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, 2001 or ------------------ ______ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to _________ 0-10200 - -------------------------------------------------------------------------------- (Commission File Number) SEI INVESTMENTS COMPANY - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-1707341 - ------------------------------------ -------------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 1 Freedom Valley Drive, Oaks, Pennsylvania 19456-1100 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (610) 676-1000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ --- *APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes___ No___ *APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of September 30, 2001: 108,024743 shares of common stock, par value $.01 per share. PART I. FINANCIAL INFORMATION - ------- --------------------- Item 1. Financial Statements - ------- -------------------- Consolidated Balance Sheets --------------------------- (In thousands) The accompanying notes are an integral part of these statements. 2
September 30, 2001 December 31, 2000 ------------------- ----------------- (unaudited) Assets - ------ Current assets: Cash and cash equivalents (including restricted cash of $10,889 and $11,900) $144,156 $159,576 Receivables from regulated investment companies 25,752 27,607 Receivables, net of allowance for doubtful accounts of $1,700 64,540 47,404 Deferred income taxes 7,160 9,030 Prepaid expenses and other current assets 6,095 5,414 -------- -------- Total current assets 247,703 249,031 -------- -------- Property and equipment, net of accumulated depreciation and amortization of $96,686 and $83,874 89,095 75,111 -------- -------- Capitalized software, net of accumulated amortization of $13,060 and $11,733 11,495 12,823 -------- -------- Investments Available for Sale 62,036 20,294 -------- -------- Other assets, net 25,529 18,323 -------- -------- Total Assets $435,858 $375,582 ======== ======== Consolidated Balance Sheets --------------------------- (In thousands, except par value) The accompanying notes are an integral part of these statements. 3
September 30, 2001 December 31, 2000 ------------------- ----------------- (unaudited) Liabilities and Shareholders' Equity - -------------------------------------- Current liabilities: Current portion of long-term debt $ 7,556 $ 2,000 Accounts payable 4,862 6,721 Accrued expenses 143,484 121,282 Deferred revenue 5,934 16,450 -------- -------- Total current liabilities 161,836 146,453 -------- -------- Long-term debt 44,444 27,000 -------- -------- Deferred income taxes 4,287 4,708 -------- --------- Shareholders' equity: Common stock, $.01 par value, 750,000 shares authorized; 108,025 and 108,560 shares issued and outstanding 1,080 1,086 Capital in excess of par value 162,410 125,473 Retained earnings 64,493 72,521 Accumulated other comprehensive losses (2,692) (1,659) -------- -------- Total shareholders' equity 225,291 197,421 -------- -------- Total Liabilities and Shareholders' Equity $435,858 $375,582 ======== ======== Consolidated Statements of Income --------------------------------- (unaudited) (In thousands, except per share data) The accompanying notes are an integral part of these statements. 4
Three Months Ended September 30, 2001 2000 ---- ---- Revenues $163,403 $155,628 Expenses: Operating and development 72,357 72,147 Sales and marketing 38,530 38,064 General and administrative 5,887 4,312 -------- -------- Income from operations 46,629 41,105 Equity in the earnings of unconsolidated affiliate 2,637 1,853 Interest income 1,887 1,938 Interest expense (532) (572) -------- -------- Income before income taxes 50,621 44,324 Income taxes 18,730 16,843 -------- -------- Net income 31,891 27,481 -------- -------- Other comprehensive loss, net of tax: Foreign currency translation adjustments, net of income tax expense (benefit) of $(66) and $158 (112) 257 Unrealized holding losses on investments, net of income tax expense benefit of $468 and $362 (797) (590) -------- -------- Other comprehensive income (loss) (909) (333) -------- -------- Comprehensive income $ 30,982 $ 27,148 ======== ======== Basic earnings per common share $ .29 $ .26 ======== ======== Diluted earnings per common share $ .28 $ .24 ======== ======== Consolidated Statements of Income --------------------------------- (unaudited) (In thousands, except per share data) The accompanying notes are an integral part of these statements. 5
Nine Months ------------------ Ended September 30, ------------------- 2001 2000 ---- ---- Revenues $493,184 $440,184 Expenses: Operating and development 225,700 207,593 Sales and marketing 115,921 115,243 General and administrative 17,391 12,097 -------- -------- Income from operations 134,172 105,881 Equity in the earnings of unconsolidated affiliate 7,429 5,363 Interest income 5,677 3,989 Interest expense (1,616) (1,722) -------- -------- Income before income taxes 145,662 113,511 Income taxes 53,895 43,134 -------- -------- Net income 91,767 70,377 -------- -------- Other comprehensive income (loss), net of tax: Foreign currency translation adjustments, net of income tax (benefit) expense of $(214) and $163 (365) 266 Unrealized holding gains (losses) on investments, net of income tax benefit of $392 and $444 (668) (724) -------- -------- Other comprehensive loss (1,003) (458) -------- -------- Comprehensive income $ 90,764 $ 66,919 ======== ======== Basic earnings per common share $ .84 $ .66 ======== ======== Diluted earnings per common share $ .80 $ .62 ======== ======== Consolidated Statements of Cash Flows ------------------------------------- (unaudited) (In thousands) The accompanying notes are an integral part of these statements. 6
