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, 1998 or
-------------
_______ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________
0-10200
- --------------------------------------------------------------------------------
(Commission File Number)
SEI INVESTMENTS COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1707341
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1 FREEDOM VALLEY DRIVE, OAKS, PENNSYLVANIA 19456-1100
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(610) 676-1000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
*APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes___ No___
*APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 1998: 17,778,975 shares of common stock, par value
$.01 per share.
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
June 30, 1998 December 31, 1997
-------------- -----------------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents $ 40,914 $ 16,891
Receivables from regulated investment companies 16,268 14,452
Receivables, net of allowance for doubtful
accounts of $1,200 27,621 31,192
Loans receivable available for sale 3,248 11,340
Prepaid expenses 2,550 3,783
Deferred income taxes 12,536 6,337
-------- --------
Total current assets 103,137 83,995
-------- --------
Investments available for sale 706 876
-------- --------
Investment in unconsolidated affiliate 1,614 --
-------- --------
Property and equipment, net of accumulated
depreciation and amortization of $53,662
and $49,493 53,714 52,131
-------- --------
Capitalized software, net of accumulated
amortization of $9,621 and $7,959 19,555 18,440
-------- --------
Customer lists, net of accumulated
amortization of $479 and $291 3,020 3,009
-------- --------
Other assets, net 10,548 10,433
-------- --------
Total Assets $192,294 $168,884
======== ========
The accompanying notes are an integral part of these statements.
2
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except par value)
June 30,1998 December 31, 1997
------------ -----------------
(unaudited)
Liabilities and Shareholders' Equity
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,000 $ 2,000
Accounts payable 6,293 5,798
Accrued compensation 14,860 20,920
Accrued proprietary fund services 10,581 9,812
Accrued discontinued operations disposal costs 5,324 7,228
Other accrued liabilities 43,454 28,760
Deferred revenue 21,154 7,158
--------- ---------
Total current liabilities 103,666 81,676
--------- ---------
Long-term debt 31,000 33,000
--------- ---------
Deferred income taxes 9,549 7,798
--------- ---------
Shareholders' equity:
Common stock, $.01 par value, 100,000 shares
authorized; 17,779 and 17,767 shares issued
and outstanding 178 178
Capital in excess of par value 48,561 46,724
Retained earnings -- --
Accumulated other comprehensive losses (660) (492)
--------- ---------
Total shareholders' equity 48,079 46,410
--------- ---------
Total Liabilities and Shareholders' Equity $ 192,294 $ 168,884
========= =========
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,
-----------------
1998 1997
------- -------
Revenues $85,499 $70,730
Expenses:
Operating and development 42,256 37,498
Sales and marketing 24,789 21,088
General and administrative 3,262 3,190
------- -------
Income from operations 15,192 8,954
Equity in the earnings of unconsolidated affiliate 681 --
Interest income 452 272
Interest expense (616) (658)
------- -------
Income before income taxes 15,709 8,568
Income taxes 6,124 3,427
------- -------
Net income 9,585 5,141
------- -------
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments,
net of income tax benefit of $24 and $26 (37) (38)
Unrealized holding (losses) gains on investments,
net of income tax (benefit) expense of $(50) and $50 (78) 75
------- -------
Other comprehensive (loss) income (115) 37
------- -------
Comprehensive income $ 9,470 $ 5,178
======= =======
Basic earnings per common share $ .54 $ .28
======= =======
Diluted earnings per common share $ .50 $ .27
======= =======
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,
-------------------
1998 1997
-------- --------
Revenues $167,370 $134,234
Expenses:
Operating and development 86,426 69,760
Sales and marketing 46,828 40,656
General and administrative 6,484 6,584
-------- --------
Income from operations 27,632 17,234
Equity in the earnings of unconsolidated affiliate 1,191 --
Interest income 672 484
Interest expense (1,328) (1,149)
-------- --------
Income before income taxes 28,167 16,569
Income taxes 10,985 6,627
-------- --------
Net income 17,182 9,942
-------- --------
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments,
net of income tax benefit of $41 and $113 (64) (169)
Unrealized holding (losses) gains on investments,
net of income tax (benefit) expense of $(66) and $187 (104) 282
-------- --------
Other comprehensive (loss) income (168) 113
-------- --------
Comprehensive income $ 17,014 $ 10,055
======== ========
Basic earnings per common share $ .97 $ .54
======== ========
Diluted earnings per common share $ .90 $ .52
======== ========
The accompanying notes are an integral part of these statements.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
(In thousands)
Six Months
--------------------
Ended June 30,
--------------------
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $ 17,182 $ 9,942
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 7,305 7,653
Provision for losses on receivables -- 189
Tax benefit on stock options exercised 8,103 821
Equity in the earnings of unconsolidated affiliate (1,191) --
Other (1,471) (718)
Change in current assets and liabilities:
Decrease (increase) in
Receivables from regulated investment companies (1,816) (1,085)
Receivables 1,245 (7,253)
Loans receivable available for sale 8,092 (1,992)
Prepaid expenses 1,233 376
Increase (decrease) in
Accounts payable 495 (1,283)
Accrued compensation (6,082) (5,159)
Accrued proprietary fund services 769 978
Accrued discontinued operations disposal costs (1,904) (838)
Other accrued liabilities 15,439 2,741
Deferred revenue 13,996 362
-------- --------
Net cash provided by operating activities 61,395 4,734
-------- --------
Cash flows from investing activities:
Additions to property and equipment (6,547) (6,605)
Additions to capitalized software (2,777) (5,126)
Other (113) (290)
-------- --------
Net cash used in investing activities (9,437) (12,021)
-------- --------
Cash flows from financing activities:
Proceeds from (payment on) long-term debt (2,000) 35,000
Payment on line of credit -- (20,000)
Purchase and retirement of common stock (26,764) (11,020)
Proceeds from issuance of common stock 6,159 5,110
Payment of dividends (5,330) (4,783)
-------- --------
Net cash (used in) provided by financing activities (27,935) 4,307
--------- --------
Net increase (decrease) in cash and cash equivalents 24,023 (2,980)
Cash and cash equivalents, beginning of period 16,891 13,167
-------- --------
Cash and cash equivalents, end of period $ 40,914 $ 10,187
======== ========
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 Investments Company (the "Company") is organized around its two
primary business lines: Investment Technology and Services and Asset
Management. The Investment Technology and Services segment provides
trust accounting and management information services through the
Company's 3000 product line, administration and distribution services to
proprietary mutual funds, and back-office trust processing. The
principal market for these products and services are trust departments of
banks located in the United States. The Asset Management segment
provides investment solutions through various investment products and
services including the Company's Family of Funds, liquidity funds and
services, and other investment products and services distributed directly
or through professional investment advisors. Principal markets for these
products and services include trust departments of banks, investment
advisors, broker-dealers, corporations, high-net-worth individuals, and
money managers located in the United States and Canada.
