<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, 2000 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 September 30, 2000: 53,331,949 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, 2000 December 31, 1999
------------------- -----------------
(unaudited)
<S> <C> <C>
Assets
------
Current assets:
Cash and cash equivalents $107,114 $ 73,206
Receivables from regulated investment companies 26,658 24,179
Receivables, net of allowance for doubtful
accounts of $1,700 55,969 33,554
Deferred income taxes 11,335 10,934
Prepaid expenses and other current assets 4,586 5,119
-------- --------
Total current assets 205,662 146,992
-------- --------
Property and equipment, net of accumulated
depreciation and amortization of $79,901
and $71,415 70,748 65,640
-------- --------
Capitalized software, net of accumulated
amortization of $11,272 and $9,838 13,284 15,626
-------- --------
Other assets, net 37,404 25,521
-------- --------
Total Assets $327,098 $253,779
======== ========
</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, 2000 December 31, 1999
------------------- -----------------
(unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,000 $ 2,000
Accounts payable 6,858 7,397
Accrued expenses 123,812 110,201
Deferred revenue 19,376 19,320
-------- --------
Total current liabilities 152,046 138,918
-------- --------
Long-term debt 27,000 29,000
-------- --------
Deferred income taxes 7,554 6,859
-------- --------
Shareholders' equity:
Common stock, $.01 par value, 100,000 shares
authorized; 53,332 and 17,692 shares issued
and outstanding 533 177
Capital in excess of par value 81,734 71,501
Retained earnings 58,738 7,373
Accumulated other comprehensive losses (507) (49)
-------- --------
Total shareholders' equity 140,498 79,002
-------- --------
Total Liabilities and Shareholders' Equity $327,098 $253,779
======== ========
</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,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Revenues $155,628 $117,199
Expenses:
Operating and development 72,147 52,577
Sales and marketing 38,064 34,383
General and administrative 4,312 3,004
-------- --------
Income from operations 41,105 27,235
Equity in the earnings of unconsolidated affiliate 1,853 1,625
Interest income 1,938 570
Interest expense (572) (585)
-------- --------
Income before income taxes 44,324 28,845
Income taxes 16,843 11,105
-------- --------
Net income 27,481 17,740
-------- --------
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments,
net of income tax expense (benefit) of $158 and $(168) 257 (269)
Unrealized holding losses on investments,
net of income tax (benefit) expense of $(362) and $75 (590) 120
-------- --------
Other comprehensive loss (333) (149)
-------- --------
Comprehensive income $ 27,148 $ 17,591
======== ========
Basic earnings per common share $ .52 $ .33
======== ========
Diluted earnings per common share $ .48 $ .31
======== ========
</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,
-----------------------
2000 1999
---- ----
<S> <C> <C>
Revenues $440,814 $333,139
Expenses:
Operating and development 207,593 156,744
Sales and marketing 115,243 92,069
General and administrative 12,097 9,134
-------- --------
Income from operations 105,881 75,192
Equity in the earnings of unconsolidated affiliate 5,363 4,904
Interest income 3,989 1,443
Interest expense (1,722) (1,763)
-------- --------
Income before income taxes 113,511 79,776
Income taxes 43,134 30,713
-------- --------
Net income 70,377 49,063
-------- --------
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments,
net of income tax expense (benefit) of $163 and $(69) 266 (110)
Unrealized holding losses on investments,
net of income tax benefit of $444 and $15 (724) 24
-------- --------
Other comprehensive loss (458) (86)
-------- --------
Comprehensive income $ 69,919 $ 48,977
======== ========
Basic earnings per common share $ 1.33 $ .92
======== ========
Diluted earnings per common share $ 1.24 $ .86
======== ========
</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,
-----------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 70,377 $ 49,063
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 12,793 11,568
Equity in the earnings of unconsolidated affiliate (5,363) (4,904)
Tax benefit on stock options exercised 5,040 11,362
Write-off of intangible assets 3,737 --
Other 4,619 2,236
Change in current assets and liabilities:
Decrease (increase) in
Receivables from regulated investment companies (2,479) (2,758)
Receivables (22,415) (9,558)
Prepaid expenses and other current assets 533 1,957
Increase (decrease) in
Accounts payable (539) (736)
Accrued expenses 17,149 11,620
Deferred revenue 56 1,136
-------- --------
Net cash provided by operating activities 83,508 70,986
-------- --------
Cash flows from investing activities:
Additions to property and equipment (18,822) (13,429)
Additions to capitalized software (449) (987)
Purchase of investments available for sale (14,863) (1,000)
Other 3,533 (3,286)
-------- --------
Net cash used in investing activities (30,601) (18,702)
-------- --------
Cash flows from financing activities:
Payment on long-term debt (2,000) (2,000)
Purchase and retirement of common stock (14,948) (50,312)
Proceeds from issuance of common stock 5,734 6,889
Payment of dividends (7,785) (6,411)
-------- --------
Net cash used in financing activities (18,999) (51,834)
-------- --------
Net increase in cash and cash equivalents 33,908 450
Cash and cash equivalents, beginning of period 73,206 52,980
-------- --------
Cash and cash equivalents, end of period $107,114 $ 53,430
======== ========
</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. 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 September 30, 2000, the results of operations
for the three and nine months ended September 30, 2000 and 1999, and
cash flows for the nine months ended September 30, 2000 and 1999.
Interim Financial Information
-----------------------------
While the Company believes that the disclosures presented are adequate
to make the information not misleading, these Consolidated Financial
Statements should be read in conjunction with the Consolidated
Financial Statements and the notes included in the Company's latest
annual report on Form 10-K.
Principles of Consolidation
---------------------------
The Consolidated Financial Statements include the accounts of the
Company and its wholly owned subsidiaries. The Company's principal
subsidiaries are SEI Investments Distribution Company, SEI Investments
Management Corporation, and SEI Trust Company. All intercompany
accounts and transactions have been eliminated. Investment in
unconsolidated affiliate is accounted for using the equity method due
to the Company's less than 50 percent ownership. The Company's portion
of the affiliate's operating results is reflected in Equity in the
earnings of unconsolidated affiliate on the accompanying Consolidated
Statements of Income.
