<PAGE>
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 September 30,1999 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)
<TABLE>
<S> <C>
Pennsylvania 23-1707341
- -------------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
</TABLE>
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 September 30, 1999: 17,727,915 shares of common stock, par
value $.01 per share.
<PAGE>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------- -----------------
(unaudited)
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 53,430 $ 52,980
Receivables from regulated investment companies 21,757 18,999
Receivables, net of allowance for doubtful
accounts of $1,200 37,477 27,919
Prepaid expenses and other current assets 4,056 6,013
Deferred income taxes 8,596 7,598
-------- --------
Total current assets 125,316 113,509
-------- --------
Property and equipment, net of accumulated
depreciation and amortization of $67,584
and $57,452 65,653 62,761
-------- --------
Capitalized software, net of accumulated
amortization of $9,461 and $8,238 16,832 17,068
-------- --------
Other assets, net 23,178 15,434
-------- --------
Total Assets $230,979 $208,772
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
Consolidated Balance Sheets
---------------------------
(In thousands, except par value)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------- -----------------
(unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
- --------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,000 $ 2,000
Accounts payable 6,069 6,805
Accrued compensation 35,827 32,105
Accrued proprietary fund services 12,811 10,370
Accrued consulting services 8,856 6,342
Other accrued liabilities 39,731 39,661
Deferred revenue 14,647 13,511
-------- --------
Total current liabilities 119,941 110,794
-------- --------
Long-term debt 29,000 31,000
-------- --------
Deferred income taxes 8,975 7,293
--------- ---------
Shareholders' equity:
Common stock, $.01 par value, 100,000 shares
authorized; 17,728 and 17,861 shares issued
and outstanding 177 179
Capital in excess of par value 66,551 57,541
Retained earnings 6,878 2,422
Accumulated other comprehensive losses (543) (457)
-------- --------
Total shareholders' equity 73,063 59,685
-------- --------
Total Liabilities and Shareholders' Equity $230,979 $208,772
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
-------------------
Ended September 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Revenues $117,199 $90,492
Expenses:
Operating and development 52,577 41,787
Sales and marketing 34,383 26,884
General and administrative 3,004 3,787
-------- -------
Income from operations 27,235 18,034
Equity in the earnings of unconsolidated affiliate 1,625 733
Interest income 570 402
Interest expense (585) (623)
-------- -------
Income before income taxes 28,845 18,546
Income taxes 11,105 6,995
-------- -------
Net income 17,740 11,551
-------- -------
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments,
net of income tax (benefit) expense of $(168) and $12 (269) 17
Unrealized holding gains on investments,
net of income tax expense of $75 and $21 120 32
-------- -------
Other comprehensive (loss) income (149) 49
-------- -------
Comprehensive income $ 17,591 $11,600
======== =======
Basic earnings per common share $ 1.00 $ .64
======== =======
Diluted earnings per common share $ .94 $ .60
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
Consolidated Statements of Income
---------------------------------
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
-------------------
Ended September 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Revenues $333,139 $257,862
Expenses:
Operating and development 156,744 128,213
Sales and marketing 92,069 73,712
General and administrative 9,134 10,271
-------- --------
Income from operations 75,192 45,666
Equity in the earnings of unconsolidated affiliate 4,904 1,924
Interest income 1,443 1,074
Interest expense (1,763) (1,951)
-------- --------
Income before income taxes 79,776 46,713
Income taxes 30,713 17,980
-------- --------
Net income 49,063 28,733
-------- --------
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustments,
net of income tax benefit of $69 and $29 (110) (47)
Unrealized holding losses on investments,
net of income tax expense (benefit) of $15 and $(45) 24 (72)
-------- --------
Other comprehensive loss (86) (119)
-------- --------
Comprehensive income $ 48,977 $ 28,614
======== ========
Basic earnings per common share $ 2.76 $ 1.61
======== ========
Diluted earnings per common share $ 2.58 $ 1.50
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
Consolidated Statements of Cash Flows
-------------------------------------
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 49,063 $ 28,733
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 11,568 11,388
Equity in the earnings of unconsolidated affiliate (4,904) (1,924)
Other 2,236 (2,507)
Change in current assets and liabilities:
Decrease (increase) in
Receivables from regulated investment companies (2,758) (1,670)
Receivables (9,558) (9,946)
Prepaid expenses and other current assets 1,957 8,134
Increase (decrease) in
Accounts payable (736) 71
Accrued compensation 3,722 3,012
Accrued proprietary fund services 2,441 (887)
Accrued consulting services 2,514 6,049
Other accrued liabilities 2,943 7
Deferred revenue 1,136 20,507
-------- --------
Net cash provided by operating activities 59,624 60,967
-------- --------
Cash flows from investing activities:
Additions to property and equipment (13,429) (16,441)
Additions to capitalized software (987) (4,538)
Purchase of investments available for sale (1,000) (3,620)
Other (3,286) (87)
-------- --------
Net cash used in investing activities (18,702) (24,686)
-------- --------
Cash flows from financing activities:
Payment on long-term debt (2,000) (2,000)
Purchase and retirement of common stock (50,312) (45,316)
Proceeds from issuance of common stock 6,889 8,702
Tax benefit on stock options exercised 11,362 16,418
Payment of dividends (6,411) (5,330)
-------- --------
Net cash used in financing activities (40,472) (27,526)
-------- --------
Net increase in cash and cash equivalents 450 8,755
Cash and cash equivalents, beginning of period 52,980 16,891
-------- --------
Cash and cash equivalents, end of period $ 53,430 $ 25,646
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE>
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 other 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 September 30, 1999, the results of operations for the
three and nine months ended September 30, 1999 and 1998, and the cash
flows for the nine months ended September 30, 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.
