<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 SEPTEMBER 30, 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)
PENNSYLVANIA 23-1707341
- --------------------------------------- ------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
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 September 30, 1998: 17,842,325 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>
September 30, 1998 December 31, 1997
------------------- -----------------
(unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 25,646 $ 16,891
Receivables from regulated investment companies 16,122 14,452
Receivables, net of allowance for doubtful
accounts of $1,200 38,662 31,192
Loans receivable available for sale 2,289 11,340
Prepaid expenses 4,700 3,783
Deferred income taxes 14,989 6,337
-------- --------
Total current assets 102,408 83,995
-------- --------
Investments available for sale 4,380 876
-------- --------
Investment in unconsolidated affiliate 2,071 --
-------- --------
Property and equipment, net of accumulated
depreciation and amortization of $54,286
and $49,493 60,696 52,131
-------- --------
Capitalized software, net of accumulated
amortization of $10,433 and $7,959 20,504 18,440
-------- --------
Customer lists, net of accumulated
amortization of $577 and $291 3,023 3,009
-------- --------
Other assets, net 10,204 10,433
-------- --------
Total Assets $203,286 $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>
September 30,1998 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 5,869 5,798
Accrued compensation 23,940 20,920
Accrued proprietary fund services 8,925 9,812
Accrued discontinued operations disposal costs 5,173 7,228
Other accrued liabilities 36,827 28,760
Deferred revenue 27,665 7,158
-------- --------
Total current liabilities 110,399 81,676
-------- --------
Long-term debt 31,000 33,000
-------- --------
Deferred income taxes 9,902 7,798
-------- --------
Shareholders' equity:
Common stock, $.01 par value, 100,000 shares
authorized; 17,842 and 17,767 shares issued
and outstanding 178 178
Capital in excess of par value 52,418 46,724
Retained earnings -- --
Accumulated other comprehensive losses (611) (492)
-------- --------
Total shareholders' equity 51,985 46,410
-------- --------
Total Liabilities and Shareholders' Equity $203,286 $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)
<TABLE>
<CAPTION>
Three Months
-----------------------------------
Ended September 30,
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues $ 90,492 $ 74,283
Expenses:
Operating and development 41,787 36,401
Sales and marketing 26,884 22,932
General and administrative 3,787 3,411
------- -------
Income from operations 18,034 11,539
Equity in the earnings of unconsolidated affiliate 733 --
Interest income 402 233
Interest expense (623) (667)
------- -------
Income before income taxes 18,546 11,105
Income taxes 6,995 4,166
------- -------
Net income 11,551 6,939
------- -------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments,
net of income tax expense of $12 and $0 17 (6)
Unrealized holding gains (losses) on investments,
net of income tax expense (benefit) of $21 and $(30) 32 (36)
------- -------
Other comprehensive income (loss) 49 (42)
------- -------
Comprehensive income $ 11,600 $ 6,897
======= =======
Basic earnings per common share $ .64 $ .38
======= =======
Diluted earnings per common share $ .60 $ .36
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
--------------------------------
Ended September 30,
--------------------------------
1998 1997
---- ----
<S> <C> <C>
Revenues $257,862 $208,517
Expenses:
Operating and development 128,213 106,161
Sales and marketing 73,712 63,588
General and administrative 10,271 9,995
-------- --------
Income from operations 45,666 28,773
Equity in the earnings of unconsolidated affiliate 1,924 --
Interest income 1,074 717
Interest expense (1,951) (1,816)
-------- --------
Income before income taxes 46,713 27,674
Income taxes 17,980 10,793
-------- --------
Net income 28,733 16,881
-------- --------
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments,
net of income tax benefit of $29 and $113 (47) (175)
Unrealized holding (losses) gains on investments,
net of income tax (benefit) expense of $(45) and $157 (72) 246
-------- --------
Other comprehensive (loss) income (119) 71
-------- --------
Comprehensive income $ 28,614 $ 16,952
======== ========
Basic earnings per common share $ 1.61 $ .92
======== ========
Diluted earnings per common share $ 1.50 $ .88
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months
---------------------------------
Ended September 30,
---------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 28,733 $ 16,881
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 11,388 11,982
Provision for losses on receivables -- 189
Equity in the earnings of unconsolidated affiliate (1,924) --
Other (2,507) (847)
Change in current assets and liabilities:
Decrease (increase) in
Receivables from regulated investment companies (1,670) (2,476)
Receivables (9,946) (9,973)
Loans receivable available for sale 9,051 (2,881)
Prepaid expenses (917) (190)
Increase (decrease) in
Accounts payable 71 1,535
Accrued compensation 3,012 (1,421)
Accrued proprietary fund services (887) 1,447
Accrued discontinued operations disposal costs (2,055) (223)
