10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 13, 2001
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
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Exchange Act of 1934 for the quarterly period ended September 30, 2001 or
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______ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________
0-10200
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(Commission File Number)
SEI INVESTMENTS COMPANY
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1707341
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
1 Freedom Valley Drive, Oaks, Pennsylvania 19456-1100
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(Address of principal executive offices)
(Zip Code)
(610) 676-1000
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(Registrant's telephone number, including area code)
N/A
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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___
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*APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes___ No___
*APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 30, 2001: 108,024743 shares of common stock, par
value $.01 per share.
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
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Consolidated Balance Sheets
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(In thousands)
The accompanying notes are an integral part of these statements.
2
Consolidated Balance Sheets
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(In thousands, except par value)
The accompanying notes are an integral part of these statements.
3
Consolidated Statements of Income
---------------------------------
(unaudited)
(In thousands, except per share data)
The accompanying notes are an integral part of these statements.
4
Consolidated Statements of Income
---------------------------------
(unaudited)
(In thousands, except per share data)
The accompanying notes are an integral part of these statements.
5
Consolidated Statements of Cash Flows
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(unaudited)
(In thousands)
The accompanying notes are an integral part of these statements.
6
Notes to Consolidated Financial Statements
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Note 1. Summary of Significant Accounting Policies
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Nature of Operations
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SEI Investments Company (the "Company") is organized around its five
primary business lines: Private Banking & Trust, Investment Advisors,
Enterprises, Money Mangers, and Investments in New Businesses. Private
Banking & Trust provides investment processing solutions, fund
processing solutions and investment management programs to banks and
private trust companies. Investment Advisors provides investment
management programs and investment processing solutions to affluent
investors through a network of financial intermediaries, independent
investment advisors and other investment professionals. Enterprises
provide retirement and treasury business solutions for corporations,
unions, foundations and endowments, and other institutional investors.
Money Managers provides investment solutions to U.S. investment
managers, mutual fund companies and alternative investment managers
worldwide. Investments in New Businesses include the Company's global
asset management businesses as well as initiatives into new U.S.
markets.
Summary Financial Information and Results of Operations
-------------------------------------------------------
In the opinion of the Company, the accompanying unaudited Consolidated
Financial Statements contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial
position as of September 30, 2001, the results of operations and cash
flows for the three and nine months ended September 30, 2001 and 2000.
Interim Financial Information
-----------------------------
While the Company believes that the disclosures presented are adequate
to make the information not misleading, these Consolidated Financial
Statements should be read in conjunction with the Consolidated
Financial Statements and the notes included in the Company's latest
annual report on Form 10-K.
Principles of Consolidation
---------------------------
The Consolidated Financial Statements include the accounts of the
Company and its wholly owned subsidiaries. The Company's principal
subsidiaries are SEI Investments Distribution Company, SEI Investments
Management Corporation, and SEI Private Trust Company. All intercompany
accounts and transactions have been eliminated. Investment in
unconsolidated affiliate is accounted for using the equity method due
to the Company's less than 50 percent ownership. The Company's portion
of the affiliate's operating results is reflected in Equity in the
earnings of unconsolidated affiliate on the accompanying Consolidated
Statements of Income, (See Note 6).
Property and Equipment
----------------------
Property and equipment on the accompanying Consolidated Balance Sheets
consist of the following:
7
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
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The Company accounts for software development costs in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed" ("SFAS 86"). Under SFAS 86,
costs incurred to create a computer software product are charged to research and
development expense as incurred until technological feasibility has been
established. The Company establishes technological feasibility upon completion
of a detail program design. At that point, computer software costs are
capitalized until the product is available for general release to customers. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs require considerable
judgment by management with respect to certain external factors, including, but
not limited to, anticipated future revenues, estimated economic life, and
changes in technology. Amortization begins when the product is released.
