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 June 30, 1996 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 CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1707341
- ---------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
680 East Swedesford Road, Wayne, Pennsylvania 19087-1658
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(610) 254-1000
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(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 June 30, 1996: 18,708,579 shares of common stock, par value
$.01 per share.
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
- ------- --------------------
Consolidated Balance Sheets
---------------------------
(In thousands)
June 30, 1996 December 31, 1995
-------------- -----------------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 7,327 $ 10,256
Receivables, net of allowance for doubtful
accounts of $1,350 and $1,206 23,939 22,436
Receivables from regulated investment
companies 9,791 8,757
Deferred income taxes 1,856 2,584
Loans receivable available for sale 14,221 5,152
Prepaid expenses 4,381 4,890
-------- --------
Total current assets 61,515 54,075
-------- --------
Net assets of discontinued operations 9,369 6,046
-------- --------
Investments available for sale -- 6,205
-------- --------
Property and equipment, net of accumulated
depreciation and amortization of $63,674
and $61,513 31,370 24,299
-------- --------
Capitalized software, net of accumulated
amortization of $4,553 and $3,746 7,531 4,356
-------- --------
Other assets, net 8,863 6,366
-------- --------
Total Assets $118,648 $101,347
======== ========
The accompanying notes are an integral part of these statements.
2
Consolidated Balance Sheets
---------------------------
(In thousands, except par value)
June 30, 1996 December 31, 1995
-------------- -----------------
(unaudited)
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Short-term borrowings $ 9,000 $ --
Accounts payable 5,880 6,252
Accrued compensation 7,648 13,724
Other accrued liabilities 22,751 19,115
Deferred revenue 4,730 5,795
------- -------
Total current liabilities 50,009 44,886
------- -------
Deferred income taxes 1,054 459
------- -------
Shareholders' equity:
Common stock, $.01 par value, 100,000 shares
authorized; 18,709 and 18,425 shares issued
and outstanding 187 184
Capital in excess of par value 52,684 48,207
Retained earnings 14,840 7,167
Cumulative translation adjustments (126) (58)
Unrealized holding gain on investments -- 502
------- -------
Total shareholders' equity 67,585 56,002
------- -------
Total Liabilities and Shareholders'
Equity $118,648 $101,347
======= =======
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 June 30,
------------------------------
1996 1995
---- ----
Revenues $61,541 $55,737
Expenses:
Operating and development 34,406 29,267
Sales and marketing 17,325 14,726
General and administrative 2,975 4,424
------ ------
Income from continuing operations before interest
and income taxes 6,835 7,320
Gain on sale of investments available for sale (1,097) --
Interest income, net (60) (220)
------ ------
Income from continuing operations before income taxes 7,992 7,540
Income taxes 3,099 3,016
------ ------
Income from continuing operations 4,893 4,524
Loss from discontinued operations, net
of income tax benefit of $603 -- (904)
------ ------
Net income $ 4,893 $ 3,620
====== ======
Earnings per share from continuing operations $ .25 $ .23
Loss per share from discontinued operations -- (.05)
------ ------
Earnings per common and common equivalent share
(primary and fully diluted) $ .25 $ .18
====== ======
The accompanying notes are an integral part of these statements.
4
Consolidated Statements of Income
---------------------------------
(unaudited)
(In thousands, except per share data)
Six Months
------------------------------
Ended June 30,
------------------------------
1996 1995
---- ----
Revenues $124,780 $109,236
Expenses:
Operating and development 68,221 55,930
Sales and marketing 33,871 27,678
General and administrative 6,132 8,602
------- -------
Income from continuing operations before interest
and income taxes 16,556 17,026
Gain on sale of investments available for sale (1,097) --
Interest income, net (157) (382)
------- -------
Income from continuing operations before income
taxes 17,810 17,408
Income taxes 7,124 6,963
------- -------
Income from continuing operations 10,686 10,445
Loss from discontinued operations, net
of income tax benefit of $1,295 -- (1,942)
------- -------
Net income $ 10,686 $ 8,503
======= =======
Earnings per share from continuing operations $ .55 $ .53
Loss per share from discontinued operations -- (.10)
------- -------
Earnings per common and common equivalent share
(primary and fully diluted) $ .55 $ .43
======= =======
The accompanying notes are an integral part of these statements.
