-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A6Y2R+8SjJTW/4VSN92mkbgoMNRGz/7DpZBOwm2P4QahFhtlx7W17Bg5N+1xbVFY Ur/gbHRBOjDUaD7aFcKJBg== /in/edgar/work/0000912057-00-049504/0000912057-00-049504.txt : 20001115 0000912057-00-049504.hdr.sgml : 20001115 ACCESSION NUMBER: 0000912057-00-049504 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WADDELL & REED FINANCIAL INC CENTRAL INDEX KEY: 0001052100 STANDARD INDUSTRIAL CLASSIFICATION: [6211 ] IRS NUMBER: 510261715 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13913 FILM NUMBER: 763402 BUSINESS ADDRESS: STREET 1: 6300 LAMAR AVE STREET 2: P O BOX 29217 CITY: OVERLAND PARK STATE: KS ZIP: 66202-4200 BUSINESS PHONE: 9132362000 MAIL ADDRESS: STREET 1: P O BOX 29217 STREET 2: 6300 LAMAR AVE CITY: OVERLAND PARK STATE: KS ZIP: 66202-4200 10-Q 1 a2030407z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ____________ Commission file number 001-13913 WADDELL & REED FINANCIAL, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 51-0261715 --------------------------------- ------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 6300 LAMAR AVENUE OVERLAND PARK, KANSAS 66202 ---------------------------------------- (Address of principal executive offices) (Zip Code) (913) 236-2000 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Shares outstanding of each of the registrant's classes of common stock as of September 30, 2000: Class Outstanding as of September 30, 2000 ------------------------------------ ------------------------------------ Class A Common stock, $.01 par value 43,471,008 Class B Common stock, $.01 par value 40,245,617 WADDELL & REED FINANCIAL, INC. FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2000 INDEX PAGE NO. -------- Part I. Financial Information Item 1. Unaudited Financial Statements Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations for the three months and nine months ended September 30, 2000 and September 30, 1999 4 Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2000 and September 30, 1999 5 Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2000 6 Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and September 30, 1999 7 Notes to Unaudited Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Part II. Other Information Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands)
=========================================================================================== September 30, December 31, 2000 1999 ASSETS (unaudited) - ------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 59,103 60,977 Investment securities, available-for-sale 71,458 90,245 Receivables: Mutual Funds 12,632 7,597 Customers and other 28,187 19,541 Current income taxes 4,717 0 Deferred income taxes 44 37 Prepaid expenses and other current assets 5,136 7,111 - ------------------------------------------------------------------------------------------- Total current assets 181,277 185,508 Property and equipment, net 48,393 27,633 Deferred sales commissions, net 9,191 1,851 Goodwill (net of accumulated amortization of $30,470 and $26,493) 168,589 112,994 Deferred income taxes 192 5,665 Other assets 2,724 1,422 - ------------------------------------------------------------------------------------------- Total assets $410,366 335,073 =========================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------- Liabilities: Current liabilities: Accounts payable $ 30,778 34,002 Accrued sales force compensation 17,231 14,578 Short term notes payable 200,341 125,307 Income taxes payable 0 8,284 Other current liabilities 21,668 16,456 - ------------------------------------------------------------------------------------------- Total current liabilities 270,018 198,627 Accrued pensions and post-retirement costs 12,872 10,103 Other liabilities 259 0 - ------------------------------------------------------------------------------------------- Total liabilities 283,149 208,730 - ------------------------------------------------------------------------------------------- Stockholders' equity: Common stock (See table below) 997 997 Additional paid-in capital 252,358 238,434 Retained earnings 179,351 97,129 Deferred compensation (10,177) (11,246) Treasury stock (See table below) (259,126) (198,360) Accumulated other comprehensive income (186) (611) - ------------------------------------------------------------------------------------------- Total stockholders' equity 127,217 126,343 - ------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $410,366 335,073 ===========================================================================================
Sept. 30, 2000 Dec. 31, 1999 Common stock -------------- ------------- ($.01 par value) Class A Class B Class A Class B --------------- ------- ------- ------- ------- Authorized ............. 225,000,000 150,000,000 225,000,000 150,000,000 Issued ................. 48,213,261 51,487,500 48,213,261 51,487,500 Outstanding ............ 43,471,008 40,245,617 44,478,318 41,971,870 Treasury Stock ......... 4,742,253 11,241,883 3,734,943 9,515,630
See accompanying notes to unaudited consolidated financial statements. 3 WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Operations Unaudited (in thousands, except for per share data)
