SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One)* X Quarterly report pursuant to Section 13 or 15(d) of the Securities - ------ Exchange Act of 1934 for the quarterly period ended March 31, 2000 or -------------- ______ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to _________ 0-10200 - -------------------------------------------------------------------------------- (Commission File Number) SEI INVESTMENTS COMPANY - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-1707341 - --------------------------------------------- --------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 1 Freedom Valley Drive, Oaks, Pennsylvania 19456-1100 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (610) 676-1000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ --- *APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes___ No___ *APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of March 31, 2000: 17,670,401 shares of common stock, par value $.01 per share.
PART I. FINANCIAL INFORMATION - ------- --------------------- Item 1. Financial Statements - ------- -------------------- Consolidated Balance Sheets --------------------------- (In thousands) March 31, 2000 December 31, 1999 -------------- ----------------- (unaudited) Assets - ------ Current assets: Cash and cash equivalents $ 57,016 $ 73,206 Receivables from regulated investment companies 26,974 24,179 Receivables, net of allowance for doubtful accounts of $1,700 41,441 33,554 Deferred income taxes 7,443 10,934 Prepaid expenses and other current assets 5,034 5,119 ---------- ------------ Total current assets 137,908 146,992 ---------- ------------ Property and equipment, net of accumulated depreciation and amortization of $74,513 and $71,415 66,392 65,640 ---------- ------------ Capitalized software, net of accumulated amortization of $10,322 and $9,838 15,591 15,626 ---------- ------------ Other assets, net 23,091 25,521 ---------- ------------ Total Assets $ 242,982 $ 253,779 ========== ============ The accompanying notes are an integral part of these statements. 2
Consolidated Balance Sheets --------------------------- (In thousands, except par value) March 31, 2000 December 31, 1999 -------------- ----------------- (unaudited) Liabilities and Shareholders' Equity - ------------------------------------ Current liabilities: Current portion of long-term debt $ 2,000 $ 2,000 Accounts payable 6,367 7,397 Accrued expenses 86,917 110,201 Deferred revenue 21,685 19,320 -------- -------- Total current liabilities 116,969 138,918 -------- -------- Long-term debt 27,000 29,000 -------- -------- Deferred income taxes 8,274 6,859 -------- -------- Shareholders' equity: Common stock, $.01 par value, 100,000 shares authorized; 17,670 and 17,692 shares issued and outstanding 177 177 Capital in excess of par value 76,140 71,501 Retained earnings 14,380 7,373 Accumulated other comprehensive gains (losses) 42 (49) -------- -------- Total shareholders' equity 90,739 79,002 -------- -------- Total Liabilities and Shareholders' Equity $242,982 $253,779 ======== ======== The accompanying notes are an integral part of these statements. 3
Consolidated Statements of Income --------------------------------- (unaudited) (In thousands, except per share data) Three Months ----------------------- Ended March 31, ----------------------- 2000 1999 ---- ---- Revenues $138,746 $104,318 Expenses: Operating and development 66,282 50,763 Sales and marketing 38,370 27,106 General and administrative 3,542 3,130 -------- -------- Income from operations 30,552 23,319 Equity in the earnings of unconsolidated affiliate 1,753 1,478 Interest income 985 498 Interest expense (599) (598) -------- -------- Income before income taxes 32,691 24,697 Income taxes 12,422 9,508 -------- -------- Net income 20,269 15,189 -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments, net of income tax expense (benefit) of $120 and $(52) 195 (83) Unrealized holding losses on investments, net of income tax benefit of $64 and $51 (104) (81) -------- -------- Other comprehensive income (loss) 91 (164) -------- -------- Comprehensive income $ 20,360 $ 15,025 ======== ======== Basic earnings per common share $ 1.15 $ .85 ======== ======== Diluted earnings per common share $ 1.08 $ .79 ======== ======== The accompanying notes are an integral part of these statements. 4
Consolidated Statements of Cash Flows ------------------------------------- (unaudited) (In thousands) Three Months --------------------- Ended March 31, --------------------- 2000 1999 ----- ----- Cash flows from operating activities: Net income $ 20,269 $ 15,189 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,053 3,532 Equity in the earnings of unconsolidated affiliate (1,753) (1,478) Other 5,466 (3,337) Change in current assets and liabilities: Decrease (increase) in Receivables from regulated investment companies (2,795) (1,495) Receivables (7,887) (5,334) Prepaid expenses and other current assets 85 185 Increase (decrease) in Accounts payable (1,030) (669) Accrued expenses (19,746) (5,032) Deferred revenue 2,365 218 -------- -------- Net cash (used in) provided by operating activities (973) 1,779 -------- -------- Cash flows from investing activities: Additions to property and equipment (4,136) (4,401) Additions to capitalized software (449) (254) Purchase of investments available for sale (782) -- Other 4,311 (2,740) -------- -------- Net cash used in investing activities (1,056) (7,395) -------- -------- Cash flows from financing activities: Payment on long-term debt (2,000) (2,000) Purchase and retirement of common stock (13,768) (25,451) Proceeds from issuance of common stock 2,316 2,092 Tax benefit on stock options exercised 2,829 2,991 Payment of dividend (3,538) (2,858) -------- -------- Net cash used in financing activities (14,161) (25,226) -------- -------- Net decrease in cash and cash equivalents (16,190) (30,842) Cash and cash equivalents, beginning of period 73,206 52,980 -------- -------- Cash and cash equivalents, end of period $ 57,016 $ 22,138 ======== ======== The accompanying notes are an integral part of these statements. 5
