholder Matters

 

6.

 

Selected Financial Data

 

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

8.

 

Financial Statements and Supplementary Data

 

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

9A.

 

Controls and Procedures

 

 

 

 

 

Part III

 

 

 

 

 

10.

 

Directors and Executive Officers of the Registrant

 

11.

 

Executive Compensation

 

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

13.

 

Certain Relationships and Related Transactions

 

14.

 

Principal Accountant Fees and Services

 

 

 

 

 

Part IV

 

 

 

 

 

15.

 

Exhibits, Financial Statement Schedules and Reports on Form 8-K

 

 

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PART I

 

Item 1.  Business.

 

Sanchez Computer Associates, Inc. (Sanchez or the Company) is publicly traded on the Nasdaq Stock Exchange under the symbol SCAI.  The Company is a global provider in developing and marketing scalable and integrated software and services that provide banking, customer integration, brokerage, wealth management and outsourcing solutions to approximately 400 financial institutions in 22 countries.  Sanchez’s corporate headquarters is located in Malvern, Pennsylvania.  The Company’s outsourcing data and operations service center is located in Seven Fields, Pennsylvania.  The Company’s Wealth Management Division is based in Toronto, Canada.  Sanchez also maintains services and sales offices in San Ramon, California; Sydney, Australia; Amsterdam, the Netherlands; and Warsaw, Poland. Beginning with the first quarter of 2003, Sanchez organized into divisions and initiated new segment reporting based on those divisions.  Sanchez’s divisional segments are Banking Solutions, Wealth Management, Outsourcing and Global Services.  Each division has individual profit and loss responsibilities.  Whether through products, methodologies, services, custom software enhancements or systems consulting engagements, each division’s mission is to significantly lower clients’ ongoing operations and technology costs, reduce their technology risk, and improve their enterprise customer management.  The divisions were created to provide the innovation and focus necessary to enable clients’ business plans to succeed.  In addition, it is believed the divisions will allow the Company to become more nimble and respond more quickly to a wider variety of client requirements and needs.

 

Recent Developments

 

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

 

In connection with the Merger, all outstanding shares of Company common stock, no par value per share (the Company Common Stock), will be entitled to receive $6.50 per share, one-half of which will be paid in cash and one-half of which will be paid in shares of FNF common stock (the FNF Common Stock) at an exchange rate based on the average closing sales prices of FNF Common Stock on the New York Stock Exchange for the twenty consecutive trading days immediately preceding but not including the second trading day before the closing date of the merger, subject to adjustment under certain circumstances set forth in the Merger Agreement.  The Company’s shareholders will have the option to elect to receive any combination of cash and FNF Common Stock.  If the aggregate cash/stock mix is not 50%/50%, then the consideration received by each Company shareholder will be adjusted accordingly as set forth in the Merger Agreement to meet such aggregate ratio.  Any shareholder who desires to receive 50% FNF Common Stock and 50% cash will not have to make an election and will receive such consideration without any adjustment.

 

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

 

Sanchez’s Banking and Wealth Management Platforms

 

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

 

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

 

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

 

Sanchez WealthwareÔ is Sanchez’s wealth management product line, which was acquired in July 2002 through the acquisition of Spectra Securities Software of Toronto, Canada.  Sanchez Wealthware is a comprehensive, multi-channel wealth management solution that helps financial institutions manage investor assets online by providing a collaborative, holistic client-view of assets and holdings based on real-time information.  The product line includes aggregation and Information Management, AIMR-Compliant Portfolio Management, Market Data Management and Order Management with Straight Through Processing (STP) for equities, options, fixed income and mutual funds.

 

Application Product Overview — Sanchez Profile

 

Sanchez Profile is an online, customer-centric, multi-currency, multi-channel strategic core processing system for deposits and loans.  Profile is designed to support the needs of both retail and commercial financial institutions and is capable of delivering significant operational efficiencies as well as reductions in the operations and technology costs of the enterprise.  Profile is engineered for high speed and high volume transaction processing throughput, (published benchmarks support real-time transaction processing at a rate of 1,900TPS) providing full ACID (Atomic, Consistent, Isolated, Durable) properties as well as logical dual site operation functionality for true 24x365 database operation.  Profile is also designed to be platform and operating system independent.  Through the use of Sanchez Profile’s automatic code generation tools, provided by DATA-QWIKÔ, the financial institution’s business users can construct custom financial products, without writing any code.

 

Application Product Overview — Sanchez Xpress

 

Sanchez Xpress is an enterprise integration solution that provides customer and account aggregation, financial product distribution, and supports the real-time integration of all customer delivery channels to an institution’s internal and external product processing systems.  Sanchez Xpress provides a product distribution engine that manages and coordinates business processes and transactions across an institution’s internal and third-party product processing systems.  This capability also provides several services including messaging, application integration, transaction monitoring, directory services and authorization and authentication functions.  Sanchez Xpress is J2EE-compliant and also acts as message-oriented middleware in that the messaging components natively assume XML is used as a standard protocol and data description language.

 

Application Product Overview — Sanchez Webclient

 

Sanchez Webclient is a Web-enabled Internet banking application that provides an institution’s customers with a single access point to their financial information by creating a personalized financial services portal for consumer banking transactions and products.  Webclient integrates a financial institution’s retail customer’s financial products into a content rich Web site where the customer can view account information and perform transactions.

 

Sanchez Webclient provides a dynamic page-publishing framework that allows an institution to retain control over the appearance, navigational elements and content of the Web site.  Sanchez Webclient also works with third-party applications to drive content presentation (e.g., Sanchez Webclient supports download capabilities to popular personal finance packages such as Microsoft Money® and Quicken® ).  The software provides a mechanism for targeting banner ads and marketing messages, according to predefined customer information.  From this data, Sanchez Webclient applies user-defined business rules to influence the content presented to customers.  This functionality supports one-to-one marketing campaigns and allows for cross selling of different products, based on customer buying behaviors.  All customer information is fully protected in a secure environment.  For customer login security, Sanchez Webclient supports password as well as certificate authentication schemes.  Data encryption techniques are applied to ensure sensitive financial data is safeguarded.

 

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

 

Application Product Overview — Sanchez WebCSR

 

Sanchez WebCSR is a browser-based customer and account servicing application used by an institution’s

 

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service representatives to respond to customer inquiries and requests.  It employs the use of standard HTML, JavaServer Page (JSP) technology and JavaServlet technology for user interface components of the application. Following these standards allows the application to be deployed using any HTTP Web server such as IBM’s HTTP Server for WebSphereMQ, or the Apache HTTP Server for maximum portability and scalability.

 

Sanchez WebCSR is built on the Sanchez Xpress platform providing service representatives with an aggregated view of the customer’s relationship with the institution.  It provides a complete customer and account origination process that includes customer authentication and credit checking as well as customer servicing capabilities.

 

Application Product Overview — Sanchez CRM

 

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

 

Wealth Management Application Products — Overview

 

Sanchez Wealthware™, an integrated enterprise wealth management solution, empowers financial institutions to effectively manage investor assets online and achieve a competitive advantage by lowering costs/improving ROI, reducing technology risks and improving customer service.  Wealthware automatically aggregates and loads customer data from multiple legacy systems and service providers to supply a single, customer-centric perspective.  Wealthware also provides the desktop tools to analyze portfolios, make informed investment decisions and execute transactions.  Sanchez Wealthware is available as separate modules and applications.  Each module can be implemented individually or integrated for a customized, seamless wealth management solution.  Sanchez Wealthware has multi-currency and multi-language capabilities, and can accommodate the wealth management requirements of financial service institutions with global transaction requirements.

 

Application Product Overview — Investor Management

 

Sanchez Account Inquiry

 

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

 

Sanchez Portfolio

 

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

 

 Application Product Overview — Order Management

 

Sanchez Equities

 

Sanchez Equities provides full-featured order management for online, real-time equities and options trading.  Advisors use Sanchez Equities to request quotes and place and validate orders for the full breadth of exchange-tradable products including equities, options, rights, warrants, and debentures.  The browser-based front-end allows users to connect through the Internet, branch office, or intranet.  Compliance failures are reduced with pre-trade business rule validation including security restrictions, licensing and entitlement.  Inadmissible orders are routed to authorized users for review and online approval.  Acceptable orders are routed to exchanges and trading systems for execution.  Rules are configurable at the user level to enable or disable types of trades, set commissions or otherwise tailor the order management experience to the needs of the institution and client base.  Sanchez Equities maintains a complete audit trail of order changes and provides visibility of client orders through approval, routing, acknowledgement and confirmation.

 

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Sanchez Bonds

 

Sanchez Bonds is a comprehensive solution for the retail distribution of fixed income securities.  The multi-functional, online application provides a real-time display of price and inventory information and is used by the fixed income trading desk, retail sales and investors.  The fixed income desk uses the trading module to manage inventory, trading rules and pricing.  Retail sales representatives and investors use the sales module to search inventories for securities, review pricing, yields and other bond information, place orders and monitor their order status.  The trading system includes a robust pricing engine capable of re-pricing thousands of line items in real-time to support large-scale operations.  It features real-time link interfaces to provide securities, inventories and pricing information in real-time from other trading systems to synchronize the retail to the wholesale market.  It offers single trade, block trading and laddering/portfolio capabilities.  As an order is placed, Sanchez Bonds immediately calculates price, commission, cost and yield.  Sanchez Bonds also validates order details to ensure that data has been entered correctly.  It can be implemented in a single- or multi-dealer environment to facilitate channel pricing.  The application serves the full breadth of fixed income securities including treasuries, municipals, strips, mortgage-backed securities, corporate and government bonds.

 

Sanchez Funds

 

Sanchez Funds is an automated, mutual fund trading application that provides straight-through processing from advisors and investors through to operations staff, FundSERV, mutual fund companies and shareholder management systems.  Sanchez Funds automates activities relating to buys, sells, exchanges, and internal transfers including changes and cancels on trade date.  Sanchez Funds edits orders in real-time.  If the order passes all edits, it is automatically sent to the appropriate fund company for processing.  Sanchez Funds delivers orders via NSCC and FundSERV connections or via optional direct links to the fund companies.  Sanchez Funds streamlines mutual fund order processing by updating back-office systems and automating the posting of dividends and other transactions.  Distribution to multiple channels, each with unique rules, commission structures and edits can be implemented quickly to reach more investors and offer more funds.  Sanchez Funds is NSCC and FETA approved and supports seg fund processing, non-financial updates, and Canadian, U.S., U.K., and European funds.  The Sanchez Funds product suite includes:

 

                  Mutual Fund Activity — automates the posting of fund company-generated transactions to the back office (e.g., dividends and transfers).

 

                  Mutual Fund Reconciliation — manages activity and reconciliation based on thresholds and filters.  The system runs unattended and facilitates on-line review of exceptions, out-of-balance situations, and other information.  This helps securities firms increase transaction processing while reducing costs and regulatory capital requirements.

 

                  Standing Order — allows a financial institution to input and query standing orders (e.g., buying the same dollar amount of the same mutual fund every month) and will automatically generate the required transactions at the specified frequency.  Standing Order generates orders for Sanchez Funds (for standard mutual fund transactions) and EFT transactions (for moving the required or resulting cash between accounts).

 

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

 

Application Product Overview — Market Data Management

 

Sanchez Market Data

 

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

 

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Sanchez Mobile Broker

 

Sanchez Mobile Broker provides advisors with secure mobile access to reliable, real-time, market data integrated with client, account, and position information in a single consolidated view.  Sanchez Mobile Broker is driven with data from a firm’s own back office and works with existing news and quote contracts.  The next generation of thin-client technology extends the broker workplace onto wireless networks for anytime, anywhere access to real-time market data and portfolio information.  In addition to quote services, Mobile Broker provides a news database, a real-time alert engine for instant notification of news and quote changes, symbol lookup and rich option search capabilities.

 

Application Product Overview — Information Management

 

Sanchez Information Server

 

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

 

                  Sanchez Correspondent Ledger — allows clearing firms to enhance relationships with correspondent clients by providing an accurate billing infrastructure to calculate balances and generate invoices.  Correspondent Ledger is flexible and accommodates various billing models and currencies.

 

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

 

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

 

Outsourcing

 

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

 

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

 

In addition to Sanchez products, the Sanchez e-PROFILE solution offers institutions a range of online financial capabilities including:

 

        ATM network & card management

        Account origination

        Bank operations

        Case management & workflow

        Call center

        Electronic bill payment

        Email management

        Imaging

        Interactive voice response

        Item processing/lockbox processing

 

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        Check production

        Collection systems

        Desktop integration

        Document creation & fulfillment

        Document archiving

        OFAC screening

        Anti money laundering

        Credit cards

        Credit decisioning

 

Revenue Generation & Recognition

 

The Company derives its revenues primarily from fees assessed on products, services, software maintenance, and processing as well as from other miscellaneous fees.

 

Sanchez products may be licensed to a customer to run on an in-house basis, or alternatively, one or more Sanchez products may be used to provide an integrated banking and technology platform that supports a complete, outsourced direct banking solution.  This outsourced solution is marketed under the Sanchez e-PROFILE brand and is operated by SDSI.  The solution provides an integrated, end-to-end bank operations and technology platform that enables financial services companies to offer comprehensive, on-line financial services to their customers.

 

Product fees include software license and product enhancement fees.  Service fees include client implementation-related services and consulting.  Processing fees consist primarily of monthly, account-based fees for account maintenance, monthly servicing and transaction fees associated with transaction volumes for a specified period.  Software maintenance and other fees primarily consist of revenue earned for ongoing software maintenance and support as well as rebillable expenses.

 

For Sanchez’s banking and wealth management software license contracts for use by the customer on an in-house basis, fees are typically paid in stages upon the completion of defined deliverables or upon specific dates.  The Company recognizes revenue from these fees using the percentage-of-completion contract accounting method, or where applicable, on a cash basis.  Service fees are generally recognized and billed monthly on a time and material basis.  Maintenance fees are normally billed annually in advance and recognized into revenue ratably during the specified maintenance period.

 

The Company’s outsourced business can generate revenues from product licenses, product enhancements, implementation-related services, license maintenance and processing.  Revenues generated from our outsourced customers during implementation are largely deferred during the implementation phase of an outsourced project in accordance with Staff Accounting Bulletin No. 104 (SAB No. 104) “Revenue Recognition in Financial Statements” which superceded Staff Accounting Bulletin No. 101.  Once an outsourced client begins processing its customers’ accounts on the outsourced platform, i.e., “goes live,” the deferred revenue and related costs are amortized over the expected life of the processing arrangement.  In addition, once the client is running on an outsourced solution, processing and transaction fees are assessed.  Under this model, once account volumes exceed a certain minimum level, as a client institution’s customer account base grows, Sanchez increases its revenue stream.  Sanchez outsourcing includes solutions for banking and wealth management.  Financial institutions selecting an outsourced solution either can purchase licenses for Sanchez products up-front, or in lieu of up-front license fees, institutions can opt to spread the license and accompanying maintenance fees on a per account/per month basis over the life of the processing contract.  Assessment of these fees begins after the client “goes live” with the solution.

 

Partners

 

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

 

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

 

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

 

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

 

Financial Services Market Overview

 

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

 

In the mature markets, generally constrained Information Technology (IT) budgets are forcing Chief Information Officers to demonstrate early return on investment (ROI) and there is a clear trend towards the commercial and technology sides of the business working in partnership to ensure IT spending brings real and near-term benefits to the enterprise and delivers increased share of wallet.  The Company sees a continued trend towards IT spending that will result in a meaningful and sustainable reduction in operations and technology costs as well as continued efforts to support a single view of the customer across the financial services enterprise.

 

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

 

Financial institutions have learned from the failed infrastructure projects of the 1980s and early 1990s and are now pursuing strategies that mitigate the financial and technological risks.  Infrastructure change is occurring in a pragmatic fashion as near-term business challenges in a particular area or line of business within the institution are being solved with IT solutions capable of supporting the whole enterprise over time.  The Company has developed a Line of Business MigrationÔ strategy, which it believes will be effective in meeting the needs of financial institutions wishing to replace legacy processing environments with a modern architecture.

 

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

 

In combination, these market demands will require the deployment of feature-rich middleware solutions, modern, real-time core processing systems in the back office and integrated wealth management solutions.  The Company’s middleware solution is designed to deliver enterprise customer and channel integration while the core-processing platform is capable of supporting the needs of the world’s largest financial services institutions.  Additionally the Company’s acquisition of a wealth management company in 2002 affords the opportunity to provide integrated banking and wealth management solutions.