================================================================================ ==================== For the three months For the nine months ended September 30, ended September 30, -------------------- -------------------- 2000 1999 2000 1999 - -------------------------------------------------------------------------------- -------------------- Revenue: Investment management fees $ 64,619 $47,091 $190,725 $124,114 Underwriting and distribution fees 49,500 30,466 150,872 94,056 Shareholder service fees 13,938 10,622 38,836 30,716 Investment and other revenue 1,869 2,090 8,010 7,561 - -------------------------------------------------------------------------------- -------------------- Total revenue 129,926 90,269 388,443 256,447 - -------------------------------------------------------------------------------- -------------------- Expenses: Underwriting and distribution 45,436 30,703 136,746 92,947 Compensation and related costs 14,126 10,991 42,550 29,734 General and administrative 7,118 5,275 21,171 13,820 Depreciation 917 551 2,433 1,613 Interest expense 4,058 1,904 10,825 3,910 Amortization of goodwill 1,525 845 3,977 2,297 - -------------------------------------------------------------------------------- -------------------- Total expenses 73,180 50,629 217,702 144,321 - -------------------------------------------------------------------------------- -------------------- Income before provision for income taxes 56,746 40,000 170,741 112,126 Provision for income taxes 22,215 15,320 66,374 42,674 - -------------------------------------------------------------------------------- -------------------- Net income $ 34,531 $24,680 $104,367 $ 69,452 ================================================================================ ==================== Net income per share: - Basic $ 0.42 $ 0.28 $ 1.25 $ 0.77 - Diluted $ 0.40 $ 0.27 $ 1.20 $ 0.75 ================================================================================ ==================== Weighted average shares outstanding: - Basic 83,152 87,860 83,339 90,453 - Diluted 87,179 89,975 86,874 92,679 ================================================================================ ==================== Dividends declared per common share $ 0.0884 $0.0884 $ 0.2652 $ 0.2652
See accompanying notes to unaudited consolidated financial statements. 4 WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income Unaudited (in thousands)
============================================================================================================================ For the three months For the nine months ended September 30, ended September 30, -------------------- ----------- -------- 2000 1999 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- Net income $ 34,531 $ 24,680 $104,367 $ 69,452 Other comprehensive income: Net unrealized appreciation (depreciation) of investments during the period, net of income taxes of $(17), $(301), $1,087, and $(926) (30) (485) 1,745 (1,491) Reclassification adjustment for amounts included in net income, net of income taxes of $(4), $(72), $(826), and $(40) (6) 115 (1,320) (63) - ---------------------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 34,495 $ 24,310 $104,792 $ 67,898 ============================================================================================================================
See accompanying notes to unaudited consolidated financial statements. 5 WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity Nine Months Ended September 30, 2000 Unaudited (in thousands)
=================================================================================================================================== Accumulated Additional other Total Common stock paid-in Retained Deferred Treasury Comprehensive Stockholders' Shares Amount capital earnings Compensation Stock Income equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 99,701 $997 238,434 97,129 (11,246) (198,360) (611) 126,343 Net income - - - 104,367 - - - 104,367 Recognition of deferred compensation - - - - 1,069 - - 1,069 Dividends paid - - - (22,145) - - - (22,145) Exercise of stock options, net - - (18,392) - - (589) - (18,981) Tax benefit from exercise of options - - 32,316 - - - - 32,316 Treasury stock repurchases - - - - - (96,177) - (96,177) Unrealized loss on investment securities - - - - - - 425 425 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 2000 99,701 $997 252,358 179,351 (10,177) (295,126) (186) 127,217 ===================================================================================================================================
See accompanying notes to unauditred consolidated financial statements. 6 WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Unaudited (in thousands)
============================================================================================================================= For the nine months ended September 30, --------------------------------------- 2000 1999 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $104,367 $ 69,452 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,460 3,910 Recognition of deferred compensation 1,069 1,030 (Gain)/Loss on sale of investments (2,096) 52 (Gain)/Loss on sale and retirement of fixed assets (1) 32 Capital gains and dividends reinvested (106) (94) Deferred income taxes 5,272 2,176 Changes in assets and liabilities (net of acquisition): Receivables from funds (5,035) (2,378) Other receivables (1,406) 6,917 Other assets (6,219) (5,751) Accounts payable (3,260) 4,710 Other liabilities 21,802 3,995 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 120,847 83,511 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to investment securities (18,032) (2,776) Proceeds from sale of investment securities 37,773 14,660 Proceeds from maturity of investment securities 2,299 856 Additions of property and equipment (22,168) (6,612) Investment in real estate - 551 Acquisition of subsidiaries (net of cash acquired) (60,290) (19,410) - ----------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (60,418) (12,731) - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net borrowings on credit facility 75,000 115,000 Cash dividends (22,145) (24,303) Purchase of treasury stock (96,177) (125,960) Stock option exercises - net payments (26,055) (8,295) Exercise of stock options 7,074 462 - ----------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (62,303) (43,096) - ----------------------------------------------------------------------------------------------------------------------------- Net increase/(decrease) in cash and cash equivalents (1,874) 27,684 Cash and cash equivalents at beginning of period 60,977 30,180 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 59,103 $ 57,864 =============================================================================================================================
