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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 September 30, 2002 or
------------------
___ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _________ to _________
0-10200
- --------------------------------------------------------------------------------
(Commission File Number)
SEI INVESTMENTS COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1707341
- ---------------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1 Freedom Valley Drive, Oaks, Pennsylvania 19456-1100
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(610) 676-1000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No___
---
*APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes___ No___
*APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 2002: 106,050,567 shares of common stock, par
value $.01 per share.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
SEI Investments Company
Consolidated Balance Sheets
(unaudited)
(In thousands)
September 30, 2002 December 31, 2001
------------------ ------------------
Assets
- ------
Current Assets:
Cash and cash equivalents $ 162,074 $ 163,685
Restricted cash 10,000 10,000
Receivables from regulated investment companies 21,371 25,550
Receivables, net of allowance for doubtful
accounts of $1,700 61,289 56,327
Deferred income taxes 3,736 4,459
Prepaid expenses and other current assets 5,737 6,121
--------- ---------
Total Current Assets 264,207 266,142
--------- ---------
Property and Equipment, net of accumulated
depreciation and amortization of $107,123
and $95,104 104,286 95,804
--------- ---------
Capitalized Software, net of accumulated
amortization of $14,770 and $13,469 12,153 11,055
--------- ---------
Investments Available for Sale 64,317 66,332
--------- ---------
Other Assets, net 22,525 21,583
--------- ---------
Total Assets $ 467,488 $ 460,916
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
2
SEI Investments Company
Consolidated Balance Sheets
(unaudited)
(In thousands, except par value)
September 30, 2002 December 31, 2001
------------------ -----------------
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
Current portion of long-term debt $ 9,556 $ 7,556
Accounts payable 2,584 4,977
Accrued expenses 125,204 128,408
Deferred revenue 1,153 3,402
----------- -----------
Total Current Liabilities 138,497 144,343
----------- -----------
Long-term Debt 34,889 43,055
----------- -----------
Deferred Income Taxes 4,215 2,925
----------- -----------
Shareholders' Equity:
Common stock, $.01 par value, 750,000 shares
authorized; 106,808 and 109,180 shares issued
and outstanding 1,068 1,092
Capital in excess of par value 205,438 186,390
Retained earnings 86,740 85,085
Accumulated other comprehensive losses (3,359) (1,974)
----------- -----------
Total Shareholders' Equity 289,887 270,593
----------- -----------
Total Liabilities and Shareholders' Equity $ 467,488 $ 460,916
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SEI Investments Company
Consolidated Statements of Income
(unaudited)
(In thousands, except per share data)
Three Months
----------------------------------------
Ended September 30,
----------------------------------------
2002 2001
---- ----
Revenues $ 153,316 $ 163,403
Expenses:
Operating and development 61,957 72,357
Sales and marketing 32,940 38,530
General and administrative 5,779 5,887
--------- ---------
Income from operations 52,640 46,629
Equity in the earnings of unconsolidated affiliate 2,861 2,637
Net gain on investments 574 --
Interest income 1,303 1,887
Interest expense (663) (532)
--------- ---------
Income before income taxes 56,715 50,621
Income taxes 20,984 18,730
--------- ---------
Net income 35,731 31,891
--------- ---------
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (202) (112)
Unrealized holding loss on investments:
Unrealized holding losses during the period,
net of income tax benefit of $1,600 and $468 (2,792) (797)
Less: reclassification adjustment for losses included
in net income, net of income tax expense of
$1,016 and $0 1,730 (1,062) -- (797)
------- --------- ------ ---------
Other comprehensive loss (1,264) (909)
--------- ---------
Comprehensive income $ 34,467 $ 30,982
========= =========
Basic earnings per common share $ .33 $ .29
========= =========
Diluted earnings per common share $ .32 $ .28
========= =========
Dividends declared per common share $ .00 $ .00
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
SEI Investments Company
Consolidated Statements of Income
(unaudited)
(In thousands, except per share data)
Nine Months
-----------------------------
Ended September 30,
-----------------------------
2002 2001
---- ----
Revenues $ 471,382 $ 493,184
Expenses:
Operating and development 198,880 225,700
Sales and marketing 99,033 115,921
General and administrative 17,460 17,391
--------- ---------
Income from operations 156,009 134,172
Equity in the earnings of unconsolidated affiliate 8,643 7,429
Net gain on investment 574 --
Interest income 3,847 5,677
Interest expense (1,628) (1,616)
--------- ---------
Income before income taxes 167,445 145,662
Income taxes 61,954 53,895
--------- ---------
Net income 105,491 91,767
--------- ---------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 656 (365)
Unrealized holding loss on investments:
Unrealized holding losses during the period
net of income tax benefit of $2,240 and $392 (3,771) (668)
Less: reclassification adjustment for losses included
in net income, net of income tax expense
of $1,016 and $0 1,730 (2,041) -- (668)
----- --------- ---- ---------
Other comprehensive loss (1,385) (1,033)
--------- ---------
Comprehensive income $ 104,106 $ 90,734
========= =========
Basic earnings per common share $ .97 $ .84
========= =========
Diluted earnings per common share $ .93 $ .80
========= =========
Dividends declared per common share $ .11 $ .09
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
SEI Investments Company
Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
Nine Months
-------------------------
Ended September 30,
-------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 105,491 $ 91,767
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 13,614 14,527
Undistributed equity in the earnings of unconsolidated affiliate (1,896) (714)
Tax benefit on stock options exercised 15,188 25,473
Other (736) (1,156)
Change in current assets and liabilities:
Decrease (increase) in
Receivables from regulated investment companies 4,179 1,855
Receivables (4,523) (17,136)
Prepaid expenses and other current assets 425 (1,746)
Increase (decrease) in
Accounts payable (2,393) (1,859)
Accrued expenses 1,100 26,549
Deferred revenue (2,249) (10,516)
--------- --------
Net cash provided by operating activities 128,200 127,044
--------- --------
Cash flows from investing activities:
Additions to property and equipment (20,944) (27,176)
Additions to capitalized software (2,399) --
Purchase of investments available for sale (16,489) (60,464)
Sale of investments available for sale 21,215 18,227
Other 432 (1,742)
--------- --------
Net cash used in investing activities (18,185) (71,155)
--------- --------
Cash flows from financing activities:
Payment on long-term debt (6,166) (2,000)
Purchase and retirement of common stock (103,639) (96,072)
Proceeds from issuance of common stock 10,229 12,560
Borrowing on long term debt -- 25,000
Payment of dividends (12,050) (9,786)
--------- --------
Net cash used in financing activities (111,626) (70,298)
--------- --------
Net decrease in cash and cash equivalents (1,611) (14,409)
Cash and cash equivalents, beginning of period 163,685 147,676
--------- --------
Cash and cash equivalents, end of period $ 162,074 $133,267
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
SEI Investments Company
Notes to Consolidated Financial Statements
(all figures are in thousands except per share data)
Note 1. Summary of Significant Accounting Policies
Nature of Operations
SEI Investments Company (the "Company") is organized around its
five primary target markets: Private Banking and Trust, Investment
Advisors, Enterprises, Money Mangers, and Investments in New
Businesses. Private Banking and Trust provides investment
processing solutions, fund processing solutions and investment
management programs to banks and private trust companies.