5
Consolidated Statements of Cash Flows
-------------------------------------
(unaudited)
(In thousands)
Six Months
------------------------------
Ended June 30,
------------------------------
1996 1995
---- ----
Cash flows from operating activities:
Net income $ 10,686 $ 8,503
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 5,380 5,886
Provision for losses on receivables 144 --
Discontinued operations (3,323) 2,816
Tax benefit on stock options exercised 1,553 1,150
Gain on sale of investments available for sale (1,097) --
Other 1,849 (1,658)
Change in current assets and liabilities:
Decrease (increase) in
Receivables (1,647) (5,437)
Receivables from regulated investment
companies (1,034) (935)
Loans receivable available for sale (9,069) --
Prepaid expenses 509 (58)
Increase (decrease) in
Accounts payable (372) 532
Accrued compensation (6,076) (5,704)
Other accrued liabilities 5,478 (207)
Deferred revenue (1,065) (401)
------- -------
Net cash provided by operating activities 1,916 4,487
------- -------
Cash flows from investing activities:
Additions to property and equipment (11,388) (4,198)
Additions to capitalized software (3,982) (876)
Deposit on property and equipment (1,398) --
Investment in joint venture (1,658) --
Proceeds from sale of investments available for
sale 6,536 --
Purchase of investments available for sale -- (5,132)
Other (27) 200
------- -------
Net cash used in investing activities (11,917) (10,006)
------- -------
Cash flows from financing activities:
Purchase and retirement of common stock (870) (5,781)
Proceeds from issuance of common stock 3,032 3,890
Proceeds from short-term borrowings 9,000 --
Payment of dividends (4,090) (3,396)
------- -------
Net cash provided by (used in) financing
activities 7,072 (5,287)
------- -------
Net decrease in cash and cash equivalents (2,929) (10,806)
Cash and cash equivalents, beginning of period 10,256 20,232
------- -------
Cash and cash equivalents, end of period $ 7,327 $ 9,426
======= =======
The accompanying notes are an integral part of these statements.
6
Notes to Consolidated Financial Statements
------------------------------------------
Note 1. Summary of Significant Accounting Policies
------------------------------------------
Nature of Operations
--------------------
SEI Corporation (the "Company") is organized around its two major
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. Principal
markets for these products and services include trust departments of
large banks located in the United States. The Asset Management segment
provides investment solutions through various investment products
including the Company's Family of Funds, liquidity funds and services,
and consulting services. Principal markets for these products and
services include trust departments of large banks, investment advisors,
corporations, 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 June 30, 1996, the results of operations for the three
and six months ended June 30, 1996 and 1995, and the cash flows for the
six months ended June 30, 1996 and 1995.
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
June 30, 1996 December 31, 1995 (In Years)
------------- ----------------- ------------
Equipment $ 43,603,000 $ 43,469,000 3
Buildings, furniture and fixtures 16,747,000 16,754,000 3 to 39
Leasehold improvements 9,814,000 9,814,000 Lease Term
Purchased software 7,765,000 7,220,000 3
Land 4,065,000 4,065,000 N/A
Construction in progress 13,050,000 4,490,000 N/A
----------- -----------
95,044,000 85,812,000
Less: Accumulated depreciation
and amortization (63,674,000) (61,513,000)
----------- -----------
Property and equipment, net $ 31,370,000 $ 24,299,000
=========== ===========
Property and equipment are stated at cost. 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.
In December 1994, the Company purchased 90 acres of land near its
present site for construction of the Company's new corporate campus.
All costs relating to the construction are reflected in Construction in
progress. This corporate campus is expected to be completed in late
1996.
7
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 development is completed.
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
years.
Earnings per Share
------------------
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 June 30, 1996 and
1995, the weighted average shares outstanding for primary earnings per
share were 19,526,000 and 19,668,000, respectively. For the six months
ending June 30, 1996 and 1995, the weighted average shares outstanding
for primary earnings per share were 19,505,000 and 19,598,000,
respectively. Shares used to calculate fully diluted earnings per share
were not materially different from those used for primary earnings per
share.
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 six months
ended June 30:
1996 1995
---- ----
Interest paid $ 242,000 $ --
Interest and dividends received $ 436,000 $ 337,000
Income taxes paid $5,100,000 $7,893,000
Stock-Based Compensation Plans
------------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). The disclosure requirements of
SFAS 123 are effective for the Company's December 31, 1996 year-end
financial statements. However, these disclosures will include the
effects of all awards granted during the year ended December 31, 1995.
SFAS 123 establishes a fair value based method of accounting for stock-
based compensation plans. SFAS 123 requires that an employer's
financial statements include certain disclosures about stock-based
employee compensation arrangements regardless of the method used to
account for the plan. The required information, if the Company chooses
to continue to apply certain allowable accounting principles, will not
affect any adjustments to reported net income or earnings per share.
8
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 quarter's presentation.
Note 2. 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 provides 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. For CR, the expected manner of disposal is the sale of
substantially all of its assets. For DC, its full-service recordkeeping
operations were transferred to KPMG Peat Marwick ("KPMG") during the
first quarter of 1996. The Company anticipates CR's sale to be
completed in 1996.
