SEI Investments Co (SEIC) 2002 Q4 法說會逐字稿

Good afternoon and thank you for joining the SEI Investments Q4 2002 earnings conference call. At this time, all listeners are in a listen-only mode. If you should require assistance during the call, please zero and then star and an operator will assist you. As a reminder, this call is being recorded. I'd like to turn the call over to Chairman and CEO, Alfred West, Jr.

Welcome, everybody. All of our segment leaders are here, with me on the call, as well as Dennis McGonigle, SEI's new CFO. And Kathy Heilig, SEI's new controller.

I'll start today by recapping the fourth quarter, 2002, and then the year as a whole. I'll then turn it over to each of the business segment leaders to comment on the results of their segment. And as usual, we'll field questions at the end of each segment's report. Finally, Kathy will give us important companywide statistics.

As a preamble, don't look for things to change in my statements. Times are tough. But we're keeping on the course that we set a couple of years ago. All of our efforts are being expended in learning and refining on that direction that we set at that time. So let me start with the fourth quarter in the year 2002. Fourth quarter earnings grew by 6% from a year ago from a revenue shortfall of 9%. For the entire year, earnings grew by 12% on an earnings short fall of 6%.

Now, due to our stock buy-back program, our diluted earnings per share grew at a greater rate than earnings. Diluted earnings per share of 32 cents represents growth of 10% over the fourth quarter 2001. And for the entire year of 2002, diluted earnings per share equalled a dollar and a quarter, which represents a 15% growth year-over-year. As I mentioned, our stock buy-back program contributed to our EPS growth. We purchased 1.7 million shares in the fourth quarter, at an average price of $26.70. And we have purchased 5.4 million shares during 2002, at an average price of $27.50. If you do the math, that means we brought back $148 million worth of stock in 2002. And that's a record for the company.

Now, 2002 was certainly a tough year. Two related phenomena adversely affect our business. The first phenomena is the poor performance of the equity markets. Since a good portion of the revenues are tied to the performance of the equity market, falling prices reduce our revenue directly. For instance, a portfolio invested 60/40 in equities and fixed income, respectively, which is the typical portfolio we manage for our clients, dropped approximately 9% in 2002. Now, during the fourth quarter, the market regained some ground and the 60/40 portfolio was actually up 6%, keeping the annual drop to single digits. Now, these market affects have eroded our noncash assets to the tune of approximately $6.2 billion, during 2002. Despite this, we were able to end the year essentially flat with the beginning balances, having made up the difference with new sales.

Now, the second phenomena is the fact that all of our clients are either investors or are in the investment business. Individual investors have headed for the sidelines. Now, institutional investors, they don't have anywhere to go, but they certainly are shell-shocked. And then, those in the investment business are going through what we have been going through. Although, when we look around, they are faring less well than we are. But in short, all markets have severely curtailed buying decisions. Now, this double-barreled effect made 2002 a very tough year. While we have detected a thawing in some of our important markets, our best hope for 2003 is that it's the beginning of the end of the freeze. All of our segment leaders will comment on this in their segments later.

Now, even though growth in 2002 revenues didn't occur, we had reasonable sales in several of our businesses, and we were able to increase our earnings per share by a respectable 15%, which I mentioned earlier. Now, first and foremost, 2002 was a year in which we concentrated all of our efforts on cost containment and better focusing our activities around our new strategic direction. And as I mentioned, last quarter, our cost containment efforts were aided by our incentive compensation structure. Both sales commissions and nonsales bonus payments are a large portion of our payroll costs, and in times like these, when sales are lower, and profit growth is not up to par, the structure of our payout plans has a buoyant effect on profits. All in all, our operating margins improved to 39% for the fourth quarter, from 33% a year ago. And for all of 2002, our operating margins improved to 37%, versus 31% in 2001.

Now, let me assure you of two things. First, even though cost reductions are tougher and tougher, the longer these business conditions continue, we still have some productivity in focusing programs underway that will help the bottom line. The second thing I want to assure you of is that our control of costs has not impeded our investments of our future. Now, during these times, we've sharpened our investment priorities and better focused our investment expenditures. But we are definitely, definitely continuing to invest heavily in our future. We feel strongly that these investments will have extremely high payoff in the future. And to jeopardize them for the sake of short-term profits would be foolhardy.

Our primary investments are aimed at helping our clients improve their business, and helping us grow our revenues and profits. They're also necessary for us to distance our solutions from competitors. In addition, all of our investments are, by design, leveragible across the company. These investments are the same as we have been making over the past two years and are as follows: our first investment is being made in straight-through processing platform, designed to streamline investment processing for our clients as well as our own operations. This investment will help fuel our future growth by providing large new sources of revenue.

During late 2002 and throughout 2003, electronic trading has and is being delivered. Bob Crudup will elaborate on what this means to the private banking sector. Our second investment is a front-end desk top system for intermediaries to enhance their and their customers and to streamline transaction processing. It is an important aspect of our processing design and will make us more competitive in all of our intermediary distribution businesses. The first phase of the desk top system will be delivered late 2003 and promises to dramatically change for the better how SEI and its clients do business. Our third investment is new outsourcing business solutions to expand with our clients. These will provide with more competitive services to sell and provide us with new sources of revenue in the private banking and advisor segments. These services are being delivered in 2003 and 2004.

Fourth, our fourth investment is expanding our asset management business solutions worldwide. Our European and Canadian market entries are examples of this investment and the investments we are making here have been multiyear, and Carl Guarino will update you on their progress.

Our fifth investment is creating the expanded business solutions for money managers and alternative investment managers. These investments are necessary for us to create a very large business, supplying outsourcing services to the money manager and alternative investment market places. These will be delivered starting in 2003 and will carry over into 2004. Wayne Widrow will speak to these investments.

Now I'd like to footnote, as I have done before, the first two investments. The investment we are making in the straight-through processing platform, including the new desk top. The securities industry defines STP as streamlining the process from the trader through to the street. Now, SEI's definition of straight-through processing or STP encompasses the entire process from the end client through the administrator or advisor through to the trader to the street. Now, the efficiencies, new capabilities and quality improvements available by streamlining this end-to-end process far dwarfs what is available from what this industry is considering. Plus, I cannot emphasize enough, our straight-through processing initiative will provide us large new revenue sources from current clients. I would also like to add that the first three investments all provide our clients with cost savings as well as quality-enhancing services. These are especially important in our current environment.

As we look to the near future, even though we are expecting the market to be neutral to negative, we actually do see growth in sales in nearly all of our businesses. We are particularly heartened by strong sales pipelines in most of the businesses. Consequently, we know that any near term EPS improvement will first of all be difficult, and second will be a combination of modest growth in revenues and some improvements in productivity. And as I mentioned earlier, it will not come from cutting investments.

In the longer run, we remain very optimistic. Times of tough market climate such as these make our outsourcing solutions even more appropriate. And they also reinforce our investment management story.

In addition, the work we have done over the past two years, and the work we are doing this year will pay enormous dividends. In every market we serve, we have created new, expanded solutions for our clients, and these new solutions are designed to help distance us from our competitors and help make us more attractive as a business partner to our clients. Each of our segment heads will speak to their part in these new directions.

We also remain bullish because of the fundamentals of our business. The recurring nature of our revenues, strong cash flow, market acceptance of our outsource business solutions, the inherent leverage in our operations and the diversity of the portfolio businesses we are creating will serve us well in the future.