Notes to Consolidated Financial Statements ------------------------------------------ Note 1. Summary of Significant Accounting Policies ------------------------------------------ Nature of Operations -------------------- SEI Investments Company (the "Company") is organized around its four primary business lines: Technology Services, Asset Management, Mutual Fund Services, and Investments in New Business. Technology Services includes the Trust 3000 product line and trust operations outsourcing. Asset Management 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. Mutual Fund Services provides administration and distribution services to proprietary mutual funds created for banks, insurance firms, and investment management companies. Investments in New Business consists of the Company's Canadian and international operations which provide investment advisory services globally through investment products and services and performance evaluation and consulting services to Canadian pension plans. Summary Financial Information and Results of Operations ------------------------------------------------------- In the opinion of the Company, the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of March 31, 2000, the results of operations and cash flows for the three months ended March 31, 2000 and 1999. Interim Financial Information ----------------------------- While the Company believes that the disclosures presented are adequate to make the information not misleading, these Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes included in the Company's latest annual report on Form 10-K. Principles of Consolidation --------------------------- The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. The Company's principal subsidiaries are SEI Investments Distribution Company, SEI Investments Management Corporation, and SEI Trust Company. All intercompany accounts and transactions have been eliminated. Investment in unconsolidated affiliate is accounted for using the equity method due to the Company's less than 50 percent ownership. The Company's portion of the affiliate's operating results is reflected in Equity in the earnings of unconsolidated affiliate on the accompanying Consolidated Statements of Income. Property and Equipment ---------------------- Property and equipment on the accompanying Consolidated Balance Sheets consist of the following: Estimated Useful Lives March 31, 2000 December 31, 1999 (In Years) -------------- ----------------- -------- Equipment $ 64,650,000 $ 62,437,000 3 to 5 Buildings 34,806,000 34,676,000 10 to 39 Land 7,686,000 7,686,000 N/A Purchased software 13,803,000 13,302,000 3 Furniture and fixtures 13,360,000 12,554,000 3 to 5 Leasehold improvements 6,600,000 6,400,000 Lease Term ------------ --------------- 140,905,000 137,055,000 Less: Accumulated depreciation and amortization (74,513,000) (71,415,000) ------------ --------------- Property and Equipment, net $ 66,392,000 $ 65,640,000 ============ =============== 6
Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful life of each asset. Expenditures for renewals and betterments are capitalized, while maintenance and repairs are charged to expense when incurred. Capitalized Software -------------------- The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed" ("SFAS 86"). Under SFAS 86, costs incurred to create a computer software product are charged to research and development expense as incurred until technological feasibility has been established. The Company establishes technological feasibility upon completion of a detail program design. At that point, computer software costs are capitalized until the product is available for general release to customers. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life, and changes in technology. Amortization begins when the product is released. Capitalized software development costs are amortized on a product-by- product basis using the straight-line method over the estimated economic life of the product or enhancement, which is primarily three to ten years, with a weighted average remaining life of approximately 7.8 years. Earnings per Share ------------------ The Company computes earnings per common share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Pursuant to SFAS 128, dual presentation of basic and diluted earnings per common share is required on the face of the statements of income for companies with complex capital structures. Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution from the exercise or conversion of securities into common stock, such as stock options. For the three month period ended March 31, 2000 -------------------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic earnings per common share $20,269,000 17,665,000 $1.15 ========= Dilutive effect of stock options -- 1,097,000 ----------- ---------- Diluted earnings per common share $20,269,000 18,762,000 $1.08 =========== ========== ========= For the three month period ended March 31, 1999 --------------------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic earnings per common share $15,189,000 17,867,000 $ .85 ======== Dilutive effect of stock options -- 1,417,000 --------------- ---------- Diluted earnings per common share $15,189,000 19,284,000 $ .79 =============== ========== ======== 7
Options to purchase 370,000 shares of common stock, with an average exercise price of $118.50 were outstanding during the first quarter in 2000, but were excluded from the diluted earnings per common share calculation because the options' exercise prices were greater than the average market price of the Company's common stock. All options outstanding during the first quarter in 1999 were included in the diluted earnings per common share calculation. Statements of Cash Flows ------------------------ For purposes of the Consolidated Statements of Cash Flows, the Company considers investment instruments purchased with an original maturity of three months or less to be cash equivalents. Supplemental disclosures of cash paid/received during the three months ended March 31 is as follows: 2000 1999 ---- ---- Interest paid $1,133,000 $1,206,000 Interest and dividends received $ 936,000 $ 551,000 Income taxes paid $6,093,000 $ 545,000 Management's Use of Estimates ----------------------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Pronouncements --------------------- In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The Company is currently evaluating the provisions established in SAB 101 to assess if application of SAB 101 is required in its financial statements. Note 2. Comprehensive Income - The Company computes comprehensive income in -------------------- accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and presentation of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements that is presented with equal prominence as other financial statements. Comprehensive income includes net income, foreign currency translation adjustments, and unrealized holding gains and losses and is presented on the accompanying Consolidated Statements of Income. Foreign Unrealized Accumulated Currency Holding Other Translation Gains Comprehensive Adjustments on Investments Gains ------------------------- ------------------------ ------------------------ Beginning balance $(469,000) $ 420,000 $(49,000) Current period change 195,000 (104,000) 91,000 --------- --------- -------- Ending Balance $(274,000) $ 316,000 $ 42,000 ========== ========= ======== 8