Summary Financial Information and Results of Operations
-------------------------------------------------------
In the opinion of the Company, the accompanying unaudited Consolidated
Financial Statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position
as of June 30, 1998, the results of operations for the three and six
months ended June 30, 1998 and 1997, and the cash flows for the six
months ended June 30, 1998 and 1997.
Interim Financial Information
-----------------------------
While the Company believes that the disclosures presented are adequate
to make the information not misleading, these Consolidated Financial
Statements should be read in conjunction with the Consolidated Financial
Statements and the notes included in the Company's latest annual report
on Form 10-K.
Principles of Consolidation
---------------------------
The Consolidated Financial Statements include the accounts of the Company
and its wholly owned subsidiaries. The Company's principal subsidiaries
are SEI Investments Distribution Company, SEI Investments Management
Corporation, and SEI Trust Company. All intercompany accounts and
transactions have been eliminated. Investment in unconsolidated
affiliate is accounted for using the equity method due to the Company's
less than 50 percent ownership. The Company's portion of the affiliate's
operating results is reflected in Equity in the earnings of
unconsolidated affiliate on the accompanying Consolidated Statements of
Income.
Management's Use of Estimates
-----------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
7
Property and Equipment
----------------------
Property and equipment on the accompanying Consolidated Balance Sheets
consist of the following:
Estimated
Useful Lives
June 30, 1998 December 31, 1997 (In Years)
------------- ----------------- ------------
Equipment $ 46,047,000 $ 42,376,000 3 to 5
Buildings 28,273,000 27,940,000 25 to 39
Land 6,993,000 6,993,000 N/A
Furniture and fixtures 10,089,000 9,790,000 3 to 5
Purchased software 9,580,000 9,181,000 3
Leasehold improvements 6,029,000 5,344,000 Lease Term
Construction in progress 365,000 -- N/A
------------ ------------
107,376,000 101,624,000
Less: Accumulated depreciation
and amortization (53,662,000) (49,493,000)
------------ ------------
Property and Equipment, net $ 53,714,000 $ 52,131,000
============ ============
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.
Customer Lists
--------------
Customer Lists represent the value assigned to customer relationships
obtained in various acquisitions. Customer Lists are amortized on a
straight-line basis over 10 years. The Company evaluates the
realizability of intangible assets based on estimates of undiscounted
future cash flows over the remaining useful life of the asset. If the
amount of such estimated undiscounted cash flow is less than the net book
value of the asset, the asset is written down to its net realizable
value. As of June 30, 1998, no such write-down was required.
Capitalized Software
--------------------
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed"
("SFAS 86"). Under SFAS 86, costs incurred to create a computer software
product are charged to research and development expense as incurred until
technological feasibility has been established. The Company establishes
technological feasibility upon completion of a detail program design. At
that point, computer software costs are capitalized until the product is
available for general release to customers. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment by
management with respect to certain external factors, including, but not
limited to, anticipated future revenues, estimated economic life, and
changes in technology. Amortization begins when the product is released.
Capitalized software development costs are amortized on a product-by-
product basis using the straight-line method over the estimated economic
life of the product or enhancement, which is primarily three to ten
years, with a weighted average remaining life of approximately 7.9 years
at June 30, 1998.
8
Earnings per Share
------------------
The Company computes earnings per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), which superceded Accounting Principles Board Opinion No.
15. Pursuant to SFAS 128, dual presentation of basic and diluted
earnings per common share is required on the face of the statements of
income for companies with complex capital structures. Basic earnings per
common share is calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per common share reflects the potential
dilution from the exercise or conversion of securities into common stock,
such as stock options. If the inclusion of common stock equivalents has
an anti-dilutive effect in the aggregate, it is excluded from the diluted
earnings per common share calculation. The Company adopted SFAS 128 in
its December 31, 1997 financial statements. All prior period earnings
per common share information has been restated to conform with the
provisions of SFAS 128.
FOR THE THREE-MONTH PERIOD ENDED
JUNE 30, 1998
-------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (Denominator) Amount
----------- ------------- ---------
Basic earnings per common share $9,585,000 17,787,000 $.54
====
Dilutive effect of stock options -- 1,439,000
---------- ----------
Diluted earnings per common share $9,585,000 19,226,000 $.50
========== ========== ====
FOR THE THREE-MONTH PERIOD ENDED
JUNE 30, 1997
-------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (Denominator) Amount
----------- ------------- ---------
Basic earnings per common share $5,141,000 18,494,000 $.28
====
Dilutive effect of stock options -- 729,000
---------- ----------
Diluted earnings per common share $5,141,000 19,223,000 $.27
========== ========== ====
Options to purchase 5,000 and 515,000 shares of common stock with an
average exercise price per share of $71.13 and $24.16 were outstanding
during the second quarter of 1998 and 1997, respectively, but were
excluded from the diluted earnings per common share calculation because
the option's exercise price was greater than the average market price of
the Company's common stock.
