<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________
Commission file number 001-13913
WADDELL & REED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0261715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.
6300 LAMAR AVENUE
OVERLAND PARK, KANSAS
66202
(Address of principal executive offices)
(Zip Code)
(913) 236-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _____
Shares outstanding of each of the registrant's classes of common
stock as of September 30, 1999:
Class Outstanding as of September 30, 1999
- --------------------------------------- ------------------------------------
Class A Common stock, $.01 par value 29,613,495
Class B Common stock, $.01 par value 28,271,847
<PAGE>
WADDELL & REED FINANCIAL, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets at
September 30, 1999 and December 31, 1998 3
Consolidated Statements of
Operations for the three months and nine months
ended September 30, 1999 and September 30, 1998 4
Consolidated Statements of Comprehensive
Income for the three months and nine months
ended September 30, 1999 and September 30, 1998 5
Consolidated Statements of Changes in Shareholder's
Equity for the nine months ended September 30, 1999 6
Consolidated Statements of Cash
Flows for the nine months ended
September 30, 1999 and September 30, 1998 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
======================================================================================================================
September 30, December 31,
ASSETS 1999 1998
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $57,864 $30,180
Investment securities, available-for-sale 87,940 103,153
Receivables:
United funds and W&R funds 8,118 5,740
Customers and other 23,786 28,865
Deferred income taxes 1,140 1,309
Prepaid expenses and other current assets 5,033 3,222
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 183,881 172,469
Property and equipment, net 22,772 17,685
Investment in real estate 23,793 24,718
Deferred sales commissions, net 19,545 15,710
Goodwill (net of accumulated amortization of $22,676 and $20,382) 113,515 95,928
Other assets 813 669
- ----------------------------------------------------------------------------------------------------------------------
Total assets $364,319 $327,179
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------
Liabilities:
Current liabilities:
Accounts payable $32,715 $28,304
Accrued sales force compensation 12,524 11,916
Short term notes payable 155,254 40,076
Income taxes payable 9,442 13,464
Other current liabilities 15,288 16,034
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 225,223 109,794
Deferred income taxes 1,254 208
Accrued pensions and post-retirement costs 11,595 10,041
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 238,072 120,043
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock ($.01 par value; 150,000,000 Class A shares 665 665
authorized, 32,142,174 issued and 29,613,495 outstanding
and 100,000,000 Class B shares authorized, 34,325,000
issued and 28,271,847 outstanding September 30, 1999;
150,000,000 Class A shares authorized, 32,142,174 issued
and 30,906,445 outstanding and 100,000,000 Class B
shares authorized, 34,325,000 issued and 31,911,956
outstanding December 31, 1998)
Additional paid-in capital 238,962 246,271
Retained earnings 92,474 47,325
Deferred compensation (11,464) (12,494)
Treasury stock (2,528,679 Class A shares and 6,053,153 Class B shares
September 30, 1999; 1,235,729 Class A shares and 2,413,044 Class B
shares December 31, 1998) (193,038) (74,833)
Accumulated other comprehensive income (1,352) 202
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 126,247 207,136
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $364,319 $327,179
======================================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Unaudited
(in thousands, except for per share data)
<TABLE>
<CAPTION>
======================================================================================================================
For the three months ended For the nine months ended
September 30, September 30,
----------------------------------------------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Investment management fees $ 47,091 $ 34,982 $ 124,114 $ 102,623
Underwriting and distribution fees 30,466 27,887 94,056 79,889
Shareholder service fees 10,622 8,306 30,716 24,336
Investment and other revenue 2,090 2,268 7,561 6,432
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 90,269 73,443 256,447 213,280
Expenses:
Underwriting and distribution 30,703 26,215 92,947 70,770
Compensation and related costs 10,991 8,256 29,734 24,820
General and administrative 5,275 2,032 13,820 5,682
Depreciation 551 492 1,613 1,351
Interest expense 1,904 400 3,910 400
Amortization of goodwill 845 725 2,297 2,177
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 50,269 38,120 144,321 105,200
- ----------------------------------------------------------------------------------------------------------------------
Income before affiliated items and provision for 40,000 35,323 112,126 108,080
income taxes
Affiliated items:
Interest income - - - 1,950
Interest expense - - - (8,604)
- ----------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 40,000 35,323 112,126 101,426
Provision for income taxes 15,320 13,356 42,674 38,902
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 24,680 $ 21,967 $ 69,452 $ 62,524
======================================================================================================================
Net income per share:
Basic $ 0.42 $ 0.33 $ 1.15 $ 0.94
Diluted $ 0.41 $ 0.33 $ 1.12 $ 0.94
======================================================================================================================
Weighted average shares outstanding:
Basic 58,573 66,399 60,302 66,437
Diluted 59,983 66,416 61,786 66,534
======================================================================================================================
Dividends declared per common share $ 0.1325 $ 0.1325 $ 0.3975 $ 0.3975
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited in thousands)
<TABLE>
<CAPTION>
======================================================================================================================
For the three months ended For the nine months ended
September 30, September 30,
--------------------------- -------------------------
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 24,680 $ 21,967 $ 69,452 $ 62,524
Other comprehensive income:
Net unrealized appreciation (depreciation) of
investments during the period, net of income
taxes of $(225), $(218), $(826), and $(331) (361) (358) (1,295) (543)
Reclassification adjustment for amounts
included in net income, net of income taxes of
$(4), $62, $(134), and $62 (9) 103 (259) 103
- ----------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 24,310 $ 21,712 $ 67,898 $ 62,084
======================================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Statement of Changes in Shareholders' Equity
Nine Months Ended September 30, 1999
(unaudited in thousands)
<TABLE>
<CAPTION>
===================================================================================================================================
Additional Deferred Treasury Unrealized Total
Common stock paid-in Retained Compensation Stock gain (loss) on stockholders'
Shares Amount capital earnings investment equity (deficit)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 66,467 $ 665 246,271 47,325 (12,494) (74,833) 202 207,136
Net income 0 0 0 69,452 0 0 0 69,452
Recognition of deferred compensation 0 0 0 0 1,030 0 0 1,030
Dividends paid 0 0 0 (24,303) 0 0 0 (24,303)
Exercise of stock options, net 0 0 (15,588) 0 0 7,755 0 (7,833)
Tax benefit from exercise of options 0 0 8,279 0 0 0 0 8,279
Treasury stock purchases 0 0 0 0 0 (125,960) 0 (125,960)
Unrealized loss on investment
securities 0 0 0 0 0 0 (1,554) (1,554)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 66,467 $ 665 238,962 92,474 (11,464) (193,038) (1,352) 126,247
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited in thousands)
<TABLE>
<CAPTION>
======================================================================================================================
For the Nine Months Ended September 30,
---------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 69,452 $ 62,524
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,910 3,528
Recognition of deferred compensation 1,030 792
Loss on sale of investments 52 0
Loss on sale and retirement of fixed assets 32 30
Capital gains and dividends reinvested (94) (77)
Deferred income taxes 2,176 1,158
Changes in assets and liabilities:
Receivables from funds (2,378) (412)
Other receivables 6,917 (10,618)
Due to/from affiliates - operating 0 5,232
Other assets (5,751) (1,616)
Accounts payable 4,170 (2,162)
Other liabilities 3,995 7,578
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 83,511 65,957
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to investments (2,776) (110,628)
Sale of investments 14,660 0
Proceeds from maturity of investments 856 1,588
Purchase of property and equipment (6,612) (7,983)
Investment in real estate 551 0
Investment in Austin, Calvert and Flavin, net of cash (19,410) 0
Other 0 (26)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (12,731) (117,049)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from IPO 0 516,014
Notes payable 115,000 0
Cash dividends (24,303) (17,615)
Change in due to/from affiliates - nonoperating 0 (479,601)
Purchase of treasury stock (125,960) (4,759)
Stock option exercises - net payments (8,295) 0
Exercise of stock options 462 0
- ----------------------------------------------------------------------------------------------------------------------
Net cash (used in)/provided by financing activities (43,096) 14,039
- ----------------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 27,684 (37,053)
Cash and cash equivalents at beginning of period 30,180 73,820
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 57,864 $ 36,767
======================================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
7
<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 ("United"), Waddell
& Reed mutual funds ("W&R"), Target/United mutual funds ("Target") and
institutional accounts in the United States. Until March 1998, the Company
was wholly owned by Torchmark. In March 1998, the Company completed the
initial public offering ("Offering") of its Class A common stock, with the
Company realizing net proceeds of approximately $516 million. Approximately
$481 million of the proceeds were used to prepay notes payable to Torchmark.
On November 6, 1998 Torchmark distributed its remaining ownership interest in
the Company by means of a tax-free spin-off to the stockholders of Torchmark
of all shares of common stock of the Company held by Torchmark.
BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments consisting of normal recurring
adjustments, necessary to present fairly the results of its operations and
its cash flows for the periods ended September 30, 1999 and 1998 and its
financial position at September 30, 1999. These financial statements should
be read in conjunction with the Company's audited financial statements for
the year ended December 31, 1998, from which the accompanying balance sheet
as of December 31, 1998 was derived. The operating results and cash flows for
the periods ended September 30, 1999 are not necessarily indicative of the
results that will be achieved in future periods.
