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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------
Commission file number 0 - 10200
SEI INVESTMENTS COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1707341
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
1 Freedom Valley Drive, Oaks, Pennsylvania 19456-1100
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-676-1000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on Which
Title of Each Class Registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No[ ]
The aggregate market value of the voting common stock held by non-affiliates of
the registrant was approximately $2.2 billion based on the closing price of
$28.17 as reported by NASDAQ on June 28, 2002 (the last business day of the
registrant's most recently completed second fiscal quarter). For purposes of
making this calculation only, the registrant has defined affiliates as including
all executive officers, directors and beneficial owners of more than ten percent
of the common stock of the registrant.
(Cover page 1 of 2 pages)
APPLICABLE ONLY TO REGISTRANTS 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 Section 12, 13, or 14(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 REGISTRANTS:
Number of shares outstanding of each of the registrant's classes of common
stock, as of the close of business on February 28, 2003:
Common Stock, $.01 par value 105,554,135
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated by reference herein:
1. The definitive proxy statement relating to the registrant's 2003
Annual Meeting of Shareholders to be filed within 120 days after the
end of the fiscal year covered by this annual report, is incorporated
by reference in Part III hereof.
(Cover page 2 of 2 pages)
TABLE OF CONTENTS
Page
PART I
Item 1. Business. 4
Item 2. Properties. 12
Item 3. Legal Proceedings. 12
Item 4. Submission of Matters to a Vote of Security Holders. 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters. 13
Item 6. Selected Financial Data. 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 15
Item 8. Financial Statements and Supplementary Data. 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 60
PART III
Item 10. Directors and Executive Officers of the Registrant. 61
Item 11. Executive Compensation. 62
Item 12. Security Ownership of Certain Beneficial Owners and Management. 62
Item 13. Certain Relationships and Related Transactions. 62
Item 14. Controls and Procedures 62
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 63
3
PART I
Item 1. Business.
Forward Looking Information
Our disclosure and analysis in this Annual Report on Form 10-K contains some
forward-looking statements. Forward-looking statements give our current
expectations or forecasts of future events. You can identify these statements by
the fact that they do not relate strictly to historical or current facts. Such
statements may include words such as "anticipate," "estimate," "expect,"
"project," "intend," "plan," "believe," and other words and terms of similar
meaning in connection with any discussion of future operating or financial
performance. In particular, these include statements relating to present or
anticipated products and markets, future revenues, capital expenditures,
expansion plans, future financing and liquidity, personnel, and other statements
regarding matters that are not historical facts or statements of current
condition.
Any or all of our forward-looking statements contained within this Annual Report
on Form 10-K may turn out to be wrong. They can be affected by inaccurate
assumptions we might make, or by known or unknown risks and uncertainties. Many
factors mentioned in the discussion below will be important in determining
future results. Consequently, we cannot guarantee any forward-looking
statements. Actual future results may vary materially.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise, except as
required by law. You are advised, however, to consult any further disclosures we
make on related subjects in our filings with the U.S. Securities and Exchange
Commission. This discussion is provided as permitted by the Private Securities
Litigation Reform Act of 1995.
General Development of Business
We were incorporated in Pennsylvania in 1968 and initially offered shares to the
public in March 1981. Our principal wholly owned subsidiaries are SEI
Investments Distribution Company, or SIDCO, SEI Investments Management
Corporation, or SIMC, and SEI Private Trust Company, or SPTC. SIDCO is a
broker-dealer registered with the Securities and Exchange Commission, or SEC,
under the Securities Exchange Act of 1934 and is a member of the National
Association of Securities Dealers, Inc. SIMC is an investment advisor registered
with the SEC under the Investment Advisers Act of 1940. SPTC is a federal
savings association chartered and regulated by the Office of Thrift Supervision.
Our first trust accounting system was introduced to bank trust departments in
1972. Today, our TRUST 3000(TM) product line, offered through SIMC, provides
product capabilities and processing power to large trust institutions.
Additionally, SPTC offers back-office accounting and processing services to
trust institutions, enabling these institutions to outsource their trust
operations and related investment functions.
In 1982, we began to sponsor a number of investment products, primarily in the
form of registered investment companies sold to institutional investors and
financial intermediaries. SIDCO and SIMC provide asset management and related
services that include products and services that enable clients to establish
asset allocation strategies and gain access to top-quality investment managers.
We have also expanded our asset management services outside the United States by
targeting selected foreign markets for our investment management programs.
SIDCO and SIMC also provide a full range of administration and distribution
services to mutual funds established by banks and other financial institutions
and intermediaries. Typically, the client serve's as the investment advisor for
the mutual funds and the mutual funds are sold primarily to customers of the
client.
4
Industry Segments
Financial information is measured internally through the following segments:
Private Banking and Trust - provides investment processing solutions, fund
processing solutions, and investment management programs to banks and other
trust institutions.
Investment Advisors - provides investment management programs and
investment processing solutions to affluent investors through a network of
independent registered investment advisors, financial planners, and other
investment professionals.
Enterprises - provides retirement investment and business solutions to
pension plan sponsors, hospitals, foundations, unions, endowment funds and
other institutional investors. We also provide treasury investment and
business solutions to corporations.
Money Managers - provides investment solutions to U.S.-based investment
managers, U.S.-based mutual fund companies and to investment managers
worldwide of alternative asset classes (e.g., hedge funds and private
equity funds).
Investments in New Businesses - provides investment management, fund
processing, and investment processing solutions to non-U.S. banks,
investment advisors, enterprises and money managers located outside the
United States. This segment also includes other initiatives in new U.S.
markets.
The following table shows the portion of our consolidated revenues earned by
each segment for each of the past three years:
2002 2001 2000
---- ---- ----
Private Banking and Trust 52% 55% 57%
Investment Advisors 24% 23% 22%
Enterprises 9% 10% 9%
Money Managers 8% 6% 5%
Investments in New Businesses 7% 6% 7%
--- --- ---
100% 100% 100%
Financial information about each segment is contained in Note 12 of the Notes to
Consolidated Financial Statements in Item 8, and a discussion about each segment
is included in Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7.
Private Banking and Trust
Banks and other trust institutions utilize our comprehensive software products
and computer processing services to manage investments for their personal and
institutional investors. TRUST 3000 is a complete trust accounting and
investment system with fully automated securities movement and control linked
directly to the Depository Trust Company. TRUST 3000 offers investment
management functionality through integrated products and sub-systems that
support investment accounting, client administration, portfolio analysis, and
trade order processing for both domestic and global securities processing. TRUST
3000 also provides access to multiple third-party pricing and asset related
information. Through training, custom programming and our open architecture
strategy, we help adapt our products to each client's particular needs. Clients
directly access TRUST 3000 utilizing terminals and workstations that are
connected to our data center. As such, we are an application service provider,
or ASP.
5
We believe the value of TRUST 3000 has been enhanced by the StrataQuest(TM)
product line which includes technology platform products that manage the flow of
data and allow for the integration of TRUST 3000 information with any
application operating in our clients' distributed computing environment.
StrataQuest is a flexible combination of modular workstation application
products that transform data into user-friendly customer service and investment
analysis desktop applications.
Our Internet access products, which run as an ASP, are an extension of our
investment processing services. StrataWeb(TM) is our Internet solution for
accessing investment account and trust account information. It provides our
clients' customers the ability to access real-time account information through
the Internet. StrataWeb reduces the number of inquiry related phone calls and
has e-mail capabilities, customizable features and a secure website that can be
integrated with a client's website.
For institutional clients who wish to outsource their trust department
operations and processes, we combine our technological strength and investment
expertise to assume the entire back-office trust function. As such, we are a
business service provider, or BSP. Through our subsidiary SPTC, we provide the
following business services: processing, reporting, and custody services as well
as automating and centralizing our clients' trust accounting, income
collections, securities settlement, and securities processing functions. In
addition, SPTC prepares and processes customer statements, investment reviews,
and employee benefit accrual reports and remittances to our clients' customers.
Some clients can remit payment to us for investment related services, subject to
applicable regulatory guidelines, by directing brokerage commissions to SIDCO
through certain clearing agents or clearing brokers. These clients may also
apply a portion of such directed brokerage commissions to defray certain other
third-party research and investment related costs.
Client contracts for our ASP and BSP services are generally between three and
seven years. Revenues are primarily based on monthly processing and software
application service fees. Our principal competitors include Fidelity-Trust
Technology Services LLC (or FTTS), SunGard Data Systems Inc., Metavante
Corporation, and other financial institutions that operate their own trust
accounting systems. It has been reported in the industry press and by some
clients of FTTS that FTTS will be exiting the trust processing business.
We also provide administration and distribution services to mutual funds and
other pools of money sponsored and advised by banks. Administration services
consist of: fund accounting, investment tracking, transaction processing, fund
valuation, investment and tax reporting, regulatory compliance and daily
support. Our distribution services focus on identifying distribution
opportunities and establishing product and program strategies that assist the
client in attracting and retaining assets.
Our contracts with bank mutual fund complexes for administration and
distribution services have terms ranging from two to five years. Revenues are
earned based upon a percentage of the average net asset value of the proprietary
funds. At December 31, 2002, we had approximately $83.7 billion in assets under
administration from banks with mutual fund complexes. Our principal competitors
include The BISYS Group, Inc., Federated Investors, Inc., PFPC Worldwide Inc. (a
member of the PNC Financial Services Group, Inc.), State Street Bank and Trust
Company, and other investment company administrators.
Some of our clients that have outsourced their back-office trust function to us
may also be in our investment management programs. These programs are similar to
those offered in our investment advisor segment. Investment management programs
consist of mutual funds and separate account managers. We have made considerable
investments in sales and marketing in order to offer these solutions to this
segment's market. We have a core of about 25 small regional and community banks
where we had success with the new investment programs.
At December 31, 2002, we had significant relationships with approximately 200
banks and trust institutions, including trust departments of 8 of the top 10
largest U.S. banks. We also had single product relationships with approximately
200 additional clients.
6
Investment Advisors
We deliver business building solutions to independent broker-dealers, registered
investment advisors, financial planners, and life insurance producers located in
the United States. Our programs permit these financial advisors to outsource
many aspects of asset management, back-office operations, marketing, and client
services and allow them to focus their resources on creating financial plans,
implementing investment strategies, and educating and servicing their customers.
The investment programs offered through these financial advisors are targeted to
attract the assets of high-net-worth individual investors (defined as
individuals with over $500,000 of investable assets) and small to medium sized
institutional plans.
There are five key principles of our investment philosophy: asset allocation,
portfolio structure, tax management, specialist investment management, and
continuous portfolio management. We offer financial advisors various asset
allocation models that provide diversification among investment classes and
periodic rebalancing to achieve their customers' investment objectives. The
programs allow access to some of the best style-specific money managers normally
not available to individual investors. This innovative approach, called Manager
of Managers, ensures adherence to our disciplined investment principles because
each manager's performance is tracked and scrutinized. We also provide
comprehensive support services, including accounting and investor reporting.
Investment management components consist of mutual funds and separate account
managers. Advisors are able to customize portfolios to include separate account
managers as well as mutual funds. We offer a wide range of investment solutions
including tax managed programs. Through our subsidiary SIMC, we serve as the
administrator, transfer agent, and fund accountant for the mutual funds. We also
act as the investment advisor for many of these products. The investment
advisory and administration contracts between SIMC and the funds are subject to
annual renewal by the board of trustees of the funds. These contracts provide
for the payment of administrative fees based on a percentage of the average
daily net asset values of each fund.
At December 31, 2002, there were approximately 1,000 financial advisors who each
had at least $5.0 million of customer assets invested in our mutual fund and
separate account asset management programs. Our financial advisor clients, taken
together, have $24.2 billion, in the aggregate, invested in our asset management
programs through separate accounts or through our mutual funds. The principal
competition for our asset management products is from other investment advisors
and mutual fund companies. In the advisor distributor channel, our main
competition is Lockwood Advisors, Inc. (a subsidiary of Bank of New York), which
offers a separate account wrap product. Fees are earned as a percentage of
average asset values under management.
Enterprises
We provide investment solutions that enable pension plan sponsors, hospitals,
foundations, unions, endowment funds, and other institutional investors located
in the United States to outsource their investment management process. Our
investment solutions integrate a strategic platform with the Manager of Managers
investment process and complete plan administrative services, including trustee,
custodial, payment, and record-keeping services. Using a disciplined fund
management process, we work with each client to develop asset management
strategies that are consistent with the client's actuarial valuation, asset
liability modeling, and investment restrictions. Then, through the combination
of our portfolio construction process, multiple asset classes, and style
allocations, we work toward the client's investment goals. We implement our
client's strategy through our mutual funds that employ sub-advisors who are
specialists in a particular style. The potential benefit of this method is
improved performance with reduced volatility because it eliminates the task of
attempting to estimate which style of investing will be in favor at any point in
time. Specialist-advisors are monitored for performance, so trading strategies
conform to predetermined market, sector, and style characteristics. We maintain
the asset class exposure within the specifically defined boundaries of our
client's asset allocation plan by incorporating a formal rebalancing program in
our asset management process.
The principal competition for our asset management products is from Frank
Russell Company, a subsidiary of Northwestern Mutual. At December 31, 2002, our
primary client base consisted of approximately 400 clients with $16.3 billion in
assets invested. Fees are primarily earned as a percentage of average asset
values under management.
7
Money Managers
We provide fund processing to traditional investment managers located in the
United States and to investment managers worldwide of alternative asset classes
(e.g., hedge funds and private equity funds) including: fund accounting,
administration, marketing and distribution, and shareholder services. Fund
accounting and administration services are comprised of investment tracking,
transaction processing, fund valuation, investment and tax reporting, regulatory
compliance and daily support. Distribution services focus on identifying
distribution opportunities and establishing product and program strategies that
will assist the client in attracting and retaining assets. This includes
assistance with developing and executing business and marketing plans.
Additionally, we maintain an office in Dublin, Ireland that offers fund
administration and shareholder services to fund complexes requiring offshore
capabilities. This multidisciplinary global team is experienced in administering
a full range of investment structures including mutual funds, money funds, and
hedge funds. Our principal competitors include The BISYS Group, Inc., Federated
Investors, Inc., Citco, PFPC Worldwide Inc. (a member of the PNC Financial
Services Group, Inc.), State Street Bank and Trust Company, and Bank of Bermuda.
At December 31, 2002 we provided fund processing services to approximately 140
investment management companies and alternative investment managers with assets
under management and administration of approximately $80.3 billion. Our
contracts generally have terms ranging from one to five years. Fees are
primarily earned as a percentage of average asset values under management and
administration.
Investments in New Businesses
We have several other business ventures intended to expand our asset management
programs and services to high-net-worth investors, pension plans, governmental
organizations, and private corporations in certain foreign countries.
Using the same asset management disciplines that have benefited our U.S.
clients, we provide investment management programs tailored to the needs of
institutional and affluent individual investors in selected target markets:
Canada, Europe/South Africa, and Asia. These initial efforts have created
distribution channels for our asset management services and have positioned us
for the introduction of new products.
Our approach is to expand existing business lines into a coherent global
business consistent with our U.S. strategy of providing portfolio solution
offerings rather than product sales. These portfolio solution offerings are
focused on allocation of assets among the portfolio's specialist money managers
and direction and evaluation of the investment services provided by these
selected managers. Additionally, our services include the delivery of local
investment management as part of a portfolio solution and local distribution and
marketing.
We are also expanding our investment solutions to include affluent families
located in the United States. Our family wealth management solution offers
flexible family office type services through a highly personalized solution
while utilizing the Manager of Managers investment process.
At December 31, 2002, we had approximately $7.8 billion in assets under
management and an additional $4.9 billion in assets under administration from
our clients. The global market for financial services is highly competitive and
is subject to regulatory and financial constraints. Additionally, we have to
overcome recognition and branding hurdles caused by lack of an historical record
in a particular market. We attempt to overcome these obstacles by partnering
with firms with an established market presence. We believe that this also helps
us make decisions about product packaging and distribution strategies because we
get access to a local staff that understands the local culture. Fees are
primarily earned as a percentage of average asset values under management.
8
Other
Equity Investments
LSV Asset Management, or LSV, is a partnership formed with three leading
academics in the field of finance. LSV, a registered investment advisor,
provides investment advisory services to institutions, including pension plans
and investment companies. LSV is a value-oriented, contrarian money manager that
offers a deep-value investment alternative utilizing a proprietary equity
investment model to identify securities that are generally considered to be out
of favor by the market. LSV is currently the specialist advisor to a portion of
the SEI Large Cap Value Funds and the SEI Small Cap Value Funds. In addition,
LSV is a portfolio manager to a portion of our global investment products. At
December 31, 2002, LSV managed about $9.3 billion in total assets of which
approximately $1.4 billion related to our products. We account for LSV using the
equity method of accounting due to our less than 50 percent ownership interest.
