-----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, WlgynXFiCrdNM1mGqlER5dHe1DAOIPYX66cne5c2AI52FtF/6wbYOj1ND5HlyoA8 GDRA9Y/iUqvW/QKbM4Mq4g== 0000930661-98-001747.txt : 19980814 0000930661-98-001747.hdr.sgml : 19980814 ACCESSION NUMBER: 0000930661-98-001747 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NYSE 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: 98685269 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 FORM 10-Q 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 June 30, 1998 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 --- --- Number of shares outstanding of each of the issuer's classes of common stock as of June 30, 1998: Class Outstanding as of June 30, 1998 ----- -------------------------------- Class A Common stock, $.01 par value 32,142,174 Class B Common stock, $.01 par value 34,325,000 WADDELL & REED FINANCIAL, INC. FORM 10-Q QUARTER ENDED JUNE 30, 1998 INDEX Page No. -------- Part I. Financial Information Item 1. Financial Statements Unaudited Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 3 Unaudited Consolidated Statements of Operations for the three months and six months ended June 30, 1998 and June 30, 1997 5 Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. Other Information Item 2. Changes in Securities and Use of Proceeds 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In Thousands) ===============================================================================
June 30, December 31, ASSETS 1998 1997 (Unaudited) - -------------------------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 70,619 73,820 Investment securities, available-for-sale 95,787 18,977 Receivables: United Funds and W&R Funds 4,336 4,031 Customers and other 15,545 11,840 Due from affiliates 1,941 17,232 Deferred income taxes 1,676 1,241 Prepaid expenses and other current assets 3,089 2,991 - -------------------------------------------------------------------------------------------------------------------- Total current assets 192,993 130,132 Due from affiliates 1,418 175,450 Property and equipment, net 12,845 12,058 Investment in real estate partnership 17,609 17,544 Deferred sales commissions, net 13,546 12,316 Goodwill (net of accumulated amortization of $18,931 and $17,479) 97,379 98,831 Other assets 649 633 - -------------------------------------------------------------------------------------------------------------------- Total assets $336,439 446,964 ==================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------------------------------------------- Liabilities: - -------------------------------------------------------------------------------------------------------------------- Current liabilities: Accounts payable $ 29,871 22,929 Due to affiliates 541 102,459 Accrued sales force compensation 8,851 8,666 Income taxes payable 13,280 3,314 Other current liabilities 15,641 18,525 - --------------------------------------------------------------------------------------------------------------------
Total current liabilities 68,184 155,893 Due to affiliates -- 509,186 Deferred income taxes 2,491 2,246 Accrued pensions and post-retirement costs 10,318 9,530 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 80,993 676,855 - -------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Common stock ($.01 par value; 42,300,000 shares authorized, 665 423 issued and outstanding - 1997; 32,142,174 Class A shares and 34,325,000 Class B shares authorized, issued and outstanding -June 30, 1998) Additional paid-in capital 246,271 -- Retained earnings 21,727 -- Dividends in excess of retained earnings and additional -- (230,658) paid-in capital Deferred compensation (13,375) -- Accumulated other comprehensive income 158 344 - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 255,446 (229,891) - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $336,439 446,964 ====================================================================================================================
See accompanying notes to consolidated financial statements. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Operations Unaudited (In Thousands, except for per share and dividend data) ================================================================================
For the three months ended For the six months ended June 30, June 30, -------------------------- ------------------------- 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Revenue: Investment management fees $35,215 27,808 $ 67,641 54,686 Underwriting and distribution fees: United Funds and W&R Funds 18,908 13,403 34,758 27,449 Affiliates and others 9,633 8,371 17,244 15,411 Shareholder service fees 8,257 7,781 16,030 15,294 Investment and other revenue 2,725 990 4,164 1,923 - ----------------------------------------------------------------------------------------------------------------------- Total revenue 74,738 58,353 139,837 114,763 - ----------------------------------------------------------------------------------------------------------------------- Expenses: Underwriting and distribution 24,272 18,495 44,555 36,891 Compensation and related costs 9,144 6,020 16,564 12,162 General and