Other accrued liabilities 8,111 4,920
Deferred revenue 20,507 1,188
-------- --------
Net cash provided by operating activities 60,967 20,131
-------- --------
Cash flows from investing activities:
Additions to property and equipment (16,441) (10,488)
Additions to capitalized software (4,538) (6,634)
Purchase of investments available for sale (3,620) --
Other (87) (461)
-------- --------
Net cash used in investing activities (24,686) (17,583)
-------- --------
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 (45,316) (23,347)
Proceeds from issuance of common stock 8,702 7,506
Tax benefit on stock options exercised 16,418 1,903
Payment of dividends (5,330) (4,777)
-------- --------
Net cash used in financing activities (27,526) (3,715)
-------- --------
Net increase (decrease) in cash and cash equivalents 8,755 (1,167)
Cash and cash equivalents, beginning of period 16,891 13,167
-------- --------
Cash and cash equivalents, end of period $ 25,646 $ 12,000
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<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, broker-dealers, 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 September 30, 1998, the results of operations
for the three and nine months ended September 30, 1998 and 1997, and
the cash flows for the nine months ended September 30, 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.
7
<PAGE>
Property and Equipment
----------------------
Property and equipment on the accompanying Consolidated Balance Sheets
consist of the following:
<TABLE>
<CAPTION>
Estimated
Useful Lives
September 30, 1998 December 31, 1997 (In Years)
------------------ ----------------- ----------
<S> <C> <C> <C>
Equipment $ 52,073,000 $ 42,376,000 3 to 5
Buildings 28,303,000 27,940,000 25 to 39
Land 6,993,000 6,993,000 N/A
Purchased software 10,075,000 9,181,000 3
Furniture and fixtures 9,900,000 9,790,000 3 to 5
Leasehold improvements 6,714,000 5,344,000 Lease Term
Construction in progress 924,000 -- N/A
------------ ------------
114,982,000 101,624,000
Less: Accumulated depreciation
and amortization (54,286,000) (49,493,000)
------------ ------------
Property and Equipment, net $ 60,696,000 $ 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 September 30, 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 8.15 years at September 30, 1998.
8
<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
SEPTEMBER 30, 1998
----------------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic earnings per common share $11,551,000 17,946,000 $.64
====
Dilutive effect of stock options -- 1,181,000
----------- ----------
Diluted earnings per common share $11,551,000 19,127,000 $.60
=========== ========== ====
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE-MONTH PERIOD ENDED
SEPTEMBER 30, 1997
----------------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic earnings per common share $ 6,939,000 18,270,000 $.38
====
Dilutive effect of stock options -- 968,000
----------- ----------
Diluted earnings per common share $ 6,939,000 19,238,000 $.36
=========== ========== ====
</TABLE>
Options to purchase 2,500 shares of common stock with an average
exercise price per share of $74.94 were outstanding during the third
quarter of 1998, 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.
All options outstanding during the third quarter of 1997 were included
in the diluted earnings per common share calculation.
9
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 1998
----------------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic earnings per common share $28,733,000 17,827,000 $1.61
=====
Dilutive effect of stock options -- 1,340,000
----------- ----------
Diluted earnings per common share $28,733,000 19,167,000 $1.50
=========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 1997
----------------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic earnings per common share $16,881,000 18,432,000 $ .92
=====
Dilutive effect of stock options -- 828,000
----------- ----------
Diluted earnings per common share $16,881,000 19,260,000 $ .88
=========== ========== =====
</TABLE>
Options to purchase 20,000 and 275,250 shares of common stock with an
average exercise price per share of $70.12 and $25.26 were outstanding
during the first nine months of 1998 and 1997, respectively, 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 nine months
ended September 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest paid $ 2,585,000 $1,499,000
Interest and dividends received $ 1,063,000 $ 704,000
Income taxes paid $12,508,000 $5,187,000
</TABLE>
10
<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 shareholders. 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 (47) (72) (119)
----- ----- -----
Ending Balance $(464) $(147) $(611)
===== ===== =====
</TABLE>
Note 3. Receivables - Receivables on the accompanying Consolidated Balance
-----------
Sheets consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Trade receivables $23,506,000 $16,219,000
Fees earned, not received 2,860,000 2,308,000
Fees earned, not billed 13,496,000 13,865,000
----------- -----------
39,862,000 32,392,000
Less: Allowance for doubtful accounts (1,200,000) (1,200,000)
----------- -----------
$38,662,000 $31,192,000
=========== ===========
</TABLE>
11
<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.