At December 31, 2002, our interest in LSV was approximately 44 percent of the
partnership's total interests. Our portion of LSV's net operating income was
$12.7 million in 2002, $10.3 million in 2001, and $7.5 million in 2000.
Research and Development
We continue to devote significant resources to research and development. We
expended, including amounts capitalized, approximately $53.6 million in 2002,
$61.5 million in 2001, and $58.7 million in 2000 to design, develop, and modify
existing or new products and services. Our research and development expenditures
as a percentage of sales were 8.6 percent in 2002, 9.3 percent in 2001, and 9.8
percent in 2000.
System requirements to satisfy the needs of the financial services industry are
complex, substantial and continually evolving because of a number of different
factors, including but not limited to, increased trading volume, introduction of
new investment alternatives, changes in technology, changes in laws, and
increased competition. We believe service to existing and potential clients is
enhanced by substantial investment in improving existing software products and
developing new products and services for the financial services industry. To
sustain and enhance our competitive position in the industry, we are committed
to a continuous and high level of expenditures for research and development. We
utilize numerous professionals solely dedicated to the design, development, and
enhancement of our software products.
An area of emphasis for us has been in the development of straight through
processing platforms. The securities industry is moving towards a trade date
plus one settlement cycle where all trades will be settled on the next business
day. Our project plan is far more expansive than that of the securities
industry. We are building a number of different platforms that are designed to
streamline the entire investment transaction process from beginning to end for
both financial and non-financial transactions. Straight through processing is
designed to increase operational efficiency and is intended to significantly
reduce processing and trading errors. We have made modifications to our system
infrastructure to accommodate increased functional capabilities.
Marketing and Sales
Our services are primarily sold directly to potential clients in our target
markets. We employ sales representatives in each segment. These sales personnel
operate from offices located throughout the United States, Canada, Western
Europe, South Africa and other locations.
Customers
For the year ended December 31, 2002, no single customer accounted for more than
10 percent of revenues in any industry segment.
Personnel
At February 28, 2003, we had 1,824 full-time and 66 part-time employees. None of
our employees are represented by a labor union. Management considers employee
relations to be good.
9
Regulatory Considerations
SIDCO and SIMC are subject to various federal and state laws and regulations
that grant supervisory agencies, including the SEC, broad administrative powers.
In the event of a failure to comply with these laws and regulations, the
possible sanctions that may be imposed include the suspension of individual
employees, limitations on the permissibility of SIDCO, SIMC, SEI, and our other
subsidiaries to engage in business for specified periods of time, the revocation
of applicable registration as a broker-dealer or investment advisor, as the case
may be, censures, and fines. SPTC is subject to laws and regulations imposed by
Federal and state banking authorities. In the event of a failure to comply with
these laws and regulations, restrictions, including, without limitation,
revocation of applicable banking charter, may be placed on the business of SPTC.
Additionally, the securities and banking laws applicable to us and our
subsidiaries provide for certain private rights of action that could give rise
to civil litigation. Any litigation could have significant financial and
non-financial consequences including money judgments and the requirement to take
action or limit activities that could ultimately affect our business.
We offer investment and banking products that also are subject to regulation by
the federal and state securities and banking authorities, as well as non-U.S.
regulatory authorities, where applicable. Existing or future regulations that
affect these products could lead to a reduction in sales of these products.
Directed brokerage payment arrangements offered by us are also subject to SEC
and other federal regulatory authorities. Changes in the regulation of directed
brokerage or soft dollar payment arrangements could affect sales of some
services, primarily our brokerage services.
Bank clients are subject to supervision by federal and state banking authorities
concerning the manner in which such clients purchase and receive our products
and services. Plan sponsor clients are subject to supervision by the Department
of Labor and compliance with employee benefit regulations. Investment advisor
and broker-dealer clients are regulated by the SEC and state securities
authorities. Existing or future regulations applicable to our clients may affect
our clients' purchase of our products and services.
Risk Factors
We believe that the risks and uncertainties described below are those that
impose the greatest threat to the sustainability of our business. However, there
are other risks and uncertainties that exist that may be unknown to us or, in
the present opinion of our management, do not pose a material exposure to us. If
any of the events were to occur, our future results of operations, financial
condition or liquidity could be materially adversely affected.
Our revenues and earnings are affected by changes in the capital markets. A
significant portion of our revenues are asset-based fees, which are derived from
the assets we manage and administer. Economic uncertainty and volatile capital
markets may influence an investor's decision to invest in and maintain an
investment in a mutual fund. As a result, the value of the assets we manage and
administer could fluctuate and cause a reduction in our revenues and earnings.
Changes in interest rates may affect fees from our money market funds. Interest
rates during the past several years have remained relatively low. The effect of
rising interest rates may prompt investors to redeem their shares in our money
market funds for other securities offering higher yields. These redemptions
would cause a decline in the amount of money market assets we manage, thereby
negatively affecting our revenues.
Poor fund performance may affect our revenues and earnings. We operate in a
highly competitive business environment and our success is dependent upon the
performance of our funds. Our ability to maintain and attract new clients may be
affected if the performance of our mutual funds, relative to market conditions
and other comparable funds, is lower. Investors may decide to place their
investable funds elsewhere which would reduce the amount of assets we manage
resulting in a decrease in our revenues.
Consolidation within our target markets may affect our business. Merger and
acquisition activity within our target markets is a major strategic issue for
us. Consolidations between banks and other financial institutions could reduce
our existing client base and the number of potential clients. This activity may
also cause larger institutions to internalize some or all of our services. These
factors may negatively impact our ability to generate future growth in revenues
and earnings.
10
Our business is subject to governmental regulation. Our business is subject to
laws and regulations promulgated by federal, state and foreign authorities. We
are most affected by regulations established by the SEC particularly under the
Investment Company Act and the Investment Advisers Act of 1940, regulations for
broker-dealers established by the National Association of Securities Dealers,
and federal banking laws as established by the Office of Thrift Supervision. We
are also regulated by many other authorities at the state level as well as from
foreign authorities. Noncompliance with any of these regulations may result in
fines, suspension of business, or a cease and desist order. Any significant
action taken by governmental regulators imposed on us may materially affect our
future operations. Also, changes to current laws and regulations may adversely
affect our ability to operate competitively.
We are exposed to systems and technology risks. Our business operations rely
heavily on the use of our proprietary systems and technology. Through our
proprietary system, we maintain and process data for our clients that is
critical to their business operations. An unanticipated interruption of service
or the infiltration by an unauthorized user may have significant ramifications,
such as lost data, damaged software codes, or inaccurate processing of
transactions. As a result, the cost necessary to rectify the problem may be
substantial.
We rely on our executive officers and senior management. Our future success
depends on retaining seasoned highly skilled management personnel. Most of our
executive officers and senior management personnel do not have employment
agreements with us. The loss of these individuals may have a material adverse
affect on our future operations.
Available Information
We maintain a website at www.seic.com and make available free of charge through
this website our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the SEC. The material on our website is not part of this report.
11
Item 2. Properties.
Our corporate headquarters is located in Oaks, Pennsylvania and consists of six
buildings situated on approximately 90 acres. We own and operate the land and
buildings, which encompass approximately 444,000 square feet. We are currently
building a 34,000 square foot data center facility, which we expect to complete
by mid-2004. This facility will replace our existing data center and warehouse
facility, which is housed in an additional 70,000 square feet of leased space in
Wayne, Pennsylvania. We also lease an additional 67,500 square feet of space in
Wayne, Pennsylvania for our mutual funds operation. All other offices that we
lease aggregate 92,000 square feet. Additionally, we own a 3,400 square foot
condominium in New York, New York that we use for business purposes.
Item 3. Legal Proceedings.
There are no legal proceedings to which we are a party or to which any of our
properties is subject that we believe will have a material adverse effect on our
business.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders during the fourth
quarter of 2002.
Executive Officers of the Registrant
Information with regard to our executive officers is contained in Item 10 of
this report and is incorporated by reference into this Part I.
12
PART II
Item 5. Market for the Registrant's Securities and Related Stockholder Matters.
Price Range of Common Stock:
Our common stock is traded in the NASDAQ National Market System under the symbol
"SEIC". The following table shows the range of sales prices on the NASDAQ
National Market System for the periods indicated.
2002 High Low
- ---- ------ ------
First Quarter $45.98 $36.40
Second Quarter 42.83 27.25
Third Quarter 31.09 22.12
Fourth Quarter 32.70 18.82
2001 High Low
- ---- ------ ------
First Quarter $54.91 $27.88
Second Quarter 48.00 26.25
Third Quarter 51.75 27.27
Fourth Quarter 46.00 28.85
As of February 28, 2003, there were approximately 700 shareholders of record.
Our Board of Directors declared a $.06 dividend in May and December of 2002, and
a $.05 dividend in May and December of 2001. All stock prices have been restated
to reflect the two-for-one stock split paid in February 2001 (See Note 8 of the
Notes to the Consolidated Financial Statements).
13
Item 6. Selected Financial Data.
(In thousands, except per share data)
The following table represents selected consolidated financial information for
the five year period ended December 31, 2002. This data should be read in
conjunction with the financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this
report.
For the Year Ended December 31, 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Revenues ............................................ $620,819 $658,013 $598,806 $456,192 $366,119
Expenses:
Operating and development ........................ 264,032 298,728 279,024 215,216 180,937
Sales and marketing .............................. 124,784 152,642 154,984 126,184 103,834
General and administrative ....................... 22,184 23,457 16,839 12,298 13,463
-------- -------- -------- -------- --------
Income from operations .............................. 209,819 183,186 147,959 102,494 67,885
Equity in the earnings of unconsolidated affiliate .. 12,652 10,342 7,533 6,765 3,015
Net loss on investments ............................. (2,360) -- -- -- --
Interest income ..................................... 5,200 6,945 6,419 2,285 1,558
Interest expense .................................... (2,263) (2,149) (2,293) (2,375) (2,575)
-------- -------- -------- -------- --------
Income from continuing operations
before income taxes .............................. 223,048 198,324 159,618 109,169 69,883
Income taxes ........................................ 82,528 73,380 60,655 42,030 26,904
-------- -------- -------- -------- --------
Income from continuing operations ................... 140,520 124,944 98,963 67,139 42,979
Income from disposal of
discontinued operations .......................... -- -- -- 1,292 710
-------- -------- -------- -------- --------
Net income .......................................... $140,520 $124,944 $ 98,963 $ 68,431 $ 43,689
- ------------------------------------------------------------------------------------------------------------
Basic earnings per common share from
continuing operations (a) ........................ $ 1.30 $ 1.15 $ .93 $ .63 $ .40
Basic earnings per common share from
discontinued operations (a) ...................... -- -- -- .01 .01
-------- -------- -------- -------- --------
Basic earnings per common share (a) ................. $ 1.30 $ 1.15 $ .93 $ .64 $ .41
Shares used to calculate basic earnings per
common share (a) ................................. 108,330 108,596 106,490 106,632 106,962
- ------------------------------------------------------------------------------------------------------------
Diluted earnings per common share from
continuing operations (a) ........................ $ 1.25 $ 1.09 $ .87 $ .59 $ .37
Diluted earnings per common share from
discontinued operations (a) ...................... -- -- -- .01 .01
-------- -------- -------- -------- --------
Diluted earnings per common share (a) ............... $ 1.25 $ 1.09 $ .87 $ .60 $ .38
Shares used to calculate diluted earnings per
common share (a) ................................. 112,803 114,810 113,820 113,826 114,756
- ------------------------------------------------------------------------------------------------------------
Cash dividends declared per common share (a) ........ $ .12 $ .10 $ .08 $ .07 $ .05
- ------------------------------------------------------------------------------------------------------------
Financial Position as of December 31,
Cash and cash equivalents ........................... $165,724 $163,685 $147,676 $ 73,206 $ 52,980
Total assets ........................................ $464,147 $460,916 $375,582 $253,779 $208,772
Long-term debt (including short-term portion) ....... $ 43,056 $ 50,611 $ 29,000 $ 31,000 $ 33,000
Shareholders' equity ................................ $290,007 $270,593 $197,421 $ 79,002 $ 59,685
- ------------------------------------------------------------------------------------------------------------
(a) All share and per share information has been adjusted to reflect the
three-for-one stock split paid in June 2000 and the two-for-one stock split paid
in February 2001. See Note 8 of the Notes to the Consolidated Financial
Statements.
14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
(In thousands, except per share data)
This discussion reviews and analyzes the consolidated financial condition at
December 31, 2002 and 2001, the consolidated results of operations for the past
three years, and other factors that may affect future financial performance.
This discussion should be read in conjunction with the Selected Financial Data
included in Item 6 of this report and the Consolidated Financial Statements and
Notes to the Consolidated Financial Statements included in Item 8 of this
report.
Results of Operations
Consolidated Overview
Our operations are organized into five business segments that offer various
products and services tailored to meet the needs of particular markets. 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 our operating segments based on Income from operations.
Revenues and Income from operations by segment for 2002, 2001, and 2000 are as
follows:
(In thousands) Year ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Private Banking and Trust:
Revenues $324,505 $360,069 $338,416
Income from operations 138,004 144,225 130,522
Investment Advisors:
Revenues 149,181 154,988 133,959
Income from operations 78,009 61,060 44,510
Enterprises:
Revenues 55,875 64,522 55,034
Income from operations 21,836 20,003 10,365
Money Managers:
Revenues 46,220 36,576 32,349
Income from operations 8,864 4,944 2,556
Investments in New Businesses:
Revenues 45,038 41,858 39,048
Loss from operations (14,710) (23,589) (23,155)
General and Administrative:
Loss from operations (22,184) (23,457) (16,839)
Consolidated Segment Totals:
Revenues $620,819 $658,013 $598,806
Income from operations $209,819 $183,186 $147,959
Other income, net 13,229 15,138 11,659
-------- -------- --------
Income before income taxes 223,048 198,324 159,618
Income taxes 82,528 73,380 60,655
-------- -------- --------
Net income $140,520 $124,944 $ 98,963
======== ======== ========
Diluted earnings per common share $ 1.25 $ 1.09 $ .87
======== ======== ========
15
Consolidated revenues decreased $37.2 million, or 6 percent, to $620.8 million
in 2002 compared to 2001, but were up $59.2 million, or 10 percent, to $658.0
million in 2001 over 2000. Our revenues decreased during 2002 primarily due to
the loss of certain clients in our Private Banking and Trust and Enterprises
segments during the latter part of 2001. Revenues for 2002 reflect the full year
negative impact from these lost clients whereas 2001 revenues were only
moderately affected. Revenues for both comparable periods were impacted by the
volatile capital markets during the past few years. This, along with client
redemptions, resulted in a reduction of our asset-based fee revenues and created
economic uncertainty that has slowed some buying decisions in our target
markets. Despite this, we were able to generate sales to new clients and
cross-sales to existing clients. New business activity was the primary driver
for revenue expansion during 2001. However, the decline in the capital markets
has reduced our asset-based fee revenues greater than revenue increases from new
sales activity during 2002.
Operating income was up $26.6 million in 2002, or 15 percent, and $35.2 million
in 2001, or 24 percent, over prior year comparable periods. Operating margins
also improved during the past three years, 34 percent in 2002, 28 percent in
2001, and 25 percent in 2000. The improvement in both operating income and
operating margin was primarily due to cost containment and improved productivity
in both comparable periods, especially during 2002. Operating income and margin
during 2001 was also boosted by revenue growth. We focused our cost containment
efforts at discretionary spending, primarily marketing, consulting, and annual
incentive compensation payments. A portion of our personnel costs are paid in
the form of sales commissions and non-sales bonus payments that are tied to
performance goals at the corporate and business unit levels. The actual amount
of bonuses to be paid for the year is a function of actual performance relative
to established targets. As a percentage of sales, incentive and sales
compensation expense decreased in both comparable periods. Our cost containment
efforts also extended to our investment spending. We continued to expend
significant dollars on the development of new products but sharpened our
investment priorities to better focus our efforts. Our primary investments are
aimed at building outsourced business solutions that are leveragable across
multiple target markets.
We remain optimistic because of the recurring nature of our revenues, strong
cash flow, the leverage in our operations, and our portfolio of businesses. We
will also 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, continued economic uncertainty and mergers
and acquisitions in the banking industry will continue to be long-term
challenges.