Property and Equipment
----------------------
Property and equipment on the accompanying Consolidated Balance Sheets
consist of the following:
<TABLE>
<CAPTION>
Estimated
Useful Lives
September 30, 2000 December 31, 1999 (In Years)
------------------ ----------------- ----------
<S> <C> <C> <C>
Equipment $ 67,638,000 $ 62,437,000 3 to 5
Buildings 34,695,000 34,676,000 10 to 39
Land 9,096,000 7,686,000 N/A
Purchased software 14,829,000 13,302,000 3
Furniture and fixtures 14,176,000 12,554,000 3 to 5
Leasehold improvements 7,295,000 6,400,000 Lease Term
Construction in progress 2,920,000 -- N/A
------------ ------------
150,649,000 137,055,000
Less: Accumulated depreciation
and amortization (79,901,000) (71,415,000)
------------ ------------
Property and Equipment, net $ 70,748,000 $ 65,640,000
============ ============
</TABLE>
7
<PAGE>
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the
estimated useful life of each asset. Expenditures for renewals and
betterments are capitalized, while maintenance and repairs are charged
to expense when incurred.
Capitalized Software
--------------------
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to Be Sold, Leased, or Otherwise
Marketed" ("SFAS 86"). Under SFAS 86, costs incurred to create a
computer software product are charged to research and development
expense as incurred until technological feasibility has been
established. The Company establishes technological feasibility upon
completion of a detail program design. At that point, computer
software costs are capitalized until the product is available for
general release to customers. The establishment of technological
feasibility and the ongoing assessment of recoverability of
capitalized software development costs require considerable judgment
by management with respect to certain external factors, including, but
not limited to, anticipated future revenues, estimated economic life,
and changes in technology. Amortization begins when the product is
released. Capitalized software development costs are amortized on a
product-by-product basis using the straight-line method over the
estimated economic life of the product or enhancement, which is
primarily three to ten years, with a weighted average remaining life
of approximately 7.8 years.
Earnings per Share
------------------
The Company computes earnings per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). Pursuant to SFAS 128, dual presentation of basic
and diluted earnings per common share is required on the face of the
statements of income for companies with complex capital structures.
Basic earnings per common share is calculated by dividing net income
available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per common
share reflects the potential dilution from the exercise or conversion
of securities into common stock, such as stock options. All common
share figures have been restated to reflect the three-for-one stock
split in June 2000.
<TABLE>
<CAPTION>
For the Three-Month period ended
September 30, 2000
----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic earnings per common share $27,481,000 53,251,000 $ .52
=====
Dilutive effect of stock options -- 3,977,000
----------- ----------
Diluted earnings per common share $27,481,000 57,228,000 $ .48
=========== ========== =====
<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 53,289,000 $ .33
=====
Dilutive effect of stock options -- 3,327,000
----------- ----------
Diluted earnings per common share $17,740,000 56,616,000 $ .31
=========== ========== =====
</TABLE>
8
<PAGE>
Options to purchase 18,000 and 60,000 shares of common stock, with an
average exercise price per share of $69.56 and $32.42 were outstanding
during the third quarter of 2000 and 1999, 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.
<TABLE>
<CAPTION>
For the Nine-Month period ended
September 30, 2000
----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Basic earnings per common share $70,377,000 53,108,000 $1.33
=====
Dilutive effect of stock options -- 3,563,000
----------- ----------
Diluted earnings per common share $70,377,000 56,671,000 $1.24
=========== ========== =====
<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 53,352,000 $ .92
=====
Dilutive effect of stock options -- 3,741,000
----------- ----------
Diluted earnings per common share $49,063,000 57,093,000 $ .86
=========== ========== =====
</TABLE>
Options to purchase 18,000 shares of common stock, with an average
exercise price per share of $69.56 were outstanding during the first
nine months of 2000, but were excluded from the diluted earnings per
common share calculation because the options' exercise prices were
greater than the average market price of the Company's common stock.
All options outstanding during the first nine months of 1999 were
included in the diluted earnings per common share calculation.
Statements of Cash Flows
------------------------
For purposes of the Consolidated Statements of Cash Flows, the Company
considers investment instruments purchased with an original maturity
of three months or less to be cash equivalents.
Supplemental disclosures of cash paid/received during the nine months
ended September 30 is as follows:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Interest paid $ 2,207,000 $ 2,351,000
Interest and dividends received $ 3,762,000 $ 1,434,000
Income taxes paid $36,622,000 $17,944,000
</TABLE>
Management's Use of Estimates
-----------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
9
<PAGE>
Note 2. Sale of Fund Evaluation Services Business - On July 31, 2000, the
-----------------------------------------
Company entered into a definitive agreement to sell all the rights and
titles to its Canadian performance measurement business along with the
related assets of such business to Royal Trust Corporation of Canada
("Royal Trust"), a unit of Royal Bank of Canada. The performance
measurement business measured and evaluated investment portfolio
performance for defined benefit plan sponsors and investment managers
located in Canada. Under the terms of the agreement, the Company
received cash consideration, which was subject to adjustment at
closing. A transition plan is currently being implemented for
integrating the clients, affected employees and systems to Royal Trust
by the end of 2000. The Company recognized a minimal gain from the
sale in the third quarter 2000, which was immaterial.
Note 3. Comprehensive Income - The Company computes comprehensive income in
--------------------
accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and presentation of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements that is presented with equal
prominence as other financial statements. Comprehensive income
includes net income, foreign currency translation adjustments, and
unrealized holding gains and losses and is presented on the
accompanying Consolidated Statements of Income.
<TABLE>
<CAPTION>
Foreign Unrealized Accumulated
Currency Holding Other
Translation Gains(Losses) Comprehensive
Adjustments on Investments Losses
----------- -------------- ------
<S> <C> <C> <C>
Beginning balance $(469,000) $ 420,000 $ (49,000)
Current period change 266,000 (724,000) (458,000)
--------- --------- ---------
Ending Balance $(203,000) $(304,000) $(507,000)
========= ========= =========
</TABLE>
Note 4. Receivables - Receivables on the accompanying Consolidated Balance
-----------
Sheets consist of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Trade receivables $31,910,000 $16,339,000
Fees earned, not received 2,275,000 2,304,000
Fees earned, not billed 23,484,000 16,611,000
----------- -----------
57,669,000 35,254,000
Less: Allowance for doubtful accounts (1,700,000) (1,700,000)
----------- -----------
$55,969,000 $33,554,000
=========== ===========
</TABLE>
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.