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 tax-free municipal bonds and 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 September 30, 1998, Investments available for sale had an aggregate
cost of $4,620,000 and an aggregate market value of $4,380,000 with
gross unrealized losses of $240,000. At that date, the unrealized
holding losses of $147,000 (net of income tax benefit of $93,000) were
reported as a separate component of Shareholders' equity on the
accompanying Consolidated Balance Sheets.
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, 1999,
at which time the outstanding principal balance, if any, becomes due
unless the Agreement is 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 September 30, 1998.
12
<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 the first principal payment of
$2,000,000 in February 1998. The current portion of the Notes amounted
to $2,000,000 at September 30, 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 $298,365,000. The
Company purchased 280,000 shares at a total cost of $18,552,000 during
the third quarter of 1998 and 730,000 shares at a total cost of
$45,316,000 during the nine month period ended September 30, 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 May 21, 1998, the Board of Directors declared a cash
--------
dividend of $.16 per share on the Company's common stock, which was
paid on June 30, 1998, to shareholders of record on June 16, 1998.
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 and nine months
ended September 30, 1998 and 1997.
13
<PAGE>
<TABLE>
<CAPTION>
Investment
Technology and Asset General
Services Management and Admin. Consolidated
-------- ---------- ------------ -------------
For the Three-Month Period Ended September 30, 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $53,851,000 $36,641,000 $90,492,000
=========== =========== ===========
Operating profit $13,908,000 $ 7,913,000 $(3,787,000) $18,034,000
=========== =========== ===========
Equity in the earnings of
unconsolidated affiliate 733,000
Interest income 402,000
Interest expense (623,000)
-----------
Income before income taxes $18,546,000
===========
Depreciation and amortization $ 2,998,000 $ 876,000 $ 209,000 $ 4,083,000
=========== =========== =========== ===========
Capital expenditures $ 8,963,000 $ 767,000 $ 164,000 $ 9,894,000
=========== =========== =========== ===========
Investment
Technology and Asset General
Services Management and Admin. Consolidated
-------- ---------- ------------ -------------
For the Three-Month Period Ended September 30, 1998
----------------------------------------------------------------
Revenues $45,271,000 $29,012,000 $74,283,000
=========== =========== ===========
Operating profit $10,553,000 $ 4,397,000 $(3,411,000) $11,539,000
=========== =========== ===========
Interest income 233,000
Interest expense (667,000)
-----------
Income before income taxes $11,105,000
===========
Depreciation and amortization $ 2,642,000 $ 1,497,000 $ 190,000 $ 4,329,000
=========== =========== =========== ===========
Capital expenditures $ 3,556,000 $ 176,000 $ 151,000 $ 3,883,000
=========== =========== =========== ===========
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Investment
Technology and Asset General
Services Management and Admin. Consolidated
-------- ------------ ------------- -------------
For the Nine-Month Period Ended September 30, 1998
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $157,070,000 $100,792,000 $257,862,000
============ ============ ============
Operating profit $ 34,111,000 $ 21,826,000 $(10,271,000) $ 45,666,000
============ ============ ============
Equity in the earnings of
unconsolidated affiliate 1,924,000
Interest income 1,074,000
Interest expense (1,951,000)
------------
Income before income taxes $ 46,713,000
============
Depreciation and amortization $ 8,286,000 $ 2,493,000 $ 609,000 $ 11,388,000
============ ============ ============ ============
Capital expenditures $ 14,226,000 $ 1,760,000 $ 455,000 $ 16,441,000
============ ============ ============ ============
Investment
Technology and Asset General
Services Management and Admin. Consolidated
-------- ------------ ------------ ------------
For the Nine-Month Period Ended September 30, 1997
----------------------------------------------------------------
Revenues $129,689,000 $ 78,828,000 $208,517,000
============ ============ ============
Operating profit $ 31,021,000 $ 7,747,000 $ (9,995,000) $ 28,773,000
============ ============ ============
Interest income 717,000
Interest expense (1,816,000)
------------
Income before income taxes $ 27,674,000
============
Depreciation and amortization $ 7,755,000 $ 3,683,000 $ 544,000 $ 11,982,000
============ ============ ============ ============
Capital expenditures $ 7,967,000 $ 1,649,000 $ 872,000 $ 10,488,000
============ ============ ============ ============
</TABLE>
15
<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
- ---------------------
Third Quarter Ended September 30, 1998 Compared to Third Quarter Ended September
30, 1997
The Company's results of operations included revenues of $90,492,000, as
compared to $74,283,000 for the same period in 1997, an increase of 22 percent.