Asset Balances
(In millions) As of December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Assets invested in equity and fixed income programs .. $ 57,001 $ 55,986 $ 51,851
Assets invested in liquidity funds ................... 20,972 21,562 24,481
-------- -------- --------
Assets under management ........................... 77,973 77,548 76,332
Client proprietary assets under administration ....... 163,069 180,430 200,113
-------- -------- --------
Assets under management and administration ........ $241,042 $257,978 $276,445
======== ======== ========
The asset figures shown above represent assets of our clients or their customers
for which we provide management and/or administrative services and are not
included in the accompanying balance sheets since we do not own these assets.
Assets under management consist of total assets of our clients or their
customers invested in our equity and fixed income investment programs and
liquidity funds for which we provide asset management services. Assets under
administration consist of total assets of our clients or their customers for
which we provide administrative services, including client proprietary fund
balances for which we provide administration and/or distribution services.
16
Private Banking and Trust
Private Banking and Trust provides investment processing solutions, fund
processing solutions, and investment management programs to banks and other
trust institutions. Investment processing services primarily include outsourcing
services as an application service provider, or ASP, through our TRUST 3000
product line and as a business services provider, or BSP, through our trust
company. TRUST 3000 includes integrated systems that provide a complete
investment accounting and management information system for private banks and
trust companies. Revenues are primarily earned from monthly processing and
non-recurring project fees.
Fund processing solutions include administration and distribution services
provided to bank proprietary mutual funds. These services primarily include fund
administration and accounting, regulatory and compliance services, shareholder
recordkeeping, and marketing. Revenues are primarily earned as a percentage of
average asset values of the proprietary funds.
Investment management revenues are primarily earned through management fees that
are based upon a percentage of the average daily net asset value of assets under
management.
Year ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Revenues:
Investment processing fees ................ $227,434 $230,985 $208,887
Fund processing fees ...................... 53,924 85,361 87,755
Investment management fees ................ 43,147 43,723 41,774
-------- -------- --------
Total revenues .......................... 324,505 360,069 338,416
Expenses:
Operating and development ................. 146,348 167,904 163,212
Sales and marketing ....................... 40,153 47,940 44,682
-------- -------- --------
Income from operations ....................... $138,004 $144,225 $130,522
======== ======== ========
Operating margin ............................. 43% 40% 39%
Percent of Revenue:
Operating and development ................. 45% 47% 48%
Sales and marketing ....................... 12% 13% 13%
Total revenues for this segment were down $35.6 million, or 10 percent, in 2002,
compared with 2001, but were up $21.7 million, or 6 percent, in 2001 over 2000.
The change in revenues during both comparable periods was due to two separate
factors. The decrease in 2002 revenues was mainly due to lost clients in our
fund processing business because of bank consolidations. The increase in 2001
revenues resulted from an increase in recurring and non-recurring investment
processing fees from new business and cross-sales to existing clients.
Investment processing fees decreased 2 percent during 2002 but increased 11
percent in 2001. These revenues include recurring processing fees and
non-recurring project fees. Our recurring revenue base from our ASP solution and
our total outsourcing solution increased in both years, approximately $14.7
million in 2002 and $13.1 million in 2001. This was mostly due to some new sales
and the completed conversion of existing clients involved in bank merger
activity during 2000. However, a lack of new deals along with diminished bank
merger activity has reduced our non-recurring project fees. Non-recurring
project fees decreased approximately $16.8 million in 2002 but increased $7.3
million in 2001.
Fund processing fees declined in both comparable periods primarily because of
client losses involved in bank mergers and the decline in the capital markets.
As a result, our assets under administration from this business dropped
considerably, reducing our asset-based fee revenues. The decline in our revenues
from these lost clients began in late 2001 and extended throughout most of 2002.
Revenues decreased approximately $23.2 million in 2002 because of these lost
clients. The balance of the revenue decrease was caused mostly by the continued
decline in the capital markets.
17
Operating income was also down in 2002 but increased in 2001 whereas operating
margins were up in each year. Operating income decreased $6.2 million, or 4
percent, in 2002, compared with 2001, but was up $13.7 million, or 10 percent,
in 2001 over 2000. The decrease in operating income for 2002 was mainly because
of the decline in fund processing fees, net of the decrease in direct expenses
associated with these lost clients. The increase in operating income in 2001 was
primarily due to an increase in our investment processing fees described above.
An additional factor affecting operating income and margin in both comparable
periods was our cost containment efforts. We continued to be more selective
about our investment spending for new product development, reduced sales and
incentive compensation payments, and lower marketing expenditures.
We believe our future growth in revenues and income will come from the
development of new products and services to grow existing markets and to expand
into new markets. In addition, consolidations among our bank clients continue to
be a major strategic issue facing this segment. The result could either be an
increase or decrease in our client base thereby affecting revenues and earnings.
Investment Advisors
Investment Advisors provides investment management programs and investment
processing solutions to affluent investors through a network of independent
registered investment advisors, financial planners, and other investment
professionals. Revenues are primarily earned as a percentage of the average
asset values under management.
Year ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Revenues ..................................... $149,181 $154,988 $133,959
Expenses:
Operating and development ................. 37,528 45,906 39,009
Sales and marketing ....................... 33,644 48,022 50,440
-------- -------- --------
Income from operations ....................... $ 78,009 $ 61,060 $ 44,510
======== ======== ========
Operating margin ............................. 52% 39% 33%
Percent of Revenues:
Operating and development ................. 25% 30% 29%
Sales and marketing ....................... 23% 31% 38%
Revenues were down $5.8 million in 2002, or 4 percent, compared with 2001 but
grew $21.0 million in 2001, or 16 percent, over 2000. Our revenues are primarily
earned as asset-based fees tied to the value of the assets we manage. Poor
capital markets during the past few years have caused a devaluation in the
assets we manage from existing clients. The difficult capital markets led to an
industry wide increase in mutual fund redemptions to which we were not immune.
Despite the increase in our redemption rate, our sales efforts were still able
to generate positive net new cash flow which helped to lessen the revenue impact
of the declining capital markets. New business activity was the primary driver
for revenue growth during 2001.
Operating income and margins were up in each comparable period. Operating income
for 2002 increased $16.9 million, or 28 percent, compared with 2001, and
increased $16.6 million in 2001, or 37 percent, compared with 2000. Operating
income and margin improvement for 2002 came mostly from cost containment
measures, mainly reduced incentive compensation costs and marketing
expenditures. In addition, our investment spending decreased primarily due to
development expenditures made in 2001 and 2000 relating to some new products
that were completed in 2001. Finally, operating income and margin improvement
for 2001 was mainly because of increased revenues.
The current economic environment has been difficult for both us and our clients,
but we will continue to make investments in the development of new products to
enhance our current product offering. However, continued volatility in the
capital markets and client redemptions could impede future growth in our
revenues and earnings.
18
Enterprises
Enterprises provides business solutions to pension plan sponsors, hospitals,
foundations, unions, endowment funds and other institutional investors. We also
provide treasury business solutions to corporations. Revenues are primarily
earned as a percentage of average asset values under management.
Year ended December 31,
---------------------------
2002 2001 2000
------- ------- -------
Revenues ........................................ $55,875 $64,522 $55,034
Expenses:
Operating and development .................... 17,188 21,943 19,505
Sales and marketing .......................... 16,851 22,576 25,164
------- ------- -------
Income from operations .......................... $21,836 $20,003 $10,365
======= ======= =======
Operating margin ................................ 39% 31% 19%
Percent of Revenue:
Operating and development .................... 31% 34% 35%
Sales and marketing .......................... 30% 35% 46%
Revenues dropped $8.6 million during 2002, or 13 percent, compared with 2001 but
grew $9.5 million in 2001, or 17 percent, over 2000. The primary reason for the
decline in 2002 revenues was the market impact on our assets under management
from declining capital markets. Also, we lost two large retirement solution
clients in late 2001. We generated new client sales in 2002 of $2.7 billion in
assets. Revenue growth in 2001 was primarily due to new business activity.
Operating income and margins were up in both comparable periods. Operating
income grew $1.8 million in 2002, or 9 percent, compared with 2001, and
increased $9.6 million in 2001 over 2000. Throughout 2002, we diligently managed
expenses in two discretionary areas, marketing and incentive compensation. We
also benefited from lower technology development costs. We incurred significant
technology development costs in 2001 and 2000 for our Treasury trading platform.
This project was completed during 2001. 2001 operating income and margin was up
because of new business activity and lower marketing costs.
Pension and retirement programs have become a more visible and strategic issue
facing institutions which could be a positive catalyst for increasing the level
of client purchase decisions. We believe our product offering has us well
positioned once institutions return to making purchase decisions. However,
economic uncertainty coupled with continued volatility in the capital markets
remains a long-term challenge that could negatively affect future revenues and
earnings.
19
Money Managers
Money Managers provides investment solutions to U.S.-based investment managers,
U.S.-based mutual fund companies and to investment managers worldwide of
alternative asset classes (e.g., hedge funds and private equity funds). Revenues
are primarily earned as a percentage of the average asset values of assets under
management and administration.
Year ended December 31,
---------------------------
2002 2001 2000
------- ------- -------
Revenues ........................................ $46,220 $36,576 $32,349
Expenses:
Operating and development .................... 24,021 18,088 16,062
Sales and marketing .......................... 13,335 13,544 13,731
------- ------- -------
Income from operations .......................... $ 8,864 $ 4,944 $ 2,556
======= ======= =======
Operating margin ................................ 19% 14% 8%
Percent of Revenue:
Operating and development .................... 52% 49% 50%
Sales and marketing .......................... 29% 37% 42%
Revenues increased in each comparable period, $9.6 million in 2002, or 26
percent, compared with 2001 and $4.2 million in 2001, or 13 percent, over 2000.
Revenue growth for the past two years came mostly from the sale of new business.
We added 39 new clients during 2002 and 47 new clients during 2001. Most of our
new business activity came from the alternative investment market. In this
market, we added 28 new clients in 2002 and 40 new clients in 2001. The balance
of new business came from U.S.-based money managers. In addition, revenue growth
was assisted by cross-sales to existing clients. However, the volatile capital
markets offset some of this growth.
Operating income and margins also increased in each comparable period. Operating
income increased $3.9 million in 2002, compared with 2001 and increased $2.4
million in 2001 over 2000. Operating income and margins were up because of
increased revenues from new business. However, the increase in revenues was not
fully reflected in profitability growth because of continued investment in new
product offerings and in our infrastructure.
We expect future growth will come from continued investments in new product
offerings and enhancements to our existing products. Also, we expect that
investments made in our infrastructure will improve productivity and increase
leverage that should control expenses. However, we expect the capital markets
will remain volatile in the near term which could impede revenue and earnings
growth. In addition, we expect increased investment spending that may hold
operating margins down.
20
Investments in New Businesses
Investments in New Businesses provides investment management, fund processing,
and investment processing solutions to non-U.S. banks, investment advisors,
enterprises and money managers located outside the United States. This segment
also includes other initiatives in new U.S. markets. Revenues are primarily
earned as a percentage of the average asset values under management.
Year ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Revenues $ 45,038 $ 41,858 $ 39,048
Expenses:
Operating and development 38,947 44,887 41,236
Sales and marketing 20,801 20,560 20,967
-------- -------- --------
Loss from operations $(14,710) $(23,589) $(23,155)
======== ======== ========
Operating margin (33%) (56%) (59%)
Percent of Revenue:
Operating and development 87% 107% 105%
Sales and marketing 46% 49% 54%
The following table displays revenues by geographic region as a percentage of
total segment revenues:
Year ended December 31,
-----------------------
2002 2001 2000
---- ---- ----
Europe/South Africa................................... 57% 58% 51%
Canada................................................ 27% 24% 28%
Asia.................................................. 9% 8% 9%
Other................................................. 7% 10% 12%
---- ---- ---
Total.............................................. 100% 100% 100%
==== ==== ===
Revenues increased $3.2 million during 2002, or 8 percent, compared with 2001
and increased $2.8 million in 2001, or 7 percent, over 2000. The increase in
revenues in both comparable periods is primarily due to new business activity
despite weak capital markets globally. Most of our revenue growth came from our
global institutional business in both the U.K. and Canada as our product
offering gained market acceptance. We also had modest growth from the
high-net-worth segment but believe this sector has slowed due to the weak
capital markets. Finally, revenues in 2000 included our Canadian consulting
business that was sold in July 2000. Revenues actually increased 15 percent in
2001 excluding all revenues attributable to that business.
Operating losses for each year include significant investments in technology,
our Dublin-based operations and sales and marketing in Europe. Operating losses
and margin improvement during 2002 were affected by increased revenues, a
sharpening of our investment spending, and some cost containment measures. In
addition, we reduced or eliminated some of our Latin America initiatives in late
2001 and early 2002 because these operations no longer fit into our strategy of
global expansion. We expect continued investment during 2003, both in our global
expansion and other new business initiatives. We will continue to build our
distribution network and remain optimistic about the long-term prospects for our
global business initiatives but expect to incur losses throughout 2003.
21
General & Administrative
Year ended December 31,
---------------------------
2002 2001 2000
------- ------- -------
General and Administrative expenses $22,184 $23,457 $16,839
Percent of Revenue 4% 4% 3%
General and administrative expense includes corporate overhead costs and other
costs not directly attributable to any of our business segments. The change in
general and administrative expenses for each comparable period was due to
fluctuations in various corporate overhead costs.
Other Income
Other income consists of the following:
Year ended December 31,
---------------------------
2002 2001 2000
------- ------- -------
Equity in the earnings of
unconsolidated affiliate $12,652 $10,342 $ 7,533
Net loss from investments (2,360) -- --
Interest income 5,200 6,945 6,419
Interest expense (2,263) (2,149) (2,293)
------- ------- -------
Total other income, net $13,229 $15,138 $11,659
======= ======= =======
Equity in the earnings of unconsolidated affiliate includes our less than 50
percent ownership in LSV Asset Management, or LSV, general partnership (See Note
5 to the Consolidated Financial Statements). The increase in the net earnings of
LSV was due to an increase in assets under management and an increase in
performance-based fees in 2002 and 2001.
Net loss on investments includes a gain of $2.0 million from hedge
ineffectiveness, a charge of $3.9 million for other-than-temporary declines in
market value, and $.5 million in realized losses from marketable securities (See
Notes 3 and 4 to the 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 balances invested for the period
and/or changes in interest rates. Interest income was down in 2002 from lower
interest rates and a decrease in our average cash balances. Interest income was
up in 2001 from a higher average daily cash balance net of lower interest rates
than in 2000.
Our interest expense is directly attributable to our long-term debt and other
borrowings. Interest expense fluctuations result from debt transactions or
changes in interest rates.
Income Taxes
Our effective tax rate was 37.0 percent in 2002, 37.0 percent in 2001, and 38.0
percent in 2000. The rate reduction in 2001, compared with 2000, was largely due
to effective state and international tax planning.
22
Liquidity and Capital Resources
Year ended December 31,
------------------------------
2002 2001 2000
-------- -------- --------
Net cash provided by operating activities..... $175,734 $174,379 $143,263
Net cash used in investing activities......... (20,715) (85,587) (46,433)
Net cash used in financing activities......... (152,980) (72,783) (22,360)
-------- -------- --------
Net increase in cash and cash equivalents..... 2,039 16,009 74,470
Cash and cash equivalents, beginning of year.. 163,685 147,676 73,206
-------- -------- --------
Cash and cash equivalents, end of year........ $165,724 $163,685 $147,676
======== ======== ========
Cash requirements and liquidity needs are expected to be funded through our cash
flow from operations and our capacity for additional borrowing. We currently
have a line of credit agreement that provides for borrowings of up to $25.0
million. The availability of the line of credit is subject to compliance with
certain covenants set forth in the agreement (See Note 6 to the Consolidated
Financial Statements). At December 31, 2002, our unused sources of liquidity
consisted of unrestricted cash and cash equivalents of $165.7 million and the
unused portion of the line of credit of $25.0 million.
Net cash provided by operating activities grew $1.4 million in 2002 and $31.1
million in 2001 from the prior comparable years primarily from an increase in
income and favorable working capital trends. This was due to improved
productivity and lower discretionary costs, such as compensation and marketing.
However, net cash from operating activities in 2002 only improved slightly from
last year because of the reduced tax benefit received from stock option
exercises.
Capital expenditures for property, plant and equipment, including capitalized
software development costs, were $28.1 million in 2002, $40.3 million in 2001,
and $27.6 million in 2000. Our capital expenditures are primarily for the
expansion of our corporate headquarters. During 2002, we completed construction
on one building and a parking structure. Currently, we are building a new data
center facility at our headquarters in order to relocate our current data center
facility, which we are currently leasing. This project should be completed by
mid-2004 with a total expected cost of approximately $12.0 million.