Note 3. Receivables - Receivables on the accompanying Consolidated Balance ----------- Sheets consist of the following: March 31, 2000 December 31, 1999 -------------- ----------------- Trade receivables $21,286,000 $16,339,000 Fees earned, not received 2,454,000 2,304,000 Fees earned, not billed 19,401,000 16,611,000 ----------- ----------- 43,141,000 35,254,000 Less: Allowance for doubtful accounts (1,700,000) (1,700,000) ----------- ----------- $41,441,000 $33,554,000 =========== =========== Fees earned, not received represent brokerage commissions earned but not yet collected. Fees earned, not billed represent receivables earned but unbilled and result from timing differences between services provided and contractual billing schedules. Receivables from regulated investment companies on the accompanying Consolidated Balance Sheets represent fees collected from the Company's wholly owned subsidiaries, SEI Investments Distribution Company and SEI Investments Management Corporation, for distribution, investment advisory, and administration services provided by these subsidiaries to various regulated investment companies sponsored by the Company. Note 4. Other Assets - Other assets on the accompanying Consolidated Balance ------------ Sheets consist of the following: March 31, 2000 December 31,1999 ---------------------- ----------------------- Investment in unconsolidated affiliate $ 5,454,000 $ 5,305,000 Investments available for sale 4,680,000 6,704,000 Other, net 12,957,000 13,512,000 ----------- ----------- Other assets $23,091,000 $25,521,000 =========== =========== Investment in Unconsolidated Affiliate - LSV Asset Management ("LSV") is -------------------------------------- a partnership formed between the Company and three leading academics in the field of finance. LSV is a registered investment advisor which provides investment advisory services to institutions, including pension plans and investment companies. LSV is currently the portfolio manager for a number of Company-sponsored mutual funds. The Company's interest in LSV for the first quarter in 2000 and 1999 was approximately 47 percent. LSV is accounted for using the equity method of accounting due to the less than 50 percent ownership. The Company's portion of LSV's net earnings is reflected in Equity in the earnings of unconsolidated affiliate on the accompanying Consolidated Statements of Income. The following table contains the Condensed Statements of Income of LSV for the three months ended March 31: 2000 1999 ---------- ---------- Revenues $5,294,000 $4,469,000 ========== ========== Net income $3,761,000 $3,143,000 ========== ========== 9
The following table contains the Condensed Balance Sheets of LSV: March 31, 2000 December 31, 1999 --------------------- ----------------------- Current assets $10,020,000 $9,459,000 Non-current assets 116,000 131,000 ----------- ---------- Total assets $10,136,000 $9,590,000 =========== ========== Current liabilities $ 846,000 $ 782,000 Partners' capital 9,290,000 8,808,000 ----------- ---------- Total liabilities and partners' capital $10,136,000 $9,590,000 =========== ========== 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 Shareholders' equity. Realized gains and losses, as determined on a specific identification basis, are reported separately on the accompanying Consolidated Statements of Income. At March 31, 2000, Investments available for sale had an aggregate cost of $4,172,000 and an aggregate market value of $4,680,000 with gross unrealized gains of $508,000. At that date, the net unrealized holding gains of $316,000 (net of income tax expense of $192,000) were reported as a separate component of Accumulated other comprehensive gains on the accompanying Consolidated Balance Sheets. The Company liquidated certain investments in the first quarter of 2000 and recognized a minimal loss on the disposition of these investments which was immaterial. At December 31, 1999, Investments available for sale had an aggregate cost of $6,235,000 and an aggregate market value of $6,704,000 with gross unrealized holding gains of $469,000. At that date, the net unrealized holding gains of $420,000 (net of income tax expense of $49,000) were reported as a separate component of Accumulated other comprehensive losses on the accompanying Consolidated Balance Sheets. Note 5. Accrued Expenses - Accrued expenses on the accompanying Consolidated ---------------- Balance Sheets consist of the following: March 31, 2000 December 31, 1999 --------------------- ----------------------- Accrued compensation $18,683,000 $ 39,846,000 Accrued proprietary fund services 12,963,000 11,562,000 Accrued consulting services 8,713,000 7,342,000 Accrued corporate income taxes 8,612,000 9,801,000 Other accrued expenses 37,946,000 41,650,000 ----------- ------------ Total accrued expenses $86,917,000 $110,201,000 =========== ============ 10
