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SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: DECEMBER 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________________
Commission file number 0 - 10200
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SEI INVESTMENTS COMPANY
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1707341
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(State or other jurisdiction of incorporation (IRS Employer Identification
or organization) Number)
1 FREEDOM VALLEY DRIVE, OAKS, PENNSYLVANIA 19456-1100
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including 610-676-1000
area code ------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on Which
Title of Each Class Registered
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NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of class)
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 ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
(Cover page 1 of 2 pages)
Exhibit Index on Page 64
Page 1 of 135 Pages
1
State the aggregate market value of the voting stock held by non-affiliates of
the registrant based on the closing price of such stock as reported by NASDAQ as
of February 26, 1999: $1,272,785,000. For purposes of making this calculation
only, registrant has defined affiliates as including all directors and
beneficial owners of more than ten percent of the common stock of the
registrant.
APPLICABLE ONLY TO REGISTRANTS 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 Section 12, 13, or 14(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 REGISTRANTS:
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of February 26, 1999: 17,874,121.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated by reference herein:
1. Notice of and Proxy Statement for the 1999 Annual Meeting of
Shareholders to be filed within 120 days after the end of the fiscal
year covered by this annual report, incorporated by reference in Part
III hereof.
(Cover page 2 of 2 pages)
2
PART I
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ITEM 1. BUSINESS.
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General Development of Business
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SEI Investments Company ("SEI") was incorporated in Pennsylvania in 1968. SEI
Investments Distribution Company ("SIDCO"), SEI Investments Management
Corporation ("SIMC"), and SEI Trust Company ("SEI Trust") are the principal
wholly owned subsidiaries of SEI. SIDCO is a broker-dealer registered
with the Securities and Exchange Commission ("SEC") under the Securities
Exchange Act of 1934 and is a member of the National Association of Securities
Dealers, Inc. SIMC is an investment advisor registered with the SEC under the
Investment Advisers Act of 1940. SEI Trust is a trust entity chartered in the
Commonwealth of Pennsylvania.
At the time of SEI's initial public offering in March 1981, its principal
business activity was providing an on-line, real-time accounting and management
information system to bank trust departments. This service is offered today
through the TRUST 3000 product line. An extension of the trust technology
product line is provided through SEI Trust, offering complete back-office
accounting and processing services to trust institutions which allows them to
outsource their trust operations and related investment functions.
In 1982, SEI, through SIDCO and SIMC, began to sponsor a number of institutional
investment products, primarily in the form of registered investment companies
sold to institutional investors and financial intermediaries. These subsidiaries
also provide various asset management services to institutional investors and to
high-net-worth individuals. These services include programs created to help
clients establish asset allocation strategies and to gain access to top-quality
investment managers. SEI has expanded its asset management services outside the
United States by targeting selected foreign markets for its investment
management programs.
SIDCO and SIMC also provide a full range of administration and distribution
services to proprietary mutual funds established for banks and other financial
institutions and intermediaries. The client serves as the investment advisor for
the proprietary funds, and the funds are sold primarily to customers of the
client.
3
Industry Segments
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Starting in 1998, we report financial information through four business lines:
Technology Services, Mutual Fund Services, Asset Management, and Investments in
New Business. These business segments reflect how management measures financial
information internally. The Technology Services segment, which accounted for 45
percent of consolidated revenues in 1998, includes the TRUST 3000 product line
and trust operations outsourcing. The Mutual Fund Services segment, which
accounted for 27 percent of consolidated revenues in 1998, includes proprietary
funds administration and distribution services created for banks, money managers
and other financial institutions. The Asset Management segment, which accounted
for 25 percent of consolidated revenues in 1998, consists of the distribution of
asset management products to the institutional and high-net-worth markets.
Investments in New Business, which accounted for 3 percent of consolidated
revenues in 1998, consists of our Canadian and international operations.
Financial information about each business segment is contained in Note 12 of the
Notes to Consolidated Financial Statements in Item 8. Additional financial
information and discussion about each business segment, including a breakdown of
revenues by product line, is contained in Management's Discussion and Analysis
of Financial Condition and Results of Operations in Item 7.
TECHNOLOGY SERVICES
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Trust Technology Services
Through SIMC, we provide trust and investment accounting and management
information services as an outsourcer to financial institutions with our TRUST
3000 product line. The success of TRUST 3000 is tied to its reliability, broad
functionality and open architecture system. TRUST 3000 provides banks with
comprehensive software capabilities to manage investments for their personal and
institutional trust clients. TRUST 3000 is a complete trust accounting and
investment system with fully automated securities movement and control linked
directly to the Depository Trust Company. TRUST 3000 offers investment
management functionality through a number of integrated products and sub-systems
that supports investment accounting, client administration, portfolio analysis,
and trade order processing for both domestic and global securities processing.
TRUST 3000 also provides access to multiple third-party pricing and asset
related information. Trust and investment processing services are provided
through a state-of-the-art data communications network that is internally
managed. Clients utilize terminals and workstations that are connected through
this network to access our data center.
The value of the TRUST 3000 product line has been further enhanced by the
introduction of the StrataQuest product line. StrataQuest is a flexible
combination of modular workstation application products that transform data into
user-friendly customer service and investment analysis desktop applications.
StrataQuest also provides technology platform products that manage the flow of
data and allow for the integration of TRUST 3000 information with other
financial institution systems in an open systems architecture. This product
provides standard, efficient, and reliable interfaces that update and retrieve
TRUST 3000 information from any application operating in the customer's
distributed computing environment. StrataQuest may be installed on the client's
processor or provided in a service bureau environment through our network at our
data center.
Beginning in 1982, we began offering liquidity products to bank trust
departments. Clients that use the TRUST 3000 product line can effect purchases
and redemptions through an automated subsystem that performs daily sweeps of
trust accounts and invests the available cash in one or more of our liquidity
investment products. Bank clients can also invest in the SEI Tri-Party
Repurchase Agreement program that offers competitive yields for short-term
investing.
Money manager and TRUST 3000 clients remit payment for services rendered in cash
or, subject to applicable regulatory guidelines, by directing brokerage
commissions to SIDCO through SEI-approved clearing agents or clearing brokers.
These clients may also apply a portion of such directed brokerage commissions to
defray certain other third-party costs. As a result of the directed brokerage
business, revenues may be affected by changes in market trading volume or
changes in government regulations affecting directed brokerage payments.
4
The market for our trust accounting and management information services consists
primarily of bank trust departments managing assets between $10 million and $100
billion. There are approximately 1,500 trust departments of this size. At
December 31, 1998, we were providing processing or software services to
approximately 92 trust departments, including trust departments of 20 of the top
60 banks, primarily located throughout the United States. We segregate the trust
accounting and information services market by trust assets under management: $20
billion or more in managed assets; $750 million to $20 billion in managed
assets; and under $750 million in managed assets. Each of these three trust
accounting and management information services markets are characterized by
different pricing, service, and product parameters. We endeavor to offer a full
range of products and services suitable for each. Customers generally contract
for terms of three to seven years and revenues are based on monthly processing
and software application service fees.
Principal competitors offering trust accounting and processing services are
Fidelity-Trust Technology Services LLC, SunGard Data Systems, and Marshall and
Isley, as well as numerous financial institutions that operate their own trust
processing systems. In addition, consolidations in the banking industry may
reduce the number of bank prospects and/or eliminate customers from our user
base. In terms of both revenues and number of trust accounts processed, the
TRUST 3000 product line is the leading trust accounting and management system
sold by third-party vendors to bank trust departments. With regard to the TRUST
3000 product line, the most important factors in a potential customer's
evaluation and choice of vendor are: product and service reliability; security
and risk; functional capability; ease of use and future flexibility; value; and
cost effectiveness. A vendor's experience in, and commitment to, the financial
industry is also considered. Revenues from trust technology services accounted
for approximately 41 percent of consolidated revenues in 1998.
Trust Operations Outsourcing
In 1994, we began to expand our trust technology product line by offering trust
back-office processing to assist those who wish to outsource their trust
department operations and processes. We provide back office services, which
include trust operations, asset management, and custody. Our outsourcing is the
integration of well-defined processes, along with fully automated, on-line,
real-time accounting, control, and reporting systems. This level of outsourcing
provides trust institutions with access to TRUST 3000, along with processing,
reporting, and custody services provided through the specialized capabilities of
SEI Trust personnel. SEI Trust automates and centralizes the client's trust
accounting, income collections, securities settlement, and securities processing
functions. In addition, SEI Trust prepares and processes customer statements,
investment reviews, and employee benefit accrual reports and remittances to the
clients' customers.
Initially, community banks were the target market for this product. However, as
the concept of outsourcing has gained credibility and acceptance within the
industry, banks of all sizes are recognizing the value in outsourcing their
trust operations. The market for our trust operations outsourcing consists
primarily of bank trust departments ranging in size from start-ups to those
managing assets of $10 billion, and selected business lines of trust departments
up to $100 billion in assets. We also believe there is a market for these
services in non-bank financial institution channels. The term of the contracts
varies from three to five years. At December 31, 1998, we had contracts to
perform trust operations outsourcing services to 62 clients.
The major strategic issue facing this product line is the continued
consolidation of the banking industry, which may reduce the number of potential
bank prospects and/or eliminate customers from our user base. Currently, the
only significant competitor in this market is Marshall and Isley. Additional
competitors can be expected over the next few years. Revenues from trust
operations outsourcing accounted for approximately 4 percent of consolidated
revenues in 1998.
5
MUTUAL FUND SERVICES
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In 1990, through SIDCO and SIMC, we began providing administrative and
distribution services to bank proprietary mutual funds that were sold primarily
to bank customers for which the bank served as investment advisor. Today, we
provide a full range of services to banks as well as, insurance firms, and
investment management companies. Services include fund administration and
accounting, legal and regulatory compliance, and shareholder recordkeeping
services. Distribution services range from assistance with strategic business
planning to product development through marketing program development and
execution. We assist our clients with identifying distribution opportunities and
establishing product and program strategies that cross retail and institutional
markets.
The market for fund services and products consists primarily of banks, insurance
companies, and investment managers. At the end of 1998, there were approximately
105 bank proprietary fund complexes that existed in the United States. As of
December 31, 1998, we provided fund services to 35 banks, investment management
companies, and insurance firms with proprietary mutual fund assets of
approximately $133.4 billion. Additionally, we maintain an office in Dublin,
Ireland that offers administrative services, distribution consulting services,
and marketing support services to fund complexes in international markets.
Contracts with mutual fund complexes have initial terms ranging from two to five
years. Principal competitors for mutual fund services include The BISYS Group,
Federated Investors, Inc., First Data Corporation, PFPC, and State Street Bank.
Potential customers of mutual fund services consider the price of such services,
the performance of its administrative and other support services such as legal
and marketing, and the integration of such services provided through our
proprietary software.
While banks are currently prohibited by banking laws from serving as the
principal underwriter to mutual funds, legislation has been proposed from time
to time to remove this restriction. If such legislation is passed, some banks
may consider performing some or all of these services themselves. In addition,
consolidations in the banking industry may reduce the number of bank proprietary
fund complexes in existence. In view of this phenomenon, we are vigorously
pursuing new market opportunities. Revenues from mutual fund services accounted
for approximately 27 percent of consolidated revenues in 1998.
ASSET MANAGEMENT
Through SIDCO and SIMC, we have created a number of investment products and
services for institutional investors and high-net-worth investors distributed
through investment advisors and other financial intermediaries. The initial
investment products, first distributed in 1982, were developed to meet the
liquidity requirements of bank trust departments utilizing the TRUST 3000
product line. In 1985, we began offering equity, fixed income, and tax-exempt
products. Currently, the products offered include a series of domestic equity,
fixed income, and tax-exempt mutual funds, separate account management, and
offshore funds. We employ a total investment management approach that utilizes a
quantitative asset allocation model and investment strategies based upon the
precepts of modern portfolio theory, specialist sub-advisors that we select and
monitor, and active risk management.
Through SIMC, we serve as the administrator, transfer agent, and fund accountant
for these products. We also acts as the investment advisor for many of these
products. The investment advisory and administration contracts between SIMC and
the funds are subject to renewal annually by the board of trustees of the funds.
These contracts provide for the payment of administrative fees based on a
percentage of the average daily net assets of each fund.
6
Investment Management Fees
We began providing investment solutions to defined benefit plans, hospitals,
foundations, endowment funds, and other institutional investors in 1991. We
offer such investors an integrated investment program, which enables a pension
or other investment committee to outsource their investment management process
to us. We offer flexible investment strategies using a disciplined fund
management process and superior technology. We work with each client to develop
asset management strategies that are consistent with the client's business needs
and investment objectives. Consideration is given to the client's financial and
investment objectives, risk tolerance, investment restrictions, and time
horizon. Then, through the combination of the portfolio construction process,
multiple asset classes, and style allocations, we work toward the client's
investment goals. A client's strategy is implemented through our Family of Funds
that employ sub-advisors that are specialists in a particular style. We select
the best style-specific investment managers to act as sub-advisors and manage
each asset class. The potential benefit of this method is improved performance
with reduced volatility. This style-neutral approach eliminates the task of
attempting to estimate which style of equity investing will be in favor at any
point in time. Specialist-advisors are monitored for performance and so trading
strategies conform to predetermined market, sector, and style characteristics.
We maintain the asset class exposure within the specifically defined boundaries
of our client's asset allocation plan by incorporating a formal rebalancing
program in our asset management process utilizing state-of-the-art technology.
Overall, diversifying by asset class, manager style, sub-style, and sector tends
to reduce risk while improving the prospects for long-term growth. Clients also
have the ability to access specialized money managers through separate accounts.
We also offer asset management programs tailored to meet the needs of high-net-
worth individuals (defined as individuals with over $500,000 of investable
assets) and small institutions that are marketed through selected intermediaries
such as independent broker-dealers, registered investment advisors, financial
planners, life insurance producers, and bank trust departments. Our investment
philosophy focuses on four key principles: asset allocation, portfolio
structure, specialist investment and continuous portfolio management. Our asset
management strategies offer financial intermediaries various asset allocation
models that provide diversification among investment classes and periodic
rebalancing to achieve the investor's objectives. It also provides access to
institutional money managers normally not available to individual investors. We
offer a wide range of investment solutions including tax managed programs. We
also provide marketing assistance, sales support, investor reporting, and back-
office services such as custody and recordkeeping.
At December 31, 1998, there were approximately 1,900 clients invested in our
asset management programs through separate accounts or through our Family of
Funds with $18.1 billion in assets invested. The principal competition for our
asset management products is from other investment advisors and mutual fund
companies. Also, revenues are affected by changes in the value of securities
traded in various financial markets. Fees are earned as a percentage of average
assets under management. Revenues from investment management fees accounted for
approximately 21 percent of consolidated revenues in 1998.
Liquidity Management Fees
We assist corporations in developing investment programs to meet their unique
cash flow needs by coordinating investment strategies with expected
disbursements. CashStrategies is a sophisticated system for managing corporate
cash that incorporates cash flow analytics with our proprietary software to
provide corporate treasurers with an effective solution in managing their cash
and investment portfolios. We help clients allocate their cash between liquid
and longer-term investments. Longer-duration cash is invested in one of our
Secondary Cash Investment Models, each providing an optimal balance of strong
yield and high liquidity. We help to implement the strategy and render ongoing
service and analytical support. We also offer the CashSweep program that enables
financial institutions to sweep excess balances from demand deposit accounts
into money market accounts. To build a successful sweep program, we combine
technology with our cash management investment products, cash management
services, marketing and consulting support.
Liquidity products consist primarily of money market and other short-term mutual
funds and our Repurchase Agreement Program ("REPO"). REPO permits institutions
to invest short-term funds in overnight and term tri-party repurchase agreements
and other overnight and short-term investment products. Clients may purchase or
redeem investment products and retrieve information about their accounts through
SEI Direct, or by telephone orders to SIMC.
7
The market for our liquidity products and services consist primarily of bank
trust departments, investment advisors, and corporations located in the United
States. The number of bank and non-bank clients utilizing our liquidity products
and services totaled approximately 600 at December 31, 1998. Total assets
invested in liquidity funds, including REPO, totaled $20.0 billion at December
31, 1998.
