SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)*
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----
Exchange Act of 1934 for the quarterly period ended MARCH 31, 2001 or
--------------
Transition report pursuant to Section 13 or 15(d) of the Securities
- ----
Exchange Act of 1934 for the transition period from _________ to _________
0-10200
-------
(Commission File Number)
SEI INVESTMENTS COMPANY
-----------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1707341
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1 FREEDOM VALLEY DRIVE, OAKS, PENNSYLVANIA 19456-1100
------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(610) 676-1000
--------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
*APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes___ No___
*APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 2001: 108,531,508 shares of common stock, par
value $.01 per share.
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
March 31, 2001 December 31, 2000
--------------- -----------------
(unaudited)
Assets
- ------
Current assets:
Cash and cash equivalents (including restricted
cash of $10,889 and $11,900) $111,159 $159,576
Receivables from regulated investment companies 28,103 27,607
Receivables, net of allowance for doubtful
accounts of $1,700 54,442 47,404
Deferred income taxes 9,030 9,030
Prepaid expenses and other current assets 6,185 5,414
-------- --------
Total current assets 208,919 249,031
-------- --------
Property and equipment, net of accumulated
depreciation and amortization of $88,005
and $83,874 79,797 75,111
-------- --------
Capitalized software, net of accumulated
amortization of $12,178 and $11,733 12,378 12,823
-------- --------
Investments Available for Sale 29,916 20,294
-------- --------
Other assets, net 21,749 18,323
-------- --------
Total Assets $352,759 $375,582
======== ========
The accompanying notes are an integral part of these statements.
2
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except par value)
March 31, 2001 December 31, 2000
--------------- -----------------
(unaudited)
Liabilities and Shareholders' Equity
- --------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,000 $ 2,000
Accounts payable 5,993 6,721
Accrued expenses 101,153 121,282
Deferred revenue 11,929 16,450
--------- ---------
Total current liabilities 121,075 146,453
--------- ---------
Long-term debt 25,000 27,000
--------- ---------
Deferred income taxes 5,758 4,708
--------- ---------
Shareholders' equity:
Common stock, $.01 par value, 750,000 shares
authorized; 108,532 and 108,560 shares issued
and outstanding 1,085 1,086
Capital in excess of par value 145,775 125,473
Retained earnings 55,747 72,521
Accumulated other comprehensive losses (1,681) (1,659)
-------- --------
Total shareholders' equity 200,926 197,421
-------- --------
Total Liabilities and Shareholders' Equity $352,759 $375,582
======== ========
The accompanying notes are an integral part of these statements.
3
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(unaudited)
(In thousands, except per share data)
Three Months
Ended March 31,
2001 2000
---- ----
Revenues $161,301 $138,746
Expenses:
Operating and development 76,029 66,282
Sales and marketing 38,256 38,370
General and administrative 5,383 3,542
-------- --------
Income from operations 41,633 30,552
Equity in the earnings of unconsolidated affiliate 2,238 1,753
Interest income 2,249 985
Interest expense (550) (599)
-------- --------
Income before income taxes 45,570 32,691
Income taxes 16,861 12,422
-------- --------
Net income 28,709 20,269
-------- --------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments,
net of income tax expense (benefit) of ($136) and $120 (232) 195
Unrealized holding gains (losses) on investments,
net of income tax benefit of $123 and $64 210 (104)
-------- --------
Other comprehensive income (loss) (22) 91
-------- --------
Comprehensive income $ 28,687 $ 20,360
======== ========
Basic earnings per common share $ .26 $ .19
========= =======
Diluted earnings per common share $ .25 $ .18
========= =======
The accompanying notes are an integral part of these statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
(In thousands)
Three Months
Ended March 31,
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 28,709 $ 20,269
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 4,735 4,053
Equity in the earnings of unconsolidated affiliate (2,238) (1,753)
Tax benefit on stock options exercised 13,809 2,829
Other 103 5,466
Change in current assets and liabilities:
Decrease (increase) in
Receivables from regulated investment companies (496) (2,795)
Receivables (7,038) (7,887)
Prepaid expenses and other current assets (771) (85)
Increase (decrease) in
Accounts payable (728) (1,030)
Accrued expenses (15,782) (19,746)
Deferred revenue (4,521) 2,365
-------- --------
Net cash provided by operating activities 15,782 1,856
-------- --------
Cash flows from investing activities:
Additions to property and equipment (8,915) (4,136)
Additions to capitalized software -- (449)
Purchase of investments available for sale (11,794) (782)
Other 1,845 4,311
-------- --------
Net cash used in investing activities (18,864) (1,056)
-------- --------
Cash flows from financing activities:
Payment on long-term debt (2,000) (2,000)
Purchase and retirement of common stock (46,249) (13,768)
Proceeds from issuance of common stock 7,261 2,316
Payment of dividend (4,347) (3,538)
-------- --------
Net cash used in financing activities (45,335) (16,990)
Net decrease in cash and cash equivalents (48,417) (16,190)
Cash and cash equivalents, beginning of period 159,576 73,206
-------- --------
Cash and cash equivalents, end of period $111,159 $ 57,016
======== ========
The accompanying notes are an integral part of these statements.
