SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One)* X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange - --- Act of 1934 for the quarterly period ended September 30, 2002 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 October 31, 2002: 106,050,567 shares of common stock, par value $.01 per share.
PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements SEI Investments Company Consolidated Balance Sheets (unaudited) (In thousands) September 30, 2002 December 31, 2001 ------------------ ------------------ Assets - ------ Current Assets: Cash and cash equivalents $ 162,074 $ 163,685 Restricted cash 10,000 10,000 Receivables from regulated investment companies 21,371 25,550 Receivables, net of allowance for doubtful accounts of $1,700 61,289 56,327 Deferred income taxes 3,736 4,459 Prepaid expenses and other current assets 5,737 6,121 --------- --------- Total Current Assets 264,207 266,142 --------- --------- Property and Equipment, net of accumulated depreciation and amortization of $107,123 and $95,104 104,286 95,804 --------- --------- Capitalized Software, net of accumulated amortization of $14,770 and $13,469 12,153 11,055 --------- --------- Investments Available for Sale 64,317 66,332 --------- --------- Other Assets, net 22,525 21,583 --------- --------- Total Assets $ 467,488 $ 460,916 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 2
SEI Investments Company Consolidated Balance Sheets (unaudited) (In thousands, except par value) September 30, 2002 December 31, 2001 ------------------ ----------------- Liabilities and Shareholders' Equity - ------------------------------------ Current Liabilities: Current portion of long-term debt $ 9,556 $ 7,556 Accounts payable 2,584 4,977 Accrued expenses 125,204 128,408 Deferred revenue 1,153 3,402 ----------- ----------- Total Current Liabilities 138,497 144,343 ----------- ----------- Long-term Debt 34,889 43,055 ----------- ----------- Deferred Income Taxes 4,215 2,925 ----------- ----------- Shareholders' Equity: Common stock, $.01 par value, 750,000 shares authorized; 106,808 and 109,180 shares issued and outstanding 1,068 1,092 Capital in excess of par value 205,438 186,390 Retained earnings 86,740 85,085 Accumulated other comprehensive losses (3,359) (1,974) ----------- ----------- Total Shareholders' Equity 289,887 270,593 ----------- ----------- Total Liabilities and Shareholders' Equity $ 467,488 $ 460,916 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 3
SEI Investments Company Consolidated Statements of Income (unaudited) (In thousands, except per share data) Three Months ---------------------------------------- Ended September 30, ---------------------------------------- 2002 2001 ---- ---- Revenues $ 153,316 $ 163,403 Expenses: Operating and development 61,957 72,357 Sales and marketing 32,940 38,530 General and administrative 5,779 5,887 --------- --------- Income from operations 52,640 46,629 Equity in the earnings of unconsolidated affiliate 2,861 2,637 Net gain on investments 574 -- Interest income 1,303 1,887 Interest expense (663) (532) --------- --------- Income before income taxes 56,715 50,621 Income taxes 20,984 18,730 --------- --------- Net income 35,731 31,891 --------- --------- Other comprehensive loss, net of tax: Foreign currency translation adjustments (202) (112) Unrealized holding loss on investments: Unrealized holding losses during the period, net of income tax benefit of $1,600 and $468 (2,792) (797) Less: reclassification adjustment for losses included in net income, net of income tax expense of $1,016 and $0 1,730 (1,062) -- (797) ------- --------- ------ --------- Other comprehensive loss (1,264) (909) --------- --------- Comprehensive income $ 34,467 $ 30,982 ========= ========= Basic earnings per common share $ .33 $ .29 ========= ========= Diluted earnings per common share $ .32 $ .28 ========= ========= Dividends declared per common share $ .00 $ .00 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 4
SEI Investments Company Consolidated Statements of Income (unaudited) (In thousands, except per share data) Nine Months ----------------------------- Ended September 30, ----------------------------- 2002 2001 ---- ---- Revenues $ 471,382 $ 493,184 Expenses: Operating and development 198,880 225,700 Sales and marketing 99,033 115,921 General and administrative 17,460 17,391 --------- --------- Income from operations 156,009 134,172 Equity in the earnings of unconsolidated affiliate 8,643 7,429 Net gain on investment 574 -- Interest income 3,847 5,677 Interest expense (1,628) (1,616) --------- --------- Income before income taxes 167,445 145,662 Income taxes 61,954 53,895 --------- --------- Net income 105,491 91,767 --------- --------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 656 (365) Unrealized holding loss on investments: Unrealized holding losses during the period net of income tax benefit of $2,240 and $392 (3,771) (668) Less: reclassification adjustment for losses included in net income, net of income tax expense of $1,016 and $0 1,730 (2,041) -- (668) ----- --------- ---- --------- Other comprehensive loss (1,385) (1,033) --------- --------- Comprehensive income $ 104,106 $ 90,734 ========= ========= Basic earnings per common share $ .97 $ .84 ========= ========= Diluted earnings per common share $ .93 $ .80 ========= ========= Dividends declared per common share $ .11 $ .09 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 5
SEI Investments Company Consolidated Statements of Cash Flows (unaudited) (In thousands) Nine Months ------------------------- Ended September 30, ------------------------- 2002 2001 ---- ---- Cash flows from operating activities: Net income $ 105,491 $ 91,767 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 13,614 14,527 Undistributed equity in the earnings of unconsolidated affiliate (1,896) (714) Tax benefit on stock options exercised 15,188 25,473 Other (736) (1,156) Change in current assets and liabilities: Decrease (increase) in Receivables from regulated investment companies 4,179 1,855 Receivables (4,523) (17,136) Prepaid expenses and other current assets 425 (1,746) Increase (decrease) in Accounts payable (2,393) (1,859) Accrued expenses 1,100 26,549 Deferred revenue (2,249) (10,516) --------- -------- Net cash provided by operating activities 128,200 127,044 --------- -------- Cash flows from investing activities: Additions to property and equipment (20,944) (27,176) Additions to capitalized software (2,399) -- Purchase of investments available for sale (16,489) (60,464) Sale of investments available for sale 21,215 18,227 Other 432 (1,742) --------- -------- Net cash used in investing activities (18,185) (71,155) --------- -------- Cash flows from financing activities: Payment on long-term debt (6,166) (2,000) Purchase and retirement of common stock (103,639) (96,072) Proceeds from issuance of common stock 10,229 12,560 Borrowing on long term debt -- 25,000 Payment of dividends (12,050) (9,786) --------- -------- Net cash used in financing activities (111,626) (70,298) --------- -------- Net decrease in cash and cash equivalents (1,611) (14,409) Cash and cash equivalents, beginning of period 163,685 147,676 --------- -------- Cash and cash equivalents, end of period $ 162,074 $133,267 ========= ======== The accompanying notes are an integral part of these consolidated financial statements. 6
