<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 4, 1998.
REGISTRATION NO. 333-43687
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
PRE-EFFECTIVE AMENDMENT NO. 6
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
WADDELL & REED FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6211 51-0261715
(PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER)
(I.R.S. EMPLOYER
(STATE OR OTHER IDENTIFICATION NO.)
JURISDICTION OF
INCORPORATION OR
ORGANIZATION)
6300 LAMAR AVENUE
OVERLAND PARK, KANSAS 66202
(913) 236-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
KEITH A. TUCKER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
WADDELL & REED FINANCIAL, INC.
6300 LAMAR AVENUE
OVERLAND PARK, KANSAS 66202
(913) 236-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
ALAN J. BOGDANOW MATTHEW J. MALLOW
HUGHES & LUCE, L.L.P. SKADDEN, ARPS, SLATE, MEAGHER & FLOM
1717 MAIN STREET, SUITE 2800 LLP
DALLAS, TEXAS 75201 919 THIRD AVENUE
(214) 939-5500 NEW YORK, NEW YORK 10022
(212) 735-3000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to 462(b) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
The Prospectus relating to the shares of Class A Common Stock to be used in
connection with a United States and Canadian offering (the "U.S. Prospectus")
is set forth following this page. The Prospectus to be used in a concurrent
international offering (the "International Prospectus") will consist of the
alternate page set forth following the U.S. Prospectus and the balance of the
pages included in the U.S. Prospectus for which no alternate is provided. The
U.S. Prospectus and the International Prospectus are identical except that
they contain different front cover pages.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued March 4, 1998
21,700,000 Shares
Waddell & Reed Financial, Inc.
CLASS A COMMON STOCK
----------
OF THE 21,700,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED, 17,360,000
SHARES ARE BEING OFFERED INITIALLY IN THE UNITED STATES AND CANADA BY THE
U.S. UNDERWRITERS AND 4,340,000 SHARES ARE BEING OFFERED INITIALLY OUTSIDE
THE UNITED STATES AND CANADA BY THE INTERNATIONAL UNDERWRITERS. ALL SHARES
OF CLASS A COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE COMPANY. IT
IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE
WILL BE BETWEEN $20 AND $22 PER SHARE. SEE "UNDERWRITERS" FOR A
DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL
PUBLIC OFFERING PRICE.
THE COMPANY HAS TWO CLASSES OF AUTHORIZED COMMON STOCK CONSISTING OF CLASS A
COMMON STOCK OFFERED HEREBY AND CLASS B COMMON STOCK (COLLECTIVELY, THE
"COMMON STOCK"). SEE "DESCRIPTION OF CAPITAL STOCK." HOLDERS OF CLASS A COMMON
STOCK ARE ENTITLED TO ONE VOTE PER SHARE AND HOLDERS OF CLASS B COMMON STOCK
ARE ENTITLED TO FIVE VOTES PER SHARE ON EACH MATTER SUBMITTED TO A VOTE OF
STOCKHOLDERS. ALL OF THE CLASS B COMMON STOCK IS BENEFICIALLY OWNED BY
TORCHMARK CORPORATION. SUBSTANTIALLY ALL OF THE NET PROCEEDS OF THE OFFERING
WILL BE USED TO PREPAY OUTSTANDING INDEBTEDNESS TO TORCHMARK CORPORATION
AND ONE OF ITS SUBSIDIARIES. SEE "USE OF PROCEEDS." ALL HOLDERS OF COMMON
STOCK ARE ENTITLED TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS, IF ANY, AS
MAY BE DECLARED FROM TIME TO TIME BY THE BOARD OF DIRECTORS.
----------
THE CLASS A COMMON STOCK HAS BEEN APPROVED FOR LISTING, SUBJECT TO OFFICIAL
NOTICE OF ISSUANCE, ON THE NEW YORK STOCK EXCHANGE UNDER THE TRADING SYMBOL
"WDR."
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR RISK FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------
PRICE $ A SHARE
----------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
-------- ---------------------- -----------
<S> <C> <C> <C>
Per Share........................... $ $ $
Total(3)............................ $ $ $
</TABLE>
- -----
(1) The Company and Torchmark Corporation have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company has granted the U.S. Underwriters an option exercisable
within 30 days of the date hereof to purchase up to an aggregate of
2,170,000 additional shares of Class A Common Stock at the price to the
public shown above less underwriting discounts and commissions for the
purpose of covering over-allotments, if any. If the U.S. Underwriters
exercise such option in full, the total price to the public, underwriting
discounts and commissions, and proceeds to the Company will be $ ,
$ , and $ , respectively. See "Underwriters."
----------
The Class A Common Stock is offered subject to prior sale, when, as, and if
accepted by the Underwriters and, subject to approval of certain legal matters
by Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters, and
to certain other conditions. It is expected that delivery of the Class A Common
Stock will be made on or about , 1998 at the offices of Morgan Stanley &
Co. Incorporated, New York, New York, against payment therefor in immediately
available funds.
----------
MORGAN STANLEY DEAN WITTER
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
, 1998
<PAGE>
[MAP OF WADELL & REED FINANCIAL OFFICES APPEARS HERE]
Map of the United States showing Division and District Offices in the Cities
and states listed: Mobile, Alabama; Anchorage and Wasilla, Alaska; Temple and
Tuscon, Arizona; Bentonville, Arkansas; Capitola, Costa Mesa, Fairfield,
Fullerton, Lodi, Napa (2), Oakland, Rancho Cucamon, Riverside, Sacramento, San
Diego, San Mateo, Santa Clara, Torrance and Woodland Hills, California;
Boulder, Colorado Springs, Denver, Fort Collins, Grand Junction, Greeley,
Littleton (2) and Pueblo, Colorado; Hamden, Connecticut; Clearwater,
Jacksonville, St. Petersburg, Tallahassee and Winter Park, Florida; Alpharetta
and Atlanta (3), Georgia; Davenport and Des Moines, Iowa; Boise, Coeur
D'Alene, Idaho Falls, Lewiston, Meridian, Mountain Home and Twin Falls, Idaho;
Countryside, Elgin, Evergreen Park, Homewood, Joliet, Lombard, Park Ridge,
Springfield and Sterling, Illinois; Indianapolis, Indiana; Dodge City, Garden
City, Great Bend, Hays, Hutchinson, Lawrence, Manhattan, Oakley, Overland
Park, Salina, Topeka and Wichita, Kansas; Fort Wright and Louisville
Kentucky; Braintree, Waltham and Weburn, Massachusetts; Burton, Grand Rapids,
Muskegon and Southfield, Michigan; Bloomington, Duluth, Edina, Plymouth,
Rochester, and St. Paul, Minnesota; Columbia, Creve Coeur, Joplin, Kansas City
(2) and Springfield, Missouri; Billings, Boulder, Bozeman, Great Falls,
Helena, Kalispell and Missoula, Montana; Charlotte, Raleigh and Winston-Salem,
North Carolina; Bismark, North Dakota; Grand Island, Kearney, Lincoln, Norfolk
and Omaha, Nebraska; Las Vegas and Reno, Nevada; Nashua and Portsmouth, New
Hampshire; Lawrenceville, New Jersey; Albuquerque, New Mexico; Albany (2) and
Rochester, New York; Cincinnati, Dublin and Willoughby, Ohio; Edmond, Lawton
and Tulsa, Oklahoma; Beaverton, Bend, Eugene, Medford, Portland and Salem,
Oregon; Allenton, Erie (2), Harrisburg, Langhorne, Monroeville, Philadelphia,
Pittsburgh and Wyomissing, Pennsylvania; Warwick, Rhode Island; Charleston and
Columbia, South Carolina; Rapid City and Sioux Falls, South Dakota; Memphis
and Nashville, Tennessee; Austin, Corpus Christi, Dallas, El Paso, Fort Worth,
Harlingen, Houston (2), McAllen and San Antonio, Texas; Ogden and Salt Lake
City, Utah; McLean, Richmond and Virginia Beach, Virginia; Bellevue,
Bellingham, College Place, Federal Way, Lynnwood, Pullman, Silverdale,
Spokane, Tacoma, Vancouver and Yakima, Washington; Brookfield and Madison,
Wisconsin; Casper, Cody and Rock Springs, Wyoming.
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITY OTHER THAN THE CLASS A COMMON STOCK OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREBY WILL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 11
Special Note Regarding Forward-
Looking Information................ 16
Use of Proceeds..................... 16
Dividend Policy..................... 17
Dilution............................ 17
Capitalization...................... 18
Selected Financial and Operating
Data............................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................ 24
Management.......................... 42
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Relationships and Related Transactions.................................. 56
Principal Stockholder........................................................... 60
Description of Capital Stock.................................................... 60
Shares Eligible for Future Sale................................................. 68
Certain United States Federal Tax Considerations for Non-United States Holders.. 69
Underwriters.................................................................... 71
Legal Matters................................................................... 74
Experts......................................................................... 74
Additional Information.......................................................... 74
Index to Consolidated Financial Statements...................................... F-1
</TABLE>
----------------
The Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.
----------------
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT THE CLASS A COMMON STOCK
IN CONNECTION WITH THE OFFERING, AND MAY BID FOR AND PURCHASE THE SHARES OF
CLASS A COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITERS."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
(including notes) appearing elsewhere in this Prospectus. Unless otherwise
indicated, the information contained in this Prospectus (i) gives effect to the
transactions described below under "Background," which will have been
consummated prior to or concurrently with the Offering, and (ii) assumes no
exercise of the Underwriters' over-allotment option. Unless the context
otherwise requires, (i) the "Company" and "Waddell & Reed" refer to Waddell &
Reed Financial, Inc. and its subsidiaries and (ii) "Torchmark" refers to
Torchmark Corporation and its subsidiaries other than the Company. References
to "Common Stock" are to the Class A Common Stock and the Class B Common Stock
of the Company.
THE COMPANY
OVERVIEW
Waddell & Reed, founded in 1937, is one of the oldest mutual fund complexes
in the United States, having introduced the United family of funds in 1940.
Waddell & Reed sells its investment products primarily to middle income
Americans through a virtually exclusive sales force consisting, at December 31,
1997, of 2,160 financial advisers operating from 177 sales offices located
throughout the United States. As of December 31, 1997, the Company had $23.4
billion of assets under management, of which $20.6 billion were mutual fund
assets and the remainder were institutional accounts, and more than 563,000
mutual fund customers having an average account size of $33,200.
The Company is the exclusive underwriter and distributor of 36 mutual fund
portfolios (the "Funds"), including 17 comprising the United Group of Mutual
Funds (the "United Funds"), eight comprising the Waddell & Reed Funds, Inc.
(the "W&R Funds"), and 11 comprising the TMK/United Funds, Inc. (the
"TMK/United Funds"). The Company also distributes Torchmark underwritten
variable annuities and life insurance products to its customers as part of its
financial planning services. For the year ended December 31, 1997, the
Company's financial adviser sales force sold $1.5 billion of mutual fund and
variable products.
The Company's sales force competes primarily with small broker/dealers and
independent financial advisers. The Company's customers generally reside in
smaller metropolitan areas and rural communities. The Company conducts
investment seminars throughout the United States and also develops individual
financial plans for clients (over 40,000 plans in 1997) through one-on-one
consultations with financial advisers, who emphasize long-term relationships
with a client through continuing service, rather than a one-time sale. The
Company believes that it benefits from a developing industry trend toward
"assisted sales"--sales of mutual fund products through a sales person--driven
by the array of options now available to investors and the need for financial
planning advice that has resulted from the recent increase in the average
household's financial assets. According to the Investment Company Institute,
assisted sales for the year ended December 31, 1997 constituted 61.9% of the
total dollar value of mutual fund sales, a figure that has grown from 54.9% for
1994.
The Company's investment philosophy and financial planning approach emphasize
long-term savings. The Company's portfolio managers seek consistent long-term
performance and downside protection in turbulent markets. As a result, the
Company has developed a loyal customer base with clients maintaining their
accounts for approximately 13 years on average as compared to six years for the
mutual fund industry, according to the Investment Company Institute. This
loyalty is also evidenced by a relatively low fund redemption rate for the five
years ended December 31, 1997 of 7.6% for the Funds (other than money market
funds), which is less than one-half of the industry average of 18.4% and a
relatively high dividend reinvestment rate of 86.6% for the Funds (other than
money market funds) for the same period versus 66.9% for the mutual fund
industry. Approximately 45% of the Company's assets under management were in
retirement accounts as of December 31, 1997.
4
<PAGE>
The Company has a seasoned team of portfolio managers, having an average of
20 years industry experience and 14 years tenure with the Company. The five
most senior portfolio managers have an average of 30 years industry experience
and 26 years tenure with the Company. Portfolio managers usually were
investment research analysts for a substantial length of time prior to
acquiring money management assignments. The predominant style of the Company's
investments is growth equity. As of December 31, 1997, approximately 78% of the
Company's mutual fund assets under management were invested in equity funds and
the remainder in fixed income and money market funds. This investment strategy
emphasizes investment at attractive valuations in companies that the portfolio
managers believe can produce above average growth in earnings.
BUSINESS STRATEGY
The Company's business strategy is outlined below.
. INCREASE NUMBER OF FINANCIAL ADVISERS: The Company intends to expand its
distribution network by recruiting high quality candidates to be financial
advisers. The Company's current objective is to increase the number of
financial advisers by 10% per year. From December 31, 1996 to December 31,
1997, the number of financial advisers has increased from 2,010 to 2,160.
In 1994, the Company also began implementing a "bridge income" program,
which provides newly recruited financial advisers with a source of earnings
until they can develop the skills and client base necessary to earn a
stable income from commissions. Financial advisers recruited in 1997 who
participated in the bridge income program produced, on average, at two and
a half times the rate of non-participants.
. CONTINUE TO INCREASE PERCENTAGE OF FULL-TIME FINANCIAL ADVISERS: Since 1993,
the Company has emphasized increasing the proportion of its sales force that
sells financial services products on a full-time basis. At December 31,
1997, the percentage of financial advisers whose annual production is the
equivalent of investment product sales in excess of $900,000 per year, which
the Company considers full-time ("Full-Time Advisers"), was 31% of the
Company's total sales force, up from 18% at December 31, 1992. Over the same
period, the annual investment product sales per Full-Time Adviser increased
approximately 25% to a current annual rate of about $1.7 million.
. EXPAND GEOGRAPHIC SCOPE: The Company intends to pursue geographic expansion
of its sales force. In larger communities it intends to establish new
division offices with the facilities to accommodate up to 20 financial
advisers, and in smaller communities or suburban areas it will open offices
with facilities to accommodate a smaller group of advisers. While
historically the Company has opened new offices in areas that were
contiguous with existing offices, it now intends to select new locations
based on expected growth opportunities. Consistent with its focus on
retirement savings and planning, the Company expects to open new offices in
Florida and Arizona, as well as smaller offices in other areas of the
country, in 1998.
. ENHANCE MARKETING AND FINANCIAL PLANNING TOOLS: The Company expects to
implement an improved financial planning package, which will allow its
financial advisers to customize solutions to a client's savings, retirement
income, estate planning, life insurance, and other personal financial
planning needs. The Company has traditionally provided financial planning
advice to its clients free of charge. The Company now intends to begin
charging a fee, typically $250, for such services. The Company believes that
its program of selling its improved financial plans for a fee will stimulate
sales and result in a significantly higher average sale per plan. The
Company expects to introduce the revised financial plan by the end of the
first quarter of 1998.
. INVEST IN PORTFOLIO MANAGERS AND INVESTMENT ANALYSTS: The Company's
objective is for its Fund families to achieve top quartile performance. The
Company is also focused on building its industry and geographic expertise.
To achieve this goal, the Company has begun to implement a plan to add
several portfolio managers and investment analysts. The Company is
implementing a new incentive compensation structure that relies on stock
options and increases in cash compensation to bring total compensation for
portfolio managers and investment analysts to a more market-competitive
level.
5
<PAGE>
. INVEST IN SYSTEMS AND TECHNOLOGY: In order to support its anticipated
growth, the Company is engaged in projects to enhance its information
systems. The Company will install a management system in all division
offices that it believes will better enable division managers to monitor the
activities of the individual financial advisers including the number of
sales calls completed, the number of client contacts, and overall sales
results. The Company has recently completed agreements to outsource the data
processing components of its transfer agency activities to a third party
provider by the fourth quarter of 1998. The Company has developed and is
testing an intranet to be used by its financial advisers to obtain updated
training materials, product information, and electronic interactive product
illustrations. In addition, the Company expects that clients will have
access to the intranet to obtain data related to their personal accounts
once information security concerns are addressed.
. PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES TO EXPAND PRODUCT OFFERING AND
DISTRIBUTION: The Company intends to selectively pursue acquisitions and
alliances that will add new products or alternative distribution systems.
The Company believes that it will be better positioned to pursue
acquisitions as one of relatively few independent, public investment
advisory and asset management companies. The Company has traditionally
distributed its investment products only through its virtually exclusive
financial adviser sales force. In the future, the Company may acquire
another fund complex the products of which will likely not be marketed to
the Company's existing customer base.
6
<PAGE>
THE OFFERING
Class A Common Stock
Offered
United States Offering...... 17,360,000 shares
International Offering...... 4,340,000 shares
Total....................... 21,700,000 shares
Common Stock to be
outstanding after the
Offering
Class A Common Stock........ 29,675,000 shares(1)
Class B Common Stock........ 34,325,000 shares
Total....................... 64,000,000 shares(1)
Use of proceeds...............
Net proceeds (other than from any exercise
of the over-allotment option) to prepay
amounts outstanding under the Notes (as
defined below) payable to Torchmark, which
prior to the Offering will be prepaid to
the extent necessary so that the remaining
aggregate principal amount thereof equals
the greater of $428 million or the net
proceeds of the Offering (including net
proceeds from exercise of the over-
allotment option in excess of $35.0
million). Net proceeds from any exercise of
the over-allotment option to be retained by
the Company for general corporate purposes
to the extent of $35.0 million, and the
excess over $35.0 million, if any, will be
paid to Torchmark. See "Use of Proceeds."
Dividend Policy............... The Company currently intends to pay
quarterly dividends of approximately $.1325
per share to holders of Class A Common
Stock and Class B Common Stock.
Voting Rights
Class A Common Stock........ 1 vote per share
Class B Common Stock........ 5 votes per share
NYSE Symbol................... "WDR"
- --------
(1) Does not include options to purchase 2,372,300 shares of Class A Common
Stock to be issued pursuant to compensation and benefit plans of the
Company or 200,000 shares of Class A Common Stock to be restricted stock
under the Company's compensation and benefit plans. See "Management--
Compensation, Benefits, and Retirement Plans." Also, does not include (i)
options issuable in connection with conversion of options issued under
Torchmark compensation and benefit plans and (ii) the conversion of 48,000
shares of restricted stock of Torchmark Corporation issued under Torchmark
stock plans to Class A Common Stock at the time of consummation of the
Offering. See "Management--Conversion of Torchmark Equity Compensation to
Class A Common Stock of the Company."
BACKGROUND
From 1981 until the Offering, the Company has been a subsidiary of Torchmark,
and was known as United Investors Management Company until it effected a name
change in December 1997 to Waddell & Reed Financial, Inc. The Company is a
holding company that conducts its business through its subsidiaries. One
subsidiary, Waddell & Reed, Inc. ("W&R"), is a registered broker-dealer and
registered investment adviser that acts primarily as the nationwide distributor
and underwriter for the shares of mutual funds and distributor of insurance
products issued primarily by United Investors Life Insurance Company ("UILIC"),
a subsidiary of Torchmark. Another subsidiary, Waddell & Reed Investment
Management Company ("WRIMCO"), is a registered investment adviser that provides
investment management and advisory services to the Funds and to institutions
and other private clients through a subcontract with another subsidiary of
Torchmark. Finally, Waddell & Reed Services Company ("WRSCO") provides transfer
agency and accounting services to the Funds and their shareholders.
The Company's outstanding capital stock currently consists solely of common
stock, all of which is held by Torchmark. Prior to the consummation of the
Offering, the Company will file an amended and restated certificate
7
<PAGE>
of incorporation (the "Certificate of Incorporation") that will convert all
currently outstanding common stock into 7,975,000 shares of Class A Common
Stock and 34,325,000 shares of Class B Common Stock, all of which will be held
by Torchmark (the "Recapitalization").
After the consummation of the Offering, the Company will continue to be
controlled by Torchmark, which will own more than 89% of the combined voting
power of the Class A Common Stock and the Class B Common Stock of the Company.
The holders of Class A Common Stock and Class B Common Stock have identical
rights except that (i) holders of Class A Common Stock are entitled to one vote
per share while holders of Class B Common Stock are entitled to five votes per
share on all matters to be voted on by stockholders and (ii) holders of Class A
Common Stock are not eligible to vote on any alteration or change in the
powers, preferences, or special rights of the Class B Common Stock that would
not adversely affect the rights of Class A Common Stock and vice versa. For
example, holders of Class A Common Stock would not be entitled to vote on
proposals to decrease the voting power of the Class B Common Stock, to decrease
the right of Class B Common Stock to receive dividends, or to diminish the
rights of the Class B Common Stock in liquidation, and vice versa. See "Risk
Factors--Relationship with Torchmark"; "Risk Factors--Conflicts of Interest
Between the Company and Torchmark"; and "Certain Relationships and Related
Transactions--Relationship with Torchmark."
The Company, in keeping with Torchmark's strategy for its subsidiaries, paid
virtually all of its earnings to Torchmark as dividends. 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 Corporation of all of the Class A Common Stock and
Class B Common Stock owned by Torchmark after the Offering (the "Spin-Off").
The purpose of the Spin-Off is to allow the Company to devote more of its
earnings to support future growth, to allow the Company to set compensation and
other policies on a separate basis from Torchmark, and to maximize the value of
the Offering. The Offering will allow the Company to pay down the Notes and
thereby allow Torchmark to realize cash proceeds from its investment in the
Company. In the event that the Spin-Off is effected, holders of record of the
common stock of Torchmark Corporation as of the record date will be entitled to
receive a dividend of Common Stock without payment of further consideration.
The Company expects, however, that the market value of Torchmark Corporation
common stock will diminish after the Spin-Off dividend is effected to reflect
the value of the shares of Common Stock distributed in the Spin-Off. See "Risk
Factors--Uncertainty of Planned Spin-Off of the Company" and "Certain
Relationships and Related Transactions--Relationship With Torchmark--Spin-Off."
As of the date of the Offering, the Company is indebted to Torchmark as a
result of previous intercompany funding arrangements and from certain
promissory notes issued to Torchmark as dividends (as defined below, the
"Notes"). Prior to the Offering, the Company will prepay outstanding amounts
remaining under the Notes to the extent necessary so that the remaining
aggregate principal amount of the Notes equals the greater of $428 million or
the net proceeds of the Offering (including net proceeds from the exercise of
the over-allotment option in excess of $35.0 million). The net proceeds of the
Offering (including net proceeds from the exercise of the over-allotment option
in excess of $35.0 million) will be used to prepay the Notes. See "Use of
Proceeds" and "Certain Relationships and Related Transactions--Relationship
with Torchmark--Intercompany Debt." If the net proceeds of the Offering
(assuming no exercise of the Underwriters' over-allotment option) are less than
$428 million, an amount equal to $428 million minus such net proceeds will
remain an obligation of the Company.
The Company formerly held all of the issued and outstanding capital stock of
UILIC. The Company has declared and paid a dividend of all the capital stock of
UILIC to Torchmark (the "UILIC Dividend"). See "Certain Relationships and
Related Transactions--UILIC."
In connection with the Offering, the Company is either entering into or
amending several agreements with Torchmark and its affiliates (the "Affiliate
Agreements"), which will provide the basis for future relationships between the
Company and Torchmark. See "Risk Factors--Relationship with Torchmark"; "Risk
Factors-- Conflicts of Interest Between the Company and Torchmark"; and
"Certain Relationships and Related Transactions--Relationship with Torchmark."
In order to address certain potential conflicts of interest that could affect
the Company and its officers and directors, the Certificate of Incorporation of
the Company contains provisions concerning the conduct of certain affairs of
the Company as it may involve Torchmark and its affiliates and the Company and
its affiliates. Persons acquiring the Common Stock will be deemed to have
consented to these provisions. These provisions allocate corporate
opportunities between the Company and Torchmark and specify the terms on which
transactions between the Company and Torchmark will not be voidable
notwithstanding the existence of common directors. For a detailed description
of these provisions, see "Description of Capital Stock--Corporate Opportunity
and Conflict of Interest Policies."
8
<PAGE>
SUMMARY HISTORICAL FINANCIAL AND OPERATING DATA
The following tables set forth summary historical financial and operating
data for the five years ended December 31, 1997 as well as summary historical
balance sheet data of the Company, as of December 31, 1997 and as adjusted to
reflect the Offering and the application of the net proceeds therefrom and to
reflect further repayment of certain affiliated indebtedness. See "Certain
Relationships and Related Transactions." The information set forth should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Consolidated Financial Statements
and the related notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Investment management
fees................... $ 64,208 $ 70,711 $ 85,289 $101,466 $117,784
Underwriting and
distribution fees...... 78,037 72,150 70,393 85,837 89,427
Shareholder service
fees................... 21,280 22,297 23,527 28,378 30,763
Investment and other
income................. 14,681 3,878 4,295 5,295 3,798
-------- -------- -------- -------- --------
Total revenue.......... 178,206 169,036 183,504 220,976 241,772
Goodwill
amortization(1)........ 1,332 2,903 2,903 2,903 2,903
Other expenses.......... 101,494 89,282 95,894 112,766 123,746
-------- -------- -------- -------- --------
Total expenses......... 102,826 92,185 98,797 115,669 126,649
-------- -------- -------- -------- --------
Income before interest
and income taxes...... 75,380 76,851 84,707 105,307 115,123
Interest income, net.... -- 1,915 3,886 3,886 24
-------- -------- -------- -------- --------
Income before income
taxes................. 75,380 78,766 88,593 109,193 115,147
Income taxes............ 28,873 31,140 35,092 42,493 44,855
-------- -------- -------- -------- --------
Income before effect of
change in accounting
principle............. 46,507 47,626 53,501 66,700 70,292
Cumulative effect of
change in accounting
principle.............. 4,125 -- -- -- --
-------- -------- -------- -------- --------
Net income............. $ 50,632 $ 47,626 $ 53,501 $ 66,700 $ 70,292
======== ======== ======== ======== ========
Pro forma net income per
share:
Basic and diluted(2).... $ 1.10
========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
--------------------------
AS
ACTUAL ADJUSTED
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Current assets...................................... $130,132 116,534
Goodwill............................................ 98,831 98,831
Total assets........................................ 446,964 265,916
Total liabilities................................... 676,855 67,807
Total stockholder's equity.......................... (229,891) 198,109
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Financial Advisers:
Full time(3)................ 546 487 505 634 660
Part time................... 2,141 1,770 1,830 1,376 1,500
-------- -------- -------- -------- --------
Totals..................... 2,687 2,257 2,335 2,010 2,160
Number of investors(4):
Mutual funds................ 499,400 517,600 537,100 522,600 563,800
Variable products........... 16,400 22,700 27,800 33,400 38,200
Average value per
investor(5):
Mutual funds................ $ 22,500 $ 21,600 $ 26,100 $ 28,500 $33,200
Variable products........... $ 33,700 $ 31,900 $ 39,600 $ 42,900 $49,600
Redemption rates of mutual
funds:
Mutual funds................ 7.55% 7.52% 7.64% 7.64% 7.61%
Industry average(6)......... 18.37% 21.27% 17.35% 16.95% 17.86%
Dividend reinvestment rate:
Mutual funds................ 84.9% 86.0% 86.8% 87.5% 87.7%
Industry average(6)......... 53.9% 65.8% 71.7% 72.6% 73.2%
Assets under management
(millions):
Mutual fund:
Equity funds............... $ 7,563 $ 8,174 $ 10,931 $ 12,990 $16,093
Fixed income funds......... 3,870 3,349 3,719 3,681 3,921
Money market funds......... 348 369 442 537 572
-------- -------- -------- -------- --------
Total mutual funds......... $ 11,781 $ 11,892 $ 15,092 $ 17,208 $20,586
Institutional(7)............ $ 2,659 $ 2,606 $ 3,397 $ 1,862 $ 2,831
</TABLE>
- --------
(1) Amortization relates to Torchmark's acquisition of the Company in 1981 and
1993. Current annual amortization is $2.9 million.
(2) Pro forma basic and diluted net income per share has been computed by
dividing net income, as adjusted to eliminate the after tax interest cost
on the Notes, by 64,000,000 shares (the average number of shares
outstanding plus the number of shares the proceeds of which would be used
to pay the Notes).
(3) Financial advisers whose annual or annualized production is the equivalent
of investment product sales in excess of $900 thousand.
(4) Mutual funds reflect the number of investors in the United Funds and W&R
Funds. Variable products reflect the number of variable annuity and
variable life policies.
(5) Mutual funds average value reflects the value for the United Funds and W&R
Funds. The variable product average is based on the value of TMK/United
Fund assets divided by the number of variable annuity and life policies.
(6) Source: Investment Company Institute. The industry dividend reinvestment
rate average for 1997 is for the twelve months ended September 30, 1997.
(7) Institutional assets include assets of Torchmark affiliates of $0, $77.3
million, $373.8 million, $390.9 million, and $1,265.0 million at December
31, 1993, 1994, 1995, 1996, and 1997, respectively.
10
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following risk factors
and cautionary statements before making an investment in the Class A Common
Stock offered by this Prospectus, as well as the other information set forth
in this Prospectus.
TORCHMARK'S ABILITY TO CONTROL THE COMPANY
Torchmark currently owns all of the outstanding capital stock of the
Company. See "Certain Relationships and Related Transactions." Upon completion
of the Offering, Torchmark will beneficially own approximately 66.1% of the
Company's outstanding Common Stock, representing approximately 89.3% of the
combined voting power of all classes of voting stock of the Company. In
addition, Torchmark and the Company will have a majority of their directors in
common upon completion of the Offering and the Spin-Off. As long as Torchmark
beneficially owns a majority of the combined voting power of the Common Stock,
it will have the ability to elect all of the members of the Board of Directors
and thereby to control the management and affairs of the Company, including
any determinations with respect to acquisitions, dispositions, borrowings,
issuances of Common Stock or other securities of the Company, and the
declaration and payment of any dividends on the Common Stock. In addition,
Torchmark will be able to determine the outcome of any matter submitted to a
vote of the Company's stockholders for approval and will be able to cause or
prevent a change in control of the Company. As a result of Torchmark's control
of the Company, none of the Affiliate Agreements resulted from "arm's-length"
negotiations, although the parties endeavored to implement market based
agreements. There can be no assurance that the Company would not have received
more favorable terms from an unaffiliated party. For a description of the
Affiliate Agreements, see "Certain Relationships and Related Transactions--
Relationship with Torchmark."
CONTROL OF COMPANY BY TORCHMARK COULD RESULT IN LESS FAVORABLE RESOLUTION OF
CONFLICTS
Conflicts of interest may arise between the Company and Torchmark in a
number of areas relating to their past and ongoing relationships, including
the nature, quality, and pricing of services rendered by the Company to
Torchmark or by Torchmark to the Company, potential competitive business
activities, shared marketing functions, tax and employee benefit matters,
indemnity agreements, sales or distributions by Torchmark of all or any
portion of its ownership interest in the Company, or Torchmark's ability to
control the management and affairs of the Company. There can be no assurance
that Torchmark and the Company will be able to resolve any potential conflict
or that, if resolved, the Company would not receive more favorable resolution
if it were dealing with an unaffiliated party. See "Description of Capital
Stock--Certificate of Incorporation and Bylaw Provisions--Corporate
Opportunity and Conflict of Interest Policies."
TORCHMARK'S ABILITY TO DISPOSE OF COMMON STOCK; NO ASSURANCE OF A PREMIUM TO
HOLDERS OF CLASS A COMMON STOCK
If the Spin-Off does not occur, Torchmark could decide to sell or otherwise
dispose of all or a portion of its Common Stock at some future date. See "--
Availability of Common Stock for Sale or Distribution." There can be no
assurance that any holders of Class A Common Stock will be allowed to
participate in any transfer by Torchmark of a controlling interest in the
Company or will realize any premium with respect to their shares of Class A
Common Stock.
POTENTIAL ADVERSE EFFECT ON CLASS A COMMON STOCK SHARE VALUE FROM DISPARATE
VOTING RIGHTS OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK
The holders of Class A Common Stock and Class B Common Stock have identical
rights except that (i) holders of Class A Common Stock are entitled to one
vote per share while holders of Class B Common Stock are entitled to five
votes per share on all matters to be voted on by stockholders and (ii) holders
of Class A Common Stock are not eligible to vote on any alteration of the
powers, preferences, or special rights of the Class B Common Stock that would
not adversely affect the Class A Common Stock and vice versa. For example,
holders of Class A Common Stock would not be entitled to vote on proposals to
decrease the voting power of the Class B Common Stock, to decrease the right
of Class B Common Stock to receive dividends, or to diminish the rights of the
Class B Common Stock in liquidation, and vice versa. The differential in the
voting rights could,
11
<PAGE>
however, adversely affect the value of the Class A Common Stock to the extent
that investors or any potential future purchaser of the Company views the
superior voting rights of the Class B Common Stock to have value. The
existence of two separate classes of Common Stock could result in less
liquidity for either class of Common Stock than if there were only one class
of Common Stock.
UNCERTAINTY OF PLANNED SPIN-OFF OF THE COMPANY
Torchmark has advised the Company that, subject to certain conditions,
Torchmark intends to divest its ownership interest in the Company in the Spin-
Off by means of a special dividend to Torchmark Corporation shareholders of
all of the Class A Common Stock and Class B Common Stock owned by Torchmark.
Torchmark has advised the Company that it presently anticipates that the Spin-
Off will occur in the fourth quarter of 1998. Among other things, the Spin-Off
is conditioned on the receipt of a ruling by the Internal Revenue Service to
the effect that the Spin-Off will qualify as a tax-free distribution under (S)
355 of the Internal Revenue Code of 1986, as amended (the "Code"). In
connection therewith, it is a condition to the Offering that Liberty (as
defined below), a wholly owned subsidiary of Torchmark (which, before the
Offering owns more than 80% of the outstanding Common Stock and, after the
Offering and the Recapitalization will own more than 80% of the voting power
of the Common Stock) must control (within the meaning of (S)(S)355 and 368(c)
of the Code) the Company. No assurance can be given that such conditions will
be satisfied or waived, nor can any assurance be given that, in any event, the
Spin-Off will occur or that Torchmark will not sell or retain its Common
Stock. See "Certain Relationships and Related Transactions--Relationship with
Torchmark--Public Offering and Separation Agreement."
POTENTIAL EXPENSE, DELAY, AND UNCERTAINTY TO SPIN-OFF ARISING FROM REGULATORY
ENVIRONMENT
The Company has been advised by counsel that the Spin-Off as presently
contemplated should not result in an assignment of the Company's investment
advisory agreements under the Investment Company Act of 1940, as amended (the
"Investment Company Act") or the Investment Advisers Act of 1940, as amended
(the "Investment Advisers Act") and, therefore, that the Company should not be
required under the Investment Company Act or the Investment Advisers Act to
obtain the consent of mutual fund shareholders to new investment advisory
agreements. Were the Company required to seek shareholder approval of new
investment advisory agreements as a result of a change in circumstances or
otherwise, seeking such approval would result in expenses to the Company,
could result in a delay of the Spin-Off, and would expose the Company to the
prospect of not obtaining the requisite approval.
POTENTIAL ADVERSE EFFECTS ON THE COMPANY'S BUSINESS AND PROSPECTS FROM A
DECLINE IN SECURITIES MARKETS
The Company's results of operations are affected by certain economic
factors, including the level of the securities markets. Favorable performance
by the United States securities markets over the last five years has attracted
a substantial increase in the investments in these markets and has benefited
the Funds and the Company. A decline in the securities markets, failure of the
securities markets to sustain their recent levels of growth, or short-term
volatility in the securities markets could result in investors withdrawing
from the markets or decreasing their rate of investment, either of which could
adversely affect the Company. Because the revenues of the Company are, to a
large extent, based on the value of assets under management, a decline in the
value of these assets would adversely affect revenues of the Company. The
Company's growth is dependent to a significant degree upon the ability of the
Funds to attract and retain mutual fund assets, and, in an adverse economic
environment, this may prove difficult. The Company's growth rate has varied
from year to year, and there can be no assurance that the average growth rates
sustained in the recent past will continue.
POTENTIAL ADVERSE EFFECTS ON THE COMPANY'S BUSINESS AND PROSPECTS IF THE
FUNDS' PERFORMANCE DECLINES
Success in the investment management and mutual fund businesses is dependent
on the Funds' investment performance. Good performance stimulates sales of the
Funds' shares and tends to keep redemptions low. Sales of Funds' shares
generate higher management fees and distribution revenues (which are based on
assets of the Funds). Good performance also attracts private institutional
accounts to the Company. Conversely, relatively poor performance tends to
result in decreased sales, increased redemptions of the Funds' shares, and the
loss of
12
<PAGE>
private institutional accounts, with corresponding decreases in revenues to
the Company. Failure of the Funds to perform well could, therefore, have a
material adverse effect on the Company.
ADVERSE EFFECT OF TERMINATION OR FAILURE TO RENEW AGREEMENTS
A substantial majority of the Company's revenues are derived from investment
management agreements with the Funds that, as required by law, are terminable
on 60 days' notice. In addition, each such investment management agreement
must be approved and renewed annually by the disinterested members of each
Fund's board or its shareholders, as required by law. See "Business--
Investment Management Agreements." Any failure to renew or termination of a
significant number of these agreements would have a material adverse effect on
the Company.
The Company estimates that it will receive revenues for investment services
provided to Torchmark equal to approximately 2.5% of the Company's total
revenues in 1998. After the Offering, the Company will perform these services
pursuant to an Investment Services Agreement which agreement is terminable by
either party on 30 days notice. Additionally, the Company has the right to
distribute variable annuities, life insurance products, and Medicare
supplement and long term care insurance underwritten by a Torchmark
subsidiary. These activities resulted in revenues constituting approximately
12.7% of the Company's total revenues for the year ended December 31, 1997.
The agreements through which the Company has the right to distribute such
products terminate on December 31, 1998. See "Certain Relationships and
Related Transactions--Relationship with Torchmark--Services to WRAMCO" and
"Certain Relationships and Related Transactions--Relationship with Torchmark--
Agent Agreements." There can be no assurance that these agreements will not be
terminated, or if not terminated, that they will be renewed.
DIFFICULTY OF EXECUTING STRATEGY IF KEY PERSONNEL AND SALES FORCE CANNOT BE
RECRUITED AND RETAINED
The future success of the Company depends to a substantial degree on its
ability to attract and retain qualified personnel to conduct its fund
management and investment advisory business. The market for qualified fund
managers, investment analysts, and financial advisers is extremely competitive
and has grown more so in recent periods as the mutual fund management industry
has experienced growth. The Company anticipates that it will be necessary for
it to add fund managers and investment analysts, and it has adopted a strategy
of which the Offering and Spin-Off are a significant part intended to attract
and retain fund managers and investment analysts. See "Business--Business
Strategy." There can be no assurance, however, that the Company will be
successful in its efforts to recruit and retain the required personnel.
The Company is currently dependent on its sales force to sell its mutual
fund and other investment products. The Company's future growth prospects will
be directly affected by the quality and quantity of financial advisers it is
able to successfully recruit and retain.
COMPETITORS WITH GREATER RESOURCES
The mutual fund distribution and service and investment management
industries are intensely competitive and are undergoing substantial
consolidations. Many organizations in these industries are attempting to
market to and service the same clients as the Company, not only with mutual
fund investments and services but with a wide range of other financial
products and services. Many of the Company's competitors have more products
and product lines, services, and may also have substantially greater assets
under management and financial resources. Many larger mutual fund complexes
have developed relationships with brokerage houses with large distribution
networks, which may enable these fund complexes to reach broader client bases.
See "Business--Competition."
POTENTIAL EFFECT ON PREVAILING MARKET PRICE OF CLASS A COMMON STOCK RESULTING
FROM THE AVAILABILITY OF COMMON STOCK FOR SALE OR DISTRIBUTION
Subject to applicable law, Torchmark will be free to sell any and all of the
shares of Common Stock it owns after completion of the Offering. In addition,
the Affiliate Agreements provide that Torchmark will have the right in certain
circumstances to require the Company to use its best efforts to register for
resale its shares of
13
<PAGE>
Common Stock. See "Certain Relationships and Related Transactions--
Relationship with Torchmark--Public Offering and Separation Agreement." Each
of Torchmark and the Company has, however, entered into a lock up agreement
(the "Lock Up Agreement") providing that, subject to certain exceptions, they
will not sell or otherwise dispose of any shares of Common Stock (other than
the shares offered by this Prospectus or pursuant to employee stock benefit
plans that exist on, or are described in this Prospectus to be implemented
after, the date of this Prospectus) for a period of 180 days after the date of
this Prospectus without the prior written consent of Morgan Stanley & Co.
Incorporated, on behalf of the Underwriters. Torchmark will be permitted to
sell in the public market limited amounts of such Common Stock without
registration pursuant to Rule 144 ("Rule 144") under the Securities Act of
1933, as amended (the "Securities Act"), immediately after the shares of
Common Stock owned by Torchmark are no longer subject to the Lock Up
Agreement. Torchmark has also announced its intent, subject to certain
conditions, to effect the Spin-Off. Torchmark will own approximately 66.1% of
the outstanding Common Stock after the Offering. The Spin-Off as currently
proposed could be effected without registration under the Securities Act and
without regard to the limitations of Rule 144. It is also probable that
holders of Class A Common Stock will experience dilution as a result of the
conversion of Torchmark stock options and restricted stock to Class A Common
Stock and related rights. See "Management--Conversion of Torchmark Equity
Compensation to Class A Common Stock of the Company." No prediction can be
made as to the effect, if any, that future sales or distributions of Class A
Common Stock or Class B Common Stock by Torchmark, or the availability of
Class A Common Stock and Class B Common Stock for future sale or distribution,
will have on the market price of the Class A Common Stock prevailing from time
to time. Sales or distributions of substantial amounts of Class A Common Stock
or Class B Common Stock, or the perception that such sales or distributions
could occur, could adversely affect prevailing market prices for the Class A
Common Stock. See "Shares Eligible for Future Sale."
DIFFICULTY OF EXECUTING ACQUISITION STRATEGY
The Company has no history of finding, acquiring, or integrating other
companies. There can be no assurance that the Company will find suitable
acquisition candidates at acceptable prices, have sufficient capital resources
to realize its acquisition strategy, be successful in entering into definitive
agreements for desired acquisitions, or successfully integrate acquired
companies into the Company, or that any such acquisitions, if consummated,
will prove to be advantageous to the Company.
POTENTIAL MISUSE OF FUNDS AND INFORMATION IN POSSESSION OF ADVISERS
The Company's financial advisers handle a significant amount of funds and
financial and personal information for investors in the Funds and purchasers
of other investment and insurance products. Although the Company has
implemented a system of controls to minimize the risk of fraudulent taking or
misuse of such funds and information, there can be no assurance that such
controls will be adequate or that such taking or misuse can be prevented. The
Company could have liability in the event of such taking or misuse and could
also be subject to regulatory sanctions. Although the Company believes that it
is adequately insured against such risks, there can be no assurance that such
insurance will be maintained or that it will be adequate to meet any future
liability.
NO ASSURANCE OF DIVIDENDS; HOLDING COMPANY STRUCTURE MAY LIMIT AVAILABLE CASH
FOR DISTRIBUTION
The Company's Board of Directors currently intends to declare quarterly
dividends on both the Class A Common Stock and the Class B Common Stock. See
"Dividend Policy." The declaration and payment of dividends by the Company are
subject to the discretion of its Board of Directors. Any determination as to
the payment of dividends, as well as the level of such dividends, will depend
on, among other things, general economic and business conditions, the
strategic plans of the Company, the Company's financial results and condition,
contractual, legal, and regulatory restrictions on the payment of dividends by
the Company or its subsidiaries, and such other factors as the Board of
Directors of the Company may consider to be relevant. The Company is a holding
company, and, as such, its ability to pay dividends is subject to the ability
of the subsidiaries of the Company to provide cash to the Company. There can
be no assurance that the initial quarterly dividend level will be maintained
or that any dividends will be paid by the Company in any future period.
14
<PAGE>
NO ASSURANCE THAT NEW INFORMATION SYSTEMS WILL BE IMPLEMENTED SUCCESSFULLY
A number of the Company's key information technology systems were developed
solely to handle the Company's particular information technology
infrastructure. The Company is in the process of implementing new information
technology and systems (internally and through outsourcing the data processing
portion of its shareholder service functions) that it believes could
facilitate the acquisition and integration of other mutual fund companies. See
" --Difficulty of Executing Acquisition Strategy." There can be no assurance
that the Company will be successful in implementing the new information
technology and systems or that their implementation will be completed in a
timely manner or within the Company's budget.
VOLATILITY OF STOCK PRICE
The market price for the Class A Common Stock may be highly volatile. The
Company believes that factors such as announcements by the Company, or by its
competitors, of quarterly variances in financial results could cause the
market price of the Class A Common Stock to fluctuate substantially. In
addition, the stock market may experience extreme price and volume
fluctuations, which often are unrelated to the operating performance of
specific companies. Market fluctuations or perceptions regarding the Company's
industry, as well as general economic or political conditions, may adversely
affect the market price of the Class A Common Stock.
OFFERING PRICE DETERMINED IN THE ABSCENCE OF A PUBLIC MARKET; MAY NOT INDICATE
POST-OFFERING PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock and there can be no assurance that an active trading market will
develop or be sustained. The initial public offering price of the Class A
Common Stock will be determined through negotiation among the Company,
Torchmark, and the Underwriters and may not be indicative of the market price
for the Class A Common Stock after the Offering. See "Underwriters."
POTENTIAL COSTS AND ADVERSE EFFECTS ON THE COMPANY'S BUSINESS RESULTING FROM
YEAR 2000 RISKS
As the year 2000 approaches, an issue has emerged regarding how existing
application software programs and operating systems can accommodate this date
value. The Company is in the process of modifying its systems and working with
its software vendors to prepare the Company for the year 2000. In addition,
the Company and the Funds have relationships with third parties that have
computer systems that may not be year 2000 compliant. The Company estimates
that its compliance activities will be completed no later than the first
quarter of 1999. The remaining costs of this effort are estimated to be $1.7
million. To the extent the Company's or such third parties' systems are not
fully year 2000 compliant, there can be no assurance that potential systems
interruptions or the cost necessary to update software would not have a
material adverse effect on the Company's business, financial condition,
results of operations, or business prospects.
CHANGES IN REGULATION COULD ADVERSELY AFFECT THE COMPANY
The Company's investment management business is subject to extensive
regulation in the United States, primarily at the Federal level, including
regulation by the Securities and Exchange Commission (the "Commission").
Changes in laws or regulations or in governmental policies could materially
and adversely affect the business and operations of the Company. See
"Business--Regulation."
CHARTER AND BYLAW PROVISIONS COULD DETER TAKEOVER ATTEMPTS
Under the Company's Certificate of Incorporation, the Board of Directors has
the authority, without action by the Company's stockholders, to fix certain
terms and issue shares of Preferred Stock, par value $1.00 per share (the
"Preferred Stock"). Actions of the Board of Directors pursuant to this
authority may have the effect of delaying, deterring, or preventing a change
in control of the Company. Other provisions in the Certificate of
Incorporation and in the Bylaws of the Company (the "Bylaws") impose
procedural and other requirements that could make it more difficult to effect
certain corporate actions, including replacing incumbent directors. In
15
<PAGE>
addition, the Board of Directors of the Company is divided into three classes,
each of which is to serve for a staggered three-year term after the initial
classification and election, and, after Torchmark ceases to be the beneficial
owner of an aggregate of at least a majority of the voting power of the
Company, incumbent directors may not be removed without cause, all of which
may make it more difficult for a third party to gain control of the Board of
Directors. With certain exceptions, (S) 203 of the Delaware General
Corporation Law (the "DGCL") imposes certain restrictions on mergers and other
business combinations between the Company and any holder of 15% or more of the
voting stock of the Company. Section 203 does not apply to Torchmark's
interest in the Company. See "Description of Capital Stock--Certificate of
Incorporation and Bylaw Provisions" and "Description of Capital Stock--
Business Combination Statute."
POTENTIAL ISSUANCE OF PREFERRED STOCK COULD DETER TAKEOVER ATTEMPTS
Although the Board of Directors has no current intention of doing so, it
could issue a series of preferred stock that could have powers, rights, or
preferences superior to that of the Class A Common Stock or that could impede
the completion of a merger, tender offer, or other takeover attempt. Such
issuance of preferred stock could be effected without a vote of the holders of
the Class A Common Stock even though some or a majority of the Company's
stockholders might believe that such merger, tender offer or takeover is in
their best interests and even if such transactions could result in
stockholders receiving a premium for their stock over the then current market
price of such stock. See "Description of Capital Stock--Preferred Stock."
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements under "Prospectus Summary"; "Risk Factors"; "Management's
Discussion and Analysis of Financial Condition and Results of Operations";
"Business"; and elsewhere in this Prospectus constitute forward-looking
statements, 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. Such factors include,
among others, those listed under "Risk Factors" and elsewhere in this
Prospectus. 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 assumes responsibility for the
accuracy and completeness of such statements.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the shares
of Class A Common Stock in the Offering at an assumed public offering price of
$21.00 per share, after deducting underwriting commissions and discounts and
the estimated expenses of the Offering, are expected to be approximately $428
million. The Company intends to use the net proceeds from the Offering to
repay the Notes.
