<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________
Commission file number 001-13913
WADDELL & REED FINANCIAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 51-0261715
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6300 LAMAR AVENUE
OVERLAND PARK, KANSAS
66202
(Address of Principal Executive Offices)
(Zip Code)
(913) 236-2000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the issuer's classes of common stock as
of June 30, 1998:
Class Outstanding as of June 30, 1998
----- --------------------------------
Class A Common stock, $.01 par value 32,142,174
Class B Common stock, $.01 par value 34,325,000
<PAGE>
WADDELL & REED FINANCIAL, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1998
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Unaudited Consolidated Balance Sheets as of
June 30, 1998 and December 31, 1997 3
Unaudited Consolidated Statements of Operations
for the three months and six months ended June 30,
1998 and June 30, 1997 5
Unaudited Consolidated Statements of Cash
Flows for the six months ended
June 30, 1998 and 1997 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
===============================================================================
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1998 1997
(Unaudited)
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 70,619 73,820
Investment securities, available-for-sale 95,787 18,977
Receivables:
United Funds and W&R Funds 4,336 4,031
Customers and other 15,545 11,840
Due from affiliates 1,941 17,232
Deferred income taxes 1,676 1,241
Prepaid expenses and other current assets 3,089 2,991
- --------------------------------------------------------------------------------------------------------------------
Total current assets 192,993 130,132
Due from affiliates 1,418 175,450
Property and equipment, net 12,845 12,058
Investment in real estate partnership 17,609 17,544
Deferred sales commissions, net 13,546 12,316
Goodwill (net of accumulated amortization of $18,931 and $17,479) 97,379 98,831
Other assets 649 633
- --------------------------------------------------------------------------------------------------------------------
Total assets $336,439 446,964
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
Liabilities:
- --------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 29,871 22,929
Due to affiliates 541 102,459
Accrued sales force compensation 8,851 8,666
Income taxes payable 13,280 3,314
Other current liabilities 15,641 18,525
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Total current liabilities 68,184 155,893
Due to affiliates -- 509,186
Deferred income taxes 2,491 2,246
Accrued pensions and post-retirement costs 10,318 9,530
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 80,993 676,855
- --------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock ($.01 par value; 42,300,000 shares authorized, 665 423
issued and outstanding - 1997; 32,142,174 Class A shares and
34,325,000 Class B shares authorized, issued and outstanding
-June 30, 1998)
Additional paid-in capital 246,271 --
Retained earnings 21,727 --
Dividends in excess of retained earnings and additional -- (230,658)
paid-in capital
Deferred compensation (13,375) --
Accumulated other comprehensive income 158 344
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 255,446 (229,891)
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $336,439 446,964
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Unaudited
(In Thousands, except for per share and dividend data)
================================================================================
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- -------------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Investment management fees $35,215 27,808 $ 67,641 54,686
Underwriting and distribution fees:
United Funds and W&R Funds 18,908 13,403 34,758 27,449
Affiliates and others 9,633 8,371 17,244 15,411
Shareholder service fees 8,257 7,781 16,030 15,294
Investment and other revenue 2,725 990 4,164 1,923
- -----------------------------------------------------------------------------------------------------------------------
Total revenue 74,738 58,353 139,837 114,763
- -----------------------------------------------------------------------------------------------------------------------
Expenses:
Underwriting and distribution 24,272 18,495 44,555 36,891
Compensation and related costs 9,144 6,020 16,564 12,162
General and administrative 1,867 1,492 3,650 3,142
Depreciation 430 323 859 642
Amortization of goodwill 726 726 1,452 1,452
- -----------------------------------------------------------------------------------------------------------------------
Total expenses 36,439 27,056 67,080 54,289
- -----------------------------------------------------------------------------------------------------------------------
Income before interest and income taxes 38,299 31,297 72,757 60,474
Interest:
Income -- 2,831 1,950 5,661
Expense -- (1,859) (8,604) (3,721)
Income before income taxes 38,299 32,269 66,103 62,414
Provision for income taxes 14,489 12,509 25,546 24,216
- -----------------------------------------------------------------------------------------------------------------------
Net income $23,810 19,760 $ 40,557 38,198
=======================================================================================================================
Net income per share:
Basic and diluted $0.36 $0.30 $0.61 $0.57
=======================================================================================================================
Weighted average outstanding - basic 66,467 66,467 66,467 66,467
Weighted average shares outstanding - diluted 66,567 66,467 66,614 66,467
