ITEM 1. BUSINESS.
T. Rowe Price Associates, Inc. (Price Associates) and its consolidated subsidiaries (collectively, the Company) serve as investment adviser to the T. Rowe Price Mutual Funds (the Price Funds), other sponsored investment portfolios, and private accounts of other institutional and individual investors primarily domiciled in the United States of America, including defined benefit and defined contribution retirement plans, endowments, foundations, trusts, and other mutual funds including those which hold the assets of variable annuity insurance contracts. Total assets under management at December 31, 1997 were $124.3 billion, up $24.9 billion since December 31, 1996. The Company also provides various investment advisory- related administrative services to the Price Funds and its other investment advisory clients, including mutual fund transfer agent, accounting and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; and trust services. A discount brokerage service is also offered. The Company was incorporated in Maryland in January 1947 as successor to the investment counseling business formed by the late Mr. T. Rowe Price in 1937.
The Company offers its Price Funds' shareholders and private accounts a broad range of investment portfolios designed to attract and retain investors with varying investment objectives. Shareholders are allowed to exchange balances among mutual funds as economic and market conditions and investor needs change. The Company frequently introduces new mutual funds and investment portfolios designed to complement and expand its investment offerings, respond to competitive developments in the financial marketplace, and meet the changing needs of its funds' shareholders and private account investors. New mutual funds and other investment portfolios are introduced when the Company believes that it has personnel with sufficient investment expertise to manage the portfolio successfully for a substantial group of investors over a long period of time. The Company's base of assets under management consists of a broad range of domestic and international stock, bond and money market mutual funds and other investment portfolios which meet the varied needs and objectives of its individual and institutional investment advisory clients. Company revenues are dependent on the total value and composition of assets under management; accordingly, fluctuations in financial markets and in the composition of assets under management impact revenues and results of operations.
In the performance of its investment advisory functions, the Company uses fundamental, technical and cyclical security analysis methods. The Company maintains a substantial internal equity and fixed income investment research effort, which includes original industry and company research, utilizing such sources as inspection of corporate activities, management interviews, company-prepared information, financial information published by companies and/or filed with the SEC, financial newspapers and magazines, corporate rating services, and field checks with participants in the industry such as suppliers or competitors. In addition, the Company utilizes research
provided by brokerage firms in a supportive capacity; information is received from private economists, political observers, foreign commentators, government experts, and market and security analysts. In certain instances, computerized data analyses are the bases of the stock selection process.
Investment objectives for the Price Funds and private accounts accommodate a variety of investment strategies. Investors in the Price Funds select mutual funds for investment based on the unique approaches that are detailed in each fund's prospectus. Management of private account investments in stocks include active approaches similar to those employed in several of the Price Funds, including ones emphasizing large-cap blue chip growth, large-cap value, mid-cap growth, mid-cap value, small-cap, small-cap growth, small-cap value, international, and natural resources as well as systematic and balanced portfolio strategies. Approaches for private account investing in fixed income securities include active and systematic management strategies and management of high yield securities and cash reserves. The Company has also developed several specialized investment advisory services including investing in private companies with prospects of becoming public companies, investing in debt securities and creditor claims of financially-troubled companies, the efficient disposition of equity distributions from venture capital investments, and stable value investment contract management.
Average assets under management (in millions) during the past five years and total assets under management at December 31, 1997 are:
1993 1994 1995 1996 1997 12/31/97 ________ ________ ________ ________ ________ ________ Price Funds Stock $ 14,713 $ 21,495 $ 27,211 $ 40,287 $ 55,969 $ 61,849 Bond and money market 15,097 14,970 15,468 16,690 18,257 19,265 ________ ________ ________ ________ ________ ________ Total 29,810 36,465 42,679 56,977 74,226 81,114 Private accounts 17,136 19,490 23,866 30,495 40,038 43,148 ________ ________ ________ ________ ________ ________ Total assets under management $ 46,946 $ 55,955 $ 66,545 $ 87,472 $114,264 $124,262 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________ ________
The Company's revenues (in thousands) from investment advisory and related administrative services provided under agreements with the Price Funds and other clients during the past five years are:
1993 1994 1995 1996 1997 ________ ________ ________ ________ ________ Investment advisory fees Price Funds Stock $ 96,136 $145,020 $180,574 $260,807 $354,194 Bond and money market 70,879 68,437 70,535 75,181 81,771 ________ ________ ________ ________ ________ Total 167,015 213,457 251,109 335,988 435,965 Private accounts 57,794 76,614 80,978 115,319 152,049 ________ ________ ________ ________ ________ Total 224,809 290,071 332,087 451,307 588,014 ________ ________ ________ ________ ________ Administrative fees Price Funds 54,184 61,057 67,166 87,031 105,042
Price Funds' shareholders and others 23,024 24,615 27,211 30,772 39,864 ________ ________ ________ ________ ________ Total 77,208 85,672 94,377 117,803 144,906 ________ ________ ________ ________ ________ Total investment advisory and administrative fees $302,017 $375,743 $426,464 $569,110 $732,920 ________ ________ ________ ________ ________ ________ ________ ________ ________ ________
PRICE FUNDS. The Company provides investment advisory, distribution and other administrative services to the Price Funds under investment management, underwriting, transfer agency and service agreements. Pursuant to investment management agreements with each of the Price Funds, the Company provides investment advisory services to each fund, subject to the authority of each fund's board of directors and to each fund's fundamental investment objective. The investment management agreements with the Price Funds are approved annually by the directors of the respective funds, including a majority of the directors who are not "interested persons" of the funds or the Company as defined under the Investment Company Act of 1940, as amended (the Investment Company Act). Amendments to such agreements must be approved by the Price Funds' shareholders. Each agreement automatically terminates in the event of its assignment (as defined in the Investment Company Act) and either party may terminate the agreement without penalty after notice (generally 60 days). Each fund has the right to use the "T. Rowe Price" name for so long as its investment management agreement with the Company remains in effect.
The Company is paid an investment advisory fee based upon the average daily net assets of each fund and separate administrative fees for other services rendered by the Company. Management of the Company and the independent directors of the Price Funds regularly review the fund fee structures in light of fund performance, the level and range of services provided, industry conditions, and other factors. The advisory fee paid by each of the Price Funds (excluding the Price Spectrum and Summit Funds, the Price Equity Index 500 Fund, and the Foreign Equity and Mid-Cap Equity Growth Funds) is computed by multiplying the individual fund's average daily net assets by a fee rate equal to the sum of a group charge based on the combined net assets of the Price Funds and the applicable individual fund charge.
Except as noted in the following paragraph, each fund (excluding the Price Spectrum and Summit Funds) bears all expenses associated with the operation of the fund and the issuance and redemption of its securities. In particular, each fund pays investment advisory fees; shareholder servicing fees and expenses; fund accounting fees and expenses; transfer agent fees; custodian fees and expenses; legal and auditing fees; expenses of preparing, printing and mailing prospectuses and shareholder reports to existing shareholders; registration fees and expenses; proxy and annual meeting expenses; and independent directors' fees and expenses. All advertising, promotion and selling expenses are borne by the Company.
The Company generally guarantees that a newly-organized fund's expenses will not exceed a specified ratio during its initial operations. Advisory fees and other mutual fund expenses in excess of these self-imposed limits are absorbed by the Company and have not been material.
Pursuant to underwriting agreements with each fund, T. Rowe Price Investment Services, Inc. (TRP Investment Services) is the exclusive distributor of the Price Funds. The agreements provide that TRP Investment Services shall always offer the funds' shares at a public offering price equal to the net asset value per share and shall use its best efforts to obtain investors for the funds. The underwriting agreements with the Price Funds are approved annually by the directors of the respective funds, including a majority of the directors who are not "interested persons" of the funds or the Company as defined under the Investment Company Act. Each agreement automatically terminates in the event of its assignment (as defined in the Investment Company Act), and either party may terminate the agreement without penalty after notice (generally 60 days). TRP Investment Services does not receive a separate fee for its services to the Price Funds.
The Company expends substantial resources in advertising and direct mail communications to existing and potential Price Funds' shareholders and in providing the staff and communications capabilities to respond to inquiries. The Company's marketing effort has traditionally been focused in the print media, but in recent years, the Company has expanded its promotional activities to the television market including cable channels. The level of advertising and promotion expenditures varies over time as market conditions and cash inflows to the Price Funds warrant. In addition, considerable direct marketing efforts are targeted at participant-directed defined contribution plans that invest, in whole or in part, in mutual funds.