Purchases and sales of our mutual funds and other securities are mainly for the
testing and subsequent startup of new investment programs to be offered to our
clients. Purchases were approximately $23.8 million in 2002, $69.6 million in
2001, and $17.7 million in 2000. Sales totaled $30.7 million in 2002, $24.6
million in 2001, and $2.5 million in 2000 (See Note 3 to the Consolidated
Financial Statements).
Principal payments on our long-term debt were $7.6 million in 2002, $3.4 million
in 2001 and $2.0 million in 2000. In 2001, we borrowed $25.0 million as a term
loan with a lending institution. Our long-term debt is subject to various
covenants contained in each lending agreement. The aggregate maturities of our
long-term debt at December 31, 2002 are $9.6 million each year through 2005,
$5.4 million in 2006, and $9.0 million in 2007 and thereafter (See Note 7 to the
Consolidated Financial Statements).
Our board of directors has authorized the repurchase of our common stock of up
to $703.4 million, including the additional $50.0 million authorized on February
26, 2003. During 2002, we repurchased approximately 5.4 million shares of our
common stock at a cost of $147.9 million. As of February 28, 2003, we still had
$75.4 million of authorization remaining for the purchase of our common stock
under this program (See Note 8 of the Notes to Consolidated Financial
Statements).
Cash dividends paid were $12.1 million or $.11 per share in 2002 and $9.8
million or $.09 per share in 2001. Our board of directors declared a cash
dividend $.06 per share on December 10, 2002. The dividend was paid on January
21, 2003 for $6.4 million.
23
We have no off-balance sheet financing arrangements or transactions with
structured finance and special purpose entities. Our off-balance sheet
commitments are generally limited to future payments under non-cancelable
operating leases for facilities, data processing equipment, and software and
other maintenance agreements. As of December 31, 2002, our total commitments
under these leases and agreements are $10.7 million in 2003, $6.5 million in
2004, $2.9 million in 2005, $1.6 million in 2006, $1.0 million in 2007, and
$10.1 million in 2008 and thereafter (See Note 10 to the Consolidated Financial
Statements).
We believe our operating cash flow, available borrowing capacity, and existing
cash and cash equivalents should provide adequate funds for continuing
operations, continued investment in new products and equipment, our common stock
repurchase program, expansion of our corporate headquarters, future dividend
payments, and principal and interest payments on our long-term debt.
Critical Accounting Policies
In 2001, the Securities and Exchange Commission, or SEC, issued a statement
addressing selection and disclosure by public companies of "critical accounting
policies and practices." The SEC encouraged inclusion in Management's Discussion
and Analysis commentary as to "the likelihood of materially different reported
results if different assumptions or conditions were to prevail" in the
application of these critical accounting policies.
The accompanying consolidated financial statements and supplementary information
were prepared in accordance with accounting principles generally accepted in the
United States. Our significant accounting policies are discussed in Note 1 of
the Notes to Consolidated Financial Statements. Inherent in the application of
many of these accounting policies is the need for management to make estimates
and judgements in the determination of certain revenues, expenses, assets and
liabilities. Materially different financial results can occur as circumstances
change and additional information becomes known. We believe that the following
accounting policies require extensive judgement by our management to determine
the recognition and timing of amounts recorded in our financial statements.
Revenue Recognition:
Revenues are recognized in the periods in which they are performed. Cash
received by us in advance of the performance of services is deferred and
recognized as revenue when earned. Our principal sources of revenues are: (1)
Information processing and software servicing fees that are recurring in nature
and earned based on the number of trust accounts being serviced and
non-recurring project fees that are determined upon contractual agreements; and
(2) management, administration and distribution fees that are based upon a
percentage of the average daily net asset value of assets under management or
administration. The majority of our revenues are based on contractual
arrangements and do not require judgement by management. Certain portions of our
revenues do require management's consideration to determine the amount and
timing of recognition.
Allowance for Doubtful Accounts:
We maintain an allowance for doubtful accounts for estimated losses resulting
from the inability of some of our clients to make their scheduled payments. The
allowance for doubtful accounts is primarily based upon an aging analysis of the
total outstanding receivables balance at each balance sheet date. Other factors
are considered in determining the adequacy of the allowance for doubtful
accounts, such as historical trends, the financial condition of our clients and
other factors that may be deemed appropriate. Based upon this analysis, the
allowance for doubtful accounts is adjusted to an amount that is sufficient to
cover expected losses from doubtful accounts.
Investments Available For Sale:
We value our investments in marketable securities based on quoted market prices.
We review our investments in marketable securities on a quarterly basis with
regards to impairment. Factors considered in determining other than temporary
impairment are significant or prolonged declines in the fair value of our
investments, our ability and intent to retain the investment for a period
sufficient to allow the value to recover and the financial condition of the
investment. After considering these factors, if we believe that a decline is
other-than-temporary, the carrying value of the investment is written down to
its fair value through current period earnings.
24
Computer Software Development Costs:
We utilize internally developed computer software as part of our product
offering. In the development of a new software product, considerable
consideration must be made by management to determine whether costs incurred are
research and development costs or production costs to be capitalized. Management
must consider a number of different factors during their evaluation of each
computer software development project that include estimates and assumptions.
Costs considered to be research and development are expensed as incurred. After
meeting certain requirements, production costs are capitalized as incurred.
The recoverability of computer software development costs capitalized requires
considerable judgement by management which includes, but is not limited to, an
evaluation of expected future revenues and cash flows, acceptability of the
product in the market, the ability to support the product in a cost-effective
manner, technological enhancements and any other factor deemed appropriate. If
management determines that certain software products are considered either
obsolete or incapable of producing sustainable future cash flows, an impairment
charge would be required. The amount of the impairment charge would be based on
estimates of the software's fair value compared to its book value.
Income Tax Accounting:
The computation of our income tax expense requires the interpretation of complex
tax laws and regulations in many taxing jurisdictions around the world. Actual
income tax expense can differ significantly from our estimates.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. We assess the
recoverability of deferred tax assets based upon our estimated future taxable
income and our tax strategies. We also recognize a liability for expected future
tax contingencies. We assess the liability based on our review of various tax
issues and interpretations of tax law. Differences between our estimates and
actual results could have a significant impact to our consolidated results of
operations, financial position, or liquidity.
The assessment of critical accounting policies is not meant to be an
all-inclusive discussion of the uncertainties to financial results that can
occur from the application of the full range of our accounting policies.
Materially different financial results could occur in the application of other
accounting policies as well. Also, materially different results can occur upon
the adoption of new accounting standards.
New Accounting Pronouncements
See the discussion of New Accounting Pronouncements in Note 1 of the Notes to
the Consolidated Financial Statements.
Forward-looking Statements
Certain statements contained in this discussion may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are based upon estimates and assumptions that involve
risks, uncertainties, and other factors, many of which are beyond our control,
that could cause actual results to differ materially from our expected results.
We have no obligation to publicly update or revise any forward-looking
statements, except as required by law.
25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk - Our exposure to changes in interest rates primarily relates
to our investment portfolio and long-term debt obligations. Our excess cash is
principally invested in short-term, highly liquid financial instruments, mainly
money market funds, with a substantial proportion of such investments having
initial maturities of three months or less. Our investment portfolio also
includes some long-term fixed income mutual funds, principally invested in
federal government agency securities. We place our investments in financial
instruments that meet high credit quality standards. A portion of our long-term
debt is based upon a variable rate which renews every three months. While
changes in interest rates could decrease interest income or increase interest
expense, we do not believe that we have a material exposure to changes in
interest rates. 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.
Concentration of Credit Risk - Financial instruments which potentially expose us
to concentrations of credit risk consist primarily of cash equivalents,
marketable securities and trade receivables. Cash equivalents are principally
invested in short-term money market funds or placed with major banks and high
credit qualified financial institutions. Concentrations of credit risk with
respect to our receivables are limited due to the large number of clients and
their dispersion across geographic areas. No single group or customer represents
greater than 10 percent of total accounts receivable.
Foreign Currency Risk - We transact business in the local currencies of various
foreign countries, principally Canada, Europe and Asia. The total of all of our
foreign operations only accounts for approximately 6 percent of total
consolidated revenues. Also, most of our foreign operations match local currency
revenues with local currency costs. Due to these reasons, we do not hedge
against foreign operations nor do we expect any material loss with respect to
foreign currency risk.
Price Risk - We are exposed to price risk associated with changes in the fair
value of our investment portfolio. To provide some protection against potential
fair value changes for some of these investments, we have entered into various
derivative financial instruments. We currently hold derivative financial
instruments with a notional amount of $17.4 million with various terms,
generally less than one year. The effectiveness of these hedging relationships
is evaluated on a retrospective and prospective basis using quantitative
measures of correlation. If a hedge is ineffective, any excess gains or losses
attributable to such ineffectiveness are recognized in current period earnings.
During 2002, we did not enter into or hold any derivative financial instruments
for trading purposes.
During 2002, we recorded a $3.8 million impairment charge related to
other-than-temporary declines in the fair value of certain securities held
within our investment portfolio. Also, the amount of hedge ineffectiveness that
was charged to current period earnings was a gain of $4.2 million. The aggregate
effect of a hypothetical 10 percent change in the fair value of these derivative
financial instruments would not be material to our results of operations,
financial position, or liquidity.
A significant portion of our revenues are based upon the market value of assets
we manage or administer. A decline in the market value of these assets as a
result of changes in market conditions, the general economy or other factors
will negatively impact our revenues and earnings.
26
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements:
Report of Independent Accountants
Consolidated Balance Sheets -- December 31, 2002 and 2001
Consolidated Statements of Operations -- For the years ended
December 31, 2002, 2001, and 2000
Consolidated Statements of Shareholders' Equity -- For the years ended
December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows -- For the years ended December
31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, or not
required, or because the required information is included in the Consolidated
Financial Statements or notes thereto.
27
Report of Independent Accountants
To the Board of Directors and Shareholders
of SEI Investments Company:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15 (a) (1) and (2) present fairly, in all material
respects, the financial position of SEI Investments Company (a Pennsylvania
corporation) and its subsidiaries at December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule for the year ended
December 31, 2002 listed in the index appearing under Item 15 (a) (1) and (2)
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion. The
financial statements and financial statement schedule of the Company as of
December 31, 2001 and for each of the two years in the period ended December 31,
2001 were audited by other independent accountants who have ceased operation.
Those independent accountants expressed an unqualified opinion on those
consolidated financial statements and financial statement schedule in their
report dated January 31, 2002.
PricewaterhouseCoopers LLP
Philadelphia, PA
January 29, 2003
28
This is a copy of the audit report issued by Arthur Andersen LLP in connection
with SEI Investments Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001. This audit report has not been reissued by Arthur
Andersen LLP in connection with this Form 10-K. See also the notice regarding
lack of consent of Arthur Andersen LLP set forth in Exhibit 23.2 to this Annual
Report on Form 10-K.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SEI Investments Company:
We have audited the accompanying consolidated balance sheets of SEI Investments
Company (a Pennsylvania corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2001. These financial statements and schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SEI Investments Company and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Financial Statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Philadelphia, PA
January 31, 2002
29
Consolidated Balance Sheets SEI Investments Company
(In thousands) and Subsidiaries
December 31, 2002 2001
----------------------------------------------------------------------
Assets Current Assets:
Cash and cash equivalents ...................... $165,724 $163,685
Restricted cash ................................ $ 10,000 $ 10,000
Receivables from regulated investment
companies ................................... 22,588 25,550
Receivables, net of allowance for doubtful
accounts of $1,700 .......................... 52,054 56,327
Deferred income taxes .......................... 3,526 4,459
Prepaid expenses and other current assets ...... 7,543 6,121
-------- --------
Total Current Assets ........................ 261,435 266,142
-------- --------
Property and Equipment, net of accumulated
depreciation and amortization of $111,210
and $95,104 ................................. 104,258 95,804
-------- --------
Capitalized Software, net of accumulated
amortization of $15,204 and $13,469 ......... 12,596 11,055
-------- --------
Investments Available for Sale ................. 62,433 66,332
-------- --------
Other Assets, net .............................. 23,425 21,583
-------- --------
$464,147 $460,916
----------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
30
Consolidated Balance Sheets SEI Investments Company
(In thousands, except par value) and Subsidiaries
December 31, 2002 2001
----------------------------------------------------------------------------------
Liabilities Current Liabilities:
and
Shareholders' Current portion of long-term debt .......................... $ 9,556 $ 7,556
Equity Accounts payable ........................................... 4,058 4,977
Accrued liabilities ........................................ 119,427 128,408
Deferred revenue ........................................... 1,206 3,402
-------- --------
Total Current Liabilities ............................... 134,247 144,343
-------- --------
Long-term Debt ............................................. 33,500 43,055
-------- --------
Deferred Income Taxes ...................................... 6,393 2,925
-------- --------
Commitments and Contingencies (Note 10)
Shareholders' Equity:
Series Preferred stock, $.05 par value,
60 shares authorized; no shares issued and outstanding .. -- --
Common stock, $.01 par value,
750,000 shares authorized; 106,184 and
109,180 shares issued and outstanding ................... 1,062 1,092
Capital in excess of par value ............................. 216,284 186,390
Retained earnings .......................................... 74,019 85,085
Accumulated other comprehensive losses, net ................ (1,358) (1,974)
-------- --------
Total Shareholders' Equity ............................. 290,007 270,593
-------- --------
$464,147 $460,916
----------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial
statements.
31
Consolidated Statements of Operations SEI Investments Company
(In thousands, except per share data) and Subsidiaries
Year Ended December 31, 2002 2001 2000
- --------------------------------------------------------------------------------------
Revenues............................................. $620,819 $658,013 $598,806
Expenses:
Operating and development......................... 264,032 298,728 279,024
Sales and marketing............................... 124,784 152,642 154,984
General and administrative........................ 22,184 23,457 16,839
-------- -------- --------
Income from operations............................... 209,819 183,186 147,959
Equity in the earnings of unconsolidated affiliate... 12,652 10,342 7,533
Net loss from investments............................ (2,360) -- --
Interest income...................................... 5,200 6,945 6,419
Interest expense..................................... (2,263) (2,149) (2,293)
-------- -------- --------
Income before income taxes........................... 223,048 198,324 159,618
Income taxes......................................... 82,528 73,380 60,655
-------- -------- --------
Net income........................................... $140,520 $124,944 $ 98,963
- --------------------------------------------------------------------------------------
Basic earnings per common share...................... $ 1.30 $ 1.15 $ .93
- --------------------------------------------------------------------------------------
Diluted earnings per common share.................... $ 1.25 $ 1.09 $ .87
- --------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
32
Consolidated Statements of Shareholders' Equity SEI Investments Company
(In thousands) and Subsidiaries
Accumulated Other
Comprehensive Losses
-------------------------
Cumulative Unrealized
Foreign Holding
Common Stock Capital Currency Gain (Loss) Total
---------------- In Excess of Retained Translation on Shareholders'
Shares Amount Par Value Earnings Adjustments Investments Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999............... 17,692 $ 177 $ 71,501 $ 7,373 $(469) $ 420 $ 79,002
Comprehensive income:
Net income............................ -- -- -- 98,963 -- -- 98,963
Foreign currency translation
Adjustments........................ -- -- -- -- (267) -- (267)
Unrealized loss on investments........ -- -- -- -- -- (1,343) (1,343)
---------
Total comprehensive income .............. 97,353
Stock split adjustment................... 89,709 897 -- (897) -- -- --
Purchase and retirement of common
Stock................................. (226) (2) (518) (24,323) -- -- (24,843)
Issuance of common stock under the
employee stock purchase plan.......... 46 1 3,144 -- -- -- 3,145
Issuance of common stock upon
exercise of stock options............. 1,339 13 9,111 -- -- -- 9,124
Tax benefit on stock options exercised... -- -- 42,235 -- -- -- 42,235
Dividends declared ($.08 per share)...... -- -- -- (8,595) -- -- (8,595)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000............... 108,560 $1,086 $125,473 $ 72,521 $(736) $ (923) $ 197,421
Comprehensive income:
Net income............................ -- -- -- 124,944 -- -- 124,944
Foreign currency translation
adjustments........................ -- -- -- -- (242) -- (242)
Unrealized loss on investments........ -- -- -- -- -- (73) (73)
---------
Total comprehensive income .............. 124,629
Purchase and retirement of common
stock................................. (2,588) (26) (1,847) (101,476) -- -- (103,349)
Issuance of common stock under the
employee stock purchase plan.......... 104 1 3,946 -- -- -- 3,947
Other.................................... 13 619 619
Issuance of common stock upon
exercise of stock options............. 3,091 31 14,763 -- -- -- 14,794
Tax benefit on stock options exercised... -- -- 43,436 -- -- -- 43,436
Dividends declared ($.09 per share)...... -- -- -- (10,904) -- -- (10,904)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001............... 109,180 $1,092 $186,390 $ 85,085 $(978) $ (996) $ 270,593
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
33
Consolidated Statements of Shareholders' Equity SEI Investments Company
(In thousands) and Subsidiaries
Accumulated Other
Comprehensive Losses
-------------------------
Cumulative Unrealized
Foreign Holding
Common Stock Capital Currency Loss Total
---------------- In Excess of Retained Translation On Shareholders'
Shares Amount Par Value Earnings Adjustments Investments Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001............... 109,180 $1,092 $186,390 $ 85,085 $ (978) $ (996) $ 270,593
Comprehensive income:
Net income............................ -- -- -- 140,520 -- -- 140,520
Foreign currency translation
adjustments........................ -- -- -- -- 1,345 -- 1,345
Unrealized loss on investments........ -- -- -- -- -- (729) (729)
---------
Total comprehensive income............... 141,136
Purchase and retirement of common
stock.............................. (5,378) (54) (9,181) (138,622) -- -- (147,857)
Issuance of common stock under the
employee stock purchase plan....... 108 1 2,980 -- -- -- 2,981
Issuance of common stock upon
exercise of stock options.......... 2,274 23 11,478 -- -- -- 11,501
Tax benefit on stock options exercised... -- -- 24,617 -- -- -- 24,617
Dividends declared ($.12 per share)...... -- -- -- (12,964) -- -- (12,964)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002............... 106,184 $1,062 $216,284 $ 74,019 $ 367 $(1,725) $ 290,007
==================================================================================================================================
The accompanying notes are an integral part of these financial statements.