Investment Advisors provides investment management programs and
investment processing solutions to affluent investors through a
network of financial intermediaries, independent investment
advisors and other investment professionals. Enterprises provides
retirement and treasury business solutions for corporations,
unions, foundations and endowments, and other institutional
investors. Money Managers provides investment solutions to U.S.
investment managers, mutual fund companies and alternative
investment managers worldwide. Investments in New Businesses
include the Company's global asset management businesses as well
as initiatives into new U.S. markets.
Summary Financial Information and Results of Operations
In the opinion of the Company, the accompanying unaudited
Consolidated Financial Statements contain all adjustments
(consisting of only normal recurring adjustments) necessary for a
fair statement of the financial position as of September 30, 2002
and the results of operations for the three and nine months period
ended September 30, 2002 and 2001, and cash flows for the nine
month period ended September 30, 2002 and 2001.
Interim Financial Information
While the Company believes that the disclosures presented are
adequate to make the information not misleading, these
Consolidated Financial Statements should be read in conjunction
with the Consolidated Financial Statements and the Notes to the
Consolidated Financial Statements included in the Company's latest
Annual Report on Form 10-K.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the
Company and its wholly owned subsidiaries. The Company's principal
subsidiaries are SEI Investments Distribution Company ("SIDCO"),
SEI Investments Management Corporation ("SIMC"), and SEI Private
Trust Company. All intercompany accounts and transactions have
been eliminated. Investment in unconsolidated affiliate is
accounted for using the equity method due to the Company's less
than 50 percent ownership. The Company's portion of the
affiliate's operating results is reflected in Equity in the
earnings of unconsolidated affiliate on the accompanying
Consolidated Statements of Income (See Note 6).
7
Property and Equipment
Property and equipment on the accompanying Consolidated Balance Sheets
consist of the following:
Estimated
Useful Lives
September 30, 2002 December 31, 2001 (In Years)
------------------ ----------------- -------------
Equipment $ 78,453 $ 74,809 3 to 5
Buildings 75,286 44,981 25 to 39
Land 9,345 9,345 N/A
Purchased software 20,845 18,952 3
Furniture and fixtures 15,353 14,748 3 to 5
Leasehold improvements 7,421 7,492 Lease Term
Construction in progress 4,706 20,581 N/A
-------- ---------
211,409 190,908
Less: Accumulated depreciation
and amortization (107,123) (95,104)
-------- ---------
Property and Equipment, net $104,286 $ 95,804
======== =========
Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful
life of each asset. Expenditures for renewals and betterments are
capitalized, while maintenance and repairs are charged to expense when
incurred.
Capitalized Software
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed"
("SFAS 86"). Under SFAS 86, costs incurred to create a computer software
product are charged to research and development expense as incurred
until technological feasibility has been established. The Company
establishes technological feasibility upon completion of a detail
program design. At that point, computer software costs are capitalized
until the product is available for general release to customers. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs require
considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future revenues,
estimated economic life, and changes in technology. Amortization begins
when the product is released. Capitalized software development costs are
amortized on a product-by-product basis using the straight-line method
over the estimated economic life of the product or enhancement, which is
primarily three to ten years, with a weighted average remaining life of
approximately 5.9 years.
In accordance with EITF 00-03 "Application of AICPA Statement of
Position 97-2 to Arrangements That Include the Right to Use Software
Stored on Another Entity's Hardware", the Company applies Statement of
Position ("SOP") 98-1 " Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use," for development costs
associated with software products to be provided in a hosting
environment. SOP 98-1 requires that costs incurred in the preliminary
project and post implementation stages of an internal software project
be expensed as incurred and that certain costs incurred in the
application development stage of a project be capitalized. The Company
capitalized $2.4 million in software development costs in accordance
with SOP 98-1 during the nine month period ending September 30, 2002.
Earnings per Share
The Company computes earnings per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). Pursuant to SFAS 128, dual presentation of basic
and diluted earnings per common share is required on the face of the
statements of income for companies with complex capital structures.
Basic earnings per common share is calculated by dividing net income
available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per common
share reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options.
8
For the Three month period ended
September 30, 2002
-----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic earnings per common share $35,731 107,936 $.33
====
Dilutive effect of stock options -- 3,799
------- -------
Diluted earnings per common share $35,731 111,735 $.32
======= ======= ====
For the Three month period ended
September 30, 2001
-----------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic earnings per common share $31,891 108,794 $.29
====
Dilutive effect of stock options -- 6,030
------- -------
Diluted earnings per common share $31,891 114,824 $.28
======= ======= ====
Options to purchase 2,802 and 1,253 shares of common stock, with
an average exercise price of $45.53 and $49.96, were outstanding
during the third quarter of 2002 and 2001, respectively, but were
excluded from the diluted earnings per common share calculation
because the options' exercise prices were greater than the average
market price of the Company's common stock.
For the Nine month period ended
September 30, 2002
---------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic earnings per common share $105,491 108,988 $.97
====
Dilutive effect of stock options -- 4,686
-------- -------
Diluted earnings per common share $105,491 113,674 $.93
======== ======= ====
For the Nine month period ended
September 30, 2001
----------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic earnings per common share $91,767 108,685 $.84
====
Dilutive effect of stock options -- 6,546
------- --------
Diluted earnings per common share $91,767 115,231 $.80
======= ======== =====
Options to purchase 2,802 and 1,288 shares of common stock, with
an average exercise price of $45.53 and $49.73 were outstanding
during the first nine months of 2002 and 2001, respectively, but
were excluded from the diluted earnings per common share
calculation because the options' exercise prices were greater than
the average market price of the Company's common stock.
9
Statements of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, the Company
considers investment instruments purchased with an original maturity of
three months or less to be cash equivalents.