Pursuant to agreements with the Price Funds, T. Rowe Price Services, Inc. (TRP Services) provides mutual fund transfer agency and shareholder services, including maintenance of staff and equipment to respond to all telephone inquiries from shareholders. In addition, Price Associates provides mutual fund accounting services including maintenance of financial records, preparation of financial statements and reports, daily valuation of portfolio securities and computation of daily net asset values per share.
T. Rowe Price Retirement Plan Services, Inc. (TRP Retirement Plan Services) provides participant accounting, plan administration and transfer agent services for defined contribution retirement plans that invest in the Price Funds. Plan sponsors compensate TRP Retirement Plan Services for certain services while the Price Funds compensate it for maintaining and administering the individual participant accounts for those plans that invest in the Price Funds.
The Company provides certain trust services through its Maryland-chartered limited service trust company, T. Rowe Price Trust Company, Inc. (TRP Trust Company). TRP Trust Company serves as custodian or trustee for the Price Funds' prototype retirement plans, IRAs, and certain other retirement plans. TRP Trust Company also sponsors common trust funds principally for investment by qualified employee retirement plans. Under its charter, TRP Trust Company may not be in the business of accepting deposits and cannot make personal or commercial loans.
Each of the Price Funds has a distinct investment objective that has been
developed as part of the Company's strategy to provide a broad and balanced selection of investment products. All Funds are sold exclusively by the Company on a no-load basis (without a sales commission). No-load mutual funds offer investors a low-cost and relatively easy method of investing in a variety of stock and bond products. The Company believes that its distribution methods and fund shareholder and administrative services promote stability of assets in the Price Funds through market cycles in addition to reducing costs to fund shareholders.
At December 31, 1997, assets under management in the Price Funds aggregated $81.1 billion, an increase of $16.7 billion during 1997. Advisory services to international funds, which totalled $16.7 billion at December 31, 1997, are provided by Rowe Price-Fleming International, Inc. (RPFI) while Price Associates is the investment adviser to the domestic funds. The following information sets forth the net assets at December 31, 1997 of each fund available to the investing public and includes the year the fund was added to the Price family of funds.
STOCK FUNDS: Growth Stock (1950) $ 3,988,000,000 New Horizons (1960) 5,104,000,000 New Era (1969) 1,493,000,000 International Stock (1980) 9,721,000,000 Growth & Income (1982) 3,447,000,000 Equity Income (1985) 12,771,000,000 New America Growth (1985) 1,758,000,000 Capital Appreciation (1986) 1,060,000,000 Science & Technology (1987) 3,539,000,000 International Discovery (1988) 228,000,000 Small-Cap Value (1988) 2,088,000,000 Equity Index 500 (1990) 1,908,000,000 European Stock (1990) 1,021,000,000 New Asia (1990) 782,000,000 Balanced (1991) 1,219,000,000 Japan (1991) 152,000,000 Dividend Growth (1992) 747,000,000 Mid-Cap Growth (1992) 1,839,000,000 Small-Cap Stock (1992) 816,000,000 Blue Chip Growth (1993) 2,345,000,000 Latin America (1993) 433,000,000 Media & Telecommunications (1993) 134,000,000 Capital Opportunity (1994) 109,000,000 Personal Strategy - Balanced (1994) 282,000,000 Personal Strategy - Growth (1994) 98,000,000 Personal Strategy - Income (1994) 66,000,000 Value (1994) 546,000,000 Emerging Markets Stock (1995) 124,000,000 Global Stock (1995) 34,000,000 Health Sciences (1995) 271,000,000 Financial Services (1996) 177,000,000 Mid-Cap Value (1996) 218,000,000
Diversified Small-Cap Growth (1997) 72,000,000 Real Estate (1997) 7,000,000 Tax-Efficient Balanced (1997) 14,000,000
The Company also sponsors two other stock funds for institutional investors: the Foreign Equity Fund, an international fund begun in 1989, and the Mid-Cap Equity Growth Fund, a domestic fund begun in 1996. Assets under management in these two funds were $3,238,000,000 at December 31, 1997.
BOND AND MONEY MARKET FUNDS: New Income (1973) $ 1,945,000,000 Prime Reserve (1976) 4,536,000,000 Tax-Free Income (1976) 1,385,000,000 Tax-Exempt Money (1981) 714,000,000 U.S. Treasury Money (1982) 827,000,000 Tax-Free Short-Intermediate (1983) 439,000,000 High Yield (1984) 1,572,000,000 Short-Term Bond (1984) 345,000,000 GNMA (1985) 1,063,000,000 Tax-Free High Yield (1985) 1,199,000,000 California Tax-Free Bond (1986) 188,000,000 California Tax-Free Money (1986) 85,000,000 International Bond (1986) 826,000,000 New York Tax-Free Bond (1986) 171,000,000 New York Tax-Free Money (1986) 91,000,000 Maryland Tax-Free Bond (1987) 908,000,000 U.S. Treasury Intermediate (1989) 199,000,000 U.S. Treasury Long-Term (1989) 207,000,000 Global Government Bond (1990) 44,000,000 New Jersey Tax-Free Bond (1991) 94,000,000 Short-Term U.S. Government (1991) 102,000,000 Virginia Tax-Free Bond (1991) 227,000,000 Tax-Free Insured Intermediate Bond (1992) 106,000,000 Florida Insured Intermediate Tax-Free Bond (1993) 96,000,000 Georgia Tax-Free Bond (1993) 47,000,000 Maryland Short-Term Tax-Free Bond (1993) 107,000,000 Summit Cash Reserves (1993) 1,273,000,000 Summit GNMA (1993) 32,000,000 Summit Limited-Term Bond (1993) 31,000,000 Summit Municipal Income (1993) 37,000,000 Summit Municipal Intermediate (1993) 53,000,000 Summit Municipal Money Market (1993) 140,000,000 Emerging Markets Bond (1994) 124,000,000 Virginia Short-Term Tax-Free Bond (1994) 19,000,000 Corporate Income (1995) 33,000,000
In addition, the Company also sponsors the Spectrum series of funds (Growth, Income and International), three mutual funds that invest in a broadly diversified portfolio of other T. Rowe Price funds. Assets under management in these funds, which aggregated $4,679,000,000 at December 31, 1997, are included in the amounts presented above for each underlying fund. PRIVATE ACCOUNTS. The Company also serves as investment adviser to pension, profit sharing and other employee benefit plans, endowments, foundations, trusts, individuals, corporations, other mutual funds (including those which hold the assets of variable annuity insurance contracts issued by independent insurance companies) and other investors who are principally domiciled in the United States. Private account assets aggregate almost $43.2 billion at December 31, 1997. No private account client accounted for more than 6% of the Company's 1997 private account investment advisory revenues. Investment management services are provided to client accounts on an individual basis and through sponsored investment portfolios organized generally as partnerships and common trust funds. Sponsored investment portfolios have generally been issued through private placements. Various special-purpose subsidiaries generally serve as the general partner of the sponsored investment partnerships.
Fees for separately managed private account clients are generally computed based on the value of assets under management. The standard form of investment advisory agreement with private account clients provides that the agreement may be terminated at any time and that any unearned fees paid in advance will be refunded. The minimum account size is generally $20 million for institutional private account services, although the minimum account size for certain specialized investment services may be higher. Fees for sponsored portfolio management are based on individual product advisory agreements, which result from consideration of, among other things, the type of investments to be made and the unique investment management services to be provided.
Many specialized investment advisory services are provided to private accounts by Price Associates and its investment adviser subsidiaries. International equity and fixed income securities management, which totalled almost $13.4 billion at December 31, 1997, is provided by RPFI. Management of stable value investment contracts, totalling $7.1 billion at December 31, 1997, is provided by T. Rowe Price Stable Asset Management, Inc. (TRP Stable Asset Management).