Principal competitors in liquidity products and services include Federated
Investors, Inc., Fidelity Management Corporation, Investors Fiduciary Trust
Company, and Goldman, Sachs & Co., and other mutual fund complexes that market
to institutional investors as well as individual bank proprietary and common
trust funds. A potential customer of liquidity services business considers the
price and performance of investment products and diverse product offerings, as
well as the ease of investment through the automated sweep system. Revenues from
liquidity management fees offered to investment advisors and corporations
accounted for approximately 4 percent of consolidated revenues in 1998.
INVESTMENTS IN NEW BUSINESS
We have several other operations that include performance evaluation and
consulting services to Canadian pension plans and other business ventures to
expand our asset management programs and services to high-net-worth investors,
pension plans, governmental organizations, and private corporations in foreign
countries.
Performance evaluation and other consulting services offered to Canadian pension
plans are provided through SEI Inc., a wholly owned subsidiary. We also support
money managers in managing their clients' investments through investment
performance evaluation services, as well as trading cost analysis and marketing
strategy review. The market for our consulting services consists mainly of
defined benefit plan sponsors and investment managers located in Canada. At
December 31, 1998, we were providing consulting services to approximately 400
defined benefit plan sponsors and investment managers.
Fund sponsor and money manager clients remit payment for performance evaluation
and consulting services in cash or, subject to applicable regulatory guidelines,
by directing brokerage commissions to SIDCO or SEI Inc. through SEI-approved
clearing agents or clearing brokers. These clients may also apply a portion of
such directed brokerage commissions to defray certain other third-party costs.
As a result of the directed brokerage business, revenues may be affected by
changes in market trading volume or changes in government regulations affecting
directed brokerage payments.
We also formed an asset management company in Canada in 1994, Primus Capital
Advisors Co. ("Primus"). Primus is an investment counselor/portfolio manager
offering investment advisory services to both large and small Canadian defined
benefit pension plans.
We are currently establishing distribution channels for our asset management
programs in the global asset management marketplace through various acquisitions
and the startup of satellite offices outside the United States. Our approach is
to expand existing business lines into a coherent global business consistent
with our United States strategy of providing portfolio solution offerings rather
than product sales. Similar to the United States model, we design global
investment strategies and employ specialist money managers to implement these
strategies. We are also responsible for managing the allocation of assets among
the portfolio's specialist money managers and directing and evaluating the
investment services provided by these selected managers. Our efforts have
focused on establishing the business platform, which includes the delivery of
local investment management as part of a portfolio solution and local
distribution and marketing. In South Africa, we have assembled an investment
advisory team that markets institutional asset management programs to pension
and insurance industries. We also acquired established investment advisory firms
in Argentina and Mexico that offer asset management services to high-net-worth
investors. In addition, we have established a joint venture in Taiwan and Korea
that offers asset management solutions to institutions and high-net-worth
individuals.
The global market for financial services is highly competitive. Entering into a
foreign market requires a shift in perspective from a United States focus to
that of the other country. In addition, consideration must be given to the
regulatory and financial constraints that exist in a foreign market. Finally, it
can be difficult to overcome recognition and branding hurdles caused by lack of
a track record in a particular market. The way that we attempt to overcome these
obstacles is to purchase or partner with a local firm who already has an
established presence in the market. By partnering, we get a recognized name and
established customers. We also get access to a staff that speaks the language
and understands the culture, which helps us in making decisions about product
packaging and distribution strategies. Revenues from other investment products
and services accounted for approximately 3 percent of consolidated revenues in
1998.
8
OTHER
Equity Investments in Investees
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In 1994, we formed a partnership with three leading academics in the field of
finance. The partnership, LSV Asset Management ("LSV"), is a registered
investment advisor which provides investment advisory services to institutions,
including pension plans and investment companies. LSV is a value-oriented,
contrarian money manager that offers a deep-value investment alternative. LSV
utilizes a proprietary equity investment model to identify securities that are
generally considered to be out of favor. They identify stocks that exhibit
below-average past performance and below-average market expectations for future
growth because these stocks typically produce superior future returns as their
future growth exceeds the pessimistic expectation of the market. LSV is
currently the specialist-advisor to a portion of SEI Large Cap Value Fund and
SEI Small Cap Value Fund. In addition, LSV is a portfolio manager to a portion
of our global investment products. Approximately 17% of the total assets managed
by LSV relate to our products. At December 31, 1998, our interest represented
approximately 45% of the partnership's total interests.
Marketing and Sales
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We employ 17 sales representatives in the Technology Services segment, 7 sales
representatives in the Mutual Fund Services segment, 40 sales representatives in
the Asset Management segment, and 27 sales representatives in the Investments in
New Business segment. These sales personnel operate from 18 offices located in
Oaks, Pennsylvania; San Francisco and Irvine, California; Chicago, Illinois;
Boston, Massachusetts; New York, New York; Dallas, Texas; Norcross, Georgia;
Toronto, Ontario; Montreal, Quebec; Vancouver, British Columbia; Halifax, Nova
Scotia; Zurich, Switzerland; Dublin, Ireland; Johannesburg, South Africa;
Causeway Bay, Hong Kong; Buenos Aires, Argentina, and Mexico City, Mexico.
Customers
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We currently serve approximately 3,200 clients. For the year ended December
31, 1998, no single customer accounted for more than 10 percent of revenues in
any industry segment.
Development of New Products and Services
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Software products
We believe that service to existing and potential customers is enhanced by
substantial investment in improving existing software products and developing
new products and services for the financial industry. To sustain and enhance our
competitive position in the industry, we are committed to a continuous and high
level of expenditures for research and development. We currently utilize 238
professionals dedicated to the design, development, and enhancement of our
software products. New products are released when they are completed. The
benefit to the client is frequent, more manageable releases. Maintenance
releases generally occur four times each year.
During the year, we have continued to focus our product development efforts on
the StrataQuest open architecture product line. StrataQuest allows clients to
operate in a multi-platform environment using client/server installations. This
open architecture facilitates the development of new applications, as well as
expanding the upward functionality of our existing products to enhance their
attractiveness to even the largest clients. Also, StrataQuest has positioned us
for the installation of web based products. During 1998, we began to design our
web-browser technology platform using open architecture as the interface to
TRUST 3000. Clients will soon be able to access our services through the
Internet which offers several advantages. First, Internet and web-browser
technology dramatically alters the quality and responsiveness of information and
services that can be offered to end investors. Our clients can enhance the
relationships with their clients by using the web as a delivery mechanism.
Second, the web offers a lower cost infrastructure for our clients to deploy
services across professionals' desk-tops. Internet technology can allow clients
to access services remotely from home or on the road. Finally, Internet
technology gives clients far more flexibility and access from the desk-top to
multiple sources of information.
9
We expended, including amounts capitalized, approximately $24,866,000 (6.8
percent of revenues) in 1998, $22,500,000 (7.7 percent of revenues) in 1997, and
$26,254,000 (10.6 percent of revenues) in 1996 to design, develop, and modify
existing or new products and services.
Investment products
We are looking to capitalize on international growth opportunities in the
investment management industry by expanding the distribution of investment
products and services through asset management solutions for institutions and
high-net-worth investors outside North America. Our strategy is designed to
capitalize on two major trends in the global marketplace: (1) the privatization
and globalization of pension funds, and (2) the increased wealth accumulation
among high-net-worth investors. Our marketing efforts have focused on four main
regions: Europe, East Asia, Latin America, and South Africa. In all four
regions, the initial strategy is to team with local partners to establish name
recognition and distribution channels for our products and services. Our global
asset management group has made significant progress during the past three
years, including the establishment of an offshore fund family in Ireland, the
creation of a distribution network and the acquisition of investment advisory
firms in Argentina and Mexico, a joint venture in Taiwan and Korea, and asset
management contracts signed with European pension plans and several South
African institutions.
Year 2000
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 clients and to the
perpetuation of our own business. Through May 1997, we focused our Year 2000
efforts on an assessment of our TRUST 3000 product line. In mid-1997, we
expanded our efforts to include a review of all proprietary systems, vendors,
internally used systems, and any other item that could be affected by the Year
2000. A Corporate Year 2000 Committee reports regularly to the Board of
Directors on the progress and status of the Year 2000 efforts.
The Corporate Year 2000 Committee is made up of representatives from every area
of our business and is managed by a full time senior project manager. 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 process fully
subscribes to the Federal Financial Institutions Examination Council (FFIEC)
guidelines.
We continue to do everything possible to mitigate any potential risk resulting
from the roll over to the Year 2000. However, there is the potential of
experiencing minor to moderate system issues at the beginning of the Year 2000.
In preparation for the century roll over, we will work closely with all clients
to instruct them on maintaining all year-end 1999 data for recovery purposes.
Current Year 2000 project expertise will remain dedicated to the Year 2000
program to be available to resolve all potential issues. We will budget funds
into the Year 2000 to support potential problems.
Our contingency planning efforts have been focused on the most critical business
functions and vary significantly based on the TRUST 3000 system and how it
operates. The contingency strategy for our own proprietary products, which
includes TRUST 3000, 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. Clients will be apprised
of the plan and advised on appropriate data retention (See Assessment of Risks
Associated with the Year 2000 in Management's Discussion and Analysis of
Financial Condition and Results of Operations).
10
Regulatory Considerations
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Our subsidiaries, SIDCO and SIMC, are subject to various federal and state laws
and regulations that grant supervisory agencies, including the SEC, broad
administrative powers. In the event of a failure to comply with such laws and
regulations, the possible sanctions that may be imposed include the suspension
of individual employees, limitations on SIDCO's or SIMC's engaging in business
for specified periods of time, the revocation of SIDCO's or SIMC's registration
as a broker-dealer or investment advisor, censures, and fines. SEI Trust is
subject to laws and regulations imposed by state banking authorities. In the
event of a failure to comply with these laws and regulations, limitations may be
placed on the business of SEI Trust, or its license as a trust company may be
revoked.
We offer investment products that are also subject to regulation by the SEC and
state securities authorities, as well as non-U.S. regulatory authorities, where
applicable. Existing or future regulations that affect these investment
vehicles or their investment strategies could impair their investment
performance and lead to a reduction in sales of such investment products.
Directed brokerage payment arrangements offered by us are also subject to SEC
and other federal regulatory authorities. Changes in the regulation of directed
brokerage or soft dollar payment arrangements could affect sales of some
services, primarily our brokerage and consulting services.
Bank clients are subject to supervision by federal and state banking authorities
concerning the manner in which such clients purchase and receive our products
and services. Plan sponsor clients are subject to supervision by the Department
of Labor and compliance with employee benefit regulations. Investment advisor
clients are regulated by the SEC and state securities authorities. Existing or
future regulations applicable to our clients may affect such clients' purchase
of our products and services.
Personnel
- - ---------
At February 28, 1999, we had 1,211 full-time and 98 part-time employees. None
of our employees are represented by a labor union. Management considers
employee relations to be good.
ITEM 2. PROPERTIES.
----------
Our corporate headquarters are located in Oaks, Pennsylvania. The corporate
campus consists of six buildings situated on approximately 90 acres. We own and
operate the land and buildings, which encompasses approximately 265,000 square
feet. Our data center and warehouse facility is housed in an additional 70,000
square feet of leased space in Wayne, Pennsylvania. We also lease an additional
67,500 square feet of space in Wayne for our mutual funds operation. All other
offices that we lease aggregate 43,000 square feet. Additionally, we own a New
York City condominium (3,400 square feet) used for business purposes.
ITEM 3. LEGAL PROCEEDINGS.
-----------------
There are no legal proceedings to which we are a party or to which any of our
properties is subject which are expected to have a material adverse effect on
our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
There were no matters submitted to a vote of security holders during the fourth
quarter of 1998.
Information with regard to our executive officers is contained in Item 10 hereof
and is incorporated by reference to this Part I.
11
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED STOCKHOLDER MATTERS.
----------------------------------------------------------------------
Price Range of Common Stock:
- - ---------------------------
SEI's common stock is traded in the NASDAQ National Market System under the
symbol SEIC. The following table shows the range of closing sales prices on the
NASDAQ National Market System for the periods indicated.
1998 High Low
- - ---- ---- ---
First Quarter 69 37
Second Quarter 76 61
Third Quarter 80 1/2 59 5/16
Fourth Quarter 100 1/2 50 1/4
1997 High Low
- - ---- ---- ---
First Quarter 25 3/4 20
Second Quarter 24 3/8 18 3/4
Third Quarter 33 1/2 24
Fourth Quarter 44 1/2 32 3/4
As of February 26, 1999, there were approximately 850 shareholders of record.
The Board of Directors declared a $.16 dividend in May and December of 1998, and
a $.14 dividend in May and December of 1997. The Board of Directors has
indicated its intention to pay future dividends on a semiannual basis.
12
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
(In thousands, except per share data)
The following table summarizes selected financial data for the five years in the
period ended December 31, 1998. The historical selected financial data for each
of the five years in the period ended December 31, 1998 are derived from, and
are qualified by reference to, the financial statements which are included with
Item 8 in this report. Such financial statements have been audited by Arthur
Andersen LLP, independent public accountants, to the extent indicated in their
reports. This data should be read in conjunction with the financial statements
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this report.
FOR THE YEAR 1998 1997 1996 1995(A) 1994(A)
- - --------------------------------------------------------------------------------------------------------------------------
Revenues.................................................. $366,119 $292,749 $247,817 $225,964 $205,051
Expenses:
Operating and development.............................. 180,937 148,536 129,776 115,366 110,504
Sales and marketing.................................... 103,834 84,770 68,719 58,892 48,561
General and administrative............................. 13,463 13,931 13,235 16,963 16,919
-------- -------- -------- -------- --------
Income from operations.................................... 67,885 45,512 36,087 34,743 29,067
Gain on sale of investments available for sale............ -- -- 1,097 -- --
Equity in the earnings of unconsolidated affiliate........ 3,015 -- -- -- --
Interest income........................................... 1,558 983 808 1,019 407
Interest expense.......................................... (2,575) (2,488) (48) (255) (33)
-------- --------- -------- -------- --------
Income from continuing operations
before income taxes.................................... 69,883 44,007 37,944 35,507 29,441
Income taxes.............................................. 26,904 17,163 14,798 14,381 11,188
-------- -------- -------- -------- --------
Income from continuing operations......................... 42,979 26,844 23,146 21,126 18,253
Income (loss) from discontinued operations................ -- -- -- (1,942) 997
Income (loss) from disposal of
discontinued operations................................ 710 -- (16,335) -- --
-------- -------- -------- -------- --------
Net income................................................ $ 43,689 $ 26,844 $ 6,811 $ 19,184 $ 19,250
- - --------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share from
continuing operations.................................. $ 2.41 $ 1.47 $ 1.25 $ 1.14 $ .97
Basic earnings (loss) per common share from
discontinued operations................................ .04 -- (.88) (.11) .05
-------- -------- -------- -------- --------
Basic earnings per common share........................... $ 2.45 $ 1.47 $ .37 $ 1.03 $ 1.02
Shares used to calculate basic earnings per
common share........................................... 17,827 18,315 18,497 18,607 18,845
- - --------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share from
continuing operations.................................. $ 2.25 $ 1.40 $ 1.20 $ 1.08 $ .91
Diluted earnings (loss) per common share from
discontinued operations................................ .04 -- (.85) (.10) .05
-------- -------- -------- -------- --------
Diluted earnings per common share......................... $ 2.28 $ 1.40 $ .35 $ .98 $ .96
Shares used to calculate diluted earnings per
common share........................................... 19,126 19,236 19,364 19,554 20,101
- - --------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per common share.................. $ .32 $ .28 $ .24 $ .20 $ .16
- - --------------------------------------------------------------------------------------------------------------------------
Year-end Financial Position:
Cash and cash equivalents................................. $ 52,980 $ 16,891 $ 13,167 $ 10,256 $ 20,232
Total assets.............................................. $208,772 $168,884 $141,041 $101,347 $ 91,148
Short-term borrowings..................................... $ -- $ -- $ 20,000 $ -- $ --
Long-term debt (including short-term portion)............. $ 33,000 $ 35,000 $ -- $ -- $ --
Shareholders' equity...................................... $ 59,685 $ 46,410 $ 56,108 $ 56,002 $ 51,309
- - --------------------------------------------------------------------------------------------------------------------------
(A) Information for 1995 and 1994 has been reported to reflect the SEI Capital
Resources Division and the SEI Defined Contribution Retirement Services
Division as discontinued operations. See Note 2 of the Notes to
Consolidated Financial Statements.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
- - -------------
(In thousands, except per share data)
Management's discussion and analysis reviews the consolidated financial
condition at December 31, 1998 and 1997, the consolidated results of operations
for the past three years and, where appropriate, other factors that may affect
future financial performance. This discussion should be read in conjunction with
the Consolidated Financial Statements, Notes to the Consolidated Financial
Statements and Selected Financial Data.