Nine Months ------------------- Ended September 30, -------------------- 2001 2000 -------- -------- Cash flows from operating activities: Net income $ 91,767 $ 70,377 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,527 12,793 Equity in the earnings of unconsolidated affiliate (7,429) (5,363) Tax benefit on stock options exercised 25,473 5,040 Other (2,167) 8,356 Change in current assets and liabilities: Decrease (increase) in Receivables from regulated investment companies 1,855 (2,479) Receivables (17,136) (22,415) Prepaid expenses and other current assets (1,746) 533 Increase (decrease) in Accounts payable (1,859) (539) Accrued expenses 26,549 17,149 Deferred revenue (10,516) 56 -------- -------- Net cash provided by operating activities 119,318 83,508 -------- -------- Cash flows from investing activities: Additions to property and equipment (27,176) (18,822) Additions to capitalized software -- (449) Purchase of investments available for sale (60,464) (17,373) Sale of investments available for sale 18,227 2,510 Other 4,973 3,533 -------- -------- Net cash used in investing activities (64,440) (30,601) -------- -------- Cash flows from financing activities: Payment on long-term debt (2,000) (2,000) Purchase and retirement of common stock (96,072) (14,948) Proceeds from issuance of common stock 12,560 5,734 Borrowing on long term debt 25,000 -- Payment of dividends (9,786) (7,785) -------- -------- Net cash used in financing activities (70,298) (18,999) -------- -------- Net decrease in cash and cash equivalents (15,420) 33,908 Cash and cash equivalents, beginning of period 159,576 73,206 -------- -------- Cash and cash equivalents, end of period $144,156 $107,114 ======== ======== Notes to Consolidated Financial Statements ------------------------------------------ Note 1. Summary of Significant Accounting Policies ------------------------------------------ Nature of Operations -------------------- SEI Investments Company (the "Company") is organized around its five primary business lines: Private Banking & Trust, Investment Advisors, Enterprises, Money Mangers, and Investments in New Businesses. Private Banking & Trust provides investment processing solutions, fund processing solutions and investment management programs to banks and private trust companies. Investment Advisors provides investment management programs and investment processing solutions to affluent investors through a network of financial intermediaries, independent investment advisors and other investment professionals. Enterprises provide retirement and treasury business solutions for corporations, unions, foundations and endowments, and other institutional investors. Money Managers provides investment solutions to U.S. investment managers, mutual fund companies and alternative investment managers worldwide. Investments in New Businesses include the Company's global asset management businesses as well as initiatives into new U.S. markets. Summary Financial Information and Results of Operations ------------------------------------------------------- In the opinion of the Company, the accompanying unaudited Consolidated Financial Statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2001, the results of operations and cash flows for the three and nine months ended September 30, 2001 and 2000. Interim Financial Information ----------------------------- While the Company believes that the disclosures presented are adequate to make the information not misleading, these Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the notes included in the Company's latest annual report on Form 10-K. Principles of Consolidation --------------------------- The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. The Company's principal subsidiaries are SEI Investments Distribution Company, SEI Investments Management Corporation, and SEI Private Trust Company. All intercompany accounts and transactions have been eliminated. Investment in unconsolidated affiliate is accounted for using the equity method due to the Company's less than 50 percent ownership. The Company's portion of the affiliate's operating results is reflected in Equity in the earnings of unconsolidated affiliate on the accompanying Consolidated Statements of Income, (See Note 6). Property and Equipment ---------------------- Property and equipment on the accompanying Consolidated Balance Sheets consist of the following: 7
Estimated Useful Lives September 30, 2001 December 31, 2000 (In Years) ------------------------- ------------------------ ---------- Equipment $ 78,499,000 $ 71,377,000 3 to 5 Buildings 44,981,000 34,695,000 25 to 39 Land 9,345,000 9,345,000 N/A Purchased software 20,379,000 16,035,000 3 Furniture and fixtures 14,897,000 14,230,000 3 to 5 Leasehold improvements 7,427,000 7,313,000 Lease Term Construction in progress 10,253,000 5,990,000 N/A ------------ ------------ 185,781,000 158,985,000 Less: Accumulated depreciation and amortization (96,686,000) (83,874,000) ---------- ---------- Property and Equipment, net $ 89,095,000 $ 75,111,000 ========== ========== Property and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful life of each asset. Expenditures for renewals and betterments are capitalized, while maintenance and repairs are charged to expense when incurred. Capitalized Software - -------------------- The Company accounts for software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed" ("SFAS 86"). Under SFAS 86, costs incurred to create a computer software product are charged to research and development expense as incurred until technological feasibility has been established. The Company establishes technological feasibility upon completion of a detail program design. At that point, computer software costs are capitalized until the product is available for general release to customers. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs require considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future revenues, estimated economic life, and changes in technology. Amortization begins when the product is released. Capitalized software development costs are amortized on a product-by-product basis using the straight-line method over the estimated economic life of the product or enhancement, which is primarily three to ten years, with a weighted average remaining life of approximately 6.8 years. Earnings per Share - ------------------ The Company computes earnings per common share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). Pursuant to SFAS 128, dual presentation of basic and diluted earnings per common share is required on the face of the statements of income for companies with complex capital structures. Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution from the exercise or conversion of securities into common stock, such as stock options. All common share figures have been restated to reflect the two-for-one stock split in February 2001.
