10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 12, 2000
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
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Exchange Act of 1934 for the quarterly period ended March 31, 2000 or
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______ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________
0-10200
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(Commission File Number)
SEI INVESTMENTS COMPANY
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1707341
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1 Freedom Valley Drive, Oaks, Pennsylvania 19456-1100
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(Address of principal executive offices)
(Zip Code)
(610) 676-1000
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(Registrant's telephone number, including area code)
N/A
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(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___
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*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
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Item 1. Financial Statements
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Consolidated Balance Sheets
---------------------------
(In thousands)
The accompanying notes are an integral part of these statements.
2
Consolidated Balance Sheets
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(In thousands, except par value)
The accompanying notes are an integral part of these statements.
3
Consolidated Statements of Income
---------------------------------
(unaudited)
(In thousands, except per share data)
The accompanying notes are an integral part of these statements.
4
Consolidated Statements of Cash Flows
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(unaudited)
(In thousands)
Three Months
---------------------
Ended March 31,
---------------------
2000 1999
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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
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Net cash (used in) provided by operating activities (973) 1,779
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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)
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Net cash used in investing activities (1,056) (7,395)
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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)
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Net cash used in financing activities (14,161) (25,226)
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Net decrease in cash and cash equivalents (16,190) (30,842)
Cash and cash equivalents, beginning of period 73,206 52,980
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Cash and cash equivalents, end of period $ 57,016 $ 22,138
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The accompanying notes are an integral part of these statements.
5
Notes to Consolidated Financial Statements
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Note 1. Summary of Significant Accounting Policies
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Nature of Operations
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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:
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.
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:
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.
8
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. Other Assets - Other assets on the accompanying Consolidated Balance
------------
Sheets consist of the following:
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:
9
The following table contains the Condensed Balance Sheets of LSV:
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:
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
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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
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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.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations.
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(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
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)
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.
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.
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.
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.
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.
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Liquidity and Capital Resources
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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.
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Recent Pronouncements
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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.
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PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
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(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.
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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
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