ACQUISITION OF SUBSIDIARY
On August 9, 1999 the Company completed its acquisition of Austin
Calvert & Flavin, Inc. ("ACF"), a privately held investment management firm.
The acquisition has been accounted for as a purchase and, accordingly, the
results of ACF have been included with those of the Company since the date of
acquisition. The purchase price of $21.2 million, including $0.2 million of
direct costs, has been allocated to the assets acquired and liabilities
assumed resulting in goodwill of $19.9 million which is being amortized on a
straight line basis over 25 years. The proforma effect of the acquisition on
net income was not and is not expected to be material.
The acquisition agreement provides for additional purchase price
payments based upon the achievement by ACF of specified earnings levels over
the next five years. These payments could aggregate as much as $8.7 million.
LIQUIDITY AND CAPITAL
On July 15, 1999, the Company declared a dividend payable on
November 1, 1999 in the amount of $.1325 per share to shareholders of record
as of October 11, 1999. The total dividend paid was $7.7 million.
During the third quarter of 1998, the Company announced that it would
commence a stock repurchase program whereby shares of the Company's common
stock would be purchased on the open market from time to time under
conditions deemed attractive by management. These shares will be held in
treasury and used for stock options.
During the fourth quarter of 1999, the Company renewed its revolving
credit facility. The credit facility is a $220 million, expandable to $330
million, 364-Day revolving facility at an interest rate of LIBOR plus .625%.
As of September 30, 1999, the outstanding balance on this facility was $155.0
million. The primary use of the borrowed funds was to repurchase stock under
the stock repurchase program.
During the third quarter of 1999, certain employees and directors of the
Company exercised options covering 1.7 million shares. The exercise price was
paid with previously owned shares and the Company withheld 0.3 million shares
for tax withholdings. Cash payments remitted to the taxing authorities on
behalf of the employees and directors aggregated approximately $9.0 million.
8
<PAGE>
EARNINGS PER SHARE
Basic earnings per share for the 1999 and 1998 periods are based on the
average number of shares outstanding for the periods ended September 30, 1999
and 1998, respectively. Diluted earnings per share for these periods also
includes the dilutive impact of stock options.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR STRATEGIES REGARDING
THE FUTURE. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT INCLUDED
IN THIS FORM 10-Q REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS
STRATEGY AND OTHER PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ARE
FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
FORM 10-Q ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE
HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING
STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS AND
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT
CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT
OR THAT THE COMPANY WILL TAKE ANY ACTIONS THAT MAY PRESENTLY BE PLANNED AND
NEITHER THE COMPANY NOR ANY OTHER PERSON WILL BE RESPONSIBLE FOR THE ACCURACY
OR COMPLETENESS OF ANY SUCH FORWARD-LOOKING STATEMENTS. CERTAIN IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
COMPANY'S EXPECTATIONS ARE DISCLOSED IN THE "RISK FACTORS" SECTION OF THE
COMPANY'S FORM 10-K ANNUAL REPORT, WHICH INCLUDE, WITHOUT LIMITATION, THE
ADVERSE EFFECT OF EITHER A DECLINE IN SECURITIES MARKETS OR A DECLINE IN THE
COMPANY'S PRODUCTS' PERFORMANCE, FAILURE TO RENEW INVESTMENT MANAGEMENT
AGREEMENTS, COMPETITION, CHANGES IN GOVERNMENT REGULATION, AVAILABILITY AND
TERMS OF CAPITAL AND YEAR 2000 UNCERTAINTIES. ALL SUBSEQUENT WRITTEN OR ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON
ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS. UPDATED
INFORMATION WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
OVERVIEW
The Company derives its revenues primarily from providing investment
management, distribution and administrative services to the United, W&R and
Target funds and institutional accounts. Investment management fees, the
Company's most substantial source of revenue, are based on the amount of
assets under management and the management fee rate charged and are affected
by sales levels, financial market conditions, redemptions and the composition
of assets. Underwriting and distribution revenues consist of sales charges
and commissions derived from the sales of investment and insurance products
and distribution fees earned from the W&R Funds for distributing their
shares. The products sold have various sales charge structures and the
revenues received from the sale of products vary based on the type and amount
sold. Rule 12b-1 distribution and service fees earned for distributing shares
of the W&R Funds are based upon a percentage of assets and fluctuate based on
sales, redemptions, and financial market conditions. Service fees include
transfer agency fees, custodian fees for retirement plan accounts and
portfolio accounting fees.
9
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1998
Third quarter 1999 net income was $24.7 million or $.41 per share on
a diluted basis, compared with net income of $22.0 million or $.33 per share
for the prior year's third quarter. Operating revenues, excluding investment
and other income for the third quarter of 1999, were $88.2 million, up 23.9%
over last year's third quarter. The acquisition of Austin Calvert & Flavin,
Inc. ("ACF") in early August of this year added $1.0 million to 1999's
operating revenue.
