10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on May 14, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)*
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1999 or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________ to _________
0-10200
(Commission File Number)
SEI INVESTMENTS COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1707341
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1 Freedom Valley Drive, Oaks, Pennsylvania 19456-1100
(Address of principal executive offices)
(Zip Code)
(610) 676-1000
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
*APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ___ No ___
*APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1999: 17,699,246 shares of common stock, par value
$.01 per share.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
(In thousands)
The accompanying notes are an integral part of these statements.
2
Consolidated Balance Sheets
(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
(unaudited)
(In thousands)
The accompanying notes are an integral part of these statements.
5
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Nature of Operations
--------------------
SEI Investments Company (the "Company") is organized around its four
primary business lines: Technology Services, Asset Management, Mutual
Fund Services, and Investments in New Business. The Technology
Services segment includes the Trust 3000 product line and trust
operations outsourcing. The Asset Management segment provides
investment solutions through various investment products and services
distributed directly or through professional investment advisors,
financial planners, and other financial intermediaries to
institutional and high-net-worth markets. The Mutual Fund Services
segment 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, 1999, the results of operations and
cash flows for the three months ended March 31, 1999 and 1998.
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.
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.
6
Property and Equipment
----------------------
Property and equipment on the accompanying Consolidated Balance Sheets
consist of the following:
Property and equipment are stated at cost, which includes interest on
funds borrowed to finance the construction of the Company's corporate
campus. Depreciation and amortization are computed using the
straight-line method over the estimated useful life of each asset.
Expenditures for renewals and betterments are capitalized, while
maintenance and repairs are charged to expense when incurred.
Capitalized Software
--------------------
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed" ("SFAS 86"). Under SFAS 86, costs incurred to create a
computer software product are charged to research and development
expense as incurred until technological feasibility has been
established. The Company establishes technological feasibility upon
completion of a 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 8.9 years.
7
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"), which superceded Accounting Principles Board
Opinion No. 15. Pursuant to SFAS 128, dual presentation of basic and
diluted earnings per common share is required on the face of the
statements of 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 options outstanding during the first quarter of 1999 and 1998 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:
Reclassifications
-----------------
The financial statements for prior periods have been reclassified to
conform with the current period's presentation.
8
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.
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 cash receivables
earned but unbilled and result from timing differences between
services provided and contractual billing schedules.
Receivables from regulated investment companies on the accompanying
Consolidated Balance Sheets represent fees collected from the
Company's wholly owned subsidiaries, 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. Loans Receivable Available for Sale - Loans receivable available for
sale represent loans which were purchased through SEI Capital AG,
which is based in Zurich. These receivables are reported at the lower
of cost or market, and any difference between the purchase price and
the related loan principal amount is recognized as an adjustment of
the yield over the life of the loan using the effective interest
method. Each loan receivable involves various risks, including, but
not limited to, country, interest rate, credit, and liquidity risk.
Management evaluates and monitors these risks on a continuing basis to
ensure that these loan receivables are recorded at their realizable
value. This evaluation is based upon management's best estimates and
the amounts the Company will ultimately realize could differ from
these estimates. The Company intends to sell these loans within one
year from the balance sheet date.
9
Note 5. Other Assets - Other assets on the accompanying Consolidated Balance
Sheets consist of the following:
Investment in Unconsolidated Affiliate - In 1994, the Company and
three leading academics in the field of finance formed a general
partnership, LSV Asset Management ("LSV"). LSV is a registered
investment advisor which provides investment advisory services to
institutions, including pension plans and investment companies. LSV is
currently the investment sub-advisor to a portion of SEI Large Cap
Value Fund and SEI Small Cap Value Fund, as well as portfolio manager
to a portion of the Company's global investment products. The Company
accounts for LSV using the equity method of accounting due to a less
than 50 percent ownership. The Company's portion of LSV's net earnings
is reflected in Equity in the earnings of unconsolidated affiliate on
the accompanying Consolidated Statements of Income.