Supplemental disclosures of cash paid/received during the nine month
period ended September 30 is as follows:
2002 2001
---- ----
Interest paid $ 2,318 $ 2,061
Interest and dividends received 4,010 6,046
Income taxes paid 34,210 --
Management's Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the Unites States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Note 2. Comprehensive Income - The Company computes comprehensive income in
accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and presentation of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements that is presented with equal
prominence as other financial statements. Comprehensive income includes
net income, foreign currency translation adjustments, and unrealized
holding gains and losses and is presented on the accompanying
Consolidated Statements of Income. Accumulated other comprehensive
losses on the Consolidated Balance Sheets is the change from December
31, 2001 to September 30, 2002 as follows:
Foreign Unrealized Accumulated
Currency Holding Other
Translation Losses Comprehensive
Adjustments on Investments Losses
----------- -------------- -------------
Beginning balance (Dec. 31, 2001) $(978) $ (996) $ (1,974)
Current period change 656 (2,041) (1,385)
----- ------- --------
Ending Balance (September 30, 2002) $(322) $(3,037) $ (3,359)
===== ======= ========
Note 3. Receivables - Receivables on the accompanying Consolidated Balance
Sheets consist of the following:
September 30, 2002 December 31, 2001
------------------ -----------------
Trade receivables $ 29,189 $ 26,415
Fees earned, not received 1,326 2,527
Fees earned, not billed 32,474 29,085
-------- --------
62,989 58,027
Less: Allowance for doubtful accounts (1,700) (1,700)
-------- --------
$ 61,289 $ 56,327
======== ========
Fees earned, not received represent brokerage commissions earned but not
yet collected. Fees earned, not billed represent receivables earned but
unbilled and result from timing differences between services provided
and contractual billing schedules.
10
Receivables from regulated investment companies on the accompanying
Consolidated Balance Sheets represent fees earned from the Company's
wholly owned subsidiaries, SIDCO and SIMC, for distribution, investment
advisory, and administration services provided by these subsidiaries to
various regulated investment companies sponsored by the Company.
Note 4. Investments Available for Sale - Investments available for sale
consist of investments in mutual funds sponsored by the Company. The
Company accounts for investments in marketable securities pursuant to
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS
115 requires that debt and equity securities classified as available
for sale be reported at market value. Unrealized holding gains and
losses, net of income taxes, are reported as a separate component of
comprehensive income. Realized gains and losses, as determined on a
specific identification basis and declines in value, if any, judged to
be other than temporary are reported separately on the accompanying
Consolidated Statements of Income.
Investments available for sale at September 30, 2002 had an aggregate
cost of $69,247 and an aggregate market value of $64,317 with gross
unrealized holding losses of $4,930. At that date, the net unrealized
holding losses of $3,037 (net of income tax benefit of $1,893) were
included in Accumulated other comprehensive losses on the accompanying
Consolidated Balance Sheets.
Investments available for sale at December 31, 2001 had an aggregate
cost of $67,996 and an aggregate market value of $66,332 with gross
unrealized holding losses of $1,664. At that date, the net unrealized
holding losses of $996 (net of income tax benefit of $668) were
included in Accumulated other comprehensive losses on the accompanying
Consolidated Balance Sheets.
The Company continually evaluates the value of its investments that
have experienced a decline in value that should be adjusted to its
current market value. During the third quarter 2002, management
determined that certain investments classified as Investments available
for sale experienced a decline in value, which was considered to be
other than temporary. As a result, the Company recorded a loss of
$2,367 which is included in Net gain on investments on the accompanying
Consolidated Statements of Operations.
Note 5. Derivative Instruments and Hedging Activities - The Company is exposed
to market risk associated with its designated Investments available for
sale. To provide some protection against potential market fluctuations
associated with its Investments available for sale the Company has
entered into various derivative financial transactions in the form of
futures and equity contracts (i.e. derivatives).
The Company accounts for its derivatives in accordance with Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133" ) and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133", ("SFAS 138").
The Company recognizes all derivatives on the balance sheet at fair
value. On the date the derivative instrument is entered into, the
Company generally designates the derivative as a hedge of the fair
value of a recognized asset. Changes in the fair value of a derivative
that is designated as, and meets all the required criteria for, a fair
value hedge, along with the gain or loss on the hedged asset that is
attributable to the hedged risk, are recorded in current period
earnings. The portion of the change in fair value of a derivative
associated with hedge ineffectiveness or the component of a derivative
instrument excluded from the assessment of hedge effectiveness is
recorded currently in earnings. Also, changes in the entire fair value
of a derivative that is not designated as a hedge are recognized
immediately in earnings. The Company formally documents all
relationships between hedging instruments and hedged items, as well as
its risk-management objective and strategy for undertaking various
hedge transactions. This process includes relating all derivatives that
are designated as fair value hedges to specific assets on the balance
sheet.
The Company also formally assesses, both at the inception of the hedge
and on an ongoing basis, whether each derivative is highly effective in
offsetting changes in fair values of the hedged item. If it is
determined that a derivative is not highly effective as a hedge or if a
derivative ceases to be a highly
11
effective hedge, the Company will discontinue hedge accounting
prospectively. During 2002, the Company discontinued hedge accounting
prospectively for certain derivatives utilized to manage economic
exposure because of hedge ineffectiveness. The Company may continue to
enter into economic hedges to support certain business strategies but
may not designate such derivatives as accounting hedges. Management's
decision to no longer apply hedge accounting to certain derivatives as
well as hedge ineffectiveness may cause volatility in quarterly
earnings and equity.
At September 30, 2002, income before taxes, on the accompanying
Consolidated Statements of Income include a net gain of $3,308 and
$5,500 from hedge ineffectiveness for the third quarter 2002 and nine
month period ended September 30, 2002, respectively.
The Company currently holds futures contracts with a notional amount of
$5,107 with a financial institution for various terms. The Company also
currently holds equity derivatives with a notional amount of $15,297
with a financial institution with various terms. During the nine month
period ended September 30, 2002, the Company did not enter into or hold
derivative financial instruments for trading purposes.
Note 6. Other Assets - Other assets on the accompanying Consolidated Balance
Sheets consist of the following:
September 30, 2002 December 31, 2001
------------------ -----------------
Investment in unconsolidated affiliate $ 7,929 $ 6,033
Other, net 14,596 15,550
---------- ---------
Other assets $ 22,525 $ 21,583
========== =========
Other, net consists of long-term prepaid expenses, deposits and other
investments carried at cost.
Investment in Unconsolidated Affiliate - LSV Asset Management ("LSV")
is a partnership formed between the Company and several leading
academics in the field of finance. LSV is a registered investment
advisor, which provides investment advisory services to institutions,
including pension plans and investment companies. LSV is currently the
portfolio manager for a number of Company-sponsored mutual funds. The
Company's interest in LSV was approximately 44 percent for the nine
month period ending September 30, 2002 and 45 percent for the nine
month period ending September 30, 2001. LSV is accounted for using the
equity method of accounting due to the Company's less than 50 percent
ownership. The Company's portion of LSV's net earnings is reflected in
Equity in the earnings of unconsolidated affiliate on the accompanying
Consolidated Statements of Income.