9
FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 1998
-------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (Denominator) Amount
----------- ------------- ---------
Basic earnings per common share $17,182,000 17,768,000 $.97
====
Dilutive effect of stock options -- 1,420,000
----------- ----------
Diluted earnings per common share $17,182,000 19,188,000 $.90
=========== ========== ====
FOR THE SIX-MONTH PERIOD ENDED
JUNE 30, 1997
-------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (Denominator) Amount
----------- ------------- ---------
Basic earnings per common share $ 9,942,000 18,513,000 $.54
====
Dilutive effect of stock options -- 758,000
----------- ----------
Diluted earnings per common share $ 9,942,000 19,271,000 $.52
=========== ========== ====
Options to purchase 17,500 and 515,000 shares of common stock with an
average exercise price per share of $69.43 and $24.16 were outstanding
during the first six months of 1998 and 1997, respectively, but were
excluded from the diluted earnings per common share calculation because
the option's exercise price was greater than the average market price of
the Company's common stock.
Statements of Cash Flows
------------------------
For purposes of the Consolidated Statements of Cash Flows, the Company
considers investment instruments purchased with an original maturity of
three months or less to be cash equivalents.
Supplemental disclosures of cash paid/received during the six months
ended June 30 is as follows:
1998 1997
-------- --------
Interest paid $1,355,000 $ 231,000
Interest and dividends received $ 649,000 $ 474,000
Income taxes paid $2,456,000 $5,108,000
10
Recent Accounting Pronouncements
--------------------------------
In June 1997, The Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued
to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. SFAS
131 is required to be adopted for the Company's 1998 year-end financial
statements. The Company is currently evaluating the impact, if any, of
the adoption of this pronouncement on the Company's existing
disclosures.
Reclassifications
-----------------
The financial statements for prior periods have been reclassified to
conform with the current period's presentation.
Note 2. Comprehensive Income - In the first quarter of 1998, the Company adopted
--------------------
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for
reporting and presentation of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements and requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is presented with equal
prominence as other financial statements.
Foreign Unrealized Accumulated
Currency Holding Other
Translation Losses Comprehensive
Adjustments on Investments Losses
----------- -------------- -------------
Beginning balance $(417) $ (75) $(492)
Current period change (64) (104) (168)
----- ----- -----
Ending Balance $(481) $(179) $(660)
===== ===== =====
Note 3. Receivables - Receivables on the accompanying Consolidated Balance Sheets consist of the following:
-----------
June 30, 1998 December 31, 1997
------------- -----------------
Trade receivables $12,647,000 $16,219,000
Fees earned, not received 2,877,000 2,308,000
Fees earned, not billed 13,297,000 13,865,000
----------- -----------
28,821,000 32,392,000
Less: Allowance for doubtful accounts (1,200,000) (1,200,000)
----------- -----------
$27,621,000 $31,192,000
=========== ===========
11
Fees earned, not received represent brokerage commissions earned but
not yet collected. Fees earned, not billed represent cash receivables
earned but unbilled and result from timing differences between services
provided and contractual billing schedules.
Receivables from regulated investment companies on the accompanying
Consolidated Balance Sheets represent fees collected from the Company's
wholly owned subsidiaries, SEI Investments Distribution Company and SEI
Investments Management Corporation, for distribution, investment
advisory, and administration services provided by these subsidiaries to
various regulated investment companies.
Note 4. Loans Receivable Available for Sale - Loans receivable available for
-----------------------------------
sale represent loans which were purchased through SEI Capital AG, which
is based in Zurich. These receivables are reported at the lower of cost
or market, and any difference between the purchase price and the related
loan principal amount is recognized as an adjustment of the yield over
the life of the loan using the effective interest method. Each loan
receivable involves various risks, including, but not limited to,
country, interest rate, credit, and liquidity risk. Management evaluates
and monitors these risks on a continuing basis to ensure that these loan
receivables are recorded at their realizable value. This evaluation is
based upon management's best estimates and the amounts the Company will
ultimately realize could differ from these estimates. The Company
intends to sell these loans within one year from the balance sheet date.
Note 5. Investments Available for Sale - Investments available for sale
------------------------------
consist of mutual funds sponsored by the Company which are primarily
invested in 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 June 30, 1998, Investments available for sale had an aggregate cost
of $1,000,000 and an aggregate market value of $706,000 with gross
unrealized losses of $294,000. At that date, the unrealized holding
losses of $179,000 (net of income tax benefit of $115,000) were reported
as a separate component of Shareholders' equity on the accompanying
Consolidated Balance Sheets. There were no unrealized holding gains as
of June 30, 1998. The Company purchased additional investments in the
first quarter of 1998 which were liquidated in the second quarter of
1998. The Company recognized a minimal loss on the disposition of these
investments which was immaterial.
At December 31, 1997, Investments available for sale had an aggregate
cost of $1,000,000 and an aggregate market value of $876,000 with gross
unrealized losses of $124,000. At that date, the unrealized holding
losses of $75,000 (net of income tax benefit of $49,000) were reported
as a separate component of Shareholders' equity on the accompanying
Consolidated Balance Sheets. There were no unrealized holding gains as
of December 31, 1997.
Note 6. Line of Credit - The Company has a line of credit agreement (the
--------------
"Agreement") with its principal lending institution which provides for
borrowings of up to $50,000,000. The Agreement ends on May 31, 1999, at
which time the outstanding principal balance, if any, becomes due unless
the Agreement is extended. The line of credit, when utilized, accrues
interest at the Prime rate or three-tenths percent above the London
Interbank Offered Rate. The Company is obligated to pay a commitment fee
equal to one-tenth percent per annum on the average daily unused portion
of the commitment. Certain covenants under the Agreement require the
Company to maintain specified levels of net worth and place certain
restrictions on investments. The Company had no outstanding borrowings
on its line of credit at June 30, 1998.
12
Note 7. Long-term Debt - On February 24, 1997, the Company signed a Note
--------------
Purchase Agreement authorizing the issuance and sale of $20,000,000 of
7.20% Senior Notes, Series A, and $15,000,000 of 7.27% Senior Notes,
Series B, (collectively, the "Notes") in a private offering with certain
financial institutions. The Notes are unsecured with final maturities
ranging from 10 to 15 years with an average life of 7 to 10 years. The
proceeds from the Notes were used to repay the outstanding balance on
the Company's line of credit at that date. The Note Purchase Agreement
contains various covenants, including limitations on indebtedness,
maintenance of minimum net worth levels, and restrictions on certain
investments. In addition, the agreement limits the Company's ability to
merge or consolidate, and to sell certain assets. None of these
covenants negatively affect the Company's liquidity or capital
resources. Principal payments on the Notes will be made annually from
the date of issuance while interest payments are made semi-annually.
