<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)*
___X__ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended MARCH 31, 1998 or
--------------
______ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________
0-10200
- --------------------------------------------------------------------------------
(Commission File Number)
SEI INVESTMENTS COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 23-1707341
- ---------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
</TABLE>
1 FREEDOM VALLEY DRIVE, OAKS, PENNSYLVANIA 19456-1100
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(610) 676-1000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 X No
___ ___
*APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes___ No___
*APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1998: 17,884,863 shares of common stock, par value
$.01 per share.
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
--------------- -----------------
(unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 17,247 $ 16,891
Receivables from regulated investment companies 15,680 14,452
Receivables, net of allowance for doubtful
accounts of $1,200 27,576 31,192
Loans receivable available for sale 2,738 11,340
Prepaid expenses 3,555 3,783
Deferred income taxes 7,251 6,337
-------- --------
Total current assets 74,047 83,995
-------- --------
Investments available for sale 3,834 876
-------- --------
Investment in unconsolidated affiliate 1,270 --
-------- --------
Property and equipment, net of accumulated
depreciation and amortization of $51,734
and $49,493 52,570 52,131
-------- --------
Capitalized software, net of accumulated
amortization of $8,790 and $7,959 18,916 18,440
-------- --------
Customer lists, net of accumulated
amortization of $381 and $291 3,018 3,009
-------- --------
Other assets, net 11,147 10,433
-------- --------
Total Assets $164,802 $168,884
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except par value)
<TABLE>
<CAPTION>
March 31,1998 December 31, 1997
-------------- -----------------
(unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,000 $ 2,000
Accounts payable 7,680 5,798
Accrued compensation 6,557 20,920
Accrued proprietary fund services 10,372 9,812
Accrued discontinued operations disposal costs 6,275 7,228
Other accrued liabilities 32,671 28,760
Deferred revenue 7,479 7,158
--------- --------
Total current liabilities 73,034 81,676
--------- --------
Long-term debt 31,000 33,000
--------- --------
Deferred income taxes 8,182 7,798
--------- --------
Shareholders' equity:
Common stock, $.01 par value, 100,000 shares
authorized; 17,885 and 17,767 shares issued
and outstanding 179 178
Capital in excess of par value 52,952 46,724
Retained earnings -- --
Accumulated other comprehensive losses (545) (492)
--------- --------
Total shareholders' equity 52,586 46,410
--------- --------
Total Liabilities and Shareholders' Equity $ 164,802 $168,884
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(unaudited)
(In thousands, except per share data)
Three Months
Ended March 31,
1998 1997
---- ----
<TABLE>
<CAPTION>
<S> <C> <C>
Revenues $81,871 $63,504
Expenses:
Operating and development 44,170 32,262
Sales and marketing 22,039 19,568
General and administrative 3,222 3,394
------- -------
Income from operations 12,440 8,280
Equity in the earnings of unconsolidated affiliate 510 --
Interest income 220 212
Interest expense (712) (491)
------- -------
Income before income taxes 12,458 8,001
Income taxes 4,861 3,200
------- -------
Net income 7,597 4,801
------- -------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments,
net of income tax benefit of $17 and $87 (27) (131)
Unrealized holding (losses) gains on investments,
net of income tax (benefit) expense of $(16) and $137 (26) 207
------- -------
Other comprehensive (loss) income (53) 76
------- -------
Comprehensive income $ 7,544 $ 4,877
======= =======
Basic earnings per common share $ .43 $ .26
======= =======
Diluted earnings per common share $ .40 $ .25
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,597 $ 4,801
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 3,580 3,364
Provision for losses on receivables -- 189
Tax benefit on stock options exercised 5,653 218
Equity in the earnings of unconsolidated affiliate (510) --
Other (1,536) (1,239)
Change in current assets and liabilities:
Decrease (increase) in
Receivables from regulated investment companies (1,228) (245)
Receivables 1,883 (5,489)
Loans receivable available for sale 8,602 263
Prepaid expenses 228 (342)
Increase (decrease) in
Accounts payable 1,882 (1,167)
Accrued compensation (14,358) (9,930)
Accrued proprietary fund services 560 925
Accrued discontinued operations disposal costs (953) (696)
Other accrued liabilities 7,740 4,290
Deferred revenue 321 1,524
-------- --------
Net cash provided by (used in) operating activities 19,461 (3,534)
-------- --------
Cash flows from investing activities:
Additions to property and equipment (2,914) (3,649)
Additions to capitalized software (1,307) (2,660)
Purchase of investments available for sale (3,000) --
Other (376) (190)
-------- --------
Net cash used in investing activities (7,597) (6,499)
-------- --------
Cash flows from financing activities:
Proceeds from (payment on) long-term debt (2,000) 35,000
Payment on line of credit -- (20,000)
Purchase and retirement of common stock (11,610) (1,075)
Proceeds from issuance of common stock 4,589 1,144
Payment of dividend (2,487) (2,220)
-------- --------
Net cash (used in) provided by financing activities (11,508) 12,849
-------- --------
Net increase in cash and cash equivalents 356 2,816
Cash and cash equivalents, beginning of period 16,891 13,167
-------- --------
Cash and cash equivalents, end of period $ 17,247 $ 15,983
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Notes to Consolidated Financial Statements
------------------------------------------
Note 1. Summary of Significant Accounting Policies
------------------------------------------
Nature of Operations
--------------------
SEI Investments Company (the "Company") is organized around its two
primary business lines: Investment Technology and Services and Asset
Management. The Investment Technology and Services segment provides
trust accounting and management information services through the
Company's 3000 product line, administration and distribution services to
proprietary mutual funds, and back-office trust processing. The
principal market for these products and services are trust departments of
banks located in the United States. The Asset Management segment
provides investment solutions through various investment products and
services including the Company's Family of Funds, liquidity funds and
services, and other investment products and services distributed directly
or through professional investment advisors. Principal markets for these
products and services include trust departments of banks, investment
advisors, corporations, high-net-worth individuals, and money managers
located in the United States and Canada.
