SEI Investments Co (SEIC) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Your conference will begin momentarily. Please continue to hold. Ladies and gentlemen, thank you for standing by. Welcome to SEI investments third quarter 2002 earnings conference call. At this time all phone participants are in a listen only mode. Later there will be an opportunity for your questions with instructions given at that time. If you should require assistance during this call, please press zero followed by the star key. As a reminder, today's conference is being recorded. I would now like to turn the conference over to chairman and chief executive officer Alfred P. West. Please go ahead, sir.

Welcome, everybody, and good afternoon. Here with me are all of our segment leaders as well as Kathy Heilig, SEI's controller. Now I'm going to start by capping the third quart of 2002 as the company as a whole. Then I'll turn it over to each segment of the business leaders to comment on the results of their segment. As usual, we will field questions at the end of each segment report. And then finally, after all the segments have reported, we will turn it over to Kathy who will give us some important company wide statistics.

Now, third quarter earnings grew 12 percent from a year ago on a revenue shortfall of 6 percent. Now, our diluted earnings per share of 32 cents represents a 14 percent growth from the second quarter a year ago and a slight increase over the 31 cents that we reported in second quarter of 2002. Now, please note, that the results of the 32 cents was aided by a smaller number of shares outstanding. Mostly that was created or caused by our ongoing stock by buy back program. We purchased 2.3 million shares in the third quarter at an average price of $20 -- $25.85 and then we have purchased 3.7 million shares since the beginning of the year at an average price of $27.80.

Now, other than that, SEI's situation appears to have changed to not have changed substantially over the last quarter. Times certainly remain challenging, to say the least. A portfolio invested 60/ 40 in equities and fixed income which is our typical portfolio we manage for our clients has dropped approximately 14 percent from the first quarter from the first of the year through this the third quarter. Of that drop, 10 percent occurred in the third quarter. Now, these market effects have eroded our noncash assets to the tune of $8.5 billion since the beginning of the year. Now, this large market decline directly reduces the revenue we generate from our businesses which receive asset based fees. Now, despite this in the general how are of sentiment of investors and business people which adversely affects the buying decisions of our clients and their customers, we have grown underneath the gloomy veneer. Call me crazy, but I feel good about the last quarter even though it was the worst that the market has dealt us. I think the most heartening thing, we see for the first time a light at the end of the tunnel. Things are slowly getting back to normal with many of our clients. Plus, even in these bad times, we continue to grow earnings. All of our business -- all of our businesses experienced some growth in the quarter and some of them grew faster than what the market took away so they reported positive net growth and profits. And throughout the company, we have aggressively controlled costs and improved productivity.

Please note, that on our cost containment efforts they have been aided by our incentive compensation structure. Sales commission and non-sales bonus payments are a large portion of our payroll costs. And in times like these, a slow economic downturn.

All in, our operating margins improved again to 38% from 32% a year ago. Let me assure you, that our control of costs has not impeded our investments in the future. We have tried to better focus our investments. During these times, we our shifting our priorities and focusing on our investments. Our primary investments are aimed at improving our client's business results and growing our revenues and profits. Now, all of our investments are by design leverageable across multiple markets and our critical ones are as follows: we have five.

First, we're investing in a straight through processing platform designed to streamline investment processing for our clients as well as our own trust company. Now, this investment will help our future growth by providing large new sources of revenue. Robert Crudup will elaborate what this means to the private banking segment.

Our second investment is a front end desktop system for any intermediaries to enhance them or their customer's experience and to streamline transactions processes. This will make us more competitive in all our intermediary distribution businesses.

Our third investment is the creation of new outsourcing business solutions to expand our business with our intermediary clients. This investment will provide us with new services to sale and new sources of revenue in both the private banking and the advisor segments.

Our fourth investment is expanding our asset management business solutions worldwide. Now, our European and Canadian markets are an example of this investment and Carl Guarino will update you on their progress.

And finally, our fifth investment which is creating business solutions for money managers and alternative investment managers, it is also creating a new sources of revenue for us.

Now, like I did last quarter, I would like to footnote that the first investment, and that investment is the one we're making the straight through processing platform. There is a lot of talk in the securities industry about straight through processing and settlements on trade day plus one. They're talking about stream ling the process from the trader through to the street. Our street through processing is defined differently. We define it as the process from the client through the administrator or advisor through to the trader to the street. The efficiencies and quality improvement available by streamlining this, the end process which is available from what the industry is considering. Now, please understand, we can implement our straight through processing regardless what the industry advocates or undertakes. Plus, I can't emphasize if you enough, our straight through processing initiative will provide us with large new revenue sources from current clients.

Now, as far as looking ahead, as we look to the very near future, we see growth in sales in all our businesses but are expecting the market to continue to work against us. Consequently, we know that profit improvement will have to continue to be eeked out of cost containment and further productivity and believe me, we're working very hard on that.

Now, as we look a little further out, nearly all our sales pipelines are very strong and we know it is just a matter of time before clients freeze their decision and as I mentioned, we are seeing some of that taking place already.

In the longer run, we remain very optimistic. Tough market collide pants such as climates make our outsourcing business solutions even more appropriate. In addition, the investments we are making as well as the significant progress we have made to date in extreme lining our operations will assure we exit these dole drums stronger than ever. Also remain bullish because the fundamentals of our business. The recurring nature of our revenues, our strong cash flow, the strong and growing market acceptance of outsourced business solutions, inherent leverage in our operations and the diversity of the portfolio businesses we're creating, all will serve us well in any future business climate. As a footnote to this, our cash flow from operations during the first three-quarters of the year total $128 million and has allowed us to comfortably buy back our stock.

Finally, it is not something we usually talk about but these unique times make it most important. We have a very clean balance sheet and ultraconservative accounting as always. That concludes my remarks. I'm going to like to move it to the segments now and we'll report our segments in our normal order and we'll start with private banking and trust. I'm going to turn it over to Robert Crudup to discuss the results in this segment. Bob.

Thanks, Al, and good afternoon everyone. Let's start reviewing the financial by comparing this quarter to q3 last year. Our revenues were 80-point five million and profits were 34.3 million. These were down 9.7 percent and 8.7 percent respectively. Let's look at more detail by-product line. First looking at investment processing, total revenues remained flat versus last year at about $57 million. As you know, this revenue is made up of both recurring and onetime revenues. Our onetime implementation fees have been significantly negatively affected by the slow down in new deal flow and a lack of bank acquisitions. This resulted in one time revenues being decreased by about 50 percent. As an indicator of underlying business growth, the increase in recurring revenues off set the impact of the one time losses.

Now, let's talk about fund processing. Versus last year, the Q3 revenues dropped from 21.4 to 13.4 million. The revenue loss of 8 million explains most of the private banking and trust segments revenue decrease. This loss is attributed to business loss last year. As explained before, those losses were due mostly to two large clients being acquired. Next moving to investment management: Revenues were down very slightly but nonliquidity balances were up. This was insignificant except to say that sales of the new fall (ph) fund bank market were able to outrun market losses.