Capitalized software development costs are amortized on a product-by-product
basis using the straight-line method over the estimated economic life of the
product or enhancement, which is primarily three to ten years, with a weighted
average remaining life of approximately 6.8 years.
Earnings per Share
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The Company computes earnings per common share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128").
Pursuant to SFAS 128, dual presentation of basic and diluted earnings per common
share is required on the face of the statements of income for companies with
complex capital structures. Basic earnings per common share is calculated by
dividing net income available to common shareholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per common
share reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options. All common share figures
have been restated to reflect the two-for-one stock split in February 2001.
8
Options to purchase 1,253,000 and 36,000 shares of common stock, with
an average exercise price of $49.96 and 34.78 were outstanding during
the third quarter of 2001 and 2000, respectively but were excluded
from the diluted earnings per common share calculation because the
options' exercise prices were greater than the average market price of
the Company's common stock.
Options to purchase 1,288,000 and 36,000 shares of common stock, with
an average exercise price of $49.73 and $34.78 were outstanding during
the first nine months of 2001 and 2000, respectively, but were
excluded from the diluted earnings per common share calculation
because the options' exercise prices were greater than the average
market price of the Company's common stock.
Statements of Cash Flows
------------------------
For purposes of the Consolidated Statements of Cash Flows, the Company
considers investment instruments purchased with an original maturity
of three months or less to be cash equivalents.
Supplemental disclosures of cash paid/received during the nine months
ended September 30 is as follows:
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
9
income includes net income, foreign currency translation adjustments,
and unrealized holding gains and losses and is presented on the
accompanying Consolidated Statements of Income. Accumulated Other
Comprehensive Income on the Consolidated Balance Sheets listed below
is the changes from December 31, 2000 to September 30, 2001
Note 3. Receivables - Receivables on the accompanying Consolidated Balance
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Sheets consist of the following:
Fees earned, not received represent brokerage commissions earned but
not yet collected. Fees earned, not billed represent receivables
earned but unbilled and result from timing differences between
services provided and contractual billing schedules.
Receivables from regulated investment companies on the accompanying
Consolidated Balance Sheets represent fees collected from the
Company's wholly owned subsidiaries, SEI Investments Distribution
Company and SEI Investments Management Corporation, for distribution,
investment advisory, and administration services provided by these
subsidiaries to various regulated investment companies sponsored by
the Company.
Note 4. Investments Available for Sale - Investments available for sale
------------------------------
consist of investments in mutual funds sponsored by the Company. The
Company accounts for investments in marketable securities pursuant to
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"). SFAS
115 requires that debt and equity securities classified as available
for sale be reported at market value. Unrealized holding gains and
losses, net of income taxes, are reported as a separate component of
comprehensive income. Realized gains and losses, as determined on a
specific identification basis, are reported separately on the
accompanying Consolidated Statements of Income.
At September 30, 2001, Investments available for sale had an aggregate
cost of $64,574,000 and an aggregate market value of $62,036,000 with
gross unrealized holding losses of $2,538,000. At that date, the net
unrealized holding losses of $1,591,000 (net of income tax expense of
$947,000) were reported as a separate component of Accumulated other
comprehensive losses on the accompanying Consolidated Balance Sheets.
At December 31, 2000, Investments available for sale had an aggregate
cost of $21,710,000 and an aggregate market value of $20,294,000 with
gross unrealized holding losses of $1,416,000. At that date, the net
unrealized holding losses of $923,000 (net of income tax expense of
$493,000) were reported as a separate component of Accumulated Other
Comprehensive Losses on the accompanying Consolidated Balance Sheets.
10
Note 5 Derivative Instruments and Hedging Activities - The Company accounts
---------------------------------------------
for its derivatives in accordance with Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS 133" ) and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an
amendment of FASB Statement No. 133", ("SFAS 138").