A 34.6% increase in management fee revenues for 1999's third quarter,
compared to 1998's third quarter, was attributable to several factors. The
restructuring of the Funds' management fee arrangements, effective July 1st
of this year, added approximately $5.3 million to 1999's management fee
revenues, while ACF's $1.5 billion in managed assets contributed $1.0 million
to management fee revenues. The remaining increase was due to higher assets
under management and the composition of assets. Mutual fund assets under
management were $26.0 billion at September 30, 1999, up 18.6% from $21.9
billion at September 30, 1998. Institutional assets under management were
$3.3 billion at September 30, 1999, up 14.0% from $2.9 billion at September
30, 1998.
Mutual fund sales net of redemptions were $41.7 million for the
third quarter of 1999 compared with net redemptions of $67.2 million for the
third quarter of 1998. The blended mutual funds' redemption rates were 7.4%
and 9.0% for the third quarters ended 1999 and 1998, respectively.
Underwriting and distribution revenues were up 9.2% for the third
quarter of 1999 compared with the prior year period. Commission revenues from
sales of front-load investment products, primarily the United Funds and
variable annuity products, accounted for $1.7 million of the $2.6 million
difference in the quarter over quarter comparison. The increase in these
sales, especially variable product sales which have higher commission rates,
drove the growth in commission revenues. Revenues from the Waddell & Reed
Funds, which are derived primarily from asset-based 12b-1 fees, increased in
relation to growth in assets, reduced somewhat by lower contingent deferred
sales charges from lower fund redemptions.
INVESTMENT PRODUCT SALES ( $ IN THOUSANDS)
<TABLE>
<CAPTION>
3Q 99 3Q 98 % change
--------------------------- ----------
<S> <C> <C> <C>
United Funds $320,290 $315,177 1.6%
Waddell & Reed Funds 97,457 76,468 27.4
Variable Products (Target/United) 95,092 90,807 4.7
--------- --------
Total Investment Product Sales $512,839 $482,452 6.3
========= ========
</TABLE>
Shareholder service fees for the third quarter of 1999 increased
27.9% from the third quarter of last year. A fee increase, implemented in the
fourth quarter of 1998, added approximately $1.3 million per quarter to
1999's service fee revenue. This fee increase was offset by higher processing
10
<PAGE>
costs recorded in general and administrative expenses. Excluding the effects
of this fee increase, revenues grew in correlation to the increase in the
number of shareholder accounts. The number of shareholder accounts was 1.66
million at September 30, 1999, up 12% from a year ago.
Underwriting and distribution expenses increased $4.5 million over
last year's third quarter. Over 45% of the increase was attributable to
increased volume. The increase also includes $1.1 million for additional
advertising, training, marketing support and field offices, and approximately
$1.5 million for sales force compensation enhancements and increased sales
program costs.
Compensation and related costs for the third quarter of 1999 were
33.1% higher than last year's third quarter. Staff additions in investment
management, shareholder services and back office operations have increased
home office personnel by 27% since September 30, 1998. The Company's major
investments made in hiring additional personnel to add breadth and depth to
the investment management staff and to increase customer service and other
back office support staff will be substantially completed by the end of 1999.
Therefore, more modest growth in compensation costs is expected in future
periods.
General and administrative expenses have increased substantially in
1999 when compared with the prior period. The Company began outsourcing its
transfer agency data processing in the fourth quarter of 1998, the costs of
which accounted for $1.5 million of the $3.2 million increase on a quarter
over quarter comparison. The remaining difference was due to numerous items
associated with investments made to facilitate growth and enhance customer
service, notably information systems contracting costs, consulting expenses
and administrative costs associated with growth in the customer base and home
office personnel.
Investment and other income, which consists primarily of interest
income from investment securities, was $2.1 million for the quarter ended
September 30,1999 down from $2.3 million for the prior year's third quarter,
due primarily to lower balances in investment securities. Interest expense
was higher in the third quarter due to increased borrowing on the credit
facility to finance stock repurchases and the ACF acquisition.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1999 AS COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1998
For the nine months ended September 30, 1999, net income was $69.5
million or $1.12 per share on a diluted basis, compared with net income of
$62.5 million or $0.94 per share for the prior year's nine-month period.
Excluding the impact of interest relating to notes with Torchmark
Corporation, net income for the nine months ended September 30, 1998 was
$66.8 million or $1.00 per diluted share. Concurrent with the Offering, all
notes were prepaid. Operating revenues, excluding investment and other income
for the nine-month period ended September 30, 1999 were $248.9 million, up
20.3% when compared to the same period of 1998. The acquisition of ACF in
early August of this year added $1.0 million to 1999's operating revenue.
