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, 2001 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, 2001: 108,531,508 shares of common stock, par value $.01 per share. PART I. FINANCIAL INFORMATION - ------- --------------------- ITEM 1. FINANCIAL STATEMENTS - ------- -------------------- CONSOLIDATED BALANCE SHEETS --------------------------- (In thousands) The accompanying notes are an integral part of these statements. 2
March 31, 2001 December 31, 2000 --------------- ----------------- (unaudited) Assets - ------ Current assets: Cash and cash equivalents (including restricted cash of $10,889 and $11,900) $111,159 $159,576 Receivables from regulated investment companies 28,103 27,607 Receivables, net of allowance for doubtful accounts of $1,700 54,442 47,404 Deferred income taxes 9,030 9,030 Prepaid expenses and other current assets 6,185 5,414 -------- -------- Total current assets 208,919 249,031 -------- -------- Property and equipment, net of accumulated depreciation and amortization of $88,005 and $83,874 79,797 75,111 -------- -------- Capitalized software, net of accumulated amortization of $12,178 and $11,733 12,378 12,823 -------- -------- Investments Available for Sale 29,916 20,294 -------- -------- Other assets, net 21,749 18,323 -------- -------- Total Assets $352,759 $375,582 ======== ======== CONSOLIDATED BALANCE SHEETS --------------------------- (In thousands, except par value) The accompanying notes are an integral part of these statements. 3
March 31, 2001 December 31, 2000 --------------- ----------------- (unaudited) Liabilities and Shareholders' Equity - -------------------------------------- Current liabilities: Current portion of long-term debt $ 2,000 $ 2,000 Accounts payable 5,993 6,721 Accrued expenses 101,153 121,282 Deferred revenue 11,929 16,450 --------- --------- Total current liabilities 121,075 146,453 --------- --------- Long-term debt 25,000 27,000 --------- --------- Deferred income taxes 5,758 4,708 --------- --------- Shareholders' equity: Common stock, $.01 par value, 750,000 shares authorized; 108,532 and 108,560 shares issued and outstanding 1,085 1,086 Capital in excess of par value 145,775 125,473 Retained earnings 55,747 72,521 Accumulated other comprehensive losses (1,681) (1,659) -------- -------- Total shareholders' equity 200,926 197,421 -------- -------- Total Liabilities and Shareholders' Equity $352,759 $375,582 ======== ======== CONSOLIDATED STATEMENTS OF INCOME --------------------------------- (unaudited) (In thousands, except per share data) The accompanying notes are an integral part of these statements. 4
Three Months Ended March 31, 2001 2000 ---- ---- Revenues $161,301 $138,746 Expenses: Operating and development 76,029 66,282 Sales and marketing 38,256 38,370 General and administrative 5,383 3,542 -------- -------- Income from operations 41,633 30,552 Equity in the earnings of unconsolidated affiliate 2,238 1,753 Interest income 2,249 985 Interest expense (550) (599) -------- -------- Income before income taxes 45,570 32,691 Income taxes 16,861 12,422 -------- -------- Net income 28,709 20,269 -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments, net of income tax expense (benefit) of ($136) and $120 (232) 195 Unrealized holding gains (losses) on investments, net of income tax benefit of $123 and $64 210 (104) -------- -------- Other comprehensive income (loss) (22) 91 -------- -------- Comprehensive income $ 28,687 $ 20,360 ======== ======== Basic earnings per common share $ .26 $ .19 ========= ======= Diluted earnings per common share $ .25 $ .18 ========= ======= CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (unaudited) (In thousands) The accompanying notes are an integral part of these statements. 5
Three Months Ended March 31, 2001 2000 -------- -------- Cash flows from operating activities: Net income $ 28,709 $ 20,269 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,735 4,053 Equity in the earnings of unconsolidated affiliate (2,238) (1,753) Tax benefit on stock options exercised 13,809 2,829 Other 103 5,466 Change in current assets and liabilities: Decrease (increase) in Receivables from regulated investment companies (496) (2,795) Receivables (7,038) (7,887) Prepaid expenses and other current assets (771) (85) Increase (decrease) in Accounts payable (728) (1,030) Accrued expenses (15,782) (19,746) Deferred revenue (4,521) 2,365 -------- -------- Net cash provided by operating activities 15,782 1,856 -------- -------- Cash flows from investing activities: Additions to property and equipment (8,915) (4,136) Additions to capitalized software -- (449) Purchase of investments available for sale (11,794) (782) Other 1,845 4,311 -------- -------- Net cash used in investing activities (18,864) (1,056) -------- -------- Cash flows from financing activities: Payment on long-term debt (2,000) (2,000) Purchase and retirement of common stock (46,249) (13,768) Proceeds from issuance of common stock 7,261 2,316 Payment of dividend (4,347) (3,538) -------- -------- Net cash used in financing activities (45,335) (16,990) Net decrease in cash and cash equivalents (48,417) (16,190) Cash and cash equivalents, beginning of period 159,576 73,206 -------- -------- Cash and cash equivalents, end of period $111,159 $ 57,016 ======== ======== 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. 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, 2001, the results of operations and cash flows for the three months ended March 31, 2001 and 2000. 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 PrivateTrust 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. (See Note 5) Property and Equipment ---------------------- Property and equipment on the accompanying Consolidated Balance Sheets consist of the following: 6