=======================================================================================================================
Dividends declared per common share $0.13 $ -- $0.27 $ --
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
================================================================================
<TABLE>
<CAPTION>
For the six months ended June 30,
1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 40,557 38,198
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,311 2,094
Recognition of deferred compensation 452 --
Loss on sale and retirement of fixed assets 27 15
Capital gains and dividends reinvested (48) (35)
Deferred income taxes (75) (375)
Changes in assets and liabilities:
Receivables from funds (305) (632)
Other receivables (12,267) 825
Due to/from affiliates - operating 4,880 (2,650)
Other assets (1,159) (10,456)
Accounts payable 6,942 5,589
Other liabilities 7,804 (9,586)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 49,119 22,987
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to investments (78,132) (56)
Proceeds from maturity of investments 1,073 668
Purchase of property and equipment (1,652) (1,061)
Other (24) 4
- --------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (78,735) (445)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from Offering 516,014 --
Cash dividends (8,808) --
Change in due to/from affiliates - nonoperating (480,791) (74,510)
Cash contributions from parent -- 41,273
- --------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities 26,415 (33,237)
- --------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents (3,201) (10,695)
Cash and cash equivalents at beginning of period 73,820 59,003
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 70,619 48,308
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION:
Waddell & Reed Financial, Inc. and Subsidiaries
Waddell & Reed Financial, Inc. and subsidiaries ("Company") derive their
revenue primarily from investment management, administration, distribution and
related services provided to the United mutual funds, TMK/United mutual funds
and Waddell & Reed mutual funds and institutional accounts in the United States.
Prior to December 1997, the Company was known as United Investors Management
Company. In the first quarter of 1998, the insurance operations of the Company,
United Investors Life Insurance Company, were distributed to Torchmark
Corporation and a subsidiary of Torchmark (together, "Torchmark"). Until March
1998, the Company was wholly owned by Torchmark. In March 1998, the Company
completed the initial public offering ("Offering") of its Class A Common Stock,
with the Company realizing net proceeds of approximately $516 million.
Approximately $481 million of the proceeds were used to prepay notes payable to
Torchmark. After giving effect to the initial public offering and as of June
30, 1998, Torchmark controls in excess of 60% of the outstanding Class A Common
Stock and Class B Common Stock and in excess of 80% of the voting power of the
outstanding Class A Common Stock and Class B Common Stock of the Company.
Torchmark has advised the Company that, subject to certain conditions, it
currently intends to divest its ownership interest in the Company by means of a
special dividend to the stockholders of Torchmark of all shares of common stock
of the Company currently held by Torchmark. The spin-off is conditioned upon
regulatory approvals, the receipt of a ruling by the Internal Revenue Service to
the effect that the spin-off will qualify as a tax free distribution and other
conditions.
Basis of Presentation
In the opinion of the management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments necessary to present
fairly the results of its operations and its cash flows for the periods ended
June 30, 1998 and 1997 and its financial position at June 30, 1998. The
accompanying unaudited consolidated financial statements are for interim periods
and, consequently, do not necessarily include all disclosures required by
generally accepted accounting principles for annual financial statements. These
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1997, from which the
accompanying balance sheet as of December 31, 1997 was derived. The operating
results and cash flows for the periods ended June 30, 1998 are not necessarily
indicative of the results that will be achieved in future periods.
<PAGE>
Deferred Compensation and Employee Stock Options Plan
Deferred compensation at June 30, 1998 includes $4.8 million related to
restricted stock that was awarded upon consummation of the Offering pursuant to
the Company's Stock Incentive Plan. The restricted stock awards generally vest
in equal one-third increments on the second, third and fourth anniversaries of
the date awarded.
In conjunction with the Offering and pursuant to a Directed Share Program,
the Company loaned $8.6 million to key financial advisors and sales force
management personnel to encourage ownership of the Company. The loans bear
interest at an annual rate of 5.6% and are due and payable five years from the
date issued. Subject to certain conditions, including continued affiliation with
the Company, the notes may be forgiven on the maturity date.
The Company also issued options to purchase 2.4 million shares of Class A
Common Stock to employees upon consummation of the Offering pursuant to the
Stock Incentive Plan. The options are exercisable at the initial public offering
price and generally vest in equal one-third increments on the second, third and
fourth anniversaries of the consummation of the Offering.
Earnings per Share
Earnings per share for the 1997 period are based on the number of shares
outstanding as of the close of the Offering.
