-----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, ANHt3+QPAkVbY45YqFYkknHuFGsssFvCSHkro7UhKOveRrCRpBpU7/8nprE9BcQw LmdMGUgDicOSRIWfNVPpug== 0000912057-99-005964.txt : 19991117 0000912057-99-005964.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-005964 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WADDELL & REED FINANCIAL INC CENTRAL INDEX KEY: 0001052100 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [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: 99754127 BUSINESS ADDRESS: STREET 1: P O BOX 29217 STREET 2: 6300 LAMAR AVE 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 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, 1999 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 of (I.R.S. Employer 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, 1999: Class Outstanding as of September 30, 1999 - --------------------------------------- ------------------------------------ Class A Common stock, $.01 par value 29,613,495 Class B Common stock, $.01 par value 28,271,847 WADDELL & REED FINANCIAL, INC. FORM 10-Q QUARTER ENDED SEPTEMBER 30, 1999 INDEX Page No. -------- Part I. Financial Information Item 1. Unaudited Financial Statements Consolidated Balance Sheets at September 30, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the three months and nine months ended September 30, 1999 and September 30, 1998 4 Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 1999 and September 30, 1998 5 Consolidated Statements of Changes in Shareholder's Equity for the nine months ended September 30, 1999 6 Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and September 30, 1998 7 Notes to Unaudited Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. Other Information Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands)
====================================================================================================================== September 30, December 31, ASSETS 1999 1998 (Unaudited) - ---------------------------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $57,864 $30,180 Investment securities, available-for-sale 87,940 103,153 Receivables: United funds and W&R funds 8,118 5,740 Customers and other 23,786 28,865 Deferred income taxes 1,140 1,309 Prepaid expenses and other current assets 5,033 3,222 - ---------------------------------------------------------------------------------------------------------------------- Total current assets 183,881 172,469 Property and equipment, net 22,772 17,685 Investment in real estate 23,793 24,718 Deferred sales commissions, net 19,545 15,710 Goodwill (net of accumulated amortization of $22,676 and $20,382) 113,515 95,928 Other assets 813 669 - ---------------------------------------------------------------------------------------------------------------------- Total assets $364,319 $327,179 ====================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------------------------------- Liabilities: Current liabilities: Accounts payable $32,715 $28,304 Accrued sales force compensation 12,524 11,916 Short term notes payable 155,254 40,076 Income taxes payable 9,442 13,464 Other current liabilities 15,288 16,034 - ---------------------------------------------------------------------------------------------------------------------- Total current liabilities 225,223 109,794 Deferred income taxes 1,254 208 Accrued pensions and post-retirement costs 11,595 10,041 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities 238,072 120,043 - ---------------------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock ($.01 par value; 150,000,000 Class A shares 665 665 authorized, 32,142,174 issued and 29,613,495 outstanding and 100,000,000 Class B shares authorized, 34,325,000 issued and 28,271,847 outstanding September 30, 1999; 150,000,000 Class A shares authorized, 32,142,174 issued and 30,906,445 outstanding and 100,000,000 Class B shares authorized, 34,325,000 issued and 31,911,956 outstanding December 31, 1998) Additional paid-in capital 238,962 246,271 Retained earnings 92,474 47,325 Deferred compensation (11,464) (12,494) Treasury stock (2,528,679 Class A shares and 6,053,153 Class B shares September 30, 1999; 1,235,729 Class A shares and 2,413,044 Class B shares December 31, 1998) (193,038) (74,833) Accumulated other comprehensive income (1,352) 202 - ---------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 126,247 207,136 - ---------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $364,319 $327,179 ======================================================================================================================
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 ended For the nine months ended September 30, September 30, ---------------------------------------------------------------- 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- Revenue: Investment management fees $ 47,091 $ 34,982 $ 124,114 $ 102,623 Underwriting and distribution fees 30,466 27,887 94,056 79,889 Shareholder service fees 10,622 8,306 30,716 24,336 Investment and other revenue 2,090 2,268 7,561 6,432 - ---------------------------------------------------------------------------------------------------------------------- Total revenue 90,269 73,443 256,447 213,280 Expenses: Underwriting and distribution 30,703 26,215 92,947 70,770 Compensation and related costs 10,991 8,256 29,734 24,820 General and administrative 5,275 2,032 13,820 5,682 Depreciation 551 492 1,613 1,351 Interest expense 1,904 400 3,910 400 Amortization