SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)*
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- ---
Act of 1934 for the quarterly period ended March 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 _________
0-10200
- -------------------------------------------------------------------------------
(Commission File Number)
SEI INVESTMENTS COMPANY
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1707341
- ----------------------------------------- ---------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1 Freedom Valley Drive, Oaks, Pennsylvania 19456-1100
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(610) 676-1000
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
-
*APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes__ No __
*APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 2002: 109,714,895 shares of common stock, par
value $.01 per share.
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Consolidated Financial Statements
- ------- ---------------------------------
Consolidated Balance Sheets
---------------------------
(In thousands)
March 31, 2002 December 31, 2001
-------------- ------------------
(unaudited)
Assets
- ------
Current Assets:
Cash and cash equivalents $ 176,504 $ 163,685
Restricted cash 10,000 10,000
Receivables from regulated investment companies 24,236 25,550
Receivables, net of allowance for doubtful
accounts of $1,700 63,108 56,327
Deferred income taxes 3,864 4,459
Prepaid expenses and other current assets 7,156 6,121
--------- --------
Total Current Assets 284,868 266,142
------- -------
Property and Equipment, net of accumulated
depreciation and amortization of $99,080
and $95,104 101,409 95,804
-------- --------
Capitalized Software, net of accumulated
amortization of $13,902 and $13,469 10,622 11,055
-------- --------
Investments Available for Sale 68,250 66,332
-------- --------
Other Assets, net 24,111 21,583
-------- --------
Total Assets $ 489,260 $ 460,916
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
2
Consolidated Balance Sheets
---------------------------
(In thousands, except par value)
March 31, 2002 December 31, 2001
-------------- -----------------
(unaudited)
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
Current portion of long-term debt $ 9,556 $ 7,556
Accounts payable 3,779 4,977
Accrued expenses 117,259 128,408
Deferred revenue 2,636 3,402
-------- --------
Total Current Liabilities 133,230 144,343
-------- -------
Long-term Debt 37,667 43,055
-------- --------
Deferred Income Taxes 2,860 2,925
-------- --------
Shareholders' Equity:
Common stock, $.01 par value, 750,000 shares
authorized; 109,715 and 109,180 shares issued
and outstanding 1,097 1,092
Capital in excess of par value 197,268 186,390
Retained earnings 118,929 85,085
Accumulated other comprehensive losses (1,791) (1,974)
-------- --------
Total Shareholders' Equity 315,503 270,593
-------- --------
Total Liabilities and Shareholders' Equity $489,260 $460,916
======= ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
Consolidated Statements of Income
---------------------------------
(unaudited)
(In thousands, except per share data)
Three Months
-----------------------
Ended March 31,
-----------------------
2002 2001
---- ----
Revenues $159,215 $161,301
Expenses:
Operating and development 68,736 76,029
Sales and marketing 34,148 38,256
General and administrative 5,709 5,383
-------- --------
Income from operations 50,622 41,633
Equity in the earnings of unconsolidated affiliate 2,679 2,238
Interest income 1,150 2,249
Interest expense (481) (550)
-------- --------
Income before income taxes 53,970 45,570
Income taxes 19,969 16,861
-------- -------
Net income 34,001 28,709
-------- -------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (381) (232)
Unrealized holding gain on investments,
net of income tax benefit of $166 and $123 564 210
-------- --------
Other comprehensive income (loss) 183 (22)
-------- --------
Comprehensive income $ 34,184 $ 28,687
======== ========
Basic earnings per common share $ .31 $ .26
======== ========
Diluted earnings per common share $ .30 $ .25
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
Consolidated Statements of Cash Flows
-------------------------------------
(unaudited)
(In thousands)
Three Months
---------------------------------
Ended March 31,
---------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 34,001 $ 28,709
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 4,433 4,735
Equity in the earnings of unconsolidated affiliate (334) (102)
Tax benefit on stock options exercised 6,771 13,809
Other (3,036) 1,114
Change in current assets and liabilities:
Decrease (increase) in
Receivables from regulated investment companies 1,314 (496)
Receivables (6,781) (7,038)
Prepaid expenses and other current assets (1,035) (771)
Increase (decrease) in
Accounts payable (1,198) (728)
Accrued expenses (5,689) (15,782)
Deferred revenue (766) (4,521)
---------- ----------
Net cash provided by operating activities 27,680 18,929
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (9,601) (8,915)
Purchase of investments available for sale (6,564) (11,794)
Sale of investments available for sale 6,065 1,130
Other 132 (1,421)
---------- ----------
Net cash used in investing activities (9,968) (21,000)
---------- ----------
Cash flows from financing activities:
Payment on long-term debt (3,388) (2,000)
Purchase and retirement of common stock (164) (46,249)
Proceeds from issuance of common stock 4,119 7,261
Payment of dividends (5,460) (4,347)
---------- ----------
Net cash used in financing activities (4,893) (45,335)
---------- ----------
Net increase (decrease) in cash and cash equivalents 12,819 (47,406)
Cash and cash equivalents, beginning of period 163,685 147,676
---------- ----------
Cash and cash equivalents, end of period $ 176,504 $ 100,270
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
5
Notes to Consolidated Financial Statements
------------------------------------------
(all figures are in thousands except per share data)
Note 1. Summary of Significant Accounting Policies
------------------------------------------
Nature of Operations
--------------------
SEI Investments Company (the "Company") is organized around its
five primary target markets: Private Banking & Trust, Investment
Advisors, Enterprises, Money Mangers, and Investments in New
Businesses. Private Banking & Trust provides investment processing
solutions, fund processing solutions and investment management
programs to banks and private trust companies. Investment Advisors
provides investment management programs and investment processing
solutions to affluent investors through a network of financial
intermediaries, independent investment advisors and other
investment professionals. Enterprises provide retirement and
treasury business solutions for corporations, unions, foundations
and endowments, and other institutional investors. Money Managers
provides investment solutions to U.S. investment managers, mutual
fund companies and alternative investment managers worldwide.