10
<PAGE>
Note 5. Other Assets - Other assets on the accompanying Consolidated Balance
------------
Sheets consist of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31,1999
------------------------- -----------------------
<S> <C> <C>
Investments available for sale $21,072,000 $ 6,704,000
Investment in unconsolidated affiliate 5,204,000 5,305,000
Other, net 11,128,000 13,512,000
----------- -----------
Other assets $37,404,000 $25,521,000
=========== ===========
</TABLE>
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 September 30, 2000, Investments available for sale had an aggregate
cost of $21,469,000 and an aggregate market value of $21,072,000 with
gross unrealized losses of $397,000. At that date, the net unrealized
holding losses of $304,000 (net of income tax benefit of $93,000) were
reported as a separate component of Accumulated other comprehensive
losses on the accompanying Consolidated Balance Sheets.
At December 31, 1999, Investments available for sale had an aggregate
cost of $6,235,000 and an aggregate market value of $6,704,000 with
gross unrealized holding gains of $469,000. At that date, the net
unrealized holding gains of $420,000 (net of income tax expense of
$49,000) were reported as a separate component of Accumulated other
comprehensive losses on the accompanying Consolidated Balance Sheets.
Investment in Unconsolidated Affiliate - LSV Asset Management ("LSV") is
--------------------------------------
a partnership formed between the Company and three leading academics in
the field of finance. LSV is a registered investment advisor that
provides investment advisory services to institutions, including pension
plans and investment companies. LSV is currently the portfolio manager
for a number of Company-sponsored mutual funds. The Company's interest
in LSV for the first nine months in 2000 and 1999 was approximately 47
percent. LSV is accounted for using the equity method of accounting due
to the less than 50 percent ownership. The Company's portion of LSV's
net earnings is reflected in Equity in the earnings of unconsolidated
affiliate on the accompanying Consolidated Statements of Income.
The following table contains the Condensed Statements of Income of LSV
for the three months ended September 30:
2000 1999
---- ----
Revenues $5,853,000 $5,041,000
========== ==========
Net income $3,980,000 $3,457,000
========== ==========
11
<PAGE>
The following table contains the Condensed Statements of Income of LSV
for the nine months ended September 30:
2000 1999
---- ----
Revenues $16,532,000 $14,595,000
=========== ===========
Net income $11,527,000 $10,431,000
=========== ===========
The following table contains the Condensed Balance Sheets of LSV:
September 30, 2000 December 31, 1999
------------------ -----------------
Current assets $ 9,899,000 $9,459,000
Non-current assets 117,000 131,000
----------- ----------
Total assets $10,016,000 $9,590,000
=========== ==========
Current liabilities $ 1,293,000 $ 782,000
Partners' capital 8,723,000 8,808,000
----------- ----------
Total liabilities and
partners' capital $10,016,000 $9,590,000
=========== ==========
Note 6. Accrued Expenses - Accrued expenses on the accompanying Consolidated
----------------
Balance Sheets consist of the following:
September 30, 2000 December 31, 1999
------------------ -----------------
Accrued compensation $ 45,070,000 $ 39,846,000
Accrued proprietary fund services 14,044,000 11,562,000
Accrued corporate income taxes 10,841,000 9,801,000
Accrued consulting services 8,848,000 7,342,000
Other accrued expenses 45,009,000 41,650,000
------------ ------------
Total accrued expenses $123,812,000 $110,201,000
============ ============
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. Management believes
the agreement will be extended. The line of credit, when utilized,
accrues interest at the Prime rate or one and one-quarter percent above
the London Interbank Offered Rate. The Company is obligated to pay a
commitment fee equal to one-quarter of one percent per annum on the
average daily unused portion of the commitment. Certain covenants under
the Agreement require the Company to maintain specified levels of net
worth and place certain restrictions on investments. The Company had no
outstanding borrowings on its line of credit at September 30, 2000.
12
<PAGE>
Note 8. Long-term Debt - On February 24, 1997, the Company signed a Note
--------------
Purchase Agreement authorizing the issuance and sale of $20,000,000 of
7.20% Senior Notes, Series A, and $15,000,000 of 7.27% Senior Notes,
Series B, (collectively, the "Notes") in a private offering with
certain financial institutions. The Notes are unsecured with final
maturities ranging from 10 to 15 years. The proceeds from the Notes
were used to repay the outstanding balance on the Company's line of
credit at that date. The Note Purchase Agreement, as amended, contains
various covenants, including limitations on indebtedness, maintenance
of minimum net worth levels, and restrictions on certain investments.
In addition, the agreement limits the Company's ability to merge or
consolidate, and to sell certain assets. None of these covenants
negatively affect the Company's liquidity or capital resources.
Principal payments on the Notes are made annually from the date of
issuance while interest payments are made semi-annually. The Company
made its scheduled annual payment of $2,000,000 in February 2000. The
current portion of the Notes amounted to $2,000,000 at September 30,
2000. The carrying amount of the Company's long-term debt approximates
its fair value.
Note 9. Common Stock Buyback - The Board of Directors has authorized the
--------------------
purchase of the Company's common stock on the open market or through
private transactions of up to an aggregate of $403,365,000, including
an additional $50 million authorization in October 2000. Through
September 30, 2000, a total of 49,005,000 shares (adjusted for the
three for one-stock split) at an aggregate cost of $345,196,000 have
been purchased and retired. The Company purchased 432,000 shares at a
total cost of $14,948,000 during the nine month period ended September
30, 2000.
The Company immediately retires its common stock when purchased. Upon
retirement, the Company reduces Capital in excess of par value for the
average capital per share outstanding and the remainder is charged
against Retained earnings. If the Company reduces its Retained earnings
to zero, any subsequent purchases of common stock will be charged
entirely to Capital in excess of par value.