As a footnote to this, our cash flow from operations during the year totaled $176 million and has allowed us to comfortably buy back a large amount of our stock.

That concludes my summary of the company fourth quarter and all of 2002. And we will report in our segments in the following order. We'll first do Private Banking and Trust. Then we'll do Money Managers, Investment Advisors. Then Enterprises. And then we will go to investments in new business.

I will now turn to Bob Crudup in Private Banking and Trust. And Bob will discuss results in this segment. Bob?

Thank you, Al. Good afternoon, everyone.

I will begin by reviewing the financial results, then provide an update on STP initiatives, and close with a new business review. As everyone knows, Private Banking and Trust entered 2002 with financial challenges unlike we've seen in years. Specifically two challenges had dramatic effect on our results.

The first pertains to the profit squeeze our clients are experiencing. Bank asset managers have asset-based fees. These fees go up and down with the financial markets. Last year, the financial markets had severe effect on our clients' revenues and thus profits. With bank managers affecting draconian measures to maintain their profits, we saw reduced spendings on new services and new systems. For us, this led to reduced cross-sells and reduced new-deal flow. The second, and perhaps more apparent challenge, has been the loss of business in fund services. This due primarily to bank mergers, has resulted in about $30 million in revenue loss in 2002. With these challenges in mind, I believe our results are admirable.

Revenue for this quarter was $78.2 million, down 3.5%, compared to the third quarter and down 11.5% compared to the fourth quarter last year. Profits for the quarter were $36.2 million. Up 5.8%, compared to the third quarter and down 3.5% compared to the fourth quarter last year. For the year-on-year comparison, profits were down 4.4%, at $138 million, with revenues down 10% at $324.5 million.

Private Banking and Trust reports financial results across three product lines. For additional insight into our results, I will review each product, starting with investment processing.

While our investment processing recurring revenues for the year were up about $14 million, or 10%, our one-time revenues were down $16 million, completely masking our recurring revenue business growth. This phenomenon of rising recurring revenues and falling one-time revenues is something we have observed since late 2000. It began with the slowdown in bank mergers and the economic slowdown. A slowing of new-deal flow this year has extended the problem. On the other hand, I'm quite pleased that we were able to grow recurring revenues by 10%. As an example of our base revenue growth, during 2002, our total accounts processed on [INAUDIBLE] 3,000, grew by about 78,000 accounts to a total of about 1.1 million accounts.

Moving on to the fund processing product line, revenues for the year are off by about $30 million, or 35%. This is explained by the loss of clients in late 2001, mostly due to bank merger activity. We believe this is a viable business for us and continue to aggressively reposition this business in the bank market. As you know, this is a product that has seen substantial growth in the money manager market here at SEI, with 87 new clients in the last two years. We have been working with our money managers segment to evolve both our strategies as well as ensure the most leveraged solutions across both of these markets.

Relative to our asset management product line, as I have mentioned, just over a year ago, we began focusing on sales and marketing to support distributing the mutual fund wrap and separate account programs, which Carmen's group has enjoyed so much success within the advisor market. Our target is regional and community basics and private trust companies who act primarily as wealth advisors. Our current client list includes about 30 key. Even in the face of pressure from capital markets, our noncash balances have grown. For the year, assets in these programs have grown by almost 14% to a total of $3.3 billion. That's $400 million in net new assets. I'm very pleased with this result and consider it a sign that we are starting to get traction with this product in the bank market.

That completes the financial review. Now, let me briefly update you on STP. The electronic trade routing system, which moves trades from Trust 3000 to the equity markets with straight-through processing is live and installed in about 90 clients. We expect to garner significant revenues in 2003. It is important to note, given the business climate, that this is a service that does not require our clients to increase their operating expenses. Mutual fund desk, our full outsource solution for mutual fund trading, with an automated link to Schwab for clearing is on schedule for delivery in the second half of the year. We have a nice pipeline for this solution, and this represents a real opportunity for revenue in the last half of the year. Our fixed income electronic trading solution will have several technology enhancements delivered this year. These enhancements will facilitate straight-through processing and you can expect revenue impact in 2004.

I will wrap up by summarizing the new business, first for the quarter, and then the year. First, let's talk about investment processing. We closed 5 new outsourcing clients this quarter. The breakdown is three new clients and two current clients flipping from ASP to outsourcing. The new clients include First Hawaiian Bank, which will represent one of our largest outsource relationships.

The market is telling us, and our pipeline indicates, that clients and prospects are embracing our solution. Why is that? Our solution is based on four key tenets that provide value to our clients. First, we offer improved quality of investment processing. Second, we lower the financial risk of investment processing for our clients. And third, we lower their costs. Finally, we allow our clients to focus on other key core competencies, like sales and service, which will allow them to improve their overall business performance. We are winning business with this positioning. The tough economic times are beginning to move our clients toward change. And these five deals should give us some momentum.

Another positive sign, we had our best quarter yet with the advent portfolio management solution, by cross-selling five new clients. This platform is a very important component of our straight-through processing solution and strategy.

Moving on to fund services, when we realigned our business two years ago, along market lines, I knew repositioning the funds services in the bank market would be very important. We have worked hard to do that, and I felt we had stabilized the business. We actually have signed four new bank clients this year, including two this quarter, and we do have a pipeline.

So I'm disheartened to report that we failed to recontract an important client in the midwest. Also importantly, we will retain a small portion of the fund processing relationship with this client. Now, let me be clear about the financial impact of this loss. The revenue loss will be much more painful than the profit loss. Financial impact will begin at midyear. The actual profit loss this year is neither critical nor material to the Private Banking and Trust units' performance.

Now, briefly for the year, including all services we recontracted 30 clients to long-term contracts totaling $34.3 million in annual recurring revenue. Also for the year we have 10 new investment processing clients and four new funds services clients. As previously mentioned, program sales for the investment management business netted $400 million in new assets. Our pipeline for all three products, investment management, investment processing, and fund services is very strong.

I would be happy to answer any questions. I would like to make one correction. We closed 12 new investment processing clients this year and four new fund services clients. Thank you.

Ladies and Gentlemen, if you wish to ask a question, please press the 1 on your touch-tone phone. You'll hear a tone indicating you've been placed in queue. If you pressed 1 prior to this announcement, we ask that you please do so again at this time. If you're using a speaker phone, please pick up the handset before pressing the number. And one moment please for the first question.

First question is from Glen Green of Equity Partners.

Just on the client loss you mentioned, can you give us some sense for the order of magnitude of revenue loss? And is there a profitability impact in fiscal '04?

Hi, Glen. How are you doing.

Good. How are you, Bob?

I'm fine. I'd like to, as previously taken, the position that I don't like to talk about a specific client. I don't mind grouping several together and talking like that. What I would say, to try to give you a little more information is that the revenue and profit is going away this year. It will begin in the middle of the year. And we will see half of that this year and half of it next year. And the lost profit this year in 2003, and in 2004, you know, given a base profit this year of $138 million, it will be diminimis.

Okay. Just for clarification, the $30 million loss from the clients that you lost last year, what was the impact in this quarter, roughly?

I think the impact this quarter was about $8 million in revenue in the fourth quarter.

Okay.

And as I mentioned to you last quarter, we have absorbed that entire $30 million by the end of the year last year.

So at this point, it's complete?

Yes.

And just in terms of your overall macro view of the climate and I guess you alluded to some of it. How would you sort of characterize the climate?