For the Three month period ended September 30, 2001 ---------------------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic earnings per common share $ 31,891,000 108,794,000 $.29 === Dilutive effect of stock options -- 6,030,000 ---------- ----------- Diluted earnings per common share $ 31,891,000 114,824,000 $.28 ========== =========== === 8
For the Three month period ended September 30, 2000 ---------------------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic earnings per common share $ 27,481,000 106,502,000 $.26 === Dilutive effect of stock options -- 7,954,000 ---------- ----------- Diluted earnings per common share $ 27,481,000 114,456,000 $.24 ========== =========== === Options to purchase 1,253,000 and 36,000 shares of common stock, with an average exercise price of $49.96 and 34.78 were outstanding during the third quarter of 2001 and 2000, respectively but were excluded from the diluted earnings per common share calculation because the options' exercise prices were greater than the average market price of the Company's common stock.
For the Nine month period ended September 30, 2001 ---------------------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------ ------ Basic earnings per common share $91,767,000 108,685,000 $.84 === Dilutive effect of stock options -- 6,546,000 ---------- ----------- Diluted earnings per common share $91,767,000 115,231,000 $.80 ========== =========== === Options to purchase 1,288,000 and 36,000 shares of common stock, with an average exercise price of $49.73 and $34.78 were outstanding during the first nine months of 2001 and 2000, respectively, but were excluded from the diluted earnings per common share calculation because the options' exercise prices were greater than the average market price of the Company's common stock. Statements of Cash Flows ------------------------ For purposes of the Consolidated Statements of Cash Flows, the Company considers investment instruments purchased with an original maturity of three months or less to be cash equivalents. Supplemental disclosures of cash paid/received during the nine months ended September 30 is as follows:
For the Nine month period ended September 30, 2000 ---------------------------------------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------ ------ Basic earnings per common share $70,377,000 106,216,000 $.66 === Dilutive effect of stock options -- 7,126,000 ---------- ----------- Diluted earnings per common share $70,377,000 113,342,000 $.62 ========== =========== === 2001 2000 ---- ----
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 9Interest paid $2,061,000 $ 2,207,000 Interest and dividends received $6,046,000 $ 3,762,000 Income taxes paid $ -- $36,622,000 income includes net income, foreign currency translation adjustments, and unrealized holding gains and losses and is presented on the accompanying Consolidated Statements of Income. Accumulated Other Comprehensive Income on the Consolidated Balance Sheets listed below is the changes from December 31, 2000 to September 30, 2001 Note 3. Receivables - Receivables on the accompanying Consolidated Balance ----------- Sheets consist of the following:
Foreign Unrealized Accumulated Currency Holding Other Translation Gains(Losses) Comprehensive Adjustments on Investments Losses ----------- -------------- ------ Beginning balance (Dec 31, 2001) $ (736,000) $ (923,000) $(1,659,000) Current period change (365,000) (668,000) (1,033,000) -------- -------- ----------- Ending Balance $(1,101,000) $(1,591,000) $(2,692,000) ========== ========== ========== Fees earned, not received represent brokerage commissions earned but not yet collected. Fees earned, not billed represent receivables earned but unbilled and result from timing differences between services provided and contractual billing schedules. Receivables from regulated investment companies on the accompanying Consolidated Balance Sheets represent fees collected from the Company's wholly owned subsidiaries, SEI Investments Distribution Company and SEI Investments Management Corporation, for distribution, investment advisory, and administration services provided by these subsidiaries to various regulated investment companies sponsored by the Company. Note 4. Investments Available for Sale - Investments available for sale ------------------------------ consist of investments in mutual funds sponsored by the Company. The Company accounts for investments in marketable securities pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires that debt and equity securities classified as available for sale be reported at market value. Unrealized holding gains and losses, net of income taxes, are reported as a separate component of comprehensive income. Realized gains and losses, as determined on a specific identification basis, are reported separately on the accompanying Consolidated Statements of Income. At September 30, 2001, Investments available for sale had an aggregate cost of $64,574,000 and an aggregate market value of $62,036,000 with gross unrealized holding losses of $2,538,000. At that date, the net unrealized holding losses of $1,591,000 (net of income tax expense of $947,000) were reported as a separate component of Accumulated other comprehensive losses on the accompanying Consolidated Balance Sheets. At December 31, 2000, Investments available for sale had an aggregate cost of $21,710,000 and an aggregate market value of $20,294,000 with gross unrealized holding losses of $1,416,000. At that date, the net unrealized holding losses of $923,000 (net of income tax expense of $493,000) were reported as a separate component of Accumulated Other Comprehensive Losses on the accompanying Consolidated Balance Sheets. 10
September 30, 2001 December 31, 2000 ------------------ ----------------- Trade receivables $27,474,000 $22,558,000 Fees earned, not received 2,469,000 1,801,000 Fees earned, not billed 36,297,000 24,745,000 ----------- ---------- 66,240,000 49,104,000 Less: Allowance for doubtful accounts (1,700,000) (1,700,000) ---------- ---------- $64,540,000 $47,404,000 ========== ========== Note 5 Derivative Instruments and Hedging Activities - The Company accounts --------------------------------------------- for its derivatives in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133" ) and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133", ("SFAS 138"). The Company recognizes all derivatives on the balance sheet at fair value. On the date the derivative instrument is entered into, the Company generally designates the derivative as a hedge of the fair value of a recognized asset. Changes in the fair value of a derivative that is designated as, and meets all the required criteria for, a fair value hedge, along with the gain or loss on the hedged asset that is attributable to the hedged risk, are recorded in current period earnings. The portion of the change in fair value of a derivative associated with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge effectiveness is recorded currently in earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes relating all derivatives that are designated as fair value hedges to specific assets on the balance sheet. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values of the hedged item. If it is determined that a derivative is not highly effective as a hedge or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively. Operating Expense for the three and nine months period ended September 30, 2001, includes $473,000, and 203,000, respectively, of net gain from hedge ineffectiveness or from excluding a portion of a derivative instruments' gain or loss from the assessment of hedge effectiveness related to derivatives designated as fair value hedges. Note 6. Other Assets - Other assets on the accompanying Consolidated Balance ------------ Sheets consist of the following: Investment in Unconsolidated Affiliate - LSV Asset Management ("LSV") is a partnership formed between the Company and several leading academics in the field of finance. LSV is a registered investment advisor, which provides investment advisory services to institutions, including pension plans and investment companies. LSV is currently the portfolio manager for a number of Company-sponsored mutual funds. The Company's interest in LSV was approximately 45 percent in 2001 and 47 percent in 2000. LSV is accounted for using the equity method of accounting due to the less than 50 percent ownership. The Company's portion of LSV's net earnings is reflected in Equity in the earnings of unconsolidated affiliate on the accompanying Consolidated Statements of Income. 11
September 30, 2001 December 31,2000 ------------------ ---------------- Investment in unconsolidated affiliate $ 6,341,000 $ 5,627,000 Other, net 19,188,000 12,696,000 ----------- ----------- Other assets $25,529,000 $18,323,000 =========== =========== The following table contains the Condensed Statements of Income of LSV for the three months ended September 30: 2001 2000 ---- ---- Revenues $7,672,000 $5,385,000 ========== ========== Net income $5,682,000 $3,786,000 ========== ========== The following table contains the Condensed Statements of Income of LSV for the nine months ended September 30: 2001 2000 ---- ---- Revenues $22,360,000 $10,679,000 =========== =========== Net income $16,454,000 $ 7,547,000 =========== =========== The following table contains the Condensed Balance Sheets of LSV: September 30, December 31, ------------- ------------ 2001 2000 ---- ---- Current assets $13,347,000 $10,976,000 Non-current assets 114,000 103,000 ----------- ----------- Total assets $13,461,000 $11,079,000 =========== =========== Current liabilities $ 1,753,000 $ 1,285,000 Partners' capital 11,708,000 9,794,000 ----------- ----------- Total liabilities and partners' capital $13,461,000 $11,079,000 =========== =========== Note 7. Accrued Expenses - Accrued expenses on the accompanying Consolidated ---------------- Balance Sheets consist of the following: Note 8. Line of Credit - The Company has line of credit agreement with its -------------- principle lending institutions. The Agreement provides for borrowings of up to $50,000,000, and expires on November 30, 2001, at which time the outstanding principal balance, if any, becomes due unless the Agreement is extended. The Company expects to reduce its line of credit to $25,000,000 on the renewal of the line. The line of credit, when utilized, accrues interest at the Prime rate or one and one-quarter percent above the London Interbank Offered Rate (LIBOR). The Company is obligated to pay a commitment fee equal to one-quarter of one percent per annum on the average daily unused portion 12
September 30, 2001 December 31, 2000 ------------------ ----------------- Accrued compensation $ 50,109,000 $ 49,890,000 Accrued proprietary fund services 14,739,000 14,834,000 Accrued consulting services 6,696,000 8,200,000 Other accrued expenses 71,940,000 48,358,000 ------------ ------------ Total accrued expenses $143,484,000 $121,282,000 ============ ============ of the commitment. Certain covenants under the Agreement require the Company to maintain specified levels of net worth and place certain restrictions on investments. Note 9. Long-term Debt - On February 24, 1997, the Company signed a Note -------------- Purchase Agreement authorizing the issuance and sale of $20,000,000 of 7.20% Senior Notes, Series A, and $15,000,000 of 7.27% Senior Notes, Series B, (collectively, the "Notes") in a private offering with certain financial institutions. The Notes are unsecured with final maturities ranging from 10 to 15 years. The proceeds from the Notes were used to repay the outstanding balance on the Company's line of credit at that date. The Note Purchase Agreement, as amended, contains various covenants, 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. Principal payments on the Notes are made annually from the date of issuance while interest payments are made semi-annually. The Company made its scheduled payment of $2,000,000 in February 2001. The current portion of the Notes amounted to $2,000,000 at September 30, 2001. On June 26, 2001 the Company entered into a loan agreement (the "Agreement") with a separate lending institution. The agreement provides for borrowing up to $25,000,000 in the form of a term loan, and expires on March 31, 2006 and is payable in seventeen equal quarterly installments. The term loan, when utilized, accrues interest at the Prime rate or plus one and thirty-five hundredths of one percent above the London Interbank Offered Rate (LIBOR). The Agreement contains various covenants, including limitations on indebtedness and restrictions on certain investments. None of these covenants negatively affect the Company's liquidity or capital resources. On August 2, 2001, the Company borrowed $25,000,000 on this term loan. The loan was necessary to support capital improvement projects for our corporate campus and other business purposes. The current portion of the notes amounted to $5,556,000 at September 30, 2001. The Company was in compliance with all covenants during the first nine months of 2001. 