SEIC

SEI Investments Company 2006 Annual Report Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2006. SEI Investments Company is a global provider of asset management services, investment processing, and investment operations solutions. The company serves corporations, financial institutions, financial advisors, and affluent families. As of year-end 2006, SEI administered $366.6 billion in mutual fund and pooled assets and managed $181.5 billion in assets. A significant operational change occurred in 2006 with the consolidation of LSV Asset Management (LSV) into SEI's financial statements, following a transaction where SEI guaranteed debt for LSV Employee Group.

Key Financial Metrics

Note: The increase in debt and equity is largely attributable to the consolidation of LSV and LSV Employee Group.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 52% to $1.18 billion. Excluding LSV, organic revenue grew 14% to $884.6 million, driven by capital market appreciation and new business sales.
• LSV Consolidation: LSV contributed $291.1 million in revenue and $112.4 million in earnings (SEI's 43% share) in 2006. Prior to 2006, LSV earnings were reported as "Equity in earnings of unconsolidated affiliate."
• Stock-Based Compensation: The company adopted SFAS 123(R) in Q1 2006, recognizing $24.8 million in stock-based compensation expense, which reduced net income compared to prior periods where such costs were not expensed.
• Software Write-offs: The company wrote off $5.7 million in capitalized software costs, including $3.4 million for the SEI Advisor Desktop front-end component and $2.3 million related to the Global Wealth Platform.
• Segment Performance: The "Investments in New Businesses" segment reported a loss of $26.5 million, while the "LSV" segment generated $112.4 million in operating profit.

Guidance, Outlook, and Risks

• Global Wealth Platform: Management expects to continue significant investment in the Global Wealth Platform throughout 2007, with implementation planned for global private banks. Amortization of this platform is expected to begin in 2007.
• Capital Markets: Revenues are heavily dependent on asset values. Management notes that while 2005 and 2006 saw favorable market conditions, they do not anticipate these conditions to continue indefinitely.
• Regulatory Risks: The company faces ongoing regulatory examinations regarding marketing and distribution expense payments for mutual fund clients. A similar inquiry resulted in sanctions for a competitor, though the outcome for SEI remains uncertain.
• Off-Balance Sheet Guaranty: SEI provided an unsecured guaranty for an $82.8 million term loan obtained by LSV Employee Group. As of January 31, 2007, the unpaid principal balance was $67.5 million.
• Stock Repurchases: The company continued its buyback program, purchasing 2.3 million shares in 2006. Approximately $42.3 million remained authorized for future purchases as of January 31, 2007.

Investor Verification Checklist

• LSV Consolidation Impact: Verify the sustainability of LSV's earnings contribution and the specific terms of the guaranty agreement with LSV Employee Group.
• Software Capitalization: Review the criteria for capitalizing software development costs for the Global Wealth Platform and the risk of future write-offs.
• Regulatory Exposure: Monitor the status of the SEC inquiry regarding mutual fund marketing expense payments and potential financial penalties.
• Asset Sensitivity: Assess the correlation between capital market performance and SEI's asset-based fee revenue, particularly in the Investment Advisors and Enterprises segments.
• Stock-Based Compensation: Track the recognition of the remaining $61.6 million in unrecognized stock-based compensation costs over the next several years.