Estimated Useful Lives March 31, 2001 December 31, 2000 (In Years) ------------------------- ------------------------ ----------------- Equipment $ 75,421,000 $ 71,377,000 3 to 5 Buildings 34,695,000 34,695,000 25 to 39 Land 9,345,000 9,345,000 N/A Purchased software 17,433,000 16,035,000 3 Furniture and fixtures 14,524,000 14,230,000 3 to 5 Leasehold improvements 7,306,000 7,313,000 Lease Term Construction in progress 9,078,000 5,990,000 N/A ------------ ------------ 167,802,000 158,985,000 Less: Accumulated depreciation and amortization (88,005,000) (83,874,000) ------------ ------------ Property and Equipment, net $ 79,797,000 $ 75,111,000 ============ ============ Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful life of each asset. Expenditures for renewals and betterments are capitalized, while maintenance and repairs are charged to expense when incurred. 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 7.3 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. All common share figures have been restated to reflect the three-for-one stock split in June 2000 and the two-for-one stock split in February 2001. 7
For the three month period ended March 31, 2001 ---------------------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount -------------------- -------------------- -------------- Basic earnings per common share $28,709,000 108,600,000 $.26 ============== Dilutive effect of stock options -- 7,218,000 ------------------- ----------- Diluted earnings per common share $28,709,000 115,818,000 $.25 =================== =========== ============== For the three month period ended March 31, 2000 ---------------------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ------------------- ------------------- -------------- Basic earnings per common share $20,269,000 105,990,000 $.19 ============== Dilutive effect of stock options -- 6,582,000 ------------------- ----------- Diluted earnings per common share $20,269,000 112,572,000 $.18 =================== =========== ============== Options to purchase 1,249,000 and 2,220,000 shares of common stock, with an average exercise price of $50.00 and $19.75 were outstanding during the first quarter of 2001 and 2000, respectively, 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. 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: Management's Use of Estimates ----------------------------- The preparation of financial statements in conformity with accounting principles generally accepted in the Unites States 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. 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.
2001 2000 ---------- ---------- Interest paid $1,061,000 $1,133,000 Interest and dividends received $2,508,000 $ 936,000 Income taxes paid $ -- $6,093,000 8
Foreign Unrealized Accumulated Currency Holding Other Translation Gains(Losses) Comprehensive Adjustments on Investments Losses ------------------------- ------------------------ --------------------- Beginning balance $(736,000) $(923,000) $(1,659,000) Current period change (232,000) 210,000 (22,000) --------- ----------- Ending Balance $(968,000) $(713,000) $(1,681,000) Note 3. Receivables - Receivables on the accompanying Consolidated Balance ----------- Sheets consist of the following: 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. 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, 2001, Investments available for sale had an aggregate cost of $31,096,000 and an aggregate market value of $29,916,000 with gross unrealized holding losses of $1,180,000. At that date, the net unrealized holding losses of $713,000 (net of income tax expense of $467,000) were reported as a separate component of Accumulated other comprehensive losses on the accompanying Consolidated Balance Sheets. At December 31, 2000, Investments available for sale had an aggregate cost of $21,710,000 and an aggregate market value of $20,294,000 with gross unrealized holding losses of $1,416,000. At that date, the net unrealized holding losses of $923,000 (net of income tax expense of $493,000) were reported as a separate component of Accumulated other comprehensive losses on the accompanying Consolidated Balance Sheets. Note 5. Other Assets - Other assets on the accompanying Consolidated Balance ------------ Sheets consist of the following:
March 31, 2001 December 31, 2000 -------------- ----------------- Trade receivables $22,666,000 $22,558,000 Fees earned, not received 1,651,000 1,801,000 Fees earned, not billed 31,825,000 24,745,000 ----------- ----------- 56,142,000 49,104,000 Less: Allowance for doubtful accounts (1,700,000) (1,700,000) ----------- ----------- $54,442,000 $47,404,000 =========== =========== 9
