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, 1999 or [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to _________ 0-10200 (Commission File Number) SEI INVESTMENTS COMPANY (Exact name of registrant as specified in its charter) Pennsylvania 23-1707341 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 1 Freedom Valley Drive, Oaks, Pennsylvania 19456-1100 (Address of principal executive offices) (Zip Code) (610) 676-1000 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ *APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ___ No ___ *APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of March 31, 1999: 17,699,246 shares of common stock, par value $.01 per share.
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets (In thousands) March 31, 1999 December 31, 1998 -------------- ----------------- (unaudited) Assets Current assets: Cash and cash equivalents $ 22,138 $ 52,980 Receivables from regulated investment companies 20,494 18,999 Receivables, net of allowance for doubtful accounts of $1,200 33,253 27,919 Loans receivable available for sale 1,995 2,167 Prepaid expenses 3,833 3,846 Deferred income taxes 9,240 7,598 -------- -------- Total current assets 90,953 113,509 -------- -------- Property and equipment, net of accumulated depreciation and amortization of $60,312 and $57,452 63,947 62,761 -------- -------- Capitalized software, net of accumulated amortization of $8,645 and $8,238 16,915 17,068 -------- -------- Other assets, net 21,429 15,434 -------- -------- Total Assets $193,244 $208,772 ======== ======== The accompanying notes are an integral part of these statements. 2
Consolidated Balance Sheets (In thousands, except par value) March 31,1999 December 31, 1998 ------------- ----------------- (unaudited) Liabilities and Shareholders' Equity Current liabilities: Current portion of long-term debt $ 2,000 $ 2,000 Accounts payable 6,136 6,805 Accrued compensation 16,145 32,105 Accrued proprietary fund services 12,189 10,370 Accrued consulting services 8,805 6,934 Accrued discontinued operations disposal costs 3,380 3,860 Other accrued liabilities 40,069 35,209 Deferred revenue 13,293 13,511 --------- --------- Total current liabilities 102,017 110,794 --------- --------- Long-term debt 29,000 31,000 --------- --------- Deferred income taxes 7,885 7,293 --------- --------- Shareholders' equity: Common stock, $.01 par value, 100,000 shares authorized; 17,699 and 17,861 shares issued and outstanding 177 179 Capital in excess of par value 54,786 57,541 Retained earnings -- 2,422 Accumulated other comprehensive losses (621) (457) --------- --------- Total shareholders' equity 54,342 59,685 --------- --------- Total Liabilities and Shareholders' Equity $ 193,244 $ 208,772 ========= ========= 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, ---------------------------------- 1999 1998 --------- --------- Revenues $ 104,318 $ 81,871 Expenses: Operating and development 50,763 44,170 Sales and marketing 27,106 22,039 General and administrative 3,130 3,222 --------- --------- Income from operations 23,319 12,440 Equity in the earnings of unconsolidated affiliate 1,478 510 Interest income 498 220 Interest expense (598) (712) --------- --------- Income before income taxes 24,697 12,458 Income taxes 9,508 4,861 --------- --------- Net income 15,189 7,597 --------- --------- Other comprehensive loss, net of tax: Foreign currency translation adjustments, net of income tax benefit of $52 and $17 (83) (27) Unrealized holding losses on investments, net of income tax benefit of $51 and $16 (81) (26) --------- --------- Other comprehensive loss (164) (53) --------- --------- Comprehensive income $ 15,025 $ 7,544 ========= ========= Basic earnings per common share $ .85 $ .43 ========= ========= Diluted earnings per common share $ .79 $ .40 ========= ========= The accompanying notes are an integral part of these statements. 4
Consolidated Statements of Cash Flows (unaudited) (In thousands) Three Months ------------------------------ Ended March 31, ------------------------------ 1999 1998 -------- -------- Cash flows from operating activities: Net income $ 15,189 $ 7,597 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,532 3,580 Equity in the earnings of unconsolidated affiliate (1,478) (510) Other (3,337) (1,536) Change in current assets and liabilities: Decrease (increase) in Receivables from regulated investment companies (1,495) (1,228) Receivables (5,334) 1,883 Loans receivable available for sale 172 8,602 Prepaid expenses 13 228 Increase (decrease) in Accounts payable (669) 1,882 Accrued compensation (15,960) (14,358) Accrued proprietary fund services 1,819 560 Accrued consulting services 1,871 3,093 Accrued discontinued operations disposal costs (480) (953) Other accrued liabilities 7,718 4,647 Deferred revenue 218 321 -------- -------- Net cash provided by operating activities 1,779 13,808 -------- -------- Cash flows from investing activities: Additions to property and equipment (4,401) (2,914) Additions to capitalized software (254) (1,307) Purchase of investments available for sale -- (3,000) Other (2,740) (376) -------- -------- Net cash used in investing activities (7,395) (7,597) -------- -------- Cash flows from financing activities: Payment on long-term debt (2,000) (2,000) Purchase and retirement of common stock (25,451) (11,610) Proceeds from issuance of common stock 2,092 4,589 Tax benefit on stock options exercised 2,991 5,653 Payment of dividend (2,858) (2,487) -------- -------- Net cash used in financing activities (25,226) (5,855) -------- -------- Net increase (decrease) in cash and cash equivalents (30,842) 356 Cash and cash equivalents, beginning of period 52,980 16,891 -------- -------- Cash and cash equivalents, end of period $ 22,138 $ 17,247 ======== ======== 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 four primary business lines: Technology Services, Asset Management, Mutual Fund Services, and Investments in New Business. The Technology Services segment includes the Trust 3000 product line and trust operations outsourcing. The Asset Management segment provides investment solutions through various investment products and services distributed directly or through professional investment advisors, financial planners, and other financial intermediaries to institutional and high-net-worth markets. The Mutual Fund Services segment provides administration and distribution services to proprietary mutual funds created for banks, insurance firms, and investment management companies. Investments in New Business consists of the Company's Canadian and international operations which provide investment advisory services globally through investment products and services and performance evaluation and consulting services to Canadian pension plans. 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, 1999, the results of operations and cash flows for the three months ended March 31, 1999 and 1998. Interim Financial Information ----------------------------- While the Company believes that the disclosures presented are adequate to make the information not misleading, these Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes included in the Company's latest annual report on Form 10-K. Principles of Consolidation --------------------------- The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. The Company's principal subsidiaries are SEI Investments Distribution Company, SEI Investments Management Corporation, and SEI Trust Company. All intercompany accounts and transactions have been eliminated. Investment in unconsolidated affiliate is accounted for using the equity method due to the Company's less than 50 percent ownership. The Company's portion of the affiliate's operating results is reflected in Equity in the earnings of unconsolidated affiliate on the accompanying Consolidated Statements of Income. Management's Use of Estimates ----------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 6