Investments in New Businesses include the Company's global asset
management businesses as well as initiatives into new U.S.
markets.
Summary Financial Information and Results of Operations
-------------------------------------------------------
In the opinion of the Company, the accompanying unaudited
Consolidated Financial Statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to
present fairly the financial position as of March 31, 2002 and the
results of operations and cash flows for the three months ended
March 31, 2002 and 2001.
Interim Financial Information
-----------------------------
While the Company believes that the disclosures presented are
adequate to make the information not misleading, these
Consolidated Financial Statements should be read in conjunction
with the Consolidated Financial Statements and the Notes to the
Consolidated Financial Statements included in the Company's latest
annual report on Form 10-K.
Principles of Consolidation
---------------------------
The Consolidated Financial Statements include the accounts of the
Company and its wholly owned subsidiaries. The Company's principal
subsidiaries are SEI Investments Distribution Company (SIDCO), SEI
Investments Management Corporation (SIMC), and SEI Private Trust
Company (SPTC). All intercompany accounts and transactions have
been eliminated. Investment in unconsolidated affiliate is
accounted for using the equity method due to the Company's less
than 50 percent ownership. The Company's portion of the
affiliate's operating results is reflected in Equity in the
earnings of unconsolidated affiliate on the accompanying
Consolidated Statements of Income (See Note 6).
Property and Equipment
----------------------
Property and equipment on the accompanying Consolidated Balance
Sheets consist of the following:
Estimated
Useful Lives
March 31, 2002 December 31, 2001 (In Years)
-------------- ----------------- ----------
Equipment $ 76,643 $ 74,809 3 to 5
Buildings 44,981 44,981 25 to 39
Land 9,345 9,345 N/A
Purchased software 19,937 18,952 3
Furniture and fixtures 14,946 14,748 3 to 5
Leasehold improvements 7,489 7,492 Lease Term
Construction in progress 27,148 20,581 N/A
-------- --------
200,489 190,908
Less: Accumulated depreciation
and amortization (99,080) (95,104)
-------- --------
Property and Equipment, net $101,409 $ 95,804
======== ========
6
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the
estimated useful life of each asset. Expenditures for renewals and
betterments are capitalized, while maintenance and repairs are
charged to expense when incurred.
Capitalized Software
--------------------
The Company accounts for software development costs in accordance
with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased,
or Otherwise Marketed" ("SFAS 86"). Under SFAS 86, costs incurred
to create a computer software product are charged to research and
development expense as incurred until technological feasibility
has been established. The Company establishes technological
feasibility upon completion of a detail program design. At that
point, computer software costs are capitalized until the product
is available for general release to customers. The establishment
of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs require
considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated
future revenues, estimated economic life, and changes in
technology. Amortization begins when the product is released.
Capitalized software development costs are amortized on a
product-by-product basis using the straight-line method over the
estimated economic life of the product or enhancement, which is
primarily three to ten years, with a weighted average remaining
life of approximately 6.4 years.
Earnings per Share
------------------
The Company computes earnings per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). Pursuant to SFAS 128, dual presentation of
basic and diluted earnings per common share is required on the
face of the statements of income for companies with complex
capital structures. Basic earnings per common share is calculated
by dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the
period. Diluted earnings per common share reflects the potential
dilution from the exercise or conversion of securities into common
stock, such as stock options.
For the Three month period ended
March 31, 2002
--------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Basic earnings per common share $34,001 109,396 $.31
===
Dilutive effect of stock options -- 5,588
------- -------
Diluted earnings per common share $34,001 114,984 $.30
======= ======= ===
For the Three month period ended
March 31, 2001
-------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
Basic earnings per common share $28,709 108,600 $.26
===
Dilutive effect of stock options -- 7,218
------- -------
Diluted earnings per common share $28,709 115,818 $.25
======= ======= ===
7
Options to purchase 2,715 and 1,249 shares of common stock, with an
average exercise price of $46.09 and $50.00, were outstanding during
the first quarter of 2002 and 2001, respectively, but were excluded
from the diluted earnings per common share calculation because the
options' exercise prices were greater than the average market price of
the Company's common stock.
Statements of Cash Flows
------------------------
For purposes of the Consolidated Statements of Cash Flows, the Company
considers investment instruments purchased with an original maturity
of three months or less to be cash equivalents.