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 $503,365,000. Through September 30, 2001, a total of 100,880,000 shares at an aggregate cost of $451,163,000 have been purchased and retired. The Company purchased 2,616,000 shares at a total cost of $96,072,000 during the nine month period ended September 30, 2001. The Company immediately retires its common stock when purchased. Upon retirement, the Company reduces Capital in excess of par value for the average capital per share outstanding and the remainder is charged against Retained earnings. If the Company reduces its Retained earnings to zero, any subsequent purchases of common stock will be charged entirely to Capital in excess of par value. Note 11. Segment Information - The Company defines its business segments in ------------------- accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes standards for the way public business enterprises report financial information about operating segments in financial statements. SFAS 131 also requires additional disclosures about product and services, geographic areas, and major customers. The company redefined its segments during the second quarter 2001 and restated all prior periods to conform with the current presentation. The Company is organized around its five primary business lines: Private Banking & Trust, Investment Advisors, Enterprises, Money Mangers, and Investments in New Businesses. Private Banking & Trust provides investment processing solutions, fund processing solutions and investment management programs to banks and private trust companies. Investment Advisors provides investment management programs and investment processing solutions to affluent investors through a network of financial intermediaries, independent investment advisors and other investment professionals. Enterprises provide retirement and treasury business solutions for corporations, unions, foundations 13 and endowments, and other institutional investors. Money Managers provides investment solutions to U.S. investment managers, mutual fund companies and alternative investment managers worldwide. Investments in New Businesses include the Company's global asset management business as well as initiatives into new U.S. markets. The information in the following tables is derived from the Company's internal financial reporting used for corporate management purposes. The accounting policies of the reportable segments are the same as those described in Note 1. The Company's management evaluates financial performance of its operating segments based on income before income taxes. The following tables highlight certain unaudited financial information about each of the Company's segments for the three months ended September 30, 2001 and 2000. (In thousands) 14
Private Investments General Banking Investment Money In New And & Trust Advisors Enterprises Managers Businesses Administrative Total -------- ---------- ----------- -------- ------------ --------------- -------- For the Three-Month Period Ended September 30, 2001 (In thousands) ------------------------------------------------------------------------------------ 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) $ 46,929 -------- ---------- ----------- -------- ----------- -------------- 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 -------- ---------- ----------- -------- ----------- -------------- -------- Private Investments General Banking Investment Money In New And & Trust Advisors Enterprises Managers Businesses Administrative Total -------- ---------- ----------- -------- ------------ --------------- -------- For the Three-Month Period Ended September 30, 2000 (In thousands) ----------------------------------------------------------------------------------- Revenues $ 86,153 $37,008 $14,052 $8,518 $ 9,897 $155,628 -------- ---------- ----------- -------- ----------- -------- Operating income (loss) $ 33,604 $14,720 $ 3,011 $1,355 $(7,273) $(4,312) $ 41,105 -------- ---------- ----------- -------- ----------- -------------- Other income, net $ 3,219 -------- Income before income taxes $ 44,324 -------- Depreciation and amortization $ 2,583 $ 838 $ 294 $ 229 $ 297 $ 153 $ 4,394 -------- ---------- ----------- -------- ----------- -------------- -------- Capital Expenditures $ 5,125 $ 906 $ 333 $ 335 $ 1,240 $ 423 $ 8,362 -------- ---------- ----------- -------- ----------- -------------- -------- The following tables highlight certain unaudited financial information about each of the Company's segments for the nine months ended September 30, 2001 and 2000. (In thousands)
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 (In thousands) -------------------------------------------------------------------------------------- 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 -------- -------- ------- ------- -------- -------- -------- 15
Private Investments General Banking Investment Money In New And & Trust Advisor Enterprises Managers Businesses Administrative Total -------- ---------- ----------- -------- ------------ --------------- --------- For the Nine-Month Period Ended September 30, 2000 (In thousands) ------------------------------------------------------------------------------------- Revenues $250,465 $96,949 $40,401 $23,629 $ 29,370 $440,814 -------- ------- ------- ------- -------- -------- Operating income (loss) 96,543 $30,516 $ 6,816 $ 1,366 $(17,263) $(12,097) $105,881 -------- ------- ------- ------- -------- -------- Other income, net $ 7,630 -------- Income before income taxes $113,511 -------- Depreciation and amortization $ 8,032 $ 2,167 $ 736 $ 229 $ 822 $ 410 $ 12,793 -------- ------- ------- ------- -------- -------- -------- Capital Expenditures $ 12,473 $ 1,444 $ 540 $ 927 $ 2,511 $ 927 $ 18,822 -------- ------- ------- ------- -------- -------- -------- Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------- ----------------------------------------------------------------------- of Operations. - ------------- (In thousands, except per share data) We are organized around our five business lines: Private Banking & Trust, Investment Advisors, Enterprises, Money Mangers and Investments in New Businesses. Financial information on each of these segments is reflected in Note 11 of the Notes to Consolidated Financial Statements. Results of Operations - --------------------- Three and Nine Months Ended September 30, 2001 Compared to Three and Nine Months Ended September 30, 2000 Consolidated Overview Revenues and earnings increased over the corresponding prior year periods primarily because of increased sales to new clients and the delivery of new products and services to existing clients. We believe our growth is due to increased market acceptance of our products and services. Although our recurring revenue base continues to be at approximately 80 percent, a fairly large percentage of our revenues are tied to the value of assets that we manage and administer. Revenues derived from asset based fees have decreased due to recent rapid declines in the financial markets. However, these tough financial market conditions reinforce our investment strategy that leans heavily on diversification, asset allocation, and risk management. Our operating and after tax margins improved primarily due to the leveragability built within our operations. We continue to realize economies of scale in most of our back office and investment management operations. In addition, the investment in our operating infrastructure and the Internet are improving our client service and making us more productive. We are also renewing our focus on process improvement and creating additional efficiencies in our operations. We believe the market acceptance of our business solutions, our operational leverage, and our portfolio of businesses will support sustainable growth in future revenues and profits. In addition, we will continue to invest in 16
