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, 1997 or
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Transition report pursuant to Section 13 or 15(d) of the Securities
-----
Exchange Act of 1934 for the transition period from _________ to _________
0-10200
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(Commission File Number)
SEI INVESTMENTS COMPANY
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(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
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(Address of principal executive offices)
(Zip Code)
(610) 676-1000
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(Registrant's telephone number, including area code)
N/A
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(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, 1997: 18,529,659 shares of common stock, par value
$.01 per share.
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
- ------- --------------------
Consolidated Balance Sheets
---------------------------
(In thousands)
March 31, 1997 December 31, 1996
--------------- -----------------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 15,983 $ 13,167
Receivables from regulated investment companies 11,081 10,836
Receivables, net of allowance for doubtful
accounts of $1,539 and $1,350 24,858 19,558
Loans receivable available for sale 12,780 13,043
Deferred income taxes 5,559 4,527
Prepaid expenses 4,167 3,825
-------- --------
Total current assets 74,428 64,956
-------- --------
Investments available for sale 1,344 1,000
-------- --------
Property and equipment, net of accumulated
depreciation and amortization of $48,723
and $48,128 49,942 48,620
-------- --------
Capitalized software, net of accumulated
amortization of $5,872 and $5,193 15,560 13,577
-------- --------
Customer lists, net of accumulated
amortization of $66 and $0 2,434 2,000
-------- --------
Other assets, net 11,511 10,888
-------- --------
Total Assets $155,219 $141,041
======== ========
The accompanying notes are an integral part of these statements.
2
Consolidated Balance Sheets
---------------------------
(In thousands, except par value)
March 31, 1997 December 31, 1996
--------------- -----------------
(unaudited)
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 4,696 $ 5,863
Accrued compensation 4,573 14,503
Accrued discontinued operations disposal costs 6,721 7,417
Accrued proprietary fund services 7,673 6,748
Other accrued liabilities 22,373 20,303
Line of credit -- 20,000
Current portion of long-term debt 2,000 --
Deferred revenue 6,647 5,123
------- --------
Total current liabilities 54,683 79,957
------- --------
Long-term debt 33,000 --
------- --------
Deferred income taxes 6,264 4,976
------- --------
Shareholders' equity:
Common stock, $.01 par value, 100,000 shares
authorized; 18,530 and 18,498 shares issued
and outstanding 185 185
Capital in excess of par value 56,190 54,959
Retained earnings 4,998 1,141
Cumulative translation adjustments (308) (177)
Unrealized holding gain on investments 207 --
------- --------
Total shareholders' equity 61,272 56,108
------- --------
Total Liabilities and Shareholders' Equity $155,219 $141,041
======== ========
The accompanying notes are an integral part of these statements.
3
Consolidated Statements of Income
---------------------------------
(unaudited)
(In thousands, except per share data)
Three Months
-------------------
Ended March 31,
-------------------
1997 1996
---- ----
Revenues $63,504 $63,239
Expenses:
Operating and development 32,262 33,815
Sales and marketing 19,568 16,546
General and administrative 3,394 3,157
------- -------
Income before interest and income taxes 8,280 9,721
Interest income (expense), net (279) 97
------- -------
Income before income taxes 8,001 9,818
Income taxes 3,200 4,025
------- -------
Net income $ 4,801 $ 5,793
======= =======
Earnings per common and common equivalent share
(primary and fully diluted) $.25 $.30
======= =======
The accompanying notes are an integral part of these statements.
4
Consolidated Statements of Cash Flows
-------------------------------------
(unaudited)
(In thousands)
Three Months
-------------------
Ended March 31,
-------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 4,801 $ 5,793
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 3,364 2,562
Provision for losses on receivables 189 --
Discontinued operations -- (2,314)
Tax benefit on stock options exercised 218 433
Other (1,239) 1,241
Change in current assets and liabilities:
Decrease (increase) in
Receivables from regulated investment
companies (245) (468)
Receivables (5,489) 657
Loans receivable available for sale 263 (7,703)
Prepaid expenses (342) 293
Increase (decrease) in
Accounts payable (1,167) (284)
Accrued compensation (9,930) (9,792)
Accrued discontinued operations disposal
costs (696) --
Accrued proprietary fund services 925 2,447
Other accrued liabilities 4,290 5,393
Deferred revenue 1,524 (2,024)
-------- -------
Net cash used in operating activities (3,534) (3,766)
-------- -------
Cash flows from investing activities:
Additions to property and equipment (3,649) (3,815)
Additions to capitalized software (2,660) (1,461)
Other (190) (31)
-------- -------
Net cash used in investing activities (6,499) (5,307)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 35,000 --
Proceeds from (payment of) line of credit (20,000) 10,000
Purchase and retirement of common stock (1,075) --
Proceeds from issuance of common stock 1,144 1,514
Payment of dividend (2,220) (1,842)
-------- -------
Net cash provided by financing activities 12,849 9,672
-------- -------
Net increase in cash and cash equivalents 2,816 599
Cash and cash equivalents, beginning of period 13,167 10,256
-------- -------
Cash and cash equivalents, end of period $ 15,983 $10,855
======== =======
The accompanying notes are an integral part of these statements.