Net income increased 66 percent to $11,551,000, as compared to $6,939,000
reported for the corresponding quarter in 1997. Diluted earnings per share
increased 67 percent to $.60 versus the $.36 reported for the comparable quarter
in 1997. Total fund balances at September 30, 1998 increased 28 percent to
$139.2 billion, as compared to $108.8 billion at September 30, 1997. Included
in these totals are proprietary fund balances of $100.5 billion at September 30,
1998 and $79.1 billion at September 30, 1997, an increase of 27 percent.
Significant growth in fund balances and the contracting of new trust technology
clients primarily drove the increase in revenues. Operating profits increased
primarily due to growth in the higher margin trust technology product line.
Future revenues and earnings could be affected by continued consolidation within
the banking industry or a significant change in the stock market.
INVESTMENT TECHNOLOGY AND SERVICES - Revenues from Investment Technology and
- ----------------------------------
Services increased 19 percent to $53,851,000 for the three months ended
September 30, 1998, as compared to the $45,271,000 reported for the
corresponding period in 1997.
<TABLE>
<CAPTION>
INVESTMENT TECHNOLOGY AND SERVICES REVENUES
-------------------------------------------
3RD QTR 3RD QTR DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Trust technology services $29,192,000 $25,518,000 $3,674,000 14%
Proprietary fund services 21,909,000 18,068,000 3,841,000 21%
Trust back-office processing
services 2,750,000 1,685,000 1,065,000 63%
----------- ----------- ----------
Total $53,851,000 $45,271,000 $8,580,000 19%
=========== =========== ==========
</TABLE>
The 14 percent increase in trust technology services revenues reflects the
successful contracting of new TRUST 3000 clients during 1997. Trust technology
services revenues are primarily earned based upon monthly processing and
software application fees. As a result of these new trust client relationships,
recurring processing fees increased $2.7 million and nonrecurring implementation
fees increased $1.3 million. Conversely, the loss of trust client relationships
during 1997 and 1998 negatively affected recurring processing fees by $1.4
million. The recurring processing fee base is projected to increase as the new
trust clients are completely integrated onto the TRUST 3000 product line by mid
1999. Additionally, the Company has received a $12.9 million one-time
contractual buyout fee from a significant client involved in an acquisition that
has not been recognized in revenues. This one-time fee will be recognized when
the client is completely deconverted. The loss of this client will have a
negative impact on recurring processing fees in subsequent periods.
16
<PAGE>
Proprietary fund services revenues are earned through administrative fees that
are based upon a fixed percentage, referred to as basis points, of the average
daily net asset value of the proprietary funds. Growth in average assets under
administration from existing proprietary fund complexes primarily contributed to
the 21 percent growth in proprietary fund services revenues. Average
proprietary fund balances increased 33 percent or $25.3 billion to $101.6
billion, as compared to the $76.3 billion reported for the corresponding quarter
of 1997. Average proprietary fund balances increased despite the loss of
several proprietary fund complexes during the third quarter of 1998 which
decreased average assets by $5.9 billion. Moderate growth in proprietary fund
services revenues are anticipated for subsequent periods as funding of
additional assets continues in the fourth quarter from new proprietary fund
complexes converted in prior periods. Additionally, a decrease in the stock
market may impair growth in future proprietary fund services revenues.