See accompanying notes to unaudited consolidated financial statements. 7 WADDELL & REED FINANCIAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION: WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Waddell & Reed Financial, Inc. and subsidiaries (the "Company") derive their revenues primarily from investment management, distribution, administration, and related services provided to the Waddell & Reed Advisors Funds ("Advisors Funds"), W&R Funds, W&R Target Funds ("Target Funds") and institutional accounts in the United States. BASIS OF PRESENTATION In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments consisting of normal recurring adjustments, necessary to present fairly the results of its operations and its cash flows for the periods ended September 30, 2000 and 1999 and its financial position at September 30, 2000. These financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 1999, from which the accompanying balance sheet as of December 31, 1999 was derived. The operating results and cash flows for the periods ended September 30, 2000 are not necessarily indicative of the results that will be achieved in future periods. STOCK SPLIT On February 23, 2000, the Company declared a three-for-two stock split on the Company's Class A and Class B common stock payable April 7, 2000 to stockholders of record as of March 17, 2000 and effected April 10, 2000. All per share and share outstanding data in the consolidated financial statements and related notes have been restated to reflect the stock split for all periods presented. ACQUISITION OF SUBSIDIARY On March 31, 2000, the Company completed its acquisition of The Legend Group ("Legend"), a privately-held mutual fund distribution and retirement planning company based in Palm Beach Gardens, Florida. The acquisition has been accounted for as a purchase and, accordingly, the results of Legend are included with those of the Company commencing on the date of acquisition. The purchase price of $61,403,000, including direct costs, has been allocated to the assets acquired and liabilities assumed resulting in goodwill of $59,571,000, which is being amortized on a straight line basis over 25 years. The purchase agreement provides for additional purchase price payments contingent upon the achievement by Legend of specified earnings levels over the next three years. These contingent payments could aggregate to as much as $14.0 million. 8 A summary of the net assets acquired is as follows (in thousands): Assets acquired Cash and cash equivalents $ 1,113 Accounts receivable 7,156 Goodwill 59,571 Other assets 1,949 ---------- Total 69,789 Liabilities assumed 8,386 ---------- Total purchase price $ 61,403 ==========
LIQUIDITY AND CAPITAL On July 11, 2000, the Company declared a dividend payable on November 1, 2000 in the amount of $.0884 per share to shareholders of record as of October 11, 2000. The total dividend paid was $7,401,000. Excluding share repurchases used to satisfy stock option exercises, the Company did not repurchase shares of its common stock during the three month period ended September 30, 2000. For the nine month period ended September 30, 2000, the Company repurchased 4,747,292 Class A and Class B common shares at an average price of $20.24 per share, on a post-split basis. EARNINGS PER SHARE Basic earnings per share for the 2000 and 1999 periods are based on the average number of shares outstanding for the periods ended September 30, 2000 and 1999, respectively. Diluted earnings per share for these periods also includes the dilutive impact of stock options. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT INCLUDED IN THIS FORM 10-Q REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS STRATEGY AND OTHER PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT OR THAT THE COMPANY WILL TAKE ANY ACTIONS THAT MAY PRESENTLY BE PLANNED AND NEITHER THE COMPANY NOR ANY OTHER PERSON WILL BE RESPONSIBLE FOR THE ACCURACY OR COMPLETENESS OF ANY SUCH FORWARD-LOOKING STATEMENTS. CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE DISCLOSED IN THE "RISK FACTORS" SECTION OF THE COMPANY'S FORM 10-K ANNUAL REPORT AND ARE DISCUSSED BELOW IN THE "FORWARD-LOOKING INFORMATION" SECTION. ALL SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS. UPDATED INFORMATION WILL BE 9 PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. OVERVIEW The Company derives its revenues primarily from providing investment management, distribution, and administrative services to the Advisors Funds, W&R Funds, Target Funds, and institutional accounts. Investment management fees, the Company's most substantial source of revenue, are based on the amount of assets under management and the management fee rate charged; these are affected by sales levels, financial market conditions, redemptions and the composition of assets. Underwriting and distribution revenues consist of sales charges and commissions derived from the sale of investment and insurance products and distribution fees earned for distributing Class B and Class C shares. The products sold have various sales charge structures and the revenues received from the sale of products vary based on the type and amount sold. Rule 12b-1 distribution and service fees earned for distributing certain shares of the Advisors Funds and W&R Funds are based upon a percentage of assets and fluctuate based on sales, redemptions, and financial market conditions. Service fees include