The following table contains the condensed statements of income of LSV
for the three month period ending September 30:
2002 2001
---- ----
Revenues $ 9,047 $ 7,672
======= =======
Net income $ 6,526 $ 5,682
======= =======
12
The following table contains the condensed statements of income of LSV
for the nine month period ending September 30:
2002 2001
---- ----
Revenues $26,914 $22,360
======= =======
Net income $19,716 $16,454
======= =======
The following table contains the condensed balance sheets of LSV:
September 30, 2002 December 31, 2001
------------------ -----------------
Current assets $16,387 $ 13,394
Non-current assets 159 89
------- --------
Total assets $16,546 $ 13,483
======= ========
Current liabilities $ 1,807 $ 1,686
Partners' capital 14,739 11,797
------- --------
Total liabilities and
partners' capital $16,546 $ 13,483
======= ========
Note 7. Accrued Expenses - Accrued expenses on the accompanying Consolidated
Balance Sheets consist of the following:
September 30, 2002 December 31, 2001
------------------ -----------------
Accrued compensation $ 38,687 $ 39,542
Accrued income taxes 14,645 5,871
Accrued proprietary fund services 9,261 12,463
Accrued brokerage services 9,394 8,456
Other accrued expenses 53,217 62,076
---------- ---------
Total accrued expenses $ 125,204 $ 128,408
========= =========
Note 8. Line of Credit - The Company has a line of credit agreement (the
"Agreement") with a principal lending institution that provides for
borrowings of up to $25,000 and expires on December 19, 2002, at which
time the outstanding principal balance, if any, becomes due unless the
Agreement is extended. The line of credit, when utilized, accrues
interest at the Prime rate or one and one-quarter percent above the
London Interbank Offer Rate (LIBOR). The Company is obligated to pay a
commitment fee equal to one-quarter of one percent per annum on the
average daily unused portion of the commitment. Certain covenants
under the Agreement require the Company to maintain specified levels
of net worth and place certain restrictions on investments. There were
no borrowings on the Company's line of credit during the nine month
period ending September 30, 2002 and 2001.
Note 9. Long-term Debt - On February 24, 1997, the Company signed a Note
Purchase Agreement authorizing the issuance and sale of $20,000 of
7.20% Senior Notes, Series A, and $15,000 of 7.27% Senior Notes,
Series B, (collectively, the "Notes") in a private offering with
certain financial institutions. The Notes are unsecured with final
maturities ranging from 10 to 15 years. The Company may, at its
option, prepay all or part of these Notes. The prepayment amount would
be 100 percent of the principal amount of the Notes, together with
interest on the Notes accrued to the date of prepayment in addition to
a make-whole amount. The proceeds from the Notes were used to repay
the outstanding balance on the Company's line of credit at that date.
The Note Purchase Agreement, as amended, contains various covenants,
including limitations on indebtedness, maintenance of minimum net
worth levels, and restrictions on certain investments. In addition,
the agreement limits the Company's ability to merge or consolidate,
13
and to sell certain assets. The Company was in compliance with all
covenants under the Notes during the nine month period ending
September 30, 2002.
Principal payments on the Notes are made annually from the date of
issuance while interest payments are made semi-annually. The Company
made its scheduled principal payment of $2,000 in February 2002. The
current portion of the Notes amounted to $4,000 at September 30, 2002.
On June 26, 2001, the Company entered into a loan agreement (the
"Agreement") with a separate lending institution. The Agreement
provides for borrowing up to $25,000 in the form of a term loan, and
expires on March 31, 2006 and is payable in seventeen equal quarterly
installments. The term loan, when utilized, accrues interest at the
Prime rate or one and thirty-five hundredths of one percent above the
London Interbank Offer Rate (LIBOR). The Agreement contains various
covenants, including limitations on indebtedness and restrictions on
certain investments. None of these covenants negatively affect the
Company's liquidity or capital resources. On August 2, 2001, the
Company borrowed $25,000 on this term loan. The proceeds from the term
loan were used to support capital improvement projects for our
corporate campus and other business purposes. The Company made its
scheduled principal payments of $1,389 in March, June and September of
2002. The current portion of the notes amounted to $5,556 at September
30, 2002. The Company was in compliance with all covenants during the
nine month period ending September 30, 2002.
Note 10. Common Stock Buyback - The Board of Directors has authorized the
purchase of the Company's common stock on the open market or through
private transactions of up to an aggregate of $603,365, including an
additional authorization of $50,000 on September 23, 2002. Through
September 30, 2002, a total of 104,825,000 shares at an aggregate cost
of $562,078 have been purchased and retired. During the three month
period ended September 30, 2002, the Company purchased 2,303,000
shares at an aggregate cost of $59,559. The Company purchased
3,723,000 shares at a total cost of $103,639 during the nine month
period ended September 30, 2002.
The Company immediately retires its common stock when purchased. Upon
retirement, the Company reduces Capital in excess of par value for the
average capital per share outstanding and the remainder is charged
against Retained earnings. If the Company reduces its Retained
earnings to zero, any subsequent purchases of common stock will be
charged entirely to Capital in excess of par value.
The Company purchased in a privately negotiated transaction 750,000
shares for $20,340 on October 23, 2002 from an institutional investor
that holds greater than 10 percent of the outstanding shares.
Note 11. Segment Information - The Company defines its business segments in
accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way public
business enterprises report financial information about operating
segments in financial statements. SFAS 131 also requires additional
disclosures about product and services, geographic areas, and major
customers.
The Company's management evaluates financial performance of its
operating segments based on Income from operations. Our operations and
organizational structures were realigned in 2001 into separate
business units that offer products and services tailored for
particular market segments. Our reportable segments are Private
Banking and Trust, Investment Advisors, Enterprises, Money Managers,
and Investments in New Businesses. The accounting policies of the
reportable segments are the same as those described in Note 1. The
information in the following tables is derived from the Company's
internal financial reporting used for corporate management purposes.
There are no inter-segment revenues for the three and nine months
period ended September 30, 2002. Management evaluates Company assets
on a consolidated basis during interim periods.
14
The following tables highlight certain unaudited financial information
about each of the Company's segments for the three months ended
September 30, 2002 and 2001.