The Company continues to experience significant growth in its trust back-office
processing business which is an extension of its trust technology services
business. Through this business, the Company provides a fully integrated
custody and back-office outsourcing solution to trust organizations, including
both small and large banks ranging in size from start-ups to those managing
assets of $10 billion. The contracting of new clients during the past year was
the primary contributing factor for the growth in revenues. Management believes
the Company is favorably positioned to provide these services, principally to
bank trust departments, which should promote new client relationships in the
near term.
<TABLE>
<CAPTION>
INVESTMENT TECHNOLOGY AND SERVICES EXPENSES
-------------------------------------------
3RD QTR 3RD QTR DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Operating and development $29,279,000 $25,008,000 $4,271,000 17%
Sales and marketing $10,664,000 $ 9,710,000 $ 954,000 10%
</TABLE>
Operating profits and margins from Investment Technology and Services were
$13,908,000 or 26 percent, as compared to the $10,553,000 or 23 percent reported
for the comparable quarter in 1997. This represents an increase of 32 percent
in operating profits. The primary factor affecting operating profits and
margins was the growth in revenues from all major product lines in this segment
and the Company's ability to control expenses consistent with the rate of growth
in revenues. As a percentage of sales, operating and development expenses
decreased to 54 percent from 55 percent and sales and marketing expenses
decreased to 20 percent from 21 percent.
Operating and development expenses increased 17 percent primarily due to a rise
in direct proprietary fund expenses and personnel expenses. Sales and marketing
expenses increased primarily due to an increase in personnel expenses,
specifically sales compensation. The increase in personnel expenses in both
operating and development and sales and marketing expenses is attributed to the
overall increase in the trust technology and trust back-office processing
businesses. The increase in personnel costs in operating and development
expenses was necessary in order to properly implement, service, and maintain the
new trust technology and trust back-office client relationships.
Operating profits and margins are expected to increase as the new trust client
relationships established in 1997 are completely implemented. Additionally, the
eventual recognition of the $12.9 million one-time buyout fee received from a
bank client involved in an acquisition may positively affect operating profits
and margins in one period, but the loss of the recurring processing fees could
have a negative impact on operating profits and margins in subsequent periods.
Also, operating profits and margins could be affected by continued
consolidations involving bank clients.
17
<PAGE>
ASSET MANAGEMENT - Revenues from Asset Management increased 26 percent to
- ----------------
$36,641,000 for the three months ended September 30, 1998, as compared to the
$29,012,000 reported for the corresponding period in 1997.
<TABLE>
<CAPTION>
ASSET MANAGEMENT REVENUES
-------------------------
3RD QTR 3RD QTR DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Investment management
services $21,229,000 $14,713,000 $6,516,000 44%
Liquidity management services 6,796,000 6,049,000 747,000 12%
Other investment products
and services 8,616,000 8,250,000 366,000 4%
----------- ----------- ----------
Total $36,641,000 $29,012,000 $7,629,000 26%
=========== =========== ==========
</TABLE>
Investment management services revenues are earned through management fees which
are based upon a fixed percentage, referred to as basis points, of the average
daily net asset value of the Company's Family of Funds. Substantial increases
in average fund balances invested in the Company's Family of Funds was the
primary factor contributing to the 44 percent increase in investment management
services revenues. Average assets under management increased 62 percent or $6.4
billion to $16.8 billion, as compared to $10.4 billion for the corresponding
quarter of 1997. The increase in average assets under management was fueled by
continued sales of the Company's Family of Funds to high-net-worth investors
through various registered investment advisors, financial planners, and other
financial intermediaries. Additionally, average assets under management
increased as a result of new sales of the Company's asset management programs to
institutional investors. Revenues are expected to increase assuming the Company
can continue to generate new sales through its registered investment advisor
channel. The recent volatility experienced in the stock market did not have a
material impact on investment management services revenues in the third quarter
of 1998. However, any prolonged downturn in the stock market could have a
negative affect on future investment management services revenues.