We are organized around our four business lines: Technology Services, Mutual
Fund Services, Asset Management, and Investments in New Business. Financial
information on each of these segments is reflected in Note 12 of the Notes to
Consolidated Financial Statements included with Item 8 to this report.
RESULTS OF OPERATIONS
- - ---------------------
1998 COMPARED WITH 1997
CONSOLIDATED OVERVIEW
- - ---------------------
INCOME STATEMENT DATA
(In thousands, except per common share data) PERCENT
1998 1997 CHANGE
---- ---- ------
Revenues:
Technology Services Segment.................................. $164,648 $129,525 27%
Mutual Fund Services Segment................................. 97,972 83,157 18%
Asset Management Segment..................................... 90,056 61,871 46%
Investments in New Business Segment.......................... 13,443 14,439 (7%)
Other........................................................ -- 3,757 (100%)
-------- --------
Total revenues............................................. $366,119 $292,749 25%
Operating Income (Loss):
Technology Services Segment.................................. $ 49,170 $ 37,146 32%
Mutual Fund Services Segment................................. 24,405 23,858 2%
Asset Management Segment..................................... 18,091 3,281 451%
Investments in New Business Segment.......................... (10,318) (5,799) (78%)
Other........................................................ (13,463) (12,974) (4%)
-------- --------
Income from operations..................................... 67,885 45,512 49%
Other income (expense), net..................................... 1,998 (1,505) 233%
-------- --------
Income from continuing operations
before income taxes.......................................... 69,883 44,007 59%
Income taxes.................................................... 26,904 17,163 57%
-------- --------
Income from continuing operations............................... $ 42,979 $ 26,844 60%
======== ========
Diluted earnings per common share
from continuing operations................................... $ 2.25 $ 1.40 61%
======== ========
ASSET BALANCES
(In millions)
As of December 31, PERCENT
------------------
1998 1997 CHANGE
---- ---- ------
Assets invested in liquidity funds.............................. $ 19,971 $ 17,950 11%
Assets invested in non-liquidity mutual funds................... 24,994 14,347 74%
-------- --------
Assets under management...................................... 44,965 32,297 39%
Client proprietary assets under administration.................. 133,407 83,419 60%
-------- --------
Assets under administration.................................. $178,372 $115,716 54%
======== ========
14
Revenues and earnings from continuing operations reached record levels in 1998
primarily due to the contracting of new trust technology clients, the
recognition of a substantial one-time buyout fee, and significant growth in fund
balances. Although consolidated revenues in 1998 were affected by the
recognition of significant one-time items, recurring revenues constitute
approximately 81 percent of total revenues. Technology Services and Asset
Management experienced significant increases in business activity beginning in
late 1997 and extending into 1998. The inclusion of significant one-time charges
and increased investments in several product lines curtailed earnings growth in
1998. Excluding the one-time buyout fee and one-time charges, revenue growth
would have approximated 21 percent and earnings growth would have approximated
37 percent. Revenues and earnings are expected to increase in 1999 assuming the
sales momentum in Asset Management can be sustained and once the new trust
technology clients are successfully implemented. However, continued
consolidation in the banking industry and a prolonged unfavorable change in the
financial markets could impede growth in revenues and earnings.
The effective tax rate from continuing operations was 38.5 percent for 1998, as
compared to 39.0 percent for 1997. Income taxes are accounted for pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (See Note 1 and Note 11 of the Notes to Consolidated Financial
Statements).
Assets under management consist of total assets invested in our liquidity (money
market and short-term mutual funds) and non-liquidity mutual funds (Family of
Funds) for which we provide management services. Assets under administration
consist of total assets for which we provide management and administration
services, including client proprietary fund balances for which we only provide
administration services.
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.
DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---- ---- ------ ------
Revenues:
Trust technology services................ $148,583 $119,378 $29,205 24%
Trust operations outsourcing............. 16,065 10,147 5,918 58%
-------- -------- -------
Total revenues...................... 164,648 129,525 35,123 27%
Expenses:
Operating and development................ 87,284 67,973 19,311 28%
Sales and marketing...................... 28,194 24,406 3,788 16%
-------- -------- -------
Total operating profits............. $ 49,170 $ 37,146 $12,024 32%
======== ======== =======
Trust technology services revenues consists of the monthly processing and
software application fees from the TRUST 3000 product line, project fees
associated with the conversion of new clients onto the TRUST 3000 product line,
management fees for assets invested in our liquidity funds from bank clients,
and bank-related brokerage services. A significant one-time contractual buyout
fee from a client involved in an acquisition increased revenues in 1998. New
trust technology client relationships established in 1997 favorably affected
recurring processing fees by an incremental $9.3 million and nonrecurring
implementation fees by an incremental $6.0 million in 1998. Conversely, when a
client prematurely terminates its contract for processing services, recurring
processing fees are negatively affected in future periods and a one-time
contractual buyout fee is received. Buyout fees are recognized in income when
the client is completely removed from the TRUST 3000 product line. As a result
of lost trust technology clients in 1998, $15.0 million in one-time contractual
buyout fees were recognized and recurring processing fees decreased $7.0
million. Revenues earned from bank clients utilizing our liquidity products and
brokerage services increased 22 percent or $3.8 million, but only accounts for
approximately 16 percent of total trust technology services revenues recognized
in 1998 and 1997. The
15
recurring processing fee base is projected to increase as these new trust
technology clients are successfully implemented onto the TRUST 3000 product line
by mid-1999. Consolidations in the banking industry could provide additional
opportunities or could negatively affect future revenues depending on its effect
on our trust technology client base.
Trust operations outsourcing revenues experienced another year of strong growth.
Revenues are derived from processing and management fees. Revenues earned from
processing services accounts for approximately 60 percent in 1998 and 55 percent
in 1997 of total trust operations outsourcing revenues, while custody and
investment solutions comprise the remaining 40 percent in 1998 and 45 percent in
1997. Assets under custody were $38.8 billion at December 31, 1998 and $24.8
billion at December 31, 1997. New client relationships established in 1998
provided significant growth in this business.
Although revenues from this segment increased 27 percent and operating profits
increased 32 percent during 1998, profit margin only increased slightly to 30
percent for 1998, as compared to 29 percent for 1997. The contracting of new
clients and the recognition of a substantial one-time buyout fee increased
operating profits in 1998. However, increases in operating expenses to maintain
these new client relationships and a one-time write-off of capitalized software
development costs negatively affected operating profits in 1998. As a
percentage of sales, operating and development expenses increased slightly to 53
percent from 52 percent and sales and marketing expenses decreased slightly to
17 percent from 19 percent.
Operating and development expenses in 1998 increased mainly due to increased
business activity, a stronger commitment to enhancing products, the write-off of
previously capitalized software development costs, and the direct correlation
between bank-related brokerage services revenues and direct expenses. The
contracting of new clients required additional personnel and other related
operating costs in order to properly implement, service, and maintain these new
relationships. Additionally, substantial investments were incurred to analyze
and improve the implementation process for new clients. These investments
included process redesign and infrastructure reinvention.
Operating and development expenses were significantly affected in 1998 due to
several factors associated with software development costs. First, each year,
we evaluate strategies for new and existing software products, as well as
performing a recoverability assessment of software development projects
currently in production. The recoverability assessment included an evaluation
of expected future revenues and cash flows, acceptability of the software
product in its target market, a cost-benefit analysis as to the delivery and
support of the software product, and any technological advancements that could
enhance or render the product obsolete. As a result, certain projects were
considered either obsolete or incapable of achieving the expected results in
their original design and approximately $4.8 million of net software development
costs previously capitalized were written off during the fourth quarter of 1998.
Second, in order to keep a competitive edge, substantial investments in research
and development costs for the TRUST 3000 product line were incurred during 1998.
Finally, with the completion and subsequent release of several capitalized
software development projects, amortization expense increased during 1998.
Operating profits are expected to increase in 1999. This expectation is based
upon the fact that several new trust technology clients are near completion of
the implementation process, which should more than offset any negative effect on
operating profits from lost clients. Once these clients are successfully
implemented, recurring processing fees are expected to increase without any
significant corresponding increase in variable costs. Also, operating profits
should be favorably affected if sales momentum of the trust operations
outsourcing product continues. Consolidations in the banking industry could
affect future operating profits depending on how our clients are affected.
16
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.
DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---- ---- ------ ------
Total revenues........................... $97,972 $83,157 $14,815 18%
Expenses:
Operating and development................ 55,897 44,173 11,724 27%
Sales and marketing...................... 17,670 15,126 2,544 17%
------- ------- -------
Total operating profits............. $24,405 $23,858 $ 547 2%
======= ======= =======
Mutual fund services revenues are earned through administrative fees that are
based upon a fixed percentage, referred to as basis points, of the average daily
net asset value of the proprietary funds. The amount of basis points earned is
specific to each proprietary fund complex and can vary among complexes. The
increase in revenues was primarily fueled by growth in existing complexes and
the conversion of a large bank complex in 1998. Average proprietary fund
balances increased $27.1 billion or 37 percent to $100.4 billion for 1998 versus
$73.3 billion for 1997. Growth in average proprietary fund balances resulted
from banks being able to successfully convince their customers to invest assets
into bank sponsored mutual funds. Average basis points earned decreased in 1998
primarily due to a reduction in pricing for some larger clients in order to
solidify long-term relationships and the loss of some higher margin
relationships. However, the outlook for mutual fund services revenues remains
optimistic. Increased emphasis in the non-bank and offshore markets has produced
some positive results. Some recent successes achieved in the non-bank and
offshore markets included: the signing of a large non-bank client in mid-1998
that will fund approximately $7 billion in assets by early 1999, and increased
business activity offshore.
Although revenues increased 18 percent, operating profits only increased 2
percent. Profit margin in 1998 decreased to 25 percent, as compared to 29
percent for 1997. A significant increase in operating and development expenses
negatively affected operating profits in 1998. As a percentage of sales,
operating and development expenses increased to 57 percent from 53 percent. Two
primary factors contributed to this increase. There is a direct correlation
between revenues and certain direct expenses. The increase in revenues during
1998 generated an incremental $7.0 million in direct proprietary expenses.
Also, with the increased business activity and emphasis on other markets, back-
office operational costs increased, in order to maintain quality service for
existing clients and to establish distribution channels and name recognition
internationally. As a percentage of sales, sales and marketing expenses remained
flat at 18 percent for 1998 and 1997.
The combination of reduced pricing for some larger clients, the loss of some
higher margin relationships, and increased operating costs decreased profit
margin in 1998. Profit margin is expected to remain relatively flat in 1999.
Expanding services into the non-bank and offshore markets could produce
additional opportunities. However, continued consolidations in the banking
industry and a significant prolonged unfavorable change in the financial markets
could negatively affect revenues and profits.
17
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.
DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---- ---- ------ ------
Revenues:
Investment management fees............... $75,669 $51,188 $24,481 48%
Liquidity management fees................ 14,387 10,683 3,704 35%
------- ------- -------
Total revenues...................... 90,056 61,871 28,185 46%
Expenses:
Operating and development................ 27,460 25,488 1,972 8%
Sales and marketing...................... 44,505 33,102 11,403 34%
------- ------- -------
Total operating profits............. $18,091 $ 3,281 $14,810 451%
======= ======= =======
Investment management fees are earned through management fees that are based
upon a fixed percentage, referred to as basis points, of the average daily net
asset value of assets under management. Substantial increases in average assets
under management generated the 48 percent increase in revenues. Average assets
under management increased $5.1 billion or 53 percent to $14.7 billion during
1998, as compared to $9.6 billion during 1997. Investment solutions offered to
high-net-worth investors through registered investment advisors, financial
planners, and other financial intermediaries produced strong sales gains during
1998. These gains result from a unique product that allows the investment
advisor to dedicate more effort to increasing assets rather than administering
record-keeping and processing tasks. Additionally, many new institutional
clients were contracted for services in 1998. The sales momentum established in
the registered investment advisors market is projected to continue.
Liquidity management fees consist of our money market, short-term mutual funds
and cash sweep technology that are marketed to corporations and investment
firms. The 35 percent increase in liquidity management fees was mainly driven
by an increase in average assets under management and increased sales of the
cash sweep technology product.
The Asset Management segment experienced a significant increase in operating
profits primarily due to growth in assets under management. Profit margin in
1998 also improved substantially. Profit margin rose to 20 percent for 1998, as
compared to 5 percent for 1997. As a percentage of sales, operating and
development expenses decreased to 31 percent from 41 percent and sales and
marketing expenses decreased to 49 percent from 54 percent. Our ability to
leverage on our infrastructure resulted in improved margins as revenues
increased with minimal incremental variable operating costs. With the increased
sales momentum and the ability to leverage on our infrastructure, this segment
is expected to produce favorable operating results in 1999. However, any
significant devaluation in the financial markets could negatively affect
revenues and profits.
18
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 other 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.
DOLLAR PERCENT
1998 1997 CHANGE CHANGE
---- ---- ------ ------
Total revenues........................... $ 13,443 $14,439 $ (996) (7%)
Expenses:
Operating and development................ 10,296 8,102 2,194 27%
Sales and marketing...................... 13,465 12,136 1,329 11%
-------- ------- -------
Total operating losses.............. $(10,318) $(5,799) $(4,519) (78%)
========= ======== =======
Our Canadian operations are experiencing a transition in product demand. The
performance evaluation and consulting business experienced another year where
client terminations exceeded new client contracting. The investment advisory
business in Canada is gaining momentum as evidenced by revenues and assets under
management increasing in 1998. As a percentage of total segment revenues, the
performance evaluation and consulting business accounted for approximately 57
percent in 1998, as compared to 62 percent in 1997, and the investment advisory
business accounted for approximately 19 percent in 1998, as compared to only 8
percent in 1997.
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. As a percentage of
total segment revenues, these offshore enterprises accounted for approximately
22 percent in 1998, as compared to 16 percent in 1997. Revenues from any one
region were immaterial as a percentage of total segment revenues.
Operating results were affected by substantial investments made in foreign
markets. Our strategy is to team with local partners to establish name
recognition and distribution channels for our investment products and services.
Additionally, operating results were negatively affected by $2.7 million
associated with the write-off of customer lists from a foreign acquisition (See
Note 5 of the Notes to Consolidated Financial Statements). Continued investment
into offshore arenas will remain the primary focus for this business segment.
OTHER
- - -----
In 1994, we found a partnership, LSV Asset Management ("LSV"), with three
leading academics in the field of finance. Our interest in LSV at that time was
51 percent. 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 our global investment products. In 1997, LSV was consolidated into
our operating results. LSV reported $3,757 in total revenues and operating
profits of $957.
Beginning in the first quarter of 1998, our interest in LSV was reduced from 51
percent to approximately 45 percent. As a result, LSV must be accounted for
using the equity method of accounting. The vested interest in the net operating
results of LSV for 1998 is reflected in Equity in the earnings of unconsolidated
affiliate on the accompanying Consolidated Statements of Operations. Our
interest in LSV's net earnings for 1998 was $3,015.
19
General and administrative expenses decreased 3 percent to $13,463 for the year
ended December 31, 1998 from $13,931 for the year ended December 31, 1997. As a
percentage of total consolidated revenues, general and administrative expenses
were 4 percent in 1998, as compared to 5 percent in 1997. The decrease in
general and administrative expenses is primarily due to a reduction in personnel
costs in corporate overhead groups.
Interest income for the year ended December 31, 1998 was $1,558, as compared to
$983 for the year ended December 31, 1997. 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 year ended December 31, 1998 was $2,575, as compared to
$2,488 for the year ended December 31, 1997. Interest expense primarily relates
to the issuance of long-term debt in early 1997 (See Note 7 of the Notes to
Consolidated Financial Statements).
