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 June 30, 2001 or [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to _________ 0-10200 - -------------------------------------------------------------------------------- (Commission File Number) SEI INVESTMENTS COMPANY - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-1707341 ------------ ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 1 Freedom Valley Drive, Oaks, Pennsylvania 19456-1100 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (610) 676-1000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- *APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ___ No ___ *APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of June 30, 2001: 108,947,791 shares of common stock, par value $.01 per share. 1 PART I. FINANCIAL INFORMATION - ------ --------------------- Item 1. Financial Statements - ------ -------------------- Consolidated Balance Sheets --------------------------- (In thousands) The accompanying notes are an integral part of these statements. 2
June 30, 2001 December 31, 2000 ------------- ------------------ (unaudited) Assets - ------ Current assets: Cash and cash equivalents (including restricted cash of $10,889 and $11,900) $ 137,962 $ 159,576 Receivables from regulated investment companies 29,076 27,607 Receivables, net of allowance for doubtful accounts of $1,700 62,568 47,404 Deferred income taxes 6,524 9,030 Prepaid expenses and other current assets 5,182 5,414 --------- --------- Total current assets 241,312 249,031 --------- --------- Property and equipment, net of accumulated depreciation and amortization of $92,434 and $83,874 85,405 75,111 --------- --------- Capitalized software, net of accumulated amortization of $12,620 and $11,733 11,936 12,823 --------- --------- Investments Available for Sale 38,521 20,294 --------- --------- Other assets, net 23,348 18,323 --------- -------- Total Assets $ 400,522 $ 375,582 ========= ========= Consolidated Balance Sheets --------------------------- (In thousands, except par value) The accompanying notes are an integral part of these statements. 3
June 30, 2001 December 31, 2000 ------------- ----------------- (unaudited) Liabilities and Shareholders' Equity - ------------------------------------ Current liabilities: Current portion of long-term debt $ 2,000 $ 2,000 Accounts payable 4,175 6,721 Accrued expenses 121,392 121,282 Deferred revenue 10,218 16,450 ----------- ----------- Total current liabilities 137,785 146,453 ----------- ----------- Long-term debt 25,000 27,000 ----------- ----------- Deferred income taxes 4,268 4,708 ----------- ----------- Shareholders' equity: Common stock, $.01 par value, 750,000 shares authorized; 108,948 and 108,560 shares issued and outstanding 1,089 1,086 Capital in excess of par value 156,334 125,473 Retained earnings 77,829 72,521 Accumulated other comprehensive losses (1,783) (1,659) ----------- ----------- Total shareholders' equity 233,469 197,421 ----------- ----------- Total Liabilities and Shareholders' Equity $ 400,522 $ 375,582 =========== =========== Consolidated Statements of Income (unaudited) (In thousands, except per share data) The accompanying notes are an integral part of these statements. 4
Three Months -------------------------------------------- Ended June 30, -------------------------------------------- 2001 2000 ---- ---- Revenues $ 168,480 $ 146,440 Expenses: Operating and development 77,314 69,164 Sales and marketing 39,135 38,809 General and administrative 6,121 4,243 -------- -------- Income from operations 45,910 34,224 Equity in the earnings of unconsolidated affiliate 2,554 1,757 Interest income 1,541 1,066 Interest expense (534) (551) -------- -------- Income before income taxes 49,471 36,496 Income taxes 18,304 13,869 ------- ------- Net income 31,167 22,627 ------- ------- Other comprehensive loss, net of tax: Foreign currency translation adjustments, net of income tax benefit of $13 and $115 (21) (186) Unrealized holding losses on investments, net of income tax benefit of $47 and $18 (81) (30) --------- --------- Other comprehensive income (loss) (102) (216) -------- -------- Comprehensive income $ 31,065 $ 22,411 ======= ======= Basic earnings per common share $ .29 $ .21 ======== ======= Diluted earnings per common share $ .27 $ .20 ======== ======= Consolidated Statements of Income (unaudited) (In thousands, except per share data) The accompanying notes are an integral part of these statements. 5
Six Months ---------------------------------------------- Ended June 30, ---------------------------------------------- 2001 2000 ---- ---- Revenues $ 329,781 $285,186 Expenses: Operating and development 153,343 135,446 Sales and marketing 77,391 77,179 General and administrative 11,504 7,785 --------- -------- Income from operations 87,543 64,776 Equity in the earnings of unconsolidated affiliate 4,792 3,510 Interest income 3,790 2,051 Interest expense (1,084) (1,150) --------- -------- Income before income taxes 95,041 69,187 Income taxes 35,165 26,291 --------- -------- Net income 59,876 42,896 --------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments, net of income tax (benefit) expense of $(149) and $5 (253) 9 Unrealized holding gains (losses) on investments, net of income tax expense (benefit) of $76 and $(82) 129 (134) --------- -------- Other comprehensive loss (124) (125) --------- -------- Comprehensive income $ 59,752 $ 42,771 ========= ======= Basic earnings per common share $ .55 $ .40 ========= ======= Diluted earnings per common share $ .52 $ .38 ========= ======= Consolidated Statements of Cash Flows ------------------------------------- (unaudited) (In thousands) The accompanying notes are an integral part of these statements. 6