Private Investments General
Banking Investment Money In New And
& Trust Advisors Enterprises Managers Businesses Administrative Total
------- -------- ----------- -------- ---------- -------------- -----
For the Three-Month Period Ended September 30, 2002
---------------------------------------------------------------------------------------------------
Revenues $80,510 $35,866 $13,393 $ 12,502 $ 11,045 $ 153,316
------- ------- ------- -------- -------- ---------
Operating
income (loss) $34,296 $20,023 $ 5,502 $ 2,118 $ (3,520) $ (5,779) $ 52,640
------- ------- ------- -------- -------- --------
Other income, net $ 4,075
---------
Income before
income taxes $ 56,715
---------
Depreciation and
amortization $ 2,736 $ 820 $ 279 $ 289 $ 345 $ 146 $ 4,615
------- ------- ------- -------- -------- -------- ---------
Capital
expenditures $ 2,983 $ 986 $ 370 $ 417 $ 308 $ 283 $ 5,347
------- ------- ------- -------- -------- -------- ---------
Private Investments General
Banking Investment Money In New And
& Trust Advisors Enterprises Managers Businesses Administrative Total
------- -------- ----------- -------- ---------- -------------- -----
For the Three-Month Period Ended September 30, 2001
--------------------------------------------------------------------------------------------------
Revenues $89,201 $38,841 $15,559 $ 9,682 $ 10,120 $ 163,403
------- ------- ------- -------- -------- ---------
Operating
income (loss) $37,562 $15,420 $ 4,366 $ 2,054 $ (6,886) $ (5,887) $ 46,629
------- ------- ------- -------- -------- --------
Other income, net $ 3,992
---------
Income before
income taxes $ 50,621
---------
Depreciation and
amortization $ 2,846 $ 938 $ 333 $ 259 $ 352 $ 183 $ 4,911
------- ------- ------- -------- -------- -------- ---------
Capital
expenditures $ 5,382 $ 1,005 $ 368 $ 400 $ 636 $ 502 $ 8,293
------- ------- ------- -------- -------- -------- ---------
15
The following tables highlight certain unaudited financial information about
each of the Company's segments for the nine months ended September 30, 2002
and 2001.
Private Investments General
Banking Investment Money In New And
& Trust Advisors Enterprises Managers Businesses Administrative Total
------- -------- ----------- -------- ---------- -------------- -----
For the Nine-Month Period Ended September 30, 2002
-----------------------------------------------------------------------------------------------
Revenues $ 246,346 $ 113,986 $ 42,420 $ 34,103 $ 34,527 $ 471,382
---------- ---------- ----------- --------- -------- ---------
Operating
income (loss) $ 101,773 $ 58,463 $ 16,682 $ 6,693 $ (10,142) $ (17,460) $ 156,009
---------- ---------- ----------- --------- --------- ---------
Other income, net $ 11,436
---------
Income before
income taxes $ 167,445
---------
Depreciation and
amortization $ 8,337 $ 2,315 $ 807 $ 783 $ 959 $ 414 $ 13,615
---------- ---------- ----------- --------- --------- --------- ---------
Capital
expenditures $ 12,693 $ 4,282 $ 1,947 $ 1,451 $ 1,741 $ 1,229 $ 23,343
---------- ---------- ----------- --------- --------- --------- ---------
Private Investments General
Banking Investment Money In New And
& Trust Advisors Enterprises Managers Businesses Administrative Total
------- ---------- ----------- --------- ----------- -------------- -----
For the Nine-Month Period Ended September 30, 2001
------------------------------------------------------------------------------------------------
Revenues $ 271,793 $ 115,607 $ 48,757 $ 26,154 $ 30,873 $ 493,184
---------- ---------- ----------- --------- --------- ---------
Operating
income (loss) $ 106,697 $ 44,541 $ 14,839 $ 2,666 $ (17,180) $ (17,391) $ 134,172
---------- ---------- ----------- --------- --------- ---------
Other income, net $ 11,490
---------
Income before
income taxes $ 145,662
---------
Depreciation and
amortization $ 9,002 $ 2,449 $ 849 $ 706 $ 1,001 $ 520 $ 14,527
---------- ---------- ----------- --------- --------- --------- ---------
Capital
expenditures $ 19,161 $ 3,006 $ 1,102 $ 1,047 $ 1,357 $ 1,503 $ 27,176
---------- ---------- ----------- --------- --------- --------- ---------
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(In thousands, except asset balances and per share data)
This discussion reviews and analyzes the consolidated financial condition at
September 30, 2002 and 2001, the consolidated results of operations for the
three and nine months ended September 30, 2002 and 2001 and other key factors
that may affect future performance. This discussion should be read in
conjunction with the Consolidated Financial Statements and the Notes to the
Consolidated Financial Statements. Financial information on each of these
segments is reflected in Note 11 of the Notes to Consolidated Financial
Statements.
Results of Operations
Three and Nine Months Ended September 30, 2002 compared to Three and Nine Months
Ended September 30, 2001
Consolidated Overview
Our operations and organizational structures were realigned in 2001 into
business units that offer products and services tailored for particular market
segments. Our reportable segments are Private Banking and Trust, Investment
Advisors, Enterprises, Money Managers, and Investments in New Businesses. The
accounting policies of our business segments are the same as those used in the
preparation of the consolidated financial statements. Management evaluates
financial performance of its operating segments based on Income from operations.
Revenue and Income from operations by segment for the three and nine months
ended September 30, 2002 and 2001 are as follows:
Three Months ended September 30, Nine Months ended September 30,
Percent Percent
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Private Banking and Trust:
Revenues $ 80,510 $ 89,201 (10%) $246,346 $271,793 (9%)
Income from operations 34,296 37,562 (9%) 101,773 106,697 (5%)
Investment Advisors:
Revenues 35,866 38,841 (8%) 113,986 115,607 (1%)
Income from operations 20,023 15,420 30% 58,463 44,541 31%
Enterprises:
Revenues 13,393 15,559 (14%) 42,420 48,757 (13%)
Income from operations 5,502 4,366 26% 16,682 14,839 12%
Money Managers:
Revenues 12,502 9,682 29% 34,103 26,154 30%
Income (loss) from operations 2,118 2,054 3% 6,693 2,666 151%
Investments in New Businesses:
Revenues 11,045 10,120 9% 34,527 30,873 12%
Loss from operations (3,520) (6,886) 49% (10,142) (17,180) 41%
General and Administrative:
Loss from operations (5,779) (5,887) 2% (17,460) (17,391) 0%
Consolidated Segment Totals:
Revenues $153,316 $163,403 (6%) $471,382 $493,184 (4%)
Income from operations $ 52,640 $ 46,629 13% $156,009 $134,172 16%
17
Revenues decreased from the corresponding prior year periods primarily due to
client losses, the recent downturn in the capital markets and economic
uncertainty. During the latter part of 2001, certain clients in our fund
processing and institutional asset management businesses terminated their
relationship with us. The effect of these lost clients has had a negative impact
on our revenues during 2002. The recent downturn in the capital markets has
adversely affected the value of our assets under management and administration.
This directly reduces the revenue we generate from our businesses receiving
asset-based fees. In addition, economic uncertainty during the past year has
slowed many purchase decisions in most of our target markets. However, we
continue to experience moderate growth through new sales, although this has only
partially mitigated our revenue losses.