Income Statement Data (In thousands, except per common Three Months Ended Nine Months Ended share data) September 30, September 30, Percent Percent 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Revenues: Private Banking & Trust $ 89,201 $ 86,153 4% $271,793 $250,465 9% Investment Advisors 38,841 37,008 5% 115,607 96,949 19% Enterprises 15,559 14,052 11% 48,757 40,401 21% Money Mangers 9,682 8,518 14% 26,154 23,629 11% Investments in New Businesses 10,120 9,897 2% 30,873 29,370 5% -------- -------- -------- -------- Total revenues $163,403 $155,628 5% $493,184 $440,814 12% Operating Income (Loss): Private Banking & Trust $ 37,562 $ 33,604 12% $106,697 $ 96,543 11% Investment Advisors 15,420 14,720 5% 44,541 30,516 46% Enterprises 4,366 3,011 45% 14,839 6,816 118% Money Mangers 2,054 1,355 52% 2,666 1,366 95% Investments in New Businesses (6,886) (7,273) 5% (17,180) (17,263) -- General and Administrative (5,887) (4,312) (37%) (17,391) (12,097) (44%) -------- -------- -------- -------- Income from operations 46,629 41,105 13% 134,172 105,881 27% Other income, net 3,992 3,219 24% 11,490 7,630 51% -------- -------- -------- -------- Income before income taxes 50,621 44,324 14% 145,662 113,511 28% Income taxes 18,730 16,843 11% 53,895 43,134 25% -------- -------- -------- -------- Net Income $ 31,891 $ 27,481 16% $ 91,767 $ 70,377 30% ======== ======== ======== ======== Diluted earnings per common share $ .28 $ .24 17% $ .80 $ .62 29% ======== ======== ======== ======== the development of new products and services to expand our client base. However, any expected growth in revenues and earnings may be negated by continued volatility in the capital markets, delays in client decision- making, and mergers and acquisitions within the banking industry that could result in the loss of any significant clients. Assets under management consist of total assets invested in our equity and fixed income investment programs and liquidity funds for which we provide management services. Assets under management and administration consist of total assets for which we provide management and administrative services, including client proprietary fund balances for which we provide administration and/or distribution services. Private Banking and Trust - ------------------------- Private Banking & Trust provides investment processing solutions, fund processing solutions, and investment management programs to banks and private trust companies. Investment processing services primarily include outsourcing services provided through our TRUST 3000 product line. TRUST 3000 includes many integrated products and sub-systems that provide a complete investment accounting and management information system for trust institutions. Investment processing fees are primarily earned from monthly processing and software servicing fees and project fees associated with the conversion of new and merging clients. Fund processing solutions include administration and distribution services provided to bank proprietary mutual funds. These services primarily include fund administration and accounting, legal services, shareholder recordkeeping, and marketing. 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.
Asset Balances (In millions) As of September 30, PERCENT ------------------- 2001 2000 CHANGE ---- ---- ------ Assets invested in equity and fixed income programs $ 52,795 $ 51,798 2% Assets invested in liquidity funds 21,208 24,897 (15%) -------- -------- Assets under management 74,003 76,695 (4%) Client proprietary assets under administration 169,860 195,699 (13%) -------- -------- Assets under management and administration $243,863 $272,394 (10%) ======== ======== 17
Three Months Ended Nine Months Ended Sept .30, Sept. 30 Percent Sept. 30, Sept. 30 Percent 2001 2000 Change 2001 2000 Change ------- ------- ------- -------- -------- ------- Revenues: Investment processing fees $57,127 $53,967 6% $173,032 $153,975 12% Fund processing fees 21,326 21,518 (1%) 66,027 65,441 1% Investment management fees 10,748 10,668 1% 32,734 31,049 5% ------- ------- -------- -------- Total revenues 89,201 86,153 4% 271,793 250,465 9% Expenses: Operating and development 39,359 41,192 (4%) 128,213 119,389 7% Sales and marketing 12,280 11,357 8% 36,883 34,533 7% ------- ------- -------- -------- Total operating profits $37,562 $33,604 12% $106,697 $ 96,543 11% ======= ======= ======== ======== Profit margin 42% 39% -- 39% 39% -- Percent of Revenue: Operating and development 44% 48% 47% 47% Sales and marketing 14% 13% 14% 14% The increase in Investment processing fees over the corresponding prior year periods is primarily attributable to increased new sales and cross sales to existing clients. In addition, Investment processing fees were impacted by the recognition of one-time processing fees that were partially offset by a decrease in brokerage services. Although fund processing fees remained relatively flat, the third quarter of 2001includes one-time buyout fees due to the loss of two significant clients which was offset by a corresponding decrease in administration fees from these clients. Operating profits and profit margin improvement reflect the impact of increased revenues and economies of scale realized from the leveragability built within our technology business. We continued to invest in the development of new products and services. 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. This business has also been affected by delayed client decision-making due to recent market volatility. Investment Advisors - ------------------- Investment Advisors provides investment management programs and investment processing solutions to affluent investors distributed through a network of investment professionals. Revenues are primarily earned through management fees that are based upon a fixed percentage, referred to as basis points, of the average daily net asset value of assets under management. The increase in revenues in both comparable periods was primarily due to growth in assets under management as a result of new business. We attribute most of this growth to our continued success at recruiting new registered investment advisors and the offering of new services, especially our managed account program. We established approximately 900 new registered investment advisor relationships during the first nine months of 2001, of which 200 occurred in the third quarter, bringing our total network to about 8,500 advisors. However, revenues were negatively impacted by the recent downturn in the financial markets. Operating profits and profit margin improvement for the first nine months of 2001 was due to increased sales of our investment management programs. We have also lowered sales and marketing expenditures. In addition we have been able to continue making investments in developing new products without affecting margins. We believe future growth of this business is dependent upon our ability to continue to generate new business through increased sales of existing products as well as the delivery of new products and services However, continued volatility in the capital markets could negatively affect future revenues and profits. 18