5
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
core product 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, 1997, and the results of operations and cash
flows for the three months ended March 31, 1997 and 1996.
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.
Property and Equipment
----------------------
Property and equipment on the accompanying Consolidated Balance Sheets
consist of the following:
Estimated
Useful Lives
March 31, 1997 December 31, 1996 (In Years)
--------------- ------------------ -------------
Equipment $ 40,706,000 $ 40,390,000 3
Buildings 27,080,000 25,907,000 25 to 39
Land 6,903,000 6,730,000 N/A
Purchased software 9,344,000 9,397,000 3
Furniture and fixtures 9,401,000 9,030,000 3 to 5
Leasehold improvements 5,231,000 5,294,000 Lease Term
------------ ------------
98,665,000 96,748,000
Less: Accumulated depreciation
and amortization (48,723,000) (48,128,000)
------------ ------------
Property and Equipment, net $ 49,942,000 $ 48,620,000
============ ============
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.
6
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, 1997, 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 five years.
Earnings per Share
------------------
The Company computes earnings per share in accordance with Accounting
Principles Board Opinion No. 15, "Earnings per Share" ("APB 15"). In
accordance with APB 15, the Company utilizes the modified treasury
stock method to compute earnings per share since common share
equivalents at the end of the period exceeded 20 percent of the number
of common shares outstanding. Earnings per common and common equivalent
share (primary earnings per share) is computed using the weighted
average number of common shares and common share equivalents (stock
options) outstanding. Earnings per share, assuming full dilution (fully
diluted earnings per share), is based upon an increased number of
shares that would be outstanding assuming exercise of stock options
when the Company's stock price at the end of the period is higher than
the average price within the respective period. If the inclusion of
common stock equivalents has an anti-dilutive effect in the aggregate,
it is excluded from the earnings per share calculation. For the three
months ended March 31, 1997 and 1996, the weighted average shares
outstanding for primary earnings per share were 19,262,000 and
19,482,000, respectively. Shares used to calculate fully diluted
earnings per share were not materially different from those used to
calculate primary earnings per share.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"), which supersedes APB 15. SFAS 128 requires dual
presentation of basic and diluted earnings per share for complex
capital structures on the face of the statements of income. According
to SFAS 128, basic earnings per share, which replaces primary earnings
per 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 share, which replaces
fully diluted earnings per share, reflects the potential dilution from
the exercise or conversion of securities into common stock, such as
stock options. SFAS 128 is required to be adopted for the Company's
1997 year-end financial statements, earlier application is not
permitted.
Under SFAS 128, basic earnings per share for the periods ended March
31, 1997 and 1996 would have been $.26 and $.31, respectively. Diluted
earnings per share for the periods ended March 31, 1997 and 1996 would
have been $.25 and $.30, respectively.
7
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:
1997 1996
-------- --------
Interest paid $231,000 $109,000
Interest and dividends received $210,000 $235,000
Income taxes paid $ 85,000 $761,000
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.
Reclassifications
-----------------
The financial statements for prior periods have been reclassified to
conform with the current period's presentation.
Note 2. Receivables - Receivables on the accompanying Consolidated Balance
-----------
Sheets consist of the following:
March 31, 1997 December 31, 1996
-------------- -----------------
Trade receivables $16,204,000 $10,124,000
Fees earned, not received 3,119,000 3,511,000
Fees earned, not billed 7,074,000 7,273,000
----------- -----------
26,397,000 20,908,000
Less: Allowance for doubtful accounts (1,539,000) (1,350,000)
----------- -----------
$24,858,000 $19,558,000
=========== ===========
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
Financial Management Corporation, for distribution, investment
advisory, and administration services provided by these subsidiaries to
various regulated investment companies.