The Company made the first principal payment of $2,000,000 in February
1998. The current portion of the Notes amounted to $2,000,000 at June
30, 1998. The carrying amount of the Company's long-term debt
approximates its fair value.
Note 8. Common Stock Buyback - The Board of Directors has authorized the
--------------------
purchase of the Company's common stock on the open market or through
private transactions of up to an aggregate of $248,365,000. The Company
purchased 213,000 shares at a total cost of $15,154,000 during the
second quarter of 1998 and 450,000 shares at a total cost of 26,764,000
during the six month period ended June 30, 1998.
The Company immediately retires its common stock when purchased. Upon
retirement, the Company reduces Capital in excess of par value for the
average capital per share outstanding and the remainder is charged
against Retained earnings. If the Company reduces its Retained earnings
to zero, any subsequent purchases of common stock will be charged
entirely to Capital in excess of par value.
Note 9. Dividend - On May 21, 1998, the Board of Directors declared a cash
--------
dividend of $.16 per share on the Company's common stock, which was paid
on June 30, 1998, to shareholders of record on June 16, 1998.
The Board of Directors has indicated its intention to pay future
dividends on a semiannual basis.
Note 10. Segment Information - The Company defines its business segments to
-------------------
reflect the Company's focus around its two primary business lines:
Investment Technology and Services and Asset Management. The Investment
Technology and Services segment consists of the Company's trust
technology, proprietary mutual fund, and back-office trust processing
businesses. The Asset Management segment provides investment solutions
through various investment products and services distributed directly
or through professional investment advisors to institutional and high-
net-worth markets.
The following tables highlight certain unaudited financial information
about each of the Company's segments for the three and six months ended
June 30, 1998 and 1997.
13
Investment
Technology and Asset General
Services Management and Admin. Consolidated
-------------- ---------- ---------- ------------
For the Three-Month Period Ended June 30, 1998
----------------------------------------------------------
Revenues $52,154,000 $33,345,000 $85,499,000
=========== =========== ===========
Operating profit $11,561,000 $ 6,893,000 $(3,262,000) $15,192,000
=========== =========== ===========
Equity in the earnings of
unconsolidated affiliate 681,000
Interest income 452,000
Interest expense (616,000)
-----------
Income before income taxes $15,709,000
===========
Depreciation and amortization $ 2,720,000 $ 802,000 $ 203,000 $ 3,725,000
=========== =========== =========== ===========
Capital expenditures $ 3,010,000 $ 540,000 $ 83,000 $ 3,633,000
=========== =========== =========== ===========
Investment
Technology and Asset General
Services Management and Admin. Consolidated
-------------- ----------- ----------- ------------
For the Three-Month Period Ended June 30, 1997
----------------------------------------------------------
Revenues $44,455,000 $26,275,000 $70,730,000
=========== =========== ===========
Operating profit $10,545,000 $ 1,599,000 $(3,190,000) $ 8,954,000
=========== =========== ===========
Interest income 272,000
Interest expense (658,000)
-----------
Income before income taxes $ 8,568,000
===========
Depreciation and amortization $ 2,843,000 $ 1,265,000 $ 181,000 $ 4,289,000
=========== =========== =========== ===========
Capital expenditures $ 1,893,000 $ 602,000 $ 461,000 $ 2,956,000
=========== =========== =========== ===========
14
Investment
Technology and Asset General
Services Management and Admin. Consolidated
-------------- ----------- ------------ ------------
For the Six-Month Period Ended June 30, 1998
----------------------------------------------------------
Revenues $103,219,000 $64,151,000 $167,370,000
============ =========== ============
Operating profit $ 20,203,000 $13,913,000 $(6,484,000) $ 27,632,000
============ =========== ===========
Equity in the earnings of
unconsolidated affiliate 1,191,000
Interest income 672,000
Interest expense (1,328,000)
------------
Income before income taxes $ 28,167,000
============
Depreciation and amortization $ 5,288,000 $ 1,617,000 $ 400,000 $ 7,305,000
============ =========== =========== ============
Capital expenditures $ 5,263,000 $ 993,000 $ 291,000 $ 6,547,000
============ =========== =========== ============
Investment
Technology and Asset General
Services Management and Admin. Consolidated
-------------- ----------- ------------ ------------
For the Six-Month Period Ended June 30, 1997
----------------------------------------------------------
Revenues $ 84,418,000 $49,816,000 $134,234,000
============ =========== ============
Operating profit $ 20,468,000 $ 3,350,000 $(6,584,000) $ 17,234,000
============ =========== ===========
Interest income 484,000
Interest expense (1,149,000)
------------
Income before income taxes $ 16,569,000
============
Depreciation and amortization $ 5,113,000 $ 2,186,000 $ 354,000 $ 7,653,000
============ =========== =========== ============
Capital expenditures $ 4,411,000 $ 1,473,000 $ 721,000 $ 6,605,000
============ =========== =========== ============
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS.
- -------------
The Company is organized around its two primary business lines: Investment
Technology and Services and Asset Management. Financial information for each of
these segments is reflected in Note 10 of the Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
- ---------------------
Second Quarter Ended June 30, 1998 Compared to Second Quarter Ended June 30,
1997
The Company's results of operations for the second quarter of 1998 included
revenues of $85,499,000, as compared to $70,730,000 for the same period in 1997,
an increase of 21 percent. Net income for the second quarter of 1998 increased
86 percent to $9,585,000, as compared to the $5,141,000 reported in the second
quarter of 1997. Diluted earnings per share for the three months ended June 30,
1998 increased 85 percent to $.50 versus the $.27 reported for the three months
ended June 30, 1997. Total fund balances at June 30, 1998 were $142.7 billion,
as compared to $100.5 billion at June 30, 1997, an increase of 42 percent.
