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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
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(Address of principal executive offices)
(Zip Code)
(610) 676-1000
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(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