administrative 1,867 1,492 3,650 3,142 Depreciation 430 323 859 642 Amortization of goodwill 726 726 1,452 1,452 - ----------------------------------------------------------------------------------------------------------------------- Total expenses 36,439 27,056 67,080 54,289 - ----------------------------------------------------------------------------------------------------------------------- Income before interest and income taxes 38,299 31,297 72,757 60,474 Interest: Income -- 2,831 1,950 5,661 Expense -- (1,859) (8,604) (3,721) Income before income taxes 38,299 32,269 66,103 62,414 Provision for income taxes 14,489 12,509 25,546 24,216 - ----------------------------------------------------------------------------------------------------------------------- Net income $23,810 19,760 $ 40,557 38,198 ======================================================================================================================= Net income per share: Basic and diluted $0.36 $0.30 $0.61 $0.57 ======================================================================================================================= Weighted average outstanding - basic 66,467 66,467 66,467 66,467 Weighted average shares outstanding - diluted 66,567 66,467 66,614 66,467 ======================================================================================================================= Dividends declared per common share $0.13 $ -- $0.27 $ --
See accompanying notes to consolidated financial statements. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Unaudited (In Thousands) ================================================================================
For the six months ended June 30, 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 40,557 38,198 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,311 2,094 Recognition of deferred compensation 452 -- Loss on sale and retirement of fixed assets 27 15 Capital gains and dividends reinvested (48) (35) Deferred income taxes (75) (375) Changes in assets and liabilities: Receivables from funds (305) (632) Other receivables (12,267) 825 Due to/from affiliates - operating 4,880 (2,650) Other assets (1,159) (10,456) Accounts payable 6,942 5,589 Other liabilities 7,804 (9,586) - -------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 49,119 22,987 - -------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Additions to investments (78,132) (56) Proceeds from maturity of investments 1,073 668 Purchase of property and equipment (1,652) (1,061) Other (24) 4 - -------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (78,735) (445) - -------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from Offering 516,014 -- Cash dividends (8,808) -- Change in due to/from affiliates - nonoperating (480,791) (74,510) Cash contributions from parent -- 41,273 - -------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities 26,415 (33,237) - -------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents (3,201) (10,695) Cash and cash equivalents at beginning of period 73,820 59,003 - -------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 70,619 48,308 ====================================================================================================================
See accompanying notes to consolidated financial statements 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, TMK/United mutual funds and Waddell & Reed mutual funds and institutional accounts in the United States. Prior to December 1997, the Company was known as United Investors Management Company. In the first quarter of 1998, the insurance operations of the Company, United Investors Life Insurance Company, were distributed to Torchmark Corporation and a subsidiary of Torchmark (together, "Torchmark"). 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. After giving effect to the initial public offering and as of June 30, 1998, Torchmark controls in excess of 60% of the outstanding Class A Common Stock and Class B Common Stock and in excess of 80% of the voting power of the outstanding Class A Common Stock and Class B Common Stock of the Company. Torchmark has advised the Company that, subject to certain conditions, it currently intends to divest its ownership interest in the Company by means of a special dividend to the stockholders of Torchmark of all shares of common stock of the Company currently held by Torchmark. The spin-off is conditioned upon regulatory approvals, the receipt of a ruling by the Internal Revenue Service to the effect that the spin-off will qualify as a tax free distribution and other conditions. Basis of Presentation In the opinion of the management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the results of its operations and its cash flows for the periods ended June 30, 1998 and 1997 and its financial position at June 30, 1998. The accompanying unaudited consolidated financial statements are for interim periods and, consequently, do not necessarily include all disclosures required by generally accepted accounting principles for annual financial statements. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1997, from which the accompanying balance sheet as of December 31, 1997 was derived. The operating results and cash flows for the periods ended June 30, 1998 are not necessarily indicative of the results that will be achieved in future periods. Deferred Compensation and Employee Stock Options Plan Deferred compensation at June 30, 1998 includes $4.8 million related to restricted stock that was awarded upon consummation of the Offering pursuant to the Company's Stock Incentive Plan. The restricted stock awards generally vest in equal one-third increments on the second, third and fourth anniversaries of the date awarded. In conjunction with the Offering and pursuant to a Directed Share Program, the Company loaned $8.6 million to key financial advisors and sales force management personnel to encourage ownership of the Company. The loans bear interest at an annual rate of 5.6% and are due and payable five years from the date issued. Subject to certain conditions, including continued affiliation with the Company, the notes may be forgiven on the maturity date. The Company also issued options to purchase 2.4 million shares of Class A Common Stock to employees upon consummation of the Offering pursuant to the Stock Incentive Plan. The options are exercisable at the initial public offering price and generally vest in equal one-third increments on the second, third and fourth anniversaries of the consummation of the Offering. Earnings per Share Earnings per share for the 1997 period are based on the number of shares outstanding as of the close of the Offering. Summary of Significant Accounting Policies The Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, on January 1, 1998. This statement requires the reporting of comprehensive income and its components. Comprehensive income is defined as the change in equity from transactions and other events and circumstances from non-owner sources, and excludes investments by and distributions to owners. Comprehensive income includes net income and other items of comprehensive income meeting the above criteria. The Company's only component of other comprehensive is the unrealized holding gains and losses on available-for-sale securities.
For the Six Months For the Three Months Ended June 30 Ended March 31 1998 1997 1998 1997 ----------------- ---------------- ---------------- ----------------- Net earnings $23,810 $19,760 $16,747 $18,438 Change in unrealized gain (loss), net (186) 6 157 (164) ------- ------- ------- ------- Comprehensive income $23,624 $19,766 $16,904 $18,274
Subsequent Event The Board of Directors of the Company declared a dividend payable on July 31, 1998 in the amount of $.1325 per share to shareholders of record as of July 17, 1998. The total dividend paid was $8.8 million. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION 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, WHICH INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES, AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE, OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE, OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INCLUDE ALL STATEMENTS RELATING TO FUTURE EVENTS AND ALL STATEMENTS OF BELIEF AND OPINION WITH RESPECT TO MATTERS THAT ARE NOT HISTORICAL FACTS. 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. THE RISKS, UNCERTAINTIES, AND OTHER FACTORS TO WHICH FORWARD-LOOKING STATEMENTS ARE SUBJECT INCLUDE, AMONG OTHERS, THOSE SET FORTH UNDER THE CAPTION "RISK FACTORS" IN THE PROSPECTUS OF THE COMPANY DATED MARCH 4, 1998, WHICH IS AVAILABLE FROM THE SECURITIES AND EXCHANGE COMMISSION AT PRESCRIBED RATES AND AT THE SECURITIES AND EXCHANGE COMMISSION'S WEBSITE, WWW.SEC.GOV. SUCH RISK FACTORS INCLUDE, WITHOUT LIMITATION, TORCHMARK'S ABILITY TO CONTROL THE COMPANY, THE UNCERTAINTY OF THE PLANNED SPIN-OFF OF THE COMPANY, FINANCIAL MARKET CONDITIONS, THE ADVERSE EFFECT OF TERMINATION OR FAILING TO RENEW INVESTMENT MANAGEMENT AGREEMENTS AND THE DIFFICULTY OF EXECUTING ACQUISITION STRATEGY. 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. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, AS A RESULT OF THE FOREGOING AND OTHER FACTORS, NO ASSURANCE CAN BE GIVEN AS TO FUTURE RESULTS, LEVELS OF ACTIVITY, OR ACHIEVEMENTS, AND NEITHER THE COMPANY NOR ANY OTHER PERSON WILL BE RESPONSIBLE FOR THE ACCURACY OR COMPLETENESS OF ANY SUCH FORWARD-LOOKING STATEMENTS. IN SOME CASES, FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "PLANS," "ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS," "POTENTIAL," OR "CONTINUE" OR THE NEGATIVE OF SUCH TERMS OR OTHER COMPARABLE TERMINOLOGY. OVERVIEW The Company derives its revenues primarily from providing investment management, distribution and administrative services to the United ("United"), Waddell & Reed ("W&R") and TMK/United 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 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 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. RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 1997 Total revenues for the second quarter of 1998 were $74.7 million, up $16.4 million or 28% from the same period in 1997. Investment management fees, which comprised 47% of total revenue for the second quarter of 1998, were $35.2 