Moving on to our progress with straight through processing, and I want to be very clear about this, straight through processing is very important to our clients. Also, the electronic trading that we will deliver along with straight through processing will be very important to our revenue growth over the next two years. Let me explain: Why is straight through processing important to our clients? It's very simple. Straight through processing will eliminate both the paper and human intervention required today to trade ands settle securities.

There are three major benefits to our clients: First, the clients will reap significant reduction in operational cost; second, the accuracy of client reports and statements will improve because processing mistakes will go to practically zero. This is very important as clients start to depend on Internet access for account information; finally, the financial risk of incorrect trade orders and incorrect executions will be apparent immediately. And then quickly corrected. That will protect our clients from the financial risk of trading errors.

Now, why is STP important to SEI? First, our trust company will enjoy the same operational advantages and dramatically affect our costs. Second, we will provide seamless trade execution tools that we believe most of our clients will use. These trade execution platforms will generate new transaction and brokerage fees for SEI. With almost 1.2 million investor accounts processed on trust 3000, this represents a huge revenue opportunity.

We first started talking with you about electronic trading at the June investor conference. We've enjoyed progress in a number of areas so let me give you an update. First concerning equity trading, I'm sure most of you saw the press release regarding our partnership with UNX. I'm pleased to announce that 26 clients have implemented the UNX equity trading engine. This is a system that executes trades without human intervention. Clients set a maximum trade size, we suggest 20,000 shares, and the system sweeps several DCN's for available liquidity.

There are 3 benefits to our customers. First it goes from the portfolio managers desk directly to the market for electronic execution. The notice of the execution from the broker is moved back to trust 3000 with no human intervention. Second, this allows a trader to focus on larger and more important trades and, finally, the UNX trading system provides a lower price compared to a dot execution. This ensures not only good value for the investor but a compliance advantage for our customers. SEI will earn transaction fees for this service.

Now, moving on to fixed income trading, I'm happy to announce a partnership with Bob's Direct a firm we have created with Jefferies'. This new solution will provide straight through processing. We will begin installing phase one for our clients early next year. This is a very innovative offering that will provide important benefits to our clients. SEI will share in the spread on the transaction.

The other offering we mentioned in June was a mutual fund trading desk. This is perhaps the most exciting new strategy. Our product, mutual fund desk, will allow our customers to outsource one of the back offices most challenge areas, mutual fund processing. SEI private trust company will provide outsourced mutual fund processing solutions for our clients. I'm happy to announce that we have entered an agreement with Charles Scwaub to clear mutual funds for our clients through Schwaub's mutual clearing platform. This will be a straight through processing facility that will enable Schwarub's clearinghouse platform and our trust system. We generate revenues both from transaction processing and basis point fees. We expect to install our first customer next year. As you can see, we have made a lot of progress on FTP and on electronic trading in the last 90 days.

As Al said, we did see an increase in new business this quarter. In the regional community bank segment we closed four new investment processing clients and one new fund processing client. We recontracted six important customers and signed four more selling agreements for the separately managed account program. Our new recurring revenue added this quarter is $2.7 million. In an assignment our Advent partnership is starting to gain customer acceptance. Two more banks contracted with us for the Advent portfolio management workstation bringing total clients for that solution to four. Finally, the market acceptance of our solutions remain strong. The very early response to our electronic trading solution has been outstanding and the business climate remains difficult, but the pipeline is good. I'll be happy to answer your questions.

Ladies and gentlemen, if you wish to ask a question, please press the one on your touch tone phone. You will hear a toTim indicating you have been placed in the queue. You may remove yourself from the queue at any time by pressing the pound key. Once again if you have a question, please press the one. We have a question from Peter Heckman. Please go ahead

Hi, Bob. Could you go over what you had talked about on the -- when you brought up the pieces of private banking and trust. I missed the part on the kind of a delta in the Administration business for the period.

Yeah, for the mutual fund processing business?

Yeah.

Yes. That business is down versus Q3 last year. $8 million in revenue.

Okay. And that is primarily in effect of the two bank mergers?

That's correct

Okay, great. And then, let's see, in the period, I guess even though revenues were a little bit less than what I was looking for but margins were quite good, it looked like you were able to decrease the operating margins or, I'm sorry, the operating expenses by about 14 percent. Is there anything going on there in terms of -- where are the cost cuts coming from? I would assume a portion of those cuts are coming from, again, the creasing the Administration for those two large bank Administration clients, but where are some of the other cost cuts coming from?

Yeah, they're really coming from the same places that we had been talking about. We're enjoying some productivity increases in our all rating environments here that we're working very hard on. We do tie compensation for sales people and all the people in the company to our success so we've got some compensation savings. And something that we've gotten very good at over the last couple of years is leveraging our investments across all of our market segments. So if we're going to go build a new workstation, we take investments from all segments. That is paid off for us.

Okay. And then maybe a second question is, I think you had covered some of this earlier. There was a recent decent sized merger of or a pending merger with All First. Could you just -- we talked about that very briefly when the transaction was announced. Could you just comment on, are -- is there any M and A activity going on in your customer basis that you think either represents material opportunities or threats for the, let's say, the next nine months?

The only one that we're aware of being announced so far is the M and T All first merge. They both use our investment processing solution in an ASP environment so we'll have an opportunity to help them merge those businesses over the next 12 months.

Okay. And then if I remember correctly, All first is currently a funding Administration client and M and T is not so that

No, Allfirst is not a funded Administration client.

Oh, it is not?

It is not.

Okay. And neither is M and T?

No.

Then that clears that up. Thank you.

You're welcome.

Let me go to the line of Tim Willy with AG Edwards. Go ahead

Good afternoon, . Two questions, one is you mentioned I want to make sure I have my numbers correct,four newspaper investment processing clients that are banks and then one new mutual fund customer; is that correct?

That is correct

Okay. Could you talk a bit about the operations outsourcing pipelines and I guess the tone of business in your selling efforts within the regional and community banks for that product and did you sign any customers on that platform this quarter?

Robert Crudup Yes. If you look at the -- it is a new clients that we brought in. Three of them were full back office outsourcing an the other one was an ASP. If you look back at the full back office outsourcing pipeline, it remains very strong. As you know in this economic environment that we're in, an outsourcing solution usually will bring benefit to the client. So we've --our conversations continued to move forward there. And I was, you know, pleased to see some transactions come across the board this quarter.

I think you said previously that your biggest customer in the outsourcing business in the bank world I think is a bank with about 10 to $14 billion in assets. Do any of these three new customers come close to that range or would you call them more on the smaller end of he scale in bank terms?

No, they're more on the smaller end of the scale.

Okay.

We do have prospects in our pipeline that are, you know, up toward the larger end

Okay. Great. Thanks a lot.

Go to the line with Glen Greene with Sync Equity Partners, please go ahead

Thank you. A couple of questions, , I want to know where we stand from the client losses from late last year. When you have the $8 million revenue impact this quarter, is there one more quarter to go or how should we think about that?

Yeah. By the end of next quarter we will have absorbed those losses

Does that mean there is an $8 million over your head relative to last quarter?

I don't -- I note that it -- you know, I don't think it broke cleanly from quarter to quarter but I don't have that number in front of me. I do know that the total lost business was about 30 million in revenue. We really absorbed that over pretty much over five quarters with this fourth quarter being the last.