Note 6. Line of Credit - The Company has a line of credit agreement (the -------------- "Agreement") with its principal lending institution. The Agreement provides for borrowings of up to $50,000,000. The Agreement ends on August 31, 2000, at which time the outstanding principal balance, if any, becomes due unless the Agreement is extended. The line of credit, when utilized, accrues interest at the Prime rate or one and one- quarter percent above the London Interbank Offered Rate. The Company is obligated to pay a commitment fee equal to one-quarter of one percent per annum on the average daily unused portion of the commitment. Certain covenants under the Agreement require the Company to maintain specified levels of net worth and place certain restrictions on investments. The Company had no outstanding borrowings on its line of credit at March 31, 2000. Note 7. Long-term Debt - On February 24, 1997, the Company signed a Note -------------- Purchase Agreement authorizing the issuance and sale of $20,000,000 of 7.20% Senior Notes, Series A, and $15,000,000 of 7.27% Senior Notes, Series B, (collectively, the "Notes") in a private offering with certain financial institutions. The Notes are unsecured with final maturities ranging from 10 to 15 years. The proceeds from the Notes were used to repay the outstanding balance on the Company's line of credit at that date. The Note Purchase Agreement, as amended, contains various covenants, including limitations on indebtedness, maintenance of minimum net worth levels, and restrictions on certain investments. In addition, the agreement limits the Company's ability to merge or consolidate, and to sell certain assets. None of these covenants negatively affect the Company's liquidity or capital resources. Principal payments on the Notes are made annually from the date of issuance while interest payments are made semi-annually. The Company made its scheduled payment of $2,000,000 in February 2000. The current portion of the Notes amounted to $2,000,000 at March 31, 2000. The carrying amount of the Company's long-term debt approximates its fair value. Note 8. Common Stock Buyback - The Board of Directors has authorized the -------------------- purchase of the Company's common stock on the open market or through private transactions of up to an aggregate of $353,365,000. Through March 31, 2000, a total of 16,328,000 shares at an aggregate cost of $344,016,000 have been purchased and retired. The Company purchased 137,000 shares at a total cost of $13,768,000 during the first quarter of 2000. The Company immediately retires its common stock when purchased. Upon retirement, the Company reduces Capital in excess of par value for the average capital per share outstanding and the remainder is charged against Retained earnings. If the Company reduces its Retained earnings to zero, any subsequent purchases of common stock will be charged entirely to Capital in excess of par value. Note 9. Dividend - On December 14, 1999, the Board of Directors declared a -------- cash dividend of $.20 per share on the Company's common stock, which was paid on January 28, 2000, to shareholders of record on January 7, 2000. Note 10. Segment Information - The Company defines its business segments in ------------------- accordance with 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. 11
The Company is organized around its four primary business lines: Technology Services, Asset Management, Mutual Fund Services, and Investments in New Business. Technology Services includes the Company's Trust 3000 product line and trust operations outsourcing. Asset Management 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. Mutual Fund Services provides administration and distribution services to proprietary mutual funds created for banks, insurance firms, and investment management companies. Investments in New Business consists of the Company's Canadian and international operations which provides investment advisory services globally through investment products and services and performance evaluation and consulting services to Canadian pension plans. The information in the following tables is derived from the Company's internal financial reporting used for corporate management purposes. The accounting policies of the reportable segments are the same as those described in Note 1. The Company's management evaluates financial performance of its operating segments based on income before income taxes. The following tables highlight certain unaudited financial information about each of the Company's segments for the three months ended March 31, 2000 and 1999. Mutual Investments General Technology Asset Fund In New And Services Management Services Business Administrative Total -------- ---------- -------- -------- -------------- ----- For the Three-Month Period Ended March 31, 2000 ---------------------------------------------------------------------------------- Revenues $51,855,000 $48,322,000 $30,026,000 $ 8,543,000 $138,746,000 ----------- ----------- ----------- ----------- ------------ Operating income (loss) $18,071,000 $13,474,000 $ 5,403,000 $(2,854,000) $ (3,542,000) $ 30,552,000 ----------- ----------- ----------- ----------- -------------- Other income, net $ 2,139,000 ------------ Income before income taxes $ 32,691,000 ------------ Depreciation and amortization $ 2,842,000 $ 530,000 $ 293,000 $ 254,000 $ 134,000 $ 4,053,000 ----------- ----------- ----------- ----------- -------------- ------------ Capital expenditures $ 2,574,000 $ 518,000 $ 447,000 $ 333,000 $ 264,000 $ 4,136,000 ----------- ----------- ----------- ----------- -------------- ------------ For the Three-Month Period Ended March 31, 1999 ---------------------------------------------------------------------------------- Revenues $46,153,000 $28,342,000 $26,031,000 $ 3,792,000 $104,318,000 ----------- ----------- ----------- ----------- ------------ Operating income (loss) $14,322,000 $ 8,479,000 $ 5,563,000 $(1,915,000) $ (3,130,000) $ 23,319,000 ----------- ----------- ----------- ----------- -------------- Other income, net $ 1,378,000 ------------ Income before income taxes $ 24,697,000 ------------ Depreciation and amortization $ 2,505,000 $ 480,000 $ 305,000 $ 152,000 $ 90,000 $ 3,532,000 ----------- ----------- ----------- ----------- -------------- ------------ Capital expenditures $ 2,627,000 $ 843,000 $ 163,000 $ 224,000 $ 544,000 $ 4,401,000 ----------- ----------- ----------- ----------- -------------- ------------ 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations. - ------------- (In thousands, except per share data) We are organized around our four business lines: Technology Services, Asset Management, Mutual Fund Services, and Investments in New Business. Financial information on each of these segments is reflected in Note 10 of the Notes to Consolidated Financial Statements. Results of Operations - --------------------- First Quarter Ended March 31, 2000 Compared to First Quarter Ended March 31, 1999 Consolidated Overview Income Statement