10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 11, 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
------
Exchange Act of 1934 for the quarterly period ended June 30, 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 June 30, 2000: 53,187,707 shares of common stock, par value
$.01 per share.
The accompanying notes are an integral part of these statements.
1
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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Consolidated Balance Sheets
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(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 Income
---------------------------------
(unaudited)
(In thousands, except per share data)
The accompanying notes are an integral part of these statements.
5
Consolidated Statements of Cash Flows
-------------------------------------
(unaudited)
(In thousands)
The accompanying notes are an integral part of these statements.
6
Notes to Consolidated Financial Statements
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Note 1. Summary of Significant Accounting Policies
------------------------------------------
Nature of Operations
--------------------
SEI Investments Company (the "Company") is organized around its four
primary business lines: Technology Services, Asset Management, Mutual
Fund Services, and Investments in New Business. Technology Services
includes the Trust 3000 product line and trust operations outsourcing.
Asset Management provides investment solutions through various
investment products and services distributed directly or through
professional investment advisors, financial planners, and other
financial intermediaries to institutional and high-net-worth markets.
Mutual Fund Services provides administration and distribution services
to proprietary mutual funds created for banks, insurance firms, and
investment management companies. Investments in New Business consists
of the Company's Canadian and international operations which provide
investment advisory services globally through investment products and
services and performance evaluation and consulting services to
Canadian pension plans.
Summary Financial Information and Results of Operations
-------------------------------------------------------
In the opinion of the Company, the accompanying unaudited Consolidated
Financial Statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the
financial position as of June 30, 2000, the results of operations for
the three and six months ended June 30, 2000 and 1999, and cash flows
for the six months ended June 30, 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:
7
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 8.0 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.
8
Options to purchase 60,000 shares of common stock, with an average exercise
price per share of $32.42 were outstanding during the second quarter of 1999,
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
second quarter of 2000 were included in the diluted earnings per common share
calculation.
Options to purchase 1,101,000 shares of common stock, with an average
exercise price per share of $39.50 were outstanding during the first six
months of 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 six months of 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 six months ended
June 30 is as follows:
2000 1999
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Interest paid $ 1,146,000 $ 1,218,000
Interest and dividends received $ 1,782,000 $ 958,000
Income taxes paid $25,485,000 $15,267,000
Management's Use of Estimates
-----------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
9
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. Subsequent Event - On July 31, 2000, the Company entered into a
----------------
definitive agreement to sell all the rights and titles to its Canadian
performance measurement business along with the related assets of such
business to Royal Trust Corporation of Canada ("Royal Trust"), a unit of
Royal Bank of Canada. The performance measurement business measures and
evaluates investment portfolio performance for defined benefit plan
sponsors and investment managers located in Canada. Under the terms of
the agreement, the Company will receive cash consideration, subject to
adjustment, at closing. A transition plan is currently in development
for integrating the clients, affected employees and systems to Royal
Trust by the end of 2000.
Note 3. 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.
Note 4. 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.
10
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 5. Other Assets - Other assets on the accompanying Consolidated Balance
------------
Sheets consist of the following:
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 June 30, 2000, Investments available for sale had an aggregate cost
of $21,377,000 and an aggregate market value of $21,877,000 with gross
unrealized gains of $500,000. At that date, the net unrealized holding
gains of $286,000 (net of income tax expense of $214,000) were
reported as a separate component of Accumulated other comprehensive
losses on the accompanying Consolidated Balance Sheets.
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.
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 that 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 six months 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.