March 31, 2001 December 31,2000 ---------------------- ----------------------- Investment in unconsolidated affiliate $ 5,729,000 $ 5,627,000 Other, net 16,020,000 12,696,000 ----------- ----------- Other assets $21,749,000 $18,323,000 =========== =========== 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 2001 and 2000 was approximately 45 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: The following table contains the Condensed Balance Sheets of LSV:
2001 2000 ---------- ---------- Revenues $6,952,000 $5,294,000 ========== ========== Net income $5,028,000 $3,761,000 ========== ========== Note 6. Accrued Expenses - Accrued expenses on the accompanying Consolidated ---------------- Balance Sheets consist of the following:
March 31, 2001 December 31, 2000 --------------------- ----------------------- Current assets $11,205,000 $10,976,000 Non-current assets 154,000 103,000 ----------- ----------- Total assets $11,359,000 $11,079,000 =========== =========== Current liabilities $ 1,089,000 $ 1,285,000 Partners' capital 10,270,000 9,794,000 ----------- ----------- Total liabilities and partners' capital $11,359,000 $11,079,000 =========== =========== Note 7. 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, 2001, 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 10
March 31, 2001 December 31, 2000 --------------------- ----------------------- Accrued compensation $ 22,046,000 $ 49,890,000 Accrued proprietary fund services 14,252,000 14,834,000 Accrued consulting services 7,572,000 8,200,000 Other accrued expenses 57,283,000 48,358,000 ------------ ------------ Total accrued expenses $101,153,000 $121,282,000 ============ ============ 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, 2001. The Company was in compliance with these covenants during the first quarter of 2001. Note 8. 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 2001. The current portion of the Notes amounted to $2,000,000 at March 31, 2001. The carrying amount of the Company's long-term debt is not materially different from its fair value. The company was in compliance with these covenants during the first quarter of 2001. Note 9. 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 $453,365,000. Through March 31, 2001, a total of 99,492,000 shares at an aggregate cost of $401,339,000 have been purchased and retired. The Company purchased 1,227,000 shares at a total cost of $46,249,000 during the first quarter of 2001. 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 10. Dividend - On December 14, 2000, the Board of Directors declared a -------- cash dividend of $.04 per share on the Company's common stock, which was paid on January 25, 2001, to shareholders of record on January 8, 2001. Note 11. 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. 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, 2001 and 2000. 12
Mutual Investments General Technology Asset Fund In New And Services Management Services Business Administrative Total ----------- ----------- ----------- ------------ --------------- ------------ For the Three-Month Period Ended March 31, 2001 ------------------------------------------------------------------------------------ Revenues $60,660,000 $60,023,000 $32,017,000 $ 8,601,000 $161,301,000 ----------- ----------- ----------- ----------- ------------ Operating income (loss) $20,807,000 $22,559,000 $ 7,485,000 $(3,835,000) $(5,383,000) $ 41,633,000 ----------- ----------- ----------- ----------- -------------- Other income, net $ 3,937,000 ------------ Income before income taxes $ 45,570,000 ------------ Depreciation and amortization $ 3,280,000 $ 675,000 $ 377,000 $ 238,000 $ 165,000 $ 4,735,000 ----------- ----------- ----------- ----------- -------------- ------------ Capital Expenditures $ 6,447,000 $ 1,296,000 $ 440,000 $ 213,000 $ 519,000 $ 8,915,000 ----------- ----------- ----------- ----------- -------------- ------------ 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 ----------- ----------- ----------- ----------- ----------- ------------ 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 11 of the Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS - --------------------- First Quarter Ended March 31, 2001 Compared to First Quarter Ended March 31, 2000 Consolidated Overview Revenues increased 16 percent and earnings increased 42 percent during the first quarter 2001 primarily because of new business generated in our primary business lines. Revenues and earnings increased due to increased market acceptance of our products and services and the leveragability built within our operations. Sales to new clients and the delivery of new products and services to existing clients in our technology and outsourcing businesses were extremely strong. Net asset inflows from our high-net-worth and institutional investors increased during the quarter, despite the recent downturn in the market. We intend to sustain revenues and earnings growth by delivering new products and services to our existing clients and maintaining a consistent level of new sales. In addition, we will effectively utilize our current infrastructure to manage expenses across a high net incremental revenue base. However, mergers and acquisitions within the banking industry and any prolonged volatility in the capital markets could negate any expected growth in revenues and earnings. 13