RPFI. TRP Finance, Inc., an investment holding company subsidiary, owns 50% of the common stock of RPFI which, by virtue of the Company's controlling interest,is consolidated into the Company's financial statements. The balance of the common stock of RPFI is owned equally by Copthall Overseas Limited (United Kingdom), a subsidiary of the London-based merchant banking group Robert Fleming Holdings Limited, and Jardine Fleming International Holdings Limited (Cayman Islands), a subsidiary of the Jardine Fleming Group Limited, an investment bank in the Asia-Pacific Region. During 1997, international assets under management by RPFI increased $.8 billion to $30.0 billion. RPFI's financial information and assets under management are included in the Company's consolidated financial data and statistical information presented elsewhere in this Form 10-K.
International investment research is provided to RPFI by affiliates of its minority stockholders. Fees paid for these services are based on RPFI's assets under management.
REGULATION. Price Associates, RPFI, TRP Stable Asset Management, and T. Rowe Price (Canada), Inc. (TRP Canada) are registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940 and all applicable state securities agencies. Each of the Price Funds is registered with the Securities and Exchange Commission under the Investment Company Act and, except for the specific state tax-free funds, is qualified for sale throughout the United States and Puerto Rico. TRP Services is registered under the Exchange Act as a transfer agent, and TRP Trust Company is regulated by the State of Maryland Bank Commissioner. TRP Canada is also registered as an investment adviser with the Ontario Securities Commission, though it has not conducted operations since mid-1996.
TRP Investment Services is registered as a broker-dealer under the Securities Exchange Act of 1934 (Exchange Act) and all applicable state securities laws and is a member of the National Association of Securities Dealers and the Securities Investor Protection Corporation. TRP Investment Services provides discount brokerage services primarily to complement the other investment services offered to shareholders of the Price Funds. All discount brokerage transactions are cleared through and accounts maintained by BHC Securities, Inc., an independent clearing broker.
All aspects of the Company's business are subject to extensive federal and state laws and regulations. These laws and regulations are primarily intended to benefit or protect the Company's clients and the Price Funds' shareholders and generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict the Company from carrying on its business in the event that it fails to comply with such laws and regulations. In such event, the possible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of the investment adviser and other registrations, censures and fines.
The Company and certain of its subsidiaries are subject to net capital requirements including those of various federal and state regulatory agencies. The Company's net capital, as defined, has consistently met or exceeded all minimum requirements.
COMPETITION. As a member of the financial services industry, the Company is subject to substantial competition in all aspects of its business. A significant number of mutual funds are sold to the public by investment management firms, broker-dealers, banks and insurance companies and, in recent years, brokerage and other mutual fund companies have extended their product offerings to include other sponsors' mutual funds. The Company competes with brokerage and investment banking firms, insurance companies, banks, and other financial institutions in all aspects of its business. Many of these financial institutions have substantially greater resources than the Company. The Company competes with other providers of investment management services primarily on the basis of the range of investment portfolios offered, investment performance, the manner in which investment portfolios are distributed, and the scope and quality of the services provided.
The Company believes that competition within the investment management industry will increase as a result of consolidation and acquisition activity. In order to maintain and enhance its competitive position as an independent, no-load, direct marketer of mutual funds, the Company may review acquisition prospects and, if appropriate opportunities arise, engage in discussions or negotiations that could lead to acquisitions by the Company. The Company is not currently party to any agreements or understandings regarding any acquisitions.
EMPLOYEES. At December 31, 1997, the Company and its subsidiaries had approximately 3,100 active, full-time employees. The Company employs additional temporary and part-time personnel to meet periodic demands for its mutual fund shareholder and investor services as well as its technology-based support functions.
ITEM 2.
ITEM 2. PROPERTIES.
The Company's primary corporate offices consist of approximately 270,000 square feet of leased space located at 100 East Pratt Street in Baltimore, Maryland.
TRP Suburban, Inc. owns an operations center in Owings Mills, Maryland consisting of approximately 110,000 square feet. The facility houses a portion of the Company's administrative services operations. The underlying land has been leased until 2089.
TRP Suburban Second, Inc. owns 70 acres of land in Owings Mills, Maryland and has developed two buildings totalling 207,000 square feet of space for operating facilities. Construction of two additional buildings totalling approximately 360,000 square feet began late in the first quarter of 1998. The acreage will also accommodate additional development. TRP Suburban Second also owns a 46,000 square foot technology center on a separate parcel of land in Owings Mills, Maryland.
Information concerning anticipated 1998 capital expenditures is set forth in the last paragraph of the Capital Resources and Liquidity section of Item 7 of this Form 10-K.
The Company also leases facilities in Los Angeles and San Francisco, California; Owings Mills, Maryland; Glen Allen, Virginia; Washington, D.C.; and Tampa, Florida. Future minimum rental payments under noncancelable operating leases at December 31, 1997 are set forth in Note 8 to the consolidated financial statements included in Item 8 of this Form 10-K.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company is a party to various claims arising in the ordinary course of business. In the opinion of management, after consultation with counsel, it is unlikely that any adverse determination in one or more pending claims would have a material adverse effect on the
Company's financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders during the fourth quarter of 1997.
ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT.
The following information includes the names, ages, and positions of the executive officers of the Company. There are no arrangements or understandings pursuant to which any person serves the Company.
George A. Roche (56), Chairman (1997), President (1997), Managing Director (1989) and Chief Financial Officer (1984-1997) James S. Riepe (54), Vice Chairman (1997) and Managing Director (1989) M. David Testa (53), Vice Chairman (1997) and Managing Director (1989) Alvin M. Younger, Jr. (48), Chief Financial Officer (1997), Managing Director (1990), Treasurer (1985) and Secretary (1987) Edward C. Bernard (42), Managing Director (1995) and Vice President (1989-1995) Michael A. Goff (38), Managing Director (1997) and Vice President (1994-1997) Andrew C. Goresh (49), Managing Director (1997) and Vice President (1985-1997) (Has resigned effective in April 1998.) Henry H. Hopkins (55), Managing Director (1989) James A.C. Kennedy (44), Managing Director (1990) William T. Reynolds (49), Managing Director (1990) Charles E. Vieth (41), Managing Director (1993)
Similar information for certain significant employees who are the Company's other managing directors follows.
John H. Laporte (52), Managing Director (1989) Brian C. Rogers (42), Managing Director (1991) Preston G. Athey (48), Managing Director (1997) and Vice President (1991-1997) Brian W.H. Berghuis (39), Managing Director (1997) and Vice President (1991-1997) Stephen W. Boesel (53), Managing Director (1993) Thomas H. Broadus, Jr. (60), Managing Director (1989) Mary J. Miller (42), Managing Director (1993) Charles A. Morris (35), Managing Director (1995) and Vice President (1990-1995) George A. Murnaghan (41), Managing Director (1997) and Vice President (1986- 1997) Edmund M. Notzon (52), Managing Director (1997) and Vice President (1991- 1997) R. Todd Ruppert (41), Managing Director (1997) and Vice President (1988-1997) Charles P. Smith (54), Managing Director (1990) Peter Van Dyke (59), Managing Director (1990)
Richard T. Whitney, (39), Managing Director (1995) and Vice President (1988-1995)
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock ($.20 par value) trades on The Nasdaq National Market under the symbol "TROW". The high and low trade price information and dividends per share during the past two years were:
1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ________ ________ ________ ________
1996 - High price $ 29.250 $ 31.250 $ 35.750 $ 45.625 Low price $ 21.313 $ 24.750 $ 22.750 $ 32.000 Cash dividends declared $ .105 $ .105 $ .105 $ .13
1997 - High price $ 54.250 $ 52.000 $ 67.875 $ 73.750 Low price $ 37.125 $ 36.500 $ 50.000 $ 57.875 Cash dividends declared $ .13 $ .13 $ .13 $ .17
At February 13, 1998, there were approximately 3,100 holders of record of the Company's outstanding common stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Year ended December 31, ____________________________________________________ 1993 1994 1995 1996 1997 ________ ________ ________ ________ ________ (in millions, except per-share amounts)
Revenues $ 310.0 $ 382.4 $ 439.3 $ 586.1 $ 755.0 Net income $ 48.5 $ 61.2 $ 75.4 $ 98.5 $ 144.4 Basic earnings per share (1) $ .84 $ 1.06 $ 1.32 $ 1.72 $ 2.48 Diluted earnings per share (1) $ .79 $ 1.00 $ 1.24 $ 1.59 $ 2.25 Cash dividends declared per share (1) $ .2225 $ .275 $ .345 $ .445 $ .56 Weighted average shares outstanding (1) 57.8 57.7 57.1 57.2 58.1 Weighted average shares outstanding - assuming dilution (1) 61.2 61.1 61.1 61.9 64.0
(1) Retroactively adjusted to give effect to the 2-for-1 stock split in April 1996. December 31, ________________________________________________ 1993 1994 1995 1996 1997 ________ ________ ________ ________ ________ (in millions, except as noted) Balance sheet data Total assets $ 263.4 $ 297.3 $ 365.3 $ 478.8 $ 646.1 Debt $ 12.9 $ 12.6 $ -- $ -- $ -- Stockholders' equity $ 196.0 $ 216.2 $ 274.2 $ 345.7 $ 486.7 Assets under manage- ment (in billions) $ 54.4 $ 57.8 $ 75.4 $ 99.4 $ 124.3
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
GENERAL.