 

All of these solutions may be deployed in-house or through the Company’s outsourcing division, SDSI.  Beyond providing a risk-mitigating route for the deployment of mission critical IT infrastructure, SDSI has captured a significant market share in the niche market of non-bank financial institutions wishing to leverage their customer and brand franchises through the deployment of banking services.

 

In emerging markets, the Company sees a higher pace of change often driven by macro economic events; for example, Russia’s efforts to create a capitalistic economy, China’s membership in the WTO and the privatization and modernization of the financial services industry in Thailand and India.  With the emergence of the necessary domestic communication networks, these countries are now in a position to sustain an infrastructure transformation as they move from historic branch-based systems to highly flexible, real-time centralized systems.  In many emerging markets the indigenous vendors do not have the technology or banking expertise to support this transformation, opening up opportunities for western IT vendors to fill the local void in product and services.

 

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

 

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Sanchez Services

 

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

 

Project services include project management, training (both standard and customized), system implementation, solution integration, custom interfaces to third-party or in-house legacy applications, data conversion, integrated testing, custom software, custom output (reports, statements, notices), custom component application, localization, and version upgrade services.  Trained financial service industry professionals deliver Sanchez services.  They work at client locations as well as remotely and follow a published methodology employing proven project management and measurement techniques.  For institutions implementing Sanchez solutions in-house, project services are provided during the initial implementation of Sanchez products and also as contracted for by clients after conversion to Sanchez products.  Service revenues from an in-house implementation vary, but can range from $250,000 to more than $5 million for an individual project.  Typically, an in-house implementation for a top-tier institution involves moving a large volume of customer data from existing systems onto the Sanchez platform.  In these cases, service revenues are higher when compared against implementing a de novo solution where little or no data conversion work is required.  Project services from an in-house implementation also generate revenues from project management, training and custom interface work.  When an institution replaces its in-house, legacy transaction processing system with a Sanchez solution, data conversion and custom system interface projects typically are delivered in six to twelve months.  Other project services delivered during the implementation period can include conversion, localization and software customization.  Execution support is provided from several regional locations.  Education and consulting services are based in Malvern.

 

Service revenues from an outsourcing project vary by the size and scope of the implementation, but typically range from $1 million to more than $5 million per project.  An outsourcing project typically involves creating an Internet bank and does not involve replacing a legacy system.  Services associated with this type of project include project management implementation services, some data conversion, multiple system interfaces and integrated systems testing.  An institution can implement an outsourcing solution in as few as 120 days if the standard outsourcing solution and product offering are implemented.  The Company has found, however, that institutions frequently want to differentiate their direct and Internet bank offerings from the start.

 

As part of the Company’s continued strategic focus on the European region, Sanchez opened its European headquarters in Amsterdam in October 2002.  The office serves the Company’s European customers in the region.  The Company has continued to build its presence in Amsterdam and generate new sources of revenue.

 

Client Maintenance Service

 

The major portion of the worldwide customer service and support is delivered from the Company’s Malvern, Pennsylvania headquarters and the Toronto, Canada location.  The Company’s Client Engineering Group is responsible for help desk, research, systems operations, software defect resolution, and application quality assurance.  A client engineering team consists of research, quality assurance and programming personnel.  Regional servicing hubs include Pittsburgh, Pa.; Malvern, Pa.; Amsterdam, the Netherlands; Warsaw, Poland; and Toronto, Canada.  A team works together to ensure the customer issue is understood and addressed accordingly.  Each institution is assigned to a specific client engineering team to handle day-to-day issues.  Larger clients are also assigned an account manager.  The Company believes that service response considerations play a major role in an institution’s selection of banking software products.  To respond to this need, the Company continues to enhance its ability to deliver localized customer support and installation capability worldwide, either directly or through third-party partners.  The Company provides local support services to clients in Poland through a partnership with ComputerLand, in Asia through a partnership with OpenSys, as well as in India through Sanchez Capital Services.

 

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

 

Sales and Marketing

 

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

 

10



 

client institutions.  The Company’s executive management team is also leveraged to increase sales opportunities across all business lines.  In addition, the Company leverages the strength of the distribution network of its various partners to extend its global reach.

 

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

 

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

 

Line of business migration solutions — e.g., an institution has an immediate need for a new mortgage processing solution, but also wants a migration path to move other lines of business onto the same single, integrated processing platform.  The Company’s solution in this space is aimed at reducing operations and technology costs and providing a managed risk migration strategy that allows a more controlled implementation schedule.  This approach permits larger institutions to utilize Sanchez solutions on a limited basis by engaging the Company to solve an immediate need.  Once successful, the Company believes it can then grow the relationship by offering more Sanchez products and services.  In mature global markets, the Company looks to capitalize on opportunities in the core banking replacement market by replacing lines of business and offering point solutions.

 

Retail legacy system replacement solutions — e.g., an institution needs to replace its legacy processing environment with a modern, integrated core banking platform.  This is a traditional market for Sanchez.  Sanchez expects the opportunity for core replacement solutions to be strongest in emerging world markets such as in the former Soviet republics, Eastern Europe and in Asia.  Sanchez looks to sell solutions in these markets through partnerships established with local IT and financial services companies.

 

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

 

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

 

Wealth management solutions — e.g., front-end servicing solutions for equities, options, fixed-income and mutual fund securities, and wrap account processing for brokerages, bankers and insurance agents.  To complement and broaden the Company’s integrated line of banking products, Sanchez acquired Spectra Securities Software, of Toronto, Canada, in July 2002.  With the acquisition, the Company added Spectra’s Wealthware brand of full-functioned, multi-channel wealth management applications.  Sanchez intends to provide an integrated banking and brokerage platform for the industry’s growing global requirements for wealth management.  To date, the majority of the Company’s wealth management solutions have been sold in Canada.

 

Pricing Strategy

 

The Company sells software licenses for its products, offers an initial five-year maintenance and support agreement on licenses sold, sells processing contracts for outsourcing, and sells a variety of professional services on both a time-and-materials and a fixed-priced basis.

 

The Company licenses its core processing (Sanchez Profile) and middleware (Sanchez Xpress) software products on an account-based pricing model, which can accommodate licenses for one or more production/processing sites.  Based on the total number of accounts required, an institution purchases a license for these products.  Profile for Windows, the Company’s Windows-based front-end servicing product is licensed based on the number of LAN servers and individual workstations required.  The Company’s Web-based, bank front-end servicing products for customer service and teller operations in a branch or call center environment (Sanchez WebCSR and future Sanchez Webteller) are licensed on a per-user basis with discounts provided for licensing both products.  The Company’s Internet banking consumer interface (Sanchez Webclient) is based on the number of customers registered with the bank’s on-line service.  The Company also licenses its set of Profile Application Tools on an application-per-site basis or a bundle-per-site basis.  The Company’s products are sold directly to institutions

 

11



 

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

 

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

 

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

 

Engineering

 

The Company believes that it must constantly evolve and enhance both the functional scope and technical foundation of its products to remain competitive.  To accomplish this, the Company has historically incurred significant expenses related to development activities and may increase this investment in the future.  During 2003, the Company extended its utilization of offshore development resources for routine software development activities and testing.

 

Engineering, which is formally housed within the Company’s Banking Solutions Division (BSD) and Wealth Management, follows a formal software development life cycle process and as a result, BSD Engineering Group achieved the Level 3 rating of the Software Capability Maturity Model® (CMM), developed by Carnegie Mellon University’s Software Engineering Institute (SEI) during 2002 for its banking application products.  In support of this process, the Company has developed and acquired products that assist it in defining, planning, tracking, measuring and managing the development process.  The Company realizes that large software projects can incur substantial cost, schedule and technical risk.  The BSD Client Engineering Group provides Sanchez banking application development, technology and platform development, productivity and tools development, maintenance programming, documentation, quality assurance, and application deployment directly for Sanchez clients.  The Product Engineering Group and the Product Management Group, within the BSD is responsible for defining plans for new product versions, developing Sanchez product application enhancements, defining technology and platform layer enhancements to product architecture, evaluating and implementing operating system ports, programming languages, database systems, and development and productivity tools.  After Product Engineering successfully implements a new technology component under an existing application component, it is responsible for propagating the technology to the Client Engineering Group.  The Company’s Wealth Management Division, in support of the Company’s wealth management software applications, performs similar engineering functions.

 

Employees

 

As of December 31, 2003, Sanchez employed approximately 560 full-time employees.  Sanchez employees are not represented by any collective bargaining agreements and the Company has not experienced a work stoppage.  In 2003, the Company continued to develop its off-shore development effort, and expects to expand this effort during 2004.  In addition to full-time employees, the Company has historically utilized the services of various independent contractors and third-party vendors, primarily for overseas implementation projects and certain product development efforts.

 

Competition

 

For banking application software solutions, the Company’s primary competitors are the in-house development staffs of the world’s largest financial institutions.  Other competitors are third-party developers and include Fidelity National Financial, Fiserv, Accenture and Alnova Technologies Corporation, Computer Sciences Corp. (CSC), Misys International Banking Systems, Temenos, i-Flex Solutions, SAP, Kirchman Corporation, Metavante, Jack Henry, Aurum Technology, Open Solutions Inc., London Bridge International, and Unisys.  Competing with Sanchez in the direct and Internet segment of the financial services market are many of the same vendors listed above plus S1 Corporation, Corillian, Sybase (Financial Fusion), InteliData, Digital Insight and Online Resources Corporation.  For wealth management solutions, the Company’s primary competitors include Advent, x.eye, and Fincentric.

 

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Code of Conduct

 

The Sarbanes-Oxley Act of 2002 requires public companies to disclose whether they have adopted a Code of Ethics (Code).  Sanchez has published a Code for all its officers, directors, employees and independent consultants.  The Code promotes honest and ethical conduct, and addresses issues such as conflicts of interest, use of Company assets and violations of law.   The Code is published on the Company’s Web site at www.sanchez.com.

 

Investment Consideration

 

Forward-looking Statements May Prove Inaccurate

 

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

 

the effect of general economic and market conditions on processing levels and software and services buying decisions;

 

the timing and magnitude of product and services sales;

 

the timing and scope of technological advances;

 

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

 

the ability to attract and retain clients and key personnel; and

 

the overall condition of the financial services industry.

 

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

 

Risk Factors

 

Consider carefully the risks described below before making any investment decision regarding Sanchez.  The risks and uncertainties described below are not the only ones facing Sanchez.  Additional risks and uncertainties not presently known to Sanchez or that Sanchez currently deems immaterial may also impair Sanchez’s business operations.  If any of the events that create the following risks occur, Sanchez’s business, financial condition or results of future operations could be materially adversely affected.  In such case, the trading price of Sanchez’s common stock could decline, and an investor in Sanchez common stock may lose all or part of their investment.

 

FNF has proposed to acquire Sanchez.  If such acquisition is unsuccessful, Sanchez’s business and financial results may suffer.

 

Although the Company executed a definitive merger agreement with FNF, the consummation of the merger is subject to various closing conditions, including approval by the shareholders of Sanchez and regulatory approval. It is possible that the merger may not be completed in the stated timeframe or at all.  If the proposed merger is not completed or is delayed, the Company’s business may suffer for a number of reasons including, but not limited to, other opportunities foregone while the transaction was pending, additional costs incurred in support of the proposed merger, loss of employees due to uncertainty surrounding the acquisition and a reduction in our cash balances.  Even if the proposed merger is completed, we may fail to realize the anticipated benefits of the merger.

 

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

 

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

 

Sanchez’s success depends in part on adapting its computer products and services to changes in technology and in its clients’ businesses.  If Sanchez does not update its software and services or develop new products or services that are timely delivered to and well received by clients, Sanchez’s business and financial results may suffer.

 

Sanchez’s ability to successfully update and integrate its products and services and timely develop and deliver new products and services required by its clients is subject to a number of risks that could adversely affect Sanchez’s business and financial results, including:

 

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

 

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

 

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

 

ongoing developments in patent law and the increasing number of software patents granted may make it more difficult or costly for Sanchez to add or retain important features in its products and services; and

 

to the extent that Sanchez’s products and services involve the storage and transmission of confidential information, security breaches could expose Sanchez to a risk of loss and possible liability; and

 

the Company’s ability to protect its proprietary services and software.  The Company relies upon a combination of copyright, trademark and trade secret law, confidentiality restrictions in contracts with employees, customers and others and software security measures.

 

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

 

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

 

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

 

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

 

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

 

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

 

Sanchez may have to devote unanticipated financial and management resources to the acquired businesses;

 

14



 

Sanchez may not be able to realize expected operating efficiencies or product integration benefits; and

 

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

 

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

 

Sanchez’s future success depends on its ability to obtain, retain and sell additional services to clients.  A variety of factors could affect Sanchez’s ability to obtain and retain clients, including demand for Sanchez’s products and services, competition (including internal client solutions), integration of acquired businesses, and client budgetary constraints and selection procedures. Sanchez does not have a unilateral option to extend the terms of such contracts upon their expiration.  The failure of clients to renew contracts, a reduction in usage or value under any contracts or the cancellation of contracts could adversely affect Sanchez’s business and financial results.

 

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

 

Sanchez’s future success depends on the continued service and availability of skilled personnel, especially technical, sales and management personnel.  Experienced personnel in the information-technology industry are in high demand and competition exists for their talents.  There can be no assurance that Sanchez will be able to successfully attract and retain the personnel that it needs.  If Sanchez is unable to successfully attract and retain skilled personnel, Sanchez’s ability to provide its products and services may be impeded.  Even if Sanchez is able to attract and retain the skilled personnel it needs, Sanchez’s recruitment and compensation expenses could grow faster than revenues, which could adversely affect Sanchez’s financial results.

 

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

 

Sanchez sells its products and services to banks, mutual funds, brokers, insurance companies and other financial services firms. If the financial services industry or Sanchez’s clients in the financial services industry experience problems, Sanchez’s business and financial results could be affected adversely.

 

Forward-looking Statements

 

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

 

Glossary

 

AIMR

 

Association for Investment Management and Research

API

 

Application Programming Interface.  A defined calling standard for a software module that provides a consistent, standard set of calls to access the functions provided by the module.

Audit Trail

 

A record of information indicating what changes were made to an order, when, and by whom.

Back Office

 

The administrative functions at a brokerage that support the trading of securities, including trade confirmation and settlement, recordkeeping and regulatory compliance.

Clearing Firm

 

Responsible for clearance and settlement functionality for their own business (self-clearing) and that of correspondents.

Correspondent Firm / Introducing Broker

 

Interacts with clients directly, but uses a clearing broker to interact with the street (meaning to execute, settle and clear transactions).

Fill

 

The price at which an order is executed.

HTML

 

Hypertext Markup Language.  The language used to design and display Web pages.

Java

 

A programming language for Internet and intranet applications from Sun.  Java was modeled after C++, and Java programs can be called from within HTML documents or launched stand alone.  Java is an interpreted language that uses an intermediate language.  The source code of a Java program is compiled into “byte code,” which cannot be run by itself.  The byte code must be converted into machine code at runtime.  This means Java programs are not dependent on any

 

15



 

 

 

specific hardware and will run in any computer with the Java Virtual Machine.

JavaTM 2 Platform, Enterprise Edition (J2EE)

 

Defines the standard for developing multi-tier enterprise applications.  J2EE simplifies enterprise applications by basing them on standardized, modular components, by providing a complete set of services to those components, and by handling many details of application behavior automatically, without complex programming.

JavaServer Pages (JSP)

 

Technology that allows Web developers and designers to rapidly develop and easily maintain, information-rich, dynamic web pages that leverage existing business systems.  As part of the Java family, JSP technology enables rapid development of web-based applications that are platform independent.  JavaServer Pages technology separates the user interface from content generation enabling designers to change the overall page layout without altering the underlying dynamic content.

Java Naming and Directory Interface (JNDI)

 

A standard extension to the Java platform, providing Java technology-enabled applications with a unified interface to multiple naming and directory services in the enterprise.  As part of the Java Enterprise API set, JNDI enables seamless connectivity to heterogeneous enterprise naming and directory services.  Developers can now build powerful and portable directory-enabled applications using this industry standard.

JavaServlet Technology

 

JavaServlet technology provides web developers with a simple, consistent mechanism for extending the functionality of a web server and for accessing existing business systems.  A servlet can almost be thought of as an applet that runs on the server side — without a face.  Java servlets have made many web applications possible.  Servlets are the Java platform technology of choice for extending and enhancing web servers.  Servlets provide a component-based, platform-independent method for building web-based applications, without the performance limitations of CGI programs.  Today, servlets are a popular choice for building interactive web applications.