20
1997 COMPARED WITH 1996
INCOME STATEMENT DATA
(In thousands, except per common share data) PERCENT
1997 1996 CHANGE
---- ---- ------
Revenues:
Technology Services Segment........................ $129,525 $128,025 1%
Mutual Fund Services Segment....................... 83,157 62,874 32%
Asset Management Segment........................... 61,871 46,184 34%
Investments in New Business Segment................ 14,439 10,354 39%
Other.............................................. 3,757 380 889%
-------- --------
Total revenues................................... $292,749 $247,817 18%
Operating Income (Loss):
Technology Services Segment........................ $ 37,146 $ 43,309 (14%)
Mutual Fund Services Segment....................... 23,858 15,874 50%
Asset Management Segment........................... 3,281 (2,971) 210%
Investments in New Business Segment................ (5,799) (6,559) 12%
Other.............................................. (12,974) (13,566) 4%
-------- --------
Income from operations........................... 45,512 36,087 26%
Other income (expense), net........................... (1,505) 1,857 (181%)
-------- --------
Income from continuing operations
before income taxes................................ 44,007 37,944 16%
Income taxes.......................................... 17,163 14,798 16%
-------- --------
Income from continuing operations..................... $ 26,844 $ 23,146 16%
======== ========
Diluted earnings per common share
from continuing operations......................... $ 1.40 $ 1.20 17%
======== ========
ASSET BALANCES
(In millions)
As of December 31, PERCENT
------------------
1997 1996 CHANGE
---- ---- ------
Assets invested in liquidity funds.................... $ 17,950 $ 14,732 22%
Assets invested in non-liquidity funds................ $ 14,347 $ 9,050 59%
-------- --------
Assets under management............................ $ 32,297 $ 23,782 36%
Client proprietary assets under administration........ $ 83,419 $ 61,380 36%
-------- --------
Assets under administration........................ $115,716 $ 85,162 36%
======== ========
Revenues and earnings from continuing operations increased in 1997 primarily due
to strong growth in the Mutual Fund Services and Asset Management segments. The
growth in these two segments was primarily fueled by significant growth in fund
balances. However, the growth in revenues was partially offset by the
recognition of substantial one-time trust technology services revenues in 1996
due to bank clients involved in mergers and acquisitions. Also in 1996, a $1.1
million one-time realized gain, or $.03 diluted earnings per common share, was
realized from the sale of an investment.
The effective tax rate from continuing operations was 39.0 percent for 1997 and
1996. Income taxes are accounted for pursuant to Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (See Note 1 and Note
11 of the Notes to Consolidated Financial Statements).
21
TECHNOLOGY SERVICES
- - -------------------
DOLLAR PERCENT
1997 1996 CHANGE CHANGE
---- ---- ------ ------
Revenues:
Trust technology services................ $119,378 $123,782 $(4,404) (4%)
Trust operations outsourcing............. 10,147 4,243 5,904 139%
-------- -------- -------
Total revenues...................... 129,525 128,025 1,500 1%
Expenses:
Operating and development................ 67,973 62,746 5,227 8%
Sales and marketing...................... 24,406 21,970 2,436 11%
-------- -------- -------
Total operating profits............. $ 37,146 $ 43,309 $(6,163) (14%)
======== ======== =======
The comparison of trust technology services revenues were affected by the
recognition of significant one-time contractual buyout fees in 1996. An
incremental $4.5 million of one-time buyout fees were recognized in 1996, as
compared to 1997, associated with trust clients that terminated their
relationships. When a client terminates its contract for processing services,
recurring processing fees are negatively affected in future periods. As a
result, recurring processing fees in 1997 decreased approximately $4.8 million
associated with these lost clients. However, an incremental $2.2 million in
one-time implementation fees were recognized in 1997 due to the contracting of
new trust technology clients and the expansion of services to existing bank
clients involved in mergers and acquisitions. Revenues earned from liquidity
products and bank-related brokerage services increased 17 percent or $2.9
million, but only accounts for approximately 16 percent of total trust
technology services revenues in 1997 and 13 percent in 1996.
Trust operations outsourcing experienced significant growth in 1997 primarily
due to the establishment of new client relationships, including some larger
banks. Revenues earned from processing services were 55 percent in 1997 and 36
percent in 1996, while custody and investment solutions were 45 percent in 1997
and 64 percent in 1996. Assets under custody were $24.8 billion at December 31,
1997 and $16.8 billion at December 31, 1996. The transition between processing
and investment solutions was due to an increase in new clients contracting for
processing services during 1997.
Operating profits and profit margin decreased in 1997. Profit margin for 1997
was 29 percent, as compared to 34 percent for 1996. Operating profits in 1996
were boosted by the recognition of a substantial one-time contractual buyout fee
received from a client involved in an acquisition. Profit margin in 1997 was
affected by a rise in expenses associated with the contracting of new clients
and additional amortization expense of capitalized software development
projects. As a percentage of sales, operating and development expenses
increased to 52 percent from 49 percent and sales and marketing expenses
increased to 19 percent from 17 percent.
Operating and development expenses increased during 1997 primarily due to
additional operating costs associated with the contracting of new trust
operations outsourcing clients and software development costs. The contracting
of new trust operations outsourcing clients required additional personnel and
other operating costs to properly service and maintain the relationship.
Significant resources were expended to enhance the trust technology product
line, primarily through the open architecture project, as well as a concentrated
effort to address the Year 2000 issue. Amortization expense for software
development costs previously capitalized increased in 1997.
Sales and marketing expenses increased primarily due to additional personnel and
promotion costs. Personnel costs increased as a result of additional sales
compensation associated with the contracting of new trust technology clients in
1997. The increase in promotion costs resulted from additional sponsored
marketing events during 1997.
22
MUTUAL FUND SERVICES
- - --------------------
DOLLAR PERCENT
1997 1996 CHANGE CHANGE
---- ---- ------ ------
Total revenues.......................... $83,157 $62,874 $20,283 32%
Expenses:
Operating and development............... 44,173 36,255 7,918 22%
Sales and marketing..................... 15,126 10,745 4,381 41%
------- ------- -------
Total operating profits............ $23,858 $15,874 $ 7,984 50%
======= ======= =======
Mutual fund services revenues reported another year of strong growth primarily
fueled by the increase in average proprietary fund balances over the past year.
Average proprietary fund balances increased $22.9 billion or 45 percent from
$50.4 billion during 1996 to $73.3 billion during 1997. Average basis points
earned on proprietary funds decreased primarily due to a new contract
established with one of our largest non-bank proprietary clients in mid-1996
that reduced the amount of revenues earned from that complex. This decrease in
administrative fees earned was offset by an equal reduction in direct
proprietary fund expenses. The growth in proprietary fund balances was mainly
fueled by growth in existing proprietary fund complexes. This growth in
existing complexes was primarily the result of banks becoming more successful at
selling mutual funds and the favorable stock market environment. Additionally,
proprietary fund balances were affected by regulatory changes in 1996 that
permit the transfer of common trust assets into proprietary mutual funds on a
tax-free basis.
Operating profits and profit margin in 1997 increased primarily due to a
significant increase in proprietary fund balances. Profit margin was 29 percent
for 1997 and 25 percent in 1996. As a percentage of sales, operating and
development expenses decreased to 53 percent from 58 percent and sales and
marketing expenses remained relatively flat. The decrease in operating and
development expenses, as a percentage of sales, was due to administrative costs
remaining relatively flat from year to year.
ASSET MANAGEMENT
- - ----------------
DOLLAR PERCENT
1997 1996 CHANGE CHANGE
---- ---- ------ ------
Revenues:
Investment management fees............... $51,188 $37,543 $13,645 36%
Liquidity management fees................ 10,683 8,641 2,042 24%
------- ------- -------
Total revenues...................... 61,871 46,184 15,687 34%
Expenses:
Operating and development................ 25,488 25,438 50 --
Sales and marketing...................... 33,102 23,717 9,385 40%
------- ------- -------
Total operating profits............. $ 3,281 $(2,971) $ 6,252 210%
======= ======= =======
Investment management fees increased 36 percent from the prior-year period due
to an increase in average fund balances. Average assets under management
increased $3.2 billion to $9.6 billion for 1997, as compared to $6.4 billion for
1996, an increase of 50 percent. This increase in average fund balances was
primarily the result of increased sales of our Family of Funds to high-net-
worth individuals through various registered investment advisors, financial
planners, and other financial intermediaries, as well as an increase in sales of
our asset management programs to institutional investors during 1997.
Additionally, average basis points earned increased slightly during 1997.
The 24 percent increase in liquidity management fees was mainly driven by an
increase in average assets under management in liquidity products. However,
average basis points earned decreased slightly in 1997 due to clients
transferring funds into lower-fee liquidity products. Additionally, the
increase in revenues was slightly influenced by growth in our cash sweep
services to smaller banks.
23
The increase in operating profits and margin was primarily due to significant
growth in assets under management that generated a substantial increase in
revenues without a corresponding increase in variable costs. Profit margin
increased to 5 percent for 1997, as compared to a negative 6 percent in 1996. As
a percentage of sales, operating and development expenses decreased to 41
percent from 55 percent. This decrease is due to our ability to leverage on our
infrastructure without incurring significant additional operating costs. As a
percentage of sales, sales and marketing expenses increased to 54 percent from
51 percent. This increase is due to additional personnel costs, primarily sales
compensation, and promotion costs for a television advertising campaign.
INVESTMENTS IN NEW BUSINESS
- - ---------------------------
DOLLAR PERCENT
1997 1996 CHANGE CHANGE
---- ---- ------ ------
Total revenues........................... $14,439 $10,354 $4,085 39%
Expenses:
Operating and development................ 8,102 4,626 3,476 75%
Sales and marketing...................... 12,136 12,287 (151) (1%)
------- ------- ------
Total operating profits............. $(5,799) $(6,559) $ 760 12%
======= ======= ======
Revenues increased 39 percent primarily due to an increase in assets under
management. The increase in assets under management primarily stemmed from an
acquisition that was done in late 1996. Additionally, the investment advisory
business in Canada experienced significant increases in assets under management.
We continued our strategy to establish name recognition and distribution
channels in foreign markets. As a result, significant expenditures were
incurred.
OTHER
- - -----
In 1994, we formed a partnership, LSV, with three leading academics in the field
of finance. Our interest in LSV was 51 percent during 1996 and 1997 and was
consolidated into our operating results. LSV reported $3,757 in total revenues
during 1997, as compared to $380 during 1996. Operating profits from LSV were
$957 in 1997, as compared to operating losses of $331 in 1996.
General and administrative expenses increased 5 percent to $13,931 for the year
ended December 31, 1997 from $13,235 for the year ended December 31, 1996. The
increase in general and administrative expenses is primarily due to increases in
facilities and corporate overhead expenses. As a percentage of total
consolidated revenues, general and administrative expenses were 5 percent in
1997 and 1996.
Gain on sale of investments available for sale in 1996 was $1,097. The realized
gain is the result of the disposition of certain marketable securities
classified as Investments available for sale at an amount greater than original
cost.
Interest income for the year ended December 31, 1997 was $983, as compared to
$808 for the year ended December 31, 1996. 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 year ended December 31, 1997 was $2,488, as compared to
$48 for the year ended December 31, 1996. Interest expense in 1997 primarily
relates to the issuance of long-term debt in early 1997 (See Note 7 of the Notes
to Consolidated Financial Statements). All interest costs associated with
borrowings under the line of credit in 1996 were capitalized as it related to
the construction of our corporate campus.
24
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
1998 1997 1996
---- ---- ----
Net cash provided by operating activities................. $ 99,869 $ 46,537 $ 30,547
Net cash used in investing activities..................... (31,702) (21,854) (41,930)
Net cash provided by (used in) financing activities....... (32,078) (20,959) 14,294
-------- -------- --------
Net increase in cash and cash equivalents................. 36,089 3,724 2,911
Cash and cash equivalents, beginning of year.............. 16,891 13,167 10,256
-------- -------- --------
Cash and cash equivalents, end of year.................... $ 52,980 $ 16,891 $ 13,167
======== ======== ========
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 December 31, 1998, the unused sources of liquidity consisted of cash and cash
equivalents of $52,980 and the unused portion of the line of credit of $50,000.
Cash flow generated from operations in 1998 primarily resulted from an increase
in income, increased receivables collections, and an increase in accrued
compensation and various accrued liabilities. The increase in accrued
compensation and various accrued liabilities resulted from increased business
activity during 1998. Accrued compensation is paid annually in the first quarter
of the following year. Cash flow provided by operations in 1997 was negatively
affected by an increase in receivables. As a result of the contracting of new
trust clients in 1997, a substantial increase in unbilled receivables relating
to implementation fees was experienced. This increase in unbilled receivables
results from timing differences between services provided and contractual
billing schedules.
Cash flows provided by operations were also affected by several other factors.
Receivables from regulated investment companies increased in 1998 and 1997
primarily due to an increase in assets under management. These balances are
paid off in the following month. In 1998 and 1997, cash flows from operations
were favorably affected by the sales of loans classified as Loans receivable
available for sale, whereas, cash flows from operations in 1996 were negatively
affected by the purchase of these loans.
Cash flows from investing activities are principally affected by capital
expenditures, including capitalized software development costs. Capital
expenditures included significant costs associated with the construction and
subsequent expansion of our corporate campus. Construction of the corporate
campus began in late 1994 and was completed in late 1996. Construction of an
additional building within the corporate campus began in early 1998 and was
completed in early 1999. As of February 28, 1999, $5,751 has been spent on the
new building and we expect the total cost to be approximately $6,300.
Capitalized software development costs in 1998, 1997, and 1996 primarily result
from continued investments in the TRUST 3000 product line, especially the open
architecture project and a concentrated effort to address Year 2000 compliance
issues. In 1996, $5,536 in net proceeds were received from the sale of
marketable securities classified as Investments available for sale.
Cash flows from financing activities are primarily affected by debt and equity
transactions. On February 24, 1997, we issued $35,000 of medium-term notes in a
private offering with certain financial institutions. The proceeds were used to
repay the outstanding balance on our line of credit at that date, which amounted
to $30,000. Principal payments are made annually from the date of issuance while
interest payments are made semi-annually (See Note 7 of the Notes to
Consolidated Financial Statements). we continued our common stock repurchase
program. Approximately 867,000 shares of our common stock were acquired at a
cost of $55,156 during 1998 pursuant to an open market stock purchase
authorization of $298,365 made by the Board of Directors. As of February 28,
1999, SEI still had $28,056 remaining authorized for the purchase of our common
stock. Proceeds received from the issuance of common stock, including tax
benefit, rose substantially in 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.
25
DISCONTINUED OPERATIONS
- - -----------------------
In May 1995, the Board of Directors approved a plan of disposal for the SEI
Capital Resources Division ("CR") and the SEI Defined Contribution Retirement
Services Division ("DC"). CR provided investment performance evaluation
services, consulting services, and brokerage services to employee benefit plan
sponsors and investment advisors in the United States. CR was sold to a private
investment firm on December 31, 1997. DC provided administrative and processing
services, recordkeeping services, and employee retirement planning materials for
use by defined contribution plans. The transfer of DC's operations to the
acquiring firm was completed in 1996.
Discontinued operations for the year ended December 31, 1997 had revenues of
$25,675 and pre-tax losses of $3,294, as compared to revenues of $32,940 and
pre-tax losses of $6,170 for the year ended December 31, 1996. The 1997 losses
were charged against the provision established for the disposal of discontinued
operations and is reflected in Accrued discontinued operations disposal costs on
the accompanying Consolidated Balance Sheets (See Note 2 of the Notes to
Consolidated Financial Statements).
A provision for the disposal of CR and DC was established in the fourth quarter
of 1996 that included certain estimates relating to future commitments on
certain operating leases utilized by CR. These estimates were based upon
certain assumptions relating to the sub-leasing of these facilities. In 1998,
these sub-lease arrangements were finalized. As a result, the original
discontinued operations provision was overstated and accordingly was reduced by
$1,154,000, net of tax expense of $444,000, and is reflected in Income from
disposal of discontinued operations on the Consolidated Statements of
Operations.
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.
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.
26
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 of the TRUST 3000 product line is
projected to be $10 million. Through December 31, 1998, approximately $6.3
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 $1.7 million is projected for 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.
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.
27
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.
28
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
We do 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 only account for
approximately 4 percent of total 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. SEI does not undertake any specific actions
to cover its exposure to interest rate risk and is 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.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
-------------------------------------------
Index to Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheets -- December 31, 1998 and 1997
Consolidated Statements of Operations -- For the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Shareholders' Equity -- For the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows -- For the years ended
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
30
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SEI Investments Company:
We have audited the accompanying consolidated balance sheets of SEI Investments
Company (a Pennsylvania corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SEI Investments Company and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Financial Statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.