T. Rowe Price Associates, Inc. and its consolidated subsidiaries (the Company) derives its revenue primarily from investment advisory and administrative services provided to the sponsored Price Mutual Funds (the Funds), other sponsored investment portfolios, and private accounts of other institutional and individual investors. Investment advisory fees are generally based on the net assets of the portfolios managed. The majority of administrative revenues are derived from services provided to the Funds.
The Company's base of assets under management consists of a broad range of domestic and international stock, bond, and money market mutual funds and other investment portfolios which meet the varied needs and objectives of its individual and institutional investment advisory clients. At December 31, 1997, total assets under management are $124.3 billion, including $81.1 billion in the Funds. Equity investments comprise more than 70% of total assets under management at the end of 1997.
RESULTS OF OPERATIONS.
1997 versus 1996. Net income increased $45.9 million or 47% to $144.4 million or diluted earnings per share of $2.25 from nearly $98.5 million or diluted earnings per share of $1.59. Total revenues increased 29% from $586 million to a record of nearly $755 million, led by an increase of almost $137 million in investment advisory fees.
Investment advisory revenues from the Funds increased $100.0 million as the Fund's average assets under management rose more than $17.2 billion to $74.2 billion. Fund assets totalled $81.1 billion at December 31, 1997, up $16.7 billion during the year, with $61.8 billion in stock funds which also account for most of the increase during the year. Net cash inflows to the Funds during 1997 totalled $8.5 billion while appreciation in U.S. stocks drove the remaining increase of $8.2 billion. Advisory fees from private accounts and other sponsored investment portfolios contributed the balance of the investment advisory revenue gains. These assets under management rose to $43.2 billion at December 31, 1997, up $8.2 billion for 1997. Total assets
under management closed 1997 at $124.3 billion, up from $99.4 billion at the end of 1996.
Administrative fees from services to the Funds and their shareholders grew $27.1 million during 1997 to $144.9 million. Revenue gains were primarily attributable to the Company's defined contribution retirement plan recordkeeping services and mutual fund transfer agent; however, increases in related operating expenses more than offset these gains. Commissions from increased trading volume in discount brokerage contributed $3.7 million of the revenue increase.
Investment and other income rose $5.1 million primarily due to greater income from the Company's larger mutual fund investments, including its money market fund holdings.
Operating expenses increased 23% to $490.2 million. Greater compensation and related costs, which were up $56.8 million, were attributable to increases in performance-related rates of compensation and a 20% increase in the number of employees during the year primarily to support the Company's growing administrative services and technology support operations. At year-end 1997, the Company employed 3,100 associates.
Advertising and promotion expenditures increased 15% to $67.0 million as the Company endeavored to take advantage of the generally favorable stock market environment and, late in the year, retirement investing opportunities created by the Taxpayer Relief Act of 1997. These expenditures will vary over time as market conditions and cash flows to the Funds warrant. Occupancy and equipment expense was up due to the expansion of operating facilities and equipment acquisitions, primarily investments in technology. International investment research fees increased 20% or $7.8 million as international assets under management rose to $30.0 billion, including $16.7 billion in the Funds. Other operating expenses increased $2.2 million due to greater costs associated with the Company's business growth.
Higher net income reported on a separate company basis by the Company's 50%- owned subsidiary, Rowe Price-Fleming International, Inc. (RPFI), resulted in the increase in income attributable to the minority interests in the Company's consolidated subsidiaries. RPFI manages the international assets included in the Company's total assets under management.
1996 versus 1995. Net income increased $23.0 million or 31% to $98.5 million or diluted earnings per share of $1.59 from $75.4 million or diluted earnings per share of $1.24. Results for 1995 include a $1.0 million extraordinary charge from the early extinguishment of the Company's long-term debt which reduced diluted earnings per share $.01. Total revenues increased 33% from $439.3 million to a record of $586.1 million, led by an increase of $119.2 million in investment advisory fees.
Investment advisory revenues from the Funds increased $84.9 million as average fund assets under management rose $14.3 billion to $57.0 billion. Fund assets totalled $64.4 billion at December 31, 1996, up $15.8 billion during the year, with stock funds accounting for most of the increase. Net cash inflows to the Funds during 1996 totalled $8.6 billion, more than double that of the record annual net inflows of $3.9 billion previously achieved in 1993. Private accounts and other sponsored portfolios and performance management fees earned from sponsored partnerships contributed the balance of the investment advisory revenue gains as these assets under management rose $8.1 billion to $35.0 billion at December 31, 1996. Total assets under management at year end increased to nearly $99.4 billion from $75.4 billion.
Administrative fees from services to the Funds and their shareholders rose 25% during 1996 to $117.8 million, primarily as a result of growth in the activities of the Company's mutual fund transfer agent and defined contribution retirement plan recordkeeping services; however, increases in related operating expenses more than offset these revenue gains.
Investment and other income rose $4.1 million primarily due to greater capital gain dividends from the Company's holdings of stock mutual funds and higher earnings recognized from partnership investments.
Operating expenses increased 35% to $398.6 million. Greater compensation and related costs, which were up $41.5 million, were attributable to increases in performance-related rates of compensation and a 35% increase in the number of employees during the year primarily to support the Company's growing administrative and technology support operations. Advertising and promotion expenditures increased 67% to $58.3 million as the Company sought to capitalize on the strong investor demand for stock mutual funds. Occupancy and equipment expense was up due to expansion of facilities and equipment acquisitions, primarily investments in technology assets.
International investment research fees increased 31% or $9.3 million as international assets under management rose to $29.2 billion, including $16.6 billion in the Funds. Other operating expenses increased $15.8 million due primarily to greater costs associated with the Company's growing operations. Charitable contributions, which increased $3.6 million from 1995, also contributed to the increase.
The provision for income taxes increased as a percentage of income before income taxes and minority interests primarily due to the recognition of federal research expenditure credits in the prior year.
Higher net income reported on a separate company basis by RPFI resulted in the increase in income attributable to the minority interests in the Company's consolidated subsidiaries.
CAPITAL RESOURCES AND LIQUIDITY.
During the three years ended December 31, 1997, stockholders' equity increased 125% from $216.2 million to $486.7 million. Stockholders' equity at December 31, 1997 includes $28.9 million of net unrealized security holding gains on the Company's investments in sponsored mutual funds and
$41.0 million which is restricted as to use under various regulations and agreements to which the Company and its subsidiaries are subject in the ordinary course of business.
At December 31, 1997, the Company held net liquid assets of more than $300 million to meet business demands and opportunities. In addition, $20 million is available to the Company under unused bank lines of credit.
Operating activities provided net cash inflows of $197.8 million in 1997 as net income increased $45.9 million from the prior year. Comparatively, 1996 provided net operating cash inflows of $141.2 million. Net cash expended in investing activities during 1997 totalled $79.7 million, a $10.3 million increase over 1996. Property and equipment expenditures increased $11.3 million to $70.1 million in 1997, including $34.9 million for the completion of additional office facilities and the acquisition of additional land in Owings Mills, Maryland. Financing activities consumed $32.3 million in 1997, down $6.4 million from 1996.
The Company anticipates 1998 property and equipment acquisitions of approximately $61 million, including $32 million for development of two additional office buildings in Owings Mills, Maryland. Additional construction and furnishing costs of approximately $39 million for completing these new facilities are expected in 1999. These capital expenditures are expected to be funded from liquid assets currently available and from operating cash inflows. Commitments for additional investments in partnerships and other ventures aggregate $6.9 million at December 31, 1997.
YEAR 2000 ISSUE.