Liquidity management services consist primarily of the Company's money market
and other short-term mutual funds and its cash sweep technology. An increase in
average fund balances invested in the Company's liquidity products and increased
sales of cash sweep services generated the 12 percent increase in liquidity
management services revenues. Average assets under management from the
Company's liquidity funds increased 12 percent to $19.2 billion, as compared to
$17.1 billion for the corresponding quarter of 1997.
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. Increased brokerage and clearing services and an increase in
average assets under management from a small business venture generated
additional other investment products and services revenues. However, these
increases were partially offset by a reclassification of one of the Company's
business ventures into other non-operating income beginning in the first quarter
of 1998. This reporting change was required according to accounting standards
because the Company's interest in this business venture was reduced to less than
fifty percent.
18
<PAGE>
<TABLE>
<CAPTION>
ASSET MANAGEMENT EXPENSES
-------------------------
3RD QTR 3RD QTR DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Operating and development $12,508,000 $11,393,000 $1,115,000 10%
Sales and marketing $16,220,000 $13,222,000 $2,998,000 23%
</TABLE>
Operating profits and margins from Asset Management were $7,913,000 or 22
percent, as compared to $4,397,000 or 15 percent reported for the corresponding
quarter in 1997. This represents an increase of 80 percent in operating
profits. Operating profits and margins increased considerably primarily due to
revenues increasing 26 percent while expenses only rose 17 percent. The growth
in revenues was primarily generated by significant increases in assets under
management. The increase in expenses can be attributed to additional personnel
costs, promotion expenditures and direct brokerage expenses. Additional sales
compensation associated with new sales of the Company's asset management
products and services increased personnel expenses. An enhanced marketing
strategy, which includes a television advertising campaign, augmented promotion
expenditures. However, as a percentage of sales, operating and development
expenses decreased to 34 percent from 39 percent and sales and marketing
expenses decreased slightly to 44 percent from 46 percent. Revenues and profits
are projected to increase, however, a prolonged negative change in the stock
market could impair margins as revenues decline prior to a corresponding decline
in expenses.
OTHER INCOME AND EXPENSES - General and administrative expenses for the three
- -------------------------
months ended September 30, 1998 were $3,787,000, as compared to $3,411,000 for
the corresponding quarter in 1997, an increase of 11 percent. This increase is
associated with an overall increase in personnel expenses in 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 third 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 recorded in the Asset Management segment.
Interest expense for the third quarter of 1998 and 1997 relates to the Company's
issuance of long-term debt in February 1997 (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.
19
<PAGE>
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
The Company's results of operations included revenues of $257,862,000, as
compared to $208,517,000 for the same period in 1997, an increase of 24 percent.
Net income increased 70 percent to $28,733,000, as compared to $16,881,000
reported in the corresponding period in 1997. Diluted earnings per share
increased 70 percent to $1.50 versus $.88 reported for the comparable period in
1997. The increase in revenues and earnings was primarily driven by significant
growth in fund balances. Additionally, the contracting of new trust technology
client relationships increased recurring processing fees and nonrecurring
implementation fees. This growth reflects the Company's commitment to its
primary business lines.
INVESTMENT TECHNOLOGY AND SERVICES - Revenues from Investment Technology and
- ----------------------------------
Services increased 21 percent to $157,070,000 for the nine months ended
September 30, 1998, as compared to the $129,689,000 reported for the
corresponding period in 1997.
<TABLE>
<CAPTION>
INVESTMENT TECHNOLOGY AND SERVICES REVENUES
-------------------------------------------
NINE MONTHS NINE MONTHS DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Trust technology services $ 86,395,000 $ 73,241,000 $13,154,000 18%
Proprietary fund services 62,895,000 52,582,000 10,313,000 20%
Trust back-office processing
services 7,780,000 3,866,000 3,914,000 101%
------------ ------------ -----------
Total $157,070,000 $129,689,000 $27,381,000 21%
============ ============ ===========
</TABLE>
The 18 percent increase in trust technology services revenues can be attributed
to the establishment of new trust technology client relationships in 1997. The
establishment of new trust technology client relationships increased recurring
processing fees by $5.3 million and nonrecurring implementation fees by $7.3
million. When a client prematurely terminates its relationship, the Company
receives a one-time contractual buyout fee. In 1998, the Company realized
approximately $4.0 million in one-time buyout and deconversion fees while
recurring processing fees decreased approximately $4.6 million associated with
clients that terminated their relationship in prior periods.