Data (In thousands, except per common share data) 1ST QTR 1ST QTR PERCENT 2000 1999 CHANGE ---- ---- ------ Revenues: Technology Services $ 51,855 $ 46,153 12% Asset Management 48,322 28,342 70% Mutual Fund Services 30,026 26,031 15% Investments in New Business 8,543 3,792 125% -------- -------- Total revenues $138,746 $104,318 33% Operating Income (Loss): Technology Services $ 18,071 $ 14,322 26% Asset Management 13,474 8,479 59% Mutual Fund Services 5,403 5,563 (3%) Investments in New Business (2,854) (1,915) (49%) General and Administrative (3,542) (3,130) (13%) -------- -------- Income from operations 30,552 23,319 31% Other income, net 2,139 1,378 55% -------- -------- Income before income taxes 32,691 24,697 32% Income taxes 12,422 9,508 31% -------- -------- Net Income $ 20,269 $ 15,189 33% ======== ======== Diluted earnings per common share $ 1.08 $ .79 37% ======== ======== Revenues and earnings increased in the first quarter of 2000 primarily from new business generated in Technology Services and Asset Management. Technology Services operating results reflect increases in recurring processing fees generated from new clients and the delivery of new products to our existing clients. Operating results in Asset Management were boosted by significant increases in assets under management from new and existing clients in our investment advisory and institutional asset management businesses. We continue to be optimistic about our ability to sustain the growth experienced in revenues and earnings. This optimism results from several factors: we believe the recent sales momentum experienced in Technology Services and Asset Management can be sustained; we continue to invest in the development of new products and services; and we continue to leverage expenses across a higher net incremental revenue base. However, continued consolidation in the banking industry or a prolonged unfavorable change in the financial securities markets could impede growth in revenues and earnings. 13
Asset Balances (In millions) As of March 31, PERCENT --------------- 2000 1999 CHANGE ---- ---- ------ Assets invested in equity and fixed income programs $ 45,744 $ 27,559 66% Assets invested in liquidity funds 22,177 21,668 2% -------- -------- Assets under management 67,921 49,227 38% Client proprietary assets under administration 197,476 139,865 41% -------- -------- Assets under management and administration $265,397 $189,092 40% ======== ======== Assets under management consist of total assets invested in our equity and fixed income investment programs and liquidity funds for which we provide management services. Assets under management and administration consist of total assets for which we provide management and administrative services, including client proprietary fund balances for which we provide administration and/or distribution services. Technology Services - ------------------- Technology Services provides trust and investment operations outsourcing to financial institutions with our TRUST 3000 product line. TRUST 3000 incorporates a myriad of integrated products and sub-systems that provide complete trust and investment accounting capabilities for financial institutions. Trust operations outsourcing incorporates the TRUST 3000 product line within a package of services that includes full operations, custody and securities processing support. The client maintains only minimal support staff, while virtually all processing work is handled by our employees. Oftentimes, the client will also elect to outsource their investment management requirements, where we provide investment products and distribution support. 1ST QTR 1ST QTR DOLLAR PERCENT 2000 1999 CHANGE CHANGE ---- ---- ------ ------ Revenues: Trust technology services $46,661 $41,372 $5,289 13% Trust operations outsourcing 5,194 4,781 413 9% ------- ------- ------ Total revenues 51,855 46,153 5,702 12% Expenses: Operating and development 25,836 24,141 1,695 7% Sales and marketing 7,948 7,690 258 3% ------- ------- ------ Total operating profits $18,071 $14,322 $3,749 26% ======= ======= ====== Profit margin 35% 31% -- -- The increase in Trust Technology Services revenues is primarily attributable to an increase in recurring processing fees. The conversion of new clients onto the TRUST 3000 product line during the past year accounts for a significant portion of the increase in recurring processing fees. In addition, the delivery of new products has provided us with the opportunity to leverage additional recurring revenues from our existing clients. As a result, recurring processing fees increased $4.5 million or 19 percent. Another significant contributor to the growth in revenues was an increase in brokerage services revenues associated with securities trade execution activities by our TRUST 3000 clients. We expect our recurring revenue base to increase through the delivery of new products and services to our existing clients and the contracting of new clients for processing services. Also, we are currently undertaking strategies to expand our technology services into other new markets. Penetrating these new markets could provide many new opportunities. However, consolidations among our banking clients continue to be a major strategic issue facing this segment. 14
Trust Operations Outsourcing revenues increased primarily due to growth in investment management fees from our existing clients, as well as from new clients. Revenues earned from processing services remained relatively flat. We continue to evaluate new alternatives and possible new markets for this business. We still believe that this business provides an attractive alternative to any financial institution faced with the task of building the necessary infrastructure to support the delivery of trust services. Operating profits and profit margin for Technology Services increased substantially in the first quarter of 2000. The increase in operating profits and profit margin were primarily due to the increase in revenues previously discussed. In addition, we have been able to exercise cost containment in our normal ongoing operations thereby allowing increased investments in the development of new products without negatively affecting operating profits and profit margin. As a percentage of sales, operating and development expenses decreased to 50 percent from 52 percent and sales and marketing expenses decreased to 15 percent from 17 percent. We anticipate our profit margin can be sustained and our operating profits will increase as a result of additional sales of new products and our ability to control costs. Asset Management - ---------------- Asset Management 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 diversified investment strategies and portfolios delivered to these markets through mutual funds and other pooled vehicles. 