7
<PAGE>
Property and Equipment
----------------------
Property and equipment on the accompanying Consolidated Balance Sheets
consist of the following:
<TABLE>
<CAPTION>
Estimated
Useful Lives
September 30, 1999 December 31, 1998 (In Years)
------------------------- ------------------------ -----------------
<S> <C> <C> <C>
Equipment $ 59,842,000 $ 53,739,000 3 to 5
Buildings 34,353,000 28,303,000 10 to 39
Land 7,641,000 6,993,000 N/A
Purchased software 13,087,000 10,270,000 3
Furniture and fixtures 11,915,000 10,284,000 3 to 5
Leasehold improvements 6,399,000 6,791,000 Lease Term
Construction in progress -- 3,833,000 N/A
------------ ------------
133,237,000 120,213,000
Less: Accumulated depreciation
and amortization (67,584,000) (57,452,000)
------------ ------------
Property and Equipment, net $ 65,653,000 $ 62,761,000
============ ============
</TABLE>
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.
Technological feasibility is established 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 8.2 years.
8
<PAGE>
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.
<TABLE>
<CAPTION>
For the Three-Month period ended
September 30, 1999
----------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------- -------------------- --------------
<S> <C> <C> <C>
Basic earnings per common share $17,740,000 17,763,000 $1.00
==============
Dilutive effect of stock options -- 1,109,000
------------------- ----------
Diluted earnings per common share $17,740,000 18,872,000 $ .94
=================== ========== ==============
For the Three-Month period ended
September 30, 1998
----------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------- ------------------- --------------
Basic earnings per common share $11,551,000 17,946,000 $ .64
==============
Dilutive effect of stock options -- 1,181,000
------------------- ----------
Diluted earnings per common share $11,551,000 19,127,000 $ .60
=================== ========== ==============
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
For the Nine-Month period ended
September 30, 1999
----------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
-------------------- -------------------- --------------
<S> <C> <C> <C>
Basic earnings per common share $49,063,000 17,784,000 $2.76
==============
Dilutive effect of stock options -- 1,247,000
------------------- ----------
Diluted earnings per common share $49,063,000 19,031,000 $2.58
=================== ========== ==============
For the Nine-Month period ended
September 30, 1998
----------------------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------------- ------------------- --------------
Basic earnings per common share $28,733,000 17,827,000 $1.61
==============
Dilutive effect of stock options -- 1,340,000
------------------- ----------
Diluted earnings per common share $28,733,000 19,167,000 $1.50
=================== ========== ==============
</TABLE>
Statements of Cash Flows
------------------------
For purposes of the Consolidated Statements of Cash Flows, investment
instruments purchased with an original maturity of three months or less
are considered to be cash equivalents.
Supplemental disclosures of cash paid/received during the nine months
ended September 30 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
<S> <C> <C>
Interest paid $ 2,351,000 $ 2,585,000
Interest and dividends received $ 1,434,000 $ 1,063,000
Income taxes paid $17,944,000 $12,508,000
</TABLE>
Reclassifications
-----------------
The financial statements for prior periods have been reclassified to
conform with the current period's presentation.
10
<PAGE>
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.
<TABLE>
<CAPTION>
Foreign Unrealized Accumulated
Currency Holding Other
Translation Losses Comprehensive
Adjustments on Investments Losses
------------------------- ------------------------ ------------------------
<S> <C> <C> <C>
Beginning balance $(408,000) $(49,000) $(457,000)
Current period change (110,000) 24,000 (86,000)
--------- -------- ---------
Ending Balance $(518,000) $(25,000) $(543,000)
========= ======== =========
</TABLE>
Note 3. Receivables - Receivables on the accompanying Consolidated Balance
-----------
Sheets consist of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
-------------------------- --------------------------
<S> <C> <C>
Trade receivables $20,242,000 $14,586,000
Fees earned, not received 2,362,000 2,558,000
Fees earned, not billed 16,073,000 11,975,000
----------- -----------
38,677,000 29,119,000
Less: Allowance for doubtful accounts (1,200,000) (1,200,000)
----------- -----------
$37,477,000 $27,919,000
=========== ===========
</TABLE>
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.