The following table contains the Condensed Statements of Income of LSV
for the three months ended March 31:
The following table contains the Condensed Balance Sheets of LSV:
10
Investments Available for Sale - Investments available for sale
consist of mutual funds sponsored by the Company which are primarily
invested in equity securities. 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, 1999, Investments available for sale had an aggregate
cost of $3,025,000 and an aggregate market value of $2,813,000 with
gross unrealized losses of $212,000. At that date, the unrealized
holding losses of $130,000 (net of income tax benefit of $82,000) were
reported as a separate component of Accumulated other comprehensive
losses on the accompanying Consolidated Balance Sheets. The Company
liquidated certain investments in the first quarter of 1999 and
recognized a minimal gain on the dispostion of these investments which
was immaterial.
At December 31, 1998, Investments available for sale had an aggregate
cost of $3,645,000 and an aggregate market value of $3,565,000 with
gross unrealized losses of $80,000. At that date, the unrealized
holding losses of $49,000 (net of income tax benefit of $31,000) were
reported as a separate component of Accumulated other comprehensive
losses on the accompanying Consolidated Balance Sheets.
Note 6. Line of Credit - The Company has a line of credit agreement (the
"Agreement") with its principal lending institution which provides for
borrowings of up to $50,000,000. The Agreement ends on May 31, 1999,
at which time the outstanding principal balance, if any, becomes due
unless the Agreement is extended. Management believes the Agreement
will be extended. The line of credit, when utilized, accrues interest
at the Prime rate or three-tenths percent above the London Interbank
Offered Rate. The Company is obligated to pay a commitment fee equal
to one-tenth percent per annum on the average daily unused portion of
the commitment. Certain covenants under the Agreement require the
Company to maintain specified levels of net worth and place certain
restrictions on investments. The Company had no outstanding borrowings
on its line of credit at March 31, 1999.
Note 7. Long-term Debt - On February 24, 1997, the Company signed a Note
Purchase Agreement authorizing the issuance and sale of $20,000,000 of
7.20% Senior Notes, Series A, and $15,000,000 of 7.27% Senior Notes,
Series B, (collectively, the "Notes") in a private offering with
certain financial institutions. The Notes are unsecured with final
maturities ranging from 10 to 15 years. The proceeds from the Notes
were used to repay the outstanding balance on the Company's line of
credit at that date. The Note Purchase Agreement, as amended, contains
various covenants, including limitations on indebtedness, maintenance
of minimum net worth levels, and restrictions on certain investments.
In addition, the agreement limits the Company's ability to merge or
consolidate, and to sell certain assets. None of these covenants
negatively affect the Company's liquidity or capital resources.
Principal payments on the Notes are made annually from the date of
issuance while interest payments are made semi-annually. The Company
made its second principal payment of $2,000,000 in February 1999. The
current portion of the Notes amounted to $2,000,000 at March 31, 1999.
The carrying amount of the Company's long-term debt approximates its
fair value.
11
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 $323,365,000, including
an additional authorization of $25,000,000 in April 1999. Through
March 31, 1999, a total of 15,768,000 shares at an aggregate cost of
$289,729,000 have been purchased and retired. The Company purchased
265,000 shares at a total cost of $25,451,000 during the first quarter
of 1999.
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 10, 1998, the Board of Directors declared a
cash dividend of $.16 per share on the Company's common stock, which
was paid on January 25, 1999, to shareholders of record on January 5,
1999.
Note 10. Segment Information - In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way public
business enterprises report financial information about operating
segments in financial statements. SFAS 131 also requires additional
disclosures about product and services, geographic areas, and major
customers. The Company adopted SFAS 131 in its December 31, 1998
financial statements. All prior period segment information has been
restated to conform with the provisions of SFAS 131.