Supplemental disclosures of cash paid/received during the three months
ended March 31 is as follows:
2002 2001
---- ----
Interest paid $ 989 $ 1,061
Interest and dividends received $ 1,244 $ 2,508
Income taxes paid $ 56 --
Management's Use of Estimates
-----------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the Unites States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Note 2. Comprehensive Income - The Company computes comprehensive income in
--------------------
accordance with Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and presentation of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements that is presented with equal
prominence as other financial statements. Comprehensive income
includes net income, foreign currency translation adjustments, and
unrealized holding gains and losses and is presented on the
accompanying Consolidated Statements of Income. Accumulated other
comprehensive losses on the Consolidated Balance Sheets is the change
from December 31, 2001 to March 31, 2002 as follows:
Foreign Unrealized Accumulated
Currency Holding Other
Translation Gains(Losses) Comprehensive
Adjustments on Investments Losses
----------- -------------- -------------
Beginning balance (Dec 31, 2001) $ (978) $ (996) $ (1,974)
Current period change (381) 564 183
----------- -------------- -------------
Ending Balance (March 31, 2002) $ (1,359) $ (432) $ (1,791)
=========== ============== =============
Note 3. Receivables - Receivables on the accompanying Consolidated Balance
-----------
Sheets consist of the following:
March 31, 2002 December 31, 2001
-------------- -----------------
Trade receivables $ 25,428 $ 26,415
Fees earned, not received 1,369 2,527
Fees earned, not billed 38,011 29,085
-------- --------
64,808 58,027
Less: Allowance for doubtful accounts (1,700) (1,700)
-------- --------
$ 63,108 $ 56,327
======== ========
8
Fees earned, not received represent brokerage commissions earned but
not yet collected. Fees earned, not billed represent receivables
earned but unbilled and result from timing differences between
services provided and contractual billing schedules.
Receivables from regulated investment companies on the accompanying
Consolidated Balance Sheets represent fees collected from the
Company's wholly owned subsidiaries, SIDCO and SIMC, for distribution,
investment advisory, and administration services provided by these
subsidiaries to various regulated investment companies sponsored by
the Company.
Note 4. Investments Available for Sale - Investments available for sale
------------------------------
consist of investments in mutual funds sponsored by the Company. The
Company accounts for investments in marketable securities pursuant to
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS
115 requires that debt and equity securities classified as available
for sale be reported at market value. Unrealized holding gains and
losses, net of income taxes, are reported as a separate component of
comprehensive income. Realized gains and losses, as determined on a
specific identification basis, are reported separately on the
accompanying Consolidated Statements of Income.
Investments available for sale at March 31, 2002 had an aggregate cost
of $67,316 and an aggregate market value of $68,250 with gross
unrealized holding gains of $934. At that date, the net unrealized
holding gains of $432 (net of income tax expense of $502) were
reported as a separate component of Accumulated other comprehensive
losses on the accompanying Consolidated Balance Sheets.
Investments available for sale at December 31, 2001 had an aggregate
cost of $67,996 and an aggregate market value of $66,332 with gross
unrealized holding losses of $1,664. At that date, the net unrealized
holding losses of $996 (net of income tax benefit of $668) were
reported as a separate component of Accumulated other comprehensive
losses on the accompanying Consolidated Balance Sheets.
Note 5. Derivative Instruments and Hedging Activities - The Company is exposed
---------------------------------------------
to market risk associated with its designated Investments available
for sale. To provide some protection against potential market
fluctuations associated with its investments available for sale the
Company has entered into various derivative financial transactions in
the form of futures and equity contracts (i.e. derivatives).
The Company accounts for its derivatives in accordance with Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133" ) and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133", ("SFAS 138").
The Company recognizes all derivatives on the balance sheet at fair
value. On the date the derivative instrument is entered into, the
Company generally designates the derivative as a hedge of the fair
value of a recognized asset. Changes in the fair value of a derivative
that is designated as, and meets all the required criteria for, a fair
value hedge, along with the gain or loss on the hedged asset that is
attributable to the hedged risk, are recorded in current period
earnings. The portion of the change in fair value of a derivative
associated with hedge ineffectiveness or the component of a derivative
instrument excluded from the assessment of hedge effectiveness is
recorded currently in earnings. Also, changes in the entire fair value
of a derivative that is not designated as a hedge are recognized
immediately in earnings. The Company formally documents all
relationships between hedging instruments and hedged items, as well as
its risk-management objective and strategy for undertaking various
hedge transactions. This process includes relating all derivatives
that are designated as fair value hedges to specific assets on the
balance sheet.
The Company also formally assesses, both at the inception of the hedge
and on an ongoing basis, whether each derivative is highly effective
in offsetting changes in fair values of the hedged item. If it is
determined that a derivative is not highly effective as a hedge or if
a derivative ceases to be a highly effective hedge, the Company will
discontinue hedge accounting prospectively.
At March 31, 2002, operating and development expenses on the
accompanying Consolidated Statements of Operations include a net gain
of $351 from hedge ineffectiveness.
9
The Company currently holds futures contracts with a notional
amount of $10,411 with a financial institution for various terms.
The Company also currently holds equity derivatives with a
notional amount of $20,304 with a financial institution with
various terms. During the period ending March 31, 2002, the
Company did not enter into or hold derivative financial
instruments for trading purposes.
Note 6. Other Assets - Other assets on the accompanying Consolidated
------------
Balance Sheets consist of the following:
March 31, 2002 December 31,2001
-------------- ----------------
Investment in unconsolidated affiliate $ 6,367 $ 6,033
Other, net 17,744 15,550
------- -------
Other assets $24,111 $21,583
======= =======
Other, net consists of long-term prepaid expenses, deposits and
other investments carried at cost.
Investment in Unconsolidated Affiliate - LSV Asset Management
--------------------------------------
("LSV") is a partnership formed between the Company and several
leading academics in the field of finance. LSV is a registered
investment advisor, which provides investment advisory services to
institutions, including pension plans and investment companies.