Proprietary fund services revenues increased 20 percent mainly driven by
continued increases in average proprietary fund balances. Average proprietary
fund balances increased 36 percent or $24.9 billion to $95.0 billion from the
$70.1 billion reported for the corresponding period in 1997. The increase in
average proprietary fund balances was mainly fueled by growth in existing
proprietary fund complexes. This growth is principally the result of banks
maintaining their market share in a growing mutual fund industry and the
favorable growth trend experienced in the stock market during 1998.
The Company is currently experiencing significant growth in its trust back-
office processing business which is an extension of its trust technology
services business. Trust back-office processing services revenues increased as
a result of the contracting of new clients during the past year, including some
larger banks.
20
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT TECHNOLOGY AND SERVICES EXPENSES
-------------------------------------------
NINE MONTHS NINE MONTHS DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Operating and development $93,909,000 $71,016,000 $22,893,000 32%
Sales and marketing $29,050,000 $27,652,000 $ 1,398,000 5%
</TABLE>
Operating profits and margins from Investment Technology and Services were
$34,111,000 or 22 percent, as compared to the $31,021,000 or 24 percent reported
for the comparable period in 1997. This represents an increase of 10 percent in
operating profits. The primary factor affecting operating profits was the
growth in revenues from all major product lines in this segment. Operating and
development expenses, as a percentage of sales, increased to 60 percent from 55
percent. Sales and marketing expenses, as a percentage of sales, decreased to
18 percent from 21 percent.
The majority of the increase in operating and development expenses resulted from
increased business activity and a higher level of investments to enhance this
segment's primary businesses. First, the correlation between proprietary fund
revenues and direct expenses partially contributed to the increase in operating
and development expenses. Second, the Company incurred additional personnel and
other various operating costs to properly implement, service, and maintain the
new trust technology and trust back-office client relationships. Third, with the
completion and subsequent release of several capitalized software development
projects, amortization expense increased in 1998. Additionally, the Company
continues to incur substantial costs to develop and enhance its trust technology
product line that is not being capitalized, thus increasing the expense
recognized in the current period. Finally, the Company incurred substantial
nonrecurring costs to analyze and enhance its new trust technology client
implementation process in early 1998.
ASSET MANAGEMENT - Revenues from Asset Management increased 28 percent to
- ----------------
$100,792,000 for the nine months ended September 30, 1998, as compared to the
$78,828,000 reported for the corresponding period in 1997.
<TABLE>
<CAPTION>
ASSET MANAGEMENT REVENUES
-------------------------
NINE MONTHS NINE MONTHS DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Investment management
services $ 57,843,000 $38,712,000 $19,131,000 49%
Liquidity management services 19,993,000 16,952,000 3,041,000 18%
Other investment products
and services 22,956,000 23,164,000 (208,000) (1%)
------------ ----------- -----------
Total $100,792,000 $78,828,000 $21,964,000 28%
============ =========== ===========
</TABLE>
Investment management services revenues increased 49 percent due to an increase
in average fund balances invested in the Company's Family of Funds. Average
assets under management increased 76 percent or $6.8 billion to $15.7 billion,
as compared to $8.9 billion for the corresponding period in 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 during 1998 has contributed to the
growth in average assets under management.
21
<PAGE>
Liquidity management services revenues increased 18 percent primarily due to an
increase in average fund balances invested in the Company's liquidity products,
as well as, increased sales of the Company's cash sweep services to banks.
Average assets under management from the Company's liquidity funds increased 18
percent to $19.3 billion, as compared to $16.3 billion for the first nine months
of 1997.
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. During 1998, the Company realized an increase in bank-
related brokerage services and an increase in average assets under management
from one of its small business ventures. However, this was offset by the
reclassification of one of the Company's business ventures into other non-
operating income. This reclassification was required according to accounting
standards because the Company's interest in this business venture was reduced to
less than fifty percent.