Income from operations improved $6,011 or 13 percent, over the third quarter
2001, and $21,837 or 16 percent, over the nine months 2001. Operating margins
for the third quarter 2002 increased to 34 percent from 29 percent for the third
quarter 2001, and for the nine months ended 2002 increased to 33 percent from 27
percent for the nine months ended 2001. The increase in operating income and
operating margins was due to cost controls and improved productivity. We
continued to manage discretionary expenses effectively and prioritize our
investment spending. Our investment spending focuses around building outsource
business solutions for our target markets.
Our short-term expectation is that any improvement in earnings and margins is
expected to continue to come from cost containment and productivity
improvements.
In the longer run, we will continue to invest in the development of new products
and services to expand our existing client base and penetrate new markets.
However, prolonged volatility in the capital markets, delays in purchase
decisions and mergers and acquisitions in the banking industry will continue to
be long-term challenges.
Asset Balances
(In millions)
As of September 30, Percent
-------------------
2002 2001 Change
---- ---- ------
Assets invested in equity and fixed income programs $ 52,450 $ 52,795 (1%)
Assets invested in liquidity funds 19,763 21,208 (7%)
-------- ---------
Assets under management 72,213 74,003 (2%)
Client proprietary assets under administration 161,207 169,860 (5%)
-------- ---------
Assets under management and administration $233,420 $ 243,863 (4%)
======== =========
Assets under management consist of total assets invested in our equity and fixed
income investment programs and liquidity funds for which we provide management
services. Assets under management and administration consist of total assets for
which we provide management and administrative services, including client
proprietary fund balances for which we provide administration and/or
distribution services.
Private Banking and Trust
Private Banking and Trust provides investment processing solutions, fund
processing solutions, and investment management programs to banks and private
trust companies. Investment processing solutions primarily include outsourcing
services provided through our TRUST 3000 product line. TRUST 3000 includes many
integrated products and sub-systems that provide a complete investment
accounting and management information system for trust institutions. Investment
processing fees are primarily earned from monthly processing, and software
servicing and project fees associated with the conversion of new and merging
clients.
Fund processing solutions include administration and distribution services
provided to bank proprietary mutual funds. These services primarily include fund
administration and accounting, legal services, shareholder recordkeeping, and
marketing. Fund processing fees are based on a fixed percentage, referred to as
basis points, of the average daily net asset value of the proprietary funds.
Investment management fees are primarily earned through management fees that are
based upon a fixed percentage, referred to as basis points, of the average daily
net asset value of assets under management.
18
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30 Percent Sept. 30, Sept. 30 Percent
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Revenues:
Investment processing fees $57,330 $57,127 0% $171,659 $173,032 (1%)
Fund processing fees 13,360 21,326 (37%) 43,696 66,027 (34%)
Investment management fees 9,820 10,748 (9%) 30,991 32,734 (5%)
------- ------- -------- --------
Total revenues 80,510 89,201 (10%) 246,346 271,793 (9%)
Expenses:
Operating and development 33,854 39,359 (14%) 111,117 128,213 (13%)
Sales and marketing 12,360 12,280 1% 33,456 36,883 (9%)
------- ------- -------- --------
Total operating profits $34,296 $37,562 (9%) $101,773 $106,697 (5%)
======= ======= ======== ========
Profit margin 43% 42% 41% 39%
Percent of Revenue:
Operating and development 42% 44% 45% 47%
Sales and marketing 15% 14% 14% 14%
Investment processing fees for 2001 included one-time implementation fees for
additional account conversion activity relating to acquisitions by some of our
bank clients. Recurring processing fees increased in 2002 from these clients,
however the decrease in one-time implementation fees was more than the increase
in recurring processing fees.
The decrease in fund processing fees in both comparable periods in 2002 was
mainly due to the loss of certain clients during the latter part of 2001. The
loss of these clients resulted in a significant decrease in assets under
administration. As a result of these lost clients, fund processing fees
decreased approximately $4,500 for the three months ended September 30, 2002 and
$18,900 for the nine months ended September 30, 2002 as compared to the prior
year comparable periods Also, the recent decline in the capital markets has
negatively affected the value of the assets we administer which in turn had
adversely affected the revenues we earn from these assets.
Operating profits decreased in 2002, as compared to 2001 for both comparable
periods whereas profit margins increased slightly. The decrease in profits was
mainly due to the revenue losses mentioned above, net of the decrease in direct
expenses associated with these clients. We also continued to be more selective
about our investment spending and cost control measures.
We believe our future growth in revenues and earnings will come from maintaining
a consistent level of investment in the development of new products and services
to grow existing markets and to expand into new markets. However, consolidations
among our banking clients continue to be a major strategic issue facing this
segment.
Investment Advisors
Investment Advisors provides investment management programs and investment
processing solutions to affluent investors distributed through a network of
investment professionals. Revenues are primarily earned through management fees
that are based upon a fixed percentage, referred to as basis points, of the
average daily net asset value of assets under management.
19
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Total Revenues $ 35,866 $ 38,841 (8%) $113,986 $115,607 (1%)
Expenses:
Operating and development 8,393 11,449 (27%) 28,303 34,617 (18%)
Sales and marketing 7,450 11,972 (38%) 27,220 36,449 (25%)
-------- -------- -------- --------
Total operating profits $ 20,023 $ 15,420 30% $ 58,463 $ 44,541 31%
======== ======== ======== ========
Profit margin 56% 40% 51% 38%
Percent of Revenue:
Operating and development 23% 29% 25% 30%
Sales and marketing 21% 31% 24% 32%
Revenues decreased slightly over the prior year periods primarily due to the
decline in average assets under management offset in part by new business. We
established approximately 470 new registered investment advisor relationships
during the first nine months of 2002, of which 97 occurred in the third quarter
bringing our total network to about 9,170 advisors. However, the recent downturn
in the capital markets has negatively affected our revenues.
Operating profits and profit margin improvement was primarily due to the
management of discretionary expenses, mainly technology, personnel, and
marketing.
We believe future growth and success of this business is dependent upon
continued acceptance of our investment management products and services.
However, continued volatility in the capital markets could negatively affect
future revenues and profits.
Enterprises
Enterprises provides retirement business solutions and treasury business
solutions for corporations, unions and political entities, endowments and
foundations and insurance companies. Retirement solutions revenues are primarily
earned through management fees that are based upon a fixed percentage, referred
to as basis points, of the average month-end net asset value of assets under
management. Treasury solutions revenues are primarily earned through management
fees that are based upon a fixed percentage, referred to as basis points, of the
average daily net asset value of assets under management.