The Company recognizes all derivatives on the balance sheet at fair
value. On the date the derivative instrument is entered into, the
Company generally designates the derivative as a hedge of the fair
value of a recognized asset. Changes in the fair value of a derivative
that is designated as, and meets all the required criteria for, a fair
value hedge, along with the gain or loss on the hedged asset that is
attributable to the hedged risk, are recorded in current period
earnings. The portion of the change in fair value of a derivative
associated with hedge ineffectiveness or the component of a derivative
instrument excluded from the assessment of hedge effectiveness is
recorded currently in earnings. The Company formally documents all
relationships between hedging instruments and hedged items, as well as
its risk-management objective and strategy for undertaking various
hedge transactions. This process includes relating all derivatives
that are designated as fair value hedges to specific assets on the
balance sheet.
The Company also formally assesses, both at the inception of the hedge
and on an ongoing basis, whether each derivative is highly effective
in offsetting changes in fair values of the hedged item. If it is
determined that a derivative is not highly effective as a hedge or if
a derivative ceases to be a highly effective hedge, the Company will
discontinue hedge accounting prospectively.
Operating Expense for the three and nine months period ended September
30, 2001, includes $473,000, and 203,000, respectively, of net gain
from hedge ineffectiveness or from excluding a portion of a derivative
instruments' gain or loss from the assessment of hedge effectiveness
related to derivatives designated as fair value hedges.
Note 6. Other Assets - Other assets on the accompanying Consolidated Balance
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Sheets consist of the following:
Investment in Unconsolidated Affiliate - LSV Asset Management ("LSV")
is a partnership formed between the Company and several leading
academics in the field of finance. LSV is a registered investment
advisor, which provides investment advisory services to institutions,
including pension plans and investment companies. LSV is currently the
portfolio manager for a number of Company-sponsored mutual funds. The
Company's interest in LSV was approximately 45 percent in 2001 and 47
percent in 2000. LSV is accounted for using the equity method of
accounting due to the less than 50 percent ownership. The Company's
portion of LSV's net earnings is reflected in Equity in the earnings
of unconsolidated affiliate on the accompanying Consolidated
Statements of Income.
11
The following table contains the Condensed Statements of Income of LSV
for the three months ended September 30:
2001 2000
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Revenues $7,672,000 $5,385,000
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Net income $5,682,000 $3,786,000
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The following table contains the Condensed Statements of Income of LSV
for the nine months ended September 30:
2001 2000
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Revenues $22,360,000 $10,679,000
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Net income $16,454,000 $ 7,547,000
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The following table contains the Condensed Balance Sheets of LSV:
September 30, December 31,
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2001 2000
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Current assets $13,347,000 $10,976,000
Non-current assets 114,000 103,000
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Total assets $13,461,000 $11,079,000
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Current liabilities $ 1,753,000 $ 1,285,000
Partners' capital 11,708,000 9,794,000
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Total liabilities and
partners' capital $13,461,000 $11,079,000
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Note 7. Accrued Expenses - Accrued expenses on the accompanying Consolidated
----------------
Balance Sheets consist of the following:
Note 8. Line of Credit - The Company has line of credit agreement with its
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principle lending institutions. The Agreement provides for borrowings of
up to $50,000,000, and expires on November 30, 2001, at which time the
outstanding principal balance, if any, becomes due unless the Agreement
is extended. The Company expects to reduce its line of credit to
$25,000,000 on the renewal of the line. The line of credit, when
utilized, accrues interest at the Prime rate or one and one-quarter
percent above the London Interbank Offered Rate (LIBOR). The Company is
obligated to pay a commitment fee equal to one-quarter of one percent
per annum on the average daily unused portion
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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
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Purchase Agreement authorizing the issuance and sale of $20,000,000 of
7.20% Senior Notes, Series A, and $15,000,000 of 7.27% Senior Notes,
Series B, (collectively, the "Notes") in a private offering with
certain financial institutions. The Notes are unsecured with final
maturities ranging from 10 to 15 years. The proceeds from the Notes
were used to repay the outstanding balance on the Company's line of
credit at that date. The Note Purchase Agreement, as amended, contains
various covenants, including limitations on indebtedness, maintenance
of minimum net worth levels, and restrictions on certain investments.