Property and Equipment ---------------------- Property and equipment on the accompanying Consolidated Balance Sheets consist of the following: Estimated Useful Lives March 31, 1999 December 31, 1998 (In Years) --------------- ----------------- ------------ Equipment $ 54,275,000 $ 53,739,000 3 to 5 Buildings 33,699,000 28,303,000 10 to 39 Land 7,641,000 6,993,000 N/A Purchased software 11,421,000 10,270,000 3 Furniture and fixtures 10,770,000 10,284,000 3 to 5 Leasehold improvements 6,453,000 6,791,000 Lease Term Construction in progress -- 3,833,000 N/A ------------- ------------- 124,259,000 120,213,000 Less: Accumulated depreciation and amortization (60,312,000) (57,452,000) ------------- ------------- Property and Equipment, net $ 63,947,000 $ 62,761,000 ============= ============= 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. Capitalized Software -------------------- The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed" ("SFAS 86"). Under SFAS 86, costs incurred to create a computer software product are charged to research and development expense as incurred until technological feasibility has been established. The Company establishes technological feasibility upon completion of a detail program design. At that point, computer software costs are capitalized until the product is available for general release to customers. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life, and changes in technology. Amortization begins when the product is released. Capitalized software development costs are amortized on a product-by-product basis using the straight-line method over the estimated economic life of the product or enhancement, which is primarily three to ten years, with a weighted average remaining life of approximately 8.9 years. 7
Earnings per Share ------------------ The Company computes earnings per common share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which superceded Accounting Principles Board Opinion No. 15. Pursuant to SFAS 128, dual presentation of basic and diluted earnings per common share is required on the face of the statements of income for companies with complex capital structures. Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution from the exercise or conversion of securities into common stock, such as stock options. For the three month period ended March 31, 1999 ----------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic earnings per common share $15,189,000 17,867,000 $.85 ==== Dilutive effect of stock options -- 1,417,000 ----------- ----------- Diluted earnings per common share $15,189,000 19,284,000 $.79 =========== =========== ==== For the three month period ended March 31, 1998 ----------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic earnings per common share $ 7,597,000 17,750,000 $.43 ==== Dilutive effect of stock options -- 1,399,000 ----------- ----------- Diluted earnings per common share $ 7,597,000 19,149,000 $.40 =========== =========== ==== All options outstanding during the first quarter of 1999 and 1998 were included in the diluted earnings per common share calculation. Statements of Cash Flows ------------------------ For purposes of the Consolidated Statements of Cash Flows, the Company considers investment instruments purchased with an original maturity of three months or less to be cash equivalents. Supplemental disclosures of cash paid/received during the three months ended March 31 is as follows: 1999 1998 ---- ---- Interest paid $1,206,000 $1,343,000 Interest and dividends received $ 551,000 $ 226,000 Income taxes paid $ 545,000 $2,456,000 Reclassifications ----------------- The financial statements for prior periods have been reclassified to conform with the current period's presentation. 8
Note 2. Comprehensive Income - The Company computes comprehensive income in accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and presentation of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements that is presented with equal prominence as other financial statements. Comprehensive income includes net income, foreign currency translation adjustments, and unrealized holding gains and losses and is presented on the accompanying Consolidated Statements of Income. Foreign Unrealized Accumulated Currency Holding Other Translation Losses Comprehensive Adjustments on Investments Losses ----------- -------------- ------ Beginning balance $(408,000) $ (49,000) $(457,000) Current period change (83,000) (81,000) (164,000) --------- --------- --------- Ending Balance $(491,000) $(130,000) $(621,000) ========= ========= ========= Note 3. Receivables - Receivables on the accompanying Consolidated Balance Sheets consist of the following: March 31, 1999 December 31, 1998 -------------- ----------------- Trade receivables $ 18,876,000 $ 14,586,000 Fees earned, not received 2,639,000 2,558,000 Fees earned, not billed 12,938,000 11,975,000 ------------ ------------ 34,453,000 29,119,000 Less: Allowance for doubtful accounts (1,200,000) (1,200,000) ------------ ------------ $ 33,253,000 $ 27,919,000 ============ ============ 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 Investments Management Corporation, for distribution, investment advisory, and administration services provided by these subsidiaries to various regulated investment companies sponsored by the Company. Note 4. Loans Receivable Available for Sale - Loans receivable available for sale represent loans which were purchased through SEI Capital AG, which is based in Zurich. These receivables are reported at the lower of cost or market, and any difference between the purchase price and the related loan principal amount is recognized as an adjustment of the yield over the life of the loan using the effective interest method. Each loan receivable involves various risks, including, but not limited to, country, interest rate, credit, and liquidity risk. Management evaluates and monitors these risks on a continuing basis to ensure that these loan receivables are recorded at their realizable value. This evaluation is based upon management's best estimates and the amounts the Company will ultimately realize could differ from these estimates. The Company intends to sell these loans within one year from the balance sheet date. 9