Six Months -------------------------------- Ended June 30, -------------------------------- 2001 2000 ---- ---- Cash flows from operating activities: Net income $ 59,876 $ 42,896 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,616 8,399 Equity in the earnings of unconsolidated affiliate (4,792) (3,510) Tax benefit on stock options exercised 20,679 4,880 Other (138) 3,850 Change in current assets and liabilities: Decrease (increase) in Receivables from regulated investment companies (1,469) (1,809) Receivables (15,164) (16,356) Prepaid expenses and other current assets 232 (419) Increase (decrease) in Accounts payable (2,546) 642 Accrued expenses 4,457 (9,375) Deferred revenue (6,232) 2,380 -------- --------- Net cash provided by operating activities 64,519 31,578 -------- --------- Cash flows from investing activities: Additions to property and equipment (18,883) (10,460) Additions to capitalized software -- (449) Purchase of investments available for sale (25,006) (17,263) Sale of investments available for sale 6,783 2,135 Other 2,317 2,847 -------- --------- Net cash used in investing activities (34,789) (23,190) -------- --------- Cash flows from financing activities: Payment on long-term debt (2,000) (2,000) Purchase and retirement of common stock (49,962) (14,328) Proceeds from issuance of common stock 10,404 4,420 Payment of dividends (9,786) (7,785) -------- --------- Net cash used in financing activities (51,344) (19,693) -------- --------- Net decrease in cash and cash equivalents (21,614) (11,305) Cash and cash equivalents, beginning of period 159,576 73,206 -------- --------- Cash and cash equivalents, end of period $137,962 $ 61,901 ======== ========= Notes to Consolidated Financial Statements ------------------------------------------ Note 1. Summary of Significant Accounting Policies ------------------------------------------ Nature of Operations -------------------- SEI Investments Company (the "Company") is organized around its five primary business lines: Private Banking & Trust, Investment Advisors, Enterprises, Money Mangers, and Investments in New Businesses. Private Banking & Trust provides investment processing solutions, fund processing solutions and investment management programs to banks and private trust companies. Investment Advisors provides investment management programs and investment processing solutions to affluent investors through a network of financial intermediaries, independent investment advisors and other investment professionals. Enterprises provide retirement and treasury business solutions for corporations, unions, foundations and endowments, and other institutional investors. Money Managers provides investment solutions to U.S. investment managers, mutual fund companies and alternative investment managers worldwide. Investments in New Businesses include the Company's global asset management businesses as well as initiatives into new U.S. markets. 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 June 30, 2001, the results of operations and cash flows for the three and six months ended June 30, 2001 and 2000. Interim Financial Information ----------------------------- While the Company believes that the disclosures presented are adequate to make the information not misleading, these Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes included in the Company's latest annual report on Form 10-K. Principles of Consolidation --------------------------- The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. The Company's principal subsidiaries are SEI Investments Distribution Company, SEI Investments Management Corporation, and SEI Private 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, (See Note 6). Property and Equipment ---------------------- Property and equipment on the accompanying Consolidated Balance Sheets consist of the following: 7
Estimated Useful Lives June 30, 2001 December 31, 2000 (In Years) ------------- ----------------- ---------- Equipment $ 76,768,000 $ 71,377,000 3 to 5 Buildings 34,752,000 34,695,000 25 to 39 Land 9,345,000 9,345,000 N/A Purchased software 19,380,000 16,035,000 3 Furniture and fixtures 14,689,000 14,230,000 3 to 5 Leasehold improvements 7,321,000 7,313,000 Lease Term Construction in progress 15,584,000 5,990,000 N/A ------------ ------------ 177,839,000 158,985,000 Less: Accumulated depreciation and amortization (92,434,000) (83,874,000) ------------ ------------ Property and Equipment, net $ 85,405,000 $ 75,111,000 ============ ============ 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 7.1 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 two-for-one stock split in February 2001. 8
For the Three month period ended June 30, 2001 ------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ---------- ----------- ------ Basic earnings per common share $31,167,000 108,662,000 $.29 ==== Dilutive effect of stock options -- 6,346,000 ----------- ----------- Diluted earnings per common share $31,167,000 115,008,000 $.27 =========== =========== ==== For the Three month period ended June 30, 2000 ------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount --------- ----------- ------ Basic earnings per common share $22,627,000 106,156,000 $.21 ==== Dilutive effect of stock options -- 6,840,000 ----------- ----------- Diluted earnings per common share $22,627,000 112,996,000 $.20 =========== =========== ==== Options to purchase 1,299,000 shares of common stock, with an average exercise price of $49.73 were outstanding during the second quarter of 2001, 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 stock options outstanding during the second quarter of 2000 were included in the diluted earnings per common share calculation. Options to purchase 1,299,000 and 2,202,000 shares of common stock, with an average exercise price of $49.73 and $19.75 were outstanding during the first six months of 2001 and 2000, respectively, but were excluded from the diluted earnings per common share calculation because the options' exercise prices were greater than the average market price of the Company's common stock. Statements of Cash Flows ------------------------ For purposes of the Consolidated Statements of Cash Flows, the Company considers investment instruments purchased with an original maturity of three months or less to be cash equivalents. Supplemental disclosures of cash paid/received during the six months ended June 30 is as follows:
For the Six month period ended June 30, 2001 --------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount --------- ----------- ------ Basic earnings per common share $59,876,000 108,631,000 $.55 ==== Dilutive effect of stock options -- 6,782,000 ----------- ----------- Diluted earnings per common share $59,876,000 115,413,000 $.52 =========== =========== ==== For the Six month period ended June 30, 2000 ------------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount --------- ----------- ------ Basic earnings per common share $42,896,000 106,072,000 $.40 ==== Dilutive effect of stock options -- 6,712,000 ----------- ----------- Diluted earnings per common share $42,896,000 112,784,000 $.38 =========== =========== ==== Management's Use of Estimates ----------------------------- The preparation of financial statements in conformity with accounting principles generally accepted in the Unites States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 2. Comprehensive Income - The Company computes comprehensive income -------------------- in accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and presentation of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements that is presented with equal prominence as other financial statements. Comprehensive 9