I was really pleased to have five new deals this quarter in investment processing and two new deals in fund services. And I'd say, as Al mentioned, that's a definite thawing for us. And our pipeline is very strong. Additionally, this year, we're very focused on electronic trading. And see real revenue opportunities for electronic trading throughout the year.

All right. Thanks, Bob.

Oh. And further with that, the sales cycle for electronic trading is much shorter than the sales cycle for a new investment processing transaction.

Thanks, Bob.

You're welcome.

We have a question from the line of Peter Heckman.

Good afternoon, Bob. As a follow-up on the national city laws, is that more pricing related or services? And just for a modeling purposes -- I know you don't want to quantify it too much, but it -- would it be accurate to say that it was around 2% of total revenue?

I -- I hope, Peter, you can hear me better than I can hear you. Because you were breaking up on the question a little bit. I -- what I would say about the revenue is if you look at what we lost last year, and compare this to that, this is nowhere near the magnitude of that. And I'll just repeat that the profit effect this year and next year is very negligible. And I'm not sure I answered your -- answered your question because I couldn't hear -- it all.

Can you hear me better now? It was it -- was it a pricing issue? Dissatisfaction issue? Or did the winning vendor have a broader range of services?

I'm going to answer that question for you in sort of a general fashion versus a specific answer about a single client. Again, I don't want to talk about a single client in a situation like this.

As you know, we have dozens and dozens of recontracts every year. As you also know, we recontract substantially all of our clients, each year. Occasionally, we will lose a client. When we lose a client, it generally falls in one of three areas that is very consistent. The first one is that there is some kind of service disconnect. In other words, the service standard that the client feels that they need to continue their business, and the services that we provide, there's just not a match. That's one category. The second category is that a bank, for whatever reason, decides to take a strategic turn with a business and take it in a different direction. And that can sometimes be the reason we lose the contract. And then the last one is that someone in the bank has a very strong relationship and a track record with another supplier. And they just prefer that supplier because of their history.

And I would say that any loss that we've sustained this year falls into one of those three categories. It is never a price versus price -- large banks to not make decisions like this solely on a price case.

Okay. Can you hear me?

Yes.

Okay. As regards that, you know, we did see a fair amount of price erosion in the '98 '99 period, as we were renewing this -- a lot of these contracts. I know U.S. Bank was one where you renewed it early in the years but you took a hair cut on the pricing. Would you say the general trend of pricing has stabilized? Or is the general trend for fund administration, fund accounting services? Is the price still very competitive? And secondly, can you comment on are there any other large fund administration contracts that may be up for renewal here? And should we suspect any potential hair cut on pricing on other renewals this year, compared to this one?

The fund servicing business is a price competitive business. I think that that round of severe price competition that we saw in the late '90s did wring a lot of the price out, and that it has more or less stabilized in sort of a narrow band. Within the private banking and trust group, we have got a little over 20 contracts for mutual funds services. I feel like that, as I said in my prepared rashes, I feel that we have stabilized that business. I think the fact that we have won four new clients this year is a competitive edge. The pipeline for that business is the best that it's been since I've run this product line. I feel like we've stabilized the business. And generally, you'll see about 20% of our lines will be up for recontract each year.

Okay. And then last question, and then I'll let someone else ask a question. Would you say that with the pending loss with this customer, halfway try the year, plus the addition of the four you assigned in 2002, I assume those will go on sometime during the year? Would you expect revenue to be up or down in the fund administration business in 2003?

Assuming a flat capital market, I would expect it to be down.

By what order of magnitude?

I don't think it's going to be severe.

Okay. Thank you.

Question from the line of Tim Willey of A.G. Edwards.

Good afternoon. Can you hear me okay?

Yes.

I was wondering, as it relates to the three products, if you could give actually what the quarterly revenues were as I was not able to write fast enough, as you described the full-year performance for each of those.

Tim, you were breaking up a little bit, too. Was the question, what's the percentage of revenue by product line?

The actual dollar, in terms of the quarterly revenues for each of the products.

Okay. $55.8 million for investment processing. $12.2 million for mutual funds services. And $10.2 million for SM management.

Okay. And then I had a follow-up. Could you talk a bit about your hiring plans within the asset management product? Have you still been adding to the sales force? Or will you sort of, where you are at with ramping up the infrastructure for that product?

Yes. And we've accomplished that -- you know, you've seen my expense budget line. But we've accomplish the -- accomplished the focus in the SM management business by redeploying resources. And we've got about a dozen people focused on that sales and marketing for that line of business right now. And I expect to hold there maybe with one addition this year, with their senior sales person.

Okay. And regarding operational expenses, is the big sequential drop in the sales and marketing, does that pertain to the incentive compensation plan and just sort of truing up what the eventual bonuses and incentive comp was going to be for the year? Or is there something else there?

No. It's just that. It's sales commissions and bonus pools.

Great. Thank you.

We have a question from the line of Brad Moore.

Hi, Bob. Can you hear me okay?

I can.

Okay. Couple of things. First off, you quoted some statistics or numbers on the number of accounts processed in your trust accounting platform. Can you give us a sense as to how much of that was organic versus acquired growth?

Yeah. It was all acquired growth.

Okay. And can you give us a sense, then, -- what is -- what are you seeing in terms of account creation, so far here in 2003 on the Trust side of the business? And what is your outlook there?

Yeah. Brad, I haven't looked at that in a year or so. The last time I looked at it, our largest -- many of our largest clients' number of trust accounts on this system was holding fairly flat. And some of the regional and smaller banks were actually growing a number of trust accounts.

Okay. I -- is there any big client contracts up for renewal in that business in 2003?

In investment processing?

Yes.

I don't believe so. I don't believe so. Those contracts are five and seven years. And as you know, it's two years to convert. So they -- we don't have any RFPs out on the street right now.

Okay. Separate question, with regard to your STP initiative, you mentioned 90 new clients are live now. Did -- can you give us a sense as to what sort of transaction volume you're seeing as a result now of these 90 clients? And where would you expect it to take those relationships in terms of volumes? And is it so far meeting your expectations with regard to pricing? Or are you having to come in with some bigger concessions than what you thought initially?

From the -- a volume and volume expectation point of view, I think I've mentioned to you before that if you look at the total number of equity transactions that we process through our systems, the number that we're providing electronic execution for is a very, very small percentage. So the upside opportunity to capture new transactions in a straight-through processing environment is -- the upside opportunity is very large. And as I mentioned in my prepared comments, part of the good news is the expense associated with incurring those transactions is not a new expense for the bank. So it is a take-away business. We have to go in and take away the business from another supplier. But our straight-through processing story gives us a lot of credibility there. So far, the progress that we've made with the clients that we've talked to, the results have been excellent. And, you know, any time you're transitioning a client from one provider to another provider, there's things that you have to get through. The upside is huge. The client reception is excellent. The pricing that we're providing for the services is just about what I expected.

Okay. Great. All right. Thank you.

Question from the line of J.F. Kendon with Montgomery Scott.

Thank you. My question was answered. Thanks, Bob.

You're welcome.

The line of Chris Arnt with Lex Equity Group.

Thanks. I was wondering if you could repeat the investment processing -- the revenue growth with at one time how far revenues were down and if you could comment on what you anticipate in terms the mix of the business going forward? In other words, are one-time revenues down at a level where they're not going to decline further? Or if you could just comment on that?

Okay. Our recurring revenues were up about $14 million.

Okay.

Or 10%.

For the quarter?

For the year.

Year. Okay.