SEI Investments Company Notes to Consolidated Financial Statements (all figures are in thousands except per share data) Note 1. Summary of Significant Accounting Policies Nature of Operations SEI Investments Company (the "Company") is organized around its five primary target markets: Private Banking and Trust, Investment Advisors, Enterprises, Money Mangers, and Investments in New Businesses. Private Banking and 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 provides 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 for a fair statement of the financial position as of September 30, 2002 and the results of operations for the three and nine months period ended September 30, 2002 and 2001, and cash flows for the nine month period ended September 30, 2002 and 2001. 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 to the Consolidated Financial Statements 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 ("SIDCO"), SEI Investments Management Corporation ("SIMC"), 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). 7
Property and Equipment Property and equipment on the accompanying Consolidated Balance Sheets consist of the following: Estimated Useful Lives September 30, 2002 December 31, 2001 (In Years) ------------------ ----------------- ------------- Equipment $ 78,453 $ 74,809 3 to 5 Buildings 75,286 44,981 25 to 39 Land 9,345 9,345 N/A Purchased software 20,845 18,952 3 Furniture and fixtures 15,353 14,748 3 to 5 Leasehold improvements 7,421 7,492 Lease Term Construction in progress 4,706 20,581 N/A -------- --------- 211,409 190,908 Less: Accumulated depreciation and amortization (107,123) (95,104) -------- --------- Property and Equipment, net $104,286 $ 95,804 ======== ========= 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 5.9 years. In accordance with EITF 00-03 "Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity's Hardware", the Company applies Statement of Position ("SOP") 98-1 " Accounting for the Cost of Computer Software Developed or Obtained for Internal Use," for development costs associated with software products to be provided in a hosting environment. SOP 98-1 requires that costs incurred in the preliminary project and post implementation stages of an internal software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. The Company capitalized $2.4 million in software development costs in accordance with SOP 98-1 during the nine month period ending September 30, 2002. 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. 8
For the Three month period ended September 30, 2002 ----------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Basic earnings per common share $35,731 107,936 $.33 ==== Dilutive effect of stock options -- 3,799 ------- ------- Diluted earnings per common share $35,731 111,735 $.32 ======= ======= ==== For the Three month period ended September 30, 2001 ----------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Basic earnings per common share $31,891 108,794 $.29 ==== Dilutive effect of stock options -- 6,030 ------- ------- Diluted earnings per common share $31,891 114,824 $.28 ======= ======= ==== Options to purchase 2,802 and 1,253 shares of common stock, with an average exercise price of $45.53 and $49.96, were outstanding during the third quarter of 2002 and 2001, 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. For the Nine month period ended September 30, 2002 --------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Basic earnings per common share $105,491 108,988 $.97 ==== Dilutive effect of stock options -- 4,686 -------- ------- Diluted earnings per common share $105,491 113,674 $.93 ======== ======= ==== For the Nine month period ended September 30, 2001 ---------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- Basic earnings per common share $91,767 108,685 $.84 ==== Dilutive effect of stock options -- 6,546 ------- -------- Diluted earnings per common share $91,767 115,231 $.80 ======= ======== ===== Options to purchase 2,802 and 1,288 shares of common stock, with an average exercise price of $45.53 and $49.73 were outstanding during the first nine months of 2002 and 2001, 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. 9
Statements of Cash Flows For purposes of the Consolidated Statements of Cash Flows, the Company considers investment instruments purchased with an original maturity of three months or less to be cash equivalents. Supplemental disclosures of cash paid/received during the nine month period ended September 30 is as follows: 2002 2001 ---- ---- Interest paid $ 2,318 $ 2,061 Interest and dividends received 4,010 6,046 Income taxes paid 34,210 -- Management's Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the Unites States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Note 2. Comprehensive Income - The Company computes comprehensive income in accordance with Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and presentation of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements that is presented with equal prominence as other financial statements. Comprehensive income includes net income, foreign currency translation adjustments, and unrealized holding gains and losses and is presented on the accompanying Consolidated Statements of Income. Accumulated other comprehensive losses on the Consolidated Balance Sheets is the change from December 31, 2001 to September 30, 2002 as follows: Foreign Unrealized Accumulated Currency Holding Other Translation Losses Comprehensive Adjustments on Investments Losses ----------- -------------- ------------- Beginning balance (Dec. 31, 2001) $(978) $ (996) $ (1,974) Current period change 656 (2,041) (1,385) ----- ------- -------- Ending Balance (September 30, 2002) $(322) $(3,037) $ (3,359) ===== ======= ======== Note 3. Receivables - Receivables on the accompanying Consolidated Balance Sheets consist of the following: September 30, 2002 December 31, 2001 ------------------ ----------------- Trade receivables $ 29,189 $ 26,415 Fees earned, not received 1,326 2,527 Fees earned, not billed 32,474 29,085 -------- -------- 62,989 58,027 Less: Allowance for doubtful accounts (1,700) (1,700) -------- -------- $ 61,289 $ 56,327 ======== ======== 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. 10