The Company is organized around its four primary business lines:
Technology Services, Asset Management, Mutual Fund Services, and
Investments in New Business. The Technology Services segment includes
the Company's Trust 3000 product line and trust operations
outsourcing. The Asset Management segment provides investment
solutions through various investment products and services distributed
directly or through professional investment advisors, financial
planners, and other financial intermediaries to institutional and
high-net-worth markets. The Mutual Fund Services segment provides
administration and distribution services to proprietary mutual funds
created for banks, insurance firms, and investment management
companies. The Investments in New Business segment consists of the
Company's Canadian and international operations which provides
investment advisory services globally through investment products and
services and performance evaluation and consulting services to
Canadian pension plans.
The 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, 1999 and 1998.
12
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. (In thousands, except per share data)
We are organized around our four business lines: Technology Services, Asset
Management, Mutual Fund Services, and Investments in New Business. Financial
information on each of these segments is reflected in Note 10 of the Notes to
Consolidated Financial Statements.
Results of Operations
First Quarter Ended March 31, 1999 Compared to First Quarter Ended March 31,
1998
Consolidated Overview
Revenues and earnings increased in the first quarter of 1999 primarily due to
new business activity generated in the Technology Services and Asset Management
segments. Technology Services experienced a significant increase in operating
profits as a result of new clients that have been fully or partially implemented
onto our TRUST 3000 product line. Operating profits in Asset Management were
boosted by a significant increase in assets under management. Assets under
management increased primarily due to new business generated in our investment
advisory and institutional asset management businesses. Revenues and earnings
are expected to increase assuming the sales momentum in Asset Management can be
sustained and as new trust technology clients are implemented. However,
continued consolidation in the banking industry or a prolonged unfavorable
change in the financial securities markets could impede growth in revenues and
earnings.
14
Asset Balances
(In millions)
Assets under management for high-net-worth and institutional investors consist
of assets invested in our equity and fixed income investment programs and
liquidity funds for which we provide management services. Assets under
administration consist of assets for which we provide administrative services,
which includes assets invested in our investment programs, liquidity funds, and
clients' proprietary mutual funds.
Technology Services
The Technology Services segment provides trust and investment accounting and
management information services as an outsourcer to banks and other financial
institutions with our TRUST 3000 product line. TRUST 3000 incorporates a myriad
of integrated products and sub-systems to provide a complete trust accounting
and investment system.
Trust operations outsourcing incorporates the TRUST 3000 product line within a
package of services that includes custody and other back-office capabilities.
Through this business, we handle a trust department's back-office administration
function. This allows trust department managers to concentrate on expanding and
servicing their clients.
Trust technology services revenues increased due to an increase in recurring
processing fees generated from new clients that had been sold in prior years and
were fully or partially implemented during 1998. These new trust technology
client relationships contributed an incremental $5.7 million in recurring
processing fees and an incremental $4.5 million in implementation fees in the
first quarter of 1999. Trust technology clients that terminated their contract
for processing services in 1998 negatively affected recurring processing fees by
$1.5 million in the first quarter of 1999. Additionally, $3.5 million in
one-time buyout fees were recognized in the first quarter of 1998 associated
with lost trust technology clients. Revenues earned from bank clients utilizing
our liquidity products and brokerage services increased slightly and accounts
for approximately 17 percent of total trust technology services revenues in the
first quarter of 1999 and 19 percent in the first quarter of 1998. Average
assets under management invested in our liquidity products from bank clients
were $16.8 billion for the first quarter of 1999 and 1998. Future recurring
processing fees are expected to increase as these new trust technology clients
are successfully implemented onto the TRUST 3000 product line by mid-1999.
15
Our trust operations outsourcing business continued to gain momentum in the
first quarter of 1999 through the generation of new business. Revenues earned
from processing services accounts for approximately 58 percent of total trust
operations outsourcing revenues in the first quarter of 1999 and 1998, while
custody and investment solutions comprise the remaining 42 percent.
Operating profits and profit margin for Technology Services increased
significantly in the first quarter of 1999. Profit margin in the first quarter
of 1999 was 31 percent, as compared to 20 percent in the first quarter of 1998.