11
The following table contains the Condensed Statements of Income of LSV
for the three months ended June 30:
2000 1999
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Revenues $5,385,000 $5,085,000
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Net income $3,786,000 $3,831,000
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The following table contains the Condensed Statements of Income of LSV
for the six months ended June 30:
2000 1999
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Revenues $10,679,000 $9,554,000
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Net income $ 7,547,000 $6,974,000
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The following table contains the Condensed Balance Sheets of LSV:
June 30, 2000 December 31, 1999
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Current assets $10,023,000 $9,459,000
Non-current assets 118,000 131,000
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Total assets $10,141,000 $9,590,000
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Current liabilities $ 1,093,000 $ 782,000
Partners' capital 9,048,000 8,808,000
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Total liabilities and
partners' capital $10,141,000 $9,590,000
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Note 6. Accrued Expenses - Accrued expenses on the accompanying Consolidated
----------------
Balance Sheets consist of the following:
June 30, 2000 December 31, 1999
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Accrued compensation $30,375,000 $ 39,846,000
Accrued proprietary fund services 13,300,000 11,562,000
Accrued consulting services 9,082,000 7,342,000
Accrued corporate income taxes 5,783,000 9,801,000
Other accrued expenses 38,748,000 41,650,000
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Total accrued expenses $97,288,000 $110,201,000
=========== ============
12
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, 2000, at which time the outstanding principal balance, if
any, becomes due unless the Agreement is extended. Management believes
the agreement will be extended. The line of credit, when utilized,
accrues interest at the Prime rate or 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 June
30, 2000.
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 annual payment of $2,000,000 in February 2000. The
current portion of the Notes amounted to $2,000,000 at June 30, 2000.
The carrying amount of the Company's long-term debt approximates its
fair value.
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 $353,365,000. Through
June 30, 2000, a total of 48,995,000 shares (adjusted for the three-
for one-stock split) at an aggregate cost of $344,577,000 have been
purchased and retired. The Company purchased 422,000 shares at a total
cost of $14,329,000 during the six month period ended June 30, 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 10. Stock Split - On May 10, 2000, the Board of Directors declared a
-----------
three-for-one stock split of the Company's $.01 par value common
stock, effected in the form of a stock dividend which was paid on June
19, 2000 to shareholders of record as of June 5, 2000. A total of
35,400,000 shares of common stock were issued in connection with the
stock split. The par value of the common stock remains unchanged. All
references in the accompanying financial statements to the number of
shares of common stock, and per share amounts have been restated to
reflect the effect of the stock split.
Note 11. Dividend - On May 10, 2000, the Board of Directors declared a cash
--------
dividend of $.08 per share on the Company's common stock, which was
paid on June 19, 2000, to shareholders of record on June 5, 2000. The
dividend per share amounts above were adjusted to reflect the three-
for-one stock split paid on June 19, 2000.
13
Note 12. 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.
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.
14
The following tables highlight certain unaudited financial information
about each of the Company's segments for the three and six months ended
June 30, 2000 and 1999.
15
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
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 12 of the Notes to
Consolidated Financial Statements.
Results of Operations
- ---------------------
Second Quarter Ended June 30, 2000 Compared to Second Quarter Ended June 30,
1999
Consolidated Overview
Revenues and earnings increased in the second 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 and existing clients and our ability to leverage expenses
over a higher net incremental revenue base. 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 anticipate the current growth experienced in revenues
and earnings can continue through the delivery of new products and services as
well as our current infrastructure enables us to carefully manage 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.
17
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.
2ND QTR 2ND QTR DOLLAR PERCENT
2000 1999 CHANGE CHANGE
------- ------- ------ -------
Revenues:
Trust technology services $48,986 $41,567 $7,419 18%
Trust operations outsourcing 5,740 5,339 401 8%
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Total revenues 54,726 46,906 7,820 17%
Expenses:
Operating and development 25,432 24,614 818 3%
Sales and marketing 8,437 7,632 805 11%
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Total operating profits $20,857 $14,660 $6,197 42%
======= ======= ======
Profit margin 38% 31% -- --
The increase in Trust Technology Services revenues is primarily attributable to
an increase in recurring processing fees. The conversion of new clients onto
the TRUST 3000 product line during the past year accounts for a significant
portion of the increase in recurring processing fees. In addition, the delivery
of new products has provided us with the opportunity to leverage additional
recurring revenues from our existing clients. As a result, recurring processing
fees increased $4.0 million or 16 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. However, consolidations among our banking clients continue
to be a major strategic issue facing this segment.
18
Trust Operations Outsourcing revenues increased primarily due to growth in
investment management fees. 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 second quarter of 2000. The increase in operating profits
and profit margin were primarily due to the increase in revenues previously
discussed. In addition, our current infrastructure enables us to manage expenses
carefully across a higher net incremental revenue base. Because we have been
achieving real economy to scale in our operational groups, we have continued to
invest 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 47 percent from 53 percent and sales and marketing
expenses decreased to 15 percent from 16 percent.