Receivables from regulated investment companies on the accompanying Consolidated Balance Sheets represent fees earned from the Company's wholly owned subsidiaries, SIDCO and SIMC, 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 and declines in value, if any, judged to be other than temporary are reported separately on the accompanying Consolidated Statements of Income. Investments available for sale at September 30, 2002 had an aggregate cost of $69,247 and an aggregate market value of $64,317 with gross unrealized holding losses of $4,930. At that date, the net unrealized holding losses of $3,037 (net of income tax benefit of $1,893) were included in Accumulated other comprehensive losses on the accompanying Consolidated Balance Sheets. Investments available for sale at December 31, 2001 had an aggregate cost of $67,996 and an aggregate market value of $66,332 with gross unrealized holding losses of $1,664. At that date, the net unrealized holding losses of $996 (net of income tax benefit of $668) were included in Accumulated other comprehensive losses on the accompanying Consolidated Balance Sheets. The Company continually evaluates the value of its investments that have experienced a decline in value that should be adjusted to its current market value. During the third quarter 2002, management determined that certain investments classified as Investments available for sale experienced a decline in value, which was considered to be other than temporary. As a result, the Company recorded a loss of $2,367 which is included in Net gain on investments on the accompanying Consolidated Statements of Operations. Note 5. Derivative Instruments and Hedging Activities - The Company is exposed to market risk associated with its designated Investments available for sale. To provide some protection against potential market fluctuations associated with its Investments available for sale the Company has entered into various derivative financial transactions in the form of futures and equity contracts (i.e. derivatives). 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. Also, changes in the entire fair value of a derivative that is not designated as a hedge are recognized immediately 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 11
effective hedge, the Company will discontinue hedge accounting prospectively. During 2002, the Company discontinued hedge accounting prospectively for certain derivatives utilized to manage economic exposure because of hedge ineffectiveness. The Company may continue to enter into economic hedges to support certain business strategies but may not designate such derivatives as accounting hedges. Management's decision to no longer apply hedge accounting to certain derivatives as well as hedge ineffectiveness may cause volatility in quarterly earnings and equity. At September 30, 2002, income before taxes, on the accompanying Consolidated Statements of Income include a net gain of $3,308 and $5,500 from hedge ineffectiveness for the third quarter 2002 and nine month period ended September 30, 2002, respectively. The Company currently holds futures contracts with a notional amount of $5,107 with a financial institution for various terms. The Company also currently holds equity derivatives with a notional amount of $15,297 with a financial institution with various terms. During the nine month period ended September 30, 2002, the Company did not enter into or hold derivative financial instruments for trading purposes. Note 6. Other Assets - Other assets on the accompanying Consolidated Balance Sheets consist of the following: September 30, 2002 December 31, 2001 ------------------ ----------------- Investment in unconsolidated affiliate $ 7,929 $ 6,033 Other, net 14,596 15,550 ---------- --------- Other assets $ 22,525 $ 21,583 ========== ========= Other, net consists of long-term prepaid expenses, deposits and other investments carried at cost. 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 44 percent for the nine month period ending September 30, 2002 and 45 percent for the nine month period ending September 30, 2001. LSV is accounted for using the equity method of accounting due to the Company's 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 month period ending September 30: 2002 2001 ---- ---- Revenues $ 9,047 $ 7,672 ======= ======= Net income $ 6,526 $ 5,682 ======= ======= 12
The following table contains the condensed statements of income of LSV for the nine month period ending September 30: 2002 2001 ---- ---- Revenues $26,914 $22,360 ======= ======= Net income $19,716 $16,454 ======= ======= The following table contains the condensed balance sheets of LSV: September 30, 2002 December 31, 2001 ------------------ ----------------- Current assets $16,387 $ 13,394 Non-current assets 159 89 ------- -------- Total assets $16,546 $ 13,483 ======= ======== Current liabilities $ 1,807 $ 1,686 Partners' capital 14,739 11,797 ------- -------- Total liabilities and partners' capital $16,546 $ 13,483 ======= ======== Note 7. Accrued Expenses - Accrued expenses on the accompanying Consolidated Balance Sheets consist of the following: September 30, 2002 December 31, 2001 ------------------ ----------------- Accrued compensation $ 38,687 $ 39,542 Accrued income taxes 14,645 5,871 Accrued proprietary fund services 9,261 12,463 Accrued brokerage services 9,394 8,456 Other accrued expenses 53,217 62,076 ---------- --------- Total accrued expenses $ 125,204 $ 128,408 ========= ========= Note 8. Line of Credit - The Company has a line of credit agreement (the "Agreement") with a principal lending institution that provides for borrowings of up to $25,000 and expires on December 19, 2002, at