transfer agency fees, custodian fees for retirement plan accounts, and portfolio accounting fees. RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30,1999 Third quarter 2000 net income was $34.5 million or $0.40 per share on a diluted basis, compared with net income of $24.7 million or $0.27 per share for the prior year's third quarter, adjusted for April 2000's three-for-two stock split. Net income per share increased 48% quarter over quarter. Operating revenues, excluding investment and other income, for the third quarter of 2000, were $128.1 million, up 45% over last year's third quarter. Management fee revenues were $64.6 million for the third quarter of 2000, an increase of $17.5 million or 37% from 1999's third quarter. These increases in management fee revenues came from both mutual fund and institutional business. Mutual fund management fees increased 32% quarter over quarter, contributing $14.1 million or 80% of the third quarter's increase. Investment performance, net sales, plus reinvested dividends pushed average mutual fund assets under management to $34.2 billion in the third quarter of 2000, a 30% increase compared to the third quarter of 1999. Third quarter 2000 retail net sales were $103.1 million versus net sales of $20.8 million for the third quarter of 1999. Management fees increased at a slightly higher rate than that of average assets due to a greater proportion of assets being in funds with higher rate structures. Redemption rates on retail mutual funds continued to fall in the third quarter of 2000 to 6.1% compared with 7.3% for the third quarter of 1999. Management fee revenues from institutional and separately managed accounts increased by $3.4 million to $6.6 million for the three months ended September 30, 2000. Managed assets of Austin, Calvert & Flavin ("ACF"), acquired in August 1999, contributed $1.2 million of this increase. Also contributing to this increase in revenues was the addition of institutional growth equity accounts during 1999 and 2000 that had higher management fee rates. Institutional and separately managed accounts had net redemptions of $27.2 million this quarter versus net sales of $126.3 million for 1999's third quarter. Underwriting and distribution fee revenues were $49.5 million for the third quarter of 2000, a 62% increase from the previous year's third quarter. Legend, acquired in March 2000, contributed 10 $9.6 million to underwriting and distribution fee revenues during the third quarter of 2000. Excluding Legend's contribution, the increase was 31%. Retail investment product sales growth of 28% quarter over quarter was fueled by new advisors and productivity gains. Higher distribution fees from variable annuity products and an increase in the proportion of sales in variable products, which have higher commission rates, were also contributing factors.
Investment Product Sales ($ in thousands; excludes money markets) 3Q00 3Q99 % CHANGE --------- --------- ---------- Front-load (Class A) $ 369,954 $ 320,290 15.5 Back-load (Class B) 90,114 97,457 -7.5 Level-load (Class C) 39,370 - - - - W&R Target funds (variable products) 156,222 95,092 64.3 ------- ------ ---- Total retail 655,660 512,839 27.8 Institutional 230,587 224,425 2.7 ------- ------- --- Total $ 886,247 $ 737,264 20.2 ========= ========= ====
Underwriting and distribution expenses, consisting of direct costs and indirect costs, increased $14.7 million or 48% in the third quarter of 2000. Legend contributed $7.7 million to underwriting and distribution expenses. The increase after excluding Legend's contribution was 23%. This provided for a distribution margin of 5.3% compared with -0.8% for last year's third quarter. Including Legend, the distribution margin was 8.2% for this year's third quarter. Sales grew at a much faster rate than that of fixed indirect costs which contributed to margin improvement. Sales force productivity, as measured by retail investment product sales per advisor, increased 19% from $210 thousand in the third quarter of 1999 to $250 thousand in the third quarter of 2000. Third quarter sales productivity for financial advisors with two years or more of tenure increased by 9.2% from $298.5 thousand in the third quarter of 1999 to $325.8 thousand in the third quarter of 2000. The number of financial advisors was 2,713, up 230 or 9.3% from last year's third quarter. Shareholder service fees from transfer agency, custodian, and accounting services were $13.9 million for the third quarter of 2000, up 31% from last year's third quarter. Legend contributed $1.7 million to shareholder service fee revenues. Excluding Legend's contribution, the increase was 15%. The increase was due primarily to the 267 thousand increase in the average number of customer accounts, representing a 16% increase over the year before. The number of shareholder accounts was 1.93 million at September 30, 2000, compared with 1.66 million at September 30, 1999. Compensation and related costs increased $3.1 million or 29% from last year's third quarter. Legend contributed $427 thousand to compensation and related costs. Excluding Legend, compensation increased 25%. The growth in the Company's operations added 17% to the average employee headcount from the third quarter of last year to this year's third quarter. The remainder of the increase came from higher performance based compensation and normal salary increases. General and administrative expenses increased $1.8 million or 35% in the third quarter of 2000 when compared with last year's third quarter. Legend contributed $1.0 million to general and 11 administrative expenses. Excluding Legend, general and administrative expenses increased 15% due largely to higher transfer agency computer services costs. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 For the nine months ended September 30, 2000, net income was $104.4 million or $1.20 per share on a diluted basis, compared with net income of $69.5 million or $0.75 per share for the same period in 1999, adjusted for April 2000's three-for-two stock split. Net income per share on a diluted basis increased 60% year over year. Operating revenues, excluding investment and other income, for the nine months ended September 30, 2000, were $380.4 million, up 53% over the same period last year. Management fee revenues were $190.7 million for the nine months ended September 30, 2000, an increase of $66.6 million or 54% over the same period last year. These increases in management fee revenues came from both mutual fund and institutional business. Mutual fund management fees increased 46% year over year, contributing $53.4 million or 80% of the increase. Investment performance, net sales, plus reinvested dividends pushed average mutual fund assets under management to $33.6 billion in the first nine months of 2000, a 31% increase compared to the first nine months of 1999. Mutual fund management fee revenues increased at a greater rate than average assets because of the restructuring of the fund management fee arrangements implemented in July 1999 and a shift of assets to funds with higher management fee rates, such as small cap, technology, and international funds. The average mutual fund management fee rate rose to 67.6 basis points for the first nine months of 2000, up from 61.1 basis points for the same period last year. Net retail mutual fund sales were $398.2 million in the first nine months of 2000 compared with net sales of $146.8 million for the same period last year. Redemption rates on retail mutual funds have continued to fall. For the nine months ended September 30, 2000 the redemption rate on retail mutual funds was 6.7% compared with 7.9% for the same period in 1999. Management fee revenues from institutional and separately managed accounts increased by $12.9 million to $20.0 million for the nine months ended September 30, 2000. Managed assets of ACF contributed $6.4 million of this increase. Also contributing to this increase in revenues was the addition of institutional growth equity accounts during 1999 and 2000 that had higher management fee rates. Institutional and separately managed account net sales were $101.4 million for the nine months ended September 30, 2000 compared with net redemptions of $124.4 million for the same period in 1999. Underwriting and distribution fee revenues were $150.9 million for the first nine months of 2000, a 60% increase from the same period last year. Legend contributed $20.8 million to the current year's underwriting and distribution fee revenues. Excluding Legend's contribution, the increase was 38%. Retail investment product sales growth of 39% year over year was fueled by new advisors and productivity gains. Higher distribution fees from variable annuity products and an increase in the proportion of sales in variable products, which have higher commission rates, were also contributing factors. 12
Investment Product Sales ($ in thousands; excludes money markets) YTD 2000 YTD 1999 % CHANGE ----------- ----------- -------- Front-load (Class A) $ 1,259,097 $ 1,025,248 22.8 Back-load (Class B) 303,289 289,330 4.8 Level-load (Class C) 201,051 - - - - W&R Target funds (variable products) 476,847 297,409 60.3 ------- ------- ---- Total retail 2,240,284 1,611,987 39.0 Institutional 813,768 731,207 11.3 ------- ------- ---- Total $3,054,052 $2,343,194 30.3 ========== ========== ====
Underwriting and distribution expenses, consisting of direct costs and indirect costs, increased $43.8 million or 47% in the first nine months of 2000. Legend contributed $16.4 million to underwriting and distribution expenses. Excluding Legend's contribution, the increase was 30%. This provided for a distribution margin of 7.5% compared with 1.2% for the same period in 1999. Including Legend, distribution margin was 9.4% for the first nine months of 2000. Sales grew at a much faster rate than that of fixed indirect costs which contributed to margin improvement. Sales force productivity, as measured by retail investment product sales per advisor, increased 29% from $674 thousand in the nine months ended September 30, 1999 to $869 thousand for the same period in 2000. For the nine month period ended September 30, sales productivity for financial advisors with two years or more of tenure increased by 20% from $952 thousand for the nine months ended September 30, 1999 to $1.1 million for the nine months ended September 30, 2000. Shareholder service fees from transfer agency, custodian, and accounting services were $38.8 million for the nine months ended September 30, 2000, up 26% from the same period last year. Legend contributed $3.4 million to shareholder service fee revenues. Excluding Legend's contribution, the increase was 15%. The increase was due primarily to the 258 thousand increase in the average number of customer accounts, representing a 16% increase over the previous year. Compensation and related costs increased $12.8 million in the first nine months of 2000, a 43% increase over the same period last year. ACF contributed $2.9 million in the first nine months of 2000 and $406 thousand from the time of its acquisition, in August 1999, until September 30, 1999. Legend contributed $831 thousand in 2000. Excluding these acquisitions, compensation increased 33% which was driven by the growth in the Company's operations resulting in a 21% increase to average employee headcount year over year. Additionally, annual salary increases and performance incentive bonuses also contributed to the increase. General and administrative expenses increased $7.4 million in the first nine months of 2000, a 53% increase from the same period last year. ACF contributed $812 thousand in the first nine months of 2000 and $160 thousand from the time of its acquisition, in August of 1999, until September 30, 1999. Legend contributed $2.1 million in 2000. Excluding these acquisitions, general and administrative expenses increased 34%, a result of investments made to facilitate growth, notably in computer systems and services, and costs associated with implementing new funds and share classes. 