LSV is currently the portfolio manager for a number of
Company-sponsored mutual funds. The Company's interest in LSV was
approximately 44 percent for the first quarter of 2002 and 45
percent for the first quarter of 2001. LSV is accounted for using
the equity method of accounting due to the Company's less than 50
percent ownership. The Company's portion of LSV's net earnings is
reflected in Equity in the earnings of unconsolidated affiliate on
the accompanying Consolidated Statements of Income.
The following table contains the condensed statements of income of
LSV for the three months ended March 31:
2002 2001
---- ----
Revenues $8,591 $6,952
===== =====
Net income $6,111 $5,028
===== =====
The following table contains the condensed balance sheets of LSV:
March 31, 2002 December 31, 2001
-------------- -----------------
Current assets $13,788 $13,394
Non-current assets 79 89
------ ------
Total assets $13,867 $13,483
====== ======
Current liabilities $ 1,081 $ 1,686
Partners' capital 12,786 11,797
------ ------
Total liabilities and
partners' capital $13,867 $13,483
====== ======
10
Note 7. Accrued Expenses - Accrued expenses on the accompanying
----------------
ConsolidatedBalance Sheets consist of the following:
March 31, 2002 December 31, 2001
-------------- -----------------
Accrued compensation $ 23,935 $ 39,542
Accrued income taxes 18,615 5,871
Accrued proprietary fund services 12,072 12,463
Accrued brokerage services 7,708 8,456
Accrued consulting services 6,830 6,980
Other accrued expenses 48,099 55,096
------ -------
Total accrued expenses $117,259 $128,408
======= =======
Note 8. Line of Credit - The Company has a line of credit agreement with a
--------------
principle lending institution. The Agreement provides for
borrowings of up to $25,000 and expires on December 19, 2002, at
which time the outstanding principal balance, if any, becomes due
unless the Agreement is extended. The line of credit, when
utilized, accrues interest at the Prime rate or one and
one-quarter percent above the London Interbank Offer Rate (LIBOR).
The Company is obligated to pay a commitment fee equal to
one-quarter of one percent per annum on the average daily unused
portion of the commitment. Certain covenants under the Agreement
require the Company to maintain specified levels of net worth and
place certain restrictions on investments.
Note 9. Long-term Debt - On February 24, 1997, the Company signed a Note
--------------
Purchase Agreement authorizing the issuance and sale of $20,000 of
7.20% Senior Notes, Series A, and $15,000 of 7.27% Senior Notes,
Series B, (collectively, the "Notes") in a private offering with
certain financial institutions. The Notes are unsecured with final
maturities ranging from 10 to 15 years. The proceeds from the
Notes were used to repay the outstanding balance on the Company's
line of credit at that date. The Note Purchase Agreement, as
amended, contains various covenants, including limitations on
indebtedness, maintenance of minimum net worth levels, and
restrictions on certain investments. In addition, the agreement
limits the Company's ability to merge or consolidate, and to sell
certain assets.
Principal payments on the Notes are made annually from the date of
issuance while interest payments are made semi-annually. The
Company made its scheduled payment of $2,000 in February 2002. The
current portion of the Notes amounted to $4,000 at March 31, 2002.
On June 26, 2001 the Company entered into a loan agreement (the
"Agreement") with a separate lending institution. The agreement
provides for borrowing up to $25,000 in the form of a term loan,
and expires on March 31, 2006 and is payable in seventeen equal
quarterly installments. The term loan, when utilized, accrues
interest at the Prime rate or one and thirty-five hundredths of
one percent above the London Interbank Offer Rate (LIBOR). The
Agreement contains various covenants, including limitations on
indebtedness and restrictions on certain investments. None of
these covenants negatively affect the Company's liquidity or
capital resources. On August 2, 2001, the Company borrowed $25,000
on this term loan. The loan was necessary to support capital
improvement projects for our corporate campus and other business
purposes. The Company made its scheduled payment of $1,388 in
March 2002. The current portion of the notes amounted to $5,556 at
March 31, 2002. The Company was in compliance with all covenants
during the first quarter of 2002.
Note 10. Common Stock Buyback - The Board of Directors has authorized the
--------------------
purchase of the Company's common stock on the open market or
through private transactions of up to an aggregate of $503,365.
Through March 31, 2002, a total of 101,106 shares at an aggregate
cost of $458,604 have been purchased and retired. The Company
purchased four thousand shares at a total cost of $164 during the
three month period ended March 31, 2002.
11
The Company immediately retires its common stock when purchased.
Upon retirement, the Company reduces Capital in excess of par
value for the average capital per share outstanding and the
remainder is charged against Retained earnings. If the Company
reduces its Retained earnings to zero, any subsequent purchases of
common stock will be charged entirely to Capital in excess of par
value.
Note 11. Segment Information - The Company defines its business segments in
-------------------
accordance with Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the
way public business enterprises report financial information about
operating segments in financial statements. SFAS 131 also requires
additional disclosures about product and services, geographic
areas, and major customers. The company redefined its segments
during the second quarter 2001 and restated all prior periods to
conform with the current presentation.
The Company evaluates financial performance of its operating
segments based on Income from operations. Our operations and
organizational structures were realigned in 2001 into separate
business units that offer products and services tailored for
particular market segments. Our reportable segments are Private
Banking and Trust, Investment Advisors, Enterprises, Money
Managers, and Investments in New Businesses. The accounting
policies of the reportable segments are the same as those
described in Note 1. Financial information for periods prior to
2001 has been restated to conform to current year presentation.