Income Statement Data (In thousands, except per common share data) 1ST QTR 1ST QTR PERCENT 2001 2000 CHANGE -------- -------- ----------------- Revenues: Technology Services $ 60,660 $ 51,855 17% Asset Management 60,023 48,322 24% Mutual Fund Services 32,017 30,026 7% Investments in New Business 8,601 8,543 1% -------- -------- Total revenues $161,301 $138,746 16% Operating Income (Loss): Technology Services $ 20,807 $ 18,071 15% Asset Management 22,559 13,474 67% Mutual Fund Services 7,485 5,403 39% Investments in New Business (3,835) (2,854) (34%) General and Administrative (5,383) (3,542) (52%) -------- -------- Income from operations 41,633 30,552 36% Other income, net 3,937 2,139 84% -------- -------- Income before income taxes 45,570 32,691 39% Income taxes 16,861 12,422 36% -------- -------- Net Income $ 28,709 $ 20,269 42% ======== ======== Diluted earnings per common share $.25 $.18 39% ======== ======== 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 technology outsourcing services to banks and other financial institutions through our TRUST 3000 product line. TRUST 3000 includes many integrated products and sub-systems that provide a complete investment accounting and management information system for trust institutions. Revenues are earned from monthly processing and software services fees, and project fees associated with the conversion of new and merging clients. Trust operations outsourcing incorporates the TRUST 3000 product line within a package of services that includes investment management, custody and back-office capabilities. Through this business, we perform the trust department back- office administration function. Revenues are earned from processing and management fees.
ASSET BALANCES (In millions) As of March 31, --------------------------- PERCENT 2001 2000 CHANGE -------- -------- ---------------- Assets invested in equity and fixed income programs $ 51,384 $ 45,744 12% Assets invested in liquidity funds 26,691 22,177 20% -------- -------- Assets under management 78,075 67,921 15% Client proprietary assets under administration 192,218 197,476 (3%) -------- -------- Assets under management and administration $270,293 $265,397 2% ======== ======== The increase in Trust Technology Services revenues is primarily attributable to increased cross sales in our core service bureau business primarily, brokerage services. Brokerage Revenue increased $5.5 million to $16.0 million for the first quarter 2001 compared to $10.5 million for the first quarter 2000. Brokerage services allow a client to execute trades through SEI's captive broker/dealer. Trust Operations Outsourcing revenues increased primarily due to growth in investment management fees from our existing clients, as well as from new clients. 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. The increase in operating profits and profit margin were primarily due to the increase in revenues previously discussed and the leveragability inherent in our current infrastructure. As a percentage of sales, operating 14
1ST QTR 1ST QTR DOLLAR PERCENT 2001 2000 CHANGE CHANGE ------- ------- ------------------ ----------------- Revenues: Trust technology services $53,057 $46,661 $6,396 14% Trust operations outsourcing 7,603 5,194 2,409 46% ------- ------- ------ Total revenues 60,660 51,855 8,805 17% Expenses: Operating and development 31,346 25,836 5,510 21% Sales and marketing 8,507 7,948 559 7% ------- ------- ------ Total operating profits $20,807 $18,071 $2,736 15% ======= ======= ====== Profit margin 34% 35% -- -- and development expenses increased to 52 percent from 50 percent and sales and marketing expenses decreased to 14 percent from 15 percent. 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. However, consolidations among our banking clients continue to be a major strategic issue facing this segment. 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, diversified investment strategies and portfolios and back- office technology support. Revenues 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. 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. Average assets under management increased $6.1 billion or 20 percent to $37.2 billion for the first quarter of 2001, as compared to $31.1 billion for the first quarter of 2000. In our investment advisory business, we continue to be successful at recruiting new registered investment advisors. We established approximately 500 new registered investment advisor relationships during the first quarter of 2001, bringing our total network to about 8,100 advisors. Our Institutional asset management business also experienced an increase in new business. During the first quarter of 2001, 5 new institutional clients were obtained. We feel the increase in new sales in both businesses is the result of increased market acceptance of our outsource business solution across a diverse range of clients. We feel the increase in new sales in both businesses is the result of increased market acceptance of our outsource business solution across a diverse range of clients. 