13 LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents, and liquid marketable securities were $130.6 million at September 30, 2000, a $20.7 million decrease from December 31, 1999. Cash and cash equivalents at September 30, 2000 and December 31, 1999 include reserves of $13.7 million and $17.1 million, respectively, for the benefit of customers in compliance with securities regulations. Cash flow provided from operations was $120.8 million and $83.5 million for the first nine months of 2000 and 1999, respectively. The increase in cash flow was primarily attributable to the 50 percent increase in net income from the Company's operations. During the current year, cash has been used primarily to repurchase shares of the Company's stock totaling $96.2 million and to acquire Legend for $60.3 million. Other uses of cash this year were additions to property and equipment of $22.2 million, including construction of the home office building, and payment of dividends of $22.1 million. Besides cash from operations, other sources of capital during the current year include net borrowings of $75.0 million on the credit facility and proceeds from investment securities sales of $37.8 million. Management believes its available cash, marketable securities and expected cash flows from operations will be sufficient to fund dividends, obligations, and operations as well as advance sales commissions and meet any other reasonably foreseeable cash needs. The Company has entered into a 364-day revolving credit facility with various banks for a total of $220 million. The facility is expandable to $330 million, whereby the banks could increase the loans by $110 million on an uncommitted basis. At September 30, 2000, there was $200.0 million outstanding under this line of credit. RENAMING FUND FAMILIES AND BROADENING FUND DISTRIBUTION On July 1, 2000, the Company renamed its two retail mutual fund families. The United Funds family was renamed the "Waddell & Reed Advisors Funds" ("Advisors Funds"). This family of funds will continue to be available for sale only through Waddell & Reed's sales forces. Concurrently, the Waddell & Reed Funds family was renamed the "W&R Funds." The Company plans to make this family of funds available for sale through both Waddell & Reed's sales forces and selected third-party distribution channels. On October 15, 2000, the Company renamed its Target/United Fund family the "W&R Target Funds" ("Target Funds"). THE LEGEND GROUP On March 31, 2000, the Company completed its acquisition of Legend, a privately-held mutual fund distribution and retirement planning company based in Palm Beach Gardens, Florida. Through its network of approximately 300 financial advisors, Legend serves employees of school districts and other not-for-profit organizations nationwide. The acquisition has been accounted for as a purchase and, accordingly, the results of Legend are included with those of the Company commencing with the date of acquisition. The purchase price of $61.4 million, including direct costs, has been allocated to the assets acquired and liabilities assumed resulting in goodwill of $59.6 million which is being amortized on a straight line basis over 25 years. The acquisition agreement provides for additional purchase price payments based upon the achievement by Legend of specified earnings levels over the next three years. These payments could aggregate to as much as $14.0 million. 14 Beginning in May 2000, the Company began to offer its Advisors Funds and W&R Funds through Legend's financial advisors. These funds are being sold into Legend's various account types, including 403(b) plans and asset allocation accounts. NATIONWIDE AGREEMENT The Company announced on October 23, 2000 the execution of an agreement for Nationwide Financial to provide a broad span of private label insurance and retirement products for use by Waddell & Reed, Inc.'s independent financial advisors. The selection of Nationwide Financial to provide insurance and retirement products completes an exhaustive effort by the Company to increase the breadth and competitiveness of such products available to its financial advisors. Launch of these products is subject to state and federal regulatory approval. Nationwide Financial will develop for distribution by the Company's investment advisors three variable annuities, a flexible-premium variable universal life product, a survivorship life product, and a qualified group retirement plan. United Investors Life Insurance Company ("UILIC"), a subsidiary of Torchmark Corporation ("Torchmark") and formerly an affiliate of the Company, also provides insurance products for the Company. UNITED INVESTORS LIFE INSURANCE COMPANY LITIGATION The Company is in litigation with its current insurance provider and others over terms of a compensation agreement signed in July 1999 by UILIC and Waddell & Reed, Inc. The compensation is paid by UILIC to the Company on variable products underwritten by UILIC and distributed by the Company. The agreement provides for the Company to be paid annual compensation on all variable annuity policies issued after January 1, 2000, and a slightly lower annual compensation on variable annuity policies issued before that date. Payments are continuing but that agreement has been challenged by UILIC in a complaint filed in May 2000, in the Circuit Court of Jefferson County, Alabama in which the Company has subsequently named Torchmark