Okay.

There is also, Glenn, some market impact in that business as you know that is also depressed the revenues there a bit.

Okay. Are there any other client losses that you're aware of or perhaps on the Horizon that we might be thinking about?

No.

Good.

And then I was just trying to understand, the mutual fund trade clearing business that you talked about, the relationship with Schwab, does that compete with anyone? I'm trying to understand what the service is and how it relates to -- is it anything similar to what DST does or VISUS does? I'm having trouble understanding what it is exactly.

Well, if you look at our client base, and the private bank and trust clients that use our trust processing system, all of them have mutual fund operations. And our strategy here is to displace their operations with our technology and then actually settle and clear those trades in their behalf, collect income, do position reconciliation so they will, in effect, be outsourcing that operation to us and we will charge them a transaction processing fees and earn in some cases basis point fees from the fund companies and if you look at our client base, there is no one in our market offering that solution to our clients.

Okay. Sounds interesting. Thanks.

Go to the line of Brad Moore with Putnam Lovell.

Good morning. A couple of things. I said you said 2.7 million in revenue added. Can you repeat, is that annualized revenue and does that include new and existing clients and how much of that was recognized in the September quarter?

That is $2.7 million in new annualized recurring revenue. It came from the new business that was sold that will be converted early next year and it came from cross --sell of services to current clients and most of those cross sells require small implementation. So we'll be recognizing those revenues. They will start to kick in over the next eight months.

Okay.

There will be also someone time fees associated with that, Brad. I don't have that number in front of me.

Okay.

They're relatively small.

All right. And with regard to pricing then margins on this new business, what -- how would you characterize -- how would you characterize it relative to your recent historic performance?

With the new names we signed?

Yes, The new investment processing and fund processing bonds

It will definitely fall in line. Ever newly client brings more scale to us.

Okay. Could you be more -- just a little bit more specific just in terms of, you talked about some of these all rating costs improvements and I guess I wonder if you could site some examples of where you took measures to increase sort of productivity and how it is that you cut compensation? Is it -- compensation and could you give us just a sense how much more running room or how much more latitude do you have left in your ability to keep pruning opportunity from your expense structure?

Okay. Well, first looking at productivity, I think a very good example of a very significant productivity gain is you'll remember the partnership with VMS Vertical management that we announced a few months back and its technology to automate the trading and clearing and income collection in a mutual fund operations as we install -- as we integrate that system to Trust 3000, install the system, and move it into our operations in the trust company, we'll see very substantial reductions in staff in that operation environment. So it's bringing a technology platform in and automating something that has been done manually in the past. I think around productivity in our operations, as we deliver these straight through processing solutions, you're going to continue to see us improve productivity. There's very large opportunities both there for us and our clients that are our ASP clients. Around compensation almost all the employees in the company's compensation is tied to us reaching our revenue profit goals.

Okay. So then just to complete the thought then, what -- how much more running room do you think you have then in your ability to keep reducing expenses here? How should we think about that?

Robert Crudup I think you should

On different productivity or ,--

I think you should think of it as we're running at it as hard as you can possibly imagine and that we'll continue to do so -- do that and you'll see our results on a quarterly basis.

Okay. One final question. With regard to the - the equity trading, the fixed income trading, all the straight processing solutions, you mentioned the fee structure, the revenue structure, a combination of transaction fees and spread and so forth. I wonder if you can give us some sense, though, as to -- is this an incremental revenue opportunity for you? How specifically will clients pay you for -- for these services? Are these net revenue ads or would this be also paid from other -- would part of that compensation -- part of your compensation be from cannibalization of your existing revenues with these clients?

Yes. These will definitely be incremental to re new. They will be service that we provide to clients that -- will earn brokerage and transaction fees that almost in ever case will not require our clients to write us a check so it will be around services that they're either obtaining from someone else today or us automating processes for them and letting them take employee expenses out. As far as the magnitude of the opportunity, you know, you're talking about equities, fixed income and mutual funds, as we said, we processed 1.2 million in clients so you can imagine the number of transactions that are available. And our success will depend on us rolling out these solutions successfully and having clients adopt them. There are terrific opportunities for clients as I talked about in my presentation this morning. This is -- this is a win-win environment

When do you anticipate generating transaction fees rom the equity trading platform from these 26 clients?

We're generating them today.

And what would you say is sort of the penetration of those 26 clients right now and how much is reflected in the September-quarter revenue?

There's not very much -- there is not very much revenue in the third quarter for this. You'll start to see some impact on this in the fourth quarter hopefully. Our early indicator in talking with clients about this has been a lot of excitement and as you can see bringing 26 clients up this quickly, adoption rate has been very good. We are transitioning clients from an old technology platform that handled very small trades to this new sort of super charged platform that will provide a best execution.

Okay. All right, terrific. Thanks, Bob

We go to the line of Peter Heckman, Stifel Nicholus Please go ahead.

Just two follow ups, Bob. I want to make sure I understood. I thought based on some materials that you guys gave out in '99, for some reason I thought that Allfirst was both a trust and a fund Administration client and I just want to -- you had said, no, but I just wanted to confirm it. It looks like based on the analyst meeting you had in '99, that, you know, 75 percent of your revenue was coming from fund Administration on the offer side. Did they move that business in the last couple of years or is that not correct?

Yes, that business was moved some time in the last couple of years.

Okay.

They have not been a client for a little while.

Okay, great. And then with regard to these three new platforms and some of the things you're doing in addition to that along the straight through processing line

While I'm thinking about it, when we lost them as I mentioned them as a client in the northeast. And I can't remember what quarter that was, but we talked --we talked about them without mentioning their name

Okay, great. All right. That clears that up. On the STP side and the trading platforms, what type of investments do you anticipate and will we -- are the investments required? Is it something that we'll see as a material amount? Will it -- you know, impact margin sat all and for those investments are we going to see some software being capitalized on a quarterly basis?

We, as you know, we put our development budgets together very far in the future and if you look at the amount of money that we're continuing to investment in the platforms, it's always been substantial amounts of money and to a great, great majority of that is expensed in the year that it is spent. These platforms we've actually been working on some of them, you know, in excess of a year and a half. So though we're just rolling them out, allot of the investment dollars are in the past will continue to investment in straight through processing and as Al said before, when we make a decision, it's very unusual for us to capitalize software, but when we do, it's usually in infrastructure. Some of the STP things may fall into that category

All right that is helpful. Thanks.

We now go to the line of Ted Grossbeck with Grossbeck Investment management.

I'm sorry, Mike, my question has been answered. Thank you.

You're welcome.

We'll go to Gary Precipino with Barington Research. Go ahead.

Good afternoon. In implementing this straight through processing, is there any upfront costs that the client has to bare until getting this up and going?

Very little.

Okay. And there was an article in the Wall Street Journal about a month ago where the SIA pushed back the implementation decision. I think from 2004 to 2005. Basically because a lot of firms are, you know, under some kind of financial duress here. Did that impact what you're doing?

Not at all. That was a push back of T plus one?

Right.

And there will be benefits, you know, accrued to the industry for moving to T plus one but the majority of the benefits of operational savings and takeout of risk can really be accomplished with straight through processing.