11
<PAGE>
Note 4. Other Assets - Other assets on the accompanying Consolidated Balance
------------
Sheets consist of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31,1998
----------------------- -----------------------
<S> <C> <C>
Investment in unconsolidated affiliate $ 5,231,000 $ 2,573,000
Investments available for sale 3,985,000 3,565,000
Other, net 13,962,000 9,296,000
----------- -----------
Other assets $23,178,000 $15,434,000
=========== ===========
</TABLE>
Investment in Unconsolidated Affiliate - The Company has a general
--------------------------------------
partnership interest in 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 September 30:
<TABLE>
<CAPTION>
1999 1998
--------------------- -----------------------
<S> <C> <C>
Revenues $5,041,000 $2,546,000
========== ==========
Net income $3,457,000 $1,645,000
========== ==========
</TABLE>
The following table contains the Condensed Statements of Income of LSV
for the nine months ended September 30:
<TABLE>
<CAPTION>
1999 1998
--------------------- -----------------------
<S> <C> <C>
Revenues $14,595,000 $6,703,000
=========== ==========
Net income $10,431,000 $4,186,000
=========== ==========
</TABLE>
12
<PAGE>
The following table contains the Condensed Balance Sheets of LSV:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
----------------------- -----------------------
<S> <C> <C>
Current assets $9,630,000 $6,284,000
Non-current assets 147,000 100,000
---------- ----------
Total assets $9,777,000 $6,384,000
========== ==========
Current liabilities $ 598,000 $1,096,000
Partners' capital 9,179,000 5,288,000
---------- ----------
Total liabilities and
partners' capital $9,777,000 $6,384,000
========== ==========
</TABLE>
Note 5. 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, 2000, at
which time the outstanding principal balance, if any, becomes due
unless the Agreement is extended. The line of credit, when utilized,
accrues interest at the Prime rate or one and one-fourth percent above
the London Interbank Offered Rate. The Company is obligated to pay a
commitment fee equal to one-fourth 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. There were no
outstanding borrowings on the line of credit at September 30, 1999.
13
<PAGE>
Note 6. 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 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 September 30,
1999.
Note 7. 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. Through
September 30, 1999, a total of 16,042,000 shares at an aggregate cost
of $314,590,000 have been purchased and retired. The Company purchased
121,000 shares at a total cost of $11,253,000 during the third quarter
of 1999 and 539,000 shares at a total cost of $50,312,000 during the
nine month period ended September 30, 1999.
The Company immediately retires its common stock when purchased. Upon
retirement, Capital in excess of par value is reduced by the average
capital per share outstanding and the remainder is charged against
Retained earnings. If Retained earnings is reduced to zero, any
subsequent purchases of common stock will be charged entirely to
Capital in excess of par value.
Note 8. Dividend - On May 18, 1999, the Board of Directors declared a cash
--------
dividend of $.20 per share on the Company's common stock, which was
paid on June 30, 1999, to shareholders of record on June 16, 1999.
Note 9. 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 other
international operations which provides investment advisory services
globally through investment products and services and performance
evaluation and consulting services to Canadian pension plans.
14
<PAGE>
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 and nine months
ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
Mutual Investments
Technology Asset Fund In New
Services Management Services Business Other Total
----------- ----------- ----------- ------------ ------------ ------------
For the Three-Month Period Ended September 30, 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $46,951,000 $36,105,000 $27,790,000 $ 6,353,000 $117,199,000
----------- ----------- ----------- ----------- ------------
Operating
income (loss) $16,600,000 $10,236,000 $ 6,168,000 $(2,765,000) $(3,004,000) $ 27,235,000
----------- ----------- ----------- ----------- -----------
Other income, net $ 1,610,000
------------
Income before
income taxes $ 28,845,000
------------
Depreciation and
amortization $ 3,017,000 $ 596,000 $ 328,000 $ 210,000 $ 100,000 $ 4,251,000
----------- ----------- ----------- ----------- ----------- ------------
Capital
Expenditures $ 1,309,000 $ 678,000 $ 196,000 $ 157,000 $ 204,000 $ 2,544,000
----------- ----------- ----------- ----------- ----------- ------------
<CAPTION>
For the Three-Month Period Ended September 30, 1998
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $38,572,000 $23,946,000 $24,257,000 $ 3,717,000 $90,492,000
----------- ----------- ----------- ----------- -----------
Operating
income (loss) $10,762,000 $ 5,009,000 $ 7,670,000 $(1,620,000) $(3,787,000) $18,034,000
----------- ----------- ----------- ----------- -----------
Other income, net $ 512,000
-----------
Income before
income taxes $18,546,000
-----------
Depreciation and
amortization $ 2,811,000 $ 457,000 $ 399,000 $ 216,000 $ 200,000 $ 4,083,000
----------- ----------- ----------- ----------- ----------- -----------
Capital
expenditures $ 8,843,000 $ 373,000 $ 213,000 $ 200,000 $ 265,000 $ 9,894,000
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Mutual Investments
Technology Asset Fund In New
Services Management Services Business Other Total
------------ ----------- ----------- ------------ ------------ ------------
For the Nine-Month Period Ended September 30, 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $140,010,000 $96,556,000 $80,843,000 $15,730,000 $333,139,000
------------ ----------- ----------- ----------- ------------
Operating
Income (loss) $ 45,582,000 $28,155,000 $17,898,000 $(7,309,000) $(9,134,000) $ 75,192,000
------------ ----------- ----------- ----------- -----------
Other income, net $ 4,584,000
------------
Income before