34
Consolidated Statements of Cash Flows SEI Investments Company
(In thousands) and Subsidiaries
Year Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income ................................................... $140,520 $124,944 $ 98,963
Adjustments to reconcile net income to net cash
provided by operatingactivities:
Depreciation and amortization .......................... 18,060 19,650 17,305
Undistributed earnings of affiliate .................... (2,502) (406) (633)
Write-off of capitalized software and intangibles ...... -- -- 3,737
Tax benefit on stock options exercised ................. 24,617 43,436 42,235
Deferred income tax expense ............................ 4,529 3,944 349
Other .................................................. (1,617) (2,737) 4,055
Change in current assets and liabilities:
Decrease (increase) in:
Receivables from regulated investment companies .. 2,962 2,057 (3,428)
Restricted cash .................................. -- 1,900 (11,900)
Receivables ...................................... 4,712 (8,923) (13,850)
Prepaid expenses and other current assets ........ (1,381) (707) (295)
Increase (decrease) in:
Accounts payable ................................. (919) (1,744) (676)
Accrued expenses.................................. (11,051) 6,013 10,271
Deferred revenue ................................. (2,196) (13,048) (2,870)
-------- -------- --------
Total adjustments ................................... 35,214 49,435 44,300
-------- -------- --------
Net cash provided by operating activities .............. $175,734 $174,379 $143,263
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
35
Consolidated Statements of Cash Flows SEI Investments Company
(In thousands) and Subsidiaries
Year Ended December 31, 2002 2001 2000
- -----------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment ......... (24,818) (40,342) (27,188)
Additions to capitalized software ........... (3,276) -- (449)
Purchase of investments available for sale .. (23,796) (69,647) (17,660)
Sale of investments available for sale ...... 30,701 24,618 2,495
Other ....................................... 474 (216) (3,631)
--------- --------- --------
Net cash used in investing activities .... (20,715) (85,587) (46,433)
Cash flows from financing activities:
Payments on long-term debt .................. (7,555) (3,389) (2,000)
Purchase and retirement of common stock ..... (147,857) (103,349) (24,843)
Proceeds from issuance of common stock ...... 14,482 18,741 12,269
Borrowing on term loan agreement ............ -- 25,000 --
Payment of dividends ........................ (12,050) (9,786) (7,786)
--------- --------- --------
Net cash used in financing activities .... (152,980) (72,783) (22,360)
--------- --------- --------
Net increase in cash and cash equivalents ...... 2,039 16,009 74,470
Cash and cash equivalents, beginning of year ... 163,685 147,676 73,206
--------- --------- --------
Cash and cash equivalents, end of year ......... $ 165,724 $ 163,685 $147,676
========= ========= ========
Interest paid ............................... 2,733 2,389 2,220
Income taxes paid (Federal and state) ....... 48,913 -- 49,134
- -----------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
36
Notes to Consolidated Financial Statements SEI Investments Company
(all figures are in thousands except per share data) and Subsidiaries
Note 1 - Summary of Significant Accounting Policies:
Nature of Operations - SEI Investments Company (the "Company") is
organized around its primary target markets: Private Banking & Trust,
Investment Advisors, Enterprises, Money Mangers, and Investments in
New Businesses. Private Banking & Trust, which accounts for 52 percent
of consolidated revenues in 2002, provides investment processing
solutions, fund processing solutions and investment management
programs to domestic banks and private trust companies in the United
States. Investment Advisors, which accounts for 24 percent of
consolidated revenues in 2002, provides investment management programs
and investment processing solutions to affluent investors through a
network of financial intermediaries, independent investment advisors
and other investment professionals in the United States. Enterprises,
which accounts for 9 percent of consolidated revenues in 2002, provide
retirement and treasury business solutions for corporations, unions,
foundations and endowments, and other institutional investors in the
United States. Money Managers, which accounts for 8 percent of
consolidated revenues, provides investment solutions to U.S.
investment managers, mutual fund companies and alternative investment
managers worldwide. Investments in New Businesses, which accounts for
7 percent of consolidated revenues, includes the Company's global
asset management businesses as well as initiatives into new U.S.
markets.
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 because of 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 Operations (See Note 5).
Cash and Cash Equivalents - 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. Cash and cash equivalents included $116,649 and $100,851,
primarily invested in SEI Daily Income Trust in 2002 and 2001,
respectively, which are open ended money market mutual funds sponsored
by SIMC. Cash in the amount of $10,000 is restricted for the exclusive
benefit of customers related to our brokerage services provided by
SIDCO.
Concentration of Credit Risk - Financial instruments which potentially
expose us to concentrations of credit risk consist primarily of cash
equivalents, marketable securities and trade receivables. Cash
equivalents are principally invested in short-term money market funds
or placed with major banks and high credit qualified financial
institutions. Concentrations of credit risk with respect to our
receivables are limited due to the large number of clients and their
dispersion across geographic areas. No single group or customer
represents greater than 10 percent of total accounts receivable.
37
Property and Equipment - Property and Equipment on the accompanying
Consolidated Balance Sheets consists of the following:
Estimated
Useful Lives
2002 2001 (In Years)
------------------------------------------------------------------------------------
Equipment..................................... $ 79,260 $ 74,809 3 to 5
Buildings..................................... 75,825 44,981 25 to 39
Land.......................................... 9,345 9,345 N/A
Purchased software............................ 21,256 18,952 3
Furniture and fixtures........................ 15,523 14,748 3 to 5
Leasehold improvements........................ 7,386 7,492 Lease Term
Construction in progress...................... 6,873 20,581 N/A
--------- -------
215,468 190,908
Less: Accumulated depreciation
And amortization........................... (111,210) (95,104)
--------- -------
Property and Equipment, net................... $ 104,258 $ 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.
Construction in progress includes all construction costs associated
with the design and construction of two new buildings for our
corporate headquarters. Depreciation expense was $16,325, $17,883, and
$15,410 in 2002, 2001, and 2000, respectively.
Capitalized Software - The Company accounts for software development
costs in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed. 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. The Company capitalized $449 of software
development costs in accordance with SFAS 86 during 2000. The Company
did not capitalize any software development costs during 2002 and 2001
in accordance with SFAS 86.
In 2002, the Company adopted the guidance established in 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", and 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 $3,276 of software development
costs in accordance with SOP 98-1 during 2002. The Company did not
capitalize any software development costs during 2001 and 2000 in
accordance with SOP 98-1.
38
Amortization of capitalized software development costs 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 5.6 years. Amortization expense was $1,735,
$1,767 and $1,895 in 2002, 2001, and 2000, respectively, and is
included in Operating and development expense on the accompanying
Consolidated Statements of Operations.
Management continually evaluates the recoverability of existing
software products, as well as strategies for new software products.
The assessment as to the recoverability of existing software products
includes an evaluation of expected future revenues and cash flows,
acceptability of the product in the market, the ability to support the
product in a cost-effective manner, and technological enhancements. In
2000, management determined that certain software products were
considered either obsolete or incapable of producing the future cash
flows that were originally anticipated. As a result, the Company wrote
off net capitalized software development costs of $1,357 in 2000.
Accrued Liabilities - Accrued Liabilities on the accompanying
Consolidated Balance Sheets consists of the following:
----------------------------------------------------------------------
2002 2001
-------- --------
Accrued compensation............................ $ 33,612 $ 39,542
Accrued proprietary fund services............... 8,403 12,463
Accrued brokerage fees.......................... 9,103 8,456
Accrued Income tax.............................. 9,281 5,871
Other accrued liabilities....................... 59,028 62,076
-------- --------
119,427 128,408
----------------------------------------------------------------------
Accrued proprietary fund services relates to marketing and promotional
activities associated with the Company's bank related proprietary
funds business.
Revenue Recognition - Principal sources of revenues are information
processing and software services, management, administration, and
distribution of mutual funds, brokerage and consulting services, and
other asset management products and services. Revenues from these
services are recognized in the periods in which they are performed.
Cash received by the Company in advance of the performance of services
is deferred and recognized as revenue when earned.
Income Taxes - The Company accounts for income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes". Under SFAS 109, the
liability method is used for income taxes. Under this method, deferred
tax assets and liabilities are determined based on differences between
the financial reporting and tax basis of assets and liabilities and
are measured using enacted tax rates and laws that are expected to be
in effect when the differences reverse (See Note 11).
Foreign Currency Translation - The assets and liabilities of foreign
operations are translated into U.S. dollars using the rates of
exchange at year end. The results of operations are translated into
U.S. dollars at the average daily exchange rates for the period. All
foreign currency transaction gains and losses are included in income
in the periods in which they occur, and are immaterial for each of the
three years in the period ended December 31, 2002.
39
Earnings Per Share - The Company calculates earnings per share in
accordance with SFAS No. 128, "Earnings per Share". 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 reflect
the potential dilution from the exercise or conversion of securities
into common stock, such as stock options. (See Note 8).
-----------------------------------------------------------------------------------------
For the year ended December 31, 2002
---------------------------------------
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic earnings per common share................ $140,520 108,330 $1.30
Dilutive effect of stock options............... -- 4,473
-------- -------
Dilutive earnings per common share............. $140,520 112,803 $1.25
For the year ended December 31, 2001
---------------------------------------
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic earnings per common share................ $124,944 108,596 $1.15
Dilutive effect of stock options............... -- 6,214
-------- -------
Dilutive earnings per common share............. $124,944 114,810 $1.09
For the year ended December 31, 2000
---------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic earnings per common share................ $98,963 106,490 $.93
Dilutive effect of stock options............... -- 7,330
------- -------
Dilutive earnings per common share............. $98,963 113,820 $.87
-----------------------------------------------------------------------------------------
Options to purchase 2,774,000, 2,777,000, and 1,265,000 shares of
common stock, with an average exercise price per share of $45.53,
$45.95, and $49.96, were outstanding during 2002, 2001, and 2000,
respectively, but were excluded from the diluted earnings per common
share calculation because the option's exercise price was greater than
the average market price of the Company's common stock.
Comprehensive Income - SFAS No. 130, "Reporting Comprehensive Income"
establishes standards for the 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 consists of net income, foreign currency
translation adjustments, and unrealized holding gains and losses.
---------------------------------------------------------------------------------------------
Pre-Tax Tax Net of Tax
Amount Benefit Amount
------- ------- ----------
For the Year Ended December 31, 2000:
Unrealized holding losses arising during period............. $(2,166) $ 823 $(1,343)
Foreign currency translation adjustments.................... (267) -- (267)
------- ------ -------
Total other comprehensive loss.............................. $(2,433) $ 823 $(1,610)
40
For the Year Ended December 31, 2001:
Unrealized holding losses arising during period............. $ (116) $ 43 $ (73)
Foreign currency translation adjustments.................... (242) -- (242)
------- ------ -------
Total other comprehensive loss.............................. $ (358) $ 43 $ (315)
For the Year Ended December 31, 2002:
Unrealized holding losses arising during period............. $(4,534) $1,549 $(2,985)
Less: Reclassification adjustment for losses
realized in net income................................... 3,446 (1,190) 2,256
------- ------ -------
(1,088) 359 (729)
Foreign currency translation adjustments.................... 1,345 -- 1,345
------- ------ -------
Total other comprehensive income............................ $ 257 $ 359 $ 616
---------------------------------------------------------------------------------------------
Stock-Based Compensation - The Company accounts for stock-based
compensation in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations and has presented the required SFAS No. 123,
"Accounting for Stock-Based Compensation," as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure,"
pro forma disclosure in the table below.
At December 31, 2002, the Company had stock-based compensation plans,
which are described separately in Note 8. The Company applies
Accounting Principles Board Opinion No. 25 and related interpretations
in accounting for its plans, and accordingly, no compensation cost has
been recognized for the Company's fixed stock-based compensation. Had
compensation cost been determined consistent with SFAS 123, as amended
by SFAS 148, the Company's net income would have been reduced to the
following pro forma amounts:
2002 2001 2000
-------------------------------------------------------------------------------------------------
Net income:
As reported.................................................. $140,520 $124,944 $ 98,963
Deduct: Total stock-based employee compensation
expense determined under fair value based method for
all awards, net of related tax effects..................... (9,302) (23,741) (18,274)
-------- -------- --------
Pro forma.................................................... $131,218 $101,203 $ 80,689
Basic earnings per common share:
As reported.................................................. $ 1.30 $ 1.15 $ .93
Pro forma.................................................... $ 1.21 $ .93 $ .76
Diluted earnings per common share:
As reported.................................................. $ 1.25 $ 1.09 $ .87
Pro forma.................................................... $ 1.16 $ .88 $ .71
-------------------------------------------------------------------------------------------------
Management's Use of Estimates - The preparation of financial
statements in conformity with accounting principles generally accepted
in the United 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.
41
New Accounting Pronouncements - In November 2002, the FASB issued FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others", ("FIN 45"). This interpretation elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees it
has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The
initial recognition and measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified on
or after January 1, 2003. The disclosure requirements established by
FIN 45 are effective immediately. Accordingly, these new disclosures
are included in Note 10. The Company does not believe, nor does it
expect, that the recognition and measurement provisions of FIN 45 will
have any material effect on the results of operations, financial
position or liquidity.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of ARB
No. 51", ("FIN 46"). This interpretation provides guidance on the
identification of, and financial reporting for, entities over which
control is achieved through means other than voting rights. The
consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003 and to older entities
in interim periods beginning after June 30, 2003. Certain of the
disclosure requirements apply to all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. Based on our initial analysis, the Company does not
believe the adoption of FIN 46 has any material effect on the results
of operations, financial position, liquidity or disclosure
requirements.
In February 2003, the Emerging Issues Task Force ("EITF") ratified
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables",
("Issue 00-21"). Issue 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform
multiple revenue-generating activities and addresses how to determine
whether an arrangement involving multiple deliverables contains more
than one unit of accounting. The Company provides certain services
that involve a series of different product offerings that can be
purchased as a complete solution or as individual components.
Consideration for these types of services is usually a combination of
fixed and variable payment amounts. Currently, the Company is
evaluating the impact Issue 00-21 could have on our results of
operations, financial position, liquidity, and disclosure
requirements. Issue 00-21 becomes effective for revenue arrangements
entered into after June 30, 2003.
Note 2 - Receivables:
Receivables on the accompanying Consolidated Balance Sheets consist of
the following:
2002 2001
------------------------------------------------------------------------
Trade receivables .............................. $20,326 $26,415
Fees earned, not received ...................... 1,452 2,527
Fees earned, not billed ........................ 31,976 29,085
------- -------
53,754 58,027
Less: Allowance for doubtful accounts ......... (1,700) (1,700)
------- -------
$52,054 $56,327
------------------------------------------------------------------------
Fees earned, not received represent brokerage commissions earned but
not yet collected. Fees earned, not billed result from timing
differences between services provided and contractual billing
schedules.