The Notes comprise promissory notes payable to Torchmark, described below as
the Torchmark Note, the Second Liberty Note, and the First Liberty Note. The
Company is indebted to Torchmark Corporation and to Liberty National Life
Insurance Company, a wholly owned subsidiary of Torchmark Corporation
("Liberty"), under the terms of two promissory notes dated November 22, 1997,
in the original aggregate principal amounts of approximately $90 million
payable to Torchmark Corporation (the "Torchmark Note") and of approximately
$390 million payable to Liberty (the "Second Liberty Note"). The Torchmark
Note and the Second Liberty Note each mature on November 25, 2002 and bear
interest at an annual rate of 8%. The Torchmark Note and the Second Liberty
Note were distributed by the Company as a dividend. In addition, the Company
is indebted to Liberty under the terms of a promissory note dated December 31,
1996, in the original aggregate principal amount of approximately $124
million, that matures on May 1, 2000 and bears interest at an annual rate of
6% (the "First Liberty Note"). The First Liberty Note was issued in connection
with an intercompany funding arrangement.
Prior to the Offering, the Company will prepay outstanding amounts remaining
under the Notes to the extent necessary so that the remaining aggregate
principal amount of the Notes equals the greater of $428 million or the net
proceeds of the Offering (including net proceeds to be realized from any
exercise of the over-allotment option in excess of $35.0 million). See
"Certain Relationships and Related Transactions--Relationship with Torchmark--
Intercompany Debt."
16
<PAGE>
The net proceeds of the Offering (other than the net proceeds from any
exercise of the over-allotment option) will be applied to prepay the
outstanding amounts due under the Notes. If the net proceeds of the Offering
(assuming no exercise of the Underwriters' over-allotment option) are less
than $428 million, an amount equal to the difference between $428 million and
such net proceeds will remain an obligation of the Company. Net proceeds from
the exercise of the over-allotment option will be retained by the Company for
general corporate purposes to the extent of $35.0 million, and the excess over
$35.0 million, if any, will be used to prepay the Notes to Torchmark.
DIVIDEND POLICY
The Company's Board of Directors currently intends to declare quarterly cash
dividends on both the Class A Common Stock and the Class B Common Stock. The
Class A Common Stock and the Class B Common Stock will share equally in any
cash dividend, subject to any preferential rights of any outstanding Preferred
Stock. The Company expects that the first quarterly dividend payment will be
approximately $.1325 per share (an annual rate of approximately $.53), with
the initial dividend to be declared and paid in the second quarter of 1998.
The declaration and payment of dividends by the Company are subject to the
discretion of its Board of Directors. Any determination as to the payment of
dividends, including the level of dividends, will depend on, among other
things, general economic and business conditions, the strategic plans of the
Company, the Company's financial results and condition, contractual, legal,
and regulatory restrictions on the payment of dividends by the Company or its
subsidiaries, and such other factors as the Board of Directors of the Company
may consider to be relevant. The Company is a holding company, and as such,
its ability to pay dividends is subject to the ability of the subsidiaries of
the Company to provide cash to the Company. Because the Company was a wholly
owned subsidiary of Torchmark prior to the Offering, its historic dividend
payments should not be considered relevant to its future dividend policy. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DILUTION
As of December 31, 1997, the Company's net tangible book value was
approximately $(328.7) million, or approximately $(7.77) per share of Common
Stock (based on 42,300,000 Shares of Common Stock). Net tangible book value
per share represents the total book value of the Company's tangible assets
reduced by the amount of the Company's total liabilities, divided by the
number of shares of Common Stock outstanding. After giving effect to the
Offering, the application of the net proceeds therefrom as described under
"Use of Proceeds," and further repayment of the Notes as described in "Certain
Relationships and Related Transactions--Relationship with Torchmark--
Intercompany Debt," the net tangible book value of the Common Stock as of
December 31, 1997 would have been $1.55 per share. This represents an
immediate increase in net tangible book value of $9.32 per share to the
Company's existing stockholders and an immediate dilution in tangible book
value of $19.45 per share to new investors purchasing shares of Class A Common
Stock in the Offering at the initial public offering price. The following
table illustrates the per share dilution in net tangible book value to new
investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $21.00
Net tangible book value per share at December 31, 1997..... $(7.77)
Increase in net tangible book value per share attributable
to the sale of Class A Common Stock in the Offering....... 9.32
------
Net tangible book value per share after giving effect to the
Offering and the repayment of the Notes..................... 1.55
------
Dilution in net tangible book value to the purchasers of
Class A Common Stock in the Offering........................ $19.45
======
</TABLE>
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 (i) on a historical basis and (ii) as adjusted to reflect
the Offering and the application of proceeds therefrom and the further
repayment of the Notes. See "Certain Relationships and Related Transactions--
Relationship with Torchmark--Intercompany Debt" and Pro Forma Financial
Statements. This table should be read in conjunction with the Consolidated
Financial Statements and related notes and other financial and operating data
appearing elsewhere in this Prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-Term Debt:
Notes................................................. $ 480,000 --
Stockholders' Equity:
Common Stock, $.01 par value; 42,300,000 shares issued
and outstanding...................................... 423 --
Class A Common Stock, $.01 par value, 150,000,000
shares authorized; 29,675,000 shares issued and
outstanding as adjusted(1)........................... -- 297
Class B Common Stock, $.01 par value, 100,000,000
shares authorized; 34,325,000 shares issued and
outstanding, as adjusted............................. -- 343
Additional paid-in capital............................ -- 197,125
Retained earnings..................................... -- --
Unrealized gain on available-for-sale securities...... 344 344
Dividends in excess of retained earnings and
additional paid-in capital........................... (230,658) --
--------- --------
Total Stockholders' Equity.......................... (229,891) 198,109
--------- --------
Total capitalization.............................. $ 250,109 $198,109
========= ========
</TABLE>
- --------
(1) Does not include options to purchase 2,372,300 shares of Class A Common
Stock to be issued pursuant to compensation and benefit plans of the
Company or 200,000 shares of Class A Common Stock to be restricted stock
under the Company's compensation and benefit plans. See "Management--
Compensation, Benefits, and Retirement Plans." Also, does not include (i)
options issuable in connection with conversion of existing options issued
under Torchmark compensation and benefit plans and (ii) the conversion of
48,000 shares of restricted stock of Torchmark Corporation issued under
Torchmark stock plans to Class A Common Stock at the time of consummation
of the Offering. See "Management--Conversion of Torchmark Equity
Compensation to Class A Common Stock of the Company."
18
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following tables set forth summary historical financial and operating
data for the five years ended December 31, 1997, as well as summary historical
balance sheet data of the Company as of the end of each of the last five
years. The information set forth should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Consolidated Financial Statements and the related notes
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Investment management
fees...................... $64,208 $70,711 $85,289 $101,466 $117,784
Underwriting and
distribution fees......... 78,037 72,150 70,393 85,837 89,427
Shareholder service fees... 21,280 22,297 23,527 28,378 30,763
Investment and other
income.................... 14,681 3,878 4,295 5,295 3,798
------- ------- ------- -------- --------
Total revenue............. 178,206 169,036 183,504 220,976 241,772
Goodwill amortization(1)... 1,332 2,903 2,903 2,903 2,903
Other expenses............. 101,494 89,282 95,894 112,766 123,746
------- ------- ------- -------- --------
Total expenses............ 102,826 92,185 98,797 115,669 126,649
------- ------- ------- -------- --------
Income before interest and
income taxes............. 75,380 76,851 84,707 105,307 115,123
Interest income, net....... -- 1,915 3,886 3,886 24
------- ------- ------- -------- --------
Income before income
taxes.................... 75,380 78,766 88,593 109,193 115,147
Income taxes............... 28,873 31,140 35,092 42,493 44,855
------- ------- ------- -------- --------
Income before effect of
change in accounting
principle................ 46,507 47,626 53,501 66,700 70,292
Cumulative effect of change
in accounting principle... 4,125 -- -- -- --
------- ------- ------- -------- --------
Net income................ $50,632 $47,626 $53,501 $ 66,700 $ 70,292
======= ======= ======= ======== ========
Pro forma net income per
share basic and
diluted(2)................ $ 1.10
========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets(3)........... $162,933 $121,412 $ 98,608 $110,139 $130,132
Goodwill.................... 110,443 107,540 104,637 101,734 98,831
Total assets(3)............. 301,568 303,144 283,287 429,278 446,964
Total liabilities(3)........ 58,574 80,852 65,081 196,723 676,855
Total stockholder's
equity(4).................. 242,994 222,292 218,206 232,555 (229,891)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Financial Advisers:
Full time(5)................ 546 487 505 634 660
Part time................... 2,141 1,770 1,830 1,376 1,500
-------- -------- -------- -------- --------
Totals..................... 2,687 2,257 2,335 2,010 2,160
Number of investors(6):
Mutual funds................ 499,400 517,600 537,100 522,600 563,800
Variable products........... 16,400 22,700 27,800 33,400 38,200
Average value per
investor(7):
Mutual funds................ $ 22,500 $ 21,600 $ 26,100 $ 28,500 $33,200
Variable products........... $ 33,700 $ 31,900 $ 39,600 $ 42,900 $49,600
Redemption rates of mutual
funds:
Mutual funds................ 7.55% 7.52% 7.64% 7.64% 7.61%
Industry average(8)......... 18.37% 21.27% 17.35% 16.95% 17.86%
Dividend reinvestment rate:
Mutual funds................ 84.9% 86.0% 86.8% 87.5% 87.7%
Industry average(8)......... 53.9% 65.8% 71.7% 72.6% 73.2%
Assets under management
(millions):
Mutual fund:
Equity funds............... $ 7,563 $ 8,174 $ 10,931 $ 12,990 $16,093
Fixed income funds......... 3,870 3,349 3,719 3,681 3,921
Money market funds......... 348 369 442 537 572
-------- -------- -------- -------- --------
Total mutual funds........ $ 11,781 $ 11,892 $ 15,092 $ 17,208 $20,586
Institutional(9)............ $ 2,659 $ 2,606 $ 3,397 $ 1,862 $ 2,831
</TABLE>
- --------
(1) Amortization relates to Torchmark's acquisition of the Company in 1981 and
1993. Current annual amortization is $2.9 million.
(2) Pro forma basic and diluted net income per share has been computed by
dividing net income, as adjusted to eliminate the after tax interest cost
on the Notes, by 64,000,000 shares (the average number of shares
outstanding plus the number of shares the proceeds of which would be used
to pay the Notes).
(3) The Company's current assets, total assets, and total liabilities can be
significantly affected by amounts due both to and from affiliates. At
December 31, 1993, 1994, 1995, 1996, and 1997, amounts due from affiliates
amounted to $53.9 million, $96.3 million, $57.2 million, $184.5 million,
and $192.7 million, respectively. Amounts due to affiliates at December
31, 1993, 1994, 1995, 1996, and 1997 amounted to $8.0 million, $41.7
million, $13.6 million, $126.6 million, and $611.6 million, respectively.
(4) Cash dividends paid to Torchmark for the years 1993, 1994, 1995, 1996, and
1997 were $153.3 million, $80.0 million, $0, $10.0 million, and $51.7
million, respectively.
(5) Financial advisers whose annual or annualized production is the equivalent
of investment product sales in excess of $900 thousand.
(6) Mutual funds reflect the number of investors in the United Funds and W&R
Funds. Variable products reflect the number of variable annuity and
variable life policies.
(7) Mutual funds average value reflects the value for the United Funds and W&R
Funds. The variable product average is based on the value of TMK/United
Fund assets divided by the number of variable annuity and life policies.
(8) Source: Investment Company Institute. The industry dividend reinvestment
rate average for 1997 is for the twelve months ended September 30, 1997.
(9) Institutional assets include assets of Torchmark affiliates of $0, $77.3
million, $373.8 million, $390.9 million, and $1,265.0 million at December
31, 1993, 1994, 1995, 1996, and 1997, respectively.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The revenues of the Company are largely dependent on the total value and
composition of assets under management and, accordingly, fluctuations in
financial markets and in the composition of assets under management have a
substantial effect on revenues and results of operations. 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.
Equity-oriented portfolios generally have higher management fee rates than
fixed-income portfolios. See "Business--Investment Management Agreements."
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 will vary based on the type and amount sold. The
United Group of Funds have a front end load sales charge (sales charges are
paid on purchase of fund shares) or no load sales charge (no sales charges are
related to purchase of fund shares) while the W&R Funds have a contingent
deferred sales charge (sales charges are paid upon redemption of fund shares
within specified periods). 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. See
"Business--Underwriting and Distribution." The Company earns a sales
commission on insurance products sold pursuant to the Agent Agreements. See
"Certain Relationships and Related Transactions--Relationship with Torchmark--
Agent Agreements."
Shareholder service fees include transfer agency fees, custodian fees for
retirement plan accounts, and portfolio accounting fees. The transfer agency
fees and custodian fees are primarily based on annual charges per account,
and, therefore, are affected by the number of accounts opened and closed.
Portfolio accounting fees are charged based on the amount of assets in the
portfolio subject to a maximum per portfolio. These fees vary based on the
number of portfolios and the value of the assets in each portfolio. See
"Business--Service Agreements."
Other expenses consist of underwriting and distribution expenses,
compensation and related cost expenses, general and administrative expenses,
and depreciation and amortization, excluding goodwill. Underwriting and
distribution expenses include sales commissions and related amounts paid to
financial advisers, various expenses associated with product promotion,
expenses associated with education and training of financial advisers, and
other marketing costs. Distribution expenses, principally selling commissions,
related to the W&R Funds are deferred and amortized over a period not
exceeding ten years. Compensation and related costs reflect the compensation
and benefits for investment management, shareholder service, and
administrative personnel. The amount of goodwill at December 31, 1997 was
$98.8 million, and amortization of goodwill is $2.9 million annually.
OPERATING RESULTS FOR 1997 AS COMPARED TO 1996
Investment management fees increased $16.3 million or 16% to $117.8 million
for the year ended December 31, 1997 primarily as the result of strong
financial markets. Average assets under management in 1997 were up $2.3
billion or 12% from 1996 to $21.3 billion. Assets under management were $23.4
billion at December 31, 1997 compared with $19.1 billion at December 31, 1996.
Mutual fund assets increased $3.4 billion from $17.2 billion at December 31,
1996 to $20.6 billion at December 31, 1997. Institutional assets increased $.9
billion from $1.9 billion at December 31, 1996 to $2.8 billion at December 31,
1997. Market appreciation accounted for $3.3 billion of the increase with the
remainder due to the nets inflow of assets. Growth in fee revenue exceeded the
growth in average assets due to changes in the composition of assets. Mutual
fund assets, which generally have a higher management fee rate than
institutional accounts, constituted a greater percentage of total assets for
1997.
21
<PAGE>
Underwriting and distribution fee revenue was $89.4 million for 1997, up
$3.6 million or 4% compared with that of 1996. Commission revenue from front-
load investment products increased $1.4 million from $67.0 million in 1996 to
$68.4 million in 1997 primarily as a result of higher sales volumes.
Distribution revenue, which consists primarily of Rule 12b-1 distribution fees
from the W&R Funds, increased from $4.7 million in 1996 to $6.5 million in
1997 due to growth in assets. Commissions from the sale of other products
(primarily insurance) were $14.1 million in 1996 and $14.5 million in 1997.
Shareholder servicing fees in 1997 were $30.8 million, a $2.4 million or 8%
increase over that of 1996. Approximately 47% of this increase was
attributable to a fee increase that was effective April 1, 1996 with the
remainder due to the increase in number of shareholder accounts. At December
31, 1997, there were 1.38 million accounts, an increase of 5% from the 1.31
million accounts at December 31, 1996.
Other expenses increased from $112.8 million for 1996 to $123.7 million for
1997, an increase of 10%. Underwriting and distribution costs of $80.0 million
in 1997 were $1.1 million or 1% higher than that of 1996. The increase was
primarily the result of increased sales. Compensation and related costs of
$26.6 million were up $4.7 million or 22% compared with those of 1996. The
increase was attributable to additional expenses of $1.5 million related to
staff additions and normal salary and fringe benefit changes, $1.3 million for
incentive compensation and adjustments of $1.9 million to make total
compensation more competitive within the market. General and administrative
expenses were 15.8 million in 1997, a $5.6 million or 55% increase from that
of 1996. The increase is attributable to $6.8 million of non-recurring
expenses primarily related to the outsourcing of the data processing component
of transfer agency activities and the discontinuation of internally developed
systems. This increase was partially offset by lower expenses of $2.2 million
in 1997 for year 2000 compliance as compared to 1996.
The Company has considered the effect of year 2000 on its computer systems
and application software programs and has developed a plan to become year 2000
compliant. The Company estimates that its compliance activities will be
completed no later than the first quarter of 1999. Costs to date approximate
$2.4 million. The remaining costs of this effort are estimated to be $1.7
million.
Net interest income in 1997 declined $3.9 million from 1996 due to
additional interest expense attributable to the Notes.
Income tax expense was $42.5 million and $44.9 million for 1996 and 1997,
respectively, representing effective tax rates of 38.9% and 39.0%.
Net income increased from $66.7 for 1996 to $70.3 million for 1997, an
increase of 5%.
OPERATING RESULTS FOR 1996 AS COMPARED TO 1995
Investment management fees increased $16.2 million or 19% to $101.5 million
for the year ended December 31, 1996 primarily as the result of strong
financial markets. Average assets under management in 1996 were up $2.3
billion or 14% from that of the year ended December 31, 1995 to $19.0 billion
for 1996. Assets under management were $19.1 billion at December 31, 1996
compared with $18.5 billion at December 31, 1995. Mutual fund assets increased
$2.1 billion from $15.1 billion at December 31, 1995 to $17.2 billion at
December 31, 1996, while institutional assets declined from $3.4 billion at
December 31, 1995 to $1.9 billion at December 31, 1996 due to the loss of
certain accounts. Market appreciation of $1.8 billion in 1996 was
substantially offset by institutional account redemptions. Growth in fee
revenue exceeded the growth in average assets due to changes in the
composition of assets. Mutual fund assets, which generally have a higher
management fee rate than institutional accounts, constituted a greater
percentage of total assets for 1996.
Underwriting and distribution fee revenue was $85.8 million for 1996, up
$15.4 million or 22% compared with that of 1995. Commission revenue from
front-load investment products increased $13.2 million from $53.8 million in
1995 to $67.0 million in 1996 primarily as a result of higher sales volumes.
Distribution revenue, which consists primarily of Rule 12b-1 distribution fees
from the W&R Funds, increased from $2.8 million in 1995 to $4.7 million in
1996 due to growth in assets. Commissions from the sale of other products
(primarily insurance) were $13.8 million in 1995 and $14.1 million in 1996.
22
<PAGE>
Shareholder servicing fees in 1996 were $28.4 million, a $4.9 million or 21%
increase over that of 1995. Approximately 70% of this increase was
attributable to a fee increase effective April 1, 1996 with the remainder due
to the increase in number of shareholder accounts. At December 31, 1996, there
were 1.31 million accounts, an increase of 7% from the 1.22 million accounts
at December 31, 1995.
Other expenses increased from $95.9 million for 1995 to $112.8 million for
1996, an increase of 18%. Underwriting and distribution costs of $78.9 million
in 1996 were $14.8 million or 23% higher than that of 1995. Most of the
increase in underwriting and distribution costs was attributable to selling
commissions and other costs associated with higher sales levels. Compensation
and related costs of $21.9 million were up 3% over that of 1995 due primarily
to an increase in the number of employees. General and administrative expenses
were $10.2 million in 1996, a $1.6 million or 18% increase from that of 1995.
This increase was primarily attributable to charges of approximately $2.3
million in 1996 for modifying systems applications for year 2000 compliance,
partially offset by a $1.2 million one time franchise tax assessment that was
paid in 1995.
Income tax expense was $35.1 million and $42.5 million for 1995 and 1996,
respectively, representing effective tax rates of 39.6% and 38.9%.
Net income increased from $53.5 million for 1995 to $66.7 million for 1996,
an increase of 25%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have historically generated cash flows in excess of
the needs of its business plans. In keeping with Torchmark's strategy for
subsidiaries, the Company historically paid virtually all of its earnings to
Torchmark as dividends. Cash flow provided from the Company's operations was
$62.3 million, $86.2 million, and $62.3 million for the years ended December
31, 1995, 1996, and 1997, respectively. The timing of tax payments of $14.9
million increased cash from operations for the year ended December 31, 1996,
and reduced cash from the Company's operations in the same amount for the year
ended December 31, 1997. Payments to affiliates for operating purposes in the
amount of $5.9 million decreased cash from the Company's operations for the
year ended December 31, 1997. Cash flows from investing activities generally
include capital expenditures and the results of investment securities sales,
purchases, and maturities. The Company is considering an expansion of its home
office building, although no formal commitments have been entered into. The
estimated capitalized cost of this proposed expansion is approximately $7.0
million. Except for this possible expansion the Company has no material
commitments for capital expenditures.
Cash flows from financing activities include cash dividends to Torchmark,
amounts paid or received from affiliates, and cash contributions from
Torchmark. Historically, the Company has distributed its excess cash flow to
Torchmark. The Company's Board of Directors currently intends to declare
quarterly cash dividends on the Common Stock of approximately $34 million
annually. The Company believes that its cash flows from operations will be
sufficient to fund such dividends and its operations for at least the next two
years. See "Dividend Policy."
RECENT ACCOUNTING DEVELOPMENTS
In 1997, FASB issued SFAS No. 130 ("Reporting Comprehensive Income") and
SFAS No. 131 ("Disclosures about Segments of an Enterprise and Related
Information"). These statements, which are effective for periods beginning
after December 15, 1997, expand or modify disclosures. The Company does not
expect implementation to have any significant effect on the Company's reported
financial position, results of operations, or segment reporting.
SEASONALITY AND INFLATION
The Company does not believe its operations are subject to significant
seasonal fluctuations. The Company does not believe that inflation has had a
significant impact on operations.
23
<PAGE>
BUSINESS
OVERVIEW
Waddell & Reed, founded in 1937, is one of the oldest mutual fund complexes
in the United States, having introduced the United family of funds in 1940.
Waddell & Reed sells its investment products primarily to middle income
Americans through a virtually exclusive sales force. As of December 31, 1997,
the Company had $23.4 billion of assets under management, of which $20.6
billion were mutual fund assets and the remainder institutional accounts and
more than 563,000 customers holding an average mutual fund account of $33,200.
The Company is the exclusive underwriter and distributor of 36 mutual fund
portfolios, including 17 comprising the United Funds, eight comprising the W&R
Funds, and 11 comprising the TMK/United Funds. The Company also distributes
Torchmark underwritten variable annuities and life insurance products to its
customers as part of its financial planning services. The Company sells mutual
fund products with a front end load (sales charges are paid upon purchase of
fund shares), contingent deferred sales charge (sales charges are paid upon
redemption within specified periods, see "Business--Underwriting and
Distribution"), and mutual fund products with no load (no sales charges are
related to purchase of fund shares). For the year ended December 31, 1997, the
Company's financial adviser sales force sold $1.5 billion of mutual fund and
variable products.
The traditional market for the Company has generally been professionals and
working families with annual incomes between $40,000 and $100,000 who are
saving for retirement. The Company believes that demographic trends and shifts
in attitudes toward retirement savings will continue to support increased
consumer demand for its products. According to U.S. Census Bureau projections,
the number of Americans between the ages of 45 and 64 will grow from 53.7
million in 1996 to 71.1 million in 2005, making this "preretirement" age group
the fastest growing segment of the U.S. population.
The Company distributes the Funds and other financial products through a
financial adviser sales force that represents the Company on a virtually
exclusive basis. At December 31, 1997, the Company's sales force consisted of
2,160 financial advisers and 121 division managers operating from 177 sales
offices located throughout the United States. The Company believes, based on
industry data, that its financial adviser sales force is currently one of the
largest sales force in the United States selling primarily mutual funds.
Currently, 43% of the Company's financial advisers have been with the Company
for more than 5 years and 28% for more than 10 years.
The financial adviser industry is fragmented, consisting primarily of
relatively small companies generally employing fewer than 100 investment
professionals. The Company's sales force competes primarily with small
broker/dealers and independent financial advisers. The Company's marketing
efforts are currently focused on customers residing in smaller metropolitan
areas and rural communities. The Company conducts investment seminars
throughout the United States to reach a large number of potential clients. The
Company also develops individual financial plans for clients (over 40,000
plans in 1997) through one-on-one consultations with financial advisers, who
emphasize long-term relationships with a client through continuing service,
rather than a one-time sale. The Company believes that it is well-positioned
to benefit from a developing industry trend toward "assisted sales"--sales of
mutual fund products through a sales person--driven by the array of options
now available to investors and the need for financial planning advice that has
resulted from the recent increase in the average household's financial assets.
According to the Investment Company Institute, assisted sales for the year
ended December 31, 1997 constituted 61.9% of the total dollar value of mutual
fund sales, a figure that has grown from 54.9% for 1994.
The Company's investment philosophy and financial planning approach
emphasize long-term savings. The Company's portfolio managers seek consistent
long-term performance and downside protection in turbulent markets. As a
result, the Company has developed a loyal customer base with clients
maintaining their accounts for approximately 13 years on average as compared
to six years for the mutual fund industry, according to the Investment Company
Institute. This loyalty is evidenced by a relatively low fund redemption rate
for the five years ended December 31, 1997 of 7.6% for the Funds (other than
money market funds), which is less than one-half of the industry average of
18.4% and a relatively high dividend reinvestment rate of 86.6% for the Funds
24
<PAGE>
(other than money market funds) for the same period versus 66.9% for the
mutual fund industry. Approximately 45% of the Company's assets under
management are in retirement accounts as of December 31, 1997. The
historically low redemption and high reinvestment rates have provided a stable
source of asset and revenue growth at a relatively low cost. The Company's
success with these strategies has been demonstrated in turbulent markets, as,
for example, in 1994, the last year in which the Standard & Poor's 500
Composite Stock Price Index declined, when the Company's net sales as a
percentage of asset growth was more than three times better than that of the
mutual fund industry.
The Company has a seasoned team of portfolio managers, having an average of
20 years industry experience and 14 years tenure with the Company. The five
most senior portfolio managers have an average of 30 years industry experience
and 26 years tenure with the Company. The Company maintains an internal equity
and fixed income investment research staff that has substantial resources
available to it including hundreds of meetings annually with company
management both on and off site. In addition, the Company utilizes research
provided by brokerage firms and independent outside consultants. Portfolio
managers usually were investment research analysts for a substantial length of
time prior to acquiring money management assignments. The predominant style of
the Company's investments is growth equity. As of December 31, 1997
approximately 78% of the Company's mutual fund assets under management were
invested in equity funds and the remainder in fixed income and money market
funds. This investment strategy emphasizes investment at attractive valuations
in companies that the portfolio managers believe can produce above average
growth in earnings.
Waddell & Reed Financial, Inc. is a holding company that conducts its
business through its subsidiaries, which are described briefly below. W&R, is
a registered broker-dealer and registered investment adviser that acts
primarily as the nationwide distributor and underwriter for the shares of
mutual funds and distributor of insurance products issued primarily by UILIC.
WRIMCO, is a registered investment adviser that provides investment management
and advisory services to the Funds and to institutions and other private
clients through a subcontract with another subsidiary of Torchmark. WRSCO
provides transfer agency and accounting services to the Funds and their
shareholders and to another subsidiary of Torchmark.
The executive office of the Company is located at 6300 Lamar Avenue,
Overland Park, Kansas 66202, telephone number (913) 236-2000.
BUSINESS STRATEGY
The Company's business strategy is outlined below.
. INCREASE NUMBER OF FINANCIAL ADVISERS: The Company intends to expand its
distribution network by recruiting high quality candidates to be
financial advisers. In early 1994 the Company began to focus on
increasing the number of financial advisers. The Company's current
objective is to increase the number of financial advisers by 10% per
year. The Company has hired additional experienced sales managers and
reorganized its management and reporting lines and incentive structure.
The Company has revised the compensation system for its 121 division
managers by tying the majority of their potential income to the
recruitment, retention, and training of the Company's financial advisers
and proportionately less to their personal sales production. From
December 31, 1996 to December 31, 1997, the number of financial advisers
has increased from 2,010 to 2,160.
In 1994, the Company also began implementing a "bridge income" program,
which provides newly recruited financial advisers with a source of
earnings until they can develop the skills and client base necessary to
earn a stable income from commissions. The Company believes this
program, which currently provides qualifying individuals with $2,000
per month for up to six months, has been critical in increasing the
number of new financial advisers, improving retention, and increasing
average first-year sales production. Financial advisers recruited in
1997 who participated in the bridge income program produced, on
average, at two and one half times the rate of non-participants.
. CONTINUE TO INCREASE PERCENTAGE OF FULL-TIME FINANCIAL ADVISERS: Since
1993, the Company has emphasized increasing the proportion of its sales
force that sells financial services products on a full-
25
<PAGE>
time basis and generally has not allowed the renewal of the securities
licenses of financial advisers that fail to meet sales goals. The
Company believes that these changes have enhanced productivity. At
December 31, 1997, the percentage of Full-Time Advisers was 31% of the
Company's total sales force, up from 18% at December 31, 1992. Over the
same period, the annual investment product sales per Full-Time Adviser
increased approximately 25% to a current annual rate of about $1.7
million. In addition, the overall annual investment product sales per
adviser increased from $380,000 to $703,000, or 85%, over this same
period as a result of both increasing the number and the productivity of
Full-Time Advisers and of not renewing the licenses of advisers who do
not meet sales goals.
. EXPAND GEOGRAPHIC SCOPE: The Company intends to pursue geographic
expansion of its sales force with two related strategies. In larger
communities it intends to establish new division offices with the
facilities to accommodate up to 20 financial advisers, and in smaller
communities or suburban areas it will open offices with facilities to
accommodate a smaller group of advisers. While historically the Company
has opened new offices in areas that were contiguous with existing
offices, it now intends to select new locations based on expected growth
opportunities. Consistent with its focus on retirement savings and
planning, the Company expects to open new offices in Florida and
Arizona, as well as smaller offices in other areas of the country, in
1998.
. ENHANCE MARKETING AND FINANCIAL PLANNING TOOLS: The Company expects to
implement an improved financial planning package, which will allow its
financial advisers to customize solutions to a client's savings,
retirement income, estate planning, life insurance, and other personal
financial planning needs. The Company has traditionally provided
financial planning advice to its clients free of charge. The Company now
intends to begin charging a fee, typically $250, for such services. The
Company believes that its program of selling its improved financial
plans for a fee will stimulate sales and result in a significantly
higher average sale per plan. The Company expects to introduce the
revised financial plan by the end of the first quarter of 1998.
The Company has also implemented formal training programs for its new
financial advisers. The program consists of field office classes that
address prospecting techniques, product knowledge, and sales
presentation skills. Field sales management personnel, assisted by six
regional sales training specialists who receive direction and support
from the Company's headquarters, conduct the field office classes.
During 1998, the Company intends to increase the number of regional
sales training specialists from six to twelve. In addition, new advisers
will attend a three day course conducted at the Company's headquarters
intended to supplement and reinforce the field classes.
. INVEST IN PORTFOLIO MANAGERS AND INVESTMENT ANALYSTS: The Company's
objective is for its Fund families to achieve top quartile performance.
The Company is also focused on building its industry and geographic
expertise. To achieve this goal, the Company has begun to implement a
plan to add several portfolio managers and investment analysts. Through
these additions, the Company intends to increase the depth of its
investment management team and to increase the scope of its expertise.
To assist in recruiting and retention, the Offering and Spin-Off will
allow the Company to implement a new incentive compensation structure
that relies on stock options and increases in cash compensation to bring
total compensation for portfolio managers and investment analysts to a
more market-competitive level. The Company believes that providing
equity-based compensation as a significant component of income will be
important in attracting new portfolio managers and investment analysts
as well as retaining present staff.
. INVEST IN SYSTEMS AND TECHNOLOGY: In order to support its anticipated
growth, the Company is engaged in projects to enhance its information
systems. The Company will install a management system in all division
offices that it believes will better enable division managers to monitor
the activities of the individual financial advisers including the number
of sales calls completed, the number of client contacts, and overall
sales results. The Company has recently completed agreements to
outsource a portion of its data processing components of its transfer
agency activities to a third party provider by the fourth quarter of
1998. The Company expects that this arrangement will facilitate its
26
<PAGE>
ability to introduce new products and enter new markets as well as
enable the Company to improve its participant record-keeping services
offered to sponsors of 403(b) and 401(k) plans. In addition, the Company
expects to realize operating efficiencies with respect to its processing
activities through the use of electronic imaging, which is a component
of the third party system. The Company has developed and is testing an
intranet to be used by its financial advisers to obtain updated training
materials, product information, and electronic interactive product
illustrations. In addition, the Company expects that clients will have
access to the intranet to obtain data related to their personal accounts
once information security concerns are addressed.
. PURSUE STRATEGIC ACQUISITIONS AND ALLIANCES TO EXPAND PRODUCT OFFERING
AND DISTRIBUTION: The Company intends to selectively pursue acquisitions
and alliances that will add new products or alternative distribution
systems. The Company believes that it will be better positioned to
pursue acquisitions as one of relatively few independent, public
investment advisory and asset management companies. The Company believes
that potential investment management acquisition candidates may be more
receptive to receiving publicly traded shares of the Company as opposed
to stock in a company outside of the investment management industry. The
Company has traditionally distributed its investment products only
through its virtually exclusive financial adviser sales force. In the
future, the Company may acquire another fund complex the products of
which it can distribute outside its sales force. These mutual funds will
likely not be marketed to the Company's existing customer base, thereby
avoiding competing with the Company's existing sales force and
cannibalizing the Company's current revenues. The Company may also
pursue opportunities to establish strategic relationships with
alternative distribution systems such as broker/dealers and banks or
acquire independent financial planning companies.
MARKETING
The Company markets its mutual funds through a sales force that represents
the Company on a virtually exclusive basis. As of December 31, 1997, the sales
force comprised approximately 2,160 financial advisers of whom approximately
660 are Full-Time Advisers. The Company's financial advisers are located
primarily in smaller metropolitan areas and rural communities. The sales force
is organized into divisions that are supervised, as of December 31, 1997, by
one of approximately 121 division managers who, in turn, report to eight
regional vice presidents.
The Company has taken several steps to increase the productivity of its
sales force. Since 1992, the Company has been implementing a policy of
developing a full-time sales force and has not allowed the renewal of the
securities licenses of financial advisers that fail to meet sales goals. This
policy has resulted in the reduction of the number of part-time financial
advisers (those having annual or annualized production of less than $900,000
of investment product sales) from 2,141 at December 31, 1993 to 1,500 at
December 31, 1997. At the same time, the number of Full-Time Advisers
increased from 546 at December 31, 1993 to 660 at December 31, 1997. Prior to
1993, division managers were engaged in personal sales production as well as
sales management. In order to emphasize the importance of recruiting and
developing a full-time sales force, the Company implemented a compensation
system that ties compensation of division managers to the development of new
financial advisers and to division sales rather than personal sales. Beginning
in 1997, the Company initiated a program to encourage members of its financial
adviser sales force to expand the range of financial services they can offer
by registering under applicable state laws. A majority of the Company's
financial advisers have completed such registration.
The Company began implementing a bridge income program in 1994 to provide a
source of earnings to newly recruited financial advisers for a period of three
months while they developed the skills and client base necessary to earn an
income from commissions. The Company enhanced the program in 1997 by
increasing the monthly amount and extending the period to six months based on
the success of the program in improving the productivity of new recruits. In
order to qualify for the bridge income program, advisers must, within 90 days,
make five joint sales calls with the division manager, five calls with another
adviser to gather data for a financial plan, and make one sale. Once on the
bridge income program, the adviser receives $2,000 per month with earned
27
<PAGE>
commissions up to $2,000 applied against the bridge income and commission in
excess of $2,000 held in escrow until the adviser is off of the bridge income
program.
The following tables set forth information about the Company's financial
adviser sales force, product sales, and clients at the dates and for the
periods indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1993 1994 1995 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Financial Advisers:
Full time(1).................................... 546 487 505 634 660
Part time....................................... 2,141 1,770 1,830 1,376 1,500
----- ----- ----- ----- -----
Totals........................................ 2,687 2,257 2,335 2,010 2,160
===== ===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Mutual fund sales(2)............. $1,033.4 $ 988.3 $ 995.7 $1,252.2 $1,268.5
Total investment product
sales(3)........................ $1,239.2 $1,188.5 $1,187.6 $1,505.1 $1,518.3
Annualized life insurance premi-
ums............................. $ 7.4 $ 8.2 $ 9.5 $ 9.3 $ 8.3
Number of clients(4)............. 499,400 517,600 537,100 552,600 563,800
Number of mutual fund accounts
per client...................... 2.2 2.2 2.3 2.4 2.4
</TABLE>
- --------
(1) Based on minimum annual or annualized production that is the equivalent of
investment product sales in excess of $900,000.
(2) Reflects sales of United Funds for which a sales charge was collected and
sales of the W&R Funds.
(3) Reflects mutual fund and variable product sales. Reflects mutual fund and
variable product sales.
(4) Defined as a person or entity having a single Federal tax identification
number.
The Company provides training and motivational programs for its sales force.
Six sales training specialists provide a regular program of training for new
recruits as well as advanced training for experienced financial advisers.
Programs for new recruits focus on prospecting techniques, product knowledge,
and sales skills. Field office classes provide guidance in identifying target
markets, practical exercises to learn interview skills and data collection,
instruction in basic financial planning software, and guidance in matching
products with various investment objectives. Sales presentation skills are
taught and practiced in the classroom environment as well as on joint sales
calls with field sales management. The programs for experienced advisers focus
on skills related to dealing with larger investment sums (such as IRA
rollovers) and include training in the use of asset allocation and estate
planning software. In addition, the Company takes top producers to retreats
where headquarters staff and experienced sales personnel conduct workshop
seminars covering such subjects as product features, financial planning, and
the use of illustrative software packages. The Company intends to increase the
number of programs made available to new recruits and experienced advisers by
increasing the number of sales training specialists from six to twelve in
1998.
FUNDS AND ASSET MANAGEMENT
The Company serves as underwriter for, and investment adviser to, the United
Funds, the W&R Funds, and the TMK/United Funds and distributes variable
annuity products based on the TMK/United Funds. The Company's sales force also
serves as distributor of insurance products such as single premium annuities
and term and whole life insurance. The Company provides various administrative
services to the Funds, including mutual fund transfer agency, accounting, and
shareholder services.
The Company offers the Funds' shareholders a broad range of investment
products designed to attract and retain clients with varying investment
objectives. The predominant style of the Company's investments is growth
equity. This investment strategy emphasizes investment at attractive
valuations in companies that the portfolio managers believe can produce above
average growth in earnings. The Company's United Funds rank in the top
28
<PAGE>
10% of diversified mutual fund complexes for the year ended December 31, 1997,
as measured by Lipper Analytical Services Corp. As of December 31, 1997, 78%
of the assets under management in the Funds were invested in equity funds, 19%
were invested in fixed income funds, and 3% were invested in money market
funds. Fund shareholders are allowed to exchange funds within each group of
funds as economic and market conditions and investor needs change at no
additional cost. The Company periodically introduces new mutual funds designed
to complement and expand its investment product offerings, respond to
competitive developments in the financial marketplace, and meet the changing
needs of clients. The Company's base of assets under management consists of a
broad range of domestic and international stock, bond, and money market mutual
funds that meet the varied needs and objectives of its individual and
institutional investors. For summary information about each of the Funds, see
"--Fund Summary" to this Prospectus.
The Company has a seasoned team of portfolio managers, having an average of
20 years industry experience and 14 years tenure with the Company. The five
most senior portfolio managers have an average of 30 years industry experience
and 26 years tenure with the Company. The Company maintains an internal equity
and fixed income investment research staff that has substantial resources
available to it including hundreds of meetings annually with company
management both on and off site. In addition, the Company utilizes research
provided by brokerage firms and independent outside consultants. Portfolio
managers usually were analysts for a substantial length of time prior to
acquiring money management assignments.
In addition to performing investment management services for the Funds, the
Company acts as an investment adviser and portfolio manager for institutional
and other private investors. The Company receives a fee that is generally
based on a percentage of assets under management for its services as an
investment adviser or portfolio manager. Assets under management for
institutional and private accounts totaled approximately $2.8 billion at
December 31, 1997. Investment management fees from institutional accounts were
approximately $6.2 million, or approximately 5% of total investment management
fees, for the year ended December 31, 1997.
29
<PAGE>
The following table sets forth beginning assets and ending assets for the
Company's Funds by type as well as transactions related thereto for the
periods shown.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
MUTUAL FUNDS:
CHANGE IN UNITED AND W&R
FUNDS:
Equity funds:
Beginning assets........ $6,078.8 $7,187.9 $ 7,627.5 $10,047.2 $11,786.4
Net sales (1)......... 690.0 814.8 856.4 1,155.5 1,175.3
Reinvested Dividends &
Distributions........ 331.7 440.5 532.1 831.7 1,811.3
Redemptions........... (479.0) (503.1) (624.1) (785.8) (977.9)
Net exchanges in
(out)................ (32.9) 91.7 (43.6) (57.8) (120.7)
Dividends &
Distributions Paid... (353.6) (463.0) (558.3) (866.6) (1,889.0)
Net investment
income............... 90.6 94.1 109.0 110.0 112.2
Appreciation
(depreciation)....... 862.3 (35.4) 2,148.2 1,352.2 2,568.0
-------- -------- --------- --------- ---------
Ending Assets........... $7,187.9 $7,627.5 $10,047.2 $11,786.4 $14,465.6
======== ======== ========= ========= =========
Fixed income funds:
Beginning assets........ $3,249.1 $3,717.0 $ 3,200.1 $ 3,540.3 $ 3,487.6
Net sales (1)......... 380.5 216.8 205.9 198.7 244.1
Reinvested Dividends &
Distributions........ 260.9 210.1 208.1 219.7 220.3
Redemptions........... (281.4) (320.9) (317.1) (315.8) (316.4)
Net exchanges in
(out)................ (58.6) (195.1) (90.5) (132.9) (79.6)
Dividends &
Distributions Paid... (310.2) (249.7) (248.3) (260.1) (259.8)
Net investment
income............... 239.8 242.6 239.9 238.7 240.4
Appreciation
(depreciation)....... 236.9 (420.7) 342.2 (1.0) 161.4
-------- -------- --------- --------- ---------
Ending Assets........... $3,717.0 $3,200.1 $ 3,540.3 $ 3,487.6 $ 3,698.0
======== ======== ========= ========= =========
Money Market funds:
Beginning assets........ $ 393.3 $ 321.6 $ 338.6 $ 405.5 $ 499.5
Net sales............. 292.7 299.7 466.1 494.2 507.0
Reinvested Dividends &
Distributions........ 8.1 10.8 18.6 19.9 22.9
Redemptions........... (464.0) (396.9) (551.9) (610.8) (701.3)
Net exchanges in
(out)................ 91.5 103.4 134.1 190.7 200.3
Dividends &
Distributions Paid... (8.2) (11.0) (19.0) (20.6) (23.8)
Net investment
income............... 8.2 11.0 19.0 20.6 23.8
Appreciation
(depreciation)....... 0.0 0.0 0.0 0.0 0.0
-------- -------- --------- --------- ---------
Ending assets........... $ 321.6 $ 338.6 $ 405.5 $ 499.5 $ 528.4
======== ======== ========= ========= =========
VARIABLE PRODUCTS
TMK/UNITED FUNDS:
Beginning assets........ $ 302.3 $ 554.7 $ 725.3 $ 1,098.8 $ 1,434.5
Net sales............. 205.8 200.2 191.8 252.8 249.8
Reinvested Dividends &
Distributions........ 38.6 34.9 95.4 92.9 161.2
Redemptions........... (8.4) (26.9) (48.7) (75.1) (111.5)
Net exchanges in
(out)................ 0.0 0.0 0.0 0.0 0.0
Dividends &
Distributions Paid... (38.6) (34.9) (95.4) (92.9) (161.3)
Net investment
income............... 12.5 20.7 24.3 27.4 29.6
Appreciation
(depreciation)....... 42.5 (23.4) 206.1 130.6 291.2
-------- -------- --------- --------- ---------
Ending assets........... $ 554.7 $ 725.3 $ 1,098.8 $ 1,434.5 $ 1,893.5
======== ======== ========= ========= =========
</TABLE>
- --------
(1) Sales net of sales charges.
30
<PAGE>
The following table sets forth assets under management, client accounts, and
sales of the Funds by group as of the dates and for the periods shown.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Mutual Fund
Assets Under Management:
United Funds.......... $ 11,102 $ 10,948 $ 13,574 $ 15,130 $ 17,847
TMK/United Funds...... 555 725 1,099 1,435 1,894
W&R Funds............. 124 219 419 643 845
---------- ---------- ---------- ---------- ----------
Totals.............. $ 11,781 $ 11,892 $ 15,092 $ 17,208 20,586
========== ========== ========== ========== ==========
Client accounts:
United Funds(1)....... 1,067,900 1,119,800 1,171,700 1,236,900 1,291,300
TMK/United Funds(2)... 16,400 22,700 27,800 33,400 38,200
W&R Funds(1).......... 17,700 30,500 48,400 69,100 84,900
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Sales:
United Funds(3)............................ $ 939 $ 881 $ 838 $1,025 $1,093
TMK/United Funds........................... 206 200 192 253 250
W&R Funds.................................. 94 107 158 227 175
------ ------ ------ ------ ------
Totals (4)............................... $1,239 $1,188 $1,188 $1,505 $1,518
====== ====== ====== ====== ======
</TABLE>
- --------
(1) Number of mutual fund products.
(2) Number of variable policies.
(3) Reflects sales for which a sales charge was collected.
(4) Money market fund sales and United Fund sales for which there was no sales
change are excluded.
INVESTMENT MANAGEMENT AGREEMENTS
The Company provides investment advisory and management services pursuant to
an Investment Management Agreement with each Fund. While the specific terms of
the Investment Management Agreements vary, the basic terms of the Investment
Management Agreements are similar. The Investment Management Agreements
provide that the Company renders overall management services to each of the
Funds, subject to the oversight of each Fund's board of directors and in
accordance with each Fund's fundamental investment objectives and policies.
The Investment Management Agreements permit the Company to enter into separate
agreements for shareholder services or accounting services with the respective
Funds.
For the United Funds and TMK/United Funds, the total management fee for each
Fund is the sum of (i) a fee computed on a Fund's net asset value as of the
close of business on each business day at an annual rate specified in the
respective Investment Management Agreements (the "Specific Fee") and (ii) a
fee computed each day on the combined net asset values of all Funds in the
group of Funds of which the particular Fund is a member (the "Group Fee"). For
the Specific Fee for each Fund and the Group Fee for each group of Funds see
"--Fund Summary."
31
<PAGE>
The following table sets forth information with respect to the Company's
mutual fund investment management fees for the periods shown.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Mutual Fund Investment Management
Fees:
Equity funds....................... $37,759 $45,145 $59,651 $74,199 $ 90,870
Fixed income funds................. 18,441 18,172 17,859 18,126 18,513
Money market funds................. 1,603 1,462 1,670 1,989 2,179
------- ------- ------- ------- --------
Total (1)...................... $57,803 $64,779 $79,180 $94,314 $111,562
======= ======= ======= ======= ========
As a percent of average assets:
Equity funds....................... .554% .566% .619% .618% .610%
Fixed income funds................. .504% .504% .501% .497% .492%
Money market funds................. .426% .423% .420% .414% .406%
</TABLE>
- --------
(1) Other advisory fees for the years ended December 31, 1993, 1994, 1995,
1996, and 1997 in the amounts of $6,405, $5,932, $6,109, $7,152, and
$6,222, respectively are not reflected in this table. These fees fluctuate
based on the amounts and composition of assets managed and the effect of
performance based fees in some periods.
Each Fund's board of directors, including a majority of the directors who
are not "interested persons," of the Fund or the Company within the meaning of
the Investment Company Act, and its shareholders must have approved the
Investment Management Agreement between the respective Fund and the Company.
These agreements may continue in effect from year to year if specifically
approved at least annually by (i) the Fund's board of directors, including a
majority vote of the directors who are not parties to the agreements or
"interested persons" of any such party, or (ii) the vote of the holders of a
majority of the outstanding voting securities of the Fund and the vote of a
majority of the Fund's directors who are not parties to the agreement or
"interested persons" of any such party, each vote being cast in person at a
meeting called for such purpose. Each agreement automatically terminates in
the event of its "assignment" as defined in the Investment Company Act or the
Investment Advisers Act and may be terminated without penalty by the Fund by
giving the Company 60 days' written notice, if the termination has been
approved by a majority of the Fund's directors or shareholders. The Offering
will not and the Spin-Off should not constitute an "assignment" for the
purposes of the Investment Company Act or the Investment Advisers Act. The
Company may terminate an Investment Management Agreement without penalty on
120 days' written notice.
The Company receives fees for provision of investment advisory and
management services to the Funds. See "--Fund Summary." The Company pays all
of its own expenses incurred in performing investment advisory and management
services for the Funds.