NSCC

 

National Securities Clearing Corporation.  The world’s leading provider of centralized clearance, settlement and information services to the financial services industry.

 

 

 

Open Financial Exchange (OFX)

 

Is a specification for the electronic exchange of financial data between financial institutions, business and consumers via the Internet.  OFX, which enables transactional, permissive, data feed-driven Web sites, thin clients and personal financial software, streamlines the process financial institutions need to connect to multiple customer interfaces, processors and systems integrators.  OFX supports a wide range of financial activities including consumer and small business banking, consumer and small business bill payment, bill presentment, and investments tracking, including stocks, bonds, mutual funds, and 401(k) account details.

Port

 

The process of moving a software application to a new hardware platform, operating system, or language environment.

Real Time

 

Characteristic of a process that recognizes changes in dynamic data as the changes occur, communicates those changes and manages the resultant effects of the changes.

SSN

 

Social Security Number (U.S.).

WebSphere MQ

 

A range of products provides application programming services that enable application programs to communicate with each other using messages and queues.  This form of communication is referred to as commercial messaging.  It provides assured, once-only delivery of messages.  Using WebSphere MQ means you can separate application programs, so that the program sending a message can continue processing without having to wait for a reply from the receiver.  If the receiver, or the communication channel to it, is temporarily unavailable, the message can be forwarded at a later time.  WebSphere MQ also provides mechanisms for providing acknowledgements of messages received.

Wireless Application Protocol (WAP)

 

An industry wide standard for developing applications over wireless communication networks.  The WAP Forum, originally founded by Ericsson, Motorola, Nokia, and Unwired PlanetWML, was formed to create the global wireless protocol specification that works across differing wireless network technology types, for adoption by appropriate industry standards bodies.

Wireless Markup Language (WML)

 

It is a markup language based on XML, and is intended for use in specifying content and user interface for narrowband devices, including cellular phones and

 

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pagers.

Wrap

 

A fee-based account that consists of a fund of funds.

XML

 

(E)xtensible Markup Language.  A document format for the Web that is more flexible than HTML. While HTML uses only predefined tags to describe elements within the page, XML allows tags to be defined by the developer of the page.  Thus, tags for virtually any data items can be used for specific applications, allowing Web pages to function like database records.

 

Item 2.  Properties.

 

The Company’s headquarters and principal administrative, sales and marketing, and application development operations are located in approximately 72,000 square feet of leased space in Malvern, Pennsylvania.  In April 2003, the Company signed an 11 year lease with its existing landlord in Malvern to move into a newly constructed office building.  The Company expects to move into this new facility in the summer of 2004, at which time all other existing lease arrangements with this landlord will expire.  The Company runs its international operations from an office in Amsterdam in The Netherlands.  The Company’s operations center is located outside of Pittsburgh, Pennsylvania in approximately 31,000 square feet of leased space, which expires in 2004.  The Company also leases office space in Warsaw, Poland; Toronto, Canada; Sydney, Australia and Singapore.  The Company anticipates that it will be able to continue to obtain suitable space as needed.

 

Item 3.  Legal Proceedings.

 

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

 

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

 

No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 2003.

 

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Executive Officers of the Registrant.

 

The executive officers of the Company are as follows:

 

Name

 

Age

 

Position

 

 

 

 

 

Michael A. Sanchez

 

46

 

Chairman of the Board of Directors

 

 

 

 

 

Frank R. Sanchez

 

47

 

Chief Executive Officer and Director

 

 

 

 

 

Joseph F. Waterman

 

52

 

President, Chief Operating Officer and Director

 

 

 

 

 

James Goodwin

 

60

 

President, Sanchez Global Services

 

 

 

 

 

Michael D. S. Harris

 

43

 

President, Banking Solutions

 

 

 

 

 

John McLeod

 

50

 

President, Wealth Management Division

 

 

 

 

 

Eric Panepinto

 

39

 

President, Sanchez Data Systems, Inc.

 

 

 

 

 

Todd A. Pittman

 

36

 

Senior Vice President, Chief Financial Officer

 

 

 

 

 

Marcia E. Heister

 

47

 

Senior Vice President, Secretary and General Counsel

 

Michael A. Sanchez began his entrepreneurial career more than 24 years ago when he founded Sanchez Computer Associates in 1979.  He served as both chairman of the board and as the Company’s chief executive officer, a post he held until April 1997.  He continues today as board chairman and remains instrumental in building successful business partnerships with leading systems integration and financial services companies worldwide.  Under his leadership, the Company has become a global developer, distributor and marketer of financial services software.  Mr. Sanchez guided the Company through its initial public offering in December 1996, and played a pivotal role in the Company’s global expansion in the early 1990s.  Mr. Sanchez also served as chief executive officer of e-PROFILE, Inc., the Company’s outsourcing division now called SDSI, where he was responsible for that division’s initial organizational growth and development.  Michael Sanchez is the brother of Frank Sanchez.

 

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

 

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

 

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

 

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Michael D. S. Harris joined the Company in April 2000 as a vice president responsible for various business development projects for the Sanchez PROFILE banking application.  He became the Company’s senior vice president in charge of engineering in November 2000, a position in which he was responsible for delivering and maintaining Sanchez software products including all software development, testing and documentation activities.  In January 2003, he was named President of the Company’s Banking Solutions Division, a position in which he oversees all software development and client support for the entire Sanchez suite of integrated banking products.  Before arriving at Sanchez, Mr. Harris was a senior vice president for MasterCard International where he was the head of MasterCard’s global chip group.

 

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

 

John McLeod served as president and CEO of Spectra Securities Software since founding the company in 1989 until its acquisition by Sanchez in July 2002.  In January 2003, Mr. McLeod became president of the Company’s Wealth Management Division.  Prior to establishing Spectra, Mr. McLeod served on the board of directors at the Canadian brokerage firm Burns Fry Limited, where he was responsible for the firm’s global technology requirements and the implementation of a digital trading floor system.  Previously, Mr. McLeod held a variety of technical and managerial positions at Peat Marwick Mitchell & Co. and Wood Gundy Ltd.

 

Todd A. Pittman joined the Company in December 2000 as a senior vice president and chief financial officer.  He directs the day to day financial and investor relations functions for the Company.  Previously, Mr. Pittman was the chief financial officer for Integrion Financial Network, where he directed all financial activities, including business planning, accounting, financial management, human resources, pricing, and shareholder relations.  Prior to Integrion, Mr. Pittman worked for Coopers and Lybrand Consulting in their consulting practice and at Arthur Andersen in their audit practice.  Mr. Pittman is a certified public accountant.

 

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

 

19



 

PART II

 

Item 5.  Market For Registrant’s Common Equity and Related Stockholder Matters.

 

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

 

 

 

High

 

Low

 

Fiscal Year 2002:

 

 

 

 

 

First Quarter

 

$

8.83

 

$

5.25

 

Second Quarter

 

7.26

 

4.37

 

Third Quarter

 

4.52

 

1.80

 

Fourth Quarter

 

4.08

 

1.71

 

Fiscal Year 2003:

 

 

 

 

 

First Quarter

 

$

4.85

 

$

2.75

 

Second Quarter

 

6.10

 

4.05

 

Third Quarter

 

6.00

 

3.35

 

Fourth Quarter

 

4.36

 

3.42

 

 

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

 

Holders of common stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefore, subject to any preferential dividend rights of outstanding Preferred Stock.  To date, the Company has not paid any cash dividends on its common stock and does not expect to declare or pay any cash dividend in the foreseeable future.

 

20



 

Item 6.  Selected Financial Data

 

The statement of operations and balance sheet data presented below have been derived from the Company’s audited consolidated financial statements.  The unaudited backlog data is derived from the Company’s contracted product, service and maintenance agreements as well as minimum processing commitments from the Company’s outsourcing clients.  The data presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Consolidated Financial Statements and the notes thereto and other financial information appearing elsewhere in this Annual Report on Form 10-K.

 

 

 

2003 (a)

 

2002 (b)

 

2001

 

2000

 

1999

 

 

 

In Thousands, Except Per Share Data

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

96,404

 

$

93,018

 

$

93,719

 

$

74,500

 

$

59,681

 

Earnings (loss) before income taxes

 

(10,972

)

5,543

 

5,559

 

(8,805

)

7,440

 

Net earnings (loss)

 

(10,236

)

3,874

 

3,879

 

(6,072

)

5,171

 

Basic earnings (loss) per share

 

(0.38

)

0.15

 

0.15

 

(0.24

)

0.22

 

Diluted earnings (loss) per share

 

 

(0.38

)

 

0.15

 

 

0.15

 

 

(0.24

)

 

0.20

 

Weighted-average common shares outstanding

 

26,843

 

26,312

 

25,707

 

24,912

 

23,911

 

Weighted-average common and diluted shares outstanding

 

26,843

 

26,654

 

26,324

 

24,912

 

26,062

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,539

 

$

31,572

 

$

40,955

 

$

39,890

 

$

25,404

 

Working capital

 

24,549

 

28,185

 

50,301

 

45,268

 

35,541

 

Total assets

 

101,738

 

121,097

 

100,613

 

97,093

 

56,400

 

Long-term debt, including current portion

 

 

 

 

 

83

 

Total shareholders’ equity

 

 

61,992

 

 

66,546

 

 

60,130

 

 

55,352

 

 

45,438

 

 

 

 

 

 

 

 

 

 

 

 

 

Backlog:

 

 

 

 

 

 

 

 

 

 

 

Products and services

 

$

24,830

 

$

43,110

 

$

25,908

 

$

28,336

 

$

6,207

 

Maintenance

 

37,109

 

40,749

 

28,371

 

18,795

 

25,490

 

Minimum processing commitments

 

11,106

 

12,754

 

12,572

 

10,580

 

116

 

Total backlog

 

$

73,045

 

$

96,613

 

$

66,851

 

$

57,711

 

$

31,813

 

 


(a)     Loss from operations for the year ended December 31, 2003 includes a $9.5 million impairment change related to the Wealth Management Divisions goodwill and intangible assets.

 

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

21



 

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

 

Overview

 

Sanchez Computer Associates, Inc. (Sanchez or the Company) is publicly traded on the Nasdaq Stock Exchange under the symbol SCAI.  The Company is a global provider in developing and marketing scalable and integrated software and services that provide banking, customer integration, brokerage, wealth management and outsourcing solutions to approximately 400 financial institutions in 22 countries.  Sanchez’s corporate headquarters is located in Malvern, Pennsylvania.  The Company’s outsourcing data and operations service center is located in Seven Fields, Pennsylvania.  The Company’s Wealth Management Division is based in Toronto, Canada.  Sanchez also maintains services and sales offices in San Ramon, California; Sydney, Australia; Amsterdam, the Netherlands; and Warsaw, Poland. Beginning with the first quarter of 2003, Sanchez organized into divisions and initiated new segment reporting based on those divisions.  Sanchez’s divisional segments are Banking Solutions, Wealth Management, Outsourcing and Global Services.  Each division has individual profit and loss responsibilities.  Whether through products, methodologies, services, custom software enhancements or systems consulting engagements, each division’s mission is to significantly lower clients’ ongoing operations and technology costs, reduce their technology risk, and improve their enterprise customer management.  The divisions were created to provide the innovation and focus necessary to enable clients’ business plans to succeed.  In addition, the Company believes the divisions will allow the Company to become more nimble and respond more quickly to a wider variety of client requirements and needs.

 

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

 

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

 

Sanchez WealthwareÔ is Sanchez’s wealth management product line, which was acquired in July 2002 through the acquisition of Spectra Securities Software of Toronto, Canada.  Sanchez Wealthware is a comprehensive, multi-channel wealth management solution that helps financial institutions manage investor assets online by providing a collaborative, holistic client-view of assets and holdings based on real-time information.  The product line includes aggregation and Information Management, AIMR-Compliant Portfolio Management, Market Data Management and Order Management with Straight Through Processing (STP) for equities, options, fixed income and mutual funds.

 

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

 

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

 

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

 

22



 

testing, custom software, custom output (reports, statements, notices), custom component application, localization, and version upgrade services.  Trained financial service industry professionals deliver Sanchez services.  They work at client locations as well as remotely and follow a published methodology employing proven project management and measurement techniques.  For institutions implementing Sanchez solutions in-house, project services are provided during the initial implementation of Sanchez products and also as contracted for by clients after conversion to Sanchez products.  Service revenues from an in-house implementation vary, but can range from $250,000 to more than $5 million for an individual project.  Typically, an in-house implementation for a top-tier institution involves moving a large volume of customer data from existing systems onto the Sanchez platform.  In these cases, service revenues are higher when compared against implementing a de novo solution where little or no data conversion work is required.  Project services from an in-house implementation also generate revenues from project management, training and custom interface work.  When an institution replaces its in-house, legacy transaction processing system with a Sanchez solution, data conversion and custom system interface projects typically are delivered in six to 12 months.  Other project services delivered during the implementation period can include conversion, localization and software customization.  Execution support is provided from several regional locations.  Education and consulting services are based in Malvern.

 

For more information on the Company’s products and services, Sanchez maintains a Web site, which can be accessed at http://www.sanchez.com.  In addition, the Company makes its Securities and Exchange Commission (SEC) filings available for download from its Web site.

 

Critical Accounting Policies

 

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

 

For Sanchez’s software license contracts, a determination needs to be made for each contract regarding whether the percentage-of-completion contract accounting method should be used to recognize revenue or whether revenue can be recognized when the software is delivered and all of the conditions of Statement of Position (SOP) 97-2, “Software Revenue Recognition,” are met. Contract accounting is required if the services to be provided by the Company are essential to the arrangement. In many cases, the services are essential to the arrangement because they involve customization and interfaces, and license fees are paid in stages based on the completion of defined service deliverables. As a result, revenue is typically recognized from these arrangements using SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts,” which generally results in recording revenue over a six to eighteen month period of time.  In other cases, the services are not essential, such as arrangements where an unrelated third party performs implementation services and the realization of the license fee is not dependent on the completion of such services. In these situations, license fees are recognized when persuasive evidence of an arrangement exists, the software is delivered, the fee is fixed or determinable and collection is probable, which generally results in recording revenue earlier than when contract accounting is used. The determination of whether services are essential involves significant judgment and could have a material impact on the Company’s quarterly results of operations to the extent that significant new contracts are not accounted for using contract accounting.

 

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

 

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

 

23



 

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

 

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

 

Based upon this analysis, the Company determined that the carrying value of the Reporting Unit exceeded its fair value.  The identification of an impairment necessitated the preparation of a SFAS No. 142, Level 2 analysis to quantify the amount of the goodwill impairment.  During this analysis, the Company determined that there also could be an impairment of certain amortizable intangible assets associated with the Reporting Unit, primarily the customer relationships and acquired technology.  As a result, the Company performed an impairment analysis of the long-lived assets in accordance with SFAS No. 144.  As a result of this analysis, the Company determined that the carrying value of the Reporting Unit’s long-lived assets exceeded the undiscounted cash flows expected to be generated by such assets over their remaining useful life.  Accordingly, the Company recorded an impairment charge of approximately $5.5 million to write down the long-lived assets to their fair value.  The fair value of the long-lived assets was primarily determined using the income approach.  The income approach measures the value of an asset by calculating the present value of its future economic benefits.  These benefits can include revenues, cost savings, tax deductions, and proceeds from its disposition.  Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, trends within the industry, and risks associated with particular investments of similar type and quality as of the valuation date.  The Company then determined the fair value of the goodwill associated with the Reporting Unit in accordance with SFAS No. 142, resulting in an impairment charge related to goodwill of approximately $4.0 million.  The total impairment of goodwill and certain amortizable intangible assets of the Reporting Unit for the year ended December 31, 2003 was $9.5 million and appears on the Consolidated Statements of Operations as impairment charge.

 

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The majority of the Company’s receivables are due from financial service organizations located throughout the United States, Europe and Canada. From time to time, the Company’s clients dispute the amounts owed and in other cases they experience financial difficulties and cannot pay on a timely basis. In certain instances, these factors ultimately result in uncollectable accounts. The determination of the appropriate reserve needed for uncollectable accounts involves significant judgment. A change in the factors used to evaluate collectability could result in a significant change in the reserve needed. Such factors include changes in the financial condition of the Company’s customers as a result of industry, economic, political or customer-specific factors, the ultimate settlement of disputes and, in certain cases, the decisions of third party arbitrators or courts.