Note 10. Stock Split - On May 10, 2000, the Board of Directors declared a
-----------
three-for-one stock split of the Company's $.01 par value common stock,
effected in the form of a stock dividend which was paid on June 19,
2000 to shareholders of record as of June 5, 2000. A total of
35,400,000 additional shares of common stock were issued in connection
with the stock split. The par value of the common stock remains
unchanged. All references in the accompanying financial statements to
the number of shares of common stock, and per share amounts have been
restated to reflect the effect of the stock split.
Note 11. Dividend - On May 10, 2000, the Board of Directors declared a cash
--------
dividend of $.08 per share on the Company's common stock, which was
paid on June 19, 2000, to shareholders of record on June 5, 2000. The
dividend per share amounts above were adjusted to reflect the
three-for-one stock split paid on June 19, 2000.
Note 12. Segment Information - The Company defines its business segments in
-------------------
accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way public
business enterprises report financial information about operating
segments in financial statements. SFAS 131 also requires additional
disclosures about products and services, geographic areas, and major
customers.
13
<PAGE>
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 and nine months ended
September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Mutual Investments General
Technology Asset Fund In New And
Services Management Services Business Administrative Total
----------- ----------- ----------- ------------ --------------- ------------
For the Three-Month Period Ended September 30, 2000
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $57,564,000 $57,612,000 $31,740,000 $ 8,712,000 $155,628,000
----------- ----------- ----------- ----------- ------------
Operating
Income (loss) $20,516,000 $22,333,000 $ 7,758,000 $(5,190,000) $ (4,312,000) $ 41,105,000
----------- ----------- ----------- ----------- ------------
Other income, net $ 3,219,000
------------
Income before
Income taxes $ 44,324,000
------------
Depreciation and
Amortization $ 2,989,000 $ 588,000 $ 377,000 $ 320,000 $ 120,000 $ 4,394,000
----------- ----------- ----------- ----------- ------------ ------------
Capital
expenditures $ 4,666,000 $ 1,238,000 $ 508,000 $ 1,035,000 $ 915,000 $ 8,362,000
----------- ----------- ----------- ----------- ------------ ------------
<CAPTION>
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
----------- ----------- ----------- ----------- ----------- ------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Mutual Investments General
Technology Asset Fund In New And
Services Management Services Business Administrative Total
------------ ------------ ----------- ------------- --------------- -------------
For the Nine-Month Period Ended September 30, 2000
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $164,145,000 $156,629,000 $93,899,000 $ 26,141,000 $440,814,000
------------ ------------ ----------- ------------ ------------
Operating
income (loss) $ 59,444,000 $ 50,329,000 $19,481,000 $(11,276,000) $ (12,097,000) $105,881,000
------------ ------------ ----------- ------------ --------------
Other income, net $ 7,630,000
------------
Income before
income taxes $113,511,000
------------
Depreciation and
amortization $ 8,868,000 $ 1,656,000 $ 1,005,000 $ 887,000 $ 377,000 $ 12,793,000
------------ ------------ ----------- ------------ -------------- ------------
Capital
expenditures $ 11,369,000 $ 2,160,000 $ 1,900,000 $ 1,974,000 $ 1,419,000 $ 18,822,000
------------ ------------ ----------- ------------ -------------- ------------
<CAPTION>
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
------------ ----------- ----------- ----------- ----------- ------------
</TABLE>
15
<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 12 of the Notes to
Consolidated Financial Statements.
Results of Operations
---------------------
Third Quarter Ended September 30, 2000 Compared to Third Quarter Ended September
30, 1999
Consolidated Overview
<TABLE>
<CAPTION>
Income Statement Data
(In thousands, except per common share data) 3RD QTR 3RD QTR PERCENT
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Revenues:
Technology Services $ 57,564 $ 46,951 23%
Asset Management 57,612 36,105 60%
Mutual Fund Services 31,740 27,790 14%
Investments in New Business 8,712 6,353 37%
-------- --------
Total revenues $155,628 $117,199 33%
Operating Income (Loss):
Technology Services $ 20,516 $ 16,600 24%
Asset Management 22,333 10,236 118%
Mutual Fund Services 7,758 6,168 26%
Investments in New Business (5,190) (2,765) (88%)
General and Administrative (4,312) (3,004) (44%)
-------- --------
Income from operations 41,105 27,235 51%
Other income, net 3,219 1,610 100%
-------- --------
Income before income taxes 44,324 28,845 54%
Income taxes 16,843 11,105 52%
-------- --------
Net Income $ 27,481 $ 17,740 55%
======== ========
Diluted earnings per common share $ .48 $ .31 55%
======== ========
</TABLE>
During the third quarter of 2000, we experienced a substantial increase in
revenues and earnings in our primary business lines. We can attribute this
growth to two primary factors. First, the demand for our services are steadily
gaining market acceptance evidenced by the substantial increase in assets under
management and our ability to cross sell new services to our existing clients.
In addition, our outsourcing services are gaining momentum in new markets that
we have targeted within the past few years. Second, the growth we are currently
experiencing stems from the leverage that is built within our operations. We are
achieving economies of scale in most of our back-office and investment
management operations as well as having many shared technology development
projects. We anticipate the current growth experienced in revenues and earnings
can continue through the delivery of new products and services as well as
through the utilization of our current infrastructure to manage expenses across
a higher net incremental revenue base. However, continued consolidation in the
banking industry or a prolonged unfavorable change in the financial securities
markets could impede growth in revenues and earnings.
16
<PAGE>
<TABLE>
<CAPTION>
Asset Balances
(In millions)
As of September 30, PERCENT
-------------------
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Assets invested in equity and fixed income programs $ 51,798 $ 34,310 51%
Assets invested in liquidity funds 24,897 20,569 21%
-------- --------
Assets under management 76,695 54,879 40%
Client proprietary assets under administration 195,699 149,199 31%
-------- --------
Assets under management and administration $272,394 $204,078 33%
======== ========
</TABLE>
Assets under management consist of total assets invested in our equity and fixed
income investment programs and liquidity funds for which we provide management
services. Assets under management and administration consist of total assets for
which we provide management and administrative services, including client
proprietary fund balances for which we provide administration and/or
distribution services.