SERVICE AGREEMENTS
The Company provides various services to the Funds and their shareholders
pursuant to a Shareholder Servicing Agreement with each Fund (except the
TMK/United Funds) and an Accounting Services Agreement with each Fund.
Pursuant to the Shareholder Servicing Agreements, the Company performs
shareholder servicing functions, including the maintenance of shareholder
accounts, the issuance, transfer, and redemption of shares, distribution of
dividends and payment of redemptions, furnishing information related to the
Fund, and handling shareholder inquiries. The Funds pay a monthly fee to the
Company for such services. Pursuant to the Accounting Services Agreements, the
Company provides the Funds with bookkeeping and accounting services and
assistance, including maintenance of the Fund's records, pricing of the Fund's
shares, and preparation of the prospectuses for existing shareholders, proxy
statements, and certain reports. The Funds pay the Company a monthly fee for
such services. A Fund's Shareholder Servicing Agreement or Accounting Services
Agreement
32
<PAGE>
may be adopted or amended with the approval of the Fund's directors. Each of
the Shareholder Servicing Agreements and Accounting Services Agreements have
terms of one year expiring on October 1, 1998. The following table sets forth
the revenues received by the Company for accounting and shareholder services
and number of shareholder accounts for the periods and at the dates indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Transfer agent fees......... $ 15,277 $ 16,028 $ 16,906 $ 21,436 $ 23,951
Custodian fees.............. 4,767 4,958 5,179 5,352 5,123
Portfolio accounting
services................... 1,236 1,311 1,442 1,590 1,689
--------- --------- --------- --------- ---------
Totals.................... $ 21,280 $ 22,297 $ 23,527 $ 28,378 $ 30,763
========= ========= ========= ========= =========
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Number of Mutual Fund
Accounts................... 1,085,600 1,150,300 1,220,100 1,306,000 1,376,200
</TABLE>
UNDERWRITING AND DISTRIBUTION
The Company distributes the Funds pursuant to an Underwriting Agreement with
each Fund (except TMK/United Funds). The Company distributes products relating
to the TMK/United Funds under an Underwriting Agreement between the Company
and Torchmark. Under each Underwriting Agreement with a Fund, the Company
offers and sells the Fund's shares on a continual basis and pays the costs of
sales literature and printing of prospectuses furnished to it by the Fund. The
Company receives underwriting commissions for such services, a major portion
of which is paid to financial advisers and sales managers of the Company. The
Company charges a sales charge to clients upon purchase of shares in the
United Funds, which are front-end load funds, which ranges from zero to 5.75%
of the net asset value of the shares purchased. The sales charge for the
United Funds typically declines as the net asset value of the account
increases, and there is generally no sales charge for purchases over $2.0
million. In addition, investors may combine their purchases of these Funds'
shares within the respective group of Funds to qualify for the reduced sales
charge. Investors in the W&R Funds generally pay contingent deferred sales
charges upon redemption of shares in W&R Funds of up to 3% of the net asset
value of the redeemed shares if the shares are redeemed within two calendar
years of their purchase, declining to zero if the shares are held for more
than four calendar years. The following table sets forth the revenues received
by the Company for underwriting commissions for distribution of the Funds for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Underwriting/distribution fees:
United Funds(1)....................... $49,444 $43,007 $39,802 $48,505 $50,134
TMK/United Funds(1)................... 15,169 14,692 14,032 18,452 18,240
W&R Funds(2).......................... 598 1,623 2,762 4,719 6,487
------- ------- ------- ------- -------
Totals (3).......................... $65,211 $59,322 $56,596 $71,676 $74,861
======= ======= ======= ======= =======
</TABLE>
- --------
(1) Underwriting fees.
(2) Distribution fees.
(3) Commissions from other products (primarily life insurance) for the years
ended December 31, 1993, 1994, 1995, 1996, and 1997 in the amounts of
$12,826, $12,828, $13,797, $14,161, and $14,566, respectively, are not
reflected in the totals.
33
<PAGE>
The Underwriting Agreements are subject to approval annually by the
directors of the respective Funds, including a majority of the directors who
are not "interested persons" of the Funds or the Company within the meaning of
the Investment Company Act, or "interested persons" of any such party and who
have no direct or indirect financial interest in the operation of the
Distribution and Service Plan (as described below), as applicable, of the
Funds or any agreements relating thereto ("independent directors"), cast in
person at a meeting called for the purpose of voting on such approval. Each
agreement automatically terminates in the event of its assignment, as defined
in the Investment Company Act, and either party may terminate the agreement
without penalty upon 60 days' written notice.
Under a Distribution and Service Plan for Class A shares of the United Funds
(except the money market fund) and under a Distribution and Service Plan for
the Class B shares of the money market fund and the W&R Funds, each of which
plans are adopted under Rule 12b-1 of the Investment Company Act, the Funds
may pay the Company a fee for its costs and expenses in connection with the
provision of personal service to shareholders of the Fund and maintenance of
shareholder accounts and distribution costs and expenses under the
Distribution and Service Plan. Each Distribution and Service Plan is subject
to approval annually by the directors, including the independent directors,
cast in person at a meeting called for the purpose of voting on such approval.
The Fund may terminate the Plan at any time without penalty.
PROPERTIES
The Company operates from a 115,000 square foot facility that it owns, which
is located in United Investors Park, a commercial development at 6300 Lamar
Avenue, Overland Park, Kansas. The Company leases additional property as sales
office space at approximately 177 locations. The Company believes that its
properties are in good repair and adequate for their purposes.
EMPLOYEES
At December 31, 1997, the Company had 603 full-time employees. Its 2,160
financial advisers are independent contractors.
COMPETITION
The Company is subject to substantial competition in all aspects of its
business. The Company competes with hundreds of other mutual fund management
distribution and service companies that distribute their fund shares through a
variety of methods including affiliated and unaffiliated sales forces, broker-
dealers, and direct sales to the public of shares offered at low or no sales
charge. Many larger mutual fund complexes have developed relationships with
brokerage houses with large distribution networks, which may enable these fund
complexes to reach broader client bases. The Company competes with firms
offering similar services and products to those of the Company, such as
American Express Financial Advisors Inc. and Edward D. Jones & Co. In
addition, the Company competes with brokerage and investment banking firms,
insurance companies, banks, and other financial institutions and businesses
offering other financial products in all aspects of its business. Although no
one company or group of companies dominates the mutual fund management and
services industry, many are larger than the Company and have greater resources
and offer a wider array of financial services and products. Competition is
based on the methods of distribution of fund shares, the ability to develop
investment products for certain segments of the market, the ability to meet
the changing needs of investors, the ability to achieve superior investment
management performance, the type and quality of shareholder services, and the
success of sales promotion efforts. The Company believes that competition in
the mutual fund industry will increase as a result of increased flexibility
afforded to banks and other financial institutions to sponsor mutual funds and
distribute mutual fund shares, and as a result of consolidation and
acquisition activity within the industry. In addition, barriers to entry to
the investment management business are relatively few, and the Company thus
anticipates that it will face a growing number of competitors. Many of the
Company's competitors in the mutual fund industry are larger, better known,
have penetrated more markets than the Company, and have more resources than
those of the Company.
34
<PAGE>
The distribution of mutual fund products has undergone significant
developments in recent years, which has increased the competitive environment
in which the Company operates. These developments include growth in the number
of mutual funds; introduction of service fees payable to broker-dealers that
provide continual service to clients in connection with their mutual fund
investments; and development of complex distribution systems with multiple
classes of shares.
The Company's financial advisers compete primarily with small broker/dealers
and independent financial advisers. The market for financial advice and
planning is extremely fragmented, consisting primarily of relatively small
companies with fewer than 100 investment professionals. Competition is based
on sales techniques, personal relationships and skills, the quality of
financial planning products and services, the quality of the financial and
insurance products offered, and the quality of service. Competition in this
area is intense and some of the financial advisers' competitors are larger,
better known, and have more resources.
REGULATION
Virtually all aspects of the Company's businesses are subject to various
Federal and state laws and regulations. These laws and regulations are
primarily intended to protect investment advisory clients and shareholders of
registered investment companies. Under such laws and regulations, agencies
that regulate investment advisers and broker-dealers such as the Company have
broad administrative powers, including the power to limit, restrict, or
prohibit such an adviser or broker-dealer from carrying on its business in the
event that it fails to comply with such laws and regulations. In such event,
the possible sanctions that may be imposed include the suspension of
individual employees, limitations on engaging in certain lines of business for
specified periods of time, revocation of investment adviser and other
registrations, censures, and fines. The Company believes that it is in
substantial compliance with all material laws and regulations.
The business of the Company is subject to regulation at both the Federal and
state level by the Commission and other regulatory bodies. Certain
subsidiaries of the Company are registered with the Commission under the
Investment Advisers Act and the Funds are registered with the Commission under
the Investment Company Act and with various states under applicable state
laws. A subsidiary of the Company is also registered as a broker-dealer with
the Commission and is subject to regulation by the National Association of
Securities Dealers, Inc. (the "NASD") and various states.
Certain subsidiaries of the Company are registered with the Commission under
the Investment Advisers Act and, as such, are regulated by and subject to
examination by the Commission. The Investment Advisers Act imposes numerous
obligations on registered investment advisers including fiduciary duties,
recordkeeping requirements, operational requirements, and disclosure
obligations. The Commission is authorized to institute proceedings and impose
sanctions for violations of the Investment Advisers Act, ranging from censure
to termination of an investment adviser's registration. The failure of a
registered subsidiary of the Company to comply with the requirements of the
Commission could have a material adverse effect on the Company. The Company
believes it is in substantial compliance with the requirements of the
Investment Advisers Act and the regulations under the Investment Advisers Act.
The Company derives a large portion of its revenues from investment
management agreements. Under the Investment Advisers Act, the Company's
investment management agreements terminate automatically if assigned without
the client's consent. Under the Investment Company Act, advisory agreements
with registered investment companies such as the Funds terminate automatically
upon assignment. The term "assignment" is broadly defined and includes direct
assignments as well as assignments that may be deemed to occur, under certain
circumstances, upon the transfer, directly or indirectly, of a controlling
interest in the Company. The Offering will not and the Spin-Off should not
constitute an assignment for these purposes. Accordingly, the Company does not
intend to seek approvals of new investment advisory agreements from the
shareholders of the registered investment companies it manages or other client
consents in connection with these transactions. See "Risk Factors--Uncertainty
of Planned Spin-Off of the Company."
35
<PAGE>
A subsidiary of the Company is also a member of the Securities Investor
Protection Corporation. In its capacity as a broker-dealer, the Company is
required to maintain certain minimum net capital and cash reserves for the
benefit of its customers, which may limit its ability to pay dividends. The
Company's net capital, as defined, has consistently met or exceeded all
minimum requirements. Various regulations cover certain investment strategies
that may be used by the Funds for hedging purposes. To the extent that the
Funds purchase futures contracts, the Funds are subject to the commodities and
futures regulations of the Commodity Futures Trading Commission. Under the
rules and regulations of the Commission promulgated pursuant to the Federal
securities laws, the Company is subject to periodic examination by the
Commission. The Company is also subject to periodic examination by the NASD. A
subsidiary of the Company is registered under the Exchange Act as a transfer
agent. The most recent examination of the Company and the Funds by the
Commission was in 1997. The most recent examination of the Company by the NASD
was February 1996.
LEGAL MATTERS
From time to time the Company is a defendant in various lawsuits in routine
matters incidental to its business. The Company does not believe that the
outcome of any current litigation will have a material effect on the financial
condition of the Company.
36
<PAGE>
FUND SUMMARY
For the United Funds and TMK/United Funds, the total management fee for each
Fund is the sum of (i) a fee computed on a Fund's net asset value as of the
close of business on each business day at an annual rate specified in the
respective Investment Management Agreements (the "Specific Fee") and (ii) a
fee computed each day on the combined net asset values of all Funds in the
group of Funds of which the particular Fund is a member (the "Group Fee"). The
Group Fee rate for the United Funds is computed each day on the basis of the
combined net asset value of all of the United Funds at annual rates of .51% of
the first $750 million of the United Funds' net asset values declining to .36%
of the United Funds' net asset values in excess of $12 billion. The Group Fee
rate for TMK/United Funds is computed each day on the basis of the combined
net asset value of all the series at annual rates of .51% of the first $750
million of the TMK/United Funds' net asset value declining to .45% of the
TMK/United Funds' net asset value in excess of $2.25 billion. For the series
of W&R Funds, the total management fee is the Specific Fee computed daily on
each series' net assets value at the annual rate shown in the table set forth
below.
The following table sets forth, for each fund or portfolio within the Funds,
the date that shares in such Fund were first offered to the public, the net
assets of such Fund or portfolio as of December 31, 1997, a description of its
investment objective, and the Specific Fee for each Fund.
<TABLE>
<CAPTION>
NET ASSETS SPECIFIC FEE
FIRST AT DECEMBER 31, 1997 AS A FRACTION
FUND/PORTFOLIO NAME OFFERED (DOLLARS IN MILLIONS) INVESTMENT OBJECTIVE OF 1%
- ------------------- ------- --------------------- ------------------------- -------------
<S> <C> <C> <C> <C>
UNITED FUNDS
United Asset Strategy 1995 $ 28 Seeks high total return .30
Fund, Inc. over the long term by
allocating its assets
among stocks, bonds and
short-term instruments.
United Cash Management, 1979 $ 528 Seeks to maximize current None
Inc. income to the extent
consistent with stability
of principal by investing
in money market
instruments.
United Continental 1970 $ 577 Seeks to provide current .15
Income income to the extent that
Fund, Inc. market and economic
conditions permit with a
secondary objective of
seeking long-term
appreciation of capital.
United Bond Fund 1964 $ 529 Seeks to achieve a .03
reasonable return with
more emphasis on
preservation of capital.
United Income Fund 1940 $6,495 Seeks maintenance of .15
current income, subject
to market conditions with
a secondary goal of
capital growth.
United Accumulative Fund 1940 $1,599 Seeks capital growth, .15
with a secondary
objective of current
income.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
NET ASSETS SPECIFIC FEE
FIRST AT DECEMBER 31, 1997 AS A FRACTION
FUND/PORTFOLIO NAME OFFERED (DOLLARS IN MILLIONS) INVESTMENT OBJECTIVE OF 1%
- ------------------- ------- --------------------- ------------------------- -------------
<S> <C> <C> <C> <C>
United Science and 1950 $1,067 Seeks long-term capital .20
Technology Fund growth through a
portfolio emphasizing
science and technology
securities.
United Gold & Government 1985 $ 18 Seeks high total return .30
Fund, Inc. through investing in
precious metals, mineral-
related securities and
gold, silver and platinum
during periods of actual
or expected inflation or
when the environment for
investments in precious
metals appears to be
favorable, and U.S.
Government securities
during periods of actual
or expected disinflation
or low inflation.
United Government 1982 $ 131 Seeks high current income None
Securities Fund, Inc. consistent with safety of
principal by investing
primarily in securities
issued or guaranteed by
the U.S. Government or
its agencies or
instrumentalities.
United High Income Fund, 1979 $1,076 Seeks a high level of .15
Inc. current income, with a
secondary objective of
seeking capital growth
when consistent with its
primary objective.
United High Income Fund 1986 $ 417 Seeks a high level of .15
II, Inc. current income, with a
secondary objective of
seeking capital growth
when consistent with its
primary objective.
United International 1970 $1,018 Seeks long-term capital .30
Growth Fund, Inc. appreciation, with a
secondary objective of
realization of income, by
investing in securities
issued by companies or
governments of any
nation.
United Municipal Bond 1976 $ 989 Seeks income that is not .03
Fund, Inc. subject to Federal income
taxation by investing
principally in tax-exempt
municipal bonds.
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
NET ASSETS SPECIFIC FEE
FIRST AT DECEMBER 31, 1997 AS A FRACTION
FUND/PORTFOLIO NAME OFFERED (DOLLARS IN MILLIONS) INVESTMENT OBJECTIVE OF 1%
- ------------------- ------- --------------------- ------------------------- -------------
<S> <C> <C> <C> <C>
United Municipal High 1986 $ 491 Seeks a high level of .10
Income Fund, Inc. income that is not
subject to Federal income
taxation by investing
principally in medium and
lower quality tax-exempt
municipal bonds.
United New Concepts 1983 $ 674 Seeks capital growth by .35
Fund, Inc. investing in securities
issued by relatively new
or unseasoned companies,
companies in the early
stages of development or
smaller companies in new
and emerging industries
with above average
opportunity for growth.
United Retirement 1972 $ 769 Seeks the highest long- .15
Shares, Inc. term total return
consistent with
reasonable safety of
capital.
United Vanguard Fund, 1969 $1,441 Seeks capital .30
Inc. appreciation through
diversified holdings of
securities issued
primarily by companies
that have appreciation
possibilities and through
proper timing of
purchases and sales of
securities.
WADDELL & REED FUNDS,
INC.
Total Return Fund 1992 $ 417 Seeks current income and .71
capital growth by
investing primarily in
securities issued by
companies that have a
record of paying regular
dividends on common stock
or have the potential for
capital appreciation.
Growth Fund 1992 $ 269 Seeks capital .81
appreciation by investing
primarily in securities
issued by companies that
offer above-average
growth potential,
including relatively new
or unseasoned companies.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
NET ASSETS SPECIFIC FEE
FIRST AT DECEMBER 31, 1997 AS A FRACTION
FUND/PORTFOLIO NAME OFFERED (DOLLARS IN MILLIONS) INVESTMENT OBJECTIVE OF 1%
- ------------------- ------- --------------------- ------------------------- -------------
<S> <C> <C> <C> <C>
Limited-Term Bond Fund 1992 $ 19 Seeks a high level of .56
current income consistent
with preservation of
capital by investing
primarily in debt
securities of investment
grade, including U.S.
government securities,
and maintaining a dollar-
weighted average maturity
of the portfolio of two
to five years.
Municipal Bond Fund 1992 $ 40 Seeks income that is not .56
subject to Federal income
taxation by investing
primarily in municipal
bonds.
International Growth 1992 $ 71 Seeks long-term .81
Fund appreciation, with a
secondary goal of
realization of income, by
investing in securities
issued by companies or
governments of any
nation.
Asset Strategy Fund 1995 $ 17 Seeks high total return .81
over the long term by
allocating assets among
stocks, bonds and short-
term instruments.
Science and Technology 1997 $ 5 Seeks long-term capital .71
Fund growth through a
portfolio emphasizing
science and technology
securities.
High Income Fund 1997 $ 7 Seeks a high level of .66
current income, with a
secondary objective of
seeking capital growth
when consistent with its
primary objective.
TMK/UNITED FUNDS, INC.
Money Market Portfolio 1987 $ 43 Seeks maximum current None
income consistent with
stability of principal by
investing in money market
securities.
Bond Portfolio 1987 $100 Seeks current income with .03
an emphasis on
preservation of capital.
High Income Portfolio 1987 $120 Seeks high current .15
income, with a secondary
objective of capital
growth.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
NET ASSETS SPECIFIC FEE
FIRST AT DECEMBER 31, 1997 AS A FRACTION
FUND/PORTFOLIO NAME OFFERED (DOLLARS IN MILLIONS) INVESTMENT OBJECTIVE OF 1%
- ------------------- ------- --------------------- ------------------------- -------------
<S> <C> <C> <C> <C>
Growth Portfolio 1987 $639 Seeks capital growth with .20
current income as a
secondary objective.
Income Portfolio 1991 $637 Seeks maintenance of .20
current income, subject
to market conditions with
a secondary objective of
capital growth.
International Portfolio 1994 $115 Seeks long-term .30
appreciation of capital,
with current income as a
secondary objective by
investing principally in
securities issued by
companies or governments
of any nation.
Small Cap Portfolio 1994 $148 Seeks capital growth by .35
investing primarily in
securities issued by
relatively new or
unseasoned companies,
companies in their early
stages of development or
smaller companies
positioned in new and
emerging industries with
above average opportunity
for rapid growth.
Balanced Portfolio 1994 $ 68 Seeks current income with .10
a secondary objective of
long-term appreciation of
capital.
Limited-Term Bond 1994 $ 4 Seeks a high level of .05
Portfolio current income consistent
with preservation of
capital by investing
primarily in debt
securities of investment
grade and maintaining a
dollar weighted average
maturity of the portfolio
of two to five years.
Asset Strategy Portfolio 1995 $ 10 Seeks high total return .30
over the long term by
allocating its assets
among stocks, bonds and
short-term instruments.
Science and Technology 1997 $ 10 Seeks long-term capital .20
Portfolio growth by investing
primarily in science and
technology securities.
</TABLE>
41
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
As of the date of the Offering, the Company's directors and executive
officers are expected to be, and their ages as of December 31, 1997 are, as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
David L. Boren.................... 56 Director
Joseph M. Farley.................. 70 Director
Louis T. Hagopian................. 72 Director
Robert L. Hechler................. 60 Executive Vice President, Chief Operating Officer, Director
Henry J. Herrmann................. 55 President, Chief Investment Officer, Treasurer, Director
Joseph L. Lanier, Jr.............. 65 Director
Harold T. McCormick............... 68 Director
Sharon K. Pappas.................. 38 Secretary
George J. Records................. 63 Director
R.K. Richey....................... 71 Director
Keith A. Tucker................... 52 Chairman of the Board and Chief Executive Officer, Director
</TABLE>
- --------
Set forth below is a description of the backgrounds of the executive
officers and directors of the Company.
David L. Boren has been President of The University of Oklahoma, Norman,
Oklahoma since November 1994, and prior thereto he served as United States
Senator from Oklahoma, 1979-1994 and a member of the Senate Finance Committee.
Mr. Boren is a director of Torchmark Corporation, Phillips Petroleum
Corporation, AMR Corporation, and Texas Instruments, Inc. Mr. Boren's term on
the Board of Directors of the Company expires in 2000.
Joseph M. Farley has been Of Counsel at Balch & Bingham, Attorneys and
Counselors, Birmingham, Alabama since November 1992. Mr. Farley is a director
of Torchmark Corporation. Mr. Farley's term on the Board of Directors of the
Company expires in 2000.
Louis T. Hagopian has been owner of Meadowbrook Enterprises, Darien,
Connecticut, an advertising and marketing consultancy, since January 1990 and
is Vice Chairman, Partnership for a Drug-Free America, New York, New York. Mr.
Hagopian is a director of Torchmark Corporation. Mr. Hagopian's term on the
Board of Directors of the Company expires in 1999.
Robert L. Hechler has been President, Chief Executive Officer, and Treasurer
of Waddell & Reed, Inc. since April 1993 and President of Waddell & Reed
Services Company since January 1982. Mr. Hechler's term on the Board of
Directors expires in 2000.
Henry J. Herrmann has been Vice President and Chief Investment Officer of
the Company since April 1993, and prior thereto was Senior Vice President and
Chief Investment Officer of the Company since March 1987. Mr. Herrmann's term
on the Board of Directors of the Company expires in 2001.
Joseph L. Lanier, Jr. has been Chairman of the Board and Chief Executive
Officer of Dan River Incorporated, Danville, Virginia, a textile manufacturer,
since November 1989. Mr. Lanier is a director of Torchmark Corporation,
Flowers Industries, Inc., Dimon Inc., and SunTrust Banks, Inc. Mr. Lanier's
term on the Board of Directors of the Company expires in 2001.
Harold T. McCormick has served as Chairman and Chief Executive Officer of
Bay Point Yacht & Country Club, Panama City, Florida since March 1988 and as
Chairman, First Ireland Spirits Co., Ltd., Dublin, Ireland, since February
1996. Mr. McCormick is a director of Torchmark Corporation. Mr. McCormick's
term on the Board of Directors of the Company expires in 2000.
42
<PAGE>
Sharon K. Pappas has been Senior Vice President, Secretary, and General
Counsel of Waddell & Reed, Inc. and Waddell & Reed Services Company since
September 1994. Ms. Pappas was Assistant General Counsel of Waddell & Reed,
Inc. and Waddell & Reed Services Company from January 1992 until September
1994.
George J. Records has served as Chairman of Midland Financial Co., Oklahoma
City, Oklahoma, a bank and financial holding company for retail banking and
mortgage operations, since 1982. Mr. Records is a director of Torchmark
Corporation. Mr. Records' term on the Board of Directors of the Company
expires in 1999.
R. K. Richey is Chairman of and Chief Executive Officer of Torchmark
Corporation and is a director of Full House Resorts, Inc., Vesta Insurance
Group, Inc., and of each of the United Funds, the W&R Funds, and the
TMK/United Funds. Mr. Richey's term on the Board of Directors of the Company
expires in 1999.
Keith A. Tucker is a director and Vice Chairman of Torchmark Corporation. He
is a director of each of the United Funds, W&R Funds, and the TMK/United
Funds. Mr. Tucker's term on the Board of Directors of the Company expires in
1999.
BOARD OF DIRECTORS
The Company's Board of Directors is divided into three classes with the
initial term of the first class expiring at the annual meeting of stockholders
to be held in 1999 (four directors), the second class expiring at the annual
meeting of stockholders to be held in 2000 (four directors), and the third
class expiring at the annual meeting of stockholders to be held in 2001 (two
directors). The Company intends to add two independent directors to the third
class of directors as soon as practicable after the Offering.
The executive officers of the Company are elected annually and serve at the
discretion of the Board of Directors.
After completion of the Offering, the Company intends to establish an Audit
Committee and a Compensation Committee, each composed of at least two
independent directors, an Executive Committee and a Nominating Committee. The
Audit Committee will recommend the annual appointment of the Company's
auditors, with whom the Audit Committee will review the scope of audit and
non-audit assignments and related fees, accounting principles used by the
Company in financial reporting, internal auditing procedures, and the adequacy
of the Company's internal control procedures. The Compensation Committee will
administer the Company's Plans (as defined below) and make recommendations to
the Board of Directors regarding compensation for the Company's executive
officers. In the absence of a meeting of the Board of Directors, the Executive
Committee is empowered to exercise all the powers and authority of the Board
of Directors in the management of the business affairs of the Company, except
that the Executive Committee is not permitted to take any action that
committees are expressly prohibited from taking under the terms of the
Certificate of Incorporation, the Bylaws, or the laws of the State of
Delaware. The Nominating Committee will review the qualifications of potential
candidates for the Board of Directors, report its findings to the Board of
Directors, and propose nominations for Board memberships for approval by the
Board of Directors and submission to the stockholders of the Company for
approval.
COMPENSATION OF DIRECTORS
Directors of the Company who are also employees receive no additional
compensation for their services as a director. It is currently anticipated
that non-employee directors (the "Non-Employee Directors") will receive an
annual retainer and a fee for each board and committee meeting that they
attend, the amounts of which will be determined in the future. The Company
reimburses all directors of the Company for travel expenses incurred in
attending meetings of the Board of Directors and its committees.
43
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation received by the persons who
will be the Company's Chairman of the Board and Chief Executive Officer and
the four other most highly paid executive officers of the Company (the "Named
Executive Officers") for the Company's two most recent fiscal years. Mr.
Tucker's compensation has been paid by Torchmark Corporation and Messrs.
Herrmann, Hechler, Thompson, and Intagliata's compensation has been paid by
the Company. Effective January 1, 1998, Mr. Tucker's compensation has been
paid by the Company, and Mr. Tucker's compensation has been reflected in the
financial statements included in the Prospectus as a Company expense for all
periods presented.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
---------------------- -------------------------------------
SECURITIES UNDERLYING ALL OTHER
NAMES AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS/SARS(2) COMPENSATION(3)
- ---------------------------- ---- -------- -------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Keith A. Tucker......... 1997 $800,016 $ 0 386,892 $6,619
1996 $700,000 $ 0 130,000 $6,114
Henry J. Herrmann....... 1997 $420,000 $715,000 124,600 $4,800
1996 $420,000 $392,000 36,000 $4,500
Robert L. Hechler....... 1997 $300,000 $565,000 69,500 $4,800
1996 $300,000 $295,000 16,000 $4,500
Russell E. Thompson..... 1997 $364,000 $175,396 6,200 $4,800
1996 $350,000 $146,254 8,000 $4,500
Antonio Intagliata...... 1997 $235,000 $140,000 0 $4,800
1996 $235,000 $ 42,000 2,000 $4,500
</TABLE>
- --------
(1) Mr. Tucker elected to defer his 1997 bonus of $400,000, and Messrs.
Herrmann and Hechler each elected to defer $100,000 of their 1997 bonuses
pursuant to the Torchmark Corporation 1996 Executive Deferred Compensation
Stock Option Plan (the "TMK Executive Deferral Plan"). Mr. Tucker also
elected to defer his 1996 bonus of $425,000 pursuant to the TMK Executive
Deferral Plan. These amounts are excluded from the table. Pursuant to a
Portfolio Manager's Deferred Compensation Plan, $75,000 and $60,000 of the
1997 portfolio manager's bonuses for Messrs. Thompson and Intagliata,
respectively, were mandatorily deferred, and $54,000 and $18,000 of the
1996 portfolio manager's bonuses were deferred by Messrs. Thompson and
Intagliata, respectively. These amounts are also excluded from the table.
(2) In January 1997, Mr Tucker elected to convert his 1996 interest bearing
deferred compensation account in the TMK Executive Deferral Plan into
options on 163,992 shares of Torchmark Corporation common stock. In
September 1997, officers and directors of Torchmark were allowed to elect
to participate in a program pursuant to the Torchmark Corporation 1987
Stock Incentive Plan, as amended, (the "TMK Incentive Plan") whereby they
could elect to exercise their existing options in Torchmark Corporation
common stock and receive new restoration options in Torchmark Corporation
common stock. Messrs. Tucker, Herrmann, Hechler, and Thompson elected to
participate in this exercise program and accordingly received option
grants shown in this table in Torchmark Corporation common stock under the
TMK Incentive Plan in 1997 (Mr. Tucker received an option for 223,900
shares thereunder). Mr. Intagliata elected not to participate in the
exercise program and thus was not awarded options in Torchmark Corporation
common stock in 1997. Mr. Intagliata does continue to hold unexercised
options in Torchmark Corporation common stock pursuant to the TMK
Incentive Plan. For 1996, securities underlying options reflect grants of
options pursuant to the TMK Incentive Plan.
(3) For Mr. Tucker, includes Torchmark contributions to Torchmark Corporation
Savings and Investment Plan, a funded, qualified defined contribution
plan, of $4,800 for 1997 and $4,500 for 1996; interest only on prior
contributions to the Torchmark Corporation Supplemental Savings and
Investment Plan, an unfunded, non-qualified defined contribution plan, of
$1,723 for 1997 and $1,614 for 1996 and interest on deferred compensation
in the Torchmark Corporation Restated Deferred Compensation Plan for
Directors, Advisory Directors, Directors Emeritus and Officers, as amended
of $96 for 1997. Includes Company contributions to the United Investors
Management Company Saving and Investment Plan, a funded, qualified
contribution plan, for Messrs. Herrmann, Hechler, Thompson, and Intagliata
of $4,800 each for 1997 and $4,500 each for 1996.
44
<PAGE>
The following table provides information on grants of options in fiscal year
1997 to the Named Executive Officers to purchase shares of Torchmark
Corporation common stock.
OPTIONS GRANTED DURING 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF AT ASSUMED ANNUAL RATES
SECURITIES % OF TOTAL OF STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE OR FOR OPTION TERM
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION ----------------------------
NAME GRANTED(1) IN FISCAL YEAR(2) (PER SHARE) DATE 5% 10%
---- ---------- ----------------- ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Keith A. Tucker(3)...... 163,492 29.5% $25.875 01/31/08 $ 2,660,449 $ 6,742,095
223,400 45.2% $39.125 09/27/07 $5,496,872 $13,930,142
Henry J. Herrmann (3)... 124,600 25.2% $39.125 09/27/07 $ 3,065,847 $ 7,769,452
Robert L. Hechler (3)... 69,500 14.1% $39.125 09/27/07 $ 1,710,083 $ 4,333,683
Russell E. Thompson
(3).................... 6,200 1.3% $39.125 09/27/07 $ 152,554 $ 386,602
Antonio Intagliata (3).. 0 0% N/A N/A $ 0 $ 0
</TABLE>
- --------
(1) Mr. Tucker's option expiring January 31, 2008, is a non-qualified stock
option acquired pursuant to his election to convert his 1996 interest
bearing deferred compensation account in the TMK Executive Deferral Plan
to options in Torchmark Corporation common stock. Such options were
granted with an eleven year term at an exercise price equal to the closing
price of Torchmark Corporation common stock on the date of his conversion
election (the grant date). All options granted to Messrs. Herrmann and
Hechler and Mr. Tucker's option expiring on September 27, 2007 are non-
qualified stock options granted on Torchmark Corporation common stock
pursuant to a restoration option program under the TMK Incentive Plan.
Such options were granted with a ten year and two day term at an exercise
price equal to the closing price of Torchmark Corporation common stock on
the grant date. As restoration options issued in connection with the
exercise of fully vested options, these options are fully exercisable as
of their September 25, 1997 grant date.
(2) Percentages calculated for Mr. Tucker are shown separately for grants
under the TMK Executive Deferral Plan (163,492 share option) in which Mr.
Tucker was the only Company employee participating with other employees of
Torchmark and for grants under the TMK Incentive Plan (223,400 share
option) based upon option grants to Mr. Tucker and all other Company
employees (excluding all other Torchmark employees).
(3) The Company will, upon consummation of the Offering, grant to Messrs.
Tucker, Herrmann, Hechler, Thompson, and Intagliata non-qualified stock
options for 180,000 shares, 334,600 shares, 292,200 shares, 165,600
shares, and 86,800 shares, respectively, under the Stock Incentive Plan
described below as part of such persons' 1997 compensation and/or as
offering related options. Such options will be exercisable at the initial
public offering price. In addition, the Company will, upon consummation of
the Offering, make restricted stock awards to Messrs. Herrmann and Hechler
of 110,000 and 90,000 shares of Class A Common Stock, respectively. Also,
as of the date of the closing of the Offering, 48,000 shares of Torchmark
Corporation common stock previously issued to Mr. Tucker pursuant to a
Torchmark stock plan will be converted into restricted stock under a
Company stock plan. See "--Conversion of Torchmark Equity Compensation to
Class A Common Stock of the Company." These grants and conversions are not
reflected in the table.
45
<PAGE>
The following table provides information on option exercises in 1997 by the
Named Executive Officers and the value of each such Named Executive Officers'
unexercised options to acquire common stock of Torchmark Corporation at
December 31, 1997.
AGGREGATED OPTION EXERCISES DURING 1997 AND OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT
NUMBER OF SHARES OPTIONS AT FISCAL YEAR END FISCAL YEAR END
ACQUIRED VALUE ------------------------------ -------------------------
NAME ON EXERCISE (1) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ---------------- ---------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Keith A. Tucker......... 357,224 $7,068,164 388,400 393,492 $4,371,350 $6,967,588
Henry J. Herrmann....... 198,200 $4,204,512 166,100 58,000 $1,323,744 $1,074,250
Robert L. Hechler....... 127,622 $3,250,168 81,500 28,000 $ 458,844 $ 530,000
Russell E. Thompson..... 10,000 $ 221,250 10,200 12,000 $ 100,988 $ 220,500
Antonio Intagliata...... 0 $ 0 10,074 5,000 $ 239,676 $ 96,125
</TABLE>
- --------
(1) Of shares shown as acquired on exercise, Messrs. Tucker, Herrmann,
Hechler, and Thompson retained 106,500, 57,000, 44,100, and 3,000 shares,
respectively, after cashless stock option exercises.
COMPENSATION, BENEFITS, AND RETIREMENT PLANS
The Company intends to implement the following stock plans: The 1998 Stock
Incentive Plan (the "Stock Incentive Plan"), The 1998 Non-Employee Director
Stock Option Plan (the "Non-Employee Director Plan"), and The 1998 Executive
Deferred Compensation Stock Option Plan (the "Executive Deferral Plan")
(collectively, the "Plans"). Terms not expressly defined in the descriptions
of the Plans below have the same meaning as assigned to such terms in the
Plans. Each Plan will be filed as an exhibit to the Registration Statement of
which this Prospectus is a part.
Upon consummation of the Offering and after giving effect to the grants made
in connection with the Offering referred to below, under the Plans the Company
will have (on a fully diluted basis and assuming the exercise of all options
granted to them and excluding shares of stock purchased outside of the Plans)
reserved 16.3 million shares of Class A Common Stock, or approximately 25% of
the outstanding Common Stock after the Offering, for issuance under the Plans,
including (i) awarded options to purchase up to 1,069,200 shares of Class A
Common Stock, approximately 1.7% of the outstanding Common Stock, to the Named
Executive Officers; and (ii) issued 200,000 shares of restricted Class A
Common Stock, less than 1% of the outstanding Common Stock, to the Named
Executive Officers. In addition, 48,000 shares of restricted stock of
Torchmark Corporation previously issued to Mr. Tucker pursuant to a Torchmark
stock plan will be converted into Restricted Stock under the Stock Incentive
Plan. See "--Conversion of Torchmark Equity Compensation to Class A Common
Stock of the Company." The following is a brief summary of each of the Plans,
which are qualified in their entirety by the Plans, copies of which will be
filed as an exhibit to the Registration Statement of which the Prospectus is a
part.
Stock Incentive Plan
The Stock Incentive Plan, covering 13,000,000 shares, will permit (i) the
grant of options to purchase shares of Class A Common Stock intended to
qualify as incentive stock options under (S) 422 of the Code ("Incentive
Options"); (ii) the grant of options that do not so qualify ("Non-Qualified
Options"); (iii) the issuance of Class A Common Stock that may be subject to
certain restrictions ("Restricted Stock"); (iv) stock appreciation rights,
which entitle the holder, upon exercise, to receive cash or shares of Class A
Common Stock in value not to exceed the appreciation in value of Class A
Common Stock since the date of grant (an "SAR"); and (v) deferred stock awards
("Deferred Stock Awards"), which entitle the recipient to receive shares at
future dates without any payment in cash or property. The Stock Incentive Plan
was designed and intended as a performance incentive for officers, employees,
consultants, and other key persons performing services for the
46
<PAGE>
Company to encourage such persons to acquire or increase a proprietary
interest in the success and progress of the Company. Upon consummation of the
Offering and giving effect to the grants made in connection with the Offering,
2,372,300 options will be awarded under the Stock Incentive Plan, and the
Company will issue an aggregate of 200,000 shares of Restricted Stock under
the Stock Incentive Plan (excluding the conversion of Mr. Tucker's Torchmark
restricted stock). These stock options will be initially exercisable at the
initial public offering price, and such stock options and the restricted stock
grants will generally vest in equal one-third increments on the second, third,
and fourth anniversaries of the consummation of the Offering.
The Stock Incentive Plan is administered by the Compensation Committee (the
"Compensation Committee"). All members of the Compensation Committee are
"disinterested persons" as that term is defined under the rules promulgated by
the Commission. On and after the date the Stock Incentive Plan becomes subject
to (S) 162(m) of the Code, all members of the Compensation Committee will be
"outside directors" as defined in (S) 162(m) of the Code and the regulations
thereunder. The Compensation Committee has full power to select, from among
the employees and other persons eligible for awards, the individuals to whom
awards will be granted, to make any combination of awards to participants, and
to determine the specific terms and conditions of each award, subject to the
provisions of the Stock Incentive Plan. Persons eligible to participate in the
Stock Incentive Plan will be those officers, employees, and other key persons,
such as consultants, of the Company who are responsible for or contribute to
the management, growth, or profitability of the Company, as selected from time
to time by the Compensation Committee. SARs may be granted in conjunction with
options, entitling the holder upon exercise to receive an amount in any
combination of cash or unrestricted common stock of the Company (as determined
by the Compensation Committee), not greater in value than the increase in the
value of the shares covered by such right since the date of grant. Each SAR
will terminate upon the termination of the related option.
Only employees of the Company may be granted Incentive Options. The option
exercise price of each option will be determined by the Compensation Committee
but may not be less than 100% of the fair market value of the Class A Common
Stock on the date of grant in the case of Incentive Options and Non-Qualified
Options.
The Stock Incentive Plan provides that automatic formula-based Non-Qualified
Options for 6,000 shares will be awarded to non-employee directors on the date
of consummation of the Offering with an exercise price equal to the offering
price and 3,000 shares will be awarded to non-employee directors on the first
day of each calendar year on which the Company's Class A Common Stock is
traded on the New York Stock Exchange at 100% of the market value of the Class
A Common Stock on that date. Additionally, non-employee directors may be
granted non-formula based Non-Qualified Options at the discretion of the
Compensation Committee, which may have an exercise price equal to the market
value of the stock on the grant date or at a discount not to exceed 25% of the
market value on the grant date.
The Compensation Committee may make Deferred Stock Awards under the Stock
Incentive Plan. These non-transferable awards entitle the recipient to receive
shares at a future date or dates without any payment in cash or property in
one or more installments, as determined by the Compensation Committee. Receipt
of deferred stock may be conditioned on such matters as the Compensation
Committee determines, including continued employment or attainment of
performance goals. Such rights will generally terminate upon the participant's
termination of employment. Any deferral restrictions under a Deferred Stock
Award may be accelerated or waived by the Compensation Committee at any time
(including following termination of employment).
The Compensation Committee may also award shares of Restricted Stock to
officers, other employees, and key persons of the Company. The conditions and
restrictions applicable to the Restricted Stock may include the achievement of
certain performance goals and continued employment with the Company through a
specified restricted period. These conditions and restrictions, as well as the
purchase price of shares of Restricted Stock, will be determined by the
Compensation Committee. If the performance goals and other restrictions are
not attained, the employees will forfeit their awards of Restricted Stock.
The Board of Directors may at any time amend or discontinue the Stock
Incentive Plan and the Compensation Committee may at any time amend or cancel
outstanding awards for the purpose of satisfying
47
<PAGE>
changes in the law or for any other lawful purpose. No such action may be
taken, however, that adversely affects any rights under outstanding awards
without the holder's consent. Further, amendments to the Stock Incentive Plan
will be subject to approval by the Company's stockholders if and to the extent
required by the Code to preserve the qualified status of Incentive Options or
to preserve tax deductibility of compensation earned under stock options and
stock appreciation rights.
The Stock Incentive Plan provides that in the event of a "Change of Control"
(as defined in the Stock Incentive Plan), unless otherwise determined by the
Compensation Committee prior to such Change of Control or to the extent
expressly provided by the Compensation Committee at or after the time of
grant, or in the event of a "Potential Change of Control" (as defined in the
Stock Incentive Plan), in each case occurring after the first anniversary of
completion of the Offering, (i) all stock options and related SARs will become
immediately excisable, (ii) the restrictions and deferral limitations
applicable to outstanding Restricted Stock Awards and Deferred Stock Awards
will lapse and the shares in question will fully vest, and (iii) the value of
such options and awards, to the extent determined by the Compensation
Committee, will be settled on the basis of the highest price paid (or offered)
during the preceding 60-day period, as determined by the Compensation
Committee. In the sole discretion of the Compensation Committee, such
settlements may be made in cash or in stock, as is a necessary to effect the
Change of Control. In addition, at any time prior to or after a Change of
Control, the Compensation Committee may accelerate awards and waive conditions
and restrictions on any awards to the extent it may determine appropriate.
Generally, if an optionee's employment or consultant status with the Company
or a director's status as an outside director terminates by reason of or
within three months following a merger or other business combination resulting
in a Change of Control, the Stock Incentive Plan provides that such optionee's
stock options will terminate upon the latest of (i) six months and one day
after the merger or business combination, (ii) ten business days following the
expiration of the period during which publication of financial results
covering at least thirty days of post-merger combined operations has occurred,
and (iii) the expiration of the stated term of such stock option or director
stock option.
Approximately 60 employees are currently eligible to participate in the
Stock Incentive Plan.
Non-Employee Director Plan
The Non-Employee Director Plan will permit Non-Employee Directors to elect
to defer on an annual basis all or a designated portion of their director
compensation payable in 1998 or thereafter into the interest-bearing account
of the Non-Employee Director Plan (the "Interest Account"). Such deferrals
would be made subject to a one-time opportunity by the Non-Employee Director
to convert that particular year's deferred director compensation into options,
granted either at market value or at a designated discount not to exceed 25%
of market value, to acquire Class A Common Stock. The Company's current Non-
Employee Directors as well as any subsequently elected Non-Employee Directors
constitute the class of persons eligible to participate in this plan. Up to
800,000 shares of Class A Common Stock are proposed to be reserved for
issuance pursuant to the Non-Employee Director Plan.
On or before December 31 of each year, each Non-Employee Director will
determine whether to receive all or a portion of his or her annual retainer
and Board of Directors and committee meeting fees for the following calendar
year in cash or to defer all or a portion (in 10% increments, but not less
than 50%) of such Annual Compensation (as defined in the Non-Employee Director
Plan) (assuming maximum attendance at scheduled Board of Directors and
committee meetings) into an interest-bearing account in the Non-Employee
Director Plan. In the case of a newly elected Non-Employee Director, such
determination to defer compensation must be made within the 30-day period
immediately following election to the Board of Directors. The determination to
defer, if made, will be indicated upon a Primary Election Form, which will
specify the percentage of compensation deferred and the basis for payment of
the interest-bearing account balance (a lump sum or designated number of
monthly payments not to exceed 120) to the Non-Employee Director upon the
earliest of (i) December 31 of the fifth year after the year with respect to
which the deferral was made; (ii) the first business day of the fourth month
after such Non-Employee Director's death; or (iii) termination as a Non-
Employee Director, for any reason other than by death.
48
<PAGE>
At any time, but only once, during the calendar year immediately following
the filing of a Primary Election Form, a participating Non-Employee Director
may elect to convert the then current balance in his or her Interest Account
for the calendar year to which such Primary Election Form relates into options
to acquire Class A Common Stock. For example, if a Primary Election Form was
filed in December 1997 deferring Annual Compensation to be earned in 1998, the
Non-Employee Director may elect at any time during 1998 to convert such
deferred amount plus accrued interest to the conversion election date into
stock options. The irrevocable election to receive options as of this election
date, which is made on a Secondary Election Form, will specify the percentage
of such stock options to be granted at an exercise price of 100% of the Fair
Market Value per Share on the Option Grant Date and the percentage of options
to be granted at an exercise price of not less than 75% of the Fair Market
Value per Share (with the discount of up to 25% to be determined by the
Compensation Committee in its discretion). Non-Employee Directors may elect to
receive discounted stock options, market value stock options, or a combination
of both. To the extent that a Non-Employee Director chooses to receive
discounted stock options, he or she will receive options on a smaller number
of shares with a lower exercise price per share while a decision to receive
market value options will result a larger number of shares subject to option
with a higher exercise price per share.
Options granted pursuant to the Non-Employee Director Plan will be non-
qualified stock options. Based upon the Non-Employee Director's decision as to
the exercise price (discounted or market value) of the options to be received,
the number of Shares subject to such option will be the whole number of Shares
equal to (a) the dollar amount which the Non-Employee Director has elected to
convert to options divided by (b) the per share value of an option on the
Option Grant Date, as determined using an option valuation model selected by
the Compensation Committee. Options are first exercisable, cumulatively, as to
10% of the Shares on each of the first through tenth anniversaries of the
Option Grant Date. The term of the option will be as specified by the
Compensation Committee but in no event may the period of time over which an
option may be exercised exceed eleven years from the Option Grant Date. In no
event will death, disability, retirement, other termination of directorship,
or failure to be reelected as a director shorten the term of any outstanding
option. Options may be subject to accelerated vesting and will be immediately
exercisable upon the Non-Employee Director's death or Disability, a Change in
Control of the Company as defined in the plan or the unanimous decision of the
Compensation Committee to accelerate. Upon acceleration, an option remains
exercisable for the remainder of its original term. Options may be exercised
in whole or in part. Shares will be issued pursuant to the exercise of an
option only upon receipt by the Company of payment in full of the aggregate
purchase price for the Shares subject to the option or portion thereof being
exercised. The Compensation Committee may determine the specific method of
payment, including permitting "cashless exercises," and other terms and
provisions of options in its sole discretion.
Options will not be assignable or transferable other than by will or by the
laws of descent and distribution, except that the Compensation Committee may
permit transfers that it, in its sole discretion, concludes do not result in
accelerated taxation and that are otherwise appropriate and desirable taking
into account any applicable securities laws.
Based upon current Federal tax laws, a Non-Employee Director will not
recognize income upon the making of a proper and timely deferral to the
Interest Account nor will income be recognized upon the conversion of such
account balance to options. The Non-Employee Director will recognize income
for purposes of Federal income tax when the amount in his or her Interest
Account is paid out or immediately upon the exercise of the options, generally
in an amount equal to the difference between the fair market value of the
Common Stock on the date of exercise and the exercise price of the option. The
Company generally will receive a corresponding tax deduction when the Non-
Employee Director recognizes income subject to any applicable deductibility
limitations of the Code.
The Non-Employee Director Plan will be administered by the Compensation
Committee, which will have the authority to interpret and construe the Non-
Employee Director Plan, make necessary rules and regulations to administer the
plan, and designate persons as its agents who are neither members of the
Compensation Committee or the Board of Directors to carry out administrative
responsibilities under the Plan.