of goodwill 845 725 2,297 2,177 - ---------------------------------------------------------------------------------------------------------------------- Total expenses 50,269 38,120 144,321 105,200 - ---------------------------------------------------------------------------------------------------------------------- Income before affiliated items and provision for 40,000 35,323 112,126 108,080 income taxes Affiliated items: Interest income - - - 1,950 Interest expense - - - (8,604) - ---------------------------------------------------------------------------------------------------------------------- Income before provision for income taxes 40,000 35,323 112,126 101,426 Provision for income taxes 15,320 13,356 42,674 38,902 - ---------------------------------------------------------------------------------------------------------------------- Net income $ 24,680 $ 21,967 $ 69,452 $ 62,524 ====================================================================================================================== Net income per share: Basic $ 0.42 $ 0.33 $ 1.15 $ 0.94 Diluted $ 0.41 $ 0.33 $ 1.12 $ 0.94 ====================================================================================================================== Weighted average shares outstanding: Basic 58,573 66,399 60,302 66,437 Diluted 59,983 66,416 61,786 66,534 ====================================================================================================================== Dividends declared per common share $ 0.1325 $ 0.1325 $ 0.3975 $ 0.3975
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 ended For the nine months ended September 30, September 30, --------------------------- ------------------------- 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- Net Income $ 24,680 $ 21,967 $ 69,452 $ 62,524 Other comprehensive income: Net unrealized appreciation (depreciation) of investments during the period, net of income taxes of $(225), $(218), $(826), and $(331) (361) (358) (1,295) (543) Reclassification adjustment for amounts included in net income, net of income taxes of $(4), $62, $(134), and $62 (9) 103 (259) 103 - ---------------------------------------------------------------------------------------------------------------------- Comprehensive Income $ 24,310 $ 21,712 $ 67,898 $ 62,084 ======================================================================================================================
See accompanying notes to unaudited consolidated financial statements. 5 WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Statement of Changes in Shareholders' Equity Nine Months Ended September 30, 1999 (unaudited in thousands)
=================================================================================================================================== Additional Deferred Treasury Unrealized Total Common stock paid-in Retained Compensation Stock gain (loss) on stockholders' Shares Amount capital earnings investment equity (deficit) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 66,467 $ 665 246,271 47,325 (12,494) (74,833) 202 207,136 Net income 0 0 0 69,452 0 0 0 69,452 Recognition of deferred compensation 0 0 0 0 1,030 0 0 1,030 Dividends paid 0 0 0 (24,303) 0 0 0 (24,303) Exercise of stock options, net 0 0 (15,588) 0 0 7,755 0 (7,833) Tax benefit from exercise of options 0 0 8,279 0 0 0 0 8,279 Treasury stock purchases 0 0 0 0 0 (125,960) 0 (125,960) Unrealized loss on investment securities 0 0 0 0 0 0 (1,554) (1,554) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at September 30, 1999 66,467 $ 665 238,962 92,474 (11,464) (193,038) (1,352) 126,247 ===================================================================================================================================
See accompanying notes to 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, --------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 69,452 $ 62,524 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,910 3,528 Recognition of deferred compensation 1,030 792 Loss on sale of investments 52 0 Loss on sale and retirement of fixed assets 32 30 Capital gains and dividends reinvested (94) (77) Deferred income taxes 2,176 1,158 Changes in assets and liabilities: Receivables from funds (2,378) (412) Other receivables 6,917 (10,618) Due to/from affiliates - operating 0 5,232 Other assets (5,751) (1,616) Accounts payable 4,170 (2,162) Other liabilities 3,995 7,578 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 83,511 65,957 - ---------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to investments (2,776) (110,628) Sale of investments 14,660 0 Proceeds from maturity of investments 856 1,588 Purchase of property and equipment (6,612) (7,983) Investment in real estate 551 0 Investment in Austin, Calvert and Flavin, net of cash (19,410) 0 Other 0 (26) - ---------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (12,731) (117,049) - ---------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from IPO 0 516,014 Notes payable 115,000 0 Cash dividends (24,303) (17,615) Change in due to/from affiliates - nonoperating 0 (479,601) Purchase of treasury stock (125,960) (4,759) Stock option exercises - net payments (8,295) 0 Exercise of stock options 462 0 - ---------------------------------------------------------------------------------------------------------------------- Net cash (used in)/provided by financing activities (43,096) 14,039 - ---------------------------------------------------------------------------------------------------------------------- Net increase/(decrease) in cash and cash equivalents 27,684 (37,053) Cash and cash equivalents at beginning of period 30,180 73,820 - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 57,864 $ 36,767 ======================================================================================================================