Included in these totals are proprietary fund balances of $103.7 billion at June
30, 1998 and $72.0 billion at June 30, 1997, an increase of 44 percent. The
increase in revenues was primarily driven by significant growth in fund balances
and the contracting of new trust technology and back-office processing clients.
The Company anticipates growth in revenues and earnings primarily due to new
trust technology and back-office client relationships established during the
past year. Additionally, the Company anticipates continued growth from its
Asset Management segment. However, revenues and earnings could be adversely
affected by continued consolidation within the banking industry and an
unfavorable change in the stock market.
INVESTMENT TECHNOLOGY AND SERVICES - Revenues from Investment Technology and
- ----------------------------------
Services increased 17 percent to $52,154,000 for the three months ended June 30,
1998, as compared to the $44,455,000 reported for the corresponding period in
1997.
INVESTMENT TECHNOLOGY AND SERVICES REVENUES
-------------------------------------------
2ND QTR 2ND QTR DOLLAR PERCENT
1998 1997 CHANGE CHANGE
------- ------- ------ -------
Trust technology services $27,578,000 $24,684,000 $2,894,000 12%
Proprietary fund services 21,657,000 18,371,000 3,286,000 18%
Trust back-office processing
services 2,919,000 1,400,000 1,519,000 109%
----------- ----------- ----------
Total $52,154,000 $44,455,000 $7,699,000 17%
=========== =========== ==========
Trust technology services revenues increased 12 percent primarily due to the
contracting of new trust technology client relationships established during
1997. New clients generated additional implementation fees totaling $2.4
million and recurring processing fees of $1.5 million in the second quarter of
1998. The recurring processing revenue base is expected to increase as the new
trust client relationships established in 1997 are anticipated to be completely
implemented by early 1999. Conversely, recurring processing fees in the second
quarter of 1998 were negatively affected by $1.6 million as a result of clients
that terminated their relationships with the Company in 1997 and early 1998.
Future trust technology services revenues will be affected by the loss of a
significant bank client involved in an acquisition. The Company has received a
substantial one-time buyout fee which will be recognized when the client is
completely deconverted. Also, recurring processing fees will be negatively
affected in future periods.
16
Proprietary fund services revenues increased 18 percent mainly due to continued
growth in average proprietary fund balances. Average proprietary fund balances
increased 42 percent or $29.0 billion to $97.4 billion during the second quarter
of 1998 over the $68.4 billion reported for the second quarter of 1997. The
increase in average proprietary fund balances was mainly fueled by growth in
existing proprietary fund complexes. This growth can be attributed to banks
maintaining their market share in a growing mutual fund industry and the
favorable growth trend experienced in the stock market. Future proprietary fund
services revenues are expected to increase due to the conversion of new
proprietary fund complexes in the second quarter of 1998. The conversion of
these new proprietary fund complexes is expected to be completed by the fourth
quarter. However, the Company anticipates the loss of proprietary fund
complexes during the third quarter of 1998 which will negatively impact future
proprietary fund services revenues.
The Company is currently experiencing significant growth in its trust back-
office processing business which is an extension of its trust technology
services business. Trust back-office processing services revenues increased as
a result of the contracting of new clients during the past year. Management
believes the Company is favorably positioned to provide these services,
principally to bank trust departments, which could create new client
relationships in the near term.
INVESTMENT TECHNOLOGY AND SERVICES EXPENSES
-------------------------------------------
2ND QTR 2ND QTR DOLLAR PERCENT
1998 1997 CHANGE CHANGE
------- ------- ------ -------
Operating and development $31,272,000 $24,765,000 $6,507,000 26%
Sales and marketing $ 9,321,000 $ 9,145,000 $ 176,000 2%
Operating and development expenses were affected by various distinct factors in
the second quarter of 1998. First, the direct correlation between proprietary
fund revenues and direct expenses partially contributed to the increase in
operating and development expenses. Second, the Company incurred additional
personnel and other various operating costs to properly implement, service, and
maintain the new trust technology and back-office client relationships. Third,
with the completion and subsequent release of several capitalized software
development projects, amortization expense increased in the second quarter of
1998. Additionally, the Company continues to incur substantial costs to develop
and enhance its trust technology product line which are not being capitalized,
thus increasing the expense recognized in the current period.
Operating profit from Investment Technology and Services for the three months
ended June 30, 1998 was $11,561,000, as compared to the $10,545,000 reported for
the corresponding quarter in 1997. Operating margins were 22 percent for the
three months ended June 30, 1998, as compared to 24 percent for the same period
in 1997. Operating margins decreased principally due to the substantial
increases in operating and development expenses described above. Operating
margins are expected to increase as the new trust client relationships
established in 1997 are completely implemented and upon the recognition of the
substantial one-time buyout fee received from a bank client involved in an
acquisition. Additionally, revenues and profits could be adversely affected by
the loss of bank clients as a result of continued consolidation within the
banking industry and changes in banking regulations.
17
ASSET MANAGEMENT - Revenues from Asset Management increased 27 percent to
- ----------------
$33,345,000 for the three months ended June 30, 1998, as compared to the
$26,275,000 reported for the corresponding period in 1997.
ASSET MANAGEMENT REVENUES
-------------------------
2ND QTR 2ND QTR DOLLAR PERCENT
1998 1997 CHANGE CHANGE
------- ------- ------ -------
Investment management
services $19,544,000 $12,854,000 $6,690,000 52%
Liquidity management services 6,663,000 5,418,000 1,245,000 23%
Other investment products
and services 7,138,000 8,003,000 (865,000) (11%)
----------- ----------- ----------
Total $33,345,000 $26,275,000 $7,070,000 27%
=========== =========== ==========
Investment management services revenues increased 52 percent due to an increase
in average fund balances invested in the Company's Family of Funds. Average
assets under management increased 87 percent or $7.5 billion to $16.1 billion
for the second quarter of 1998, as compared to $8.6 billion for the second
quarter of 1997. This increase was the result of increased sales of the
Company's Family of Funds to high-net-worth investors through various registered
investment advisors, financial planners, and other financial intermediaries.