million, an increase of $7.4 million or 27% from the comparable 1997 period. Assets under management were up due to increased sales, investment performance and strong financial markets. Total assets under management were $26.7 billion at June 30, 1998 compared to $23.4 billion at December 31, 1997 and $21.3 billion at June 30, 1997. Average assets under management were up $6.1 billion or 30% from that of the three months ended June 30, 1997, to $26.2 billion for the three months ended June 30, 1998. The rate of increase in average assets was greater than the growth rate in management fees due, partly, to the group fee rate on the United funds. Under various management agreements, the annual management fee rates generally decline as the average net assets of the portfolios exceed certain thresholds. Also, average institutional assets for the second quarter of 1998 were $3.0 billion, an increase of $1.1 billion when compared with the second quarter of 1997. The rate of increase in average institutional assets exceeded the growth rate of management fees because most of the asset growth was due to the addition of fixed income managed accounts in the latter half of 1997. Fixed income accounts typically have lower management fee rates than equity accounts. In addition, institutional accounts generally have a lower management fee rate than mutual funds. Underwriting revenue, which accounted for 38% of total operating revenue for the second quarter of 1998, rose to $28.5 million for the period, an increase of $6.8 million or 31% compared to the same period last year, due to higher sales volume of investment products, primarily of the United funds. Total investment product sales increased 40% to $510.4 million for the second quarter of 1998 compared with $363.6 million for the same period last year. Service fees for the second quarter were $8.3 million, up $476,000 from the second quarter of 1997, due primarily to growth in the number of mutual fund accounts. Investment and other revenue for the second six months of 1998 was $2.7 million, an increase of $1.7 million or 175%. Most of this increase is attributable to the growth in invested balances related to $35 million of net proceeds that were retained from the Offering and the retention of earnings in the first half of 1998. In previous periods, substantially all of the Company's earnings were paid to Torchmark Corporation as a dividend. Underwriting and distribution expenses were $24.3 million for the second quarter of 1998, up $5.8 million or 31% from that of the same period last year, primarily due to costs related to the growth in investment product sales. Effective July 1, 1998, the Company implemented changes to enhance the compensation of advisors and increase recruiting. As a result, underwriting and distribution expenses are expected to increase relative to revenues. Compensation and related costs were $9.1 million for the second quarter of 1998, an increase of $3.1 million or 52% over the same period last year. The increase is related to normal salary and fringe benefit changes, staff additions, the impact of adjustments made to make total compensation more competitive within the market and an increase in bonus accruals to reflect favorable investment management performance during the first six months. General and administrative expenses were $1.9 million for the quarter compared to $1.5 million for the second quarter of 1997; an increase of 25% due primarily to growth in business activity. The Company did not realize any net interest income in the second quarter of 1998, a decrease of $1.0 million from the same period in 1997. The interest income in 1997 was related to notes with Torchmark that were prepaid in the first quarter of 1998. Income tax expense was $14.5 million and $12.5 million for the second quarter of 1998 and 1997, respectively, representing effective tax rates of 37.8 % and 38.8%. The effective tax rate varies based upon the amount of federally tax-exempt interest and the tax rates that apply to income taxable within various states. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1997 Total revenues for the first half of 1998 were $139.8 million, up $25.1 million or 22% from the same period in 1997. Investment management fees, which comprised 48% of total revenue for the first half of 1998, were $67.6 million, an increase of $13.0 million or 24% from the comparable 1997 period. Assets under management were up due to increased sales, investment performance and strong financial markets. Total assets under management were $26.7 billion at June 30, 1998 compared to $23.4 billion at December 31, 1997 and $21.3 billion at June 30, 1997. Average assets under management were up $5.5 billion or 28% from that of the six months ended June 30, 1997, to $25.4 billion for the six months ended June 30, 1998. As noted in the discussion of quarterly results, the rate of increase in average assets was greater than the growth rate in management fees due, partly, to the group fee rate on the United funds. Average institutional assets for the first half of 1998 were $2.9 billion, an increase of $1.1 billion when compared with the first half of 