Note 3. 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.
8
Note 4. Investments Available for Sale - Investments available for sale
------------------------------
represent investments by the Company in mutual funds which are
primarily invested in equity securities. The Company accounts for
investments 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 on these investments are reported
as a separate component of Shareholders' equity. Realized gains and
losses are determined by the specific identification method and are
reported separately on the accompanying Consolidated Statements of
Income.
At March 31, 1997, Investments available for sale had an aggregate cost
of $1,000,000 and an aggregate market value of $1,344,000 with gross
unrealized gains of $344,000. At that date, the unrealized holding
gains of $207,000 (net of income taxes of $137,000) were reported as a
separate component of Shareholders' equity on the accompanying
Consolidated Balance Sheets. There were no unrealized losses as of
March 31, 1997.
At December 31, 1996, Investments available for sale had an aggregate
cost of $1,000,000. At that date, the fair value of these investments
approximated their original cost. There were no unrealized gains or
losses as of December 31, 1996.
Note 5. 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, 1997, 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, 1997.
Note 6. 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 and $15,000,000 of 7.27% Senior Notes (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. 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. Interest payments on the
Notes will be made semi-annually beginning in August 1997. Principal
payments will be made annually beginning one year from the date of
issuance. The current portion of the Notes amounted to $2,000,000 at
March 31, 1997.
Note 7. 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, including an additional authorization of
$12,636,000 on May 14, 1997, of up to an aggregate of $188,365,000.
Through May 14, 1997, a total of 13,368,000 shares at an aggregate cost
of $168,365,000 have been purchased and retired. The Company purchased
50,000 shares at a cost of $1,075,000 during the first quarter of 1997
and 135,000 shares at a cost of $2,863,000 through May 14, 1997.
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.
9
Note 8. Dividend - On December 17, 1996, the Board of Directors declared a
--------
cash dividend of $.12 per share on the Company's common stock, which
was paid on January 21, 1997, to shareholders of record on December 31,
1996.
The Board of Directors has indicated its intention to pay future
dividends on a semiannual basis.
Note 9. Segment Information - The Company defines its business segments to
-------------------
reflect the Company's focus around its two core product 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, 1997 and 1996. Prior-period business segment information has been
restated to conform with current-period presentation.
Investment
Technology and Asset General
Services Management and Admin. Consolidated
----------- ----------- ---------- -------------
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 $11,674,000
=========== ===========
General and administrative expenses $3,394,000 3,394,000
==========
Interest expense, net 279,000
-----------
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
=========== =========== ========== ===========
For the Three-Month Period Ended March 31, 1996
--------------------------------------------------
Revenues $46,363,000 $16,876,000 $63,239,000
=========== =========== ===========
Operating profit $11,867,000 $ 1,011,000 $12,878,000
=========== ===========
General and administrative expenses $3,157,000 3,157,000
==========
Interest income, net (97,000)
-----------
Income before income taxes $ 9,818,000
===========
Depreciation and amortization $ 1,952,000 $ 556,000 $ 54,000 $ 2,562,000
=========== =========== ========== ===========
Capital expenditures $ 2,888,000 $ 553,000 $ 374,000 $ 3,815,000
=========== =========== ========== ===========
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
-------------
The Company is organized around its two core product lines: Investment
Technology and Services and Asset Management. Financial information for each of
these segments is reflected in Note 9 of the Notes to Consolidated Financial
Statements.
Results of Operations
- ---------------------
First Quarter Ended March 31, 1997 Compared to First Quarter Ended
March 31, 1996
The Company's results of operations for the first quarter of 1997 included
revenues of $63,504,000, compared to $63,239,000 for the same period of 1996.
Net income for the first quarter of 1997 was $4,801,000, compared to $5,793,000
in the same period of 1996. Earnings per share for the three months ended
March 31, 1997 and 1996 was $.25 and $.30, respectively, a decrease of 17
percent. This decrease in earnings was the result of the Company's recognition
of substantial one-time trust services revenue in the first quarter of 1996 that
had a direct impact on the Company's net income. Fund balances continued to
expand during the first quarter of 1997. Total fund balances at March 31, 1997
were $90.6 billion compared to $65.7 billion at March 31, 1996, an increase of
38 percent. Included in these totals are proprietary fund balances of $64.9
billion at March 31, 1997 and $45.1 billion at March 31, 1996, an increase of 44
percent.