Summary Financial Information and Results of Operations
-------------------------------------------------------
In the opinion of the Company, the accompanying unaudited Consolidated
Financial Statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position
as of March 31, 1998, the results of operations and cash flows for the
three months ended March 31, 1998 and 1997.
Interim Financial Information
-----------------------------
While the Company believes that the disclosures presented are adequate
to make the information not misleading, these Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and the notes included in the Company's latest annual report
on Form 10-K.
Principles of Consolidation
---------------------------
The Consolidated Financial Statements include the accounts of the Company
and its wholly owned subsidiaries. The Company's principal subsidiaries
are SEI Investments Distribution Company, SEI Investments Management
Corporation, and SEI Trust Company. All intercompany accounts and
transactions have been eliminated. Investment in unconsolidated
affiliate is accounted for using the equity method due to the Company's
less than 50 percent ownership. The Company's portion of the affiliate's
operating results is reflected in Equity in the earnings of
unconsolidated affiliate on the accompanying Consolidated Statements of
Income.
Management's Use of Estimates
-----------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
6
<PAGE>
Property and Equipment
----------------------
Property and equipment on the accompanying Consolidated Balance Sheets
consist of the following:
<TABLE>
<CAPTION>
Estimated
Useful Lives
March 31, 1998 December 31, 1997 (In Years)
-------------- ----------------- --------------
<S> <C> <C> <C>
Equipment $ 43,677,000 $ 42,376,000 3 to 5
Buildings 28,273,000 27,940,000 25 to 39
Land 6,993,000 6,993,000 N/A
Furniture and fixtures 10,172,000 9,790,000 3 to 5
Purchased software 9,330,000 9,181,000 3
Leasehold improvements 5,624,000 5,344,000 Lease Term
Construction in progress 235,000 -- N/A
------------ ------------
104,304,000 101,624,000
Less: Accumulated depreciation
and amortization (51,734,000) (49,493,000)
------------ ------------
Property and Equipment, net $ 52,570,000 $ 52,131,000
============ ============
</TABLE>
Property and equipment are stated at cost, which includes interest on
funds borrowed to finance the construction of the Company's corporate
campus. Depreciation and amortization are computed using the straight-
line method over the estimated useful life of each asset. Expenditures
for renewals and betterments are capitalized, while maintenance and
repairs are charged to expense when incurred.
Customer Lists
--------------
Customer Lists represent the value assigned to customer relationships
obtained in various acquisitions. Customer Lists are amortized on a
straight-line basis over 10 years. The Company evaluates the
realizability of intangible assets based on estimates of undiscounted
future cash flows over the remaining useful life of the asset. If the
amount of such estimated undiscounted cash flow is less than the net book
value of the asset, the asset is written down to its net realizable
value. As of March 31, 1998, no such write-down was required.
Capitalized Software
--------------------
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed"
("SFAS 86"). Under SFAS 86, costs incurred to create a computer software
product are charged to research and development expense as incurred until
technological feasibility has been established. The Company establishes
technological feasibility upon completion of a detail program design. At
that point, computer software costs are capitalized until the product is
available for general release to customers. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not
limited to, anticipated future revenues, estimated economic life, and
changes in technology. Amortization begins when the product is released.
Capitalized software development costs are amortized on a product-by-
product basis using the straight-line method over the estimated economic
life of the product or enhancement, which is primarily three to ten
years, with a weighted average remaining life of approximately 7.4 years.
7
<PAGE>
Earnings per Share
------------------
The Company computes earnings per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), which superceded Accounting Principles Board Opinion No.
