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, 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 July 31, 2002: 108,142,964 shares of common stock, par value $.01 per share.
PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets (unaudited) (In thousands) June 30, 2002 December 31, 2001 ------------- ------------------ Assets - ------ Current Assets: Cash and cash equivalents $ 167,793 $ 163,685 Restricted cash 10,000 10,000 Receivables from regulated investment companies 22,388 25,550 Receivables, net of allowance for doubtful accounts of $1,700 65,366 56,327 Deferred income taxes 3,176 4,459 Prepaid expenses and other current assets 6,113 6,121 --------- --------- Total Current Assets 274,836 266,142 --------- --------- Property and Equipment, net of accumulated depreciation and amortization of $103,065 and $95,104 104,294 95,804 --------- --------- Capitalized Software, net of accumulated amortization of $14,336 and $13,469 11,418 11,055 --------- --------- Investments Available for Sale 66,593 66,332 --------- --------- Other Assets, net 23,456 21,583 --------- --------- Total Assets $ 480,597 $ 460,916 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 2
Consolidated Balance Sheets (unaudited) (In thousands, except par value) June 30, 2002 December 31, 2001 ------------- ----------------- Liabilities and Shareholders' Equity Current Liabilities: Current portion of long-term debt $ 9,556 $ 7,556 Accounts payable 2,513 4,977 Accrued expenses 115,109 128,408 Deferred revenue 3,192 3,402 -------- -------- Total Current Liabilities 130,370 144,343 -------- -------- Long-term Debt 36,278 43,055 -------- -------- Deferred Income Taxes 2,591 2,925 -------- -------- Shareholders' Equity: Common stock, $.01 par value, 750,000 shares authorized; 108,878 and 109,180 shares issued and outstanding 1,089 1,092 Capital in excess of par value 205,751 186,390 Retained earnings 106,613 85,085 Accumulated other comprehensive losses (2,095) (1,974) -------- -------- Total Shareholders' Equity 311,358 270,593 -------- -------- Total Liabilities and Shareholders' Equity $480,597 $460,916 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 3
Consolidated Statements of Income (unaudited) (In thousands, except per share data) Three Months --------------------------------------------------- Ended June 30, --------------------------------------------------- 2002 2001 ---- ---- Revenues $158,851 $168,480 Expenses: Operating and development 68,187 77,314 Sales and marketing 31,945 39,135 General and administrative 5,972 6,121 -------- -------- Income from operations 52,747 45,910 Equity in the earnings of unconsolidated affiliate 3,103 2,554 Interest income 1,394 1,541 Interest expense (484) (534) -------- -------- Income before income taxes 56,760 49,471 Income taxes 21,001 18,304 -------- -------- Net income 35,759 31,167 -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 1,239 (21) Unrealized holding loss on investments, net of income tax benefit of $806 and $47 (1,543) (81) -------- -------- Other comprehensive loss (304) (102) -------- -------- Comprehensive income $ 35,455 $ 31,065 ======== ======== Basic earnings per common share $ .33 $ .29 ======== ======== Diluted earnings per common share $ .31 $ .27 ======== ======== Dividends declared per common share $ .06 $ .05 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 4
Consolidated Statements of Income (unaudited) (In thousands, except per share data) Six Months ------------------------------------------------------- Ended June 30, ------------------------------------------------------- 2002 2001 ---- ---- Revenues $318,066 $329,781 Expenses: Operating and development 136,923 153,343 Sales and marketing 66,093 77,391 General and administrative 11,681 11,504 -------- -------- Income from operations 103,369 87,543 Equity in the earnings of unconsolidated affiliate 5,782 4,792 Interest income 2,544 3,790 Interest expense (965) (1,084) -------- -------- Income before income taxes 110,730 95,041 Income taxes 40,970 35,165 -------- -------- Net income 69,760 59,876 -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments 858 (253) Unrealized holding gain (loss) on investments, net of income tax (benefit) expense of ($640) and $76 (979) 129 -------- -------- Other comprehensive loss (121) (124) -------- -------- Comprehensive income $ 69,639 $ 59,752 ======== ======== Basic earnings per common share $ .64 $ .55 ======== ======== Diluted earnings per common share $ .61 $ .52 ======== ======== Dividends declared per common share $ .11 $ .09 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 5
