-----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, GkquWC+hyyeQG5cxz70s8i+MLvxNJZVvk6qkzKV55US3BEuLEuqoVREE+grZskFO rUeCQ20JIsuv95eq/rL1HQ== 0001047469-99-020032.txt : 19990514 0001047469-99-020032.hdr.sgml : 19990514 ACCESSION NUMBER: 0001047469-99-020032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990513 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: 99619922 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 March 31, 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 incorporation (I.R.S. Employer 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 March 31, 1999:
Class Outstanding as of March 31, 1999 ----- -------------------------------- Class A Common stock, $.01 par value 30,558,722 Class B Common stock, $.01 par value 30,464,656
WADDELL & REED FINANCIAL, INC. FORM 10-Q QUARTER ENDED MARCH 31, 1999
INDEX Page No. -------- Part I. Financial Information Item 1. Unaudited Financial Statements Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 3 Consolidated Statements of Operations for the three months ended March 31, 1999 and March 31, 1998 4 Consolidated Statements of Comprehensive Income for the three months ended March 31, 1999 and March 31, 1998 5 Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and March 31, 1998 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. Other Information Item 2. Changes in Securities and Use of Proceeds 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands) - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- March 31, December 31, ASSETS 1999 1998 (Unaudited) - ---------------------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 63,881 30,180 Investment securities, available-for-sale 104,327 103,153 Receivables: United funds and W&R funds 8,011 5,740 Customers and other 28,167 28,865 Deferred income taxes 1,092 1,309 Prepaid expenses and other current assets 3,514 3,222 - ---------------------------------------------------------------------------------------------------------------- Total current assets 208,992 172,469 Property and equipment, net 18,786 17,685 Investment in real estate 24,124 24,718 Deferred sales commissions, net 16,997 15,710 Goodwill (net of accumulated amortization of $21,108 and $20,382) 95,202 95,928 Other assets 736 669 - ---------------------------------------------------------------------------------------------------------------- Total assets $ 364,837 327,179 - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - ---------------------------------------------------------------------------------------------------------------- Liabilities: Current liabilities: Accounts payable $ 40,678 28,304 Accrued sales force compensation 9,199 11,916 Short term notes payable 80,191 40,076 Income taxes payable 26,117 13,464 Other current liabilities 12,617 16,034 - ---------------------------------------------------------------------------------------------------------------- Total current liabilities 168,802 109,794 Deferred income taxes 336 208 Accrued pensions and post-retirement costs 10,640 10,041 - ---------------------------------------------------------------------------------------------------------------- Total liabilities 179,778 120,043 - ---------------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock ($.01 par value; 150,000,000 Class A shares 665 665 authorized, 32,142,174 issued and 30,558,722 outstanding and 100,000,000 Class B shares authorized, 34,325,000 issued and 30,464,656 outstanding March 31, 1999; 32,142,174 Class A shares issued and outstanding; 34,325,000 Class B shares issued and outstanding March 31, 1998) Additional paid-in capital 246,271 246,271 Retained earnings 60,959 47,325 Deferred compensation (12,144) (12,494) Treasury stock (1,583,452 Class A shares and 3,860,344 Class B (110,258) (74,833) shares) Accumulated other comprehensive income (434) 202 - ---------------------------------------------------------------------------------------------------------------- Total stockholders' equity 185,059 207,136 - ---------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 364,837 327,179 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited 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 March 31, -------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Revenue: Investment management fees $ 37,316 32,426 Underwriting and distribution fees 30,532 23,461 Shareholder service fees 9,702 7,773 Investment and other revenue 2,923 1,439 - ------------------------------------------------------------------------------------------------------------------- Total revenue 80,473 65,099 Expenses: Underwriting and distribution 29,812 20,283 Compensation and related costs 9,137 7,420 General and administrative 4,051 1,783 Depreciation 533 429 Interest expense 863 - Amortization of goodwill 726 726 - ------------------------------------------------------------------------------------------------------------------- Total expenses 45,122 30,641 - ------------------------------------------------------------------------------------------------------------------- Income before affiliated items and provision for 35,351 34,458 income taxes Affiliated items: Interest income - 1,950 Interest expense - (8,604) - ------------------------------------------------------------------------------------------------------------------- Income before provision for income taxes 35,351 27,804 Provision for income taxes 13,368 11,057 - ------------------------------------------------------------------------------------------------------------------- Net income $ 21,983 16,747 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Net income per share: Basic and diluted $ 0.35 0.25 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding: Basic 61,971 66,467 Diluted 63,207 66,784 - ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- Dividends declared per common share $ 0.1325 $ -