Income taxes $ 79,776,000
------------
Depreciation and
Amortization $ 8,163,000 $ 1,617,000 $ 943,000 $ 557,000 $ 288,000 $ 11,568,000
------------ ----------- ----------- ----------- ----------- ------------
Capital
Expenditures $ 9,049,000 $ 2,110,000 $ 457,000 $ 739,000 $ 1,074,000 $ 13,429,000
------------ ----------- ----------- ----------- ----------- ------------
<CAPTION>
For the Nine-Month Period Ended September 30, 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $114,486,000 $64,462,000 $69,424,000 $ 9,490,000 $257,862,000
------------ ----------- ----------- ----------- ------------
Operating
Income (loss) $ 26,797,000 $13,907,000 $20,340,000 $(5,107,000) $(10,271,000) $ 45,666,000
------------ ----------- ----------- ----------- ------------
Other income, net $ 1,047,000
------------
Income before
Income taxes $ 46,713,000
------------
Depreciation and
Amortization $ 7,647,000 $ 1,327,000 $ 1,165,000 $ 661,000 $ 588,000 $ 11,388,000
------------ ----------- ----------- ----------- ------------ ------------
Capital
expenditures $ 13,628,000 $ 923,000 $ 733,000 $ 504,000 $ 653,000 $ 16,441,000
------------ ----------- ----------- ----------- ------------ ------------
</TABLE>
16
<PAGE>
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 9 of the Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
- ---------------------
Third Quarter Ended September 30, 1999 Compared to Third Quarter Ended September
30, 1998
Consolidated Overview
<TABLE>
<CAPTION>
Income Statement Data
(In thousands, except per common share data) 3RD QTR 3RD QTR PERCENT
1999 1998 CHANGE
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Revenues:
Technology Services Segment $ 46,951 $38,572 22%
Asset Management Segment 36,105 23,946 51%
Mutual Fund Services Segment 27,790 24,257 15%
Investments in New Business Segment 6,353 3,717 71%
-------- -------
Total revenues $117,199 $90,492 30%
Operating Income (Loss):
Technology Services Segment $ 16,600 $10,762 54%
Asset Management Segment 10,236 5,009 104%
Mutual Fund Services Segment 6,168 7,670 (20%)
Investments in New Business Segment (2,765) (1,620) (71%)
General and Administrative (3,004) (3,787) 21%
-------- -------
Income from operations 27,235 18,034 51%
Other income, net 1,610 512 --
-------- -------
Income before income taxes 28,845 18,546 56%
Income taxes 11,105 6,995 59%
-------- -------
Net Income $ 17,740 $11,551 54%
======== =======
Diluted earnings per common share $.94 $.60 57%
======== =======
</TABLE>
Revenues and earnings increased in the third quarter of 1999 primarily due to
new business activity generated in the Technology Services and Asset Management
segments. Revenues and operating profit improvement in Technology Services
resulted primarily from an increase in recurring processing fees generated from
new clients and the delivery of new products to our existing clients. Revenues
and operating profit in Asset Management were boosted by significant increases
in assets under management from new and existing clients in our investment
advisory and institutional asset management businesses. Revenues and earnings
are expected to increase assuming the sales momentum in Asset Management can be
sustained and as we continue to close new business and cross-sell new and
existing products in Technology Services. However, continued consolidation in
the banking industry or a prolonged unfavorable change in the financial
securities markets could impede growth in revenues and earnings.
17
<PAGE>
<TABLE>
<CAPTION>
ASSET BALANCES
(In millions)
As of September 30, PERCENT
------------------------------------
1999 1998 CHANGE
----------------- ----------------- ------------------
<S> <C> <C> <C>
Assets invested in equity and fixed income programs $ 34,310 $ 20,102 71%
Assets invested in liquidity funds 20,569 18,584 11%
-------- --------
Assets under management 54,879 38,686 42%
Client proprietary assets under administration 149,199 100,452 49%
-------- --------
Assets under administration $204,078 $139,138 47%
======== ========
</TABLE>
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 invested in our investment programs, liquidity
funds, and clients' proprietary mutual funds for which we provide certain
services.
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.
<TABLE>
<CAPTION>
3RD QTR 3RD QTR DOLLAR PERCENT
1999 1998 CHANGE CHANGE
------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Trust technology services $41,470 $34,801 $6,669 19%
Trust operations outsourcing 5,481 3,771 1,710 45%
------- ------- ------
Total revenues 46,951 38,572 8,379 22%
Expenses:
Operating and development 22,020 19,789 2,231 11%
Sales and marketing 8,331 8,021 310 4%
------- ------- ------
Total operating profits $16,600 $10,762 $5,838 54%
======= ======= ======
</TABLE>
Trust technology services revenues increased due to an increase in recurring
processing fees generated from new clients have been fully or partially
implemented and our ability to cross-sell new and existing products to our
existing client base. Implementation revenues associated with the continued
merger and acquisition activity among our clients also contributed to the
increase in trust technology services revenues. As a result, recurring
processing fees increased $4.0 million and implementation fees increased $1.1
million. Revenues earned from our liquidity products and brokerage services
utilized by our bank clients increased slightly, but only accounted for
approximately 18 percent of total trust technology services revenues in the
third quarter of 1999 and 20 percent in the third quarter of 1998. Average
assets under management invested in our liquidity products from bank clients
were $16.0 billion for the third quarter of 1999 versus $16.1 billion for the
third quarter of 1998. Future recurring processing fees are expected to
increase as the remaining new trust technology clients are successfully
implemented onto the TRUST 3000 product line. We continue to introduce new
technology-based services designed to meet the needs of our clients. This should
create an additional opportunity to increase recurring revenues from our
existing client base.