2001 2000 ---- ---- Interest paid $1,073,000 $ 1,146,000 Interest and dividends received $4,184,000 $ 1,782,000 Income taxes paid $ -- $ 25,485,000 income includes net income, foreign currency translation adjustments, and unrealized holding gains and losses and is presented on the accompanying Consolidated Statements of Income. Note 3. Receivables - Receivables on the accompanying Consolidated Balance ----------- Sheets consist of the following:
Foreign Unrealized Accumulated Currency Holding Other Translation Gains(Losses) Comprehensive Adjustments on Investments Losses ----------- -------------- ------ Beginning balance $(736,000) $ (923,000) $(1,659,000) Current period change (253,000) 129,000 (124,000) -------- ------- ----------- Ending Balance $(989,000) $ (794,000) $(1,783,000) ======= ======= ========= Fees earned, not received represent brokerage commissions earned but not yet collected. Fees earned, not billed represent receivables earned but unbilled and result from timing differences between services provided and contractual billing schedules. Receivables from regulated investment companies on the accompanying Consolidated Balance Sheets represent fees collected from the Company's wholly owned subsidiaries, SEI Investments Distribution Company and SEI Investments Management Corporation, for distribution, investment advisory, and administration services provided by these subsidiaries to various regulated investment companies sponsored by the Company. Note 4. Investments Available for Sale - Investments available for sale ------------------------------ consist of investments in mutual funds sponsored by the Company. The Company accounts for investments in marketable securities pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires that debt and equity securities classified as available for sale be reported at market value. Unrealized holding gains and losses, net of income taxes, are reported as a separate component of comprehensive income. Realized gains and losses, as determined on a specific identification basis, are reported separately on the accompanying Consolidated Statements of Income. At June 30, 2001, Investments available for sale had an aggregate cost of $39,790,000 and an aggregate market value of $38,521,000 with gross unrealized holding losses of $1,269,000. At that date, the net unrealized holding losses of $794,000 (net of income tax expense of $475,000) were reported as a separate component of Accumulated other comprehensive losses on the accompanying Consolidated Balance Sheets. At December 31, 2000, Investments available for sale had an aggregate cost of $21,710,000 and an aggregate market value of $20,294,000 with gross unrealized holding losses of $1,416,000. At that date, the net unrealized holding losses of $923,000 (net of income tax expense of $493,000) were reported as a separate component of Accumulated other comprehensive losses on the accompanying Consolidated Balance Sheets. 10
June 30, 2001 December 31, 2000 ------------- ----------------- Trade receivables $26,986,000 $22,558,000 Fees earned, not received 1,743,000 1,801,000 Fees earned, not billed 35,539,000 24,745,000 ---------- ---------- 64,268,000 49,104,000 Less: Allowance for doubtful accounts (1,700,000) (1,700,000) ----------- ----------- $62,568,000 $47,404,000 ========== ========== Note 5 Derivative Instruments and Hedging Activities - The Company accounts --------------------------------------------- for its derivatives in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133" ) and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133", ("SFAS 138"). The Company recognizes all derivatives on the balance sheet at fair value. On the date the derivative instrument is entered into, the Company generally designates the derivative as a hedge of the fair value of a recognized asset. Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a fair value hedge, along with the gain or loss on the hedged asset that is attributable to the hedged risk, are recorded in current period earnings. The portion of the change in fair value of a derivative associated with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge effectiveness is recorded currently in earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes relating all derivatives that are designated as fair value hedges to specific assets on the balance sheet. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values of the hedged item. If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively. Operating Expense for the three and six months period ended June 30, 2001, includes $273,000 of net loss from hedge ineffectiveness or from excluding a portion of a derivative instruments' gain or loss from the assessment of hedge effectiveness related to derivatives designated as fair value hedges. Note 6. Other Assets - Other assets on the accompanying Consolidated Balance ------------ Sheets consist of the following: Investment in Unconsolidated Affiliate - LSV Asset Management ("LSV") -------------------------------------- is a partnership formed between the Company and several leading academics in the field of finance. LSV is a registered investment advisor, which provides investment advisory services to institutions, including pension plans and investment companies. LSV is currently the portfolio manager for a number of Company-sponsored mutual funds. The Company's interest in LSV was approximately 45 percent in 2001 and 47 percent in 2000. 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 June 30: 2001 2000 ---- ---- Revenues $7,736,000 $5,385,000 ========= ========= Net income $5,744,000 $3,786,000 ========= ========= 11