15. Pursuant to SFAS 128, dual presentation of basic and diluted
earnings per common share is required on the face of the statements of
income for companies with complex capital structures. Basic earnings per
common share is calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per common share reflects the potential
dilution from the exercise or conversion of securities into common stock,
such as stock options. If the inclusion of common stock equivalents has
an anti-dilutive effect in the aggregate, it is excluded from the diluted
earnings per common share calculation. The Company adopted SFAS 128 in
its December 31, 1997 financial statements. All prior period earnings
per common share information has been restated to conform with the
provisions of SFAS 128.
<TABLE>
<CAPTION>
FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1998
---------------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per common share $7,597,000 17,750,000 $.43
====
Dilutive effect of stock options -- 1,399,000
---------- ----------
Diluted earnings per common share $7,597,000 19,149,000 $.40
========== ========== ====
FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 1997
---------------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (Denominator) Amount
----------- ------------- ---------
Basic earnings per common share $4,801,000 18,532,000 $.26
====
Dilutive effect of stock options -- 788,000
---------- ----------
Diluted earnings per common share $4,801,000 19,320,000 $.25
========== ========== ====
</TABLE>
All options outstanding during the first quarter of 1998 were included in
the diluted earnings per common share calculation. Options to purchase
534,000 shares of common stock with an average exercise price per share
of $24.20 were outstanding during the first quarter of 1997, but were
excluded from the diluted earnings per common share calculation because
the option's exercise price was greater than the average market price of
the Company's common stock.
Statements of Cash Flows
------------------------
For purposes of the Consolidated Statements of Cash Flows, the Company
considers investment instruments purchased with an original maturity of
three months or less to be cash equivalents.
Supplemental disclosures of cash paid/received during the three months
ended March 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest paid $1,343,000 $231,000
Interest and dividends received $ 226,000 $210,000
Income taxes paid $2,456,000 $ 85,000
</TABLE>
8
<PAGE>
Recent Accounting Pronouncements
--------------------------------
In June 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about
operating segments in interim financial reports issued to stockholders.
It also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS 131 is required to
be adopted for the Company's 1998 year-end financial statements. The
Company is currently evaluating the impact, if any, of the adoption of
this pronouncement on the Company's existing disclosures.
Reclassifications
-----------------
The financial statements for prior periods have been reclassified to
conform with the current period's presentation.
Note 2. Comprehensive Income - In the first quarter of 1998, the Company adopted
--------------------
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for
reporting and presentation of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements and requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is presented with equal
prominence as other financial statements.
<TABLE>
<CAPTION>
Foreign Unrealized Accumulated
Currency Holding Other
Translation Losses Comprehensive
Adjustments on Investments Losses
----------- -------------- -------------
<S> <C> <C> <C>
Beginning balance $(417) $ (75) $(492)
Current period change (27) (26) (53)
----- ----- -----
Ending Balance $(444) $(101) $(545)
===== ===== =====
</TABLE>
Note 3. Receivables - Receivables on the accompanying Consolidated Balance
-----------
Sheets consist of the following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Trade receivables $13,972,000 $16,219,000
Fees earned, not received 2,247,000 2,308,000
Fees earned, not billed 12,557,000 13,865,000
----------- -----------
28,776,000 32,392,000
Less: Allowance for doubtful accounts (1,200,000) (1,200,000)
----------- -----------
$27,576,000 $31,192,000
=========== ===========
</TABLE>
9
<PAGE>
Fees earned, not received represent brokerage commissions earned but
not yet collected. Fees earned, not billed represent cash receivables
earned but unbilled and result from timing differences between services
provided and contractual billing schedules.
Receivables from regulated investment companies on the accompanying
Consolidated Balance Sheets represent fees collected from the Company's
wholly owned subsidiaries, SEI Investments Distribution Company and SEI
Investments Management Corporation, for distribution, investment
advisory, and administration services provided by these subsidiaries to
various regulated investment companies sponsored by the Company.
Note 4. Loans Receivable Available for Sale - Loans receivable available for
-----------------------------------
sale represent loans which were purchased through SEI Capital AG, which
is based in Zurich. These receivables are reported at the lower of cost
or market, and any difference between the purchase price and the related
loan principal amount is recognized as an adjustment of the yield over
the life of the loan using the effective interest method. Each loan
receivable involves various risks, including, but not limited to,
country, interest rate, credit, and liquidity risk. Management evaluates
and monitors these risks on a continuing basis to ensure that these loan
receivables are recorded at their realizable value. This evaluation is
based upon management's best estimates and the amounts the Company will
ultimately realize could differ from these estimates. The Company
intends to sell these loans within one year from the balance sheet date.
Note 5. Investments Available for Sale - Investments available for sale
------------------------------
consist of mutual funds sponsored by the Company which are primarily
invested in equity securities. The Company accounts for investments in
marketable securities pursuant to Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). SFAS 115 requires that debt and equity
securities classified as available for sale be reported at market value.