Many existing computer programs employed throughout the world use two digits rather than four to identify the year. These programs, if not adapted, will not correctly handle the change from "99" to "00" on January 1, 2000, and will no longer be able to perform necessary functions. The Year 2000 issue affects all companies and organizations.
The Company has implemented steps intended to assure that its computer systems and processes are capable of Year 2000 processing. The Company's goal is to have all major systems reprogrammed by the end of 1998, leaving a full twelve months for system testing prior to the year 2000. Year 2000 readiness assessments have been made in the Company's major application areas. Detailed plans for remediation efforts have been developed and are underway. Because the Company exchanges data electronically with customers and vendors, the Company is also working with these third parties to assess the adequacy of their compliance efforts, and is developing contingency plans intended to assure that third-party noncompliance will not materially affect the Company's operations.
The Company presently estimates that it will incur expenses of $21 million on Year 2000 compliance efforts during the next three years, with approximately two-thirds of the expense in 1998. The Company cannot assure that the costs of its Year 2000 compliance efforts will not be significantly more in the
event that presently unidentified complications arise; however, the Company believes that it will be able to fund any additional costs from available resources without materially affecting liquidity, financial condition, or future prospects.
FORWARD-LOOKING INFORMATION.
Information or statements provided by or on behalf of the Company from time to time, including those within this Annual Report, may contain certain "forward-looking information," including information relating to anticipated growth in revenues or earnings per share, anticipated changes in the amount and composition of assets under management, anticipated expense levels, and expectations regarding financial market conditions. The Company cautions readers that any forward-looking information provided by or on behalf of the Company is not a guarantee of future performance. Actual results may differ materially from those in forward-looking information as a result of various factors, including but not limited to those discussed below. Further, such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward- looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
The Company's future revenues may fluctuate due to factors such as: the total value and composition of assets under management and related cash inflows or outflows in mutual funds and private accounts; fluctuations in the worldwide financial markets, including those in emerging countries, resulting in appreciation or depreciation of assets under management; the relative investment performance of the Company's sponsored investment portfolios and private accounts as compared to competing offerings and market indices; the extent to which performance-based investment advisory fees are earned from private accounts; the expense ratios of the Company's sponsored investment portfolios; investor sentiment and investor confidence in mutual funds; the ability of the Company to maintain investment management fees at current levels; competitive conditions in the mutual funds industry; the introduction of new mutual funds and investment portfolios; the ability of the Company to contract with the Funds for payment for administrative services offered to the Funds and their shareholders; the continuation of trends in the retirement plan marketplace favoring defined contribution plans and participant-directed investments; and the amount and timing of income recognized on the Company's investment portfolio.
The Company's future operating results are also dependent upon the level of operating expenses, which are subject to fluctuation for the following or other reasons: changes in the level of advertising expenses in response to market conditions or other factors; variations in the level of compensation expense incurred by the Company, including performance-based compensation based on the Company's financial results, as well as changes in response to the size of the total employee population, competitive factors, or other reasons; changes in the manner in which the Company provides international investment services; expenses and capital costs, including depreciation, amortization and other non-cash charges, incurred by the Company to maintain
its administrative and service infrastructure, including costs incurred with respect to readiness for Year 2000 processing; unanticipated costs that may be incurred by the Company from time to time to protect investor accounts and client goodwill; and third-party noncompliance in Year 2000 processing.
The Company's revenues are substantially dependent on revenues from the Funds, which could be adversely affected if the independent directors of one or more of the Funds determined to terminate or significantly alter the terms of one or more investment management agreements.
The Company's business is also subject to substantial governmental regulation, and changes in legal, regulatory, accounting, tax, and compliance requirements may have a substantial effect on the Company's business and results of operations, including but not limited to effects on the level of costs incurred by the Company and effects on investor interest in mutual funds in general or in particular classes of mutual funds.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Because the Company's market capitalization on January 28, 1997 was less than $2.5 billion, this item is not applicable until the filing of the 1998 Form 10-K Annual Report.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements: Report of Independent Accountants 19 Consolidated Balance Sheets at December 31, 1996 and 1997 20 Consolidated Statements of Income for each of the three years in the period ended December 31, 1997 21 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1997 22 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 1997 23 Summary of Significant Accounting Policies 25 Notes to Consolidated Financial Statements 27 including Supplementary Quarterly Financial Data 32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of T. Rowe Price Associates, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of T. Rowe Price Associates, Inc. and its subsidiaries at December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Baltimore, Maryland January 26, 1998
T. ROWE PRICE ASSOCIATES, INC. CONSOLIDATED BALANCE SHEETS
December 31, __________________ 1996 1997 ________ ________ (in thousands) ASSETS Cash and cash equivalents (Note 1) $114,551 $200,409 Accounts receivable (Note 1) 73,239 86,795 Investments in sponsored mutual funds (Note 1) 143,410 173,729 Partnership and other investments (Note 8) 25,161 19,030 Property and equipment (Note 2) 101,207 142,497 Other assets (Note 3) 21,266 23,607 ________ ________ $478,834 $646,067 ________ ________ ________ ________
LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Accounts payable and accrued expenses $ 31,529 $ 30,722 Accrued compensation and retirement costs 41,523 49,694 Income taxes payable (Note 4) 14,464 19,102 Dividends payable 7,484 10,039 Minority interests in consolidated subsidiaries 38,168 49,837 ________ ________ Total liabilities 133,168 159,394 ________ ________
Commitments and contingent liabilities (Note 8)
Stockholders' equity (Notes 1, 5 and 8) Preferred stock, undesignated, $.20 par value - authorized and unissued 20,000,000 shares -- -- Common stock, $.20 par value - authorized 200,000,000 shares; issued 57,572,791 shares in 1996 and 59,097,705 shares in 1997 11,514 11,819 Capital in excess of par value 7,823 30,707 Retained earnings 306,566 415,279 Accumulated other comprehensive income 19,763 28,868 ________ ________ Total stockholders' equity 345,666 486,673 ________ ________ $478,834 $646,067 ________ ________ ________ ________
The accompanying notes are an integral part of the consolidated financial statements. T. ROWE PRICE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, __________________________ 1995 1996 1997 ________ ________ ________ (in thousands, except per-share amounts) Revenues (Note 1) Investment advisory fees $332,087 $451,307 $588,014 Administrative fees 94,377 117,803 144,906 Investment and other income 12,835 16,960 22,037 ________ ________ ________ 439,299 586,070 754,957 ________ ________ ________
Expenses Compensation and related costs (Notes 5 and 6) 155,400 196,925 253,676 Advertising and promotion 34,843 58,291 66,954 Occupancy and equipment (Note 8) 38,968 51,850 68,018 International investment research fees 30,023 39,328 47,105 Other operating expenses (Note 7) 36,372 52,205 54,445 ________ ________ ________ 295,606 398,599 490,198 ________ ________ ________
Income before income taxes and minority interests 143,693 187,471 264,759 Provision for income taxes (Note 4) 54,335 72,608 101,208 ________ ________ ________ Income from consolidated companies 89,358 114,863 163,551 Minority interests in consolidated subsidiaries 12,900 16,410 19,154 ________ ________ ________ Income before extraordinary charge 76,458 98,453 144,397 Extraordinary charge from early extinguishment of debt, net of income tax benefit (Note 7) (1,049) -- -- ________ ________ ________ Net income $ 75,409 $ 98,453 $144,397 ________ ________ ________ ________ ________ ________
Earnings per share Basic, which was reduced $.02 per share in 1995 because of the extraordinary charge $ 1.32 $ 1.72 $ 2.48 ________ ________ ________ ________ ________ ________ Diluted, which was reduced $.01 per share in 1995 because of the extraordinary charge $ 1.24 $ 1.59 $ 2.25 ________ ________ ________ ________ ________ ________
The accompanying notes are an integral part of the consolidated financial statements.