Consolidated Statements of Cash Flows (unaudited) (In thousands) Six Months --------------------------------------------------- Ended June 30, --------------------------------------------------- 2002 2001 ---- ---- Cash flows from operating activities: Net income $ 69,760 $ 59,876 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,000 9,616 Undistributed equity in the earnings of unconsolidated affiliate (2,116) (557) Tax benefit on stock options exercised 13,250 20,679 Other (1,236) 873 Change in current assets and liabilities: Decrease (increase) in Receivables from regulated investment companies 3,162 (1,469) Receivables (9,039) (15,164) Prepaid expenses and other current assets 8 232 Increase (decrease) in Accounts payable (2,464) (2,546) Accrued expenses (7,839) 4,457 Deferred revenue (210) (6,232) --------- --------- Net cash provided by operating activities 72,276 69,765 --------- --------- Cash flows from investing activities: Additions to property and equipment (16,766) (18,883) Additions to capitalized software (1,230) -- Purchase of investments available for sale (12,110) (25,006) Sale of investments available for sale 13,561 6,783 Other 738 (1,918) --------- --------- Net cash used in investing activities (15,807) (39,024) --------- --------- Cash flows from financing activities: Payment on long-term debt (4,777) (2,000) Purchase and retirement of common stock (44,079) (49,962) Proceeds from issuance of common stock 8,545 10,404 Payment of dividends (12,050) (9,786) --------- --------- Net cash used in financing activities (52,361) (51,344) --------- --------- Net increase (decrease) in cash and cash equivalents 4,108 (20,603) Cash and cash equivalents, beginning of period 163,685 147,676 --------- --------- Cash and cash equivalents, end of period $167,793 $127,073 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 6
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 & 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 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 June 30, 2002 and the results of operations for the three and six months ended June 30, 2002 and 2001, and cash flows for the six month period ended June 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). Property and Equipment Property and equipment on the accompanying Consolidated Balance Sheets consist of the following: Estimated Useful Lives June 30, 2002 December 31, 2001 (In Years) ------------- ----------------- ---------- Equipment $ 77,431 $ 74,809 3 to 5 Buildings 75,286 44,981 25 to 39 Land 9,345 9,345 N/A Purchased software 20,789 18,952 3 Furniture and fixtures 15,343 14,748 3 to 5 Leasehold improvements 7,445 7,492 Lease Term Construction in progress 1,720 20,581 N/A --------- -------- 207,359 190,908 Less: Accumulated depreciation and amortization (103,065) (95,104) --------- -------- Property and Equipment, net $ 104,294 $ 95,804 ========= ======== 7
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 6.1 years. The first six months of 2002 the Company capitalized $1.2 million in software development costs and none in 2001. 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. For the Three month period ended June 30, 2002 ------------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic earnings per common share $35,759 109,632 $.33 === Dilutive effect of stock options -- 4,670 ------- ------- Diluted earnings per common share $35,759 114,302 $.31 ======= ======= === For the Three month period ended June 30, 2001 ------------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic earnings per common share $31,167 108,662 $.29 === Dilutive effect of stock options -- 6,346 ------- ------- Diluted earnings per common share $31,167 115,008 $.27 ======= ======= === 8
Options to purchase 2,851 and 1,299 shares of common stock, with an average exercise price of $45.56 and $49.73, were outstanding during the second 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 Six month period ended June 30, 2002 ------------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic earnings per common share $69,760 109,514 $.64 === Dilutive effect of stock options -- 5,129 ------- ------- Diluted earnings per common share $69,760 114,643 $.61 ======= ======= === For the Six month period ended June 30, 2001 ------------------------------------------------------------ Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic earnings per common share $59,876 108,631 $.55 === Dilutive effect of stock options -- 6,782 ------- ------- Diluted earnings per common share $59,876 115,413 $.52 ======= ======= === Options to purchase 2,751 and 1,299 shares of common stock, with an average exercise price of $45.94 and $49.73 were outstanding during the first six 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. 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: 2002 2001 ---- ---- Interest paid $ 1,414 $ 1,073 Interest and dividends received 2,582 4,184 Income taxes paid 19,072 -- 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 income includes net income, foreign currency translation adjustments, and unrealized holding gains and losses and is presented on the accompanying Consolidated Statements of Income. 9