Unrealized holding gains and losses, net of income taxes, are reported
as a separate component of Shareholders' equity. Realized gains and
losses, as determined on a specific identification basis, are reported
separately on the accompanying Consolidated Statements of Income.
At March 31, 1998, Investments available for sale had an aggregate cost
of $4,000,000 and an aggregate market value of $3,834,000 with gross
unrealized losses of $166,000. At that date, the unrealized holding
losses of $101,000 (net of income tax benefit of $65,000) were reported
as a separate component of Shareholders' equity on the accompanying
Consolidated Balance Sheets. There were no unrealized holding gains as
of March 31, 1998.
At December 31, 1997, Investments available for sale had an aggregate
cost of $1,000,000 and an aggregate market value of $876,000 with gross
unrealized losses of $124,000. At that date, the unrealized holding
losses of $75,000 (net of income tax benefit of $49,000) were reported
as a separate component of Shareholders' equity on the accompanying
Consolidated Balance Sheets. There were no unrealized holding gains as
of December 31, 1997.
Note 6. Line of Credit - The Company has a line of credit agreement (the
--------------
"Agreement") with its principal lending institution which provides for
borrowings of up to $50,000,000. The Agreement ends on May 31, 1998, at
which time the outstanding principal balance, if any, becomes due unless
the Agreement is extended. Management believes the Agreement will be
extended. The line of credit, when utilized, accrues interest at the
Prime rate or three-tenths percent above the London Interbank Offered
Rate. The Company is obligated to pay a commitment fee equal to one-
tenth percent per annum on the average daily unused portion of the
commitment. Certain covenants under the Agreement require the Company to
maintain specified levels of net worth and place certain restrictions on
investments. The Company had no outstanding borrowings on its line of
credit at March 31, 1998.
10
<PAGE>
Note 7. Long-term Debt - On February 24, 1997, the Company signed a Note
--------------
Purchase Agreement authorizing the issuance and sale of $20,000,000 of
7.20% Senior Notes, Series A, and $15,000,000 of 7.27% Senior Notes,
Series B, (collectively, the "Notes") in a private offering with certain
financial institutions. The Notes are unsecured with final maturities
ranging from 10 to 15 years with an average life of 7 to 10 years. The
proceeds from the Notes were used to repay the outstanding balance on
the Company's line of credit at that date. The Note Purchase Agreement
contains various covenants, including limitations on indebtedness,
maintenance of minimum net worth levels, and restrictions on certain
investments. In addition, the agreement limits the Company's ability to
merge or consolidate, and to sell certain assets. None of these
covenants negatively affect the Company's liquidity or capital
resources. Principal payments on the Notes will be made annually from
the date of issuance while interest payments are made semi-annually.
The Company made its first principal payment of $2,000,000 in February
1998. The current portion of the Notes amounted to $2,000,000 at March
31, 1998. The carrying amount of the Company's long-term debt
approximates its fair value.
Note 8. Common Stock Buyback - The Board of Directors has authorized the
--------------------
purchase of the Company's common stock on the open market or through
private transactions of up to an aggregate of $248,365,000, including an
additional authorization in April 1998. The Company purchased 237,000
shares at a total cost of $11,610,000 during the first quarter of 1998.
The Company immediately retires its common stock when purchased. Upon
retirement, the Company reduces Capital in excess of par value for the
average capital per share outstanding and the remainder is charged
against Retained earnings. If the Company reduces its Retained earnings
to zero, any subsequent purchases of common stock will be charged
entirely to Capital in excess of par value.
Note 9. Dividend - On December 4, 1997, the Board of Directors declared a cash
--------
dividend of $.14 per share on the Company's common stock, which was paid
on January 21, 1998, to shareholders of record on December 31, 1997.
The Board of Directors has indicated its intention to pay future
dividends on a semiannual basis.
Note 10.Segment Information - The Company defines its business segments to
-------------------
reflect the Company's focus around its two primary business lines:
Investment Technology and Services and Asset Management. The Investment
Technology and Services segment consists of the Company's trust
technology, proprietary mutual fund, and back-office trust processing
businesses. The Asset Management segment provides investment solutions
through various investment products and services distributed directly or
through professional investment advisors to institutional and high-net-
worth markets.
The following tables highlight certain unaudited financial information
about each of the Company's segments for the three months ended March
31, 1998 and 1997.