which time the outstanding principal balance, if any, becomes due unless the Agreement is extended. The line of credit, when utilized, accrues interest at the Prime rate or one and one-quarter percent above the London Interbank Offer 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. There were no borrowings on the Company's line of credit during the nine month period ending September 30, 2002 and 2001. Note 9. Long-term Debt - On February 24, 1997, the Company signed a Note Purchase Agreement authorizing the issuance and sale of $20,000 of 7.20% Senior Notes, Series A, and $15,000 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 Company may, at its option, prepay all or part of these Notes. The prepayment amount would be 100 percent of the principal amount of the Notes, together with interest on the Notes accrued to the date of prepayment in addition to a make-whole amount. The proceeds from the Notes were used to repay the outstanding balance on the Company's line of credit at that date. The Note Purchase Agreement, as amended, contains various covenants, including limitations on indebtedness, maintenance of minimum net worth levels, and restrictions on certain investments. In addition, the agreement limits the Company's ability to merge or consolidate, 13
and to sell certain assets. The Company was in compliance with all covenants under the Notes during the nine month period ending September 30, 2002. 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 principal payment of $2,000 in February 2002. The current portion of the Notes amounted to $4,000 at September 30, 2002. 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 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 one and thirty-five hundredths of one percent above the London Interbank Offer Rate (LIBOR). The Agreement contains various covenants, including limitations on indebtedness and restrictions on certain investments. None of these covenants negatively affect the Company's liquidity or capital resources. On August 2, 2001, the Company borrowed $25,000 on this term loan. The proceeds from the term loan were used to support capital improvement projects for our corporate campus and other business purposes. The Company made its scheduled principal payments of $1,389 in March, June and September of 2002. The current portion of the notes amounted to $5,556 at September 30, 2002. The Company was in compliance with all covenants during the nine month period ending September 30, 2002. 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 $603,365, including an additional authorization of $50,000 on September 23, 2002. Through September 30, 2002, a total of 104,825,000 shares at an aggregate cost of $562,078 have been purchased and retired. During the three month period ended September 30, 2002, the Company purchased 2,303,000 shares at an aggregate cost of $59,559. The Company purchased 3,723,000 shares at a total cost of $103,639 during the nine month period ended September 30, 2002. 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. The Company purchased in a privately negotiated transaction 750,000 shares for $20,340 on October 23, 2002 from an institutional investor that holds greater than 10 percent of the outstanding shares. Note 11. Segment Information - The Company defines its business segments in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way public business enterprises report financial information about operating segments in financial statements. SFAS 131 also requires additional disclosures about product and services, geographic areas, and major customers. The Company's management evaluates financial performance of its operating segments based on Income from operations. Our operations and organizational structures were realigned in 2001 into separate business units that offer products and services tailored for particular market segments. Our reportable segments are Private Banking and Trust, Investment Advisors, Enterprises, Money Managers, and Investments in New Businesses. The accounting policies of the reportable segments are the same as those described in Note 1. The information in the following tables is derived from the Company's internal financial reporting used for corporate management purposes. There are no inter-segment revenues for the three and nine months period ended September 30, 2002. Management evaluates Company assets on a consolidated basis during interim periods. 14
The following tables highlight certain unaudited financial information about each of the Company's segments for the three months ended September 30, 2002 and 2001. Private Investments General Banking Investment Money In New And & Trust Advisors Enterprises Managers Businesses Administrative Total ------- -------- ----------- -------- ---------- -------------- ----- For the Three-Month Period Ended September 30, 2002 --------------------------------------------------------------------------------------------------- Revenues $80,510 $35,866 $13,393 $ 12,502 $ 11,045 $ 153,316 ------- ------- ------- -------- -------- --------- Operating income (loss) $34,296 $20,023 $ 5,502 $ 2,118 $ (3,520) $ (5,779) $ 52,640 ------- ------- ------- -------- -------- -------- Other income, net $ 4,075 --------- Income before income taxes $ 56,715 --------- Depreciation and amortization $ 2,736 $ 820 $ 279 $ 289 $ 345 $ 146 $ 4,615 ------- ------- ------- -------- -------- -------- --------- Capital expenditures $ 2,983 $ 986 $ 370 $ 417 $ 308 $ 283 $ 5,347 ------- ------- ------- -------- -------- -------- --------- Private Investments General Banking Investment Money In New And & Trust Advisors Enterprises Managers Businesses Administrative Total ------- -------- ----------- -------- ---------- -------------- ----- For the Three-Month Period Ended September 30, 2001 -------------------------------------------------------------------------------------------------- Revenues $89,201 $38,841 $15,559 $ 9,682 $ 10,120 $ 163,403 ------- ------- ------- -------- -------- --------- Operating income (loss) $37,562 $15,420 $ 4,366 $ 2,054 $ (6,886) $ (5,887) $ 46,629 ------- ------- ------- -------- -------- -------- Other income, net $ 3,992 --------- Income before income taxes $ 50,621 --------- Depreciation and amortization $ 2,846 $ 938 $ 333 $ 259 $ 352 $ 183 $ 4,911 ------- ------- ------- -------- -------- -------- --------- Capital expenditures $ 5,382 $ 1,005 $ 368 $ 400 $ 636 $ 502 $ 8,293 ------- ------- ------- -------- -------- -------- --------- 15