Three Months Ended Nine Months Ended Sept. 30. Sept. 30, Percent Sept. 30, Sept. 30, Percent 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Total Revenues $38,841 $37,008 5% $115,607 $96,949 19% Expenses: Operating and development 11,449 9,810 17% 34,617 29,654 17% Sales and marketing 11,972 12,478 (4%) 36,449 36,779 (1%) ------- ------- -------- ------- Total operating profits $15,420 $14,720 5% $ 44,541 $30,516 46% ======= ======= ======== ======= Profit margin 40% 40% -- 38% 31% -- Percent of Revenue: Operating and development 29% 26% 30% 31% Sales and marketing 31% 34% 32% 38% 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. The increase in revenues over the comparable prior year periods was fueled by growth in average assets under management due to new clients that were sold and funded during the last twelve months. We feel this increase in new sales is the result of increased market acceptance of our outsource business solution across a diverse range of clients. We added 19 new institutional clients during the third quarter of 2001 and 41 new institutional clients during the first nine months in 2001. However, revenues were negatively impacted by the downturn in the financial markets. Operating profits and profit margins were significantly affected by new sales as well as the timing of certain expenditures. During the first nine months of 2000, we incurred significant technology costs associated with the development of our treasury solutions platform. We will continue to invest in this business that is diversified by client and solution types in markets that we believe offer new opportunities for our services. However, future revenues and earnings could be significantly affected by 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. 19
Three Months Ended Nine Months Ended Sept. 30, Sept. 30 Percent Sept. 30, Sept 30 Percent 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Total Revenues $15,559 $14,052 11% $48,757 $40,401 21% Expenses: Operating and development 5,744 5,002 15% 16,535 15,220 9% Sales and marketing 5,449 6,039 (10%) 17,383 18,365 (5%) ------- ------- ------- ------- Total operating profits $ 4,366 $ 3,011 45% $14,839 $ 6,816 118% ======= ======= ======= ======= Profit margin 28% 21% -- 30% 17% -- Percent of Revenue: Operating and development 37% 36% 34% 38% Sales and marketing 35% 43% 36% 45% The increase in revenues over the prior years comparable periods was primarily due to an increase in average assets under administration as a result of new business offset in part by the downturn in the financial markets. We contracted with thirteen alternative investment managers and five U.S. money mangers during the third quarter. These funds will fund over the next two quarters. Operating profits and profit margins increased over the corresponding prior year periods due to an increase in new business activity. During 2000, we made significant investments in developing the necessary infrastructure to tailor our products and services in these markets. We will continue to make investments in this business. These investments could affect future profits and margins. In addition, revenues are affected by swings in the capital markets. Any significant change in value would have an impact on revenues. Investments in New Businesses - ----------------------------- Investments in New Businesses include our global asset management 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 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Total Revenues $9,682 $8,518 14% $26,154 $23,629 11% Expenses: Operating and development 4,308 3,986 8% 13,160 11,806 11% Sales and marketing 3,320 3,177 5% 10,328 10,457 (1%) ------ ------ ------- ------- Total operating profits $2,054 $1,355 52% $ 2,666 $ 1,366 95% ====== ====== ======= ======= Profit margin 21% 16% -- 10% 6% -- Percent of Revenue: Operating and development 45% 47% 50% 50% Sales and marketing 34% 37% 40% 44% The increase in revenues over the corresponding prior year periods is primarily due to an increase is assets under management from our Europe/South Africa, Korea and Canada initiatives despite the impact of weak financial markets globally. Also, we are beginning to see some early positive results from the launch of our U.K. pension plan initiative. Revenues in 2000 included our Canadian consulting business that was sold in July 2000. Excluding those revenues, revenues would have increased 10 percent in the third quarter 2001 and 21 percent for the first nine months of 2001. 20
Three Months Ended Nine Months Ended Sept .30, Sept. 30 Percent Sept. 30, Sept. 30 Percent 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Total Revenues $10,120 $ 9,897 2% $ 30,873 $ 29,370 5% Expenses: Operating and development 11,497 12,157 (5%) 33,175 31,524 5% Sales and marketing 5,509 5,013 10% 14,878 15,109 (2%) ------- ------- -------- -------- Total operating losses $(6,886) $(7,273) 5% $(17,180) $(17,263) -- Profit margin (68%) (73%) -- (56%) (59%) -- Percent of Revenue: Operating and development 114% 123% 107% 107% Sales and marketing 54% 51% 45% 51% The pace of global asset gathering and revenue recognition continues to accelerate. We focused substantial resources this quarter in anticipation of three major market launches of our multi-manager investment solution to our European distribution networks. We believe that global expansion is an area of significant long-term growth for our firm. We will continue to make significant investments in our global initiatives and expect to incur losses throughout the remainder of this year and in 2002. General & Administrative - ------------------------ 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 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ General and Administrative $ 5,887 $ 4,312 37% $ 17,391 $ 12,097 44% Percent of Revenue 4% 3% 4% 3% Equity in the earnings of unconsolidated affiliate on the accompanying Consolidated Statements of Income includes our less than 50 percent ownership in the general partnership of LSV Asset Management ("LSV") (See Note 6 of the Notes to Consolidated Financial Statements). The increase in LSV's net earnings is due to an increase in assets under management. Interest income is earned based upon the amount of cash that is invested daily and fluctuations in interest income recognized for one period in relation to another is due to changes in the average cash balance invested for the period. Interest Income has been affected by the recent decline in interest rates. Interest expense primarily relates to our long-term debt and other borrowings. 21