<TABLE>
<CAPTION>
ASSET MANAGEMENT EXPENSES
-------------------------
NINE MONTHS NINE MONTHS DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Operating and development $34,304,000 $35,145,000 $ (841,000) (2%)
Sales and marketing $44,662,000 $35,936,000 $8,726,000 24%
</TABLE>
Operating profits and margins from Asset Management were $21,826,000 or 22
percent, as compared to $7,747,000 or 10 percent reported for the corresponding
period in 1997. This represents an increase of 182 percent in operating
profits. Operating profits and margins increased considerably primarily due to
the 28 percent growth in revenues that was generated by a significant increase
in assets under management. Operating margins have improved because revenue
growth has exceeded any increase in variable costs. Even though expenses have
increased $7,885,000, as a percentage of sales, expenses decreased. Operating
and development expenses, as a percentage of sales, decreased to 34 percent from
45 percent and sales and marketing expenses, as a percentage of sales, decreased
to 44 percent from 46 percent.
The increase in sales and marketing expenses can be attributed to additional
personnel and promotion costs. The increase in personnel costs was mainly due
to additional sales compensation associated with new sales of the Company's
asset management products and services. The increased business activity and an
enhanced marketing strategy, which includes a television advertising campaign,
augmented promotion expenditures. Operating and development expenses decreased
primarily due to 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 was
reduced to less than fifty percent. However, this decrease was partially offset
by an increase in direct brokerage expenses and personnel costs.
OTHER INCOME AND EXPENSES - General and administrative expenses for the nine
- -------------------------
months ended September 30, 1998 were $10,271,000, as compared to $9,995,000 for
the corresponding period in 1997, an increase of 3 percent. This increase is
associated with an overall increase in personnel expenses in 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
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 recorded in the
Asset Management segment.
22
<PAGE>
Interest expense for 1998 and 1997 relates to the Company's issuance of long-
term debt in February 1997 (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 that provides for borrowings of up to $50,000,000 (See Note 6 of the
Notes to Consolidated Financial Statements). At September 30, 1998, the
Company's sources of liquidity consisted primarily of cash and cash equivalents
of $25,646,000 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 were $60,967,000, as compared to $20,131,000
for the corresponding period in 1997. The sales of loans classified as Loans
receivable available for sale by the Company's Swiss based subsidiary increased
cash flows from operations in 1998, whereas the purchase of loans classified as
Loans receivable available for sale unfavorably affected cash flows from
operations in 1997. In the second quarter of 1998, the Company received a $12.9
million one-time 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. Additionally, cash flows from operations in
1998 were positively affected by increases in income and various accrued
liabilities.
Cash flows from investing activities are principally affected by capital
expenditures. Capital expenditures, including capitalized software development
costs, were $20,979,000, as compared to $17,122,000 for the corresponding period
in 1997. The Company is currently in the process of expanding its corporate
campus. Construction is expected to be completed by late 1998 at an estimated
cost of $5,250,000. Additionally, the Company invested $3,620,000 in Company
sponsored tax-exempt municipal bond funds.
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 against
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. The Company has purchased 826,000 shares of its common stock at a cost
of $51,304,000 through October 31, 1998. The Company still has $37,939,000
remaining authorized for the purchase of its common stock. The Company declared
and paid a dividend on its common stock during the second quarter of 1998 and
1997.
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.
23
<PAGE>
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 initiates
appropriate systems testing in order to make a reasonable determination as to
whether a vendor will, in fact, be Year 2000 compliant on time. 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).
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.
24
<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 September 30, 1998.
25
<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 November 13, 1998 By /s/ Henry H. Greer
----------------------- ----------------------------------------
Henry H. Greer
President, Chief Operating
Officer, and Chief Financial Officer
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEETS CONSOLIDATED STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 25,646
<SECURITIES> 0
<RECEIVABLES> 39,862
<ALLOWANCES> (1,200)
<INVENTORY> 0
<CURRENT-ASSETS> 102,408
<PP&E> 114,982
<DEPRECIATION> (54,286)
<TOTAL-ASSETS> 203,286
<CURRENT-LIABILITIES> 110,399
<BONDS> 31,000
0
0
<COMMON> 178
<OTHER-SE> 51,807
<TOTAL-LIABILITY-AND-EQUITY> 51,985
<SALES> 0
<TOTAL-REVENUES> 257,862
<CGS> 0
<TOTAL-COSTS> 200,925
<OTHER-EXPENSES> 10,271
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,951
<INCOME-PRETAX> 46,713
<INCOME-TAX> 17,980
<INCOME-CONTINUING> 28,733
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,733
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.61
</TABLE>