Thanks.

Ladies and gentlemen, if you have further questions at this time, please press one. We have a question. From Lisa Mulvin with Chilton Investment Company. Please go ahead.

I was just wondering if you have given any forward guidance relative to what we can expect for the top line and bottom line going forward and throughout the rest of this year and next year?

We have not. We don't usually do that, Lisa.

Okay. I guess should we consider more of the same though? I mean, just by the tone of the press release it sounds like we should just pretty much experience the same structure going forward?

Yeah. I think our response there is very consistent in that if you look out over the Horizon and look at years instead of quarters and months, we're very optimistic about the long-term growth of our company.

Okay, thank you.

You're welcome

We have no further questions at this time. Please continue.

Our second thing that we want to cover is investment advisors and Carmen Romero will discuss this.

Thank you, Al and good afternoon and welcome. In this third quarter the business unit segment had revenues of $35.9 million. Operating profits of $20 million. Now, this compares with the revenue of $39 million and profit of $15.4 million in the comparable quarter in 2001. Margins in this current quarter were 56 percent versus 40 percent in the comparable quarter. Now, the expansion of margins were due to rigorous expense management and lower levels of incentive compensation that is expected to be earned due to slower new business results.

Now, the capital markets were not kind to individuals and as Al stated earlier, to quantify the market impact for you and FCI portfolio consisting of 60 percent equity and 40 percent fixed income at a 10.5 percent decline in the quarter and the year to date decline of approximately 14 percent. Marked declines of this magnitude tests investors investment convictions that manifest in slower cash flows and business results that result in lower revenues for the business unit compared to the previous quarter of this year as well as the comparable quarter last year.

Now, the asset balances at the end of this quarter stood at $23.2 billion compared to $27.4 billion at the beginning of this year. Despite this negative environment, the advisors were able to generate new cash flows in the quarter of $1.4 billion from new relationships. But investors withdrew a like amount from our investment portfolios. I might add during this wretched period we have not lost a single advisory firm which is testimony to a high degree of loyalty that our clients have in the SEI to help them grow their business through integrated business solutions consisting of investments, back office services and sales and sales and marketing support.

I would also like to add that although net cash flows in the quarter were zero, it still compares most favor favorably to other investment firms that had significant net outflows during this period. Our opinion is that as long as the market is led by pessimism and further declines, that cash flow improvements will not significantly improve from these levels. The market's behavior is something that we have no control over but let me assure you that client servicing and aggressive new business activities continue to be our number one priority.

On the servicing front we continue to provide service aides to RIA's that can be used for investor motions. We continue to have direct dialogues with end investors and advisors alike on the market environment and how to cope. New business activity is strong with 60 firms joining SEI making a total of new advisory firms standing at 272 firms for the year. Clients have agreed to convert their practices and that amount is equal to $1.2 billion. To get advisors into a proactive selling mode, we are launching a nationwide seminar program for this quarter and continuing into the first quarter of next year. Which an advisory firm, together with an SEI sales executive will conduct up to 300 educational seminars. We hope to have 6000 end investors clients and prospects in attendance in these sessions. These types of programs are another way in which we have reinforced the benefits of the SEI business relationship with our advisors.

This week we will be issuing a press release announcing the next generation of separate account management in which individual money managers stock selections will be combined in one account with tax oversight provided across all securities in the account. The expected benefit to the investor is superior after tax performance. Client reaction to this has been extremely favorable.

In summary, our overall optimism with regard to the potential growth this channel of growth remains as strong as ever because of three factors: Number one, the critical advise needed of the end investor, the strength and depth of our robust offering to the RIA and the loyalty that they have demonstrated the SEI as their business part never. Now, this concludes my remarks. I would be most happy to answer any questions that you might have.

Ladies and gentlemen, if you wish to ask a question at this time, please express the one on your touch toTim phone. We have a question from Peter Heckman with Stifle Nicholus. Please go ahead.

Good afternoon, Carmen.

Good afternoon, Pete

I was just looking at the margin expansion its been nothing short of phenomenal, and I congratulate you on it,--for revenues to be down, operating margins to be up almost 50% is really quite significant. It looks like there might be about $7 to $8 billion dollars of cost taTim out of the system compared to the quarter last year and I was wondering—you said Comp accruals is a big piece of it. Where else is it coming from? One question I wanted to follow up on is, you know, we did see in the second quarter the very unusual markets created a one time gain on the hedges that you folks use on your investments in your portfolios and I'm just wondering, that seemed to cause a one time gain that was -- that off set some of the operating expenses in the second quarter. I'm wondering if that occurred again in the third quarter at all because we seem to have kind of the same environment where the market was very weak towards the end of the quarter

Let me take the second part of your question first, Pete.

Okay.

First of all, any gains or losses from any of the investments that we made to fund these investment vehicles is not shown in this business segment. It's shown on the income statement, a separate item. And, number two, with respect to that, Kathy Heilig will be addressing the -- this issue in her closing remarks. Okay?

Right. That is great. I can't -- I'll look forward for Kathy to say it but it is not -- as far as I can see it is not a separate item. The hedging effectiveness in the second quarter it says in the 10Q was directly applied to operating expenses and distributed across the five segments whereas the loss related to the investment was just on the income statement under net income in the comprehensive income number so my understanding was that this one time gain was applied against all operating expenses across all the segments

Hey, Pete, if you look on the income statement in the press release, we now in the third quarter have it separated out a line for that. That gain net gain on investments. It is not up in the

That 600,000 then was -- was that for the quarter?

Yes.

Could you remind me what was the number for the second quarter?

It was like 1.8

Okay. Thanks allot. Thanks for clearing that up.

We'll go to the line of

Let me just add, excuse me 12th Pete let me try to answer the first part of your question regarding expense management. Obviously sales compensation as well as incentive compensation for nonsales people have been reduced from historical amounts because of lower business -- new business activity and just lower results of operations. So that has been reflected in the operating results. But at the same time, we've been looking at all of our expenses and in some cases trying to determine which ones are sort of critical and which ones are available for delay into the future. But let me make it -- a statement that -- to the extent that things are important to furthering our service offering for advisors, those type of expenditures continue to be made. They continued to be made across the company. Many of these investments are on applicability amongst a number of different business units so again, the ability to leverage some of these expenses across multiple business units in order to the benefit of earnings. So we're trying to be sensitive to top line revenue

Uh-huh.

And spend accordingly.

Okay, great. I guess if I hear correctly from what you're saying, in a better market, which will -- in a better equity market which will help the top line, we may see better net flows which will then result in higher comp. so we -- we may see a little bit more back towards a 56 percent operating margin perhaps is not sustainable given flows accelerated.

I think that is probably a fair statement

Okay, I appreciate it.

We now go to the line of Glen Greene with Think Equity Partners. Please go ahead.

Thanks. Carmen, I have a few questions for you.

Go ahead.

The first one, just to clarify the asset levels, the difference between, you gave us the cash flows and redemption, assuming the other remaining asset is a market depreciation which is 2.5, 2.6 billion in the quarter

The year to date change from the beginning of the year to the end of the quarter was about $4.2 billion. That includes cash flow as well as market depreciation.