Note 5. Other Assets - Other assets on the accompanying Consolidated Balance Sheets consist of the following: March 31, 1999 December 31,1998 -------------- ---------------- Investment in unconsolidated affiliate $ 3,660,000 $ 2,573,000 Investments available for sale 2,813,000 3,565,000 Other, net 14,956,000 9,296,000 ----------- ----------- Other assets $21,429,000 $15,434,000 =========== =========== Investment in Unconsolidated Affiliate - In 1994, the Company and three leading academics in the field of finance formed a general partnership, LSV Asset Management ("LSV"). LSV is a registered investment advisor which provides investment advisory services to institutions, including pension plans and investment companies. LSV is currently the investment sub-advisor to a portion of SEI Large Cap Value Fund and SEI Small Cap Value Fund, as well as portfolio manager to a portion of the Company's global investment products. The Company accounts for LSV using the equity method of accounting due to a less than 50 percent ownership. The Company's portion of LSV's net earnings is reflected in Equity in the earnings of unconsolidated affiliate on the accompanying Consolidated Statements of Income. The following table contains the Condensed Statements of Income of LSV for the three months ended March 31: 1999 1998 ---------- ---------- Revenues $4,469,000 $1,764,000 ========== ========== Net income $3,143,000 $1,075,000 ========== ========== The following table contains the Condensed Balance Sheets of LSV: March 31, 1999 December 31, 1998 -------------- ----------------- Current assets $7,889,000 $6,284,000 Non-current assets 175,000 100,000 ---------- ---------- Total assets $8,064,000 $6,384,000 ========== ========== Current liabilities $ 508,000 $1,096,000 Partners' capital 7,556,000 5,288,000 ---------- ---------- Total liabilities and partners' capital $8,064,000 $6,384,000 ========== ========== 10
Investments Available for Sale - Investments available for sale consist of mutual funds sponsored by the Company which are primarily invested in equity securities. The Company accounts for investments in marketable securities pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires that debt and equity securities classified as available for sale be reported at market value. Unrealized holding gains and losses, net of income taxes, are reported as a separate component of Shareholders' equity. Realized gains and losses, as determined on a specific identification basis, are reported separately on the accompanying Consolidated Statements of Income. At March 31, 1999, Investments available for sale had an aggregate cost of $3,025,000 and an aggregate market value of $2,813,000 with gross unrealized losses of $212,000. At that date, the unrealized holding losses of $130,000 (net of income tax benefit of $82,000) were reported as a separate component of Accumulated other comprehensive losses on the accompanying Consolidated Balance Sheets. The Company liquidated certain investments in the first quarter of 1999 and recognized a minimal gain on the dispostion of these investments which was immaterial. At December 31, 1998, Investments available for sale had an aggregate cost of $3,645,000 and an aggregate market value of $3,565,000 with gross unrealized losses of $80,000. At that date, the unrealized holding losses of $49,000 (net of income tax benefit of $31,000) were reported as a separate component of Accumulated other comprehensive losses on the accompanying Consolidated Balance Sheets. Note 6. Line of Credit - The Company has a line of credit agreement (the "Agreement") with its principal lending institution which provides for borrowings of up to $50,000,000. The Agreement ends on May 31, 1999, at which time the outstanding principal balance, if any, becomes due unless the Agreement is extended. 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, 1999. Note 7. Long-term Debt - On February 24, 1997, the Company signed a Note Purchase Agreement authorizing the issuance and sale of $20,000,000 of 7.20% Senior Notes, Series A, and $15,000,000 of 7.27% Senior Notes, Series B, (collectively, the "Notes") in a private offering with certain financial institutions. The Notes are unsecured with final maturities ranging from 10 to 15 years. The proceeds from the Notes were used to repay the outstanding balance on the Company's line of credit at that date. The Note Purchase Agreement, as amended, contains various covenants, including limitations on indebtedness, maintenance of minimum net worth levels, and restrictions on certain investments. In addition, the agreement limits the Company's ability to merge or consolidate, and to sell certain assets. None of these covenants negatively affect the Company's liquidity or capital resources. Principal payments on the Notes are made annually from the date of issuance while interest payments are made semi-annually. The Company made its second principal payment of $2,000,000 in February 1999. The current portion of the Notes amounted to $2,000,000 at March 31, 1999. The carrying amount of the Company's long-term debt approximates its fair value. 11
Note 8. Common Stock Buyback - The Board of Directors has authorized the purchase of the Company's common stock on the open market or through private transactions of up to an aggregate of $323,365,000, including an additional authorization of $25,000,000 in April 1999. Through March 31, 1999, a total of 15,768,000 shares at an aggregate cost of $289,729,000 have been purchased and retired. The Company purchased 265,000 shares at a total cost of $25,451,000 during the first quarter of 1999. The Company immediately retires its common stock when purchased. Upon retirement, the Company reduces Capital in excess of par value for the average capital per share outstanding and the remainder is charged against Retained earnings. If the Company reduces its Retained earnings to zero, any subsequent purchases of common stock will be charged entirely to Capital in excess of par value. Note 9. Dividend - On December 10, 1998, the Board of Directors declared a cash dividend of $.16 per share on the Company's common stock, which was paid on January 25, 1999, to shareholders of record on January 5, 1999. Note 10. Segment Information - In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way public business enterprises report financial information about operating segments in financial statements. SFAS 131 also requires additional disclosures about product and services, geographic areas, and major customers. The Company adopted SFAS 131 in its December 31, 1998 financial statements. All prior period segment information has been restated to conform with the provisions of SFAS 131. The Company is organized around its four primary business lines: Technology Services, Asset Management, Mutual Fund Services, and Investments in New Business. The Technology Services segment includes the Company's Trust 3000 product line and trust operations outsourcing. The Asset Management segment provides investment