42
Receivables from regulated investment companies on the accompanying
Consolidated Balance Sheets represent fees earned by 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 (See Note 13).
Note 3 - Investments Available for Sale:
Investments available for sale consist primarily of investments in
mutual funds sponsored by the Company. The Company accounts for
investments in marketable securities pursuant to SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
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 Operations.
-----------------------------------------------------------------------------------------------
For the Year ended December 31, 2002
-------------------------------------------
Gross Gross
Cost Unrealized Unrealized Fair
Amount Gains (Losses) Value
---------- ------- ---------- -------
Company-sponsored mutual funds................... $45,642 $860 $ (331) $46,171
Equity securities................................ 19,543 -- (3,281) 16,262
------- ---- --------- -------
$65,185 $860 $(3,612) 62,433
For the Year Ended December 31, 2001
-------------------------------------------
Company-sponsored mutual funds................... $47,621 $278 $(1,942) $45,957
Equity securities................................ 20,375 -- -- 20,375
------- ---- --------- -------
$67,996 $278 $(1,942) 66,332
-----------------------------------------------------------------------------------------------
The net unrealized holding losses at December 31, 2002 and 2001 were
$1,725 (net of income tax benefit of $1,027) and $996 (net of income
tax benefit of $668), respectively, and are reported as a separate
component of Accumulated other comprehensive losses on the
accompanying Consolidated Balance Sheets.
During 2001, the Company was applying hedge accounting for the
investments in equity securities at which time it was considered
effective. As a result, any unrealized gains or losses were netted
against the value of the hedge in current period earnings. At March
31, 2002, the item being hedged and the hedge fell outside the range
for it to be considered effective.
Management performs a review of all investments in marketable
securities on a quarterly basis with regards to impairment. Factors
considered in determining other-than-temporary impairment are
significant or prolonged declines in the price of investments based on
available market prices. Additional consideration is given to the
ability to recover the carrying amount of the investment. During 2002,
management determined that certain investments were impaired. The
Company recorded an impairment charge of $3,881 related to
other-than-temporary declines in fair value and is included in Net
loss from investments on the accompanying Consolidated Statements of
Operations.
During 2002, the Company recognized gross realized gains of $394 and
gross realized losses of $761.
43
Note 4 - Derivative Instruments and Hedging Activities:
The Company is exposed to market risk associated with investments in
marketable securities. 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
(derivatives).
The Company accounts for its derivatives in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities",
and SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - an amendment of FASB Statement No. 133".
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.
Income before taxes, on the accompanying Consolidated Statements of
Operations, includes a net gain of $4,239, and $355 from hedge
ineffectiveness in 2002 and 2001, respectively.
The Company currently holds futures contracts with a notional amount
of $1,144 with a financial institution for various terms. The Company
also currently holds equity derivatives with a notional amount of
$16,262 with a financial institution with various terms. During 2002,
the Company did not enter into or hold derivative financial
instruments for trading purposes.
The following tabular disclosure provides information about the
Company's derivative financial instruments.
Expected Maturity Date
---------------------------------------------
2003 2004 2005 Thereafter Total
---------------------------------------------
Equity $16,262 -- -- -- $16,262
Futures 1,144 -- -- -- 1,144
---------------------------------------------
Total $17,406 -- -- -- $17,406
======= ==== ===== ========== =======
44
Note 5 - Other Assets:
Other assets on the accompanying Consolidated Balance Sheets consist
of the following:
2002 2001
------------------------------------------------------------------------
Investment in unconsolidated affiliate ............. $8,535 $6,033
Other, net ......................................... 14,890 15,550
------- -------
Other assets ....................................... $23,425 $21,583
------------------------------------------------------------------------
Other, net consists of long-term prepaid expenses, deposits and other
investments carried at cost.
Investment in Unconsolidated Affiliate - The Company and several
leading academics in the field of finance operate a general
partnership, LSV Asset Management ("LSV"). 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 and derived 9 percent of revenues in 2002 as portfolio
manager for the Company's funds. The Company's interest in LSV was
approximately 44 percent in 2002 and 2001. LSV is accounted for using
the equity method of accounting. 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 Operations.
The following table contains condensed financial information of LSV:
Condensed Statement of Operations 2002 2001 2000
---------------------------------------------------------------------
Revenues ........................... $38,190 $31,193 $22,974
Net income ......................... $28,863 $23,070 $16,170
---------------------------------------------------------------------
Condensed Balance Sheet 2002 2001
---------------------------------------------------------------------
Cash and cash equivalents .................... $ 8,784 $ 6,205
Accounts receivable .......................... 8,919 7,186
Other current assets ......................... 490 3
Non-current assets ........................... 280 89
------- -------
Total assets ................................. $18,473 $13,483
======= =======
Current liabilities .......................... $2,383 $ 1,686
Partners' capital ............................ 16,090 11,797
------- -------
Total liabilities and
partners' capital ......................... $18,473 $13,483
======= =======
---------------------------------------------------------------------
The Company received partnership distribution payments from LSV of
$11,067 and $9,936 in 2002 and 2001, respectively.
45
Note 6 - Line of Credit:
The Company has a line of credit agreement (the "Agreement") with a
lending institution. The Agreement provides for borrowings of up to
$25,000 and expires on June 19, 2003, 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
lower of the Prime rate or one and one-quarter percent above the
London Interbank Offered Rate (LIBOR). The Company is obligated to pay
a commitment fee equal to one-quarter of one percent per annum on the
average daily unused portion of the commitment. Certain covenants
under the Agreement require the Company to maintain specified levels
of net worth and place certain restrictions on investments. The
Company was in compliance with these covenants during 2002.
There were no borrowings on the Company's line of credit during 2002
and 2001. Interest expense, including commitment fees, on the
Company's line of credit was $64, $127, and $127 for the years ended
December 31, 2002, 2001, and 2000, respectively.
Note 7 - 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 and
$15,000 of 7.27% Senior Notes (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 time. The Note Purchase Agreement, as amended,
contains various covenants, including limitations on indebtedness,
maintenance of minimum net worth levels, and restrictions on certain
investments. In addition, the agreement limits the Company's ability
to merge or consolidate, and to sell certain assets. Principal
payments on the Notes are made annually from the date of issuance
while interest payments are made semi-annually. The remaining unpaid
principal balance at December 31, 2002 and 2001 was $25,000 and
$27,000, respectively.
On June 26, 2001 the Company entered into a term loan agreement (the
"Agreement") with a separate lending institution. The agreement
provides for borrowings up to $25,000, and expires on March 31, 2006
and is payable in seventeen equal quarterly installments. The
Agreement provides the Company the option to have interest accrued at
either the lower of the Prime rate or one and thirty-five hundredths
of one percent above the London Interbank Offered Rate (LIBOR). The
Agreement contains various covenants, including limitations on
indebtedness and restrictions on certain investments. On August 2,
2001, the Company borrowed the full $25,000. Principal payments on the
notes are made quarterly from the date of issuance while interest
payments are made based on the term of the LIBOR borrowing. The
remaining unpaid principal balance at December 31, 2002 and 2001 was
$18,066 and $23,611 respectively. The interest rate being applied at
December 31, 2002 was 3.19 percent.
The carrying amount of the Company's long-term debt is not materially
different from its fair value. The Company was in compliance with all
covenants associated with its long-term debt during 2002.
Aggregate maturities of long-term debt at December 31, 2002 are:
------------------------------------------------------------------------------
2003................................................................ 9,555
2004................................................................ 9,556
2005................................................................ 9,555
2006................................................................ 5,389
2007................................................................ 4,000
2008 and thereafter................................................. 5,000
-------
$43,055
------------------------------------------------------------------------------
Interest expense relating to the Company's long-term debt was $2,188,
$2,003, and $2,155 for the years ended December 31, 2002, 2001, and
2000 respectively.
46
Note 8 - Shareholders' Equity:
Stock Split - On May 10, 2000, the Board of Directors approved a
three-for-one stock split of the Company's $.01 par value common
stock, effected in the form of a stock dividend which was paid on June
19, 2000 to shareholders of record on June 5, 2000. A total of
35,400,000 shares of common stock were issued in connection with the
stock split. The par value of the stock remained unchanged.
Accordingly, a total of $354 was reclassified from Retained earnings
to Common stock.
On December 14, 2000, the Board of Directors approved a two-for-one
stock split of the Company's $.01 par value common stock, effected in
the form of a stock dividend which was paid on February 28, 2001 to
shareholders of record on February 19, 2001. On February 14, 2001, a
special meeting of the shareholders was held and they approved an
increase in the number of shares authorized to 750,000,000. A total of
54,309,000 shares of common stock were issued in connection with the
stock split. The par value of the stock remained unchanged.
Accordingly, a total of $543 was reclassified from Retained earnings
to Common stock. All shares have been adjusted to reflect these
splits.
Stock-Based Compensation Plans - The Company currently has only one
equity compensation plan, the 1998 Equity Compensation Plan, pursuant
to which grants of stock may be made to employees, consultants and
directors of the Company. The Company also maintains three additional
equity compensation plans which have stock options outstanding, but
these plans have been terminated. The terminated plans are the Company
Stock Option Plan, the 1997 Stock Option Plan, and the Non-employee
Directors Plan. No options are available for grant from these
terminated plans, and grants made under these plans continue in effect
under the terms of the grant and the applicable plan. The Company
maintains an on-going annual grant program under which all employees
are eligible for consideration. All of the Company's equity
compensation plans are administered by the Company's Stock Option
Committee. The 1998 Equity Compensation Plan and the 1997 Stock Option
Plan are discussed in more detail below.
The 1998 Equity Compensation Plan:
On May 21, 1998, the Board of Directors adopted the 1998 Equity
Compensation Plan (the "1998 Plan"), and the Company's shareholders
approved the adoption of the 1998 Plan in May 1998. The Board of
Directors has made certain amendments to the 1998 Plan after its
adoption that did not require shareholder approval. The 1998 Plan
provides for grants of stock options (incentive stock options and
nonqualified stock options), stock appreciation rights, restricted
stock and performance units to all employees (including employees who
are also directors) of the Company or its subsidiaries, consultants
and advisors who perform valuable services to the Company or its
subsidiaries and members of the Board of Directors who are not
employees of the Company.
With respect to grants other than automatic grants to non-employee
directors, the Stock Option Committee has the authority to determine
the individuals who will receive grants, the type of grant, the number
of shares and the terms of the grant, the time the grants will be made
and the duration of any exercise or restriction period, and to deal
with any other matters arising under the 1998 Plan.
Options granted under the 1998 Plan may be "incentive stock options,"
which are intended to qualify with the requirements of Section 422 of
the Code, and "nonqualified stock options" which are not intended to
so qualify. Options are granted under the 1998 Plan with an exercise
price equal to the fair market value of the Company's common stock on
the date of grant, become exercisable ratably upon the attainment of
specific diluted earnings per share targets or in their entirety after
seven years from the date of grant, and expire ten years from the date
of grant. The Company has not granted any incentive stock options,
stock appreciation rights, restricted stock or performance units to
date under the 1998 Plan.
47
In addition to any discretionary grants which may be made to
non-employee members of the Board of Directors under the 1998 Plan,
the 1998 Plan also provides that non-employee directors receive
automatic grants of non-qualified stock options. Each non-employee
director who first becomes a member of the Board of Directors after
the effective date of the 1998 Plan receives a non-qualified stock
option to purchase 4,000 shares. In addition, each non-employee
director receives an annual non-qualified stock option to purchase
8,000 shares pursuant to the 1998 Plan. The exercise prices for these
options are equal to the fair market value of the Company's stock on
the date of grant, the term is ten years from the date of grant, and
the options become exercisable ratably over the first four
anniversaries of the date of grant (unless otherwise determined by the
Stock Option Committee).
If a change of control of the Company occurs, unless the Board of
Directors determines otherwise, all outstanding stock options and
stock appreciation rights will become fully exercisable, the
restrictions and conditions on all outstanding restricted stock will
lapse, and grantees holding performance units will receive a payment
in settlement of the performance unit, in an amount determined by the
Stock Option Committee, based on the grantee's target payment for the
performance period and the portion of the performance period that
precedes the change of control. Upon a change of control in which the
Company is not the surviving corporation (or survives as a subsidiary
of another corporation), unless the Board of Directors determines
otherwise, all outstanding stock options and stock appreciation rights
will be assumed by, or replaced with comparable options or rights by,
the surviving corporation. The Board of Directors may also provide in
the event of a change of control that grantees will (i) surrender
their outstanding options in exchange for cash or Company stock in an
amount equal to the difference between the exercise price for options,
or the base amount for stock appreciation rights, and the fair market
value of the stock, or (ii) terminate outstanding options and stock
appreciation rights after giving grantees the right to exercise such
grants. The Stock Option Committee may limit the application of the
change of control provisions to a grantee if certain conditions exist.
The Board of Directors may amend or terminate the 1998 Plan at any
time. Unless terminated earlier by the Board of Directors or extended
by the Board of Directors, with the approval of the Company's
shareholders, the 1998 Plan will terminate on May 20, 2008.
As of December 31, 2002, options to acquire 10,109,000 shares were
outstanding under the 1998 Plan, out of a total of 10,216,000 shares
of common stock reserved for issuance under the 1998 Plan. A total of
approximately 107,000 shares of common stock remain available for
issuance under the 1998 Plan for future grants.
The 1997 Stock Option Plan:
On December 4, 1997, the Board of Directors adopted the 1997 Stock
Option Plan (the "1997 Plan"). At the time of its initial approval,
the 1997 Plan was not submitted to, nor was it required to be
submitted to, the Company's shareholders for approval. The 1997 Plan
was terminated by the Board of Directors in May 1998, and no further
options may be granted. However, options granted under the 1997 Plan
prior to its termination continue in effect under the terms of the
grant and the 1997 Plan.
The 1997 Plan only authorized the granting of nonqualified stock
options. All employees (except officers and employee members of the
Board of Directors) of the Company or its affiliates, consultants who
perform services for the Company or its affiliates, and directors who
are not employees of the Company were eligible to receive grants under
the 1997 Plan. With respect to grants other than to non-employee
directors, the Stock Option Committee had the authority to determine
the individuals who would receive grants, the number of shares and the
terms of the grant, the time the grants would be made and the duration
of any exercise period, and deal with any other matters arising under
the 1997 Plan.
All options that were granted under the 1997 Plan to employees and
consultants were granted at the fair market value of the Company's
common stock on the date of grant, become exercisable ratably upon the
attainment of specific diluted earnings per share targets or in their
entirety after seven years from the date of grant, and expire ten
years from the date of grant.
48
The 1997 Plan provided that non-employee members of the Board of
Directors would receive automatic grants of nonqualified stock
options. Each non-employee director who first became a member of the
Board of Directors after the effective date of the 1997 Plan, but
before the termination of the 1997 Plan, received a non-qualified
stock option to purchase 8,000 shares. In addition, each non-employee
director received a non-qualified stock option to purchase 4,000
shares pursuant to the 1997 Plan. The exercise prices for these
options were equal to the fair market value of the Company's stock on
the date of grant, the term is ten years from the date of grant, and
the options became exercisable ratably over the first four
anniversaries of the date of grant (unless otherwise determined by the
Stock Option Committee.
If the Company is consolidated or merged into another corporation,
each optionee with an outstanding option under the 1997 Plan will
receive, upon exercise of the option, the same consideration as other
shareholders of the Company received in connection with the
transaction. If all or substantially all of the assets of the Company
are sold or exchanged (other than by merger or consolidation), each
optionee will have the right to exercise the option in full within ten
days after the Stock Option Committee provides notice of the right to
exercise the option, and any portion of the option not exercised will
lapse.
As of December 31, 2002, options to acquire 2,286,000 shares were
outstanding under the 1997 Plan, out of a total of 2,286,000 shares of
common stock reserved for issuance under the 1997 Plan.
Additional Stock Option Plans:
The Company has several other plans that have terminated and no
further options may be granted under these plans. Grants made under
the Plans will continue in effect under the terms of the grants and
Plans. Options previously granted under these plans that have not yet
expired or otherwise become unexercisable continue to be administered
under such plans, and any portions that expire or become unexercisable
for any reason shall be cancelled and be unavailable for future
issuance.