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Total Revenues $ 13,393 $ 15,559 (14%) $ 42,420 $ 48,757 (13%)
Expenses:
Operating and development 4,147 5,744 (28%) 13,017 16,535 (21%)
Sales and marketing 3,744 5,449 (31%) 12,721 17,383 (27%)
-------- -------- -------- --------
Total operating profits $ 5,502 $ 4,366 26% $ 16,682 $ 14,839 12%
======== ======== ======== ========
Profit margin 41% 28% 39% 30%
Percent of Revenue:
Operating and development 31% 37% 31% 34%
Sales and marketing 28% 35% 30% 36%
20
The decrease in revenues was primarily due to client losses in our Retirement
Solutions business during the fourth quarter of 2001, and the recent downturn in
the capital markets. However, we continued to generate new sales in our
Retirement Solutions business. We added 14 new clients during the third quarter
of 2002 and 34 new clients during the first nine months of 2002. However, the
downturn in the capital markets has reduced our asset based fees in both our
Retirement Solutions and Treasury Solutions businesses.
The increase in operating profit during both comparable periods was mainly due
to our ability to control costs, primarily marketing, personnel, and technology.
We will continue to invest in strategic initiatives that will continue to fuel
growth for our outsourcing solutions. However, future revenues and earnings
could be significantly affected by continued volatility in the capital markets.
Money Managers
Money Managers provides investment solutions to U.S investment managers, mutual
fund companies and alternative investment managers worldwide. Revenues are
primarily earned through administration and distribution fees that are based
upon a fixed percentage, referred to as basis points, of the average daily net
asset value of assets under administration.
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Total Revenues $ 12,502 $ 9,682 29% $ 34,103 $ 26,154 30%
Expenses:
Operating and development 6,528 4,308 52% 17,614 13,160 34%
Sales and marketing 3,856 3,320 16% 9,796 10,328 (5%)
-------- -------- -------- --------
Total operating profits $ 2,118 $ 2,054 3% $ 6,693 $ 2,666 151%
======== ======== ======== ========
Profit margin 17% 21% 20% 10%
Percent of Revenue:
Operating and development 52% 45% 51% 50%
Sales and marketing 31% 34% 29% 40%
The increase in revenues over the corresponding prior year periods was primarily
due to an increase in average assets under administration as a result of new
business. We continue to see market acceptance of our products and services from
alternative investment managers and U.S. money mangers.
Operating profits increased while profit margins decreased during the third
quarter 2002 as compared to 2001, while operating profits and profit margin
increased for the nine months ended 2002 as compared to 2001, primarily due to
the new business activity mentioned above combined with expense management and
the timing of certain expenses. In addition, revenues are affected by continued
volatility in the capital markets. Any significant change in value would have an
impact on revenues.
21
Investments in New Businesses
Investments in New Businesses include our global asset management initiatives
that provide investment solutions to institutional and high-net-worth investors
outside the United States. Revenues are primarily earned through management fees
that are based upon a fixed percentage, referred to as basis points, of the
average daily net asset value of assets under management.
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Total Revenues $ 11,045 $ 10,120 9% $ 34,527 $ 30,873 12%
Expenses:
Operating and development 9,035 11,497 (21%) 28,829 33,175 (13%)
Sales and marketing 5,530 5,509 0% 15,840 14,878 6%
-------- -------- --------- --------
Total operating losses $ (3,520) $ (6,886) 49% $ (10,142) $(17,180) 41%
======== ======== ========= ========
Profit margin (32%) (68%) (29%) (56%)
Percent of Revenue:
Operating and development 82% 114% 84% 108%
Sales and marketing 50% 54% 45% 48%
The increase in revenues over the corresponding prior year periods was primarily
due to an increase in assets under management as a result of new business. The
majority of new business activity continues to come from our Canadian and U.K.
institutional asset management business as well as continued expansion of our
U.K independent financial advisor network. However, the recent devaluation of
the capital markets has adversely affected revenues and offset a portion of this
new business activity.
Operating losses decreased during 2002 primarily due to an increase in revenues
from new business. We continued our investments in establishing marketing and
distribution channels globally and in developing technology outsourcing
solutions to satisfy the needs of these global markets. We remain optimistic
about the long-term prospects of our global business initiatives but expect to
incur losses throughout the remainder of 2002 and during 2003.
General & Administrative
General and administrative expense primarily consists of corporate overhead
costs and other costs not directly attributable to a reportable business
segment.
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
General and Administrative $ 5,779 $ 5,887 (2%) $ 17,460 $ 17,391 0%
Percent of Consolidated Revenue 4% 4% 4% 4%
22
Other Income
Other income on the accompanying Consolidated Statements of Income consist of
the following:
Three Months ended Nine Months ended
Sept. 30, Sept. 30, Percent Sept. 30, Sept. 30, Percent
2002 2001 Change 2002 2001 Change
---- ---- ------ ---- ---- ------
Equity in the earnings of
unconsolidated affiliate $ 2,861 $ 2,637 8% $ 8,643 $ 7,429 16%
Net gain on investments 574 0 100% 574 0 100%
Interest income 1,303 1,887 (31%) 3,847 5,677 (32%)
Interest expense (663) (532) (25%) (1,628) (1,616) (1%)
------- ------- ------- -------
Total other income, net $ 4,075 $ 3,992 2% $11,436 $11,490 --
======= ======= ======= =======
Equity in the earnings of unconsolidated affiliate on the accompanying
Consolidated Statements of Income includes our less than 50 percent ownership in
the general partnership of LSV Asset Management ("LSV") (See Note 6 of the Notes
to Consolidated Financial Statements). The increase in LSV's net earnings is due
to an increase in assets under management.
Net gain on investments primarily includes hedge ineffectiveness from our
hedging activities along with the realized gains and losses from our investments
available for sale. (See Notes 4 and 5 of the Notes to Consolidated Financial
Statements)
Interest income is earned based upon the amount of cash that is invested daily
and fluctuations in interest income recognized for one period in relation to
another is due to changes in the average cash balance invested for the period
and/or changes in interest rates. The decrease in interest income during both
comparable periods in 2002 was primarily due to a reduction in interest rates.
This decrease was partially offset by a higher average cash balance during both
comparable periods in 2002. Interest expense primarily relates to our long-term
debt and other borrowings. (See Note 9 of the Notes to Consolidated Financial
Statements)
Income Taxes
Our effective tax rate was 37.0 percent for the periods ending September 30,
2002 and 2001.