1ST QTR 1ST QTR DOLLAR PERCENT 2000 1999 CHANGE CHANGE ---- ---- ------ ------ Revenues: Investment management fees $43,396 $23,685 $19,711 83% Liquidity management fees 4,926 4,657 269 6% ------- ------- ------- Total revenues 48,322 28,342 19,980 70% Expenses: Operating and development 14,440 8,082 6,358 79% Sales and marketing 20,408 11,781 8,627 73% ------- ------- ------- Total operating profits $13,474 $ 8,479 $ 4,995 59% ======= ======= ======= Profit margin 28% 30% -- -- The increase in Investment Management Fees was primarily due to significant growth in assets under management generated through new business in both our investment advisory and institutional asset management businesses and an increase in the average basis points recognized. Average assets under management increased $12.3 billion or 65 percent to $31.1 billion for the first quarter of 2000, as compared to $18.8 billion for the first quarter of 1999. In our investment advisory business, we continue to be successful at recruiting new registered investment advisors in underdeveloped markets. We established approximately 400 new registered investment advisor relationships during the first quarter of 2000, bringing our total network to about 6,100 advisors. We have also been working closely with our existing advisors to increase their asset-gathering potential by growing their existing client base through the introduction of new investment options and programs. Our Institutional asset management business also experienced an increase in new business. During the first quarter of 2000, 29 new institutional clients were contracted with commitments of approximately $2 billion, of which $.8 billion has funded and the remainder is to be funded in subsequent quarters. We anticipate continued growth in both these businesses through the establishment of new client relationships and the delivery of new investment products and services. We also believe that our diversified investment programs and services affords us the ability to retain these assets. 15
The increase in Liquidity Management Fees was due to an increase in assets under management invested in our liquidity funds from institutional clients. Average assets under management invested in our liquidity products increased $1.2 billion or 25 percent to $6.2 billion for the first quarter of 2000, as compared to $5.0 billion for the first quarter of 1999. The increase in assets under management was primarily due to new sales of our cash sweep technology product. Also, client cash flows are cyclical and typically run higher in the first quarter. However, the increase in assets under management was partially offset by a decrease in the average basis points recognized. Operating profits in Asset Management continues to grow at a significant pace primarily through the generation of new business. However, operating profits and profit margin were negatively affected by substantial investments in web- enabling our Asset Management business lines as well as expanding our sales and marketing efforts. We believe that our increased pace of investments in the development of new products and services is necessary to keep our competitive advantage, as well as creating opportunities to deliver our investment products and services into new markets. As a percentage of sales, operating and development expenses increased to 30 percent from 29 percent and sales and marketing expenses increased to 42 percent from 41 percent. Our ability to leverage on our infrastructure allowed us to control variable operating costs and thereby increase the pace of investments in the development of new products. With the increased sales momentum in our investment advisory and institutional asset management businesses and the delivery of new investment products and services, operating results in this segment are expected to produce favorable results in the near future. However, any significant devaluation in the financial securities markets could negatively affect future revenues and profits. Mutual Fund Services - -------------------- The Mutual Fund Services segment provides administration and distribution services to proprietary mutual funds created for banks, insurance firms, and investment management companies. These services include fund administration and accounting, legal services, shareholder recordkeeping, and marketing. 1ST QTR 1ST QTR DOLLAR PERCENT 2000 1999 CHANGE CHANGE ---- ---- ------ ------ Total revenues $30,026 $26,031 $3,995 15% Expenses: Operating and development 19,002 16,263 2,739 17% Sales and marketing 5,621 4,205 1,416 34% ------- ------- ------ Total operating profits $ 5,403 $ 5,563 $ (160) (3%) ======= ======= ====== Profit margin 18% 21% -- -- The increase in Mutual fund services revenues was fueled by growth in average proprietary fund balances, which increased $49.0 billion or 35 percent to $187.7 billion for the first quarter of 2000 versus $138.7 billion for the first quarter of 1999. Average proprietary fund balances increased due to growth in existing complexes in all markets. We are beginning to see the impact of our sales efforts in the non-bank investment management and offshore markets. Clients in these markets constitute a larger portion of average proprietary fund balances, approximately 30 percent during the first quarter of 2000, as compared to approximately 20 percent during the first quarter in 1999. However, total revenues were negatively affected by a decrease in average basis points earned because of fee concessions granted in exchange for longer-term contracts and a reduction in the range of certain services to a few large bank clients. We will continue to aggressively focus our efforts on the non-bank investment management and offshore markets. Initially, clients in these markets will not generate as much revenue as a large bank complex would, but we believe that these will be continually growing markets. 16