Certain information relating to the Company's stock option plans for
2002, 2001, and 2000 is summarized as follows:
--------------------------------------------------------------------------------
Number of Weighted
Shares Avg. Price
---------- ----------
Balance as of December 31, 1999 ...................... 18,900,000 7.57
Granted .............................................. 1,483,000 46.69
Exercised ............................................ (3,301,000) 2.84
Expired or canceled .................................. (388,000) 12.63
----------
Balance as of December 31, 2000 ...................... 16,694,000 11.87
Granted .............................................. 1,491,000 42.72
Exercised ............................................ (3,392,000) 4.38
Expired or canceled .................................. (68,000) 29.39
----------
Balance as of December 31, 2001 ...................... 14,725,000 $16.63
Granted .............................................. 2,333,000 29.43
Exercised ............................................ (2,274,000) 5.06
Expired or canceled .................................. (311,000) 25.90
----------
Balance as of December 31, 2002 ...................... 14,473,000 $20.28
Exercisable as of December 31, 2002 .................. 6,100,000 $ 6.60
Available for future grant as of December 31, 2002 ... 107,000 --
--------------------------------------------------------------------------------
49
As of December 31, 2001 and 2000, there were 8,373,000 and 8,627,000
shares exercisable, respectively. The expiration dates for options at
December 31, 2002 range from July 14, 2003 to December 10, 2012, with
a weighted average remaining contractual life of 6.4 years.
The weighted average fair value of the stock options granted during
2002, 2001, and 2000 was $43.56, $64.49, and $71.31, respectively. The
fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions:
2002 2001 2000
----------------------------------------------------------------------
Risk-free interest rate ............... 3.84% 4.80% 6.12%
Expected dividend yield ............... 0.22% 0.22% 0.14%
Expected life ......................... 7 Years 7 Years 7 Years
Expected volatility ................... 42.66% 42.31% 40.49%
----------------------------------------------------------------------
The following table summarizes information relating to all options
outstanding at December 31, 2002:
---------------------------------------------------------------------------------
Options Outstanding Options Exercisable
at December 31, 2002 at December 31, 2002
------------------------ -----------------------
Weighted
Weighted Weighted Average
Range of Average Average Remaining
Exercise Number Exercise Number Exercise Contractual
Prices of Price Of Price Life
(Per Share) Shares (Per Share) Shares (Per Share) (Years)
-------------- ---------- ----------- --------- ----------- -----------
$ 2.75 - $4.00 2,579,000 $ 3.36 2,579,000 $ 3.36 2.7
4.01 - 7.00 2,312,000 6.36 2,312,000 6.36 4.1
7.01 - 19.00 2,505,000 14.60 1,207,000 13.92 6.2
19.01 - 29.00 2,017,000 19.81 -- -- 7.0
29.01 - 42.85 2,477,000 30.01 2,000 41.45 9.9
42.86 - 50.00 2,583,000 46.15 -- -- 8.5
---------- ---------
14,473,000 6,100,000
---------------------------------------------------------------------------------
Employee Stock Purchase Plan - The Company has an employee stock
purchase plan that provides for offerings of common stock to eligible
employees at a price equal to 85 percent of the fair market value of
the stock at the end of the stock purchase period, as defined. The
Company has reserved 7,800,000 shares for issuance under this plan. At
December 31, 2002, 5,090,000 cumulative shares have been issued.
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 $653,365. Through
December 31, 2002, a total of 106,481,000 shares at an aggregate cost
of $606,296 have been purchased and retired. The Company purchased
5,378,000 shares at a cost of $147,857 during 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.
50
Shareholders' Rights Plan - On December 10, 1998, the Company's Board
of Directors adopted a new Shareholder Rights Plan to replace the
Shareholder Rights Plan originally adopted in 1988, which expired on
December 19, 1998. The Company's Shareholder Rights Plan is designed
to deter coercive or unfair takeover tactics and to prevent a person
or group from acquiring control of the Company without offering a fair
price to all shareholders.
Under the terms of the 1998 Shareholder Rights Plan, all common
shareholders of record at the close of business on December 19, 1999
shall receive one Right for each outstanding common share of the
Company. Any new common shares issued after December 19, 1999 will
receive one Right for each common share. Each Right entitles the
registered holder to purchase from the Company one two-thousandths of
a share of Series A Junior Participating Preferred Shares, par value
$.05 per share, at an exercise price of $500 per share. The Rights
will become exercisable and trade separately from the common stock 10
days following a public announcement that a person or group is the
beneficial owner of 20 percent or more of the outstanding common stock
(the "Stock Acquisition Date"), or the commencement of a tender or
exchange offer that would result in such a person or group owning 20
percent or more of the outstanding common stock.
In the event that the Company is involved in a merger or other
business combination in which the Company survives and its common
stock remains outstanding, the other stockholders will be able to
exercise the Rights and buy common stock of the Company having twice
the value of the exercise price of the Rights. Additionally, if the
Company is involved in certain other mergers where its shares are
exchanged or certain major sales of its assets occur, stockholders
will be able to purchase the other party's common shares in an amount
equal to twice the value of the exercise price of the Rights. Upon the
occurrence of any of these events, the Rights will no longer be
exercisable into Preferred Shares.
The Rights, which do not have voting rights, will expire on December
19, 2008, and may be redeemed by the Company any time until ten days
following the Stock Acquisition Date at a price of $.01 per Right.
Dividends - On May 14, 2002, the Board of Directors declared a cash
dividend of $.06 per share on the Company's common stock, which was
paid on June 21, 2002, to shareholders of record on May 28, 2002. On
December 10, 2002, the Board of Directors declared a cash dividend of
$.06 per share on the Company's common stock, which was paid on
January 21, 2003, to shareholders of record on January 3, 2003.
The dividends declared in 2002, 2001, and 2000 were $12,964, $10,904,
and $8,595, respectively. The Board of Directors has indicated its
intention to pay future dividends on a semiannual basis.
Note 9 - Employee Benefit Plan:
The Company has a tax-qualified defined contribution plan (the
"Plan"). The Plan provides retirement benefits, including provisions
for early retirement and disability benefits, as well as a
tax-deferred savings feature. After satisfying certain requirements,
participants are vested in employer contributions at the time the
contributions are made. All Company contributions are discretionary
and are made from available profits. The Company contributed $3,393,
$4,377, and $2,210 to the Plan in 2002, 2001, and 2000, respectively.
51
Note 10 - Commitments and Contingencies:
The Company has entered into various operating leases for facilities,
data processing equipment, and software, as well as agreements for
maintenance services. Some of these leases contain escalation clauses
for increased taxes and operating expenses. Rent expense was $13,910,
$13,790, and $11,822 in 2002, 2001, and 2000, respectively.
The aggregate noncancellable minimum commitments at December 31, 2002
are:
----------------------------------------------------------------------
2003 ....................................................... 10,694
2004 ....................................................... 6,540
2005 ....................................................... 2,909
2006 ....................................................... 1,588
2007 ....................................................... 1,032
2008 and thereafter ........................................ 10,072
-------
$32,835
----------------------------------------------------------------------
In the ordinary course of business, the Company from time to time
enters into contracts containing indemnification obligations of the
Company. These obligations may require the Company to make payments to
another party upon the occurrence of certain events including the
failure by the Company to meet its performance obligations under the
contract. These contractual indemnification provisions are often
standard contractual terms of the nature customarily found in the type
of contracts entered into by the Company. In many cases, there are no
stated or notional amounts included in the indemnification provisions.
There are no amounts reflected on the Consolidated Balance Sheet as of
December 31, 2002 related to these indemnifications.
In the normal course of business, the Company is party to various
claims and legal proceedings. Although the ultimate outcome of these
matters is presently not determinable, management, after consultation
with legal counsel, does not believe that the resolution of these
matters will have a material adverse effect upon the Company's
financial position or results of operations.
Note 11 - Income Taxes:
Income taxes consist of the following:
Year Ended December 31, 2002 2001 2000
--------------------------------------------------------------------------------
Current
Federal ...................................... $71,541 $66,926 $56,752
State ........................................ 6,458 2,510 3,554
------- ------- -------
77,999 69,436 60,306
------ ------ ------
Deferred, including current deferred
Federal ...................................... 3,781 3,089 783
State ........................................ 748 855 (434)
------- ------- -------
4,529 3,944 349
------- ------- -------
Total income taxes from continuing
operations ................................... $82,528 $73,380 $60,655
--------------------------------------------------------------------------------
52
The effective income tax rate differs from the Federal income tax
statutory rate due to the following:
Year Ended December 31, 2002 2001 2000
---------------------------------------------------------------------
Statutory rate ................................. 35.0% 35.0% 35.0%
State taxes, net of Federal tax benefit ........ 2.0 1.1 1.2
Valuation allowance for foreign losses ......... .1 .5 .3
Other, net ..................................... (.1) .4 1.5
---- ---- ----
37.0% 37.0% 38.0%
---------------------------------------------------------------------
Deferred income taxes for 2002, 2001, and 2000 reflect the impact of
"temporary differences" between the amount of assets and liabilities
for financial reporting purposes and such amounts as measured by tax
laws and regulations. Principal items comprising the deferred income
tax provision (benefit) are as follows:
Year Ended December 31, 2002 2001 2000
--------------------------------------------------------------------------
Difference in financial reporting and income
tax depreciation methods ................... $1,493 $ (517) $(192)
Reserves not currently deductible ............. 1,353 518 488
Capitalized software currently deductible for
tax purposes, net of amortization .......... 539 (617) (981)
State deferred income taxes ................... 487 556 (283)
Revenue and expense recognized in
different periods for financial reporting
and income tax purposes .................... 766 4,142 542
Other, net .................................... (109) (138) 775
------- ------ -----
$4,529 $3,944 $ 349
--------------------------------------------------------------------------
The net deferred income tax (liability) asset is comprised of the
following:
Year Ended December 31, 2002 2001
---------------------------------------------------------------------
Current deferred income taxes:
Gross assets ................................. $ 3,526 $ 4,459
Gross liabilities ............................ -- --
------- -------
3,526 4,459
------- -------
Long-term deferred income taxes:
Gross assets ................................. 7,842 220
Gross liabilities ............................ (6,393) (3,145)
------- -------
1,449 (2,925)
Valuation allowance .......................... (7,842) --
------- -------
(6,393) (2,925)
------- -------
Net deferred income tax (liability) asset ....... $(2,867) $ 1,534
---------------------------------------------------------------------
53
The valuation allowance against deferred tax assets at December 31,
2002 and 2001 are related to capital losses and net operating losses
from certain domestic and foreign subsidiaries. Certain state tax
statutes significantly limit the utilization of net operating losses
for domestic subsidiaries. Furthermore, these net operating losses
cannot be used to offset other subsidiaries net income.
The tax effect of significant temporary differences representing
deferred tax assets (liabilities) is as follows:
Year Ended December 31, 2002 2001
---------------------------------------------------------------------
Difference in financial reporting and income
tax depreciation methods ..................... $(1,914) $ 807
Reserves not currently deductible ............... 1,516 1,407
Capitalized software currently deductible for
tax purposes, net of amortization ............ (5,318) (4,666)
State deferred income taxes ..................... 271 9
Revenue and expense recognized in
different periods for financial reporting
and income tax purposes ...................... 1,735 3,258
Unrealized holding gain on investments .......... 1,027 719
Other, net ...................................... (184) --
------- -------
$(2,867) $ 1,534
---------------------------------------------------------------------
54
Note 12 - Segment Information:
The Company established its segments in accordance with SFAS 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 products and services, geographic areas, and major
customers.
The Company evaluates financial performance of its operating segments
based on Income from operations. During 2001, our operations and
organizational structures were realigned 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 following tables highlight certain financial information from
continuing operations about each of the Company's segments for the
years ended December 31, 2002, 2001, and 2000:
----------------------------------------------------------------------------------------------------------------
Private Investments General
Banking Investment Money In New And
2002 & Trust Advisors Enterprises Managers Businesses Administrative Total
----------------------------------------------------------------------------------------------------------------
Revenues $324,505 $149,181 $55,875 $46,220 $ 45,038 $620,819
-------- ------- ------- -------- --------
Operating
income (loss) $138,004 $ 78,009 $21,836 $ 8,864 $(14,710) $(22,184) $209,819
-------- -------- ------- ------- -------- -------- --------
Other income, net $ 13,229
--------
Income before
income taxes $223,048
--------
Depreciation and
amortization $ 10,935 $ 3,126 $ 1,077 $ 1,062 $ 1,310 $ 550 $ 18,060
-------- -------- ------- ------- -------- -------- --------
Capital
Expenditures $ 15,256 $ 5,237 $ 2,185 $ 1,910 $ 2,246 $ 1,260 $ 28,094
-------- -------- ------- ------- -------- -------- --------
Total assets $132,831 $ 52,989 $21,621 $16,963 $ 53,976 $185,767 $464,147
-------- -------- ------- ------- -------- -------- --------
55
Private Investments General
Banking Investment Money In New And
2001 & Trust Advisors Enterprises Managers Businesses Administrative Total
-----------------------------------------------------------------------------------------------------------
Revenues $360,069 $154,988 $64,522 $36,576 $ 41,858 $658,013
-------- -------- ------- ------- -------- --------
Operating
income (loss) $144,225 $ 61,060 $20,003 $ 4,944 $(23,589) $(23,457) $183,186
-------- -------- ------- ------- -------- -------- --------
Other income,
net $ 15,138
--------
Income before
income taxes $198,324
--------
Depreciation and
amortization $ 12,119 $ 3,349 $ 1,164 $ 977 $ 1,362 $ 679 $ 19,650
-------- -------- ------- ------- -------- -------- --------
Capital
Expenditures $ 22,638 $ 6,523 $ 3,121 $ 2,099 $ 3,621 $ 2,340 $ 40,342
-------- -------- ------- ------- -------- -------- --------
Total assets $112,120 $ 41,381 $37,576 $28,059 $ 50,036 $191,744 $460,916
-------- -------- ------- ------- -------- -------- --------
Private Investments General
Banking Investment Money In New And
2000 & Trust Advisors Enterprises Managers Businesses Administrative Total
-----------------------------------------------------------------------------------------------------------
Revenues $338,416 $133,959 $55,034 $32,349 $ 39,048 $598,806
-------- -------- ------- ------- -------- --------
Operating
income (loss) $130,522 $ 44,510 $10,365 $ 2,556 $(23,155) $(16,839) $147,959
-------- -------- ------- ------- -------- -------- --------
Other income,
Net $ 11,659
--------
Income before
income taxes $159,618
--------
Depreciation and
amortization $ 10,807 $ 2,970 $ 1,020 $ 860 $ 1,137 $ 511 $ 17,305
-------- -------- ------- ------- -------- -------- --------
Capital
Expenditures $ 16,462 $ 3,809 $ 1,404 $ 1,148 $ 2,039 $ 2,326 $ 27,188
-------- -------- ------- ------- -------- -------- --------
Total Assets $ 93,510 $ 22,648 $35,178 $23,760 $ 33,418 $167,068 $375,582
======== ======== ======= ======= ======== ======== ========
-----------------------------------------------------------------------------------------------------------
General and Administrative consists of expenses and assets
attributable to corporate overhead groups that are not allocated to
the operating segments for internal financial reporting purposes.
Unallocated assets primarily consist of cash and cash equivalents,
deferred tax assets, the investment in LSV, and certain other shared
services assets.
56
The following table presents the details of other income (expense):
For the Year Ended December 31, 2002 2001 2000
-----------------------------------------------------------------------------
Equity in the earnings of
unconsolidated affiliate.................... $12,652 $10,342 $ 7,533
Net loss on investments (2,360) -- --
Interest income................................ 5,200 6,945 6,419
Interest expense............................... (2,263) (2,149) (2,293)
------- ------- -------
$13,229 $15,138 $11,659
-----------------------------------------------------------------------------
The following table presents revenues by country based on the location
of the use of the products or services:
For the Year Ended December 31, 2002 2001 2000
--------------------------------------------------------------------------------
United States.................................. $578,458 $617,108 $559,574
International operations....................... 42,361 40,905 39,232
-------- -------- --------
$620,819 $658,013 $598,806
--------------------------------------------------------------------------------
The following table presents assets based on its location:
2002 2001 2000
--------------------------------------------------------------------------------
United States.................................. $417,061 $418,550 $354,695
International operations....................... 47,086 42,366 20,887
-------- -------- --------
$464,147 $460,916 $375,582
--------------------------------------------------------------------------------
Note 13 - Related Party Transactions:
The Company, either by itself or through its wholly owned
subsidiaries, is a party to Investment Advisory and Administration
Agreements with several regulated investment companies ("RICs"), which
are administered by the Company. Shares of the RICs are offered to
clients of the Company and its subsidiaries. Under the Investment
Advisory and Administration Agreements, The Company receives a fee for
providing investment advisory, administrative, and accounting services
to the RICs. The investment advisory and administration fee is a fixed
percentage, referred to as basis points, of the average daily net
asset value of each RIC, subject to certain limitations. Investment
advisory and administration fees received by the Company totaled
$261,879, $299,108, and $246,308, in 2002, 2001, and 2000,
respectively. The Company is also a party to Distribution Agreements
with several RICs, which are advised and/or administered by the
Company. The Company receives a fee from the RICs for providing
distribution services pursuant to the provisions of various Rule 12b-1
Plans adopted by the RICs. These distribution fees totaled $44,952,
$49,209 and $41,129 in 2002, 2001, and 2000, respectively.