See accompanying notes to unaudited consolidated financial statements. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited in thousands)
- ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- For the three months ended March 31, --------- 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Net Income 21,983 16,747 Other comprehensive income: Net unrealized appreciation (depreciation) of investments during the period, net of income taxes of $(391) and $96 (636) 157 - ------------------------------------------------------------------------------------------------------------------- Comprehensive Income 21,347 16,904 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited in thousands)
- ------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------- For the three months ended March 31, ------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 21,983 16,747 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,259 1,155 Recognition of deferred compensation 339 55 Loss on sale and retirement of fixed assets 0 4 Capital gains and dividends reinvested (28) (19) Deferred income taxes 736 14 Changes in assets and liabilities: Receivables from funds (2,271) (1,895) Other receivables 841 (9,267) Due to/from affiliates - operating 0 8,919 Other assets (1,646) (559) Accounts payable 12,374 12,884 Other liabilities 7,234 11,535 - ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 40,821 39,573 Cash flows from investing activities: Additions to investments (2,247) (27,965) Proceeds from maturity of investments 74 607 Purchase of property and equipment (1,635) (712) Investment in real estate 462 0 Other 0 (23) - ------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (3,346) (28,093) - ------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from IPO 0 516,014 Notes payable 40,000 0 Cash dividends (8,324) 0 Change in due to/from affiliates - nonoperating 0 (480,763) Purchase of treasury stock (35,484) 0 Exercise of stock options 34 0 - ------------------------------------------------------------------------------------------------------------------- Net cash (used)/provided by financing activities (3,774) 35,251 - ------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 33,701 46,731 Cash and cash equivalents at beginning of period 30,180 73,820 - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 63,881 120,551 - ------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------
See accompanying notes to unaudited 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 ("United"), Waddell & Reed mutual funds ("W&R"), Target/United mutual funds ("Target") 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. 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 necessary to present fairly the results of its operations and its cash flows for the three-month periods ended March 31, 1999 and 1998 and its financial position at March 31, 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 three months ended March 31, 1999 are not necessarily indicative of the results that will be achieved in future periods. LIQUIDITY AND CAPITAL On February 22, 1999, the Company declared a dividend payable on April 30, 1999 in the amount of $.1325 per share to shareholders of record as of April 8, 1999. The total dividend paid was $8.3 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. For the three month period ended March 31, 1999, the Company purchased 1,798,200 Class A and Class B common shares at an average price of $19.68 per share. During the third quarter of 1998, the Company entered into a $200 million revolving credit facility, expandable to $300 million. The credit facility is a 364-Day revolving facility at an interest rate of LIBOR plus .35. As of March 31, 1999, the outstanding balance on this facility was $80.0 million. The primary use of the borrowed funds was to repurchase stock under the stock repurchase program. EARNINGS PER SHARE Basic earnings per share for the 1999 and 1998 periods are based on the average number of shares outstanding for the three month periods ended March 31, 1999 and 1998, respectively. Diluted earnings per share for these periods also includes the dilutive impact of stock options. SUBSEQUENT EVENT On or about May 12, 1999, in connection with the adoption of a stockholder rights plan, the Company filed a Certificate of Designation, Preferences and Rights designating the rights, preferences and privileges of a new Series A Junior Participating Preferred Stock. The Certificate of Designation created a series of 750,000 shares of Series A Preferred Stock, $1.00 par value, out of the total class of 5,000,000 shares of Preferred Stock. Pursuant to the stockholder rights plan, the Company issued rights to its stockholders of record as of May 12, 1999, entitling each stockholder to the right to purchase one one-hundredth of a share (a "Unit") of Series A Junior Participating Preferred Stock for each share of Common Stock held by the stockholder. The purchase price of $85.00 per Unit is subject to adjustment and is exercisable only upon the occurrence of certain events. 