Additionally, average assets under management increased as a result of new sales
of the Company's asset management programs to institutional investors which
funded in the first quarter of 1998. These new sales more than offset a decline
in assets due to the recent loss of a significant client. Revenues are expected
to increase as the Company continues to generate new sales through its
registered investment advisor channel. However, future revenues could be
adversely affected by an unfavorable change in the stock market.
Liquidity management services revenues increased 23 percent mainly due to an
increase in average fund balances invested in the Company's lower-fee liquidity
products, as well as increased sales of the Company's cash sweep services to
banks. Average assets under management from the Company's liquidity funds
increased 22 percent to $19.2 billion for the second quarter of 1998, as
compared to $15.8 billion for the second quarter of 1997.
Other investment products and services revenues is comprised of several distinct
operations that include performance measurement and consulting services to
Canadian pension plans, brokerage and clearing services, and several other small
business ventures. The decrease in other investment products and services
revenues was primarily due to the reporting of one of the Company's business
ventures into other non-operating income beginning in the first quarter of 1998.
This reporting change was required according to accounting standards because the
Company's interest in this business venture was reduced to less than fifty
percent.
ASSET MANAGEMENT EXPENSES
-------------------------
2ND QTR 2ND QTR DOLLAR PERCENT
1998 1997 CHANGE CHANGE
------- ------- ------ -------
Operating and development $10,984,000 $12,733,000 $(1,749,000) (14%)
Sales and marketing $15,468,000 $11,943,000 $ 3,525,000 30%
In the second quarter of 1998, the decrease in operating and development
expenses was mainly due to the reporting of one of the Company's business
ventures into other non-operating expenses beginning in the first quarter of
1998. This reporting change was required according to accounting standards
because the Company's interest in this business venture was reduced to less than
fifty percent. Additionally, certain direct expenses decreased due to the loss
of a significant client invested in the Company's asset management programs.
18
The 30 percent increase in sales and marketing expenses was primarily due to
increases in personnel and promotion expenses. The increase in personnel costs
related to additional sales compensation associated with new sales of the
Company's asset management products and services to high-net-worth investors
through registered investment advisors. The Company incurred additional
promotion expenditures in relation to an enhanced marketing strategy of its
asset management products and services. This enhanced marketing strategy
involves a television advertising campaign which is expected to increase Company
recognition.
The Asset Management segment recorded an operating profit of $6,893,000 for the
three months ended June 30, 1998, as compared to an operating profit of
$1,599,000 reported for the corresponding quarter in 1997. Operating margins
were 21 percent for the three months ended June 30, 1998, as compared to 6
percent for the same period in 1997. Operating profits and margins increased
considerably primarily due to the significant increase in assets under
management. Growth expectations for revenues and earnings generated from this
segment are principally based upon continued growth in assets currently under
management and new sales of its asset management products and services. An
unfavorable change in the stock market could adversely affect revenues and
earnings projections from this segment.
OTHER INCOME AND EXPENSES - General and administrative expenses for the three
- -------------------------
months ended June 30, 1998 were $3,262,000, as compared to $3,190,000 for the
corresponding quarter in 1997, an increase of 2 percent.
In the first quarter of 1998, in accordance with generally accepted accounting
principles, the Company could no longer consolidate one of its business
ventures, LSV Asset Management ("LSV"). The Company's interest in LSV was
reduced to less than 50 percent requiring the Company to apply the equity method
of accounting. The Company's interest in the net operating results of LSV for
the second quarter of 1998 are reflected in Equity in the earnings of
unconsolidated affiliate on the accompanying Consolidated Statements of Income.
Prior period information has not been restated. LSV's net operating results in
prior periods were recorded in the Asset Management segment.
Interest expense for the second quarter of 1998 and 1997 relates to the
Company's issuance of long-term debt in February 1997 (See Note 7 of the Notes
to Consolidated Financial Statements).
Interest income is earned based upon the amount of cash that is invested daily
and fluctuations in interest income recognized for one period as compared to
another is due to changes in the average cash balance invested for the period.
19
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
The Company's results of operations for the six month period ended June 30, 1998
included revenues of $167,370,000, as compared to $134,234,000 for the same
period in 1997, an increase of 25 percent. Net income for the first six months
of 1998 increased 73 percent to $17,182,000, as compared to the $9,942,000
reported in the corresponding period of 1997. Diluted earnings per share for
the six months ended June 30, 1998 increased 73 percent to $.90 versus the $.52
reported for the six months ended June 30, 1997. The increase in revenues and
earnings recorded for the six months ended June 30, 1998 was primarily driven by
significant growth in fund balances, the contracting of new trust technology and
back-office client relationships, and the recognition of nonrecurring trust
technology services revenues.
INVESTMENT TECHNOLOGY AND SERVICES - Revenues from Investment Technology and
- ----------------------------------
Services increased 22 percent to $103,219,000 for the six months ended June 30,
1998, as compared to the $84,418,000 reported for the corresponding period in
1997.
INVESTMENT TECHNOLOGY AND SERVICES REVENUES
-------------------------------------------
SIX MONTHS SIX MONTHS DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---------- ---------- ------ -------
Trust technology services $ 57,203,000 $47,723,000 $ 9,480,000 20%
Proprietary fund services 40,986,000 34,514,000 6,472,000 19%
Trust back-office processing
services 5,030,000 2,181,000 2,849,000 131%
------------ ----------- -----------
Total $103,219,000 $84,418,000 $18,801,000 22%
============ =========== ===========
The comparison of trust technology services revenues was influenced by several
distinct factors. In 1998, the Company recognized an incremental $6.0 million
in implementation fees related to the contracts established with new trust
clients during 1997 and early 1998. Several clients recently completed the
implementation phase which increased recurring processing fees by $2.6 million
in 1998. The Company realized approximately $4.0 million in one-time buyout and
deconversion fees in 1998 associated with trust clients that terminated their
relationships with the Company. When a client terminates its relationship,
recurring processing fees are negatively impacted. As a result, recurring
processing fees decreased approximately $3.4 million in 1998.