In addition, the agreement limits the Company's ability to merge or
consolidate, and to sell certain assets.
Principal payments on the Notes are made annually from the date of
issuance while interest payments are made semi-annually. The Company
made its scheduled payment of $2,000,000 in February 2001. The current
portion of the Notes amounted to $2,000,000 at September 30, 2001.
On June 26, 2001 the Company entered into a loan agreement (the
"Agreement") with a separate lending institution. The agreement
provides for borrowing up to $25,000,000 in the form of a term loan,
and expires on March 31, 2006 and is payable in seventeen equal
quarterly installments. The term loan, when utilized, accrues interest
at the Prime rate or plus one and thirty-five hundredths of one percent
above the London Interbank Offered Rate (LIBOR). The Agreement contains
various covenants, including limitations on indebtedness and
restrictions on certain investments. None of these covenants negatively
affect the Company's liquidity or capital resources. On August 2, 2001,
the Company borrowed $25,000,000 on this term loan. The loan was
necessary to support capital improvement projects for our corporate
campus and other business purposes. The current portion of the notes
amounted to $5,556,000 at September 30, 2001. The Company was in
compliance with all covenants during the first nine months of 2001.
Note 10. Common Stock Buyback - The Board of Directors has authorized the
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purchase of the Company's common stock on the open market or through
private transactions of up to an aggregate of $503,365,000. Through
September 30, 2001, a total of 100,880,000 shares at an aggregate cost
of $451,163,000 have been purchased and retired. The Company purchased
2,616,000 shares at a total cost of $96,072,000 during the nine month
period ended September 30, 2001.
The Company immediately retires its common stock when purchased. Upon
retirement, the Company reduces Capital in excess of par value for the
average capital per share outstanding and the remainder is charged
against Retained earnings. If the Company reduces its Retained earnings
to zero, any subsequent purchases of common stock will be charged
entirely to Capital in excess of par value.
Note 11. Segment Information - The Company defines its business segments in
-------------------
accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 establishes standards for the way public business
enterprises report financial information about operating segments in
financial statements. SFAS 131 also requires additional disclosures
about product and services, geographic areas, and major customers. The
company redefined its segments during the second quarter 2001 and
restated all prior periods to conform with the current presentation.
The Company is organized around its five primary business lines: Private
Banking & Trust, Investment Advisors, Enterprises, Money Mangers, and
Investments in New Businesses. Private Banking & Trust provides
investment processing solutions, fund processing solutions and
investment management programs to banks and private trust companies.
Investment Advisors provides investment management programs and
investment processing solutions to affluent investors through a network
of financial intermediaries, independent investment advisors and other
investment professionals. Enterprises provide retirement and treasury
business solutions for corporations, unions, foundations
13
and endowments, and other institutional investors. Money Managers
provides investment solutions to U.S. investment managers, mutual fund
companies and alternative investment managers worldwide. Investments in
New Businesses include the Company's global asset management business as
well as initiatives into new U.S. markets.
The information in the following tables is derived from the Company's
internal financial reporting used for corporate management purposes. The
accounting policies of the reportable segments are the same as those
described in Note 1. The Company's management evaluates financial
performance of its operating segments based on income before income
taxes.
The following tables highlight certain unaudited financial information
about each of the Company's segments for the three months ended
September 30, 2001 and 2000. (In thousands)
14
The following tables highlight certain unaudited financial information
about each of the Company's segments for the nine months ended September
30, 2001 and 2000. (In thousands)
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations.
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(In thousands, except per share data)
We are organized around our five business lines: Private Banking & Trust,
Investment Advisors, Enterprises, Money Mangers and Investments in New
Businesses. Financial information on each of these segments is reflected in
Note 11 of the Notes to Consolidated Financial Statements.