See accompanying notes to unaudited consolidated financial statements 7 WADDELL & REED FINANCIAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION: WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Waddell & Reed Financial, Inc. and subsidiaries ("Company") derive their revenue primarily from investment management, administration, distribution and related services provided to the United mutual funds ("United"), Waddell & Reed mutual funds ("W&R"), Target/United mutual funds ("Target") and institutional accounts in the United States. Until March 1998, the Company was wholly owned by Torchmark. In March 1998, the Company completed the initial public offering ("Offering") of its Class A common stock, with the Company realizing net proceeds of approximately $516 million. Approximately $481 million of the proceeds were used to prepay notes payable to Torchmark. On November 6, 1998 Torchmark distributed its remaining ownership interest in the Company by means of a tax-free spin-off to the stockholders of Torchmark of all shares of common stock of the Company held by Torchmark. 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, 1999 and 1998 and its financial position at September 30, 1999. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1998, from which the accompanying balance sheet as of December 31, 1998 was derived. The operating results and cash flows for the periods ended September 30, 1999 are not necessarily indicative of the results that will be achieved in future periods. ACQUISITION OF SUBSIDIARY On August 9, 1999 the Company completed its acquisition of Austin Calvert & Flavin, Inc. ("ACF"), a privately held investment management firm. The acquisition has been accounted for as a purchase and, accordingly, the results of ACF have been included with those of the Company since the date of acquisition. The purchase price of $21.2 million, including $0.2 million of direct costs, has been allocated to the assets acquired and liabilities assumed resulting in goodwill of $19.9 million which is being amortized on a straight line basis over 25 years. The proforma effect of the acquisition on net income was not and is not expected to be material. The acquisition agreement provides for additional purchase price payments based upon the achievement by ACF of specified earnings levels over the next five years. These payments could aggregate as much as $8.7 million. LIQUIDITY AND CAPITAL On July 15, 1999, the Company declared a dividend payable on November 1, 1999 in the amount of $.1325 per share to shareholders of record as of October 11, 1999. The total dividend paid was $7.7 million. During the third quarter of 1998, the Company announced that it would commence a stock repurchase program whereby shares of the Company's common stock would be purchased on the open market from time to time under conditions deemed attractive by management. These shares will be held in treasury and used for stock options. During the fourth quarter of 1999, the Company renewed its revolving credit facility. The credit facility is a $220 million, expandable to $330 million, 364-Day revolving facility at an interest rate of LIBOR plus .625%. As of September 30, 1999, the outstanding balance on this facility was $155.0 million. The primary use of the borrowed funds was to repurchase stock under the stock repurchase program. During the third quarter of 1999, certain employees and directors of the Company exercised options covering 1.7 million shares. The exercise price was paid with previously owned shares and the Company withheld 0.3 million shares for tax withholdings. Cash payments remitted to the taxing authorities on behalf of the employees and directors aggregated approximately $9.0 million. 8 EARNINGS PER SHARE Basic earnings per share for the 1999 and 1998 periods are based on the average number of shares outstanding for the periods ended September 30, 1999 and 1998, 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, WHICH INCLUDE, WITHOUT LIMITATION, THE ADVERSE EFFECT OF EITHER A DECLINE IN SECURITIES MARKETS OR A DECLINE IN THE COMPANY'S PRODUCTS' PERFORMANCE, FAILURE TO RENEW INVESTMENT MANAGEMENT AGREEMENTS, COMPETITION, CHANGES IN GOVERNMENT REGULATION, AVAILABILITY AND TERMS OF CAPITAL AND YEAR 2000 UNCERTAINTIES. 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 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 United, W&R and 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 and 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 sales of investment and insurance products and distribution fees earned from the W&R Funds for distributing their 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 shares of the 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. 