The information in the following tables is derived from the
Company's internal financial reporting used for corporate
management purposes. The accounting policies of the reportable
segments are the same as those described in Note 1. The Company's
management evaluates financial performance of its operating
segments based on income before income taxes.
12
The following tables highlight certain unaudited financial
information about each of the Company's segments for the three
months ended March 31, 2002 and 2001.
Private Investments General
Banking Investment Money In New And
& Trust Advisors Enterprises Managers Businesses Administrative Total
------- -------- ----------- -------- ---------- -------------- -----
For the Three-Month Period Ended March 31, 2002
-------------------------------------------------------------------------------------------------
Revenues $82,958 $38,891 $14,732 $ 10,797 $ 11,837 $159,215
------- ------- ------- -------- -------- --------
Operating
income (loss) $33,825 $17,983 $ 5,388 $ 2,424 $ (3,289) $(5,709) $ 50,622
------- ------- ------- -------- -------- -------
Other income,
net $ 3,348
--------
Income before
income taxes $ 53,970
--------
Depreciation and
amortization $ 2,747 $ 738 $ 261 $ 243 $ 309 $ 135 $ 4,433
------- ------- ------- -------- -------- ------- --------
Capital
expenditures $ 5,055 $ 1,802 $ 862 $ 593 $ 642 $ 647 $ 9,601
------- ------- ------- -------- -------- ------- --------
Private Investments General
Banking Investment Money In New And
& Trust Advisors Enterprises Managers Businesses Administrative Total
------- -------- ----------- -------- ---------- -------------- -----
For the Three-Month Period Ended March 31, 2001
-------------------------------------------------------------------------------------------------
Revenues $89,422 $38,079 $15,908 $ 7,764 $10,128 $161,301
------- ------- ------- -------- ------- --------
Operating
income (loss) $33,670 $14,722 $ 4,138 $ (123) $(5,391) $(5,383) $ 41,633
------- ------- ------- -------- ------- -------
Other income,
net $ 3,937
--------
Income before
income taxes $ 45,570
--------
Depreciation and
amortization $ 3,027 $ 749 $ 218 $ 256 $ 320 $ 165 $ 4,735
------- ------- ------- -------- -------- ------- --------
Capital
expenditures $ 6,787 $ 764 $ 280 $ 275 $ 290 $ 519 $ 8,915
------- ------- ------- -------- -------- ------- --------
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations.
-------------
(In thousands, except asset balances and per share data)
This discussion reviews and analyzes the consolidated financial condition at
March 31, 2002 and 2001, the consolidated results of operations for the three
months ended March 31, 2002 and 2001 and other key factors that may affect
future performance. This discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements. Financial information on each of these segments is reflected in Note
11 of the Notes to Consolidated Financial Statements.
Results of Operations
- ---------------------
Three Months Ended March 31, 2002 compared to Three Months Ended March 31, 2001
Consolidated Overview
Our operations and organizational structures were realigned in 2001 into
business units that offer products and services tailored for particular market
segments. Our reportable segments are Private Banking and Trust, Investment
Advisors, Enterprises, Money Managers, and Investments in New Businesses. The
accounting policies of our business segments are the same as those used in
preparation of the consolidated financial statements. Management evaluates
financial performance of its operating segments based on Income from operations.
Financial information for the period ending March 31, 2001 has been restated to
conform to current year presentation.
Revenue and Income from operations by segment for the three months ended March
31, 2002 and 2001 are as follows:
For the three month period ended March 31,
------------------------------------------
Percent
2002 2001 Change
---- ---- ------
Private Banking and Trust:
Revenues $ 82,958 $ 89,422 (7%)
Income from operations 33,825 33,670 --
Investment Advisors:
Revenues 38,891 38,079 2%
Income from operations 17,983 14,722 22%
Enterprises:
Revenues 14,732 15,908 (7%)
Income from operations 5,388 4,138 30%
Money Managers:
Revenues 10,797 7,764 39%
Income (loss) from operations 2,424 (123) 2,071%
Investments in New Businesses:
Revenues 11,837 10,128 17%
Loss from operations (3,289) (5,391) 39%
General and Administrative:
Loss from operations (5,709) (5,383) 6%
Consolidated Segment Totals:
Revenues $159,215 $161,301 (1%)
Income from operations $ 50,622 $ 41,633 22%
Revenues in the first quarter 2002 were primarily affected by the loss of
several significant clients during the latter part of 2001 in our fund
processing business. Also, economic uncertainty during the past year has slowed
many purchase decisions in most of our target markets.
14
Operating income improved $9.0 million, or 22 percent, over the first quarter
2001 primarily due to cost controls including prioritizing our investments in
the future. Our investment focus centers around building outsource business
solutions for our target markets aimed at improving our client's business. We
also continue to concentrate on process improvement and creating additional
efficiencies in our operations.
We believe the market acceptance of our business solutions, our operational
leverage, and our portfolio of businesses will support sustainable growth in
future revenues and profits. In addition, we will continue to invest in the
development of new products and services to expand our client base. However, any
expected growth in revenues and earnings may be negated by continued volatility
in the capital markets, delays in client decision- making, and mergers and
acquisitions within the banking industry that could result in the loss of
clients.