 

24



 

Results of Operations

 

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

 

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001

 

 

 

Dollars in Thousands

 

Revenues

 

 

 

 

 

 

 

Products

 

$

22,673

 

$

18,728

 

$

24,195

 

Services

 

28,789

 

32,207

 

33,928

 

Processing

 

18,426

 

18,431

 

14,443

 

Software maintenance fees and other

 

21,933

 

18,207

 

16,217

 

Customer reimbursements

 

4,583

 

5,445

 

4,936

 

Total revenues

 

$

96,404

 

$

93,018

 

$

93,719

 

Percentage relationship to total revenues

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

Products

 

23.5

%

20.1

%

25.8

%

Services

 

29.9

 

34.6

 

36.2

 

Processing

 

19.1

 

19.8

 

15.4

 

Software maintenance fees and other

 

22.7

 

19.6

 

17.3

 

Customer reimbursements

 

4.8

 

5.9

 

5.3

 

Total revenues

 

100.0

 

100.0

 

100.0

 

Operating expenses

 

 

 

 

 

 

 

Product development

 

22.4

 

16.7

 

18.3

 

Product support

 

6.7

 

6.6

 

5.4

 

Services

 

23.8

 

21.4

 

26.8

 

Processing

 

16.8

 

17.5

 

14.5

 

Sales and marketing

 

13.4

 

14.0

 

15.4

 

General, administrative and other

 

12.2

 

11.9

 

10.3

 

Customer reimbursements

 

4.8

 

5.9

 

5.3

 

Impairment charge

 

9.9

 

0

 

 

Restructuring charge

 

1.7

 

0.8

 

 

Total operating expenses

 

111.7

 

94.8

 

96.0

 

Earnings (loss) from operations

 

(11.7

)

5.2

 

4.0

 

Interest income, net

 

0.3

 

1.0

 

1.9

 

Gain (loss) on investment

 

0.2

 

(0.4

)

 

Foreign exchange

 

(0.2

)

0.2

 

 

Earnings (loss) before income taxes

 

(11.4

)

6.0

 

5.9

 

Income tax provision (benefit)

 

(0.8

)

1.8

 

1.8

 

Net earnings (loss)

 

(10.6

)%

4.2

%

4.1

%

 

25



 

Highlights for 2003

 

For the year ended December 31, 2003, revenues increased by $3.4 million to $96.4 million from $93.0 million achieved in 2002.  The Company also reported a net loss of $10.2 million, or $(0.38) per share, which included a $9.5 million impairment charge, compared to 2002’s net earnings of $3.9 million, or $0.15 per share.  On January 28, 2004, Sanchez announced it had signed a merger agreement with Fidelity National Financial, Inc. (FNF), a Fortune 500 provider of products and outsourced services and solutions to financial institutions and the real estate industry.  Pursuant to the agreement, Fidelity Information Services, Inc., which is a subsidiary of FNF, has agreed to acquire all of Sanchez’s common stock for an amount equal to $6.50 per share.  The consummation of the merger is subject to customary conditions, including Sanchez shareholder approval and certain regulatory approvals.  The consideration will be paid in cash and FNF stock.

 

Additional highlights for 2003 included:

 

                  Charles Schwab Corporation launched its direct bank, Charles Schwab Bank, N.A., on a Sanchez outsourcing solution incorporating the full suite of Sanchez bank technology and operations infrastructure solutions.

                  ING Direct U.K. became the sixth ING Direct bank to launch its direct savings business on the Sanchez Profile™ real-time, transaction processing solution.

                  Sanchez launched a core bank processing system running in a production environment on the Linux operating system when First Mortgage KFT of Hungary went live with the solution.

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

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

                  RBC Financial Group, Canada’s largest financial institution and a leading North American diversified financial services company, went live with Sanchez Funds, a comprehensive mutual fund order management system.  Approximately 1,600 RBC financial planners and relationship advisors at 1,300 domestic branches now provide third-party mutual fund order management services using Sanchez Funds.

 

2003 Compared to 2002

 

REVENUES

 

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

 

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

 

Service revenues decreased $3.4 million, or 10.6%, from 2002 to 2003.  Service revenues for the year ended December 31, 2002 included $6.1 million in revenue previously deferred in accordance with SAB No. 101, the predecessor to SAB No. 104 for two former clients.  The Company received a favorable arbitration ruling in respect to a dispute with 1stWebbankdirect.  Also during 2002, the Company settled its outstanding receivable with an unannounced client previously disclosed in the Company’s periodic filings with the SEC. As a result, the Company recognized all of the revenue for these two clients which had been previously deferred pursuant to SAB No. 101. The drop in revenue in 2003 due to the two settlements realized in 2002 was partially offset by an increase in service revenues of $2.7 million associated with new implementation projects, on-going existing client initiatives as well as an increase in net services revenue accretion associated with SAB No. 101.

 

Processing revenues remained constant in 2003 when compared to 2002.  Increased revenue from a new client which began processing in the Company’s outsourcing facility was offset by decreases experienced with other clients as those clients modified their customer offering and as a result of pricing incentives offered to certain clients during contract renewal negotiations.

 

Software maintenance fees and other revenue increased by $3.7 million, or 20.5%, for the year ended December 31, 2003, as compared to the year ended December 31, 2002.  Annual maintenance increases, maintenance on license expansions and new license agreements in the year ended December 31, 2003 contributed to this increase.

 

26



 

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

 

OPERATING EXPENSES

 

Product development expenses increased $6.0 million, or 38.6%, in 2003.  One reason for this increase was due to the costs associated with the Wealth Management Division, which was acquired in July 2002.  Also contributing to the increase was an increase in the net amortization of previously deferred license costs for clients using the outsourced solution in 2003 compared to 2002.  In 2002 the Company had a net deferral of $2.0 million while in 2003 it had a net amortization of $775,000.  There also were higher outside consulting expenses resulting from an increase in external resources.

 

Product support expenses increased by $302,000, or 4.9%, for the year ended December 31, 2003, as compared to the same period last year.  This increase was primarily due to the costs associated with the Wealth Management Division, which was acquired in July 2002.  Partially offsetting this increase was lower third party support fees as the Company has begun to handle more support matters with its own resources.

 

Service expenses increased by $3.0 million, or 15.1%, during the year ended December 31, 2003, as compared to the same period in 2002.  The increase was primarily due to the recognition of expenses in 2003 that had been deferred in 2002 in accordance with SAB No. 101.  The increase in expenses was offset by a reduction in the use of third party service providers.  Also, service expenses in 2002 included the recognition of $5.3 million in expenses related to 1stWebbankdirect and an unannounced client that had been previously deferred in accordance with SAB No. 101.  The gross margin relative to associated revenues was 20.3% for the year December 31, 2003, compared to 38.1% in the prior year.  The decreased margin is primarily a result of lower margin projects.  The lower margin projects were initially deferred under SAB No.101 in 2002, and then accreted in 2003.

 

Processing expenses decreased $53,000, or 0.3%, in 2003, as compared to 2002.  This decrease is attributable to lower third party processing fees and maintenance costs related to outside vendors.  The addition of the Wealth Management Division, which was acquired in July 2002, partially offset these reductions.  The gross margin relative to processing was approximately 12% during 2003 and 2002.

 

Sales and marketing expenses decreased by $101,000, or 0.8%, in 2003 compared to 2002.  This decrease is primarily due to lower commissions paid to third party partners as well as lower travel expenses.  These were partially offset by the impact of the Wealth Management Division expenses.

 

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

 

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

 

Restructuring charges during the year ended December 31, 2003 were incurred by the Company through a reduction in the Company’s worldwide workforce to improve operational efficiency and reduce operating expenses.  The charges recorded in connection with these actions totaled approximately $1.6 million, which consisted primarily of severance related payments.  In 2002 the Company incurred $752,000 in restructuring charges.

 

OTHER INCOME, EXPENSE AND TAXES

 

Interest income for 2003 decreased $695,000, or 71.3%, compared to the same period in 2002.  Interest income in 2002 included interest received related to the settlement of an outstanding receivable with a former client.  Also contributing to the decrease were lower interest rates in 2003 and lower cash reserves following the acquisition of Spectra Software in July 2002.

 

27



 

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

 

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

 

The Company’s effective tax rate in 2003 was 6.7% compared to 30.1% in 2002.  The primary reason for this decrease was due to the impairment charge related to the Wealth Management Division, which is not deductible for income tax purposes.

 

2002 Compared to 2001

 

REVENUES

 

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

 

Product revenue decreased by $5.5 million, or 22.6%, from 2001 to 2002.  The Company’s Wealth Management Division contributed $3.6 million to product revenues in 2002.  The decrease in product revenue is primarily attributable to fewer client product initiatives and an increase in the net license revenue deferrals associated with SAB No. 101 in 2002.

 

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

 

Processing revenues increased by $4.0 million, or 27.6%, in 2002, as compared to 2001.  The overall increase is primarily attributable to the increase in the number of clients using the outsourcing solution and an increase in the number of accounts being processed on the outsourcing platform.

 

Software maintenance fees and other revenue increased by $2.0 million, or 12.3%, for the year ended December 31, 2002, as compared to the year ended December 31, 2001.  Annual maintenance increases and maintenance on license expansions contributed to this increase.  Revenues in 2001 included a one-time benefit from the settlement of a disputed maintenance charge with a former customer.  The software maintenance and other revenue from Wealth Management contributed $1.9 million in 2002 and offset the effect of this one-time benefit in 2001.

 

OPERATING EXPENSES

 

Product development expenses decreased $1.6 million, or 9.5%, in 2002.  This decrease is primarily attributable to the reduction in the use of third party subcontractors.  Also contributing to the decrease was an increase in the net deferral, under SAB No. 101, of product development costs associated with certain clients who have purchased a license and were in the process of implementing an outsourced solution.  In addition, the impact of the reduction in force reduced product development expenses in 2002.  These expense reductions were partially offset by the impact of the Wealth Management acquisition in July 2002.

 

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

 

28



 

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

 

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

 

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

 

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

 

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

 

INTEREST INCOME

 

Interest income decreased $834,000, or 46%, in 2002 compared to 2001.  This decrease is a result of lower interest rates being realized in 2002 and lower cash balances following the acquisition of Spectra in July 2002.

 

LOSS ON INVESTMENT

 

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

 

INCOME TAX PROVISION

 

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

 

Liquidity and Capital Resources

 

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

 

29



 

million for the purchase of property and equipment, while financing activities contributed $600,000 of cash during 2003, principally from the proceeds from the employee stock purchase plan and the issuance of common stock.

 

In April of 2001, the Company agreed to commit up to $10 million of capital contributions to a newly formed venture fund that invests in early stage technology companies.  As of December 31, 2002, the Company had invested $2.0 million in the fund.  This commitment has since been capped at the $2.0 million contributed and no future funding is anticipated toward this venture.

 

In February 2003, the board of directors approved a stock repurchase program authorizing the Company to repurchase up to approximately 1.4 million shares, or 5 percent of Sanchez’s common stock, on the open market or through negotiated transactions.  No time limit has been placed on the duration of the stock repurchase program, and the timing of purchases will depend on market conditions.  Repurchased shares will be accumulated by the Company and held in treasury.    As of March 1, 2004, the Company has not repurchased any shares under this program.

 

The Company currently anticipates that cash generated from operations and existing cash balances will be sufficient to satisfy its operating and capital cash needs for the foreseeable future and, at a minimum, through the next year.  The Company had a line of credit of $20 million secured from its primary banker.  The Company’s line of credit was secured with the Company’s primary banker and had a term of three years, which was to expire on July 2, 2006.  As of year end, the Company had not drawn on this line of credit and currently has no debt outstanding.  In February 2004, the Company terminated its line of credit.

 

The Company has historically experienced, and can be expected to continue to experience, a certain degree of variability in its quarterly revenue, earnings and cash flow patterns.  This variability is typically driven by significant events, which directly impact the recognition and billing of project related revenues.  Examples of such events include the timing of new business contract closings 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 number of permitted users) and completion of implementation project roll outs and the related revenue recognition. Because a high percentage of the Company’s expenses are relatively fixed, a variation in the timing of the initiation or the completion of client projects, particularly at or near the end of any quarter, can cause significant variations in operating results from quarter to quarter.

 

The following table presents contracted obligations information (in thousands):

 

Contractual obligations

 

Total

 

Less than 1
year

 

1-3 Years

 

3-5 Years

 

More than
5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

$

17,948

 

$

1,737

 

$

2,829

 

$

2,884

 

$

10,498

 

 

Forward-looking Statements

 

Certain matters discussed in this Form 10-K contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, but not limited to, statements concerning the Company’s revenues, expenses and earnings, future operating and financial performance, growth rates, acquisition opportunities, and other similar forecasts and expectations.  The words “anticipate,” “estimate,” “believe,” “expect,” “intend,” “plan,” “project” and variations of these words and similar expressions are intended to identify forward-looking statements.  Forward-looking statements are based on operating budgets, forecasts, beliefs and assumptions of management and, as such, are subject to risks and uncertainties and are not guarantees of future performance.  Actual outcomes could differ materially from those expressed in any such forward-looking statement due to a variety of factors in addition to those specifically identified herein.  These factors include, without limitation, the timely and successful integration of new businesses and products of recently acquired companies and the risks associated with acquisitions, changes in or interpretations of tax laws, treaties, or regulations, governmental and public policy changes, business and economic conditions, currency fluctuations, challenges the Company may face as it expands its international operations, the development of the markets or new business areas that the Company is targeting, demand for products and services in the financial services industry, the extent to which the Internet will be used for financial services and products, the potentially adverse impact of consolidation in the financial services industry, timing of contracts and long sales cycles, competition among technology companies serving our industry, renewal of material contracts with clients, potential delays in, or

 

30



 

cancellation of, the implementation of products and services, undetected software errors or failures found in new products, the potentially adverse effect of business interruptions beyond the Company’s control, such as security breaches and future acts of terrorism, maintaining good relationships with key strategic partners, the Company’s ability to attract, hire, and retain skilled and knowledgeable employees, success of the Company’s business model, changes in and availability of capital requirements, the Company’s ability to protect its intellectual property rights, and outcomes of pending and future litigation.  In addition, the Company’s operating results may fluctuate significantly and the Company may not be able to maintain historical growth rates or meet anticipated growth levels.  The Company’s stock price fluctuates and may continue to be volatile.  The Company also has investments in other companies, which are inherently risky.  These risks, as well as risks identified in the Company’s other SEC filings and public announcements, may impact future results.  The Company undertakes no duty to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

7A.  Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Risk¾The Company’s exposure to market risk for changes in interest rates relate primarily to the Company’s cash equivalents.  The Company does not have any derivative financial instruments in its portfolio.  The Company is averse to principal loss and ensures the safety and preservation of its invested funds by limiting default risk, market risk and reinvestment risk.  The Company does not expect any material loss with respect to its cash equivalents.

 

Foreign Currency Risk¾The 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 generally matches local currency revenues with local currency costs.  The Company does have certain inter-company relationships that may create foreign exchange gains or losses.

 

31


Item 8.  Financial Statements and Supplementary Data.

 

Index to Consolidated Financial Statements and Schedule

 

Reports of Independent Auditors

 

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2003 and 2002

 

 

 

 

 

Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001

 

 

 

 

 

Consolidated Statements of Shareholders’ Equity and Other Comprehensive Income (Loss) for the Years Ended December 31, 2003, 2002 and 2001

 

 

 

 

 

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

Schedule II — Valuation and Qualifying Accounts for the Years Ended December 31, 2003, 2002 and 2001

 

 

32



 

Report of Independent Auditors

 

The Board of Directors and Shareholders
Sanchez Computer Associates, Inc.:

 

We have audited the 2003 and 2002 consolidated financial statements of Sanchez Computer Associates, Inc. and subsidiaries as listed in the accompanying index.  In connection with our audits of the 2003 and 2002 consolidated financial statements, we also have audited the 2003 and 2002 financial statement schedule as listed in the accompanying index.  These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.  The 2001 consolidated financial statements and financial statement schedule of Sanchez Computer Associates, Inc. and subsidiaries as listed in the accompanying index were audited by other auditors who have ceased operations.  Those auditors expressed an unqualified opinion on those consolidated financial statements and financial statement schedule, before the revisions and restatement described in Note 2 to the consolidated financial statements, in their reports dated February 5, 2002.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sanchez Computer Associates, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the related 2003 and 2002 financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

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

 

 

KPMG LLP

 

 

Philadelphia, Pennsylvania

January 30, 2004

 

33



 

The following report is a copy of a previously issued Arthur Andersen LLP (Andersen) Report, and the report has not been re-issued by Andersen.  The prior period consolidated financial statements have been revised and restated.  The Andersen report refers to the consolidated balance sheet as of December 31, 2001 and 2000 and the consolidated statements of operations, shareholders’ equity, and cash flows for the years ended December 31, 2000 and 1999, which are no longer included in the accompanying consolidated financial statements.