Right, I'm just looking

the quarterly change was 2.6 billion quarter to quarter. From the second quarter to the end of the third quarter

That is perfect. Then what is your current asset level in the separate account program?

1.6 billion.

That was up modestly sequentially?

That's correct.

This is really a clarification on how your pricing structure works. Is it based on average assets for the quarter or end of quarter assets

Average assets in the quarter. That is about 50 to 53 basis points, there about

Terrific. Thank you.

You're welcome.

Welcome go to the line of Tim Willy with AG Edwards.

Good afternoon, Carmen. How are you?

Good.

I have a question. Could you talk a bit about any new emerging delivery channels that you're focused on opening up? You've mentioned, I think, in the conference and maybe even in the calls from time to time the CPA channel. There has been some stuff written in the trade journals lately about maybe more aggressive movement by CPA firms to really move ahead on wealth management and financial planning and, you know, that one is a particular interest to me and if there are other areas or potential asset gathering channels that you have identified that you would be willing to share with us.

Well, the CPA channel is an area of focus, no question about that. And basically you have two types -- three types of CPA firms, right, CPA firms that don't want to get into the asset management business, CPA firms that that are already in it and some sort of advisory capacity in house or CPA firms that would like to align themselves with advisory practices and act as sort of a referral source to advisory business.

And we would like to play in the latter two segments. To the extent the CPA firm has advisory business, we will treat them as a client, as advisory client. To the extent that CPA's will act as referral sources, then we will take advantage of those client relationships and develop a business relationship that allows the CPA firm to share in fee income that we generate from those investment accounts. It's a relatively new effort, still being sort of built out, but we have with current CPA's about a billion dollars of assets under management. But there are 42,000 CPA firms in the United States. So the -- the opportunity that is in front of us is enormous, enormous.

I mean, it would seem to be a sizeable market, which is why I was just sort of curious about any additional development. With the billion dollars that you have, how many, I guess, active CPA firms that you're working with provide that asset base? Is it 10 or 20 that you've got that are really kicking those assets?

I think it's probably close to a couple of hundred.

So a couple of hundred,--

I don't know the exact number. I would have to get it for you. It clearly,--

.So a couple of hundred dread firms are -- are supporting that billion dollars of assets?

Yes.

Great, thank you.

I go to the name of Brad Moore. Please go ahead.

Hi, Carmen, a couple of things. You mentioned the --I think I guess you characterize it as a pipeline,$1.2 billion in assets to be converted.

Yes.

Okay. Can you remind me, is this -- is this carry over from the prior quarter or is this new business to be sold or what exactly is this again?

Let's try to summarize what we have said in the past. The process to profile a new prospect more often than not is oriented around trying to convert that advisor's entire book of business to the SEI platform. You might have an advisor that has $30 million under management with other non SEI type products and then in those situations we are attempting to convince that prospect to enter into an agreement that would convert those accounts, that $30 million, if you will, to the SEI platform or to the SEI investment portfolios or in some combination a custody platform as well as investment portfolios. That is sort of a rolling number. In some cases the difficulty that we see currently is that in this market, you know, clients are just sort of difficult or become extremely apprehensive in terms of new investment ideas. So, I think that the ability for us to convert that money more quickly will be aided if we have a much more stable environment on the market side. But it is a running total. You know, we sign up clients every week to enter into this program.

Okay. So you actually have clients under an agreement of some sort?

Yeah, it's a letter of intent. You know, it's nothing really hard and fast. But generally speaking, if a client enters into a letter of intent, they follow through with it. The compelling reasons for them to do it arise because it is cheaper for them to do business and they put more money in their pockets so there is less business risk on their part by utilizing the SEI platform. There is a much more defensible asset management process that they can market with their end investors and, you know, in some cases they reduce the number of custodians they are dealing with so it makes their back office more efficient and much more cost effective

So this 1.2 billion then is I guess a piece of that then theoretically would be included in the gross cash flow of 1.4 billion?

Yes

Okay

Its hard for us to identify when cash flow comes through the door Its hard for us to identify without—going through some detailed analysis the differences between a new account and an account from a converting account or from a converting client, will go through that exercise but I don’t have that data with me right now.

Okay, sure. But again, I think you said 1.6 billion last quarter so the running total is down so presumably some of that got converted?

Yes.

From existing clients and you've also included in the gross cash flow amount. And is it safe to say, how much of this then to be converted and how much of new client cash or new client cash flows in 1.4 billion are being directed into this -- your separate account product versus your traditional mutual fund programs?

I think most of this money that is in the conversion category would be mutual fund type money. That would be going into some sort of mutual fund portfolio as opposed to a separate account

Can you just remind me, what are the fees and the margins like in accept Pratt account versus mutual fund?

Well, the fees across all of our products are probably closer to 52 basis points and in managed accounts program where there is a separate managed account component, depending on the size of the account, ranging from 40 to 45 basis points. The accounts are larger in separate accounts.

Okay. And then what are the margins like?

We don’t break our PNL—by managed accounts. And the reason that we don’t is managed accounts—generally include a component of mutual funds that fill out the diversification strategy. So its compo of separate accounts and mutual funds.

Okay. Thanks

We'll go to Gary Precipino know with Berryton research, go ahead.

Hey, Carmen, you said you added 60 new firms this quarter. What is the total count versus last year at this point?

We have advisory firms at the end of September of about 4000 that have -- that we define that as someone who has given us a ticket, okay. The total at the end of -- well, we added 272 for the year. I don't have a comparable number last year for September 30th of 2001. But I suspect we probably added last year about five hundred advisory firms, 300, something like that, four to 500 firms right off the top of my head.

Okay, thanks.

450.

Ladies and gentlemen

We had 450 last year

Ladies and gentlemen, if there area additional questions at this time, please press the one. We have no further questions at this time. Please continue.

Thank you. Our third segment is the enterprise segment. I'm going to turn it over to Ed Locklin to discuss this. Ed?

Thank You Al, Good afternoon, everyone. The usual, I'm going to start by reviewing the overall results for the enterprise segment compared to the third quarter, 2001 reporting period. Revenues for the third quarter compared to a year ago decreased 14 percent to $13.4 million. There are two reasons for the decline. The first one being that the cumulative revenue impact of the year end losses that we have previously been --that we have previously discussed are apparent in that number and the second reason is the market impact of the negative capital markets of the third quarter. Now, operating profits for the quarter increased 25 percent to 5.5 million compared to the third quarter of a year ago. Year to date profits through September also increased 16.6 million, 12 percent increase over the nine month ending 2001.

We continue like the other businesses to tightly balance the discretionary spending with our investing in new initiatives that we believe will continue to further differentiate our retirement solution as well as fuel our future growth. Operating margins also improved significantly for both the September quarter and on a year to date basis compared to last year. Margins for the third quarter, 2002, were 41 percent and 13 percent increase over the prior year. And finally, asset balances the third quarter end were 14.2 billion compared to 15.4 at the beginning of the year. Substantial new client asset funding of 1.3 billion has helped to lessen the impact of the poor capital markets.