5
Notes to Consolidated Financial Statements
------------------------------------------
Note 1. Summary of Significant Accounting Policies
------------------------------------------
Nature of Operations
--------------------
SEI Investments Company (the "Company") is organized around its four
primary business lines: Technology Services, Asset Management, Mutual
Fund Services, and Investments in New Business. Technology Services
includes the Trust 3000 product line and trust operations outsourcing.
Asset Management provides investment solutions through various
investment products and services distributed directly or through
professional investment advisors, financial planners, and other
financial intermediaries to institutional and high-net-worth markets.
Mutual Fund Services provides administration and distribution services
to proprietary mutual funds created for banks, insurance firms, and
investment management companies. Investments in New Business consists
of the Company's Canadian and international operations which provide
investment advisory services globally through investment products and
services.
Summary Financial Information and Results of Operations
-------------------------------------------------------
In the opinion of the Company, the accompanying unaudited Consolidated
Financial Statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial
position as of March 31, 2001, the results of operations and cash flows
for the three months ended March 31, 2001 and 2000.
Interim Financial Information
-----------------------------
While the Company believes that the disclosures presented are adequate
to make the information not misleading, these Consolidated Financial
Statements should be read in conjunction with the Consolidated
Financial Statements and the notes included in the Company's latest
annual report on Form 10-K.
Principles of Consolidation
---------------------------
The Consolidated Financial Statements include the accounts of the
Company and its wholly owned subsidiaries. The Company's principal
subsidiaries are SEI Investments Distribution Company, SEI Investments
Management Corporation, and SEI PrivateTrust Company. All intercompany
accounts and transactions have been eliminated. Investment in
unconsolidated affiliate is accounted for using the equity method due
to the Company's less than 50 percent ownership. The Company's portion
of the affiliate's operating results is reflected in Equity in the
earnings of unconsolidated affiliate on the accompanying Consolidated
Statements of Income. (See Note 5)
Property and Equipment
----------------------
Property and equipment on the accompanying Consolidated Balance Sheets
consist of the following:
Estimated
Useful Lives
March 31, 2001 December 31, 2000 (In Years)
------------------------- ------------------------ -----------------
Equipment $ 75,421,000 $ 71,377,000 3 to 5
Buildings 34,695,000 34,695,000 25 to 39
Land 9,345,000 9,345,000 N/A
Purchased software 17,433,000 16,035,000 3
Furniture and fixtures 14,524,000 14,230,000 3 to 5
Leasehold improvements 7,306,000 7,313,000 Lease Term
Construction in progress 9,078,000 5,990,000 N/A
------------ ------------
167,802,000 158,985,000
Less: Accumulated depreciation
and amortization (88,005,000) (83,874,000)
------------ ------------
Property and Equipment, net $ 79,797,000 $ 75,111,000
============ ============
6
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the
estimated useful life of each asset. Expenditures for renewals and
betterments are capitalized, while maintenance and repairs are charged
to expense when incurred.
Capitalized Software
--------------------
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed"
("SFAS 86"). Under SFAS 86, costs incurred to create a computer
software product are charged to research and development expense as
incurred until technological feasibility has been established. The
Company establishes technological feasibility upon completion of a
detail program design. At that point, computer software costs are
capitalized until the product is available for general release to
customers. The establishment of technological feasibility and the
ongoing assessment of recoverability of capitalized software
development costs require considerable judgment by management with
respect to certain external factors, including, but not limited to,
anticipated future revenues, estimated economic life, and changes in
technology. Amortization begins when the product is released.
Capitalized software development costs are amortized on a product-by-
product basis using the straight-line method over the estimated
economic life of the product or enhancement, which is primarily three
to ten years, with a weighted average remaining life of approximately
7.3 years.
Earnings per Share
------------------
The Company computes earnings per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). Pursuant to SFAS 128, dual presentation of basic
and diluted earnings per common share is required on the face of the
statements of income for companies with complex capital structures.
Basic earnings per common share is calculated by dividing net income
available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per common
share reflects the potential dilution from the exercise or conversion
of securities into common stock, such as stock options. All common
share figures have been restated to reflect the three-for-one stock
split in June 2000 and the two-for-one stock split in February 2001.
For the three month period ended
March 31, 2001
----------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------- -------------------- --------------
Basic earnings per common share $28,709,000 108,600,000 $.26
==============
Dilutive effect of stock options -- 7,218,000
------------------- -----------
Diluted earnings per common share $28,709,000 115,818,000 $.25
=================== =========== ==============
For the three month period ended
March 31, 2000
----------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------- ------------------- --------------
Basic earnings per common share $20,269,000 105,990,000 $.19
==============
Dilutive effect of stock options -- 6,582,000
------------------- -----------
Diluted earnings per common share $20,269,000 112,572,000 $.18
=================== =========== ==============
7
Options to purchase 1,249,000 and 2,220,000 shares of common stock,
with an average exercise price of $50.00 and $19.75 were outstanding
during the first quarter of 2001 and 2000, respectively, but were
excluded from the diluted earnings per common share calculation because
the options' exercise prices were greater than the average market price
of the Company's common stock.