The increase in profits and margin were primarily due to the increase in
revenues, as well as expense control in planned expenditures. As a percentage of
sales, operating and development expenses decreased to 52 percent from 63
percent and sales and marketing expenses remained flat at 17 percent. Operating
and development expenses in the first quarter of 1998 included substantial
nonrecurring costs associated with the evaluation and enhancement of the trust
technology implementation process for new clients.
We expect to see continued growth in our existing markets in the near term, and
also begin to realize a payback on our investments in new markets and services.
Also, operating profits should be favorably affected if sales momentum of the
trust operations outsourcing product continues. However, we do intend to
reinvest a portion of profits into new technology and information products and
this will result in some increase to expenses. Year 2000 is also a short-term
challenge as some institutions are resistant to acquiring new systems before
next year. However, this could become an opportunity if a trust institution
experiences difficulty in making their existing system Year 2000 compliant. In
addition, consolidation within the banking industry continues to be a major
strategic issue facing this segment.
Asset Management
The Asset Management segment provides investment solutions through various
investment products and services distributed directly or through professional
investment advisors, financial planners, and other financial intermediaries to
institutional or high-net-worth markets. The primary products offered include
money market funds and investment strategies and portfolios delivered to these
markets through mutual funds and other pooled vehicles.
The increase in Investment management fees was primarily due to growth in assets
under management generated through new business. Average assets under management
increased $5.8 billion or 45 percent to $18.8 billion for the first quarter of
1999, as compared to $13.0 billion for the first quarter of 1998. Our investment
advisory business continued to generate new business through the successful
recruiting of 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. We anticipate the sales momentum
experienced in our investment advisory business to continue. Our Institutional
asset management business also experienced an increase in new business. During
the first quarter of 1999, new relationships were established which contributed
approximately $650 million of new asset sales. Additionally, the current
favorable trend experienced in the financial securities markets boosted growth
in assets under management in both our investment advisory and institutional
asset management businesses.
16
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 increased $2.1 billion or 70 percent to $5.0 billion for
the first quarter of 1999, as compared to $2.9 billion for the first quarter of
1998. The increase in assets under management was due to the carryover of sales
activities that occurred late in the fourth quarter of 1998 and new sales of our
cash sweep technology product. Also, client cash flows are cyclical and
typically run higher in the first quarter.
The Asset Management segment experienced a significant increase in operating
profits primarily due to growth in assets under management. Profit margin
continued to improve substantially due to our ability to leverage on our
infrastructure despite investments in technology to improve our service and
productivity. Profit margin rose to 30 percent for the first quarter of 1999, as
compared to 23 percent for the first quarter of 1998. As a percentage of sales,
operating and development expenses decreased to 29 percent from 32 percent and
sales and marketing expenses decreased to 41 percent from 45 percent. With the
increased sales momentum in our investment advisory business and our ability to
leverage expenses over higher net incremental assets, this segment is expected
to produce favorable operating results in the near term. 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, shareholder recordkeeping, and marketing.
The increase in Mutual fund services revenues was fueled by growth in
proprietary fund balances. Average proprietary fund balances increased $34.8
billion or 40 percent to $121.3 billion for the first quarter of 1999 versus
$86.5 billion for the first quarter of 1998. Average proprietary fund balances
increased due to growth in existing complexes and the conversions of a large
bank and non-bank complex during 1998. Growth in existing complexes resulted
from banks being able to successfully convince their customers to invest assets
in bank sponsored mutual funds. However, average basis points earned decreased
primarily due to two factors. First, there has been a change in the mix of
clients from the first quarter of 1998 as lower margin clients have replaced
higher margin clients. Second, fees from some clients have been reduced in
exchange for longer-term contracts. The outlook for mutual fund services
revenues remains optimistic. The non-bank investment management market has been
receptive to our mutual fund services. Initially, the size of these complexes
will be smaller and therefore these deals will not generate as much revenues as
large bank complexes. We believe that this will be a continually growing market
in terms of the number of institutions seeking mutual fund services. Also, we
continue to contract new business in offshore markets.