23
Liquidity and Capital Resources
Nine Months
-----------------------------------
Ended September 30,
-----------------------------------
2002 2001
---- ----
Net cash provided by operating activities $ 128,200 $ 127,044
Net cash used in investing activities (18,185) (71,155)
Net cash used in financing activities (111,626) (70,298)
--------- ---------
Net increase (decrease) in cash and cash equivalents (1,611) (14,409)
Cash and cash equivalents, beginning of period 163,685 147,676
--------- ---------
Cash and cash equivalents, end of period $ 162,074 $ 133,267
========= =========
Cash requirements and liquidity needs are primarily funded through operations
and our capacity for additional borrowing. We currently have a line of credit
that provides for borrowings of up to $25,000. The availability of the line of
credit is subject to compliance with certain covenants set forth in the
agreement, (See Note 8 of the Notes to Consolidated Financial Statements). At
September 30, 2002, the unused sources of liquidity consisted of unrestricted
cash and cash equivalents of $162,074 and the unused portion of the line of
credit of $25,000.
The increase in cash flows from operations was primarily due to an increase in
income. The increase in income is due to our cost cutting controls and improved
productivity. In addition, cash flows from operations in both comparable periods
were affected by the tax benefit received from stock options exercised, changes
in our receivables and in other various accrued liabilities.
Cash flows from investing activities are principally affected by capital
expenditures and investments in Company-sponsored mutual funds. Capital
expenditures in the first nine months of 2002 included $14,641 related to the
expansion of our corporate headquarters. The total expected cost of the
expansion is estimated at $47,000, of which we have spent $34,040 to date. We
expect this project to be completed by the end of 2003. The total expected
expansion cost and completion date now include the construction costs of our
data center that we are moving to our corporate headquarters. Also, cash flows
from investing activities were affected by purchases and sales of our mutual
funds, mainly for the testing and subsequent startup of new investment programs
to be offered to our clients. Purchases were approximately $16,489 in the first
nine months 2002, as compared to $60,464 in the first nine months 2001, whereas
sales totaled $21,215 in the first nine months 2002, as compared to $18,227 in
the first nine months 2001.
Cash flows from financing activities are primarily affected by debt and equity
transactions. Principal payments on the Senior notes are made annually from the
date of issuance while interest payments are made semi-annually. Principal
payments on the term loan are made quarterly from the date of issuance while
interest payments are made based on the term of the LIBOR borrowing. The
aggregate maturities of our long-term debt at September 30, 2002 are $1,389 in
the fourth quarter 2002, $9,556 each year for the years 2003 thru 2005, $5,389
in 2006, and $9,000 in 2007 and thereafter (See Note 9 of the Notes to
Consolidated Financial Statements). We continued our common stock repurchase
program. We purchased approximately 3,723,000 shares of our common stock at a
cost of $103.6 million during the first nine months of 2002. As of October 31,
2002 we still had approximately $10,204 remaining authorized for the purchase of
our common stock. Proceeds received from the issuance of common stock primarily
results from the exercise of stock options. Cash dividends of $.11 per share
were paid in the first nine months of 2002 and $.09 per share were paid in the
first nine months of 2001. Our Board of Directors has indicated its intention to
continue making cash dividend payments.
Our operating cash flow, borrowing capacity, and liquidity should provide
adequate funds for continuing operations, continued investment in new products
and equipment, our common stock repurchase program, expansion of our corporate
campus, future dividend payments, and principal and interest payments on our
long-term debt.
24
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained in this discussion
is or may be considered forward-looking. Forward-looking statements relate to
future operations, strategies, financial results or other developments.
Forward-looking statements are based upon estimates and assumptions that involve
certain risks and uncertainties, many of which are beyond our control or are
subject to change. Although we believe our assumptions are reasonable, they
could be inaccurate. Our actual future revenues and income could differ
materially from our expected results. We have no obligation to publicly update
or revise any forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We do have a number of satellite offices located outside the United States that
conduct business in local currencies of that country. All foreign operations
aggregate approximately 7 percent of total consolidated revenues. Due to this
limited activity, we do not hedge against foreign operations nor do we expect
any material loss with respect to foreign currency risk.
Exposure to market risk for changes in interest rates relate primarily to our
investment portfolio and other borrowings. We do not undertake any specific
actions to cover our exposure to interest rate risk and are not a party to any
interest rate risk management transactions. We place our investments in
financial instruments that meet high credit quality standards. We are adverse to
principal loss and ensure the safety and preservation of our invested funds by
limiting default risk, market risk, and reinvestment risk. The interest rate on
our Note Purchase Agreement is fixed and is not traded on any established
market. The interest rate on our Loan Agreement accrues interest at the Prime
rate or one and thirty-five hundredths of one percent above the (LIBOR), and is
not traded on any established market. We believe our cash flow exposure due to
changes in interest rates associated with our Loan Agreement and our long-term
debt is minimal and do not expect an adverse effect on earnings.
We are exposed to market risk associated with changes in the fair value of our
Investments available for sale. To provide some protection against potential
fair value changes associated with our Investments available for sale, we have
entered into various derivative financial transactions. The derivative
instruments are used to hedge changes in the fair market value of certain
Investments available for sale. The derivative instruments are qualifying hedges
and as such, changes in the fair value hedge along with changes in the fair
value of the related hedged item are reflected in the statements of income. We
currently hold derivatives with a notional amount of $20,404 with various terms,
generally less than one year. The effectiveness of these hedging relationships
is evaluated on a retrospective and prospective basis using quantitative
measures of correlation. If a hedge is found to be ineffective, it no longer
qualifies as a hedge and any excess gains or losses attributable to such
ineffectiveness as well as subsequent changes in fair value are recognized in
current period earnings. We believe the derivative financial instruments entered
into provide protection against volatile swings in market valuation associated
with our Investments available for sale. During the first nine months of 2002,
we did not enter into or hold derivative financial instruments for trading
purposes.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures - An evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures as of November 6, 2002 was conducted under the supervision and with
the participation of our management, including our chief executive officer and
principal financial officer. Based on that evaluation, our management, including
our chief executive officer and principal financial officer, concluded that our
disclosure controls and procedures were effective as of November 6, 2002.
Changes in Internal Controls - There have been no significant changes to our
internal controls or in other factors that could significantly affect these
controls subsequent to November 6, 2002.
25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following is a list of exhibits filed as part of the Form
10-Q.
99.1 Certification required by Section 906 of the
Sarbanes-Oxley Act of 2002. (Page 31)
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEI INVESTMENTS COMPANY
Date November 14, 2002 By /s/ Kathy Heilig
-------------------- -----------------------------
Kathy Heilig
Vice President and Controller
(Principal Accounting Officer)
27
I, Alfred P. West Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of SEI Investments
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Alfred P. West, Jr.
- ---------------------------------------
Alfred P. West, Jr.
Chairman and Chief Executive Officer
28
I, Dennis J. McGonigle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SEI Investments
Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Dennis J. McGonigle
- ----------------------------------------
Dennis McGonigle
- ----------------------------------------
(principal financial officer)
29