Summary of Significant Accounting Policies
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, on January 1, 1998. This statement requires the
reporting of comprehensive income and its components. Comprehensive income is
defined as the change in equity from transactions and other events and
circumstances from non-owner sources, and excludes investments by and
distributions to owners. Comprehensive income includes net income and other
items of comprehensive income meeting the above criteria. The Company's only
component of other comprehensive is the unrealized holding gains and losses on
available-for-sale securities.
<TABLE>
<CAPTION>
For the Six Months For the Three Months
Ended June 30 Ended March 31
1998 1997 1998 1997
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net earnings $23,810 $19,760 $16,747 $18,438
Change in unrealized gain (loss), net (186) 6 157 (164)
------- ------- ------- -------
Comprehensive income $23,624 $19,766 $16,904 $18,274
</TABLE>
<PAGE>
Subsequent Event
The Board of Directors of the Company declared a dividend payable on July
31, 1998 in the amount of $.1325 per share to shareholders of record as of July
17, 1998. The total dividend paid was $8.8 million.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING INFORMATION
CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q
CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, WHICH INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES,
AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, LEVELS OF ACTIVITY,
PERFORMANCE, OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE,
OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS INCLUDE ALL STATEMENTS RELATING TO FUTURE EVENTS AND
ALL STATEMENTS OF BELIEF AND OPINION WITH RESPECT TO MATTERS THAT ARE NOT
HISTORICAL FACTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q ARE
BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE
COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS. THE
RISKS, UNCERTAINTIES, AND OTHER FACTORS TO WHICH FORWARD-LOOKING STATEMENTS ARE
SUBJECT INCLUDE, AMONG OTHERS, THOSE SET FORTH UNDER THE CAPTION "RISK FACTORS"
IN THE PROSPECTUS OF THE COMPANY DATED MARCH 4, 1998, WHICH IS AVAILABLE FROM
THE SECURITIES AND EXCHANGE COMMISSION AT PRESCRIBED RATES AND AT THE SECURITIES
AND EXCHANGE COMMISSION'S WEBSITE, WWW.SEC.GOV. SUCH RISK FACTORS INCLUDE,
WITHOUT LIMITATION, TORCHMARK'S ABILITY TO CONTROL THE COMPANY, THE UNCERTAINTY
OF THE PLANNED SPIN-OFF OF THE COMPANY, FINANCIAL MARKET CONDITIONS, THE ADVERSE
EFFECT OF TERMINATION OR FAILING TO RENEW INVESTMENT MANAGEMENT AGREEMENTS AND
THE DIFFICULTY OF EXECUTING ACQUISITION STRATEGY. ALL SUBSEQUENT WRITTEN OR ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS. ALTHOUGH THE
COMPANY BELIEVES THAT THE ASSUMPTIONS AND EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE, AS A RESULT OF THE FOREGOING AND
OTHER FACTORS, NO ASSURANCE CAN BE GIVEN AS TO FUTURE RESULTS, LEVELS OF
ACTIVITY, OR ACHIEVEMENTS, AND NEITHER THE COMPANY NOR ANY OTHER PERSON WILL BE
RESPONSIBLE FOR THE ACCURACY OR COMPLETENESS OF ANY SUCH FORWARD-LOOKING
STATEMENTS. IN SOME CASES, FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY
TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "PLANS," "ANTICIPATES,"
"BELIEVES," "ESTIMATES," "PREDICTS," "POTENTIAL," OR "CONTINUE" OR THE NEGATIVE
OF SUCH TERMS OR OTHER COMPARABLE TERMINOLOGY.
OVERVIEW
The Company derives its revenues primarily from providing investment
management, distribution and administrative services to the United ("United"),
Waddell & Reed ("W&R") and TMK/United funds and institutional accounts.
Investment management fees, the Company's most substantial source of revenue,
are based on the amount of assets under management and are affected by sales
levels, financial market conditions, redemptions and the composition of assets.
Underwriting and distribution revenues consist of sales charges and commissions
derived from the sale of investment and insurance products and distribution fees
earned from the W&R Funds for distributing their shares. The products sold have
various sales charge structures and the revenues
<PAGE>
received from the sale of products vary based on the type and amount sold. Rule
12b-1 distribution and service fees earned for distributing shares of the W&R
Funds are based upon a percentage of assets and fluctuate based on sales,
redemptions, and financial market conditions. Service fees include transfer
agency fees, custodian fees for retirement plan accounts and portfolio
accounting fees.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1998 AS COMPARED TO THREE
MONTHS ENDED JUNE 30, 1997
Total revenues for the second quarter of 1998 were $74.7 million, up $16.4
million or 28% from the same period in 1997.