Although revenues increased 15 percent, operating profits and profit margin decreased in the first quarter of 2000, primarily because of the fee concessions already discussed and certain expenses are increasing. The increase in expenses is the result of continued investments in new technology that we believe will differentiate and broaden our services in a highly competitive market and from accelerating sales and marketing efforts in the non-bank investment management and offshore markets. As a percentage of sales, operating and development expenses remained flat at 63 percent while sales and marketing expenses increased to 18 percent from 16 percent. The market for traditional mutual fund services for banks is maturing and fewer new bank proprietary mutual fund complexes are being established. Also, many of the largest banks with well-established complexes have grown their mutual funds to the point where they are less reliant on the services of an outsourcer. In these markets, we will reposition our services by emphasizing value-added information and technology products. Also, we believe the non-bank investment management and offshore markets hold the greatest growth potential for our services in the upcoming years. We are currently positioning ourselves to establish a significant presence in these markets. If these markets grow at the pace we believe they will, our efforts will provide positive returns in the future. However, continued consolidations in the banking industry or a significant and prolonged unfavorable change in the financial securities markets could negatively affect revenues and profits. Investments in New Business - --------------------------- Investments in New Business consist primarily of our international asset management initiatives and Canadian operations. Our international operations incorporate various investment products and services to provide investment solutions to institutional and high-net-worth investors outside North America. Products being offered in Canada include investment advisory, performance evaluation and other consulting services to Canadian pension plans. 1ST QTR 1ST QTR DOLLAR PERCENT 2000 1999 CHANGE CHANGE ---- ---- ------ ------ Total revenues $ 8,543 $ 3,792 $4,751 125% Expenses: Operating and development 7,004 2,277 4,727 208% Sales and marketing 4,393 3,430 963 28% ------- ------- ------ Total operating losses $(2,854) $(1,915) $ (939) (49%) ======= ======= ====== Profit margin (33%) (51%) -- -- The significant increase in revenues is primarily due to an increase in assets under management in our non-US asset management business. Our efforts are currently focused on Europe/South Africa, Asia, and Latin America. These offshore enterprises accounted for approximately 63 percent of total segment revenues in the first quarter of 2000, as compared to 32 percent in the first quarter of 1999. We experienced substantial revenue growth in the European/South African and Asian regions. In the European/South African region, we introduced an SEI-managed fund complex in association with Mediolanum S. p. A., an Italian insurance Company, into the Italian marketplace in early 1999. Our Korean joint venture, which was initiated in March 1999, accounts for all revenue growth in the Asian region. Average assets under management from our non-US enterprises were $3.7 billion in the first quarter of 2000 versus $800 million in the first quarter of 1999. 17
Although the pace of global asset gathering and revenue recognition continued to accelerate, we also accelerated the pace of our investment efforts, especially in the European region. We recently opened a London office to address the United Kingdom pension market and to create a platform for other planned European initiatives. We are also moving forward with our planned joint venture with Credit Commercial de France ("CCF"). This joint venture, which will be based in Paris, will bring our multi-manager capabilities to the French market and, through CCF distribution channels, to selected markets outside France. However, it was recently announced that CCF has agreed to be acquired by HSBC, the second largest bank in the world. This acquisition is not expected to negatively impact our planned joint venture. We believe that global expansion is an area of significant long-term growth for our firm. We will continue to make significant investments in our global initiatives and expect to incur losses throughout the remainder of the year. Other - ----- General and administrative expenses increased 13 percent to $3,542 for the first quarter in 2000, as compared to $3,130 for the first quarter in 1999. As a percentage of total consolidated revenues, general and administrative expenses were 3 percent for the first quarter in 2000 and 1999. Other income on the accompanying Consolidated Statements of Income consist of the following: 1ST QTR 1ST QTR 2000 1999 ---- ---- Equity in the earnings of unconsolidated affiliate $1,753 $1,478 Interest income 985 498 Interest expense (599) (598) ------ ------ Total other income, net $2,139 $1,378 ====== ====== Equity in the earnings of unconsolidated affiliate on the accompanying Consolidated Statements of Income includes our less than 50 percent ownership in the general partnership of LSV Asset Management ("LSV") (See Note 4 of the Notes to Consolidated Financial Statements). Our interest in LSV's net earnings was $1,753 for the first quarter in 2000 and $1,478 for the first quarter in 1999. The increase in LSV's net earnings is due to an increase in assets under management. Average assets under management for LSV were $5.5 billion for the first quarter in 2000, as compared to $5.0 billion for the first quarter in 1999. Interest income for the first quarter in 2000 was $985, as compared to $498 for the first quarter in 1999. Interest income is earned based upon the amount of cash that is invested daily and fluctuations in interest income recognized for one period in relation to another is due to changes in the average cash balance invested for the period. Interest expense for the first quarter in 2000 was $599, as compared to $598 for the first quarter in 1999. Interest expense primarily relates to our long-term debt and borrowings on our line of credit. 18