CR and DC are being accounted for as discontinued operations with a
measurement date of May 31, 1995. The accompanying Consolidated
Financial Statements reflect the operating results and balance sheet
items of the discontinued operations separately from continuing
operations. The Company expects that the sale of CR will result in a
gain on the disposal of CR's assets which will be sufficient to offset
the losses of DC from the measurement date to the disposal date and the
loss on the transfer of DC to KPMG. As a result, no estimated losses
for DC have been accrued and the net gain will be recognized when
realized. The gain expected from the sale of CR is based upon
management's best estimate of the amount to be realized. The amount the
Company will ultimately realize could differ from this estimate. The
net income or net loss from discontinued operations from the
measurement date to the disposal date will be recorded as an adjustment
to the net assets or net liabilities of the discontinued operations on
the accompanying Consolidated Balance Sheets.
Loss from discontinued operations on the accompanying Consolidated
Statements of Income was:
Two Months Five Months
---------- -----------
Ended May 31, 1995 Ended May 31, 1995
------------------ ------------------
Revenues $ 6,445,000 $17,674,000
========== ==========
Loss before income tax benefit $(1,507,000) $(3,237,000)
Income tax benefit 603,000 1,295,000
---------- ----------
Loss $ (904,000) $(1,942,000)
========== ==========
9
The assets and liabilities of CR and DC have been reclassified on the
accompanying Consolidated Balance Sheets to separately identify them as
net assets or net liabilities of discontinued operations. A summary of
these net assets is as follows:
June 30, 1996 December 31, 1995
------------- -----------------
Current assets $5,598,000 $7,709,000
Property and equipment, net 920,000 1,257,000
Other assets 4,828,000 5,581,000
Current liabilities (8,483,000) (11,835,000)
Deferred income taxes (467,000) (421,000)
Loss from discontinued operations for the period
beginning June 1, 1995, net of income tax
benefit of $1,718,000 and $462,000 6,973,000 3,755,000
--------- ---------
Net assets of discontinued operations $9,369,000 $6,046,000
========= =========
Note 3. Receivables - Receivables on the accompanying Consolidated Balance
-----------
Sheets consist of the following:
June 30, 1996 December 31, 1995
------------- -----------------
Trade receivables $13,669,000 $14,474,000
Fees earned, not received 4,212,000 2,866,000
Fees earned, not billed 7,408,000 6,302,000
---------- -----------
25,289,000 23,642,000
Less: Allowance for doubtful accounts (1,350,000) (1,206,000)
---------- -----------
$23,939,000 $22,436,000
========== ===========
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 Financial Services Company and SEI
Financial 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 the Company's Swiss
subsidiary, SEI Capital AG, which is based in Zurich. The Company
intends to sell these loans within six months from the balance sheet
date. 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.
10
Note 5. Investments Available for Sale - Investments available for sale consist
------------------------------
of mutual funds sponsored by the Company which were 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 December 31, 1995, Investments available for sale had an aggregate
cost of $5,361,000 and an aggregate market value of $6,205,000 with
gross unrealized gains of $844,000. At that date, the unrealized
holding gains of $502,000 (net of income taxes of $342,000) were
reported as a separate component of Shareholders' equity on the
accompanying Consolidated Balance Sheets. There were no unrealized
losses as of December 31, 1995.
In the second quarter of 1996, the Company sold all of its investments
available for sale. The aggregate cost of these investments just prior
to sale was $5,439,000. Total proceeds from the disposition of these
investments were $6,536,000, resulting in a realized gain of
$1,097,000. This gain is reflected in Gain on sale of investments
available for sale on the accompanying Consolidated Statements of
Income.
Note 6. Debt - The Company has a line of credit agreement (the "Agreement")
----
with its principal lending institution which provides for borrowing of
up to $30,000,000. The Agreement ends on May 31, 1997, at which time
the outstanding principal balance, if any, becomes payable unless the
Agreement is extended. The line of credit, when utilized, accrues
interest at the Prime rate or five-eighths percent above the London
Interbank Offered Rate. The Company is obligated to pay a commitment
fee equal to one-eighth percent per annum on the average daily unused
portion of the commitment. The line of credit is secured by the common
stock of the Company's wholly owned subsidiaries. Certain other
covenants under the Agreement require the Company to maintain specified
levels of net worth, prohibit unsecured borrowings, and place certain
restrictions on investments.
The maximum month-end amount of debt outstanding during the six months
ended June 30, 1996 was $11,000,000. The weighted average balance of
debt outstanding was $8,412,000 during 1996. Interest expense was
$137,000 and $257,000 for the three and six months ended June 30, 1996,
respectively, based on a weighted average interest rate of
approximately six percent during 1996. The Company had no outstanding
debt during the first six months of 1995.
In July 1996, the Company borrowed an additional $11,000,000 on its
line of credit. As of August 9, 1996, the outstanding balance on the
line of credit was $20,000,000.
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 of up to an aggregate of $175,729,000. Through
June 30, 1996, a total of 12,740,000 shares at an aggregate cost of
$156,602,000 have been purchased and retired. The Company purchased
40,000 shares at a cost of $870,000 during the second quarter of 1996.
In July 1996, the Company purchased an additional 487,000 shares of
common stock at a cost of $8,766,000.