February 5, 1999
31
CONSOLIDATED BALANCE SHEETS SEI Investments Company
(In thousands) and Subsidiaries
DECEMBER 31, 1998 1997
============================================================================
ASSETS CURRENT ASSETS:
Cash and cash equivalents......................... $ 52,980 $ 16,891
Receivables from regulated investment
companies...................................... 18,999 14,452
Receivables, net of allowance for doubtful
accounts of $1,200............................. 27,919 31,192
Loans receivable available for sale............... 2,167 11,340
Deferred income taxes............................. 7,598 6,337
Prepaid expenses.................................. 3,846 3,783
-------- --------
TOTAL CURRENT ASSETS......................... 113,509 83,995
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated
depreciation and amortization of $57,452
and $49,493.................................... 62,761 52,131
-------- --------
CAPITALIZED SOFTWARE, net of accumulated
amortization of $8,238 and $7,959.............. 17,068 18,440
-------- --------
OTHER ASSETS, net................................. 15,434 14,318
-------- --------
$208,772 $168,884
============================================================================
The accompanying notes are an integral part of these statements.
32
CONSOLIDATED BALANCE SHEETS SEI Investments Company
(In thousands, except par value) and Subsidiaries
DECEMBER 31, 1998 1997
==========================================================================================
LIABILITIES CURRENT LIABILITIES:
AND
SHAREHOLDERS' Current portion of long-term debt........................... $ 2,000 $ 2,000
EQUITY Accounts payable............................................ 6,805 5,798
Accrued compensation........................................ 32,105 20,920
Accrued proprietary fund services........................... 10,370 9,812
Accrued consulting services................................. 6,934 3,260
Accrued discontinued operations disposal costs.............. 3,860 7,228
Other accrued liabilities................................... 35,209 25,500
Deferred revenue............................................ 13,511 7,158
-------- --------
TOTAL CURRENT LIABILITIES................................... 110,794 81,676
-------- --------
LONG-TERM DEBT.............................................. 31,000 33,000
-------- --------
DEFERRED INCOME TAXES....................................... 7,293 7,798
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Series Preferred stock, $.05 par value,
60 shares authorized; no shares issued
and outstanding............................................. -- --
Common stock, $.01 par value,
100,000 shares authorized; 17,861 and
17,767 shares issued and outstanding........................ 179 178
Capital in excess of par value.............................. 57,541 46,724
Retained earnings........................................... 2,422 --
Accumulated other comprehensive losses...................... (457) (492)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 59,685 46,410
-------- --------
$208,772 $168,884
=============================================================================================
The accompanying notes are an integral part of these statements.
33
CONSOLIDATED STATEMENTS OF OPERATIONS SEI Investments Company
(In thousands, except per share data) And Subsidiaries
YEAR ENDED DECEMBER 31, 1998 1997 1996
===================================================================================================================
REVENUES.............................................................. $366,119 $292,749 $247,817
EXPENSES:
Operating and development......................................... 180,937 148,536 129,776
Sales and marketing............................................... 103,834 84,770 68,719
General and administrative........................................ 13,463 13,931 13,235
-------- -------- --------
INCOME FROM OPERATIONS................................................ 67,885 45,512 36,087
GAIN ON SALE OF INVESTMENTS AVAILABLE FOR SALE........................ -- -- 1,097
EQUITY IN THE EARNINGS OF UNCONSOLIDATED AFFILIATE.................... 3,015 -- --
INTEREST INCOME....................................................... 1,558 983 808
INTEREST EXPENSE...................................................... (2,575) (2,488) (48)
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES................. 69,883 44,007 37,944
INCOME TAXES.......................................................... 26,904 17,163 14,798
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS..................................... 42,979 26,844 23,146
INCOME (LOSS) FROM DISPOSAL OF DISCONTINUED OPERATIONS,
NET OF INCOME TAX EXPENSE (BENEFIT) OF $444 AND $(5,139)........... 710 -- (16,335)
-------- -------- --------
NET INCOME............................................................ $ 43,689 $ 26,844 $ 6,811
===================================================================================================================
BASIC EARNINGS PER COMMON SHARE:
Earnings per common share from continuing operations.............. $ 2.41 $ 1.47 $ 1.25
Earnings (loss) per common share
from discontinued operations.................................... .04 -- (.88)
-------- -------- --------
BASIC EARNINGS PER COMMON SHARE....................................... $ 2.45 $ 1.47 $ .37
===================================================================================================================
DILUTED EARNINGS PER COMMON SHARE:
Earnings per common share from continuing operations.............. $ 2.25 $ 1.40 $ 1.20
Earnings (loss) per common share
from discontinued operations.................................... .04 -- (.85)
-------- -------- --------
DILUTED EARNINGS PER COMMON SHARE..................................... $ 2.28 $ 1.40 $ .35
===================================================================================================================
The accompanying notes are an integral part of these statements.
34
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY SEI Investments Company
(In thousands) and Subsidiaries
ACCUMULATED OTHER
COMPREHENSIVE INCOME
------------------------
CUMULATIVE UNREALIZED
FOREIGN HOLDING
CAPITAL CURRENCY GAIN (LOSS) TOTAL
COMMON STOCK IN EXCESS OF RETAINED TRANSLATION ON SHAREHOLDERS'
---------------
SHARES AMOUNT PAR VALUE EARNINGS ADJUSTMENTS INVESTMENTS EQUITY
===================================================================================================================================
BALANCE, DECEMBER 31, 1995................... 18,425 $184 $48,207 $ 7,167 $ (58) $ 502 $56,002
Comprehensive income:
Net income................................ -- -- -- 6,811 -- -- 6,811
Foreign currency translation
adjustments............................. -- -- -- -- (119) -- (119)
Realized loss on investments,
net of reclassification adjustment...... -- -- -- -- -- (502) (502)
-------
Total comprehensive income................... 6,190
Purchase and retirement of common
stock................................... (533) (5) (1,396) (8,369) -- -- (9,770)
Issuance of common stock under the
employee stock purchase plan............ 52 -- 976 -- -- -- 976
Issuance of common stock upon
exercise of stock options............... 554 6 4,434 -- -- -- 4,440
Tax benefit on stock options exercised....... -- -- 2,738 -- -- -- 2,738
Cash dividends............................... -- -- -- (4,468) -- -- (4,468)
===================================================================================================================================
BALANCE, DECEMBER 31, 1996................... 18,498 185 54,959 1,141 (177) -- 56,108
Comprehensive income:
Net income................................ -- -- -- 26,844 -- -- 26,844
Foreign currency translation
adjustments............................. -- -- -- -- (240) -- (240)
Unrealized loss on investments............ -- -- -- -- -- (75) (75)
--------
Total comprehensive income................... 26,529
Purchase and retirement of common
stock................................... (1,403) (14) (20,666) (22,940) -- -- (43,620)
Issuance of common stock under the
employee stock purchase plan............ 47 1 1,053 -- -- -- 1,054
Issuance of common stock upon
exercise of stock options............... 625 6 8,009 -- -- -- 8,015
Tax benefit on stock options
exercised............................... -- -- 3,369 -- -- -- 3,369
Cash dividends............................... -- -- -- (5,045) -- -- (5,045)
===================================================================================================================================
BALANCE, DECEMBER 31, 1997................... 17,767 $178 $ 46,724 $ -- $(417) $(75) $46,410
===================================================================================================================================
The accompanying notes are an integral part of these statements.
35
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY SEI Investments Company
(In thousands) and Subsidiaries
ACCUMULATED OTHER
COMPREHENSIVE INCOME
------------------------
CUMULATIVE UNREALIZED
FOREIGN HOLDING
CAPITAL CURRENCY GAIN (LOSS) TOTAL
COMMON STOCK IN EXCESS OF RETAINED TRANSLATION ON SHAREHOLDERS'
--------------
SHARES AMOUNT PAR VALUE EARNINGS ADJUSTMENTS INVESTMENTS EQUITY
================================================================================================================================
BALANCE, DECEMBER 31, 1997............ 17,767 $178 $ 46,724 $ -- $(417) $(75) $ 46,410
Comprehensive income:
Net income......................... -- -- -- 43,689 -- -- 43,689
Foreign currency translation
adjustments...................... -- -- -- -- 9 -- 9
Unrealized gain on investments..... -- -- -- -- -- 26 26
--------
Total comprehensive income............ 43,724
Purchase and retirement of common
stock............................ (898) (9) (21,998) (35,566) -- -- (57,573)
Issuance of common stock under the
employee stock purchase plan..... 28 -- 1,524 -- -- -- 1,524
Issuance of common stock upon
exercise of stock options........ 964 10 11,262 -- -- -- 11,272
Tax benefit on stock options
exercised........................ -- -- 20,029 -- -- -- 20,029
Cash dividends........................ -- -- -- (5,701) -- -- (5,701)
================================================================================================================================
BALANCE, DECEMBER 31, 1998............ 17,861 $179 $ 57,541 $ 2,422 $(408) $(49) $ 59,685
================================================================================================================================
The accompanying notes are an integral part of these statements.
36
CONSOLIDATED STATEMENTS OF CASH FLOWS SEI Investments Company
(In thousands) and Subsidiaries
YEAR ENDED DECEMBER 31, 1998 1997 1996
====================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $43,689 $ 26,844 $ 6,811
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................................... 15,688 14,068 10,039
Provision for losses on receivables............................... -- -- 144
Equity in the earnings of unconsolidated affiliate................ (3,015) -- --
Write-off of capitalized software................................. 4,832 -- --
Write-off of customer lists....................................... 2,662 -- --
Deferred income tax expense (benefit)............................. (3,608) 893 3,821
Discontinued operations........................................... (710) -- 6,046
Gain on sale of investments available for sale.................... -- -- (1,097)
Other............................................................. 3,450 (1,214) (3,739)
Change in current assets and liabilities:
Decrease (increase) in:
Receivables from regulated investment companies........... (4,547) (3,616) (2,079)
Receivables............................................... 2,121 (11,634) 2,734
Loans receivable available for sale....................... 9,173 1,703 (7,891)
Prepaid expenses.......................................... (63) 42 1,065
Increase (decrease) in:
Accounts payable.......................................... 1,007 (65) (389)
Accrued compensation...................................... 11,208 6,417 779
Accrued discontinued operations disposal costs............ (2,658) (189) 7,417
Accrued proprietary fund services......................... 558 3,064 4,065
Accrued consulting services............................... 3,674 (836) 1,206
Other accrued liabilities................................. 10,055 9,025 2,287
Deferred revenue.......................................... 6,353 2,035 (672)
------- -------- -------
Total adjustments............................................. 56,180 19,693 23,736
------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................ $99,869 $ 46,537 $30,547
====================================================================================================================
The accompanying notes are an integral part of these statements.
37
Consolidated Statements of Cash Flows SEI Investments Company
(In thousands) and Subsidiaries
Year Ended December 31, 1998 1997 1996
========================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment.................................... (21,774) (12,955) (33,060)
Additions to capitalized software...................................... (6,719) (8,096) (10,668)
Proceeds from sale (purchase) of investments available for sale........ (2,626) -- 5,536
Other.................................................................. (583) (803) (3,738)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES............................. (31,702) (21,854) (41,930)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payment on) long-term debt.............................. (2,000) 35,000 --
Proceeds from (payment on) line of credit.............................. -- (20,000) 20,000
Purchase and retirement of common stock................................ (55,156) (43,620) (9,770)
Proceeds from issuance of common stock................................. 10,379 9,069 5,416
Tax benefit on stock options exercised................................. 20,029 3,369 2,738
Payment of dividends................................................... (5,330) (4,777) (4,090)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............... (32,078) (20,959) 14,294
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................... 36,089 3,724 2,911
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................................ 16,891 13,167 10,256
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................................... $ 52,980 $ 16,891 $ 13,167
========================================================================================================================
The accompanying notes are an integral part of these statements.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEI Investments Company
and Subsidiaries
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,
Mutual Fund Services, Asset Management, and Investments in New
Business. The Technology Services segment, which accounted for 45
percent of consolidated revenues in 1998, includes the Trust 3000
product line and trust operations outsourcing. The Mutual Fund Services
segment, which accounted for 27 percent of consolidated revenues in
1998, provides administration and distribution services to proprietary
mutual funds created for banks, insurance firms, and investment
management companies. The Asset Management segment, which accounted for
25 percent of consolidated revenues in 1998, 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. Investments in New Business, which accounted for 3
percent of consolidated revenues in 1998, 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.
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 ("SIDCO"), SEI Investments Management Corporation ("SIMC"), 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 Operations (See Note 5).
CASH AND CASH EQUIVALENTS - At December 31, 1998 and 1997, Cash and
cash equivalents included $50,283,000 and $10,436,000, respectively,
primarily invested in SEI Tax Exempt Trust, one of several mutual funds
sponsored by SIMC. Interest and dividend income for 1998, 1997, and
1996 was $1,558,000, $983,000, and $808,000, respectively (See Note
13).
PROPERTY AND EQUIPMENT - Property and Equipment on the accompanying
Consolidated Balance Sheets consist of the following:
ESTIMATED
USEFUL LIVES
1998 1997 (IN YEARS)
---------------------------------------------------------------------------------------------------------------
Equipment............................................... $ 53,739,000 $ 42,376,000 3 to 5
Buildings............................................... 28,303,000 27,940,000 25 to 39
Land.................................................... 6,993,000 6,993,000 N/A
Purchased software...................................... 10,270,000 9,181,000 3
Furniture and fixtures.................................. 10,284,000 9,790,000 3 to 5
Leasehold improvements.................................. 6,791,000 5,344,000 Lease Term
Construction in progress................................ 3,833,000 -- N/A
------------ ------------
120,213,000 101,624,000
Less: Accumulated depreciation
and amortization...................................... (57,452,000) (49,493,000)
------------ ------------
Property and Equipment, net............................. $ 62,761,000 $ 52,131,000
---------------------------------------------------------------------------------------------------------------
39
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 detailed 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 9.0 years.
Capitalized software development costs consist primarily of salary,
consulting, and computer costs incurred to develop new products and
enhancements to existing products. During 1998, 1997, and 1996,
software development costs of $6,719,000, $8,096,000, and $10,668,000
were capitalized, respectively. Amortization expense was $3,259,000,
$3,233,000, and $1,447,000 in 1998, 1997, and 1996, respectively, and
is included in Operating and development expense on the accompanying
Consolidated Statements of Operations.
Total research and development costs, including capitalized software,
were $24,866,000, $22,500,000, and $26,254,000 in 1998, 1997, and 1996,
respectively.
Management continually evaluates the recoverability of existing
software products, as well as strategies for new software products. The
assessment as to the recoverability of existing software products
included an evaluation of expected future revenues, acceptability of
the product in the market, the ability to support the product in a
cost-effective manner, and technological enhancements. In the fourth
quarter of 1998, management determined that certain software products
were considered either obsolete or incapable of producing the
anticipated results that the product was designed to produce. As a
result, the Company wrote-off net capitalized software development
costs of $4,832,000.
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 year is as
follows:
1998 1997 1996
---- ---- ----
Interest paid............................................ $ 2,598,000 $1,499,000 $ 794,000
Interest and dividends received.......................... $ 1,467,000 $ 957,000 $ 876,000
Income taxes paid (Federal and state).................... $12,514,000 $8,667,000 $5,525,000
REVENUE RECOGNITION - Principal sources of revenues are information
processing and software services, management, administration, and
distribution of mutual funds, brokerage and consulting services, and
other asset management products and services. Revenues from these
services are recognized in the periods in which the services are
performed. Cash received by the Company in advance of the performance
of services is deferred and recognized as revenue when earned.
40
INCOME TAXES - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). Under SFAS 109, the liability method is
used for income taxes. Under this method, deferred tax assets and
liabilities are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured
using enacted tax rates and laws that are expected to be in effect when
the differences reverse (See Note 11).
FOREIGN CURRENCY TRANSLATION - The assets and liabilities of foreign
operations are translated into U.S. dollars using the rates of exchange
at year end. The results of operations are translated into U.S. dollars
at the average daily exchange rates for the period. All foreign
currency transaction gains and losses are included in income in the
periods in which they occur, and are immaterial for each of the three
years in the period ended December 31, 1998.