Statements of Cash Flows
------------------------
For purposes of the Consolidated Statements of Cash Flows, the Company
considers investment instruments purchased with an original maturity of
three months or less to be cash equivalents.
Supplemental disclosures of cash paid/received during the three months
ended March 31 is as follows:
2001 2000
---------- ----------
Interest paid $1,061,000 $1,133,000
Interest and dividends received $2,508,000 $ 936,000
Income taxes paid $ -- $6,093,000
Management's Use of Estimates
-----------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the Unites States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Note 2. Comprehensive Income - The Company computes comprehensive income in
--------------------
accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and presentation of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements that is presented with equal
prominence as other financial statements. Comprehensive income includes
net income, foreign currency translation adjustments, and unrealized
holding gains and losses and is presented on the accompanying
Consolidated Statements of Income.
Foreign Unrealized Accumulated
Currency Holding Other
Translation Gains(Losses) Comprehensive
Adjustments on Investments Losses
------------------------- ------------------------ ---------------------
Beginning balance $(736,000) $(923,000) $(1,659,000)
Current period change (232,000) 210,000 (22,000)
--------- -----------
Ending Balance $(968,000) $(713,000) $(1,681,000)
8
Note 3. Receivables - Receivables on the accompanying Consolidated Balance
-----------
Sheets consist of the following:
March 31, 2001 December 31, 2000
-------------- -----------------
Trade receivables $22,666,000 $22,558,000
Fees earned, not received 1,651,000 1,801,000
Fees earned, not billed 31,825,000 24,745,000
----------- -----------
56,142,000 49,104,000
Less: Allowance for doubtful accounts (1,700,000) (1,700,000)
----------- -----------
$54,442,000 $47,404,000
=========== ===========
Fees earned, not received represent brokerage commissions earned but
not yet collected. Fees earned, not billed represent receivables earned
but unbilled and result from timing differences between services
provided and contractual billing schedules.
Receivables from regulated investment companies on the accompanying
Consolidated Balance Sheets represent fees collected from the Company's
wholly owned subsidiaries, SEI Investments Distribution Company and SEI
Investments Management Corporation, for distribution, investment
advisory, and administration services provided by these subsidiaries to
various regulated investment companies sponsored by the Company.
Note 4. Investments Available for Sale - Investments available for sale
------------------------------
consist of investments in mutual funds sponsored by the Company. The
Company accounts for investments in marketable securities pursuant to
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS
115 requires that debt and equity securities classified as available
for sale be reported at market value. Unrealized holding gains and
losses, net of income taxes, are reported as a separate component of
Shareholders' equity. Realized gains and losses, as determined on a
specific identification basis, are reported separately on the
accompanying Consolidated Statements of Income.
At March 31, 2001, Investments available for sale had an aggregate cost
of $31,096,000 and an aggregate market value of $29,916,000 with gross
unrealized holding losses of $1,180,000. At that date, the net
unrealized holding losses of $713,000 (net of income tax expense of
$467,000) were reported as a separate component of Accumulated other
comprehensive losses on the accompanying Consolidated Balance Sheets.
At December 31, 2000, Investments available for sale had an aggregate
cost of $21,710,000 and an aggregate market value of $20,294,000 with
gross unrealized holding losses of $1,416,000. At that date, the net
unrealized holding losses of $923,000 (net of income tax expense of
$493,000) were reported as a separate component of Accumulated other
comprehensive losses on the accompanying Consolidated Balance Sheets.
Note 5. Other Assets - Other assets on the accompanying Consolidated Balance
------------
Sheets consist of the following:
March 31, 2001 December 31,2000
---------------------- -----------------------
Investment in unconsolidated affiliate $ 5,729,000 $ 5,627,000
Other, net 16,020,000 12,696,000
----------- -----------
Other assets $21,749,000 $18,323,000
=========== ===========
9
Investment in Unconsolidated Affiliate - LSV Asset Management ("LSV")
--------------------------------------
is a partnership formed between the Company and three leading academics
in the field of finance. LSV is a registered investment advisor which
provides investment advisory services to institutions, including
pension plans and investment companies. LSV is currently the portfolio
manager for a number of Company-sponsored mutual funds. The Company's
interest in LSV for the first quarter in 2001 and 2000 was
approximately 45 percent. LSV is accounted for using the equity method
of accounting due to the less than 50 percent ownership. The Company's
portion of LSV's net earnings is reflected in Equity in the earnings of
unconsolidated affiliate on the accompanying Consolidated Statements of
Income.