Asset Balances
(In millions)
As of March 31, PERCENT
---------------
2002 2001 CHANGE
---- ---- ------
Assets invested in equity and fixed income programs $ 58,846 $ 51,384 15%
Assets invested in liquidity funds 20,116 26,691 (25%)
--------- --------
Assets under management 78,962 78,075 1%
Client proprietary assets under administration 177,965 192,218 (7%)
--------- --------
Assets under management and administration $ 256,927 $270,293 (5%)
========= ========
Assets under management consist of total assets invested in our equity and fixed
income investment programs and liquidity funds for which we provide management
services. Assets under management and administration consist of total assets for
which we provide management and administrative services, including client
proprietary fund balances for which we provide administration and/or
distribution services.
Private Banking and Trust
- -------------------------
Private Banking and Trust provides investment processing solutions, fund
processing solutions, and investment management programs to banks and private
trust companies. Investment processing solutions primarily include outsourcing
services provided through our TRUST 3000 product line. TRUST 3000 includes many
integrated products and sub-systems that provide a complete investment
accounting and management information system for trust institutions. Investment
processing fees are primarily earned from monthly processing, and software
servicing and project fees associated with the conversion of new and merging
clients.
Fund processing solutions include administration and distribution services
provided to bank proprietary mutual funds. These services primarily include fund
administration and accounting, legal services, shareholder recordkeeping, and
marketing. Fund processing fees are based on a fixed percentage, referred to as
basis points, of the average daily net asset value of the proprietary funds.
Investment management fees are primarily earned through management fees that are
based upon a fixed percentage, referred to as basis points, of the average daily
net asset value of assets under management.
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Three Months Ended
Mar. 31, Mar. 31, Percent
2002 2001 Change
---- ---- ------
Revenues:
Investment processing fees $56,399 $56,216 --
Fund processing fees 15,593 22,162 (30%)
Investment management fees 10,966 11,044 (1%)
------- -------
Total revenues 82,958 89,422 (7%)
Expenses:
Operating and development 38,424 43,943 (13%)
Sales and marketing 10,709 11,809 (9%)
------- -------
Total operating profits $33,825 $33,670 --
======= =======
Profit margin 41% 38%
Percent of Revenue:
Operating and development 46% 49%
Sales and marketing 13% 13%
Investment processing fees remained flat in the first quarter 2002, as compared
to the corresponding prior year period, primarily due to a shift in revenues
from one-time implementation fees to recurring processing fees. The increase in
recurring processing fees in the first quarter 2002 was largely due to certain
clients that were involved in mergers becoming fully implemented during 2001.
Fund processing fees decreased in the first quarter of 2002, as compared to the
first quarter 2001, mainly due to the loss of several significant clients during
the latter part of 2001. The loss of these clients resulted in a decrease in
assets under administration of approximately $39 billion, as compared to the
first quarter 2001.
Operating profits remained relatively flat whereas profit margin increased due
our business model that seeks economies of scale and operational efficiencies.
In addition, profit margins in the first quarter 2002 were affected by the
revenue losses mentioned above, net of the decrease in direct expenses
associated with these clients.
We believe our future growth in revenues and earnings will come from maintaining
a consistent level of investment in the development of new products and services
to grow existing markets and to expand into new markets. However, consolidations
among our banking clients continue to be a major strategic issue facing this
segment.
Investment Advisors
- -------------------
Investment Advisors provides investment management programs and investment
processing solutions to affluent investors distributed through a network of
investment professionals. Revenues are primarily earned through management fees
that are based upon a fixed percentage, referred to as basis points, of the
average daily net asset value of assets under management.
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Three Months Ended
Mar. 31, Mar. 31, Percent
2002 2001 Change
---- ---- ------
Total Revenues $38,891 $38,079 2%
Expenses:
Operating and development 10,275 11,252 (9%)
Sales and marketing 10,633 12,105 (12%)
------- -------
Total operating profits $17,983 $14,722 22%
======= =======
Profit margin 46% 39% --
Percent of Revenue:
Operating and development 27% 29%
Sales and marketing 27% 32%
The increase in revenues over the prior year period was primarily due to growth
in assets under management as a result of new business. We established
approximately 180 new registered investment advisor relationships during the
first quarter 2002, bringing our total network to approximately 8,900 advisors.
Revenues were also affected by movements in the capital markets.
Operating profits and profit margin improvement was primarily due to the
increase in revenue and the management of discretionary expenses, mainly
technology and marketing. Operating income and margins also were affected by our
ability to utilize many shared resources across a larger revenue base, thereby
creating efficiencies in our operations.
We believe future growth and success of this business is dependent upon
continued acceptance of our investment management products and services.
However, continued volatility in the capital markets could negatively affect
future revenues and profits.
Enterprises
- -----------
Enterprises provides retirement business solutions and treasury business
solutions for corporations, unions and political entities, endowments and
foundations and insurance companies. Retirement solutions revenues are primarily
earned through management fees that are based upon a fixed percentage, referred
to as basis points, of the average month-end net asset value of assets under
management. Treasury solutions revenues are
primarily earned through management fees that are based upon a fixed percentage,
referred to as basis points, of the average daily net asset value of assets
under management.