Accumulated other comprehensive losses on the Consolidated Balance Sheets is the change from December 31, 2001 to June 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 858 (979) (121) --- ---- ----- Ending Balance (June 30, 2002) $(120) $(1,975) $(2,095) === ===== ===== Note 3. Receivables - Receivables on the accompanying Consolidated Balance Sheets consist of the following: June 30, 2002 December 31, 2001 ------------- ----------------- Trade receivables $31,652 $26,415 Fees earned, not received 1,388 2,527 Fees earned, not billed 34,026 29,085 ------ ------ 67,066 58,027 Less: Allowance for doubtful accounts (1,700) (1,700) ------ ------ $65,366 $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. Receivables from regulated investment companies on the accompanying Consolidated Balance Sheets represent fees collected 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, are reported separately on the accompanying Consolidated Statements of Income. Investments available for sale at June 30, 2002 had an aggregate cost of $69,876 and an aggregate market value of $66,593 with gross unrealized holding losses of $3,283. At that date, the net unrealized holding losses of $1,975 (net of income tax benefit of $1,308) 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. 10
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 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 June 30, 2002, operating and development expenses on the accompanying Consolidated Statements of Income include a net gain of $2,193 from hedge ineffectiveness. The Company currently holds futures contracts with a notional amount of $7,943 with a financial institution for various terms. The Company also currently holds equity derivatives with a notional amount of $18,503 with a financial institution with various terms. During the period ending June 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: June 30, 2002 December 31,2001 ------------- ---------------- Investment in unconsolidated affiliate $ 8,149 $ 6,033 Other, net 15,307 15,550 ------- ------- Other assets $23,456 $21,583 ======= ======= Other, net consists of long-term prepaid expenses, deposits and other investments carried at cost. 11
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 first six months in 2002 and 45 percent for the first six months in 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 months ended June 30: 2002 2001 ---- ---- Revenues $9,276 $7,736 ===== ===== Net income $7,079 $5,744 ===== ===== The following table contains the condensed statements of income of LSV for the six months ended June 30: 2002 2001 ---- ---- Revenues $17,867 $14,688 ====== ====== Net income $13,190 $10,772 ====== ====== The following table contains the condensed balance sheets of LSV: June 30, 2002 December 31, 2001 ------------- ----------------- Current assets $16,501 $13,394 Non-current assets 70 89 ------- ------- Total assets $16,571 $13,483 ======= ======= Current liabilities $ 1,326 $ 1,686 Partners' capital 15,245 11,797 ------- ------- Total liabilities and partners' capital $16,571 $13,483 ======= ======= Note 7. Accrued Expenses - Accrued expenses on the accompanying Consolidated Balance Sheets consist of the following: June 30, 2002 December 31, 2001 ------------- ----------------- Accrued compensation $ 29,547 $ 39,542 Accrued income taxes 12,614 5,871 Accrued proprietary fund services 9,875 12,463 Accrued brokerage services 7,977 8,456 Other accrued expenses 55,096 62,076 -------- -------- Total accrued expenses $115,109 $128,408 ======== ======== 12
Note 8. Line of Credit - The Company has a line of credit agreement (the "Agreement") with a principle 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 first six months of 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 proceeds from the Notes were used to repay the outstanding balance on the Company's line of credit at that date. The Note Purchase Agreement, as amended, contains various covenants, including limitations on indebtedness, maintenance of minimum net worth levels, and restrictions on certain investments. In addition, the agreement limits the Company's ability to merge or consolidate, and to sell certain assets. The Company was in compliance with all covenants during the first six month of 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 June 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 and June of 2002. The current portion of the notes amounted to $5,556 at June 30, 2002. The Company was in compliance with all covenants during the first six month of 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 $553,365, including an additional authorization of $50,000 on June 24, 2002. Through June 30, 2002, a total of 102,522,000 shares at an aggregate cost of $502,519 have been purchased and retired. The Company purchased 1,420,000 shares at a total cost of $44,079 during the six months period ended June 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. 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. 13