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.
2ND QTR 2ND QTR DOLLAR PERCENT
2000 1999 CHANGE CHANGE
------- ------- ------ -------
Revenues:
Investment management fees $46,067 $27,752 $18,315 66%
Liquidity management fees 4,628 4,357 271 6%
------- ------- -------
Total revenues 50,695 32,109 18,586 58%
Expenses:
Operating and development 16,492 8,496 7,996 94%
Sales and marketing 19,681 14,173 5,508 39%
------- ------- -------
Total operating profits $14,522 $ 9,440 $ 5,082 54%
======= ======= =======
Profit margin 29% 29% -- --
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 $12.8 billion or 60 percent to $34.2 billion
for the second quarter of 2000, as compared to $21.4 billion for the second
quarter of 1999. In our investment advisory business, we continue to be
successful at recruiting new registered investment 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 a significant increase in new business. 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 afford us the
ability to retain these assets.
19
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 $.7 billion
to $5.6 billion for the second quarter of 2000, as compared to $4.9 billion for
the second quarter of 1999. The increase in assets under management was
primarily due to new sales of our cash sweep technology product. 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
technology 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 32
percent from 27 percent and sales and marketing expenses decreased to 39 percent
from 44 percent. 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 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.
2ND QTR 2ND QTR DOLLAR PERCENT
2000 1999 CHANGE CHANGE
------- ------- ------ -------
Total revenues $32,133 $27,022 $5,111 19%
Expenses:
Operating and development 20,104 16,801 3,303 20%
Sales and marketing 5,709 4,054 1,655 41%
------- ------- ------
Total operating profits $ 6,320 $ 6,167 $ 153 2%
======= ======= ======
Profit margin 20% 23% -- --
The increase in Mutual fund services revenues was fueled by growth in average
proprietary fund balances, which increased $45.9 billion to $191.0 billion for
the second quarter of 2000 versus $145.1 billion for the second quarter of 1999.
We are beginning to see the impact of our sales efforts in the non-bank
investment management and offshore markets as clients in these markets
constitute a larger portion of average proprietary fund balances. We have also
seen an increase in average proprietary fund balances from our bank clients.
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 with 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.
20
Although revenues increased 19 percent, operating profits were relatively flat
and profit margin decreased in the second quarter of 2000. Operating profit and
profit margin were affected by the fee concessions already discussed and an
increase in certain expenses. 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 62 percent while sales and marketing expenses increased to 18 percent
from 15 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. 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
measurement and other consulting services to Canadian pension plans.
2ND QTR 2ND QTR DOLLAR PERCENT
2000 1999 CHANGE CHANGE
---- ---- ------ ------
Total revenues $ 8,886 $ 5,585 $3,301 59%
Expenses:
Operating and development 7,136 3,493 3,643 104%
Sales and marketing 4,982 4,721 261 6%
------- ------- ------
Total operating losses $(3,232) $(2,629) $ (603) (23%)
======= ======= ======
Profit margin (36%) (47%) -- --
The significant increase in revenues is 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 62 percent of this segments total
revenues in the second quarter of 2000, as compared to 57 percent in the second
quarter of 1999. We experienced substantial revenue growth in the
European/South African region because of significant asset growth in the SEI-
managed fund complex established in association with Mediolanum S. p. A., which
targets the Italian marketplace. Average assets under management from our non-
US enterprises were $4.0 billion in the second quarter of 2000 versus $2.1
billion in the second quarter of 1999.
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. 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.
21
On July 31, 2000, we entered into a definitive agreement to sell our Canadian
performance measurement business along with the related assets to Royal Trust
Corporation of Canada, a unit of Royal Bank of Canada. This decision to exit
the performance measurement business allows us to focus on our core asset
management business in Canada.
Other
- -----
General and administrative expenses increased 41 percent to $4,243 for the
second quarter in 2000, as compared to $3,000 for the second quarter in 1999.
As a percentage of total consolidated revenues, general and administrative
expenses were 3 percent for the second quarter in 2000 and 1999.