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 FROM A DECLINE IN SECURITIES MARKETS OR IF THE COMPANY'S PRODUCTS' PERFORMANCE DECLINES, 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 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 MARCH 31, 1999 AS COMPARED TO THREE MONTHS ENDED MARCH 31, 1998 Total revenues for the first quarter of 1999 were $80.5 million, up $15.4 million or 24% from the same period in 1998. Investment management fees, which comprised 46% of the total revenue for the first quarter of 1999, were $37.3 million, an increase of $4.9 million or 15% from the comparable 1998 period. Average assets under management were $27.9 billion for the three months ended March 31, 1999, up 14% from last year's first quarter. Management fee revenue increased at a higher rate than the rate of growth in average assets primarily because equity assets, which bear a higher management fee than fixed income assets, as a percentage of total assets increased. Total assets under management at March 31, 1999, in the amount of $28.4 billion, were composed of $25.2 billion in mutual funds and $3.2 billion in institutional accounts. Mutual fund assets were up 9.9% from March 31, 1998 and 2.6% from December 31, 1998. For the three months ended March 31, 1999, market performance accounted for $597 million of the $631 million change in mutual fund assets with the remainder due to net cash inflows. The blended mutual funds' redemption rates were 10.2% for the first quarter of 1999 and 8.2% for the first quarter of 1998. The redemption rate for the first quarter of 1999 reflects the closing of a pension plan account that resulted in a $76 million mutual fund redemption. Excluding this, the redemption rate would have been 8.9%. Additional factors that the Company believes contributed to the increase in the redemption rate include significantly higher capital gain distributions in December 1998 resulting in the need by shareholders to fund 1999 tax payments and a shift in mutual fund product mix. Capital gain distributions in December 1998 were $2.3 billion or 26% more than in December 1997. Assets in the Waddell & Reed Funds (back-end load funds) for 1999 were equal to 4.8% of total mutual fund assets compared to 4.3% last year. Redemption rates on back-end load funds are generally higher than front-end load funds. It is estimated that almost 1% of the redemption rate is attributable to redemptions related to shareholders' income tax needs and the change in product mix. Underwriting and distribution revenues from product sales were $30.5 million for the first quarter of 1999, a 30.1% increase from the prior year's first quarter. The revenue growth was primarily due to higher investment product sales. Investment product sales increased to $530.2 million for the first quarter of 1999, a 31% increase over the same period last year. The rate of growth in revenues is less than that of sales because of changes in the product mix. Sales of the Waddell & Reed Funds, which do not have an initial sales charge, equaled 17.5% of investment product sales for 1999 as compared to 11.8% for the same period last year. Shareholder service fees include transfer agency fees, retirement plan custodian fees, and portfolio accounting fees. Transfer agency and retirement plan custodian fees typically increase in correlation to the number of client accounts, which increased by 138,500 from March 31, 1998 to March 31, 1999. Beginning in the fourth quarter of 1998, transfer agency fees also increased for the recovery of costs relating to the conversion to a third party data processing system. Approximately $1.3 million of the $1.9 million increase in shareholder service fees was related to the fee increase. This increase in fee revenue was offset by a $1.3 million increase in third-party processing costs recorded in general and administrative expenses. Underwriting and distribution expenses consist of direct costs (notably, commissions paid to financial advisors, incentive payments, manager overrides, and sales program costs) and other costs such as advertising, training, field office expenses, and marketing support. Underwriting and distribution expenses were $29.8 million for the period, an increase of $9.5 million. The increase includes $6.2 million for direct costs related to sales volume, $2.0 million for investments in advertising, field offices and marketing support and approximately $1.3 million for sales force compensation enhancements introduced in the third quarter of 1998 to further facilitate asset retention and to improve sales force growth. Compensation and related expense for the first quarter of 1999 was $1.7 million higher than the first quarter of 1998, representing an increase of 23.1%. Most of the increase is related to normal salary and fringe benefit changes and the impact of staff additions made throughout 1998 to improve investment management, shareholder services and back office operations. General and administrative expense for the quarter ended 1999 was $4.1 million, a $2.3 million increase over last year's first quarter. As mentioned above, $1.3 million was attributable to increased costs of outsourcing transfer agency data processing, which was offset by increased shareholder service fee revenue. Various miscellaneous items, including costs associated with being a public company, accounted for the remaining increase. SALES FORCE GROWTH AND PRODUCTIVITY Two key strategies for accelerating growth are increasing the number of financial advisors and improving sales productivity per advisor. On March 31, 1999, the number of financial advisors was 2,358, up 288 or 13.9% from 2,070 at March 31, 1998. Typically, a decrease in the number of advisors is experienced in the first quarter of the year, as licenses are not renewed for those failing to meet minimum production requirements. The decrease in the number of advisors from December 31, 1998 to March 31, 1999 was 12 compared with a decrease of 90 for last year's first