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 $2.3 billion or 36 percent to $8.5 billion for the first quarter of 2001, as compared to $6.2 billion for the first quarter of 2000. Operating profits and profit margin increased during the first quarter due to new business and the leveragability built into our operations. We have been able to control operating costs and continue to make investments in developing new products without affecting margins. As a percentage of sales, operating and development expenses decreased to 28 percent from 30 percent and sales and marketing expenses decreased to 34 percent from 42 percent. Despite the recent volatility in the marketplace, we remain optimistic about this business. We are confident that our sales and product strategy will continue to provide new business to support future growth. However, continued volatility in the capital markets could negatively affect future revenues and profits. 15
1ST QTR 1ST QTR DOLLAR PERCENT 2001 2000 CHANGE CHANGE ------- ------- -------- ------- Revenues: Investment management fees $54,237 $43,396 $10,841 25% Liquidity management fees 5,786 4,926 860 17% ------- ------- ------- Total revenues 60,023 48,322 11,701 24% Expenses: Operating and development 17,185 14,440 2,745 19% Sales and marketing 20,279 20,408 (129) (1%) ------- ------- Total operating profits $22,559 $13,474 $ 9,085 67% ======= ======= ======= Profit margin 38% 28% -- -- 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. Revenues are based upon a fixed percentage, referred to as basis points, of the average daily asset value of the proprietary funds. The increase in Mutual fund services revenues was fueled by growth in average proprietary fund balances, which increased $10.5 billion or 6 percent to $198.2 billion for the first quarter of 2001 versus $187.7 billion for the first quarter of 2000. The increase in revenues resulted from new sales in the non- bank investment management and offshore markets. Profit margin increased to 23 percent from 18 percent. The increase in profit margin was due to an increase in revenue and the leveragability built into our operations. As a percentage of sales, operating and development expenses decreased to 61 percent from 63 percent and sales and marketing expenses decreased to 16 percent from 18 percent. The demand for our services in the investment management, offshore and hedge fund markets has steadily risen. We will continue to focus our efforts in these markets because we believe these markets hold the greatest long-term growth potential for our services. Conversely, 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 include our global asset management initiatives that incorporate our investment products and services to provide investment solutions to institutional and high-net-worth investors outside the United States Revenues are primarily 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. 16
1ST QTR 1ST QTR DOLLAR PERCENT 2001 2000 CHANGE CHANGE ------- ------- ------------------ ----------------- Total revenues $32,017 $30,026 $1,991 7% Expenses: Operating and development 19,413 19,002 411 2% Sales and marketing 5,119 5,621 (502) (9%) ------- ------- ------ Total operating profits $ 7,485 $ 5,403 $2,082 39% ======= ======= ====== Profit margin 23% 18% -- -- Although revenues were flat for the first quarter 2001, assets under management from our offshore enterprises increased $1.0 billion to $4.7 billion during the first quarter 2001, compared to $3.7 billion in the first quarter 2000. The first quarter 2000 revenue included our Canadian consulting business that was sold later in 2000. Excluding those revenues, revenues for the first quarter would have increased 27 percent. Our efforts are currently focused on Europe/South Africa, Asia, and Latin America. We gained initial market acceptance for our U.K. pension plan initiative, which offers a comprehensive multi-manager based solution to U.K. pension funds. Three commitments for $125 million in assets have been made in the first quarter. The pace of global asset gathering and revenue recognition continues to accelerate, and we also accelerated the pace of our investment efforts especially in the European region. We plan to undertake new initiatives later in the year, directed at high net worth investors in Europe. 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 in this segment. GENERAL & ADMINISTRATIVE - ------------------------ General and administrative expenses increased 52 percent to $5,383 for the first quarter in 2001, as compared to $3,542 for the first quarter in 2000. As a percentage of total consolidated revenues, general and administrative expenses were 3 percent for the first quarter in 2001 and 2000. OTHER INCOME - ------------ Other income on the accompanying Consolidated Statements of Income consist of the following:
1ST QTR 1ST QTR DOLLAR PERCENT 2001 2000 CHANGE CHANGE ------- ------- ------ ------- Total revenues $ 8,601 $ 8,543 $ 58 1% Expenses: Operating and development 8,085 7,004 1,081 15% Sales and marketing 4,351 4,393 (42) (1%) ------- ------- Total operating losses $(3,835) $(2,854) $ (981) (34%) ======= ======= ====== ====== Profit margin (45%) (33%) -- -- Equity in the earnings of unconsolidated affiliate on the accompanying Consolidated Statements of Income includes our less than 50 percent ownership in the general partnership of LSV Asset Management ("LSV") (See Note 5 of the Notes to Consolidated Financial Statements). Our interest in LSV's net earnings was $2,238 for the first quarter in 2001 and $1,753 for the first quarter in 2000. The increase in LSV's net earnings is due to an increase in assets under management. Average assets under management for LSV were $5.7 billion for the first quarter in 2001, as compared to $4.2 billion for the first quarter in 2000. Interest income for the first quarter in 2001 was $2,249, as compared to $985 for the first quarter in 2000. Interest income is earned based upon the amount of cash that is invested daily and fluctuations in interest 17
1ST QTR 1ST QTR 2001 2000 ------ ------ Equity in the earnings of unconsolidated affiliate $2,238 $1,753 Interest income 2,249 985 Interest expense (550) (599) ------ ------ Total other income, net $3,937 $2,139 ====== ====== 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 2001 was $550, as compared to $599 for the first quarter in 2000. Interest expense primarily relates to our long-term debt and borrowings on our line of credit. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- 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 7 of the Notes to Consolidated Financial Statements). At March 31, 2001, the unused sources of liquidity consisted of unrestricted cash and cash equivalents of $100.3 million and the unused portion of the line of credit of $50.0 million. The increase in cash flow from operations was primarily due to the tax benefit received from stock options exercised as a result of the rise in our stock price during the past 3 years. The tax benefit on stock options exercised was previously included in cash flows from financing activities. The prior year has been reclassified to conform with the current year presentation. In addition, an increase in income and annual compensation payments affected cash flows from operations for the first quarter of 2001 and 2000. 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 2001 and 2000. Cash flows from investing activities are principally affected by capital expenditures, including capitalized software development costs. Capital expenditures in the first quarter of 2001 primarily related to purchases of equipment and furniture associated with the expansion of our corporate headquarters. A parking structure was completed during the first quarter of 2001 and we are currently constructing two additional buildings that is expected to be completed by the end of 2001. Total cost of the expansion is estimated at $25.0 million. The additional buildings are necessary due to the recent growth experienced in our primary business lines. Another factor that affected cash flow from investing activities was the initiation of a new Company-sponsored mutual fund in which we invested approximately $11.0 million. We expect these funds will remain invested until the third quarter 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 2001 and 2000 (See Note 8 of the Notes to Consolidated Financial Statements). We continued our common stock repurchase program. We purchased approximately 1,227,000 shares of our common stock at a cost of $46.3 million during the first quarter of 2001. As of April 30, 2001, we still had $48.3 million remaining authorized for the purchase of our common stock. Cash dividends of $.04 per share were paid in the first quarter of 2001 and $.03 in the first quarter of 2000. The Board of Directors has indicated its intention to continue making cash dividend payments. 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, 18
Three Months ------------------------------------------ Ended March 31, ------------------------------------------ 2001 2000 -------- -------- Net cash provided by operating activities $ 15,782 $ 1,856 Net cash used in investing activities (18,864) (1,056) Net cash used in financing activities (45,335) (16,990) -------- -------- Net decrease in cash and cash equivalents (48,417) (16,190) Cash and cash equivalents, beginning of period 159,576 73,206 -------- -------- Cash and cash equivalents, end of period $111,159 $ 57,016 ======== ======== expansion of our corporate campus, future dividend payments, and principal and interest payments on our long-term debt. 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 do have a number of satellite offices located outside the United States that conduct business in local currencies of that country. All foreign operations aggregate approximately 5 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. 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. 19 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, 2001. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEI INVESTMENTS COMPANY Date May 14, 2001 By /s/ Kathy Heilig -------------------------- ----------------------- Kathy Heilig Vice President and Controller 21