The following table contains the Condensed Statements of Income of LSV
for the three months ended March 31:
2001 2000
---------- ----------
Revenues $6,952,000 $5,294,000
========== ==========
Net income $5,028,000 $3,761,000
========== ==========
The following table contains the Condensed Balance Sheets of LSV:
March 31, 2001 December 31, 2000
--------------------- -----------------------
Current assets $11,205,000 $10,976,000
Non-current assets 154,000 103,000
----------- -----------
Total assets $11,359,000 $11,079,000
=========== ===========
Current liabilities $ 1,089,000 $ 1,285,000
Partners' capital 10,270,000 9,794,000
----------- -----------
Total liabilities and
partners' capital $11,359,000 $11,079,000
=========== ===========
Note 6. Accrued Expenses - Accrued expenses on the accompanying Consolidated
----------------
Balance Sheets consist of the following:
March 31, 2001 December 31, 2000
--------------------- -----------------------
Accrued compensation $ 22,046,000 $ 49,890,000
Accrued proprietary fund services 14,252,000 14,834,000
Accrued consulting services 7,572,000 8,200,000
Other accrued expenses 57,283,000 48,358,000
------------ ------------
Total accrued expenses $101,153,000 $121,282,000
============ ============
Note 7. Line of Credit - The Company has a line of credit agreement (the
---------------
"Agreement") with its principal lending institution. The Agreement
provides for borrowings of up to $50,000,000. The Agreement ends on
August 31, 2001, at which time the outstanding principal balance, if
any, becomes due unless the Agreement is extended. The line of credit,
when utilized, accrues interest at the Prime rate or one and one-
quarter percent above the London Interbank Offered Rate. The Company is
obligated to pay a commitment fee equal to one-quarter of one percent
10
per annum on the average daily unused portion of the commitment.
Certain covenants under the Agreement require the Company to maintain
specified levels of net worth and place certain restrictions on
investments. The Company had no outstanding borrowings on its line of
credit at March 31, 2001. The Company was in compliance with these
covenants during the first quarter of 2001.
Note 8. Long-term Debt - On February 24, 1997, the Company signed a Note
--------------
Purchase Agreement authorizing the issuance and sale of $20,000,000 of
7.20% Senior Notes, Series A, and $15,000,000 of 7.27% Senior Notes,
Series B, (collectively, the "Notes") in a private offering with
certain financial institutions. The Notes are unsecured with final
maturities ranging from 10 to 15 years. The proceeds from the Notes
were used to repay the outstanding balance on the Company's line of
credit at that date. The Note Purchase Agreement, as amended, contains
various covenants, including limitations on indebtedness, maintenance
of minimum net worth levels, and restrictions on certain investments.
In addition, the agreement limits the Company's ability to merge or
consolidate, and to sell certain assets. None of these covenants
negatively affect the Company's liquidity or capital resources.
Principal payments on the Notes are made annually from the date of
issuance while interest payments are made semi-annually. The Company
made its scheduled payment of $2,000,000 in February 2001. The current
portion of the Notes amounted to $2,000,000 at March 31, 2001. The
carrying amount of the Company's long-term debt is not materially
different from its fair value. The company was in compliance with these
covenants during the first quarter of 2001.
Note 9. Common Stock Buyback - The Board of Directors has authorized the
--------------------
purchase of the Company's common stock on the open market or through
private transactions of up to an aggregate of $453,365,000. Through
March 31, 2001, a total of 99,492,000 shares at an aggregate cost of
$401,339,000 have been purchased and retired. The Company purchased
1,227,000 shares at a total cost of $46,249,000 during the first
quarter of 2001.
The Company immediately retires its common stock when purchased. Upon
retirement, the Company reduces Capital in excess of par value for the
average capital per share outstanding and the remainder is charged
against Retained earnings. If the Company reduces its Retained earnings
to zero, any subsequent purchases of common stock will be charged
entirely to Capital in excess of par value.
Note 10. Dividend - On December 14, 2000, the Board of Directors declared a
--------
cash dividend of $.04 per share on the Company's common stock, which
was paid on January 25, 2001, to shareholders of record on January 8,
2001.
Note 11. Segment Information - The Company defines its business segments in
-------------------
accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way public
business enterprises report financial information about operating
segments in financial statements. SFAS 131 also requires additional
disclosures about product and services, geographic areas, and major
customers.
11
The Company is organized around its four primary business lines:
Technology Services, Asset Management, Mutual Fund Services, and
Investments in New Business. Technology Services includes the Company's
Trust 3000 product line and trust operations outsourcing. Asset
Management provides investment solutions through various investment
products and services distributed directly or through professional
investment advisors, financial planners, and other financial
intermediaries to institutional and high-net-worth markets. Mutual Fund
Services provides administration and distribution services to proprietary
mutual funds created for banks, insurance firms, and investment
management companies. Investments in New Business consists of the
Company's Canadian and international operations which provides investment
advisory services globally through investment products and services.
The information in the following tables is derived from the Company's
internal financial reporting used for corporate management purposes. The
accounting policies of the reportable segments are the same as those
described in Note 1. The Company's management evaluates financial
performance of its operating segments based on income before income
taxes.