Our one-time revenues were down about $16 million and actually those are the numbers for the quarter.

Okay.

And the one-time revenues, you know, I mentioned that we have been seeing a decline in one-time revenues since late 2000.

Uh-huh.

So I don't think I want to take a look at where I think they're going. They're obviously the lowest they were since 2000. I'm sorry. Those were numbers for the year.

Okay. Okay. And then if you just clarify again the expenses for sales and marketing in this segment, do you expect them going forward to be more similar to the third quarter? Or was this an anomaly? The reduction in the fourth quarter?

Our sales and marketing expenses will depend upon our sales events and the commissions associated with sales events and our profitability So if you can anticipate what those will be, you can anticipate what the expenses will be. If sales events goes up and profit goes up, those expenses will go up.

Okay. Fair enough. Thanks.

Question from the line of Carla Cooper with Robert W. Baird.

Thank you. It was answered.

To the line of Gary Precipino with Fairings Research.

Good afternoon. I might have missed this, but could you give us some idea of the revenues from these 10 new investment processing clients, the four new funds clients that you're going to expect in '03? The annual run rate?

Yes. It's -- Gary, the contracted rate is about $16 million.

Okay.

We obviously will sell those clients other cross services like liquidity, electronic trading, and other services. So I would anticipate the total value of the client to be higher than that.

And these will all come on stream throughout '03 or...

I would say most of them will be on stream by the end of the first quarter. They're either on stream today or will be on stream by the end of the first quarter.

Okay. And then the other thing is, with this straight-through processing, the 90 clients, can you give us some idea what kind of revenues you would expect off of something like that, with 90 clients? Because it's based on trades, right? That's how you're getting paid?

Yes. Well, if you look at the revenue associated with that business last year, it was a little over $40 million in revenue. And as I've said before, the percentage of trades that we are processing in electronic trading volume based on the number of trades in the system is very low. So there's lot the of upside for us there.

Thank you.

Question from the line of Peter Heckman.

Hey, just a follow-up, an extension of my prior question. You had said that fund administration with the loss of National City would probably be down modestly for the year. Can you give some guidance as to what you feel the full Private Banking and Trust revenue line looks like for 2003? Is it midsingle digits up? Or is it more flattish?

Yeah. I don't think I want to give a forward look.

At this time.

Yes.

Okay. And is that primarily because of the uncertainty of the capital markets or...

No. It's primarily because Al won't let me.

Understood.

At this time, there are no further questions in queue.

Thank you.

Thank you, Bob. We'll now -- Our second segment today is Money Managers. And I'm going to turn it over to Wayne Widrow to discuss this segment. Wayne?

Thank you, Al.

Let me start by saying that as Al mentioned, the money managers segment is an area of focus for SEI, and our newest business segment. Our early results have been good, and I expect this segment to be one of the engines for SEI's continued growth.

Now, turning to the financials, during the fourth quarter, sales of $12.1 million, an increase of 16% over the fourth quarter of 2001. For the years, revenues increased $9.6 million, or 26%. Revenues for the fourth quarter were down slightly from the third quarter, due primarily to a decrease in transaction-based revenues. I consider this a speed bump against the long-term upward trend.

Profits for this segment totaled $2.2 million in the fourth quarter. For the year, profits increased 79%, from $4.9 million to $8.9 million. The 2002 revenues and profits, both represent new records for this segment.

We had a good business quarter for sales generating a projected $3.1 million, in annualized revenue. This included 10 new clients, with eight of them being alternative investment managers, and the balance being U.S.-based investment managers. This brings up sales of annualized revenue for the year, up to a total of $11.7 million.

In discussing what drives this business, last January, I overviewed three near-term strategies. They were: first, to stay the course by continuing to sell our current offering. Second, to capitalize on the growth of alternative investments. And third, to innovate.

Looking back at 2002, these strategies served us well. We added new clients to our offering, while at the same time, we continued to improve that offering to keep it fresh. For example, the etransformation of our administration services continued in 2002, with the addition of our marketing automated review system, MARS for short. This internet-based tool allows SEI customers to electronically submit for marketing materials for legal review, online editing, NASD filing and tracking, and electronic NASD approval.

For our alternative managers, we add internet-faced customer account access. E-info, which is an internet-based current events and breaking news service. And due diligence and audit services to help our clients face the trend toward increase said scrutiny by regulators and the public.

As the impact of the industrywide growth of alternative managers, we added 28 new clients and $10 billion in assets in 2002. We also saw this product line go from 17% of the segment's revenue to 27%.

2002 was a good year for our third area of focus. Innovation. During the 2001 year-end conference call, I mentioned our efforts to create an offering in the rapidly growing hedge funds. In 2002, we introduced our offerings and now count four registered hedge funds among our clients. We now have investment outsourcing to introduce in that area and to sign our first investment client.

Finally, we continue to invest in our infrastructure. These investments should reduce expenses and improve quality in 2003 and beyond. Let me offer two examples. In 2002, we began implementation of a new accounting engine for alternative and investment management business, which will bring an element of straight-through processing for trade entering to customer statementing to this business. 2002 also saw completion of our proprietary productivity tools, targeted at improving quality and reducing the expense associated with processing money market mutual funds.

Looking ahead, I expect to continue to grow this segment, using the same approach as 2002. We will continue to sell and further enhance our existing products. We expect continued growth in alternative investment management business, despite the slowdown in this industry predicted by many. And finally, we will begin to reap the benefits of our Innovations 2002, and we will continue to develop additional innovations. As we enter 2003, we will continue to feel the effect of the volatile capital markets on our asset-based feeds. However, our pipeline remains strong, supported by a better core product in 2002. They brought a sweeter product and brought a customer base.

I will now entertain questions.

Once again, Ladies and Gentlemen, if you wish to ask a question, press "1" on your touch-tone phone. First question JF Kendon with Montgomery Scott.

First, could you give us a little color on the transaction-based revenue that you said was the reason why revenue was down for the third quarter? And also your operating margins, while high, have been flattened for a couple of quarters now. Maybe insight to where we should expect the margins to go forward?

On the transaction-based revenues, it is just that. Primarily trading revenue. And what I would say the third quarter was higher than unusual. While the fourth quarter was lower than usual. So I would look for a trend in the [INAUDIBLE] quarter to get an feel for what it is.

So that is just seasonality?

It's hard to say.

Okay.

What was your second question?

Second question was operating margins that have been flat for several quarters now? What is your expectation going forward?

Well, as Al mentioned, this is an area of focus for us. And we continue to invest in this segment in order to bring new products to market and to drive the future growth of the segment. So what's buried, you know, what's included in the expenses here are some reinvestments in this business to bring new products to market in the future. And that obviously has an impact on the margins.

Okay. If you back out the impact of the market, what was the growth in the quarter on the top line?

What I can tell you for the year, if you look at assets, for the year, our total assets decreased about $900 million. And that, basically, is comprised of $12 billion in market-value losses and $3.1 billion in closed funds. Essentially, offset by about $14 billion in new-client fundings.

Okay. That makes sense, thanks.

We have a question from the line of Glen Greene.

I -- basically had the same question as you just answered, except for the most recent quarter, the mix of market appreciation inflows and redemptions, if any.

Okay. For the quarter, the assets increased $3.2 billion. And that was a combination of $1.8 billion in appreciation. And $1.4 billion in new-client fundings.

Okay. Thank you.

We have a question from Tim Willey with A. G. Edwards.