 

To Sanchez Computer Associates, Inc.:

 

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

 

We conducted our audits in accordance with auditing standards generally accepted in the United States.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sanchez Computer Associates, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

 

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

 

 

 

Arthur Andersen LLP

 

 

Philadelphia, Pennsylvania

February 5, 2002

 

34



 

Sanchez Computer Associates, Inc.
Consolidated Balance Sheets
(In Thousands Except per Share Amounts)

 

 

 

December 31,

 

 

 

2003

 

2002

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

28,539

 

$

31,572

 

Accounts receivable less allowances ($340 – 2003; $979 – 2002)

 

12,715

 

14,138

 

Contracts in process

 

3,244

 

4,851

 

Deferred income taxes

 

2,553

 

2,661

 

Prepaid and other current assets

 

2,360

 

2,812

 

Deferred expenses

 

10,252

 

8,343

 

Total current assets

 

59,663

 

64,377

 

 

 

 

 

 

 

Property and equipment

 

 

 

 

 

Equipment

 

18,944

 

16,532

 

Furniture and fixtures

 

2,668

 

2,674

 

Leasehold improvements

 

3,178

 

3,148

 

 

 

24,790

 

22,354

 

Accumulated depreciation and amortization

 

(20,597

)

(16,826

)

Net property and equipment

 

4,193

 

5,528

 

 

 

 

 

 

 

Goodwill

 

22,474

 

23,896

 

Deferred expenses

 

3,004

 

11,496

 

Amortizable intangibles, net

 

3,479

 

8,454

 

Deferred income taxes

 

6,391

 

4,514

 

Other non-current assets

 

2,534

 

2,832

 

Total assets

 

$

101,738

 

$

121,097

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

3,687

 

$

3,771

 

Accrued expenses

 

7,682

 

9,617

 

Deferred revenue

 

23,745

 

22,804

 

Total current liabilities

 

35,114

 

36,192

 

Deferred revenue

 

3,878

 

18,150

 

Other non-current liabilities

 

521

 

 

Minority interest

 

233

 

209

 

Total liabilities

 

39,746

 

54,551

 

 

 

 

 

 

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Common stock, stated value of $.01 per share, 75,000 shares authorized, 26,954 and 26,689 shares issued and outstanding as of December 31, 2003 and 2002, respectively.

 

270

 

267

 

Additional paid-in capital

 

49,575

 

48,794

 

Retained earnings

 

8,339

 

18,575

 

Accumulated comprehensive income (loss)

 

3,808

 

(1,090

)

Total shareholders’ equity

 

61,992

 

66,546

 

Total liabilities and shareholders’ equity

 

$

101,738

 

$

121,097

 

 

See notes to consolidated financial statements

 

35



 

Sanchez Computer Associates, Inc.
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)

 

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001

 

Revenues

 

 

 

 

 

 

 

Products

 

$

22,673

 

$

18,728

 

$

24,195

 

Services

 

28,789

 

32,207

 

33,928

 

Processing

 

18,426

 

18,431

 

14,443

 

Software maintenance fees and other

 

21,933

 

18,207

 

16,217

 

Customer reimbursements

 

4,583

 

5,445

 

4,936

 

Total revenues

 

96,404

 

93,018

 

93,719

 

Operating expenses

 

 

 

 

 

 

 

Product development

 

21,563

 

15,555

 

17,194

 

Product support

 

6,451

 

6,149

 

5,043

 

Services

 

22,935

 

19,923

 

25,153

 

Processing

 

16,241

 

16,294

 

13,573

 

Sales and marketing

 

12,955

 

13,056

 

14,403

 

General, administrative and other

 

11,786

 

11,043

 

9,667

 

Customer reimbursements

 

4,583

 

5,445

 

4,936

 

Impairment charge

 

9,500

 

 

 

Restructuring charge

 

1,644

 

752

 

 

Total operating expenses

 

107,658

 

88,217

 

89,969

 

 

 

 

 

 

 

 

 

Earnings (loss) from operations

 

(11,254

)

4,801

 

3,750

 

Interest income, net

 

280

 

975

 

1,809

 

Gain (loss) on investment

 

156

 

(393

)

 

Foreign exchange gain (loss)

 

(154

)

160

 

 

Earnings (loss) before income taxes

 

(10,972

)

5,543

 

5,559

 

Income tax provision (benefit)

 

(736

)

1,669

 

1,680

 

Net earnings (loss)

 

$

(10,236

)

$

3,874

 

$

3,879

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per average common share

 

$

(0.38

)

$

0.15

 

$

0.15

 

Diluted earnings (loss) per average common share

 

$

(0.38

)

$

0.15

 

$

0.15

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding

 

26,843

 

26,312

 

25,707

 

Weighted-average common and diluted shares outstanding

 

26,843

 

26,654

 

26,324

 

 

See notes to consolidated financial statements

 

36



 

Sanchez Computer Associates, Inc.

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

(In Thousands)

 

 

 

Common Stock

 

Treasury

 

Additional
Paid-in

 

Retained

 

Accumulated
Other
Comprehensive

 

 

 

 

 

Shares

 

Amount

 

Stock Amount

 

Capital

 

Earnings

 

Income (Loss)

 

Total

 

Balances at January 1, 2001

 

25,211

 

$

252

 

$

(153

)

$

44,431

 

$

10,822

 

$

 

 

$

55,352

 

Net earnings

 

 

 

 

 

 

 

 

 

3,879

 

 

 

3,879

 

Exercise of stock options

 

115

 

1

 

153

 

586

 

 

 

 

 

740

 

Tax benefit from stock options exercised

 

 

 

 

 

 

 

353

 

 

 

 

 

353

 

Employee stock purchase plan

 

117

 

1

 

 

 

811

 

 

 

 

 

812

 

Exchange of subsidiary stock

 

520

 

5

 

 

 

(5

)

 

 

 

 

0

 

Repurchase of subsidiary stock

 

 

 

 

 

 

 

(1,006

)

 

 

 

 

(1,006

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2001

 

25,963

 

259

 

0

 

45,170

 

14,701

 

 

 

60,130

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

 

 

3,874

 

 

 

 

 

Cumulative translation adjustments

 

 

 

 

 

 

 

 

 

 

 

(1,090

)

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

2,784

 

Exercise of stock options

 

16

 

1

 

 

 

39

 

 

 

 

 

40

 

Tax benefit from stock options exercised

 

 

 

 

 

 

 

7

 

 

 

 

 

7

 

Stock-based compensation expense

 

15

 

 

 

 

 

45

 

 

 

 

 

45

 

Employee stock purchase plan

 

111

 

1

 

 

 

574

 

 

 

 

 

575

 

Issuance of common stock for acquisition

 

584

 

6

 

 

 

2,959

 

 

 

 

 

2,965

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2002

 

26,689

 

267

 

0

 

48,794

 

18,575

 

(1,090

)

66,546

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

(10,236

)

 

 

 

 

Cumulative translation adjustments

 

 

 

 

 

 

 

 

 

 

 

4,898

 

 

 

Total comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,338

)

Exercise of stock options

 

105

 

1

 

 

 

255

 

 

 

 

 

256

 

Tax benefit from stock options exercised

 

 

 

 

 

 

 

86

 

 

 

 

 

86

 

Stock-based compensation expense

 

28

 

1

 

 

 

125

 

 

 

 

 

126

 

Employee stock purchase plan

 

132

 

1

 

 

 

344

 

 

 

 

 

345

 

Other

 

 

 

 

 

 

 

(29

)

 

 

 

 

(29

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2003

 

26,954

 

$

270

 

$

0

 

$

49,575

 

$

8,339

 

$

3,808

 

$

61,992

 

 

See notes to consolidated financial statements

 

37



 

Sanchez Computer Associates, Inc.
Consolidated Statements of Cash Flows

(In Thousands)

 

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001

 

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net earnings (loss)

 

$

(10,236

)

$

3,874

 

$

3,879

 

Adjustments to reconcile net earnings (loss) to cash provided (used) by operating activities

 

 

 

 

 

 

 

Depreciation and amortization

 

4,898

 

5,175

 

4,700

 

Impairment charge

 

9,500

 

 

 

Deferred income taxes

 

(1,544

)

464

 

(1,205

)

Equity in loss of venture fund

 

 

837

 

462

 

Non-cash gain on investment

 

(156

)

 

 

Provision for doubtful accounts receivable

 

 

1,138

 

100

 

Other

 

 

(65

)

 

Cash provided by (used in) changes in operating assets and liabilities net of effect of acquisition

 

 

 

 

 

 

 

Accounts receivable

 

1,565

 

7,611

 

(3,553

)

Contracts in process

 

1,632

 

(3,081

)

684

 

Income taxes receivable/payable

 

 

326

 

3,314

 

Prepaid and other current assets

 

839

 

(722

)

(108

)

Accounts payable and accrued expenses

 

(1,393

)

(3,649

)

(2,202

)

Deferred revenue

 

(13,024

)

9,696

 

944

 

Deferred expense

 

6,438

 

(2,936

)

(2,098

)

Net cash provided by (used in) operating activities

 

(1,481

)

18,668

 

4,917

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Capital expenditures

 

(2,348

)

(2,173

)

(3,148

)

Investments

 

(75

)

(500

)

(1,250

)

Cost of acquisition, net of cash acquired

 

 

(25,917

)

 

Net cash used in investing activities

 

(2,423

)

(28,590

)

(4,398

)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Purchase of common stock for treasury

 

 

 

(1,006

)

Issuance of common stock

 

255

 

40

 

740

 

Proceeds from issuance of shares under the employee stock purchase plan

 

345

 

575

 

812

 

Net cash provided by financing activities

 

600

 

615

 

546

 

 

 

 

 

 

 

 

 

Effect of foreign exchange on cash

 

271

 

(76

)

 

Net increase (decrease) in cash and cash equivalents

 

(3,033

)

(9,383

)

1,065

 

Cash and cash equivalents at beginning of year

 

31,572

 

40,955

 

39,890

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of year

 

$

28,539

 

$

31,572

 

$

40,955

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

Interest paid

 

$

 

$

 

$

 

Income taxes paid

 

810

 

772

 

$

1,216

 

 

See notes to consolidated financial statements

 

38



 

Sanchez Computer Associates, Inc.

Notes to Consolidated Financial Statements

 

(1)                                 Description of Business

 

Sanchez Computer Associates, Inc. (Sanchez or the Company) is a global provider in developing and marketing scalable and integrated software and services that provide banking, customer integration, brokerage, wealth management and outsourcing solutions to approximately 400 financial institutions in 22 countries.  Sanchez’s corporate headquarters is located in Malvern, Pennsylvania.  The Company’s outsourcing data and operations service center is located in Seven Fields, Pennsylvania.  Beginning with the first quarter of January 2003, Sanchez organized into divisions and initiated new segment reporting based on those divisions.  Sanchez’s divisional segments are Banking Solutions, Wealth Management, Outsourcing and Global Services.  The Company’s products include an integrated banking platform.  The banking platform products include:  Sanchez Profile, a multi-currency, multi-language, customer-centric, core banking and transaction processing application; Sanchez Xpress, an enterprise customer and transaction management system, which empowers customer relationship management (CRM) and delivers business integration; Sanchez Webclient, a Web-based, Internet customer front-end processor; Sanchez WebCSR, a browser-based integrated customer servicing application that can be deployed across multiple retail delivery channels such as branches and call centers; and Sanchez CRM, a Web-based customer relationship management system, available as a stand-alone application or integrated with Sanchez’s banking platform.  The Company’s outsourcing offering is operated by Sanchez Data Systems, Inc. (SDSI), a wholly owned subsidiary, which uses the Sanchez integrated banking platform as the basis for an outsourced direct banking solution under the Sanchez e-PROFILE brand.  The Sanchez e-PROFILE solution provides an integrated end-to-end operations and technology platform that enables financial services companies to offer comprehensive on-line financial services to their customers.  The Company also offers Sanchez Wealthware, a group of integrated, full-functioned, multi-channel wealth management applications that satisfy the real-time, straight through processing requirements of brokers, bankers and insurance agents.  The product includes application solutions for equities, options, fixed-income securities, mutual fund securities and wrap account processing.

 

(2)                                 Significant Accounting Policies

 

Principles of Consolidation—The consolidated financial statements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Management Estimates—The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to continuously make estimates and assumptions that affect the reported amounts of certain assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenues and expenses during the period.  Actual results could differ from these estimates.  The most significant estimates are the measurement of the percentage-of-completion for revenue recognition, estimated lives of processing relationships, the valuation of goodwill and intangibles and allowance for doubtful accounts.

 

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

 

39



 

contracts, maintenance fees are normally billed annually in advance and recognized as revenue ratably during the specified maintenance period.   For customer reimbursements the Company follows Emerging Issues Task Force (EITF) Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred,” which requires that customer reimbursements received for direct costs paid to third parties and related expenses be characterized as revenue.  Customer reimbursements primarily represent travel, postage and data communication costs.

 

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

 

Accounts Receivable—The majority of the Company’s receivables are due from financial service organizations located throughout the United States, Europe, Asia and Canada.  The Company determines the allowance based on a specific review of its accounts receivable.  From time to time, the Company’s clients dispute the amounts owed and in other cases they experience financial difficulties and cannot pay on a timely basis.  In certain instances, these factors ultimately result in uncollectable accounts.  The determination of the appropriate reserve needed for uncollectable accounts involves significant judgment.  A change in the factors used to evaluate collectability could result in a significant change in the reserve need.  Such factors include changes in the financial condition of the Company’s customers as a result of industry, economic or customer-specific factors, the ultimate settlement of disputes and, in certain cases, the decisions of third party arbitrators or courts.

 

Contracts in Process—Contracts in process in the accompanying consolidated balance sheets represent revenues recognized in excess of amounts invoiced, primarily related to contracts accounted for using the percentage of completion method.

 

Investments—The Company has certain investments in technology service firms which are accounted for on the cost method, as the Company does not have significant influence over its investees.  Through December 31, 2003, the Company had invested $2.0 million in a venture fund that it formed to invest in early stage technology companies.  The Company accounts for its investment in the fund using the consolidation method whereby the Company includes the profits and losses, and balance sheet of the fund in its consolidated financial statements, and then records a minority interest to reflect the interest owned by outside limited partners.

 

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

 

Depreciation and Amortization—Depreciation and amortization are provided over the estimated useful lives of the related assets using the straight-line method.  Equipment and furniture and fixtures typically have useful lives of three and five years, respectively.  The useful life of leasehold improvements is the lesser of the lease term or five years.

 

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

 

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

 

Impairment of Long Lived Assets—In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangibles,” the Company no longer amortizes goodwill but instead

 

40



 

performs an annual test to determine if the Company’s goodwill is impaired.  During the third fiscal quarter of 2003, the Company performed its annual assessment of goodwill associated with its Wealth Management reporting unit (Reporting Unit) and recorded an impairment charge. (see Note 4.)

 

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

 

Goodwill—Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142, which addresses the financial accounting and reporting for acquired goodwill and other intangible assets and supercedes Accounting Principle Board (APB) Opinion No. 17, “Intangible Assets.”  Under SFAS No. 142, goodwill and other intangible assets with indefinite lives are not amortized but are subject to tests for impairment at least annually.  In accordance with the provisions of SFAS No. 142, the Company ceased the amortization of goodwill effective January 1, 2002.  Prior to the adoption of SFAS No. 142, the Company amortized goodwill over ten years.  Amortization expense was $127,000 for the year ended December 31, 2001.

 

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

 

 

 

For the year ended December 31,

 

 

 

2003

 

2002

 

2001

 

Net earnings (loss):

 

 

 

 

 

 

 

Net earnings (loss)

 

$

(10,236

)

$

3,874

 

$

3,879

 

Add: goodwill amortization, net of tax

 

 

 

89

 

Adjusted net earnings (loss)

 

$

(10,236

)

$

3,874

 

$

3,968

 

 

 

 

 

 

 

 

 

Basic and diluted earnings (loss) per average Common share:

 

 

 

 

 

 

 

Reported

 

$

(0.38

)

$

0.15

 

$

0.15

 

Goodwill amortization, net of tax

 

 

 

 

Adjusted basic and diluted earnings (loss) per average common share

 

$

(0.38

)

$

0.15

 

$

0.15

 

 

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

 

41



 

Deferred Revenue—Deferred revenues represent amounts collected from or invoiced to customers in excess of revenue recognized.  Deferred revenues consist of prepaid maintenance and license milestone amounts which are typically expected to be recognized within one year.  In addition, a substantial amount of the fees invoiced during the implementation phase related to our outsourcing customers are deferred, along with their associated costs, in accordance with SAB No. 104.  These amounts are recognized over the expected life of the outsourcing relationship, which is generally one to three years.