The following tables highlight certain unaudited financial information
about each of the Company's segments for the three months ended March 31,
2001 and 2000.
Mutual Investments General
Technology Asset Fund In New And
Services Management Services Business Administrative Total
----------- ----------- ----------- ------------ --------------- ------------
For the Three-Month Period Ended March 31, 2001
------------------------------------------------------------------------------------
Revenues $60,660,000 $60,023,000 $32,017,000 $ 8,601,000 $161,301,000
----------- ----------- ----------- ----------- ------------
Operating
income (loss) $20,807,000 $22,559,000 $ 7,485,000 $(3,835,000) $(5,383,000) $ 41,633,000
----------- ----------- ----------- ----------- --------------
Other income, net $ 3,937,000
------------
Income before
income taxes $ 45,570,000
------------
Depreciation and
amortization $ 3,280,000 $ 675,000 $ 377,000 $ 238,000 $ 165,000 $ 4,735,000
----------- ----------- ----------- ----------- -------------- ------------
Capital
Expenditures $ 6,447,000 $ 1,296,000 $ 440,000 $ 213,000 $ 519,000 $ 8,915,000
----------- ----------- ----------- ----------- -------------- ------------
For the Three-Month Period Ended March 31, 2000
---------------------------------------------------------------------------------
Revenues $51,855,000 $48,322,000 $30,026,000 $ 8,543,000 $138,746,000
----------- ----------- ----------- ----------- ------------
Operating
income (loss) $18,071,000 $13,474,000 $ 5,403,000 $(2,854,000) $(3,542,000) $ 30,552,000
----------- ----------- ----------- ----------- -----------
Other income, net $ 2,139,000
------------
Income before
income taxes $ 32,691,000
------------
Depreciation and
amortization $ 2,842,000 $ 530,000 $ 293,000 $ 254,000 $ 134,000 $ 4,053,000
----------- ----------- ----------- ----------- ----------- ------------
Capital
expenditures $ 2,574,000 $ 518,000 $ 447,000 $ 333,000 $ 264,000 $ 4,136,000
----------- ----------- ----------- ----------- ----------- ------------
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS.
-------------
(In thousands, except per share data)
We are organized around our four business lines: Technology Services, Asset
Management, Mutual Fund Services, and Investments in New Business. Financial
information on each of these segments is reflected in Note 11 of the Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
First Quarter Ended March 31, 2001 Compared to First Quarter Ended March 31,
2000
Consolidated Overview
Income Statement Data
(In thousands, except per common share data) 1ST QTR 1ST QTR PERCENT
2001 2000 CHANGE
-------- -------- -----------------
Revenues:
Technology Services $ 60,660 $ 51,855 17%
Asset Management 60,023 48,322 24%
Mutual Fund Services 32,017 30,026 7%
Investments in New Business 8,601 8,543 1%
-------- --------
Total revenues $161,301 $138,746 16%
Operating Income (Loss):
Technology Services $ 20,807 $ 18,071 15%
Asset Management 22,559 13,474 67%
Mutual Fund Services 7,485 5,403 39%
Investments in New Business (3,835) (2,854) (34%)
General and Administrative (5,383) (3,542) (52%)
-------- --------
Income from operations 41,633 30,552 36%
Other income, net 3,937 2,139 84%
-------- --------
Income before income taxes 45,570 32,691 39%
Income taxes 16,861 12,422 36%
-------- --------
Net Income $ 28,709 $ 20,269 42%
======== ========
Diluted earnings per common share $.25 $.18 39%
======== ========
Revenues increased 16 percent and earnings increased 42 percent during the first
quarter 2001 primarily because of new business generated in our primary business
lines. Revenues and earnings increased due to increased market acceptance of
our products and services and the leveragability built within our operations.
Sales to new clients and the delivery of new products and services to existing
clients in our technology and outsourcing businesses were extremely strong. Net
asset inflows from our high-net-worth and institutional investors increased
during the quarter, despite the recent downturn in the market.
We intend to sustain revenues and earnings growth by delivering new products and
services to our existing clients and maintaining a consistent level of new
sales. In addition, we will effectively utilize our current infrastructure to
manage expenses across a high net incremental revenue base. However, mergers
and acquisitions within the banking industry and any prolonged volatility in the
capital markets could negate any expected growth in revenues and earnings.
13
ASSET BALANCES
(In millions)
As of March 31,
--------------------------- PERCENT
2001 2000 CHANGE
-------- -------- ----------------
Assets invested in equity and fixed income programs $ 51,384 $ 45,744 12%
Assets invested in liquidity funds 26,691 22,177 20%
-------- --------
Assets under management 78,075 67,921 15%
Client proprietary assets under administration 192,218 197,476 (3%)
-------- --------
Assets under management and administration $270,293 $265,397 2%
======== ========
Assets under management consist of total assets invested in our equity and fixed
income investment programs and liquidity funds for which we provide management
services. Assets under management and administration consist of total assets
for which we provide management and administrative services, including client
proprietary fund balances for which we provide administration and/or
distribution services.