solutions through various investment products and services distributed directly or through professional investment advisors, financial planners, and other financial intermediaries to institutional and high-net-worth markets. The Mutual Fund Services segment provides administration and distribution services to proprietary mutual funds created for banks, insurance firms, and investment management companies. The Investments in New Business segment consists of the Company's Canadian and international operations which provides investment advisory services globally through investment products and services and performance evaluation and consulting services to Canadian pension plans. The information in the following tables is derived from the Company's internal financial reporting used for corporate management purposes. The accounting policies of the reportable segments are the same as those described in Note 1. The Company's management evaluates financial performance of its operating segments based on income before income taxes. The following tables highlight certain unaudited financial information about each of the Company's segments for the three months ended March 31, 1999 and 1998. 12
Mutual Investments Technology Asset Fund In New Services Management Services Business Other Total ---------- ---------- -------- ----------- ----- ----- For the Three-Month Period Ended March 31, 1999 --------------------------------------------------------------------------------------------------- Revenues $ 46,153,000 $ 28,342,000 $ 26,031,000 $ 3,792,000 $104,318,000 ------------ ------------ ------------ ------------ ------------ Operating income (loss) $ 14,322,000 $ 8,479,000 $ 5,563,000 $ (1,915,000) $ (3,130,000) $ 23,319,000 ------------ ------------ ------------ ------------ ------------ Other income, net $ 1,378,000 ------------ Income before income taxes $ 24,697,000 ------------ Depreciation and amortization $ 2,505,000 $ 480,000 $ 305,000 $ 152,000 $ 90,000 $ 3,532,000 ------------ ------------ ------------ ------------ ------------ ------------ Capital expenditures $ 2,627,000 $ 843,000 $ 163,000 $ 224,000 $ 544,000 $ 4,401,000 ------------ ------------ ------------ ------------ ------------ ------------ For the Three-Month Period Ended March 31, 1998 -------------------------------------------------------------------------------------------------- Revenues $ 39,177,000 $ 18,680,000 $ 21,430,000 $ 2,584,000 $ 81,871,000 ------------ ------------ ------------ ------------ ------------ Operating income (loss) $ 7,765,000 $ 4,281,000 $ 5,441,000 $ (1,825,000) $ (3,222,000) $ 12,440,000 ------------ ------------ ------------ ------------ ------------ Other income, net $ 18,000 ------------ Income before income taxes $ 12,458,000 ------------ Depreciation and amortization $ 2,365,000 $ 421,000 $ 378,000 $ 224,000 $ 192,000 $ 3,580,000 ------------ ------------ ------------ ------------ ------------ ------------ Capital expenditures $ 2,087,000 $ 365,000 $ 95,000 $ 113,000 $ 254,000 $ 2,914,000 ------------ ------------ ------------ ------------ ------------ ------------ 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (In thousands, except per share data) We are organized around our four business lines: Technology Services, Asset Management, Mutual Fund Services, and Investments in New Business. Financial information on each of these segments is reflected in Note 10 of the Notes to Consolidated Financial Statements. Results of Operations First Quarter Ended March 31, 1999 Compared to First Quarter Ended March 31, 1998 Consolidated Overview Income Statement Data (In thousands, except per common share data) 1ST QTR 1ST QTR PERCENT 1999 1998 CHANGE --------- --------- --------- Revenues: Technology Services Segment $ 46,153 $ 39,177 18% Asset Management Segment 28,342 18,680 52% Mutual Fund Services Segment 26,031 21,430 21% Investments in New Business Segment 3,792 2,584 47% --------- --------- Total revenues $ 104,318 $ 81,871 27% Operating Income (Loss): Technology Services Segment $ 14,322 $ 7,765 84% Asset Management Segment 8,479 4,281 98% Mutual Fund Services Segment 5,563 5,441 2% Investments in New Business Segment (1,915) (1,825) (5%) General and Administrative (3,130) (3,222) 3% --------- --------- Income from operations 23,319 12,440 87% Other income, net 1,378 18 -- --------- --------- Income before income taxes 24,697 12,458 98% Income taxes 9,508 4,861 96% --------- --------- Net Income $ 15,189 $ 7,597 100% ========= ========= Diluted earnings per common share $ .79 $ .40 98% ========= ========= Revenues and earnings increased in the first quarter of 1999 primarily due to new business activity generated in the Technology Services and Asset Management segments. Technology Services experienced a significant increase in operating profits as a result of new clients that have been fully or partially implemented onto our TRUST 3000 product line. Operating profits in Asset Management were boosted by a significant increase in assets under management. Assets under management increased primarily due to new business generated in our investment advisory and institutional asset management businesses. Revenues and earnings are expected to increase assuming the sales momentum in Asset Management can be sustained and as new trust technology clients are implemented. However, continued consolidation in the banking industry or a prolonged unfavorable change in the financial securities markets could impede growth in revenues and earnings. 14
Asset Balances (In millions) As of March 31 ---------------------------- PERCENT 1999 1998 CHANGE -------- ----------- -------- Assets invested in equity and fixed income programs $ 27,559 $ 18,536 49% Assets invested in liquidity funds 21,668 18,793 15% -------- -------- Assets under management 49,227 37,329 32% Client proprietary assets under administration 139,865 90,821 54% -------- -------- Assets under administration $189,092 $128,150 48% ======== ======== Assets under management for high-net-worth and institutional investors consist of assets invested in our equity and fixed income investment programs and liquidity funds for which we provide management services. Assets under administration consist of assets for which we provide administrative services, which includes assets invested in our investment programs, liquidity funds, and clients' proprietary mutual funds. Technology Services The Technology Services segment provides trust and investment accounting and management information services as an outsourcer to banks and other financial institutions with our TRUST 3000 product line. TRUST 3000 incorporates a myriad of integrated products and sub-systems to provide a complete trust accounting and investment system. Trust operations outsourcing incorporates the TRUST 3000 product line within a package of services that includes custody and other back-office capabilities. Through this business, we handle a trust department's back-office administration function. This allows trust department managers to concentrate on expanding and servicing their clients. 