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. The following tables highlight certain unaudited financial information about each of the Company's segments for the three months ended June 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 June 30, 2002 -------------------------------------------------------------------------------------------------- Revenues $82,878 $39,229 $14,295 $ 10,804 $ 11,645 $158,851 ------ ------ ------ ------ ------ ------- Operating income (loss) $33,652 $20,457 $ 5,792 $ 2,151 $ (3,333) $ (5,972) $ 52,747 ------ ------ ------ ------ ------ ----- Other income, net $ 4,013 ------- Income before income taxes $ 56,760 ------- Depreciation and amortization $ 2,854 $ 757 $ 267 $ 251 $ 305 $ 133 $ 4,567 ------ ------ ------ ------ ------- ------- ------- Capital expenditures $ 4,655 $ 1,494 $ 715 $ 441 $ 791 $ 299 $ 8,395 ------ ------ ------ ------ ------- ------- ------- 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 -------------------------------------------------------------------------------------------------- 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 ------ ------ ------ ----- ------ ------ ------- 14
The following tables highlight certain unaudited financial information about each of the Company's segments for the six months ended June 30, 2002 and 2001. Private Investments General Banking Investment Money In New And & Trust Advisors Enterprises Managers Businesses Administrative Total ------- -------- ----------- -------- ---------- -------------- ----- For the Six-Month Period Ended June 30, 2002 --------------------------------------------------------------------------------------------------- Revenues $165,836 $ 78,120 $ 29,027 $ 21,601 $ 23,482 $ 318,066 ------- ------ ------ ------ ------ ------- Operating income (loss) $ 67,477 $ 38,440 $ 11,180 $ 4,575 $ (6,622) $(11,681) $ 103,369 ------- ------ ------ ------ ------ ------ Other income, net $ 7,361 ------- Income before income taxes $ 110,730 ------- Depreciation and amortization $ 5,601 $ 1,495 $ 528 $ 494 $ 614 $ 268 $ 9,000 ------- ------ ------ ------ ------ ------- ------- Capital expenditures $ 9,710 $ 3,296 $ 1,577 $ 1,034 $ 1,433 $ 946 $ 17,996 ------- ------ ------ ------ ------ ------- ------- 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 -------------------------------------------------------------------------------------------------- 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 ------- ------ ------ ------ ------- ------ ------- 15
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 June 30, 2002 and 2001, the consolidated results of operations for the three and six months ended June 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 Six Months Ended June 30, 2002 compared to Three and Six Months Ended June 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 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 six months ended June 30, 2002 and 2001 are as follows: Three Months ended June 30, Six Months ended June 30, Percent Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Private Banking and Trust: Revenues $ 82,878 $ 93,170 (11%) $165,836 $182,592 (9%) Income from operations 33,652 35,465 (5%) 67,477 69,135 (2%) Investment Advisors: Revenues 39,229 38,687 1% 78,120 76,766 2% Income from operations 20,457 14,399 42% 38,440 29,121 32% Enterprises: Revenues 14,295 17,290 (17%) 29,027 33,198 (13%) Income from operations 5,792 6,335 (9%) 11,180 10,473 7% Money Managers: Revenues 10,804 8,708 24% 21,601 16,472 31% Income (loss) from operations 2,151 735 193% 4,575 612 648% Investments in New Businesses: Revenues 11,645 10,625 10% 23,482 20,753 13% Loss from operations (3,333) (4,903) 32% (6,622) (10,294) 36% General and Administrative: Loss from operations (5,972) (6,121) (2%) (11,681) (11,504) 2% Consolidated Segment Totals: Revenues $158,851 $168,480 (6%) $318,066 $329,781 (4%) Income from operations $ 52,747 $ 45,910 15% $103,369 $ 87,543 18% 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 16
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, many of our businesses continue to experience moderate growth through new sales, although this has only partially mitigated our revenue losses. Income from operations improved $6,837 or 15 percent, over the second quarter 2001, and $15,826 or 18 percent, over the six months 2001. Operating margins for the second quarter 2002 increased to 33 percent from 27 percent for the second quarter 2001, and for the six months ended 2002 increased to 32 percent from 27 percent for the six 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 June 30, Percent -------------- 2002 2001 Change ---- ---- ------ Assets invested in equity and fixed income programs $ 56,362 $ 56,196 -- Assets invested in liquidity funds 20,420 23,710 (14%) -------- -------- Assets under management 76,782 79,906 (4%) Client proprietary assets under administration 172,763 220,103 (22%) -------- -------- Assets under management and administration $249,545 $300,009 (17%) ======== ======== 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. 17