49
<PAGE>
Adjustments will be made to the total number of Shares reserved for issuance
under the Non-Employee Director Plan, the number of Shares covered by, and the
exercise price of each outstanding option if the Company at any time changes
the number of issued Shares through a stock dividend, stock split,
recapitalization, reorganization, or other change in corporate structure
affecting the Shares. The Compensation Committee will authorize the issuance,
continuation, or assumption of outstanding options or provide for other
equitable adjustments after changes in Shares resulting from any merger,
consolidation, sale of assets, acquisition of property or stock, or similar
occurrence in which the Company is the surviving or continuing corporation
upon such terms and conditions as it deems necessary. In the case of an
acquisition where the Company is not the surviving or continuing corporation
and outstanding Shares are not converted into or exchanged for different
securities, cash, or other property, a Non-Employee Director who holds an
outstanding option will have the right then and during the remaining term of
the option to receive the same acquisition consideration received by the
Company's other shareholders.
The Board of Directors may amend, suspend, or terminate the Non-Employee
Director Plan or any stock option award notice under the plan at any time,
except that it may condition amendments or modifications on shareholder
approval if necessary or advisable because of tax, securities, or other
applicable laws, policies, or regulations. No amendment, modification, or
termination will adversely affect any outstanding options or Interest Accounts
without the consent of the participant.
Executive Deferral Plan
The Executive Deferral Plan will permit Eligible Executives to defer salary
and bonus into interest-bearing accounts in the plan, subject to a one time
opportunity to elect to convert within a designated time period any deferred
salary for that year as well as a one time opportunity to elect within a
designated time period to convert any deferred bonus for that calendar year
into options to acquire Class A Common Stock. Such options may be granted with
an exercise price of the fair market value of the stock or at a discount not
to exceed 25% of its market value. The Eligible Executives will be determined
from time to time by the Compensation Committee or its designee or by the
Chairman of the Board. Currently, three persons have been designated as
eligible to participate in the Executive Deferral Plan, and it is contemplated
that the number of Eligible Executives will not in any case exceed 10 persons.
Up to 2,500,000 shares of Class A Common Stock have been reserved for issuance
pursuant to the Executive Deferral Plan.
On or before the last day of each calendar quarter, an Eligible Executive
may elect to receive all or a portion of his or her salary for the next
calendar quarter in cash or may irrevocably elect to defer all or a portion in
10% or $10,000 increments of next quarter's salary into an Interest Account
for Salary under the Executive Deferral Plan by delivering a Primary Election
Form for Salary to the plan administrator. Such Primary Election Form for
Salary will specify the amount of Salary to be deferred into the interest-
bearing account and the form and timing of the payout of deferred amounts,
except that if an executive elects to defer Salary for more than one quarter
in a calendar year, the form and timing of payout for each quarter's deferral
must be identical.
At any time prior to December 31 of each year, an Eligible Executive may
also elect to receive all or a portion of his or her bonus for the current
calendar year in cash or may irrevocably elect to defer all or a portion (in
10% or $10,000 increments) of such current calendar year bonus into an
Interest Account for Bonus under the Executive Deferral Plan by delivering a
Primary Election Form for Bonus to the Plan administrator. Such Primary
Election Form for Bonus will specify the amount of Annual Bonus to be deferred
and the form and timing of payout of the deferred amount, except that if an
executive elects to defer both Salary and Annual Bonus for a particular
calendar year, the form and timing must be identical.
The Interest Accounts of an Eligible Executive will be segregated to reflect
deferred compensation on a year-by-year basis and as to the type of
compensation deferred (salary or bonus). Interest will be credited to such
Interest Accounts at the rate determined from time to time by the Compensation
Committee. Payment of the balances in an executive's Interest Accounts will be
made as designated by the executive in a lump sum or in the number of
approximately equal monthly installments not to exceed 120 which have been
selected by the
50
<PAGE>
executive. Such payments will begin on the earliest of (a) December 31 of the
fifth year after the year with respect to which the deferral was made, (b) the
first business day of the fourth month after the executive's death, or (c)
termination as an employee of the Company for any reason other than by death.
At any time, but only once, during the twelve-month period following the end
of the calendar year with respect to which an executive deferred Salary into
the Executive Deferral Plan, such executive will have the right to convert his
or her Interest Account for Salary for the previous year into options in Class
A Common Stock by filing an irrevocable Secondary Election Form for Salary.
Also, at any time, but only one time, during the twelve month period following
the end of a calendar year with respect to which an executive has deferred
Annual Bonus into the Plan, such executive will have the right to convert his
or her Interest Account for Bonus for such previous year into options in Class
A Common Stock by filing an irrevocable Secondary Election Form for Bonus. The
filing of such Secondary Election Form for Salary or Secondary Election Form
for Bonus will result in receipt by the executive of options as of the date of
such filing. The Secondary Election Form will specify the percentage of
options to be granted at an exercise price of 100% of the Fair Market Value
per Share on the Option Grant Date and the percentage of options to be granted
at an exercise price of not less than 75% of the Fair Market Value per Share
on the Option Grant Date (with the discount of up to 25% to be determined by
Compensation Committee in its discretion). An Eligible Executive may elect to
receive market value stock options, discounted stock options or a combination
of both. To the extent that an executive selects market value options, he or
she will receive options on a larger number of shares with a higher exercise
price than if discounted options on fewer shares with a lower exercise price
were selected.
Options issued pursuant to the Executive Deferral Plan will be non-qualified
stock options. Based upon the Eligible Executive's decision as to the exercise
price (discounted or market value) of the options to be received, the number
of Shares subject to such option will be the whole number of Shares equal to
(i) the dollar amount that the executive has elected to convert to options
divided by (ii) the per share value of an option on the Option Grant Date, as
determined using an option valuation model selected by the Compensation
Committee. Options are first exercisable, cumulatively, as to 10% of the
Shares on each of the first through tenth anniversaries of the Option Grant
Date, except that any option held by a "Covered Employee," as defined in (S)
162(m) of the Code, will not be exercisable before the first day of the
calendar year immediately following the year in which the executive ceased to
be a Covered Employee. The term of the option will be as specified by the
Compensation Committee but in no event may the period of time over which an
option may be exercised exceed the longer of eleven years from the Option
Grant Date or the thirtieth day of the calendar year immediately following the
year in which the executive ceased to be a Covered Employee. In no event will
death, disability, retirement, or other termination of employment shorten the
term of any outstanding option. Options will be subject to accelerated vesting
and will be immediately exercisable upon the executive's death or disability,
a Change in Control, or the unanimous decision of the Compensation Committee
to accelerate. Upon acceleration, an option remains exercisable for the
remainder of its original term.
Options may be exercised in whole or in part. Shares will be issued pursuant
to the exercise of an option only upon receipt by the Company of payment in
full of the aggregate purchase price for the Shares subject to the option or
portion thereof being exercised. The Compensation Committee may determine the
specific method of payment, including permitting "cashless exercises," and
other terms and provisions of options in its sole discretion.
Options will not be assignable or transferable other than by will or by the
laws of descent and distribution, except that the Compensation Committee may
permit transfers that it, in its sole discretion, concludes do not result in
accelerated taxation and that are otherwise appropriate and desirable taking
into account any applicable securities laws.
Based on current Federal tax laws, a participating executive will not
recognize income upon the making of a proper and timely deferral to Interest
Accounts nor will income be recognized upon the conversion of such account
balances to options. The executive will recognize income for purposes of
Federal income tax when the amounts in his or her Interest Accounts are paid
out or immediately upon the exercise of the non-qualified
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options, generally in an amount equal to the option spread on the date of
exercise. The Company generally will receive a corresponding tax deduction
when the executive recognizes income, subject to any applicable deductibility
limitations of the Code.
The Executive Deferral Plan will be administered by the Compensation
Committee, which will have the authority to interpret and construe the plan,
make necessary rules and regulations to administer the Plan and designate
persons as its agents who are neither members of the Compensation Committee or
the Board of Directors to carry out administrative responsibilities under the
Plan.
Adjustments will be made to the total number of Shares reserved for issuance
under the Executive Deferral Plan, the number of Shares covered by and the
exercise price of each outstanding option if the Company at any time changes
the number of issued Shares through a stock dividend, stock split,
recapitalization, reorganization, or other change in corporate structure
affecting the Shares. The Compensation Committee will authorize the issuance,
continuation or assumption of outstanding options or provide for other
equitable adjustments after changes in the number of Shares resulting from any
merger, consolidation, sale of assets, acquisition of property or stock, or
similar occurrence in which the Company is the surviving or continuing
corporation upon such terms and conditions as it deems necessary. In the case
of an acquisition where the Company is not the surviving or continuing
corporation and outstanding Shares are not converted into or exchanged for
different securities, cash, or other property, a participating executive who
holds an outstanding option will have the right then and during the remaining
term of the option to receive the same acquisition consideration received by
the Company's other shareholders.
The Board of Directors may amend, suspend, or terminate the Executive
Deferral Plan or any Stock Option Award Notice under the Plan at any time,
except that it may condition amendments or modifications on shareholder
approval if necessary or advisable because of tax, securities, or other
applicable laws, policies, or regulations. No amendment, modification, or
termination will adversely affect any outstanding options or Interest Accounts
without the consent of the participating executive.
Other Plans
Waddell & Reed Financial, Inc. Savings and Investment Plan (formerly the
United Investors Management Company Savings and Investment Plan). This plan
will be amended and restated, effective as of a date no sooner than the date
of the Offering, to rename it the Waddell & Reed Financial, Inc. Savings and
Investment Plan, bring it into compliance with recent legislative and
regulatory changes, and change the investment options available to
participants. Effective as of the same date as the adoption of this plan,
assets and liabilities related to the following categories of current and
former employees will be transferred from the plan to the Torchmark
Corporation Savings and Investment Plan: (i) current and former employees of
UILIC who have an account balance under this plan, (ii) current employees of
WRAMCO employed in the marketing division; and (iii) former employees of the
Company or one of its affiliates who are currently employed by Torchmark or
its affiliates. Effective as of the same date, the Torchmark Corporation
Savings and Investment Plan will also transfer to the Waddell & Reed
Financial, Inc. Savings And Investment Plan assets and liabilities related to
former employees of Torchmark or its affiliates who are currently employees of
the Company. The Waddell & Reed Financial, Inc. Savings and Investment Plan is
a tax-qualified, defined contribution plan that allows eligible employees of
the Company to contribute up to 16% of compensation, as described below, on an
after-tax basis. Employees of the Company are eligible to begin contributing
to the plan after completing one year of service. The Company makes a matching
contribution to the Plan, on behalf of each employee who elects to
participate, equal to 50% of the participant's contributions up to the first
6% of compensation. The plan defines compensation as total compensation
(including amounts deferred pursuant to a cafeteria plan under (S) 125 of the
Code) less annual service awards and other non-cash prizes, deferred
compensation, director's fees, expense reimbursements or allowances, and
amounts in excess of $150,000 per year (as adjusted). Participants may invest
their account balances in a Torchmark stock fund or one or more of 15 mutual
funds that are sponsored by the Company and made available under the plan.
Effective no sooner than the date of the Offering, participants may elect to
invest their account balances in Class A Common Stock. Effective as of this
same date, participants will be permitted
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to make investment transfers out of the Torchmark stock fund but will not be
permitted to make transfers into it. Cash dividends on stock held in the
Torchmark stock fund will be reinvested in Torchmark common stock. The plan
permits investment transfers to take place up to eight times per year.
Transfers take effect during the valuation period that begins after the
valuation period during which a change is requested. There are 24 semi-monthly
valuation periods under the plan. Participants may receive in-service
distributions from their accounts under the plan. Distributions are also
available upon normal retirement (age 65), disability, death, or termination
of employment before normal retirement age. Upon the occurrence of this latter
event, only the vested portion of the matching contributions account is
distributable. The vesting schedule is a graded six-year schedule, beginning
at 20% at two years of service and increasing in 20% increments per year of
service until six years of service have been completed.
Waddell & Reed Financial, Inc. Retirement Income Plan (formerly the United
Investors Management Company Retirement Income Plan). This plan will be
amended and restated, effective as of a date no sooner than the date of the
Offering, to rename it the Waddell & Reed Financial, Inc. Retirement Income
Plan and bring it into compliance with recent legislative and regulatory
changes. Effective upon adoption of this plan, assets and liabilities related
to the following categories of employees will be transferred to the Torchmark
Corporation Pension Plan: (i) existing employees of WRAMCO employed in the
marketing division and (ii) former employees of the Company who are currently
employed by Torchmark or its affiliates. Effective as of the same date, the
Torchmark Corporation Pension Plan will also transfer to the Waddell & Reed
Financial, Inc. Retirement Income Plan assets and liabilities related to
former employees of Torchmark or its affiliates who are currently employees of
the Company. The plan is a tax-qualified, non-contributory pension plan that
covers all eligible employees of the Company who are 21 years of age or older
and have one or more years of credited service. The benefits under the plan
are determined by multiplying the average of the participant's earnings in the
five consecutive years in which they were highest during the last ten years
before the participant's retirement by a percentage equal to 2% for each year
of credited service up to 30 years and by 1% for each year of credited service
for the next ten years and then reducing that result by a Social Security
offset and by other benefits from certain other plans of the Company and
Torchmark or its affiliates. Earnings for purposes of the plan do not include
bonuses or commissions (other than for Regional Vice Presidents, and Division
Managers), directors' fees, expense reimbursements, employer contributions to
retirement plans, deferred compensation, or any amounts in excess of $150,000
per year (as adjusted). Benefits under the plan vest 100% after five years.
Upon the participant's retirement, benefits under the plan are payable as an
annuity or in a lump sum.
Waddell & Reed, Inc. Career Field Retirement Plan. Until January 1, 1973,
Company employees participated in the Waddell & Reed, Inc. Career Field
Retirement Plan. Under this plan, the Company contributed annually up to 10%
of its profits less forfeitures, which were allocated to the participants on
the basis of their compensation. Voluntary employee contributions were
permitted under the plan but not required. Since January 1, 1973, no new
participants have been admitted to the plan, and participants and the employer
make no further contributions. All participants are fully vested. Upon the
participant's retirement, termination of employment, disability, death, or
reaching age 65, his account is used to purchase an annuity or is paid in a
lump sum. Benefits paid under the plan do not offset benefits paid under any
other pension plan.
Control Group Issues. Following the consummation of the Offering, the
Company will continue to be a member of the Torchmark controlled group, within
the meaning of (S) 414(b) of the Code, and will continue to be treated as a
trade or business under common control with Torchmark, within the meaning of
(S) 414(c) of the Code. All members of a controlled group or group of trades
or businesses under common control are required to be treated as one employer
for purposes of many of the Code's provisions relating to tax qualification,
such as (S) 401 (nondiscrimination in benefits and various other
nondiscrimination rules), (S) 410 (coverage rules), (S) 411 (benefit accrual
and vesting rules), (S) 415 (maximum benefit rules), and (S) 416 (top-heavy
rules). Application of these rules may require a change of benefits, coverage,
or structure of the Company's qualified plans in order to maintain the
qualified status of the plans.
Continuing Interrelationships with Torchmark. Both the Company's and
Torchmark's qualified plans will continue to pay benefits to former employees
of Torchmark who were entitled to benefits under the predecessor
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plans maintained by the Company (except to the extent that assets and
liabilities related to such benefits are spun off to other qualified plans of
Torchmark). For example, employees of Torch Energy Advisors Incorporated who
participated in the Company's plans prior to January 1, 1996, will continue to
be entitled to receive benefit payments under the Company's tax-qualified
plans.
CONVERSION OF TORCHMARK EQUITY COMPENSATION TO CLASS A COMMON STOCK OF THE
COMPANY
As of February 2, 1998, there are outstanding options (the "Torchmark
Options") to purchase 7,250,218 shares of common stock of Torchmark
Corporation granted by Torchmark to officers, directors, and employees of
Torchmark Corporation and its affiliates, including the Company, under various
Torchmark Corporation stock compensation plans (the "Torchmark Plans"). It is
currently anticipated that in connection with the Spin-Off existing Torchmark
Options will be adjusted (the "Adjusted Torchmark Options") and the Company
will provide for the issuance of options (the "Conversion Options") to
purchase Class A Common Stock to the holders of outstanding Torchmark Options
(except for options granted December 24, 1997). The Company and Torchmark will
then provide (i) holders of Torchmark Options that are employees of the
Company an election to receive either solely Conversion Options or a
combination of Conversion Options and Adjusted Torchmark Options in a ratio
that is reflective of the pro rata distribution of Class A Common Stock to
Torchmark stockholders in the Spin-Off and (ii) holders of Torchmark Options
who are employees of Torchmark an election to receive either solely Adjusted
Torchmark Options or a combination of Conversion Options and Adjusted
Torchmark Options in a ratio that is reflective of the pro rata distribution
of Class A Common Stock to Torchmark stockholders in the Spin-Off. The number
of options that the option holder will be entitled to receive and respective
exercise prices will be determined so that (i) the ratio of the exercise price
of each of the Conversion Options and the Adjusted Torchmark Options to the
market value of their respective underlying common stock will not be less than
the ratio of the exercise price of Torchmark Options to the underlying market
value of the Torchmark Corporation common stock immediately prior to the Spin-
Off and (ii) the aggregate intrinsic value of the Conversion Options and
Adjusted Torchmark Options (the difference between the aggregate exercise
price and aggregate market value of the underlying stock) will not exceed the
aggregate intrinsic value inherent in Torchmark Options immediately prior to
the Spin-Off. The Company and Torchmark reserve the right to adjust the
foregoing procedures as it deems necessary in its sole discretion so that the
purposes of the conversion are effected in a manner suitable to the Company
and Torchmark. All other terms and conditions of the options issued in the
conversions described above will be the same as the original options.
As of the date of the closing of the Offering, Messrs. Tucker, Herrmann, and
Hechler will be able to elect to convert deferrals of bonus for 1997 under TMK
Executive Deferral Plan into options to purchase Class A Common Stock at a
formula price set forth in such plan. Also as of the date of the closing of
the Offering, Messrs. Lanier, McCormick, and Records will be able to elect to
convert Torchmark Options (covering an aggregate of approximately 30,586
shares of Torchmark common stock) received by them as a result of deferrals,
and Mr. Hagopian will be entitled to convert the cash balance of his interest
account ($48,000 principal amount, plus interest) of director compensation for
1998 under Torchmark's non-employee director plan into options to purchase
Class A Common Stock. Such options to purchase Class A Common Stock will vest
on the original schedule provided for in the Torchmark plans. The number of
shares to be subject to such options and the exercise price for the options to
purchase Class A Common Stock will be computed in a manner consistent with the
conversions referred to above. Finally, as of the date of the closing of the
Offering, 48,000 shares of restricted stock of Torchmark Corporation
previously issued to Mr. Tucker pursuant to a Torchmark stock plan will be
converted into a number of shares of Restricted Stock under the Stock
Incentive Plan equal to 48,000 times the market value of the Torchmark
Corporation common stock divided by the offering price of the Class A Common
Stock. Such shares of Restricted Stock will vest on the original schedule,
which provides for ratable vesting over four years from the date of grant.
As of the date of this Prospectus, it is not possible to determine how many
shares of Class A Common Stock will be issued in the conversions described
above. It is probable that holders of Class A Common Stock will experience
dilution as a result of such conversions. Holders of Torchmark Options are not
contractually bound to make either election outlined above.
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Solely as an example of the potential dilution that could result to holders
of Class A Common Stock, assuming that (i) the market value per share of
Torchmark Corporation common stock is $42.00 (its closing price on the NYSE on
February 11, 1997); (ii) the market value per share of the Class A Common
Stock after giving effect to the Spin-Off is $21.00 (the mid-point in the
range of the offering price set forth on the cover page of this Prospectus);
and (iii) the market value per share of the Torchmark Corporation common stock
after giving effect to the Spin-Off reflects the assumed value of the Class A
Common Stock; and (iv) all persons eligible to receive Class A Common Stock
options elect to receive the maximum available, then the conversions described
above would result in the issuance of options to purchase approximately
4,618,663 shares of Class A Common Stock with an average exercise price of
approximately $14.452 per share. The foregoing example is for purposes of
illustration only, and represents only the Company's and Torchmark's present
intentions. Actual results of the conversions described above could vary.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a summary of certain arrangements between the Company and
Torchmark. Although the Company believes that these arrangements embody terms
and conditions no less favorable to the Company than could be obtained in
negotiations between independent parties, these arrangements were established
before the Offering and were not the subject of arm's-length negotiations. See
"Risk Factors--Relationship with Torchmark" and "Risk Factors--Conflicts of
Interest Between the Company and Torchmark."
RELATIONSHIP WITH TORCHMARK
Intercompany Debt. From 1981 until the Offering, the Company has been a
subsidiary of Torchmark. The Company, in keeping with Torchmark's strategy for
its subsidiaries, paid virtually all of its earnings to Torchmark as
dividends. In November 1997, the Company paid Torchmark a dividend of
unsecured promissory notes in the original aggregate principal amount of
approximately $480 million that mature on November 25, 2002 and bear interest
at an annual rate of 8%, of which approximately $390 million was payable to
Liberty (the "Second Liberty Note") and approximately $90 million was payable
to Torchmark Corporation (the "Torchmark Note"). The Torchmark Note and the
Second Liberty Note are mandatorily prepayable from any capital raised from
any public or private offering of debt or equity securities, including the
Offering. The Torchmark Note and the Second Liberty Note were issued to permit
Torchmark to withdraw the Company's surplus earnings plus a portion of
Torchmark's capital investment in the Company.
The Company is also indebted to Liberty under the First Liberty Note, a
promissory note dated December 23, 1996, originally in the aggregate principal
amount of approximately $124 million, that matures on May 1, 2000 and bears
interest at an annual rate of 6%. The First Liberty Note was issued in
connection with an intercompany funding arrangement with Liberty and Torchmark
Corporation.
The Torchmark Note, the First Liberty Note, and the Second Liberty Note
constitute the "Notes." Prior to the Offering, the Company will prepay the
outstanding amounts remaining under the Notes to the extent necessary so that
the remaining aggregate principal amount of the Notes equals the greater of
$428 million or the net proceeds of the Offering (including net proceeds to be
realized from any exercise of the over-allotment option in excess of $35.0
million). If the net proceeds of the Offering (assuming no exercise of the
Underwriters' over-allotment option) are less than $428 million, an amount
equal to the difference between $428 million and such net proceeds will remain
an obligation of the Company.
Spin-Off. From 1981 until the Offering, the Company has been a subsidiary of
Torchmark. After the consummation of the Offering, the Company will continue
to be controlled by Torchmark, which will own more than 80% of the combined
voting power of the Class A Common Stock and the Class B Common Stock of the
Company. The holders of Class A Common Stock and Class B Common Stock have
identical rights except that (i) holders of Class A Common Stock are entitled
to one vote per share while holders of Class B Common Stock are entitled to
five votes per share on all matters to be voted on by stockholders and (ii)
holders of Class A Common Stock are not eligible to vote on matters relating
exclusively to Class B Common Stock and vice versa. Torchmark Corporation has
advised the Company that, subject to certain conditions, Torchmark currently
intends to divest its ownership interest in the Company by means of the Spin-
Off. Torchmark has advised the Company that it expects to complete the Spin-
Off in the last quarter of 1998. Conditions to the Spin-Off include the
receipt by Torchmark of a ruling by the Internal Revenue Service to the effect
that such dividend will qualify as a tax-free distribution under (S) 355 of
the Code and receipt of necessary regulatory approvals to the Spin-Off and
related transactions. There can be no assurance that such conditions will be
fulfilled or waived by Torchmark, nor can there be any assurance that, in any
event, the Spin-Off will occur or that Torchmark will not sell or otherwise
dispose of its Class A Common Stock and Class B Common Stock. See "Risk
Factors--Uncertainty of Planned Spin-Off of the Company."
Several purposes underlie the Spin-Off. Torchmark, in keeping with its
strategy for its subsidiaries, has caused the Company to pay virtually all of
its earnings to Torchmark as dividends. The Company desires to be able to
devote substantially more of its earnings to support its future growth. In
addition, the Company believes that its future growth would be enhanced if it
is able to set compensation and other policies for its core business on a
separate basis from Torchmark. Also, in keeping with the strategy of enhancing
shareholder value,
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Torchmark desires to access the capital markets and has determined that
raising funds through the completion by the Company of a public offering of
its Class A Common Stock will maximize value to Torchmark and its
shareholders. The Offering will allow the Company to pay down the Notes and
thereby allow Torchmark to realize cash proceeds from its investment in the
Company. In the event that the Spin-Off is effected, holders of record of the
common stock of Torchmark Corporation as of the record date will be entitled
to receive a dividend of Common Stock without payment of further
consideration. The Company expects, however, that the market value of
Torchmark Corporation common stock will diminish after the Spin-Off dividend
is effected to reflect the value of the shares of Common Stock distributed in
the Spin-Off.
The following are summaries of the Affiliate Agreements. Reference should be
made to the Affiliate Agreements themselves, which have been filed as exhibits
to the Registration Statement of which this Prospectus is part.
Public Offering and Separation Agreement. The Company and Torchmark have
agreed in principle to a public offering and separation agreement (the
"Separation Agreement") setting forth the parties' agreements with respect to
the Offering, the Spin-Off, and certain relationships of the parties prior to
and following the Offering.
The Separation Agreement provides for certain conditions precedent to the
parties obligation to consummate the Offering, including, that as of the date
of the Offering, Liberty, a wholly owned subsidiary of Torchmark (which,
before the Offering, owns more than 80% of the outstanding Common Stock and,
after the Offering and the Recapitalization will own more than 80% of the
voting power of the Common Stock) must control (within the meaning of (S)(S)
355 and 368(c) of the Code) the Company, all other conditions to permit the
Spin-Off to qualify as a tax-free distribution to Torchmark and the
shareholders of Torchmark, must, to the extent applicable as of the time of
the Offering, be satisfied, and there must be no event or condition that is
likely to cause any of the foregoing not to be satisfied as of the time of the
Spin-Off. Among other conditions, the Board of Directors of Torchmark
Corporation must also have determined that the terms of the Offering are
acceptable to Torchmark. Subject to the satisfaction of certain conditions,
Torchmark has agreed to effect the Spin-Off as promptly as practicable after
October 1, 1998. The Company and Torchmark have agreed that the Board of
Directors of Torchmark Corporation will have the sole discretion to determine
whether to waive any stated condition. The Spin-Off is conditioned upon, among
other things, the receipt of a private letter ruling from the Internal Revenue
Service that the Spin-Off will qualify as a tax-free distribution for Federal
income tax purposes under (S) 355 of the Code, which ruling must be in form
and substance satisfactory to Torchmark in its sole discretion. The Spin-Off
is also conditioned upon the absence of, since December 31, 1997, any material
adverse change and Torchmark and the Company must have complied with all
conditions set forth in the ruling with respect to the business or financial
condition of Torchmark or any other event or development which the Board of
Directors of Torchmark Corporation determines, in its sole discretion, makes
the Spin-Off not in the best interest of Torchmark and its stockholders. The
Company has agreed that if the Spin-Off does not occur on or before March 31,
1999, Torchmark will have the right at any time after such date but prior to
March 31, 2002 to cause the Company to use its best efforts to register the
shares of Class A Common Stock and Class B Common Stock held by Torchmark for
resale under the Securities Act, subject to certain conditions and
limitations. The Company has also agreed that if it files a registration
statement for the sale of securities (except with respect to registration
statements on Form S-4 or Form S-8 or another form available for registration
of securities other than for sale to the public for cash) before December 31,
2002, Torchmark may, subject to certain conditions and limitations, include in
such registration statement shares of Class A Common Stock and Class B Common
Stock held by Torchmark.
Under the Separation Agreement, each of Torchmark Corporation and the
Company will indemnify the other in the event of certain liabilities,
including, liabilities arising under the Securities Act or the Exchange Act.
Additionally, each of the Company and Torchmark Corporation have agreed to
indemnify the other for certain liabilities relating to (i) their respective
businesses, (ii) any individual employed by such company or its affiliates on
the date the Offering is completed, except to the extent such person was
acting solely as an officer, director, or employee of the other company or the
other company's affiliates, or (iii) any authorized accountants, counsel,
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or other designated representative of the company or any of the company's
affiliates, in each case, whether relating to or arising out of occurrences
prior to, on, or after the date the Offering is completed. The Separation
Agreement also provides that the Company will indemnify Torchmark for tax
liabilities with respect to the Spin-Off that result from certain errors or
omissions in written statements that the Company has furnished or will furnish
to Torchmark in connection with this Registration Statement or the private
letter ruling request and related supplements to be filed with the Internal
Revenue Service regarding the Spin-Off.
Torchmark and the Company have agreed to continue joint coverage under
certain insurance policies following the Offering until the earlier of the
renewal date of the relevant policies or the date of the Spin-Off.
The Company has agreed that between the date the Offering is completed and
the date of the Spin-Off, the Company will not issue any shares of stock or
enter into a binding obligation to do so if the effect would be that Torchmark
would not control the Company within the meaning of (S) 355 and (S) 368(c) of
the Code.
Tax Disaffiliation Agreement. The Company and Torchmark have entered into a
tax disaffiliation agreement (the "Tax Disaffiliation Agreement") providing
for the allocation of responsibility between the Company and its subsidiaries
(the "Company Group") and Torchmark and its affiliates other than the Company
and its subsidiaries (the "Torchmark Group") for (i) the filing of tax
returns, (ii) tax liabilities for taxable periods, before and after the
Offering, (iii) the conduct of tax audits and the handling of tax
controversies, and (iv) various related matters. Under the Tax Disaffiliation
Agreement, the Company will be responsible for, and will hold each member of
the Torchmark Group harmless on an after tax basis against, any liability for
taxes attributable to any member of the Company Group with respect to periods
before and after the Offering other than tax liabilities, if any, with respect
to the Offering (including the recognition of certain deferred intercompany
gains at the close of the Offering), the Spin-Off, the distributions of the
stock of WRAMCO by certain members of the Company Group and the Torchmark
Group on September 30, 1997 (the "WRAMCO Spin-Off") and certain other
transactions (collectively, the "Restructuring Transactions"). However, the
Company will be responsible for any tax liability of the Company Group or the
Torchmark Group with respect to a Restructuring Transaction caused by or
resulting from a breach by any member of the Company Group of certain
agreements made in the Tax Disaffiliation Agreement or certain of the
representations, warranties, or agreements set forth in the private letter
ruling request and supplements filed with the Internal Revenue Service with
respect to the Spin-Off, but only to the extent that the Torchmark Group in
the aggregate is liable for more taxes than it would have been had such breach
not occurred. In the event that such tax liabilities with respect to a
Restructuring Transaction were to become payable by the Company, such payment
could have a material adverse effect on the Company. The Company will be
entitled to any tax refund that is attributable to both an entity and a
taxable year or period for which the Company has tax liability under the Tax
Disaffiliation Agreement. No member of the Company Group may carry back any
net operating loss from a tax period after the Offering to a tax period before
the Offering. Members of the Company Group may carry back any credit or other
tax attribute attributable to a member of the Company Group from a tax period
after the Offering to a tax period before the Offering and receive a payment
related to the associated tax benefit, unless such carry back results in a
material detriment to any member of the Torchmark Group. Torchmark has full
responsibility and discretion to file tax returns for periods during which the
Company Group and the Torchmark Group are included in the same consolidated
group for federal income tax purposes or the same consolidated, combined, or
unitary returns for state, local, or foreign tax purposes.
Services to WRAMCO. In September 1997, the Company distributed all of the
capital stock of WRAMCO to Torchmark by means of a dividend. WRAMCO provides
investment advisory services to pension funds and to Torchmark. The Company
effected the WRAMCO dividend, in part, to separate its pension fund marketing
activities from its investment management and mutual fund distribution
activities. Prior to the date of the Offering, the Company, through a wholly
owned subsidiary, has provided advisory services to WRAMCO, to support
WRAMCO's investment advisory services to pension funds and to Torchmark.
Pursuant to an Investment Services Agreement, a subsidiary of the Company will
continue to provide investment advisory services to WRAMCO to support WRAMCO's
advisory services provided to its pension fund clients and to Torchmark. Such
advisory services relating to Torchmark will be primarily limited to advice
relating to the management of
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high yield portfolio accounts, emerging market accounts, and certain other
types of accounts, and the advisory fee will be based on a percentage of net
assets, with such percentage believed to approximate market. The agreement may
be terminated by either party upon 30 days notice.
Prior to the Offering, the Company provided certain services to WRAMCO.
Pursuant to a Services Agreement, the Company will continue to provide certain
services to WRAMCO such as legal services. The Company will also continue to
provide certain other services to WRAMCO, including, among others, data
processing services and mail services pursuant to an oral agreement. The
Company will receive payment for such services based on the costs actually
incurred on a time and materials basis. The Company estimates that the
aggregate revenues it will receive from its relationship with WRAMCO will
constitute approximately 2.5% of the Company's total revenues in 1998.
Agent Agreements. The Company will continue to have the right to distribute
variable annuities and life insurance products, Medicare supplement, and long
term care insurance underwritten by Torchmark. The current General Agent
Contract (relating to variable annuities and life insurance products) and the
current Independent Agent Contract (relating to Medicare supplement and long
term care insurance) between such parties entered into prior to the Offering
will each be extended through December 31, 1998 on their current terms.
Additionally, the Company will continue to serve as an Underwriter for
Torchmark pursuant to a letter agreement which establishes a distribution
arrangement and a Principal Underwriting Agreement, which terms will also be
extended through December 31, 1998. Aggregate revenues under these agreements
constitute approximately 12.7% of the Company's total revenue in 1997.
Partnership. As of December 31, 1997, TMK Income Properties, L.P. , a
partnership in which Torchmark holds a majority interest, owed the Company
approximately $1,426,136 pursuant to a promissory note bearing interest at a
rate of 8% per annum with a maturity date of December 31, 2002. The Company
intends to reduce the amount of the note by approximately $900,000 in
consideration of certain real property the Company will receive and use for
parking and future expansion. In addition, the Company will provide certain
maintenance services pursuant to a Maintenance Agreement with TMK Income
Properties, L.P., which services generated approximately $66,000 in revenues
in 1997.
Any future material transactions between the Company and Torchmark and its
affiliates will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties on an arm's-length basis and would be
approved by a majority of the Company's independent and disinterested
directors. The Company's Board of Directors will be advised in advance of any
such proposed transactions that are material to the Company and will utilize
such procedures in evaluating their terms and provisions as are appropriate in
light of the Board's fiduciary duties under state law. Depending on the nature
and size of the particular transaction, in any such review the Board may rely
on management's knowledge, utilize outside experts or consultants, secure
appraisals, refer to industry statistics or prices or take such other actions
as are appropriate under the circumstances. The Certificate of Incorporation
contains provisions that address certain potential conflicts of interest
between Torchmark and the Company. See "Description of Capital Stock--
Certificate of Incorporation and Bylaw Provisions--Corporate Opportunity and
Conflicts of Interest Policy."
UILIC
The Company formerly held all of the issued and outstanding capital stock of
UILIC. The Company has declared and paid the UILIC Dividend. The Company
effected the UILIC Dividend in order to divest itself of insurance operations
to enable the Company to focus on its core business of investment management
and distribution.
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PRINCIPAL STOCKHOLDER
Before the Offering, all of the outstanding Common Stock will be owned by
Torchmark. After the Recapitalization and consummation of the Offering,
Torchmark will beneficially own approximately 27% of the Class A Common Stock
(approximately 25% if the Underwriters' over-allotment option is exercised in
full) and all of the Class B Common Stock then outstanding. Except as
described above, the Company is not aware of any other person or group that
will beneficially own more than 5% of the outstanding shares of Common Stock
after the Offering.
The following table lists each person that, to the knowledge of the Company,
is the beneficial owner of more than five percent of the outstanding common
stock of Torchmark Corporation as of December 31, 1997.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS NUMBER OF SHARES(1) CLASS
---------------- ------------------- ----------
<S> <C> <C>
AMVESCAP PLC 9,255,730 6.6%
11 Devonshire Square
London EC2M 4YR
England
</TABLE>
- --------
(1) All stock reported is held by holding companies (AVZ, Inc., AIM Management
Group, Inc., AMVESCAP Group Services, Inc., INVESCO, Inc., INVESCO North
America Holdings, Inc., and INVESCO Capital Management, Inc.) and
investment advisors (INVESCO Capital Management, Inc. and INVESCO Funds
Group, Inc.) that are subsidiaries of AMVESCAP PLC. These entities share
the voting and the dispositive power over the shares and have disclaimed
beneficial ownership of such stock.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 150,000,000 shares
of Class A Common Stock, 100,000,000 shares of Class B Common Stock, and
5,000,000 shares of Preferred Stock. No Preferred Stock is outstanding as of
the date of this Prospectus. Of the Class A Common Stock authorized,
29,675,000 shares will be outstanding upon consummation of the Offering;
7,975,000 held by Torchmark and 21,700,000 shares are being offered in the
Offering (23,870,000 shares if the Underwriters' over-allotment option is
exercised in full). 16,300,000 shares have been reserved for issuance pursuant
to certain employee benefits plans. See "Management--Compensation, Benefits,
and Retirement Plans." Of the 100,000,000 shares of Class B Common Stock
authorized, 34,325,000 will be outstanding and held by Torchmark upon
consummation of the Offering. The following summary description of the capital
stock of the Company is qualified by reference to the Certificate of
Incorporation and Bylaws of the Company, copies of which are filed as exhibits
to the Registration Statement.
COMMON STOCK
Voting Rights. The holders of Class A Common Stock and Class B Common Stock
have identical rights except that (i) holders of Class A Common Stock are
entitled to one vote per share while holders of Class B Common Stock are
entitled to five votes per share on all matters to be voted on by stockholders
and (ii) holders of Class A Common Stock are not eligible to vote on any
alteration or change in the powers, preferences, or special rights of the
Class B Common Stock or vice versa. Holders of shares of Class A Common Stock
and Class B Common Stock are not entitled to cumulate their votes in the
election of directors. Generally, all matters to be voted on by stockholders
must be approved by a majority (or, in the case of election of directors, by a
plurality) of the votes entitled to be cast by all shares of Class A Common
Stock and Class B Common Stock present in person or represented by proxy,
voting together as a single class, subject to any voting rights granted to
holders of any Preferred Stock. Except as otherwise provided by law, and
subject to any voting rights granted to holders of any outstanding Preferred
Stock, amendments to the Company's Certificate of Incorporation generally must
be approved by a majority of the combined voting power of all Class A Common
Stock and Class
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B Common Stock voting together as a single class. Amendments to the Company's
Certificate of Incorporation that would alter or change the powers,
preferences, or special rights of the Class A Common Stock or the Class B
Common Stock so as to affect them adversely also must be approved by a
majority of the votes entitled to be cast by the holders of the shares
affected by the amendment, voting as a separate class. Notwithstanding the
foregoing, any amendment to the Company's Certificate of Incorporation to
increase the authorized shares of any class or classes of stock will be deemed
not to affect adversely the powers, preferences, or special rights of the
Class A Common Stock or Class B Common Stock.
Dividends. Holders of Class A Common Stock and Class B Common Stock will
receive an equal amount per share in any dividend declared by the Board of
Directors, subject to any preferential rights of any outstanding Preferred
Stock. Dividends consisting of shares of Class A Common Stock and Class B
Common Stock may be paid only as follows: (i) shares of Class A Common Stock
may be paid only to holders of Class A Common Stock and shares of Class B
Common Stock may be paid only to holders of Class B Common Stock and (ii)
shares will be paid proportionally with respect to each outstanding share of
Class A Common Stock and Class B Common Stock.
Other Rights. On liquidation, dissolution, or winding up of the Company,
after payment in full of the amounts required to be paid to holders of
Preferred Stock, if any, all holders of Common Stock, regardless of class, are
entitled to share ratably in any assets available for distribution to holders
of shares of Common Stock. No shares of Common Stock are subject to redemption
or have preemptive rights to purchase additional shares of Common Stock. Upon
consummation of the Offering, all the outstanding shares of Class A Common
Stock and Class B Common Stock will be validly issued, fully paid, and
nonassessable.
PREFERRED STOCK
As of the date of this Prospectus, no shares of Preferred Stock are
outstanding. The Board of Directors may authorize the issuance of Preferred
Stock in one or more series and may determine, with respect to any such
series, the designations, powers, preferences, and rights of such series, and
its qualifications, limitations, and restrictions, including, without
limitation, (i) the designation of the series; (ii) the number of shares of
the series, which number the Board of Directors may thereafter (except where
otherwise provided in the designations for such series) increase or decrease
(but not below the number of shares of such series then outstanding); (iii)
whether dividends, if any, will be cumulative or noncumulative and the
dividend rate of the series; (iv) the conditions upon which and the dates at
which dividends, if any, will be payable, and the relation that such
dividends, if any, will bear to the dividends payable on any other class or
classes of stock; (v) the redemption rights and price or prices, if any, for
shares of the series; (vi) the terms and amounts of any sinking fund provided
for the purchase or redemption of shares of the series; (vii) the amounts
payable on and the preferences, if any, of shares of the series, in the event
of any voluntary or involuntary liquidation, dissolution, or winding up of the
affairs of the Company; (viii) whether the shares of the series will be
convertible into shares of any other class or series, or any other security,
of the Company or any other corporation, and, if so, the specification of such
other class or series or such other security, the conversion price or prices
or rate or rates, any adjustments thereof, the date or dates as of which such
shares will be convertible and all other terms and conditions upon which such
conversion may be made; and (ix) the voting rights, if any, of the holders of
shares of such series.
The Company believes that the ability of the Board of Directors to issue one
or more series of Preferred Stock will provide the Company with flexibility in
structuring possible future financings and acquisitions and in meeting other
corporate needs that might arise. The authorized shares of Preferred Stock
will be available for issuance without further action by the Company's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. The New York Stock Exchange, Inc. (the
"NYSE") currently requires stockholder approval as a prerequisite to listing
shares in several instances, including where the present or potential issuance
of shares could result in an increase in the number of shares of common stock
outstanding, or in the amount of voting securities outstanding, of at least
20%.
Although the Board of Directors has no current intention of doing so, it
could issue a series of Preferred Stock that could, depending on the terms of
such series, impede the completion of a merger, tender offer, or
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other takeover attempt. The Board of Directors will make any determination to
issue such shares based on its judgment as to the best interests of the
Company and its stockholders. The Board of Directors, in so acting, could
issue Preferred Stock having terms that could discourage a potential acquirer
from making, without first negotiating with the Board of Directors, an
acquisition attempt through which such acquirer may be able to change the
composition of the Board of Directors, including a tender offer or other
transaction that some, or a majority, of the Company's stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then current market price of such stock.
BUSINESS COMBINATION STATUTE
As a corporation organized under the laws of the State of Delaware, the
Company will be subject to (S) 203 of the DGCL, which restricts certain
business combinations between the Company and an "interested stockholder" (in
general, a stockholder owning 15% or more of the Company's outstanding voting
stock) or its affiliates or associates for a period of three years following
the time that the stockholder becomes an "interested stockholder." The
restrictions do not apply if (i) prior to an interested stockholder becoming
such, the Board of Directors approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder; (ii) upon consummation of the transaction that resulted in any
person becoming an interested stockholder, such interested stockholder owns at
least 85% of the voting stock of the Company outstanding at the time the
transaction commenced (excluding shares owned by certain employee stock
ownership plans and persons who are both directors and officers of the
Company); or (iii) at or subsequent to the time an interested stockholder
becomes such, the business combination is both approved by the Board of
Directors and authorized at an annual or special meeting of the Company's
stockholders, not by written consent, by the affirmative vote of at least 66
2/3% of the outstanding voting stock not owned by the interested stockholder.
Because Torchmark became an interested stockholder at a time when the
restrictions did not apply, the restrictions will not apply to any business
combination with Torchmark.
Under certain circumstances, (S) 203 of the DGCL makes it more difficult for
a person who would be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
under (S) 203. The Certificate of Incorporation of the Company does not
exclude the Company from the restrictions imposed under (S) 203 of the DGCL.
It is anticipated that the provisions of (S) 203 of the DGCL may encourage
companies interested in acquiring the Company to negotiate in advance with the
Board of Directors, since the stockholder approval requirement would be
avoided if a majority of the directors then in office approves, prior to the
date on which a stockholder becomes an interested stockholder, either the
business combination or the transaction that results in the stockholder
becoming an interested stockholder.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The summary set forth below describes certain provisions of the Certificate
of Incorporation and Bylaws. The summary is qualified in its entirety by
reference to the provisions of the Certificate of Incorporation and Bylaws,
copies of which will be filed as exhibits to the Registration Statement of
which this Prospectus forms a part.
Certain of the provisions of the Certificate of Incorporation and Bylaws
discussed below may have the effect, either alone or in combination with the
provisions of (S) 203 discussed above, of making more difficult or
discouraging a tender offer, proxy contest, or other takeover attempt that is
opposed by the Board of Directors but that a stockholder might consider to be
in such stockholder's best interest. Those provisions include (i) the
classification of the Company's Board of Directors; (ii) restrictions on the
rights of stockholders to remove or elect directors; and (iii) prohibitions
against stockholders calling a special meeting of stockholders or acting by
unanimous written consent in lieu of a meeting. In addition, the Certificate
of Incorporation contains provisions relating to the allocation of certain
corporate opportunities and resolution of certain potential conflicts of
interest. See "--Corporate Opportunity and Conflict of Interest Policies."
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Classified Board; Number of Directors; Removal; Filling Vacancies
The Certificate of Incorporation and Bylaws of the Company provide that the
Board of Directors--except for directors who may be elected by the holders of
Preferred Stock--will be divided into three classes of directors, initially
with four directors in two of the classes and two directors in the third
class. See "Management--Directors and Executive Officers." One class is to be
originally elected for a term expiring at the annual meeting of stockholders
to be held in 1999, another class is to be originally elected for a term
expiring at the annual meeting of stockholders to be held in 2000, and another
class is to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 2001. Each director is to hold office until his or
her successor is duly elected and qualified. Commencing with the 1999 annual
meeting of stockholders, directors elected to succeed directors whose terms
then expire will be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election, with each
director to hold office until such person's successor is duly elected and
qualified.
The Certificate of Incorporation provides that, subject to any rights of
holders of Preferred Stock to elect directors under specified circumstances,
the number of directors will be fixed from time to time exclusively pursuant
to a resolution adopted by directors constituting a majority of the total
number of directors that the Company would have if there were no vacancies on
the Board of Directors (the "Whole Board"), with the Whole Board consisting of
not more than 15 nor less than seven directors. The Certificate of
Incorporation also provides that, subject to any rights of holders of
Preferred Stock or any other series or class of stock, and unless the Board of
Directors otherwise determines, any vacancies will be filled only by the
affirmative vote of a majority of the remaining directors, even if less than a
quorum. Accordingly, absent an amendment to the Certificate of Incorporation,
the Board of Directors could prevent any stockholder from enlarging the Board
of Directors and filling the new directorships with such stockholder's own
nominees.
The Certificate of Incorporation and Bylaws of the Company provide that,
subject to the rights of holders of Preferred Stock to elect directors under
specified circumstances, effective as of the date on which Torchmark
beneficially owns less than a majority of the Voting Stock (as defined below)
(the "Trigger Date"), directors may be removed only for cause and only upon
the affirmative vote of holders of at least 80% of the voting power of all the
then outstanding shares of stock entitled to vote generally in the election of
directors ("Voting Stock"), voting together as a single class. Before the
Trigger Date, directors may be removed, without cause, with the affirmative
vote of the holders of at least a majority of the voting power of the then
outstanding Voting Stock, voting together as a single class.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Board of
Directors. At least two annual meetings of stockholders, instead of one, will
generally be required to effect a change in a majority of the Board of
Directors. Such a delay may help ensure that the Company's directors, if
confronted by a holder attempting to force a proxy contest, a tender or
exchange offer, or an extraordinary corporate transaction, would have
sufficient time to review the proposal as well as any available alternatives
to the proposal and to act in what they believe to be the best interest of the
stockholders. The classification provisions will apply to every election of
directors, however, regardless of whether a change in the composition of the
Board of Directors would be beneficial to the Company and its stockholders and
whether or not a majority of the Company's stockholders believe that such a
change would be desirable. The classification provisions could also have the
effect of discouraging a third party from initiating a proxy contest, making a
tender offer or otherwise attempting to obtain control of the Company, even
though such an attempt might be beneficial to the Company and its
stockholders. The classification of the Board of Directors could thus increase
the likelihood that incumbent directors will retain their positions. In
addition, because the classification provisions may discourage accumulations
of large blocks of the Company's stock by purchasers whose objective is to
take control of the Company and remove a majority of the Board of Directors,
the classification of the Board of Directors could tend to reduce the
likelihood of fluctuations in the market price of the Common Stock that might
result from accumulations of large blocks. Accordingly, stockholders could be
deprived of certain opportunities to sell their shares of Common Stock at a
higher market price than might otherwise be the case.
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No Stockholder Action By Written Consent; Special Meetings
The Certificate of Incorporation and Bylaws provide that, effective as of
the Trigger Date, and subject to the rights of any holders of Preferred Stock
to elect additional directors under specified circumstances, stockholder
action can be taken only at an annual or special meeting of stockholders and
stockholder action may not be taken by written consent in lieu of a meeting.
The Bylaws provide that, subject to the rights of holders of any series of
Preferred Stock to elect additional directors under specified circumstances,
special meetings of stockholders can be called only by the Board of Directors
pursuant to a resolution adopted by a majority of the Whole Board or the
Chairman of the Board, except that prior to the Trigger Date, special meetings
can also be called at the request of the holders of a majority of the voting
power of the then outstanding Voting Stock. Effective as of the Trigger Date,
stockholders will not be permitted to call a special meeting or to require
that the Board of Directors call a special meeting of stockholders. Moreover,
the business permitted to be conducted at any special meeting of stockholders
is limited to the business brought before the meeting pursuant to the notice
of meeting given by the Company.