11
<PAGE>
<TABLE>
<CAPTION>
Investment
Technology and Asset General
Services Management and Admin. Consolidated
--------------- ----------- ------------ -------------
For the Three-Month Period Ended March 31, 1998
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $51,065,000 $30,806,000 $81,871,000
=========== =========== ===========
Operating profit $ 8,642,000 $ 7,020,000 $(3,222,000) $12,440,000
=========== =========== ===========
Equity in the earnings of
unconsolidated affiliate 510,000
Interest income 220,000
Interest expense (712,000)
-----------
Income before income taxes $12,458,000
===========
Depreciation and amortization $ 2,568,000 $ 815,000 $ 197,000 $ 3,580,000
=========== =========== =========== ===========
Capital expenditures $ 2,253,000 $ 453,000 $ 208,000 $ 2,914,000
=========== =========== =========== ===========
For the Three-Month Period Ended March 31, 1997
-----------------------------------------------------------
Revenues $39,963,000 $23,541,000 $63,504,000
=========== =========== ===========
Operating profit $ 9,923,000 $ 1,751,000 $(3,394,000) $ 8,280,000
=========== =========== =========== ===========
Interest income 212,000
Interest expense (491,000)
-----------
Income before income taxes $ 8,001,000
===========
Depreciation and amortization $ 2,270,000 $ 921,000 $ 173,000 $ 3,364,000
=========== =========== =========== ===========
Capital expenditures $ 2,518,000 $ 871,000 $ 260,000 $ 3,649,000
=========== =========== =========== ===========
</TABLE>
12
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS.
-------------
The Company is organized around its two primary business lines: Investment
Technology and Services and Asset Management. Financial information for each of
these segments is reflected in Note 10 of the Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
- ---------------------
First Quarter Ended March 31, 1998 Compared to First Quarter Ended March 31,
1997
The Company's results of operations for the first quarter of 1998 included
revenues of $81,871,000, as compared to $63,504,000 for the same period in 1997,
an increase of 29 percent. Net income for the first quarter of 1998 increased
58 percent to $7,597,000, as compared to the $4,801,000 reported in the first
quarter of 1997. Diluted earnings per share for the three months ended March
31, 1998 and 1997 was $.40 and $.25, respectively, an increase of 60 percent.
Total fund balances at March 31, 1998 were $128.1 billion, as compared to $90.6
billion at March 31, 1997, an increase of 41 percent. Included in these totals
are proprietary fund balances of $89.3 billion at March 31, 1998 and $64.9
billion at March 31, 1997, an increase of 38 percent. The increase in revenues
recorded in the first quarter of 1998 was primarily driven by significant growth
in fund balances and the recognition of nonrecurring trust technology services
revenues. Earnings increased principally due to improved operating margins from
the Company's Asset Management segment, which more than offset a decline in
operating margins from the Company's Investment Technology and Services segment.
Revenues and earnings expectations are optimistic primarily due to an increased
interest in the Company's trust products, as evidenced by the new trust
technology and back-office client relationships established during the past
year. Additionally, the Company anticipates continued growth from its Asset
Management segment. However, revenues and earnings could be adversely affected
by continued consolidation within the banking industry and an unfavorable change
in the stock market.
INVESTMENT TECHNOLOGY AND SERVICES - Revenues from Investment Technology and
- ----------------------------------
Services for the three months ended March 31, 1998 and 1997 were $51,065,000 and
$39,963,000, respectively.
<TABLE>
<CAPTION>
INVESTMENT TECHNOLOGY AND SERVICES REVENUES
-------------------------------------------
1ST QTR 1ST QTR DOLLAR PERCENT
1998 1997 CHANGE CHANGE
------- ------- ------ -------
<S> <C> <C> <C> <C>
Trust technology services $29,625,000 $23,039,000 $ 6,586,000 29%
Proprietary fund services 19,329,000 16,143,000 3,186,000 20%
Trust back-office processing
services 2,111,000 781,000 1,330,000 170%
----------- ----------- -----------
Total $51,065,000 $39,963,000 $11,102,000 28%
=========== =========== ===========
</TABLE>
The comparison of trust technology services revenues was influenced by the
inclusion of significant one-time revenues in the first quarter of 1998. The
Company recognized an increase in implementation fees of $3.6 million in
connection with the contracting of new trust clients during 1997. Once a client
becomes fully implemented, recurring processing fees are favorably impacted in
future periods. The Company estimates that the increase in recurring processing
fees relating to the new trust client relationships established in 1997 will not
be completely recognized until early 1999. Additionally, the Company realized
approximately $4.0 million in one-time buyout and deconversion fees associated
with trust clients that terminated their relationship with the Company in 1997.
When a client ceases its relationship with the Company, recurring processing
fees are negatively impacted in future periods. As a result, recurring
processing fees decreased approximately $1.6 million in the first quarter of
1998. The outlook for trust technology services revenues is optimistic. The
establishment of new trust client relationships in early 1998 and during 1997
should increase the recurring processing revenue base following implementation.
However, continued consolidation within the banking industry could negatively
affect future recurring revenues. Additionally, future trust technology services
revenues will be impacted by the recognition of a substantial one-time buyout
fee from one of its clients involved in an acquisition once the client has been
fully deconverted.