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.
11
Note 8. Dividend - On May 21, 1996, the Board of Directors declared a cash
--------
dividend of $.12 per share on the Company's common stock, which was
paid on June 28, 1996 to shareholders of record on June 12, 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 two core product lines: Investment
Technology and Services and Asset Management. The Investment Technology
and Services segment consists of the Company's trust technology and
proprietary mutual fund businesses. The Asset Management segment
consists of the Company's liquidity management, asset management, and
mutual fund businesses.
The following tables highlight certain unaudited financial information
from continuing operations about each of the Company's segments for the
three and six months ended June 30, 1996 and 1995. 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 June 30, 1996
------------------------------------------------------------------
Revenues $42,488,000 $19,053,000 $61,541,000
========== ========== ==========
Operating profit $ 9,135,000 $ 675,000 $ 9,810,000
========== ==========
General and administrative expenses $2,975,000 2,975,000
=========
Gain on sale of investments available
for sale (1,097,000)
Interest income, net (60,000)
----------
Income from continuing operations
before income taxes $ 7,992,000
==========
Depreciation and amortization $ 2,189,000 $ 575,000 $ 54,000 $ 2,818,000
========== ========== ========= ==========
Capital expenditures $ 1,290,000 $ 60,000 $6,223,000 $ 7,573,000
========== ========== ========= ==========
For the Three-Month Period Ended June 30, 1995
------------------------------------------------------------------
Revenues $38,986,000 $16,751,000 $55,737,000
========== ========== ==========
Operating profit $10,510,000 $ 1,234,000 $11,744,000
========== ==========
General and administrative expenses $4,424,000 4,424,000
=========
Interest income, net (220,000)
----------
Income from continuing operations
before income taxes $ 7,540,000
==========
Depreciation and amortization $ 2,316,000 $ 557,000 $ 73,000 $ 2,946,000
========== ========== ========= ==========
Capital expenditures $ 1,125,000 $ 311,000 $1,191,000 $ 2,627,000
========== ========== ========= ==========
12
Investment
Technology and Asset General
Services Management and Admin. Consolidated
-------- ---------- ---------- ------------
For the Six-Month Period Ended June 30, 1996
------------------------------------------------------------------
Revenues $88,851,000 $35,929,000 $124,780,000
========== ========== ===========
Operating profit $21,002,000 $ 1,686,000 $ 22,688,000
========== ==========
General and administrative expenses $6,132,000 6,132,000
=========
Gain on sale of investments available
for sale (1,097,000)
Interest income, net (157,000)
----------
Income from continuing operations
before income taxes $ 17,810,000
===========
Depreciation and amortization $ 4,141,000 $ 1,131,000 $ 108,000 $ 5,380,000
========== ========== ========= ===========
Capital expenditures $ 2,729,000 $ 99,000 $8,560,000 $ 11,388,000
========== ========== ========= ==========
For the Six-Month Period Ended June 30, 1995
------------------------------------------------------------------
Revenues $75,528,000 $33,708,000 $109,236,000
========== ========== ===========
Operating profit $21,432,000 $ 4,196,000 $ 25,628,000
========== ==========
General and administrative expenses $8,602,000 8,602,000
=========
Interest income, net (382,000)
----------
Income from continuing operations
before income taxes $ 17,408,000
==========
Depreciation and amortization $ 4,602,000 $ 1,126,000 $ 158,000 $ 5,886,000
========== ========== ========= ==========
Capital expenditures $ 2,025,000 $ 589,000 $1,584,000 $ 4,198,000
========== ========== ========= ==========
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
-------------
The Company operates primarily in two business segments: 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
- ---------------------
Second Quarter Ended June 30, 1996 Compared to Second Quarter Ended
June 30, 1995
The Company's results of operations for the second quarter of 1996 included
revenues from continuing operations of $61,541,000, compared to $55,737,000 for
the same period of 1995, an increase of 10 percent from the prior year's
corresponding quarter. Income from continuing operations for the second quarter
of 1996 was $4,893,000, compared to $4,524,000 in the same period of 1995.
Earnings per share from continuing operations for the three months ended
June 30, 1996 was $.25, compared to $.23 in the corresponding period of 1995.
Included in second quarter earnings was a gain on sale of investments available
for sale of $1,097,000. Excluding the gain on sale of investments available for
sale, earnings decreased from the prior-year period due to substantial
investments the Company made in the sales and marketing of its asset management
business, along with investments made in its offshore investment funds business
and its Canadian asset management subsidiary. In addition, the Company
continues to invest heavily in trust technology, primarily in its open
architecture system. Fund balances continued to expand during the second
quarter of 1996. Total fund balances at June 30, 1996 were $71.6 billion
compared to $54.8 billion at June 30, 1995, an increase of 31 percent. Included
in these totals are proprietary fund balances of $50.2 billion at June 30, 1996
and $34.5 billion at June 30, 1995, an increase of 46 percent.