Now, let's look what makes up behind the numbers. On the sales side, we continue to experience positive growing sales momentum during the quarter. New retirement asset sales for the quarter total $600 million and year to date that total is 1.8 billion. 34 clients have selected SEI's outsourced retirement solution this year and we were encouraged to see 14 clients make a decision during a third quarter which is historically slow due to the summer season. Our new clients continue to be diversified across the institutional spectrum, government organizations, endowment foundations and also insurance companies. Some notable names are H and r block, American standard, QUANIS airways and alpha insurance company. On the treasury side four new relationships were started during the quarter totaling $250 million in assets. Moving on to funding, $412 million of retirement assets were funded during the third quarter bringing the year to data set funding to 1.3 billion. As of September 30th, there was an unfunded backlog of $582 million in retirement assets and $400 million in cash assets.

So in conclusion, we're seeing institutions are starting to make changed decisions again. The volume of those decisions is accelerating. We're winning new business and expanding our client base and our continued sales efforts have really enabled us to replace retirement asset balances that year to date market depreciation as taTim away. Our quarter end balances are essentially flat at the beginning of the year. If there is a silver lining in the poor market, poor capital market of the past several years, it is making the financial impact on corporate earnings of the retirement plan allot more visual in the institutional marketplace and this is really due to the fact that many of the plans -- I think there was a recent statistic in the paper about78 percent of the defined benefit plans are now in an under funded stat under the circumstances us. SEI's retirement solution is vessel positioned to capitalize on this trend and we remain optimistic that the market accepts a complete outsource solution will continue to grow. Thank you very much and I'm certainly happy to take any questions.

Ladies and gentlemen, if you wish to ask a question at this time, please press the one. We have a question from Peter Heckman with Nicholas. Please go ahead.

Hello, Ed .

Hi, Pete.

I'm curious. Are you seeing given that it is becoming more difficult to attract assets for -- in the investment management industry due to the difficult markets, are you seeing any change in the competitive threat and have you seen any change in Frank Russell's kind of market strategy? Seems like three or four years ago they were pretty tough competitor. Haven't heard of them that much lately. I'm just wondering, is there any change in the competitive landscape from a pricing perspective, strategy perspective or from a new entrance perspective?

Okay. As far as a new entrance perspective, I think the fact that this particular category has become more visible. There are some new entrances over the last couple of years. They tend to be either insurance companies who might be approaching it more from the perspective of offering total benefits outsourcing and then trying to move, you know, from the back end of the process and to the front end of it. Or we see some banks that over the years have acquired several different investment management firms and now they offer, you know, for a client to be able to manage managers but the managers that they're managing tend to be all of their, you know, wholly owned subsidiaries so that is kind of a variation of the theme.

As far as Frank Russell, I would say we continue to see them and we compete with them. The piece that I guess that I could -- I could comment on from a strategic standpoint, it does look like they are going after some of their consulting clients, you know, as a way to really try and introduce this investment program to their consulting clients.

Okay as a follow up on the defined contribution side given some changes we've seen in the marketplace over the last couple of years, is it - are you seeing less interest from some of the asset management companies to continue to provide defined --to participate in defined contribution plans and to offer those? Is there an opportunity for SEI to perhaps gain some share in that side of business?

Well, I think that there is an opportunity for us to gain some share in that particular business. Pretty much the fastest growing segment there is at the smaller end of the spectrum. That is probably where you're displacing potentially an insurance company or insurance provider. There is not a lot of change that goes on at kind of the upper end of that market because of the implications having to convert direct keeping systems. So the activity is more in the smaller end of the market.

Thanks.

We'll go to the line of Brad Moore with Putnam. Go ahead.

Hi, I just wondered if you could go through these unfunded numbers again. I don't think I got those.

Okay. When you're talking about the unfunded you're talking about the backlog?

Yes, unfunded backlog

As of the end of September, these are clients that have committed to us but we have just not converted them yet. So these would be new assets coming on streams that we would typically be starting to recognize revenue this quarter. On the retirement side it is $582 million in assets. And on the treasury or the cash side it is$400 million of assets.

Okay. So you did say, was any of it recognized in the September quarter or is it all to be recognized in the December quarter?

91 of it was recognized in the September quarter. I would anticipate that we would, you know, see that come on stream in the fourth quarter. I believe there is one client that we do have to convert them from a record side.

Okay

The bulk should come in the fourth quarter

Okay, Could you remind me again is the pricing the same between the 2 business’—In terms of model?

Between the treasury and retirement

Retirement side

No its not on the retirement side typically (inaudible) 35 basis points recognition on our part and 7 to 8 on the treasury side

Okay. And then can you speak to the pipeline at this point, how it is sort of shaping up at this point and if you were to put sort of a time weighted average on when you whole accept bringing some of that business on tour platform, could you make a guess?

Ed Locklin Well, I think we've talked a little bit before about the pipeline. We have continued to be very busy in so far as really out talk to go prospective new clients, you know, starting out I guess certainly with a suspect and moving it into a prospect status so the pipeline continues to grow. The catalyst that we believe at this point is helping that is the fact that this under funded status, okay, is a concern to most chief financial officers and they are looking for ways to be able to approach the retirement on a more strategic basis. They can't just leave it as kind of this off balance sheet item that they don't have to worry about any more. It now has implications to them that are now more meaningful. Those have all been positive. I think it would be difficult to say exactly when some of that business is going to, you know, come on-line. What we have seen over the last couple of years is that the decision-making cycle l has shortened so once a client does decide they're going to start to do due diligence, it doesn't take as long as it used to. Now, having said that, we are slowly moving back, we believe, to kind of the pace that we saw back in 2000, '99 and 2000 so far as the number of decisions that are being made so we're optimistic about that. 34 decisions through September, I believe, is pretty much what we did all of last year. So it kind of gives you some sense of the momentum that is starting to comeback.

Okay. If you could just give me a sense in terms of, how long does a typical customer stay in your pipeline before they either sign up or walk away? Can you give me a range?

You know, it is kind of a hard one, Brad. I would say maybe it's 12 months to 18 months.

Okay. Great. All right, thanks.

Go to the line of Tim Willy with AG Edwards. Go ahead.

Hi, is there opportunity or leverage within the advisor network to generate leads within the defined benefit world? And if so, what has it been like historically? Has there been any change there? Are these individuals, would they be prospecting possibility for some plans like this if their retailed oriented businesses are sluggish?

It is pretty much yes to all of those questions. We have a very active program that continues to grow in size and certainly visibility within the advisory program. To help them go through their books of business and try to understand where they might have a leverage opportunity for them to introduce us, whether it's the defined benefit plan or endowment or foundation. If you were to look at the 34 clients that we closed year to date about one-third of those came from a referral process through our advisory group. So it is again a win-win for both ourselves and also for the advisor because the advisor does get an on going recurring extreme of revenue and they really don't have any kind of expense that they have to deal with. So it's pretty profitable venture for them and can certainly help them in filling in the revenue gaps that they would have because of a decline in their retail business.

Okay. Sort of follow up question to that, I don't completely have an appreciation for how your sales force versus Carmen's might be managed, but in terms of if an advisor were to bring in a lead that is eventually successful where you get an endowment or a pension and then those assets, I'm assuming in revenue are largely credited to your business line, is there some kind of mechanism between yours and Carmen's where his people would be incentive -- I won't say be aggressive but work with the advisors and encourage them to think about generating more referrals?