Good afternoon. I don't remember if you gave this number, Wayne, but did you give any statistics on the annualized revenue you signed this quarter and the number of clients to go with the $1.4 billion in new funding. Or is that new funding stuff that was actually signed in prior quarters?

Yeah. The $1.4 billion, that's going to be a mix of prior quarters and this quarter. For this quarter, what we sold was $3.1 million in annualized revenue. And that was 10 new clients.

Okay. And then could you talk a bit about your outlook for strong growth and alternative investments and sort of what, I guess just describing that, are you you expecting to steal market share from other people that are in this space? Or you just still sense very strong demand in the marketplace for new hedge funds and other kind of alternative investment vehicles?

Yeah. Tim, I'd say what you see here is take-away business from existing providers. And also people that have done this work inhouse and are now outsourcing it. The other area driving revenue growth here is we see larger and larger alternative managers making decisions. So the assets are coming in bigger chunks.

Okay. Okay. That's helpful. Thank you.

We have a question from the line of Peter Heckman.

Hi, Wayne. Let me clarify. You said -- or did you say $11.7 million in new annualized revenue was signed for new contracts in '02?

That's correct.

Okay. So on a base of $46 million, we're looking at growing this business, 20, 25% next year.

I would say the 11 point -- a portion of the $11.7 would have been recognized in the current year because that was sold during the year. And generally, the business gets implemented over say a two- to six-month time period.

Okay. And were there any offsetting business losses that carried into 2003?

Not of significance.

Okay. Thank you.

We have a question from the line of Brad Moore.

Hi, Wayne. The -- your answer to the prior question actually helped. That was one question. The other thing is on the alternative investment management space, how much does that constitute now of your assets? And also, if you could give us a sense as to how much revenue you're generating from that segment alone?

Well, rather than get into the assets, what I would say, it's 27% of the revenue. Or was 27% of the revenue.

Okay. And is your -- in terms of your experience with regard to cash flows, organic cash flows, out of the alternative investment managers, versus traditional managers, are you seeing a big shift, much like the overall market today? Or what's your experience in terms of client cash flows, right now, as you come into 2003?

I'm not seeing a real big shift. What I'm saying is this area, you have a lot of the haves and have nots. So the popular hedge manager can grow rather quickly. And as they fall out of favor, they grow not as quickly. And we have obviously a mixture of those.

Okay. Is it safe to say, then, that you're seeing positive cash flows from your alternative managers at this point should?

That is correct.

Okay. Thanks.

We have a question from the line of Carla Cooper with Robert W. Baird.

Hi. Good afternoon. Just to clarify. Is 27% of revenue a quarter number?

That's an annualized number.

Okay. And I wonder if you could talk any any changes you've seen in competition on the alternative investments side? Thanks.

Okay. During the past year, there's been a couple of acquisitions that have occurred. So -- acquisitions that have occurred. So State Street purchased a boutique[ph] provider in the States and [INAUDIBLE] purchase a boutique [ph] provider in the States and have both have entered the market with those boutique [ph] providers. So I would say that would be the most significant change in the competition.

Thanks.

And there are no further questions in queue at this time.

Thank you, Wayne. Our third segment is Investment Advisors. And even though Carl Guarino who has just taken leadership of this segment, I've asked Carmen Romeo to cover this segment today, since he led the segment most of the year. So I'll turn it over to Carmen.

Thank you, Al. And good afternoon to you. Let me begin by restating a theme that has been repeated now for over two years unfortunately. Namely, that our new business activity results continue to be impacted by the negative returns in the equity markets and the general uncertainty that continues to prey upon the nerves of many individual investors. Managing our business to maximize results while not sacrificing the long term has been our primary focus.

Our results from operations for the fourth quarter of this year, included revenues of $35.2 million, and profits of $19.6. And for the full year, revenues were $149 million, with profit of $78 million. Profit margins were 55.5 and 52.3% respectively. Now, the comparable numbers for similar periods last year were $39.4 million in the fourth quarter of 2001 with profit of $16.5. And total revenues for all of 2001 of $155 million and $61 million of profit. Margins for the fourth quarter of '01 and for all of '01 was approximately 40%. Profit margins improved throughout 2002 in light of reduced revenue is a result of continual management of our expenses. Primarily sales and incentive compensation and marketing.

We continue to spend on investments to align with new business activity. We continue to adhere to this tactic until there is a sustained change in the investment lineup. This cannot go on forever, as you all can appreciate, so that profit levels at these cannot be maintained.

To measure our business in terms of assets, we now have $22.4 billion under management at year end, compared with almost $27.4 billion at the end of 2001. Cash flow, net of redemptions, added approximately $900 million this year, while the decline in the equity market took the bulk out of our asset balances. As Al stated earlier, to give sense of investment typical portfolio, 60% equity. And 40% fixed income declined by about 9% last year.

Now, net cash flow for the fourth quarter this year was $125 million. So for the full year, our gross cash receipts from clients amounted to $6.1 billion. And as I said previously, net cash flow for the year was $900 million. These results are unsatisfactory to us. But despite that, SEI ranks in the top 10 of all investment companies in terms of asset growth for all of 2002. And of the 25 largest fund complexes, only 15 had positive cash flows, and SEI was one of those firms. These results provide testimony to the strength of our business proposition that we make with our advisors. Namely, that we will help them grow their practices, if they outsource their investment management and back office to SEI and have them concentrate on managing and servicing clients.

Now, on the client front, we continue to selectively recruit new clients and segment existing clients base the upon their adoption of SEI's philosophy of growing and managing their businesses. We are concentrating our sales and servicing around the top 600 firms. These firms contribute about 50% of our total assets that are managed.

On closing, this year has been difficult for advisors, investors, and for SEI alike. But we remain confident and secure in our belief that our client focus and comprehensive business solution will reap benefits of an equity market that begins to normalize to the mean. After all, the desired to provide personalized service to the investors remains consistent, no matter what the markets may serve.

With that, I'd lake to -- like to conclude my remarks and respond to any questions you may have.

And Ladies and Gentlemen, if you'd like to ask a question, press the 1 on your touch-tone phone. First question is from the line of Brad Moore.

Hi, Carmen.

Good afternoon.

Couple of things. Can you give us a number for the number of firms that you added in the fourth quarter? And what is your expectation in terms of bringing those clients on to your platform?

Again, let me just restate that we're trying to be much more selective going forward in our -- securing new clients. So the process is we want a few good advisors to add to the lineup of SEI type advisors. So in the fourth quarter, we added about 16 advisory firms. But I wouldn't necessarily infer from what that new business activity is reducing from prior quarters. And typically, December of any year is a shortened month for obvious reasons.

Okay. And then with regard to your fee rates, can you remind me what they are on this product? And whether or not there's been any change on the pricing front?

You know, the typical portfolio that we deliver to a client has an expense ratio of about 90 basis points. That's about 60% equity, 40% fixed income. And we make about 50 basis points, give or take, on that type of asset mix. So it's about in the 50-basis point range is what we're getting. And that's pretty much held constant throughout.

Okay. Thank you.

We have a question from the line of Peter Heckman.

Hey, Carmen. As regards those fee spreads, I've been reading some anecdotal information. They are seeing some pressure from the advisors because they are having some pressure given low returns on passing 150 or 190 basis points on to their clients. The first question would be, so are you seeing any pressure from your registered investment advisors for you to lower that 90 basis points? Or two, competitively, have you seen some of your competitors offering discounted rates. And third, I don't think I've seen any statistics regarding this, but I'm wondering in terms of year-asset allocation, and internally, with your subadvisors, how has performance been relative to what you consider your peers?