Three Months Ended
Mar. 31, Mar. 31, Percent
2002 2001 Change
---- ---- ------
Total Revenues $14,732 $15,908 (7%)
Expenses:
Operating and development 4,618 5,453 (15%)
Sales and marketing 4,726 6,317 (25%)
------- -------
Total operating profits $ 5,388 $ 4,138 30%
======= =======
Profit margin 37% 26% --
Percent of Revenue:
Operating and development 31% 34%
Sales and marketing 32% 40%
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Revenues from our Retirement Solutions business were affected by the loss of two
clients during the fourth quarter of 2001. However, these losses were offset by
an increase in funding to new clients. We established fourteen new client
relationships during the first quarter 2002. In our Treasury Solutions business,
revenues were affected by a decrease in assets under management invested in our
liquidity funds as compared to the first quarter 2001.
Operating profit and profit margin improvement was primarily due to management
of discretionary spending, primarily in marketing expenses and technology costs.
We will continue to invest in strategic initiatives that will continue to fuel
growth for our outsourcing solutions. However, future revenues and earnings
could be significantly affected by continued volatility in the capital markets.
Money Managers
- --------------
Money Managers provides investment solutions to U.S investment managers, mutual
fund companies and alternative investment managers worldwide. Revenues are
primarily earned through administration and distribution fees that are based
upon a fixed percentage, referred to as basis points, of the average daily net
asset value of assets under administration.
Three Months Ended
Mar. 31, Mar. 31, Percent
2002 2001 Change
---- ---- ------
Total Revenues $10,797 $ 7,764 39%
Expenses:
Operating and development 5,467 4,572 20%
Sales and marketing 2,906 3,315 (12%)
------- -------
Total operating profits $ 2,424 $ (123) 2,071%
======= =======
Profit margin 22% (2%) --
Percent of Revenue:
Operating and development 51% 59%
Sales and marketing 27% 43%
The increase in revenues over the corresponding prior year period was primarily
due to an increase in average assets under administration as a result of new
business. We continue to see market acceptance of our products and services from
alternative investment managers and U.S. money mangers.
Operating profits and profit margins increased over the corresponding prior year
period due to an increase in new business activity mentioned above combined with
expense management. In addition, revenues are affected by swings in the capital
markets. Any significant change in value would have an impact on revenues.
Investments in New Businesses
- -----------------------------
Investments in New Businesses include our global asset management initiatives
that provide investment solutions to institutional and high-net-worth investors
outside the United States. Revenues are primarily earned through management fees
that are based upon a fixed percentage, referred to as basis points, of the
average daily net asset value of assets under management.
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Three Months Ended
Mar. 31, Mar. 31, Percent
2002 2001 Change
---- ---- ------
Total Revenues $11,837 $10,128 17%
Expenses:
Operating and development 9,952 10,809 (8%)
Sales and marketing 5,174 4,710 10%
------- -------
Total operating losses $(3,289) $(5,391) 39%
======= =======
Profit margin (28%) (53%) --
Percent of Revenue:
Operating and development 84% 107%
Sales and marketing 44% 46%
The increase in revenues over the corresponding prior year period was primarily
due to an increase in assets under management from our global operations. We
continue to experience positive market acceptance of our multi-manager
investment solution offerings in Europe, especially in the U.K. pension market.
We have also seen early positive results from other initiatives in Europe. We
began a controlled launch in late 2001 targeting affluent and high-net worth
investors through certain U.K. independent financial advisors. Also, our
distribution activities are expanding in Europe and Canada.
The pace of global asset gathering and revenue recognition continues to
accelerate. We plan to continue our efforts in establishing marketing and
distribution channels and in developing technology outsourcing solutions to fill
the needs of these markets. We expect to incur losses throughout the remainder
of 2002 and during 2003.
General & Administrative
- ------------------------
Three Months Ended
Mar. 31, Mar. 31, Percent
2002 2001 Change
---- ---- ------
General and Administrative $5,709 $5,383 6%
Percent of Revenue 4% 3%
General and administrative expense primarily consists of corporate overhead
costs and other costs not directly attributable to a reportable business
segment.
Other Income
- ------------
Other income on the accompanying Consolidated Statements of Income consist of
the following:
Three Months Ended
Mar. 31, Mar. 31, Percent
2002 2001 Change
---- ---- ------
Equity in the earnings of
unconsolidated affiliate $2,679 $2,238 20%
Interest income 1,150 2,249 (49%)
Interest expense (481) (550) 13%
------ ------
Total other income, net $3,348 $3,937 (15%)
====== ======
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Equity in the earnings of unconsolidated affiliate on the accompanying
Consolidated Statements of Income includes our less than 50 percent ownership in
the general partnership of LSV Asset Management ("LSV") (See Note 6 of the Notes
to Consolidated Financial Statements). The increase in LSV's net earnings is due
to an increase in assets under management.
Interest income is earned based upon the amount of cash that is invested daily
and fluctuates in interest income recognized for one period in relation to
another is due to changes in the average cash balance invested for the period.
The decrease in interest income in the first quarter 2002 was primarily due to a
reduction in interest rates, partially offset by a higher average cash balance,
as compared to the first quarter 2001.
Interest expense primarily relates to our long-term debt and other borrowings.
Income Taxes
- ------------
Our effective tax rate was 37.0 percent for the periods ending March 31, 2002
and 2001.