Investment Technology and Services - Revenues from Investment Technology and
- ----------------------------------
Services for the three months ended June 30, 1996 and 1995 were $42,488,000 and
$38,986,000, respectively.
INVESTMENT TECHNOLOGY AND SERVICES REVENUES
-------------------------------------------
2ND QTR 2ND QTR DOLLAR PERCENT
1996 1995 CHANGE CHANGE
------- ------- ------ ------
Trust systems and services $27,085,000 $27,881,000 $ (796,000) (3%)
Proprietary fund services 15,403,000 11,105,000 4,298,000 39%
---------- ---------- ---------
Total $42,488,000 $38,986,000 $3,502,000 9%
========== ========== =========
Proprietary fund services revenue increased 39 percent from the prior-year
period due to an increase in average proprietary fund balances over the past
year despite the loss of two proprietary fund complexes in the first quarter of
1996. Average proprietary fund balances increased $15.1 billion or 47 percent
from $32.3 billion during the second quarter of 1995 to $47.4 billion during the
second quarter of 1996. This increase in proprietary fund balances was the
result of growth in existing fund complexes and the commencement of new fund
complexes during the past year. Trust systems and services revenue was
relatively flat from the prior-year period as decreases in trust processing fees
were offset by an increase in one-time implementation fees. The increase in
one-time implementation fees was a result of mergers among various bank clients.
Revenues should continue to expand for the remainder of 1996 due to continued
growth in fund balances from proprietary funds. However, future revenue
increases could be partially offset by the loss of bank clients as a result of
continued mergers among banks.
INVESTMENT TECHNOLOGY AND SERVICES EXPENSES
-------------------------------------------
2ND QTR 2ND QTR DOLLAR PERCENT
1996 1995 CHANGE CHANGE
---- ---- ------ ------
Operating and development $25,061,000 $20,520,000 $4,541,000 22%
Sales and marketing $ 8,292,000 $ 7,956,000 $ 336,000 4%
14
The 22 percent increase in operating and development expense was primarily due
to an increase in consulting and outsourcing expense, along with an increase in
direct expense related to the growth in proprietary fund balances. The increase
in consulting expense reflects the Company's significant investment in its open
architecture system and advanced client service technology. The Company expects
investments in its trust technology to continue for the remainder of 1996 and
into 1997. The increase in outsourcing expense reflects the Company's
commitment to focus on its core competencies. The four percent increase in
sales and marketing expense was due primarily to an increase in promotion
expense. Operating profit from Investment Technology and Services for the three
months ended June 30, 1996 was $9,135,000, a decrease of 13 percent from the
$10,510,000 reported in the corresponding quarter of 1995. Operating margins
were 22 percent for the three months ended June 30, 1996, compared to 27 percent
for the same period of 1995. The decline in operating margins is attributable
to the Company's substantial investment in trust technology and lower margins
from its proprietary mutual fund business.
Asset Management - Revenues from Asset Management for the three months ended
- ----------------
June 30, 1996 and 1995 were $19,053,000 and $16,751,000, respectively.
ASSET MANAGEMENT REVENUES
-------------------------
2ND QTR 2ND QTR DOLLAR PERCENT
1996 1995 CHANGE CHANGE
---- ---- ------ ------
Liquidity services $ 4,905,000 $ 5,509,000 $ (604,000) (11%)
Mutual fund services 6,305,000 4,628,000 1,677,000 36%
Asset management services 3,485,000 3,464,000 21,000 1%
Brokerage and consulting
services 4,358,000 3,150,000 1,208,000 38%
---------- ---------- ---------
Total $19,053,000 $16,751,000 $2,302,000 14%
========== ========== =========
Liquidity services revenue decreased 11 percent from the prior-year period due
to assets being transferred from higher-fee liquidity products to lower-fee
liquidity products. Mutual fund services revenue increased 36 percent due to an
increase in average fund balances from the Company's Family of Funds over the
past year. This increase was partially due to clients transferring their assets
from separate accounts under the Customized Asset Management Service ("CAMS")
product into the Company's own mutual funds. The 38 percent increase in
brokerage and consulting services revenue is due primarily to an internal
reclassification of bank-related brokerage services.
ASSET MANAGEMENT EXPENSES
-------------------------
2ND QTR 2ND QTR DOLLAR PERCENT
1996 1995 CHANGE CHANGE
---- ---- ------ ------
Operating and development $9,345,000 $8,747,000 $ 598,000 7%
Sales and marketing $9,033,000 $6,770,000 $2,263,000 33%
Operating and development expense increased seven percent due to an increase in
direct expenses relating to the increase in brokerage and consulting services
revenues. The 33 percent increase in sales and marketing expense was due
primarily to increases in personnel, promotion and travel expense, along with
significant investments in the Company's offshore investment funds and Canadian
asset management businesses. The Asset Management segment recorded an operating
profit of $675,000 for the three months ended June 30, 1996 compared to an
operating profit of $1,234,000 in the corresponding period of 1995. The decline
in operating profit is primarily attributable to investments the Company has
made to strengthen its sales and marketing efforts in its core asset management
business, along with additional investments made in new businesses. The Company
expects these investments to continue for the remainder of 1996.