Technology Services
-------------------
Technology Services provides trust and investment operations outsourcing to
financial institutions with our TRUST 3000 product line. TRUST 3000 incorporates
a myriad of integrated products and sub-systems that provide complete trust and
investment accounting capabilities for financial institutions.
Trust operations outsourcing incorporates the TRUST 3000 product line within a
package of services that includes full operations, custody and securities
processing support. The client maintains only minimal support staff, while
virtually all processing work is handled by our employees. Oftentimes, the
client will also elect to outsource their investment management requirements,
where we provide investment products and distribution support.
<TABLE>
<CAPTION>
3RD QTR 3RD QTR DOLLAR PERCENT
2000 1999 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Revenues:
Trust technology services $51,081 $41,470 $ 9,611 23%
Trust operations outsourcing 6,483 5,481 1,002 18%
------- ------- -------
Total revenues 57,564 46,951 10,613 23%
Expenses:
Operating and development 29,057 22,020 7,037 32%
Sales and marketing 7,991 8,331 (340) (4%)
------- ------- -------
Total operating profits $20,516 $16,600 $ 3,916 24%
======= ======= =======
Profit margin 36% 35% -- --
</TABLE>
The increase in Trust Technology Services revenues is primarily attributable to
an increase in recurring processing fees. The conversion of new clients onto the
TRUST 3000 product line during the past year accounts for a significant portion
of the increase in recurring processing fees. In addition, the delivery of new
products has provided us with the opportunity to leverage additional recurring
revenues from our existing clients. As a result, recurring processing fees
increased $4.1 million or 17 percent. Another significant contributor to the
growth in revenues was an increase in brokerage services revenues associated
with securities trade execution activities by our TRUST 3000 clients. We expect
our recurring revenue base to increase through the delivery of new products and
services to our existing clients and the contracting of new clients for
processing services. However, consolidations among our banking clients continue
to be a major strategic issue facing this segment.
17
<PAGE>
Trust Operations Outsourcing revenues increased primarily due to growth in
investment management fees. We continue to evaluate new alternatives and
possible new markets for this business. We still believe that this business
provides an attractive alternative to any financial institution faced with the
task of building the necessary infrastructure to support the delivery of trust
services.
The increase in operating profits and profit margin were primarily due to the
increase in revenues previously discussed. In addition, our current
infrastructure enables us to manage expenses carefully across a higher net
incremental revenue base. Because we have been achieving real economy to scale
in our operational groups, we have continued to make significant investments in
the development of new products and the expansion of our services into possible
new markets without negatively affecting operating profits and profit margin. As
a percentage of sales, operating and development expenses increased to 50
percent from 47 percent and sales and marketing expenses decreased to 14 percent
from 18 percent.
Asset Management
----------------
Asset Management provides investment solutions through various investment
products and services distributed directly or through professional investment
advisors, financial planners, and other financial intermediaries to
institutional or high-net-worth markets. The primary products offered include
money market funds and diversified investment strategies and portfolios
delivered to these markets through mutual funds and other pooled vehicles.
<TABLE>
<CAPTION>
3RD QTR 3RD QTR DOLLAR PERCENT
2000 1999 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Revenues:
Investment management fees $52,728 $31,823 $20,905 66%
Liquidity management fees 4,884 4,282 602 14%
------- ------- -------
Total revenues 57,612 36,105 21,507 60%
Expenses:
Operating and development 15,071 9,415 5,656 60%
Sales and marketing 20,208 16,454 3,754 23%
------- ------- -------
Total operating profits $22,333 $10,236 $12,097 118%
======= ======= =======
Profit margin 39% 28% -- --
</TABLE>
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 $13.6 billion or 57 percent to $37.4 billion
for the third quarter of 2000, as compared to $23.8 billion for the third
quarter of 1999. In our investment advisory business, we continue to be
successful at recruiting new registered investment advisors. We have also been
working closely with our existing advisors to increase their asset-gathering
potential by growing their existing client base through the introduction of new
investment options and programs. Our Institutional asset management business
also experienced a significant increase in new business. We anticipate continued
growth in both these businesses through the establishment of new client
relationships and the delivery of new investment products and services. We also
believe that our diversified investment programs and services afford us the
ability to retain these assets.
18
<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 invested in our liquidity products increased to $5.3
billion for the third quarter of 2000, as compared to $4.3 billion for the third
quarter of 1999. The increase in assets under management was primarily due to
new sales of our cash sweep technology product. However, the increase in assets
under management was partially offset by a decrease in the average basis points
recognized.
Operating profits in Asset Management continues to grow at a significant pace
primarily through the generation of new business. As a percentage of sales,
operating and development expenses remained flat at 26 percent and sales and
marketing expenses decreased to 35 percent from 46 percent. With the increased
sales momentum in our investment advisory and institutional asset management
businesses and the delivery of new investment products and services, favorable
operating results are expected to continue in the near future. However, any
prolonged devaluation in the financial securities markets could negatively
affect future revenues and profits.
Mutual Fund Services
--------------------
The Mutual Fund Services segment provides administration and distribution
services to proprietary mutual funds created for banks, insurance firms, and
investment management companies. These services include fund administration and
accounting, legal services, shareholder recordkeeping, and marketing.
<TABLE>
<CAPTION>
3RD QTR 3RD QTR DOLLAR PERCENT
2000 1999 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Total revenues $31,740 $27,790 $3,950 14%
Expenses:
Operating and development 18,811 17,021 1,790 11%
Sales and marketing 5,171 4,601 570 12%
------- ------- ------
Total operating profits $ 7,758 $ 6,168 $1,590 26%
======= ======= ======
Profit margin 24% 22% -- --
</TABLE>
The increase in Mutual fund services revenues was fueled by growth in average
proprietary fund balances, which increased $42.7 billion to $194.4 billion for
the third quarter of 2000 versus $151.7 billion for the third quarter of 1999.
We are beginning to see the impact of our sales efforts in the non-bank
investment management and offshore markets as clients in these markets
constitute a larger portion of average proprietary fund balances. We have also
seen an increase in average proprietary fund balances from our bank clients.
However, total revenues were negatively affected by a decrease in average basis
points earned because of fee concessions granted in exchange for longer-term
contracts with a few large bank clients. We will continue to aggressively focus
our efforts on the non-bank investment management and offshore markets.