17
Although revenues increased 21 percent, operating profits increased only 2
percent. Profit margin in the first quarter of 1999 decreased to 21 percent, as
compared to 25 percent for the first quarter of 1998. A significant increase in
operating and development expenses negatively affected operating profits in the
first quarter of 1999. As a percentage of sales, operating and development
expenses increased to 63 percent from 57 percent and sales and marketing
expenses decreased to 16 percent from 18 percent. The recontracting of some
existing clients generated a substantial increase in direct marketing expenses.
Also, investments have been made to enhance services as well as establishing
distribution channels for our mutual fund services in the non-bank and global
markets.
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. As a
result, profit margin is expected to remain relatively flat in the near term.
Expanding services into the non-bank and offshore markets could produce
additional opportunities that could favorably affect operating profits. However,
continued consolidations in the banking industry and a significant prolonged
unfavorable change in the financial securities markets could negatively affect
revenues and profits.
Investments in New Business
Investments in New Business consist of our Canadian and international
operations. Products being offered in Canada include investment advisory,
performance evaluation and consulting services to Canadian pension plans.
International operations consist of various investment products and services
providing investment solutions to institutional and high-net-worth investors
outside North America.
The increase in revenues from this segment is primarily due to an increase in
assets under management from our Canadian and offshore asset management
businesses. Also, the acquisition of a Mexican based investment advisory firm in
the fourth quarter of 1998 partially contributed to the growth in revenues. Our
Canadian and offshore asset management business accounted for 56 percent of
total segment revenues in the first quarter of 1999, as compared to 35 percent
in the first quarter of 1998. The performance evaluation and consulting business
accounted for the remaining 44 percent in the first quarter of 1999, as compared
to 65 percent in the first quarter of 1998. This transition is due to various
acquisitions of offshore investment advisory firms during the past 18 months.
Our offshore enterprises are looking to capitalize on international growth
opportunities by creating distribution channels for our investment products and
services outside North America. Our efforts are currently focused on four main
regions: Europe, East Asia, Latin America, and South Africa. These offshore
enterprises accounted for approximately 31 percent of total segment revenues in
the first quarter of 1999, as compared to 20 percent in the first quarter of
1998. Revenues from any one region were immaterial as a percentage of total
segment revenues.
18
Operating results were affected by substantial investments made in foreign
markets. Our strategy for this year will be on further penetrating markets
within the European and South African region through distribution arrangements,
continuing to integrate and grow our recently acquired businesses in Argentina
and Mexico, and strengthening our new joint venture in Korea. We will continue
to explore additional markets for future expansion, especially in Asia and Latin
America, but don't envision any major market entries in these regions in 1999.
Other
General and administrative expenses decreased 3 percent to $3,130 for the first
quarter of 1999, as compared to $3,222 for the first quarter of 1998. As a
percentage of total consolidated revenues, general and administrative expenses
were 3 percent for the first quarter of 1999, as compared to 4 percent for the
first quarter of 1998.
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
$1,478 for the first quarter of 1999 and $510 for the first quarter of 1998. The
increase in LSV's net earnings is due to an increase in assets under management.
Average assets under management for LSV were $4.1 billion for the first quarter
of 1999, as compared to $1.7 billion for the first quarter of 1998.
Interest income for the first quarter of 1999 was $498, as compared to $220 for
the first quarter of 1998. 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 of 1999 was $598, as compared to $712 for
the first quarter of 1998. Interest expense relates to the issuance of long-term
debt in early 1997 and borrowings on our line of credit. Interest expense
decreased due to a lower carrying balance on our long-term debt and less
borrowings on our line of credit in the first quarter of 1999 than in the first
quarter of 1998.