EARNINGS PER SHARE - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
128, "Earnings per Share" ("SFAS 128"), which supersedes 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 operations 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 YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (Denominator) Amount
----------- ------------- ------
Basic earnings per common share
from continuing operations............................... $42,979,000 17,827,000 $2.41
Dilutive effect of stock options.............................. -- 1,299,000
----------- ----------
Diluted earnings per common share
from continuing operations............................... $42,979,000 19,126,000 $2.25
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (Denominator) Amount
------------ ------------- ------
Basic earnings per common share
from continuing operations............................... $26,844,000 18,315,000 $1.47
Dilutive effect of stock options.............................. -- 921,000
----------- ----------
Diluted earnings per common share
from continuing operations............................... $26,844,000 19,236,000 $1.40
FOR THE YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (Denominator) Amount
----------- ------------ ------
Basic earnings per common share
from continuing operations............................... $23,146,000 18,497,000 $1.25
Dilutive effect of stock options.............................. -- 867,000
----------- ----------
Diluted earnings per common share
from continuing operations............................... $23,146,000 19,364,000 $1.20
--------------------------------------------------------------------------------------------------------------------
Options to purchase 422,000, 580,000, and 544,000 shares of common
stock, with an average exercise price per share of $89.43, $42.00, and
$24.20, were outstanding during 1998, 1997, and 1996, 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.
41
According to SFAS 128, all earnings per common share data previously
reported have been restated to comply with its provisions. The effect of
this accounting change on previously reported earnings per common share
data is as follows:
------------------------------------------------------------------------------------------------------------
1996
----
Per common share amounts from continuing operations:
Primary earnings per common share as reported.................................................. $1.20
Effect of SFAS 128............................................................................. .05
-----
Basic earnings per common share as restated.................................................... $1.25
Fully diluted earnings per common share as reported............................................ $1.20
Effect of SFAS 128............................................................................. .00
-----
Diluted earnings per common share as restated.................................................. $1.20
------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME - In 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 that is
presented with equal prominence as other financial statements.
Comprehensive income consists of net income, foreign currency translation
adjustments, and unrealized holding gains and losses. The adoption of SFAS
130 had no impact on total shareholders' equity and is presented on the
accompanying Consolidated Statements of Shareholders' Equity. Prior year
financial statements have been reclassified to conform with the provisions
established in SFAS 130.
----------------------------------------------------------------------------------------------------------------------
TAX
PRE-TAX (EXPENSE) NET-OF TAX
AMOUNT OR BENEFIT AMOUNT
------ ---------- ------
For the Year Ended December 31, 1996:
------------------------------------
Unrealized gains on investments:
Unrealized holding gains arising during period.................... $ 273 $(106) $ 167
Less: reclassification adjustment for
gains realized in net income...................................... (1,097) 428 (669)
------- ----- -----
Net unrealized loss................................................. (824) 322 (502)
Foreign currency translation adjustments............................... (195) 76 (119)
------- ----- -----
Total other comprehensive loss......................................... $(1,019) $ 398 $(621)
======= ===== =====
FOR THE YEAR ENDED DECEMBER 31, 1997:
------------------------------------
Unrealized holding loss arising during period.......................... $ (393) $ 153 $(240)
Foreign currency translation adjustments............................... (123) 48 (75)
------- ----- -----
Total other comprehensive loss......................................... $ (516) $ 201 $(315)
======= ===== =====
FOR THE YEAR ENDED DECEMBER 31, 1998:
------------------------------------
Unrealized holding gains arising during period......................... $ 15 $ (6) $ 9
Foreign currency translation adjustments............................... 42 (16) 26
------- ----- -----
Total other comprehensive income....................................... $ 57 $ (22) $ 35
======= ===== =====
----------------------------------------------------------------------------------------------------------------------
42
Management's Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS - The financial statements for prior years have been
reclassified to conform with current-year presentation.
NOTE 2 - DISCONTINUED OPERATIONS:
In May 1995, the Company's Board of Directors approved a plan of disposal
for the SEI Capital Resources Division ("CR") and the SEI Defined
Contribution Retirement Services Division ("DC"). CR provided investment
performance evaluation services, consulting services, and brokerage
services to employee benefit plan sponsors and investment advisors in the
United States. DC provided administrative and processing services,
recordkeeping services, and employee retirement planning materials for use
by defined contribution plans. In 1996, the Company completed the transfer
of DC's full service recordkeeping operations to KPMG Peat Marwick. CR and
DC were being accounted for together as discontinued operations. The
accompanying Consolidated Financial Statements reflect the operating
results and balance sheet items of the discontinued operations separately
from continuing operations.
At the measurement date, the Company expected the sale of CR would have
resulted in a gain on the disposal of CR's assets which would have been
sufficient to offset any losses incurred by DC. As a result, no provision
for estimated losses was established for the period from the measurement
date to the estimated disposal date. In the fourth quarter of 1996, based
on current information, management of the Company concluded that any
proceeds received from a possible sale of CR would not be sufficient to
offset the remaining net assets of CR and DC. Therefore, the Company
recorded a charge of $16,335,000 ($.88 basic earnings per common share and
$.85 diluted earnings per common share), net of income tax benefit of
$5,139,000. This provision was established to cover all future costs
associated with the disposal of CR and DC. This provision is reflected in
Accrued discontinued operations disposal costs on the accompanying
Consolidated Balance Sheets.
In July 1997, the Company entered into a definitive agreement to sell the
remaining net assets of CR to a private investment firm. The deal was
closed on December 31, 1997. Based upon the terms of the agreement, the
Company received a specified amount at closing which was subject to
adjustment. The adjustment to the purchase price consisted of a working
capital adjustment plus an amount representing the net amount of cash
activity from CR's operations during the period between August 18, 1997 and
December 31, 1997. Additionally, the Company received a note from the
acquiring firm, which was due in two installments in August 1998 and
February 1999. As of March 29, 1999, the Company has not received any
principal payments on this note. No additional gain or loss was recorded at
December 31, 1997 as a result of this transaction. Any additional gain will
be recorded when payment on the note is received.
The charge recorded in the fourth quarter of 1996 included certain
estimates relating to the Company's future commitments on certain of its
operating leases utilized by CR. These estimates were based upon certain
assumptions relating to the sub-leasing of these facilities. In 1998, these
sub-lease arrangements were finalized. As a result, the original
discontinued operations provision was overstated. Accordingly, the Company
reduced the discontinued operations provision by $1,154,000, net of tax
expense of $444,000, which is reflected in Income from disposal of
discontinued operations on the Consolidated Statements of Operations.
43
NOTE 3 - RECEIVABLES:
Receivables on the accompanying Consolidated Balance Sheets consist of the
following:
1998 1997
--------------------------------------------------------------------------------------------------------
Trade receivables.................................................. $14,586,000 $16,219,000
Fees earned, not received.......................................... 2,558 000 2,308,000
Fees earned, not billed............................................ 11,975,000 13,865,000
----------- -----------
29,119,000 32,392,000
Less: Allowance for doubtful accounts............................. (1,200,000) (1,200,000)
----------- -----------
$27,919,000 $31,192,000
--------------------------------------------------------------------------------------------------------
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, SIDCO and SIMC, for distribution, investment
advisory, and administration services provided by these subsidiaries to
various regulated investment companies sponsored by the Company (See Note
13).
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 continual 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 a year from the balance sheet
date.
NOTE 5 - OTHER ASSETS:
Other assets on the accompanying Consolidated Balance Sheets consist of the
following:
1998 1997
-----------------------------------------------------------------------------------------------------------------------
Investments available for sale................................................ $ 3,565,000 $ 876,000
Investment in unconsolidated affiliate........................................ 2,573,000 --
Customer lists, net of accumulated
amortization of $291....................................................... -- 3,009,000
Other, net.................................................................... 9,296,000 10,433,000
----------- -----------
Other assets.................................................................. $15,434,000 $14,318,000
-----------------------------------------------------------------------------------------------------------------------
44
INVESTMENTS AVAILABLE FOR SALE - Investments available for sale consist of
investments in mutual funds sponsored by the Company. 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 Comprehensive income. Realized gains
and losses, as determined on a specific identification basis, are reported
separately on the accompanying Consolidated Statements of Operations.
Investments available for sale had an aggregate cost of $3,645,000 and
$1,000,000 at December 31, 1998 and 1997, respectively. These securities
had an aggregate market value of $3,565,000 and $876,000, with gross
unrealized holding losses of $80,000 and $124,000 at December 31, 1998 and
1997, respectively. The net unrealized holding losses of $49,000 and
$75,000 (net of income tax benefit of $31,000 and $49,000) were reported as
a separate component of Accumulated other comprehensive losses on the
accompanying Consolidated Balance Sheets at December 31, 1998 and 1997,
respectively. There were no gross unrealized holding gains as of December
31, 1997.
In 1996, proceeds from the sale of securities classified as Investments
available for sale were $6,536,000. The aggregate cost of these securities
prior to sale was $5,439,000, resulting in a realized gain of $1,097,000.
This gain is reflected in Gain on sale of investments available for sale on
the accompanying Consolidated Statements of Operations. The Company did
not sell any of its investments in 1997.
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"). The Company contributed $1,000,000 in cash for a
51 percent general partnership interest and the other three partners
contributed all of its rights, title, and interest in the Quantitative
Value Analysis Method and Software in consideration for aggregate
partnership interests of 49 percent. 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, two of several portfolios included in both SEI
Institutional Managed Trust and SEI Institutional Investments Trust, which
are open-end regulated investment companies. In addition, LSV is a
portfolio manager of certain assets within SEI U.S. Equity Portfolio, which
is one of many portfolios included in SEI Global Master Fund, a variable
limited liability investment company organized in Ireland.
Beginning in the first quarter of 1998, the Company's interest in LSV was
reduced to approximately 45 percent. As a result, the Company modified its
accounting for LSV from the consolidation method to the equity method. 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 Operations.
The following table contains condensed financial information of LSV:
CONDENSED STATEMENT OF OPERATIONS 1998
---------------------------------------------------------------------------------------------------
Revenues........................................................................ $10,810,000
Net income...................................................................... $ 6,637,000
---------------------------------------------------------------------------------------------------
45
CONDENSED BALANCE SHEET 1998
--------------------------------------------------------------------------------------------------
Current assets.................................................................. $6,284,000
Non-current assets.............................................................. 100,000
----------
Total assets.................................................................... $6,384,000
Current liabilities............................................................. $1,096,000
Partners' capital............................................................... 5,288,000
----------
Total liabilities and
partners' capital............................................................ $6,384,000
--------------------------------------------------------------------------------------------------
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. Amortization expense for
1998 and 1997 was $384,000 and $291,000, respectively. There was no
amortization expense in 1996.
Management continually 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
future cash flow is less than the net book value of the asset, the asset is
written down to its net realizable value. In the fourth quarter of 1998,
the Company recorded a charge of $2,662,000 to write-off the remaining
value assigned to customer lists acquired in the 1996 acquisition of a
company in Latin America. A recent change in the strategic direction of
this business resulted in a devaluation of the customer list that was
originally acquired.
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 maximum month-end amount of debt outstanding on the Company's line of
credit for the years ended December 31, 1998 and 1997 was $15,000,000 and
$30,000,000, respectively. Interest expense, including commitment fees, on
the Company's line of credit was $127,000, $302,000, and $794,000 based on
a weighted average interest rate of approximately 5.9 percent, 5.8 percent,
and 6.0 percent for the years ended December 31, 1998, 1997, and 1996,
respectively.
46
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 and
$15,000,000 of 7.27% Senior Notes (collectively, the "Notes") in a private
offering with certain financial institutions. The Notes are unsecured with
final maturities ranging from 10 to 15 years. The proceeds from the Notes
were used to repay the outstanding balance on the Company's line of credit
at that time. 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. Principal payments on the Notes are made annually
from the date of issuance while interest payments are made semi-annually.
The Company paid the first two principal payments for $2,000,000 each in
February 1998 and 1999. The carrying amount of the Company's long-term
debt approximates its fair value.
Aggregate maturities of long-term debt at December 31, 1998 are:
--------------------------------------------------------------------------------------------------------
1999.......................................................................... $ 2,000,000
2000.......................................................................... 2,000,000
2001.......................................................................... 2,000,000
2002.......................................................................... 2,000,000
2003.......................................................................... 4,000,000
2004 and thereafter........................................................... 21,000,000
-----------
$33,000,000
--------------------------------------------------------------------------------------------------------
Interest expense relating to the Company's long-term debt was $2,448,000
and $2,186,000 for the years ended December 31, 1998 and 1997,
respectively.
NOTE 8 - SHAREHOLDERS' EQUITY:
STOCK-BASED COMPENSATION PLANS - The Company has several stock option plans
under which non-qualified and incentive stock options for common stock are
available for grant to officers, directors, and key employees. The options
granted and the option prices are established by the Board of Directors in
accordance with the terms of the plans. The Board of Directors has
reserved an aggregate 14,605,000 shares for grant under these plans. All
options outstanding were granted at prices equal to the fair market value
of the stock on the date of grant and expire 10 years after the date of
grant. All options granted prior to December 1997 vest ratably over a four
year period from the date of grant. All options granted in December 1997
and after vest ratably upon the Company's attainment of specific earnings
levels or entirely after seven years from the date of grant.
The Company accounts for its stock option plans in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly,
no compensation expense has been recognized. In 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
SFAS 123 establishes a fair value based method of accounting for stock-
based compensation plans. SFAS 123 requires that an employer's financial
statements include certain disclosures about stock-based employee
compensation arrangements regardless of the method used to account for the
plan. Had the Company recognized compensation cost for its stock option
plans consistent with the provisions of SFAS 123, the Company's net income
and earnings per common share would have been reduced to the following pro
forma amounts:
47
1998 1997 1996
----------------------------------------------------------------------------------------------------------------
Net income:
As reported................................................... $43,689 $26,844 $6,811
Pro forma..................................................... $37,721 $25,334 $6,201
Basic earnings per common share:
As reported................................................... $ 2.45 $ 1.47 $ .37
Pro forma..................................................... $ 2.12 $ 1.38 $ .34
Diluted earnings per common share:
As reported................................................... $ 2.28 $ 1.40 $ .35
Pro forma..................................................... $ 1.97 $ 1.32 $ .32
----------------------------------------------------------------------------------------------------------------
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
The weighted average fair value of the stock options granted during 1998,
1997, and 1996 was $121.86, $59.71, and $31.31, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
1998 1997 1996
----------------------------------------------------------------------------------------------------------
Risk-free interest rate............................................ 5.34% 6.55% 6.70%
Expected dividend yield............................................ 1.00% 1.00% 1.00%
Expected life...................................................... 7 YEARS 7 Years 7 Years
Expected volatility................................................ 40.19% 37.36% 34.87%
----------------------------------------------------------------------------------------------------------
Certain information relating to the Company's stock option plans for 1998,
1997, and 1996 is summarized as follows:
-------------------------------------------------------------------------------------------------------------------
Weighted
Number of Average
Shares Exercise Price
------ --------------
Balance as of December 31, 1995.......................................... 4,127,000 $13.44
Granted.................................................................. 365,000 21.65
Exercised................................................................ (554,000) 8.02
Expired or canceled...................................................... (82,000) 20.44
---------
Balance as of December 31, 1996.......................................... 3,856,000 14.85
Granted.................................................................. 622,000 40.55
Exercised................................................................ (625,000) 12.83
Expired or canceled...................................................... (58,000) 22.25
---------
Balance as of December 31, 1997.......................................... 3,795,000 19.27
-------------------------------------------------------------------------------------------------------------------
48
--------------------------------------------------------------------------------------------------------------------
Weighted
Number of Average
Shares Exercise Price
------ --------------
Balance as of December 31, 1997.......................................... 3,795,000 19.27
Granted.................................................................. 508,000 84.07
Exercised................................................................ (964,000) 11.70
Expired or canceled...................................................... (95,000) 32.49
---------
Balance as of December 31, 1998.......................................... 3,244,000 $31.25
Exercisable as of December 31, 1998...................................... 1,976,000 $15.99
Available for future grant as of December 31, 1998....................... 1,429,000 --
--------------------------------------------------------------------------------------------------------------------
As of December 31, 1997 and 1996, there were 2,725,000 shares and 3,010,000
shares exercisable, respectively. The expiration dates for options at
December 31, 1998 range from July 17, 1999 to December 16, 2008, with a
weighted average remaining contractual life of 6.2 years.