Investment Technology and Services - Revenues from Investment Technology and
- ----------------------------------
Services for the three months ended March 31, 1997 and 1996 were $39,963,000 and
$46,363,000, respectively.
INVESTMENT TECHNOLOGY AND SERVICES REVENUES
-------------------------------------------
1ST QTR 1ST QTR DOLLAR PERCENT
1997 1996 CHANGE CHANGE
---- ---- ------ ------
Trust technology services $23,039,000 $32,218,000 $(9,179,000) (28%)
Proprietary fund services 16,143,000 13,821,000 2,322,000 17%
Trust back-office
processing services 781,000 324,000 457,000 141%
----------- ----------- -----------
Total $39,963,000 $46,363,000 $(6,400,000) (14%)
=========== =========== ===========
Trust technology services revenue decreased 28 percent from the prior-year
period. This decrease in revenue was primarily caused by the recognition of a
$5.6 million one-time contractual obligation and $2.5 million in one-time
deconversion fees received from clients that terminated their relationships with
the Company in the first quarter of 1996. Additionally, during the first
quarter of 1997, the Company wrote-off $1.0 million of accounts receivable that
related to contractual agreements the Company entered into with clients for
specialized software development projects. Proprietary fund services revenue
increased 17 percent from the prior-year period due to an increase in average
proprietary fund balances over the past year. Average proprietary fund balances
increased $21.4 billion or 49 percent from $44.1 billion during the first
quarter of 1996 to $65.5 billion during the first quarter of 1997. Recent
changes in legislation regarding bank common trust funds now permit the transfer
of common trust assets into proprietary mutual funds on a tax-free basis. The
increase in proprietary fund balances is a result of the transfer of common
trust assets into proprietary mutual funds, as well as growth in existing fund
complexes and the commencement of new fund complexes during the past year. The
Company is experiencing significant growth in its trust back-office processing
business which is an extension of its trust technology business. The increase
in trust back-office processing services revenue was the result of an increase
in processing fees from the contracting of new clients. The Company expects
continued growth in its proprietary fund and trust back-office processing
businesses while the trust technology business may remain flat for the remainder
of 1997. The Company is currently establishing new trust technology client
relationships that should have a favorable impact on trust technology
services revenue in 1998.
11
INVESTMENT TECHNOLOGY AND SERVICES EXPENSES
-------------------------------------------
1ST QTR 1ST QTR DOLLAR PERCENT
1997 1996 CHANGE CHANGE
---- ---- ------ ------
Operating and development $21,243,000 $25,662,000 $(4,419,000) (17%)
Sales and marketing $ 8,797,000 $ 8,834,000 $ (37,000) --
The 17 percent decrease in operating and development expense was primarily due
to decreases in direct expenses associated with trust technology services
revenue, in addition to decreases in personnel and outsourcing expenses.
Additionally, the Company capitalized more software development costs relating
to the Company's open architecture project in the first quarter of 1997
compared to the first quarter of 1996. Sales and marketing expense remained
relatively flat in the first quarter of 1997 compared to the first quarter of
1996. Operating profit from Investment Technology and Services for the three
months ended March 31, 1997 was $9,923,000, a decrease of 16 percent from the
$11,867,000 reported in the corresponding quarter of 1996. Operating margins
were 25 percent for the three months ended March 31, 1997, compared to 26
percent for the same period of 1996. The decline in operating margins was
primarily the result of the one-time trust technology revenue received in the
first quarter of 1996 as well as the Company experiencing higher growth in its
lower margin products.
Asset Management - Revenues from Asset Management for the three months ended
- ----------------
March 31, 1997 and 1996 were $23,541,000 and $16,876,000, respectively.