18
<PAGE>
Trust operations outsourcing revenues increased significantly due to new
contracts for processing services and investment solutions. Revenues earned
from processing services accounts for approximately 48 percent of total trust
operations outsourcing revenues in the third quarter of 1999 and 56 percent in
the third quarter of 1998. Custody and investment solutions comprise the
remaining 52 percent in the third quarter of 1999 and 44 percent in the third
quarter of 1998. We are expanding our trust operations outsourcing efforts
beyond the community and regional bank markets because we believe that our trust
operations outsourcing service is an attractive alternative to any trust
institution faced with the task of building the necessary internal
infrastructure to support the delivery of trust services.
Operating profits and profit margin for Technology Services increased in the
third quarter of 1999. Profit margin in the third quarter of 1999 was 35
percent, as compared to 28 percent in the third quarter of 1998. The increase
in profits and margin are the culmination of increased system sales in the large
bank market over the last few years and back office sales in the community bank
market. In addition, we have been able to leverage on our infrastructure which
has allowed revenues to increase at a faster pace than our expenses. As a
percentage of sales, operating and development expenses decreased to 47 percent
from 51 percent and sales and marketing expenses decreased to 18 percent from 21
percent. Although we have been able to control costs, we do anticipate
increased investments in new technology and information products and services.
In the large bank segment, we anticipate continued growth through the
introduction of new products, continued interest from existing clients in both
our core application and server-based products, our ability to cross-sell
existing products, and the potential for new business. In the trust operations
outsourcing business, the potential for new business from both the processing
and investment solutions products is expected to contribute to our growth in the
future. However, consolidation within the banking industry continues to be a
major strategic issue facing this segment. In addition, there may be some
negative impact from the Year 2000 due to some postponing in minor purchase and
installation decisions.
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.
<TABLE>
<CAPTION>
3RD QTR 3RD QTR DOLLAR PERCENT
1999 1998 CHANGE CHANGE
------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Investment management fees $31,823 $20,378 $11,445 56%
Liquidity management fees 4,282 3,568 714 20%
------- ------- -------
Total revenues 36,105 23,946 12,159 51%
Expenses:
Operating and development 9,415 7,158 2,257 32%
Sales and marketing 16,454 11,779 4,675 40%
------- ------- -------
Total operating profits $10,236 $ 5,009 $ 5,227 104%
======= ======= =======
</TABLE>
The increase in Investment management fees was primarily due to growth in assets
under management generated through new business. Average assets under
management increased $8.8 billion or 59 percent to $23.8 billion for the third
quarter of 1999, as compared to $15.0 billion for the third 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 through the introduction of new
investment options and programs. Our Institutional asset management business
also experienced an increase in new business. During the third quarter of 1999,
fourteen new relationships were established which contributed approximately $1.4
billion of new asset sales. We continue to invest in new investment programs
and initiatives to enhance our outsourcing alternatives.
19
<PAGE>
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 $5.1 billion for
the third quarter of 1999, as compared to $3.0 billion for the third quarter of
1998. The increase in assets under management was due to new sales to corporate
and institutional clients.
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 the introduction of new investment
programs and initiatives and our ability to leverage on our infrastructure even
with investments in technology to improve our service and productivity. Profit
margin rose to 28 percent for the third quarter of 1999, as compared to 21
percent for the third quarter of 1998. As a percentage of sales, operating and
development expenses decreased to 26 percent from 30 percent and sales and
marketing expenses decreased to 46 percent from 49 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.
<TABLE>
<CAPTION>
3RD QTR 3RD QTR DOLLAR PERCENT
1999 1998 CHANGE CHANGE
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Total revenues $27,790 $24,257 $ 3,533 15%
Expenses:
Operating and development 17,021 12,652 4,369 35%
Sales and marketing 4,601 3,935 666 17%
------- ------- -------
Total operating profits $ 6,168 $ 7,670 $(1,502) (20%)
======= ======= =======
</TABLE>
The increase in Mutual fund services revenues was fueled by growth in
proprietary fund balances. Average proprietary fund balances increased $50.1
billion or 49 percent to $151.7 billion for the third quarter of 1999 versus
$101.6 billion for the third 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 late 1998. However, average basis points
earned decreased primarily due to fee concessions extended to existing clients
in exchange for longer-term contracts. Also, average basis points were affected
by a reduction in the range of our services in the large bank market. As the
large bank segment continues to be in transition, we are initiating new
strategies and investing in new products to penetrate the non-bank and offshore
segments. Initially, the size of these non-bank complexes will be smaller and
therefore these deals will not generate as much revenues as large bank
complexes. However, we believe this will be a continually growing market in
terms of the number of institutions seeking mutual fund services.
20
<PAGE>
Although revenues increased 15 percent, operating profits decreased 20 percent.
Profit margin in the third quarter of 1999 decreased to 22 percent, as compared
to 32 percent for the third quarter of 1998. Fee concessions and a significant
increase in operating and development expenses negatively affected operating
profits. As a percentage of sales, operating and development expenses increased
to 61 percent from 52 percent and sales and marketing expenses increased
slightly to 17 percent from 16 percent. The recontracting of some existing
clients generated a substantial increase in direct marketing expenses. Also, we
are currently investing heavily in new products and services and in our
infrastructure to improve service quality and back-office efficiency.