9 RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 Third quarter 1999 net income was $24.7 million or $.41 per share on a diluted basis, compared with net income of $22.0 million or $.33 per share for the prior year's third quarter. Operating revenues, excluding investment and other income for the third quarter of 1999, were $88.2 million, up 23.9% over last year's third quarter. The acquisition of Austin Calvert & Flavin, Inc. ("ACF") in early August of this year added $1.0 million to 1999's operating revenue. A 34.6% increase in management fee revenues for 1999's third quarter, compared to 1998's third quarter, was attributable to several factors. The restructuring of the Funds' management fee arrangements, effective July 1st of this year, added approximately $5.3 million to 1999's management fee revenues, while ACF's $1.5 billion in managed assets contributed $1.0 million to management fee revenues. The remaining increase was due to higher assets under management and the composition of assets. Mutual fund assets under management were $26.0 billion at September 30, 1999, up 18.6% from $21.9 billion at September 30, 1998. Institutional assets under management were $3.3 billion at September 30, 1999, up 14.0% from $2.9 billion at September 30, 1998. Mutual fund sales net of redemptions were $41.7 million for the third quarter of 1999 compared with net redemptions of $67.2 million for the third quarter of 1998. The blended mutual funds' redemption rates were 7.4% and 9.0% for the third quarters ended 1999 and 1998, respectively. Underwriting and distribution revenues were up 9.2% for the third quarter of 1999 compared with the prior year period. Commission revenues from sales of front-load investment products, primarily the United Funds and variable annuity products, accounted for $1.7 million of the $2.6 million difference in the quarter over quarter comparison. The increase in these sales, especially variable product sales which have higher commission rates, drove the growth in commission revenues. Revenues from the Waddell & Reed Funds, which are derived primarily from asset-based 12b-1 fees, increased in relation to growth in assets, reduced somewhat by lower contingent deferred sales charges from lower fund redemptions. INVESTMENT PRODUCT SALES ( $ IN THOUSANDS)
3Q 99 3Q 98 % change --------------------------- ---------- United Funds $320,290 $315,177 1.6% Waddell & Reed Funds 97,457 76,468 27.4 Variable Products (Target/United) 95,092 90,807 4.7 --------- -------- Total Investment Product Sales $512,839 $482,452 6.3 ========= ========
Shareholder service fees for the third quarter of 1999 increased 27.9% from the third quarter of last year. A fee increase, implemented in the fourth quarter of 1998, added approximately $1.3 million per quarter to 1999's service fee revenue. This fee increase was offset by higher processing 10 costs recorded in general and administrative expenses. Excluding the effects of this fee increase, revenues grew in correlation to the increase in the number of shareholder accounts. The number of shareholder accounts was 1.66 million at September 30, 1999, up 12% from a year ago. Underwriting and distribution expenses increased $4.5 million over last year's third quarter. Over 45% of the increase was attributable to increased volume. The increase also includes $1.1 million for additional advertising, training, marketing support and field offices, and approximately $1.5 million for sales force compensation enhancements and increased sales program costs. Compensation and related costs for the third quarter of 1999 were 33.1% higher than last year's third quarter. Staff additions in investment management, shareholder services and back office operations have increased home office personnel by 27% since September 30, 1998. The Company's major investments made in hiring additional personnel to add breadth and depth to the investment management staff and to increase customer service and other back office support staff will be substantially completed by the end of 1999. Therefore, more modest growth in compensation costs is expected in future periods. General and administrative expenses have increased substantially in 1999 when compared with the prior period. The Company began outsourcing its transfer agency data processing in the fourth quarter of 1998, the costs of which accounted for $1.5 million of the $3.2 million increase on a quarter over quarter comparison. The remaining difference was due to numerous items associated with investments made to facilitate growth and enhance customer service, notably information systems contracting costs, consulting expenses and administrative costs associated with growth in the customer base and home office personnel. Investment and other income, which consists primarily of interest income from investment securities, was $2.1 million for the quarter ended September 30,1999 down from $2.3 million for the prior year's third quarter, due primarily to lower balances in investment securities. Interest expense was higher in the third quarter due to increased borrowing on the credit facility to finance stock repurchases and the ACF acquisition. RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 For the nine months ended September 30, 1999, net income was $69.5 million or $1.12 per share on a diluted basis, compared with net income of $62.5 million or $0.94 per share for the prior year's nine-month period. Excluding the impact of interest relating to notes with Torchmark Corporation, net income for the nine months ended September 30, 1998 was $66.8 million or $1.00 per diluted share. Concurrent with the Offering, all notes were prepaid. Operating revenues, excluding investment and other income for the nine-month period ended September 30, 1999 were $248.9 million, up 20.3% when compared to the same period of 1998. The acquisition of ACF in early August of this