19
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 $50,000. The availability of the
line of credit is subject to compliance with certain covenants set forth in the
agreement (See Note 6 of the Notes to Consolidated Financial Statements). At
March 31, 1999, the unused sources of liquidity consisted of cash and cash
equivalents of $22,138 and the unused portion of the line of credit of $50,000.
Cash flows from operations for the first quarter of 1999 and 1998 primarily
resulted from an increase in income and various accrued liabilities. The
increase in various accrued liabilities resulted from increased business
activity during the past 18 months. 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 1999 and 1998. In the first
quarter of 1998, cash flows from operations were favorably affected by the sales
of loans classified as Loans receivable available for sale.
Cash flows provided by operations were also affected by receivables. Receivables
from regulated investment companies increased in the first quarter of 1999 and
1998 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 1999 negatively affected cash flows from operations.
Conversely, an increase in receivable collections in the first quarter of 1998
favorably affected cash flows from operations.
Cash flows from investing activities are principally affected by capital
expenditures, including capitalized software development costs. Capital
expenditures included significant costs associated with the expansion of our
corporate campus. Construction of an additional building within the corporate
campus began in early 1998 and was completed in early 1999. Investments
classified as Investments available for sale were purchased in the first quarter
of 1998 for $3,000. These same investments were sold early in the second quarter
of 1998 at a minimal gain.
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 1999 and 1998 (See Note
7 of the Notes to Consolidated Financial Statements). We continued our common
stock repurchase program. We purchased approximately 265,000 shares of our
common stock at a cost of $25.5 million during the first quarter of 1999. As of
April 30, 1999, we still had $26.0 million remaining authorized for the purchase
of our common stock. Proceeds received from the issuance of common stock,
including tax benefit, rose substantially in the first quarter of 1999 and 1998
primarily due to increased stock option activity and the rapid increase in our
common stock share price.
Our operating cash flow, borrowing capacity, and liquidity should provide
adequate funds for continuing operations, continued investment in new products
and equipment, our common stock repurchase program, future dividend payments,
and principal and interest payments on our long-term debt.
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Assessment of Risks Associated with the Year 2000
Background
We began work on the Year 2000 issue in 1995 with management recognition that
failure to acknowledge, analyze and remediate potential Year 2000 processing
issues could result in material consequences to our financial position and
operating results. Through early 1997, we focused our efforts on an assessment
of our TRUST 3000 product line and by mid-1997, we expanded our efforts to
include a review of all proprietary systems, vendors, internally used systems,
and any other item that may be affected by the Year 2000. A corporate Year 2000
committee was formed consisting of representatives from every area of our
business and is managed by a full time senior project manager. This committee
reports regularly to the Board of Directors on the progress and status of our
Year 2000 efforts. The Year 2000 program encompasses all system hardware and
software, physical facilities, utilities, electronic equipment and
communications, as well as all other ancillary purchased products and services.
Our Year 2000 program fully subscribes to the Federal Financial Institutions
Examination Council ("FFIEC") guidelines.
State of Readiness
In accordance with FFIEC guidelines, Year 2000 remediation and time dimensional
testing for all proprietary applications, including TRUST 3000, was completed or
is near completion. The final release of TRUST 3000 Year 2000 remediated code
was released into production in late 1998. All TRUST 3000 clients have been
provided with the opportunity to review the actual Year 2000 test scripts and
test results and/or conduct their own time dimensional testing.
With the completion of remediation and testing of all proprietary systems, we
proceeded with vendor testing. A corporate intranet database was established to
track and evaluate the compliance status of all vendors and their products. Each
vendor product within this database has been assigned to a specific coordinator
who is responsible for communications and certification of vendor products. The
vendor products have been evaluated using the following criterion to establish
the vendor relationship:
Business Risk - Products importance to mission-critical functionality
Failure Risk - Likelihood of vendor achieving or not achieving Year 2000
compliance on time
Compliance Code - Based on communications from vendor and/or test results.