 

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

 

Income Taxes—The Company accounts for income taxes following the provisions of SFAS No. 109, “Accounting for Income Taxes”  (SFAS No. 109) requires deferred tax assets or liabilities to be recognized for the estimated future tax effects of net operating loss and credit carryforwards as well as temporary differences between the financial reporting and tax basis of assets and liabilities based on the enacted tax law and statutory tax rates applicable to the periods in which the temporary differences are expected to impact taxable income.  Additionally, the benefits of utilizing the Company’s deferred tax assets are recognized to the extent management of the Company believes that it is more likely than not that the benefits will be realized in future periods.

 

Earnings Per Share—The Company follows SFAS No. 128, “Earnings per Share,” which requires presentation of two amounts, basic and diluted earnings (loss) per share.

 

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

 

The following table provides a reconciliation of weighted average common shares outstanding to weighted-average common and diluted shares outstanding (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001

 

Weighted-average shares outstanding

 

26,843

 

26,312

 

25,707

 

Dilutive effect of options

 

 

342

 

617

 

 

 

 

 

 

 

 

 

Total common and diluted shares

 

26,843

 

26,654

 

26,324

 

 

All potentially dilutive common stock equivalents were excluded from the calculation of net loss per share for the year ended December 31, 2003 since their effect was anti-dilutive as a result of the net loss incurred for the period.  At December 31, 2003, 2002 and 2001, potentially dilutive common stock equivalents include options to purchase 6,627,915, 6,093,707 and 4,050,795 shares of common stock, respectively.

 

Translation of Foreign Financial Statements—Assets and liabilities of the Company’s foreign subsidiaries are translated at the exchange rate as of the end of each reporting period.  The income statement is translated at the average exchange rate for the period.  Gains or losses from translating foreign currency financial statements are accumulated in a separate component of shareholders’ equity.

 

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

 

42



 

 

 

Year Ended December 31,

 

 

 

 

 

2003

 

2002

 

2001

 

Net earnings (loss)

 

As reported

 

$

(10,236

)

$

3,874

 

$

3,879

 

 

 

 

 

 

 

 

 

 

 

Deduct:  Total stock-based employee compensation expense determined under the fair-value based methods for all awards, net of tax

 

 

 

(3,048

)

(8,522

)

(3,889

)

Net earnings (loss)

 

Pro forma

 

$

(13,284

)

$

(4,648

)

$

(10

)

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

As reported

 

$

(0.38

)

$

0.15

 

$

0.15

 

 

 

Pro forma

 

(0.49

)

(0.17

)

0.00

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share

 

As reported

 

$

(0.38

)

$

0.15

 

$

0.15

 

 

 

Pro forma

 

(0.49

)

(0.17

)

0.00

 

 

The per share weighted-average fair value of stock options issued by the Company during 2003, 2002 and 2001 was $2.69, $3.69 and $4.96, respectively, on the date of grant using the Black-Scholes option-pricing model.  The Company used the following weighted-average assumptions to determine the fair value of stock options granted: 2003—expected dividend yield of 0%, risk-free interest rate of 2.32% to 3.45%, expected volatility of 90%, and an average expected life of five years.  2002—expected dividend yield of 0%, risk-free interest rate of 2.63% to 4.50%, expected volatility of 95%, and an average expected life of five years.  2001—expected dividend yield of 0%, risk-free interest rate of 3.97% to 4.99%, expected volatility of 75%, and an average expected life of five years.

 

Fair Value of Financial Instruments—The Company believes that the fair value of its financial instruments, which include cash and cash equivalents, accounts receivable and accounts payable, approximate fair value.

 

Reclassifications—Certain prior period amounts have been reclassified to conform to the current presentation.

 

43



 

(3)                                 Acquisition, Goodwill and Intangible Assets

 

Acquisition

 

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

 

                The purchase price for this acquisition was allocated as follows

 

(in thousands):

 

 

 

Cash paid, net of cash acquired of $1,849

 

$

25,159

 

Direct transaction costs

 

759

 

Fair value of stock issued

 

2,965

 

Liabilities assumed:

 

 

 

Accounts payable and accruals

 

4,320

 

Deferred revenues

 

3,452

 

Total liabilities assumed

 

7,772

 

Total purchase price

 

$

36,655

 

Assets acquired:

 

 

 

Accounts receivable

 

$

1,601

 

Prepaid expenses

 

642

 

Income tax refund receivable

 

344

 

Deferred income taxes

 

551

 

Property and equipment

 

344

 

Intangible assets

 

 

 

Goodwill

 

23,827

 

Intangibles

 

9,346

 

Total assets acquired:

 

$

36,655

 

 

Goodwill

 

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

 

 

 

Wealth Management

 

Outsourcing

 

Total

 

Balance, January 1, 2002

 

$

 

$

899

 

899

 

Acquisition of Spectra

 

23,827

 

 

23,827

 

Foreign currency translation

 

(608

)

 

(608

)

Other

 

(222

)

 

(222

)

Balance, December 31, 2002

 

22,997

 

899

 

23,896

 

Foreign currency translation

 

3,267

 

 

3,267

 

Impairment charge

 

(4,000

)

 

(4,000

)

Other

 

(689

)

 

(689

)

Balance, December 31, 2003

 

$

21,575

 

$

899

 

$

22,474

 

 

44



 

Intangible assets

 

Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. The following table provides a summary of the Company’s intangible assets with definite useful lives, which relates primarly to the acquistion of Spectra:

 

 

 

 

December 31, 2003

 

 

 

Useful Life

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Book Value

 

Customer relationships

 

10 Years

 

$

3,581

 

$

1,001

 

$

2,580

 

Acquired technology

 

5 Years

 

1,205

 

384

 

821

 

Other

 

2 Years

 

386

 

308

 

78

 

Total

 

 

 

$

5,172

 

$

1,693

 

$

3,479

 

 

 

 

December 31 2002

 

 

 

Useful Life

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Book Value

 

Customer relationships

 

10 Years

 

$

6,628

 

$

331

 

$

6,297

 

Acquired technology

 

5 Years

 

1,979

 

99

 

1,880

 

Other

 

2 Years

 

369

 

92

 

277

 

Total

 

 

 

$

8,976

 

$

522

 

$

8,454

 

 

Amortization expense was $969,000 and $527,000 for the years ended December 31, 2003 and 2002, respectively.  Amortization expense for 2004 through 2008 is expected to be approximately $607,000, $530,000, $530,000, $415,000 and $299,000 respectively.

 

(4)                                 Impairment Charge

 

During the third fiscal quarter of 2003, the Company performed its annual assessment of goodwill associated with its Wealth Management reporting unit (Reporting Unit).  The Company engaged an external valuation specialist to assist in this assessment.  The market approach was used to measure the fair value of the Reporting Unit.  This approach derives market multiples from recent transactions or offerings of companies with similar operations as the Reporting Unit.  Market multiples of publicly traded companies that were deemed comparable to the Company were also used in the analysis.  Based upon this analysis, the Company determined that the carrying value of the Reporting Unit exceeded its fair value.  The identification of an impairment necessitated the preparation of a SFAS No. 142 Level 2 analysis to quantify the amount of the goodwill impairment.  During this analysis, the Company determined that there also could be an impairment to certain amortizable intangible assets associated with the Reporting Unit, primarily the customer relationships and acquired technology.  As a result, the Company performed an impairment analysis of the long-lived assets in accordance with SFAS No. 144. As a result of this analysis, the Company determined that the carrying value of the Reporting Unit’s long-lived assets exceeded the undiscounted cash flows expected to be generated by such assets over their remaining useful life.  Accordingly, the Company recorded an impairment charge of approximately $5.5 million to write down the long-lived assets to their fair value.  The fair value of the long-lived assets was primarily determined using the income approach.  The income approach measures the value of an asset by calculating the present value of its future economic benefits.  These benefits can include revenues, cost savings, tax deductions, and proceeds from its disposition.  Value indications are developed by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, trends within the industry, and risks associated with particular investments of similar type and quality as of the valuation date.  The Company then determined the fair value of the goodwill associated with the Reporting Unit in accordance with SFAS No. 142, resulting in an impairment charge related to goodwill of approximately $4.0 million.  The total impairment to goodwill and certain amortizable intangible assets of the Reporting Unit for the year ended December 31, 2003 was $9.5 million and appears on the Consolidated Statements of Operations as impairment charge.

 

(5)                                 Restructuring Charge

 

In an effort to improve future operating margin performance, during 2003 the Company took steps to reduce its cost base.  As part of this process, the Company reduced its workforce and implemented broad-based salary reductions.  As a result, the Company took a restructuring charge of approximately $1.3 million in 2003 primarily

 

45



 

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

 

During the year ended December 31, 2002, the Company initiated restructuring actions by reducing its worldwide workforce by approximately 12% to improve operational efficiency and reduce operating expenses.  Charges related to these restructuring actions were accrued in the quarter ended September 30, 2002, the same period that executive management committed to execute such actions.  Restructuring charges recorded in connection with these actions totaled approximately $752,000, which consisted primarily of severance related payments.  Of these restructuring charges, approximately $670,000 was paid during the year ended December 31, 2002, and the remainder was paid during the three month period ended March 31, 2003.

 

(6)                                 Concentration of Credit Risk and Geographic Segment Data

 

The following table summarizes the percentage of revenues from the Company’s significant clients (listing those clients that exceed 10% in the applicable year):

 

 

 

Year Ended December 31,

 

Client

 

2003

 

2002

 

2001

 

A

 

11

%

 

*

 

*

B

 

10

%

 

*

 

*

C

 

 

*

11

%

16

%

D

 

 

*

 

*

10

%

 

               


* Less than 10%

 

At December 31, 2003 and 2002, the significant clients listed above accounted for $4.1 million (or 26%) and $231,000 (or 1%) of combined net accounts receivable and contracts in process, respectively.  The Company does not require its customers to provide collateral relative to accounts receivable balances.

 

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

 

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001

 

U.S. and Caribbean

 

$

50,640

 

$

54,822

 

$

61,758

 

Europe

 

19,209

 

22,438

 

26,880

 

Canada

 

15,504

 

11,043

 

3,736

 

Asia and other

 

11,051

 

4,715

 

1,345

 

 

 

$

96,404

 

$

93,018

 

$

93,719

 

 

(7)                                 Segments

 

Beginning with the first quarter of 2003, the Company organized into divisions and initiated segment reporting based on those divisions.  Sanchez’s new divisional segments are Banking Solutions, Wealth Management, Outsourcing and Global Services.  The Company evaluates the performance of its segments and allocates resources to them accordingly.  Prior to 2003, the Company classified its operations into three segments: Sanchez’s software licensing business, the SDSI outsourcing business and the Wealth Management Division, which was created following the Company’s acquisition of Spectra in July 2002 (see Note 3).    It is not practicable at this time to restate segment data for prior periods to conform to the Company’s new segment reporting.  As a result, the Company will continue to present segment information under the previous format until comparative information is available under the new segment reporting.  The table below summarizes the Company’s segments (in thousands):

 

46



 

 

 

Year Ended
December 31, 2003

 

Revenues

 

 

 

Banking Solutions

 

$

36,507

 

Wealth Management

 

10,395

 

Outsourcing

 

23,713

 

Global Services

 

21,206

 

Total segment revenue

 

91,821

 

Customer reimbursements

 

4,583

 

Total revenues

 

$

96,404

 

 

 

 

 

Earnings (loss) from operations

 

 

 

Banking Solutions

 

$

6,906

 

Wealth Management

 

(13,548

)

Outsourcing

 

(2,513

)

Global Services

 

(2,099

)

Total loss from operations

 

$

(11,254

)

 

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

 

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001

 

Revenues

 

 

 

 

 

 

 

Sanchez

 

$

48,211

 

$

39,397

 

$

54,555

 

SDSI

 

37,788

 

45,896

 

39,164

 

Wealth Management

 

10,405

 

7,725

 

 

Total

 

$

96,404

 

$

93,018

 

$

93,719

 

 

 

 

 

 

 

 

 

Earnings (loss) from operations

 

 

 

 

 

 

 

Sanchez

 

$

(4,339

)

$

1,015

 

$

8,228

 

SDSI

 

4,249

 

3,091

 

(4,478

)

Wealth Management

 

(11,164

)

695

 

 

Total

 

$

(11,254

)

$

4,801

 

$

3,750

 

 

 

 

 

 

December 31,

 

 

 

 

 

2003

 

2002

 

Total assets

 

 

 

 

 

 

 

Sanchez

 

 

 

$

92,696

 

$

97,438

 

SDSI

 

 

 

25,038

 

41,000

 

Wealth Management

 

 

 

24,618

 

38,655

 

Eliminations

 

 

 

(40,614

)

(55,996

)

Total

 

 

 

$

101,738

 

$

121,097

 

 

47



 

(8)                                 Accrued Expenses

 

 

 

Year Ended December 31,

 

(In thousands)

 

2003

 

2002

 

Accrued compensation and related items

 

$

2,785

 

$

3,206

 

Other

 

4,897

 

6,411

 

Total

 

$

7,682

 

$

9,617

 

 

(9)                                 Shareholders’ Equity

 

The Board of Directors is authorized, subject to certain limitations and without Shareholder approval, to issue up to an aggregate of 10,000,000 shares of preferred stock in one or more series and to fix the rights and preferences of the shares in each series.  No shares of preferred stock have been issued.

 

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

 

In May 1998, the Company’s shareholders approved an Employee Stock Purchase Plan (ESPP).  Under the ESPP, employees of the Company can purchase common stock through payroll deductions.  A maximum of 600,000 shares are authorized for issuance under the ESPP.  As of December 31, 2003, a total of 452,607 shares have been purchased under the ESPP.

 

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

 

A summary of stock option activity is as follows:

 

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001

 

 

 

Shares

 

Weighted-
Average
Exercise
Price

 

Shares

 

Weighted-
Average
Exercise
Price

 

Shares

 

Weighted-
Average
Exercise
Price

 

Outstanding at beginning of year

 

6,093,707

 

$

7.75

 

4,050,795

 

$

10.20

 

2,625,654

 

$

12.14

 

Options granted

 

1,503,414

 

3.73

 

2,472,678

 

4.47

 

1,774,835

 

7.70

 

Options exercised

 

(104,620

)

2.33

 

(16,140

)

4.17

 

(127,953

)

7.05

 

Options cancelled

 

(864,586

)

6.88

 

(413,626

)

12.28

 

(221,741

)

14.94

 

Outstanding at end of year

 

6,627,915

 

7.04

 

6,093,707

 

7.75

 

4,050,795

 

10.20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable

 

3,723,690

 

 

 

2,887,703

 

 

 

1,928,696

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares available for future grants

 

786,891

 

 

 

1,468,900

 

 

 

1,527,952

 

 

 

 

48



 

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

 

 

 

Options Outstanding

 

Options Exercisable

 

Range of Exercise Prices

 

Number
Outstanding
12/31/03

 

Weighted-
Average
Remaining
Contractual
Life (in
years)

 

Weighted-
Average
Exercise
Price

 

Number
Excercisable
12/31/03

 

Weighted-
Average
Exercise
Price

 

$

0.835

to

$

6.740

 

1,952,201

 

5.18

 

$

2.627

 

700,984

 

$

2.149

 

6.875

to

8.690

 

1,635,520

 

5.33

 

5.775

 

389,354

 

6.633

 

9.844

to

13.313

 

1,522,235

 

3.69

 

7.587

 

1,184,185

 

7.621

 

15.563

to

19.094

 

1,393,759

 

2.65

 

11.624

 

1,324,967

 

11.791

 

31.625

to

42.375

 

124,200

 

2.82

 

34.738

 

124,200

 

34.738

 

$

0.835

to

$

42.375

 

6,627,915

 

4.30

 

$

7.037

 

3,723,690

 

$

8.876

 

 

(10)         Income Taxes

 

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

 

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001

 

Current taxes:

 

 

 

 

 

 

 

Federal

 

$

 

$

956

 

$

3,053

 

State

 

368

 

 

(31

)

Foreign

 

440

 

249

 

(137

)

 

 

808

 

1,205

 

2,885

 

Deferred taxes:

 

 

 

 

 

 

 

Federal

 

(1,278

)

464

 

(1,205

)