June 30, 2000 December 31,2000 ------------- ---------------- Investment in unconsolidated affiliate $ 6,184,000 $ 5,627,000 Other, net 17,164,000 12,696,000 ---------- ----------- Other assets $ 23,348,000 $ 18,323,000 ========== ========== The following table contains the Condensed Statements of Income of LSV for the six months ended June 30: 2001 2000 ---- ---- Revenues $14,688,000 $10,679,000 ========== ========== Net income $10,772,000 $ 7,547,000 ========== ========== The following table contains the Condensed Balance Sheets of LSV: June 30, 2001 December 31, 2000 ------------- ----------------- Current assets $ 12,442,000 $10,976,000 Non-current assets 134,000 103,000 ----------- ---------- Total assets $ 12,576,000 $11,079,000 =========== ========== Current liabilities $ 1,229,000 $ 1,285,000 Partners' capital 11,347,000 9,794,000 ----------- ---------- Total liabilities and partners' capital $ 12,576,000 $11,079,000 =========== ========== Note 7. Accrued Expenses - Accrued expenses on the accompanying Consolidated Balance Sheets consist of the following: June 30, 2000 December 31, 2000 ------------- ----------------- Accrued compensation $ 34,156,000 $ 49,890,000 Accrued proprietary fund services 14,384,000 14,834,000 Accrued consulting services 6,731,000 8,200,000 Other accrued expenses 66,121,000 48,358,000 ----------- ----------- Total accrued expenses $121,392,000 $121,282,000 =========== =========== Note 8. Line of Credit - The Company has line of credit agreement with its -------------- principle lending institutions. The fAgreement provides for borrowings of up to $50,000,000, and expires 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 (LIBOR). 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. Note 9. 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, 12 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. The Company was in compliance with all covenants during the first six months of 2001. Principal payments on the Notes are made annually from the date of issuance while interest payments are made semi-annually. The Company made its scheduled payment of $2,000,000 in February 2001. The current portion of the Notes amounted to $2,000,000 at June 30, 2001. The carrying amount of the Company's long-term debt is not materially different from its fair value. On June 26, 2001 the Company entered into a loan agreement (the "Agreement") with a separate lending institution. The agreement provides for borrowing up to $25,000,000 in the form of a term loan, and expires on March 31, 2006 and is payable in seventeen equal quarterly installments. The term loan, when utilized, accrues interest at the Prime rate or plus one and thirty-five hundredths of one percent above the London Interbank Offered Rate (LIBOR). The Agreement contains various covenants, including limitations on indebtedness and restrictions on certain investments. On August 2, 2001, the Company borrowed $25,000,000 on this term loan. The loan was necessary to support capital improvement projects for our corporate campus and other business purposes. None of these covenants negatively affect the Company's liquidity or capital resources. Note 10. Common Stock Buyback - The Board of Directors has authorized -------------------- the purchase of the Company's common stock on the open market or through private transactions of up to an aggregate of $453,365,000. Through June 30, 2001, a total of 99,592,000 shares at an aggregate cost of $405,053,000 have been purchased and retired. The Company purchased 1,327,000 shares at a total cost of $49,962,000 during the six month period ended June 30, 2001. The Company immediately retires its common stock when purchased. Upon retirement, the Company reduces Capital in excess of par value for the average capital per share outstanding and the remainder is charged against Retained earnings. If the Company reduces its Retained earnings to zero, any subsequent purchases of common stock will be charged entirely to Capital in excess of par value. Note 11. Dividend - On May 29, 2001, the Board of Directors declared a cash -------- dividend of $.05 per share on the Company's common stock, which was paid on June 26, 2001, to shareholders of record on June 12, 2001. 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 product and services, geographic areas, and major customers. The company redefined its segments during the second quarter 2001 and restated all prior periods to conform with the current presentation. The Company is organized around its five primary business lines: Private Banking & Trust, Investment Advisors, Enterprises, Money Mangers, and Investments in New Businesses. Private Banking & Trust provides investment processing solutions, fund processing solutions and investment management programs to banks and private trust companies. Investment Advisors provides investment management programs and investment processing solutions to affluent investors through a network of financial intermediaries, independent investment advisors and other investment professionals. Enterprises provide retirement and treasury business solutions for corporations, unions, foundations and endowments, and other institutional investors. Money Managers provides investment solutions to U.S. investment managers, mutual fund companies and alternative investment managers worldwide. Investments in New Businesses include the Company's global asset management business as well as initiatives into new U.S. markets. 13 The information in the following tables is derived from the Company's internal financial reporting used for corporate management purposes. The accounting policies of the reportable segments are the same as those described in Note 1. The Company's management evaluates financial performance of its operating segments based on income before income taxes. The following tables highlight certain unaudited financial information about each of the Company's segments for the three months ended June 30, 2001 and 2000. (In thousands) 14
Private Investments General Banking Investment Money In New And & Trust Advisors Enterprises Managers Businesses Administrative Total ------- -------- ----------- -------- ---------- -------------- ----- For the Three-Month Period Ended June 30, 2001 (In thousands) --------------------------------------------------------------------------------------------------------- Revenues $93,170 $38,687 $17,290 $ 8,708 $ 10,625 $168,480 ------- ------- ------- ------- -------- -------- Operating income (loss) $35,465 $14,399 $ 6,335 $ 735 $ (4,903) $(6,121) $ 45,910 ------- ------- ------- ------- -------- ------- Other income, net $ 3,561 -------- Income before income taxes $ 49,471 -------- Depreciation and amortization $ 3,129 $ 762 $ 260 $ 229 $ 329 $ 172 $ 4,881 ------- ------- ------- ------- -------- ------- -------- Capital Expenditures $ 6,992 $ 1,238 $ 454 $ 372 $ 430 $ 482 $ 9,968 ------- ------- ------- ------- -------- ------- -------- Private Investments General Banking Investment Money In New And & Trust Advisors Enterprises Managers Businesses Administrative Total ------- -------- ----------- -------- ---------- -------------- ----- For the Three-Month Period Ended June 30, 2000 (In thousands) --------------------------------------------------------------------------------------------------------- Revenues $83,479 $30,944 $13,613 $8,452 $ 9,952 $146,440 ------- ------- ------- ------ ------- -------- Operating income (loss) $32,555 $ 9,786 $ 1,537 $ 302 $(5,713) $(4,243) $ 34,224 ------- ------- ------- ------ ------- ------- Other income, $ 2,272 net -------- Income before income taxes $ 36,496 -------- Depreciation and amortization $ 2,825 $ 686 $ 204 $ 230 $ 278 $ 123 $ 4,346 ------- ------- ------- ------ ------- ------- -------- Capital Expenditures $ 4,530 $ 291 $ 136 $ 380 $ 747 $ 240 $ 6,324 ------- ------- ------- ------ ------- ------- -------- The following tables highlight certain unaudited financial information about each of the Company's segments for the six months ended June 30, 2001 and 2000. (In thousands) 15