Other income on the accompanying Consolidated Statements of Income consist of
the following:
2ND QTR 2ND QTR
2000 1999
---- ----
Equity in the earnings of unconsolidated affiliate $ 1,757 $ 1,801
Interest income 1,066 375
Interest expense (551) (580)
------- -------
Total other income, net $ 2,272 $ 1,596
======= =======
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
$1,757 for the second quarter in 2000 and $1,801 for the second quarter in 1999.
Average assets under management for LSV remained flat at $5.9 billion for the
second quarter in 2000 and 1999.
Interest income for the second quarter in 2000 was $1,066, as compared to $375
for the second 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 second quarter in 2000 was $551, as compared to $580
for the second quarter in 1999. Interest expense primarily relates to our long-
term debt.
22
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Consolidated Overview
Revenues and earnings increased in the six months ended June 30, 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. In addition, our current infrastructure enables us to leverage
expenses over a higher net incremental revenue base. 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.
23
Technology Services
- -------------------
SIX MONTHS SIX MONTHS DOLLAR PERCENT
2000 1999 CHANGE CHANGE
---- ---- ------ ------
Revenues:
Trust technology services $ 95,647 $ 82,939 $12,708 15%
Trust operations outsourcing 10,934 10,120 814 8%
---------- --------- -------
Total revenues 106,581 93,059 13,522 15%
Expenses:
Operating and development 51,268 48,755 2,513 5%
Sales and marketing 16,385 15,322 1,063 7%
---------- --------- -------
Total operating profits $ 38,928 $ 28,982 $ 9,946 34%
========== ========= =======
Profit margin 37% 31% -- --
The increase in Trust Technology Services revenues is primarily attributable to
an increase in recurring processing fees. The conversion of new clients onto
the TRUST 3000 product line during the past year accounts for a significant
portion of the increase in recurring processing fees. In addition, the delivery
of new products has provided us with the opportunity to generate additional
recurring revenues from our existing clients. As a result, recurring processing
fees increased $8.5 million or 18 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.
Operating profits and profit margin for Technology Services increased
substantially in the six months ended June 30, 2000. The increase in operating
profits and profit margin were primarily due to the increase in revenues
previously discussed. In addition, our current infrastructure enables us to
manage expenses carefully across the higher net incremental revenue base. This
has allowed for continued 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 48 percent from 52
percent and sales and marketing expenses decreased to 15 percent from 17
percent.
Asset Management
- ----------------
SIX MONTHS SIX MONTHS DOLLAR PERCENT
2000 1999 CHANGE CHANGE
---- ---- ------ ------
Revenues:
Investment management fees $ 89,463 $51,437 $38,026 74%
Liquidity management fees 9,554 9,014 540 6%
---------- ------- -------
Total revenues 99,017 60,451 38,566 64%
Expenses:
Operating and development 30,932 16,578 14,354 87%
Sales and marketing 40,089 25,954 14,135 54%
---------- ------- -------
Total operating profits $ 27,996 $17,919 $10,077 56%
========== ======= =======
Profit margin 28% 30% -- --
24
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. In our investment advisory
business, we continue to be successful at recruiting new registered investment
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 six months of 2000, we have asset commitments that
have exceeded total asset commitments for all of 1999.
The increase in Liquidity Management Fees was due to an increase in assets under
management invested in our liquidity funds from institutional clients. The
increase in assets under management was primarily due to new sales of our cash
sweep technology product. 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 technology
as well as expanding our sales and marketing efforts. As a percentage of sales,
operating and development expenses increased to 31 percent from 27 percent and
sales and marketing expenses decreased to 41 percent from 43 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.
Mutual Fund Services
- --------------------
The increase in Mutual fund services revenues was fueled by growth in average
proprietary fund balances. We are beginning to see the impact of our sales
efforts in the non-bank investment management and offshore markets as clients in
these markets constitute a larger portion of average proprietary fund balances.
We have also seen an increase in average proprietary fund balances from our bank
clients. 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 with a few large bank clients.
Although revenues increased 17 percent, operating profits remained flat and
profit margin decreased in the first six months of 2000, primarily because of
the fee concessions already discussed and an increase in certain expenses. 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 increased slightly to 63 percent from 62
percent while sales and marketing expenses increased to 18 percent from 16
percent.