State

 

(368

)

 

 

Foreign

 

102

 

 

 

 

 

(1,544

)

464

 

(1,205

)

Total provision

 

$

(736

)

$

1,669

 

$

1,680

 

 

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

 

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001

 

Domestic

 

$

319

 

$

4,936

 

$

5,559

 

Foreign

 

(11,291

)

607

 

 

Total

 

$

(10,972

)

$

5,543

 

$

5,559

 

 

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

 

 

 

Year Ended December 31,

 

 

 

2003

 

2002

 

2001

 

Statutory tax provision (benefit)

 

$

(3,731

)

$

1,885

 

$

1,890

 

Non-deductible impairment charge

 

3,230

 

 

 

State income taxes, net of federal income tax benefit

 

 

 

(20

)

Foreign income taxes

 

 

42

 

(137

)

EIE/Foreign sales corporation

 

(1,484

)

(414

)

(148

)

Increase in valuation allowance related to foreign taxes

 

1,151

 

 

 

Other, net

 

98

 

156

 

95

 

Total

 

$

(736

)

$

1,669

 

$

1,680

 

 

49



 

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

 

 

 

December 31,

 

 

 

2003

 

2002

 

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

Federal net operating loss carryforwards and credits

 

4,247

 

551

 

State net operating loss carryforwards and credits

 

1,264

 

1,133

 

Foreign net operating losses

 

5,209

 

4,600

 

Foreign tax credits

 

2,371

 

1,931

 

Deferred revenue

 

6,895

 

11,598

 

Accrued Expenses and other

 

1,364

 

1,348

 

Gross deferred tax assets

 

21,350

 

21,161

 

Valuation allowance

 

(7,462

)

(6,533

)

Deferred tax assets

 

13,888

 

14,628

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

Deferred costs

 

(4,944

)

(7,400

)

Other

 

 

(53

)

Deferred tax liabilities

 

(4,944

)

(7,453

)

Net deferred tax assets

 

$

8,944

 

$

7,175

 

 

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

 

50



 

(11)                          Commitments and Contingencies

 

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

 

2004

 

$

1,737

 

2005

 

1,444

 

2006

 

1,385

 

2007

 

1,422

 

2008

 

1,462

 

Thereafter

 

10,498

 

 

 

$

17,948

 

 

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

 

In February 2001, SDSI filed for arbitration in response to 1stWebbankdirect’s October 2000 termination of its processing agreement in connection with the consolidation of its e-banking platforms.  SDSI was seeking payment of all outstanding receivables from this customer.  1stWebbankdirect counterclaimed and was seeking a refund of the implementation fees they paid for the project. During the year ended December 31, 2002, the Company prevailed in its arbitration claim with 1stWebbankdirect and was awarded $1.7 million.  As a result of this settlement, the Company recognized approximately $3.2 million in revenues and $2.9 million in costs, previously deferred in accordance with SAB No. 101, related to this client during year ended December 31, 2002.

 

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

 

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

 

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

 

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

 

(12)                          Related Party Transactions

 

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

 

On August 13, 2002, Mr. Michael Sanchez repaid two loans and interest in full that were previously outstanding with the Company.  During 2001 and the first quarter of 2002, the Company had made two loans to Mr. Sanchez which totaled $1.1 million.  Mr. Sanchez was personally liable for these loans, which were secured by collateral.  The loans to Mr. Sanchez bore  interest at a rate of 3.58% per annum and 2.73% per annum.  The Company was advised that Mr. Sanchez used a portion of the loan proceeds to partially repay certain indebtedness obtained for personal purposes and secured by his shares of Company stock.  Mr. Sanchez’s loans from the Company were ratified and approved by the Company’s board of directors, with Mr. Michael Sanchez and Mr. Frank Sanchez abstaining in such actions.  Both loans were full recourse loans.

 

On July 3, 2002, in connection with the acquisition of Spectra, the Company loaned Mr. John McLeod, President of the Company’s Wealth Management Division, approximately $314,000.  This loan is currently secured by the pledge of 80,000 shares of Sanchez common stock.  The interest rate on the loan is set at the interest rate 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 was 3%.  The current rate is 4%.  The loan has a term of three years commencing July 3, 2002 with six semi-annual payments.  Mr. McLeod has made all three of his scheduled payments on the loan through January 2004.  During 2003, Mr. McLeod repaid $118,000 in principal and interest and has a balance, including interest, of $252,000 as of December 31, 2003.  The highest outstanding balance in 2003 was $301,000.

 

51



 

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

 

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

 

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

 

(13)                          Profit Sharing Trust Plan

 

The Company maintains a profit sharing trust plan (the Plan) which permits eligible participating members to contribute up to 20% of their gross earnings.  The Company will typically make a contribution equal to 100% of the first 3% which an employee contributes, subject to a statutory cap, and may also make additional voluntary contributions.  During the last five months of 2002, the Company temporarily reduced its contributions to 100% of the first 1.5% which an employee contributes.  The Company expensed $881,000, $584,000 and $649,000 related to the Plan during the years ended December 31, 2003, 2002, and 2001respectively.

 

(14)                          Revolving Line of Credit

 

On July 3, 2002, the Company secured a $20 million revolving line of credit.  There have been no borrowings under this facility through December 31, 2003.  Borrowings under the facility bear interest at either a Base Rate Option, defined as either the prime rate or a rate equal to one quarter of one percentage point above the Federal Funds Rate, or the LIBOR Rate Option, defined as the LIBOR Rate plus 150 basis points.  In February 2004, the Company terminated the revolving line of credit.

 

(15)                          Quarterly Financial Information (Unaudited)

 

The following table presents the unaudited quarterly financial information for 2003 and 2002 (in thousands, except for per share data):

 

 

 

2003 Quarter Ended

 

2002 Quarter Ended

 

 

 

31-Mar

 

30-Jun

 

30-Sep

 

31-Dec

 

31-Mar

 

30-Jun

 

30-Sep

 

31-Dec

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

23,005

 

$

24,040

 

$

25,159

 

$

24,200

 

$

19,326

 

$

22,332

 

$

25,215

 

$

26,145

 

Earnings (loss) before income taxes

 

444

 

(543

)

(9,359

)

(1,515

)

325

 

343

 

1,723

 

3,152

 

Net earnings (loss)

 

335

 

(383

)

(9,433

)

(756

)

218

 

230

 

1,314

 

2,112

 

Basic earnings (loss) per share

 

0.01

 

(0.01

)

(0.35

)

(0.03

)

0.01

 

0.01

 

0.05

 

0.08

 

Diluted earnings (loss) per share

 

0.01

 

(0.01

)

(0.35

)

(0.03

)

0.01

 

0.01

 

0.05

 

0.08

 

 

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

 

(16)                          Subsequent Event

 

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

 

52



 

the merger is subject to customary conditions, including Sanchez shareholder approval and certain regulatory approvals.  The consideration will be paid in cash and FNF stock.  This merger is expected to close sometime in the second quarter of 2004.  The Company is required to pay a termination fee of $7.0 million to FNF if the merger agreement with FNF is terminated in certain circumstances that are set forth in more detail in the merger agreement.

 

53



 

Schedule II

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

 

Allowance for Doubtful Accounts

 

Balance at
Beginning
of Year

 

Charged
to Costs
and
Expenses

 

Deductions

 

Balance at
End of
Year

 

Year ended December 31, 2001

 

$

1,197,000

 

$

100,000

 

$

78,000

 

$

1,219,000

 

Year ended December 31, 2002

 

1,219,000

 

1,138,000

 

1,378,000

 

979,000

 

Year ended December 31, 2003

 

979,000

 

 

639,000

 

340,000

 

 

54



 

The following report is a copy of a previously issued Arthur Andersen LLP (Andersen) report on the consolidated schedule of valuation and qualifying accounts and the report has not been re-issued.  The Andersen report pertains to the 2001 and 2000 information in the consolidated schedule of valuation and qualifying accounts.

 

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

 

To Sanchez Computer Associates, Inc.

 

Our report on the consolidated financial statements of Sanchez Computer Associates, Inc. and subsidiaries is included on page 33 of this Form 10-K.  Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole.  The above schedule is presented for purposes of complying with the Securities and Exchange Commission rules and is not part of the basic financial statements.  This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

 

Arthur Andersen LLP

 

Philadelphia, Pennsylvania

February 5, 2002

 

55



 

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

On June 27, 2002, we dismissed Arthur Andersen LLP (“Andersen”), as our independent accountant, and appointed KPMG LLP as our new independent accountant. The decision to change our independent accountant was recommended and approved by the Audit Committee of our Board of Directors.  Andersen’s reports on our financial statements for the two most recent fiscal years prior to its dismissal did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

 

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

 

56



 

During 2001 and the period from the end of 2001 through June 27, 2002, we did not consult KPMG LLP with respect to the application of accounting principles to a specified transaction either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

 

Item 9A.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

Evaluation of Internal Controls

 

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

 

57



 

PART III

 

Item 10.  Directors of the Registrant.

 

Directors

 

MICHAEL A. SANCHEZ

Director since 1979

 

Age 46

 

 

 

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

 

FRANK R. SANCHEZ

Director since 1980

 

Age 47

 

 

 

Mr. Frank Sanchez has been the chief executive officer since April 1999 and previously was president and chief operating officer of the Company since 1994.  In his capacity as chief executive officer, Mr. Sanchez is responsible for the overall strategic direction and performance of the Company.  Mr. Sanchez also oversees a senior management team that directs the Company’s four principal business units – Banking Solutions, Wealth Management, Outsourcing and Global Services.  He was the principal architect of the Company’s integrated banking solutions and continues to be responsible for providing the overall direction of the product suite and technical strategy.  From 1980 until 1994, Mr. Sanchez was executive vice president in charge of technology and product development.  Mr. Sanchez is a director of Transaction Systems Architects Inc.  Mr. Sanchez is the brother of Michael A. Sanchez.

 

JOSEPH F. WATERMAN

Director since 2000

 

Age 52

 

 

 

Mr. Waterman has served as president and chief operating officer of Sanchez since April 1999 and is responsible for the internal operations of the Company.  He leads a senior management team that directs the Company’s sales, marketing, finance, legal, human resources, investor relations and information technology infrastructure.  Mr. Waterman joined the Company in 1992 as a senior vice president and chief financial officer.  Prior to joining Sanchez, Mr. Waterman was employed by Safeguard Scientifics, Inc. for 13 years.

 

LAWRENCE CHIMERINE

Director since 1987

 

Age 63

 

 

 

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

 

WILLIAM M. FENIMORE, JR.

Director since 2001

 

Age 60

 

 

 

Mr. Fenimore is the president of Fenimore and Associates, a consulting firm.  Mr. Fenimore was the chief executive officer of Integrion Financial Network, a developer and provider of electronic banking technologies and services for a consortium of large banks in the United States.  Previously, he was the group executive vice president, chief technology and strategic planning officer of Meridian Bancorp.  Mr. Fenimore held several senior management positions during his career of 29 years with CoreStates Financial Corp.  Mr. Fenimore serves on the Audit Committee, has been designated a financial expert by the Company’s board of directors and is independent in accordance with SEC regulations.

 

58



 

FREDERICK J. GRONBACHER

Director since 2001

 

Age 62

 

 

 

Prior to retiring in January 2000, Mr. Gronbacher was the chief executive officer of PNC Consumer Bank.  He also served as chief executive officer of PNC Credit Card, PNC National Bank and PNC Insurance.  In September 1993, he joined the Management Committee as executive vice president of PNC Bank Corp.  Mr. Gronbacher serves as chairperson of the Audit Committee.

 

ALEX W. HART

Director since 1998

 

Age 63

 

 

 

Since 1998, Mr. Hart has served as an independent consultant.  Before 1998, Mr. Hart served as chief executive officer of Advanta Corp., a consumer and small business service company that he joined in March 1994.  Before joining Advanta Corp., Mr. Hart had been president and chief executive officer of MasterCard International, Inc., a worldwide association of over 29,000 member financial institutions.  Mr. Hart is a director of Fair Isaac Corporation, Silicon Valley Bancshares and Global Payments, Inc..

 

THOMAS C. LYNCH

Director since 1996

 

Age 62

 

 

 

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

 

JAMES R. STOJAK

Director since 1999

 

Age 57

 

 

 

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

 

GARY C. WENDT

Director since 1999

 

Age 62

 

 

 

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

 

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

 

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

 

59



 

Disclosure of Delinquent Filers Pursuant to Item 405 of Regulation S-K

 

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

 

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

 

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

 

Item 11.  Executive Compensation.

 

Board Compensation

Cash Compensation for Sanchez Board of Directors

 

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

 

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

 

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

 

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

 

Equity Compensation for Sanchez Board of Directors

 

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

 

Cash Compensation for SDSI Board of Directors

 

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

 

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

 

Expenses

 

Directors receive reimbursement of out-of-pocket expenses incurred in connection with attendance at meetings or other Company business.

 

Executive Compensation

 

Cash and Non-Cash Compensation Paid to Certain Officers

 

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

 

60



 

Summary Compensation Table

 

 

 

 

 

 

 

 

 

 

 

Long-Term Compensation

 

 

 

Awards

Name and Principal Position

 

Year

 

Annual Compensation (1)

 

Restricted
Stock
Awards ($)

 

Securities
Underlying
Options/
SARS (#)

 

All Other
Compensation
($) (4)

 

Salary ($)

 

Bonus ($)

 

Other Annual
Compensation
($)

Michael A. Sanchez
Chairman

 

2003

 

$

341,250

 

$

 

$

 

$

 

61,000

 

$

6,000

 

 

2002

 

322,174

 

 

68,133

(2)

 

112,500

 

6,000

 

 

2001

 

332,694

 

 

 

 

61,500

 

5,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Frank R. Sanchez
Chief Executive Officer

 

2003

 

$

341,250

 

$

 

$

 

$

 

71,000

 

$

6,000

 

 

2002

 

320,833

 

 

68,133

(2)

 

150,000

 

6,000

 

 

2001

 

331,248

 

 

 

 

76,500

 

5,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joseph F. Waterman
President and COO

 

2003

 

$

243,750

 

$

 

$

 

$

 

45,500

 

$

6,000

 

 

2002

 

234,375

 

 

36,500

(2)

 

75,000

 

5,414

 

 

2001

 

242,500

 

 

 

 

50,000

 

5,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

James B. Goodwin
President, Global Services

 

2003

 

$

243,750

 

$

 

$

37,690

(7)

$

 

35,000

 

$

 

Division (5)

 

2002

 

161,130

 

 

31,968

(6)

 

125,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Eric Panepinto,
President, Outsourcing
Division

 

2003

 

$

219,808

 

$

 

$

1,506

(3)

$

 

33,500

 

$

4,854

 

 

2002

 

208,750

 

 

21,900

(2)

 

45,100

 

3,426

 

 

2001

 

193,077

 

 

 

 

70,000

 

4,708

 

 


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

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

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

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

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

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

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

 

61



 

2003 Stock Option/SAR Grants

 

Individual Grants(1)

 

 

 

Name

 

Number of
Securities
Underlying
Options/
SARs
Granted (#)

 

% of Total
Options/
SARS
Granted to
Employees in
Fiscal Year

 

Exercise or
Base Price
($/Sh)

 

Expiration
Date

 

Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
for Option Term(2)

 

5%
($)

 

10%
($)

Michael A. Sanchez

 

40,000

(3)

3.0

%

$

3.38

 

2/25/2011

 

$

64,552

 

$

154,613

 

 

 

21,000

(4)

1.6

%

4.10

 

11/12/2009

 

29,282

 

66,431

 

Frank R. Sanchez

 

50,000

(3)

3.8

%

$

3.38

 

2/25/2011

 

$

72,763

 

$

171,311

 

 

 

21,000

(4)

1.6

%

4.10

 

11/12/2009

 

29,282

 

66,431

 

Joseph F. Waterman

 

30,500

(3)

2.3

%

$

3.38

 

2/25/2011

 

$

44,465

 

$

104,719

 

 

 

15,000

(4)

1.1

%

4.10

 

11/12/2009

 

20,916

 

47,451

 

James B. Goodwin

 

20,000

(3)

1.5

%

$

3.38

 

2/25/2011

 

$

29,106

 

$

68,525

 

 

 

15,000

(4)

1.1

%

4.10

 

11/12/2009

 

20,916

 

47,451

 

Eric Panepinto

 

20,000

(3)

1.5

%

$

3.38

 

2/25/2011

 

$

29,182

 

$

68,925

 

 

 

13,500

(4)

1.0

%

4.10

 

11/12/2009

 

18,824

 

42,706

 

 


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

 

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

 

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

 

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

 

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2003 Stock Option Exercises and Year-End Stock Option Values

 

Name

 

Shares
Acquired on
Exercise (#)

 

Value Realized
($)

 

Number of Securities
Underlying Unexercised
Options/SARs
at Fiscal Year-End (#)

 

Value of Unexercised
In-The-Money
Options/SARs
at Fiscal Year-End ($)(1) (2)

 

Exercisable

 

Unexercisable

Exercisable

 

Unexercisable

Michael A. Sanchez

 

 

 

 

 

 

 

 

 

 

 

 

 

Sanchez Options

 

 

 

224,190

 

150,250

 

$

185,009

 

$

68,881

 

SDSI Options

 

 

 

33,333

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Frank R. Sanchez

 

 

 

 

 

 

 

 

 

 

 

 

 

Sanchez Options

 

 

 

275,135

 

188,165

 

$

197,353

 

$

88,925

 

SDSI Options

 

 

 

50,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Joseph F. Waterman

 

 

 

 

 

 

 

 

 

 

 

 

 

Sanchez Options

 

 

 

103,185

 

107,999

 

$

24,687

 

$

48,922

 

SDSI Options

 

 

 

16,667

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

James B. Goodwin
Sanchez Options

 

 

 

58,334

 

101,666

 

$

16,460

 

$

49,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Eric Panepinto

 

 

 

 

 

 

 

 

 

 

 

 

 

Sanchez Options

 

 

 

68,368

 

80,232

 

$

14,812

 

$

30,888

 

SDSI Options

 

 

 

40,000

 

 

 

 

 


(1)   Sanchez option value is calculated using the difference between the option exercise price and the year-end stock price of $4.15, multiplied by the number of shares subject to an option.