Investment management fees, which comprised 47% of total revenue for the
second quarter of 1998, were $35.2 million, an increase of $7.4 million or 27%
from the comparable 1997 period. Assets under management were up due to
increased sales, investment performance and strong financial markets. Total
assets under management were $26.7 billion at June 30, 1998 compared to $23.4
billion at December 31, 1997 and $21.3 billion at June 30, 1997. Average assets
under management were up $6.1 billion or 30% from that of the three months ended
June 30, 1997, to $26.2 billion for the three months ended June 30, 1998. The
rate of increase in average assets was greater than the growth rate in
management fees due, partly, to the group fee rate on the United funds. Under
various management agreements, the annual management fee rates generally decline
as the average net assets of the portfolios exceed certain thresholds. Also,
average institutional assets for the second quarter of 1998 were $3.0 billion,
an increase of $1.1 billion when compared with the second quarter of 1997. The
rate of increase in average institutional assets exceeded the growth rate of
management fees because most of the asset growth was due to the addition of
fixed income managed accounts in the latter half of 1997. Fixed income accounts
typically have lower management fee rates than equity accounts. In addition,
institutional accounts generally have a lower management fee rate than mutual
funds.
Underwriting revenue, which accounted for 38% of total operating revenue for
the second quarter of 1998, rose to $28.5 million for the period, an increase of
$6.8 million or 31% compared to the same period last year, due to higher sales
volume of investment products, primarily of the United funds. Total investment
product sales increased 40% to $510.4 million for the second quarter of 1998
compared with $363.6 million for the same period last year.
Service fees for the second quarter were $8.3 million, up $476,000 from the
second quarter of 1997, due primarily to growth in the number of mutual fund
accounts. Investment and other revenue for the second six months of 1998 was
$2.7 million, an increase of $1.7 million or 175%. Most of this increase is
attributable to the growth in invested balances related to $35 million of net
proceeds that were retained from the Offering and the retention of earnings in
the first half of 1998. In previous periods, substantially all of the Company's
earnings were paid to Torchmark Corporation as a dividend.
Underwriting and distribution expenses were $24.3 million for the second
quarter of 1998, up $5.8 million or 31% from that of the same period last year,
primarily due to costs related to the
<PAGE>
growth in investment product sales. Effective July 1, 1998, the Company
implemented changes to enhance the compensation of advisors and increase
recruiting. As a result, underwriting and distribution expenses are expected to
increase relative to revenues.
Compensation and related costs were $9.1 million for the second quarter of
1998, an increase of $3.1 million or 52% over the same period last year. The
increase is related to normal salary and fringe benefit changes, staff
additions, the impact of adjustments made to make total compensation more
competitive within the market and an increase in bonus accruals to reflect
favorable investment management performance during the first six months. General
and administrative expenses were $1.9 million for the quarter compared to $1.5
million for the second quarter of 1997; an increase of 25% due primarily to
growth in business activity.
The Company did not realize any net interest income in the second quarter of
1998, a decrease of $1.0 million from the same period in 1997. The interest
income in 1997 was related to notes with Torchmark that were prepaid in the
first quarter of 1998.
Income tax expense was $14.5 million and $12.5 million for the second
quarter of 1998 and 1997, respectively, representing effective tax rates of 37.8
% and 38.8%. The effective tax rate varies based upon the amount of federally
tax-exempt interest and the tax rates that apply to income taxable within
various states.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED TO SIX MONTHS
ENDED JUNE 30, 1997
Total revenues for the first half of 1998 were $139.8 million, up $25.1
million or 22% from the same period in 1997.
Investment management fees, which comprised 48% of total revenue for the
first half of 1998, were $67.6 million, an increase of $13.0 million or 24% from
the comparable 1997 period. Assets under management were up due to increased
sales, investment performance and strong financial markets. Total assets under
management were $26.7 billion at June 30, 1998 compared to $23.4 billion at
December 31, 1997 and $21.3 billion at June 30, 1997. Average assets under
management were up $5.5 billion or 28% from that of the six months ended June
30, 1997, to $25.4 billion for the six months ended June 30, 1998. As noted in
the discussion of quarterly results, the rate of increase in average assets was
greater than the growth rate in management fees due, partly, to the group fee
rate on the United funds. Average institutional assets for the first half of
1998 were $2.9 billion, an increase of $1.1 billion when compared with the first
half of 1997. Most of the growth in institutional accounts was due to the
addition of fixed income managed accounts in the latter half of 1997. Fixed
income accounts usually have lower management fees rates than equity accounts.