13
<PAGE>
Proprietary fund services revenues increased 20 percent over the prior year
period principally driven by continued increases in average proprietary fund
balances. Average proprietary fund balances increased $21.0 billion or 32
percent from the $65.5 billion reported in the first quarter of 1997 to $86.5
billion during the first quarter of 1998. The increase in average proprietary
fund balances was mainly fueled by growth in existing proprietary fund
complexes. The growth in existing complexes can be attributed to banks
maintaining their market share in a rapidly growing mutual fund industry and the
favorable growth trend experienced in the stock market. The Company anticipates
this strong growth trend in proprietary fund balances to continue in the near
term. However, revenues could be adversely affected by continued consolidation
within the banking industry and an unfavorable change in the stock market.
The Company is currently experiencing significant growth in its trust back-
office processing business which is an extension of its trust technology
services business. The increase in trust back-office processing services
revenues was primarily due to increases in recurring processing fees associated
with the contracting of new clients during the past year, including some larger
banks. Management believes the Company is favorably positioned to provide these
services, principally to bank trust departments, which could create new client
relationships in the near term.
<TABLE>
<CAPTION>
INVESTMENT TECHNOLOGY AND SERVICES EXPENSES
-------------------------------------------
<S> <C> <C> <C> <C>
1ST QTR 1ST QTR DOLLAR PERCENT
1998 1997 CHANGE CHANGE
------- ------- ------ -------
Operating and development $33,358,000 $21,243,000 $12,115,000 57%
Sales and marketing $ 9,065,000 $ 8,797,000 $ 268,000 3%
</TABLE>
Operating and development expenses were affected by various distinct factors in
the first quarter of 1998. First, the direct correlation between proprietary
fund revenues and direct expenses partially contributed to the increase in
operating and development expenses. Second, associated with the new trust
technology and back-office processing client relationships established during
1997, the Company incurred additional personnel and other operating costs in
order to properly implement, service, and maintain these new relationships.
Third, with the completion and subsequent release of several capitalized
software development projects, the Company recognized additional maintenance
costs relating to the trust technology product line that were not eligible for
capitalization in accordance with accounting standards. Finally, the Company
incurred substantial nonrecurring costs to evaluate and enhance its new trust
technology client implementation process. The Company does not expect to incur
any significant additional costs associated with this project.
Operating profit from Investment Technology and Services for the three months
ended March 31, 1998 was $8,642,000, as compared to the $9,923,000 reported in
the corresponding quarter of 1997. Operating margins were 17 percent for the
three months ended March 31, 1998, as compared to 25 percent for the same period
in 1997. Operating profits and margins decreased principally due to the
substantial increases in operating and development expenses described above.
Management believes that operating margins from this segment should increase in
the near term primarily due to increases in revenues from all product lines.
However, revenues and profits could be adversely affected by the loss of bank
clients as a result of continued consolidation within the banking industry and
changes in banking regulations, as well as an unfavorable change in the stock
market.
14
<PAGE>
ASSET MANAGEMENT - Revenues from Asset Management for the three months ended
- ----------------
March 31, 1998 and 1997 were $30,806,000 and $23,541,000, respectively.
<TABLE>
<CAPTION>
ASSET MANAGEMENT REVENUES
-------------------------
1ST QTR 1ST QTR DOLLAR PERCENT
1998 1997 CHANGE CHANGE
------- ------- ------ -------
<S> <C> <C> <C> <C>
Investment management
services $17,070,000 $11,145,000 $5,925,000 53%
Liquidity management services 6,534,000 5,485,000 1,049,000 19%
Other investment products
and services 7,202,000 6,911,000 291,000 4%
----------- ----------- ----------
Total $30,806,000 $23,541,000 $7,265,000 31%
=========== =========== ==========
</TABLE>
Investment management services revenues increased 53 percent over the prior year
period due to an increase in average fund balances invested in the Company's
Family of Funds. Average assets under management invested in the Company's
Family of Funds increased $5.7 billion or 71 percent to $13.7 billion for the
first quarter of 1998, as compared to $8.0 billion for the first quarter of
1997. This increase was the result of increased sales of the Company's Family
of Funds to high-net-worth investors through various registered investment
advisors, financial planners, and other financial intermediaries, as well as
increased sales of the Company's asset management programs to institutional
investors. Additionally, the favorable increase in the stock market has
contributed to the growth in average assets under management. Revenues are
expected to increase as the Company continues to experience growth through its
registered investment advisor channel and acceptance of its asset management
programs by institutional investors. However, future revenues could be
adversely affected by an unfavorable change in the stock market.
Liquidity management services revenues increased 19 percent over the prior year
period primarily due to an increase in average fund balances invested in the
Company's lower-fee liquidity products, as well as, increased sales of the
Company's cash sweep services to smaller banks. Average assets under management
from the Company's liquidity funds were $19.4 billion for the first quarter of
1998, as compared to $16.1 billion for the first quarter of 1997, an increase of
20 percent.