1ST QTR 1ST QTR DOLLAR PERCENT 1999 1998 CHANGE CHANGE -------- -------- ------- ------- Revenues: Trust technology services $41,372 $35,539 $ 5,833 16% Trust operations outsourcing 4,781 3,638 1,143 31% ------- ------- ------- Total revenues 46,153 39,177 6,976 18% Expenses: Operating and development 24,141 24,646 (505) (2%) Sales and marketing 7,690 6,766 924 14% ------- ------- ------- Total operating profits $14,322 $ 7,765 $ 6,557 84% ======= ======= ======= Trust technology services revenues increased due to an increase in recurring processing fees generated from new clients that had been sold in prior years and were fully or partially implemented during 1998. These new trust technology client relationships contributed an incremental $5.7 million in recurring processing fees and an incremental $4.5 million in implementation fees in the first quarter of 1999. Trust technology clients that terminated their contract for processing services in 1998 negatively affected recurring processing fees by $1.5 million in the first quarter of 1999. Additionally, $3.5 million in one-time buyout fees were recognized in the first quarter of 1998 associated with lost trust technology clients. Revenues earned from bank clients utilizing our liquidity products and brokerage services increased slightly and accounts for approximately 17 percent of total trust technology services revenues in the first quarter of 1999 and 19 percent in the first quarter of 1998. Average assets under management invested in our liquidity products from bank clients were $16.8 billion for the first quarter of 1999 and 1998. Future recurring processing fees are expected to increase as these new trust technology clients are successfully implemented onto the TRUST 3000 product line by mid-1999. 15
Our trust operations outsourcing business continued to gain momentum in the first quarter of 1999 through the generation of new business. Revenues earned from processing services accounts for approximately 58 percent of total trust operations outsourcing revenues in the first quarter of 1999 and 1998, while custody and investment solutions comprise the remaining 42 percent. Operating profits and profit margin for Technology Services increased significantly in the first quarter of 1999. Profit margin in the first quarter of 1999 was 31 percent, as compared to 20 percent in the first quarter of 1998. The increase in profits and margin were primarily due to the increase in revenues, as well as expense control in planned expenditures. As a percentage of sales, operating and development expenses decreased to 52 percent from 63 percent and sales and marketing expenses remained flat at 17 percent. Operating and development expenses in the first quarter of 1998 included substantial nonrecurring costs associated with the evaluation and enhancement of the trust technology implementation process for new clients. We expect to see continued growth in our existing markets in the near term, and also begin to realize a payback on our investments in new markets and services. Also, operating profits should be favorably affected if sales momentum of the trust operations outsourcing product continues. However, we do intend to reinvest a portion of profits into new technology and information products and this will result in some increase to expenses. Year 2000 is also a short-term challenge as some institutions are resistant to acquiring new systems before next year. However, this could become an opportunity if a trust institution experiences difficulty in making their existing system Year 2000 compliant. In addition, consolidation within the banking industry continues to be a major strategic issue facing this segment. Asset Management The Asset Management segment provides investment solutions through various investment products and services distributed directly or through professional investment advisors, financial planners, and other financial intermediaries to institutional or high-net-worth markets. The primary products offered include money market funds and investment strategies and portfolios delivered to these markets through mutual funds and other pooled vehicles. 1ST QTR 1ST QTR DOLLAR PERCENT 1999 1998 CHANGE CHANGE ------- ------- -------- ------- Revenues: Investment management fees $23,685 $15,407 $ 8,278 54% Liquidity management fees 4,657 3,273 1,384 42% ------- ------- ------- Total revenues 28,342 18,680 9,662 52% Expenses: Operating and development 8,082 5,900 2,182 37% Sales and marketing 11,781 8,499 3,282 39% ------- ------- ------- Total operating profits $ 8,479 $ 4,281 $ 4,198 98% ======= ======= ======= The increase in Investment management fees was primarily due to growth in assets under management generated through new business. Average assets under management increased $5.8 billion or 45 percent to $18.8 billion for the first quarter of 1999, as compared to $13.0 billion for the first quarter of 1998. Our investment advisory business continued to generate new business through the successful recruiting of new registered investment advisors. We have also been working closely with our existing advisors to increase their asset-gathering potential by growing their existing client base. We anticipate the sales momentum experienced in our investment advisory business to continue. Our Institutional asset management business also experienced an increase in new business. During the first quarter of 1999, new relationships were established which contributed approximately $650 million of new asset sales. Additionally, the current favorable trend experienced in the financial securities markets boosted growth in assets under management in both our investment advisory and institutional asset management businesses. 16
The increase in Liquidity management fees was due to an increase in assets under management invested in our liquidity funds from institutional clients. Average assets under management increased $2.1 billion or 70 percent to $5.0 billion for the first quarter of 1999, as compared to $2.9 billion for the first quarter of 1998. The increase in assets under management was due to the carryover of sales activities that occurred late in the fourth quarter of 1998 and new sales of our cash sweep technology product. Also, client cash flows are cyclical and typically run higher in the first quarter. The Asset Management segment experienced a significant increase in operating profits primarily due to growth in assets under management. Profit margin continued to improve substantially due to our ability to leverage on our infrastructure despite investments in technology to improve our service and productivity. Profit margin rose to 30 percent for the first quarter of 1999, as compared to 23 percent for the first quarter of 1998. As a percentage of sales, operating and development expenses decreased to 29 percent from 32 percent and sales and marketing expenses decreased to 41 percent from 45 percent. With the increased sales momentum in our investment advisory business and our ability to leverage expenses over higher net incremental assets, this segment is expected to produce favorable operating results in the near term. However, any significant devaluation in the financial securities markets could negatively affect future revenues and profits. Mutual Fund Services The Mutual Fund Services segment provides administration and distribution services to proprietary mutual funds created for banks, insurance firms, and investment management companies. These services include fund administration and accounting, legal, shareholder recordkeeping, and marketing. 