Private Investments General Banking Investment Money In New And & Trust Advisors Enterprises Managers Businesses Administrative Total ------- -------- ----------- -------- ---------- -------------- ----- For the Six-Month Period Ended June 30, 2001 (In thousands) ---------------------------------------------------------------------------------------------- Revenues $182,592 $ 76,766 $33,198 $ 16,472 $ 20,753 $329,781 -------- -------- ------- -------- -------- -------- Operating income (loss) $ 69,135 $ 29,121 $10,473 $ 612 $(10,294) $(11,504) $ 87,543 -------- -------- ------- -------- -------- -------- Other income, net $ 7,498 -------- Income before income taxes $ 95,041 -------- Depreciation and amortization $ 6,156 $ 1,511 $ 516 $ 447 $ 649 $ 337 $ 9,616 -------- -------- ------- ------- ------- -------- -------- Capital Expenditures $ 13,779 $ 2,001 $ 734 $ 647 $ 721 $ 1,001 $ 18,883 Private Investments General Banking Investment Money In New And & Trust Advisors Enterprises Managers Businesses Administrative Total ------- -------- ----------- -------- ---------- -------------- ----- For the Six-Month Period Ended June 30, 2001 (In thousands) ---------------------------------------------------------------------------------------------- Revenues $164,312 $ 59,941 $26,349 $ 15,111 $ 19,473 $285,186 -------- -------- ------- -------- -------- -------- Operating income (loss) 62,939 $ 15,796 $ 3,805 $ 11 $(69,990) $ (7,785) $ 64,776 -------- -------- ------- -------- -------- -------- Other income, net $ 4,411 -------- Income before income taxes $ 69,187 -------- Depreciation and amortization $ 5,449 $ 1,329 $ 442 $ 397 $ 525 $ 257 $ 8,399 -------- -------- ------- -------- -------- -------- -------- Capital Expenditures $ 7,348 $ 538 $ 207 $ 592 $ 1,271 $ 504 $ 10,460 -------- -------- ------- -------- -------- -------- -------- 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 five business lines: Private Banking & Trust, Investment Advisors, Enterprises, Money Mangers and Investments in New Businesses. Financial information on each of these segments is reflected in Note 12 of the Notes to Consolidated Financial Statements. Results of Operations - --------------------- Three and Six Months Ended June 30, 2001 Compared to Three and Six Months Ended June 30, 2000 Consolidated Overview Revenues and earnings increased over the corresponding prior year periods primarily because of increased sales to new clients and the delivery of new products and services to existing clients in our primary business lines. We believe our growth is due to increased market acceptance of our products and services. Also, the economies of scale built within our operations have partially contributed to our growth in earnings. The increase in margins is accomplished at the same time we are investing heavily in the future. We believe our future growth is dependent upon our ability to deliver new products and services in our diversified portfolio of business. Also, we must continue to generate economies of scale in most of our back-office and investment management operations, as well as having many shared technology development projects that leverage our technology spending. However, any expected growth in revenues and earnings may be negated by volatility in the capital markets, and mergers and acquisitions within the banking industry that would result in the loss of any significant clients. 16
Income Statement Data (In thousands, except per common Three Months Ended Six Month Ended share data) June 30, June 30, Percent Percent 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Revenues: Private Banking & Trust $ 93,170 $ 83,479 12% $ 182,592 $ 164,312 11% Investment Advisors 38,687 30,944 25% 76,766 59,941 28% Enterprises 17,290 13,613 27% 33,198 26,349 26% Money Mangers 8,708 8,452 3% 16,472 15,111 9% Investments in New Businesses 10,625 9,952 7% 20,753 19,473 7% --------- --------- --------- --------- Total revenues $ 168,480 $ 146,440 15% $ 329,781 $ 285,186 16% Operating Income (Loss): Private Banking & Trust $ 35,465 $ 32,555 9% $ 69,135 $ 62,939 10% Investment Advisors 14,399 9,786 47% 29,121 15,796 84% Enterprises 6,335 1,537 312% 10,473 3,805 175% Money Mangers 735 302 143% 612 11 5,464% Investments in New Businesses (4,903) (5,713) 14% (10,294) (9,990) (3%) General and Administrative (6,121) (4,243) (44%) (11,504) (7,785) (48%) --------- --------- --------- --------- Income from operations 45,910 34,224 34% 87,543 64,776 35% Other income, net 3,561 2,272 57% 7,498 4,411 70% --------- --------- --------- --------- Income before income taxes 49,471 36,496 36% 95,041 69,187 37% Income taxes 18,304 13,869 32% 35,165 26,291 34% --------- --------- --------- --------- Net Income $ 31,167 $ 22,627 38% $ 59,876 $ 42,896 40% ========= ========= ========= ========= Diluted earnings per common share $ .27 $ .20 35% $ .52 $ .38 37% ========= ========= ========= ========= Asset Balances (In millions) 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. Private Banking and Trust - ------------------------- Private Banking & Trust provides investment processing solutions, fund processing solutions, and investment management programs to banks and private trust companies. Investment processing services primarily include outsourcing services provided through our TRUST 3000 product line. TRUST 3000 includes many integrated products and sub-systems that provide a complete investment accounting and management information system for trust institutions. Revenues are primarily earned from monthly processing and software services fees and project fees associated with the conversion of new and merging clients. Fund processing solutions include administration and distribution services provided to bank proprietary mutual funds. These services primarily include fund administration and accounting, legal services, shareholder recordkeeping, and marketing. Revenues are based on a fixed percentage, referred to as basis points, of the average daily asset value of the proprietary funds. Investment management revenues are primarily earned through management fees that are based upon a fixed percentage, referred to as basis points, of the average daily net asset value of assets under management.