15
Other Income and Expenses - General and administrative expenses for the three
- -------------------------
months ended June 30, 1996 and 1995 were $2,975,000 and $4,424,000,
respectively. General and administrative expenses declined 33 percent primarily
due to decreases in personnel expense in corporate overhead areas.
Gain on sale of investments available for sale for the three months ended June
30, 1996 was $1,097,000. The realized gain is a result of the Company's
disposition of all of its investments classified as Investments available for
sale at an amount greater than original cost (See Note 5 of the Notes to
Consolidated Financial Statements). There were no realized gains or losses for
the three months ended June 30, 1995.
Interest income for the three months ended June 30, 1996 and 1995 was $60,000
and $220,000, respectively. Interest income in 1996 is net of interest expense
relating to the Company's borrowings under its line of credit (See Note 6 of the
Notes to Consolidated Financial Statements).
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
The Company's results of operations for the six months ended June 30, 1996
included revenues from continuing operations of $124,780,000, compared to
$109,236,000 for the same period of 1995, an increase of 14 percent from the
prior period. Approximately $5.6 million of this increase was due to the
Company's recognition of one-time trust services revenue relating to a
contractual settlement received from a client in the first quarter of 1996.
Income from continuing operations for the first six months of 1996 was
$10,686,000, compared to $10,445,000 in the same period of 1995. Earnings per
share from continuing operations for the six months ended June 30, 1996 was
$.55, compared to $.53 for the same period of 1995.
Investment Technology and Services - Revenues from Investment Technology and
- ----------------------------------
Services for the six months ended June 30, 1996 and 1995 were $88,851,000 and
$75,528,000, respectively.
INVESTMENT TECHNOLOGY AND SERVICES REVENUES
-------------------------------------------
SIX MONTHS SIX MONTHS DOLLAR PERCENT
1996 1995 CHANGE CHANGE
---- ---- ------ ------
Trust systems and services $59,627,000 $54,879,000 $ 4,748,000 9%
Proprietary fund services 29,224,000 20,649,000 8,575,000 42%
---------- ---------- ----------
Total $88,851,000 $75,528,000 $13,323,000 18%
========== ========== ==========
Proprietary fund services revenue increased 42 percent from the prior-year
period due to an increase in average proprietary fund balances over the past
year despite the loss of two proprietary fund complexes in the first quarter of
1996. Average proprietary fund balances increased $15.5 billion or 51 percent
from $30.2 billion during the first six months of 1995 to $45.7 billion during
the first six months of 1996. This increase in proprietary fund balances was
the result of growth in existing fund complexes and the commencement of new fund
complexes during the past year. Trust systems revenue increased nine percent
from the prior-year period due to a $5.6 million one-time contractual
obligation received from a client in the first quarter of 1996. Revenues should
continue to expand for the remainder of 1996 due to continued growth in fund
balances from proprietary funds. However, future revenue increases could
be partially offset by the loss of bank clients as a result of continued mergers
among banks.
INVESTMENT TECHNOLOGY AND SERVICES EXPENSES
-------------------------------------------
SIX MONTHS SIX MONTHS DOLLAR PERCENT
1996 1995 CHANGE CHANGE
---- ---- ------ ------
Operating and development $50,723,000 $39,099,000 $11,624,000 30%
Sales and marketing $17,126,000 $14,997,000 $ 2,129,000 14%
16
The 30 percent increase in operating and development expense was primarily due
to an increase in consulting and outsourcing expense, along with an increase in
direct expense related to the growth in proprietary fund balances. The increase
in consulting expense reflects the Company's significant investment in its open
architecture system and advanced client service technology. The Company expects
investments in its trust technology to continue for the remainder of 1996 and
into 1997. The increase in outsourcing expense reflects the Company's
commitment to focus on its core competencies. The 14 percent increase in sales
and marketing expense was due primarily to increases in promotion, outsourcing,
and personnel expenses. Operating profit from Investment Technology and
Services for the six months ended June 30, 1996 was $21,002,000, a decrease of
two percent from the $21,432,000 reported in the corresponding period of 1995.
Operating margins were 24 percent for the six months ended June 30, 1996,
compared to 28 percent for the same period of 1995. The decline in operating
margins is attributable to the Company's substantial investment in trust
technology and lower margins from its proprietary mutual fund business.
Asset Management - Revenues from Asset Management for the six months ended
- ----------------
June 30, 1996 and 1995 were $35,929,000 and $33,708,000, respectively.