1ST QTR 1ST QTR DOLLAR PERCENT 1999 1998 CHANGE CHANGE ------- ------- ------- ------- Total revenues $26,031 $21,430 $ 4,601 21% Expenses: Operating and development 16,263 12,191 4,072 33% Sales and marketing 4,205 3,798 407 11% ------- ------- ------- Total operating profits $ 5,563 $ 5,441 $ 122 2% ======= ======= ======= The increase in Mutual fund services revenues was fueled by growth in proprietary fund balances. Average proprietary fund balances increased $34.8 billion or 40 percent to $121.3 billion for the first quarter of 1999 versus $86.5 billion for the first quarter of 1998. Average proprietary fund balances increased due to growth in existing complexes and the conversions of a large bank and non-bank complex during 1998. Growth in existing complexes resulted from banks being able to successfully convince their customers to invest assets in bank sponsored mutual funds. However, average basis points earned decreased primarily due to two factors. First, there has been a change in the mix of clients from the first quarter of 1998 as lower margin clients have replaced higher margin clients. Second, fees from some clients have been reduced in exchange for longer-term contracts. The outlook for mutual fund services revenues remains optimistic. The non-bank investment management market has been receptive to our mutual fund services. Initially, the size of these complexes will be smaller and therefore these deals will not generate as much revenues as large bank complexes. We believe that this will be a continually growing market in terms of the number of institutions seeking mutual fund services. Also, we continue to contract new business in offshore markets. 17
Although revenues increased 21 percent, operating profits increased only 2 percent. Profit margin in the first quarter of 1999 decreased to 21 percent, as compared to 25 percent for the first quarter of 1998. A significant increase in operating and development expenses negatively affected operating profits in the first quarter of 1999. As a percentage of sales, operating and development expenses increased to 63 percent from 57 percent and sales and marketing expenses decreased to 16 percent from 18 percent. The recontracting of some existing clients generated a substantial increase in direct marketing expenses. Also, investments have been made to enhance services as well as establishing distribution channels for our mutual fund services in the non-bank and global markets. The market for traditional mutual fund services for banks is maturing and fewer new bank proprietary mutual fund complexes are being established. Also, many of the largest banks with well-established complexes have grown their mutual funds to the point where they are less reliant on the services of an outsourcer. As a result, profit margin is expected to remain relatively flat in the near term. Expanding services into the non-bank and offshore markets could produce additional opportunities that could favorably affect operating profits. However, continued consolidations in the banking industry and a significant prolonged unfavorable change in the financial securities markets could negatively affect revenues and profits. Investments in New Business Investments in New Business consist of our Canadian and international operations. Products being offered in Canada include investment advisory, performance evaluation and consulting services to Canadian pension plans. International operations consist of various investment products and services providing investment solutions to institutional and high-net-worth investors outside North America. 1ST QTR 1ST QTR DOLLAR PERCENT 1999 1998 CHANGE CHANGE ------- ------- ------- ------- Total revenues $ 3,792 $ 2,584 $ 1,208 47% Expenses: Operating and development 2,277 1,433 844 59% Sales and marketing 3,430 2,976 454 15% ------- ------- ------- Total operating losses $(1,915) $(1,825) $ (90) (5%) ======= ======= ======= The increase in revenues from this segment is primarily due to an increase in assets under management from our Canadian and offshore asset management businesses. Also, the acquisition of a Mexican based investment advisory firm in the fourth quarter of 1998 partially contributed to the growth in revenues. Our Canadian and offshore asset management business accounted for 56 percent of total segment revenues in the first quarter of 1999, as compared to 35 percent in the first quarter of 1998. The performance evaluation and consulting business accounted for the remaining 44 percent in the first quarter of 1999, as compared to 65 percent in the first quarter of 1998. This transition is due to various acquisitions of offshore investment advisory firms during the past 18 months. Our offshore enterprises are looking to capitalize on international growth opportunities by creating distribution channels for our investment products and services outside North America. Our efforts are currently focused on four main regions: Europe, East Asia, Latin America, and South Africa. These offshore enterprises accounted for approximately 31 percent of total segment revenues in the first quarter of 1999, as compared to 20 percent in the first quarter of 1998. Revenues from any one region were immaterial as a percentage of total segment revenues. 18
Operating results were affected by substantial investments made in foreign markets. Our strategy for this year will be on further penetrating markets within the European and South African region through distribution arrangements, continuing to integrate and grow our recently acquired businesses in Argentina and Mexico, and strengthening our new joint venture in Korea. We will continue to explore additional markets for future expansion, especially in Asia and Latin America, but don't envision any major market entries in these regions in 1999. Other General and administrative expenses decreased 3 percent to $3,130 for the first quarter of 1999, as compared to $3,222 for the first quarter of 1998. As a percentage of total consolidated revenues, general and administrative expenses were 3 percent for the first quarter of 1999, as compared to 4 percent for the first quarter of 1998. Other income on the accompanying Consolidated Statements of Income consist of the following: 1ST QTR 1ST QTR 1999 1998 ------- ------- Equity in the earnings of unconsolidated affiliate $ 1,478 $ 510 Interest income 498 220 Interest expense (598) (712) ------- ------- Total other income, net $ 1,378 $ 18 ======= ======= Equity in the earnings of unconsolidated affiliate on the accompanying