Proprietary fund services revenues increased 19 percent mainly driven by
continued increases in average proprietary fund balances. Average proprietary
fund balances increased 38 percent or $25.1 billion to $92.0 billion during the
first six months of 1998 over the $66.9 billion during the first six months of
1997. The increase in average proprietary fund balances was mainly fueled by
growth in existing proprietary fund complexes. This growth is principally the
result of banks maintaining their market share in a growing mutual fund industry
and the favorable growth trend experienced in the stock market.
The Company is currently experiencing significant growth in its trust back-
office processing business which is an extension of its trust technology
services business. Trust back-office processing services revenues increased as
a result of the contracting of new clients during the past year, including some
larger banks. Management believes the Company is favorably positioned to
provide these services, principally to bank trust departments, which could
create new client relationships in the near term.
20
INVESTMENT TECHNOLOGY AND SERVICES EXPENSES
-------------------------------------------
SIX MONTHS SIX MONTHS DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---------- ----------- ------ -------
Operating and development $64,630,000 $46,008,000 $18,622,000 40%
Sales and marketing $18,386,000 $17,942,000 $ 444,000 2%
The 40 percent increase in operating and development expenses in 1998 can be
attributed primarily to an increase in average proprietary fund balances and an
increase in the Company's trust technology and back-office processing
businesses. First, the correlation between proprietary fund revenues and direct
expenses partially contributed to the increase in operating and development
expenses. Second, the Company incurred additional personnel and other various
operating costs to properly implement, service, and maintain the new trust
technology and back-office client relationships. Third, with the completion and
subsequent release of several capitalized software development projects,
amortization expense increased in 1998. Additionally, the Company continues to
incur substantial costs to develop and enhance its trust technology product line
which are not being capitalized, thus increasing the expense recognized in the
current period. Finally, the Company incurred substantial nonrecurring costs to
analyze and enhance its new trust technology client implementation process.
Operating profit from Investment Technology and Services for the six months
ended June 30, 1998 was $20,203,000, as compared to the $20,468,000 reported in
the corresponding period of 1997. Operating margins were 20 percent for the six
months ended June 30, 1998, as compared to 24 percent for the same period in
1997. Although this segment experienced an increase in revenues in 1998,
operating profits and margins were negatively impacted by the substantial
increases in operating and development expenses as described above.
ASSET MANAGEMENT - Revenues from Asset Management increased 29 percent to
- ----------------
$64,151,000 for the six months ended June 30, 1998, as compared to the
$49,816,000 reported for the corresponding period in 1997.
ASSET MANAGEMENT REVENUES
-------------------------
SIX MONTHS SIX MONTHS DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---------- ---------- ------ -------
Investment management
services $36,614,000 $23,999,000 $12,615,000 53%
Liquidity management services 13,197,000 10,903,000 2,294,000 21%
Other investment products
and services 14,340,000 14,914,000 (574,000) (4%)
----------- ----------- -----------
Total $64,151,000 $49,816,000 $14,335,000 29%
=========== =========== ===========
Investment management services revenues increased 53 percent due to an increase
in average fund balances invested in the Company's Family of Funds. Average
assets under management increased 87 percent or $7.1 billion to $15.3 billion
for the first six months of 1998, as compared to $8.2 billion for the first six
months of 1997. This increase was the result of increased sales of the Company's
Family of Funds to high-net-worth investors through various registered
investment advisors, financial planners, and other financial intermediaries, as
well as increased sales of the Company's asset management programs to
institutional investors, despite the recent loss of a significant client.
Additionally, the favorable increase in the stock market has contributed to the
growth in average assets under management.
21
Liquidity management services revenues increased 21 percent primarily due to an
increase in average fund balances invested in the Company's lower-fee liquidity
products, as well as, increased sales of the Company's cash sweep services to
banks. Average assets under management from the Company's liquidity funds
increased 22 percent to $19.4 billion for the first six months of 1998, as
compared to $15.9 billion for the first six months of 1997.
Other investment products and services revenues is comprised of several distinct
operations that include performance measurement and consulting services to
Canadian pension plans, brokerage and clearing services, and several other small
business ventures. During 1998, the Company realized an increase in bank-
related brokerage services. However, this was offset by the reclassification of
one of the Company's business ventures from this segment into other non-
operating income. This reclassification was required according to accounting
standards because the Company's interest in this business venture was reduced to
less than fifty percent.
ASSET MANAGEMENT EXPENSES
-------------------------
SIX MONTHS SIX MONTHS DOLLAR PERCENT
1998 1997 CHANGE CHANGE
----------- ----------- ------ -------
Operating and development $21,796,000 $23,752,000 $(1,956,000) (8%)
Sales and marketing $28,442,000 $22,714,000 $ 5,728,000 25%
In 1998, operating and development expenses were affected by the
reclassification of one of the Company's business ventures into other non-
operating expenses. This reclassification was required according to accounting
standards because the Company's interest in this business venture was reduced to
less than fifty percent. Additionally, direct expenses were reduced as a result
of the loss of a significant client invested in the Company's asset management
programs.
The 25 percent increase in sales and marketing expenses was primarily due to
increases in personnel and promotion expenses. The increase in personnel costs
related to additional sales compensation associated with new sales of the
Company's asset management products and services to high-net-worth and
institutional investors. The Company incurred additional promotion expenditures
in relation to an enhanced marketing strategy of its asset management products
and services. This enhanced marketing strategy involves a television
advertising campaign which is expected to increase Company recognition.
The Asset Management segment recorded an operating profit of $13,913,000 for the
six months ended June 30, 1998, as compared to an operating profit of $3,350,000
for the corresponding period in 1997. Operating margins were 22 percent for the
six months ended June 30, 1998, as compared to 7 percent for the same period in
1997. Operating profits and margins increased considerably primarily due to the
significant increase in assets under management.
OTHER INCOME AND EXPENSES - General and administrative expenses for the six
- -------------------------
months ended June 30, 1998 were $6,484,000, as compared to $6,584,000 for the
corresponding period in 1997, a decrease of 2 percent.
In the first quarter of 1998, in accordance with generally accepted accounting
principles, the Company could no longer consolidate one of its business
ventures, LSV Asset Management ("LSV"). The Company's interest in LSV was
reduced to less than 50 percent requiring the Company to apply the equity method
of accounting. The Company's interest in the net operating results of LSV for
the second quarter of 1998 are reflected in Equity in the earnings of
unconsolidated affiliate on the accompanying Consolidated Statements of Income.