ASSET MANAGEMENT REVENUES
-------------------------
SIX MONTHS SIX MONTHS DOLLAR PERCENT
1996 1995 CHANGE CHANGE
---- ---- ------ ------
Liquidity services $10,202,000 $10,995,000 $ (793,000) (7%)
Mutual fund services 11,695,000 9,190,000 2,505,000 27%
Asset management services 6,827,000 7,681,000 (854,000) (11%)
Brokerage and consulting
services 7,205,000 5,842,000 1,363,000 23%
---------- ---------- ---------
Total $35,929,000 $33,708,000 $2,221,000 7%
========== ========== =========
Liquidity services revenue decreased seven percent from the prior-year period
due to assets being transferred from higher-fee liquidity products to lower-fee
liquidity products. Mutual fund services revenue increased 27 percent due to an
increase in average fund balances from the Company's Family of Funds over the
past year. This increase was partially due to clients transferring their assets
from separate accounts under the Customized Asset Management Service ("CAMS")
product into the Company's own mutual funds. The 11 percent decrease in asset
management services revenue is due primarily to a decrease in fund balances from
the Company's International Collective Trust, along with the CAMS transfer of
assets to the Company's Family of Funds. The 23 percent increase in brokerage
and consulting services revenue is due primarily to an internal reclassification
of bank-related brokerage services.
ASSET MANAGEMENT EXPENSES
-------------------------
SIX MONTHS SIX MONTHS DOLLAR PERCENT
1996 1995 CHANGE CHANGE
---- ---- ------ ------
Operating and development $17,498,000 $16,831,000 $ 667,000 4%
Sales and marketing $16,745,000 $12,681,000 $4,064,000 32%
Operating and development expense increased four percent due to an increase in
direct expenses relating to the increase in brokerage and consulting services
revenues. The 32 percent increase in sales and marketing expense was due
primarily to increases in personnel and travel expense, along with significant
investments in the Company's offshore investment funds and Canadian asset
management businesses. The Asset Management segment recorded an operating
profit of $1,686,000 for the six months ended June 30, 1996 compared to an
operating profit of $4,196,000 in the corresponding period of 1995. The decline
in operating profit is primarily attributable to investments the Company has
made to strengthen its sales and marketing efforts in its core asset management
business, along with additional investments made in new businesses. The Company
expects these investments to continue for the remainder of 1996.
17
Other Income and Expenses - General and administrative expenses for the six
- -------------------------
months ended June 30, 1996 and 1995 were $6,132,000 and $8,602,000,
respectively. General and administrative expenses declined 29 percent primarily
due to decreases in personnel expense in corporate overhead areas.
Gain on sale of investments available for sale for the six months ended
June 30, 1996 was $1,097,000. The realized gain is a result of the Company's
disposition of all of its investments classified as Investments available for
sale at an amount greater than original cost (See Note 5 of the Notes to
Consolidated Financial Statements). There were no realized gains or losses for
the six months ended June 30, 1995.
Interest income for the six months ended June 30, 1996 and 1995 was $157,000 and
$382,000, respectively. Interest income in 1996 was net of interest expense
relating to the Company's borrowings under its line of credit (See Note 6 of the
Notes to Consolidated Financial Statements).
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 borrowing capacity. The Company has a line of credit agreement which
provides for borrowings of up to $30,000,000. At June 30, 1996, the Company's
sources of liquidity consisted primarily of cash and cash equivalents of
$7,327,000 and the unused balance on the line of credit of $21,000,000. The
availability of the line of credit is subject to the Company's compliance with
certain covenants set forth in the agreement.
Cash flow provided by operations for the six months ended June 30, 1996 was
$1,916,000 compared to $4,487,000 for the six months ended June 30, 1995. The
decline in operating cash flow is primarily due to an increase in loans
receivable available for sale. Loans receivable available for sale represent
loans purchased through the Company's Swiss-based subsidiary, SEI Capital AG
(See Note 4 of the Notes to Consolidated Financial Statements). The Company
contributed $7,000,000 in this business in the first quarter of 1996.
Capital expenditures, including capitalized software development costs, for the
six months ended June 30, 1996 and 1995 were $15,370,000 and $5,074,000,
respectively. The increase in capital expenditures is primarily the result of
expenditures made by the Company for its new corporate campus, along with an
increase in capitalized software development costs. The corporate campus is
expected to be completed in 1996 at a total estimated cost of $31,800,000,
including $4,065,000 for the cost of the land which the Company purchased in
1994. Construction in progress related to the corporate campus was $13,050,000
at June 30, 1996. The Company believes that anticipated long-term borrowing
arrangements will provide adequate funds for all future costs relating to this
corporate campus. The increase in capitalized software development costs relates
primarily to the Company's investment in its open architecture and advanced
client service technology projects. Capitalized software development costs
relating to these projects are expected to increase for the remainder of 1996.
In the second quarter of 1996, the Company received $6,536,000 from the sale of
all of its investments classified as Investments available for sale (See Note 5
of the Notes to Consolidated Financial Statements).