Yeah, absolutely. I guess from an accounting standpoint, all of the revenue and all of the expense so far as the referral program would really be within the enterprise segment so we reported, you know, the way the relationship would be managed. It would be managed by the enterprise group. There is the referral program, it's well received by Carmen's sales first because number one they have goals that they are kind of committed to make and so far as generating a certain number of leads and then there is compensation, a piece of their compensation is based on the attainment of those goals. It has worked out well. Were fine it over the years and introduce it to other market places as well. We introduce the same concept tour banks

So if they have a goal to generate X amount of assets or revenue or whatever it is, even though it may be housed or recognized within your business line, because it was generated through the advisor network, they know they're getting credit for it in terms of meeting their goals and compensation?

Correct. I mean, their goal is the number of leads. What they can really impact is to generate leads and opportunities and that is what they're compensated on.

Okay, great. Thanks allot.

Ladies and gentlemen, if there are additional questions at this time, please press the one. We have no further questions at this time. Please continue.

Our fourth segment is money managers and I'm going to turn it over to Wayne Widrow to discuss this segment. Wayne?

Thank you, Al. During the third quarter to money manager segment revenues of 12.5 million an increase of29 percent over the 9.7 million recorded in same quarter last year. This is a new record for quarterly revenues in this segment. Operating profits for the third quarter were 2.1 million. A 3 percent increase from the same period last year. Strong increase in revenues would not be directly reflected profit ability growth due primarily to the timing of investments. Client assets under Administration at the end of September were 71.3 billion, a decrease of 4.1 billion for the quarter. This decrease reflects 7.3 billion in market depreciation and 100 million in closed funds partially off set by 3.4 billion in client funding.

New business sold in the third quarter represented $3 million in annualized revenue. This included nine new clients with six of them being alternative investment managers and the balance being US based money managers. We will begin to recognize this revenue over the next two quarters. All and all, this quarter looked very much like prior quarts. First, we continued to add new clients at a brisk pace and the pipeline of new prospects remained strong.

Second, the sale of new business continues to drive revenue growth but the volatile capital market offset some of this growth. And third, while we see growth with both alternative money managers and traditional managers, the growth in our alternative manager business is more robust. I will now entertain any questions.

Ladies and gentlemen, if you wish to ask a question, please press the one at this time. I have a question from Tim Willy with AG Edwards. Go ahead.

Wayne, one question on the expense side. How much or could you give a feel for what level of expenses would be directly attributed to ramping up and converting new business versus just on-going investment, you know, and product and sales staff, et cetera.

I think the majority was not converting new business but ramping up, you know, just trying to grow the revenue of the business. You know, part of the investment would be in operational efficiencies and improving the operation, you know, as we grow this.

Okay.

That is the area.

Does the same logic then hold true for revenue, there are not any kind of one time implementation or conversion fees such as what Bob talked about in his private bank discussion?

Not significant. I mean, there is a tiny little piece on the outsourcing deal we mentioned last quarter.

Okay, great. Thanks.

We'll now go to the line of Brad Moore with Putnam Lovell. Please go ahead.

Hi, Wayne. I'm curious to know, are you seeing any client attrition from your fall out in the alternative managers segment?

Yeah, Brad, what I say is, I know that is all in the press nowadays and what I would say is, we have a very disciplined approach as to how we accept new clients because of that issue. The attrition is primarily in the newer and smaller funds and we put those through a fairly rigorous checklist as -- before we accept the client. We probably turn away more than we accept on the smaller end for that reason. So we're not seeing significant attrition. If you looked at the numbers I would say through the first nine months this year we had four clients close down their funds and it totally represented approximately $60 million in assets.

Okay. Do you have those same me metrics for the fourth quarter?

I believe it was two client in the third quarter and they were about $40 million.

Okay.

The other thing I would point out here is, a lot of these managers closed down not because -- some closed own because they are not getting funding. Allot closed down because they're significantly below their benchmarks for their performance fees and what you find is they resurface again with either a new strategy or a new investor and until we establish relationships with them, we have a pretty good shot at resigning them.

Okay. And in these six new clients, six new alternative managers that you signed, did they sign up for the full suite of products? What has been your experience in terms of signing up that segment of the market in terms of that I recall utilization of your suite of products.

They pretty much sign up for the whole suite of products.

And the six you signed, they signed up for the full suite

That's correct

And what is the experience on the U.S. manager side?

They tend to choose like a little bit more on the U.S. Side. And primarily because the range of the client size, if you look at a smaller manager, they would tend to go to a full outsource model where very, very large ones may choose to select some outsourcing services because they may have built some and abilities in-house.

Okay, great. Thanks, Wayne.

Ladies and gentlemen, if there area additional questions at this time, please press the one. We'll go to the line of Chris Arnt with Select Equity Group. Go ahead.

Could you comment on what portion of this business is fund Administration and what portion is a newer product that you're selling to hedge funds or separately managed accounts?

The majority -- if you look at hedge Administration and traditional fund Administration, that what is the majority of this business is.

Okay. And one other quick follow up question is, where are you in offering a separate account program for multiple -- for client that has multiple custodians? Do you expect to bring that price down?

We're currently studying that offering.

We have no further questions at this time. Please continue.

Thank you. Our fifth and final segment is investment of new business and I'm going to turn it over to Carl Guarino and he'll discuss it

Thank you and something afternoon. Results there in the business segment reflect a continue weakness in markets globally. Revenues of 11 million were up approximately9 percent from the year ago period but slightly down quarter to quarter result a decline in assets under management of 7.4 billion at quarter end. We did experience positive net asset flow in the quarter of approximately $100 million but this is more than off set by adverse market movement during the quarter. Assets under Administration for the quarter, that is where we're doing mutual fund processing, were up slightly to over 4 billion at quarter end. The operating loss for the quarter of about 3.5 million reflects a substantial improvement over the prior year period but continued investments in technology are Dublin based on rations and European sales and marketing. Not reflected in the quarterly numbers real growth we've experienced despite the about you lance markets in the U.K. Institutional segment. We expressed optimistic in this, sight a growing pipeline. I'm now pleased to report strong results from that pipeline inQ3 we received seven newspaper client commitments from U.k institutions, ago debating approximately $600 million in US new assets most of which is expected to fund in the next two quarters. This is by far our best quarter ever in this market segment. Although this new business total may be hard to equal in the next seating quarters, your UK institutional pipeline continues to be strong and we are pleased with our institutional pipeline in Canada as well. New asset growth from the high network growth through distributors was modest in all regions due to weak markets globally. The good news here is we have been holding our own and not experiencing a net outflow of fund as have many other asset managers. During these difficult markets we're continuing to bill our network by adding is a and discussing distribution arrangements with private banks on the European continent. Looking beyond the current market uncertainties, we remain optimistic about the long-term prospects for our global business initiatives. Thank you and I would be happy to respond to any questions.

Ladies and gentlemen, if you have a question at this time, please press one. We do have a question from the line of Tim Willy from AG Edwards. Go ahead.