Consolidated Statements of Income includes our less than 50 percent ownership in the general partnership of LSV Asset Management ("LSV") (See Note 5 of the Notes to Consolidated Financial Statements). Our interest in LSV's net earnings was $1,478 for the first quarter of 1999 and $510 for the first quarter of 1998. The increase in LSV's net earnings is due to an increase in assets under management. Average assets under management for LSV were $4.1 billion for the first quarter of 1999, as compared to $1.7 billion for the first quarter of 1998. Interest income for the first quarter of 1999 was $498, as compared to $220 for the first quarter of 1998. Interest income is earned based upon the amount of cash that is invested daily and fluctuations in interest income recognized for one period in relation to another is due to changes in the average cash balance invested for the period. Interest expense for the first quarter of 1999 was $598, as compared to $712 for the first quarter of 1998. Interest expense relates to the issuance of long-term debt in early 1997 and borrowings on our line of credit. Interest expense decreased due to a lower carrying balance on our long-term debt and less borrowings on our line of credit in the first quarter of 1999 than in the first quarter of 1998. 19
Liquidity and Capital Resources Three Months --------------------- Ended March 31, --------------------- 1999 1998 -------- -------- Net cash provided by operating activities $ 1,779 $ 13,808 Net cash used in investing activities (7,395) (7,597) Net cash used in financing activities (25,226) (5,855) -------- -------- Net increase (decrease) in cash and cash equivalents (30,842) 356 Cash and cash equivalents, beginning of period 52,980 16,891 -------- -------- Cash and cash equivalents, end of period $ 22,138 $ 17,247 ======== ======== Cash requirements and liquidity needs are primarily funded through operations and our capacity for additional borrowing. We currently have a line of credit agreement that provides for borrowings of up to $50,000. The availability of the line of credit is subject to compliance with certain covenants set forth in the agreement (See Note 6 of the Notes to Consolidated Financial Statements). At March 31, 1999, the unused sources of liquidity consisted of cash and cash equivalents of $22,138 and the unused portion of the line of credit of $50,000. Cash flows from operations for the first quarter of 1999 and 1998 primarily resulted from an increase in income and various accrued liabilities. The increase in various accrued liabilities resulted from increased business activity during the past 18 months. Annual compensation and bonus payments are paid in the first quarter of the following year and negatively affected cash flows from operations in the first quarter of 1999 and 1998. In the first quarter of 1998, cash flows from operations were favorably affected by the sales of loans classified as Loans receivable available for sale. Cash flows provided by operations were also affected by receivables. Receivables from regulated investment companies increased in the first quarter of 1999 and 1998 primarily due to an increase in assets under management. These balances are paid off in the following month. In addition, an increase in trade receivables in the first quarter of 1999 negatively affected cash flows from operations. Conversely, an increase in receivable collections in the first quarter of 1998 favorably affected cash flows from operations. Cash flows from investing activities are principally affected by capital expenditures, including capitalized software development costs. Capital expenditures included significant costs associated with the expansion of our corporate campus. Construction of an additional building within the corporate campus began in early 1998 and was completed in early 1999. Investments classified as Investments available for sale were purchased in the first quarter of 1998 for $3,000. These same investments were sold early in the second quarter of 1998 at a minimal gain. Cash flows from financing activities are primarily affected by debt and equity transactions. Principal payments on our long-term debt are made annually from the date of issuance while interest payments are made semi-annually. Principal and interest payments were made in the first quarter of 1999 and 1998 (See Note 7 of the Notes to Consolidated Financial Statements). We continued our common stock repurchase program. We purchased approximately 265,000 shares of our common stock at a cost of $25.5 million during the first quarter of 1999. As of April 30, 1999, we still had $26.0 million remaining authorized for the purchase of our common stock. Proceeds received from the issuance of common stock, including tax benefit, rose substantially in the first quarter of 1999 and 1998 primarily due to increased stock option activity and the rapid increase in our common stock share price. Our operating cash flow, borrowing capacity, and liquidity should provide adequate funds for continuing operations, continued investment in new products and equipment, our common stock repurchase program, future dividend payments, and principal and interest payments on our long-term debt. 20
Assessment of Risks Associated with the Year 2000 Background We began work on the Year 2000 issue in 1995 with management recognition that failure to acknowledge, analyze and remediate potential Year 2000 processing issues could result in material consequences to our financial position and operating results. Through early 1997, we focused our efforts on an assessment of our TRUST 3000 product line and by mid-1997, we expanded our efforts to include a review of all proprietary systems, vendors, internally used systems, and any other item that may be affected by the Year 2000. A corporate Year 2000 committee was formed consisting of representatives from every area of our business and is managed by a full time senior project manager. This committee reports regularly to the Board of Directors on the progress and status of our Year 2000 efforts. The Year 2000 program encompasses all system hardware and software, physical facilities, utilities, electronic equipment and communications, as well as all other ancillary purchased products and services. Our Year 2000 program fully subscribes to the Federal Financial Institutions Examination Council ("FFIEC") guidelines. State of Readiness In accordance with FFIEC guidelines, Year 2000 remediation and time dimensional testing for all proprietary applications, including TRUST 3000, was completed or is near completion. The final release of TRUST 3000 Year 2000 remediated code was released into production in late 1998. All TRUST 3000 clients have been provided with the opportunity to review the actual Year 2000 test scripts and test results and/or conduct their own time dimensional testing. With the completion of remediation and testing of all proprietary systems, we proceeded with vendor testing. A corporate intranet database was established to track and evaluate the compliance status of all vendors and