The Company borrowed $11,000,000 on its line of credit during the first quarter
of 1996 for capital expenditures relating to the new corporate campus, along
with investments in the operations of its Swiss-based subsidiary. At
June 30, 1996, the Company had $9,000,000 on its line of credit still
outstanding. In July 1996, the Company borrowed an additional $11,000,000
primarily to fund the purchase of 487,000 shares of common stock at a cost of
$8,766,000 (See Note 6 of the Notes to Consolidated Financial Statements).
The Company's operating cash flow, borrowing capacity of short and long-term
debt, and liquidity should provide adequate funds for continuing operations,
continued investment in new products and equipment, its common stock repurchase
program, and the completion of its new corporate campus.
18
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 June 30, 1996.
19
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 CORPORATION
Date August 9, 1996 By /s/ Carmen V. Romeo
--------------------- ------------------------------
Carmen V. Romeo
Executive Vice President and
Chief Financial Officer
20
SEI CORPORATION AND SUBSIDIARIES
--------------------------------
EXHIBIT 11 - EARNINGS PER SHARE CALCULATION
-------------------------------------------
FOR THE THREE-MONTH PERIOD ENDED JUNE 30,
-----------------------------------------
1996 1995
-------- --------
Earnings per common and common
equivalent share (Primary EPS):
Income from continuing operations $ 4,893,000 $ 4,524,000
========== ==========
Net income $ 4,893,000 $ 3,620,000
========== ==========
Weighted average number of
shares issued and outstanding 18,665,000 18,879,000
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 861,000 789,000
---------- ----------
Adjusted weighted average number
of shares outstanding 19,526,000 19,668,000
========== ==========
Earnings per common and common
equivalent share from continuing operations $ .25 $ .23
========== ==========
Earnings per common and common
equivalent share $ .25 $ .18
========== ==========
21
SEI CORPORATION AND SUBSIDIARIES
--------------------------------
EXHIBIT 11 - EARNINGS PER SHARE CALCULATION
-------------------------------------------
FOR THE THREE-MONTH PERIOD ENDED JUNE 30,
-----------------------------------------
1996 1995
-------- --------
Earnings per common and common
equivalent share, assuming full dilution
(Fully diluted EPS):
Income from continuing operations $ 4,893,000 $ 4,524,000
========== ==========
Net income $ 4,893,000 $ 3,620,000
========== ==========
Weighted average number of
shares issued and outstanding 18,665,000 18,879,000
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 861,000 1,038,000
---------- ----------
Adjusted weighted average number
of shares outstanding, assuming full dilution 19,526,000 19,917,000
========== ==========
Earnings per common and common
equivalent share from continuing
operations, assuming full dilution $ .25 $ .23
========== ==========
Earnings per common and common
equivalent share, assuming full dilution $ .25 $ .18
========== ==========
22
SEI CORPORATION AND SUBSIDIARIES
--------------------------------
EXHIBIT 11 - EARNINGS PER SHARE CALCULATION
-------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED JUNE 30,
---------------------------------------
1996 1995
-------- --------
Earnings per common and common
equivalent share (Primary EPS):
Income from continuing operations $10,686,000 $10,445,000
========== ==========
Net income $10,686,000 $ 8,503,000
========== ==========
Weighted average number of
shares issued and outstanding 18,587,000 18,822,000
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 918,000 776,000
---------- ----------
Adjusted weighted average number
of shares outstanding 19,505,000 19,598,000
========== ==========
Earnings per common and common
equivalent share from continuing operations $ .55 $ .53
========== ==========
Earnings per common and common
equivalent share $ .55 $ .43
========== ==========
23
SEI CORPORATION AND SUBSIDIARIES
--------------------------------
EXHIBIT 11 - EARNINGS PER SHARE CALCULATION
-------------------------------------------
FOR THE SIX-MONTH PERIOD ENDED JUNE 30,
---------------------------------------
1996 1995
-------- --------
Earnings per common and common
equivalent share, assuming full dilution
(Fully diluted EPS):
Income from continuing operations $10,686,000 $10,445,000
========== ==========
Net income $10,686,000 $ 8,503,000
========== ==========
Weighted average number of
shares issued and outstanding 18,587,000 18,822,000
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 918,000 1,087,000
---------- ----------
Adjusted weighted average number
of shares outstanding, assuming full dilution 19,505,000 19,909,000
========== ==========
Earnings per common and common
equivalent share from continuing
operations, assuming full dilution $ .55 $ .52
========== ==========
Earnings per common and common
equivalent share, assuming full dilution $ .55 $ .43
========== ==========
24
5
1,000
6-MOS
DEC-31-1996
JAN-01-1996
JUN-30-1996
7,327
0
25,289
(1,350)
0
61,515
95,044
(63,674)
118,648
50,009
0
0
0
187
67,398
118,648
0
124,924
0
102,092
5,035
144
(157)
17,810
7,124
10,686
0
0
0
10,686
.55
.55