TECHNOLOGY SERVICES
- -------------------
Technology Services provides trust technology outsourcing services to banks and
other financial institutions through our TRUST 3000 product line. TRUST 3000
includes many integrated products and sub-systems that provide a complete
investment accounting and management information system for trust institutions.
Revenues are earned from monthly processing and software services fees, and
project fees associated with the conversion of new and merging clients.
Trust operations outsourcing incorporates the TRUST 3000 product line within a
package of services that includes investment management, custody and back-office
capabilities. Through this business, we perform the trust department back-
office administration function. Revenues are earned from processing and
management fees.
1ST QTR 1ST QTR DOLLAR PERCENT
2001 2000 CHANGE CHANGE
------- ------- ------------------ -----------------
Revenues:
Trust technology services $53,057 $46,661 $6,396 14%
Trust operations outsourcing 7,603 5,194 2,409 46%
------- ------- ------
Total revenues 60,660 51,855 8,805 17%
Expenses:
Operating and development 31,346 25,836 5,510 21%
Sales and marketing 8,507 7,948 559 7%
------- ------- ------
Total operating profits $20,807 $18,071 $2,736 15%
======= ======= ======
Profit margin 34% 35% -- --
The increase in Trust Technology Services revenues is primarily attributable to
increased cross sales in our core service bureau business primarily, brokerage
services. Brokerage Revenue increased $5.5 million to $16.0 million for the
first quarter 2001 compared to $10.5 million for the first quarter 2000.
Brokerage services allow a client to execute trades through SEI's captive
broker/dealer.
Trust Operations Outsourcing revenues increased primarily due to growth in
investment management fees from our existing clients, as well as from new
clients. We still believe that this business provides an attractive alternative
to any financial institution faced with the task of building the necessary
infrastructure to support the delivery of trust services.
The increase in operating profits and profit margin were primarily due to the
increase in revenues previously discussed and the leveragability inherent in our
current infrastructure. As a percentage of sales, operating
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and development expenses increased to 52 percent from 50 percent and sales and
marketing expenses decreased to 14 percent from 15 percent. We expect our
recurring revenue base to increase through the delivery of new products and
services to our existing clients and the contracting of new clients for
processing services. However, consolidations among our banking clients continue
to be a major strategic issue facing this segment.
ASSET MANAGEMENT
- ----------------
Asset Management provides investment solutions through various investment
products and services distributed directly or through professional investment
advisors, financial planners, and other financial intermediaries to
institutional or high-net-worth markets. The primary products offered include
money market funds, diversified investment strategies and portfolios and back-
office technology support. Revenues are earned through management fees that are
based upon a fixed percentage, referred to as basis points, of the average daily
net asset value of assets under management.
1ST QTR 1ST QTR DOLLAR PERCENT
2001 2000 CHANGE CHANGE
------- ------- -------- -------
Revenues:
Investment management fees $54,237 $43,396 $10,841 25%
Liquidity management fees 5,786 4,926 860 17%
------- ------- -------
Total revenues 60,023 48,322 11,701 24%
Expenses:
Operating and development 17,185 14,440 2,745 19%
Sales and marketing 20,279 20,408 (129) (1%)
------- -------
Total operating profits $22,559 $13,474 $ 9,085 67%
======= ======= =======
Profit margin 38% 28% -- --
The increase in Investment Management Fees was primarily due to significant
growth in assets under management generated through new business in both our
investment advisory and institutional asset management businesses. Average
assets under management increased $6.1 billion or 20 percent to $37.2 billion
for the first quarter of 2001, as compared to $31.1 billion for the first
quarter of 2000. In our investment advisory business, we continue to be
successful at recruiting new registered investment advisors. We established
approximately 500 new registered investment advisor relationships during the
first quarter of 2001, bringing our total network to about 8,100 advisors. Our
Institutional asset management business also experienced an increase in new
business. During the first quarter of 2001, 5 new institutional clients were
obtained. We feel the increase in new sales in both businesses is the result of
increased market acceptance of our outsource business solution across a diverse
range of clients.
We feel the increase in new sales in both businesses is the result of increased
market acceptance of our outsource business solution across a diverse range of
clients. The increase in Liquidity Management Fees was due to an increase in
assets under management invested in our liquidity funds from institutional
clients. Average assets under management invested in our liquidity products
increased $2.3 billion or 36 percent to $8.5 billion for the first quarter of
2001, as compared to $6.2 billion for the first quarter of 2000.
Operating profits and profit margin increased during the first quarter due to
new business and the leveragability built into our operations. We have been
able to control operating costs and continue to make investments in developing
new products without affecting margins. As a percentage of sales, operating and
development expenses decreased to 28 percent from 30 percent and sales and
marketing expenses decreased to 34 percent from 42 percent.
Despite the recent volatility in the marketplace, we remain optimistic about
this business. We are confident that our sales and product strategy will
continue to provide new business to support future growth. However, continued
volatility in the capital markets could negatively affect future revenues and
profits.