ASSET MANAGEMENT REVENUES
-------------------------
1ST QTR 1ST QTR DOLLAR PERCENT
1997 1996 CHANGE CHANGE
---- ---- ------ ------
Investment management
services $11,145,000 $ 8,330,000 $2,815,000 34%
Liquidity management services 5,485,000 5,297,000 188,000 4%
Other investment products
and services 6,911,000 3,249,000 3,662,000 113%
----------- ----------- ----------
Total $23,541,000 $16,876,000 $6,665,000 39%
=========== =========== ==========
Investment management services revenue, which is comprised of the Company's core
asset management business, increased 34 percent from the prior-year period due
to an increase in average fund balances from the Company's Family of Funds
during the past year. Average assets under management from the Company's Family
of Funds were $8.0 billion for the first quarter of 1997 compared to $4.8
billion for the first quarter of 1996. This increase was primarily the result
of increased sales of the Company's Family of Funds to high-net-worth
individuals through various registered investment advisors. Liquidity
management services revenue increased slightly due to an increase in average
fund balances invested in the Company's lower-fee liquidity products. Average
assets under management from the Company's liquidity funds were $16.1 billion
for the first quarter of 1997 compared to $14.3 billion for the first quarter of
1996. Other investment products and services revenue increased 113% as a result
of an internal reassignment of bank-related brokerage services, in addition to
an increase in revenue from the Company's new business ventures. Revenues are
expected to expand in this segment due to continued growth in the Company's core
asset management business.
12
ASSET MANAGEMENT EXPENSES
-------------------------
1ST QTR 1ST QTR DOLLAR PERCENT
1997 1996 CHANGE CHANGE
---- ---- ------ ------
Operating and development $11,019,000 $8,153,000 $2,866,000 35%
Sales and marketing $10,771,000 $7,712,000 $3,059,000 40%
Operating and development expense increased 35 percent from the prior-year
period as a result of increases in direct expenses associated with the internal
reassignment of bank-related brokerage services revenue. Additionally,
personnel expenses increased in connection with the growth in the Company's new
business ventures. The 40 percent increase in sales and marketing expense was
due primarily to increases in personnel and promotion expenses to strengthen the
Company's core asset management business, as well as significant investments to
establish its distribution channels in non-U.S. markets. The Asset Management
segment recorded an operating profit of $1,751,000 for the three months ended
March 31, 1997 compared to an operating profit of $1,011,000 in the
corresponding period of 1996. The increase in operating profit is primarily
attributable to increased margins from the Company's core asset management
business, as well as a reduction in losses incurred from the Company's new
business ventures. The Company expects continued growth in its core asset
management business for the remainder of 1997.
Other Income and Expenses - General and administrative expenses for the three
- -------------------------
months ended March 31, 1997 and 1996 were $3,394,000 and $3,157,000,
respectively. General and administrative expenses increased 8 percent primarily
due to increases in personnel expense in corporate overhead areas.
Net interest expense for the three months ended March 31, 1997 was $279,000 and
net interest income for the three months ended March 31, 1996 was $97,000. The
increase in interest expense relates to the Company's issuance of long-term debt
instruments and increased borrowings under the line of credit in the first
quarter of 1997. Interest income in 1996 was net of interest expense relating
to the Company's borrowings under its line of credit (See Note 5 of the Notes to
Consolidated Financial Statements).
Discontinued Operations - In May 1995, the Company's Board of Directors approved
- -----------------------
a plan of disposal for the SEI Capital Resources Division ("CR") and the SEI
Defined Contribution Retirement Services Division ("DC"). CR provided investment
performance evaluation services, consulting services, and brokerage services to
employee benefit plan sponsors and investment advisors in the United States. DC
provided administrative and processing services, recordkeeping services, and
employee retirement planning materials for use by defined contribution plans. CR
and DC were being accounted for together as discontinued operations with a
measurement date of May 31, 1995. The accompanying Consolidated Financial
Statements reflect the operating results and balance sheet items separately from
continuing operations.
In the fourth quarter of 1996, management of the Company concluded that any
proceeds received from a possible sale of CR would not be sufficient to offset
the remaining net assets of CR and DC. The Company, therefore, recorded a charge
of $16,335,000 or $.85 per share. This charge included the operating losses
incurred by CR and DC from June 1, 1995 to December 31, 1996, the complete
write-off of CR and DC's non-recoverable assets, and a provision for the
disposal of discontinued operations. The provision for the disposal of
discontinued operations included accruals for future operating losses, future
commitments relating to leased facilities, severance, and an additional reserve
for doubtful accounts relating to CR's receivables
Discontinued operations in the first quarter of 1997 had revenues of $6,442,000
and pre-tax losses of $1,621,000 compared to revenues of $10,121,000 and pre-tax
losses of $1,189,000 for the first quarter of 1996. The 1997 losses are charged
against the provision which was established in the fourth quarter of 1996 and is
reflected in Accrued discontinued operations disposal costs on the accompanying
Consolidated Balance Sheets.