As of June 30, -------------- PERCENT 2001 2000 CHANGE ---- ---- ------ Assets invested in equity and fixed income programs $ 56,196 $ 48,278 16% Assets invested in liquidity funds 23,710 23,412 1% --------- --------- Assets under management 79,906 71,690 11% Client proprietary assets under administration 220,103 187,259 18% --------- --------- Assets under management and administration $ 300,009 $ 258,949 16% ========= ========= 17
Three Months Ended Six Months Ended June 30, June 30 Percent June 30, June 30 Percent 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Revenues: Investment processing fees $59,689 $51,184 17% $115,905 $100,008 16% Fund processing fees 22,539 21,992 2% 44,701 43,923 2% Investment management fees 10,942 10,303 6% 21,986 20,381 8% ------- ------- -------- -------- Total revenues 93,170 83,479 12% 182,592 164,312 11% Expenses: Operating and development 44,911 39,180 15% 88,854 78,197 14% Sales and marketing 12,794 11,744 9% 24,603 23,176 6% ------- ------- -------- -------- Total operating profits $35,465 $32,555 9% $ 69,135 $ 62,939 10% ======= ======= ======== ======== Profit margin 38% 39% -- 38% 38% -- Percent of Revenue: Operating and development 48% 47% 49% 48% Sales and marketing 14% 14% 13% 14% The increase in Investment processing revenues over the corresponding prior year periods is primarily attributable to increased sales in our core service bureau business. This improvement reflects the installation of new clients onto TRUST 3000 that contracted for services during the past several quarters. Revenues were also affected by an increase in brokerage services through SEI's captive broker/dealer. Operating profits and profit margin reflect increased revenue and continued investments in new products. We believe our future growth in revenues and earnings will come from maintaining a consistent level of investment in the development of new products and services to grow existing markets and to expand into new markets. However, consolidations among our banking clients continue to be a major strategic issue facing this segment. Investment Advisors - ------------------- Investment Advisors provides investment management programs and investment processing solutions to affluent investors distributed through a network of investment professionals. Revenues are primarily earned through management fees that are based upon a fixed percentage, referred to as basis points, of the average daily net asset value of assets under management. The increase in revenues in both comparable periods was primarily due to growth in assets under management as a result of new business. Our net cash flow from funds for the second quarter 2001 was $1.0 billion and $2.4 billion for the first six months of 2001. We attribute most of this growth to our continued success at recruiting new registered investment advisors. We established approximately 700 new registered investment advisor relationships during the first six months of 2001, of which 200 occurred in the second quarter, bringing our total network to about 8,300 advisors. Operating profits and profit margin improvement was due to increased sales of our investment management programs while controlling costs, primarily sales and marketing. We have been able to continue to make investments in developing new products without affecting margins. Despite the recent volatility in the marketplace, we continue to attract new business that will support future growth. However, continued volatility in the capital markets could negatively affect future revenues and profits. 18
Three Months Ended Six Months Ended June 30, June 30, Percent June 30, June 30, Percent 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Total Revenues $38,687 $30,944 25% $76,766 $59,941 28% Expenses: Operating and development 11,916 9,229 29% 23,168 19,844 17% Sales and marketing 12,372 11,929 4% 24,477 24,301 1% ------- ------- ------- ------- Total operating profits $14,399 $ 9,786 47% $29,121 $15,796 84% ======= ======= ======= ======= Profit margin 37% 32% -- 38% 26% -- Percent of Revenue: Operating and development 31% 30% 30% 33% Sales and marketing 32% 38% 32% 41% Enterprises - ----------- Enterprises provides retirement business solutions and treasury business solutions for corporations, unions and political entities, endowments and foundations and insurance companies. Revenues are primarily earned through management fees that are based upon a fixed percentage, referred to as basis points, of the average daily net asset value of assets under management. The increase in revenues over the comparable prior year periods was fueled by growth in average assets under management due to new clients that were sold and funded during the last twelve months. We feel this increase in new sales is the result of increased market acceptance of our outsource business solution across a diverse range of clients. We added 17 new institutional clients during the second quarter of 2001 and 22 new institutional clients during the first six months in 2001. Net cash inflow from funds during the quarter was approximately $1.3 billion. We had an unfunded backlog of about $400 million as of June 30, 2001. Operating profits and profit margins in both comparable periods were significantly affected by the timing of certain expenditures. During the first six months of 2000, we incurred significant technology costs associated with the development of our treasury solutions platform that strained profits and margins. In addition, the second quarter of 2001 reflects an unusual decrease in sales and marketing expenditures due to the timing of marketing programs and events. We do anticipate a increase in marketing expenditures in the near term. We are encouraged by the receptivity of the market to our business solutions. We will continue to build and invest in this business that is diversified by client and solution types in markets that we believe offer new opportunities for our services. However, future revenues and earnings could be significantly affected by changes in the capital markets. Money Managers - -------------- Money Managers provides investment solutions to U.S investment managers, mutual fund companies and alternative investment managers worldwide. Revenues are earned through administration and distribution fees that are based upon a fixed percentage, referred to as basis points, of the average daily net asset value of assets under management. 19