The following tables highlight certain unaudited financial information about each of the Company's segments for the nine months ended September 30, 2002 and 2001. Private Investments General Banking Investment Money In New And & Trust Advisors Enterprises Managers Businesses Administrative Total ------- -------- ----------- -------- ---------- -------------- ----- For the Nine-Month Period Ended September 30, 2002 ----------------------------------------------------------------------------------------------- Revenues $ 246,346 $ 113,986 $ 42,420 $ 34,103 $ 34,527 $ 471,382 ---------- ---------- ----------- --------- -------- --------- Operating income (loss) $ 101,773 $ 58,463 $ 16,682 $ 6,693 $ (10,142) $ (17,460) $ 156,009 ---------- ---------- ----------- --------- --------- --------- Other income, net $ 11,436 --------- Income before income taxes $ 167,445 --------- Depreciation and amortization $ 8,337 $ 2,315 $ 807 $ 783 $ 959 $ 414 $ 13,615 ---------- ---------- ----------- --------- --------- --------- --------- Capital expenditures $ 12,693 $ 4,282 $ 1,947 $ 1,451 $ 1,741 $ 1,229 $ 23,343 ---------- ---------- ----------- --------- --------- --------- --------- Private Investments General Banking Investment Money In New And & Trust Advisors Enterprises Managers Businesses Administrative Total ------- ---------- ----------- --------- ----------- -------------- ----- For the Nine-Month Period Ended September 30, 2001 ------------------------------------------------------------------------------------------------ Revenues $ 271,793 $ 115,607 $ 48,757 $ 26,154 $ 30,873 $ 493,184 ---------- ---------- ----------- --------- --------- --------- Operating income (loss) $ 106,697 $ 44,541 $ 14,839 $ 2,666 $ (17,180) $ (17,391) $ 134,172 ---------- ---------- ----------- --------- --------- --------- Other income, net $ 11,490 --------- Income before income taxes $ 145,662 --------- Depreciation and amortization $ 9,002 $ 2,449 $ 849 $ 706 $ 1,001 $ 520 $ 14,527 ---------- ---------- ----------- --------- --------- --------- --------- Capital expenditures $ 19,161 $ 3,006 $ 1,102 $ 1,047 $ 1,357 $ 1,503 $ 27,176 ---------- ---------- ----------- --------- --------- --------- --------- 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. (In thousands, except asset balances and per share data) This discussion reviews and analyzes the consolidated financial condition at September 30, 2002 and 2001, the consolidated results of operations for the three and nine months ended September 30, 2002 and 2001 and other key factors that may affect future performance. This discussion should be read in conjunction with the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements. Financial information on each of these segments is reflected in Note 11 of the Notes to Consolidated Financial Statements. Results of Operations Three and Nine Months Ended September 30, 2002 compared to Three and Nine Months Ended September 30, 2001 Consolidated Overview Our operations and organizational structures were realigned in 2001 into business units that offer products and services tailored for particular market segments. Our reportable segments are Private Banking and Trust, Investment Advisors, Enterprises, Money Managers, and Investments in New Businesses. The accounting policies of our business segments are the same as those used in the preparation of the consolidated financial statements. Management evaluates financial performance of its operating segments based on Income from operations. Revenue and Income from operations by segment for the three and nine months ended September 30, 2002 and 2001 are as follows: Three Months ended September 30, Nine Months ended September 30, Percent Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Private Banking and Trust: Revenues $ 80,510 $ 89,201 (10%) $246,346 $271,793 (9%) Income from operations 34,296 37,562 (9%) 101,773 106,697 (5%) Investment Advisors: Revenues 35,866 38,841 (8%) 113,986 115,607 (1%) Income from operations 20,023 15,420 30% 58,463 44,541 31% Enterprises: Revenues 13,393 15,559 (14%) 42,420 48,757 (13%) Income from operations 5,502 4,366 26% 16,682 14,839 12% Money Managers: Revenues 12,502 9,682 29% 34,103 26,154 30% Income (loss) from operations 2,118 2,054 3% 6,693 2,666 151% Investments in New Businesses: Revenues 11,045 10,120 9% 34,527 30,873 12% Loss from operations (3,520) (6,886) 49% (10,142) (17,180) 41% General and Administrative: Loss from operations (5,779) (5,887) 2% (17,460) (17,391) 0% Consolidated Segment Totals: Revenues $153,316 $163,403 (6%) $471,382 $493,184 (4%) Income from operations $ 52,640 $ 46,629 13% $156,009 $134,172 16% 17
Revenues decreased from the corresponding prior year periods primarily due to client losses, the recent downturn in the capital markets and economic uncertainty. During the latter part of 2001, certain clients in our fund processing and institutional asset management businesses terminated their relationship with us. The effect of these lost clients has had a negative impact on our revenues during 2002. The recent downturn in the capital markets has adversely affected the value of our assets under management and administration. This directly reduces the revenue we generate from our businesses receiving asset-based fees. In addition, economic uncertainty during the past year has slowed many purchase decisions in most of our target markets. However, we continue to experience moderate growth through new sales, although this has only partially mitigated our revenue losses. Income from operations improved $6,011 or 13 percent, over the third quarter 2001, and $21,837 or 16 percent, over the nine months 2001. Operating margins for the third quarter 2002 increased to 34 percent from 29 percent for the third quarter 2001, and for the nine months ended 2002 increased to 33 percent from 27 percent for the nine months ended 2001. The increase in operating income and operating margins was due to cost controls and improved productivity. We continued to manage discretionary expenses effectively and prioritize our investment spending. Our investment spending focuses around building outsource business solutions for our target markets. Our short-term expectation is that any improvement in earnings and margins is expected to continue to come from cost containment and productivity improvements. In the longer run, we will continue