year added $1.0 million to 1999's operating revenue. A 20.9% increase in management fee revenues when compared to the same period of 1998 was attributable to several factors. The restructuring of the Funds' management fee arrangements, effective July 1st of this year, added approximately $5.3 million to 1999's management fee revenues, 11 while ACF's $1.5 billion in managed assets contributed $1.0 million to management fee revenues. The remaining increase was due to higher assets under management and the composition of assets. Mutual fund assets under management were $26.0 billion at September 30, 1999, up 18.6% from $21.9 billion at September 30, 1998. Sales net of redemptions were $65.0 million for the nine-month period ended September 30, 1999 compared with net redemptions of $182.2 million for the same period ended September 1998. The blended mutual funds' redemption rates were 8.4% and 8.8% for the nine-month period ended September 30, 1999 and 1998, respectively. Underwriting and distribution revenues were up 17.7% for the nine-month period ended September 30, 1999. Commission revenues from sales of front-load investment products, primarily the United Funds and variable annuity products, accounted for $10.5 million of the $14.2 million difference between the nine months ended September 30, 1999 and the same period in 1998. The increase in these sales, especially variable product sales which have higher commission rates, drove the growth in commission revenues. Revenues from the Waddell & Reed Funds, which are derived primarily from asset based 12b-1 fees, increased in relation to growth in assets, reduced somewhat by lower contingent deferred sales charges from lower fund redemptions. INVESTMENT PRODUCT SALES ( $ IN THOUSANDS)
YTD 99 YTD 98 % change ---------------------- ------------- United Funds $1,025,248 $991,219 3.4% Waddell & Reed Funds 289,330 189,449 52.7 Variable Products (Target/United) 297,409 217,026 37.0 ------------ --------- Total Investment Product Sales $1,611,987 $1,397,694 15.3 =========== ==========
Shareholder service fees for the nine months ending September 30 1999 increased 26.2% from the same period in 1998. A fee increase, implemented in the fourth quarter of 1998, added approximately $1.3 million per quarter to 1999's service fee revenue. This fee increase is offset by higher processing costs recorded in general and administrative expenses. Excluding the effects of this fee increase, revenues grew in correlation to growth in the number of shareholder accounts. The number of shareholder accounts was 1.66 million at September 30, 1999, up 12% from a year ago. Underwriting and distribution expenses increased $22.2 million or 31.3% for the nine-month period ended September 30, 1999 over the same period in 1998. Over 48% of the increase was attributable to increased volume. The increase also includes an additional $6.1 million for additional advertising, training, marketing support and field offices, and approximately $4.7 million for additional sales force compensation enhancements and increased sales program costs. Compensation and related costs for the nine-month period ended September 30, 1999 were 19.8% higher compared to the same period last year. Staff additions in investment management, shareholder services and back office operations have increased home office personnel by 27% since September 30, 1998. The Company's major investments made in hiring additional personnel to add 12 breadth and depth to the investment management staff and to increase customer service and other back office support staff will be substantially completed by the end of 1999. Therefore, more modest growth in compensation costs is expected in future periods. General and administrative expense for the nine-month period ended September 30, 1999 increased $8.1 million over the same period last year. Increased costs of outsourcing transfer agency data processing accounted for $4.1 million, which were partially offset by increased shareholder service fee revenue, as previously mentioned. The remaining difference was due to numerous items associated with investments made to facilitate growth and enhance customer service, notably information systems contracting costs, consulting expenses and administrative costs associated with growth in the customer base and addition of home office personnel. ASSETS UNDER MANAGEMENT (amounts in millions)
ENDING 3Q 99 3Q 98 % change 2Q 99 % change ------------------------- -------- Mutual Fund Equity $21,523 $17,274 24.6% $21,880 -1.6% Fixed Income 3,666 3,951 -7.2% 3,809 -3.8% Money Market 788 670 17.6% 732 7.7% ------- ------- ------- Total 25,977 21,895 18.6% 26,421 -1.7% Institutional Assets 3,292 2,887 14.0% 3,174 3.7% ------- ------- ------- Total Assets Under Management* $29,269 $24,782 18.1% $29,595 -1.1% ------- ------- ------- ------- ------- ------- AVERAGE 3Q 99 3Q 98 % change YTD 1999 YTD 1998 % change ------------------------- ------------------------ Mutual Funds Equity $21,808 $18,310 19.1% $21,016 $18,020 16.6% Fixed Income 3,742 3,961 -5.5% 3,859 3,973 -2.9% Money Market 776 645 20.3% 734 599 22.5% ------- ------- ------- ------- Total 26,326 22,916 14.9% 25,609 22,592 13.4% Institutional Assets 3,198 2,906 10.0% 3,187 2,914 9.4% ------- ------- ------- ------- Total Assets Under Management* $29,524 $25,822 14.3% $28,796 $25,506 12.9% ------- ------- ------- ------- ------- ------- ------- -------
*Excludes $1,474 of assets managed by Austin, Calvert & Flavin, Inc.