Other investment products and services revenues is comprised of several distinct
operations that include performance measurement and consulting services to
Canadian pension plans, brokerage and clearing services, and several other small
business ventures. In the first quarter of 1998, the Company realized an
increase in bank-related brokerage services. However, this was partially offset
due to the removal of one of the Company's business ventures from this segment.
This reclassification was required according to accounting standards because the
Company's interest in this business venture has been reduced to less than fifty
percent.
<TABLE>
<CAPTION>
ASSET MANAGEMENT EXPENSES
-------------------------
<S> <C> <C> <C> <C>
1ST QTR 1ST QTR DOLLAR PERCENT
1998 1997 CHANGE CHANGE
----------- ----------- ------ -------
Operating and development $10,812,000 $11,019,000 $ (207,000) (2%)
Sales and marketing $12,974,000 $10,771,000 $2,203,000 20%
</TABLE>
In the first quarter of 1998, operating and development expenses were affected
by additional direct brokerage expenses associated with the increase in bank-
related brokerage services revenues. However, this was offset by the
reclassification of one of the Company's business ventures into other non-
operating expenses. This reclassification was required according to accounting
standards because the Company's interest in this business venture has been
reduced to less than fifty percent.
15
<PAGE>
The 20 percent increase in sales and marketing expenses was primarily due to
increases in personnel and promotion expenses. The increase in personnel costs
related to additional sales compensation associated with new sales of the
Company's asset management products and services to high-net-worth and
institutional investors. The Company incurred additional promotion expenditures
in relation to an enhanced marketing strategy of its asset management products
and services.
The Asset Management segment recorded an operating profit of $7,020,000 with an
operating margin of 23 percent for the three months ended March 31, 1998, as
compared to an operating profit of $1,751,000 with an operating margin of 7
percent for the three months ended March 31, 1997. Operating profits and margin
increased considerably primarily due to the significant increase in assets under
management which generated substantial revenues without incurring substantial
additional operating expenses. The Company's growth expectations for revenues
and earnings generated from this segment are principally based upon continued
growth in assets currently under management and new sales of its asset
management products and services.
OTHER INCOME AND EXPENSES - General and administrative expenses for the three
- -------------------------
months ended March 31, 1998 and 1997 were $3,222,000 and $3,394,000,
respectively, a decrease of 5 percent. This decrease is primarily due to a
decline in various expenses associated with corporate overhead groups.
In the first quarter of 1998, in accordance with generally accepted accounting
principles, the Company could no longer consolidate one of its business
ventures, LSV Asset Management ("LSV"). The Company's interest in LSV was
reduced to less than 50 percent requiring the Company to apply the equity method
of accounting. The Company's interest in the net operating results of LSV for
the first quarter of 1998 are reflected in Equity in the earnings of
unconsolidated affiliate on the accompanying Consolidated Statements of Income.
Prior period information has not been restated. LSV's net operating results in
prior periods were reflected in the Asset Management segment.
Interest expense for the first quarter of 1998 and 1997 relates to the Company's
issuance of long-term debt in February 1997. The increase in interest expense
over the prior year period results from carrying an outstanding debt balance for
a full quarter in 1998 (See Note 7 of the Notes to Consolidated Financial
Statements).
Interest income is earned based upon the amount of cash that is invested daily
and fluctuations in interest income recognized for one period as compared to
another is due to changes in the average cash balance invested for the period.
LIQUIDITY AND CAPITAL RESOURCES - The Company's ability to generate cash
- -------------------------------
adequate to meet its needs results primarily from cash flows from operations and
its capacity for additional borrowing. The Company has a line of credit
agreement which provides for borrowings of up to $50,000,000 (See Note 6 of the
Notes to Consolidated Financial Statements). At March 31, 1998, the Company's
sources of liquidity consisted primarily of cash and cash equivalents of
$17,247,000 and the unused balance on the line of credit of $50,000,000. The
availability of the line of credit is subject to the Company's compliance with
certain covenants set forth in the agreement.
Cash flows provided by operations for the three months ended March 31, 1998 were
$19,461,000, as compared to cash flows used in operations for the three months
ended March 31, 1997 of $3,534,000. The sales of loans classified as Loans
receivable available for sale by the Company's Swiss based subsidiary, increased
collections of receivables, and increases in income and various accrued
liabilities principally boosted cash flows from operations in the first quarter
of 1998. Cash flows from operations in the first quarter of 1997 were
unfavorably affected by an increase in receivables. Additionally, the payout of
sales and incentive compensation in the first quarter of 1998 and 1997
negatively affected cash flows from operations. In the second quarter of 1998,
the Company expects to receive a buyout payment relating to a bank client
involved in an acquisition. This buyout payment will not be recognized in
revenues until the client has been fully deconverted.