Initially, clients in these markets will not generate as much revenue as a large
bank complex would, but we believe that these will be continually growing
markets.
19
<PAGE>
The increase in operating profits and profit margin was due to revenue growth
exceeding the increase in expenses. Although we have made substantial
investments repositioning this product line as a result of market changes, the
timing of these investments can cause short-term swings in profit margins and
should be compared over a longer time period. The increase in expenses is the
result of continued investments in new technology that we believe will
differentiate and broaden our services in a highly competitive market and from
accelerating sales and marketing efforts targeting the non-bank investment
management and offshore markets. We will continue to make investments in
repositioning this segment. As a percentage of sales, operating and development
expenses remained flat at 62 percent while sales and marketing expenses
increased to 18 percent from 15 percent.
The market for traditional mutual fund services for banks is maturing and fewer
new bank proprietary mutual fund complexes are being established. Also, many of
the largest banks with well-established complexes have grown their mutual funds
to the point where they are less reliant on the services of an outsourcer. In
these markets, we are repositioning our services by emphasizing value-added
information and technology products. Also, we believe the non-bank investment
management and offshore markets hold the greatest growth potential for our
services in the upcoming years. We are currently positioning ourselves to
establish a significant presence in these markets. However, continued
consolidations in the banking industry or a significant and prolonged
unfavorable change in the financial securities markets could negatively affect
revenues and profits.
Investments in New Business
---------------------------
Investments in New Business consist primarily of our international asset
management initiatives and Canadian operations. Our international operations
incorporate various investment products and services to provide investment
solutions to institutional and high-net-worth investors outside North America.
Products being offered in Canada include investment advisory services.
<TABLE>
<CAPTION>
3RD QTR 3RD QTR DOLLAR PERCENT
2000 1999 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Total revenues $ 8,712 $ 6,353 $ 2,359 37%
Expenses:
Operating and development 9,208 4,121 5,087 123%
Sales and marketing 4,694 4,997 (303) (6%)
------- ------- -------
Total operating losses $(5,190) $(2,765) $(2,425) (88%)
======= ======= =======
Profit margin (60%) (44%) -- --
</TABLE>
The significant increase in revenues is due to an increase in assets under
management in our non-US asset management business. Our efforts are currently
focused on Europe/South Africa, Asia, and Latin America. We experienced
substantial revenue growth in the European/South African region because of
significant asset growth in the SEI-managed fund complex established in
association with Mediolanum S. p. A., which targets the Italian marketplace.
Average assets under management from our offshore enterprises were $4.1 billion
in the third quarter of 2000 versus $2.6 billion in the third quarter of 1999.
We also experienced a substantial increase in revenues in Canada as a result of
the generation of new sales of our asset management programs.
20
<PAGE>
Although the pace of global asset gathering and revenue recognition continued to
accelerate, we also accelerated the pace of our investment efforts, especially
in the European region. We recently opened a London office to address the United
Kingdom pension market and to create a platform for other planned European
initiatives. The joint venture with Credit Commercial de France ("CCF") was
completed in the third quarter of 2000. This joint venture, which is based in
Paris, brings our multi-manager capabilities to the French market and, through
CCF distribution channels, to selected markets outside France. We believe that
global expansion is an area of significant long-term growth for our firm. We
will continue to make significant investments in our global initiatives and
expect to incur losses throughout the remainder of the year and into 2001.
On July 31, 2000, we sold our Canadian performance measurement business along
with the related assets to Royal Trust Corporation of Canada, a unit of Royal
Bank of Canada. This decision to exit the performance measurement business
allows us to focus on our core asset management business in Canada.
Other
-----
General and administrative expenses increased 44 percent to $4,312 for the third
quarter in 2000, as compared to $3,004 for the third quarter in 1999. As a
percentage of total consolidated revenues, general and administrative expenses
were 3 percent for the third quarter in 2000 and 1999.
Other income on the accompanying Consolidated Statements of Income consist of
the following:
<TABLE>
<CAPTION>
3RD QTR 3RD QTR
2000 1999
---- ----
<S> <C> <C>
Equity in the earnings of unconsolidated affiliate $1,853 $1,625
Interest income 1,938 570
Interest expense (572) (585)
------ ------
Total other income, net $3,219 $1,610
====== ======
</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 5 of the Notes
to Consolidated Financial Statements). Our interest in LSV's net earnings was
$1,853 for the third quarter in 2000 and $1,625 for the third quarter in 1999.
Average assets under management for LSV increased $1.1 billion, or 21 percent,
to $6.4 billion for the third quarter of 2000, as compared to $5.3 billion for
the corresponding quarter in 1999.
Interest income for the third quarter in 2000 was $1,938, as compared to $570
for the third quarter in 1999. Interest income is earned based upon the amount
of cash that is invested daily and fluctuations in interest income recognized
for one period in relation to another is due to changes in the average cash
balance invested for the period.
Interest expense for the third quarter in 2000 was $572, as compared to $585 for
the third quarter in 1999. Interest expense primarily relates to our long-term
debt.
21
<PAGE>
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Consolidated Overview
<TABLE>
<CAPTION>
Income Statement Data
(In thousands, except per common share data) NINE MONTHS NINE MONTHS PERCENT
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Revenues:
Technology Services $164,145 $140,010 17%
Asset Management 156,629 96,556 62%
Mutual Fund Services 93,899 80,843 16%
Investments in New Business 26,141 15,730 66%
-------- --------
Total revenues $440,814 $333,139 32%
Operating Income (Loss):
Technology Services $ 59,444 $ 45,582 30%
Asset Management 50,329 28,155 79%
Mutual Fund Services 19,481 17,898 9%
Investments in New Business (11,276) (7,309) (54%)
General and Administrative (12,097) (9,134) (32%)
-------- --------
Income from operations 105,881 75,192 41%
Other income, net 7,630 4,584 66%
-------- --------
Income before income taxes 113,511 79,776 42%
Income taxes 43,134 30,713 40%
-------- --------
Net Income $ 70,377 $ 49,063 43%
======== ========
Diluted earnings per common share $ 1.24 $ .86 44%
======== ========
</TABLE>
Revenues and earnings increased in the nine months ended September 30, 2000
primarily from new business generated in Technology Services and Asset
Management. Technology Services operating results reflect increases in recurring
processing fees generated from new clients and the delivery of new products to
our existing clients. In addition, our current infrastructure enables us to
leverage expenses over a higher net incremental revenue base. Operating results
in Asset Management were boosted by significant increases in assets under
management from new and existing clients in our investment advisory and
institutional asset management businesses.