OTHER ITEMS 3Q 99 3Q 98 YTD 1999 YTD 1998 ------------------------- ------------------------- Redemption Rate(1) 7.4% 9.0% 8.4% 8.8% Sales per advisor (000's) 210 221 674 658 Number of advisors 2,483 2,242 2,483 2,242 Number shareholder accounts 1,659,200 1,483,951 1,659,200 1,483,951
(1) Excludes a pension plan redemption of $76 million in first quarter 1999 and also excludes Torchmark Corporation's redemptions in June 1998 of $35 million which were re-deposited in institutional accounts. APPROVAL OF CHANGE IN MANAGEMENT FEE RATE STRUCTURE The Company's proposal to restructure the management fee arrangements of the Funds was approved by the Funds' shareholders in the second quarter of this year. This restructuring replaced the "group" fee structure and "specific fund" add-on fee with a specific fee schedule for each Fund. The restructuring, effective July 1, 1999, added approximately .08% to the Company's overall management fee rate applied to assets under management. ENHANCED COMMISSION ARRANGEMENT FOR VARIABLE PRODUCT SALES The Company entered into an agreement with United Investors Life Insurance Company in July of 1999 whereby, commencing January 1, 2000, the Company will receive additional annual commissions from United Investors for selling variable products for which it is the underwriter. It is estimated that this arrangement will provide additional underwriting and distribution revenues of approximately $6.0 million in 2000. ACQUISITION OF INVESTMENT MANAGEMENT FIRM As previously announced, the Company acquired Austin, Calvert & Flavin, Inc. ("ACF"), a privately held investment management firm based in San Antonio, Texas on August 9, 1999. ACF manages investments of approximately $1.5 billion for trusts, high net worth families and individuals and pension plans of corporations, hospitals, schools, labor unions, endowments and foundations. The transaction was financed by invested cash and amounts borrowed against the credit facility. STOCK REPURCHASE PROGRAM The Company continued acquiring shares of its common stock by repurchasing 0.5 million Class A shares and 1.7 million Class B shares at an aggregate cost of $53.8 million during the third quarter of this year. These repurchases were funded primarily by an additional $65.0 million net borrowing against the credit facility. The outstanding balance on this facility was $155.0 million at September 30, 1999. The total number of shares outstanding at September 30, 1999 was 57.9 million, comprised of 29.6 million Class A shares and 28.3 million Class B shares. From October 1, 1999 through November 10, 13 1999, the Company repurchased an additional .3 million Class B shares at an aggregate cost of $5.4 million. NEW CLASSES OF MUTUAL FUND SHARES AND RELATED WRITE-OFF Effective October 4th, Waddell & Reed began restructuring its United family of funds and Waddell & Reed family of funds. By offering additional classes of mutual fund shares and closing non-industry standard classes, the restructuring will enhance the Company's competitiveness and strategic distribution alternatives. Commencing October 4th, the United family of funds began offering B class shares ("back-end sales charge shares") and C class shares ("level sales charge shares"). These are in addition to the already offered A class shares ("front-end sales charge shares") and Y class shares ("institutional shares"). Concurrently, the Waddell & Reed family of funds now offers C class shares ("level sales charge shares"). This is in addition to the already offered Y class shares ("institutional shares"). As of October 4th, the Waddell & Reed family of funds' B class shares no longer are offered for new sales due to their non-industry standard structure. By industry standards, these B shares are a hybrid of C and B shares. Subject to obtaining the necessary approvals, including the approval of the Funds' Boards of Directors, the Company plans to convert these B shares into C shares, which do have an industry standard structure and only a one-year contingent deferred sales charge period. As a result of converting the B shares, the related deferred selling cost is anticipated to be written off in the fourth quarter resulting in approximately a $19 million pretax charge. These costs were previously capitalized and amortized over the life of the specific investments over a period not exceeding ten years. As a result of this product restructuring of the United and Waddell & Reed families of funds, the Company's product line will: 1) be more consistent with that of the industry, 2) provide its clients with more choices and greater value, and 3) accommodate additional changes for strategic distribution flexibility. This restructuring is expected to favorably impact the Company's distribution margin. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and liquid marketable securities were $145.8 million at September 30, 1999, an increase of $12.5 million from December 31, 1998. The increase is primarily related to cash flow from operations. Cash and cash equivalents at September 30, 1999 and December 31, 1998 include reserves of $16.4 million and $10.8 million, respectively, for the benefit of customers in compliance with securities regulations. Cash flow provided from operations was $83.5 million and $66.0 million for the first nine months of 1999 and 1998, respectively. Investing activities used $12.7 million in cash during the nine months ended September 30, 1999, due primarily to net proceeds used in the ACF acquisition of $19.4 million and partially offset by the sale of investments securities of $14.7 14 million. The Company repurchased $126.0 million of its common stock through the stock repurchase program during the first nine months of 1999, funded primarily by the credit facility. In the third quarter, the Company began construction of a new building as an expansion to its home office. It is expected to be completed in the third quarter of 2000 and cost $14.6 million. In the fourth quarter, the Company reached an agreement to sell all of its investments in real estate, including its home office and the building under construction, to unrelated parties for approximately $45.8 million net of related expenses. The book gain on sale is expected to be approximately $0.3 million and the taxable gain on sale is expected to be $0.4 million. After due diligence has been completed, the sales are expected to close at two different times; the building under construction will close for net proceeds of approximately $18.3 million upon its completion in the third quarter of 2000 and the remaining properties will close for net proceeds of approximately $27.5 million in December of 1999. For its home office operations, the Company is expected to enter into two 15 year leases costing $0.9 million and $1.6 million per year starting in December 1999 and the third quarter of 2000, respectively. Other than the expansion of the home office facilities, the Company has no material commitments for capital expenditures. Management believes its available cash, marketable securities and expected cash flow 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 $220 million credit facility, expandable to $330 million, is also available for the Company's use. The outstanding balance on the facility at September 30, 1999 was $155.0 million. INFORMATION SYSTEMS AND YEAR 2000 READINESS Some computers, software, and other equipment include computer code in which the calendar year data is abbreviated to only two digits. As a result, some of these systems will not operate correctly after 1999 because they may interpret "00" to mean 1900, rather than 2000. These problems are widely expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "Year 2000 Problem". The information provided in this Form 10-Q about our Year 2000 progress is provided as of November 1, 1999. The Company believes that it has identified all significant data, computer hardware, software applications and related equipment, as well as office and facilities equipment such as telephone switches and security systems used in connection with its internal operations that must be modified, upgraded or replaced to minimize the possibility of a material disruption to its business. The Company has completed the process of modifying, upgrading and replacing systems that have been assessed as adversely affected, to prevent the occurrence of any material disruption of its business. However, there can be no assurances in this regard. Internal and external resources were used to make the required modifications and test Year 2000 compliance. The Company has completed compliance activities on all of its systems. Additional verification will continue through 1999 to ensure that no new date related problems are introduced into previously tested or newly developed systems. Newly purchased software and systems are required to be Year 2000 compliant and are subject to the same verification standards as existing systems. The Company estimates that the total costs of this effort will be $4.4 million for the five year period ending June 30, 2000. Total costs incurred to date are approximately $4.1 million. 15 The Company is dependent on several mission critical systems, including those maintained by third-party service providers, to perform its core business activities. Mission critical investment management systems have been remediated and tested. The mutual fund transfer agency system is maintained by a third-party service provider and interfaces with other Company systems. As of December 31, 1998 this service provider has represented that their transfer agency systems have been updated for Year 2000 compliance. Integrated testing of these systems was completed and included transaction processing in a Year 2000 environment. Additional verification testing will continue through the end of the year to ensure that no new date related problems are introduced into previously tested systems. The following chart summarizes the Company's current state of completion for the systems it uses.