T. ROWE PRICE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, ______________________________ 1995 1996 1997 ________ ________ ________ (in thousands) Cash flows from operating activities Net income $ 75,409 $ 98,453 $144,397 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization of property and equipment 13,278 18,062 29,034 Minority interests in consolidated subsidiaries 12,900 16,410 19,154 Increase in accounts receivable (9,119) (17,398) (13,556) Increase in accounts payable and accrued liabilities 6,055 27,421 19,016 Other changes in assets and liabilities 3,229 (1,792) (237) ________ ________ ________ Net cash provided by operating activities 101,752 141,156 197,808 ________ ________ ________
Cash flows from investing activities Investments in sponsored mutual funds (19,101) (14,151) (28,675) Proceeds from dispositions of sponsored mutual funds 6,846 3,580 14,172 Partnership and other investments (1,387) (7,186) (2,146) Distributions from partnership investments 2,076 7,201 7,062 Additions to property and equipment (23,906) (58,771) (70,081) ________ ________ ________ Net cash used in investing activities (35,472) (69,327) (79,668) ________ ________ ________
Cash flows from financing activities Purchases of stock (9,679) (19,667) (9,655) Receipts relating to stock issuances 4,455 5,061 15,066 Dividends paid to stockholders (18,259) (24,058) (30,132) Distributions to minority interests (7,720) (45) (7,561) Debt payments (12,613) -- -- Extraordinary charge from early extinguishment of debt (1,049) -- -- ________ ________ ________ Net cash used in financing activities (44,865) (38,709) (32,282) ________ ________ ________
Cash and cash equivalents Net increase during year 21,415 33,120 85,858 At beginning of year 60,016 81,431 114,551 ________ ________ ________ At end of year $ 81,431 $114,551 $200,409 ________ ________ ________ ________ ________ ________
The accompanying notes are an integral part of the consolidated financial statements. T. ROWE PRICE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Accumu- Capital lated Common in other Total stock excess compre- stock- - par of par Retained hensive holders' value value earnings income equity _______ _______ ________ ________ ________ Balance at December 31, 1994, 28,569,419 common shares $ 5,714 $ 1,935 $206,036 $ 2,554 $216,239 Comprehensive income Net income 75,409 Unrealized security holding gains 10,099 Total comprehensive income 85,508 465,553 common shares issued under stock-based compensation plans 93 5,555 (2) 5,646 369,500 common shares purchased (74) (4,578) (8,789) (13,441) Dividends declared (19,720) (19,720) _______ _______ ________ _______ ________ Balance at December 31, 1995, 28,665,472 common shares 5,733 2,912 252,934 12,653 274,232 Comprehensive income Net income 98,453 Unrealized security holding gains 7,110 Total comprehensive income 105,563 782,307 common shares issued under stock-based compensation plans 156 6,979 (1) 7,134 28,570,012 common shares issued in 2-for-1 split 5,714 (547) (5,167) -- 445,000 common shares purchased (89) (1,521) (14,147) (15,757) Dividends declared (25,506) (25,506) _______ _______ ________ _______ ________ Balance at December 31, 1996, 57,572,791 common shares $11,514 $ 7,823 $306,566 $19,763 $345,666 _______ _______ ________ _______ ________ _______ _______ ________ _______ ________
Continued on next page.
The accompanying notes are an integral part of the consolidated financial statements.
T. ROWE PRICE ASSOCIATES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands)
Accumu- Capital lated Common in other Total stock excess compre- stock- - par of par Retained hensive holders' value value earnings income equity _______ _______ ________ ________ ________
Continued from prior page.
Balance at December 31, 1996, 57,572,791 common shares $11,514 $ 7,823 $306,566 $19,763 $345,666 Comprehensive income Net income 144,397 Unrealized security holding gains 9,105 Total comprehensive income 153,502 1,754,914 common shares issued under stock-based compensation plans 351 29,496 29,847 230,000 common shares purchased (46) (6,612) (2,997) (9,655) Dividends declared (32,687) (32,687) _______ _______ ________ _______ ________ Balance at December 31, 1997, 59,097,705 common shares $11,819 $30,707 $415,279 $28,868 $486,673 _______ _______ ________ _______ ________ _______ _______ ________ _______ ________
The accompanying notes are an integral part of the consolidated financial statements. T. ROWE PRICE ASSOCIATES, INC. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
T. Rowe Price Associates, Inc. and its consolidated subsidiaries (the Company) derives its revenue primarily from investment advisory and administrative services provided to sponsored mutual funds and investment portfolios and to private accounts of other institutional and individual investors, primarily domiciled in the United States of America. Company revenues are largely dependent on the total value and composition of assets under management, which include domestic and international equity and debt securities; accordingly, fluctuations in financial markets and in the composition of assets under management impact revenues and results of operations. Assets under management at December 31, 1997 total $124.3 billion.
BASIS OF PREPARATION. The consolidated financial statements are prepared in accordance with generally accepted accounting principles which requires the use of estimates made by the Company's management. Certain 1995 and 1996 amounts have been reclassified to conform to the 1997 presentation.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of all majority owned subsidiaries and, by virtue of the Company's controlling interest, its 50%-owned subsidiary, Rowe Price-Fleming International, Inc. (RPFI). All material intercompany accounts and transactions are eliminated in consolidation.
CASH EQUIVALENTS. Cash equivalents consist of all short-term, highly liquid investments including money market mutual funds and overnight commercial paper investments. The cost of these investments is equivalent to fair value.
INVESTMENTS IN SPONSORED MUTUAL FUNDS. The Company classifies its investments in sponsored stock and bond mutual funds as available-for-sale securities and reports them at fair value. Unrealized security holding gains are recognized in comprehensive income.
CONCENTRATION OF CREDIT RISK. Financial instruments which potentially expose the Company to concentrations of credit risk as defined by Statement of Financial Accounting Standards (SFAS) No. 105 consist primarily of investments in sponsored money market and bond mutual funds and accounts receivable. Credit risk is believed to be minimal in that counterparties to these financial instruments have substantial assets including the investment portfolios managed by the Company.
PARTNERSHIP AND OTHER INVESTMENTS. Investments in partnerships and ventures, including those sponsored by the Company, do not have a readily determinable fair value. These investments, which include venture capital and debt securities, are generally accounted for using the equity method which adjusts the Company's cost for its share of subsequent earnings or losses. Minor limited partnership investments are accounted for using the cost method.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost net of accumulated depreciation and amortization computed using the straight-line method. Provisions for depreciation and amortization are based on the following estimated average useful lives: computer and communications equipment, 3 years; furniture and other equipment, 5 years; buildings, 33 years; leasehold improvements, 10 years; and leased land, 99 years.
COMPREHENSIVE INCOME. On December 31, 1997, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." Total comprehensive income is reported in the consolidated statements of stockholders' equity and includes net income and unrealized security holding gains, net of income taxes and minority interests.
REVENUE RECOGNITION. Investment advisory and administrative services fees are recognized when earned.
ADVERTISING. Costs of advertising are expensed the first time that the advertising takes place.
INTERNATIONAL INVESTMENT RESEARCH FEES. International investment research is provided by affiliates of the minority stockholders of RPFI. Fees paid for these services are based on international assets under management by RPFI.
EARNINGS PER SHARE. On December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share," and restated all prior-period earnings per share data. Basic earnings per share excludes the dilutive effect of outstanding stock options and is computed by dividing net income by the weighted average common shares outstanding of 57,075,000 in 1995, 57,227,000 in 1996, and 58,129,000 in 1997. Diluted earnings per share reflects the potential dilution that could occur if outstanding stock options were exercised. It is computed by increasing the denominator of the basic calculation by potential dilutive common shares, determined using the treasury stock method, of 3,975,000 shares in 1995, 4,715,000 shares in 1996, and 5,907,000 shares in 1997.
T. ROWE PRICE ASSOCIATES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INVESTMENTS IN AND TRANSACTIONS WITH SPONSORED MUTUAL FUNDS.
Cash equivalents comprising investments in sponsored money market mutual funds aggregate $112,251,000 at December 31, 1996 and $196,513,000 at December 31, 1997.
The Company's investments in sponsored mutual funds at December 31 include:
Aggregate Aggregate Unrealized fair cost holding gains value _________ ______________ _________ (in thousands) ___________ Stock funds $ 84,282 $29,278 $113,560 Bond funds 27,871 1,979 29,850 ________ _______ ________ Total $112,153 $31,257 $143,410 ________ _______ ________ ________ _______ ________
___________ Stock funds $ 97,706 $43,307 $141,013 Bond funds 30,476 2,240 32,716 ________ _______ ________ Total $128,182 $45,547 $173,729 ________ _______ ________ ________ _______ ________
The following table reconciles unrealized holding gains on investments in sponsored mutual funds to that recognized in comprehensive income.