The provisions of the Certificate of Incorporation and Bylaws of the Company
prohibiting stockholder action by written consent and permitting special
meetings to be called only by the Chairman or at the request of a majority of
the Whole Board may have the effect, after the Trigger Date, of delaying
consideration of a stockholder proposal until the next annual meeting. The
provisions would also prevent the holders of a majority of the voting power of
the Voting Stock from unilaterally using the written consent procedure to take
stockholder action. Moreover, a stockholder could not force stockholder
consideration of a proposal over the opposition of the Chairman or a majority
of the Whole Board by calling a special meeting of stockholders prior to the
time such parties believe such consideration to be appropriate.
Liability of Directors; Indemnification
The Certificate of Incorporation provides that a director will not be
personally liable for monetary damages to the Company or its stockholders for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) for paying a dividend or
approving a stock repurchase in violation of (S) 174 of the DGCL; or (iv) for
any transaction from which the director derived an improper personal benefit.
Any amendment or repeal of such provision will not adversely affect any right
or protection of a director existing under such provision for any act or
omission occurring prior to such amendment or repeal.
The Certificate of Incorporation provides that the Company will indemnify
any person who was or is a party to any threatened, pending, or completed
action, suit, or proceeding because he or she is or was a director or officer
of the Company, or is or was serving at the request of the Company as a
director or officer of another corporation, partnership, or other enterprise.
The Certificate of Incorporation provides that this indemnification will be
from and against expenses, judgments, fines, and amounts paid in settlement by
the indemnitee. However, this indemnification will only be provided if the
indemnitee acted in good faith and in a manner he or she reasonably believed
to be in, or not opposed to, the best interests of the Company.
Corporate Opportunity and Conflict of Interest Policies
In order to address certain potential conflicts of interest between the
Company and Torchmark, the Certificate of Incorporation contains provisions
concerning the conduct of certain affairs of the Company as they may involve
Torchmark and its subsidiaries (other than the Company and its subsidiaries)
and their respective officers and directors, and the powers, rights, duties,
and liabilities of the Company and its subsidiaries and their respective
officers, directors, and stockholders in connection therewith. In general,
these provisions recognize that the Company and Torchmark may engage in the
same or similar business activities and lines of business and have an interest
in the same areas of corporate opportunities and that the Company and
Torchmark will continue to have contractual and business relations with each
other (including service of officers and directors of Torchmark as directors
of the Company). See "Management--Directors and Executive Officers."
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For purposes of these provisions, the terms "Company" and "Torchmark"
include their subsidiaries and other entities in which they respectively
beneficially own, directly or indirectly, 50% or more of the outstanding
voting securities or interests (except that "Torchmark" does not include the
Company and its subsidiaries and such other entities), and, in the case of
Torchmark, all successors to Torchmark by way of merger, consolidation, or
sale of all or substantially all its assets.
The Certificate of Incorporation provides that any person purchasing or
otherwise acquiring any interest in any shares of capital stock of the Company
will be deemed to have notice of and to have consented to these provisions.
Before the Trigger Date, the affirmative vote of the holders of more than
80% of the outstanding Voting Stock, voting together as a single class, will
be required to alter, amend, or repeal any of these conflict of interest or
corporate opportunity provisions in a manner adverse to the interests of
Torchmark. After the Trigger Date, the conflict of interest and corporate
opportunity provisions will terminate.
Corporate Opportunity Policy. The Certificate of Incorporation provides
that, except as Torchmark may otherwise agree in writing, Torchmark will have
the right (i) to engage in the same or similar business activities or lines of
business as the Company; (ii) to do business with any potential or actual
client, customer, or supplier of the Company; and (iii) to employ or engage
any officer or employee of the Company. Neither Torchmark nor any officer or
director of Torchmark will be liable to the Company or its stockholders for
breach of any fiduciary duty by reason of these activities.
If Torchmark acquires knowledge of a potential transaction or matter that
may be a corporate opportunity for both Torchmark and the Company, Torchmark
will have no duty to communicate that opportunity to the Company. Furthermore,
Torchmark will not be liable to the Company or its stockholders because
Torchmark pursues or acquires such corporate opportunity for itself, directs
that corporate opportunity to another person or entity, or does not present
that corporate opportunity to the Company.
If a director or officer of the Company who is also a director or officer of
Torchmark acquires knowledge of a potential transaction or matter that may be
a corporate opportunity for both the Company and Torchmark, the Certificate of
Incorporation requires that the director or officer of the Company act in good
faith in accordance with the following three-part policy, and a director or
officer so acting will be deemed to have acted reasonably and in good faith
and fully to have satisfied his or her duties of loyalty and fiduciary duties
to the Company and its stockholders with respect to such opportunity.
First, a corporate opportunity offered to any person who is a director but
not an officer of the Company and who is also an officer (whether or not a
director) of Torchmark will belong to Torchmark, unless the opportunity is
expressly offered to that person primarily in his or her capacity as a
director of the Company, in which case the opportunity will belong to the
Company.
Second, a corporate opportunity offered to any person who is an officer
(whether or not a director) of the Company and who is also a director but not
an officer of Torchmark will belong to the Company, unless the opportunity is
expressly offered to that person primarily in his or her capacity as a
director of Torchmark, in which case the opportunity will belong to Torchmark.
Third, a corporate opportunity offered to any other person who is either an
officer of both the Company and Torchmark or a director of both the Company
and Torchmark will belong to Torchmark or to the Company, as the case may be,
if the opportunity is expressly offered to the person primarily in his or her
capacity as an officer or director of Torchmark or of the Company,
respectively. Otherwise, the opportunity will belong to Torchmark.
Under the Certificate of Incorporation, any corporate opportunity that
belongs to Torchmark or to the Company pursuant to the foregoing policy will
not be pursued by the other (or directed by the other to another person or
entity) unless and until Torchmark or the Company, as the case may be,
determines not to pursue the
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opportunity. If the party to whom the corporate opportunity belongs does not,
however, within a reasonable period of time, begin to pursue, or thereafter
continue to pursue, such opportunity diligently and in good faith, the other
party may pursue such opportunity (or direct it to another person or entity).
A director or officer of the Company who acts in accordance with the
foregoing three-part policy (i) will be deemed fully to have satisfied his or
her fiduciary duties to the Company and its stockholders with respect to such
corporate opportunity; (ii) will not be liable to the Company or its
stockholders for any breach of fiduciary duty by reason of the fact that
Torchmark pursues or acquires such opportunity for itself or directs such
corporate opportunity to another person or entity or does not communicate
information regarding such opportunity to the Company; (iii) will be deemed to
have acted in good faith and in a manner he or she reasonably believes to be
in the best interests of the Company; and (iv) will be deemed not to have
breached his or her duty of loyalty to the Company or its stockholders and not
to have derived an improper benefit therefrom.
Under the Certificate of Incorporation, "corporate opportunities"
potentially allocable to the Company consist of business opportunities that
(i) the Company is financially able to undertake; (ii) are, from their nature,
in the Company's line or lines of business and are of practical advantage to
the Company; and (iii) are ones in which the Company has an interest or
reasonable expectancy. In addition, "corporate opportunities" do not include
transactions in which the Company or Torchmark is permitted to participate
pursuant to any agreement between the Company and Torchmark that is in effect
as of the time any equity security of the Company is held of record by any
person other than Torchmark or subsequently entered into with the approval of
the disinterested directors.
For purposes of these corporate-opportunity provisions, a director of the
Company who is chairman of the Board of Directors (or a committee thereof) or
chief executive officer will not be deemed to be an officer of the Company by
reason of holding such position, unless such person is a full-time employee of
the Company.
Conflict of Interests Policy. The Certificate of Incorporation provides that
no contract, agreement, arrangement, or transaction between the Company and
Torchmark or any customer or supplier or any entity in which a director of the
Company has a financial interest (a "Related Entity"), or between the Company
and one or more of the directors or officers of the Company, Torchmark, or any
Related Entity; any amendment, modification, or termination thereof; or any
waiver of any right thereunder, will be voidable solely because Torchmark or
such customer or supplier, any Related Entity, or any one or more of the
officers or directors of the Company, Torchmark, or any Related Entity are
parties thereto, or solely because any such directors or officers are present
at or participate in the meeting of the Board of Directors or committee
thereof that authorizes the contract, agreement, arrangement, transaction,
amendment, modification, termination, or waiver (each, a "Transaction") or
solely because their votes are counted for such purpose, if the standard
specified is satisfied. That standard will be satisfied, and Torchmark, the
Related Entity, and the directors and officers of the Company, Torchmark, or
the Related Entity (as applicable) will be deemed to have acted reasonably and
in good faith (to the extent such standard is applicable to such person's
conduct) and fully to have satisfied any duties of loyalty and fiduciary
duties they may have to the Company and its stockholders with respect to such
Transaction if any of the following four requirements are met:
(i) the material facts as to the relationship or interest and as to the
Transaction are disclosed or known to the Board of Directors or the
committee thereof that authorizes the Transaction, and the Board of
Directors or such committee in good faith approves the Transaction by the
affirmative vote of a majority of the disinterested directors on the Board
of Directors or such committee, even if the disinterested directors are
less than a quorum;
(ii) the material facts as to the relationship or interest and as to the
Transaction are disclosed or known to the holders of Voting Stock entitled
to vote thereon, and the Transaction is specifically approved by vote of
the holders of a majority of the voting power of the then outstanding
Voting Stock not owned by Torchmark or such Related Entity, voting together
as a single class;
(iii) the Transaction is effected pursuant to guidelines that are in good
faith approved by a majority of the disinterested directors on the Board of
Directors or the applicable committee thereof or by vote of the holders of
a majority of the then outstanding Voting Stock not owned by Torchmark or
such Related Entity, voting together as a single class; or
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(iv) the Transaction is fair to the Company as of the time it is approved
by the Board of Directors, a committee thereof or the stockholders of the
Company.
The Certificate of Incorporation also provides that any such Transaction
authorized, approved, or effected, and each of such guidelines so authorized
or approved, as described in (i), (ii), or (iii) above, will be deemed to be
entirely fair to the Company and its stockholders, except that, if such
authorization or approval is not obtained, or such Transaction is not so
effected, no presumption will arise that such Transaction or guideline is not
fair to the Company and its stockholders. In addition, the Certificate of
Incorporation provides that Torchmark will not be liable to the Company or its
stockholders for breach of any fiduciary duty that Torchmark may have as a
stockholder of the Company by reason of the fact that Torchmark takes any
action in connection with any transaction between Torchmark and the Company.
LISTING
The Class A Common Stock has been approved for listing, subject to official
notice of issuance, on the NYSE under the trading symbol "WDR."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is First Chicago Trust
Company of New York.
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SHARES ELIGIBLE FOR FUTURE SALE
Before the Offering, there has been no market for the Common Stock of the
Company. Future sales or distributions of substantial amounts of Common Stock
in the public market could adversely affect prevailing market prices.
Torchmark has advised the Company that it intends to effect the Spin-Off,
subject to conditions. See "Certain Relationships and Related Transactions--
Relationship with Torchmark--Spin-Off."
Upon completion of the Offering, the Company will have 29,675,000 shares of
Class A Common Stock issued and outstanding (31,845,000 Shares of Class A
Common Stock if the Underwriters' over-allotment option is exercised in full)
and 34,325,000 shares of Class B Common Stock issued and outstanding. All of
the shares of Class A Common Stock to be sold in the Offering will be freely
tradable without restrictions, or further registration under the Securities
Act, except that shares purchased by an "affiliate" of the Company (as that
term is defined in Rule 144 (an "Affiliate")) will be subject to the resale
limitations of Rule 144. None of the outstanding shares of Common Stock owned
by Torchmark has been registered under the Securities Act, and may be sold
only pursuant to an effective registration statement under the Securities Act
or in accordance with Rule 144 or another exemption from registration
("Restricted Shares").
The Restricted Shares will constitute "restricted securities" within the
meaning of Rule 144 promulgated under the Securities Act and will be eligible
for sale in the open market after the Offering subject to the Lock-Up
Agreement and applicable requirements of Rule 144 described below. For as long
as Torchmark is able to cause a majority of the Company's Board of Directors
to be elected, it will be able to require the Company at any time to register
under the Securities Act all or a portion of the Common Stock owned by it, in
which event such shares could be sold publicly upon the effectiveness of any
such registration without restriction. In addition, under the Affiliate
Agreements, Torchmark will have the right to require the Company to use its
best efforts to register for sale its shares of Common Stock and to include
such shares of Common Stock in certain registration statements. See "Certain
Relationships and Related Transactions--Relationship with Torchmark."
In general, under Rule 144 as currently in effect, if a period of at least
one year has elapsed between the later of the date on which "restricted
shares" (as that phrase is defined in Rule 144) were acquired from the Company
and the date on which they were acquired from an Affiliate, then the holder of
such restricted shares (including an Affiliate) is entitled to sell a number
of shares within any three-month period that does not exceed the greater of
(i) one percent of the then outstanding shares of the Common Stock or (ii) the
average weekly reported volume of trading of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain requirements pertaining to the manner of such sales, notices of such
sales, and the availability of current public information concerning the
Company. Because Torchmark will be deemed to have held its shares of Common
Stock for more than one year, Torchmark will be able to sell its shares of
Common Stock in the public markets without registration immediately upon
expiration of the Lock-Up Agreement, subject to the foregoing volume limits.
Affiliates may sell shares not constituting restricted shares in accordance
with the foregoing volume limitations and other requirements but without
regard to the one-year period. Under Rule 144(k), if a period of at least two
years has elapsed between the later of the date on which restricted shares
were acquired from the Company and the date on which they were acquired from
an Affiliate, a holder of such restricted shares who is not an Affiliate at
the time of the sale and has not been an Affiliate for at least three months
prior to the sale would be entitled to sell the shares immediately without
regard to the volume limitations and other conditions described above. The
foregoing description of Rule 144 is not intended to be complete, and Rule 144
in its entirety should be referred to.
Sales of significant amounts of the Class A Common Stock or Class B Common
Stock, or the perception that such sales could occur, could have an adverse
effect on the market price of the Class A Common Stock. Torchmark has advised
the Company that, subject to certain conditions, it currently intends to
divest its ownership of Common Stock by means of the Spin-Off. Torchmark will
own more than 66% of the outstanding Common Stock after the Offering. The
Spin-Off as currently proposed could be effected without registration under
the Securities Act and without regard to the limitations of Rule 144. Each of
the Company and Torchmark have agreed that during the period beginning on the
date of this Prospectus and continuing to and including the
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date 180 days after the date of this Prospectus, it will not offer, sell,
contract to sell, or otherwise dispose of any shares of Class A Common Stock
or Class B Common Stock (other than pursuant to employee benefit plans
existing, or on conversion or exchange of convertible or exchangeable
securities outstanding, on the date of this Prospectus or as payment for
acquisitions by the Company) without the prior written consent of Morgan
Stanley & Co. Incorporated, except for the shares of Class A Common Stock
offered in connection with the Offering. See "Underwriters."
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States Federal
income and estate tax considerations with respect to the ownership and
disposition of Class A Common Stock applicable to Non-U.S. Holders. In
general, a "Non-U.S. Holder" is any holder other than (i) a citizen or
resident of the United States; (ii) a corporation or partnership created or
organized in the United States or under the laws of the United States or of
any state; (iii) an estate, the income of which is includable in gross income
for United States federal income tax purposes regardless of its source; or
(iv) a trust if (a) a court within the United States is able to exercise
primary supervision over the administration of the trust and (b) one or more
United States persons have the authority to control all substantial decisions
of the trust. This discussion is based on current law, which is subject to
change (possibly with retroactive effect), and is for general information
only. This discussion does not address all aspects of income and estate
taxation or any aspects of state, local or non-United States taxes, nor does
it consider any specific facts or circumstances that may apply to a particular
Non-U.S. Holder (including certain U.S. expatriates). ACCORDINGLY, PROSPECTIVE
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES
FEDERAL, STATE, LOCAL, AND NON-UNITED STATES INCOME AND OTHER TAX
CONSIDERATIONS OF HOLDING AND DISPOSING OF SHARES OF CLASS A COMMON STOCK.
DIVIDENDS
In general, dividends paid to a Non-U.S. Holder will be subject to United
States withholding tax at a 30% rate of the gross amount (or a lower rate
prescribed by an applicable income tax treaty) unless the dividends are either
(i) effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States or (ii) if certain income tax treaties apply,
attributable to a permanent establishment in the United States maintained by
the Non-U.S. Holder. Dividends effectively connected with such a United States
trade or business or attributable to such a United States permanent
establishment generally will not be subject to United States withholding tax
if the Non-U.S. Holder files certain forms, including Internal Revenue Service
Form 4224, with the payor of the dividend, and generally will be subject to
United States federal income tax on a net income basis, in the same manner as
if the Non-U.S. Holder were a resident of the United States. A Non-U.S. Holder
that is a corporation may be subject to an additional branch profits tax at a
rate of 30% (or such lower rate as may be specified by an applicable income
tax treaty) on the repatriation from the United States of its "effectively
connected earnings and profits," subject to certain adjustments. To determine
the applicability of a tax treaty providing for a lower rate of withholding
under the currently effective Treasury Regulations (the "Current
Regulations"), dividends paid to an address in a foreign country are presumed
to be paid to a resident of that country absent knowledge to the contrary.
Under Treasury Regulations issued on October 6, 1997 (the "Final
Regulations"), generally effective for payments made after December 31, 1998,
a Non-U.S. Holder (including, in certain cases of Non-U.S. Holders that are
entities, the owner or owners of such entities) will be required to satisfy
certain certification requirements in order to claim a reduced rate of
withholding pursuant to an applicable income tax treaty.
GAIN OR SALE OR OTHER DISPOSITION OF CLASS A COMMON STOCK
In general, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon the sale or other disposition of such
holder's shares of Class A Common Stock unless (i) the gain either is
effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States or, if certain income tax treaties apply, is
attributable to a permanent establishment in the United States maintained by
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the Non-U.S. Holder (and, in either case, the branch profits tax discussed
above may also apply if the Non-U.S. Holder is a corporation); (ii) the Non-
U.S. Holder is an individual who holds shares of Class A Common Stock as a
capital asset and is present in the United States for 183 days or more in the
taxable year of disposition and certain other tests are met; or (iii) the
Company is or has been a United States real property holding corporation (a
"USRPHC") for United States Federal income tax purposes (which the Company
does not believe that it has been, currently is, or will become) at any time
within the shorter of the five-year period preceding such disposition or such
Non-U.S. Holder's holding period. If the Company were or were to become a
USRPHC at any time during this period, gains realized upon a disposition of
Class A Common Stock by a Non-U.S. Holder that did not directly or indirectly
own more than 5% of the Class A Common Stock during this period generally
would not be subject to United States Federal income tax, provided that the
Class A Common Stock is regularly traded on an established securities market.
ESTATE TAX
Class A Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as defined for United States Federal estate tax purposes)
of the United States at the time of death will be includable in the
individual's gross estate for United States Federal estate tax purposes unless
an applicable estate tax treaty provides otherwise, and therefore may be
subject to United States Federal estate tax.
BACKUP WITHHOLDING, INFORMATION REPORTING, AND OTHER REPORTING REQUIREMENTS
The Company must report annually to the Internal Revenue Service and to each
Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply
regardless of whether withholding was reduced or eliminated by an applicable
tax treaty. Copies of this information also may be made available under the
provisions of a specific treaty or agreement with the tax authorities in the
country in which the Non-U.S. Holder resides or is established.
Under the Current Regulations, United States backup withholding tax (which
generally is imposed at the rate of 31% on certain payments to persons that
fail to furnish the information required under the United States information
reporting requirements) and information reporting requirements (other than
those discussed above under "Dividends") generally will not apply to dividends
paid on Class A Common Stock to a Non-U.S. holder at an address outside the
United States. Backup withholding and information reporting generally will
apply, however, to dividends paid on shares of Class A Common Stock to a Non-
U.S. Holder at an address in the United States, if such holder fails to
establish an exemption or to provide certain other information to the payor.
Under the Current Regulations, the payment of proceeds from the disposition
of Class A Common Stock to or through a United States office of a broker will
be subject to information reporting and backup withholding unless the
beneficial owner, under penalties of perjury, certifies, among other things,
its status as a Non-U.S. Holder or otherwise establishes an exemption. The
payment of proceeds from the disposition of Class A Common Stock to or through
a non-U.S. office of a broker generally will not be subject to backup
withholding and information reporting except as noted below. In the case of
proceeds from a disposition of Class A Common Stock paid to or through a non-
U.S. office of a broker that is (i) a United States person; (ii) a "controlled
foreign corporation" for United States Federal income tax purposes; or (iii) a
foreign person 50% or more of whose gross income from certain periods is
effectively connected with a United States trade or business, information
reporting (but not backup withholding) will apply unless the broker has
documentary evidence in its files that the owner is a Non-U.S. Holder (and the
broker has no actual knowledge to the contrary).
Under the Final Regulations, the payment of dividends or the payment of
proceeds from the disposition of Class A Common Stock to a Non-U.S. Holder may
be subject to information reporting and backup withholding unless such
recipient satisfies applicable certification requirements or otherwise
establishes an exemption.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to a Non-U.S. Holder will be refunded
or credited against the Non-U.S. Holder's United States Federal income tax
liability, if any, provided that the required information is furnished to the
Internal Revenue Service in a timely manner.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this Prospectus (the "Underwriting Agreement"),
the U.S. Underwriters named below for whom Morgan Stanley & Co. Incorporated,
Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated
are acting as U.S. Representatives, and the International Underwriters named
below for whom Morgan Stanley & Co. International Limited, Goldman Sachs
International, and Merrill Lynch International are acting as International
Representatives, have severally agreed to purchase, and the Company has agreed
to sell to them, severally, the respective number of shares of Class A Common
Stock set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated..................................
Goldman, Sachs & Co. ..............................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................................
----------
Subtotal......................................................... 17,360,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited.........................
Goldman Sachs International........................................
Merrill Lynch International........................................
----------
Subtotal......................................................... 4,340,000
----------
Total.......................................................... 21,700,000
==========
</TABLE>
The U.S. Underwriters and the International Underwriters, and the U.S.
Representatives and the International Representatives are collectively
referred to as the "Underwriters" and the "Representatives," respectively. The
Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to the approval of certain legal matters by
their counsel and to certain other conditions. The Underwriters are obligated
to take and pay for all of the shares of Class A Common Stock offered hereby
(other than those covered by the U.S. Underwriters' over-allotment option
described below) if any such shares are taken.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented and agreed that, with certain exceptions (i)
it is not purchasing any Shares (as defined below,) for the account of anyone
other than a United States or Canadian Person (as defined below) and (ii) it
has not offered or sold, and will not offer or sell, directly or indirectly,
any Shares or distribute any prospectus relating to Shares outside the United
States or Canada or to anyone other than a United States or Canadian Person.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that, with certain
exceptions (i) it is not purchasing any Shares for the account of any United
States or Canadian person and (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any Shares or distribute any prospectus
relating to the Shares in the United States or Canada or to any United States
or Canadian Person. With respect to any Underwriter that is a U.S. Underwriter
and an International Underwriter, the foregoing representations and agreements
(i) made by it in its capacity as a U.S. Underwriter apply only to it in its
capacity as a U.S. Underwriter and (ii) made by it in its capacity as an
International Underwriter apply only to it in its capacity as an International
Underwriter. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement
between the U.S. and International Underwriters. As used herein, "United
States or Canadian Person" means any national or resident of the United States
or Canada, or any corporation, pension, profit-sharing, or other trust or
other entity organized under the laws of the United States or Canada or of any
political subdivision thereof (other than a branch located outside the United
States and Canada of any United States or Canadian Person) and includes any
United States or
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Canadian branch of a person who is otherwise not a United States or Canadian
person. All shares of Class A Common Stock to be purchased by the Underwriters
are referred to herein as the "Shares."
Pursuant to the Agreement between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of
any number of Shares as may be mutually agreed. The per share price of any
Shares so sold will be the public offering price set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per
share amount of the concession to dealers set forth below.
Pursuant to the Agreement between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has
agreed not to offer or sell, any Shares, directly or indirectly, in any
province or territory of Canada or to, or for the benefit of, any resident of
any province or territory of Canada in contravention of the securities laws
thereof and has represented that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made.
Each U.S. Underwriter has further agreed to send to any dealer who purchases
from it any of the Shares a notice stating in substance that, by purchasing
such Shares, such dealer represents and agrees that it has not offered or
sold, and will not offer or sell, directly or indirectly, any of such Shares
in any province or territory of Canada or to, or for the benefit of, any
resident of any province or territory of Canada in contravention of the
securities laws thereof and that any offer or sale of Shares in Canada will be
made only pursuant to an exemption from the requirement to file a prospectus
in the province or territory of Canada in which such offer or sale is made,
and that such dealer will deliver to any other dealer to whom it sells any of
such Shares a notice containing substantially the same statement as is
contained in this sentence.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not
offered or sold and, prior to the date six months after the closing date for
the sale of the Shares to the International Underwriters, will not offer or
sell, any Shares to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing, or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances that have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995; (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the Shares in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and
will only issue or pass on in the United Kingdom any document received by it
in connection with the offering of the Shares to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document
may otherwise be lawfully issued or passed on.
Pursuant to the Agreement between U.S. and International Underwriters, each
International Underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the Shares acquired in
connection with the distribution contemplated hereby, except for offers or
sales to Japanese International Underwriters or dealers and except pursuant to
any exemption from the registration requirements of the Securities and
Exchange Law and otherwise in compliance with applicable provisions of
Japanese law. Each International Underwriter has further agreed to send to any
dealer who purchases from it any of the Shares a notice stating in substance
that, by purchasing such Shares, such dealer represents and agrees that it has
not offered or sold, and will not offer or sell, any of such Shares, directly
or indirectly, in Japan or to or for the account of any resident thereof
except for offers or sales to Japanese International Underwriters or dealers
and except pursuant to any exemption from the registration requirements of the
Securities and Exchange Law and otherwise in compliance with applicable
provisions of Japanese law, and that such dealer will send to any other dealer
to whom it sells any of such Shares a notice containing substantially the same
statement as is contained in this sentence.
The Underwriters initially propose to offer part of the Shares directly to
the public at the public offering price set forth on the cover page hereof and
part to certain dealers at a price that represents a concession not in
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excess of $ per share under the public offering price. Any Underwriter may
allow, and such dealers may reallow, a concession not in excess of $ per
share to other Underwriters or to certain dealers. After the initial offering
of the Shares, the offering price and other selling terms may from time to
time be varied by the Representatives.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days from the date of this Prospectus, to purchase up to an aggregate of
2,170,000 additional shares of Class A Common Stock at the price to public set
forth on the cover page hereof, less underwriting discounts and commissions.
The U.S. Underwriters may exercise such option solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
shares of Class A Common Stock offered hereby. To the extent such option is
exercised, each U.S. Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of such additional
shares of Class A Common Stock as the number set forth next to such U.S.
Underwriter's name in the preceding table bears to the total number of shares
of Class A Common Stock set forth next to the names of all U.S. Underwriters
in the preceding table.
The Underwriters have informed the Company that they do not intend for sales
to discretionary accounts to exceed five percent of the aggregate number of
shares of Class A Common Stock offered by them.
The Class A Common Stock has been approved for listing, subject to official
notice of issuance, on the NYSE under the trading symbol "WDR."
Each of the Company and Torchmark and each of the directors and executive
officers of the Company has agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of this Prospectus (the
"Lock-up Period"), (i) offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer, lend or dispose
of, directly or indirectly, any shares of Class A Common Stock or any
securities convertible into or exercisable or exchangeable for Class A Common
Stock or (ii) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
the Class A Common Stock whether any such transaction described in clause (i)
or (ii) above is settled by delivery of Class A Common Stock, or such other
securities, in cash or otherwise. The restrictions described in this paragraph
do not apply to (x) the sale of Shares to the Underwriters, (y) the issuance
by the Company of shares of Class A Common Stock upon the exercise of an
option or warrant or the conversion of a security outstanding on the date of
this Prospectus of which the Underwriters have been advised in writing, or (z)
transactions by any person other than the Company or Torchmark relating to
shares of Class A Common Stock or other securities acquired in open market
transactions after the completion of the Offering. The restrictions on the
Company and Torchmark are subject to exceptions for the issuance of Class A
Common Stock (A) pursuant to employee benefit plans and (B) as payment for
acquisitions by the Company, if all persons or entities receiving Shares
pursuant to this clause (B) agree to be subject to the restrictions in clauses
(i) and (ii) above for the remainder of the Lock-up Period.
In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain, or otherwise affect the price of the
Class A Common Stock. Specifically, the Underwriters may over-allot in
connection with the Offering, creating a short position in the Class A Common
Stock for their own account. In addition, to cover over-allotments or to
stabilize the price of the Class A Common Stock, the Underwriters may bid for,
and purchase, shares of Class A Common Stock in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an
Underwriter or a dealer for distributing the Class A Common Stock in the
Offering, if the syndicate repurchases previously distributed Class A Common
Stock in transactions to cover syndicate short positions, in stabilization
transactions, or otherwise. Any of these activities may stabilize or maintain
the market price of the Class A Common Stock above independent market levels.
The Underwriters are not required to engage in these activities, and may end
any of these activities at any time.
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From time to time, Morgan Stanley & Co. Incorporated has provided, and
continues to provide, investment banking services to Torchmark Corporation and
the Company.
Torchmark, the Company, and the Underwriters have agreed to indemnify each
other against certain liabilities, including liabilities under the Securities
Act.
DIRECTED SHARE PROGRAM
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to 1.25 million shares of the Class A
Common Stock (that will be offered by this Prospectus) for directors,
officers, employees, business associates, and related persons of the Company.
The number of shares of Class A Common Stock available for sale to the general
public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares that are not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares
offered hereby.
PRICING OF THE OFFERING
Prior to the Offering, there has been no public market for the Class A
Common Stock. The initial public offering price will be determined by
negotiations between Torchmark and the Company on the one hand and the U.S.
Representative on the other hand. Among the factors to be considered in
determining the initial public offering price will be the future prospects of
the Company and its industry in general, sales, earnings, and certain other
financial operating information of the Company in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
certain financial and operating information of companies engaged in activities
similar to those of the Company. The estimated initial public offering price
range set forth on the cover page of this Prospectus is subject to change as a
result of market conditions and other factors.
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for the Company by Hughes & Luce, L.L.P., Dallas, Texas. Certain
legal matters in connection with the sale of shares of Class A Common Stock in
the Offering will be passed upon for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31, 1996
and 1997, and for each of the years in the three-year period ended December
31, 1997 included in this Prospectus have been so included in reliance on the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (as amended from time to time and together with all exhibits and schedules
thereto, the "Registration Statement") under the Securities Act with respect
to the Class A Common Stock to be sold in the Offering. This Prospectus
constitutes a part of the Registration Statement and does not contain all the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance, reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respect
by such reference. For further information regarding the Company and the Class
A Common Stock, reference is hereby made to the
74
<PAGE>
Registration Statement, a copy of which may be obtained from the Commission at
its principal office in Washington, D.C. upon payment of the fees prescribed
by the Commission.
The Registration Statement, and the reports and other information to be
filed by the Company with the Commission following the Offering in accordance
with the Exchange Act, can be inspected and copied at the principal office of
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material may be obtained from the Commission's website,
http//www.sec.gov, and from the Public Reference Section of the Commission at
its principal office at 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of the fees prescribed by the Commission.
75
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF WADDELL & REED FINANCIAL, INC. AND
SUBSIDIARY
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997............. F-3
Consolidated Statements of Operations for the years ended December 31,
1995, 1996 and 1997..................................................... F-4
Consolidated Statements of Common Stockholder's Equity for the years
ended December 31, 1995, 1996 and 1997.................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Pro Forma Financial Statements........................................... F-18
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Waddell & Reed Financial, Inc.:
We have audited the accompanying consolidated balance sheets of Waddell &
Reed Financial, Inc. and subsidiaries, a subsidiary of Torchmark Corporation,
as of December 31, 1996 and 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Waddell &
Reed Financial, Inc. and subsidiaries as of December 31, 1996 and 1997 and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Kansas City, Missouri
January 30, 1998
F-2
<PAGE>
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Assets:
Cash and cash equivalents (note 2)........................ $ 59,003 73,820
Investment securities, available-for-sale (note 3)........ 19,980 18,977
Receivables:
United Funds and W&R Funds.............................. 3,579 4,031
Customers and other..................................... 11,986 11,840
Due from affiliates (note 6).............................. 13,320 17,232
Deferred income taxes (note 8)............................ 120 1,241
Prepaid expenses and other current assets................. 2,151 2,991
-------- --------
Total current assets.................................... 110,139 130,132
Due from affiliates (note 6).............................. 171,153 175,450
Property and equipment, net (note 4)...................... 10,392 12,058
Investment in real estate, net (note 5)................... 17,092 --
Investment in real estate partnership (note 5)............ -- 17,544
Deferred sales commissions, net........................... 10,439 12,316
Goodwill (net of accumulated amortization of $14,575 and
$17,479)................................................. 101,734 98,831
Other assets.............................................. 8,329 633
-------- --------
Total assets............................................ $429,278 446,964
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current liabilities:
Accounts payable.......................................... $ 24,832 22,929
Due to affiliates (note 6)................................ 2,428 102,459
Accrued salesforce compensation........................... 9,007 8,666
Income taxes payable...................................... 18,249 3,314
Other current liabilities................................. 8,146 18,525
-------- --------
Total current liabilities............................... 62,662 155,893
-------- --------
Due to affiliates (note 6)................................ 124,133 509,186
Deferred income taxes (note 8)............................ 947 2,246
Accrued pensions and post-retirement costs (notes 9 and
10)...................................................... 7,938 9,530
Other liabilities......................................... 1,043 --
-------- --------
Total liabilities....................................... 196,723 676,855
-------- --------
Stockholders' equity (note 7):
Common stock ($.01 par value; 42,300,000 shares
authorized,
issued and outstanding).................................. 423 423
Additional paid-in capital................................ 231,968 --
Retained earnings......................................... -- --
Dividends in excess of retained earnings and additional
paid-in capital -- (230,658)
Unrealized gain on available-for-sale securities.......... 164 344
-------- --------
Total stockholders' equity.............................. 232,555 (229,891)
-------- --------
Commitments, contingencies and subsequent events (notes 14
and 15)
Total liabilities and stockholders' equity.................. $429,278 446,964
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
(IN THOUSANDS, EXCEPT
FOR PER SHARE AMOUNT)
<S> <C> <C> <C>
Revenue (note 6):
Investment management fees.......................... $85,289 101,466 117,784
Underwriting and distribution fees:
United Funds and W&R Funds......................... 44,126 55,059 58,815
Affiliates......................................... 26,267 30,778 30,612
Shareholder service fees............................ 23,527 28,378 30,763
Investment and other revenue........................ 4,295 5,295 3,798
------- ------- -------
Total revenue..................................... 183,504 220,976 241,772
------- ------- -------
Expenses:
Underwriting and distribution....................... 64,082 78,915 79,995
Compensation and related costs...................... 21,304 21,913 26,618
General and administrative (note 6)................. 8,594 10,180 15,826
Depreciation........................................ 1,914 1,758 1,307
Amortization of goodwill............................ 2,903 2,903 2,903
------- ------- -------
Total expenses.................................... 98,797 115,669 126,649
------- ------- -------
Income before interest and income taxes........... 84,707 105,307 115,123
Interest (note 6)
Income.............................................. 3,886 4,072 11,323
Expense............................................. -- (186) (11,299)
------- ------- -------
Income before income taxes........................ 88,593 109,193 115,147
Income taxes (note 8)................................. 35,092 42,493 44,855
------- ------- -------
Net income........................................ $53,501 66,700 70,292
======= ======= =======
Pro forma net income per share:
Basic and diluted................................... $ 1.10
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WADDELL & REED FINANCIAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
-------------
DIVIDENDS IN
ADDITIONAL EXCESS OF
PAID-IN RETAINED RETAINED EARNINGS UNREALIZED TOTAL
CAPITAL EARNINGS AND ADDITIONAL GAIN (LOSS) ON STOCKHOLDER'S
SHARES AMOUNT (NOTE 7) (NOTE 7) PAID-IN CAPITAL INVESTMENT EQUITY (DEFICIT)
------ ------ ---------- -------- ----------------- -------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 42,300 $423 193,377 29,158 -- (666) 222,292
Net income.............. -- -- -- 53,501 -- -- 53,501
Contributions from
parent................. -- -- 10,581 -- -- -- 10,581
Other distributions
(note 6)............... -- -- -- (69,098) -- -- (69,098)
Unrealized gain on
investment securities.. -- -- -- -- -- 930 930
------ ---- -------- ------- -------- ---- --------
Balance at December 31,
1995................... 42,300 423 203,958 13,561 -- 264 218,206
Net income.............. -- -- -- 66,700 -- -- 66,700
Contributions from
parent................. -- -- 121,358 -- -- -- 121,358
Other distributions
(note 6)............... -- -- (93,348) (70,261) -- -- (163,609)
Cash dividends to
parent................. -- -- -- (10,000) -- -- (10,000)
Unrealized loss on
investment securities.. -- -- -- -- -- (100) (100)
------ ---- -------- ------- -------- ---- --------
Balance at December 31,
1996................... 42,300 423 231,968 -- -- 164 232,555
Net income.............. -- -- -- 70,292 -- -- 70,292
Contributions from
parent................. -- -- 47,980 -- -- -- 47,980
Other distributions
(note 6)............... -- -- (279,948) (18,627) (230,658) -- (529,233)
Cash dividends to
parent................. -- -- (51,665) -- -- (51,665)
Unrealized gain on
investment securities.. -- -- -- -- -- 180 180
------ ---- -------- ------- -------- ---- --------
Balance at December 31,
1997................... 42,300 $423 -- -- (230,658) 344 (229,891)
====== ==== ======== ======= ======== ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $53,501 66,700 70,292
Adjustments to reconcile net income to net
cash
provided by operating activities:
Depreciation and amortization............. 4,817 4,661 4,210
Gain on sale of investments............... (30) -- --
Loss on sale and retirement of fixed
assets................................... 59 311 65
Capital gains and dividends reinvested.... (60) (60) (78)
Deferred income taxes..................... (186) 827 27
Changes in assets and liabilities:
Receivables from funds.................. (1,606) 1,172 (452)
Other receivables....................... (1,836) 2,725 (1,195)
Due to/from affiliates--operating....... (660) 1,703 (4,217)
Other assets............................ (3,317) (9,913) (5,383)
Accounts payable........................ 7,488 (252) (1,883)
Other liabilities....................... 4,082 18,369 898
------- -------- -------
Net cash provided by operating activities..... 62,252 86,243 62,284
------- -------- -------
Cash flows from investing activities:
Additions to investments.................... (917) (116) (40)
Proceeds from sales of investments.......... 1,201 -- 1
Proceeds from maturity of investments....... 1,440 1,355 1,260
Purchase of property and equipment.......... (1,428) (1,689) (3,218)
Investment in real estate................... (312) (298) --
Other....................................... 25 18 50
------- -------- -------
Net cash provided by (used in) investing
activities................................... 9 (730) (1,947)
------- -------- -------
Cash flows from financing activities:
Cash dividends to parent.................... -- (10,000) (51,665)
Change in due to/from affiliates--
nonoperating............................... (60,040) (170,016) (37,888)
Cash contributions from parent.............. 13,236 111,718 44,033
------- -------- -------
Net cash used in financing activities......... (46,804) (68,298) (45,520)
------- -------- -------
Net increase in cash and cash equivalents..... 15,457 17,215 14,817
Cash and cash equivalents at beginning of
period....................................... 26,331 41,788 59,003
------- -------- -------
Cash and cash equivalents at end of period.... $41,788 59,003 73,820
======= ======== =======
Cash paid for income taxes.................... $33,084 43,667 65,754
======= ======== =======
</TABLE>
See notes 5, 6 and 7 for noncash investing and financing activities.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Waddell & Reed Financial, Inc. is owned by Torchmark Corporation and
Torchmark's subsidiary, Liberty National Life Insurance Company (Liberty).
Torchmark and its subsidiaries, other than Waddell & Reed Financial, Inc., are
referred to herein as "Torchmark." In December 1997, Waddell & Reed Financial,
Inc.'s name was changed from United Investors Management Company to Waddell &
Reed Financial, Inc. In the first quarter of 1998, the insurance operations of
Waddell & Reed Financial, Inc., United Investors Life Insurance Company, were
distributed to Torchmark. Waddell & Reed Financial, Inc.'s remaining
subsidiary is Waddell & Reed Financial Services, Inc. and its subsidiaries
(WRFS).
The accompanying financial statements include the accounts of Waddell & Reed
Financial, Inc. and WRFS (the Company) for all periods presented (note 7).
Amounts for UILIC have been excluded for all periods presented. All
significant intercompany accounts and transactions are eliminated in
consolidation.
Business
Through WRFS, the Company derives its revenue primarily from investment
management, administration, distribution and related services provided to the
United mutual funds and Waddell & Reed mutual funds (the Funds) and
institutional accounts in the United States. The Funds and institutional
accounts operate under various rules and regulations set forth by the
Securities and Exchange Commission (SEC). Services to the Funds are provided
under contracts that set forth the fees to be charged for these services. The
majority of these contracts are subject to annual review and approval by each
fund's Board of Directors/Trustees and stockholders. In 1997, the United
Income Fund represented approximately 16% of total revenues. No other fund
represented 10% or more of revenues. Company revenues are largely dependent on
the total value and composition of assets under management, which include
domestic and international equity and debt securities; accordingly,
fluctuations in financial markets and composition of assets under management
impact revenues and results of operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term investments.
The Company considers all highly liquid debt instruments with original
maturities of ninety days or less to be cash equivalents.
Revenue Recognition
Investment advisory and administrative service fees are recognized when
earned. Commission revenue and expenses (and related receivables and payables)
resulting from securities transactions are recorded on the date on which the
order to buy or sell securities is executed.
Advertising
Costs of advertising are expensed as incurred. Amounts charged to expense
were not significant for the years ended December 31, 1995, 1996 and 1997.
Investments Securities and Investment in Affiliated Mutual Funds
All investments in debt securities and affiliated stock and fixed income
mutual funds are classified as available-for-sale. As a result, these
investments are recorded at fair value. Unrealized holding gains and losses,
net of related tax effects, are excluded from earnings until realized and are
reported as a separate component of stockholders' equity. Realized gains and
losses are computed using the specific identification method for investment
securities other than mutual funds. For mutual funds, realized gains and
losses are computed using the average cost method.
F-7
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations
of credit risk, as defined by Statement of Financial Accounting Standards
(SFAS) No. 105, consist primarily of investments in U. S. government and
agency securities, municipal securities and affiliated money market and fixed
income mutual funds and accounts receivable. Credit risk is believed to be
minimal in that the U. S government and agency securities are backed by the
full faith and credit of the U. S. government, municipal securities are backed
by the full taxing power of the issuing municipality or revenues from a
specific project, and the affiliated mutual funds have substantial net assets.
Property and Equipment
Property and equipment are carried at cost. Depreciation on property and
equipment is calculated using the straight-line method over the estimated
useful lives of the assets.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, arose in connection with the acquisition of the Company
by Torchmark. Amortization is on a straight-line basis over forty years. The
Company assesses the recoverability of goodwill by determining whether the
unamortized balance can be recovered through undiscounted future operating
cash flows over its remaining life. Impairment, if any, is measured by the
excess of the unamortized balance over discounted future operating cash flows.
Deferred Sales Commissions
The Company defers certain costs, principally selling commissions, that are
paid to financial advisors in connection with the sale of certain shares of
Waddell & Reed mutual funds (W&R Funds). These costs are amortized on a
straight line basis over a period not exceeding ten years which approximates
the historical life of shareholder investments. The Company recovers such
costs through 12b-1 distribution fees, which are paid by the W&R Funds and a
contingent deferred sales charge paid by stockholders who redeem their shares
prior to completion of the required holding periods.
Income Taxes
The accounts of the Company are included in the consolidated federal income
tax return of Torchmark. The Company's provision for income taxes has been
made on the same basis as if the Company filed separate returns.
Disclosures About Fair Value of Financial Instruments
Given the nature of the Company's assets and liabilities, the Company
believes the amounts in the financial statements approximate fair value.
Pro Forma Net Income Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, which revised the calculation and presentation provisions of Accounting
Principles Board Opinion 15 and related interpretations. SFAS No. 128 became
effective for the Company's fiscal year ending December 31, 1997. Pro forma
basic and diluted net income per share amounts have been presented under SFAS
No. 128.
F-8
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma basic and diluted net income per share has been computed by
dividing net income, as adjusted to eliminate the after tax interest cost on
the Torchmark Notes, by 64,000,000 shares (the average number of shares
outstanding plus the number of shares, whose proceeds would be used to pay the
Torchmark and Liberty notes (note 6).) Diluted net income per share is the
same as basic net income per share as there are no dilutive securities.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Recent Accounting Developments
In 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. These statements, which are effective for periods beginning after
December 15, 1997, expand or modify disclosures. The Company does not expect
implementation to have any significant effect on the Company's reported
financial position, results of operations or segment reporting.
(2) CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 1996 and 1997 includes reserves of
$15,028,000 and $14,943,000, respectively, for the benefit of customers in
compliance with securities industry regulations and an investment of
$4,344,000 and $325,000, respectively, in a money market fund for which the
Company is principal underwriter and investment advisor. Substantially all
such reserves are in excess of federal deposit insurance limits. The money
market fund is uninsured.
(3) INVESTMENTS SECURITIES, AVAILABLE-FOR-SALE
Investments at December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
---- --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
United States government-backed
mortgage securities............... $ 5,925 32 (17) 5,940
Municipal bonds maturing:
After five years but within ten
years........................... 11,760 276 (42) 11,994
After ten years.................. 1,196 12 -- 1,208
Affiliated mutual funds............ 833 9 (4) 838
-------- --- --- ------
$ 19,714 329 (63) 19,980
======== === === ======
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
1997 COST GAINS LOSSES VALUE
---- --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
United States government-backed
mortgage securities............... $ 4,749 86 -- 4,835
Municipal bonds maturing:
Within five years................ 3,017 115 -- 3,132
After five years but within ten
years........................... 8,520 304 -- 8,824
After ten years.................. 1,186 3 (2) 1,187
Affiliated mutual funds............ 949 50 -- 999
-------- --- --- ------
$ 18,421 558 (2) 18,977
======== === === ======
</TABLE>
F-9
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1996 and 1997 is as
follows:
<TABLE>
<CAPTION>
ESTIMATED
1996 1997 USEFUL LIVES
---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land.................................... $ 1,717 1,717 --
Building................................ 6,242 6,257 40 years
Furniture and fixtures.................. 5,719 5,862 3-10 years
Equipment and machinery................. 6,186 7,859 3-10 years
------- --------
Property and equipment, at cost......... 19,864 21,695
Less accumulated depreciation........... 9,472 9,637
------- --------
Property and equipment, net............. $10,392 12,058
======= ========
(5) INVESTMENT IN REAL ESTATE
A summary of investment in rental real estate at December 31, 1996 is as
follows:
<CAPTION>
ESTIMATED
1996 USEFUL LIVES
---------- ------------
(IN
THOUSANDS)
<S> <C> <C>
Land.................................... $ 7,784 --
Buildings............................... 10,771 40 years
-------
Rental real estate, at cost............. 18,555
Less accumulated depreciation........... 1,463
-------
Rental real estate, net................. $17,092
=======
</TABLE>
Rental income of $1,409,000, $1,682,000 and $0 for the years ended December
31, 1995, 1996 and 1997, respectively, is included in investment and other
revenue. Depreciation expense for the years ended December 31, 1995, 1996 and
1997 was $367,000, $383,000 and $18,000, respectively.
Effective January 1, 1997, the Company contributed its investment in real
estate, which is located adjacent to its offices in Overland Park, Kansas, to
TMK Income Properties, L.P. (TMK) in exchange for a 14% limited partnership
interest in TMK. TMK is a limited partnership with other Torchmark affiliates
that was formed for the purpose of acquiring, developing and managing real
property. The property was transferred to TMK at the Company's net book value
as of December 31, 1996 in the amount of $11,961,000. Effective July 1, 1997,
the Company contributed additional land and land improvements for an
additional 5% interest in TMK. The land and improvements were transferred at
the Company's net book value in the amount of $5,113,000.
(6) TRANSACTIONS WITH RELATED PARTIES
The Company serves as investment advisor to various affiliates of Torchmark
and receives advisory fees for this service. Advisory fees, which are based on
assets under management, amounted to $800,000, $1,037,000 and $1,241,000 for
the years ended December 31, 1995, 1996 and 1997, respectively.
F-10
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company earns commissions from Torchmark for marketing life and health
insurance products and variable annuities. For the years ended December 31,
1995, 1996 and 1997, the commissions amounted to $26,267,000, $30,778,000 and
$30,612,000 respectively. These commissions were earned under contracts which
have been renewed for 1998 with substantially the same terms.
Torchmark performs certain administrative services for the Company. Charges
for such services which are allocated based on a defined formula that
allocates Torchmark's total costs for services provided based on each
affiliate's assets and compensation expense as a percentage of the total
affiliate assets and compensation expense. The Company believes the allocation
results in a reasonable allocation to the Company of costs. These charges were
$2,731,000, $2,189,000 and $2,008,000 for the years ended December 31, 1995,
1996 and 1997, respectively.