A 20.9% increase in management fee revenues when compared to the same
period of 1998 was attributable to several factors. The restructuring of the
Funds' management fee arrangements, effective July 1st of this year, added
approximately $5.3 million to 1999's management fee revenues,
11
<PAGE>
while ACF's $1.5 billion in managed assets contributed $1.0 million to
management fee revenues. The remaining increase was due to higher assets
under management and the composition of assets. Mutual fund assets under
management were $26.0 billion at September 30, 1999, up 18.6% from $21.9
billion at September 30, 1998.
Sales net of redemptions were $65.0 million for the nine-month
period ended September 30, 1999 compared with net redemptions of $182.2
million for the same period ended September 1998. The blended mutual funds'
redemption rates were 8.4% and 8.8% for the nine-month period ended September
30, 1999 and 1998, respectively.
Underwriting and distribution revenues were up 17.7% for the
nine-month period ended September 30, 1999. Commission revenues from sales of
front-load investment products, primarily the United Funds and variable
annuity products, accounted for $10.5 million of the $14.2 million difference
between the nine months ended September 30, 1999 and the same period in 1998.
The increase in these sales, especially variable product sales which have
higher commission rates, drove the growth in commission revenues. Revenues
from the Waddell & Reed Funds, which are derived primarily from asset based
12b-1 fees, increased in relation to growth in assets, reduced somewhat by
lower contingent deferred sales charges from lower fund redemptions.
INVESTMENT PRODUCT SALES ( $ IN THOUSANDS)
<TABLE>
<CAPTION>
YTD 99 YTD 98 % change
---------------------- -------------
<S> <C> <C> <C>
United Funds $1,025,248 $991,219 3.4%
Waddell & Reed Funds 289,330 189,449 52.7
Variable Products (Target/United) 297,409 217,026 37.0
------------ ---------
Total Investment Product Sales $1,611,987 $1,397,694 15.3
=========== ==========
</TABLE>
Shareholder service fees for the nine months ending September 30
1999 increased 26.2% from the same period in 1998. A fee increase,
implemented in the fourth quarter of 1998, added approximately $1.3 million
per quarter to 1999's service fee revenue. This fee increase is offset by
higher processing costs recorded in general and administrative expenses.
Excluding the effects of this fee increase, revenues grew in correlation to
growth in the number of shareholder accounts. The number of shareholder
accounts was 1.66 million at September 30, 1999, up 12% from a year ago.
Underwriting and distribution expenses increased $22.2 million or
31.3% for the nine-month period ended September 30, 1999 over the same period
in 1998. Over 48% of the increase was attributable to increased volume. The
increase also includes an additional $6.1 million for additional advertising,
training, marketing support and field offices, and approximately $4.7 million
for additional sales force compensation enhancements and increased sales
program costs.
Compensation and related costs for the nine-month period ended
September 30, 1999 were 19.8% higher compared to the same period last year.
Staff additions in investment management, shareholder services and back
office operations have increased home office personnel by 27% since September
30, 1998. The Company's major investments made in hiring additional personnel
to add
12
<PAGE>
breadth and depth to the investment management staff and to increase customer
service and other back office support staff will be substantially completed by
the end of 1999. Therefore, more modest growth in compensation costs is
expected in future periods.
General and administrative expense for the nine-month period ended
September 30, 1999 increased $8.1 million over the same period last year.
Increased costs of outsourcing transfer agency data processing accounted for
$4.1 million, which were partially offset by increased shareholder service
fee revenue, as previously mentioned. The remaining difference was due to
numerous items associated with investments made to facilitate growth and
enhance customer service, notably information systems contracting costs,
consulting expenses and administrative costs associated with growth in the
customer base and addition of home office personnel.
ASSETS UNDER MANAGEMENT
(amounts in millions)
<TABLE>
<CAPTION>
ENDING
3Q 99 3Q 98 % change 2Q 99 % change
------------------------- --------
<S> <C> <C> <C> <C> <C> <C>
Mutual Fund
Equity $21,523 $17,274 24.6% $21,880 -1.6%
Fixed Income 3,666 3,951 -7.2% 3,809 -3.8%
Money Market 788 670 17.6% 732 7.7%
------- ------- -------
Total 25,977 21,895 18.6% 26,421 -1.7%
Institutional Assets 3,292 2,887 14.0% 3,174 3.7%
------- ------- -------
Total Assets Under Management* $29,269 $24,782 18.1% $29,595 -1.1%
------- ------- -------
------- ------- -------
AVERAGE
3Q 99 3Q 98 % change YTD 1999 YTD 1998 % change
------------------------- ------------------------
Mutual Funds
Equity $21,808 $18,310 19.1% $21,016 $18,020 16.6%
Fixed Income 3,742 3,961 -5.5% 3,859 3,973 -2.9%
Money Market 776 645 20.3% 734 599 22.5%
------- ------- ------- -------
Total 26,326 22,916 14.9% 25,609 22,592 13.4%
Institutional Assets 3,198 2,906 10.0% 3,187 2,914 9.4%
------- ------- ------- -------
Total Assets Under Management* $29,524 $25,822 14.3% $28,796 $25,506 12.9%
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
*Excludes $1,474 of assets managed by Austin, Calvert & Flavin, Inc.