as a third party defendant in a tortious interference claim. The Company is confident that the court will uphold the agreement as a contract and that the Company will prevail on the merits of the case. Moreover, the Company does not foresee any additional risk to existing variable policy assets and anticipates continued growth in sales of variable annuity products. In a related development, a number of Torchmark affiliates terminated Waddell & Reed Investment Management Company as investment adviser for certain insurance company general account assets and pension plan assets totaling $768 million with an average management fee of 25 basis points. These accounts paid approximately $1.9 million in annual investment management fees. The only other Torchmark-affiliated assets for which Waddell & Reed Investment Management Company serves as investment adviser are approximately $40 million in 401(k) plans of Torchmark affiliates. SALE-LEASEBACK AGREEMENT On October 23, 2000, the Company reached an agreement with Mesirow Realty Sale-Leaseback, Inc. to sell its two home office buildings and to lease them back for a period of fifteen years. Proceeds from the sale are expected to be approximately $28.5 million resulting in a gain of 15 approximately $2.0 million. This gain will be deferred and amortized over the term of the operating lease. The transaction is expected to be closed by year end. One of these two buildings has been under construction and will be completed and substantially occupied by year-end. In late September, the Company's information technology departments relocated there and more units of our operating and support groups will move each week. It is estimated that going forward, the Company will incur approximately $3.4 million annually in lease expense and additional operating expenses that will be reflected in general and administrative expenses. The sale of these properties and the sale of multi-tenant properties last year were made because real estate is not viewed to be part of the Company's core business. The proceeds from the sale will initially be used to repay debt, but will ultimately increase the Company's capacity to invest in its core business and to repurchase the Company's common stock. STOCK REPURCHASE PROGRAM In the third quarter of 2000, the Company did not repurchase shares of its common stock. For the nine month period ended September 30, the Company repurchased 4.7 million shares of its common stock at an aggregate cost of $96.2 million. The total number of shares outstanding at September 30, 2000 was 83.7 million, comprised of 43.5 million Class A shares and 40.2 million Class B shares. From October 1, 2000 through October 19, 2000, the Company acquired 292 thousand Class A and 106 thousand Class B shares of its common stock at an aggregate cost, including commissions, of $12.2 million. The average price per share of these repurchases was $30.73. CLASS A AND CLASS B SHARE RECAPITALIZATION The Company has received a ruling from the Internal Revenue Service allowing it to recapitalize its Class A and Class B common stock without adversely affecting the prior Internal Revenue Service rulings obtained at the time of the tax-free spin-off from Torchmark. The Company is seeking guidance from the New York Stock Exchange on how to proceed before taking any further definitive action. It is anticipated that, subject to approval by the New York Stock Exchange, the Board of Directors and the stockholders, upon completion of the proposed recapitalization, the Company will have only Class A common stock authorized, issued and outstanding. 16 OTHER INFORMATION ASSETS UNDER MANAGEMENT (amounts in millions)
ENDING 3Q00 3Q99 % CHANGE 2Q00 % CHANGE - ----- ------- ------- -------- -------- -------- Mutual Fund Equity $30,019 $21,523 39.5 $29,685 1.1 Fixed Income 3,135 3,666 -14.5 3,202 -2.1 Money Market 939 788 19.2 854 10.0 ------- ------- ------- Total 34,093 25,977 31.2 33,741 1.0 Institutional and private accounts 5,927 4,769 24.3 6,010 -1.4 ------- ------- ------- Total $40,020 $30,746 30.2 $39,751 0.7 ======= ======= ======= AVERAGE Mutual Fund Equity $28,765 $21,808 31.9 $29,067 -1.0 Fixed Income 4,486 3,742 19.9 3,206 39.9 Money Market 924 776 19.1 885 4.4 ------- ------- ------- Total 34,175 26,326 29.8 33,158 3.1 Institutional and private accounts 5,986 4,318 38.6 5,947 0.7 ------- ------- ------- Total $40,161 $30,644 31.1 $39,105 2.7 ======= ======= =======
OTHER ITEMS
3Q00 3Q99 % Change YTD 2000 YTD 1999 % Change ---- ---- -------- -------- -------- -------- Retail Redemption Rate 6.14% 7.25% 6.71% 7.90% Sales per Advisor (000s) - ------------------------ Total 250 210 18.8 869 674 29.0 2+ Years * 326 298 9.2 1,142 952 20.0 0 to 2 Years ** 70 57 23.9 200 154 30.2 Other 55 25 121.4 187 84 123.6 Number of advisors *** 2,713 2,483 9.3 Number of shareholder accounts 1,933,447 1,659,200 16.5
* Advisors licensed with the Company for two or more years. ** Advisors licensed with the Company for less than two years. *** Excludes Legend advisors INFORMATION SYSTEMS The Company believes its software programs and operating systems are year 2000 compliant and ready for use beyond the year 2000. The Company is not currently aware of any material year 2000 problem relating to any of its material internal software programs or operating systems. Its internal operation and business are also dependent upon the computer-controlled systems of third parties such as our suppliers, customers and other service providers. The Company believes that, absent a systemic failure outside its control, such as a prolonged loss of electrical or telecommunications service, year 2000 17 problems at third parties will not have a material impact on its operations. The failure of the Company's internal systems or the systems of third parties to be year 2000 ready