The current amounts due from affiliates at December 31, 1996 and 1997
include interest bearing notes from Torchmark, noninterest bearing advances
for current operating expenses and commissions due from the sale of
affiliates' products. At December 31, 1996 and 1997, the 5.5% demand notes
amounted to $11,672,000 plus accrued interest. At December 31, 1996 and 1997,
the noncurrent amounts due from affiliates include a $123,947,000 note
receivable from Torchmark, plus $186,000 and $1,239,000, respectively, of
accrued interest. The 6% note requires semiannual interest payments and
matures May 1, 2000. Also included in the noncurrent portion is a $40,000,000
note receivable from Torchmark, due November, 1999 with interest at 8.1%.
During 1995, 1996 and 1997, amounts due from Torchmark aggregating
$69,098,000, $163,609,000 and $38,124,000, respectively, were forgiven and
charged against stockholders' equity.
The current amounts due to affiliates at December 31, 1996 and 1997 include
amounts due for administrative services. Included in the 1996 and 1997
noncurrent due to affiliates balance is a $123,947,000 note payable to
Torchmark, plus $186,000 and $1,239,000, respectively, of accrued interest.
The 6% note requires semiannual interest payments and matures May 1, 2000.
Effective September 1997, Waddell & Reed Asset Management Company (WRAMCO),
a subsidiary of WRFS, was distributed to Torchmark at its net book value of
$2,977,000. WRAMCO provides investment management services to institutional
investors. Subsequent to the distribution date, WRFS provides advisory
investment management services to WRAMCO and receives a fee based upon assets
under management. The Company was paid $1,296,000 for investment advisory
services provided subsequent to the distribution date. The accompanying
financial statements include the amounts for WRAMCO. Subsequent to
distribution, the Company operates under a subadvisory agreement with WRAMCO
to provide approximately the same level of services as prior to the
distribution.
On November 25, 1997, the Company declared a $480,000,000 dividend evidenced
by two 8% promissory notes to Torchmark and Liberty. These notes are payable
on or before November 25, 2002 and require semiannual interest payments. Notes
aggregating $96,000,000 are due in 1998 and, accordingly, are classified in
the current portion of due to affiliates. The remaining $384,000,000 of these
notes is included in the long-term portion of due to affiliates. The notes are
mandatorily prepayable from the capital raised by the Company from a public or
private sale or offering of debt or equity securities.
The Company, at the direction of its parent, has engaged in inter-corporate
financings with affiliates. Such activities are not considered representative
of the Company's activities on an ongoing basis as the Company does not intend
to engage in inter-corporate financings other than on its own behalf in the
ordinary course of business. Accordingly, for purposes of the statement of
cash flows, inter-corporate financings have been reported in financing
activities as "change in due to/from affiliates - non-operating".
(7) STOCKHOLDERS' EQUITY
As discussed in note 1, the consolidated financial statements include only
amounts for the Company. Transactions involving former subsidiaries of Waddell
& Reed Financial, Inc., and Torchmark are reflected as due to/due from
affiliates. To the extent such transactions resulted in a gain or loss, such
amounts are reflected in additional paid-in capital or retained earnings.
F-11
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Retained earnings have been charged for dividends and other distributions to
the Company's parent to the extent such retained earnings were sufficient. The
excess has been charged to additional paid-in capital with the remainder
classified as dividends in excess of retained earnings and additional paid-in
capital.
(8) INCOME TAXES
The components of total income tax expense are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal............................................ $ 31,449 36,197 38,939
State.............................................. 3,829 5,469 5,889
-------- ------ ------
35,278 41,666 44,828
Deferred taxes....................................... (186) 827 27
-------- ------ ------
$ 35,092 42,493 44,855
======== ====== ======
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of deferred tax liabilities and deferred tax assets at December 31,
1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Deferred sales commissions................................ $(3,967) (4,680)
Fixed assets.............................................. (418) (824)
Other..................................................... (458) (500)
------- ------
Total gross deferred liabilities............................ (4,843) (6,004)
------- ------
Deferred tax assets:
Benefit plans............................................. 3,050 3,557
Accrued expenses.......................................... 966 1,442
------- ------
Total gross deferred assets................................. 4,016 4,999
------- ------
Net deferred tax liability.................................. $ (827) (1,005)
======= ======
</TABLE>
A valuation allowance for deferred tax assets was not necessary at December
31, 1996 and 1997.
The following table reconciles the statutory federal income tax rate to the
Company's effective income tax rate:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.......................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefits............ 2.9 3.1 3.3
Other items................................................ 1.7 .8 .7
---- ---- ----
Effective income tax rate.................................. 39.6% 38.9% 39.0%
==== ==== ====
</TABLE>
(9) RETIREMENT PLAN
The Company sponsors a noncontributory retirement plan which covers
substantially all employees and, prior to 1996, the employees of former
affiliates. As of December 31, 1995, former affiliates ceased participation in
the plan. Benefits payable under the plan are based on employees' years of
service and compensation during the final ten years of employment.
F-12
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996 and 1997, the assumed discount rate, the rate at which
the plan benefit obligations could be settled, was 7.5%. The estimated rate of
increase in future compensation levels used in determining the actuarial
present value of the projected benefit obligation was 4.5% for December 31,
1996 and 1997. The expected long-term rate of return on plan assets was 9.25%
at December 31, 1996 and 1997.
The Company's funding policy is to contribute annually the maximum amount
that can be deducted for federal income tax purposes. Contributions are
intended to provide not only for benefits attributed to service to date but
also for those expected to be earned in the future.
All plan assets are commingled and available for distribution to all
participating employees, and thus, net pension cost for 1995 includes the cost
for the Company as well as affiliates.
Net pension cost for all companies for the years ended December 31, 1995,
1996 and 1997 included the following components:
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period.... $2,365 1,304 1,511
Interest cost on projected benefit obligation...... 2,103 1,953 2,148
Actual return on plan assets....................... (3,626) (3,489) (4,102)
Net amortization and deferral...................... 2,078 1,679 1,987
------ ------ ------
Net periodic pension cost of all participating com-
panies............................................ $2,920 1,447 1,544
------ ------ ------
Company portion.................................... $1,648 1,447 1,544
====== ====== ======
</TABLE>
The following table sets forth the plan's funded status as of December 31,
1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------- ------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits.......................................... $17,715 20,693
Nonvested benefits....................................... 558 751
------- ------
Accumulated benefit obligation............................. 18,273 21,444
Increase in benefits due to future compensation increases.. 6,513 7,535
------- ------
Projected benefit obligation............................... 24,786 28,979
Estimated fair market value of plan assets................. 23,483 25,689
------- ------
Projected benefit obligation in excess of plan assets...... 1,303 3,290
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions........ 3,482 2,989
Unrecognized net transition obligation being recognized
over 21.6 years........................................... (114) (108)
Unrecognized prior service cost attributable to plan amend-
ments..................................................... (761) (717)
------- ------
Pension liability of all participating companies........... $ 3,910 5,454
======= ======
Company portion............................................ $ 6,711 8,299
======= ======
</TABLE>
As of December 31, 1995, former affiliates ceased participation in the plan,
which resulted in a decrease in projected benefits of the Plan.
F-13
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors an unfunded defined benefit postretirement medical plan
that covers substantially all its employees. The plan is contributory with
retiree contributions adjusted annually.
Net periodic postretirement benefit cost for the year ended December 31,
1995, 1996 and 1997 included the following components:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits attributed to service during the
year..................................................... $ 48 48 48
Interest cost on accumulated postretirement benefit obli-
gation................................................... 71 70 68
Amortization of unrecognized prior service cost........... (18) (18) (19)
---- --- ---
Net periodic postretirement benefit cost.................. $101 100 97
==== === ===
</TABLE>
The following table sets forth the plan's funded status as of December 31,
1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
------ -----
(IN
THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees................................................... $ 356 405
Fully eligible active plan participants.................... 134 190
Other active plan participants............................. 382 547
------ -----
Total APBO................................................... 872 1,142
------ -----
Unrecognized prior service cost............................ 223 191
Actuarial experience....................................... 132 (102)
------ -----
Accumulated postretirement benefit obligation in excess of
plan assets................................................. $1,227 1,231
====== =====
</TABLE>
The significant assumptions used in computing the APBO as of December 31,
1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
----------------- -----------------
<S> <C> <C>
Assumed health care cost trend rate
used to measure the expected cost of
benefits covered by the plan:
Current year........................ 10% 9%
Thereafter.......................... Decrease annually Decrease annually
to 5.5% by 2018 to 5.5% by 2019
Discount rate......................... 7.5% 7.5%
</TABLE>
The health care cost trend rate assumption can effect the expenses and
obligations. The effect of a 1% increase each year in the assumed health care
cost trend rate on the aggregate of the service and interest cost components
of net periodic postretirement benefit cost would be an increase of
approximately $34,000 for the year ended December 31, 1997. The effect on the
APBO as of December 31, 1997 would be an increase of approximately $217,000.
F-14
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) SAVINGS AND INVESTMENT PLAN
The Company has a savings and investment plan covering substantially all
employees. The plan provides for a matching corporate contribution of 50% of
the employee's investment in mutual fund shares and/or Torchmark stock, not to
exceed 3% of the employee's salary.
The charge to expense for this plan for the years ended December 31, 1995,
1996 and 1997 was $626,000, $641,000 and $716,000, respectively.
(12) EMPLOYEE STOCK OPTIONS
Under the provisions of the Torchmark Corporation 1987 Stock Incentive Plan
(1987 Option Plan), certain employees and directors of the Company have been
granted options to buy shares of Torchmark stock generally at the market value
of the stock on the date of grant. The options are exercisable during a period
of up to ten years and two days after grant. Employee stock options granted
under the 1987 Option Plan generally vest one-half in two years and one-half
in three years. Director grants generally vest in six months.
In October 1995, the FASB issued Statement No. 123, Accounting for Stock-
Based Compensation (SFAS No. 123), which was effective for the Company
beginning January 1, 1996. SFAS No. 123 defines the "fair value method" of
accounting for employee stock options. It also allows accounting for such
options under the "intrinsic value method" in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
No. 25) and related interpretations. If a company elects to use the intrinsic
value method, pro forma disclosures of earnings and earnings per share are
required as if the fair value method of accounting was applied. The effects of
applying SFAS No. 123 in the pro forma disclosures are not necessarily
indicative of future amounts because the pro forma disclosures do not take
into account the amortization of the fair value of awards granted prior to
1995.
The Company has elected to account for stock options under the intrinsic
value method. The fair value method requires use of the Black-Scholes option
valuation model to value employee stock options. The Black-Scholes option
valuation model was not developed for use in valuing employee stock options.
Instead, this model was developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because Torchmark's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, it is management's opinion that the
existing models do not provide a reliable measure of the fair value of its
employee stock options. Under the intrinsic value method, compensation expense
is only recognized if the exercise price of the employee stock option is less
than the market price of the underlying stock on the date of grant.
Accordingly, the Company has recognized no compensation expense for options
granted in 1995, 1996 or 1997.
In accordance with SFAS No. 123, the fair value for Torchmark's employee
stock options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted average assumptions for 1996 and
1997:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Risk-free interest rate.......................................... 6.4% 6.4%
Dividend yield................................................... 3.7 1.7
Volatility factor................................................ 22.8 21.1
Weighted average expected life (in years)........................ 4.17 3.93
</TABLE>
The weighted average fair values of an option granted during the years ended
December 31, 1996 and 1997 were $4.93 and $8.36, respectively.
F-15
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
1996 1997
----------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Actual net income................................... $ 66,700 70,292
Pro forma net income................................ $ 65,958 68,022
----------- ----------
Proforma net income per share, as adjusted for SFAS
No. 123:
Basic and diluted................................. $ 1.06
==========
</TABLE>
A summary of stock option activity and related information for the years
ended December 31, 1995, 1996 and 1997 follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,335,984 $16.21 1,596,642 $18.11 1,738,442 $19.54
Granted................. 373,600 21.69 277,600 24.88 688,292 35.98
Exercised............... (105,126) 6.72 (130,800) 13.49 (927,024) 17.68
Expired................. (7,816) 17.00 (5,000) 17.00 (3,020) 22.27
--------- ------ --------- ------ --------- ------
Outstanding at end of
year................... 1,596,642 $18.11 1,738,442 $19.54 1,496,690 $28.25
--------- ------ --------- ------ --------- ------
Exercisable at end of
year................... 660,934 $17.36 999,742 $17.48 868,798 $31.18
========= ====== ========= ====== ========= ======
</TABLE>
(13) UNIFORM CAPITAL RULE REQUIREMENTS
Waddell & Reed, Inc. (W&R), a subsidiary of the Company, is a registered
broker-dealer and a member of the National Association of Securities Dealer,
Inc. and therefore is subject to a requirement of the SEC's Uniform Net
Capital Rule, requiring the maintenance of certain minimal capital levels. At
December 31, 1997, W&R had net capital, as defined by the Uniform Capital
Rule, of $7,745,000 which is $4,628,000 in excess of the required net capital.
(14) COMMITMENTS AND CONTINGENCIES
Rental Expense and Lease Commitments
The Company rents certain sales and other office space under long-term
operating leases. Rent expense for the years ended December 31, 1995, 1996 and
1997, was $3,459,000, $3,824,000 and $4,397,000 respectively. Future minimum
rental commitments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Minimum remaining rental commitments years ended December
31:
1998..................................................... $ 2,589
1999..................................................... 1,612
2000..................................................... 961
2001..................................................... 330
2002..................................................... 85
-------
$ 5,577
=======
</TABLE>
F-16
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
New leases are expected to be executed as existing leases expire. Thus,
future minimum lease commitments are not expected to be less than those in
1998.
Contingencies
From time to time, the Company is a party to various claims arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, it is unlikely that any adverse determination in one or
more pending claims would have a material adverse effect on the Company's
financial position or results of operations.
F-17
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The following pro forma balance sheet reflects (1) payment of notes due from
Torchmark with Torchmark Preferred Stock, (2) a prepayment of $124 million
plus all outstanding interest on the Second Liberty Note and the First Liberty
Note, in each case with Torchmark Preferred Stock, (3) the application of the
net proceeds of the Offering to make a prepayment of $428 million on the Notes
and, (4) prepayment of the remaining balance of the Notes and accrued interest
with Torchmark Preferred Stock as if these transactions had occurred on
December 31, 1997. The pro forma Consolidated Statement of Operations reflects
the aforementioned transactions as if they had occurred on January 1, 1997.
F-18
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Assets:
Cash and cash equivalents................... $ 73,820 73,820
Investment securities, available-for-sale 18,977 18,977
Receivables:
United funds and W&R funds................ 4,031 4,031
Customers and other....................... 11,840 11,840
Due from affiliates......................... 17,232 (13,598)(1) 3,634
Deferred income taxes....................... 1,241 1,241
Prepaid expenses and other current assets... 2,991 2,991
-------- -------
Total current assets...................... 130,132 116,534
Due from affiliates......................... 175,450 (175,450)(1) --
Torchmark Preferred Stock................... -- 189,048 (1) 8,000
(125,186)(2)
(55,862)(2)
Property and equipment, net................. 12,058 12,058
Investment in real estate, net.............. -- --
Investment in real estate partnership....... 17,544 17,544
Deferred sales commissions, net............. 12,316 12,316
Goodwill (net of accumulated amortization of
$14,575
and $17,479)............................... 98,831 98,831
Other assets................................ 633 633
-------- -------
Total assets.............................. $446,964 265,916
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current liabilities:
Accounts payable............................ $ 22,929 22,929
Due to affiliates........................... 102,459 (96,000)(3) 2,597
(3,862)(2)
Accrued sales force compensation............ 8,666 8,666
Income taxes payable........................ 3,314 3,314
Other current liabilities................... 18,525 18,525
-------- -------
Total current liabilities................. 155,893 56,031
Due to affiliates........................... 509,186 (332,000)(3)
(125,186)(2)
(52,000)(2) --
Deferred income taxes....................... 2,246 2,246
Accrued pensions and post-retirement costs.. 9,530 9,530
Other liabilities........................... -- --
-------- -------
Total liabilities......................... 676,855 67,807
-------- -------
Stockholders' equity (deficit):
Common stock ............................... 423 217 (3) 640
Additional paid-in capital.................. -- 197,125 (3) 197,125
Retained earnings........................... -- --
Dividends in excess of retained earnings and
additional
paid-in capital............................ (230,658) 230,658 (3) --
Unrealized gain on available-for-sale
securities................................. 344 344
-------- -------
Total Stockholders' equity (deficit)...... (229,891) 198,109
-------- -------
Total liabilities and Stockholders' equity.... $446,964 265,916
======== =======
</TABLE>
- --------
(1) To reflect payment of notes due from Torchmark with Torchmark Preferred
Stock.
(2) To reflect payment of the Notes and accrued interest, with Torchmark
Preferred Stock.
(3) To reflect proceeds from the Offering and the use of proceeds to pay the
remainder of the Notes.
F-19
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS, EXCEPT
FOR PER SHARE AMOUNT)
<S> <C> <C> <C>
Revenue:
Investment management
fees..................... $117,784 117,784
Underwriting and
distribution fees:
United Funds and W&R
Funds.................. 58,815 58,815
Affiliates.............. 30,612 30,612
Shareholder service fees.. 30,763 30,763
Investment and other
revenue.................. 3,798 3,798
-------- -------
Total revenue........... 241,772 241,772
-------- -------
Expenses:
Underwriting and
distribution............. 79,995 79,995
Compensation and related
costs.................... 26,618 26,618
General and
administrative........... 15,826 15,826
Depreciation.............. 1,307 1,307
Amortization of goodwill.. 2,903 2,903
-------- -------
Total expenses.......... 126,649 126,649
-------- -------
Income before interest
and income taxes....... 115,123 115,123
Interest
Income.................... 11,323 (11,323)(1) --
Expense................... (11,299) 11,299 (2) --
-------- -------
Income before income
taxes.................. 115,147 115,123
Income taxes................ 44,855 (9)(2) 44,846
-------- ------- -------
Net income.............. $ 70,292 (15) 70,277
======== ======= =======
Pro forma net income per
share:
Basic and diluted......... $ 1.10
=======
</TABLE>
- --------
(1) To eliminate interest income on amounts due from Torchmark.
(2) To eliminate interest expense on the Notes.
(3) Tax effects of the above.
F-20
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
International Prospectus Alternate Cover Page
PROSPECTUS (Subject to Completion)
Issued March 4, 1998
21,700,000 Shares
Waddell & Reed Financial, Inc.
CLASS A COMMON STOCK
----------
OF THE 21,700,000 SHARES OF CLASS A COMMON STOCK BEING OFFERED, 4,340,000
SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY
THE INTERNATIONAL UNDERWRITERS AND 17,360,000 SHARES ARE BEING OFFERED
INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS. ALL
SHARES OF CLASS A COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY THE
COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING
PRICE PER SHARE WILL BE BETWEEN $20 AND $22 PER SHARE. SEE
"UNDERWRITERS" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED IN
DETERMINING THE INITIAL PUBLIC OFFERING PRICE.
THE COMPANY HAS TWO CLASSES OF AUTHORIZED COMMON STOCK CONSISTING OF CLASS A
COMMON STOCK OFFERED HEREBY AND CLASS B COMMON STOCK (COLLECTIVELY, THE
"COMMON STOCK"). SEE "DESCRIPTION OF CAPITAL STOCK." HOLDERS OF CLASS A COMMON
STOCK ARE ENTITLED TO ONE VOTE PER SHARE AND HOLDERS OF CLASS B COMMON STOCK
ARE ENTITLED TO FIVE VOTES PER SHARE ON EACH MATTER SUBMITTED TO A VOTE OF
STOCKHOLDERS. ALL OF THE CLASS B COMMON STOCK IS BENEFICIALLY OWNED BY
TORCHMARK CORPORATION. SUBSTANTIALLY ALL OF THE NET PROCEEDS OF THE OFFERING
WILL BE USED TO PREPAY OUTSTANDING INDEBTEDNESS TO TORCHMARK CORPORATION
AND ONE OF ITS SUBSIDIARIES. SEE "USE OF PROCEEDS." ALL HOLDERS OF COMMON
STOCK ARE ENTITLED TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS, IF ANY,
AS MAY BE DECLARED FROM TIME TO TIME BY THE BOARD OF DIRECTORS.
----------
THE CLASS A COMMON STOCK HAS BEEN APPROVED FOR LISTING, SUBJECT TO OFFICIAL
NOTICE OF ISSUANCE, ON THE NEW YORK STOCK EXCHANGE UNDER THE TRADING SYMBOL
"WDR."
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR CERTAIN INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
----------
PRICE $ A SHARE
----------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
-------- ---------------------- -----------
<S> <C> <C> <C>
Per Share........................... $ $ $
Total(3)............................ $ $ $
</TABLE>
- -----
(1) The Company and Torchmark Corporation have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriters."
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company has granted the U.S. Underwriters an option exercisable
within 30 days of the date hereof to purchase up to an aggregate of
2,170,000 additional shares of Class A Common Stock at the price to the
public shown above less underwriting discounts and commissions for the
purpose of covering over-allotments, if any. If the U.S. Underwriters
exercise such option in full, the total price to the public, underwriting
discounts and commissions, and proceeds to the Company will be $ ,
$ , and $ , respectively. See "Underwriters."
----------
The Class A Common Stock is offered subject to prior sale, when, as, and if
accepted by the Underwriters and subject to approval of certain legal matters
by Skadden, Arps, Slate, Meagher & Flom LLP, counsel to the Underwriters, and
to certain other conditions. It is expected that delivery of the Class A Common
Stock will be made on or about , 1998 at the offices of Morgan Stanley & Co.
Incorporated, New York, New York, against payment therefor in immediately
available funds.
----------
MORGAN STANLEY DEAN WITTER
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
, 1998
<PAGE>
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table indicates the estimated expenses to be incurred in
connection with the Offering, all of which will be paid by the Company.
<TABLE>
<S> <C>
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............... 515,000
Miscellaneous expenses........................................... 156,172
----------
Total.......................................................... $2,800,000
==========
</TABLE>
- --------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation provides that no director of the
Company will be personally liable to the Company or any of its stockholders
for monetary damages arising from the director's breach of fiduciary duty as a
director, with certain limited expectations. See "Description of Capital
Stock--Certificate of Incorporation and Bylaw Provisions--Liability of
Directors; Indemnification" in the Prospectus.
Pursuant to the provisions of (S) 145 of the Delaware General Corporation
Law, every Delaware corporation has the power to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit, or proceeding (other than an action by or in the
right of the corporation) by reason of the fact that such person is or was a
director, officer, employee, or agent of any corporation, partnership, joint
venture, trust, or other enterprise, against any and all expenses, judgments,
fines, and amounts paid in settlement and reasonably incurred in connection
with such action, suit, or proceeding. The power to indemnify applies only if
such person acted in good faith and in a manner such person reasonably
believed to be in the best interest, or not opposed to the best interest, of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
The power to indemnify applies to actions brought by or in the right of the
corporation as well, but only to the extent of defense and settlement expenses
and not to any satisfaction of a judgment or settlement of the claim itself,
and with the further limitation that in such actions no indemnification will
be made in the event of any adjudication of negligence or misconduct unless
the court, in its discretion, believes that in light of all the circumstances
indemnification should apply.
To the extent any of the persons referred to in the two immediately
preceding paragraphs is successful in the defense of such actions, such person
is entitled, pursuant to Section 145, to indemnification as described above.
The Company's Certificate of Incorporation and Bylaws provide for
indemnification to officers and directors of the Company to the fullest extent
permitted by the Delaware General Corporation Law. See "Description of Capital
Stock--Certificate of Incorporation and Bylaw Provisions--Liability of
Directors; Indemnification" in the Prospectus.
II-1
<PAGE>
The form of Underwriting Agreement filed as Exhibit 1.1 contains agreements
of indemnity between the Company and the Underwriters and controlling persons
against certain civil liabilities, including liabilities under the Securities
Act, or will contribute to payments which the Underwriters or any such
controlling persons may be required to make in respect thereof.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
ITEMS 16. EXHIBITS
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1* --Form of Underwriting Agreement
3.1+ --Certificate of Incorporation of the Company
3.2+ --Bylaws of the Company
4.1+ --Specimen of Common Stock Certificate
4.2+ --Promissory Note of United Investors Management Company, payable to
Torchmark Corporation,
dated November 25, 1997
4.3+ --Promissory Note of United Investors Management Company, payable to
Liberty National Life
Insurance Company, dated November 25, 1997
4.4+ --Promissory Note of Waddell & Reed Financial Services, Inc., payable
to United Investors Management Company, dated December 23, 1996
4.5+ --Assignment by United Investors Management Company to Liberty
National Life Insurance Company, dated December 23, 1996
--Opinion of Hughes & Luce, L.L.P. regarding legality of securities
5.1* being registered
10.1* --Form of Public Offering and Separation Agreement between Torchmark
Corporation and Waddell
& Reed Financial, Inc.
10.2+ --Form of Tax Disaffiliation Agreement between Torchmark Corporation
and Waddell & Reed
Financial, Inc.
10.3+ --Form of Investment Services Agreement between Waddell & Reed
Investment
Management Company and Waddell & Reed Asset Management Company.
10.4+ --General Agent Contract, dated January 1, 1985, between United
Investors Life Insurance Company
and W&R Insurance Agency, Inc.
10.5+ --Form of Amendment Extending General Agent Contract between United
Investors Life Insurance
Company and W & R Insurance Agency, Inc.
10.6+ --Independent Agent Contract, dated June 25, 1997, between United
American Insurance Company,
W & R Insurance Agency, Inc., and affiliates identified therein.
10.7+ --Form of Amendment Extending Independent Agent Contract between
United American Insurance
Company, W & R Insurance Agency, Inc., and affiliates identified
therein.
10.8+ --Form of The 1998 Stock Incentive Plan.
10.9+ --Form of The 1998 Non-Employee Director Stock Option Plan.
10.10+ --Form of The 1998 Executive Deferred Compensation Stock Option Plan.
10.11+ --Form of Waddell & Reed Financial, Inc. Savings and Investment Plan.
10.12+ --Form of Waddell & Reed Financial, Inc. Retirement Income Plan.
10.13+ --Form of Waddell & Reed, Inc. Career Field Retirement Plan.
10.14+ --Form of Administration Contract between United Investors Park
Owners' Association and Waddell & Reed Property Management Division.
10.15+ --Form of Agreement Amending Distribution Contract between United
Investors Life Insurance Company and TMK/United Funds, Inc.
10.16+ --Distribution Contract, dated April 4, 1997, between United Investors
Life Insurance Company and TMK/United Funds, Inc.
10.17+ --Form of Agreement Amending Principal Underwriting Agreement between
United Investors Life Insurance Company and Waddell & Reed, Inc.
10.18+ --Principal Underwriting Agreement, dated May 1, 1990, between United
Investors Life Insurance Company and Waddell & Reed, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.19+ --Form of Services Agreement between Waddell & Reed Investment
Management Company and Waddell & Reed Asset Management Company.
10.20+ --Form of Reciprocity Agreement between Torchmark Corporation and
Waddell & Reed Financial, Inc.
10.21+ --Form of Administrative Services Agreement between Torchmark
Corporation and Waddell & Reed Financial, Inc.
21.1+ --Subsidiaries of the Registrant
23.1* --Consent of Hughes & Luce, L.L.P. (included in Exhibit 5.1)
23.2* --Consent of KPMG Peat Marwick LLP
24.1+ --Powers of Attorney (appearing on Signature Page of Registration
Statement on Form S-1 filed
January 2, 1998, Registration No. 333-43687).
27.1+ --Financial Data Schedule
</TABLE>
- --------
*Filed herewith.
+Previously filed.
(b) Financial Statement Schedules:
Financial statement schedules are omitted as not required or not applicable
or because the information is included in the Financial Statements or notes
thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant by the Registrant pursuant to the underwriting agreements, the
Company's Certificate of Incorporation, Bylaws, Delaware law or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the Offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF OVERLAND PARK, STATE OF
KANSAS, ON MARCH 3, 1998.
Waddell & Reed Financial, Inc.
/s/ Keith A. Tucker
By: _____________________________
KEITH A. TUCKER
CHAIRMAN OF THE BOARD
POWER OF ATTORNEY
EACH PERSON WHOSE SIGNATURE APPEARS BELOW HEREBY CONSTITUTES AND APPOINTS
KEITH A. TUCKER, HENRY J. HERMANN, AND ROBERT L. HECHLER, AND EACH OF THEM, HIS
TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT WITH FULL POWER OF SUBSTITUTION AND
RESUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE, AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE
AMENDMENTS) TO THIS REGISTRATION STATEMENT AND ANY ADDITIONAL REGISTRATION
STATEMENTS RELATED TO THE OFFERING CONTEMPLATED BY THIS REGISTRATION STATEMENT
AND TO FILE THE SAME, WITH ALL EXHIBITS THERETO, AND OTHER DOCUMENTS IN
CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE COMMISSION, AND HEREBY
GRANTS TO SUCH ATTORNEY-IN-FACT AND AGENT FULL POWER AND AUTHORITY TO DO AND
PERFORM EACH AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE, AS
FULLY TO ALL INTENTS AND PURPOSES AS HE MIGHT OR COULD DO IN PERSON, HEREBY
RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEY-IN-FACT AND AGENT OR HIS
SUBSTITUTE OR SUBSTITUTES MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
SIGNATURE TITLE DATE
* Director March 3, 1998
- ------------------------------------
RONALD K. RICHEY
/s/ Keith A. Tucker Chairman of the March 3, 1998
- ------------------------------------ Board and Chief
*KEITH A. TUCKER Executive Officer
ATTORNEY-IN-FACT (Principal
Financial Officer)
/s/ David L. Boren Director March 3, 1998
- ------------------------------------
DAVID L. BOREN
* Principal March 3, 1998
- ------------------------------------ Accounting Officer
MICHAEL D. STROHM
II-4
<PAGE>
SIGNATURE TITLE DATE
/s/ Joseph M. Farley Director March 3, 1998
- ------------------------------------
JOSEPH M. FARLEY
/s/ Louis T. Hagopian Director March 3, 1998
- ------------------------------------
LOUIS T. HAGOPIAN
/s/ Joseph L. Lanier, Jr. Director March 3, 1998
- ------------------------------------
JOSEPH L. LANIER, JR.
/s/ Harold T. McCormick Director March 3, 1998
- ------------------------------------
HAROLD T. MCCORMICK
/s/ George J. Records Director March 3, 1998
- ------------------------------------
GEORGE J. RECORDS
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1* --Form of Underwriting Agreement
3.1+ --Certificate of Incorporation of the Company
3.2+ --Bylaws of the Company
4.1+ --Specimen of Common Stock Certificate
4.2+ --Promissory Note of United Investors Management Company, payable to
Torchmark Corporation, dated November 25, 1997
4.3+ --Promissory Note of United Investors Management Company, payable to
Liberty National Life Insurance Company, dated November 25, 1997
4.4+ --Promissory Note of Waddell & Reed Financial Services, Inc., payable
to United Investors Management Company, dated December 23, 1996
4.5+ --Assignment by United Investor Management Company to Liberty National
Life Insurance Company, dated December 23, 1996
5.1* --Opinion of Hughes & Luce, L.L.P. regarding legality of securities
being registered
10.1* --Form of Public Offering and Separation Agreement between Torchmark
Corporation and Waddell & Reed Financial, Inc.
10.2+ --Form of Tax Disaffiliation Agreement between Torchmark Corporation
and Waddell & Reed Financial, Inc.
10.3+ --Form of Investment Services Agreement between Waddell & Reed
Investment Management Company and Waddell & Reed Asset Management
Company.
10.4+ --General Agent Contract, dated January 1, 1985, between United
Investors Life Insurance Company and W&R Insurance Agency, Inc.
10.5+ --Form of Amendment Extending General Agent Contract between United
Investors Life Insurance Company and W & R Insurance Agency, Inc.
10.6+ --Independent Agent Contract, dated June 25, 1997, between United
American Insurance Company, W & R Insurance Agency, Inc., and
affiliates identified therein.
10.7+ --Form of Amendment Extending Independent Agent Contract between
United American Insurance Company, W & R Insurance Agency, Inc., and
affiliates identified therein.
10.8+ --Form of The 1998 Stock Incentive Plan.
10.9+ --Form of The 1998 Non-Employee Director Stock Option Plan.
10.10+ --Form of The 1998 Executive Deferred Compensation Stock Option Plan.
10.11+ --Form of Waddell & Reed Financial, Inc. Savings and Investment Plan.
10.12+ --Form of Waddell & Reed Financial, Inc. Retirement Income Plan.
10.13+ --Form of Waddell & Reed, Inc. Career Field Retirement Plan.
10.14+ --Form of Administration Contract between United Investors Park
Owners' Association and Waddell & Reed Property Management Division.
10.15+ --Form of Agreement Amending Distribution Contract between United
Investors Life Insurance Company and TMK/United Funds, Inc.
10.16+ --Distribution Contract, dated April 4, 1997, between United Investors
Life Insurance Company and TMK/United Funds, Inc.
10.17+ --Form of Agreement Amending Principal Underwriting Agreement between
United Investors Life Insurance Company and Waddell & Reed, Inc.
10.18+ --Principal Underwriting Agreement, dated May 1, 1990, between United
Investors Life Insurance Company and Waddell & Reed, Inc.
10.19+ --Form of Services Agreement between Waddell & Reed Investment
Management Company and Waddell & Reed Asset Management Company.
10.20+ --Form of Reciprocity Agreement between Torchmark Corporation and
Waddell & Reed Financial, Inc.
10.21+ --Form of Administrative Services Agreement between Torchmark
Corporation and Waddell & Reed Financial, Inc.
21.1+ --Subsidiaries of the Registrant
23.1* --Consent of Hughes & Luce, L.L.P. (included in Exhibit 5.1)
23.2* --Consent of KPMG Peat Marwick LLP
24.1+ --Powers of Attorney (appearing on Signature Page of Registration
Statement on Form S-1 filed January 2, 1998, Registration No. 333-
43687).
27.1+ --Financial Data Schedule
</TABLE>
- --------
*Filed herewith.
+Previously filed.
<PAGE>
EXHIBIT 1.1
21,700,000 SHARES
WADDELL & REED FINANCIAL, INC.
SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE PER SHARE
UNDERWRITING AGREEMENT
March [ ], 1998
<PAGE>
March [ ], 1998
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Merrill Lynch & Co.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Goldman Sachs International
Merrill Lynch International
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
Waddell & Reed Financial, Inc., a Delaware corporation (the "COMPANY"),
proposes to issue and sell to the several Underwriters (as defined below)
21,700,000 shares of its Class A Common Stock, $.01 par value per share (the
"FIRM SHARES").
It is understood that, subject to the conditions hereinafter stated,
17,360,000 Firm Shares (the "U.S. FIRM SHARES") will be sold to the several U.S.
Underwriters named in Schedule I hereto (the "U.S. UNDERWRITERS") in connection
with the offering and sale of such U.S. Firm Shares in the United States and
Canada to United States and Canadian Persons (as such terms are defined in the
Agreement Between U.S. and International Underwriters of even date herewith),
and 4,340,000 Firm Shares (the "INTERNATIONAL SHARES") will be sold to the
several International Underwriters named in Schedule II hereto (the
"INTERNATIONAL UNDERWRITERS") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons other than
United States and Canadian Persons. Morgan Stanley & Co. Incorporated, Goldman,
Sachs & Co. and Merrill Lynch & Co. shall act as representatives (the "U.S.
REPRESENTATIVES") of the several U.S. Underwriters, and Morgan Stanley & Co.
International Limited, Goldman Sachs International and Merrill Lynch
International shall
<PAGE>
act as representatives (the "INTERNATIONAL REPRESENTATIVES") of the several
International Underwriters. The U.S. Underwriters and the International
Underwriters are hereinafter collectively referred to as the UNDERWRITERS.
The Company also proposes to issue and sell to the several U.S.
Underwriters not more than an additional 2,170,000 shares of its Class A
Common Stock, $.01 par value (the "ADDITIONAL SHARES") if and to the extent that
the U.S. Representatives shall have determined to exercise, on behalf of the
U.S. Underwriters, the right to purchase such shares of Class A Common Stock
granted to the U.S. Underwriters in Section 2 hereof. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "SHARES". The
shares of Class A Common Stock, $.01 par value of the Company to be outstanding
after giving effect to the sales contemplated hereby are hereinafter referred to
as the "CLASS A COMMON STOCK".
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement relating to the Shares. The registration
statement contains two prospectuses to be used in connection with the offering
and sale of the Shares: the U.S. prospectus, to be used in connection with the
offering and sale of Shares in the United States and Canada to United States and
Canadian Persons, and the international prospectus, to be used in connection
with the offering and sale of Shares outside the United States and Canada to
persons other than United States and Canadian Persons. The international
prospectus is identical to the U.S. prospectus except for the outside front
cover page. The registration statement as amended at the time it becomes
effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the U.S. prospectus and the
international prospectus (as described in Rule 434(a)(1) under the Securities
Act) in the respective forms first used to confirm sales of Shares are
hereinafter collectively referred to as the "PROSPECTUS"; If the Company has
filed an abbreviated registration statement to register additional shares of
Class A Common Stock pursuant to Rule 462(b) under the Securities Act (the
"RULE 462 REGISTRATION STATEMENT"), then any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462 Registration
Statement.
As part of the offering contemplated by this Agreement (the "OFFERING"),
Morgan Stanley & Co. Incorporated and certain of its affiliates (collectively,
"MORGAN STANLEY") has agreed to reserve out of the Shares set forth opposite its
name on Schedule II to this Agreement, up to 1,250,000 shares, for sale to the
Company's employees, officers and directors and other parties associated with
the Company (collectively, "PARTICIPANTS"), as set forth in the Prospectus under
the heading "Underwriters" (the "DIRECTED SHARE PROGRAM"). The Shares to be
sold by Morgan Stanley pursuant to the Directed Share Program (the "DIRECTED
SHARES") will be sold by Morgan Stanley pursuant to this Agreement at the public
offering price. Any Directed Shares not orally confirmed for purchase by any
Participants by the end of the business day on which this
2
<PAGE>
Agreement is executed will be offered to the public by Morgan Stanley as set
forth in the Prospectus.
1. Representations and Warranties. Each of Torchmark Corporation,
a Delaware corporation ("TORCHMARK") and the Company represents and warrants to
and agrees with each of the Underwriters that:
(a) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company
and its subsidiaries have not incurred any material liability or
obligation, direct or contingent, nor entered into any material
transaction not in the ordinary course of business; (2) the Company has
not purchased any of its outstanding capital stock, nor declared, paid
or otherwise made any dividend or distribution of any kind on its
capital stock other than ordinary and customary dividends; and (3) there
has not been any material change in the capital stock, short-term debt
or long-term debt of the Company and its subsidiaries, except in each
case as described in the Prospectus.
(b) The Company and its subsidiaries have good and marketable
title in fee simple to all real property and good title to all
personal property owned by them which is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus
or such as do not materially affect the value of such property and do
not interfere with the use made and proposed to be made of such property
by the Company and its subsidiaries; and any real property and buildings
held under lease by the Company and its subsidiaries are held by them
under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use made and proposed to
be made of such property and buildings by the Company and its
subsidiaries, in each case except as described in the Prospectus.
(c) The Company and its subsidiaries own or possess, or can
acquire on reasonable terms, all patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names
currently employed by them in connection with, and material to, the
business now operated by them, and neither the Company nor any of its
subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any of the foregoing which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse affect on the Company
and its subsidiaries, taken as a whole.
3
<PAGE>
(d) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, except as described in the Prospectus,
or, to the knowledge of the Company, is imminent; and the Company is not
aware of any existing, threatened or imminent labor disturbance by the
employees of any of its principal suppliers, manufacturers or
contractors that could have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(e) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which
they are engaged; neither the Company nor any of its subsidiaries has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a material adverse effect on
the Company and its subsidiaries, taken as a whole, except as described
in the Prospectus.
(f) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal or state
regulatory authorities necessary to conduct their respective businesses
(except for such failures to possess as would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole),
and neither the Company nor any of its subsidiaries has received any
notice of proceedings relating to the revocation or modification of any
such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would have a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described the Prospectus.
(g) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (1) transactions are executed in accordance with management's
general or specific authorizations; (2) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain asset
accountability; (3) access to assets is permitted only in accordance
with management's general or specific authorization; and (4) the
recorded accountability for assets is compared with the existing assets
at reasonable intervals and appropriate action is taken with respect to
any differences.
(h) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or threatened by
the Commission.
4
<PAGE>
(i) (A) The Registration Statement, when it became effective, did
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, (B) the Registration Statement and the
Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder and (C) the
Prospectus does not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, except that the representations and warranties set forth in
this paragraph do not apply to statements or omissions in the
Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(j) The Company has been duly incorporated, is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its property
and to conduct its business as described in the Prospectus and is duly
qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not have
a material adverse effect on the Company and its subsidiaries, taken as a
whole.
(k) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority
to own its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to
the extent that the failure to be so qualified or be in good standing
would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole; all of the issued shares of capital stock
of each subsidiary of the Company have been duly and validly authorized
and issued, are fully paid and non-assessable and are owned directly or
indirectly by the Company, free and clear of all liens, encumbrances,
equities or claims.
(l) This Agreement has been duly authorized, executed and
delivered by each of the Company and Torchmark.
(m) The authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus.
5
<PAGE>
(n) The shares of Class A Common Stock outstanding prior to the
issuance of the Shares have been duly authorized and are validly issued,
fully paid and non-assessable.
(o) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(p) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the certificate of
incorporation or by-laws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(q) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from
that set forth in the Prospectus (exclusive of any amendments or
supplements thereto subsequent to the date of this Agreement).
(r) There are no legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is a party or
to which any of the properties of the Company or any of its subsidiaries
is subject that are required to be described in the Registration
Statement or the Prospectus and are not so described or any statutes,
regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed
as exhibits to the Registration Statement that are not described or filed
as required.
(s) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or
filed pursuant to Rule 424 under the Securities Act, complied when so
filed in all material respects with the Securities Act and the applicable
rules and regulations of the Commission thereunder.
6
<PAGE>
(t) The Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended (the
"INVESTMENT COMPANY ACT").
(u) Each of Waddell & Reed, Inc. ("WRI") and Waddell & Reed
Investment Management Company ("WRIMCO") is duly registered as an
investment adviser under the Investment Advisers Act of 1940, as amended
(the "ADVISERS ACT") and neither WRI or WRIMCO is prohibited by any
provision of the Advisers Act or the Investment Company Act, or the
respective rules and regulations thereunder, from acting as an investment
adviser. WRI and WRIMCO are the only direct or indirect subsidiaries of
the Company required to be registered as investment advisers under the
Advisers Act.
(v) WRI is duly registered as a broker-dealer under the Securities
Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and under the
securities laws of each state where the conduct of its business requires
such registration and is in compliance in all material respects with all
United States federal and state laws requiring such registration or is
subject to no material liability or disability by reason of the failure
to be so registered in any such jurisdiction or to be in such compliance
in all material respects. WRI is a member in good standing of the
National Association of Securities Dealers (the "NASD"). None of the
Company's other direct or indirect subsidiaries is required to be
registered, licensed or qualified as a broker-dealer under the laws
requiring any such registration, licensing or qualification in any state
in which it conducts business or is subject to any material liability or
disability by reason of the failure to be so registered, licensed or
qualified.
(w) Waddell & Reed Services Company, Inc. ("WRSCO") is duly
registered as a transfer agent under the Exchange Act and under the
securities laws of each state where the conduct of its business requires
such registration and is in compliance in all material respects with all
United States federal and state laws requiring such registration or is
subject to no material liability or disability by reason of the failure
to be so registered in any such jurisdiction or to be in such compliance.
None of the Company's other direct or indirect subsidiaries is required
to be registered, licensed or qualified as a transfer agent under the
laws requiring any such registration, licensing or qualification in any
state in which it conducts business or is subject to any material
liability or disability by reason of the failure to be so registered,
licensed or qualified.
(x) None of the Company or its direct or indirect subsidiaries
including WRI and WRIMCO is required to be registered, licensed or
qualified as an investment adviser under the laws requiring any such
registration, licensing
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<PAGE>
or qualification in any state in which it or its subsidiaries conduct
business or is not subject to material liability or disability by reason
of the failure to be so registered, licensed or qualified.
(y) Each of the Company, WRI and WRIMCO is and has been in
compliance with, and each such entity has or will have had, as the case
may be, received no notice of any violation of, (A) all laws,
regulations, ordinances and rules (including those of any non-
governmental self-regulatory agencies) applicable to it or its operations
relating to investment advisory or broker-dealer activities and (B) all
other such laws, regulations, ordinances and rules applicable to it and
its operations, except, in either case, where any failure by the Company,
WRI or WRIMCO to comply with any such law, regulation, ordinance or rule
would not have, individually or in the aggregate, a material adverse
effect on the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries taken as a whole.
(z) Each entity for which WRI or WRIMCO acts as investment adviser
and which is required to be registered with the Commission as an
investment company under the Investment Company Act and which is listed
in the Prospectus under "Business -- Fund Summary" (a "FUND") is, and
upon consummation of the transactions contemplated herein will be, duly
registered with the Commission as an investment company under the
Investment Company Act and to the best knowledge of the Company, each
Fund has been operated in compliance in all material respects with the
Investment Company Act and the rules and regulations thereunder and to
the best knowledge of the Company, there are no facts with respect to any
such Fund that are likely to have a material adverse effect on the
general affairs, management, financial position, stockholders' equity or
results of operations of the Company and its subsidiaries taken as a
whole.
(aa) To the best knowledge of the Company, each Fund's
registration statement complies in all material respects with the
provisions of the Securities Act, the Investment Company Act and the
rules and regulations thereunder and does not contain any untrue
statement of material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading.
(bb) To the best knowledge of the Company, each agreement between
the Company, WRI, WRIMCO or any other subsidiary of the Company on the
one hand and any Fund or private client on the other hand is a legal and
valid obligation of the parties thereto, and none of the Company, WRI,
WRIMCO or any other subsidiary of the Company is in breach or violation
of or in default under any such agreement which would individually or in
the aggregate have a material adverse effect on, or cause a prospective
material adverse change in, the
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general affairs, management, financial position, stockholders' equity or
results of operations of the Company and its subsidiaries taken as a
whole.
(cc) The Offering will not, and the special dividend to the
shareholders of Torchmark of all of the Class A Common Stock and Class B
Common Stock owned by Torchmark after the Offering should not, constitute
an "assignment" as defined in the Investment Company Act and the Advisers
Act of any of the investment advisory contracts to which WRI or WRIMCO is
a party.
(dd) The Company and its subsidiaries (i) are in compliance with
any and all applicable federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms
and conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the terms
and conditions of such permits, licenses or approvals would not, singly
or in the aggregate, have a material adverse effect on the Company and
its subsidiaries, taken as a whole.
(ee) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries, taken
as a whole.
(ff) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the
Company to file a registration statement under the Securities Act with
respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement except as disclosed in the Prospectus.
(gg) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government
of Cuba or with any person or affiliate located in Cuba.
(hh) The Company does not anticipate incurring significant
operating expenses or costs to ensure that all Company management
information systems will be year 2000 compliant.
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<PAGE>
(ii) The Company has not offered, or caused the Underwriters to
offer, Shares to any person pursuant to the Directed Share Program with
the specific intent to unlawfully influence (i) a customer or supplier of
the Company to alter the customer's or supplier's level or type of
business with the Company, or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products.
(jj) The Company represents and warrants that any loans made to
officers or employees of the Company enabling such officers or employees
to participate in the Directed Share Program will not violate Regulations
G, T, U or X of the Board of Governors of the Federal Reserve System.
2. Agreements to Sell and Purchase. The Company hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedules I and II
hereto opposite its names at U.S.$[ ] a share ("PURCHASE PRICE").
On the basis of the representations and warranties contained in
this Agreement, and subject to its terms and conditions, the Company agrees to
sell to the U.S. Underwriters the Additional Shares, and the U.S. Underwriters
shall have a one-time right to purchase, severally and not jointly, up to
2,170,000 Additional Shares at the Purchase Price. If the U.S. Representatives,
on behalf of the U.S. Underwriters, elects to exercise such option, the U.S.
Representatives shall so notify the Company in writing not later than 30 days
after the date of this Agreement, which notice shall specify the number of
Additional Shares to be purchased by the U.S. Underwriters and the date on which
such shares are to be purchased. Such date may be the same as the Closing Date
(as defined below) but not earlier than the Closing Date nor later than ten
business days after the date of such notice. Additional Shares may be purchased
as provided in Section 4 hereof solely for the purpose of covering over-
allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each U.S. Underwriter agrees, severally
and not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as the U.S. Representatives may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule I
hereto opposite the name of such U.S. Underwriter bears to the total number of
U.S. Firm Shares.