16
<PAGE>
Cash flows from investing activities are principally affected by capital
expenditures. Capital expenditures, including capitalized software development
costs, for the three months ended March 31, 1998 and 1997 were $4,221,000 and
$6,309,000, respectively. The Company is currently in the early stages of
expanding its corporate campus. Construction is expected to be completed by
late 1998 at an estimated cost of $5,250,000. Additionally in the first quarter
of 1998, the Company purchased additional investments classified as Investments
available for sale (see Note 5 of the Notes to Consolidated Financial
Statements). The Company disposed of these same investments in the second
quarter of 1998.
Cash flows from financing activities are primarily affected by debt and equity
transactions. On February 24, 1997, the Company issued $35,000,000 of medium-
term notes in a private offering with certain financial institutions. The
proceeds were used to repay the outstanding balance on its line of credit at
that date. The Company made its first principal payment of $2,000,000 on its
long-term debt in February 1998 (See Note 7 of the Notes to Consolidated
Financial Statements). The Company continued its common stock repurchase
program during the first quarter of 1998. The Company has purchased 315,000
shares of its common stock at a cost of $16,735,000 through April 30, 1998. The
Company still has $22,508,000 remaining authorized for the purchase of its
common stock.
The Company's operating cash flow, borrowing capacity, and liquidity should
provide adequate funds for continuing operations, continued investment in new
products and equipment, its common stock repurchase program, future dividend
payments, and principal and interest payments on its long-term debt.
Assessment of Risks Associated with the Year 2000
- -------------------------------------------------
The Company began to address the Year 2000 issue in 1995, initially focusing on
its TRUST 3000 product line. In 1997, a committee was formed with
representatives from all areas of the Company's business in order to review all
internal proprietary systems and every vendor with which the Company interacts.
Each vendor was contacted in order for the Committee to assess the impact the
Year 2000 will have on operations. If deemed necessary, the Company will
initiate appropriate systems testing in order to make a reasonable determination
as to whether a vendor will, in fact, be Year 2000 compliant on time. SEI
customers have been informed of the Company's Year 2000 program through a users
group and periodic communications.
The current Year 2000 project has the highest level of corporate commitment. The
Company will utilize both internal and external resources to reprogram, or
replace, and test software for Year 2000 compliance. The Company plans to have
all its systems Year 2000 compliant by early 1999. Management estimates that it
will cost approximately $10 million to bring TRUST 3000 into Year 2000
compliance, the majority of which will be capitalized. Management does not
expect to expend significant resources to bring all of its internal proprietary
systems into Year 2000 compliance. Amounts incurred for internal proprietary
systems are expensed, unless new software is purchased which will be
capitalized. The cost of the Year 2000 project and the date on which the Company
plans to complete Year 2000 modifications are based on management's best
estimates. At this time, management does not believe the financial impact of the
Company's Year 2000 project will have a material adverse affect on its financial
position or results of operations in any given year. However, if the Company or
any significant vendors utilized in the Company's operations do not successfully
achieve Year 2000 compliance in a timely manner, the Company's operations could
be adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 is required to be
adopted for the Company's 1998 year-end financial statements. The Company is
currently evaluating the impact, if any, of the adoption of this pronouncement
on the Company's existing disclosures (See Note 1 of the Notes to Consolidated
Financial Statements).
17
<PAGE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
Except for the historical information contained herein, the matters discussed in
this report are forward-looking statements which involve risks and
uncertainties, including but not limited to economic, competitive, governmental
and technological factors affecting the Company's operations, markets, services
and related products, prices, and other factors discussed in the Company's prior
filings with the Securities and Exchange Commission. Although the Company
believes the assumptions underlying the forward-looking statements contained
herein are reasonable, any of the assumptions could be inaccurate.
18
<PAGE>
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) The following is a list of exhibits filed as part of the Form 10-Q.
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the
quarter ended March 31, 1998.
19
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
SEI INVESTMENTS COMPANY
Date May 14, 1998 By /s/ Henry H. Greer
-------------------- ------------------------------------
Henry H. Greer
President, Chief Operating
Officer, and Chief Financial Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 17247
<SECURITIES> 0
<RECEIVABLES> 28776
<ALLOWANCES> (1200)
<INVENTORY> 0
<CURRENT-ASSETS> 74047
<PP&E> 104304
<DEPRECIATION> (51734)
<TOTAL-ASSETS> 164802
<CURRENT-LIABILITIES> 73034
<BONDS> 31000
0
0
<COMMON> 179
<OTHER-SE> 52407
<TOTAL-LIABILITY-AND-EQUITY> 164802
<SALES> 0
<TOTAL-REVENUES> 81871
<CGS> 0
<TOTAL-COSTS> 66209
<OTHER-EXPENSES> 3222
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 712
<INCOME-PRETAX> 12458
<INCOME-TAX> 4681
<INCOME-CONTINUING> 7597
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7597
<EPS-PRIMARY> .43
<EPS-DILUTED> .40
</TABLE>