Underwriting revenue, which accounted for 37% of total operating revenue for
the first half of 1998, rose to $52.0 million for the period, an increase of
$9.1 million or 21% compared to the same period last year, due to higher sales
volume of investment products, primarily of the
<PAGE>
United funds. Total investment product sales increased 26% to $915.2 million for
the first half of 1998 compared with $726.6 million for the same period last
year.
Service fees for the first half of 1998 were $16.0 million, up $736,000 from
the first half of 1997, due primarily to growth in the number of mutual fund
accounts. Investment and other revenue for the first half of 1998 was $4.2
million, an increase of $2.2 million. Most of this increase is attributable to
the growth in invested balances related to $35 million of net proceeds that were
retained from the Offering and the retention of earnings in the first half of
1998. In previous periods, substantially all of the Company's earnings were
distributed to Torchmark Corporation as dividends.
Underwriting and distribution expenses were $44.6 million for the first half
of 1998, up $7.7 million or 21% from that of the same period last year,
primarily due to costs related to the growth in investment product sales.
Compensation and related costs were $16.6 million for the first half of
1998, an increase of $4.4 million or 36% over the same period last year. The
increase is related to additions to the investment management staff, the impact
of adjustments made to make total compensation more competitive within the
market, and normal salary and fringe benefit changes. General and administrative
expenses were $3.7 million for the first half of 1998 compared to $3.1 million
for the second quarter of 1997; an increase of 16% due primarily to growth in
business activity.
Net interest expense for the first half of 1998 was $6.7 million compared
with net interest income of $2.0 million for last year's first half. The net
interest expense and income was related to notes with Torchmark that were
prepaid at the time of the initial public offering in the first quarter of 1998.
Income tax expense was $25.5 million and $24.2 million for the first half of
1998 and 1997, respectively, representing effective tax rates of 38.6 % and
38.8%. The effective tax rate varies based upon the amount of federally tax-
exempt interest and the tax rates that apply to income taxable within various
states.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investment securities available for sale were
$166.4 million at June 30, 1998, an increase of $73.6 million from December 31,
1997. Cash and cash equivalents at June 30, 1998 and December 31, 1997 includes
reserves of $16.9 million and $14.9 million, respectively, for the benefit of
customers in compliance with securities regulations.
Cash flow provided by operations was $49.1 million and $23.0 million for the
first six months of 1998 and 1997, respectively. Other than net income and
related adjustments, the most significant sources of cash from operations
resulted from the timing of payments. The timing of tax payments and mutual
fund trade settlements provided $10.0 million and $5.8 million,
<PAGE>
respectively, of cash for the first six months of 1998. Approximately $8.6
million of cash was used for interest bearing loans related to the Offering.
Investing activities used $78.7 million of cash during the quarter, due
primarily to additional investments in longer term securities. Although the
Company has not entered into formal commitments, it is considering alternatives
for acquiring additional office space. The estimated cost of the alternatives
to construct facilities is $12 million. Except for this possible expansion, the
Company has no material commitments for capital expenditures.
The net cash provided by financing activities in the first six months of
1998 was $26.4 million. The increase is primarily related to the Company's
Initial Public Offering that closed on March 10, 1998. Net proceeds from the
sale of 23.9 million shares were $516 million, of which the Company retained
approximately $35 million for working capital purposes. The remainder of the
proceeds were used to prepay notes payable to Torchmark Corporation.
The Company's Board of Directors declared a quarterly cash dividend on the
common stock of approximately $8.8 million to be paid July 31, 1998 to
shareholders of record on July 22. Management believes its available cash, cash
equivalents, investments securities available-for-sale and expected continuing
cash flow from operations will be sufficient to fund dividends, payments,
operations and other reasonably foreseeable cash needs.
INFORMATION SYSTEMS AND YEAR 2000 COMPLIANCE
Some computers, software, and other equipment include computer code in which
calendar year data is abbreviated to only two digits. As a result, some of
these systems will not operate correctly after 1999 because they may interpret
"00" to mean 1900, rather than 2000. These problems are widely expected to
increase in frequency and severity as the year 2000 approaches, and are commonly
referred to as the "Year 2000 Problem."