could temporarily prevent the Company from providing service to its customers and could require the Company to devote significant resources to correct such problems. The costs associated with remediating any year 2000 problems have not, in the opinion of management, been material to date. Although the Company does not anticipate that these costs will be material in the future, there can be no assurance that these costs will not be material. FORWARD-LOOKING INFORMATION From time-to-time, information or statements provided by or on behalf of the Company, including those within this quarterly report on Form 10-Q may contain certain "forward-looking information," including information relating to anticipated growth in our revenues or earnings, anticipated changes in the amount and composition of assets under management, our anticipated expense levels, and our expectations regarding financial markets and other conditions. Readers are cautioned 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 contained in these forward-looking statements 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 or revise 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, whether as a result of new information, future developments or otherwise. Our future revenues will fluctuate due to many factors, such as the total value and composition of assets under our management and related cash inflows or outflows in the Advisors, W&R and W&R Target mutual funds (the "Funds") and other investment portfolios; fluctuations in national and worldwide financial markets resulting in appreciation or depreciation of assets under our management; the relative investment performance of the Funds and other investment portfolios as compared to competing offerings; the expense ratios of the Funds; investor sentiment and investor confidence; the ability to maintain our investment management and administrative fees at appropriate levels; competitive conditions in the mutual fund, asset management, and broader financial services sectors; our introduction of new mutual funds and investment portfolios; our ability to contract with the Funds for payment for investment advisory-related administrative services provided to the Funds and their shareholders; the continuation of trends in the retirement plan marketplace favoring defined contribution plans and participant-directed investments; potential misuse of client funds and information in the possession of our financial advisors; and the risk that the restructuring of our mutual fund products and development of additional distribution channels may not be successful. Our revenues are substantially dependent on fees earned under contracts with the Funds and could be adversely affected if the independent directors of one or more of the Funds determined to terminate or significantly alter the terms of the investment management or related administrative services agreements. Our future operating results are also dependent upon the level of our operating expenses, which are subject to fluctuation for the following or other reasons: variations in the level of compensation expense due to, among other things, performance-based bonuses, changes in our employee count and mix, and competitive factors; unanticipated costs that may be incurred to protect investor accounts and the goodwill of our clients; and disruptions of services, including 18 those provided by third parties such as communications, power, and the mutual fund transfer agent system. In addition, our future operating results may also be impacted by our ability to incur additional debt and by adverse litigation. 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 our operations and results, including but not limited to effects on costs we incur and effects on investor interest in mutual funds and investing in general or in particular classes of mutual funds or other investments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Since December 31, 1999, there has been no material change in the information provided in Item 7A of the 1999 Form 10-K Annual Report. PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION FORWARD-LOOKING STATEMENTS The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). The 1995 Act provides a "safe harbor" for forward-looking statements to encourage companies to provide information without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected. Although the Company does not anticipate that it will make forward-looking statements as a general policy, the Company will make forward-looking statements as required by law or regulation, and from time to time may make such statements with respect to management's estimation of the future operating results and business of the Company. The Company hereby incorporates into this report by reference to its Form 10-K for the year ended December 31, 1999, the cautionary statements found on pages 25-29 of such Form 10-K. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K None. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 13th day of November, 2000. WADDELL & REED FINANCIAL, INC. By: /s/ John E. Sundeen, Jr. ------------------------------ John E. Sundeen, Jr., Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) By: /s/ D. Tyler Towery ------------------------------- D. Tyler Towery, Vice President and Controller (Principal Accounting Officer) 20 EX-27 2 a2030407zex-27.txt ARTICLE 5 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS REPORTED IN THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001052100 WADDELL & REED FINANCIAL, INC. 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 59,103 71,458 40,819 0 0 181,277 65,066 16,673 410,366 270,018 0 0 0 997 126,220 410,366 0 388,443 0 202,900 3,977 0 10,825 170,741 66,374 104,367 0 0 0 104,367 $1.25 $1.20
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