Results of Operations
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Three and Nine Months Ended September 30, 2001 Compared to Three and Nine Months
Ended September 30, 2000
Consolidated Overview
Revenues and earnings increased over the corresponding prior year periods
primarily because of increased sales to new clients and the delivery of new
products and services to existing clients. We believe our growth is due to
increased market acceptance of our products and services. Although our
recurring revenue base continues to be at approximately 80 percent, a fairly
large percentage of our revenues are tied to the value of assets that we manage
and administer. Revenues derived from asset based fees have decreased due to
recent rapid declines in the financial markets. However, these tough financial
market conditions reinforce our investment strategy that leans heavily on
diversification, asset allocation, and risk management.
Our operating and after tax margins improved primarily due to the leveragability
built within our operations. We continue to realize economies of scale in most
of our back office and investment management operations. In addition, the
investment in our operating infrastructure and the Internet are improving our
client service and making us more productive. We are also renewing our focus on
process improvement and creating additional efficiencies in our operations.
We believe the market acceptance of our business solutions, our operational
leverage, and our portfolio of businesses will support sustainable growth in
future revenues and profits. In addition, we will continue to invest in
16
the development of new products and services to expand our client base. However,
any expected growth in revenues and earnings may be negated by continued
volatility in the capital markets, delays in client decision- making, and
mergers and acquisitions within the banking industry that could result in the
loss of any significant clients.
Assets under management consist of total assets invested in our equity and fixed
income investment programs and liquidity funds for which we provide management
services. Assets under management and administration consist of total assets
for which we provide management and administrative services, including client
proprietary fund balances for which we provide administration and/or
distribution services.
Private Banking and Trust
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Private Banking & Trust provides investment processing solutions, fund
processing solutions, and investment management programs to banks and private
trust companies. Investment processing services primarily include outsourcing
services provided through our TRUST 3000 product line. TRUST 3000 includes many
integrated products and sub-systems that provide a complete investment
accounting and management information system for trust institutions. Investment
processing fees are primarily earned from monthly processing and software
servicing fees and project fees associated with the conversion of new and
merging clients.
Fund processing solutions include administration and distribution services
provided to bank proprietary mutual funds. These services primarily include
fund administration and accounting, legal services, shareholder recordkeeping,
and marketing. Fund processing fees are based on a fixed percentage, referred
to as basis points, of the average daily net asset value of the proprietary
funds.
Investment management fees are primarily earned through management fees that are
based upon a fixed percentage, referred to as basis points, of the average daily
net asset value of assets under management.
17
The increase in Investment processing fees over the corresponding prior year
periods is primarily attributable to increased new sales and cross sales to
existing clients. In addition, Investment processing fees were impacted by the
recognition of one-time processing fees that were partially offset by a decrease
in brokerage services.
Although fund processing fees remained relatively flat, the third quarter of
2001includes one-time buyout fees due to the loss of two significant clients
which was offset by a corresponding decrease in administration fees from these
clients.
Operating profits and profit margin improvement reflect the impact of increased
revenues and economies of scale realized from the leveragability built within
our technology business. We continued to invest in the development of new
products and services.
We believe our future growth in revenues and earnings will come from maintaining
a consistent level of investment in the development of new products and services
to grow existing markets and to expand into new markets. However, consolidations
among our banking clients continue to be a major strategic issue facing this
segment. This business has also been affected by delayed client decision-making
due to recent market volatility.
Investment Advisors
- -------------------
Investment Advisors provides investment management programs and investment
processing solutions to affluent investors distributed through a network of
investment professionals. Revenues are primarily earned through management fees
that are based upon a fixed percentage, referred to as basis points, of the
average daily net asset value of assets under management.
The increase in revenues in both comparable periods was primarily due to growth
in assets under management as a result of new business. We attribute most of
this growth to our continued success at recruiting new registered investment
advisors and the offering of new services, especially our managed account
program. We established approximately 900 new registered investment advisor
relationships during the first nine months of 2001, of which 200 occurred in the
third quarter, bringing our total network to about 8,500 advisors. However,
revenues were negatively impacted by the recent downturn in the financial
markets.
