TROW

Business Context and Reporting Period

Company: T. Rowe Price Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2003
Business Overview: The Company derives revenues primarily from investment advisory services provided to individual and institutional investors in sponsored mutual funds and other portfolios. It also provides administrative services, including transfer agency, recordkeeping, and discount brokerage. Revenues are highly dependent on the value and composition of assets under management (AUM).

Key Financial Metrics

Material Changes vs. Prior Period

• Quarterly Performance (Q2 2003 vs. Q2 2002): Net income increased 4% to $53.8 million, and diluted EPS rose from $0.40 to $0.42. Net revenues declined slightly by 1% ($2.8 million) to $237.5 million. Operating expenses increased 1% to $152.6 million, driven by higher compensation costs, partially offset by reduced advertising spend.
• Year-to-Date Performance (6mo 2003 vs. 6mo 2002): Net income decreased 12% to $92.6 million, and diluted EPS fell from $0.81 to $0.73. Total revenues declined $25 million to $458 million. This decline was primarily due to lower average assets under management in the first half of 2003 compared to 2002.
• Assets Under Management (AUM): Total AUM reached $161.2 billion at June 30, 2003, a $14.6 billion increase year-to-date. This growth was driven by $9.1 billion in market appreciation (mostly in Q2) and $3.7 billion in net investor inflows. Q2 2003 saw record net cash inflows of $4 billion since Q3 1997.
• Debt Reduction: The Company significantly reduced its debt load. In Q2 2003, it repaid $38.5 million of debt. In July 2003 (post-period), it repaid the remaining $5 million of dollar-denominated acquisition debt.

Outlook, Risks, and Management Commentary

• Market Conditions: Improved financial market valuations in Q2 2003 resulted in significant asset appreciation, offsetting declines in Q1. Management expects advertising and promotion expenses in Q3 to remain similar to Q2, with Q4 spending dependent on late summer and early fall market conditions.
• Accounting Changes (FASB Interpretation No. 46): The Company reviewed its involvement with two high-yield collateralized bond obligations (CBOs). Following a waiver of performance fees in May 2003, management determined it is not the "primary beneficiary" and will not consolidate these entities. Maximum exposure to future losses is limited to the carrying amount of the investment ($6.9 million in the 2001 CBO).
• Stock-Based Compensation: The Company uses the intrinsic value method for stock options. Pro forma net income for the six months ended June 30, 2003, would have been $78.9 million (EPS $0.63) if the fair value method had been applied.
• Risks: Future results are subject to fluctuations in financial markets, investor sentiment, cash inflows/outflows, and competitive conditions. Revenues are substantially dependent on contracts with Price funds, which could be terminated or altered by independent directors.

Investor Verification Checklist

• AUM Composition: Verify the breakdown of the $161.2 billion AUM between equity ($108.9B) and fixed income ($52.3B) to assess sensitivity to market sector shifts.
• Debt Status: Confirm the full repayment of the $5 million dollar-denominated debt and the status of the remaining yen-denominated debt ($12.1 million) as of the filing date.
• Expense Management: Monitor the trend in advertising and promotion expenses, which were curtailed in early 2003 but may increase if market conditions improve.
• Pro Forma Earnings: Review the impact of stock-based compensation on net income, noting the difference between reported EPS ($0.73) and pro forma EPS ($0.63) for the six-month period.
• CBO Exposure: Assess the $6.9 million exposure to the 2001 Collateralized Bond Obligation and the implications of the fee waivers on future revenue recognition.