to invest in the development of new products and services to expand our existing client base and penetrate new markets. However, prolonged volatility in the capital markets, delays in purchase decisions and mergers and acquisitions in the banking industry will continue to be long-term challenges. Asset Balances (In millions) As of September 30, Percent ------------------- 2002 2001 Change ---- ---- ------ Assets invested in equity and fixed income programs $ 52,450 $ 52,795 (1%) Assets invested in liquidity funds 19,763 21,208 (7%) -------- --------- Assets under management 72,213 74,003 (2%) Client proprietary assets under administration 161,207 169,860 (5%) -------- --------- Assets under management and administration $233,420 $ 243,863 (4%) ======== ========= 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 and Trust provides investment processing solutions, fund processing solutions, and investment management programs to banks and private trust companies. Investment processing solutions 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. Investment processing fees are primarily earned from monthly processing, and software servicing 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. Fund processing fees are based on a fixed percentage, referred to as basis points, of the average daily net asset value of the proprietary funds. Investment management fees 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. 18
Three Months Ended Nine Months Ended Sept. 30, Sept. 30 Percent Sept. 30, Sept. 30 Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Revenues: Investment processing fees $57,330 $57,127 0% $171,659 $173,032 (1%) Fund processing fees 13,360 21,326 (37%) 43,696 66,027 (34%) Investment management fees 9,820 10,748 (9%) 30,991 32,734 (5%) ------- ------- -------- -------- Total revenues 80,510 89,201 (10%) 246,346 271,793 (9%) Expenses: Operating and development 33,854 39,359 (14%) 111,117 128,213 (13%) Sales and marketing 12,360 12,280 1% 33,456 36,883 (9%) ------- ------- -------- -------- Total operating profits $34,296 $37,562 (9%) $101,773 $106,697 (5%) ======= ======= ======== ======== Profit margin 43% 42% 41% 39% Percent of Revenue: Operating and development 42% 44% 45% 47% Sales and marketing 15% 14% 14% 14% Investment processing fees for 2001 included one-time implementation fees for additional account conversion activity relating to acquisitions by some of our bank clients. Recurring processing fees increased in 2002 from these clients, however the decrease in one-time implementation fees was more than the increase in recurring processing fees. The decrease in fund processing fees in both comparable periods in 2002 was mainly due to the loss of certain clients during the latter part of 2001. The loss of these clients resulted in a significant decrease in assets under administration. As a result of these lost clients, fund processing fees decreased approximately $4,500 for the three months ended September 30, 2002 and $18,900 for the nine months ended September 30, 2002 as compared to the prior year comparable periods Also, the recent decline in the capital markets has negatively affected the value of the assets we administer which in turn had adversely affected the revenues we earn from these assets. Operating profits decreased in 2002, as compared to 2001 for both comparable periods whereas profit margins increased slightly. The decrease in profits was mainly due to the revenue losses mentioned above, net of the decrease in direct expenses associated with these clients. We also continued to be more selective about our investment spending and cost control measures. 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. 19
Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Total Revenues $ 35,866 $ 38,841 (8%) $113,986 $115,607 (1%) Expenses: Operating and development 8,393 11,449 (27%) 28,303 34,617 (18%) Sales and marketing 7,450 11,972 (38%) 27,220 36,449 (25%) -------- -------- -------- -------- Total operating profits $ 20,023 $ 15,420 30% $ 58,463 $ 44,541 31% ======== ======== ======== ======== Profit margin 56% 40% 51% 38% Percent of Revenue: Operating and development 23% 29% 25% 30% Sales and marketing 21% 31% 24% 32% Revenues decreased slightly over the prior year periods primarily due to the decline in average assets under management offset in part by new business. We established approximately 470 new registered investment advisor relationships during the first nine months of 2002, of which 97 occurred in the third quarter bringing our total network to about 9,170 advisors. However, the recent downturn in the capital markets has negatively affected our revenues. Operating profits and profit margin improvement was primarily due to the management of discretionary expenses, mainly technology, personnel, and marketing. We believe future growth and success of this business is dependent upon continued acceptance of our investment management products and services. However, continued volatility in the capital markets could negatively affect future revenues and profits. Enterprises Enterprises provides retirement business solutions and treasury business solutions for corporations, unions and political entities, endowments and foundations and insurance companies. Retirement solutions revenues are primarily earned through management fees that are based upon a fixed percentage, referred to as basis points, of the average month-end net asset value of assets under management. Treasury solutions 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. Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Total Revenues $ 13,393 $ 15,559 (14%) $ 42,420 $ 48,757 (13%) Expenses: Operating and development 4,147 5,744 (28%) 13,017 16,535 (21%) Sales and marketing 3,744 5,449 (31%) 12,721 17,383 (27%) -------- -------- -------- -------- Total operating profits $ 5,502 $ 4,366 26% $ 16,682 $ 14,839 12% ======== ======== ======== ======== Profit margin 41% 28% 39% 30% Percent of Revenue: Operating and development 31% 37% 31% 34% Sales and marketing 28% 35% 30% 36% 20