13
Liquidity and Capital Resources - The Company's ability to generate cash
- -------------------------------
adequate to meet its needs results primarily from cash flow 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 5 of the
Notes to Consolidated Financial Statements). At March 31, 1997, the Company's
sources of liquidity consisted primarily of cash and cash equivalents of
$15,983,000 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. On February 24, 1997, the Company
issued $35,000,000 of medium-term notes (See Note 6 of the Notes to Consolidated
Financial Statements). The proceeds were used to repay the outstanding balance
on its line of credit which amounted to $30,000,000.
Cash flow used in operations for the three months ended March 31, 1997 and 1996
was $3,534,000 and $3,766,000, respectively. The negative cash flow from
operations in the first quarter of 1997 and 1996 is the result of the Company's
payout of sales and incentive compensation in the first quarter of each year
that were earned in the prior year. In addition, cash flow from operations for
first quarter 1997 was negatively affected by a decrease in collections of
accounts receivable. First quarter 1996 cash flow from operations was negatively
affected by the investments the Company made in its Swiss-based subsidiary along
with cash used from the Company's discontinued operations.
Capital expenditures, including capitalized software development costs, for the
three months ended March 31, 1997 and 1996 were $6,309,000 and $5,276,000,
respectively. The increase in capital expenditures is primarily the result of
increased capitalized software development costs relating to the Company's open
architecture project (See Note 1 of the Notes to Consolidated Financial
Statements). The Company expects its capital expenditures to decrease in 1997
as expenditures relating to the Company's new corporate campus decline. In
addition, the Company has purchased 135,000 shares of its common stock at a cost
of $2,863,000 during 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, and the repayment
of its long-term debt.
14
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Report 8-K
- ------- ----------------------------------
(a) The following is a list of exhibits filed as part of the Form 10-Q.
Exhibit 11. Earnings per share calculations.
Exhibit 27. Financial data schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three-month period
ended March 31, 1997.
15
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, 1997 By /s/ Henry H. Greer
------------------- -----------------------------------
Henry H. Greer
President, Chief Operating
Officer, and Chief Financial Officer
16
SEI INVESTMENTS COMPANY AND SUBSIDIARIES
----------------------------------------
EXHIBIT 11 - EARNINGS PER SHARE CALCULATION
-------------------------------------------
FOR THE THREE-MONTH PERIOD ENDED MARCH 31,
------------------------------------------
1997 1996
----------- -----------
Earnings per common and common
equivalent share (Primary EPS):
Net income $ 4,801,000 $ 5,793,000
----------- -----------
Weighted average number of
shares issued and outstanding 18,532,000 18,509,000
Dilutive effect (excess of
number of shares issuable over
number of shares assumed to be
repurchased with the proceeds,
using the average market price
during the period) of
outstanding options 730,000 973,000
----------- -----------
Adjusted weighted average number
of shares outstanding 19,262,000 19,482,000
----------- -----------
Earnings per common and common
equivalent share $ .25 $ .30
----------- -----------
17
SEI INVESTMENTS COMPANY AND SUBSIDIARIES
----------------------------------------
EXHIBIT 11 - EARNINGS PER SHARE CALCULATION
-------------------------------------------
FOR THE THREE-MONTH PERIOD ENDED MARCH 31,
------------------------------------------
1997 1996
----------- -----------
Earnings per common and common
equivalent share, assuming full dilution
(Fully diluted EPS):
Net income $ 4,801,000 $ 5,793,000
----------- -----------
Weighted average number of
shares issued and outstanding 18,532,000 18,509,000
Dilutive effect (excess of
number of shares issuable over
number of shares assumed to be
repurchased with the proceeds,
using the higher of the average market price
or ending price during the period) of
outstanding options 730,000 973,000
----------- -----------
Adjusted weighted average number
of shares outstanding, assuming full dilution 19,262,000 19,482,000
----------- -----------
Earnings per common and common
equivalent share, assuming full dilution $ .25 $ .30
----------- -----------
18
5
1,000
3-MOS
DEC-31-1997
JAN-1-1997
MAR-31-1997
15,983
0
26,397
(1,539)
0
74,428
98,665
(48,723)
155,219
54,683
33,000
0
0
185
61,087
155,219
0
63,504
0
51,830
3,394
189
279
8,001
3,200
4,801
0
0
0
4,801
.25
.25