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 other 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.
<TABLE>
<CAPTION>
3RD QTR 3RD QTR DOLLAR PERCENT
1999 1998 CHANGE CHANGE
-------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Total revenues $ 6,353 $ 3,717 $ 2,636 71%
Expenses:
Operating and development 4,121 2,188 1,933 88%
Sales and marketing 4,997 3,149 1,848 59%
------- ------- -------
Total operating losses $(2,765) $(1,620) $(1,145) (71%)
======= ======= =======
</TABLE>
The increase in revenues from this segment is primarily due to an increase in
assets under management from our offshore asset management businesses. The
increase in assets under management is due to the launch of a new SEI-managed
fund complex into the Italian marketplace in association with one of Italy's
largest providers of life insurance and financial and investment products. In
addition, we also entered into a newly formed joint venture with a Korean
investment advisory firm. Our Canadian and offshore asset management business
accounted for 75 percent of total segment revenues in the third quarter of 1999,
as compared to 51 percent in the third quarter of 1998. The performance
evaluation and consulting business accounted for the remaining 25 percent in the
third quarter of 1999, as compared to 49 percent in the third quarter of 1998.
This transition is due to a significant increase in assets under management
through the generation of new business and various small 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 60 percent of total segment revenues in
the third quarter of 1999, as compared to 26 percent in the third quarter of
1998.
21
<PAGE>
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
and continuing to integrate and grow our recently acquired businesses. 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 21 percent to $3,004 for the third
quarter of 1999, as compared to $3,787 for the third quarter of 1998. As a
percentage of total consolidated revenues, general and administrative expenses
were 3 percent for the third quarter of 1999, as compared to 4 percent for the
third quarter of 1998.
Other income on the accompanying Consolidated Statements of Income consist of
the following:
<TABLE>
<CAPTION>
3RD QTR 3RD QTR
1999 1998
------------ -----------
<S> <C> <C>
Equity in the earnings of unconsolidated affiliate $1,625 $ 733
Interest income 570 402
Interest expense (585) (623)
------ -----
Total other income, net $1,610 $ 512
====== =====
</TABLE>
Equity in the earnings of unconsolidated affiliate on the accompanying
Consolidated Statements of Income includes our less than 50 percent ownership in
the general partnership of LSV Asset Management ("LSV") (See Note 4 of the Notes
to Consolidated Financial Statements). Our interest in LSV's net earnings was
$1,625 for the third quarter of 1999 and $733 for the third quarter of 1998.
The increase in our portion of LSV's net earnings was due to an increase in
assets under management. Average assets under management for LSV were $4.1
billion for the third quarter of 1999, as compared to $2.6 billion for the third
quarter of 1998.
Interest income for the third quarter of 1999 was $570, as compared to $402 for
the third 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 third quarter of 1999 was $585, as compared to $623 for
the third 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 third quarter of 1999 than in the third
quarter of 1998.
22
<PAGE>
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Consolidated Overview
<TABLE>
<CAPTION>
Income Statement Data
(In thousands, except per common share data) NINE MONTHS NINE MONTHS PERCENT
1999 1998 CHANGE
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Revenues:
Technology Services Segment $140,010 $114,486 22%
Asset Management Segment 96,556 64,462 50%
Mutual Fund Services Segment 80,843 69,424 16%
Investments in New Business Segment 15,730 9,490 66%
-------- --------
Total revenues $333,139 $257,862 29%
Operating Income (Loss):
Technology Services Segment $ 45,582 $ 26,797 70%
Asset Management Segment 28,155 13,907 102%
Mutual Fund Services Segment 17,898 20,340 (12%)
Investments in New Business Segment (7,309) (5,107) (43%)
General and Administrative (9,134) (10,271) 11%
-------- --------
Income from operations 75,192 45,666 65%
Other income, net 4,584 1,047 --
-------- --------
Income before income taxes 79,776 46,713 71%
Income taxes 30,713 17,980 71%
-------- --------
Net Income $ 49,063 $ 28,733 71%
======== ========
Diluted earnings per common share $2.58 $1.50 72%
======== ========
</TABLE>
Revenues and earnings increased in the nine months ended September 30, 1999
primarily due to new business activity generated in the Technology Services and
Asset Management segments. Revenues and operating profit increased in
Technology Services primarily from an increase in recurring processing fees
generated from new clients and the delivery of new products to our existing
clients. Revenues and operating profit in Asset Management were boosted by
significant increases in assets under management from new and existing clients
in our investment advisory and institutional asset management businesses.