The decrease in revenues was primarily due to client losses in our Retirement Solutions business during the fourth quarter of 2001, and the recent downturn in the capital markets. However, we continued to generate new sales in our Retirement Solutions business. We added 14 new clients during the third quarter of 2002 and 34 new clients during the first nine months of 2002. However, the downturn in the capital markets has reduced our asset based fees in both our Retirement Solutions and Treasury Solutions businesses. The increase in operating profit during both comparable periods was mainly due to our ability to control costs, primarily marketing, personnel, and technology. We will continue to invest in strategic initiatives that will continue to fuel growth for our outsourcing solutions. However, future revenues and earnings could be significantly affected by continued volatility 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 primarily 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 administration. Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Total Revenues $ 12,502 $ 9,682 29% $ 34,103 $ 26,154 30% Expenses: Operating and development 6,528 4,308 52% 17,614 13,160 34% Sales and marketing 3,856 3,320 16% 9,796 10,328 (5%) -------- -------- -------- -------- Total operating profits $ 2,118 $ 2,054 3% $ 6,693 $ 2,666 151% ======== ======== ======== ======== Profit margin 17% 21% 20% 10% Percent of Revenue: Operating and development 52% 45% 51% 50% Sales and marketing 31% 34% 29% 40% The increase in revenues over the corresponding prior year periods was primarily due to an increase in average assets under administration as a result of new business. We continue to see market acceptance of our products and services from alternative investment managers and U.S. money mangers. Operating profits increased while profit margins decreased during the third quarter 2002 as compared to 2001, while operating profits and profit margin increased for the nine months ended 2002 as compared to 2001, primarily due to the new business activity mentioned above combined with expense management and the timing of certain expenses. In addition, revenues are affected by continued volatility in the capital markets. Any significant change in value would have an impact on revenues. 21
Investments in New Businesses Investments in New Businesses include our global asset management initiatives that provide investment solutions to institutional and high-net-worth investors outside the United States. Revenues are primarily earned through management fees that are based upon a fixed percentage, referred to as basis points, of the average daily net asset value of assets under management. Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Total Revenues $ 11,045 $ 10,120 9% $ 34,527 $ 30,873 12% Expenses: Operating and development 9,035 11,497 (21%) 28,829 33,175 (13%) Sales and marketing 5,530 5,509 0% 15,840 14,878 6% -------- -------- --------- -------- Total operating losses $ (3,520) $ (6,886) 49% $ (10,142) $(17,180) 41% ======== ======== ========= ======== Profit margin (32%) (68%) (29%) (56%) Percent of Revenue: Operating and development 82% 114% 84% 108% Sales and marketing 50% 54% 45% 48% The increase in revenues over the corresponding prior year periods was primarily due to an increase in assets under management as a result of new business. The majority of new business activity continues to come from our Canadian and U.K. institutional asset management business as well as continued expansion of our U.K independent financial advisor network. However, the recent devaluation of the capital markets has adversely affected revenues and offset a portion of this new business activity. Operating losses decreased during 2002 primarily due to an increase in revenues from new business. We continued our investments in establishing marketing and distribution channels globally and in developing technology outsourcing solutions to satisfy the needs of these global markets. We remain optimistic about the long-term prospects of our global business initiatives but expect to incur losses throughout the remainder of 2002 and during 2003. General & Administrative General and administrative expense primarily consists of corporate overhead costs and other costs not directly attributable to a reportable business segment. Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ General and Administrative $ 5,779 $ 5,887 (2%) $ 17,460 $ 17,391 0% Percent of Consolidated Revenue 4% 4% 4% 4% 22
Other Income Other income on the accompanying Consolidated Statements of Income consist of the following: Three Months ended Nine Months ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Equity in the earnings of unconsolidated affiliate $ 2,861 $ 2,637 8% $ 8,643 $ 7,429 16% Net gain on investments 574 0 100% 574 0 100% Interest income 1,303 1,887 (31%) 3,847 5,677 (32%) Interest expense (663) (532) (25%) (1,628) (1,616) (1%) ------- ------- ------- ------- Total other income, net $ 4,075 $ 3,992 2% $11,436 $11,490 -- ======= ======= ======= ======= 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. Net gain on investments primarily includes hedge ineffectiveness from our hedging activities along with the realized gains and losses from our investments available for sale. (See Notes 4 and 5 of the Notes to Consolidated Financial Statements) 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 and/or changes in interest rates. The decrease in interest income during both comparable periods in 2002 was primarily due to a reduction in interest rates. This decrease was partially offset by a higher average cash balance during both comparable periods in 2002. Interest expense primarily relates to our long-term debt and other borrowings. (See Note 9 of the Notes to Consolidated Financial Statements) Income Taxes Our effective tax rate was 37.0 percent for the periods ending September 30, 2002 and 2001. 23