1997. Most of the growth in institutional accounts was due to the addition of fixed income managed accounts in the latter half of 1997. Fixed income accounts usually have lower management fees rates than equity accounts. Underwriting revenue, which accounted for 37% of total operating revenue for the first half of 1998, rose to $52.0 million for the period, an increase of $9.1 million or 21% compared to the same period last year, due to higher sales volume of investment products, primarily of the United funds. Total investment product sales increased 26% to $915.2 million for the first half of 1998 compared with $726.6 million for the same period last year. Service fees for the first half of 1998 were $16.0 million, up $736,000 from the first half of 1997, due primarily to growth in the number of mutual fund accounts. Investment and other revenue for the first half of 1998 was $4.2 million, an increase of $2.2 million. Most of this increase is attributable to the growth in invested balances related to $35 million of net proceeds that were retained from the Offering and the retention of earnings in the first half of 1998. In previous periods, substantially all of the Company's earnings were distributed to Torchmark Corporation as dividends. Underwriting and distribution expenses were $44.6 million for the first half of 1998, up $7.7 million or 21% from that of the same period last year, primarily due to costs related to the growth in investment product sales. Compensation and related costs were $16.6 million for the first half of 1998, an increase of $4.4 million or 36% over the same period last year. The increase is related to additions to the investment management staff, the impact of adjustments made to make total compensation more competitive within the market, and normal salary and fringe benefit changes. General and administrative expenses were $3.7 million for the first half of 1998 compared to $3.1 million for the second quarter of 1997; an increase of 16% due primarily to growth in business activity. Net interest expense for the first half of 1998 was $6.7 million compared with net interest income of $2.0 million for last year's first half. The net interest expense and income was related to notes with Torchmark that were prepaid at the time of the initial public offering in the first quarter of 1998. Income tax expense was $25.5 million and $24.2 million for the first half of 1998 and 1997, respectively, representing effective tax rates of 38.6 % and 38.8%. The effective tax rate varies based upon the amount of federally tax- exempt interest and the tax rates that apply to income taxable within various states. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and investment securities available for sale were $166.4 million at June 30, 1998, an increase of $73.6 million from December 31, 1997. Cash and cash equivalents at June 30, 1998 and December 31, 1997 includes reserves of $16.9 million and $14.9 million, respectively, for the benefit of customers in compliance with securities regulations. Cash flow provided by operations was $49.1 million and $23.0 million for the first six months of 1998 and 1997, respectively. Other than net income and related adjustments, the most significant sources of cash from operations resulted from the timing of payments. The timing of tax payments and mutual fund trade settlements provided $10.0 million and $5.8 million, respectively, of cash for the first six months of 1998. Approximately $8.6 million of cash was used for interest bearing loans related to the Offering. Investing activities used $78.7 million of cash during the quarter, due primarily to additional investments in longer term securities. Although the Company has not entered into formal commitments, it is considering alternatives for acquiring additional office space. The estimated cost of the alternatives to construct facilities is $12 million. Except for this possible expansion, the Company has no material commitments for capital expenditures. The net cash provided by financing activities in the first six months of 1998 was $26.4 million. The increase is primarily related to the Company's Initial Public Offering that closed on March 10, 1998. Net proceeds from the sale of 23.9 million shares were $516 million, of which the Company retained approximately $35 million for working capital purposes. The remainder of the proceeds were used to prepay notes payable to Torchmark Corporation. The Company's Board of Directors declared a quarterly cash dividend on the common stock of approximately $8.8 million to be paid July 31, 1998 to shareholders of record on July 22. Management believes its available cash, cash equivalents, investments securities available-for-sale and expected continuing cash flow from operations will be sufficient to fund dividends, payments, operations and other reasonably foreseeable cash needs. INFORMATION SYSTEMS AND YEAR 2000 COMPLIANCE Some computers, software, and other equipment include computer code in which 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 Company believes that it has identified all significant applications that will require modification to ensure