quarter. Furthermore, productivity as measured by sales per advisor increased 15.9% from $194 thousand for last year's first quarter to $225 thousand for the quarter ended March 31, 1999. INVESTMENTS TO ACCELERATE GROWTH Following the Company's initial public offering on March 4, 1998, management implemented strategies to accelerate growth. Investments made during 1998 and 1999 included investments in new sales offices, sales force compensation, advertising, training and additional investment management, shareholder service and back-office personnel. While these investments generally affect operating costs immediately, their benefits in the form of sales force growth, improved productivity, increased sales and assets under management are not fully realized until future periods. The ramping up of our investment costs to date have reduced margins in advance of increased benefits. Distribution margin was 2.4% for the first quarter of 1999 compared to 13.5% for the same period last year. Most of this decline was due to expenses incurred for advertising, training, sales force compensation enhancements and marketing support. Pretax operating margin was further affected by the costs of the 1998 staff additions for investment management, shareholder services and back-office operations. Pretax operating margin was 43.9% for the first quarter of 1999 compared to 53.0% for the first quarter of 1998. The Company is clearly beginning to benefit from the investments as reflected by the first quarter growth of investment product sales, increase in the number of advisors and improvement of sales force productivity. Most of the investments were made during the later half of 1998 and as a result, the rate of growth in expenses will moderate by the end of 1999. Consequently, the Company's operating and distribution margins should substantially strengthen during the second half of 1999 if revenues accelerate as expected. STOCK REPURCHASE PROGRAM The Company continued acquiring shares of its common stock by repurchasing 1.8 million Class A and Class B common shares at an aggregate cost of $35.5 million during the quarter. These repurchases were funded by an additional $40 million borrowing against a credit facility. The outstanding balance on this facility at March 31, 1999 was $80 million. The total number of common shares outstanding at March 31, 1999 was 61.0 million. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and liquid marketable securities were $168.2 million at March 31, 1999, an increase of $34.9 million from December 31, 1998. Cash and cash equivalents at March 31, 1999 and December 31, 1998 include reserves of $18.6 million and $10.8 million, respectively, for the benefit of customers in compliance with securities regulations. The increase is primarily related to cash flow from operations. Cash flow provided by operations was $40.8 million and $39.6 million for the first three months of 1999 and 1998, respectively. Investing activities used $3.3 million of cash during the three months ended March 31, 1999, due primarily to $2.2 million in investments in marketable securities and $1.6 million invested in property and equipment. As mentioned, the Company repurchased $35.5 million of its common stock through the stock repurchase program during the first quarter of 1999, funded by the credit facility. The Company is considering selling its investment in real estate and its home office properties during the latter half of 1999 to an unrelated party. Proceeds from this sale are expected to approximately equal the book and tax basis in these properties ($35 million -$40 million). The Company also has plans to expand its existing home office facilities commencing in 1999 at an estimated cost of $12.0 million. The plan for the sale provides that the buyer would assume responsibility for completing the expansion. The proceeds from the sale of these properties would be available for share repurchases, debt repayment, or other corporate purposes. Subsequent to the sale of these properties, the Company would enter into a lease agreement to lease back sufficient space to accommodate its home office operations. 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 $300 million credit facility is also available for the Company's use. The outstanding balance on the facility at March 31, 1999 was $80.0 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 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 is currently in 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 Company's Year 2000 plan prioritizes the Year 2000 readiness of mission critical systems over non-mission critical systems. Because the Year 2000 project is an ongoing Company-wide endeavor, the state of the Company's progress changes daily. The information provided in this Form 10-Q about our Year 2000 progress is provided as of May 1, 1999. Internal and external resources are being used to make the required modifications and test Year 2000 compliance. The Company has completed compliance activities for all internal mission critical items and estimates that its compliance activities will be completed no later than the second quarter of 1999 for all non-mission critical items. 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 $3.7 million. 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 is in process and includes transaction processing in a Year 2000 environment. The Company plans to complete this testing no later than the end of the second quarter of 1999. 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 estimated timetable and current state of completion for its mission critical and non-mission critical systems.