Prior period information has not been restated. LSV's net operating results in
prior periods were recorded in the Asset Management segment.
22
Interest expense for 1998 and 1997 relates to the Company's issuance of long-
term debt in February 1997 (See Note 7 of the Notes to Consolidated Financial
Statements).
Interest income is earned based upon the amount of cash that is invested daily
and fluctuations in interest income recognized for one period as compared to
another is due to changes in the average cash balance invested for the period.
LIQUIDITY AND CAPITAL RESOURCES - The Company's ability to generate cash
- -------------------------------
adequate to meet its needs results primarily from cash flows from operations and
its capacity for additional borrowing. The Company has a line of credit
agreement which provides for borrowings of up to $50,000,000 (See Note 6 of the
Notes to Consolidated Financial Statements). At June 30, 1998, the Company's
sources of liquidity consisted primarily of cash and cash equivalents of
$40,914,000 and the unused balance on the line of credit of $50,000,000. The
availability of the line of credit is subject to the Company's compliance with
certain covenants set forth in the agreement.
Cash flows provided by operations for the six months ended June 30, 1998 were
$61,395,000, as compared to cash flows provided by operations for the six months
ended June 30, 1997 of $4,734,000. The sales of loans classified as Loans
receivable available for sale by the Company's Swiss based subsidiary, increased
collections of receivables, the receipt of a significant one-time buyout fee,
and increases in income and various accrued liabilities principally boosted cash
flows from operations in 1998. Cash flows from operations in 1997 were
unfavorably affected by an increase in receivables and the purchase of loans
classified as Loans receivable available for sale. The payout of sales and
incentive compensation in the first quarter of 1998 and 1997 negatively affected
cash flows from operations. In the second quarter of 1998, the Company received
a buyout payment relating to a bank client involved in an acquisition. This
buyout payment will not be recognized in revenues until the client has been
fully deconverted.
Cash flows from investing activities are principally affected by capital
expenditures. Capital expenditures, including capitalized software development
costs, for the six months ended June 30, 1998 were $9,324,000, as compared to
$11,731,000 for the corresponding period in 1997. The Company is currently in
the early stages of expanding its corporate campus. Construction is expected to
be completed by late 1998 at an estimated cost of $5,250,000.
Cash flows from financing activities are primarily affected by debt and equity
transactions. On February 24, 1997, the Company issued $35,000,000 of medium-
term notes in a private offering with certain financial institutions. The
proceeds were used to repay the outstanding balance on its line of credit at
that date. The Company made its first principal payment of $2,000,000 against
its long-term debt in February 1998 (See Note 7 of the Notes to Consolidated
Financial Statements). The Company continued its common stock repurchase
program. The Company has purchased 479,000 shares of its common stock at a cost
of $28,977,000 through July 31, 1998. The Company still has $10,266,000
remaining authorized for the purchase of its common stock. The Company declared
and paid a dividend on its common stock during the second quarter of 1998 and
1997.
The Company's operating cash flow, borrowing capacity, and liquidity should
provide adequate funds for continuing operations, continued investment in new
products and equipment, its common stock repurchase program, future dividend
payments, and principal and interest payments on its long-term debt.
23
Assessment of Risks Associated with the Year 2000
- -------------------------------------------------
The Company began to address the Year 2000 issue in 1995, initially focusing on
its TRUST 3000 product line. In 1997, a committee was formed with
representatives from all areas of the Company's business in order to review all
internal proprietary systems and every vendor with which the Company interacts.
Each vendor was contacted in order for the Committee to assess the impact the
Year 2000 will have on operations. If deemed necessary, the Company initiates
appropriate systems testing in order to make a reasonable determination as to
whether a vendor will, in fact, be Year 2000 compliant on time. Customers have
been informed of the Company's Year 2000 program through a users group and
periodic communications.
The current Year 2000 project has the highest level of corporate commitment.
The Company will utilize both internal and external resources to reprogram, or
replace, and test software for Year 2000 compliance. The Company plans to have
all its systems Year 2000 compliant by early 1999. Management estimates that it
will cost approximately $10 million to bring TRUST 3000 into Year 2000
compliance, the majority of which will be capitalized. Management does not
expect to expend significant resources to bring all of its internal proprietary
systems into Year 2000 compliance. Amounts incurred for internal proprietary
systems are expensed, unless new software is purchased which will be
capitalized. The cost of the Year 2000 project and the date on which the
Company plans to complete Year 2000 modifications are based on management's best
estimates. At this time, management does not believe the financial impact of
the Company's Year 2000 project will have a material adverse affect on its
financial position or results of operations in any given year. However, if the
Company or any significant vendors utilized in the Company's operations do not
successfully achieve Year 2000 compliance in a timely manner, the Company's
operations could be adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 is required to be
adopted for the Company's 1998 year-end financial statements. The Company is
currently evaluating the impact, if any, of the adoption of this pronouncement
on the Company's existing disclosures (See Note 1 of the Notes to Consolidated
Financial Statements).
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
Except for the historical information contained herein, the matters discussed in
this report are forward-looking statements which involve risks and
uncertainties, including but not limited to economic, competitive, governmental
and technological factors affecting the Company's operations, markets, services
and related products, prices, and other factors discussed in the Company's prior
filings with the Securities and Exchange Commission. Although the Company
believes the assumptions underlying the forward-looking statements contained
herein are reasonable, any of the assumptions could be inaccurate.
24
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 June 30, 1998.
25
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 August 12, 1998 By /s/ Henry H. Greer
------------------------- ------------------------------
Henry H. Greer
President, Chief Operating
Officer, and Chief Financial Officer
26
5
1,000
6-MOS
DEC-31-1998
JAN-01-1998
JUN-30-1998
40,914
0
28,821
(1,200)
0
103,137
107,376
(53,662)
192,294
103,666
31,000
178
0
0
47,901
192,294
0
167,370
0
133,254
6,484
0
1,328
28,167
10,985
17,182
0
0
0
17,182
.97
.90