22
<PAGE>
Technology Services
-------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS DOLLAR PERCENT
2000 1999 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Revenues:
Trust technology services $146,728 $124,409 $22,319 18%
Trust operations outsourcing 17,417 15,601 1,816 12%
-------- -------- -------
Total revenues 164,145 140,010 24,135 17%
Expenses:
Operating and development 80,325 70,775 9,550 13%
Sales and marketing 24,376 23,653 723 3%
-------- -------- -------
Total operating profits $ 59,444 $ 45,582 $13,862 30%
======== ======== =======
Profit margin 36% 33% -- --
</TABLE>
The increase in Trust Technology Services revenues is primarily attributable to
an increase in recurring processing fees. The conversion of new clients onto the
TRUST 3000 product line during the past year accounts for a significant portion
of the increase in recurring processing fees. In addition, the delivery of new
products has provided us with the opportunity to generate additional recurring
revenues from our existing clients. Another significant contributor to the
growth in revenues was an increase in brokerage services revenues associated
with securities trade execution activities by our TRUST 3000 clients.
Operating profits and profit margin for Technology Services increased
substantially in the nine months ended September 30, 2000. The increase in
operating profits and profit margin were primarily due to the increase in
revenues previously discussed. In addition, our current infrastructure enables
us to manage expenses carefully across the higher net incremental revenue base.
This has allowed for continued investments in the development of new products
without negatively affecting operating profits and profit margin. As a
percentage of sales, operating and development expenses decreased to 49 percent
from 50 percent and sales and marketing expenses decreased to 15 percent from 17
percent.
Asset Management
----------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS DOLLAR PERCENT
2000 1999 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Revenues:
Investment management fees $142,192 $83,260 $58,932 71%
Liquidity management fees 14,437 13,296 1,141 9%
-------- ------- -------
Total revenues 156,629 96,556 60,073 62%
Expenses:
Operating and development 46,003 25,993 20,010 77%
Sales and marketing 60,297 42,408 17,889 42%
-------- ------- -------
Total operating profits $ 50,329 $28,155 $22,174 79%
======== ======= =======
Profit margin 32% 29% -- --
</TABLE>
23
<PAGE>
The increase in Investment Management Fees was primarily due to significant
growth in assets under management generated through new business in both our
investment advisory and institutional asset management businesses and an
increase in the average basis points recognized. In our investment advisory
business, we continue to be successful at recruiting new registered investment
advisors. We have also been working closely with our existing advisors to
increase their asset-gathering potential by growing their existing client base
through the introduction of new investment options and programs. Our
Institutional asset management business also experienced an increase in new
business. During the first nine months of 2000, we have asset commitments that
have exceeded total asset commitments for all of 1999.
The increase in Liquidity Management Fees was due to an increase in assets under
management invested in our liquidity funds from institutional clients. The
increase in assets under management was primarily due to new sales of our cash
sweep technology product. However, the increase in assets under management was
partially offset by a decrease in the average basis points recognized.
Operating profits in Asset Management continues to grow at a significant pace
primarily through the generation of new business. As a percentage of sales,
operating and development expenses increased to 29 percent from 27 percent and
sales and marketing expenses decreased to 39 percent from 44 percent. Our
ability to leverage on our infrastructure allowed us to control variable
operating costs and thereby increase the pace of investments in the development
of new products.
Mutual Fund Services
--------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS DOLLAR PERCENT
2000 1999 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Total revenues $93,899 $80,843 $13,056 16%
Expenses:
Operating and development 57,917 50,085 7,832 16%
Sales and marketing 16,501 12,860 3,641 28%
------- ------- -------
Total operating profits $19,481 $17,898 $ 1,583 9%
======= ======= =======
Profit margin 21% 22% -- --
</TABLE>
The increase in Mutual fund services revenues was fueled by growth in average
proprietary fund balances. We are beginning to see the impact of our sales
efforts in the non-bank investment management and offshore markets as clients in
these markets constitute a larger portion of average proprietary fund balances.
We have also seen an increase in average proprietary fund balances from our bank
clients. However, total revenues were negatively affected by a decrease in
average basis points earned because of fee concessions granted in exchange for
longer-term contracts with a few large bank clients.
Although revenues increased 16 percent, operating profits only reported a 9
percent increase in the first nine months of 2000. We have made substantial
investments repositioning this product line during the past nine months as a
result of market changes. We have accelerated our sales and marketing efforts
in the non-bank investment management and offshore markets. We have developed
and continue to develop new technology that we believe will differentiate and
broaden our services in a highly competitive market. As a percentage of sales,
operating and development expenses remained flat at 62 percent while sales and
marketing expenses increased slightly to 17 percent from 16 percent.
24
<PAGE>
Investments in New Business
---------------------------
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS DOLLAR PERCENT
2000 1999 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Total revenues $ 26,141 $15,730 $10,411 66%
Expenses:
Operating and development 23,348 9,891 13,457 136%
Sales and marketing 14,069 13,148 921 7%
-------- ------- -------
Total operating losses $(11,276) $(7,309) $(3,967) (54%)
======== ======= =======
Profit margin (43%) (46%) -- --
</TABLE>
The significant increase in revenues is due to an increase in assets under
management in our non-US asset management business. Our efforts are currently
focused on Europe/South Africa, Asia, and Latin America. In the European/South
African region, we experienced substantial asset growth in the SEI-managed fund
complex established in association with Mediolanum S. p. A., which targets the
Italian marketplace. Our Korean joint venture accounts for all revenue growth in
the Asian region.
Although the pace of global asset gathering and revenue recognition continued to
accelerate, we also accelerated the pace of our investment efforts, especially
in the European region. We recently opened a London office to address the United
Kingdom pension market and to create a platform for other planned European
initiatives. We also completed the joint venture with Credit Commercial de
France ("CCF"). This joint venture, which is based in Paris, brings our multi-
manager capabilities to the French market and, through CCF distribution
channels, to selected markets outside France.