Each of Torchmark (for itself and on behalf of its subsidiaries)
and the Company and each of the directors and executive officers of the Company
hereby agrees that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of the Prospectus (the "LOCK-UP PERIOD"), (i)
offer, pledge, sell, contract to sell, sell any option
10
<PAGE>
or contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of Class A Common Stock or any securities
convertible into or exercisable or exchangeable for Class A Common Stock or (ii)
enter into any swap or other arrangement that transfers to another, in whole or
in part, any of the economic consequences of ownership of the Class A Common
Stock, whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of Class A Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to (A) the Shares to be
sold hereunder, (B) the issuance by the Company of shares of Class A Common
Stock upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof of which the Underwriters have been advised in
writing, (C) transactions by any person other than the Company or Torchmark
relating to shares of Class A Common Stock or other securities acquired in open
market transactions after completion of the Offering, (D) options on shares of
Class A Common Stock issued in connection with employee benefit plans as
described in the Prospectus or (E) the issuance of Class A Common Stock as
payment for acquisitions by the Company, if all persons or entities receiving
shares of Class A Common Stock pursuant to this clause (E) agree to be subject
to the restrictions in clauses (i) and (ii) above for the remainder of the Lock-
up Period.
3. Terms of Public Offering. The Company is advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
U.S.$[ ] a share (the "PUBLIC OFFERING PRICE") and to certain dealers selected
by you at a price that represents a concession not in excess of U.S.$[ ] a share
under the Public Offering Price, and that any Underwriter may allow, and such
dealers may reallow, a concession, not in excess of U.S.$[ ] a share, to any
Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be
made to the Company in Federal or other funds immediately available in New York
City against delivery of such Firm Shares for the respective accounts of the
several Underwriters at 10:00 a.m., New York City time, on [ ], 1998, or at such
other time on the same or such other date, not later than [ ], 1998, as shall be
designated in writing by you. The time and date of such payment are hereinafter
referred to as the "CLOSING DATE".
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than [ ], 1998,
11
<PAGE>
as shall be designated in writing by the U.S. Representatives. The time and date
of such payment are hereinafter referred to as the "OPTION CLOSING DATE".
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations
of the Company to sell the Shares to the Underwriters and the several
obligations of the Underwriters to purchase and pay for the Shares on the
Closing Date are subject to the condition that the Registration Statement shall
have become effective not later than [ ] (New York City time) on the date
hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date there shall not have occurred any change, or
any development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or operations of the
Company and its subsidiaries, taken as a whole, from that set forth in
the Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment, impracticable
to market the Shares on the terms and in the manner contemplated in the
Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company and a certificate, dated the Closing Date and signed by an
executive officer of Torchmark, to the effect that the representations
and warranties of the Company and Torchmark respectively contained in
this Agreement are true and correct as of the Closing Date and that each
of the Company and Torchmark has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied
hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon
the best of his or her knowledge as to proceedings threatened.
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<PAGE>
(c) The Underwriters shall have received on the Closing Date an
opinion of Hughes & Luce, L.L.P., special counsel for the Company, dated
the Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property
requires such qualification, except to the extent that the failure
to be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries, taken as a
whole;
(ii) the authorized capital stock of the Company conforms as
to legal matters to the description thereof contained in the
Prospectus;
(iii) the shares of Class A Common Stock outstanding prior to
the issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable;
(iv) the Shares have been duly authorized and, when issued
and delivered in accordance with the terms of this Agreement, will
be validly issued, fully paid and non-assessable, and the issuance
of such Shares will not be subject to any preemptive or similar
rights;
(v) this Agreement has been duly authorized, executed and
delivered by each of the Company and Torchmark;
(vi) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the
certificate of incorporation or by-laws of the Company or, to the
best of such counsel's knowledge, any agreement or other instrument
binding upon the Company or any of its subsidiaries that is material
to the Company and its subsidiaries, taken as a whole, or, to the
best of such counsel's knowledge, any judgment, order or decree of
any governmental body, agency or court having jurisdiction over the
Company or any subsidiary, and no consent, approval, authorization
or order of, or qualification with, any governmental body or agency
is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the
securities or Blue Sky laws of the various states in connection with
the offer and sale of the Shares by the U.S. Underwriters;
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<PAGE>
(vii) the statements (A) in the Prospectus under the captions
"Description of Capital Stock" and "Underwriters" and (B) in the
Registration Statement in Items 14 and 15, in each case insofar as
such statements constitute summaries of the legal matters, documents
or proceedings referred to therein, fairly present the information
called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein;
(viii) after inquiry of the executive officers and the general
counsel of the Company, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company
or any of its subsidiaries is a party or to which any of the
properties of the Company or any of its subsidiaries is subject that
are required to be described in the Registration Statement or the
Prospectus and are not so described or of any statutes, regulations,
contracts or other documents that are required to be described in
the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or
filed as required;
(ix) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act;
(x) Based on and assuming the accuracy of the determinations
of the Company's board of directors that the Company had adequate
surplus within the meaning of Section 170 of the Delaware General
Corporation law, the declaration of dividends to the shareholders of
the Company of (A) all of the capital stock of Waddell & Reed Asset
Management Company ("WRAMCO"), (B) the Company's $480 million
principal amount unsecured promissory notes due November 25, 2002
and (C) all of the capital stock of United Investors Life Insurance
Company ("UILIC"), did not violate Section 170 of the Delaware
General Corporation Law.
(xi) based upon all the facts and circumstances existing as of
the date of each distribution of WRAMCO described in this paragraph
and also as of the Closing Date, including representations contained
in officer certificates made as of the Closing Date, (A) pursuant to
Section 355 of the Internal Revenue Code of 1986, as amended (the
"Code"), no gain or loss was recognized to (and no amount was
included in the income of WRSCO or WRI upon the distribution of 100%
of the issued and outstanding stock of WRAMCO (the "WRAMCO STOCK")
by WRSCO, (B) pursuant to Section 355 of the Code, no gain or loss
was recognized to (and no amount was included in the income of) the
Company or WRSCO
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<PAGE>
upon the distribution of the WRAMCO Stock by WRSCO to the Company,
(C) pursuant to Section 355 of the Code, no gain or loss was
recognized to (and no amount included in the income of) the Company,
Liberty National Life Insurance Company ("LIBERTY") or Torchmark
upon the distribution of the WRAMCO Stock by the Company to Liberty
and Torchmark, and (D) pursuant to Section 355 of the Code, no gain
or loss was recognized to (and no amount was included in the income
of) Liberty or Torchmark upon the distribution of the WRAMCO Stock
by Liberty to Torchmark; provided, however, that Liberty increased
its taxable income by the amount of the distribution considered to
be made from Liberty's policy holders surplus account pursuant to
Section 815 of the Code.
(xii) based upon all the facts and circumstances existing as
of the date of the distribution of UILIC described in this paragraph
and also as of the Closing Date, including representations contained
in the officer certificates made as of the Closing Date, pursuant to
Section 355 of the Code, no gain or loss will be recognized to (and
no amount will be included in the income of) the Company, Liberty or
Torchmark upon the distribution of 100% of the issued and
outstanding stock of UILIC by the Company to Liberty and Torchmark.
(xiii) any loans made to officers or employees of the Company
enabling such officers or employees to participate in the Directed
Share Program will not violate Regulations G, T, U or X of the Board
of Governors of the Federal Reserve System.
(xiv) such counsel (A) is of the opinion that the Registration
Statement and Prospectus (except for financial statements and
schedules and other financial and statistical data included therein
as to which such counsel need not express any opinion) comply as to
form in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder, (B)
has no reason to believe that (except for financial statements and
schedules and other financial and statistical data as to which such
counsel need not express any belief) the Registration Statement and
the prospectus included therein at the time the Registration
Statement became effective contained any untrue statement of a
material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading and (C) has no reason to believe that (except for
financial statements and schedules and other financial and
statistical data as to which such counsel need not express any
belief) the Prospectus contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under
which they were made, not misleading.
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<PAGE>
(d) The Underwriters shall have received on the Closing Date an
opinion of Dechert Price & Rhoads, special outside counsel for the
Company, dated the Closing Date, to the effect that:
(i) the Offering will not constitute an "assignment" as
defined in the Investment Company Act and the Advisers Act of any of
the investment advisory contracts to which WRI or WRIMCO is a
party.
(ii) each of WRI and WRIMCO is duly registered as an
investment adviser under the Advisers Act. No other subsidiary of
the Company is required to be registered as an investment adviser
under the Advisers Act and the rules and regulations of the
Commission promulgated thereunder. WRI is duly registered, licensed
or qualified as a broker-dealer under all federal laws requiring any
such registration, licensing or qualification. None of the Company's
other direct or indirect subsidiaries is required to be registered,
licensed or qualified as a broker-dealer under any federal law
requiring any such registration, licensing or qualification.
(iii) none of the Company or its direct or indirect
subsidiaries including WRI and WRIMCO is required to be registered,
licensed or qualified as an investment adviser under the laws of any
state.
(e) The Underwriters shall have received on the Closing Date an
opinion of Sharon K. Pappas, General Counsel to the Company, dated the
Closing Date to the effect that:
(i) each subsidiary of the Company listed in Exhibit 21.1 to
the Registration Statement (a "COMPANY SUBSIDIARY") has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken
as a whole;
(ii) all of the issued shares of capital stock of each
Company Subsidiary have been duly and validly authorized and issued,
are fully paid and non-assessable and are owned directly by the
Company, and to the best knowledge of counsel, are free and clear of
all liens, encumbrances, equities or claims;
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(iii) each of WRI and WRIMCO is duly registered as an
investment adviser under the Advisers Act. No other subsidiary of
the Company is required to be registered as an investment adviser
under the Advisers Act and the rules and regulations of the
Commission promulgated thereunder. WRI is duly registered, licensed
or qualified as a broker-dealer in each United States jurisdiction
where the conduct of its business requires such registration and is
in compliance in all material respects with all United States
federal and state laws requiring any such registration, licensing or
qualification. None of the Company's other direct or indirect
subsidiaries is required to be registered, licensed or qualified as
a broker-dealer under the laws requiring any such registration,
licensing or qualification in any state in which it or its
subsidiaries conduct business. To the best knowledge of counsel,
each of the Company, WRI and WRIMCO is in compliance with all laws,
regulations, ordinances and rules (including those of any non-
governmental self-regulatory agencies) applicable to it or its
operations relating to investment advisory or broker dealer
activities except where any failure by the Company or any subsidiary
to comply with any such law, regulation, ordinance or rule would not
have, individually, or in the aggregate, a material adverse effect
on the Company and its subsidiaries, taken as a whole;
(iv) none of the Company or its direct or indirect
subsidiaries including WRI and WRIMCO is required to be registered,
licensed or qualified as an investment adviser under the laws of any
state.
(f) The Underwriters shall have received on the Closing Date an
opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the
Underwriters, dated the Closing Date, covering the matters referred to in
Sections 5(c)(iv), 5(c)(v), 5(c)(vii) (but only as to the statements in
the Prospectus under "Description of Capital Stock" and "Underwriters")
and 5(c)(xiv) above.
With respect to Section 5(c)(xiv) above, Hughes & Luce, L.L.P.,
and Skadden, Arps, Slate, Meagher & Flom LLP may state that their opinion
and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are
without independent check or verification, except as specified.
The opinions of Hughes & Luce, L.L.P., Dechert Price & Rhoads and
Sharon K. Pappas described respectively in Sections 5(c), 5(d) and 5(e)
above shall be rendered to the Underwriters at the request of the Company
and shall so state therein.
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(g) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance satisfactory to
the Underwriters, from KPMG Peat Marwick LLP, independent public
accountants, containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect
to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus; provided that the
letter deliVered on the Closing Date shall use a "cut-off date" not
earlier than the date hereof.
(h) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and each shareholder of the Company
relating to sales and certain other dispositions of shares of Class A
Common Stock or certain other securities, delivered to you on or before
the date hereof, shall be in full force and effect on the Closing
Date.
(i) The several obligations of the U.S. Underwriters to purchase
Additional Shares hereunder are subject to the delivery to the U.S.
Representatives on the Option Closing Date of such documents as they may
reasonably request with respect to the good standing of the Company, the
due authorization and issuance of the Additional Shares and other matters
related to the issuance of the Additional Shares.
6. Covenants of the Company and Torchmark. In further
consideration of the agreements of the Underwriters herein contained, the
Company and, with respect to paragraph (f) below, Torchmark, covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, eight signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City,
without charge, prior to 10:00 a.m. New York City time on the business
day next succeeding the date of this Agreement and during the period
mentioned in Section 6(c) below, as many copies of the Prospectus and
any supplements and amendments thereto or to the Registration Statement
as you may reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment
or supplement and not to file any such proposed amendment or supplement
to which you reasonably object, and to file with the Commission within
the applicable period specified in Rule 424(b) under the Securities Act
any prospectus required to be filed pursuant to such Rule.
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<PAGE>
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the Underwriters
the Prospectus is required by law to be delivered in connection with
sales by an Underwriter or dealer, any event shall occur or condition
exist as a result of which it is necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters, it is
necessary to amend or supplement the Prospectus to comply with applicable
law, forthwith to prepare, file with the Commission and furnish, at its
own expense, to the Underwriters and to the dealers (whose names and
addresses you will furnish to the Company) to which Shares may have been
sold by you on behalf of the Underwriters and to any other dealers upon
request, either amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will not, in
the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders
and to you as soon as practicable an earning statement covering the
twelve-month period ending March 31, 1999 that satisfies the provisions
of Section 11(a) of the Securities Act and the rules and regulations of
the Commission thereunder.
(f) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be
paid all expenses incident to the performance of its obligations under
this Agreement, including: (i) the fees, disbursements and expenses of
the Company's counsel and the Company's accountants in connection with
the registration and delivery of the Shares under the Securities Act and
all other fees or expenses in connection with the preparation and filing
of the Registration Statement, any preliminary prospectus, the Prospectus
and amendments and supplements to any of the foregoing, including all
printing costs associated therewith, and the mailing and delivering of
copies thereof to the Underwriters and dealers, in the quantities
hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any
transfer or other taxes payable thereon, (iii) the cost of printing or
producing any Blue Sky memorandum in connection with the offer and sale
of the Shares under state securities laws and all expenses in connection
with the qualification of the Shares for offer and sale under state
securities laws as provided in Section 6(d) hereof, including filing fees
and the reasonable fees and disbursements of counsel for the Underwriters
in connection with such qualification and in connection with the Blue Sky
memorandum, (iv) all filing fees and the reasonable fees and
disbursements of
19
<PAGE>
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association
of Securities Dealers, Inc., (v) all fees and expenses in connection with
the preparation and filing of the registration statement on Form 8-A
relating to the Class A Common Stock and all costs and expenses incident
to listing the Shares on the New York Stock Exchange, (vi) the cost of
printing certificates representing the Shares, (vii) the costs and
charges of any transfer agent, registrar or depositary, (viii) the costs
and expenses of the Company relating to investor presentations on any
"road show" undertaken in connection with the marketing of the offering
of the Shares, including, without limitation, expenses associated with
the production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with
the prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and
the cost of any aircraft chartered in connection with the road show, (ix)
all expenses in connection with any offer and sale of the Shares outside
of the United States, including filing fees and the reasonable fees and
disbursements of counsel for the Underwriters in connection with offers
and sales outside of the United States, and (x) all other costs and
expenses incident to the performance of the obligations of the Company
hereunder for which provision is not otherwise made in this Section. It
is understood, however, that except as provided in this Section, Section
7 entitled "Indemnity and Contribution", and the last paragraph of
Section 9 below, the Underwriters will pay all of their costs and
expenses, including fees and disbursements of their counsel, stock
transfer taxes payable on resale of any of the Shares by them and any
advertising expenses connected with any offers they may make.
(g) That in connection with the Directed Share Program, the Company
will ensure that the Directed Shares will be restricted to the extent
required by the NASD or the NASD rules from sale, transfer, assignment,
pledge or hypothecation for a period of five months following the date of
the effectiveness of the Registration Statement. Morgan Stanley will
notify the Company as to which Participants will need to be so
restricted. The Company will direct the transfer agent to place stop
transfer restrictions upon such securities for such period of time.
(h) To pay all fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp
duties, similar taxes or duties or other taxes, if any, incurred by the
Underwriters in connection with the Directed Share Program.
20
<PAGE>
7. Indemnity and Contribution. (a) Torchmark and the Company,
jointly and severally, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of either
Section 15 of the Securities Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein; provided, however, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
loss, claim, damage or liability.
(b) The Company agrees to indemnify and hold harmless Morgan Stanley
and each person, if any, who controls Morgan Stanley within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange
Act ("MORGAN STANLEY ENTITIES"), from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal
or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) (i) caused by the failure of
any Participant to pay for and accept delivery of the shares which,
immediately following the effectiveness of the Registration Statement,
were subject to a properly confirmed agreement to purchase; or (ii)
related to, arising out of, or in connection with the Directed Share
Program, provided that, the Company shall not be responsible under this
subparagraph (ii) for any losses, claim, damages or liabilities (or
expenses relating thereto) that are finally judicially determined to have
resulted from the bad faith or gross negligence of Morgan Stanley
Entities.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless Torchmark and the Company, their directors, their
officers who sign the Registration Statement and each person, if any, who
controls the Company or Torchmark within the meaning of either Section 15
of the Securities
21
<PAGE>
Act or Section 20 of the Exchange Act to the same extent as the foregoing
indemnity from Torchmark and the Company to such Underwriter, but only
with reference to information relating to such Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use
in the Registration Statement, any preliminary prospectus, the Prospectus
or any amendments or supplements thereto.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to Section 7(a) or 7(b), such
person (the "INDEMNIFIED PARTY") shall promptly notify the person against
whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party, upon request of the indemnified party, shall
retain counsel reasonably satisfactory to the indemnified party to
represent the indemnified party and any others the indemnifying party may
designate in such proceeding and shall pay the fees and disbursements of
such counsel related to such proceeding. In any such proceeding, any
indemnified party shall have the right to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such
indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii)
the named parties to any such proceeding (including any impleaded
parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between
them. It is understood that the indemnifying party shall not, in respect
of the legal expenses of any indemnified party in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for
the fees and expenses of more than one separate firm (in addition to any
local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley & Co. Incorporated, in the case
of parties indemnified pursuant to Section 7(a), and by Torchmark and the
Company, in the case of parties indemnified pursuant to Section 7(b). The
indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by reason of such settlement or judgment.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional
release of such indemnified party from all liability on claims that are
the subject matter of such proceeding.
22
<PAGE>
Notwithstanding anything contained herein to the contrary, if
indemnity may be sought pursuant to Section 7(b) hereof in respect of such
action or proceeding, then in addition to such separate firm for the indemnified
parties, the indemnifying party shall be liable for the reasonable fees and
expenses of not more than one separate firm (in addition to any local counsel)
for Morgan Stanley for the defense of any losses, claims, damages and
liabilities arising out of the Directed Share Program, and all persons, if any,
who control Morgan Stanley within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act.
(e) To the extent the indemnification provided for in Section 7(a),
7(b) or 7(c) is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to
therein, then each indemnifying party under such paragraph, in lieu of
indemnifying such indemnified party thereunder, shall contribute to the
amount paid or payable by such indemnified party as a result of such
losses, claims, damages or liabilities (i) in such proportion as is
appropriate to reflect the relative benefits received by Torchmark and
the Company on the one hand and the Underwriters on the other hand from
the offering of the Shares or (ii) if the allocation provided by clause
7(e)(i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in
clause 7(e)(i) above but also the relative fault of Torchmark and the
Company on the one hand and of the Underwriters on the other hand in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by Torchmark and the
Company on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the
same respective proportions as the net proceeds from the offering of the
Shares (before deducting expenses) received by the Company and the total
underwriting discounts and commissions received by the Underwriters, in
each case as set forth in the table on the cover of the Prospectus, bear
to the aggregate Public Offering Price of the Shares. The relative fault
of Torchmark and the Company on the one hand and the Underwriters on the
other hand shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by Torchmark or the Company or by the Underwriters
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The
Underwriters' respective obligations to contribute pursuant to this
Section 7 are several in proportion to the respective number of Shares
they have purchased hereunder, and not joint.
(f) Each of Torchmark, the Company and the Underwriters agree that
it would not be just or equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation that does not take
23
<PAGE>
account of the equitable considerations referred to in Section 7(e). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages and liabilities referred to in the immediately preceding
paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 7, no
Underwriter shall be required to contribute any amount in excess of the
amount by which the total price at which the Shares underwritten by it
and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwriter has otherwise been required
to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any person who was not guilt y of such
fraudulent misrepresentation. The remedies provided for in this Section 7
are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of
Torchmark and the Company contained in this Agreement shall remain
operative and in full force and effect regardless of (i) any termination
of this Agreement, (ii) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter or by or on behalf
of the Company, its officers or directors or any person controlling the
Company and (iii) acceptance of and payment for any of the Shares.
8. Termination. This Agreement shall be subject to termination by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 8(a)(i) through 8(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
9. Effectiveness; Defaulting Underwriters. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
24
<PAGE>
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I or Schedule
II bears to the aggregate number of Firm Shares set forth opposite the names of
all such non-defaulting Underwriters, or in such other proportions as you may
specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to this Agreement be increased pursuant to this Section 9 by
an amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If, on the Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Firm Shares to be purchased, and
arrangements satisfactory to you and the Company for the purchase of such Firm
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case either you or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. If, on the
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
Additional Shares or (ii) purchase not less than the number of Additional Shares
that such non-defaulting Underwriters would have been obligated to purchase in
the absence of such default. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company or Torchmark
to comply with the terms or to fulfill any of the conditions of this Agreement,
or if for any reason the Company or Torchmark shall be unable to perform its
obligations under this Agreement, the Company will reimburse the Underwriters or
such Underwriters as have so terminated this Agreement with respect to
themselves, severally, for all out-of-pocket expenses (including the fees and
disbursements of their counsel) reasonably incurred by such Underwriters in
connection with this Agreement or the offering contemplated hereunder.
25
<PAGE>
10. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
12. Headings. The headings of the sections of this Agreement have
been inserted for convenience of reference only and shall not be deemed a part
of this Agreement.
26
<PAGE>
Very truly yours,
TORCHMARK CORPORATION
By:
-------------------------------------------
Name: R. K. Richey
Title: Chairman and Chief Executive
Officer
WADDELL & REED FINANCIAL, INC.
By:
-------------------------------------------
Name: Keith A. Tucker
Title: Chairman of the Board and Chief
Executive Officer
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
Acting severally on behalf of themselves
and the several U.S. Underwriters
named in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:
----------------------------------
Name: Phillip S. Barnett
Title: Managing Director
27
<PAGE>
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
Acting severally on behalf of themselves
and the several International Underwriters
named in Schedule II hereto.
By: Morgan Stanley & Co. International Limited
By:
----------------------------------
Name: Phillip S. Barnett
Title: Managing Director
28
<PAGE>
SCHEDULE I
U.S. UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
----------- ---------------
<S> <C>
Morgan Stanley & Co. Incorporated 4,320,000
Goldman, Sachs & Co. 4,320,000
Merrill Lynch & Co. 4,320,000
George K. Baum & Company 200,000
Sanford C. Bernstein & Co., Inc. 800,000
CIBC Oppenheimer Corp. 800,000
Donaldson, Lufkin & Jenrette Securities Corporation 800,000
Fox-Pitt Kelton Inc. 800,000
Janney Montgomery Scott Inc. 200,000
Morgan Keegan & Company, Inc. 200,000
Piper Jaffray Inc. 200,000
The Robinson-Humphrey Company, LLC 200,000
Stephens Inc. 200,000
----------
Total U.S. Firm Shares .............. 17,360,000
==========
</TABLE>
29
<PAGE>
SCHEDULE II
INTERNATIONAL UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
----------- ---------------
<S> <C>
Morgan Stanley & Co. International Limited 1,200,000
Goldman Sachs International 1,200,000
Merrill Lynch International 1,200,000
Sanford C. Bernstein & Co., Inc. 370,000
Donaldson, Lufkin & Jenrette International 370,000
---------
Total International Firm Shares ...... 4,340,000
=========
</TABLE>
30
<PAGE>
EXHIBIT A
FORM OF LOCK-UP LETTER
____________, 1998
Morgan Stanley & Co. Incorporated
Goldman, Sachs & Co.
Merrill Lynch & Co.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
Goldman Sachs International
Merrill Lynch International
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") and Morgan Stanley & Co. International Limited ("MSIL")
propose to enter into an Underwriting Agreement (the "UNDERWRITING AGREEMENT")
with Waddell & Reed Financial, Inc., a Delaware corporation (the "COMPANY")
providing for the public offering (the "PUBLIC OFFERING") by the several
Underwriters, including Morgan Stanley and MSIL (the "UNDERWRITERS"), of
[ ] shares (the "SHARES") of the Class A common stock, $.01 par value per
share of the Company (the "CLASS A COMMON STOCK").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period ending
180 days after the date of the final prospectus (the "PROSPECTUS") relating to
the Public Offering (the "LOCK-UP PERIOD"), (1) offer, pledge, sell, contract
to sell, sell any option or contract to purchase, purchase
31
<PAGE>
any option or contract to sell, grant any option, right or warrant to purchase,
lend, or otherwise transfer or dispose of, directly or indirectly, any shares of
Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock, or (2) enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Class A Common Stock, whether any such
transaction described in clause (1) or (2) above is to be settled by delivery of
Class A Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to (a) the sale of any Shares to the
Underwriters pursuant to the Underwriting Agreement, (b) the issuance by the
Company of shares of Class A Common Stock upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof of which
the Underwriters have been advised in writing, (c) transactions by any person
other than the Company or Torchmark Corporation ("TORCHMARK") relating to shares
of Class A Common Stock or other securities acquired in open market transactions
after completion of the Offering, (d) options on shares of Class A Common
Stock issued in connection with employee benefit plans as described in the
Prospectus or (e) the issuance of Class A Common Stock as payment for
acquisitions by the Company, if all persons or entities receiving shares of
Class A Common Stock pursuant to this clause (e) agree to be subject to the
restrictions in clauses (i) and (ii) above for the remainder of the Lock-up
Period.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation among the Company, Torchmark and the Underwriters.
Very truly yours,
----------------------------------------------
(Name)
----------------------------------------------
(Address)
32
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF HUGHES & LUCE, L.L.P. APPEARS HERE]
March 3, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We have acted as counsel to Waddell & Reed Financial, Inc., a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended, of 21,700,000 shares of the Company's
Class A common stock, par value $0.01 per share (the "Common Stock"), and up to
an additional 2,170,000 shares of Common Stock subject to an over-allotment
option as described in the Registration Statement of the Company on Form S-1
(No. 333-43687) (the "Registration Statement") filed with the Securities and
Exchange Commission. Upon effectiveness, the Company proposes to sell such
shares to the Underwriters (the "Underwriters") listed in the final Prospectus
(the "Prospectus") that forms a part of the Registration Statement.
In rendering this opinion, we have examined and relied upon executed
originals, counterparts or copies of such documents, records and certificates
(including certificates of public officials and officers of the Company) as we
considered necessary or appropriate for enabling us to express the opinions set
forth herein. In all such examinations, we have assumed the authenticity and
completeness of all documents submitted to us as originals and the conformity to
originals and completeness of all documents submitted to us as photostatic,
conformed, notarized or certified copies.
Based on the foregoing, we are of the opinion that the Common Stock, when
issued and sold to the Underwriters as described in the Registration Statement,
will be validly issued, fully paid and nonassessable.
This opinion may be filed as an exhibit to the Registration Statement.
We also consent to the reference to this firm as having passed on the validity
of the Common Stock under the caption "Legal Matters" in the Prospectus. In
giving this consent, we do not admit that we are included in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Securities and Exchange Commission promulgated thereunder.
Very truly yours,
/s/ HUGHES & LUCE, L.L.P.
<PAGE>
EXHIBIT 10.1
PUBLIC OFFERING AND SEPARATION AGREEMENT
THIS AGREEMENT is made and entered into this __ day of March, 1998,
between Torchmark Corporation, a Delaware corporation ("Torchmark"), and Waddell
& Reed Financial, Inc., a Delaware corporation which as of the date hereof is an
indirect wholly owned subsidiary of Torchmark (the "Company").
WHEREAS, Torchmark and the Company have determined that it is
desirable, on the terms and conditions described in this Agreement, to cause the
Company to make an initial public offering of certain newly issued shares of
common stock of the Company;
WHEREAS, Torchmark directly or indirectly owns 100% of the common
stock of the Company;
WHEREAS, the Company is planning an initial public offering and
Torchmark has determined, subject to satisfaction of certain conditions, to
separate the ownership of the Company and the other members of the Company Group
(as defined herein) from Torchmark and the other members of the Torchmark Group
(as defined herein), by means of a distribution of the common stock of the
Company held by Torchmark and the other members of the Torchmark Group to
Torchmark stockholders as described in this Agreement; and
WHEREAS, this Agreement is made to set forth the principal corporate
actions required to effect the Public Offering (as defined herein) and the Spin-
Off (as defined herein) and to set forth other agreements that will govern
certain other matters following the Public Offering and the Spin-Off;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following words, terms and phrases
herein written with an initial capital letter shall have the meanings assigned
to them below:
"Action" shall mean any suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
"Agent" shall mean the distribution agent to be appointed by Torchmark
to distribute to the stockholders of Torchmark, pursuant to the Distribution,
the shares of Class A Common Stock and Class B Common Stock held by Torchmark.
1
<PAGE>
"Ancillary Agreement" shall have the meaning set forth in Section 8.1.
"Balancing Cash" shall have the meaning set forth in Section
2.1(m).
"Class A Common Stock" shall mean shares of Class A Common Stock, par
value $.01 per share, of the Company.
"Class B Common Stock" shall mean shares of Class B Common Stock, par
value of $.01 per share, of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company Affiliate" shall mean a Person that directly, or indirectly
through one or more intermediaries, Controls or is Controlled by the Company,
provided, however, that for purposes of this Agreement none of the following
Persons shall be considered Company Affiliates: (i) Torchmark or any Torchmark
Affiliate, (ii) any corporation less than 50.1% of whose voting stock is
directly or indirectly owned by any member of the Company Group, any partnership
less than 50.1% of whose interests in profits and losses is directly or
indirectly owned by any member of the Company Group, and any corporation
(regardless of the percentage of its ownership) where the ownership by any
member of the Company Group was made as a venture capital or a portfolio (as
opposed to operational) investment or where the equity ownership resulted from a
default on a loan to such corporation, (iii) UILIC, and (iv) any former
Torchmark Affiliate previously Controlled by the Company.
"Company's Business" shall mean all of the investment management
business and the business of acting as underwriter, administrator or distributor
of Registered Investment Companies and any related or ancillary business
conducted by any member of the Company Group in the past, at the date hereof, or
in the future.
"Company Group" shall mean collectively, the Company and the Company
Affiliates, or any one or more of such companies.
"Company Registration Statement" shall have the meaning set forth in
Section 5.3(f).
"Control" shall mean the possession, directly or indirectly of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise, provided that no person shall be deemed to control a Registered
Investment Company solely by reason of serving as an investment advisor,
administrator, principal underwriter or distributor for such Registered
Investment Company.
"Demand Registration Statement" shall have the meaning set forth in
Section 5.1.
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"Distribution" shall mean the distribution by Torchmark on a pro rata
basis to holders of Torchmark common stock of all of the outstanding shares of
Class A Common Stock and Class B Common Stock owned by Torchmark on the
Distribution Date as provided in Article IV.
"Distribution Date" shall mean the date determined by Torchmark in
accordance with Section 4.3 on which the Spin-Off will occur.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated thereunder.
"Firm Shares" shall mean the number of newly issued shares of Class A
Common Stock specified as "Firm Shares" in the Underwriting Agreement included
in the Public Offering.
"Group" shall mean the Company Group or the Torchmark Group.
"Indemnifying Party" shall mean a party to this Agreement which is
obligated to provide indemnification under this Agreement.
"Indemnitee" shall mean a Person who is entitled to indemnification
under this Agreement.
"Information" shall have the meaning set forth in Section 7.1.
"Insurance Proceeds" shall mean those moneys (i) received by an
insured from an insurance carrier or (ii) paid by an insurance carrier on behalf
of the insured, in either case net of any applicable premium adjustments,
retrospectively rated premium adjustments, deductibles, retentions or costs paid
by such insured.
"Internal Distribution" shall mean the distribution by Liberty to its
sole stockholder, Torchmark, of all of the outstanding shares of Class B Common
Stock owned by it on the Distribution Date as provided in Article IV.
"Investment Company Act" shall mean the Investment Company Act of
1940, as amended, together with the rules and regulations promulgated
thereunder.
"Liabilities" shall mean all debts, liabilities and obligations,
matured or unmatured, absolute or contingent, accrued or unaccrued, liquidated
or unliquidated, known or unknown, whenever arising, and whether or not the same
would properly be reflected on a balance sheet, including all costs and expenses
related thereto.
"Liberty" shall mean Liberty National Life Insurance Company, an
Alabama corporation and a wholly owned subsidiary of Torchmark.
"Losses" shall mean any and all losses, Liabilities, claims, damages,
obligations, payments, costs and expenses, matured or unmatured, absolute or
contingent, accrued or unaccrued, liquidated or unliquidated, known or unknown
(including, without limitation, the costs and
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expenses of any and all Actions, threatened Actions, demands, assessments,
judgments, settlements and compromises relating thereto and attorneys' fees and
any and all expenses whatsoever reasonably incurred in investigating, preparing
or defending against any such Actions or threatened Actions).
"Net Offering Proceeds" shall mean the proceeds of the Public Offering
other than the proceeds attributable to the Overallotment Shares, after
deducting underwriting commissions and discounts, and after deducting Offering
Expenses paid or advanced by the Company, Company Affiliates, Torchmark and
Torchmark Affiliates which the Company reimburses pursuant to Section 3.4(a)
hereof and after deducting any amount retained by the Company pursuant to
Section 3.5(a) hereof.
"Offering Expenses" shall mean the costs and expenses of any
registration by the Company which is made hereunder, including specifically the
fees and expenses of counsel and accountants; all out-of-pocket costs and
expenses incidental to the preparation, printing and filing of any registration
statement and all amendments and supplements thereto; the costs of furnishing
copies of preliminary prospectuses, each final prospectus and each amendment or
supplement thereto to the underwriter, dealers and other purchasers of shares so
registered; the reimbursable expenses of the underwriter; the costs and expenses
incurred in connection with the qualification of such shares under the "blue
sky" laws of various jurisdictions; the fees and expenses of the Company's
transfer agent; stock exchange listing fees; fees paid to the National
Association of Securities Dealers, Inc.; and similar expenses incurred in
complying with the registration provisions of this Agreement, but excluding the
underwriter's discounts and commissions and any overtime expenses charged by
R.R. Donnelley.
"Overallotment Shares" shall have the meaning set forth in Section
3.1(a)(1).
"Person" shall mean an individual, corporation, partnership,
association, joint venture, unincorporated organization, trust, or other entity,
including, without limitation, employee pension, profit sharing or other benefit
plan or trust.
"Public Offering" shall mean the registered offering for sale to the
public of the newly issued Shares as contemplated by Section 3.1 hereof.
"Public Offering Date" shall mean the date of the closing of the sale
of the Firm Shares in the Public Offering.
"Record Date" shall mean the close of business on the date to be
determined by the Torchmark Board of Directors as the record date for
determining stockholders of Torchmark entitled to receive shares of Class A
Common Stock and Class B Common Stock.
"Registered Investment Company" shall mean an investment company
registered as such under the Investment Company Act.
"Registration Statement" shall mean the registration statement to be
filed by the Company with the SEC in connection with the Public Offering as
contemplated by Section 3.1(a)(1) hereof.
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"Representatives" shall mean the authorized accountants, counsel and
other designated representatives of any Person.
"Ruling Request" shall have the meaning set forth in Section
4.1(a)(1).
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended,
together with the rules and regulations promulgated thereunder.
"Shares" shall mean the Firm Shares and the Overallotment Shares, if
any, included in the Public Offering, in the aggregate constituting no more than
thirty six percent (36%) of the outstanding shares of common stock of the
Company on a fully diluted basis.
"Spin-Off" shall mean the Internal Distribution and the Distribution.
"Torchmark Affiliate" shall mean a Person that directly, or indirectly
through one or more intermediaries Controls or is Controlled by Torchmark and
shall include Century Capital Partners, L.P., a Delaware limited partnership
("Century") although not Controlled by Torchmark; provided, however, that for
purposes of this Agreement none of the following Persons shall be considered
Torchmark Affiliates: (i) the Company or any Company Affiliate and (ii) any
corporation less than 50.1% of whose voting stock is directly or indirectly
owned by any member of the Torchmark Group, any partnership (other than Century)
less than 50.1% of whose interests in profits and losses is directly or
indirectly owned by any member of the Torchmark Group, and any corporation
(regardless of the percentage of its ownership) where the ownership by any
member of the Torchmark Group was made as a venture capital or a portfolio (as
opposed to operational) investment or where the equity ownership resulted from a
default on a loan to such corporation.
"Torchmark's Business" shall mean any business other than the
Company's Business conducted by any member of the Torchmark Group in the past,
at the date hereof, or in the future, including without limitation, Vesta
Insurance Group, Inc.
"Torchmark Group" shall mean collectively, Torchmark and the Torchmark
Affiliates, or any one or more of such companies.
"UILIC" shall mean United Investors Life Insurance Company, a Missouri
corporation and a wholly owned subsidiary of the Company.
"Underwriters" shall mean Morgan Stanley & Co. Incorporated and Morgan
Stanley & Co. International Limited, the managing underwriters for the Public
Offering, and Goldman, Sachs & Co, Goldman Sachs International, Merrill Lynch &
Co., and Merrill Lynch International.
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"Underwriting Agreement" shall mean the underwriting agreement to be
entered into between the Company and the Underwriters with respect to the Public
Offering.
ARTICLE II
CERTAIN TRANSACTIONS PRIOR TO THE PUBLIC OFFERING
SECTION 2.1 Actions by the Company. At the request of Torchmark, the
Company shall, prior to the Public Offering, take or cause to be taken, the
following actions in the order set forth below:
(a) The Company shall cancel the balance of all remaining promissory
notes payable to the Company by Torchmark, which notes were in the aggregate
original principal amount of approximately $194 million, in exchange for
preferred stock of Torchmark in an amount equal to the remaining unpaid
principal and interest on such notes (the "$200 Million Preferred");
(b) Waddell & Reed Financial Services, Inc. ("WRFS") shall cancel the
balance of a promissory note payable to WRFS by Torchmark, which note was in the
original principal amount of approximately $124 million, in exchange for
preferred stock of Torchmark in an amount equal to the remaining unpaid
principal and interest on such note (the "$124 Million Preferred");
(c) WRFS shall distribute the $124 Million Preferred to the Company,
and simultaneously the Company shall assume WRFS's obligation to pay principal
and interest on a promissory note payable by WRFS to Liberty in the original
principal amount of approximately $124 million (the "$124 Million Note");
(d) [THIS SECTION INTENTIONALLY OMITTED.]
(e) The Company shall transfer part of the $124 Million Preferred and
the $200 Million Preferred to UILIC as a contribution to capital, in an amount
equal to the excess of (i) the aggregate face amount of the $124 Million
Preferred plus the $200 Million Preferred over (ii) the remainder (but not less
than zero) obtained by subtracting (A) the greater of the Net Offering Proceeds
and $428 million, from (B) the aggregate remaining outstanding amounts of
principal and interest due under the $124 Million Note, the
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promissory note payable by the Company to Liberty in the original principal
amount of approximately $390 million (the "$390 Million Note"), and the
promissory note payable by the Company to Torchmark in the original principal
amount of approximately $90 million (the "$90 Million Note");
(f) The Company shall transfer the portion of the $124 Million
Preferred and the $200 Million Preferred not transferred to UILIC pursuant to
Section 2.1(e) hereof, to Liberty in an amount not to exceed the original face
amount of the $124 Million Preferred, as partial prepayment of the $124 Million
Note and the $390 Million Note, such aggregate prepayment to be applied in
proportion to the respective outstanding amounts of unpaid principal and
interest on such notes, and to be applied to interest first, then principal, and
(ii) second, if any, to Torchmark as partial prepayment of the $90 Million Note,
such prepayment to be applied to interest first, then principal;
(g) The Company shall distribute all of the capital stock of UILIC to
the Company's shareholders pro rata in a distribution pursuant to Section 355 of
the Code;
(h) The Company shall distribute a dividend of all of the stock of
Torch Royalty Company, a Delaware corporation, owned by the Company to Liberty
as a non-pro rata dividend;
(i) The Company shall distribute a dividend of all of its interest in
Century Capital Partners, L.P., a Delaware limited partnership, to Liberty as a
non-pro rata dividend;
(j) The Company shall distribute a dividend of that certain account
receivable, payable by Torch Energy Advisors Incorporated in the amount of
approximately $1,938,000 and received in connection with the disposition of
Torch Energy Advisors Incorporated, to Torchmark as a non-pro rata dividend;
(k) The Company shall distribute a dividend of all of its interest in
Associates Oil & Gas Company, L.P., a Texas limited partnership, to Liberty as a
non-pro rata dividend;
(l) The Company shall distribute all its interest in that certain
prepaid expense in the amount of approximately $122,538 that was created in
connection with the sale of stock of Nuevo Energy Company, a Delaware
corporation, to Torchmark as a non-pro rata dividend;
(m) The Company shall distribute cash to Torchmark as a non-pro rata
dividend in the amount necessary for the aggregate dividends paid by the Company
pursuant to Sections 2.1(h) through (m) hereof to be paid to Torchmark and
Liberty in proportion to their stock holdings in the Company (approximately
$251,298) (the "Balancing Cash"); and
(n) The Company shall sell all its interest in Velasco Gas Company
Ltd., a Texas limited partnership, to Torchmark Development Corporation.
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SECTION 2.2 Certificate of Incorporation and Bylaws. The Company and
Torchmark shall take all actions necessary to adopt and make effective prior to
the Public Offering Date the amendments to the Certificate of Incorporation and
Bylaws of the Company in substantially the forms attached as Exhibits A and B
hereto.
ARTICLE III
PUBLIC OFFERING
SECTION 3.1 Public Offering. Subject to the conditions specified in
Section 3.2, the Company and Torchmark shall use all reasonable efforts to
consummate the Public Offering and shall take all actions necessary in
connection therewith, including, without limitation, the following actions:
(a) Actions by each Party.
(1) The Company has filed a Registration Statement on Form S-1 to
register under the Securities Act for sale or distribution to the public newly
issued Shares for the account of the Company. The Company shall hereafter file
such amendment or amendments to the Registration Statement as shall be necessary
to cause it to become effective. The Registration Statement shall provide for
an Overallotment option to the Underwriters to purchase from the
Company shares of Class A Common Stock in an amount of up to ten percent
(10%) of the Firm Shares (the "Overallotment Shares").
(2) The Company and Torchmark shall use all reasonable efforts to
obtain any and all approvals and authorizations necessary to consummate the
Public Offering and the other transactions and agreements contained herein.
(3) The Company and Torchmark shall use all reasonable efforts to
cause the Shares, upon their issuance pursuant to the Public Offering, to be
approved for listing on the New York Stock Exchange, subject to official notice
of issuance.
(4) Except for the individuals to be directors of the Company in
accordance with Section 3.1(c)(4) and for such other individuals as to whom
Torchmark and the Company may agree, Torchmark shall cause all directors and
employees of the Torchmark Group to resign, effective as of the Public Offering
Date, from all boards of directors or similar governing bodies of all members of
the Company Group on which they serve, and from all positions as officers of all
members of the Company Group in which they serve, it being understood that,
without limitation, this provision does not apply to any directorships of any
Registered Investment Company.
(5) Except for such individuals as to whom Torchmark and the Company
may agree, the Company shall cause all directors and employees of the Company
Group to resign, effective as of the Public Offering Date, from all boards of
directors or similar governing bodies of all members of the Torchmark Group on
which they serve, and from all positions as officers of all members of the
Torchmark Group in which they serve.
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(6) Prior to the Public Offering Date:
(a) Torchmark shall advise the Company as to all outstanding
guarantees, letter of credit obligations, performance or surety bonds, comfort
letters and other similar obligations of Torchmark and the Torchmark Affiliates
relating to the Company's Business. Except as otherwise provided in Section
8.4, the Company shall use its best efforts from and after the Public Offering
Date to obtain the release of Torchmark and the Torchmark Affiliates from all
such obligations or liabilities.
(b) The Company shall advise Torchmark as to all outstanding
guarantees, letter of credit obligations, performance or surety bonds, comfort
letters and other similar obligations of the Company and the Company Affiliates
relating to Torchmark's Business. Except as otherwise provided in Section 8.4,
Torchmark shall use its best efforts from and after the Public Offering Date to
obtain the release of the Company and the Company Affiliates from all such
obligations or liabilities.
(b) Actions by the Company.
(1) The Company shall use all reasonable efforts to have the
Registration Statement declared effective as promptly as reasonably practicable
and will promptly notify Torchmark and confirm such advice in writing, (i) when
the Registration Statement has become effective, (ii) when any post-effective
amendment to the Registration Statement becomes effective, (iii) of any SEC
comment letters, and (iv) of any request by the SEC for any amendment or
supplement to the Registration Statement or any prospectus relating thereto or
for additional information.
(2) The Company shall promptly deliver to Torchmark copies of the
Registration Statement and amendments thereto as filed with the SEC. The
Company shall furnish to the Underwriters such number of copies of any
prospectus (including any preliminary prospectus) as such Underwriters may
reasonably request in order to effect the offering and sale of any Shares being
offered and sold pursuant to such Registration Statement.
(3) The Company shall use its reasonable efforts to qualify not later
than the effective date of the Registration Statement the Shares registered
thereunder under the "blue sky" laws of such states as the Underwriters may
reasonably request; provided, however, that the Company shall not be required to
qualify as a foreign corporation or execute a general consent to service of
process in any jurisdiction.
(4) The Company shall enter into customary agreements (including the
Underwriting Agreement) and take all other customary and appropriate actions in
order to expedite or facilitate the disposition of Shares subject to the
Registration Statement.
(5) On the Public Offering Date, the Company shall hereby
represent and warrant to Torchmark that the Registration Statement, in the form
declared effective by the SEC,
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and any amendment and supplement thereto and any prospectus included therein,
will comply in all material respects with the applicable provisions of the
Securities Act, and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided that the Company shall not represent and warrant
as to the information provided in writing by or on behalf of Torchmark which
either (i) related to Torchmark, Torchmark's Business, its operations or its
relationship with the Company, or (ii) was furnished specifically for use in the
Registration Statement or any amendment or supplement thereto or any prospectus
included therein.
(6) On the Public Offering Date, the Company shall issue to the
Underwriters such number of Shares as provided in the Underwriting Agreement.
(c) Actions by Torchmark.
(1) Torchmark shall furnish the Company such information regarding
Torchmark as is reasonably required by the Company in connection with any
registration, qualification or compliance referred to in this Article III.
(2) On the Public Offering Date, Torchmark shall hereby represent and
warrant to the Company that information furnished in writing to the Company by
or on behalf of Torchmark which either (i) related to Torchmark, Torchmark's
Business, its operations or its relationship with the Company, or (ii) was
furnished specifically for use in the Registration Statement or any amendment or
supplement thereto or any prospectus included therein, did not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(3) Torchmark shall, and shall cause Liberty to, take all action
necessary to cause the persons identified on Exhibit C to be elected to the
Board of Directors of the Company promptly after the date hereof.
SECTION 3.2 Conditions Precedent to Consummation of the Public
Offering. The obligations of the parties to consummate the Public Offering shall
be conditioned on the satisfaction of the following conditions:
(a) The Registration Statement shall have been filed and declared effective
by the SEC, and there shall be no stop-order in effect with respect thereto;
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(b) The actions and filings with regard to state securities and blue sky
laws of the United States, if any are required, shall have been taken and, where
applicable, have become effective or been accepted;
(c) The Company shall have entered into the Underwriting Agreement and all
conditions to the obligations of the Underwriters shall have been satisfied or
waived;
(d) As of the Public Offering Date, Liberty shall control (within the
meaning of Sections 355 and 368(c) of the Code) the Company, and all other
conditions to permit the Internal Distribution to qualify as a tax-free
distribution to Torchmark and the Distribution to qualify as a tax-free
distribution to Torchmark shareholders shall, to the extent applicable as of the
time of the Public Offering, be satisfied, and there shall be no event or
condition that is likely to cause any of the foregoing not to be satisfied as of
the time of the Distribution Date or thereafter;
(e) The Shares shall have been approved for listing on the New York Stock
Exchange, subject to official notice of issuance;
(f) No order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Public Offering or any of the other transactions
contemplated by this Agreement or any other agreement or document contemplated
by this Agreement shall be in effect;
(g) Torchmark and the Company shall have received any necessary
governmental or regulatory approval or authorization;
(h) This Agreement shall not have been terminated;
(i) The Board of Directors of Torchmark or a duly authorized committee of
Torchmark directors shall have determined that the terms of the Public Offering
are acceptable to Torchmark;
(j) The actions required pursuant to Section 2.1 shall have been taken; and
(k) Such other actions as the parties may, based upon the advice of
counsel, reasonably request to be taken prior to the Public Offering in order to
assure the successful completion of the Public Offering, the Spin-Off and the
other transactions contemplated by this Agreement or any other agreement or
document contemplated by this Agreement shall have been taken.
SECTION 3.3 Participation. The participation of any party or its
counsel or other representatives in the preparation of the Registration
Statement or any amendment or supplement thereto or any prospectus included
therein, or its approval of all or any of such documents to be filed, shall not
alter the rights to indemnification or to contribution pursuant to Article VI.