 

(2)   SDSI option value is calculated using the difference between the option exercise price and the last valuation of SDSI common stock established by the SDSI Board of Directors during 2000, multiplied by the number of shares subject to an option.

 

63



 

Report of the Compensation Committee on Executive Compensation

 

Compensation Philosophy

 

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

attract and retain qualified employees,

promote among them the economic benefits of stock ownership in our Company, and

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

 

Compensation Structure

 

The compensation of our executives consists of:

base pay,

cash incentives, and

stock options.

 

Base Pay

 

Base pay is established initially for new executives on the basis of subjective factors, including experience, individual achievements, and the level of responsibility to be assumed.  Salary increases are awarded on an annual cycle. based on subjective factors, including:

an executive’s increased level of individual responsibility,

maintaining an appropriate scale among our executives based on relative positions and responsibilities,

the competitiveness of the labor market in the technology sector, and general levels of inflation.

 

Mr. Frank Sanchez’s 2003 base pay.

 

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

 

Other highly compensated executives’ 2003 base pay.

 

Base pay for 2003 was determined by considering the subjective factors previously discussed.  All highly compensated executives were subject to the broad-based salary reductions discussed above.

 

Cash Incentives

 

Cash incentives may be awarded at the discretion of the Compensation Committee.  Cash incentives are intended to motivate executives to achieve and exceed not only the targeted tasks and objectives determined for each executive according to his or her functional responsibilities within the organization, but also our annual performance targets and strategic objectives as defined in our annual strategic plan.

 

Mr. Frank Sanchez’s 2003 cash incentive.

 

Mr. Sanchez was awarded no cash incentive for 2003.

 

Other highly compensated executives’ 2003 cash incentive.

 

Typically, cash incentives are determined by considering corporate performance and other subjective factors.  No cash incentives were awarded in 2003, however, the Company paid out variable compensation as described below.  Cash incentives for 2003 were determined by considering corporate performance other subjective factors.

 

Variable Compensation Plan

 

The Sanchez Computer Associates, Inc. Variable Compensation Plan (the Plan) was implemented in April 2003, to provide employees with the ability to earn incentive compensation based upon their individual performance, their business unit’s performance and the overall performance of the corporation.  The Plan provides for individuals within the Company to earn cash compensation based on individual performance measured against

 

64



 

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

 

Stock Options

 

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

 

2003 Stock Option Awards.

 

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

 

IRS Limits on Deductibility of Compensation

 

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

 

Employment Contracts

 

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

 

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

 

By the Compensation Committee:

 

Lawrence Chimerine, Chairman

Frederick J. Gronbacher

Thomas C. Lynch

 

65



 

Stock Performance Graph

 

The following graph compares the cumulative total return on our common stock for the period December 31, 1998, through December 31, 2003, with the cumulative total return on the Nasdaq Index and the peer group index for the same period.  The peer group consists of Nasdaq companies with SIC Code 737—Computer Programming and Data Processing Services.  The comparison assumes that $100 was invested on December 31, 1998, in our common stock and in each of the comparison indices, and assumes reinvestment of dividends.  We have historically reinvested earnings in the growth of our business and have not paid cash dividends on our common stock.

 

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Equity Plan Compensation Information

 

The following table sets forth a summary of the shares available pursuant to the Company’s 1995 Equity Compensation Plan.  All of the Company’s equity compensation plans have been approved by the shareholders.

 

 

 

Number of shares to
be issued upon
exercise

 

Weighted-average
exercise price

 

Shares available for future
issuance under equity
compensation plans

 

Equity Compensation Plans Approved by Stockholders

 

6,627,915

 

$

7.04

 

786,891

 

 

66



 

Stock Ownership of Certain Beneficial Owners and Management

 

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

 

Name

 

Outstanding
Shares
Beneficially
Owned

 

Options
Exercisable
Within 60 Days

 

Shares Beneficially
Owned Assuming
Exercise of Options

 

Percent of
Shares

 

Safeguard Scientifics, Inc.
800 The Safeguard Building
435 Devon Park Drive
Wayne, PA 19087-1945

 

6,288,184

 

 

6,288,184

 

23.3

%

Wellington Management Company, LLP
75 State Street
Boston, MA 02109

 

2,550,670

 

 

2,550,670

 

9.4

%

Michael A. Sanchez
40 Valley Stream Parkway
Malvern, PA 19355

 

3,301,989

 

257,677

 

3,559,666

 

13.0

%

Frank R. Sanchez
40 Valley Stream Parkway
Malvern, PA 19355

 

1,399,020

 

316,500

 

1,715,520

 

6.3

%

Lawrence Chimerine

 

98,878

 

30,000

 

128,878

 

 

*

Frederick J. Gronbacher

 

10,261

 

30,000

 

40,261

 

 

*

Alex W. Hart

 

14,878

 

68,800

 

83,678

 

 

*

William M. Fenimore, Jr.

 

5,878

 

28,334

 

34,212

 

 

*

Thomas C. Lynch

 

17,534

 

30,000

 

47,534

 

 

*

James R. Stojak

 

7,894

 

56,800

 

64,694

 

 

*

Gary C. Wendt

 

 

56,800

 

56,800

 

 

*

Joseph F. Waterman

 

456,304

 

146,685

 

602,989

 

2.2

%

James B. Goodwin

 

 

65,000

 

65,000

 

 

*

Eric Panepinto

 

 

104,232

 

104,232

 

 

*

Executive officers and directors as a group

 

5,630,596

 

1,507,979

 

7,138,575

 

25.0

%

 


*                 Less than 1% of our outstanding shares of common stock

 

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

 

Safeguard Scientifics

 

Shares are held of record by wholly owned subsidiaries of Safeguard as follows: Safeguard Scientifics (Delaware), Inc.—5,470,584 shares; Safeguard Delaware, Inc.—817,600 shares.

Wellington Management

 

Wellington Management, a registered investment adviser, is the beneficial owner as a result of acting as investment adviser to various clients.  This disclosure is based on information contained in a report as of December 31, 2003 on Schedule 13G filed with the Securities and Exchange Commission.

Michael A. Sanchez

 

Includes 198,000 shares held in custodial accounts for three minor children and 90,000 shares held by his spouse.

Joseph F. Waterman

 

Includes 3,996 shares held by his spouse, 600 shares held in a custodial account for one minor child, and 1,054 shares held in a spousal trust.

 

67



 

Item 13.  Certain Relationships and Related Transactions.

 

Relationships and Related Transactions with Management and Others

 

On July 3, 2002, in connection with the acquisition of Spectra, the Company loaned Mr. John McLeod, President of the Company’s Wealth Management Division, approximately $314,000.  This loan is secured by the pledge of 80,000 shares of Sanchez common stock.  The interest rate on the loan is set at the interest rate 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 was 3%.  The current rate is 4%.  The loan has a term of three years commencing July 3, 2002 with six semi-annual payments.  During 2003, Mr. McLeod repaid approximately $118,000 in principal and interest and has a balance, including interest, of approximately $252,000, as of December 31, 2003.  The highest outstanding balance in 2003 was approximately $301,000.

 

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

 

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

 

Item 14.  Principal Accounting Fees and Services

 

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

 

 

KPMG LLP

 

2003

 

2002

 

Audit fees

 

$

196,500

 

$

146,500

 

 

 

 

 

 

 

Audit related (401K Plan audit, SAS 70)

 

84,224

 

85,000

 

 

 

 

 

 

 

Tax (Tax preparation and consultation)

 

50,000

 

47,000

 

 

Audit Committee Pre-Approval Policies and Procedures

 

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

 

Pursuant to the Sarbanes-Oxley Act of 2002, the fees and services provided as noted in the table above were authorized and approved by the Audit Committee in compliance with the pre-approval policies and procedures described herein.

 

68



 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

 

(a)           Financial Statements and Schedules

 

The financial statements and schedules listed below are filed as part of this Form 10-K.

 

Financial Statements (see Item No. 8, page 32)

 

Reports of Independent Auditors

 

Consolidated Balance Sheets as of December 31, 2003 and 2002

 

Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001

 

Consolidated Statements of Shareholders’ Equity and Other Comprehensive Income (Loss) for the years ended December 31, 2003, 2002 and 2001

 

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001

 

Notes to Consolidated Financial Statements

 

 

Financial Statement Schedules

 

Schedule II—Valuation and Qualifying Accounts for the years ended December 31, 2003, 2002 and 2001 All other information for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission is either included in the financial statements or is not required under the related instructions or are inapplicable, and therefore have been omitted.

 

69



 

(b)           Reports on Form 8-K

 

Form 8-K.  Related to the registrant’s third quarter of 2003 results.  Furnished on October 28, 2003.

Form 8-K.  Related to the registrant’s pre-announcement of its third quarter results.  Furnished on October 17, 2003.

 

(c)           Exhibits

 

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

 

Exhibit
Number

 

Description

3.1

 

 

Amended and Restated Articles of Incorporation of the Company. (2) (Exhibit 3.1)

3.2

 

 

Amended and Restated By-laws of the Company. (2) (Exhibit 3.2)

3.3

 

 

Certificate of Designation of Powers, Rights and Preferences of Sanchez Computer Associates, Inc. of Series A Participating Preferred Stock.  Filed as exhibit on Form 8-K on February 23, 2003 (Exhibit 3.2)

4.1

 

 

Specimen stock certificate representing the Common Stock. (2) (Exhibit 4.1)

4.2

 

 

Shareholder Rights Agreement, dated as of February 28, 2003, between Sanchez Computer Associates, Inc. and Mellon Investor Services LLC, including Form of Certificate of Designation of Powers, Rights and Preferences of Sanchez Computer Associates, Inc., including Series A Participating Preferred Stock (Exhibit A thereto) and Form of Rights Certificate (Exhibit B thereto). Filed as exhibit on Form 8-K on February 23, 2003 (Exhibit 4.1)

10.1

#

 

1995 Equity Compensation Plan. (2) (Exhibit 10.1)

10.2

 

 

Common Stock, Warrants and Rights Agreement dated February 26, 1987 among Sanchez Computer Associates, Inc., Michael A. Sanchez, Frank R. Sanchez, Safeguard Scientifics (Delaware), Inc., and Safeguard Scientifics, Inc. (1) (Exhibit 10.2)

10.3

 

 

Common Stock Purchase Agreement dated September 30, 1989 among Sanchez Computer Associates, Inc., Radnor Venture Partners, L.P., and Safeguard Scientifics (Delaware), Inc. (1) (Exhibit 10.3)

10.4

 

 

Common Stock Purchase Agreement dated December 1, 1989 among Sanchez Computer Associates, Inc., Radnor Venture Partners, L.P., and Safeguard Scientifics (Delaware), Inc. (1) (Exhibit 10.4)

10.5

 

 

Form of Rights Agent Agreement dated November 13, 1996 among ChaseMellon Shareholder Services, L.L.C., Mellon Bank, N.A., Sanchez Computer Associates, Inc., Safeguard Scientifics, Inc., Radnor Venture Partners, L.P., Michael A. Sanchez and Frank R. Sanchez. (2) (Exhibit 10.5)

10.6

 

 

Amended and restated 1995 Equity Compensation Plan filed as part of Company’s proxy statement on April 20, 2001.

10.7

 

 

Combination Agreement, dated as of May 15, 2002, entered into by and among Sanchez, 1518356 Ontario Limited, Sanchez Software, Ltd., Spectra, John C. McLeod and The 1998 McLeod Family Trust.  Filed as exhibit on Form 8-K filed July 3, 2002 (Exhibit 10.1)

10.8

 

 

Loan Agreement, dated July 3, 2002, entered into by and among Sanchez Computer Associates, Inc., Sanchez Software Ltd., Sanchez Computer Associates Polska, SP. Z.O.O., Sanchez FSC, Inc., ePROFILE Holdings, Inc., Sanchez Data Systems, Inc., Sanchez Computer Associates International, Inc. and PNC Bank, National Association.  Filed as exhibit on Form 8-K filed July 3, 2002 (Exhibit 10.39)

10.9

 

 

Security Agreement, dated July 3, 2002, entered into by and Sanchez Computer Associates, Inc., Sanchez Software Ltd., Sanchez Computer Associates International Inc., e-PROFILE Holdings, Inc., Sanchez Data Systems, Inc. and PNC Bank, National Association.  Filed as exhibit on Form 8-K filed July 3, 2002 (Exhibit 10.40)

10.10

 

 

Employment Agreement, dated July 3, 2002, between Sanchez Computer Associates, Inc. and John C. McLeod*

21.1

 

 

Subsidiaries of the Registrant. *

23.1

 

 

Consent of Independent Public Accountants KPMG LLP*

31.1

 

 

Certification of the Chief Executive Officer pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934

31.2

 

 

Certification of the Chief Financial Officer pursuant to Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934

32.1

 

 

Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

70



 


*              Filed herewith.

 

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

 

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

 

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

 

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

 

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

 

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

 

71



 

SIGNATURES

 

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

 

 

SANCHEZ COMPUTER ASSOCIATES, INC.

 

 

 

Dated: March 15, 2004

By:

/s/  FRANK R. SANCHEZ

 

 

Frank R. Sanchez, Chief Executive Officer and Director

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

 

Dated: March 15, 2004

 

/s/  MICHAEL A. SANCHEZ

 

 

Michael A. Sanchez, Chairman of the Board of Directors

 

 

 

 

Dated: March 15, 2004

 

/s/  FRANK R. SANCHEZ

 

 

Frank R. Sanchez, Chief Executive Officer and Director
(Principal Executive Officer)

 

 

 

 

Dated: March 15, 2004

 

/s/  TODD A. PITTMAN

 

 

Todd A. Pittman, Senior Vice President and CFO
(Principal Financial and Accounting Officer)

 

 

 

 

Dated: March 15, 2004

 

/s/  JOSEPH F. WATERMAN

 

 

Joseph F. Waterman, President, Chief Operating Officer
and Director

 

 

 

 

Dated: March 15, 2004

 

/s/  LAWRENCE A. CHIMERINE

 

 

Lawrence A. Chimerine, Director

 

 

 

 

Dated: March 15, 2004

 

/s/  WILLIAM M. FENIMORE

 

 

William M. Fenimore, Director

 

 

 

 

Dated: March 15, 2004

 

/s/  FREDERICK G. GRONBACHER

 

 

Frederick G. Gronbacher, Director

 

 

 

 

Dated: March 15, 2004

 

/s/  ALEX W. HART

 

 

Alex W. Hart, Director

 

 

 

 

Dated: March 15, 2004

 

/s/  THOMAS C. LYNCH

 

 

Thomas C. Lynch, Director

 

 

 

 

Dated: March 15, 2004

 

/s/  JAMES R. STOJAK

 

 

James R. Stojak, Director

 

 

 

 

Dated: March 15, 2004

 

/s/  GARY C. WENDT

 

 

Gary C. Wendt, Director

 

72