15
MUTUAL FUND SERVICES
- --------------------
The Mutual Fund Services segment provides administration and distribution
services to proprietary mutual funds created for banks, insurance firms, and
investment management companies. These services include fund administration and
accounting, legal services, shareholder recordkeeping, and marketing. Revenues
are based upon a fixed percentage, referred to as basis points, of the average
daily asset value of the proprietary funds.
1ST QTR 1ST QTR DOLLAR PERCENT
2001 2000 CHANGE CHANGE
------- ------- ------------------ -----------------
Total revenues $32,017 $30,026 $1,991 7%
Expenses:
Operating and development 19,413 19,002 411 2%
Sales and marketing 5,119 5,621 (502) (9%)
------- ------- ------
Total operating profits $ 7,485 $ 5,403 $2,082 39%
======= ======= ======
Profit margin 23% 18% -- --
The increase in Mutual fund services revenues was fueled by growth in average
proprietary fund balances, which increased $10.5 billion or 6 percent to $198.2
billion for the first quarter of 2001 versus $187.7 billion for the first
quarter of 2000. The increase in revenues resulted from new sales in the non-
bank investment management and offshore markets.
Profit margin increased to 23 percent from 18 percent. The increase in profit
margin was due to an increase in revenue and the leveragability built into our
operations. As a percentage of sales, operating and development expenses
decreased to 61 percent from 63 percent and sales and marketing expenses
decreased to 16 percent from 18 percent.
The demand for our services in the investment management, offshore and hedge
fund markets has steadily risen. We will continue to focus our efforts in these
markets because we believe these markets hold the greatest long-term growth
potential for our services. Conversely, consolidations in the banking industry
or a significant and prolonged unfavorable change in the financial securities
markets could negatively affect revenues and profits.
INVESTMENTS IN NEW BUSINESS
- ---------------------------
Investments in New Business include our global asset management initiatives that
incorporate our investment products and services to provide investment solutions
to institutional and high-net-worth investors outside the United States
Revenues are primarily earned through management fees that are based upon a
fixed percentage, referred to as basis points, of the average daily net asset
value of assets under management.
16
1ST QTR 1ST QTR DOLLAR PERCENT
2001 2000 CHANGE CHANGE
------- ------- ------ -------
Total revenues $ 8,601 $ 8,543 $ 58 1%
Expenses:
Operating and development 8,085 7,004 1,081 15%
Sales and marketing 4,351 4,393 (42) (1%)
------- -------
Total operating losses $(3,835) $(2,854) $ (981) (34%)
======= ======= ====== ======
Profit margin (45%) (33%) -- --
Although revenues were flat for the first quarter 2001, assets under management
from our offshore enterprises increased $1.0 billion to $4.7 billion during the
first quarter 2001, compared to $3.7 billion in the first quarter 2000. The
first quarter 2000 revenue included our Canadian consulting business that was
sold later in 2000. Excluding those revenues, revenues for the first quarter
would have increased 27 percent. Our efforts are currently focused on
Europe/South Africa, Asia, and Latin America.
We gained initial market acceptance for our U.K. pension plan initiative, which
offers a comprehensive multi-manager based solution to U.K. pension funds.
Three commitments for $125 million in assets have been made in the first
quarter.
The pace of global asset gathering and revenue recognition continues to
accelerate, and we also accelerated the pace of our investment efforts
especially in the European region. We plan to undertake new initiatives later
in the year, directed at high net worth investors in Europe. We believe that
global expansion is an area of significant long-term growth for our firm. We
will continue to make significant investments in our global initiatives and
expect to incur losses throughout the remainder of the year in this segment.
GENERAL & ADMINISTRATIVE
- ------------------------
General and administrative expenses increased 52 percent to $5,383 for the first
quarter in 2001, as compared to $3,542 for the first quarter in 2000. As a
percentage of total consolidated revenues, general and administrative expenses
were 3 percent for the first quarter in 2001 and 2000.
OTHER INCOME
- ------------
Other income on the accompanying Consolidated Statements of Income consist of
the following:
1ST QTR 1ST QTR
2001 2000
------ ------
Equity in the earnings of unconsolidated affiliate $2,238 $1,753
Interest income 2,249 985
Interest expense (550) (599)
------ ------
Total other income, net $3,937 $2,139
====== ======
Equity in the earnings of unconsolidated affiliate on the accompanying
Consolidated Statements of Income includes our less than 50 percent ownership in
the general partnership of LSV Asset Management ("LSV") (See Note 5 of the Notes
to Consolidated Financial Statements). Our interest in LSV's net earnings was
$2,238 for the first quarter in 2001 and $1,753 for the first quarter in 2000.
The increase in LSV's net earnings is due to an increase in assets under
management. Average assets under management for LSV were $5.7 billion for the
first quarter in 2001, as compared to $4.2 billion for the first quarter in
2000.
Interest income for the first quarter in 2001 was $2,249, as compared to $985
for the first quarter in 2000. Interest income is earned based upon the amount
of cash that is invested daily and fluctuations in interest
17
income recognized for one period in relation to another is due to changes in the
average cash balance invested for the period.