1995 1996 1997 _______ _______ _______ (in thousands) Unrealized holding gains during the year $16,341 $11,233 $15,817 Less gains (losses) realized in net income 473 (146) 1,527 _______ _______ _______ 15,868 11,379 14,290 Less deferred taxes 5,671 4,074 5,108 _______ _______ _______ 10,197 7,305 9,182 Less minority interests 98 195 77 _______ _______ _______ Unrealized holding gains recognized in compre- hensive income $10,099 $ 7,110 $ 9,105 _______ _______ _______ _______ _______ _______
Dividends earned on the Company's investments in sponsored mutual funds, including money market mutual funds, aggregate $9,845,000 in 1995, $12,293,000 in 1996, and $16,372,000 in 1997.
The Company provides investment advisory and administrative services to the T. Rowe Price family of mutual funds which had aggregate net assets under management at December 31, 1997 of $81.1 billion. All services rendered by
the Company are provided under contracts that set forth the services to be provided and the fees to be charged. These contracts are subject to periodic review and approval by each of the funds' boards of directors and, with respect to investment advisory contracts, also by the funds' shareholders. Revenues derived from services rendered to the sponsored mutual funds were $318,276,000 in 1995, $423,019,000 in 1996, and $541,007,000 in 1997.
Accounts receivable from the sponsored mutual funds aggregate $37,994,000 and $48,952,000 at December 31, 1996 and 1997, respectively.
NOTE 2 - PROPERTY AND EQUIPMENT.
Property and equipment at December 31 consists of:
1996 1997 ________ ________ (in thousands)
Computer and communications equipment $ 77,442 $ 92,154 Buildings and leasehold improvements 50,166 80,463 Furniture and other equipment 19,161 26,616 Land owned and leased 11,611 16,552 ________ ________ 158,380 215,785 Accumulated depreciation and amortization (57,173) (73,288) ________ ________ $101,207 $142,497 ________ ________ ________ ________
NOTE 3 - GOODWILL.
Goodwill of $7,937,000 arising from a 1992 acquisition is included in other assets and is being amortized over eleven years using the straight-line method. Accumulated amortization aggregates $3,228,000 at December 31, 1996 and $3,974,000 at December 31, 1997.
NOTE 4 - INCOME TAXES.
The provision for income taxes consists of:
1995 1996 1997 ________ ________ ________ (in thousands) Current income taxes Federal and foreign $ 46,350 $ 63,399 $ 88,061 State and local 7,274 9,531 15,624 Deferred income taxes (tax benefits) 711 (322) (2,477) ________ ________ ________ $ 54,335 $ 72,608 $101,208 ________ ________ ________ ________ ________ ________
Deferred income taxes arise from temporary differences between taxable income for financial statement and income tax return purposes. Significant temporary differences resulted in deferred income taxes of $944,000 in 1995 related to accrued compensation and retirement costs and $1,139,000 in 1996 related to RPFI's undistributed earnings. Deferred tax benefits arising from significant temporary differences include $1,614,000 in 1996 and $1,161,000
in 1997 related to accrued compensation and retirement costs and $1,619,000 in 1997 related to depreciation expense.
The net deferred tax liability of $8,942,000 included in income taxes payable at December 31, 1996 consists of total deferred tax liabilities of $14,201,000 and total deferred tax assets of $5,259,000. Deferred tax liabilities include $2,614,000 arising from RPFI's undistributed earnings and $11,154,000 arising from unrealized holding gains on available-for-sale securities. Deferred tax assets include $4,315,000 arising from deferred compensation and retirement costs.
The net deferred tax liability of $11,572,000 included in income taxes payable at December 31, 1997 consists of total deferred tax liabilities of $19,700,000 and total deferred tax assets of $8,128,000. Deferred tax liabilities include $3,438,000 arising from RPFI's undistributed earnings and $16,262,000 arising from unrealized holding gains on available-for-sale securities. Deferred tax assets include $5,477,000 arising from deferred compensation and retirement costs and $1,167,000 arising from depreciation expense.
Cash outflows from operating activities include income taxes paid of $52,956,000 in 1995, $64,975,000 in 1996, and $86,897,000 in 1997.
The following table reconciles the statutory federal income tax rate to the Company's effective income tax rate.
1995 1996 1997 ______ ______ ______ Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefits 3.3 3.4 3.7 Other items (.5) .3 (.5) ______ ______ ______ Effective income tax rate 37.8% 38.7% 38.2% ______ ______ ______ ______ ______ ______
NOTE 5 - COMMON STOCK AND STOCK-BASED COMPENSATION PLANS.
SHARES AUTHORIZED AND ISSUED.
A two-for-one split of the Company's common stock was effected at the close of business on April 30, 1996. Earnings per-share data in the accompanying consolidated financial statements and all per-share and share data in these notes have been adjusted to give retroactive effect to this stock split.
At December 31, 1997, the Company had reserved 19,699,387 shares of its unissued common stock for issuance upon the exercise of stock options and 840,000 shares for issuance under a plan whereby substantially all employees may acquire shares of Company stock through payroll deductions at prevailing market prices.
The Company's board of directors has authorized the future repurchase of up to 2,470,000 common shares at December 31, 1997.
Subsequent to year end, the Company's board of directors adopted resolutions to amend the Company's charter to effect a two-for-one split of common shares and increase authorized common shares from 200,000,000 to 500,000,000. This amendment has been recommended to the Company's stockholders for approval at their annual meeting on April 16, 1998.
DIVIDENDS.
The Company declared cash dividends per share of $.345 in 1995, $.445 in 1996 and $.56 in 1997.
FIXED STOCK OPTION PLANS.
The Company has five stock-based compensation plans (the 1986, 1990, 1993 and 1996 Stock Incentive Plans and the 1995 Director Stock Option Plan) under which it has granted fixed stock options with a maximum term of ten years to its employees and directors. Vesting of employee options is based solely on the individual continuing to render service to the Company and generally occurs over a 5-year graded schedule. The exercise price of each option granted is equivalent to the market price of the Company's stock at the date of grant. The Company applies the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock option awards. Accordingly, the Company has not recognized any related compensation expense in its consolidated statements of income.
The following table summarizes the status of and changes in the Company's stock option plans during the past three years.
Weighted- Weighted- average average exercise Options exercise Options price exercisable price _________ __________ ___________ _________ Outstanding at beginning of 1995 10,390,846 $10.58 Granted 2,483,000 26.03 Exercised (1,031,042) 6.01 Forfeited (192,220) 12.76 __________ Outstanding at end of 1995 11,650,584 14.24 4,924,384 $ 8.53 Granted 1,913,000 35.88 Exercised (939,925) 7.28 Forfeited (262,600) 18.04 __________ Outstanding at end of 1996 12,361,059 18.04 5,748,859 10.92 Granted 1,300,398 62.32 Exercised (1,826,545) 10.46 Forfeited (275,700) 25.56 __________ Outstanding at end of 1997 11,559,212 24.04 5,904,312 14.35 __________ __________
Additional information regarding stock options outstanding at December 31, 1997 follows.
Weighted- average Weighted- remaining Weighted- average contractual average Range of exercise life (in exercise exercise prices Outstanding price years) Exercisable price ______________________________ __________ ___________ ___________ _________ $3.59375 to 4.25 436,405 $ 3.75 2.4 436,405 $ 3.75 5.6875 to 8.50 1,130,619 7.51 3.0 1,130,619 7.51 9.375 to 14.0625 2,655,025 12.18 5.4 2,273,025 11.86 16.125 to 23.75 2,095,120 16.20 6.9 1,043,520 16.25 26.125 to 39.75 3,968,645 30.63 8.3 1,003,845 29.52 58.125 to 69.25 1,273,398 62.74 9.8 16,898 62.30 __________ _________ 3.59375 to 69.25 11,559,212 24.04 6.8 5,904,312 14.35 __________ _________ __________ _________
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company to make certain disclosures as if the fair value based method of accounting had been applied to the Company's stock option grants made subsequent to 1994. Accordingly, the Company estimated the grant-date fair value of each option awarded after 1994 using the Black-Scholes option-pricing model with the following weighted-average assumptions: dividend yield of 1.6% in 1995 and 1996 and 1.5% in 1997, expected volatility of 27% in 1995 and 1996 and 29% in 1997, risk-free interest rate of 5.8% in 1995 and 1996 and 5.9% in 1997, and expected lives of 5.3 years in 1995, 5.1 years in 1996 and 4.7 years in 1997. Had compensation costs been determined including the weighted-average estimate of the fair value of each option granted of $7.85 in 1995, $10.65 in 1996, and $18.79 in 1997, pro forma net income would be $74,473,000 in 1995, $92,825,000 in 1996 and $134,871,000 in 1997. Pro forma basic earnings per share would be $1.30 in 1995, $1.62 in 1996, and $2.32 in 1997. Pro forma diluted earnings per share would be $1.22 in 1995, $1.50 in 1996, and $2.11 in 1997. These pro forma disclosures are not representative of the effects on reported net income and earnings per share for future years because the option grants were primarily made in the fourth quarter of each year, most options vest over several years, and additional awards are generally made each year.