Three Months ended Nine Months ended Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent 2001 2000 Change 2001 2000 Change ---- ---- ------ ---- ---- ------ Equity in the earnings of unconsolidated affiliate $ 2,637 $ 1,853 42% $ 7,429 $ 5,363 39% Interest income 1,887 1,938 (3%) 5,677 3,989 42% Interest expense (532) (572) 7% (1,616) (1,722) 6% ------- ------- ------- ------- Total other income, net $ 3,992 $ 3,219 24% $11,490 $ 7,630 51% ======= ======= ======= ======= Liquidity and Capital Resources - ------------------------------- Cash requirements and liquidity needs are primarily funded through operations and our capacity for additional borrowing. We currently have a line of credit that provides for borrowings of up to $50.0 million. The availability of the line of credit is subject to compliance with certain covenants set forth in the agreement, (See Note 8 of the Notes to Consolidated Financial Statements). At September 30, 2001, the unused sources of liquidity consisted of unrestricted cash and cash equivalents of $133.3 million and the unused portion of the line of credit of $50.0 million. The increase in cash flows from operations was primarily due to an increase in income, the tax benefit received from stock options exercised, and various accrued expenses. However, an increase in trade receivables in the first nine months of 2001 and 2000 negatively affected cash flows from operations. 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 2001 included $14.0 million related to the expansion of our corporate headquarters. The total expected cost of the expansion is estimated at $54.0 million of which we have spent $19.9 million to date. The completion of this project should be completed by mid 2003. Also, cash flows from investing activities includes purchases of Company-sponsored mutual funds of approximately $42.2 million during 2001, net of $18.2 million of sales. Cash flows from financing activities are primarily affected by debt and equity transactions. Principal payments on our Note Purchase Agreement are made annually from the date of issuance while interest payments are made semi- annually. Principal and interest payments were made in the first nine months of 2001 and 2000. Principal payments on the Term Loan Agreement are made at the end of each quarter beginning December 31, 2001, while interest payments are paid monthly (See Note 9 of the Notes to Consolidated Financial Statements). We continued our common stock repurchase program. We purchased approximately 2,616,000 shares of our common stock at a cost of $96.1 million during the first nine months of 2001. As of October 31, 2001, we still had $49.1 million remaining authorized for the purchase of our common stock. Cash dividends of $.09 per share were paid in the first nine months of 2001 and $.07 in the first nine months of 2000. The Board of Directors has indicated its intention to continue making cash dividend payments. Our operating cash flow, borrowing capacity, and liquidity should provide adequate funds for continuing operations, continued investment in new products and equipment, our common stock repurchase program, expansion of our corporate campus, future dividend payments, and principal and interest payments on our long-term debt. 22
Nine Months ------------------------------------- Ended September 30, ------------------------------------- 2001 2000 ---- ---- Net cash provided by operating activities $119,318 $ 83,508 Net cash used in investing activities (64,440) (30,601) Net cash used in financing activities (70,298) (18,999) -------- -------- Net decrease in cash and cash equivalents (15,420) 33,908 Cash and cash equivalents, beginning of period 159,576 73,206 -------- -------- Cash and cash equivalents, end of period $144,156 $107,114 ======== ======== 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 long-term debt is fixed and is not traded on any established market. We have no cash flow exposure due to rate changes for our long-term debt. We are exposed to market risk associated with changes in the fair value of our investments available for sale. To provide some protection against potential fair value changes associated with our investments available for sale, we have entered into various derivative financial transactions. The derivative instruments are used to hedge changes in the fair market value of certain investments available for sale. The derivative instruments are qualifying hedges and as such changes in the fair value hedge along with changes in the fair value of the related hedged item are reflected in the statement of income. We currently hold derivatives with a notional amount of $27.1 million with various terms, generally less than one year. The effectiveness of these hedging relationships is evaluated on a retrospective and prospective basis using quantitative measures of correlation. If a hedge is found to be ineffective, it no longer qualifies as a hedge and any excess gains or losses attributable to such ineffectiveness as well as subsequent changes in fair value are recognized in current period earnings. During 2001, the amount of hedge ineffectiveness that was credited to current period earnings was a gain of $.2 million. We believe the derivative financial instruments entered into provide protection against volatile swings in market valuation associated with our Investments available for sale. During 2001, we did not enter into or hold derivative financial instruments for trading purposes. 23 PART II. OTHER INFORMATION - -------- ----------------- Item 6. Exhibits and Reports on Form 8-K - ------- -------------------------------- (a) The following is a list of exhibits filed as part of the Form 10-Q. None. (b) Reports on Form 8-K There were no reports on Form 8-K filed by the Company during the quarter ended September 30, 2001. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SEI INVESTMENTS COMPANY Date November 13, 2001 By /s/ Kathy Heilig ---------------------- --------------------------------- Kathy Heilig Vice President and Controller 25