Three Months Ended Six Months Ended June 30, June 30 Percent June 30, June 30 Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Revenues: Investment processing fees $ 57,930 $ 59,689 (3%) $114,329 $115,905 (1%) Fund processing fees 14,743 22,539 (35%) 30,336 44,701 (32%) Investment management fees (7%) (4%) 10,205 10,942 21,171 21,986 -------- -------- -------- -------- Total revenues 82,878 93,170 (11%) 165,836 182,592 (9%) Expenses: Operating and development 38,839 44,911 (14%) 77,263 88,854 (13%) Sales and marketing 10,387 12,794 (19%) 21,096 24,603 (14%) -------- -------- -------- -------- Total operating profits $ 33,652 $ 35,465 (5%) $ 67,477 $ 69,135 (2%) ======== ======== ======== ======== Profit margin 41% 38% 41% 38% Percent of Revenue: Operating and development 47% 48% 46% 49% Sales and marketing 12% 14% 13% 13% 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 clients during the latter part of 2001. The loss of these clients resulted in a significant decrease in assets under administration. 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. The decrease in profits was mainly due to the revenue losses mentioned above, net of the decrease in direct expenses associated with these clients. The increase in margins was due to our business model that seeks economies of scale and operational efficiencies. 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. 18
Three Months Ended Six Months Ended June 30, June 30, Percent June 30, June 30, Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Total Revenues $39,229 $38,687 1% $78,120 $76,766 2% Expenses: Operating and development 9,635 11,916 (19%) 19,910 23,168 (14%) Sales and marketing 9,137 12,372 (26%) 19,770 24,477 (19%) ------ ------ ------ ------ Total operating profits $20,457 $14,399 42% $38,440 $29,121 32% ====== ====== ====== ====== Profit margin 52% 37% 49% 38% Percent of Revenue: Operating and development 25% 31% 26% 30% Sales and marketing 23% 32% 25% 32% Revenues increased slightly over the prior year periods primarily due to growth in average assets under management as a result of new business. We established approximately 375 new registered investment advisor relationships during the first six months of 2002, of which 190 occurred in the second quarter bringing our total network to about 9,075 advisors. However, the recent downturn in the capital markets has negatively affected our revenues and almost offset any gains in revenues earned from new business. Operating profits and profit margin improvement was primarily due to the management of discretionary expenses, mainly technology 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 Six Months Ended June 30, June 30 Percent June 30, June 30 Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Total Revenues $14,295 $17,290 (17%) $29,027 $33,198 (13%) Expenses: Operating and development 4,252 5,338 (20%) 8,870 10,791 (18%) Sales and marketing 4,251 5,617 (24%) 8,977 11,934 (25%) ------- ------- ------- ------- Total operating profits $ 5,792 $ 6,335 (9%) $11,180 $10,473 7% ======= ======= ======= ======= Profit margin 41% 37% 39% 32% Percent of Revenue: Operating and development 30% 31% 30% 32% Sales and marketing 29% 32% 31% 36% 19
The decrease in revenues was primarily due to client losses in our Retirement Solutions business during the fourth quarter of 2001, the recognition of one-time fees in the second 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 8 new clients during the second quarter of 2002 and 22 new clients during the first six months of 2002. However, the recent downturn in the capital markets has reduced our asset based fees in both our Retirement Solutions and Treasury Solutions businesses. The decrease in operating profit during the second quarter 2002, as compared to the second quarter 2001, was mainly due to the revenue events previously mentioned. The increase in operating profits for the first six months in 2002 and the increase in operating margins in both comparable periods was mainly due to our ability to control costs, primarily marketing 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 Six Months Ended June 30, June 30 Percent June 30, June 30 Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Total Revenues $10,804 $8,708 24% $21,601 $16,472 31% Expenses: Operating and development 5,619 4,280 31% 11,086 8,852 25% Sales and marketing 3,034 3,693 (18%) 5,940 7,008 (15%) ------- ------ ------- ------- Total operating profits $ 2,151 $ 735 193% $ 4,575 $ 612 648% ======= ====== ======= ======= Profit margin 20% 8% 21% 4% Percent of Revenue: Operating and development 52% 49% 51% 54% Sales and marketing 28% 43% 28% 42% 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 and profit margins increased over the corresponding prior year periods due to an increase in new business activity mentioned above combined with expense management. In addition, revenues are affected by continued volatility in the capital markets. Any significant change in value would have an impact on revenues. 20