Interest expense for the first quarter in 2001 was $550, as compared to $599 for
the first quarter in 2000. Interest expense primarily relates to our long-term
debt and borrowings on our line of credit.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Three Months
------------------------------------------
Ended March 31,
------------------------------------------
2001 2000
-------- --------
Net cash provided by operating activities $ 15,782 $ 1,856
Net cash used in investing activities (18,864) (1,056)
Net cash used in financing activities (45,335) (16,990)
-------- --------
Net decrease in cash and cash equivalents (48,417) (16,190)
Cash and cash equivalents, beginning of period 159,576 73,206
-------- --------
Cash and cash equivalents, end of period $111,159 $ 57,016
======== ========
Cash requirements and liquidity needs are primarily funded through operations
and our capacity for additional borrowing. We currently have a line of credit
agreement that provides for borrowings of up to $50.0 million. The availability
of the line of credit is subject to compliance with certain covenants set forth
in the agreement (See Note 7 of the Notes to Consolidated Financial Statements).
At March 31, 2001, the unused sources of liquidity consisted of unrestricted
cash and cash equivalents of $100.3 million and the unused portion of the line
of credit of $50.0 million.
The increase in cash flow from operations was primarily due to the tax benefit
received from stock options exercised as a result of the rise in our stock price
during the past 3 years. The tax benefit on stock options exercised was
previously included in cash flows from financing activities. The prior year has
been reclassified to conform with the current year presentation. In addition, an
increase in income and annual compensation payments affected cash flows from
operations for the first quarter of 2001 and 2000. Annual compensation and
bonus payments are paid in the first quarter of the following year and
negatively affected cash flows from operations in the first quarter of 2001 and
2000.
Cash flows from investing activities are principally affected by capital
expenditures, including capitalized software development costs. Capital
expenditures in the first quarter of 2001 primarily related to purchases of
equipment and furniture associated with the expansion of our corporate
headquarters. A parking structure was completed during the first quarter of
2001 and we are currently constructing two additional buildings that is expected
to be completed by the end of 2001. Total cost of the expansion is estimated at
$25.0 million. The additional buildings are necessary due to the recent growth
experienced in our primary business lines. Another factor that affected cash
flow from investing activities was the initiation of a new Company-sponsored
mutual fund in which we invested approximately $11.0 million. We expect these
funds will remain invested until the third quarter 2001.
Cash flows from financing activities are primarily affected by debt and equity
transactions. Principal payments on our long-term debt are made annually from
the date of issuance while interest payments are made semi-annually. Principal
and interest payments were made in the first quarter of 2001 and 2000 (See Note
8 of the Notes to Consolidated Financial Statements). We continued our common
stock repurchase program. We purchased approximately 1,227,000 shares of our
common stock at a cost of $46.3 million during the first quarter of 2001. As of
April 30, 2001, we still had $48.3 million remaining authorized for the purchase
of our common stock. Cash dividends of $.04 per share were paid in the first
quarter of 2001 and $.03 in the first quarter of 2000. The Board of Directors
has indicated its intention to continue making cash dividend payments.
Our operating cash flow, borrowing capacity, and liquidity should provide
adequate funds for continuing operations, continued investment in new products
and equipment, our common stock repurchase program,
18
expansion of our corporate campus, future dividend payments, and principal and
interest payments on our long-term debt.
FORWARD-LOOKING INFORMATION
- ---------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained in this
discussion is or may be considered forward-looking. Forward-looking statements
relate to future operations, strategies, financial results or other
developments. Forward-looking statements are based upon estimates and
assumptions that involve certain risks and uncertainties, many of which are
beyond our control or are subject to change. Although we believe our
assumptions are reasonable, they could be inaccurate. Our actual future
revenues and income could differ materially from our expected results. We have
no obligation to publicly update or revise any forward-looking statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
- ----------------------------------------------------------
We do have a number of satellite offices located outside the United States that
conduct business in local currencies of that country. All foreign operations
aggregate approximately 5 percent of total consolidated revenues. Due to this
limited activity, we do not expect any material loss with respect to foreign
currency risk.
Exposure to market risk for changes in interest rates relate primarily to our
investment portfolio and long-term debt. We do not undertake any specific
actions to cover our exposure to interest rate risk and are not a party to any
interest rate risk management transactions. We place our investments in
financial instruments that meet high credit quality standards. We are adverse
to principal loss and ensure the safety and preservation of our invested funds
by limiting default risk, market risk, and reinvestment risk. The interest rate
on our long-term debt is fixed and is not traded on any established market. We
have no cash flow exposure due to rate changes for our long-term debt.
19
PART II. OTHER INFORMATION
- -------- -----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) The following is a list of exhibits filed as part of the Form 10-Q.
None.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the
quarter ended March 31, 2001.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEI INVESTMENTS COMPANY
Date May 14, 2001 By /s/ Kathy Heilig
-------------------------- -----------------------
Kathy Heilig
Vice President and Controller
21