STAGES TARGET DATE % COMPLETE ------ ----------- ---------- Awareness Complete 100% Inventory Complete 100% Risk Assessment Complete 100% Compliance Assessment Complete 100% Remediation Complete 100% Validation Complete 100% Contingency Planning Complete 100%
The Year 2000 Problem also affects some of the Company's vendors and suppliers of data, computers, software and other equipment. The Company has contacted all significant vendors and suppliers to inquire about their Year 2000 readiness. However, the Company has limited or no control over the actions of these vendors and suppliers. Accordingly, the Company cannot guarantee that these vendors and suppliers will resolve any or all Year 2000 Problems. If the Company's vendors and suppliers fail to resolve Year 2000 Problems, the Company's business could be materially disrupted. The Company believes it has identified and resolved all Year 2000 Problems that could materially adversely affect its business operations. However, due to the number of interactions with internal and external systems, equipment and data, management believes that it is not possible to determine with complete certainty that all Year 2000 Problems affecting the Company or its clients have been identified or corrected. In addition, no one can accurately predict how many Year 2000 Problem-related failures will occur or the severity, duration or financial consequences of these potential failures. As a result, management expects that the Company could suffer a small number of operational inconveniences and inefficiencies for the Company and its clients that will divert some of management's time and attention and financial and human resources from its ordinary business activities. In order to minimize the risk of the Company's products and services being affected by Year 2000 issues, the Company intends to suspend the implementation or modification of hardware and software between October 1, 1999 and December 31, 1999, unless such implementation or modification is critical to its business operations or relates to Year 2000 maintenance concerns. This 16 precautionary measure should allow the Company to preserve the compliant status of remediated systems and to further assess the stability of its internal systems environment prior to year end. The Company has developed contingency plans to minimize the impact of potential Year 2000 Problems on its mission critical and non-mission critical systems for which it is practical to develop contingency plans. The Company will refine and test its contingency plans throughout the remainder of 1999. However, in an operation as complex as providing investment advisory services, there are limited alternatives to certain mission critical systems and third-party providers, including electrical power and communications services. If these services or mission critical systems such as the mutual fund transfer agency system fail for an extended period of time, there would likely be a material adverse affect on the Company's business, results of operations and financial condition. Although the Company is investigating alternative solutions, it is unlikely that any adequate contingency plan can be developed for any prolonged failure of these mission critical services and systems. Additionally, the investment portfolios from which the Company derives the majority of its revenue could be subject to increased credit, market and liquidity risk arising from the impact of Year 2000 issues on individual securities. Additionally, governments and financial markets around the world could be affected by Year 2000 issues. To the extent that the market prices of securities are negatively affected by these or other Year 2000 issues, the Company's investment advisory revenues, results of operations and financial condition could be materially adversely affected. The discussion of the Company's efforts, and management's expectations, relating to Year 2000 compliance constitutes forward-looking statements. The Company's ability to achieve Year 2000 compliance and the level of incremental costs associated therewith, could be adversely affected by, among other things, vendor ability to modify proprietary software and unanticipated problems identified in the ongoing compliance review. 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, 1998, the cautionary statements found on pages 16-18 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: No reports on Form 8-K were filed during the period subject to this Quarterly Report on Form 10-Q. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 15th day of November, 1999. WADDELL & REED FINANCIAL, INC. By: /s/ John E. Sundeen, Jr. ------------------------ Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) By: /s/ D. Tyler Towery ------------------- Vice President and Controller (Principal Accounting Officer) 18 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF WADDELL & REED FINANCIAL INC. INCLUDED IN PART I ITEM 1 OF THE ACCOMPANYING FORM 10-Q QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 57,864 87,940 31,904 0 0 183,881 36,005 13,233 364,319 225,223 0 0 0 665 125,582 364,319 0 256,447 0 138,114 2,297 0 3,910 112,126 42,674 69,452 0 0 0 69,452 1.15 1.12
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