Three Months Ended Six Months Ended June 30, June 30 Percent June 30, June 30 Percent 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Total Revenues $ 17,290 $13,613 27% $ 33,198 $ 26,349 26% Expenses: Operating and development 5,338 5,901 (10%) 10,791 10,218 6% Sales and marketing 5,617 6,175 (9%) 11,934 12,326 (3%) -------- ------- -------- -------- Total operating profits $ 6,335 $ 1,537 312% $ 10,473 $ 3,805 175% ======== ======= ======== ======== Profit margin 37% 11% -- 32% 14% -- Percent of Revenue: Operating and development 31% 44% 32% 39% Sales and marketing 32% 45% 36% 47% The increase in revenues over the prior years comparable periods was primarily due to a significant increase in average assets under administration, mainly during the second quarter of 2001. We experienced strong sales during the second quarter 2001, including a significant client that funded during June 2001. We contracted with eight alternative investment managers and six U.S. money mangers, many of which will be funding during the third quarter of 2001. Operating profits and profit margins increased over the corresponding prior year periods due to the increase in new business activity. During 2000, we made significant investments in developing the necessary infrastructure to tailor our products and services in these markets. We will continue to make investments in this business that could affect future profits and margins. In addition, revenues are affected by swings in the capital markets. Any significant change in value would have an impact on revenues. Investments in New Businesses - ----------------------------- Investments in New Businesses include our global asset management and investment processing initiatives that incorporate our investment products and services to provide investment solutions to institutional and high-net-worth investors outside the United States. Revenues are primarily earned through management fees and processing fees that are based upon a fixed percentage, referred to as basis points, of the average daily net asset value of assets under management.
Three Months Ended Six Months Ended June 30, June 30 Percent June 30, June 30 Percent 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Total Revenues $8,708 $8,452 3% $16,472 $15,111 9% Expenses: Operating and development 4,280 4,543 (6%) 8,852 7,820 13% Sales and marketing 3,693 3,607 2% 7,008 7,280 (4%) ------ ------ ------- ------- Total operating profits $ 735 $ 302 143% $ 612 $ 11 5,464% ====== ====== ======= ======= Profit margin 8% 4% -- 4% 0% -- Percent of Revenue: Operating and development 49% 53% 54% 52% Sales and marketing 43% 43% 42% 48% 20
Three Months Ended Six Months Ended June 30, June 30 Percent June 30, June 30 Percent 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Total Revenues $ 10,625 $ 9,952 7% $ 20,753 $ 19,473 7% Expenses: Operating and development 10,869 10,311 5% 21,678 19,367 12% Sales and marketing 4,659 5,354 (13%) 9,369 10,096 (7%) -------- -------- -------- -------- Total operating losses $ (4,903) $ (5,713) 14% $(10,294) $ (9,990) (3%) ======== ======== ======== ======== Profit margin (46%) (57%) -- (50%) (51%) -- Percent of Revenue: Operating and development 102% 104% 105% 99% Sales and marketing 44% 53% 45% 52% The increase in revenues over the corresponding prior year periods is primarily due to an increase is assets under management from our Europe/South Africa, Korea and Canada initiatives. Also, we are beginning to see some early positive results from the launch of our U.K. pension plan initiative. Finally, revenues in 2000 included our Canadian consulting business that was sold in July 2000. Excluding those revenues, revenues would have increased 25 percent in the second quarter 2001 and 28 percent for the first six months of 2001. The pace of global asset gathering and revenue recognition continues to accelerate. However, we also accelerated the pace of our investment efforts especially in the European region. We plan to undertake new initiatives later in the year, directed at high net worth and institutional investors in Europe. We've also continued our substantial development efforts to enhance our global capabilities of the TRUST 3000 system, especially multi-currency and global reporting capabilities. 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 this year and into 2002. General & Administrative - ------------------------ Other Income - ------------ Other income on the accompanying Consolidated Statements of Income consist of the following:
Three Months Ended Six Months Ended June 30, June 30 Percent June 30, June 30 Percent 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ General and Administrative $6,121 $4,243 44% $11,504 $7,785 48% Percent of Revenue 4% 3% 3% 3% 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 6 of the Notes to Consolidated Financial Statements). The increase in LSV's net earnings is due to an increase in assets under management. 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. Although interest income increased over the corresponding prior periods, our interest rates have substantially decreased. Interest expense primarily relates to our long-term debt and other borrowings. 21
Three Months ended Six Months ended June 30, June 30, Percent June 30, June 30, Percent 2001 2001 Change 2000 2001 Change ---- ---- ------ ---- ---- ------ Equity in the earnings of unconsolidated affiliate $2,554 $1,757 45% $ 4,792 $ 3,510 37% Interest income 1,541 1,066 45% 3,790 2,051 85% Interest expense (534) (551) (3%) (1,084) (1,150) 6% ------ ------ ------- ------- Total other income, net $3,561 $2,272 57% $ 7,498 $ 4,411 70% ====== ====== ======= ======= Liquidity and Capital Resources - ------------------------------- Six Months --------------------- Ended June 30, --------------------- 2001 2000 ---- ---- Net cash provided by operating activities $ 64,519 $ 31,578 Net cash used in investing activities (34,789) (23,190) Net cash used in financing activities (51,344) (19,693) -------- -------- Net decrease in cash and cash equivalents (21,614) (11,305) Cash and cash equivalents, beginning of period 159,576 73,206 -------- -------- Cash