The following table summarizes information relating to all options
outstanding at December 31, 1998:
---------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
at December 31, 1998 at December 31, 1998
----------------------------- ------------------------------
Weighted
Weighted Weighted Average
Range of Average Average Remaining
Exercise Number Exercise Number Exercise Contractual
Prices of Price of Price Life
(Per Share) Shares (Per Share) Shares (Per Share) (Years)
----------- ------ ----------- ------ ----------- -------
$ 8.00 - $13.00 748,000 $ 9.95 748,000 $ 9.95 2.3
13.75 - 18.50 670,000 16.65 668,000 16.65 4.8
19.50 - 26.25 794,000 22.73 560,000 23.25 6.7
42.00 - 57.00 598,000 43.75 -- -- 9.1
68.75 - 89.75 434,000 88.83 -- -- 9.9
--------- ---------
3,244,000 1,976,000
---------------------------------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN - The Company has an employee stock purchase
plan that provides for offerings of common stock to eligible employees at a
price equal to 85 percent of the fair market value of the stock at the end
of the stock purchase period, as defined. The Company has reserved
1,300,000 shares for issuance under this plan. At December 31, 1998,
761,000 cumulative shares have been issued.
COMMON STOCK BUYBACK - The Board of Directors has authorized the purchase
of the Company's common stock on the open market or through private
transactions of up to an aggregate of $298,365,000. Through December 31,
1998, a total of 15,503,000 shares at an aggregate cost of $264,278,000
have been purchased and retired. The Company purchased 867,000 shares at a
cost of $55,156,000 during 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.
49
SHAREHOLDERS' RIGHTS PLAN - On December 10, 1998, the Company's Board of
Directors adopted a new Shareholder Rights Plan to replace the Shareholder
Rights Plan originally adopted in 1988 which expired on December 19, 1998.
The Company's Shareholders Rights Plan is designed to deter coercive or
unfair takeover tactics and to prevent a person or group from acquiring
control of the Company without offering a fair price to all shareholders.
Under the terms of the 1998 Shareholder Rights Plan, all common
shareholders of record at the close of business on December 19, 1999 shall
receive one Right for each outstanding common share of the Company. Any
new common shares issued after December 19, 1999 will receive one Right for
each common share. Each Right entitles the registered holder to purchase
from the Company one two-thousandths of a share of Series A Junior
Participating Preferred Shares, par value $.05 per share, at an exercise
price of $500 per share. The Rights will become exercisable and trade
separately from the Common Stock 10 days following a public announcement
that a person or group is the beneficial owner of 20 percent or more of the
outstanding Common Shares (the "Stock Acquisition Date"), or the
commencement of a tender or exchange offer that would result in such a
person or group owning 20 percent or more of the outstanding Common Shares.
In the event that the Company is involved in a merger or other business
combination in which the Company survives and its common stock remains
outstanding, the other stockholders will be able to exercise the Rights and
buy common stock of the Company having twice the value of the exercise
price of the Rights. Additionally, if the Company is involved in certain
other mergers where its shares are exchanged or certain major sales of its
assets occur, stockholders will be able to purchase the other party's
common shares in an amount equal to twice the value of the exercise price
of the Rights. Upon the occurrence of any of these events, the Rights will
no longer be exercisable into Preferred Shares.
The Rights, which do not have voting rights, will expire on December 19,
2008, and may be redeemed by the Company any time until ten days following
the Stock Acquisition Date at a price of $.01 per Right.
DIVIDENDS - 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. 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.
The dividends declared in 1998 and 1997 were $5,701,000 and $5,045,000,
respectively. The Board of Directors has indicated its intention to pay
future dividends on a semiannual basis.
NOTE 9 - EMPLOYEE BENEFIT PLAN:
The Company has a tax-qualified defined contribution plan (the "Plan").
The Plan provides retirement benefits, including provisions for early
retirement and disability benefits, as well as a tax-deferred savings
feature. After satisfying certain requirements, participants are vested in
employer contributions at the time the contributions are made. All Company
contributions are discretionary and are made from available profits. The
Company contributed $1,471,000, $1,412,000, and $1,345,000 to the Plan in
1998, 1997, and 1996, respectively.
50
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
The Company has entered into various operating leases for facilities, data
processing equipment, and software. Some of these leases contain
escalation clauses for increased taxes and operating expenses. Rent
expense was $14,142,000, $16,192,000, and $17,527,000 in 1998, 1997, and
1996, respectively.
Aggregate noncancellable minimum lease commitments at December 31, 1998
are:
-------------------------------------------------------------------------------------------------
1999.......................................................................... $ 6,658,000
2000.......................................................................... 5,036,000
2001.......................................................................... 4,330,000
2002.......................................................................... 1,887,000
2003.......................................................................... 1,430,000
2004 and thereafter........................................................... 125,000
-----------
$19,466,000
-------------------------------------------------------------------------------------------------
The Company has future lease obligations relating to office facilities that
were being used by its discontinued operations. The Company established a
provision for future lease commitments relating to these facilities which
is included in Accrued discontinued operations disposal costs on the
accompanying Consolidated Balance Sheets. Management of the Company
believes this provision will be adequate to cover all future costs incurred
relating to these facilities. These lease obligations are not included in
the above commitments table.
In the normal course of business, the Company is party to various claims
and legal proceedings. Although the ultimate outcome of these matters is
presently not determinable, management, after consultation with legal
counsel, does not believe that the resolution of these matters will have a
material adverse effect upon the Company's financial position or results of
operations.
NOTE 11 - INCOME TAXES:
Income taxes from continuing operations consist of the following:
YEAR ENDED DECEMBER 31, 1998 1997 1996
------------------------------------------------------------------------------------------------------------------
Current
Federal............................................... $28,841,000 $15,544,000 $10,491,000
State................................................. 1,671,000 726,000 486,000
----------- ----------- -----------
30,512,000 16,270,000 10,977,000
----------- ----------- -----------
Deferred, including current deferred
Federal............................................... (3,020,000) 607,000 2,963,000
State................................................. (588,000) 286,000 858,000
----------- ----------- -----------
(3,608,000) 893,000 3,821,000
----------- ----------- -----------
Total income taxes from continuing
operations............................................ $26,904,000 $17,163,000 $14,798,000
------------------------------------------------------------------------------------------------------------------
51
The effective income tax rate from continuing operations differs from the
Federal income tax statutory rate due to the following:
YEAR ENDED DECEMBER 31, 1998 1997 1996
----------------------------------------------------------------------------------------------------------------
Statutory rate............................................... 35.0% 35.0% 35.0%
State taxes, net of Federal tax benefit...................... 1.0 1.3 2.3
Foreign losses............................................... 3.2 1.2 1.1
Other, net................................................... (0.7) 1.5 0.6
---- ---- ----
38.5% 39.0% 39.0%
----------------------------------------------------------------------------------------------------------------
Deferred income taxes for 1998, 1997, and 1996 reflect the impact of
"temporary differences" between the amount of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws and
regulations. Principal items comprising the deferred income tax provision
(benefit) from continuing operations are as follows:
YEAR ENDED DECEMBER 31, 1998 1997 1996
---------------------------------------------------------------------------------------------------------------
Difference in financial reporting and income
tax depreciation methods............................. $ 385,000 $ 996,000 $ 598,000
Reserves not currently deductible......................... 1,000,000 (73,000) (28,000)
Capitalized software currently deductible for
tax purposes, net of amortization.................... (674,000) 1,662,000 3,461,000
State deferred income taxes............................... (382,000) 186,000 558,000
Revenue and expense recognized in
different periods for financial reporting
and income tax purposes.............................. (2,722,000) (1,508,000) (724,000)
Other, net................................................ (1,215,000) (370,000) (44,000)
----------- ----------- ----------
$(3,608,000) $ 893,000 $3,821,000
---------------------------------------------------------------------------------------------------------------
52
The net deferred income tax asset (liability) is comprised of the
following:
YEAR ENDED DECEMBER 31, 1998 1997
----------------------------------------------------------------------------------------------------
Current deferred income taxes:
Gross assets............................................ $ 7,598,000 $ 6,461,000
Gross liabilities....................................... -- (124,000)
----------- -----------
7,598,000 6,337,000
----------- -----------
Long-term deferred income taxes:
Gross assets............................................ 116,000 243,000
Gross liabilities....................................... (7,409,000) (8,041,000)
----------- -----------
(7,293,000) (7,798,000)
----------- -----------
Net deferred income tax asset (liability).................... $ 305,000 $(1,461,000)
----------------------------------------------------------------------------------------------------
The Company did not record any valuation allowance against deferred tax
assets at December 31, 1998 and 1997.
The tax effect of significant temporary differences representing deferred
tax assets (liabilities) is as follows:
YEAR ENDED DECEMBER 31, 1998 1997
----------------------------------------------------------------------------------------------------
Difference in financial reporting and income
tax depreciation methods............................. $ (119,000) $ 52,000
Reserves not currently deductible......................... 853,000 750,000
Capitalized software currently deductible for
tax purposes, net of amortization.................... (7,288,000) (8,088,000)
State deferred income taxes............................... 173,000 324,000
Revenue and expense recognized in
different periods for financial reporting
and income tax purposes.............................. 6,572,000 5,388,000
Unrealized holding gain on investments.................... 114,000 48,000
Other, net................................................ -- 65,000
----------- -----------
$ 305,000 $(1,461,000)
----------------------------------------------------------------------------------------------------
53
NOTE 12 - 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, Mutual Fund Services, Asset Management, and Investments in New
Business. Each segment offers different products and services that utilize
different technology and marketing techniques. The information in the
following tables is derived directly from the segments' 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 evaluates financial performance of its operating segments based on
income from continuing operations before income taxes.
The Technology Services segment includes the Company's TRUST 3000 product
line and trust operations outsourcing. The Mutual Funds Services
segment provides administration and distribution services to proprietary
mutual funds created for banks, insurance firms, and investment management
companies. 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
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 following tables highlight certain financial information from
continuing operations about each of the Company's segments for the years
ended December 31, 1998, 1997, and 1996.
Mutual Investments
Technology Fund Asset In New
1998 Services Services Management Business Other Total
-----------------------------------------------------------------------------------------------------------------------
Revenues........................... $164,648,000 $97,972,000 $90,056,000 $ 13,443,000 $366,119,000
------------ ----------- ----------- ------------ ------------
Operating
income (loss)................... $ 49,170,000 $24,405,000 $18,091,000 $(10,318,000) $(13,463,000) $ 67,885,000
------------ ----------- ----------- ------------ ------------
Other income, net.................. $ 1,998,000
------------
Income from
continuing
operations before
income taxes.................... $ 69,883,000
------------
Depreciation and
amortization.................... $ 10,468,000 $ 1,576,000 $ 1,954,000 $ 899,000 $ 791,000 $ 15,688,000
------------ ----------- ----------- ------------ ------------ ------------
Capital
expenditures.................... $ 16,999,000 $ 772,000 $ 2,469,000 $ 763,000 $ 771,000 $ 21,774,000
------------ ----------- ----------- ------------ ------------ ------------
Total assets....................... $ 96,856,000 $17,362,000 $23,084,000 $ 15,427,000 $ 56,043,000 $208,772,000
------------ ----------- ----------- ------------ ------------ ------------
-----------------------------------------------------------------------------------------------------------------------
54
Mutual Investments
Technology Fund Asset In New
1997 Services Services Management Business Other Total
-----------------------------------------------------------------------------------------------------------------------
Revenues........................... $129,525,000 $83,157,000 $61,871,000 $14,439,000 $ 3,757,000 $292,749,000
------------ ----------- ----------- ----------- ------------ ------------
Operating
income (loss)................... $ 37,146,000 $23,858,000 $ 3,281,000 $(5,799,000) $(12,974,000) $ 45,512,000
------------ ----------- ----------- ----------- ------------
Other expense, net................. $ 1,505,000
------------
Income from
continuing
operations before
income taxes.................... $ 44,007,000
------------
Depreciation and
amortization.................... $ 8,634,000 $ 1,883,000 $ 1,791,000 $ 1,021,000 $ 739,000 $ 14,068,000
------------ ----------- ----------- ----------- ------------ ------------
Capital
expenditures.................... $ 9,465,000 $ 600,000 $ 1,636,000 $ 225,000 $ 1,029,000 $ 12,955,000
------------ ----------- ----------- ----------- ------------ ------------
Total assets....................... $ 89,471,000 $15,559,000 $17,464,000 $29,994,000 $ 16,396,000 $168,884,000
------------ ----------- ----------- ----------- ------------ ------------
-----------------------------------------------------------------------------------------------------------------------
Mutual Investments
Technology Fund Asset In New
1996 Services Services Management Business Other Total
-------------------------------------------------------------------------------------------------------------------------
Revenues........................... $128,025,000 $62,874,000 $46,184,000 $10,354,000 $ 380,000 $247,817,000
------------ ----------- ----------- ----------- ------------ ------------
Operating
income (loss)................... $ 43,309,000 $15,874,000 $(2,971,000) $(6,559,000) $(13,566,000) $ 36,087,000
------------ ----------- ----------- ----------- ------------
Other income, net.................. $ 1,857,000
------------
Income from
continuing
operations before
income taxes.................... $ 37,944,000
------------
Depreciation and
amortization.................... $ 6,567,000 $ 1,367,000 $ 1,246,000 $ 649,000 $ 210,000 $ 10,039,000
------------ ----------- ----------- ----------- ------------ ------------
Capital
expenditures.................... $ 20,174,000 $ 1,277,000 $ 6,763,000 $ 401,000 $ 4,445,000 $ 33,060,000
------------ ----------- ----------- ----------- ------------ ------------
Total assets....................... $ 67,819,000 $13,283,000 $19,216,000 $26,964,000 $ 13,759,000 $141,041,000
------------ ----------- ----------- ----------- ------------ ------------
-------------------------------------------------------------------------------------------------------------------------
Other consists of expenses and assets attributable to corporate overhead
groups that are not allocated to the operating segments for internal
financial reporting purposes. Other in 1997 and 1996 also consists of the
revenues, expenses, and assets of LSV, which are not allocated to any
operating segment. Unallocated assets primarily consist of cash and cash
equivalents, deferred tax assets, the investment in and assets of LSV, and
certain other shared services assets.
55
The following table presents the details of Other income (expense):
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------
Equity in the earnings of
unconsolidated affiliate............................... $ 3,015,000 $ -- $ --
Gain on sale of investments
available for sale..................................... -- -- 1,097,000
Interest income........................................... 1,558,000 983,000 808,000
Interest expense.......................................... (2,575,000) (2,488,000) (48,000)
----------- ----------- ----------
$ 1,998,000 $(1,505,000) $1,857,000
--------------------------------------------------------------------------------------------------------------------
The following table presents revenues by country based on the location of
the use of the product or services.
FOR THE YEAR ENDED DECEMBER 31, 1998 1997 1996
------------------------------------------------------------------------------------------------------------------
United States............................................. $350,729,000 $277,655,000 $237,046,000
Canada.................................................... 10,183,000 9,952,000 8,785,000
Other..................................................... 5,207,000 5,142,000 1,986,000
------------ ------------ ------------
$366,119,000 $292,749,000 $247,817,000
-----------------------------------------------------------------------------------------------------------------
The following table presents assets based on its location.
1998 1997 1996
---------------------------------------------------------------------------------------------------------------
United States............................................. $193,133,000 $141,652,000 $117,225,000
Canada.................................................... 3,706,000 3,708,000 4,030,000
Other..................................................... 11,933,000 23,524,000 19,786,000
------------ ------------ ------------
$208,772,000 $168,884,000 $141,041,000
---------------------------------------------------------------------------------------------------------------
56
NOTE 13 - RELATED PARTY TRANSACTIONS:
SIMC, either by itself or through its wholly owned subsidiaries, is a party
to Investment Advisory and Administration Agreements with several regulated
investment companies ("RICs"), which are administered by the Company.
Shares of the RICs are offered to clients of the Company and its
subsidiaries. Under the Investment Advisory and Administration Agreements,
SIMC receives a fee for providing investment advisory, administrative, and
accounting services to the RICs. The investment advisory and administration
fee is a fixed percentage of the average daily net asset value of each RIC,
subject to certain limitations. Investment advisory and administration fees
received by the Company totaled $152,076,000, $119,606,000, and $92,143,000
in 1998, 1997, and 1996, respectively. SIDCO is a party to Distribution
Agreements with several RICs, which are advised and/or administered by
SIMC. SIDCO receives a fee from the RICs for providing distribution
services pursuant to the provisions of various Rule 12b-1 Plans adopted by
the RICs. These distribution fees totaled $15,480,000, $7,269,000, and
$4,026,000 in 1998, 1997, and 1996, respectively.