The Company believes that it has identified all significant applications
that will require modification to ensure Year 2000 compliance. Internal and
external resources are being used to make the required modifications and test
Year 2000 compliance. The Company estimates that its compliance activities will
be completed no later than the second quarter of 1999, and estimates that the
total costs of this effort will be $4.1 million for the four year period ending
December 31, 1999. The Company believes that it has identified most of the major
computers, software applications, and related equipment used in connection with
its internal operations that must be modified, upgraded, or replaced to minimize
the possibility of a material disruption to its business. The Company has
commenced the process of modifying, upgrading, and replacing major systems that
have been assessed as adversely affected, and expects to complete this process
before the occurrence of any material disruption of its business. However, there
can be no assurance in this regard.
<PAGE>
The Year 2000 Problem also affects some of the Company's customers and major
suppliers of computers, software, and other equipment. The Company has
discussed the Year 2000 Problem with some of these customers and suppliers.
However, the Company has limited or no control over the actions of these
customers and suppliers. Accordingly, the Company cannot guarantee that these
customers and suppliers will resolve any or all Year 2000 Problems. If the
Company's customers and suppliers fail to resolve Year 2000 Problems, the
Company's business could be materially disrupted.
The discussion of the Company's efforts, and management's expectations,
relating to Year 2000 compliance constitutes forward-looking statements. The
Company's ability to achieve Year 2000 compliance, and the level of incremental
costs associated therewith, could be adversely impacted by, among other things,
the availability and cost of programming and testing resources, vendors' ability
to modify proprietary software, and unanticipated problems identified in the
ongoing compliance review.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On March 10, 1998, the Company completed the Offering. The managing
underwriters in the Offering were Morgan Stanley Dean Witter, Goldman, Sachs &
Co., and Merrill Lynch & Co. (the "Underwriters"). The shares of Class A Common
Stock sold in the Offering were registered under the Securities Act of 1933, as
amended, on a Form S-1 Registration Statements (registration no. 333-43687) (the
"Registration Statement"). The Registration Statement was declared effective by
the Securities and Exchange Commission on March 4, 1998.
On March 4, 1998, the Company commenced the Offering. The Offering closed on
March 10, 1998 after the Company had sold all 23,870,000 shares (including the
over-allotment option) of Class A Common Stock registered under the Registration
Statement. The offering price was $23.00 per share for an aggregate offering
price of $549,010,000.
From the effective date of the Registration Statement to June 30, 1998, the
Company paid an aggregate of $30,195,550 in underwriting discounts and
commissions in the Offering. None of this amount was paid directly or
indirectly to any director, officer, general partner of the Company or their
associates, persons owning ten percent or more of any class of equity securities
of the Company, or an affiliate of the Company. In addition, the following
table sets forth an estimate of all expenses incurred in connection with the
Offering, other than underwriting discounts and commissions. All of the amounts
shown are estimated except for the registration fees of the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc. and
the New York Stock Exchange, Inc.
SEC registration fee $ 177,728
NASD fee 30,500
NYSE listing fee 210,600
Accounting fees and expenses 500,000
Legal fees and expenses 600,000
Printing and engraving 550,000
Transfer Agent's fees 50,000
Blue Sky fees and expenses (including counsel fees) 10,000
Directors and Officers Liability Insurance Premium 515,500
Miscellaneous expenses 156,172
----------
Total $2,800,000
==========
After deducting underwriting discounts and commissions and the Offering
expenses described above, net proceeds to the Company from the Offering were
approximately $516 million. Of this amount, the Company used approximately $481
million to prepay notes payable to Torchmark Corporation, the parent company of,
an affiliate to and a greater than ten
<PAGE>
percent owner of, the Company. Other than the payments to Torchmark Corporation,
none of the other net proceeds of the Offering were paid directly or indirectly
to any director, officer, general partner of the Company or their associates,
persons owning ten percent or more of any class of equity securities of the
Company, or an affiliate of the Company.
ITEM 6.
(a) Exhibits:
27.1 Financial Data Schedule (electronic filing only).
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
period subject to this Quarterly Report on Form 10-Q.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 13th day of August, 1998.
WADDELL & REED FINANCIAL, INC.
By: /s/ Keith A. Tucker
------------------------------------
Keith A. Tucker
Chairman of the Board and
Chief Executive Officer
By: /s/ Michael D. Strohm
------------------------------------
Michael D. Strohm
Principal Accounting Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS AS REPORTED ON FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
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<SECURITIES> 95,787
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