Other
-----
General and administrative expenses increased 32 percent to $12,097 for the
third quarter in 2000, as compared to $9,134 for the third quarter in 1999. As a
percentage of total consolidated revenues, general and administrative expenses
were 3 percent for the nine months ended September 30, 2000 and September 30,
1999.
Other income on the accompanying Consolidated Statements of Income consist of
the following:
<TABLE>
<CAPTION>
NINE NINE
MONTHS MONTHS
2000 1999
---- ----
<S> <C> <C>
Equity in the earnings of unconsolidated affiliate $ 5,363 $ 4,904
Interest income 3,989 1,443
Interest expense (1,722) (1,763)
------- -------
Total other income, net $ 7,630 $ 4,584
======= =======
</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 5 of the Notes
to Consolidated Financial Statements). Our interest in LSV's net earnings was
$5,363 for the nine months ended September 30, 2000 and $4,904 for the nine
months ended September 30, 1999. The increase in LSV's net earnings is due to an
increase in assets under management.
25
<PAGE>
Interest income for the nine months ended September 30, 2000 was $3,989, as
compared to $1,443 for the nine months ended September 30, 1999. Interest income
is earned based upon the amount of cash that is invested daily and fluctuations
in interest income recognized for one period in relation to another is due to
changes in the average cash balance invested for the period.
Interest expense for the nine months ended September 30, 2000 was $1,722, as
compared to $1,763 for the nine months ended September 30, 1999. Interest
expense primarily relates to our long-term debt.
26
<PAGE>
Liquidity and Capital Resources
-------------------------------
<TABLE>
<CAPTION>
Nine Months
-----------------------------------
Ended September 30,
-----------------------------------
2000 1999
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 83,508 $ 70,986
Net cash used in investing activities (30,601) (18,702)
Net cash used in financing activities (18,999) (51,834)
-------- --------
Net increase in cash and cash equivalents 33,908 450
Cash and cash equivalents, beginning of period 73,206 52,980
-------- --------
Cash and cash equivalents, end of period $107,114 $ 53,430
======== ========
</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 $50.0 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 September 30, 2000, the unused sources of liquidity consisted of cash and
cash equivalents of $107.1 million and the unused portion of the line of credit
of $50.0 million.
An increase in income, accrued annual compensation payments, and changes in
various accrued expenses primarily affected cash flows from operations for the
first nine months of 2000 and 1999. Annual compensation and bonus payments are
accrued throughout the year and are paid in the first quarter of the following
year. Also, an increase in various accrued expenses positively affected cash
flows from operations in the first nine months of 2000.
Cash flows from operations were also affected by receivables. Receivables from
regulated investment companies increased in the first nine months of 2000 and
1999 primarily due to an increase in assets under management. These balances are
paid off in the following month. In addition, an increase in trade receivables
in the first nine months of 2000 and 1999 negatively affected cash flows from
operations.
Cash flows from investing activities are principally affected by capital
expenditures, including capitalized software development costs. Capital
expenditures in the first nine months of 2000 primarily related to purchases of
equipment and furniture associated with the rise in our headcount due to
increased new business. However, capital expenditures in the first nine months
of 1999 included significant costs associated with the expansion of our
corporate campus. Additionally, we have approved plans to further expand our
corporate campus in order to accommodate the additional personnel employed as a
result of increased interest in our products. This project should be completed
in late 2001 at an estimated cost of $20.0 million. In the second quarter of
2000, we initiated the startup of a new Company-sponsored investment product, an
Insurance Products trust, in which we invested approximately $16.0 million. We
expect these funds will remain invested until at least early 2001.
Cash flows from financing activities are primarily affected by debt and equity
transactions. Principal payments on our long-term debt are made annually from
the date of issuance while interest payments are made semi-annually. Principal
payments were made in the first quarter of 2000 and 1999 (See Note 8 of the
Notes to Consolidated Financial Statements). We continued our common stock
repurchase program. We purchased approximately 432,000 shares (adjusted for the
three-for-one stock split) of our common stock at a cost of $14.9 million during
the first nine months of 2000. As of October 31, 2000, we still had $53.1
million remaining authorized for the purchase of our common stock. Cash
dividends of $.15 per share were paid in the first nine months of 2000 and $.12
in the first nine months of 1999.
Our operating cash flow, borrowing capacity, and liquidity should provide
adequate funds for continuing operations, continued investment in new products
and equipment, our common stock repurchase program, expansion of our corporate
campus, future dividend payments, and principal and interest payments on our
long-term debt.
27
<PAGE>
Forward-Looking Information
---------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained in this discussion
is or may be considered forward-looking. Forward-looking statements relate to
future operations, strategies, financial results or other developments. Forward-
looking statements are based upon estimates and assumptions that involve certain
risks and uncertainties, many of which are beyond our control or are subject to
change. Although we believe our assumptions are reasonable, they could be
inaccurate. Our actual future revenues and income could differ materially from
our expected results. We have no obligation to publicly update or revise any
forward-looking statements.
Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
We currently have several offices located outside the United States that conduct
business in the local currencies of that country. We do not use foreign currency
exchange contracts or other types of derivative financial investments to hedge
local currency cash flows. All foreign operations aggregate approximately 7
percent of total consolidated revenues. Due to this limited activity, we do not
expect any material loss with respect to foreign currency risk.
Exposure to market risk for changes in interest rates relate primarily to our
investment portfolio and long-term debt. Currently, we do not invest in
derivative financial instruments. We do not undertake any specific actions to
cover our exposure to interest rate risk and are not a party to any interest
rate risk management transactions. We place our investments in financial
instruments that meet high credit quality standards. We are adverse to principal
loss and ensure the safety and preservation of our invested funds by limiting
default risk, market risk, and reinvestment risk. The interest rate on our long-
term debt is fixed and is not traded on any established market. We have no cash
flow exposure due to rate changes for our long-term debt.
28
<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.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the
quarter ended September 30, 2000.
29
<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 13, 2000 By /s/ Kathy Heilig
------------------------- ----------------------------
Kathy Heilig
Vice President and Controller
30