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED):
For the Three Months Ended
----------------------------------------------------------
1998 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------------------------------------------------------------------------------------------------------------
Revenues............................................. $81,871,000 $85,499,000 $90,492,000 $108,257,000
Income from continuing operations
before income taxes............................... $12,458,000 $15,709,000 $18,546,000 $ 23,170,000
Income from continuing operations.................... $ 7,597,000 $ 9,585,000 $11,551,000 $ 14,246,000
Net income........................................... $ 7,597,000 $ 9,585,000 $11,551,000 $ 14,956,000 (a)
Basic earnings per common share
from continuing operations........................ $ .43 $ .54 $ .64 $ .80
Basic earnings per common share...................... $ .43 $ .54 $ .64 $ .84 (a)
Diluted earnings per common share
from continuing operations........................ $ .40 $ .50 $ .60 $ .75
Diluted earnings per common share.................... $ .40 $ .50 $ .60 $ .79 (a)
---------------------------------------------------------------------------------------------------------------
(a) Includes income from disposal of discontinued operations of $710,000
or $.04 basic earnings per common share and $.04 diluted earnings per
common share (See Note 2).
For the Three Months Ended
------------------------------------------------------
1997 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-----------------------------------------------------------------------------------------------------------
Revenues............................................. $63,504,000 $70,730,000 $74,283,000 $84,232,000
Income before income taxes........................... $ 8,001,000 $ 8,568,000 $11,105,000 $16,333,000
Net income........................................... $ 4,801,000 $ 5,141,000 $ 6,939,000 $ 9,963,000
Basic earnings per common share...................... $ .26 $ .28 $ .38 $ .55
Diluted earnings per common share.................... $ .25 $ .27 $ .36 $ .52
-----------------------------------------------------------------------------------------------------------
57
SEI INVESTMENTS COMPANY AND SUBSIDIARIES
----------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
-----------------------------------------------
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
-----------------------------------------------------------------
Additions
----------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Year Expenses Accounts (Deductions) of Year
- - ---------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1996:
Allowance for doubtful accounts $1,206,000 $144,000 $ -- $ -- $1,350,000
========== ======== ======= ========== ===========
For the Year Ended December 31, 1997:
Allowance for doubtful accounts $1,350,000 $ -- $ -- $ (150,000) $1,200,000
========== ======== ======= ========== ===========
For the Year Ended December 31, 1998:
Allowance for doubtful accounts $1,200,000 $ -- $ -- $ -- $1,200,000
========== ======== ======= ========== ==========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
None.
59
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
--------------------------------------------------
The information required by this item concerning directors is hereby
incorporated by reference to the Company's definitive proxy statement for its
1999 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission within 120 days after December 31, 1998 pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended (the "1999 Proxy
Statement").
The executive officers of the Company are as follows:
ALFRED P. WEST, JR., 56, has been the Chairman of the Board of Directors and
Chief Executive Officer of the Company since its inception in 1968. Mr. West
was President from June 1979 to August 1990.
HENRY H. GREER, 61, has been Chief Financial Officer since September 1996. Mr.
Greer has been President and Chief Operating Officer since August 1990, and was
an Executive Vice President from July 1990 to August 1990. Mr. Greer has been a
Director since November 1979.
CARMEN V. ROMEO, 55, has been an Executive Vice President since December 1985.
Mr. Romeo has been a Director since June 1979. Mr. Romeo was Treasurer and
Chief Financial Officer from June 1979 to September 1996.
RICHARD B. LIEB, 51, has been an Executive Vice President since October 1990,
and a Director since May 1995.
CARL A. GUARINO, 41, has been a Senior Vice President since April 1988, and was
General Counsel from April 1988 to January 1994.
EDWARD D. LOUGHLIN, 48, has been an Executive Vice President since January 1994
and a Senior Vice President since January 1988.
DENNIS J. MCGONIGLE, 38, has been an Executive Vice President since July 1996.
Mr. McGonigle has been a Senior Vice President since January 1994 and a Vice
President since January 1991.
KEVIN P. ROBINS, 37, has been a Senior Vice President and General Counsel since
January 1994 and a Vice President since January 1992.
60
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
The information called for in this item is hereby incorporated by reference to
the 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
--------------------------------------------------------------
The information called for in this item is hereby incorporated by reference to
the 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The information called for in this item is hereby incorporated by reference to
the 1999 Proxy Statement.
61
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
----------------------------------------------------------------
(a) 1 and 2. Financial Statements and Financial Statement Schedules. The
------------------------------------------------------
following is a list of the Consolidated Financial Statements of
the Company and its subsidiaries and supplementary data filed as
part of Item 8 hereof:
Report of Independent Public Accountants
Consolidated Balance Sheets -- December 31, 1998 and 1997
Consolidated Statements of Operations -- For the years ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Shareholders' Equity -- For the years
ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows -- For the years ended
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable,
or not required, or because the required information is included
in the Consolidated Financial Statements or notes thereto.
3. Exhibits, Including Those Incorporated by Reference. The exhibits
---------------------------------------------------
to this Report are listed on the accompanying index to exhibits
and are incorporated herein by reference or are filed as part of
this annual report on Form 10-K.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
-------------------
Company during the quarter ended December 31, 1998.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 29, 1999 By /s/ Henry H. Greer
----------------------------- ---------------------------------
Henry H. Greer
President, Chief Operating
Officer, Chief Financial Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on dates indicated.
Date March 29, 1999 By /s/ Alfred P. West, Jr.
----------------------------- ---------------------------------
Alfred P. West, Jr.
Chairman of the Board,
Chief Executive Officer,
and Director
Date March 29, 1999 By /s/Carmen V. Romeo
----------------------------- ---------------------------------
Carmen V. Romeo
Executive Vice President and
Director
Date March 29, 1999 By /s/ Richard B. Lieb
----------------------------- ---------------------------------
Richard B. Lieb
Executive Vice President and
Director
Date March 29, 1999 By /s/ William M. Doran
----------------------------- ---------------------------------
William M. Doran
Director
Date March 29, 1999 By /s/ Henry H. Porter, Jr.
----------------------------- ---------------------------------
Henry H. Porter, Jr.
Director
Date March 29, 1999 By /s/ Kathryn M. McCarthy
----------------------------- ---------------------------------
Kathryn M. McCarthy
Director
63
EXHIBIT INDEX
-------------
The following is a list of exhibits filed as part of this annual report on Form
10-K. For exhibits incorporated by reference, the location of the exhibit in
the previous filing is indicated in parentheses.
3.1 Articles of Incorporation of the Registrant as amended on January 21,
1983. (Incorporated by reference to exhibit 3.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1982.)
3.1.2 Amendment to Articles of Incorporation of the Registrant, dated May
21, 1992. (Incorporated by reference to exhibit 3.1.2 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.)
3.1.3 Amendment to Articles of Incorporation of the Registrant, dated May
26, 1994. (Incorporated by reference to exhibit 3.1.3 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.)
3.1.4 Amendment to Articles of Incorporation of the Registrant, dated
November 21, 1996. (Incorporated by reference to exhibit 3.1.4 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.)
3.2 By-Laws. (Incorporated by reference to exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1983.)
3.2.1 Amendment to By-Laws, dated December 19, 1988. (Incorporated by
reference to exhibit 3.2.1 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1988.)
3.2.2 Amendment to By-Laws, dated July 12, 1990. (Incorporated by reference
to exhibit 3.2.2 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1990.)
4.1 Form of Certificate for Shares of Common Stock. (Incorporated by
reference to exhibit 4.1 to the Registrant's Annual Report on Form 10-
K for the fiscal year ended December 31, 1988.)
4.2* Rights Agreement dated December 10, 1998. (Page 68)
Note: Exhibits 10.1 through 10.10 constitute the management contracts
and executive compensatory plans or arrangements in which certain of
the directors and executive officers of the Registrant participate.
10.1 Stock Option Plan, Amended, Restated and Renewed as of February 11,
1997. (Incorporated by reference to exhibit 99(a) to the Registrant's
Registration Statement on Form S-8 (No. 333-63709) filed September 18,
1998.)
10.1.1 1997 Stock Option Plan. (Incorporated by reference to exhibit 99(b) to
the Registrant's Registration Statement on Form S-8 (No. 333-63709)
filed September 18, 1998.)
10.1.2 1997 Option Share Deferral Plan. (Incorporated by reference to exhibit
99(c) to the Registrant's Registration Statement on Form S-8 (No. 333-
63709) filed September 18, 1998.)
10.1.3 1998 Equity Compensation Plan. (Incorporated by reference to exhibit
99(f) to the Registrant's Registration Statement on Form S-8 (No. 333-
63709) filed September 18, 1998.)
10.2 Employee Stock Ownership Plan. (Incorporated by reference to exhibit
10.3 (b) to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1985.)
10.3 Employee Stock Purchase Plan, Amended and Restated as of May 8, 1991.
(Incorporated by reference to exhibit 10.3 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1991.)
10.3.1 Employee Stock Purchase Plan as Amended and Restated on October 15,
1997. (Incorporated by reference to exhibit 99(e) to the Registrant's
Registration Statement on Form S-8 (No. 333-63709) filed September 18,
1998.)
10.4 SEI Capital Accumulation Plan. (Incorporated by reference to exhibit
99(e) to the Registrant's Registration Statement on Form S-8 (No. 333-
41343) filed December 2, 1997.)
10.5 Stock Option Plan for Non-Employee Directors. (Incorporated by
reference to exhibit 10.12 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1988.)
10.5.1 Amendment 1997-1 to the Stock Option Plan for Non-Employee Directors.
(Incorporated by reference to exhibit 10.5.1 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997.)
10.5.2 1997 Option Share Deferral Plan for Non-Employee Directors.
(Incorporated by reference to exhibit 99(d) to the Registrant's
Registration Statement on Form S-8 (No. 333-63709) filed September 18,
1998.)
64
10.6 Employment Agreement, dated May 25, 1979, between Alfred P. West, Jr.
and the Registrant. (Incorporated by reference to exhibit 10.7 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990.)
10.7 Employment Agreement, dated January 21, 1987, between Gilbert L.
Beebower and the Registrant. (Incorporated by reference to exhibit
10.8 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990.)
10.8.1 Employment Agreement, dated July 1, 1987, between Richard B. Lieb and
the Registrant. (Incorporated by reference to exhibit 10.9 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1990.)
10.8.2 Stock Option Agreement, dated February 23, 1989, between Richard B.
Lieb and a subsidiary of the Registrant, as amended. (Incorporated by
reference to exhibit 10.8.2 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1992.)
10.9 Summary of Company Bonus Plan for Senior Management. (Incorporated by
reference to exhibit 10.9 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1993.)
10.11 Directors and Officers Liability Insurance Policy. (Incorporated by
reference to exhibit 10.9 to the Registrant's Registration Statement
on Form S-8 (No.2-78133) filed June 25, 1982.)
10.12 Lease Agreement, dated as of January 1, 1990, between The Canada Life
Assurance Company and the Registrant. (Incorporated by reference to
exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990.)
10.13 Lease Agreement, dated as of May 1, 1991, between Two North Riverside
Plaza Joint Venture and the Registrant. (Incorporated by reference to
exhibit 10.11 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.)
10.14 Credit Agreement, dated May 31, 1992, between Provident National Bank
and the Registrant, as amended. (Incorporated by reference to exhibit
10.12 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.)
10.14.1 Second Modification Agreement to the Credit Agreement, dated April
19, 1993, between PNC Bank, National Association, successor by merger
to Provident National Bank, and the Registrant. (Incorporated by
reference to exhibit 10.14.1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.)
10.14.2 Third Modification Agreement to the Credit Agreement, dated May 31,
1993, between PNC Bank, National Association, successor by merger to
Provident National Bank, and the Registrant. (Incorporated by
reference to exhibit 10.14.2 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993.)
10.14.3 Fourth Modification Agreement to the Credit Agreement, dated March
14, 1994, between PNC Bank, National Association, successor by merger
to Provident National Bank, and the Registrant. (Incorporated by
reference to exhibit 10.14.3 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.)
10.14.4 Fifth Modification Agreement to the Credit Agreement, dated May 31,
1994, between PNC Bank, National Association, successor by merger to
Provident National Bank, and the Registrant. (Incorporated by
reference to exhibit 10.14.4 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.)
10.14.5 Sixth Modification Agreement to the Credit Agreement, dated May 5,
1995, between PNC Bank, National Association, successor by merger to
Provident National Bank, and the Registrant. (Incorporated by
reference to exhibit 10.14.5 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.)
10.14.6 Seventh Modification Agreement to the Credit Agreement, dated June
15, 1995, between PNC Bank, National Association, successor by
merger to Provident National Bank, and the Registrant.
(Incorporated by reference to exhibit 10.14.6 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995.)
10.14.7 Eighth Modification Agreement to the Credit Agreement, dated
October 19, 1995, between PNC Bank, National Association,
successor by merger to Provident National Bank, and the
Registrant. (Incorporated by reference to exhibit 10.14.7 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.)
10.14.8 Ninth Modification Agreement to the Credit Agreement, dated March
31, 1996, between PNC Bank, National Association, successor by
merger to Provident National Bank, and the Registrant.
(Incorporated by reference to exhibit 10.14.8 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996.)
65
10.14.9 Tenth Modification Agreement to the Credit Agreement, dated May
31, 1996, between PNC Bank, National Association, successor by
merger to Provident National Bank, and the Registrant.
(Incorporated by reference to exhibit 10.14.9 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996.)
10.14.10 Eleventh Modification Agreement to the Credit Agreement, dated
October 1, 1996, between PNC Bank, National Association, successor
by merger to Provident National Bank, and the Registrant.
(Incorporated by reference to exhibit 10.14.10 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996.)
10.14.11 Release and Modification Agreement to the Credit Agreement, dated
February 20, 1997, between PNC Bank, National Association,
successor by merger to Provident National Bank, and the
Registrant. (Incorporated by reference to exhibit 10.14.11 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.)
10.14.12 Thirteenth Modification Agreement to the Credit Agreement, dated
May 30, 1997, between PNC Bank, National Association, successor by
merger to Provident National Bank, and the Registrant.
(Incorporated by reference to exhibit 10.14.12 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997.)
10.14.13 Fourteenth Modification Agreement to the Credit Agreement, dated
December 31, 1997, between PNC Bank, National Association,
successor by merger to Provident National Bank, and the
Registrant. (Incorporated by reference to exhibit 10.14.13 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.)
10.14.14* Fifteenth Modification Agreement to the Credit Agreement, dated
March 31, 1998, between PNC Bank, National Association, successor
by merger to Provident National Bank, and the Registrant. (Page
111)
10.14.15* Sixteenth Modification Agreement to the Credit Agreement, dated
May 29, 1998, between PNC Bank, National Association, successor by
merger to Provident National Bank, and the Registrant. (Page 115)
10.14.16* Seventeenth Modification Agreement to the Credit Agreement, dated
September 29, 1998, between PNC Bank, National Association,
successor by merger to Provident National Bank, and the
Registrant. (Page 119)
10.15 Pledge Agreement, dated May 31, 1992, between Provident National
Bank and the Registrant. (Incorporated by reference to exhibit
10.13 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.)
10.16 Master Lease Agreement, dated December 29, 1989, between Varilease
Corporation and the Registrant, as amended. (Incorporated by
reference to exhibit 10.14 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.)
10.17 Note Purchase Agreement, dated as of February 24, 1997, with
respect to the issuance by the Registrant of $20,000,000 7.20%
Senior Notes, Series A, due February 24, 2007, and $15,000,000
7.27% Senior Notes, Series B, due February 24, 2012. (Incorporated
by reference to exhibit 10.17 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.)
10.17.1* First Amendment, dated December 15, 1998, to Note Purchase
Agreement, dated February 24, 1997. (Page 123)
21* Subsidiaries of the Registrant. (Page 131)
23* Consent of Independent Public Accountants. (Page 133)
27* Financial Data Schedule
99* Miscellaneous exhibits. (Page 135)
* Filed herewith as an exhibit to this Form 10-K.
66