and cash equivalents, end of period $137,962 $ 61,901 ======== ======== Cash requirements and liquidity needs are primarily funded through operations and our capacity for additional borrowing. We currently have a line of credit 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 8 of the Notes to Consolidated Financial Statements). Additionally, we have a term loan agreement that provides for borrowings of up to $25.0 million (See Note 9 of the Notes to the Consolidated Financial Statements). At June 30, 2001, the unused sources of liquidity consisted of unrestricted cash and cash equivalents of $127.1 million and the unused portion of the line of credit of $50.0 million and $25.0 million of the term loan agreement On August 2, 2001, we borrowed $25.0 on the term loan agreement. The increase in cash flow from operations was primarily due to an increase in income and the tax benefit received from stock options exercised as a result of the rise in our stock price during the past 3 years. The tax benefit on stock options exercised was previously included in cash flows from financing activities. The prior year has been reclassified to conform with the current year presentation. Cash flows from investing activities are principally affected by capital expenditures and investments in Company-sponsored mutual funds. Capital expenditures in the first six months of 2001 primarily related to the expansion of our corporate headquarters. Total cost of the expansion is estimated at $50.0 million, of which we have spent $15.5 million to date and $9.6 million during 2001. The expansion is expected to be completed by late 2002. Also, cash flow from investing activities includes purchases of Company-sponsored mutual funds of approximately $18.2 million during 2001, net of $6.8 million of sales, as compared to $15.1 million during 2000, net of $2.1 million of sales. Cash flows from financing activities are primarily affected by debt and equity transactions. Principal payments on our long-term debt are made annually from the date of issuance while interest payments are made semi-annually. Principal and interest payments were made in the first six months of 2001 and 2000 (See Note 9 of the Notes to Consolidated Financial Statements). We continued our common stock repurchase program. We purchased approximately 1,327,000 shares of our common stock at a cost of $50.0 million during the first six months of 2001. As of July 31, 2001, we still had $46.1 million remaining authorized for the purchase of our common stock. Cash dividends of $.09 per share were paid in the first six months of 2001 and $.07 in the first six months of 2000. The Board of Directors has indicated its intention to continue making cash dividend payments. Our operating cash flow, borrowing capacity, and liquidity should provide adequate funds for continuing operations, continued investment in new products and equipment, our common stock repurchase program, expansion of our corporate campus, future dividend payments, and principal and interest payments on our long-term debt. 22 Forward-Looking Information - --------------------------- The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information contained in this discussion is or may be considered forward-looking. Forward-looking statements relate to future operations, strategies, financial results or other developments. Forward- looking statements are based upon estimates and assumptions that involve certain risks and uncertainties, many of which are beyond our control or are subject to change. Although we believe our assumptions are reasonable, they could be inaccurate. Our actual future revenues and income could differ materially from our expected results. We have no obligation to publicly update or revise any forward-looking statements. Quantitative and Qualitative Disclosures About Market Risk. - ---------------------------------------------------------- We do have a number of satellite offices located outside the United States that conduct business in local currencies of that country. All foreign operations aggregate approximately 6 percent of total consolidated revenues. Due to this limited activity, we do not hedge against foreign operations nor do we 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 other borrowing. 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. We are exposed to market risk associated with changes in the fair value of our investments available for sale. To provide some protection against potential fair value changes associated with our investments available for sale, we have entered into various derivative financial transactions. The derivative instruments are used to hedge changes in the fair market value of certain investments available for sale. The derivative instruments are qualifying hedges and as such changes in the fair value hedge along with changes in the fair value of the related hedged item are reflected in the statement of income. We currently hold derivatives with a notional amount of $5.9 million with various terms, generally less than one year. The effectiveness of these hedging relationships is evaluated on a retrospective and prospective basis using quantitative measures of correlation. If a hedge is found to be ineffective, it no longer qualifies as a hedge and any excess gains or losses attributable to such ineffectiveness as well as subsequent changes in fair value are recognized in current period earnings. During 2001, the amount of hedge ineffectiveness that was charged against current period earnings was $.3 million. We believe the derivative financial instruments entered into provide protection against volatile swings in market valuation associated with our Investments available for sale. During 2001, we did not enter into or hold derivative financial instruments for trading purposes. 23 PART II. OTHER INFORMATION - -------- ----------------- Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) The following is a list of exhibits filed as part of the Form 10-Q. None. (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Company during the quarter ended June 30, 2001. 24 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 August 13, 2001 By /s/ Kathy Heilig ---------------------- --------------------------- Kathy Heilig Vice President and Controller 25