TECHNOLOGY SERVICES
- -------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS DOLLAR PERCENT
1999 1998 CHANGE CHANGE
------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Trust technology services $124,409 $103,275 $21,134 20%
Trust operations outsourcing 15,601 11,211 4,390 39%
-------- -------- -------
Total revenues 140,010 114,486 25,524 22%
Expenses:
Operating and development 70,775 66,197 4,578 7%
Sales and marketing 23,653 21,492 2,161 10%
-------- -------- -------
Total operating profits $ 45,582 $ 26,797 $18,785 70%
======== ======== =======
</TABLE>
23
<PAGE>
Trust technology services revenues increased due to an increase in recurring
processing fees generated from new clients that had purchased our products and
services in prior years and our ability to cross-sell new and existing products
to our existing client base. In addition, implementation revenues associated
with the continued merger and acquisition activity among our clients partially
contributed to the increase in trust technology services revenues. As a result,
recurring processing fees increased $15.1 million and implementation fees
increased $8.1 million for the first nine months of 1999 over the same period of
1998. Revenues earned from our liquidity products and brokerage services
utilized by our bank clients increased slightly, but only accounted for
approximately 18 percent of total trust technology services revenues for the
first nine months of 1999 and 21 percent for the comparable period in 1998.
Average assets under management invested in our liquidity products from bank
clients were $16.5 billion for the first nine months of 1999 and 1998.
Our trust operations outsourcing business continued to generate new business in
1999. Revenues earned from processing services accounts for approximately 53
percent of total trust operations outsourcing revenues for the first nine months
of 1999 and 56 percent for the comparable period in 1998. Custody and
investment solutions comprise the remaining 47 percent for the first nine months
in 1999 and 44 percent for the comparable period in 1998.
Operating profits and profit margin for Technology Services increased
significantly for the first nine months of 1999. Profit margin for the nine
months ended September 30, 1999 was 33 percent, as compared to 23 percent for
the same period of 1998. The increase in profits and margin are the culmination
of increased system sales in the large bank market over the last few years, back
office sales in the community bank market and our ability to manage expenses
carefully. As a percentage of sales, operating and development expenses
decreased to 51 percent from 58 percent and sales and marketing expenses
decreased slightly to 17 percent from 19 percent.
ASSET MANAGEMENT
- ----------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS DOLLAR PERCENT
1999 1998 CHANGE CHANGE
------------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Revenues:
Investment management fees $83,260 $54,256 $29,004 53%
Liquidity management fees 13,296 10,206 3,090 30%
------- ------- -------
Total revenues 96,556 64,462 32,094 50%
Expenses:
Operating and development 25,993 19,178 6,815 36%
Sales and marketing 42,408 31,377 11,031 35%
------- ------- -------
Total operating profits $28,155 $13,907 $14,248 102%
======= ======= =======
</TABLE>
The increase in Investment management fees was primarily due to growth in assets
under management generated through new business. Average assets under
management increased $7.2 billion or 51 percent to $21.4 billion for the first
nine months of 1999, as compared to $14.2 billion for the first nine months 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. Our
Institutional asset management business also experienced an increase in new
business. In 1999, 37 new relationships were established which contributed
approximately $2.3 billion 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.
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 72 percent to $5.0 billion for
the first nine months of 1999, as compared to $2.9 billion for the first nine
months of 1998. The increase in assets under management was due to new sales to
corporate and institutional clients.
24
<PAGE>
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 even with investments in technology to improve our service and
productivity. Profit margin rose to 29 percent for the nine months ended
September 30,1999, as compared to 22 percent for the corresponding period of
1998. As a percentage of sales, operating and development expenses decreased to
27 percent from 30 percent and sales and marketing expenses decreased to 44
percent from 49 percent.
MUTUAL FUND SERVICES
- --------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS DOLLAR PERCENT
1999 1998 CHANGE CHANGE
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Total revenues $80,843 $69,424 $11,419 16%
Expenses:
Operating and development 50,085 37,614 12,471 33%
Sales and marketing 12,860 11,470 1,390 12%
------- ------- -------
Total operating profits $17,898 $20,340 $(2,442) (12%)
======= ======= =======
</TABLE>
The increase in Mutual fund services revenues was fueled by growth in
proprietary fund balances. Average proprietary fund balances increased $44.4
billion or 47 percent to $139.4 billion for the first nine months of 1999 versus
$95.0 billion for the first nine months 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 late 1998. However, average basis points
earned decreased primarily due to fee concessions extended to existing clients
in exchange for longer-term contracts as well as a reduction in the range of our
services in the large bank market.
Although revenues increased 16 percent, operating profits decreased 12 percent.
Profit margin for the nine months ended September 30, 1999 decreased to 22
percent, as compared to 29 percent for the corresponding period in 1998. A
significant increase in operating and development expenses negatively affected
operating profits in the first nine months of 1999. As a percentage of sales,
operating and development expenses increased to 62 percent from 54 percent and
sales and marketing expenses decreased slightly to 16 percent from 17 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 offshore markets.
INVESTMENTS IN NEW BUSINESS
- ---------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS DOLLAR PERCENT
1999 1998 CHANGE CHANGE
-------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Total revenues $15,730 $ 9,490 $ 6,240 66%
Expenses:
Operating and development 9,891 5,224 4,667 89%
Sales and marketing 13,148 9,373 3,775 40%
------- ------- -------
Total operating losses $(7,309) $(5,107) $(2,202) (43%)
======= ======= =======
</TABLE>
25
<PAGE>
Revenues increased 66 percent primarily due to an increase in assets under
management from our offshore asset management businesses and various
acquisitions of investment advisory firms during the past 18 months. Our
Canadian and offshore asset management business accounted for 70 percent of
total segment revenues for the first nine months of 1999, as compared to 42
percent for the first nine months of 1998. The performance evaluation and
consulting business accounted for the remaining 30 percent for the nine months
ended September 30, 1999, as compared to 58 percent for the same period in 1998.