Mission Critical % of Mission Stages Target Date Critical Complete ------ ----------- ----------------- Awareness Complete 100% Inventory Complete 100% Risk Assessment Complete 100% Compliance Assessment Complete 100% Remediation Complete 100% Validation* Complete 100% Contingency Planning 6/30/99 51% Non-Mission % of Non-Mission Critical Stages Target Date Critical Complete --------------- ----------- ----------------- Awareness Complete 100% Inventory Complete 100% Risk Assessment Complete 100% Compliance Assessment Complete 100% Remediation 6/15/99 88% Validation* 6/30/99 86% Contingency Planning 8/31/99 47%
- --------- * Internal Testing The Year 2000 Problem also affects some of the Company's vendors and suppliers of data, computers, software and other equipment. The Company has been actively contacting all 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 expects to identify and resolve 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 of new hardware and software between October 1, 1999 and December 31, 1999. This 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 is developing 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 expects to complete its contingency plans by the end of the third quarter 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, the availability and cost of programming and testing resources, vendor 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 or about May 12, 1999, in connection with the adoption of a stockholder rights plan, the Company filed a Certificate of Designation, Preferences and Rights ("Certificate of Designation") designating the rights, preferences and privileges of a new Series A Junior Participating Preferred Stock. The Certificate of Designation created a series of 750,000 shares of Series A Preferred Stock, $1.00 par value, out of the total class of 5,000,000 shares of Preferred Stock. Pursuant to the stockholder rights plan, the Company issued rights to its stockholders of record as of May 12, 1999, entitling each stockholder to the right to purchase one one-hundredth of a share (a "Unit") of Series A Junior Participating Preferred Stock for each share of Common Stock held by the shareholder. The purchase price of $85.00 per Unit is subject to adjustment and is exercisable only upon the occurrence of certain events. 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. Stockholder Proposals Proposals of stockholders intended to be presented at the Company's 2000 annual meeting of stockholders must be received at the Company's principal executive offices no later than November 26, 1999 in order to be included in the Company's proxy statement and form of proxy relating to the 2000 annual meeting. Pursuant to Rule 14a-4(c) of the Securities Exchange Act of 1934, as amended, if a stockholder who intends to present a proposal at the 2000 annual meeting of stockholders does not notify the Company of such proposal on or prior to 45 days before the date on which the Company first mailed proxy materials for the 2000 annual meeting of stockholders, then management proxies would be allowed to use their discretionary voting authority to vote on the proposal when the proposal is raised at the annual meeting, even though there is no discussion of the proposal in the 2000 proxy statement. If a stockholder proposal is submitted outside the proposal process mandated by Securities and Exchange Commission rules, it will be considered untimely if received after February 11, 2000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10 Rights Agreement, dated April 28, 1999, by and between the Company and First Chicago Trust Company of New York, as Rights Agent, including the form of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Company as Exhibit A and the form of Rights Certificates as Exhibit B. Filed as Exhibit 1 to the Company's Registration Statement on Form 8-A12B, Accession Number 0000950172-99-000526, filed with the Securities and Exchange Commission on May 6, 1999. 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. 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 May, 1999. WADDELL & REED FINANCIAL, INC. By: /s/ Keith A. Tucker ------------------- Chairman of the Board and Chief Executive Officer (Principal Financial Officer) By: /s/ Michael D. Strohm --------------------- Senior Vice President (Principal Accounting Officer) EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS REPORTED IN THE QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 63,881 104,327 36,178 0 0 208,992 30,501 11,715 364,837 168,802 0 0 0 665 184,394 364,837 0 80,473 0 43,533 726 0 863 35,351 13,368 21,983 0 0 0 21,983 .35 .35
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