<TABLE>
<CAPTION>
OTHER ITEMS
3Q 99 3Q 98 YTD 1999 YTD 1998
------------------------- -------------------------
<S> <C> <C> <C> <C>
Redemption Rate(1) 7.4% 9.0% 8.4% 8.8%
Sales per advisor (000's) 210 221 674 658
Number of advisors 2,483 2,242 2,483 2,242
Number shareholder accounts 1,659,200 1,483,951 1,659,200 1,483,951
</TABLE>
(1) Excludes a pension plan redemption of $76 million in first quarter 1999
and also excludes Torchmark Corporation's redemptions in June 1998 of $35
million which were re-deposited in institutional accounts.
APPROVAL OF CHANGE IN MANAGEMENT FEE RATE STRUCTURE
The Company's proposal to restructure the management fee
arrangements of the Funds was approved by the Funds' shareholders in the
second quarter of this year. This restructuring replaced the "group" fee
structure and "specific fund" add-on fee with a specific fee schedule for
each Fund. The restructuring, effective July 1, 1999, added approximately .08%
to the Company's overall management fee rate applied to assets under
management.
ENHANCED COMMISSION ARRANGEMENT FOR VARIABLE PRODUCT SALES
The Company entered into an agreement with United Investors Life
Insurance Company in July of 1999 whereby, commencing January 1, 2000, the
Company will receive additional annual commissions from United Investors for
selling variable products for which it is the underwriter. It is estimated that
this arrangement will provide additional underwriting and distribution
revenues of approximately $6.0 million in 2000.
ACQUISITION OF INVESTMENT MANAGEMENT FIRM
As previously announced, the Company acquired Austin, Calvert &
Flavin, Inc. ("ACF"), a privately held investment management firm based in
San Antonio, Texas on August 9, 1999. ACF manages investments of
approximately $1.5 billion for trusts, high net worth families and
individuals and pension plans of corporations, hospitals, schools, labor
unions, endowments and foundations. The transaction was financed by invested
cash and amounts borrowed against the credit facility.
STOCK REPURCHASE PROGRAM
The Company continued acquiring shares of its common stock by
repurchasing 0.5 million Class A shares and 1.7 million Class B shares at an
aggregate cost of $53.8 million during the third quarter of this year. These
repurchases were funded primarily by an additional $65.0 million net
borrowing against the credit facility. The outstanding balance on this
facility was $155.0 million at September 30, 1999. The total number of shares
outstanding at September 30, 1999 was 57.9 million, comprised of 29.6 million
Class A shares and 28.3 million Class B shares. From October 1, 1999 through
November 10,
13
<PAGE>
1999, the Company repurchased an additional .3 million Class B shares at an
aggregate cost of $5.4 million.
NEW CLASSES OF MUTUAL FUND SHARES AND RELATED WRITE-OFF
Effective October 4th, Waddell & Reed began restructuring its United
family of funds and Waddell & Reed family of funds. By offering additional
classes of mutual fund shares and closing non-industry standard classes, the
restructuring will enhance the Company's competitiveness and strategic
distribution alternatives.
Commencing October 4th, the United family of funds began offering B
class shares ("back-end sales charge shares") and C class shares ("level
sales charge shares"). These are in addition to the already offered A class
shares ("front-end sales charge shares") and Y class shares ("institutional
shares"). Concurrently, the Waddell & Reed family of funds now offers C class
shares ("level sales charge shares"). This is in addition to the already
offered Y class shares ("institutional shares").
As of October 4th, the Waddell & Reed family of funds' B class
shares no longer are offered for new sales due to their non-industry standard
structure. By industry standards, these B shares are a hybrid of C and B
shares. Subject to obtaining the necessary approvals, including the approval
of the Funds' Boards of Directors, the Company plans to convert these B shares
into C shares, which do have an industry standard structure and only a
one-year contingent deferred sales charge period. As a result of converting
the B shares, the related deferred selling cost is anticipated to be written
off in the fourth quarter resulting in approximately a $19 million pretax
charge. These costs were previously capitalized and amortized over the life
of the specific investments over a period not exceeding ten years.