Let me try to answer your first question with respect to fees. We haven't really seen any pressure from advisors to reduce our internal expense ratios of any of our funds or products. And I can't really -- say for sure whether we've seen any reduction or pressure from clients to reduce the advisory fees that clients are paying to advisors. So at this stage of the game, you know, there has been no pressure for advisory fees that they charge their clients to come down. Now, remember, we have no control over the advisory fee that is assessed to a -- end investor. And that advisory fee may be covering a multitude of services beyond simply asset management. So it really depends on how that fee arrangement is structured between the advisor and the end investor. So there's other types of services that may or may not be included in that fee. But again, we haven't seen any pressure for that fee to be reduced.

Now, with respect to the second part of your question regarding performance, investment has been tough for us and for a lot of other investment management firms. And I'd like to say that we -- that we are matching our particular internal bench marks for this year, but we're not. Ask you know, it's -- it's just one of those tough years that we have got to get through and move on. But that is not necessarily a reason why clients are upset. If a client has a portfolio, and they're down 20% of being down another 20.5% isn't necessarily a reason for them to move. But we're trailing the benchmark slightly compared to -- active performance relative to the benchmark is somewhat below the bench mark.

And is that just on a -- you can always have an off year. In terms of longer term, like a 3 to 5 year.

That's positive And we're looking at blended benchmark of equity and investment and fixed income.

And then your comments earlier on the margins are appreciated. You saw sales and marketing expense down, like 45%, year over year. There -- is that all attributable to sales commissions and bonus payments? Or are you also seeing some other cost reductions that could potentially be more sustainable?

Well, the bulk of it is incentive comp and sales comp that we paid to the field folks. Our compensation is paid out at the time of funding from our clients. And we recognize that expense currently. And since we didn't have a great net cash flow year, accordingly the expense flow will be reduced. And on top of that, there was some other marketing initiatives that we elected to reprioritize, if you will, and move on.

Okay. Thank you.

We have a question from the line of Carla Cooper with Robert W. Baird.

Just to make sure I've got all the data, did you give the fourth quarter -- I was a little confused on the performance numbers that you cited. You said the average model portfolio for you guys was down 9% in '02. Then I heard, up 6 in Q4. Is that right?

Yeah. I think Al may have mentioned that. For the full year, a 60/40 portfolio was down 9%. Now, the fourth quarter results were a positive 6%.

And -- is that a direct one-to-one relationship to your fee? Because I know the movement of prices during the fourth quarter meant that the average daily price on the equity markets in any case was actually down about 1%? Is that a better measure to look at? Or is that point-to-point measure the best to look at?

In our particular business, the advisory business, we calculate fees on a daily average basis. So looking at averages during the course of a particular quarter is really more appropriate in our business.

Okay. And I guess is the 1% -- how should the 1% that I cited for equity be adjusted if you look at the 60/40 mix? I'm not clear what the 1% represented.

It was my calculation for what average closing price for the S&P 500 was down in Q4.

Well, I -- I'm a little bit confused. If you wanted to give me a call offline, I could perhaps try to attempt a better answer. But --

Yeah, that's fine. I'll do that.

Okay.

We have a question from the line of Glen Greene.

Hi, Carmen. How are you?

Glen, how are you.

Couple of questions. One, have you seen any pickup in redemption activity at all?

It's been pretty constant this year. Slight pickup in the fourth quarter, unfortunately. But it's not where we'd like it to be.

Okay. And then just sort of a progress update on the separate account program and what your asset levels are and if you're seeing any pricing pressure?

Let's see? Total assets at the end of the year are approximately 1.9 to $2 billion dollars. And we have not seen any pricing pressure at all. So those comments with respect to mutual fund pricing, as well as the separate account or managed accounts remains the same.

All right. And then the final question, and maybe Al wants to answer it, but I want to get some understanding of the management change? I mean, Wayne is obviously stepping up and Carmen you will you're going to take a new role. I'd like to understand what the thinking is there and why that happened?

The main thinking there is -- this is Al. And I'll let Carmen also comment on it. Is that Carmen is, shall we say, slowing down? So he didn't want the pressures of this business on a day to-day basis in the future.

That's understandable.

He is getting awfully old. [ Laughter ] Carmen, you might want to comment on that. Rebuttal? Carmen, wake up.

I'm -- first of all, I'm not old. [ Laughter ] No. I think that I wanted to do that. I had been with SEI for almost 26 years. And started this advisory business several -- like mid-90s. So I wanted to do some other things. So that's sort of the impetus behind this change for me. But believe me, there are enough people on the bench that are pitching in to make this transition as seamless as possible for our clients and for their clients. So I don't think there is anything for you or our clients to worry about in the changing the of the guard here.

You'll hear more from Carl Guarino in quarters to come. But he has lots of experience in the advisory business and in the institutional business. That he will transfer into this particular unit. So I think we're in good hands here.

And you've done a great job, Carmen.

But Al, I was wondering if anything strategically might change in this unit?

To answer the question about anything strategic, we have been, even under Carmen, have been working on a new strategy and new directions in this business. As every other the business during the last two to three years. And I think some of that is starting to come to fruition. I think what Carmen mentioned, just as a -- in passing is that we're being much more selective about advisors. And we realize where our real business is coming from, and it's not from the 7000. And I think when you start zeroing in on a few of our advisors, then we also want more, I guess control, if you will over the end client. Because had those been -- or if we had a bigger role in capturing those end clients, we would -- I don't think we would have suffered as many. And Carmen feels that way as well, as much withdrawals during this period, as we have. So we're going to get a lot closer to a lot fewer advisors, but hopefully do a hell of a lot more business with that. And there's other things happening in the industry. And I think we'll talk about those in quarters to come.

Okay. That's great. Thanks.

We have a question from the line J. F. Kendon with Montgomery Scott.

Thank you. Hi, Carmen.

How are you.

Not too bad. Just a couple of questions here. You may have touched on this before. But your asset allocations models. Have you sort of diversified? I think in the past you had talked about adding some new funds like tax efficient funds and things like that. Any color on that? In terms of where you added capabilities?

We introduced tax management portfolios in the mid-90s and more tax management with the introduction of separate accounts three years ago or two years ago. And we will introduce another new, separate account tax management program called i-map, which will integrate a series of separate account managers in one account so that you can make offsetting stock decisions within that portfolio because it's treated as one account, even though several managers may be managing the portfolio. That's sort of the extent of tax management at this point. We are looking at introducing things like hedge funds and alternative investments to the asset allocation mix. And that will be included in our asset allocation recommendations during this coming year.

I guess what I'm trying to get a sense of also is have you seen a bigger component of, say, merging market funds or other international funds or something like that in your asset mix? And is that having any fee impact on your structure at all?

In our asset allocation recommending as, we offer a series or group of portfolios, that in some cases includes emerging markets. And in some cases doesn't include emerging markets. But we leave that decision up to the advisor to make with the end investor. So it -- depends on the tolerances that the end investor has with respect to being comfortable or uncomfortable, with regard to a particular asset class or particular style. [ SIMULTANEOUS SPEAKERS ] Excuse me?

Sorry. Go ahead.

So it's a manual approach. And we give the end investor the tools necessary to make that decision.

Okay. So even a change in mix like that wouldn't really have any bearing on your fee structure. Is that what you're suggesting?