Liquidity and Capital Resources - ------------------------------- Three Months ------------------------------ Ended March 31, ------------------------------ 2000 1999 ---- ---- Net cash (used in) provided by operating activities $ (973) $ 1,779 Net cash used in investing activities (1,056) (7,395) Net cash used in financing activities (14,161) (25,226) -------- -------- Net decrease in cash and cash equivalents (16,190) (30,842) Cash and cash equivalents, beginning of period 73,206 52,980 -------- -------- Cash and cash equivalents, end of period $ 57,016 $ 22,138 ======== ======== 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 $50.0 million. The availability of the line of credit is subject to compliance with certain covenants set forth in the agreement (See Note 6 of the Notes to Consolidated Financial Statements). At March 31, 2000, the unused sources of liquidity consisted of cash and cash equivalents of $57.0 million and the unused portion of the line of credit of $50.0 million. An increase in income, annual compensation payments, and changes in various accrued expenses primarily affected cash flows from operations for the first quarter of 2000 and 1999. Annual compensation and bonus payments are paid in the first quarter of the following year and negatively affected cash flows from operations in the first quarter of 2000 and 1999. Also, a decrease in various accrued expenses negatively affected cash flows from operations in the first quarter of 2000 and 1999. Cash flows from operations were also affected by receivables. Receivables from regulated investment companies increased in the first quarter of 2000 and 1999 primarily due to an increase in assets under management. These balances are paid off in the following month. In addition, an increase in trade receivables in the first quarter of 2000 and 1999 negatively affected cash flows from operations. Cash flows from investing activities are principally affected by capital expenditures, including capitalized software development costs. Capital expenditures in the first quarter of 2000 primarily related to purchases of equipment and furniture associated with the rise in our headcount. However, capital expenditures in the first quarter of 1999 included significant costs associated with the expansion of our corporate campus. Additionally, we have approved plans to further expand our corporate campus in 2000. This expansion is necessary to accommodate the additional personnel employed as a result of increased interest in our products. This project should be completed in late 2001 at an estimated cost of $20.0 million. Investments in mutual funds were liquidated in the first quarter of 2000 for approximately $2.0 million at a minimal loss which was immaterial. In the second quarter of 2000, we initiated the startup of a new Company-sponsored investment product, an Insurance Products trust, in which we invested approximately $16.0 million. We expect these funds will remain invested until at least early 2001. Cash flows from financing activities are primarily affected by debt and equity transactions. Principal payments on our long-term debt are made annually from the date of issuance while interest payments are made semi-annually. Principal and interest payments were made in the first quarter of 2000 and 1999 (See Note 7 of the Notes to Consolidated Financial Statements). We continued our common stock repurchase program. We purchased approximately 137,000 shares of our common stock at a cost of $13.8 million during the first quarter of 2000. As of April 30, 2000, we still had $9.3 million remaining authorized for the purchase of our common stock. Cash dividends of $.20 per share were paid in the first quarter of 2000 and $.16 in the first quarter of 1999. 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, expansion of our corporate campus, future dividend payments, and principal and interest payments on our long-term debt. 19
Recent Pronouncements - --------------------- In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The Company is currently evaluating the provisions established in SAB 101 to assess if application of SAB 101 is required in its financial statements. 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. Forward- looking statements are based upon estimates and assumptions that involve certain risks and uncertainties, many of which are beyond our control or are subject to change. Although we believe our assumptions are reasonable, they could be inaccurate. Our actual future revenues and income could differ materially from our expected results. We have no obligation to publicly update or revise any forward-looking statements. Quantitative and Qualitative Disclosures About Market Risk. - ---------------------------------------------------------- We currently have several offices located outside the United States that conduct business in the local currencies of that country. We do not use foreign currency exchange contracts or other types of derivative financial investments to hedge local currency cash flows. All foreign operations aggregate approximately 7 percent of total consolidated revenues. Due to this limited activity, we do not expect any material loss with respect to foreign currency risk. Exposure to market risk for changes in interest rates relate primarily to our investment portfolio and long-term debt. Currently, we do not invest in derivative financial instruments. We do not undertake any specific actions to cover our exposure to interest rate risk and are not a party to any interest rate risk management transactions. We place our investments in financial instruments that meet high credit quality standards. We are adverse to principal loss and ensure the safety and preservation of our invested funds by limiting default risk, market risk, and reinvestment risk. The interest rate on our long- term debt is fixed and is not traded on any established market. We have no cash flow exposure due to rate changes for our long-term debt. 20
PART II. OTHER INFORMATION - -------- ----------------- Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) The following is a list of exhibits filed as part of the Form 10-Q. None. (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Company during the quarter ended March 31, 2000. 21
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEI INVESTMENTS COMPANY Date May 12, 2000 By /s/ Kathy Heilig -------------------- ------------------------------------ Kathy Heilig Vice President and Controller 22