Liquidity and Capital Resources Nine Months ----------------------------------- Ended September 30, ----------------------------------- 2002 2001 ---- ---- Net cash provided by operating activities $ 128,200 $ 127,044 Net cash used in investing activities (18,185) (71,155) Net cash used in financing activities (111,626) (70,298) --------- --------- Net increase (decrease) in cash and cash equivalents (1,611) (14,409) Cash and cash equivalents, beginning of period 163,685 147,676 --------- --------- Cash and cash equivalents, end of period $ 162,074 $ 133,267 ========= ========= 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 $25,000. 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). At September 30, 2002, the unused sources of liquidity consisted of unrestricted cash and cash equivalents of $162,074 and the unused portion of the line of credit of $25,000. The increase in cash flows from operations was primarily due to an increase in income. The increase in income is due to our cost cutting controls and improved productivity. In addition, cash flows from operations in both comparable periods were affected by the tax benefit received from stock options exercised, changes in our receivables and in other various accrued liabilities. Cash flows from investing activities are principally affected by capital expenditures and investments in Company-sponsored mutual funds. Capital expenditures in the first nine months of 2002 included $14,641 related to the expansion of our corporate headquarters. The total expected cost of the expansion is estimated at $47,000, of which we have spent $34,040 to date. We expect this project to be completed by the end of 2003. The total expected expansion cost and completion date now include the construction costs of our data center that we are moving to our corporate headquarters. Also, cash flows from investing activities were affected by purchases and sales of our mutual funds, mainly for the testing and subsequent startup of new investment programs to be offered to our clients. Purchases were approximately $16,489 in the first nine months 2002, as compared to $60,464 in the first nine months 2001, whereas sales totaled $21,215 in the first nine months 2002, as compared to $18,227 in the first nine months 2001. Cash flows from financing activities are primarily affected by debt and equity transactions. Principal payments on the Senior notes are made annually from the date of issuance while interest payments are made semi-annually. Principal payments on the term loan are made quarterly from the date of issuance while interest payments are made based on the term of the LIBOR borrowing. The aggregate maturities of our long-term debt at September 30, 2002 are $1,389 in the fourth quarter 2002, $9,556 each year for the years 2003 thru 2005, $5,389 in 2006, and $9,000 in 2007 and thereafter (See Note 9 of the Notes to Consolidated Financial Statements). We continued our common stock repurchase program. We purchased approximately 3,723,000 shares of our common stock at a cost of $103.6 million during the first nine months of 2002. As of October 31, 2002 we still had approximately $10,204 remaining authorized for the purchase of our common stock. Proceeds received from the issuance of common stock primarily results from the exercise of stock options. Cash dividends of $.11 per share were paid in the first nine months of 2002 and $.09 per share were paid in the first nine months of 2001. Our 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. 24
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. Item 3. 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 7 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 borrowings. 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 Note Purchase Agreement is fixed and is not traded on any established market. The interest rate on our Loan Agreement accrues interest at the Prime rate or one and thirty-five hundredths of one percent above the (LIBOR), and is not traded on any established market. We believe our cash flow exposure due to changes in interest rates associated with our Loan Agreement and our long-term debt is minimal and do not expect an adverse effect on earnings. 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 statements of income. We currently hold derivatives with a notional amount of $20,404 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. We believe the derivative financial instruments entered into provide protection against volatile swings in market valuation associated with our Investments available for sale. During the first nine months of 2002, we did not enter into or hold derivative financial instruments for trading purposes. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures - An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of November 6, 2002 was conducted under the supervision and with the participation of our management, including our chief executive officer and principal financial officer. Based on that evaluation, our management, including our chief executive officer and principal financial officer, concluded that our disclosure controls and procedures were effective as of November 6, 2002. Changes in Internal Controls - There have been no significant changes to our internal controls or in other factors that could significantly affect these controls subsequent to November 6, 2002. 25
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. 99.1 Certification required by Section 906 of the Sarbanes-Oxley Act of 2002. (Page 31) 26
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEI INVESTMENTS COMPANY Date November 14, 2002 By /s/ Kathy Heilig -------------------- ----------------------------- Kathy Heilig Vice President and Controller (Principal Accounting Officer) 27
I, Alfred P. West Jr. certify that: 1. I have reviewed this quarterly report on Form 10-Q of SEI Investments Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Alfred P. West, Jr. - --------------------------------------- Alfred P. West, Jr. Chairman and Chief Executive Officer 28
I, Dennis J. McGonigle, certify that: 1. I have reviewed this quarterly report on Form 10-Q of SEI Investments Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 14, 2002 /s/ Dennis J. McGonigle - ---------------------------------------- Dennis McGonigle - ---------------------------------------- (principal financial officer) 29
Exhibit 99.1 Certification Required by Section 906 of the Sarbanes-Oxley Act of 2002. 30
Written Statement of Chairman and Chief Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 I, Alfred P. West, Jr., Chairman and Chief Executive Officer, and Dennis J McGonigle, principal financial officer of SEI Investments Company; a Pennsylvania corporation (the "Company"), hereby certify that, based on our knowledge: (a) The Quarterly Report on Form 10-Q of the Company for the three and nine months ended September 30, 2002 filed on the date hereof with the Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (b) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Alfred P. West, Jr. -------------------------------------------- Alfred P. West, Jr. Chairman and Chief Executive Officer November 14, 2002 /s/ Dennis J. McGonigle -------------------------------------------- Dennis J. McGonigle (principal financial officer) November 14, 2002 31