As of early 1999, approximately 42 percent of vendor products had been certified
as Year 2000 compliant within FFIEC guidelines. The remaining 58 percent are on
target to be fully compliant by mid-1999.
All systems in use for internal business purposes, including, but not limited
to, network, accounting, communications and power supply, have been tested or
are in the process of being modified for Year 2000 compliance. Internal use
systems requiring modifications will be mitigated through enhancements to
existing software and hardware or conversions to new software and hardware.
Costs to Address Year 2000 Issues
The cost of Year 2000 remediation and testing is projected to be $10 million.
Through March 31, 1999, approximately $6.8 million has been spent, of which
approximately $4.5 million has been capitalized pursuant to Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed" (See Note 1 of the Notes to
Consolidated Financial Statements). Additional spending of $1.2 million is
projected for the remainder of 1999 and approximately $2.0 million is estimated
for contingency plans in the Year 2000. The spending dedicated to the TRUST 3000
product line represents the material costs incurred to achieve Year 2000
compliance. All Year 2000 compliance costs for all other proprietary systems,
including those used for internal business purposes, were expensed as incurred
or capitalized if new software or hardware was purchased. These costs were
immaterial. Any future costs incurred associated with ancillary systems or
equipment is not expected to be material. No planned development projects were
delayed or cancelled as a result of Year 2000 compliance efforts.
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Risks of the Year 2000 Issues
Every effort has been made to mitigate any potential risk resulting from the
roll over to the Year 2000. However, we believe that despite all of our best
efforts, there still exists the potential of experiencing minor to moderate
system issues at the beginning of the Year 2000. In anticipation of these risks,
we are planning the following actions:
1.) Work closely with all clients to instruct them on maintaining all 1999
year-end data for recovery purposes.
2.) Current Year 2000 project expertise will remain dedicated to the Year
2000 program to be available to resolve potential issues.
3.) Budget funds into the Year 2000 to support potential issues.
4.) All future product releases will be analyzed for potential date
related changes. If such a change is identified as having an impact to
our Year 2000 certification, tests will be performed to re-certify the
modified code.
5.) To reconfirm the TRUST 3000 product line as Year 2000 compliant, a
full re-certification of compliance will be conducted in the third
quarter of 1999.
As part of our Corporate Year 2000 due diligence, all of our insurance programs
were reviewed with regard to the Year 2000. There are no specific Year 2000
exclusions in any of our policies. In addition, we have reviewed and will
continue to review the status of our Year 2000 program efforts with our
insurance carriers.
Contingency Plans
Contingency planning efforts have been focused on the most critical business
functions and vary significantly based on a system's functionality and how it
operates. Manual overrides exist for many functions and in some cases
alternative suppliers or delivery channels have been identified. The contingency
strategy for our own proprietary products focuses on additional planned
resources to react in the Year 2000. A plan exists to identify, correct and
release Year 2000 related core and custom problems in the quickest fashion
possible. A rapid response team will be available during peak processing times
that will execute this plan. Clients will be apprised of the plan and advised on
appropriate data retention. In the event electrical suppliers are not Year 2000
compliant and an interruption in electrical services occurs, each facility has a
backup generator that will supply necessary electrical service to core
processing systems and databases.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained in this discussion
is or may be considered forward-looking. Forward-looking statements relate to
future operations, strategies, financial results or other developments, and
contain words or phrases such as "may," "expects," "anticipates," or similar
expressions. Forward-looking statements are based upon estimates and assumptions
that involve certain risks and uncertainties, including but not limited to,
economic, competitive, governmental and technological, many of which are beyond
our control or are subject to change. Although we believe the assumptions
underlying the forward-looking statements contained herein are reasonable, any
of the assumptions could be inaccurate. Therefore, we caution the reader that
revenues and income could differ materially from those expected to occur. We
disclaim any obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future developments or
otherwise.
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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 4
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
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 March 31, 1999.
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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 14, 1999 By /s/ Kathy Heilig
------------ -------------------
Kathy Heilig
Vice President and Controller
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