Year 2000 compliance. Internal and external resources are being used to make the required modifications and test Year 2000 compliance. The Company estimates that its compliance activities will be completed no later than the second quarter of 1999, and estimates that the total costs of this effort will be $4.1 million for the four year period ending December 31, 1999. The Company believes that it has identified most of the major computers, software applications, and related equipment 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 commenced the process of modifying, upgrading, and replacing major systems that have been assessed as adversely affected, and expects to complete this process before the occurrence of any material disruption of its business. However, there can be no assurance in this regard. The Year 2000 Problem also affects some of the Company's customers and major suppliers of computers, software, and other equipment. The Company has discussed the Year 2000 Problem with some of these customers and suppliers. However, the Company has limited or no control over the actions of these customers and suppliers. Accordingly, the Company cannot guarantee that these customers and suppliers will resolve any or all Year 2000 Problems. If the Company's customers and suppliers fail to resolve Year 2000 Problems, the Company's business could be materially disrupted. 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 impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to modify proprietary software, and unanticipated problems identified in the ongoing compliance review. PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On March 10, 1998, the Company completed the Offering. The managing underwriters in the Offering were Morgan Stanley Dean Witter, Goldman, Sachs & Co., and Merrill Lynch & Co. (the "Underwriters"). The shares of Class A Common Stock sold in the Offering were registered under the Securities Act of 1933, as amended, on a Form S-1 Registration Statements (registration no. 333-43687) (the "Registration Statement"). The Registration Statement was declared effective by the Securities and Exchange Commission on March 4, 1998. On March 4, 1998, the Company commenced the Offering. The Offering closed on March 10, 1998 after the Company had sold all 23,870,000 shares (including the over-allotment option) of Class A Common Stock registered under the Registration Statement. The offering price was $23.00 per share for an aggregate offering price of $549,010,000. From the effective date of the Registration Statement to June 30, 1998, the Company paid an aggregate of $30,195,550 in underwriting discounts and commissions in the Offering. None of this amount was paid directly or indirectly to any director, officer, general partner of the Company or their associates, persons owning ten percent or more of any class of equity securities of the Company, or an affiliate of the Company. In addition, the following table sets forth an estimate of all expenses incurred in connection with the Offering, other than underwriting discounts and commissions. All of the amounts shown are estimated except for the registration fees of the Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and the New York Stock Exchange, Inc. SEC registration fee $ 177,728 NASD fee 30,500 NYSE listing fee 210,600 Accounting fees and expenses 500,000 Legal fees and expenses 600,000 Printing and engraving 550,000 Transfer Agent's fees 50,000 Blue Sky fees and expenses (including counsel fees) 10,000 Directors and Officers Liability Insurance Premium 515,500 Miscellaneous expenses 156,172 ---------- Total $2,800,000 ========== After deducting underwriting discounts and commissions and the Offering expenses described above, net proceeds to the Company from the Offering were approximately $516 million. Of this amount, the Company used approximately $481 million to prepay notes payable to Torchmark Corporation, the parent company of, an affiliate to and a greater than ten percent owner of, the Company. Other than the payments to Torchmark Corporation, none of the other net proceeds of the Offering were paid directly or indirectly to any director, officer, general partner of the Company or their associates, persons owning ten percent or more of any class of equity securities of the Company, or an affiliate of the Company. ITEM 6. (a) Exhibits: 27.1 Financial Data Schedule (electronic filing only). (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. 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 13th day of August, 1998. WADDELL & REED FINANCIAL, INC. By: /s/ Keith A. Tucker ------------------------------------ Keith A. Tucker Chairman of the Board and Chief Executive Officer By: /s/ Michael D. Strohm ------------------------------------ Michael D. Strohm Principal Accounting Officer EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS REPORTED ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 70,619 95,787 21,822 0 0 192,993 12,845 10,348 336,439 68,184 0 0 0 665 254,781 336,439 135,673 141,787 0 65,628 1,452 0 8,604 66,103 25,546 40,557 0 0 0 40,557 .61 .61
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