Well, if an individual investor decides to select a 100% equity portfolio, both domestic and international, we're going to make more money on that account.

Right.

Than an individual who might select a 60/40 portfolio. But the bulk of our business is around a diversified model.

Okay. Makes sense. I guess one final question was -- and I may have missed this again. In terms of your cash flow in the last quarter, was that break-even by month? Or was there any sort of meaningful change from the last quarter, the third quarter, that is?

The third quarter was almost awash.

Right.

Right. With receipts being offset by dispersements. And the fourth quarter, as I said, was $125 million plus.

In receipts?

That's correct.

Okay. Thanks.

We have a question from the line of Brad Moore.

Carmen, just a quick follow-up. I was curious to understand, then, with regard to your comment regarding focusing on your most productive clients, is that to suggest that there may be an active effort in 2003 to begin to prune clients and that we might see an actual drop in the number of client numbers?

Well, I think that strategy is being studied now, but we have begun a policy probably over a year and a half ago of trying to select our best clients. And spending most of our time, whether it be in-the-field sales people or internal sales people in helping those clients with their businesses. So there has been a very deliberate process to orient our own resources to where we have the best payoff. For us and for them. You know, we're not necessarily going to say that we're going to leave clients that have given us business, but clearly those clients that have given us a ticket or two aren't necessarily going to receive a lot of attention from us.

Have you lost any assets recently to client turnover or client losses?

No. No. Okay. So --

So no advisors, in other words, have left wholesale and moved their entire book away from SEI.

No.

Great. Thanks.

And at this time, there are no further questions in queue.

Thank you, Carmen. The -- our fourth segment is the enterprise segment, and I'm going to turn it over to Ed Locklin for this segment.

Good afternoon, Al. I'm going to discuss the results for the fourth and quarter and also the results for the full year 2002.

The weak economy of 2002 continued to dampen the sales level for the new opportunity for the sales segment. And the consecutive year of negative equity returns contributed to a decline in revenue for the year.

Revenues for the full year declined $8.6 million. The two primary reasons for the decline were two client losses early in the year. And the lost revenue due to negative capital markets. Profits for the year increased 9%, to $21.8 million. Throughout the entire year, we diligently managed expenses in two discretionary areas, marketing and incentive compensation. And we also benefited from lower technology development costs due to the treasury point trading project being completed.

Operating margins improved throughout the year, finishing the year at 39%, compared to 31% for the year 2001. Asset balances at year-end were $16.2 billion. An $800 million dollar increase from the beginning of the year. New-client sales and funding activity enabled us to offset the negative impact of capital market depreciation on asset balances.

During 2002, SEI established 45 new client relationships with retirement and treasury asset sales, totaling $2.7 billion. This represents a 32% increase in new clients and 150% increase in new assets for both the retirement and the treasury solution. Our client base continues to be diversified by both size and also market segment.

So notable new relationships during 2002 were the Jewish Federation of Philadelphia, Ohio State University Alumni Association, American Standard, and also SAP America. Client fundings through the year totaled $1.8 billion in equity and fixed income assets and $980 million in cash. Funding for the fourth quarter 2002 was $550 million. Strong client funding enabled us to end the year with asset balances equal to the beginning of the year, during a period when a globally diversified portfolio was down a little over 9%.

So to summarize, throughout the challenging economic and capital markets of 2002, the enterprise segment continued to successfully expand our client base through new sales and also prudently-manage expenses. This enabled us to increase profit margins for the year. Looking ahead, pension and retirement programs have become a more visible and strategic issue facing institutions, and we are optimistic that this will be a positive catalyst for increasing the level of client sales decisions and also to contribute, to continued increases in revenues and profits for the enterprise segment.

With that, I would be happy to entertain any questions that you may have.

Ladies and Gentlemen, once again, if you wish to ask a question, press the 1 on your phone. First we'll go to the line of J. F. Kendon with Montgomery Scott.

Hi, Ed. Couple of questions. First and foremost, in the past, you've touched on this. The main driver in your business of late seems to be the pension plan. Is that correct? Could you give us a little more color on that, please?

Primarily, insofar as the longer term assets that we're selling, for a retirement solution or an endowment foundation solution. This year, we sold both of those. That made up the diversified client basis. What -- the driver behind what we're seeing now is that to a large degree, what we have seen over the last couple of years was disappointing capital markets, and declining interest rates. These liabilities, you know, have -- or these pension plans have really gotten to a point where they have less assets than they have liabilities, so they're underfunded. Companies are now starting to make contributions. And I think what we're seeing is that this is something where companies are looking for different ways to be able to do deal with this. Because this retirement funding issue and contribution issue is really competing for investment dollars, that they would rather invest other places in the company. So that, we see as a positive catalyst for the business.

Are you sort of going in as the new vendor? Or are you displacing other people who might have been involved in the outsourcing functions with these new clients.

Typically, the clients that we go into, they are not outsourcing today. Our proposition would be to outsource the manager selection, manager monitoring manager replacement and also the trust and the custody work. We would be displacing a variety of different types of prior relationships. Typically, it would be their trustee, their custodian, and either all or some of their money managers.

And in terms of numbers, I think you had a pretty strong quarter in terms of client funding so when does that begin to show up on the top line? How many quarters does it usually take?

You know, our -- I guess that the -- typically, if we sell something one quarter, it's going to be funded the second quarter. Or the next quarter. So it's probably a 90-day max type of a delay between a client sign a contract and then the revenue starting.

Oh, I get it. So the funding in the fourth quarter should really begin to impact this quarter.

Correct.

Okay. And what was your unfunded balance at the end of the quarter? I think you said that, but sorry. Yeah.

We worked pretty hard this fourth quarter because of the severe market declines to really get as much as we could implemented. So going into the first of the year, we had an unfunded backlog of I think it was about $45 million dollars. Because we had gotten most of it on line.

Okay. And what has been the client activity so far this year?

So far this year, we have seen a brisk pace. And we are very optimistic that the thawing in the client decision process that Al had alluded to earlier were starting to see that in this segment.

Great. Thanks, Ed.

Sure.

And at this time, there are no further questions in queue.

Thank you, Ed. And our fifth and final segment is investment in new business. I'm going to turn it over to Carl Guarino to discuss this segment. And Carl will cover this segment today, and then Joe [INAUDIBLE], who recently took over from Carl as head of our global business will discuss this segment in the future. Carl?

Thanks, Al. And good afternoon, everyone.

Results for the business segment for both the full year and quarter reflect weakness in markets globally. For both the quarter to quarter and year to year basis, revenues were down slightly while average asset balances remained essentially flat at $7.6 billion. These flat-asset balances conceal positive debt asset flow of approximately $150 million for the quarter and $620 million for the full year, which were offset by the market declines.

The operating losses for the quarter and full year reflect substantial improvement over the prior periods, but we have continued to invest in technology, our Dublin based operation and European sales and marketing.

On the institutional side, we had continued growth in the quarter with three new institutional wins in the UK, bringing our client count there to 18. And total committed assets in this segment to over $1 billion, U.S. Approximately 700 million of this amount was unfunded at year end, and most of that is expected to fund by the end of the first quarter.

We also had funding in the fourth quarter from Alliance, an important new Canadian defined contribution client. Our prospect pipeline for the institutional business in both the UK and Canada remain strong.

On the other hand, net asset growth in the high network segment through distributors was modest in all regions, due to weak markets globally. We are continuing to build out our distribution network, focusing on IFA [ph] and the UK in Canada. And private banks on the European continent. And we believe this will position us well for growth as markets normalize.