57
Note 14 - Quarterly Financial Data (Unaudited):
For the Three Months Ended
-----------------------------------------
2002 March 31 June 30 Sept. 30 Dec. 31
---------------------------------------------------------------------------------------
Revenues................................... $159,215 $158,851 $153,316 $149,437
Income before income taxes................. $ 53,970 $ 56,760 $ 56,715 $ 55,603
Net income................................. $ 34,001 $ 35,759 $ 35,731 $ 35,029
Basic earnings per common share............ $ .31 $ .33 $ .33 $ .33
Diluted earnings per common share.......... $ .30 $ .31 $ .32 $ .32
---------------------------------------------------------------------------------------
For the Three Months Ended
-----------------------------------------
2001 March 31 June 30 Sept. 30 Dec. 31
---------------------------------------------------------------------------------------
Revenues................................... $161,301 $168,480 $163,403 $164,829
Income before income taxes................. $ 45,570 $ 49,471 $ 50,621 $ 52,662
Net income................................. $ 28,709 $ 31,167 $ 31,891 $ 33,177
Basic earnings per common share............ $ .26 $ .29 $ .29 $ .31
Diluted earnings per common share.......... $ .25 $ .27 $ .28 $ .29
---------------------------------------------------------------------------------------
A portion of the Company's total personnel costs are paid in the form
of incentive and sales compensation tied to performance objectives.
Performance objectives, which may include financial and non-financial
goals, are established each year at the Company and business unit
levels. Incentive and sales compensation costs are charged to expense
throughout the year based on estimates of annual performance and
adjusted in the fourth quarter after the actual achievement of
performance objectives are determined.
58
SEI INVESTMENTS COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
Additions
---------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Year Expenses Accounts (Deductions) of Year
------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
2002 $1,700 $ -- $-- $-- $1,700
2001 $1,700 $ -- $-- $-- $1,700
2000 $1,700 $ -- $-- $-- $1,700
Deferred income tax valuation allowance:
2002 $6,022 $1,820 $-- $-- $7,842
59
Item 9. Changes in and disagreements with Accountants on Accounting
and Financial Disclosure.
On June 18, 2002, we filed a Current Report on Form 8-K reporting that
on June 14, 2002, at the direction of our Board of Directors, acting
upon the recommendation of the Audit Committee, we dismissed Arthur
Andersen LLP as our independent public accountants and appointed
PricewaterhouseCoopers LLP to serve as our independent public
accountants for the fiscal year 2002.
60
PART III
Item 10. Directors and Executive Officers of the Registrant.
Certain information required by this item is hereby incorporated by reference to
the Company's definitive proxy statement for its 2003 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after December 31, 2002 pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "2003 Proxy Statement").
The executive officers of the Company are as follows:
ALFRED P. WEST, JR., 60, has been the Chairman of the Board of Directors and
Chief Executive Officer of the Company since its inception in 1968. Mr. West was
President from June 1979 to August 1990.
CARMEN V. ROMEO, 59, has been an employee of the Company since March 1977. Mr.
Romeo has been an Executive Vice President since December 1985 and a Director
since June 1979. Mr. Romeo was Treasurer and Chief Financial Officer from June
1979 to September 1996.
CARL A. GUARINO, 45, has been an employee of the Company since April 1988. Mr.
Guarino has been an Executive Vice President since March 2000 and a Senior Vice
President since April 1988. Mr. Guarino was General Counsel from April 1988 to
January 1994.
EDWARD D. LOUGHLIN, 52, has been an employee of the Company since September
1979. Mr. Loughlin has been an Executive Vice President since May 1993 and a
Senior Vice President since January 1988.
DENNIS J. MCGONIGLE, 42, has been an employee of the Company since August 1985.
Mr. McGonigle has been the Chief Financial Officer since December 2002 and an
Executive Vice President since July 1996 and a Senior Vice President since May
1995.
WAYNE M. WITHROW, 47, has been an employee of the Company since January 1990.
Mr. Withrow has been an Executive Vice President and Chief Information Officer
since March 2000 and a Senior Vice President since January 1994.
KEVIN P. ROBINS, 41, has been an employee of the Company since September 1992.
Mr. Robins has been a Senior Vice President since January 1994. Mr. Robins was
General Counsel from January 1994 to March 2000.
TODD B. CIPPERMAN, 37, has been an employee of the Company since April 1995. Mr.
Cipperman has been a Senior Vice President and General Counsel since March 2000.
KATHY HEILIG, 44, has been an employee of the Company since November 1987. Ms.
Heilig has been Chief Accounting Officer and Controller since May 1999 and
Treasurer since May 1997.
MARK SAMUELS, 55, has been an employee of the Company since September 1992. Mr.
Samuels has been a Senior Vice President since May 2001 and Director of
Communications and Marketing since May 2000.
ROBERT F. CRUDUP, 55, has been an employee of the Company since 1987. Mr. Crudup
has been a Executive Vice President since January 2001.
JUDITH E. TSCHIRGI, 49, has been an employee of the Company since May 1995. Ms.
Tschirgi has been a Senior Vice President since January 2001.
JOSEPH P. UJOBAI, 41, has been an employee of the Company since May 1998. Mr.
Ujobai has been a Senior Vice President since January 2001.
MARK NAGLE, 43, has been an employee of the Company since November 1996. Mr.
Nagle has been a Senior Vice President since January 2001.
KENNETH G. ZIMMER, 46, has been an employee of the Company since April 1982. Mr.
Zimmer has been a Senior Vice President since January 2001.
61
Item 11. Executive Compensation.
The information called for in this item is hereby incorporated by reference to
the 2003 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for in this item is hereby incorporated by reference to
the 2003 Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information called for in this item is hereby incorporated by reference to
the 2003 Proxy Statement.
Item 14. Controls and Procedures
Within 90 days prior to the date of filing this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the
design and operation of our disclosure controls and procedures. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures have been designed and are
functioning effectively to provide reasonable assurance that the information
required to be disclosed by us in reports filed under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. A controls system, no matter how
well designed and operated, cannot provide absolute assurance that the
objectives of the controls systems are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected. Subsequent to the date of the most
recent evaluation of our internal controls, there were no significant changes in
our internal controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.
62
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1 and 2. Financial Statements and Financial Statement Schedules. The
following is a list of the Consolidated Financial Statements of
the Company and its subsidiaries and supplementary data filed as
part of Item 8 hereof:
Report of Independent Public Accountants
Consolidated Balance Sheets -- December 31, 2002 and 2001
Consolidated Statements of Operations -- For the years ended
December 31, 2002, 2001, and 2000
Consolidated Statements of Shareholders' Equity -- For the
years ended December 31, 2002, 2001, and 2000
Consolidated Statements of Cash Flows -- For the years ended
December 31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable,
or not required, or because the required information is included
in the Consolidated Financial Statements or notes thereto.
3. Exhibits, Including Those Incorporated by Reference. The exhibits
to this Report are listed on the accompanying index to exhibits
and are incorporated herein by reference or are filed as part of
this annual report on Form 10-K.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the quarter ended December 31, 2002.
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 March 27, 2003 By /s/ Dennis McGonigle
-----------------------------
Dennis McGonigle
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on dates indicated.
Date March 27, 2003 By /s/ Alfred P. West, Jr.
-----------------------------
Alfred P. West, Jr.
Chairman of the Board,
Chief Executive Officer,
and Director
Date March 27, 2003 By /s/Carmen V. Romeo
-----------------------------
Carmen V. Romeo
Executive Vice President and
Director
Date March 27, 2003 By /s/ Richard B. Lieb
-----------------------------
Richard B. Lieb
Director
Date March 27, 2003 By /s/ William M. Doran
-----------------------------
William M. Doran
Director
Date March 27, 2003 By /s/ Henry H. Porter, Jr.
-----------------------------
Henry H. Porter, Jr.
Director
Date March 27, 2003 By /s/ Kathryn M. McCarthy
-----------------------------
Kathryn M. McCarthy
Director
Date March 27, 2003 By /s/ Sarah Blumenstein
-----------------------------
Sarah Blumenstein
Director
64
I, Alfred P. West Jr., certify that:
1. I have reviewed this annual report on Form 10-K of SEI Investments Company;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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 annual
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: March 27, 2003
/s/ Alfred P. West, Jr.
- ------------------------------------
Alfred P. West, Jr.
Chairman and Chief Executive Officer
65
I, Dennis J. McGonigle, certify that:
1. I have reviewed this annual report on Form 10-K of SEI Investments Company;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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 annual
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: March 27, 2003
/s/ Dennis J. McGonigle
- ------------------------------------
Dennis J. McGonigle
Chief Financial Officer
66
Written Statement of Chairman and Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Alfred P. West, Jr., Chairman and Chief Executive Officer, and Dennis J
McGonigle, Chief Financial Officer, of SEI Investments Company; a Pennsylvania
corporation (the "Company"), hereby certify that, based on our knowledge:
(a) The Annual Report on Form 10-K of the Company for the year ended
December 31, 2002 filed on the date hereof with the Securities and
Exchange Commission (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934; and
(b) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Alfred P. West, Jr.
------------------------------------
Alfred P. West, Jr.
Chairman and Chief Executive Officer
March 27, 2003
/s/ Dennis J. McGonigle
------------------------------------
Dennis J. McGonigle
Chief Financial Officer
March 27, 2003
67
EXHIBIT INDEX
The following is a list of exhibits filed as part of this annual report on Form
10-K. For exhibits incorporated by reference, the location of the exhibit in the
previous filing is indicated in parentheses.
3.1 Articles of Incorporation of the Registrant as amended on January
21, 1983. (Incorporated by reference to exhibit 3.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1982.)
3.1.2 Amendment to Articles of Incorporation of the Registrant, dated
May 21, 1992. (Incorporated by reference to exhibit 3.1.2 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992.)
3.1.3 Amendment to Articles of Incorporation of the Registrant, dated
May 26, 1994. (Incorporated by reference to exhibit 3.1.3 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.)
3.1.4 Amendment to Articles of Incorporation of the Registrant, dated
November 21, 1996. (Incorporated by reference to exhibit 3.1.4 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996.)
3.1.5 Amendment to Articles of Incorporation of the Registrant, dated
February 14, 2001. (Incorporated by reference to exhibit 3.1.4 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.)
3.2 By-Laws. (Incorporated by reference to exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1983.)
3.2.1 Amendment to By-Laws, dated December 19, 1988. (Incorporated by
reference to exhibit 3.2.1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988.)
3.2.2 Amendment to By-Laws, dated July 12, 1990. (Incorporated by
reference to exhibit 3.2.2 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1990.)
4.1 Form of Certificate for Shares of Common Stock. (Incorporated by
reference to exhibit 4.1 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988.)
4.2 Rights Agreement dated December 10, 1998. (Incorporated by
reference to exhibit 4.2 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998.)
Note: Exhibits 10.1 through 10.9 constitute the management
contracts and executive compensatory plans or arrangements in
which certain of the directors and executive officers of the
Registrant participate.
10.1 Stock Option Plan, Amended, Restated and Renewed as of February
11, 1997. (Incorporated by reference to exhibit 99(a) to the
Registrant's Registration Statement on Form S-8 (No. 333-63709)
filed September 18, 1998.)
10.1.1 1997 Stock Option Plan. (Incorporated by reference to exhibit
99(b) to the Registrant's Registration Statement on Form S-8 (No.
333-63709) filed September 18, 1998.)
10.1.2 1997 Option Share Deferral Plan. (Incorporated by reference to
exhibit 99(c) to the Registrant's Registration Statement on Form
S-8 (No. 333-63709) filed September 18, 1998.)
10.1.3 1998 Equity Compensation Plan. (Incorporated by reference to
exhibit 99(f) to the Registrant's Registration Statement on Form
S-8 (No. 333-63709) filed September 18, 1998.)
10.1.4 First Amendment to the 1998 Equity Compensation Plan.
(Incorporated by reference to exhibit 10.1.4 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1999.)
10.2 Employee Stock Ownership Plan. (Incorporated by reference to
exhibit 10.3 (b) to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1985.)
10.3 Employee Stock Purchase Plan, Amended and Restated as of May 8,
1991. (Incorporated by reference to exhibit 10.3 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.)
10.3.1 Employee Stock Purchase Plan as Amended and Restated on October
15, 1997. (Incorporated by reference to exhibit 99(e) to the
Registrant's Registration Statement on Form S-8 (No. 333-63709)
filed September 18, 1998.)
10.4 SEI Capital Accumulation Plan. (Incorporated by reference to
exhibit 99(e) to the Registrant's Registration Statement on Form
S-8 (No. 333-41343) filed December 2, 1997.)
10.5 Stock Option Plan for Non-Employee Directors. (Incorporated by
reference to exhibit 10.12 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988.)
68
10.5.1 Amendment 1997-1 to the Stock Option Plan for Non-Employee
Directors. (Incorporated by reference to exhibit 10.5.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997.)
10.5.2 1997 Option Share Deferral Plan for Non-Employee Directors.
(Incorporated by reference to exhibit 99(d) to the Registrant's
Registration Statement on Form S-8 (No. 333-63709) filed
September 18, 1998.)
10.6 Employment Agreement, dated May 25, 1979, between Alfred P. West,
Jr. and the Registrant. (Incorporated by reference to exhibit
10.7 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990.)
10.7 Employment Agreement, dated January 21, 1987, between Gilbert L.
Beebower and the Registrant. (Incorporated by reference to
exhibit 10.8 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1990.)
10.8.1 Employment Agreement, dated July 1, 1987, between Richard B. Lieb
and the Registrant. (Incorporated by reference to exhibit 10.9 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990.)
10.8.2 Stock Option Agreement, dated February 23, 1989, between Richard
B. Lieb and a subsidiary of the Registrant, as amended.
(Incorporated by reference to exhibit 10.8.2 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1992.)
10.9 Summary of Company Bonus Plan for Senior Management.
(Incorporated by reference to exhibit 10.9 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1993.)
10.11 Directors and Officers Liability Insurance Policy. (Incorporated
by reference to exhibit 10.9 to the Registrant's Registration
Statement on Form S-8 (No.2-78133) filed June 25, 1982.)
10.12 Lease Agreement, dated as of January 1, 1990, between The Canada
Life Assurance Company and the Registrant. (Incorporated by
reference to exhibit 10.11 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990.)
10.13 Lease Agreement, dated as of May 1, 1991, between Two North
Riverside Plaza Joint Venture and the Registrant. (Incorporated
by reference to exhibit 10.11 to the Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1991.)
10.14 Credit Agreement, dated December 21, 2001 between PNC Bank,
National Association and the registrant. (Incorporated by
reference to exhibit 10.19 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.)
10.16 Master Lease Agreement, dated December 29, 1989, between
Varilease Corporation and the Registrant, as amended.
(Incorporated by reference to exhibit 10.14 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1992.)
10.17 Note Purchase Agreement, dated as of February 24, 1997, with
respect to the issuance by the Registrant of $20,000,000 7.20%
Senior Notes, Series A, due February 24, 2007, and $15,000,000
7.27% Senior Notes, Series B, due February 24, 2012.
(Incorporated by reference to exhibit 10.17 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31,
1996.)
10.17.1 First Amendment, dated December 15, 1998, to Note Purchase
Agreement, dated February 24, 1997. (Incorporated by reference to
exhibit 10.17.1 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.)
10.17.2* Second Amendment, dated February 19, 2003, to Note Purchase
Agreement, dated February 24, 1997. (Page 70).
10.18 Term Loan Agreement, dated June 26, 2001 between Firstar Bank,
National Association and the registrant. (Incorporated by
reference to exhibit 10.18 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.)
21* Subsidiaries of the Registrant. (Page 78)
23.1* Consent of Independent Public Accountants. (Page 81)
23.2* Notice regarding lack of consent of Arthur Andersen LLP. (Page
83)
99.1 * Miscellaneous exhibit. (Page 85)
99.2 Miscellaneous exhibit. (Incorporated by reference to exhibit 99.2
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2001.)
* Filed herewith as an exhibit to this Form 10-K.
69