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Liquidity and Capital Resources
- -------------------------------
Three Months
-------------------------------------
Ended March 31,
-------------------------------------
2002 2001
---- ----
Net cash provided by operating activities $ 27,680 $ 18,929
Net cash used in investing activities (9,968) (21,000)
Net cash used in financing activities (4,893) (45,335)
-------- --------
Net increase (decrease) in cash and cash equivalents 12,819 (47,406)
Cash and cash equivalents, beginning of period 163,685 147,676
-------- --------
Cash and cash equivalents, end of period $176,504 $100,270
======== ========
Cash requirements and liquidity needs are primarily funded through operations
and our capacity for additional borrowing. We currently have a line of credit
that provides for borrowings of up to $25.0 million. The availability of the
line of credit is subject to compliance with certain covenants set forth in the
agreement, (See Note 8 of the Notes to Consolidated Financial Statements). At
March 31, 2002, the unused sources of liquidity consisted of unrestricted cash
and cash equivalents of $176.5 million and the unused portion of the line of
credit of $25.0 million.
The increase in cash flows from operations was primarily due to an increase in
income. In addition, cash flows from operations in both comparable periods were
affected by the tax benefit received from stock options exercised, and increase
in trade receivables and a decrease in various accrued expenses.
Cash flows from investing activities are principally affected by capital
expenditures and investments in Company-sponsored mutual funds. Capital
expenditures in the first three months of 2002 included $6.4 million related to
the expansion of our corporate headquarters. The total expected cost of the
expansion is estimated at $30.8 million, of which we have spent $25.2 million to
date. We expect this project should be completed by mid 2002. Also, cash flows
from investing activities were affected by purchases and sales of our mutual
funds, mainly for the testing and subsequent startup of new investment programs
to be offered to our clients. Purchases were approximately $6.6 million in the
first quarter 2002, as compared to $11.8 million in the first quarter 2001,
whereas sales totaled $6.1 million in the first quarter 2002, as compared to
$1.1 million in the first quarter 2001.
Cash flows from financing activities are primarily affected by debt and equity
transactions. Principal payments on the Senior notes are made annually from the
date of issuance while interest payments are made semi-annually. Principal
payments on the term loan are made quarterly from the date of issuance while
interest payments are made based on the term of the LIBOR borrowing. We
continued our common stock repurchase program. Our common stock buyback was
minimal in the first quarter 2002, as compared to purchases of 1.3 million
shares at a cost of $46.3 million during the first quarter 2001. Proceeds
received from the issuance of common stock primarily results from stock option
exercise activity. Cash dividends of $.05 per share were paid in the first
quarter of 2002 and $.04 per share were paid in the first quarter 2001. Our
Board of Directors has indicated its intention to continue making cash dividend
payments.
Our operating cash flow, borrowing capacity, and liquidity should provide
adequate funds for continuing operations, continued investment in new products
and equipment, our common stock repurchase program, expansion of our corporate
campus, future dividend payments, and principal and interest payments on our
long-term debt.
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Forward-Looking Information
- ---------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Certain information contained in this discussion
is or may be considered forward-looking. Forward-looking statements relate to
future operations, strategies, financial results or other developments.
Forward-looking statements are based upon estimates and assumptions that involve
certain risks and uncertainties, many of which are beyond our control or are
subject to change. Although we believe our assumptions are reasonable, they
could be inaccurate. Our actual future revenues and income could differ
materially from our expected results. We have no obligation to publicly update
or revise any forward-looking statements.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
We do have a number of satellite offices located outside the United States that
conduct business in local currencies of that country. All foreign operations
aggregate approximately 6 percent of total consolidated revenues. Due to this
limited activity, we do not hedge against foreign operations nor do we expect
any material loss with respect to foreign currency risk.
Exposure to market risk for changes in interest rates relate primarily to our
investment portfolio and other borrowings. We do not undertake any specific
actions to cover our exposure to interest rate risk and are not a party to any
interest rate risk management transactions. We place our investments in
financial instruments that meet high credit quality standards. We are adverse to
principal loss and ensure the safety and preservation of our invested funds by
limiting default risk, market risk, and reinvestment risk. The interest rate on
our long-term debt is fixed and is not traded on any established market. We have
no cash flow exposure due to rate changes for our long-term debt.
We are exposed to market risk associated with changes in the fair value of our
investments available for sale. To provide some protection against potential
fair value changes associated with our investments available for
sale, we have entered into various derivative financial transactions. The
derivative instruments are used to hedge changes in the fair market value of
certain investments available for sale. The derivative instruments are
qualifying hedges and as such changes in the fair value hedge along with changes
in the fair value of the related hedged item are reflected in the statement of
income. We currently hold derivatives with a notional amount of $30.7 million
with various terms, generally less than one year. The effectiveness of these
hedging relationships is evaluated on a retrospective and prospective basis
using quantitative measures of correlation. If a hedge is found to be
ineffective, it no longer qualifies as a hedge and any excess gains or losses
attributable to such ineffectiveness as well as subsequent changes in fair value
are recognized in current period earnings. During the first quarter 2002, the
amount of hedge ineffectiveness that was credited to current period earnings was
a gain of $.4 million. We believe the derivative financial instruments entered
into provide protection against volatile swings in market valuation associated
with our Investments available for sale. During the first quarter 2002, we did
not enter into or hold derivative financial instruments for trading purposes.
22
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) The following is a list of exhibits filed as part of the Form 10-Q.
None.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the
quarter ended March 31, 2002.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEI INVESTMENTS COMPANY
Date May 14, 2002 By /s/ Kathy Heilig
-------------- -----------------------
Kathy Heilig
Vice President and Controller
24