Looking beyond the current market uncertainties, we remain optimistic about the long-term prospects for our global initiatives. We expect to continue to invest in 2003 both in our global expansion and other new business initiatives and therefore expect to incur additional operating losses in 2003 in this segment. The size of these losses may, however, be modestly less than those in 2002 as we continue to gain market traction and scale in our global business.

And I will be happy to respond to any questions that you have.

Once again, Ladies and Gentlemen, if you wish to ask a question, press the 1 on your touch-tone phone.

Our first question is from Tim Willey, with A.G. Edwards & Sons.

Carl, could you repeat a couple of numbers for me? The billion dollars that you talked about, that's in the equity and fixed income investment business?

Yes. It reflects what is committed to us by UK-pension clients.

Okay.

So that's typically a full portfolio solution that we're giving them, both domestic, meaning UK equity and fixed income for them as well as international for them, which would be the U.S. and the continent and Asia. And the $700 million of that amount is not yet funded.

Okay. So that will come on in like 1Q you said?

Most would expect to come in in the first quarter. We work through basically both the contracting issues and then transition issues from where the portfolio is.

Okay. And then in regards to IFAs [ph] in the UK, how many do you currently have? Or you don't have any yet working with you there?

No. We've got about 30 signed up in the UK.

Okay. So 30 IFAs. Great. Thank you.

If there are any additional questions, please press 1 at this time. And there are no further questions in queue.

Thank you, Carl. That concludes the quarterly report from our segments. I would like now to turn it to on Kathy Heilig to give you a few companywide statistics.

Thanks, Al. Good afternoon, everyone. I have some additional corporate information about this quarter.

Fourth quarter cash flow from operations was $47.5 million, or 43 cents per share. Fourth quarter free cash flow was $41.1 million, or 37 cents per share. Year to date cash flow from operations was $175.7 million, or $1.57 per share. Fourth quarter capital expenditures were $4.8 million, that includes $2.7 million for new facilities as well as 9 million -- excuse me. $900,000 on capitalized software for investment [INAUDIBLE] platform. Year-to-date capital expenditures were $28.1 million, which includes $17.3 million towards our new facilities and $3.3 million of capitalized software.

Fourth quarter's depreciation, $4 million. Amortization of $434,000, year-to-date depreciation $16.3 million and year to date amortization at $1.7 million. For 2003, we would expect capital expenditures to be approximately $20 million, which include about $12 million towards our new facilities.

The accounts payable balance at December 31st, was $4.1 million.

Also, we would like to remind you that many of our responses are based upon assumptions that involve risk. Our actual future revenues and income could differ from expected results. We have no obligation to publicly update any forward-looking statements.

Are there any other questions?

Once again, Ladies and Gentlemen, to ask a question, press 1 on you're touch-tone phone. Go first to the line of Glen Greene.

Kathy, just -- two questions on sort of below the line items. The $4 million equity in earnings rose pretty significantly. And also the -- understanding the $2.9 million writeoff in net loss in investments.

Okay. The equity in earnings of our [INAUDIBLE] affiliate. In the fourth quarter, they had pretty significant performance fees that they earned. And that really is the difference of the number of what you're used to seeing.

So they had a great quarter.

Yeah, they did have a great quarter. And the net loss in investments, that is basically three things. It is our hedge in effectiveness. Write-downs that we account when losses are deemed to be other than temporary, as well as a smaller portion of it is summarized losses on investments.

Okay.

We have a question from the line of Gary Precipino.

Just a general question. As I look at your expenses, I -- I -- can you hear me?

Yes, I can, Gary.

I count about $64 million of an absolute decline in expenses between operating and developing sales and marketing, about $20 million for the year -- $20 for Q4. Off of that, can we expect that the expenses would remain stable or down? Or how much more can you cut there?

Well, I mean, the expenses and this has already been talked somewhat about all the quarters. One, you're seeing some of what is in R&D, really relating to some of the mutual fund clients that we lost lost year. So there are some direct costs associated with that. There were significantly less compensation costs in 2002, compared to 2001. Both incentive-based as well as sales commission. And then there is really some -- pieces of just generally less expense. I mean, I can see it in telephones, supplies, consulting, promotion. So there was definitely some cost control.

Okay. Thank you.

We have a question from the line of Robert Lee with KBW.

Thank you. I have two questions. First one relates to, you know, EPS targets. I mean, if I remember, since a lot of your expenses have come from a lower compensation cost and my understanding is at least part of your compensation is related to senior management with certain EPS growth targets, what are those growth targets going for? Is there any change taking place? What's your own expectation in order for your own options to sort of quit when they hit their [INAUDIBLE]? And then I have a follow-up question.

Okay. This is Al. As I understand it, you're asking, going forward, what are our goals?

More or less, yeah. Yeah, more or less. [ Laughter ] Mostly more.

I'm sorry. We don't divulge those. They're usually higher than what your estimates are.

Okay. Okay. Then the -- in terms of the use of cash flow, I mean, this -- obviously this year, you've used the lion's share of it to buy back stock. Just hypothetically, if there was some type of change in tax relating to dividends,? Anything that would make you change your strategy there? Or, you know, just -- will you just take it under advisement kind of thing? Or how should I think of your use of cash flow going forward?

Well, I cannot speak for the board. It does make dividends certainly more attractive to individual investors, those paying taxes. But we're not. I mean, even at the levels we pay, and we have increased our dividend, pretty much every year, we are a very small dividend payer. And we would take it under some advisement, but speaking for myself rather than for the board, I -- I really am not crazy about dividends. We might move a little more money there, but I don't think it would be significant. Certainly nothing like -- and we can't -- we cannot spend the kind of money on dividends as we do on buying our stock back. So buying our stock back will still be the lion's share of our use of cash.

Okay. Great. Thank you.

We have a question from the line of Tim Willey with A.G. Edwards & Sons.

Would you happen to have a head count number for year-end '02, versus year-end, '01 available?

Tim, you know what? You can call me. I don't have that with me.

Okay. Great. Thanks.

Yeah, you about I would assume it's pretty --

It's fairly flat. But I don't have that number at hand either.

Okay.

Thanks.

And at this time, there are no further questions in queue.

Thank you, Kathy. And so, Ladies and Gentlemen, we have again managed to grow earnings in times that, to say the least, are trying. To keep that going, which we've mentioned a few times, we'll need revenue growth to supplement productivity improvements. And we have a number of new, expanded solutions being rolled out in just about every market to help us grow revenues. And we do look forward to again building sales momentum in our key markets.

And I can't stress enough that in the longer run, we are very optimistic and confident. Our recurring revenues, strong cash flow, the market acceptance of our business solutions, operational leverage, added to continually investing in new solutions for our markets, as well as our portfolio businesses, all serve to support the goal of creating long-term, sustainable growth in revenues and profits.

And once again, if there is anything I would like to leave you with, is a reminder, we're in the business solutions business. Our clients stay with us, because we are solving essential problems for them and making their businesses better. This is a high-value added proposition. It differentiates us from our competition, and we believe it will serve us strongly during times as we look ahead.

Now, if there are any other questions you might have of any kind, this would be a good time to ask them.

Once again, Ladies and Gentlemen, to ask a question, press "1" on your touch-tone phone. And there are no further questions in queue.

Thank you very much for your attendance and your attention and have a great day. Thank you a lot.

That does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.