Operating profits and profit margin improvement for the first nine months of
2001 was due to increased sales of our investment management programs. We have
also lowered sales and marketing expenditures. In addition we have been able to
continue making investments in developing new products without affecting
margins.
We believe future growth of this business is dependent upon our ability to
continue to generate new business through increased sales of existing products
as well as the delivery of new products and services However, continued
volatility in the capital markets could negatively affect future revenues and
profits.
18
Enterprises
- -----------
Enterprises provides retirement business solutions and treasury business
solutions for corporations, unions and political entities, endowments and
foundations and insurance companies. Retirement solutions revenues are
primarily earned through management fees that are based upon a fixed percentage,
referred to as basis points, of the average month-end net asset value of assets
under management. Treasury solutions revenues are primarily earned through
management fees that are based upon a fixed percentage, referred to as basis
points, of the average daily net asset value of assets under management.
The increase in revenues over the comparable prior year periods was fueled by
growth in average assets under management due to new clients that were sold and
funded during the last twelve months. We feel this increase in new sales is the
result of increased market acceptance of our outsource business solution across
a diverse range of clients. We added 19 new institutional clients during the
third quarter of 2001 and 41 new institutional clients during the first nine
months in 2001. However, revenues were negatively impacted by the downturn in
the financial markets.
Operating profits and profit margins were significantly affected by new sales as
well as the timing of certain expenditures. During the first nine months of
2000, we incurred significant technology costs associated with the development
of our treasury solutions platform.
We will continue to invest in this business that is diversified by client and
solution types in markets that we believe offer new opportunities for our
services. However, future revenues and earnings could be significantly affected
by continued volatility in the capital markets.
Money Managers
- --------------
Money Managers provides investment solutions to U.S investment managers, mutual
fund companies and alternative investment managers worldwide. Revenues are
primarily earned through administration and distribution fees that are based
upon a fixed percentage, referred to as basis points, of the average daily net
asset value of assets under administration.
19
The increase in revenues over the prior years comparable periods was primarily
due to an increase in average assets under administration as a result of new
business offset in part by the downturn in the financial markets. We contracted
with thirteen alternative investment managers and five U.S. money mangers during
the third quarter. These funds will fund over the next two quarters.
Operating profits and profit margins increased over the corresponding prior year
periods due to an increase in new business activity. During 2000, we made
significant investments in developing the necessary infrastructure to tailor our
products and services in these markets. We will continue to make investments in
this business. These investments could affect future profits and margins. In
addition, revenues are affected by swings in the capital markets. Any
significant change in value would have an impact on revenues.
Investments in New Businesses
- -----------------------------
Investments in New Businesses include our global asset management initiatives
that provide investment solutions to institutional and high-net-worth investors
outside the United States. Revenues are primarily earned through management
fees that are based upon a fixed percentage, referred to as basis points, of the
average daily net asset value of assets under management.
The increase in revenues over the corresponding prior year periods is primarily
due to an increase is assets under management from our Europe/South Africa,
Korea and Canada initiatives despite the impact of weak financial markets
globally. Also, we are beginning to see some early positive results from the
launch of our U.K. pension plan initiative. Revenues in 2000 included our
Canadian consulting business that was sold in July 2000. Excluding those
revenues, revenues would have increased 10 percent in the third quarter 2001 and
21 percent for the first nine months of 2001.
20
The pace of global asset gathering and revenue recognition continues to
accelerate. We focused substantial resources this quarter in anticipation of
three major market launches of our multi-manager investment solution to our
European distribution networks. We believe that global expansion is an area of
significant long-term growth for our firm. We will continue to make significant
investments in our global initiatives and expect to incur losses throughout the
remainder of this year and in 2002.