As a result of this product restructuring of the United and Waddell
& Reed families of funds, the Company's product line will: 1) be more
consistent with that of the industry, 2) provide its clients with more
choices and greater value, and 3) accommodate additional changes for
strategic distribution flexibility. This restructuring is expected to
favorably impact the Company's distribution margin.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and liquid marketable securities were $145.8
million at September 30, 1999, an increase of $12.5 million from December 31,
1998. The increase is primarily related to cash flow from operations. Cash
and cash equivalents at September 30, 1999 and December 31, 1998 include
reserves of $16.4 million and $10.8 million, respectively, for the benefit of
customers in compliance with securities regulations.
Cash flow provided from operations was $83.5 million and $66.0 million
for the first nine months of 1999 and 1998, respectively. Investing
activities used $12.7 million in cash during the nine months ended September
30, 1999, due primarily to net proceeds used in the ACF acquisition of $19.4
million and partially offset by the sale of investments securities of $14.7
14
<PAGE>
million. The Company repurchased $126.0 million of its common stock through
the stock repurchase program during the first nine months of 1999, funded
primarily by the credit facility. In the third quarter, the Company began
construction of a new building as an expansion to its home office. It is
expected to be completed in the third quarter of 2000 and cost $14.6 million.
In the fourth quarter, the Company reached an agreement to sell all of its
investments in real estate, including its home office and the building under
construction, to unrelated parties for approximately $45.8 million net of
related expenses. The book gain on sale is expected to be approximately $0.3
million and the taxable gain on sale is expected to be $0.4 million. After
due diligence has been completed, the sales are expected to close at two
different times; the building under construction will close for net proceeds
of approximately $18.3 million upon its completion in the third quarter of
2000 and the remaining properties will close for net proceeds of
approximately $27.5 million in December of 1999. For its home office
operations, the Company is expected to enter into two 15 year leases costing
$0.9 million and $1.6 million per year starting in December 1999 and the
third quarter of 2000, respectively. Other than the expansion of the home
office facilities, the Company has no material commitments for capital
expenditures.
Management believes its available cash, marketable securities and
expected cash flow from operations will be sufficient to fund dividends,
obligations and operations as well as advance sales commissions and meet any
other reasonably foreseeable cash needs. The $220 million credit facility,
expandable to $330 million, is also available for the Company's use. The
outstanding balance on the facility at September 30, 1999 was $155.0 million.
INFORMATION SYSTEMS AND YEAR 2000 READINESS
Some computers, software, and other equipment include computer code in
which the calendar year data is abbreviated to only two digits. As a result,
some of these systems will not operate correctly after 1999 because they may
interpret "00" to mean 1900, rather than 2000. These problems are widely
expected to increase in frequency and severity as the year 2000 approaches,
and are commonly referred to as the "Year 2000 Problem". The information
provided in this Form 10-Q about our Year 2000 progress is provided as of
November 1, 1999.
The Company believes that it has identified all significant data,
computer hardware, software applications and related equipment, as well as
office and facilities equipment such as telephone switches and security
systems used in connection with its internal operations that must be
modified, upgraded or replaced to minimize the possibility of a material
disruption to its business. The Company has completed the process of
modifying, upgrading and replacing systems that have been assessed as
adversely affected, to prevent the occurrence of any material disruption of
its business. However, there can be no assurances in this regard.
Internal and external resources were used to make the required
modifications and test Year 2000 compliance. The Company has completed
compliance activities on all of its systems. Additional verification will
continue through 1999 to ensure that no new date related problems are
introduced into previously tested or newly developed systems. Newly purchased
software and systems are required to be Year 2000 compliant and are subject
to the same verification standards as existing systems. The Company estimates
that the total costs of this effort will be $4.4 million for the five year
period ending June 30, 2000. Total costs incurred to date are approximately
$4.1 million.
15
<PAGE>
The Company is dependent on several mission critical systems, including
those maintained by third-party service providers, to perform its core
business activities. Mission critical investment management systems have been
remediated and tested. The mutual fund transfer agency system is maintained
by a third-party service provider and interfaces with other Company systems.
As of December 31, 1998 this service provider has represented that their
transfer agency systems have been updated for Year 2000 compliance.
Integrated testing of these systems was completed and included transaction
processing in a Year 2000 environment. Additional verification testing will
continue through the end of the year to ensure that no new date related
problems are introduced into previously tested systems.
The following chart summarizes the Company's current state of completion
for the systems it uses.