their products. Each vendor product within this database has been assigned to a specific coordinator who is responsible for communications and certification of vendor products. The vendor products have been evaluated using the following criterion to establish the vendor relationship: Business Risk - Products importance to mission-critical functionality Failure Risk - Likelihood of vendor achieving or not achieving Year 2000 compliance on time Compliance Code - Based on communications from vendor and/or test results. As of early 1999, approximately 42 percent of vendor products had been certified as Year 2000 compliant within FFIEC guidelines. The remaining 58 percent are on target to be fully compliant by mid-1999. All systems in use for internal business purposes, including, but not limited to, network, accounting, communications and power supply, have been tested or are in the process of being modified for Year 2000 compliance. Internal use systems requiring modifications will be mitigated through enhancements to existing software and hardware or conversions to new software and hardware. Costs to Address Year 2000 Issues The cost of Year 2000 remediation and testing is projected to be $10 million. Through March 31, 1999, approximately $6.8 million has been spent, of which approximately $4.5 million has been capitalized pursuant to Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed" (See Note 1 of the Notes to Consolidated Financial Statements). Additional spending of $1.2 million is projected for the remainder of 1999 and approximately $2.0 million is estimated for contingency plans in the Year 2000. The spending dedicated to the TRUST 3000 product line represents the material costs incurred to achieve Year 2000 compliance. All Year 2000 compliance costs for all other proprietary systems, including those used for internal business purposes, were expensed as incurred or capitalized if new software or hardware was purchased. These costs were immaterial. Any future costs incurred associated with ancillary systems or equipment is not expected to be material. No planned development projects were delayed or cancelled as a result of Year 2000 compliance efforts. 21
Risks of the Year 2000 Issues Every effort has been made to mitigate any potential risk resulting from the roll over to the Year 2000. However, we believe that despite all of our best efforts, there still exists the potential of experiencing minor to moderate system issues at the beginning of the Year 2000. In anticipation of these risks, we are planning the following actions: 1.) Work closely with all clients to instruct them on maintaining all 1999 year-end data for recovery purposes. 2.) Current Year 2000 project expertise will remain dedicated to the Year 2000 program to be available to resolve potential issues. 3.) Budget funds into the Year 2000 to support potential issues. 4.) All future product releases will be analyzed for potential date related changes. If such a change is identified as having an impact to our Year 2000 certification, tests will be performed to re-certify the modified code. 5.) To reconfirm the TRUST 3000 product line as Year 2000 compliant, a full re-certification of compliance will be conducted in the third quarter of 1999. As part of our Corporate Year 2000 due diligence, all of our insurance programs were reviewed with regard to the Year 2000. There are no specific Year 2000 exclusions in any of our policies. In addition, we have reviewed and will continue to review the status of our Year 2000 program efforts with our insurance carriers. Contingency Plans Contingency planning efforts have been focused on the most critical business functions and vary significantly based on a system's functionality and how it operates. Manual overrides exist for many functions and in some cases alternative suppliers or delivery channels have been identified. The contingency strategy for our own proprietary products focuses on additional planned resources to react in the Year 2000. A plan exists to identify, correct and release Year 2000 related core and custom problems in the quickest fashion possible. A rapid response team will be available during peak processing times that will execute this plan. Clients will be apprised of the plan and advised on appropriate data retention. In the event electrical suppliers are not Year 2000 compliant and an interruption in electrical services occurs, each facility has a backup generator that will supply necessary electrical service to core processing systems and databases. Forward-Looking Information The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information contained in this discussion is or may be considered forward-looking. Forward-looking statements relate to future operations, strategies, financial results or other developments, and contain words or phrases such as "may," "expects," "anticipates," or similar expressions. Forward-looking statements are based upon estimates and assumptions that involve certain risks and uncertainties, including but not limited to, economic, competitive, governmental and technological, many of which are beyond our control or are subject to change. Although we believe the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, we caution the reader that revenues and income could differ materially from those expected to occur. We disclaim any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise. 22
Quantitative and Qualitative Disclosures About Market Risk. We currently have several offices located outside the United States that conduct business in the local currencies of that country. We do not use foreign currency exchange contracts or other types of derivative financial investments to hedge local currency cash flows. All foreign operations aggregate approximately 4 percent of total consolidated revenues. Due to this limited activity, we do not expect any material loss with respect to foreign currency risk. Exposure to market risk for changes in interest rates relate primarily to our investment portfolio and long-term debt. Currently, we do not invest in derivative financial instruments. We do not undertake any specific actions to cover our exposure to interest rate risk and are not a party to any interest rate risk management transactions. We place our investments in financial instruments that meet high credit quality standards. We are adverse to principal loss and ensure the safety and preservation of our invested funds by limiting default risk, market risk, and reinvestment risk. The interest rate on our long-term debt is fixed and is not traded on any established market. We have no cash flow exposure due to rate changes for our long-term debt. 23
PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) The following is a list of exhibits filed as part of the Form 10-Q. Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Company during the quarter ended March 31, 1999. 24
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, 1999 By /s/ Kathy Heilig ------------ ------------------- Kathy Heilig Vice President and Controller 25