General & Administrative
- ------------------------
Other Income
- ------------
Other income on the accompanying Consolidated Statements of Income consist of
the following:
Equity in the earnings of unconsolidated affiliate on the accompanying
Consolidated Statements of Income includes our less than 50 percent ownership in
the general partnership of LSV Asset Management ("LSV") (See Note 6 of the Notes
to Consolidated Financial Statements). The increase in LSV's net earnings is
due to an increase in assets under management.
Interest income is earned based upon the amount of cash that is invested daily
and fluctuations in interest income recognized for one period in relation to
another is due to changes in the average cash balance invested for the period.
Interest Income has been affected by the recent decline in interest rates.
Interest expense primarily relates to our long-term debt and other borrowings.
21
Liquidity and Capital Resources
- -------------------------------
Cash requirements and liquidity needs are primarily funded through operations
and our capacity for additional borrowing. We currently have a line of credit
that provides for borrowings of up to $50.0 million. The availability of the
line of credit is subject to compliance with certain covenants set forth in the
agreement, (See Note 8 of the Notes to Consolidated Financial Statements). At
September 30, 2001, the unused sources of liquidity consisted of unrestricted
cash and cash equivalents of $133.3 million and the unused portion of the line
of credit of $50.0 million.
The increase in cash flows from operations was primarily due to an increase in
income, the tax benefit received from stock options exercised, and various
accrued expenses. However, an increase in trade receivables in the first nine
months of 2001 and 2000 negatively affected cash flows from operations.
Cash flows from investing activities are principally affected by capital
expenditures and investments in Company-sponsored mutual funds. Capital
expenditures in the first nine months of 2001 included $14.0 million related to
the expansion of our corporate headquarters. The total expected cost of the
expansion is estimated at $54.0 million of which we have spent $19.9 million to
date. The completion of this project should be completed by mid 2003. Also,
cash flows from investing activities includes purchases of Company-sponsored
mutual funds of approximately $42.2 million during 2001, net of $18.2 million of
sales.
Cash flows from financing activities are primarily affected by debt and equity
transactions. Principal payments on our Note Purchase Agreement are made
annually from the date of issuance while interest payments are made semi-
annually. Principal and interest payments were made in the first nine months of
2001 and 2000. Principal payments on the Term Loan Agreement are made at the
end of each quarter beginning December 31, 2001, while interest payments are
paid monthly (See Note 9 of the Notes to Consolidated Financial Statements). We
continued our common stock repurchase program. We purchased approximately
2,616,000 shares of our common stock at a cost of $96.1 million during the first
nine months of 2001. As of October 31, 2001, we still had $49.1 million
remaining authorized for the purchase of our common stock. Cash dividends of
$.09 per share were paid in the first nine months of 2001 and $.07 in the first
nine months of 2000. The Board of Directors has indicated its intention to
continue making cash dividend payments.
Our operating cash flow, borrowing capacity, and liquidity should provide
adequate funds for continuing operations, continued investment in new products
and equipment, our common stock repurchase program, expansion of our corporate
campus, future dividend payments, and principal and interest payments on our
long-term debt.
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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 $27.1 million with
various terms, generally less than one year. The effectiveness of these hedging
relationships is evaluated on a retrospective and prospective basis using
quantitative measures of correlation. If a hedge is found to be ineffective, it
no longer qualifies as a hedge and any excess gains or losses attributable to
such ineffectiveness as well as subsequent changes in fair value are recognized
in current period earnings. During 2001, the amount of hedge ineffectiveness
that was credited to current period earnings was a gain of $.2 million. We
believe the derivative financial instruments entered into provide protection
against volatile swings in market valuation associated with our Investments
available for sale. During 2001, we did not enter into or hold derivative
financial instruments for trading purposes.
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PART II. OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) The following is a list of exhibits filed as part of the Form 10-Q.
None.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company during the
quarter ended September 30, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEI INVESTMENTS COMPANY
Date November 13, 2001 By /s/ Kathy Heilig
---------------------- ---------------------------------
Kathy Heilig
Vice President and Controller
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