<TABLE>
<CAPTION>
STAGES TARGET DATE % COMPLETE
------ ----------- ----------
<S> <C> <C>
Awareness Complete 100%
Inventory Complete 100%
Risk Assessment Complete 100%
Compliance Assessment Complete 100%
Remediation Complete 100%
Validation Complete 100%
Contingency Planning Complete 100%
</TABLE>
The Year 2000 Problem also affects some of the Company's vendors and
suppliers of data, computers, software and other equipment. The Company has
contacted all significant vendors and suppliers to inquire about their Year
2000 readiness. However, the Company has limited or no control over the
actions of these vendors and suppliers. Accordingly, the Company cannot
guarantee that these vendors and suppliers will resolve any or all Year 2000
Problems. If the Company's vendors and suppliers fail to resolve Year 2000
Problems, the Company's business could be materially disrupted.
The Company believes it has identified and resolved all Year 2000
Problems that could materially adversely affect its business operations.
However, due to the number of interactions with internal and external
systems, equipment and data, management believes that it is not possible to
determine with complete certainty that all Year 2000 Problems affecting the
Company or its clients have been identified or corrected. In addition, no one
can accurately predict how many Year 2000 Problem-related failures will occur
or the severity, duration or financial consequences of these potential
failures. As a result, management expects that the Company could suffer a
small number of operational inconveniences and inefficiencies for the Company
and its clients that will divert some of management's time and attention and
financial and human resources from its ordinary business activities.
In order to minimize the risk of the Company's products and services
being affected by Year 2000 issues, the Company intends to suspend the
implementation or modification of hardware and software between October 1,
1999 and December 31, 1999, unless such implementation or modification is
critical to its business operations or relates to Year 2000 maintenance
concerns. This
16
<PAGE>
precautionary measure should allow the Company to preserve the compliant
status of remediated systems and to further assess the stability of its
internal systems environment prior to year end.
The Company has developed contingency plans to minimize the impact of
potential Year 2000 Problems on its mission critical and non-mission critical
systems for which it is practical to develop contingency plans. The Company
will refine and test its contingency plans throughout the remainder of 1999.
However, in an operation as complex as providing investment advisory
services, there are limited alternatives to certain mission critical systems
and third-party providers, including electrical power and communications
services. If these services or mission critical systems such as the mutual
fund transfer agency system fail for an extended period of time, there would
likely be a material adverse affect on the Company's business, results of
operations and financial condition. Although the Company is investigating
alternative solutions, it is unlikely that any adequate contingency plan can
be developed for any prolonged failure of these mission critical services and
systems. Additionally, the investment portfolios from which the Company
derives the majority of its revenue could be subject to increased credit,
market and liquidity risk arising from the impact of Year 2000 issues on
individual securities. Additionally, governments and financial markets around
the world could be affected by Year 2000 issues. To the extent that the
market prices of securities are negatively affected by these or other Year
2000 issues, the Company's investment advisory revenues, results of
operations and financial condition could be materially adversely affected.
The discussion of the Company's efforts, and management's expectations,
relating to Year 2000 compliance constitutes forward-looking statements. The
Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely affected by, among
other things, vendor ability to modify proprietary software and unanticipated
problems identified in the ongoing compliance review.
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Forward-Looking Statements
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). The
1995 Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide information without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected. Although the
Company does not anticipate that it will make forward-looking statements as a
general policy, the Company will make forward-looking statements as required
by law or regulation, and from time to time may make such statements with
respect to management's estimation of the future operating results and
business of the Company.
The Company hereby incorporates into this report by reference to its
Form 10-K for the year ended December 31, 1998, the cautionary statements
found on pages 16-18 of such Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
period subject to this Quarterly Report on Form 10-Q.
17
<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 15th day of November, 1999.
WADDELL & REED FINANCIAL, INC.
By: /s/ John E. Sundeen, Jr.
------------------------
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
By: /s/ D. Tyler Towery
-------------------
Vice President and
Controller
(Principal Accounting Officer)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF WADDELL & REED FINANCIAL INC.
INCLUDED IN PART I ITEM 1 OF THE ACCOMPANYING FORM 10-Q QUARTERLY REPORT FOR THE
PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 57,864
<SECURITIES> 87,940
<RECEIVABLES> 31,904
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 183,881
<PP&E> 36,005
<DEPRECIATION> 13,233
<TOTAL-ASSETS> 364,319
<CURRENT-LIABILITIES> 225,223
<BONDS> 0
0
0
<COMMON> 665
<OTHER-SE> 125,582
<TOTAL-LIABILITY-AND-EQUITY> 364,319
<SALES> 0
<TOTAL-REVENUES> 256,447
<CGS> 0
<TOTAL-COSTS> 138,114
<OTHER-EXPENSES> 2,297
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,910
<INCOME-PRETAX> 112,126
<INCOME-TAX> 42,674
<INCOME-CONTINUING> 69,452
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,452
<EPS-BASIC> 1.15
<EPS-DILUTED> 1.12
</TABLE>