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SECTION 3.4 Use of Proceeds. The Company shall apply the proceeds
of the Public Offering other than the proceeds attributable to the Overallotment
Shares, after deducting underwriting commissions and discounts, as follows:
(a) First, to reimburse the Company, Company Affiliates, Torchmark and
Torchmark Affiliates for all Offering Expenses paid or advanced by such
party;
(b) Second, to prepay the amounts due under the Company's promissory
notes outstanding as of the Public Offering Date to Torchmark and Liberty to the
extent of such remaining proceeds; and
(c) Third, any remaining amount of such net proceeds shall be paid to
Torchmark and Liberty as a pro rata dividend.
All such amounts shall be paid immediately upon the Company's receipt of
such proceeds (or as soon thereafter as is possible). To the extent the exact
amount of any such payment cannot be immediately determined, a good faith
estimate shall be made by the parties as the basis for an immediate initial
payment, and the parties shall settle with an exact amount as soon as is
practicable.
SECTION 3.5 Use of Overallotment Proceeds. The Company shall apply the
proceeds of the Public Offering attributable to the Overallotment Shares, after
deducting underwriting commissions and discounts, as follows:
(a) First, the Company shall retain $35,000,000 plus an amount equal to the
Balancing Cash; and
(b) Second, any remaining amount of such net proceeds to prepay the amounts
due under the Company's promissory notes outstanding as of the Public Offering
Date to Torchmark and Liberty to the extent of such remaining proceeds (to the
extent not prepaid pursuant to Section 3.4(b) above); and
(c) Third, any remaining amount of such net proceeds shall be paid to
Torchmark and Liberty as a pro rata dividend.
SECTION 3.6 Overtime Charges. The Company agrees to pay overtime expenses
charged by R.R. Donnelley as approved by the Company from time to time in
connection with the Public Offering.
SECTION 3.7 Intercompany Debt.
(a) In the event the Company's transfer to Torchmark and Liberty of the
cash amounts to be paid pursuant to Section 3.4(b) are sufficient to constitute
the final payment of the remaining outstanding principal plus accrued interest
under the $90 Million Note, the $390 Million Note and the $124 Million Note,
Torchmark shall cancel the $90 Million Note and Liberty shall cancel the $390
Million Note and the $124 Million Note.
(b) In the event the Company's transfer to Torchmark and Liberty of the
cash amounts to be paid pursuant to Section 3.4(b) are not sufficient to
constitute the final payment of the remaining outstanding principal plus accrued
interest under the $90 Million Note, the $390 Million Note and the $124 Million
Note, the cash shall be applied first to the $90 Million Note and the $390
Million Note in the proportions directed by Torchmark, and then to the $124
Million Note, and the unpaid portion of any such Notes shall remain outstanding
as an obligation of the Company. If such payment completely prepays all amounts
due under any such Note, then Torchmark or Liberty, as applicable, shall cancel
such Note.
All such amounts shall be paid immediately upon the Company's receipt of
such proceeds (or as soon thereafter as is possible). To the extent the exact
amount of any such payment cannot be immediately determined, a good faith
estimate shall be made by the parties as the basis for an immediate initial
payment, and the parties shall settle with an exact amount as soon as is
practicable.
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ARTICLE IV
DISTRIBUTION
SECTION 4.1 Actions Prior to the Spin-Off.
(a) Actions by Torchmark.
(1) Torchmark shall continue to seek to obtain a private letter ruling
from the Internal Revenue Service to the effect that, among other things, the
Spin-Off will qualify as a tax-free distribution for federal income tax purposes
under Section 355 of the Code (the "Ruling Request"). The Company shall provide
all information requested by Torchmark as necessary for Torchmark to obtain such
ruling.
(2) Subject to Section 4.3, on or prior to the Distribution Date,
Torchmark shall, subject to any necessary governmental approvals and consents,
cause Liberty to distribute a dividend of all of the Class B Common Stock held
by Liberty to Torchmark, its sole stockholder.
(3) On or prior to the Distribution Date, Torchmark shall, subject to
any necessary governmental approvals and consents, transfer all of the stock of
American Income Life Insurance Company to Globe Life and Accident Insurance
Company as a contribution to capital.
(b) Actions by each Party.
(1) Subject to Section 4.3, prior to the Distribution Date, the
Company and Torchmark shall prepare and mail to the holders of Torchmark common
stock, such information concerning the Company, its business, operations and
management, the Spin-Off and such other matters as Torchmark and the Company
shall reasonably determine and as may be required by law. Torchmark and the
Company, as may be appropriate, will prepare and, to the extent required under
applicable law, will file with the SEC any such documentation which Torchmark
determines is necessary or desirable to effectuate the Spin-Off and Torchmark
and the Company shall each use its reasonable efforts to obtain all necessary
approvals from the SEC with respect thereto.
(2) In addition to their respective obligations under Section
4.1(b)(1) above, Torchmark and the Company shall take all other actions as may
be necessary or appropriate under the securities or blue sky laws of the United
States in connection with the Spin-Off.
(3) Torchmark and the Company shall use their reasonable efforts to
cause the conditions set forth in Section 4.3 to be satisfied and to effect the
Spin-Off on the Distribution Date.
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(c) Actions by the Company.
(1) The Company shall prepare and file, and shall use its reasonable
efforts to have approved, an application for the listing of the Class A Common
Stock and Class B Common Stock to be distributed in the Spin-Off on the New York
Stock Exchange.
(2) Between the Public Offering Date and the Distribution Date, the
Company shall not issue any shares of stock or enter into any binding obligation
to do so if the effect thereof would be that Liberty would not control the
Company within the meaning of Sections 355 and 368(c) of the Code, or,
subsequent to the Internal Distribution, that Torchmark would not control the
Company within the meaning of Sections 355 and 368(c) of the Code.
SECTION 4.2 The Spin-Off.
(a) Subject to Section 4.3, on or prior to the Distribution Date, Torchmark
shall deliver to the Agent for the benefit of holders of record of Torchmark
common stock on the Record Date, a single stock certificate endorsed by
Torchmark in blank, representing all of the outstanding shares of Class A Common
Stock then owned by Torchmark or any other member of the Torchmark Group and a
single stock certificate endorsed by Torchmark in blank, representing all of the
outstanding shares of Class B Common Stock then owned by Torchmark or any other
member of the Torchmark Group, and shall cause the transfer agent for the shares
of Torchmark common stock to instruct the Agent to distribute on the
Distribution Date the appropriate number of such shares of Class A Common Stock
and Class B Common Stock (except for fractional shares which will be sold for
cash pursuant to Section 4.4 to be distributed in lieu thereof) to each such
holder or designated transferee or transferees of such holder.
(b) Subject to Section 4.4, each holder of Torchmark common stock on the
Record Date (or such holder's designated transferee or transferees) shall be
entitled to receive, in the Spin-Off, the following:
(1) A number of shares of Class A Common Stock equal to the number of
shares of Class A Common Stock owned by Torchmark and any other member of the
Torchmark Group on the Record Date multiplied by a fraction, the numerator of
which is the number of shares of Torchmark common stock held by such holder on
the Record Date, and the denominator of which is the number of shares of
Torchmark common stock outstanding on the Record Date, which number shall be
rounded down to the nearest whole number of shares; and
(2) A number of shares of Class B Common Stock equal to the number of
shares of Class B Common Stock owned by Torchmark or any other member of the
Torchmark Group on the Record Date multiplied by a fraction, the numerator of
which is the number of shares of Torchmark common stock held by such holder on
the Record Date, and the denominator of which is the number of shares of
Torchmark common stock outstanding on the Record Date, which number shall be
rounded down to the nearest whole number of shares.
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(c) Torchmark and the Company, as the case may be, will provide to the
Agent all share certificates and any information required in order to complete
the Spin-Off on the basis specified above.
SECTION 4.3 Conditions to Spin-Off. Torchmark shall effect the Spin-
Off as promptly as practicable after October 1, 1998 as determined by Torchmark,
following the satisfaction or waiver by Torchmark, in its sole discretion, of
the conditions set forth below:
(a) A private letter ruling from the Internal Revenue Service shall have
been obtained, and shall continue in effect, providing that, among other things,
the Spin-Off will qualify as a tax-free distribution for federal income tax
purposes under Section 355 of the Code, such ruling shall be in form and
substance satisfactory to Torchmark in its sole discretion and Torchmark and the
Company shall have complied with all conditions set forth in such ruling;
(b) Any material governmental approvals and consents necessary to
consummate the Spin-Off shall have been obtained and shall be in full force and
effect;
(c) No order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Spin-Off shall be in effect and no other event outside the
control of Torchmark shall have occurred or failed to occur that prevents the
consummation of the Spin-Off;
(d) The transactions contemplated hereby shall be in compliance with
applicable federal and state securities and insurance laws;
(e) Each of the Company and Torchmark shall have received such material
consents, and shall have received executed copies of such agreements or
amendments of agreements, as they shall deem material in connection with the
completion of the transactions contemplated by this Agreement or any other
agreement or document contemplated by this Agreement or otherwise;
(f) All action and other documents and instruments deemed necessary or
advisable in connection with the transactions contemplated hereby shall have
been taken or executed, as the case may be, in form and substance satisfactory
to Torchmark;
(g) Since December 31, 1997, no material adverse change shall have occurred
with respect to the business or financial condition of Torchmark and no other
event or development shall have occurred which the Board of Directors of
Torchmark determines, in its sole discretion, make the Spin-Off not in the best
interests of Torchmark and its stockholders.
The foregoing conditions are for the sole benefit of Torchmark and shall not
give rise to or create any duty on the part of Torchmark to waive or not waive
any such condition.
SECTION 4.4 Fractional Shares. As soon as practicable after the
Distribution Date, Torchmark shall direct the Agent to determine the number of
whole shares and fractional shares
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of the Class A Common Stock and the Class B Common Stock allocable to each
holder of record of Torchmark common stock as of the Record Date, to aggregate
all such fractional shares and sell the whole shares obtained thereby in open-
market transactions in the Agent's sole discretion as to when, how, through
which broker-dealer and at what price to make such sales, and to cause to be
distributed to each such holder or for the benefit of each such holder, in lieu
of any fractional share, such holder's ratable share of the proceeds of such
sale, after making appropriate deductions of the amount required to be withheld
for federal income tax purposes and after deducting an amount equal to all
brokerage charges, commissions and transfer taxes attributed to such sale.
Torchmark and the Agent shall use their reasonable efforts to aggregate the
shares of Torchmark common stock that may be held by any holder of record
thereof through more than one account in determining the fractional shares
allocable to such holder.
ARTICLE V
REGISTRATION RIGHTS
SECTION 5.1 Registration of Shares In the event that the Spin-Off
has not occurred by March 31, 1999, upon the request of Torchmark [made at any
time after such date but prior to March 31, 2002], the Company shall file with
the SEC, as promptly as practicable, a demand registration statement (the
"Demand Registration Statement") including the shares of Class A Common Stock
and/or Class B Common Stock then held by Torchmark or any other member of the
Torchmark Group Torchmark requests to be included, provided, however, that the
number of shares of Class A Common Stock and/or Class B Common Stock Torchmark
requests be included must represent not less than the lesser of (i) twenty
percent (20%) of the Class A Common Stock and the Class B Common Stock then held
by Torchmark and any other member of the Torchmark Group and (ii) all of the
shares of Class A Common Stock and Class B Common Stock then held by Torchmark
and the other members of the Torchmark Group. Torchmark shall have the right to
request up to three Demand Registration Statements, provided that the Company
shall have no obligation to file any such Demand Registration Statement on or
prior to a ninety (90) day period following the filing of any other registration
statement by the Company (other than registration statements on Form S-4 or Form
S-8 or another form available for registration of securities other than for sale
to the public for cash). The Company shall use its best efforts to cause each
Demand Registration Statement to be declared effective by the SEC as promptly as
practicable. If a Demand Registration Statement shall be withdrawn by the
Company before effectiveness, it shall not be counted against Torchmark's right
to request three registrations. Torchmark will pay all reasonable costs incurred
to obtain shareholder approval for any mutual fund which is a party to an
investment advisory contract with any member of the Company Group in the event a
sale by Torchmark pursuant to a Demand Registration Statement or a Company
Registration Statement would constitute an "assignment" as defined in the
Investment Company Act and the Advisors Act of such investment advisory
contract.
SECTION 5.2 Limitations of Registration Rights.
(a) The Company may, by written notice to Torchmark, for a period of
up to forty-five (45) days from the date of written notice, delay the filing or
effectiveness of any of the Demand Registration Statements in the event that (1)
the Company is engaged in any activity or
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transaction that the Company desires to keep confidential for business reasons,
(2) the Company's Board of Directors determines in good faith that the
disclosure of such information would be detrimental to the Company, and (3) the
Company's Board of Directors determines in good faith that the public disclosure
requirements imposed on the Company under the Securities Act in connection with
any Demand Registration Statement would require disclosure of such activity
or transaction.
(b) If the Company delays a Demand Registration Statement, the Company
shall, as promptly as practicable following the termination of the circumstances
which entitled the Company to do so, provide notice to Torchmark of the
termination of such circumstances and take such actions as may be necessary to
file or reinstate the effectiveness of a Demand Registration Statement. If as a
result thereof the prospectus included in a Demand Registration Statement has
been amended to comply with the requirements of the Securities Act, the Company
shall enclose such revised prospectus with the notice to Torchmark given
pursuant to this paragraph (b), and Torchmark shall make no offers or sales of
shares pursuant to a Demand Registration Statement other than by means of such
revised prospectus.
SECTION 5.3 Registration Procedures.
(a) In connection with the filing by the Company of a Demand
Registration Statement, the Company shall furnish to Torchmark as many copies of
the prospectus, including each preliminary prospectus, in conformity with the
requirements of the Securities Act as Torchmark shall reasonably request for the
purpose of effecting the plan of distribution set forth therein.
(b) The Company shall use its best efforts to register or qualify the
shares of Class A Common Stock and/or Class B Common Stock covered by a Demand
Registration Statement under the securities laws of such states as Torchmark
shall reasonably request; provided, however, that the Company shall not be
required in connection with this paragraph (b) to qualify as a foreign
corporation or execute a general consent to service of process in any
jurisdiction.
(c) If the Company has delivered preliminary or final prospectuses to
Torchmark and after having done so the prospectus is amended to comply with the
requirements of the Securities Act, the Company shall promptly notify Torchmark
and, if requested by the Company, Torchmark shall immediately return all
prospectuses to the Company. The Company shall promptly provide Torchmark with
revised prospectuses.
(d) At the request of Torchmark, the Company shall sign an
underwriting agreement in customary form with managing underwriter selected by
Torchmark and reasonably satisfactory to the Company, and shall cooperate with
such managing underwriter in all reasonable respects to facilitate the
distribution contemplated by Torchmark, including without limitation making
available the books, records and personnel of the Company for the purpose of the
underwriter's "due diligence" and providing customary legal opinions and
auditors' comfort letters.
(e) The Offering Expenses incurred in complying with this Section 5.3
shall be paid as follows:
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(i) Offering Expenses in connection with a Demand Registration
Statement shall be paid by Torchmark; provided, that in the event any shares of
the Company's stock are included in a Demand Registration Statement in addition
to the shares of Class A Common Stock and/or Class B Common Stock held by
Torchmark or any other member of the Torchmark Group, the Company shall pay its
prorata portion of the Offering Expenses equal to the Offering Expenses
multiplied by a fraction, the numerator of which is the number of any shares
included in the Demand Registration Statement other than the shares held by
Torchmark or any other member of the Torchmark Group and the denominator of
which is the total number of shares included in the Demand Registration
Statement; and
(ii) Offering Expenses in connection with a Company Registration
Statement (as defined below) shall be paid by the Company; provided, that in the
event Class A Common Stock and/or Class B Common Stock held by Torchmark or any
other member of the Torchmark Group is included in the Company Registration
Statement, Torchmark shall pay its prorata portion of the Offering Expenses
equal to the Offering Expenses multiplied by a fraction, the numerator of which
is the number of such Class A Common Stock and/or Class B Common Stock held by
Torchmark or any other member of the Torchmark Group and included in the Company
Registration Statement and the denominator of which is the total number of
shares included in the Company Registration Statement.
(f) Prior to March 31, 2002, each time the Company proposes to
register any of its securities (except with respect to registration statements
on Form S-4 or Form S-8 or another form available for registration of securities
other than for sale to the public for cash), whether or not for sale for its own
account, which is in whole or in part, an underwritten public offering (a
"Company Registration Statement"), it will give prompt written notice to
Torchmark of its intention to do so and of Torchmark's rights under this Section
5.3(f). Torchmark may request within thirty (30) days after receipt of any such
notice to include in the Company Registration Statement some or any portion of
the shares of Class A Common Stock or Class B Common Stock then held by
Torchmark or any other member of the Torchmark Group. The Company shall use its
best efforts to cause the Company Registration Statement to include all shares
of Class A Common Stock and/or Class B Common Stock that Torchmark requested to
be included; provided, however, the number of shares of Class A Common Stock
and/or Class B Common Stock Torchmark requested be included in the Company
Registration Statement may be reduced (pro rata among Torchmark and any other
stockholder with similar registration rights based on the number of shares so
requested to be registered) if and to the extent that the managing underwriter
shall be of the opinion that such inclusion would adversely affect the marketing
of the securities to be sold. Torchmark's exercise of its right under this
Section 5.3(f) to include shares in any Company Registration Statement shall not
be counted against Torchmark's right to request three registrations.
SECTION 5.4 Requirements of Torchmark. The Company shall not be
required to include any Class A Common Stock and/or Class B Common Stock owned
by Torchmark or any other member of the Torchmark Group in a Demand Registration
Statement or a Company Registration Statement unless:
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(a) Torchmark furnishes to the Company in writing such information
regarding Torchmark as the Company may reasonably request in writing in
connection with the Demand Registration Statement or the Company Registration
Statement, as the case may be, or as shall be required in connection therewith
by the SEC or any state securities law authorities; and
(b) Torchmark shall have provided to the Company its written agreement
to report to the Company sales made pursuant to the Demand Registration
Statement or the Company Registration Statement, as the case may be.
SECTION 5.5 Sales without Registration. Torchmark and any other
member of the Torchmark Group may sell shares of Class A Common Stock and/or
Class B Common Stock without a registration in the event Torchmark provides to
the Company an opinion of counsel, satisfactory in form and substance to the
Company, to the effect that such Class A Common Stock and/or Class B Common
Stock is eligible for sale without limitation or restriction of any sort under
Rule 144 under the Securities Act.
ARTICLE VI
INDEMNIFICATION
SECTION 6.1 Indemnification by the Company. Subject to Section 6.5,
the Company hereby agrees to indemnify and hold harmless Torchmark and the
Torchmark Affiliates and their respective directors, officers, employees, and
agents, and each Person, if any, who controls Torchmark within the meaning of
the Securities Act (the "Torchmark Indemnitees"), against:
(a) All Liabilities of the Company Group under this Agreement, any
Ancillary Agreement or the Underwriting Agreement;
(b) All Losses relating to, arising out of or due to an untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, any Demand Registration Statement, or any Company
Registration Statement, any prospectus (including a preliminary prospectus)
contained therein, or any amendment or supplement to any such Registration
Statement, Demand Registration Statement, Company Registration Statement or
prospectus, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided that the Company shall not be so liable insofar as such
Losses arise out of or are based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made in such Registration
Statement, Demand Registration Statement, Company Registration Statement,
prospectus, supplement or amendment in conformity with or based upon information
furnished in writing to the Company by or on behalf of Torchmark which either
(i) related to Torchmark, Torchmark's Business, its operations, or its
relationship with the Company, or (ii) was furnished specifically for use
therein;
(c) All Losses relating to, arising out of or due to an untrue
statement or alleged untrue statement of a material fact contained in any
Exchange Act report by Torchmark or the
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omission or alleged omission to state therein a material fact required to be
stated in any such report or necessary to make the statements therein not
misleading, but only insofar as such Losses arise out of or are based upon any
such untrue statement or alleged untrue statement or omission or alleged
omission made in such report in conformity with or based upon information
furnished in writing to Torchmark by or on behalf of the Company which either
(i) related to the Company, the Company's Business, its operations, or its
relationship with Torchmark, or (ii) was furnished specifically for use therein;
(d) All Losses relating to, arising out of or due to an untrue statement or
alleged untrue statement of a material fact contained in any Exchange Act report
by the Company or the omission or alleged omission to state therein a material
fact required to be stated in any such report or necessary to make the
statements therein not misleading; provided that the Company shall not be liable
insofar as such Losses arise out of or are based upon any such untrue statement
or alleged untrue statement or omission or alleged omission made in such report
in conformity with or based upon information furnished in writing to the Company
by or on behalf of Torchmark which either (i) related to Torchmark, Torchmark's
Business, its operations or its relationship with the Company or (ii) was
furnished specifically for use therein;
(e) All Losses relating to, or arising out of or due to, directly or
indirectly, (i) the Company's Business, (ii) any individual employed by any
member of the Company Group on the Public Offering Date or any individual
employed by any member of the Company Group prior to the Public Offering Date,
except to the extent such person was acting solely as an officer, director or
employee of any member of the Torchmark Group, or (iii) any Representative of
any member in the Company Group, in each case, whether relating to or arising
out of occurrences prior to, on or after the Public Offering Date; and
(f) All Losses to which Torchmark and the Torchmark Affiliates may be
subject as a result of the Spin-Off not qualifying as a tax-free transaction
under Section 355 of the Code, to the extent that any Losses would not have
resulted but for (x) the actions described in Section 4.1(c)(2) or (y) any
untrue statement or alleged untrue statement of a material fact contained in the
Ruling Request or the Registration Statement or the omission or alleged omission
to state in the Ruling Request or the Registration Statement a material fact
required to be stated therein or necessary to make the statements therein not
misleading, but only insofar as any such statement or omission was made in
reliance upon, and in conformity with information furnished in writing by or on
behalf of the Company which either (i) related to the Company, the Company's
Business, its operations, or its relationship with the Company, or (ii) was
furnished specifically for use therein.
SECTION 6.2 Indemnification by Torchmark. Subject to Section 6.5,
Torchmark hereby agrees to indemnify and hold harmless the Company and the
Company Affiliates and their respective directors, officers, employees, and
agents, and each Person, if any, who controls the Company within the meaning of
the Securities Act (the "Company Indemnitees"), against:
(a) All Liabilities of the Torchmark Group under this Agreement, any
Ancillary Agreement, or the Underwriting Agreement;
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(b) All Losses relating to, arising out of or due to an untrue statement or
alleged untrue statement of a material fact in the Registration Statement, any
Demand Registration Statement, or any Company Registration Statement, any
prospectus (including a preliminary prospectus) contained therein, or any
amendment or supplement to such Registration Statement, Demand Registration
Statement, Company Registration Statement, or prospectus, or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only insofar as
such Losses arise out of or are based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made in such Registration
Statement, Demand Registration Statement, Company Registration Statement,
prospectus, supplement or amendment that was based upon or in conformity with
information furnished in writing to the Company by or on behalf of Torchmark
which either (i) related to Torchmark, Torchmark's Business, its operations or
its relationship with the Company or (ii) was furnished specifically for use
therein;
(c) All Losses relating to, arising out of or due to an untrue statement or
alleged untrue statement of a material fact contained in any Exchange Act report
by Torchmark or the omission or alleged omission to state therein a material
fact required to be stated in any such report or necessary to make the
statements therein not misleading; provided that Torchmark shall not be liable
insofar as such Losses arise out of or are based upon any such untrue statement
or alleged untrue statement or omission or alleged omission made in such report
in conformity with or based upon information furnished in writing to Torchmark
by or on behalf of the Company which either (i) related to the Company,
Company's Business, its operations or its relationship with Torchmark or (ii)
was furnished specifically for use therein;
(d) All Losses relating to, arising out of or due to an untrue statement or
alleged untrue statement of a material fact contained in any Exchange Act report
by the Company or the omission or alleged omission to state therein a material
fact required to be stated in any such report or necessary to make the
statements therein not misleading, but only insofar as such Losses arise out of
or are based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made in such report in conformity with or based
upon information furnished in writing to the Company by or on behalf of
Torchmark which either (i) related to Torchmark, Torchmark's Business, its
operations, or its relationship with the Company, or (ii) was furnished
specifically for use therein;
(e) All Losses relating to, or arising out of or due to, directly or
indirectly, (i) Torchmark's Business, (ii) any individual employed by any member
of the Torchmark Group on the Public Offering Date or any individual employed by
any member of the Torchmark Group prior to the Public Offering Date, except to
the extent such person was acting solely as an officer, director or employee of
any member of the Company Group, (iii) or any Representative of any member of
the Torchmark Group, in each case, whether relating to or arising out of
occurrences prior to, on or after the Public Offering Date; and
(f) All Losses to which the Company and the Company Affiliates may be
subject as a result of the Spin-Off not qualifying as a tax-free transaction
under Section 355 of the Code,
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provided that Torchmark shall not be liable in any such case to the extent that
any Losses would not have resulted but for (x) the actions described in Section
4.1(c)(2) or (y) any untrue statement or alleged untrue statement of a material
fact contained in the Ruling Request or the Registration Statement or the
omission or alleged omission to state in the Ruling Request or the Registration
Statement a material fact required to be stated therein or necessary to make the
statements therein not misleading, but only insofar as any such statement or
omission was made in reliance upon, and in conformity with information furnished
in writing by or on behalf of the Company which either (i) related to the
Company, the Company's Business, its operations or its relationship with the
Torchmark or (ii) was furnished specifically for use therein.
SECTION 6.3 Indemnification Procedure. Promptly after receipt by an
Indemnitee of notice of the commencement of any action or proceeding in respect
of which indemnity may be sought by such Indemnitee pursuant to Section 6.1 or
6.2, such Indemnitee will, if a claim in respect thereof is to be made against
an Indemnifying Party under Section 6.1 or 6.2, notify the Indemnifying Party of
the commencement thereof, but the omission so to notify the Indemnified Party
will not relieve the Indemnifying Party from any liability which it may have to
any Indemnitee under Section 6.1 or 6.2 or otherwise, except to the extent the
Indemnifying Party is prejudiced by such omission. In case any such action or
proceeding is brought against any Indemnitee and it notifies an Indemnifying
Party of the commencement thereof, the Indemnifying Party will be entitled to
participate therein and, to the extent that it may wish to assume the defense
thereof, and if it assumes such defense, it shall retain counsel reasonably
satisfactory to such Indemnitee to represent the Indemnitee and any others the
Indemnifying Party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any Indemnitee shall have the right to retain its own counsel, but
the fees and expenses of such counsel shall be at the expense of such Indemnitee
unless in the reasonable judgment of the Indemnitee separate and conflicting
defenses are available to such Indemnitee, in which event the Indemnitee may
select one firm of separate counsel reasonably satisfactory to the Indemnifying
Party for purposes of defending such action, whose fees and expenses shall be
borne by the Indemnifying Party, provided that the Indemnifying Party shall not
be responsible for the fees and expenses of more than one counsel for all such
Indemnitees. After notice from the Indemnifying Party to such Indemnitee of its
election so to assume the defense thereof, the Indemnifying Party will not
(except as otherwise provided herein) be liable to such Indemnitee under
Sections 6.1 or 6.2 for any legal or other expenses subsequently incurred by
such Indemnitee in connection with the defense thereof other than reasonable
costs of investigation. If the Indemnifying Party elects not to assume the
defense of a claim or action, it will not be obligated to pay the fees and
expenses of more than one counsel for the Indemnitee with respect to such claim
or action. No Indemnifying Party shall consent to entry of any judgment or enter
into any settlement without the consent of any Indemnitee which does not include
as an unconditional term thereof the giving by the claimant or plaintiff to such
Indemnitee of a release from all liability in respect to such action or
proceeding. No Indemnifying Party shall be subject to any liability for any
settlement made without its consent, which consent shall not be unreasonably
withheld.
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SECTION 6.4 Indemnification Payments.
(a) The amount which any Indemnifying Party is or may be required to
pay to an Indemnitee pursuant to Section 6.1 or Section 6.2 shall be reduced,
including, without limitation, retroactively, by any Insurance Proceeds or other
amounts actually recovered by or on behalf of such Indemnitee, in reduction of
the related Loss. If an Indemnitee shall have received the payment required by
this Agreement from an Indemnifying Party in respect of any Loss and shall
subsequently actually receive Insurance Proceeds or other amounts in respect of
such Loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal
to the amount of such Insurance Proceeds or other amounts actually received (up
to but not in excess of the amount of any indemnity payment made hereunder). An
insurer who would otherwise be obligated to pay any claim shall not be relieved
of the responsibility with respect thereto, or, solely by virtue of the
indemnification provisions hereof, have any subrogation rights with respect
thereto, it being expressly understood and agreed that no insurer or any other
third party shall be entitled to a "windfall" (i.e., a benefit they would not be
entitled to receive in the absence of the indemnification provisions) by virtue
of the indemnification provisions hereof.
(b) Any payment required to be made pursuant to this Article VI shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or losses, damages or
liabilities are incurred.
(c) If the indemnification provided for in this Article VI is held by a
court of competent jurisdiction to be unavailable to an Indemnitee with respect
to any Loss, then the Indemnifying Party, in lieu of indemnifying such
Indemnitee hereunder, shall contribute the amount that would have been due
hereunder to the amount paid or payable by such Indemnitee as a result of such
Loss.
SECTION 6.5 Tax Liabilities. This Article VI shall not be applicable
to Losses related to Taxes (as defined in the Tax Disaffiliation Agreement)
which shall be governed by the Tax Disaffiliation Agreement, attached hereto as
Exhibit D, except as otherwise provided in Sections 6.1(e) and 6.2(e). To the
extent this Agreement and the Tax Disaffiliation Agreement are inconsistent, the
provisions of the Tax Disaffiliation Agreement shall control.
ARTICLE VII
ACCESS TO, AND TREATMENT OF, INFORMATION
SECTION 7.1 Access to Information. From and after the Public
Offering Date Torchmark shall afford to the Company and its Representatives
reasonable access (including using reasonable efforts to give access to persons
or firms possessing information) and duplicating rights during normal business
hours to all records, books, contracts, instruments, computer data and other
data and information (collectively, "Information") within Torchmark's possession
relating to the businesses of the Company, insofar as such access is reasonably
required by the Company. The Company shall afford to Torchmark and its
Representatives reasonable access (including using reasonable efforts to give
access to persons or firms possessing Information) and duplicating rights during
normal business hours to Information within the Company's possession
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relating to the business of the Company, insofar as such access is reasonably
required by Torchmark. Information may be requested under this Article VII for,
without limitation, audit, accounting, claims, litigation and tax purposes, as
well as for purposes of fulfilling disclosure and reporting obligations and for
performing the transactions contemplated in this Agreement or any other
agreement or document contemplated by this Agreement or otherwise.
SECTION 7.2 Securities Filings. For a period of three (3) years
following the Effective Date, each of the Company and Torchmark shall provide to
the other, (a) promptly following such time at which such documents shall be
filed with the SEC, copies of all documents which shall be filed by either the
Company or Torchmark, as the case may be, with the SEC pursuant to the periodic
and interim reporting requirements of the Exchange Act and the rules and
regulations of the SEC promulgated thereunder, and (b) promptly following
receipt thereof, any comment letter of the SEC related to any documents
described in paragraph (a) of this Section 7.2.
SECTION 7.3 Reimbursement. Except to the extent otherwise
contemplated by any Ancillary Agreement, a party providing information to the
other party under this Article VII shall be entitled to receive from the
recipient, upon the presentation of invoices therefor, payments for such
amounts, relating to supplies, disbursements and other out-of-pocket expenses,
as may be reasonably incurred in providing such information.
SECTION 7.4 Production of Witnesses. After the Public Offering Date,
each of Torchmark and the Company and the other members of their respective
Group shall use reasonable efforts to make available to the other party and the
other members of their Group, upon written request, its directors, officers,
employees and agents as witnesses to the extent that any such Person may
reasonably be required (giving consideration to business demands of such
Representatives) in connection with any legal, administrative or other
proceedings in which the requesting party may from time to time be involved
(other than proceedings between the parties or the other members of their
Group).
SECTION 7.5 Confidentiality. Each of Torchmark and the other members
of the Torchmark Group on the one hand, and the Company and the other members of
the Company Group on the other hand, shall hold, and shall cause its
Representatives to hold, in strict confidence, all Information concerning the
other in its possession or furnished by the other or the other's Representatives
pursuant to this Agreement (except to the extent that such Information is (a)
publicly available or (b) known or becomes known to such party on a non-
confidential basis from a source not bound by a confidentiality agreement to the
other party), and each party shall not release or disclose such Information to
any other Person, except its auditors, attorneys, financial advisors, bankers
and other consultants and advisors, unless compelled to disclose by judicial or
administrative process or, as advised by its counsel, by other requirements of
law or the applicable rules of any securities exchange.
SECTION 7.6 Retention of Records. For a period of six (6) years
following the Public Offering Date, each of Torchmark and the Company shall
retain all Information relating to the other as of the Public Offering Date,
except as otherwise required by law or set forth in an
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Ancillary Agreement or except to the extent that such Information is in the
public domain or in the possession of the other party.
ARTICLE VIII
RELATIONSHIP FOLLOWING PUBLIC OFFERING
SECTION 8.1 Ancillary Agreements. Torchmark and the Company agree
to, as soon as practicable following the execution of this Agreement, execute
and deliver the following agreements which agreements will become effective as
of the Public Offering Date (the "Ancillary Agreements"):
(a) Tax Disaffiliation Agreement, attached hereto as Exhibit D;
(b) Investment Services Agreement, attached hereto as Exhibit E;
(c) Amendment No. 1 to the General Agent Contract, attached hereto as
Exhibit F;
(d) Amendment No. 1 to Independent Agent Contract, attached hereto as
Exhibit G;
(e) Amendment to Distribution Contract, attached hereto as Exhibit H;
(f) Amendment to Principal Underwriting Agreement, attached hereto as
Exhibit I;
(g) Services Agreement, attached hereto as Exhibit J;
(h) Administrative Services Agreement, attached hereto as Exhibit
K;
(i) Reciprocity Agreement, attached hereto as Exhibit L; and
(j) Management Contract, attached hereto as Exhibit M.
SECTION 8.2 Cancellation of Agreements. Torchmark and the Company
agree, on their own behalf and on behalf of the other members of their
respective Group, that each and every agreement, arrangement, commitment or
understanding, whether or not in writing, by or among any such parties except
this Agreement, the agreements specifically identified in this Article VIII, and
the agreements set forth on Exhibit N, shall be canceled and of no further
effect as of the Public Offering Date. Each party shall, at the reasonable
request of the other party, take, or cause to be taken, such other actions as
may be necessary to effect the foregoing. Notwithstanding the foregoing,
neither party shall be relieved from any obligations or liabilities accruing
prior to the Public Officering Date by any member of the Company Group or any
member of the Torchmark Group, as the case may be, which obligations or
liabilities shall be paid or satisfied consistent with past practices.
SECTION 8.3 Use of Name.
(a) As soon as practicable following the Public Offering Date,
Torchmark shall take all action necessary to change the name of Waddell & Reed
Asset Management Company to a name bearing no similarity to "Waddell & Reed".
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(b) The Company shall take all necessary action to ensure that the
members of the Company Group, and Torchmark shall take all necessary action to
ensure that the members of the Torchmark Group, shall take all reasonable
diligent action to discontinue the use of any existing printed material or any
signage implicitly or explicitly showing any current affiliation or connection
between Torchmark and the Company or any member of their respective Groups as
promptly after the Distribution Date as practicable. After the Distribution
Date, neither party shall permit any member of its respective Group, to
represent to third parties that it has a present business affiliation with the
other party or its affiliates other than for ongoing contractual relationships.
SECTION 8.4 Insurance.
(a) All insurance coverage provided by Torchmark or any other member
of the Torchmark Group to any member of the Company Group insuring the
properties, employees, assets or operations of any member of the Company Group
and all insurance coverage provided by the Company or any other member of the
Company Group to any member of the Torchmark Group, insuring the properties,
employees, assets or operations of any member of the Torchmark Group, in each
case, as identified on Exhibit O, shall continue in full force and effect
until the earlier of the renewal date of the respective policy as set forth on
Exhibit O, or the Distribution Date (the "Coverage Expiration Date"). The
Company shall or shall cause the other members of the Company Group (as the case
may be) to, reimburse Torchmark or other members of the Torchmark Group (as the
case may be), and Torchmark shall or shall cause the other members of the
Torchmark Group (as the case may be) to, reimburse the Company or other members
of the Company Group (as the case may be), the portion of the premiums for such
coverage in accordance with the past practices established by Torchmark and the
Company related to the period of such coverage through the Coverage Expiration
Date. The Company shall be responsible for obtaining insurance coverage for
itself and the other members of the Company Group, at the Company's expense, and
Torchmark shall be responsible for obtaining insurance coverage for itself and
the other members of the Torchmark Group, at Torchmark's expense, from and after
the Coverage Expiration Date of the respective policy.
(b) Torchmark and the Company agree that each party (the "Insured
Party") shall have the right to present claims to the other party (the "Insuring
Party") or the other party's insurers under all policies of insurance identified
on Exhibit N for insured incidents occurring prior to the Coverage Expiration
Date of the relevant policy. The parties acknowledge that any such policies
written on a "claims made" rather than an "occurrence" basis will not provide
coverage for incidents occurring prior to the Coverage Expiration Date of the
relevant policy but which are first reported after the Coverage Expiration Date
of the relevant policy. With respect to any insured Losses prior to the
Coverage Expiration Date of the relevant policy (i) the Insuring Party shall pay
promptly over to the Insured Party, any Insurance Proceeds it receives on
account of such Losses; and (ii) the Insured Party shall promptly reimburse the
Insuring Party for all costs, expenses or payments made by the Insuring Party in
good faith and consistent with past practice on or after the Coverage Expiration
Date of the relevant policy on account of such Losses (including any self-
insured retention), with such costs, expenses or payments allocated on a basis
consistent with that utilized by the parties as of the date hereof.
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SECTION 8.5 Employee Benefits.
(a) Torchmark and the Company agree to establish stock
option conversion programs as described in this Section 8.5(a) to become
effective on the date the Spin-Off occurs. Outstanding options to purchase
shares of common stock of Torchmark (the "Torchmark Options") granted by
Torchmark to officers, directors, and employees of Torchmark and its affiliates,
including the Company, under various Torchmark stock compensation plans (the
"Torchmark Plans") will be adjusted (the "Adjusted Torchmark Options") and the
Company will provide for the issuance of options (the "Conversion Options") to
purchase Class A Common Stock to the holders of outstanding Torchmark Options
(except for options granted December 24, 1997). The Company and Torchmark agree
to then provide (i) holders of Torchmark Options that are employees of the
Company an election to receive either solely Conversion Options or a combination
of Conversion Options and Adjusted Torchmark Options in a ratio that is
reflective of the pro rata distribution of Class A Common Stock to Torchmark
stockholders in the Spin-Off and (ii) holders of Torchmark Options who are
employees of Torchmark an election to receive either solely Adjusted Torchmark
Options or a combination of Conversion Options and Adjusted Torchmark Options in
a ratio that is reflective of the pro rata distribution of Class A Common Stock
to Torchmark stockholders in the Spin-Off. The number of options that the
option holder will be entitled to receive and respective exercise prices will be
determined so that (i) the ratio of the exercise price of each of the Conversion
Options and the Adjusted Torchmark Options to the market value of their
respective underlying common stock will not be less than the ratio of the
exercise price of Torchmark Options to the underlying market value of the
Torchmark common stock immediately prior to the Spin-Off and (ii) the aggregate
intrinsic value of the Conversion Options and Adjusted Torchmark Options (the
difference between the aggregate exercise price and aggregate market value of
the underlying stock) will not exceed the aggregate intrinsic value inherent in
Torchmark Options immediately prior to the Spin-Off. All other terms and
conditions of the options issued in the conversions described above will be the
same as the original options. Notwithstanding the foregoing, if either
Torchmark or the Company determines that because of legal, accounting, tax,
and/or regulatory rules or requirements applicable to options, stock
appreciation rights or restricted stock in any jurisdiction, compliance with any
of its obligations under this Section 8.5(a) with respect to options, stock
appreciation rights or restricted stock held by or to be issued to any
individual would be impossible, illegal, impracticable or unreasonably
expensive, it shall so notify the other party, and Torchmark and the Company
shall use their best efforts to agree to appropriate alternative
arrangements.
(b) Until the date the Spin-Off occurs, Torchmark agrees to cause
Liberty to continue to provide insurance to the employees of members of the
Company Group at a discount and the Company agrees to continue to provide
certain net asset value accounts without certain charges to employees of members
of Torchmark Group, in each case, consistent with past practice.
SECTION 8.6 Unclaimed Stock. The Company agrees to provide to
Torchmark any claim or notice of claim for payment for shares of non-voting
stock of the Company converted into cash as a result of the merger of the
Company and a wholly owned subsidiary of Torchmark
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on October 1, 1993 and Torchmark agrees to pay any amounts legally owing to such
claimants prior to the date their claim escheats to any state.
ARTICLE IX
DISPUTE RESOLUTION
SECTION 9.1 Negotiation. Any dispute, controversy or claim arising
out of or relating to this Agreement or the Tax Disaffiliation Agreement,
attached hereto as Exhibit D, other than those disputes governed by Section 7.1
of the Tax Disaffiliation Agreement, or the breach, termination or invalidity
hereof or thereof (a "Dispute") shall be settled by the procedures provided in
this Article IX. Either party may send the other party written notice
identifying the matter in Dispute and invoking the procedures in this Article
IX. Within ten (10) days of such written notice, the parties shall meet to
negotiate in good faith a resolution of the Dispute.
SECTION 9.2 Arbitration. Any Dispute which cannot be resolved
pursuant to Section 9.1 within fifteen (15) days of the written request provided
pursuant to Section 9.1, will be settled by binding arbitration in accordance
with Title 9 of the United States Code (the Federal Arbitration Act) and the
Commercial Arbitration Rules of the American Arbitration Association ("AAA"). A
party may initiate arbitration by sending written notice of its intention to
arbitrate to the other party and to the AAA office located in Chicago, Illinois.
Such written notice will contain a description of the Dispute and remedy sought.
Each party shall select one arbitrator, and such arbitrators, jointly, shall
select another arbitrator. If either party fails to appoint an arbitrator or the
two arbitrators fail to agree on the third arbitrator, either party may request
that the AAA appoint such arbitrator. The place of the arbitration will be
Chicago, Illinois. The law of the State of Delaware shall govern the
arbitration. The award rendered by the arbitrators shall be conclusive and
binding upon the parties and judgment on the award may be entered in any court
of competent jurisdiction. The parties intend that this agreement to arbitrate
by irrevocable.
SECTION 9.3 Injunctive Relief. Notwithstanding anything in this
Article IX, in advance of the institution of any arbitration proceeding, but in
aid thereof, an application may be filed for order or orders to be entered by
any court of competent jurisdiction (i) invoking the jurisdiction of the court
over the controversy in rem, by attachment, garnishment, sequestration, or (ii)
seeking to restrain or enjoin the destruction of the subject matter of the
controversy or any essential part thereof, or the destruction or alteration of
books, records, documents, or evidence needed for the arbitration proceeding.
No such judicial proceeding by a party shall be deemed a waiver of the party's
right to arbitrate.
SECTION 9.4 Consolidation of Disputes. The arbitrators, in their
discretion, may consolidate two or more arbitrations or Disputes between the
parties into one arbitration, or terminate any such consolidation and/or
establish other arbitration proceedings for different Disputes that may arise in
any one arbitration. Notwithstanding the foregoing, the arbitrators shall
consolidate arbitrations and/or Disputes, if they determine that it would be
more efficient to consolidate such arbitrations and/or Disputes than to continue
them separately and (i) there are matters of fact or law that are common to the
arbitrations and/or Disputes to be consolidated, (ii)
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there are related payment and performance obligations considered in the
arbitrations and/or Disputes to be consolidated, or (iii) there is a danger of
inconsistent awards.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 Survival. All representations, covenants and agreements
contained or provided for herein shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the party
benefiting from any such covenant or agreement and shall survive the Public
Offering Date and the Distribution Date.
SECTION 10.2 Notices. All notices, requests, demands, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given if delivered by hand, or when sent by telex or telecopier (without
receipt confirmed), provided a copy is also sent by certified mail, postage
prepaid and return receipt requested, addressed as follows (or to such other
address as a party may designate by notice to the other):
If to the Company:
Waddell & Reed Financial, Inc.
6300 Lamar Avenue
Overland Park, Kansas 66202
Attn: General Counsel
If to Torchmark:
Torchmark Corporation
2001 Third Avenue South
Birmingham, Alabama 35203
Attn: General Counsel
SECTION 10.3 Governing Law. This Agreement shall be governed by,
construed and interpreted in accordance with the laws of the State of Delaware,
without regard to the conflicts of law principles thereof.
SECTION 10.4 Headings. The Article and Section headings contained in
this Agreement are for reference purposes only and shall not in any way affect
the meaning of interpretation of this Agreement.
SECTION 10.5 Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties hereto and supersedes all prior
agreements and understandings, written or oral, between the parties.
SECTION 10.6 Amendment and Modification. The parties may, by written
agreement, (i) extend the time for the performance of any of the obligations or
other acts of the
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parties hereto, (ii) waive any inaccuracies in any document delivered pursuant
to this Agreement, and (iii) waive compliance with or modify, amend or
supplement any of the agreements contained in this Agreement or waive or modify
performance of any of the obligations of any of the parties hereto. This
Agreement may not be amended or modified except by an instrument in writing duly
signed on behalf of the parties hereto.
SECTION 10.7 Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, but shall not be assignable by any party hereto without the prior
written consent of the other party. No purchaser (or transferee or assignee) of
Shares from Torchmark shall have any rights or obligations under this
Agreement.
SECTION 10.8 Severability. To the extent any provision of this
Agreement shall be invalid or unenforceable, it shall be considered deleted
herefrom and the remaining provisions of this Agreement shall be unaffected and
shall continue in full force and effect.
SECTION 10.9 Waiver. No failure by any party to take any action or
assert any right hereunder shall be deemed to be a waiver of such right in the
event of the continuation or repetition of the circumstances giving rise to such
right, unless expressly waived in writing as contemplated by the terms of
Section 10.6 hereof.
SECTION 10.10 Termination. Notwithstanding any provision hereof,
this Agreement may be terminated and the Public Offering and/or the Spin-Off
abandoned at any time prior to the Public Offering Date by Torchmark in its sole
discretion without the approval of the Company. This Agreement may be terminated
by either party if the Spin-Off does not occur on or before March 31, 1999. In
the event this Agreement is terminated on or after the Public Offering Date,
only the provisions of Article IV will terminate and the other provisions of
this Agreement or any agreement or document contemplated by this Agreement or
otherwise shall remain in full force and effect.
SECTION 10.11 Limitation of Liability. Neither Torchmark nor the
Company shall be liable to the other for any special, indirect, incidental or
consequential damages of the other arising in connection with this Agreement.
SECTION 10.12 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
shall constitute one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
TORCHMARK CORPORATION
By: ________________________________________
Title: _____________________________________
WADDELL & REED FINANCIAL, INC.
By: ________________________________________
Title: _____________________________________
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EXHIBIT A
CERTIFICATE OF INCORPORATION
EXHIBIT A - Page 1
<PAGE>
EXHIBIT B
BYLAWS
EXHIBIT B - Page 1
<PAGE>
EXHIBIT C
BOARD OF DIRECTORS
EXHIBIT C - Page 1
<PAGE>
EXHIBIT D
TAX DISAFFILIATION AGREEMENT
EXHIBIT D - Page 1
<PAGE>
EXHIBIT E
INVESTMENT SERVICES AGREEMENT
EXHIBIT E - Page 1
<PAGE>
EXHIBIT F
AMENDMENT NO. 1 TO GENERAL AGENT CONTRACT
EXHIBIT F - Page 1
<PAGE>
EXHIBIT G
AMENDMENT NO. 1 TO INDEPENDENT AGENT CONTRACT
EXHIBIT G - Page 1
<PAGE>
EXHIBIT H
AMENDMENT TO DISTRIBUTION AGREEMENT
EXHIBIT H - Page 1
<PAGE>
EXHIBIT I
AMENDMENT TO PRINCIPAL UNDERWRITING AGREEMENT
EXHIBIT I - Page 1
<PAGE>
EXHIBIT J
SERVICES AGREEMENT
EXHIBIT J - Page 1
<PAGE>
EXHIBIT K
ADMINISTRATIVE SERVICES AGREEMENT
EXHIBIT K - Page 1
<PAGE>
EXHIBIT L
RECIPROCITY MANAGEMENT AGREEMENT
EXHIBIT L - Page 1
<PAGE>
EXHIBIT M
MANAGEMENT CONTRACT
EXHIBIT M - Page 1
<PAGE>
EXHIBIT N
CONTINUING AGREEMENTS
1. Tax Sharing Agreement dated August 29, 1990, effective as of January 1,
1989, by and among Torchmark and each of the corporations listed on Exhibit A
thereto, to the extent provided in the Tax Disaffiliation Agreement, between
Torchmark and the Company.
2. Wholesale Agreement, dated _____, by and among, LifeUSA, United Investors
Life Insurance Company and Waddell & Reed, Inc.
EXHIBIT N - Page 1
<PAGE>
EXHIBIT O
INSURANCE
I. Policies provided by Torchmark or other members of the Torchmark Group.
Policy Renewal Date
------ ------------
II. Policies provided by the Company or other members of the Company Group.
Policy Renewal Date
------ ------------
EXHIBIT O - Page 1
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Waddell & Reed Financial, Inc.
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Kansas City, Missouri
March 3, 1998