Carl, is there as much debate or issue over in the U.K. lately regarding the status of pension plans or retirement plans as there is in the U.S? I guess there is always been this talk about Europe and its need to revamp its retirement funds and how they're managed, but has there been any change or, you know, accelerated talk about needing to do that given the difficulties of their markets as well?

Tim, on the U.K. side of course you have a well established, sort of a funded private pension business to start with. There has been a lot of debate in that market over really the past two years that we have been active in the market on how those pension funds should be managed. There was a well documented publicized government sponsored record, the miners report that called into question the traditional of private pensions in markets like Germany and Italy. But that is still fairly, you know, relatively small initiative outside of a couple of markets like the Netherlands and Switzerland.

(inaudible) It sounds like the US—Bandwagon—(inaudible) under funded It does not sound like the case in your end just these long standing issues (inaudible)

(inaudible) in the UK (inaudible)

Okay, thank you. Operator: Ladies and gentlemen, if you have additional questions, please press the one at this time. We have no further questions. Please continue.

That conclusion the quarterly report from our segments. I'm going to turn it to Kathy over to give a few company wide businesses

Thanks, Dale. Good afternoon, everyone. I do have some additional information about this quarter. Third quarter cash flow from operations was 55.9 million or 50 cents per share. Third quarter free cash flow was $48.6 million or 44 cents per share. A year to date cash flow from operations was $128.2 million, a dollar 19 cents per share. Third quarter capital expenditure is $5.3 million which includes three million dollars for anew facilities and 1.2 million capitalized software for investment processing platforms. Year to date capital expenditures are $23.3 million which includes $14.8 million for our new facility and $2.4 million in capitalized software. The third quarter depreciation 4.3 million, amortization for the third quarter $434,000. Year to date depreciation $12.4 million, year-to-date amortization, $1.3 million.

We would expect the capital expenditures for the fourth quarter to be about $7.7 million. The accounts payable balance as of September 30th was $2.6 million. Also, we would like to remind you that many of our responses are based upon assumptions that involve risk or actual future revenues and income could differ from our expected results and we have no obligations to publicly up date any forward looking information. Thanks.

Questions?

Ladies and gentlemen, if you have a question, please press one. We do have a question from Ed Rosenfeld. From Lazard Asset Management. Please go ahead.

Good afternoon. Over the last five years, can you say how many shares have been repurchased and what corresponding dollar amount that refers to?

Yeah, I think I can if you give me a minute.

And maybe while you're looking that up, my second question was, how many shares and options have been granted to employees over the last five years?

I don't have the option information with me. I can tell you, our shares we purchased -- 19,97 4.2 million shares. In 98, 2.6 million, '99, 2 million. 2000, 600,000. And 2001, 2.8 million shares. This year is 3.7.

And maybe just comment on how shareholders should view the preponderance of free cash being designated towards share repurchase yet outside from the lastquarter shares outstanding hasn't declined?

Well, the shares outstanding hasn't declined partly because of options and partly because of the calculations that you use to account for options.

Our stock rates, you are delusions, our stock rates has increased significantly over the years which increases our deleted earnings which we use in our per share calculations.

We now go to the line of Glen Shaparo with Sigma Capital. Please go ahead.

Hi. I'm sorry, I have been in and out of the call because I have other companies reporting. I want to ask a question about generally in terms of, you guys, the operations and development item had been down over a quarter and I just wanted t o get a sense of if that is as stainable -- I guess that is a sustainable level and what that means for the long-term operations of the business because I'm under the impression that is basically -- I know it is spread out across the business units -- but that is where you guys do a lot of your investment for new product development and things like that. Please walk me through that will a little bit.

Okay, repeat the first part of the question.

I guess my question just had to do with the fact that on a consolidated basis and I'm assuming it is through each one of the business units, operating and development expense had come down about looked like about 7 million and now you guys had run kind of at a run rate of kind of somewhere in the 67, skate million over the last couple of quarters so I'm wondering why it came down and I apologize if you have already said this and then, two, if it has come down because it looked like that was what, you know, that is where most of the expense savings came this quarter and I'm wondering what that means for the long-term business in terms of new product development in terms of the GL software and things you're rolling out and things like that.

Operating and development has both. Do you remember we lost those large mutual fund service clients.

Okay.

Which took a descent amount out. I don't have the exact figure on that. the other side of it, we are --our investments are at a lower level. I believe than they have been in the last couple of years but most of that has been focused and we have run more out of what we're investing we feel we're getting more ands pending less and that has been a concerted effort

So is there a way -- let's just say the number was7 million lower, is there any way you can say that a certain amount of that was associated with the clients that you no longer have and a certain amount has to do with, I guess, cuts in RND or being able to scale back your R and D expense?

Three or four has come out because mutual fund services is the best estimate to by

And then the remainder was ,--

.About half -- it's about half that we have made our investments more efficient.

Okay. And so I would imagine that that line is kind of a run rate now barring new clients coming on until you see a pickup kind of running it on the 61 million on consolidated basis?

Well, it is hard to answer that because there is so much in there. That is -- that sounds like a good way to look at it. We're not ramping up a tremendous amount of investment. We probably will add some as these five programs we got going on go further down the pike. Bu tat the same time, there are new revenues associated, particularly with straight through processing. So those would only go up as our revenues go up.

Okay. So none of the change that you're making are going to push back revenue -- any revenue that you think is going to come on? It's not in terms of we're not going to make the decision the at is going to have any revenue impact down the road?

No, absolutely not.

I just wanted to make sure. Great. Thank you.

Go to the line of Peter Heckman. Go ahead.

Kathy, just as a question on the investments available for sale on the balance sheet, is that all money invested in seed must be money, new mutual fund products at your shop or I guess that is the first question. Or is there a part of that we have seen some write offs, some companies from investments of private companies that they have made. Do you have any investments like that that are currently listed at book -- on the book on the balance sheet

Investments available for sale are primarily investments what you would call seed money in products that we're starting. There is also a portion in there, we do have some capital requirements for our arthritis hat we thrifts and we have some fund in J and A funds also. It is all business related and not pure investment.

Okay. And then investments, do you have any venture capital investments in private companies?

No.

Okay, thanks.

We have a Timtucky from Tim Willy from AG Edwards. Please go ahead

Kathy, do you have a count number from June to last year just something to compare that against?

I don't know that off of top of my head. I wouldn't expect it was significantly different.

Okay. Thanks.

If there are additional questions at this time, please press the one. We have no further questions. Please continue.

Okay. So, we have had earnings growth and times are relatively trying and we're going to keep that -- we're going to try to keep that going through productivity improvements while we wait for more favorable business conditions. I can't stress enough in the long run we are very optimistic and confident. Our recurring revenues, our strong cash flow, the market acceptance o four business solutions and our operational leverage added to continuous investment in the future and our portfolio businesses will all support our goal of creating long-term sustainable growth in revenues and profits. And once again, if there is anything I would like to leave you with it is to remind you we're in the business solution business. Our clients that do business with us because we're solving essential business problems for them and making their businesses better. This is a high value added proposition and differentiates us from our competition and will serve us well in times like this. Now, if there are no more questions of any type, we bid you a good day. Thank you very much.

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