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 Six Months Ended June 30, June 30 Percent June 30, June 30 Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Total Revenues $11,645 $10,625 10% $23,482 $ 20,753 13% Expenses: Operating and development 9,842 10,869 (9%) 19,794 21,678 (9%) Sales and marketing 5,136 4,659 10% 10,310 9,369 10% ------- ------- ------- -------- Total operating losses $(3,333) $(4,903) 32% $(6,622) $(10,294) 36% ======= ======= ======= ======== Profit margin (29%) (46%) (28%) (50%) Percent of Revenue: Operating and development 85% 102% 84% 105% Sales and marketing 44% 44% 44% 45% 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 Six Months Ended June 30, June 30 Percent June 30, June 30 Percent 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ General and Administrative $5,972 $6,121 (2%) $11,681 $11,504 2% Percent of Revenue 4% 4% 4% 3% 21
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 2002 2001 Change 2002 2001 Change ---- ---- ------ ---- ---- ------ Equity in the earnings of unconsolidated affiliate $3,103 $2,554 21% $5,782 $ 4,792 21% Interest income 1,394 1,541 (10%) 2,544 3,790 (33%) Interest expense (484) (534) (9%) (965) (1,084) (11%) ----- ----- ----- ----- Total other income, net $4,013 $3,561 13% $7,361 $ 7,498 (2%) ===== ===== ===== ===== 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 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. Income Taxes Our effective tax rate was 37.0 percent for the periods ending June 30, 2002 and 2001. 22
Liquidity and Capital Resources Six Months ------------------------------------- Ended June 30, ------------------------------------- 2002 2001 ---- ---- Net cash provided by operating activities $ 72,276 $ 69,765 Net cash used in investing activities (15,807) (39,024) Net cash used in financing activities (52,361) (51,344) ------ ------ Net increase (decrease) in cash and cash equivalents 4,108 (20,603) Cash and cash equivalents, beginning of period 163,685 147,676 ------- ------- Cash and cash equivalents, end of period $167,793 $127,073 ======= ======= 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 June 30, 2002, the unused sources of liquidity consisted of unrestricted cash and cash equivalents of $167,793 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. 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 six months of 2002 included $11,654 related to the expansion of our corporate headquarters. The total expected cost of the expansion is estimated at $33,000, of which we have spent $30,016 million to date. We expect this project to be completed by the end of 2002. 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 $12,110 in the first six months 2002, as compared to $25,006 in the first six months 2001, whereas sales totaled $13,561 in the first six months 2002, as compared to $6,783 million in the first six 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. We continued our common stock repurchase program. We purchased approximately 1,420,000 shares of our common stock at a cost of $44,078 million during the first six months of 2002. As of July 31, 2002 we still had approximately $32,167 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 six months of 2002 and $.09 per share were paid in the first six 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. 23
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 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 $26,446 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 the first six months of 2002, the amount of hedge ineffectiveness that was credited to current period earnings was a gain of $2,193. 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 six months of 2002, we did not enter into or hold derivative financial instruments for trading purposes. 24
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 Miscellaneous exhibit (Page 27) (b) Reports on Form 8-K On June 14, the Company's Capital Accumulation Plan filed a report on Form 8-K reporting under Item 4 a change in Registrant's certifying accountant. On June 18, the Company filed a report on Form 8-K reporting under Item 4 a change in Registrant's certifying accountant. 25
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 14, 2002 By /s/ Kathy Heilig ------------------------ ------------------------------------ Kathy Heilig Vice President and Controller (Principal Accounting Officer) 26
Exhibit 99 Miscellaneous Exhibit 27
Written Statement of Chairman and Chief Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The undersigned, the Chairman and Chief Executive Officer and the Controller (principal financial officer) of SEI Investments (the "Company"), each hereby certifies that, to the best of such person's knowledge on the date hereof: (a) the Quarterly Report on Form 10-Q of the Company for the three and six months ended June 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) 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 August 14, 2002 /s/ Kathy Heilig ----------------------------------------- Kathy Heilig Vice President and Controller (principal financial officer) August 14, 2002 28