25
Investments in New Business
- ---------------------------
The significant increase in revenues is 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 62 percent of total segment revenues in
the first six months of 2000, as compared to 47 percent in the first six months
of 1999. We experienced substantial revenue growth in the European/South African
and Asian regions. In the European/South African region, we experienced
substantial asset growth in the SEI-managed fund complex established in
association with Mediolanum S. p. A., which targets the Italian marketplace. Our
Korean joint venture accounts for all revenue growth in the Asian region.
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.
Other
- -----
General and administrative expenses increased 27 percent to $7,785 for the
second quarter in 2000, as compared to $6,130 for the second quarter in 1999. As
a percentage of total consolidated revenues, general and administrative expenses
were 3 percent for the six months ended June 30, 2000 and June 30, 1999.
Other income on the accompanying Consolidated Statements of Income consist of
the following:
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
$3,510 for the six months ended June 30, 2000 and $3,279 for the six months
ended June 30, 1999. The increase in LSV's net earnings is due to an increase in
assets under management.
26
Interest income for the six months ended June 30, 2000 was $2,051, as compared
to $873 for the six months ended June 30, 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 six months ended June 30, 2000 was $1,150, as compared
to $1,178 for the six months ended June 30, 1999. Interest expense primarily
relates to our long-term debt.
27
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 June 30, 2000, the unused sources of liquidity consisted of cash and cash
equivalents of $61.9 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 six
months 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 six months of 2000 and 1999. Also, a decrease in various
accrued expenses negatively affected cash flows from operations in the first six
months of 2000.
Cash flows from operations were also affected by receivables. Receivables from
regulated investment companies increased in the first six months 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 six months 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 six months of 2000 primarily related to purchases of
equipment and furniture associated with the rise in our headcount due to
increased new business. However, capital expenditures in the first six months 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
8 of the Notes to Consolidated Financial Statements). We continued our common
stock repurchase program. We purchased approximately 422,000 shares (adjusted
for the three-for-one stock split) of our common stock at a cost of $14.3
million during the first six months of 2000. As of July 31, 2000, we still had
$8.2 million remaining authorized for the purchase of our common stock. Cash
dividends of $.15 per share were paid in the first six months of 2000 and $.12
in the first six months 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.
28
Recent Pronouncements
- ---------------------
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
provides guidance on applying generally accepted accounting principles to
revenue recognition issues in financial statements. The Company is currently
evaluating the provisions established in SAB 101 to assess if application of SAB
101 is required in its financial statements.
Forward-Looking Information
- ---------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained in this discussion
is or may be considered forward-looking. Forward-looking statements relate to
future operations, strategies, financial results or other developments. Forward-
looking statements are based upon estimates and assumptions that involve certain
risks and uncertainties, many of which are beyond our control or are subject to
change. Although we believe our assumptions are reasonable, they could be
inaccurate. Our actual future revenues and income could differ materially from
our expected results. We have no obligation to publicly update or revise any
forward-looking statements.
Quantitative and Qualitative Disclosures About Market Risk.
- ----------------------------------------------------------
We currently have several offices located outside the United States that conduct
business in the local currencies of that country. We do not use foreign currency
exchange contracts or other types of derivative financial investments to hedge
local currency cash flows. All foreign operations aggregate approximately 7
percent of total consolidated revenues. Due to this limited activity, we do not
expect any material loss with respect to foreign currency risk.
Exposure to market risk for changes in interest rates relate primarily to our
investment portfolio and long-term debt. Currently, we do not invest in
derivative financial instruments. We do not undertake any specific actions to
cover our exposure to interest rate risk and are not a party to any interest
rate risk management transactions. We place our investments in financial
instruments that meet high credit quality standards. We are adverse to principal
loss and ensure the safety and preservation of our invested funds by limiting
default risk, market risk, and reinvestment risk. The interest rate on our long-
term debt is fixed and is not traded on any established market. We have no cash
flow exposure due to rate changes for our long-term debt.
29
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) The following is a list of exhibits filed as part of the Form 10-Q.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the
quarter ended June 30, 2000.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEI INVESTMENTS COMPANY
Date August 11, 2000 By /s/ Kathy Heilig
------------------------ ------------------------------------
Kathy Heilig
Vice President and Controller
31