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 52 percent of total segment revenues for
the nine months ended September 30, 1999, as compared to 21 percent for the
corresponding period in 1998.
Operating results were affected by substantial investments made in foreign
markets. Our strategy will be on further penetrating markets within the
European and South African region through distribution arrangements and
continuing to integrate and grow our recently acquired businesses.
OTHER
- -----
General and administrative expenses decreased 11 percent to $9,134 for the nine
months ended September 30, 1999, as compared to $10,271 for the same period in
1998. As a percentage of total consolidated revenues, general and
administrative expenses were 3 percent for the first nine months of 1999, as
compared to 4 percent for the first nine months of 1998.
Other income on the accompanying Consolidated Statements of Income consist of
the following:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
1999 1998
-------------------- --------------------
<S> <C> <C>
Equity in the earnings of unconsolidated affiliate $ 4,904 $ 1,924
Interest income 1,443 1,074
Interest expense (1,763) (1,951)
------- -------
Total other income, net $ 4,584 $ 1,047
======= =======
</TABLE>
Equity in the earnings of unconsolidated affiliate on the accompanying
Consolidated Statements of Income includes our less than 50 percent ownership in
the general partnership of LSV Asset Management ("LSV") (See Note 4 of the Notes
to Consolidated Financial Statements). Our interest in LSV's net earnings was
$4,904 for the nine months ended September 30, 1999 and $1,924 for the
corresponding period in 1998. The increase in our portion of LSV's net earnings
was due to an increase in assets under management. Average assets under
management for LSV were $4.2 billion for the first nine months of 1999, as
compared to $2.3 billion for the first nine months of 1998.
Interest income for the nine months ended September 30,1999 was $1,443, as
compared to $1,074 for the same period in 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 nine months in 1999 was $1,763, as compared to
$1,951 for the first nine months in 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 nine months of 1999 than
in the first nine months of 1998.
26
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
<TABLE>
<CAPTION>
Nine Months
-----------------------------------------
Ended September 30,
-----------------------------------------
1999 1998
------------------- --------------------
<S> <C> <C>
Net cash provided by operating activities $ 59,624 $ 60,967
Net cash used in investing activities (18,702) (24,686)
Net cash used in financing activities (40,472) (27,526)
-------- --------
Net increase in cash and cash equivalents 450 8,755
Cash and cash equivalents, beginning of period 52,980 16,891
-------- --------
Cash and cash equivalents, end of period $ 53,430 $ 25,646
======== ========
</TABLE>
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 5 of the Notes to Consolidated Financial Statements).
At September 30, 1999, the unused sources of liquidity consisted of cash and
cash equivalents of $53,430 and the unused portion of the line of credit of
$50,000.
Cash flows from operations for the first nine months of 1999 and 1998 primarily
resulted from an increase in income and various accrued liabilities. In
addition, cash flows from operations for the first nine months of 1998 were
boosted by the sales of loans classified as Loans receivable available for sale
by our Swiss based subsidiary and the receipt of a significant buyout payment
relating to a bank client involved in an acquisition. The increase in various
accrued liabilities resulted from increased business activity during the past 18
months.
Cash flows from operations were also affected by receivables. Receivables from
regulated investment companies increased in the first nine months 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 nine months of 1999 and 1998 negatively 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. In addition, cash
flows from investing activities in the first nine months of 1999 included
certain costs associated with the Korean joint venture.
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
6 of the Notes to Consolidated Financial Statements). We continued our common
stock repurchase program. We purchased approximately 539,000 shares of our
common stock at a cost of $50.3 million during the first nine months of 1999.
As of October 31, 1999, we still had $3.8 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 nine months of
1999 and 1998 primarily due to increased stock option activity and the
substantial 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.
27
<PAGE>
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.
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.
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.
28
<PAGE>
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.) Reconfirm the TRUST 3000 product line as Year 2000 compliant.
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.
29
<PAGE>
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 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. 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.
30
<PAGE>
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 September 30, 1999.
31
<PAGE>
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 November 12, 1999 By /s/ Kathy Heilig
----------------------- ---------------------------------
Kathy Heilig
Vice President and Controller
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (IDENTIFY
SPECIFIC FINANCIAL STATEMENTS) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 53,430
<SECURITIES> 0
<RECEIVABLES> 38,677
<ALLOWANCES> (1,200)
<INVENTORY> 0
<CURRENT-ASSETS> 125,316
<PP&E> 133,237
<DEPRECIATION> (67,584)
<TOTAL-ASSETS> 230,979
<CURRENT-LIABILITIES> 119,941
<BONDS> 29,000
177
0
<COMMON> 0
<OTHER-SE> 72,886
<TOTAL-LIABILITY-AND-EQUITY> 230,979
<SALES> 0
<TOTAL-REVENUES> 333,139
<CGS> 0
<TOTAL-COSTS> 248,813
<OTHER-EXPENSES> 9,134
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,763
<INCOME-PRETAX> 79,776
<INCOME-TAX> 30,713
<INCOME-CONTINUING> 49,063
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 49,063
<EPS-BASIC> 2.76
<EPS-DILUTED> 2.58
</TABLE>