NOTE 6 - EMPLOYEE RETIREMENT PLANS.
The Company sponsors two defined contribution retirement plans. Additionally, the Company terminated its defined benefit pension plan in 1996 and settled all benefit obligations with plan participants in 1997. Net retirement plans expense was $8,985,000 in 1995, $10,048,000 in 1996, and $13,912,000 in 1997.
NOTE 7 - BORROWING FACILITIES.
A maximum of $20,000,000 is available to the Company under unused bank lines of credit at December 31, 1997.
In September 1995, the Company extinguished the $12,375,000 balance of its 9.77% promissory note due in 2001 and recognized an extraordinary charge of $1,049,000. Interest expense on this debt was $908,000 in 1995.
NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES.
The Company occupies office facilities and rents equipment under noncancelable operating leases. Related rental expense was $16,969,000 in 1995, $20,050,000 in 1996, and $21,319,000 in 1997. Future minimum rental payments under these leases aggregate $12,932,000 in 1998, $11,216,000 in 1999, $10,285,000 in 2000, $8,515,000 in 2001, $8,488,000 in 2002, and $31,540,000 in later years.
At December 31, 1997, the Company had outstanding commitments to invest an additional $6,896,000 in various investment partnerships and ventures.
Consolidated stockholders' equity at December 31, 1997 includes $40,971,000 which is restricted as to use under various regulations and agreements to which the Company and its subsidiaries are subject in the ordinary course of business.
From time to time, the Company is a party to various claims arising in the ordinary course of business. In the opinion of management, after consultation with counsel, it is unlikely that any adverse determination in one or more pending claims would have a material adverse effect on the Company's financial position or results of operations.
NOTE 9 - SUPPLEMENTARY QUARTERLY FINANCIAL DATA (Unaudited).
Basic Diluted earnings earnings Net per per Revenues income share share _________ _______ _________ _________ (in thousands except per-share amounts) ___________ 1st quarter $132,412 $20,419 $.36 $.33 2nd quarter 143,688 24,450 .43 .40 3rd quarter 150,150 25,948 .45 .42 4th quarter 159,820 27,636 .48 .44
___________ 1st quarter 167,959 28,547 .49 .45 2nd quarter 180,088 33,782 .58 .53 3rd quarter 199,769 41,337 .71 .64 4th quarter 207,141 40,731 .69 .63
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information required by this item as to the identification of the Company's executive officers and certain significant employees is contained as a separate item at the end of Part I of this Form 10-K Annual Report. The balance of the information required by this item as to the Company's directors and executive officers appears in the definitive proxy statement for the Company's 1998 Annual Meeting of Stockholders and is incorporated by reference in this Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION. ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information required by these Items appears in the definitive proxy statement for the Company's 1998 Annual Meeting of Stockholders and is incorporated by reference in this Form 10-K.
PART IV.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report. 1. Financial Statements: See index at Item 8 of Part II. 2. Financial Statement Schedules: None applicable. 3. The following exhibits required by Item 601 of Regulation S-K are filed as part of this Form 10-K. Exhibits 10.08 through 10.13 are compensatory plan arrangements.
3.(i) Composite Restated Charter of T. Rowe Price Associates, Inc. as of April 12, 1996. (Incorporated by reference from Form 10-Q Report for the quarterly period ended March 31, 1996; Accession No. 0000080255-96-000224.)
3.(ii) Amended and Restated By-Laws of T. Rowe Price Associates, Inc. as of April 17, 1997. (Incorporated by reference from Form 10-Q Report for the quarterly period ended June 30, 1997; Accession No. 0000080255-97-000369.)
10.01 Form of Investment Management Agreement with each of the T. Rowe Price Funds. (Incorporated by reference from Form N-1A; Accession No. 0000313212-98-000006.)
10.02 Transfer Agency and Service Agreement dated as of January 1,
1998 between each of the T. Rowe Price Funds and T. Rowe Price Services, Inc. (Incorporated by reference from Form N- 1A; Accession No. 0000313212-98-000006.)
10.03 Agreement dated January 1, 1998 between T. Rowe Price Retirement Plan Services, Inc. and each of the T. Rowe Price Taxable Funds. (Incorporated by reference from Form N-1A; Accession No. 0000313212-98-000006.)
10.04 Form of Underwriting Agreement between each of the T. Rowe Price Funds and T. Rowe Price Investment Services, Inc. (Incorporated by reference from Form N-1A; Accession No. 0000313212-98-000006.)
10.05 Agreement dated February 21, 1996 between TRP Suburban Second, Inc. and Riparius Construction, Inc. as Construction Manager and Constructor (Incorporated by reference from Form SE to the Form 10-Q for the quarterly period ended March 31, 1996; Accession No. 0000080255-96-000224.)
10.06P Agreement dated February 11, 1998 between TRP Suburban Second, Inc. and Riparius Construction, Inc. as Construction Manager and Constructor (Filed in paper on Form SE to this Form 10-K Annual Report pursuant to a continuing hardship exemption.)
10.07 Amended, Restated, and Consolidated Office Lease dated as of May 22, 1997 between 100 East Pratt Street Limited Partnership and T. Rowe Price Associates, Inc.
10.08 1986 Employee Stock Purchase Plan of T. Rowe Price Associates, Inc. as Amended to April 5, 1990. (Incorporated by reference from Exhibit A to the Definitive Proxy Statement for the 1990 Annual Meeting of Stockholders which is included in the 1989 Annual Report on Form 10-K [File No. 0-14282].)
10.09 T. Rowe Price Associates, Inc. 1986 Stock Incentive Plan. (Incorporated by reference from Form S-1 Registration Statement [File No. 33-3398].)
10.10 T. Rowe Price Associates, Inc. 1990 Stock Incentive Plan. (Incorporated by reference from Form S-8 Registration Statement [File No. 33-37573].)
10.11 T. Rowe Price Associates, Inc. 1993 Stock Incentive Plan. (Incorporated by reference from Form S-8 Registration Statement [File No. 33-72568].)
10.12 T. Rowe Price Associates, Inc. 1995 Director Stock Option Plan. (Incorporated by reference from Form DEF 14A; Accession No. 000933259-95-000009; CIK 0000080255.) 10.13 T. Rowe Price Associates, Inc. 1996 Stock Incentive Plan (Incorporated by reference from Form DEF 14A; Accession No. 0001006199-96-000031; CIK 0000080255.)
21 Subsidiaries of T. Rowe Price Associates, Inc.
23 Consent of Independent Accountants, Price Waterhouse LLP.
27 Financial Data Schedule.
(b) Reports on Form 8-K: None were filed during the last quarter of 1997.
SIGNATURES.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 24, 1998.
T. Rowe Price Associates, Inc.
By: /s/ George A. Roche, President and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 24, 1998.
/s/ George A. Roche, Chairman and Director /s/ James S. Riepe, Vice Chairman and Director /s/ M. David Testa, Vice Chairman and Director /s/ George J. Collins, Director /s/ James E. Halbkat, Jr., Director /s/ Henry H. Hopkins, Director /s/ James A.C. Kennedy, Director /s/ John H. Laporte, Director /s/ Richard L. Menschel, Director /s/ William T. Reynolds, Director /s/ Brian C. Rogers, Director /s/ John W. Rosenblum, Director /s/ Robert L. Strickland, Director /s/ Philip C. Walsh, Director /s/ Anne Marie Whittemore, Director /s/ Alvin M. Younger, Jr., Chief Financial and Accounting Officer