<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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________
Commission file number 001-13913
WADDELL & REED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0261715
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
6300 LAMAR AVENUE
OVERLAND PARK, KANSAS
66202
(Address of principal executive offices)
(Zip Code)
(913) 236-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
Shares outstanding of each of the registrant's classes of common
stock as of March 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
Class Outstanding as of March 31, 1999
----- --------------------------------
Class A Common stock, $.01 par value 30,558,722
Class B Common stock, $.01 par value 30,464,656
</TABLE>
<PAGE>
WADDELL & REED FINANCIAL, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
INDEX
Page No.
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Part I. Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998 3
Consolidated Statements of
Operations for the three months ended
March 31, 1999 and March 31, 1998 4
Consolidated Statements of Comprehensive
Income for the three months ended
March 31, 1999 and March 31, 1998 5
Consolidated Statements of Cash
Flows for the three months ended
March 31, 1999 and March 31, 1998 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
March 31, December 31,
ASSETS 1999 1998
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 63,881 30,180
Investment securities, available-for-sale 104,327 103,153
Receivables:
United funds and W&R funds 8,011 5,740
Customers and other 28,167 28,865
Deferred income taxes 1,092 1,309
Prepaid expenses and other current assets 3,514 3,222
- ----------------------------------------------------------------------------------------------------------------
Total current assets 208,992 172,469
Property and equipment, net 18,786 17,685
Investment in real estate 24,124 24,718
Deferred sales commissions, net 16,997 15,710
Goodwill (net of accumulated amortization of $21,108 and $20,382) 95,202 95,928
Other assets 736 669
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 364,837 327,179
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
Liabilities:
Current liabilities:
Accounts payable $ 40,678 28,304
Accrued sales force compensation 9,199 11,916
Short term notes payable 80,191 40,076
Income taxes payable 26,117 13,464
Other current liabilities 12,617 16,034
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 168,802 109,794
Deferred income taxes 336 208
Accrued pensions and post-retirement costs 10,640 10,041
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 179,778 120,043
- ----------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock ($.01 par value; 150,000,000 Class A shares 665 665
authorized, 32,142,174 issued and 30,558,722 outstanding
and 100,000,000 Class B shares authorized, 34,325,000
issued and 30,464,656 outstanding March 31, 1999;
32,142,174 Class A shares issued and outstanding;
34,325,000 Class B shares issued and outstanding March
31, 1998)
Additional paid-in capital 246,271 246,271
Retained earnings 60,959 47,325
Deferred compensation (12,144) (12,494)
Treasury stock (1,583,452 Class A shares and 3,860,344 Class B (110,258) (74,833)
shares)
Accumulated other comprehensive income (434) 202
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 185,059 207,136
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 364,837 327,179
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited 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
March 31,
--------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Investment management fees $ 37,316 32,426
Underwriting and distribution fees 30,532 23,461
Shareholder service fees 9,702 7,773
Investment and other revenue 2,923 1,439
- -------------------------------------------------------------------------------------------------------------------
Total revenue 80,473 65,099
Expenses:
Underwriting and distribution 29,812 20,283
Compensation and related costs 9,137 7,420
General and administrative 4,051 1,783
Depreciation 533 429
Interest expense 863 -
Amortization of goodwill 726 726
- -------------------------------------------------------------------------------------------------------------------
Total expenses 45,122 30,641
- -------------------------------------------------------------------------------------------------------------------
Income before affiliated items and provision for 35,351 34,458
income taxes
Affiliated items:
Interest income - 1,950
Interest expense - (8,604)
- -------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 35,351 27,804
Provision for income taxes 13,368 11,057
- -------------------------------------------------------------------------------------------------------------------
Net income $ 21,983 16,747
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- -------------------------------------------------------------------------------------------------------------------
Net income per share:
Basic and diluted $ 0.35 0.25
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- -------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 61,971 66,467
Diluted 63,207 66,784
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Dividends declared per common share $ 0.1325 $ -
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited in thousands)
<TABLE>
<CAPTION>
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- -------------------------------------------------------------------------------------------------------------------
For the three months ended
March 31,
---------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Income 21,983 16,747
Other comprehensive income:
Net unrealized appreciation (depreciation) of
investments during the period, net of income
taxes of $(391) and $96 (636) 157
- -------------------------------------------------------------------------------------------------------------------
Comprehensive Income 21,347 16,904
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited in thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
For the three months ended March 31,
------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 21,983 16,747
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,259 1,155
Recognition of deferred compensation 339 55
Loss on sale and retirement of fixed assets 0 4
Capital gains and dividends reinvested (28) (19)
Deferred income taxes 736 14
Changes in assets and liabilities:
Receivables from funds (2,271) (1,895)
Other receivables 841 (9,267)
Due to/from affiliates - operating 0 8,919
Other assets (1,646) (559)
Accounts payable 12,374 12,884
Other liabilities 7,234 11,535
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 40,821 39,573
Cash flows from investing activities:
Additions to investments (2,247) (27,965)
Proceeds from maturity of investments 74 607
Purchase of property and equipment (1,635) (712)
Investment in real estate 462 0
Other 0 (23)
- -------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (3,346) (28,093)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from IPO 0 516,014
Notes payable 40,000 0
Cash dividends (8,324) 0
Change in due to/from affiliates - nonoperating 0 (480,763)
Purchase of treasury stock (35,484) 0
Exercise of stock options 34 0
- -------------------------------------------------------------------------------------------------------------------
Net cash (used)/provided by financing activities (3,774) 35,251
- -------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 33,701 46,731
Cash and cash equivalents at beginning of period 30,180 73,820
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 63,881 120,551
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to unaudited 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 ("United"), Waddell
& Reed mutual funds ("W&R"), Target/United mutual funds ("Target") and
institutional accounts in the United States. Prior to December 1997, the
Company was known as United Investors Management Company. In the first
quarter of 1998, the insurance operations of the Company, United Investors
Life Insurance Company, were distributed to Torchmark Corporation and a
subsidiary of Torchmark (together, "Torchmark"). Until March 1998, the
Company was wholly owned by Torchmark. In March 1998, the Company completed
the initial public offering ("Offering") of its Class A common stock, with
the Company realizing net proceeds of approximately $516 million.
Approximately $481 million of the proceeds were used to prepay notes payable
to Torchmark. On November 6, 1998 Torchmark distributed its remaining
ownership interest in the Company by means of a tax-free spin-off to the
stockholders of Torchmark of all shares of common stock of the Company held
by Torchmark.
BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
results of its operations and its cash flows for the three-month periods
ended March 31, 1999 and 1998 and its financial position at March 31, 1999.
These financial statements should be read in conjunction with the Company's
audited financial statements for the year ended December 31, 1998, from which
the accompanying balance sheet as of December 31, 1998 was derived. The
operating results and cash flows for the three months ended March 31, 1999
are not necessarily indicative of the results that will be achieved in future
periods.
<PAGE>
LIQUIDITY AND CAPITAL
On February 22, 1999, the Company declared a dividend payable on April
30, 1999 in the amount of $.1325 per share to shareholders of record as of
April 8, 1999. The total dividend paid was $8.3 million.
During the third quarter of 1998, the Company announced that it would
commence a stock repurchase program whereby shares of the Company's common
stock would be purchased on the open market from time to time under
conditions deemed attractive by management. These shares will be held in
treasury and used for stock options. For the three month period ended March
31, 1999, the Company purchased 1,798,200 Class A and Class B common shares
at an average price of $19.68 per share.
During the third quarter of 1998, the Company entered into a $200
million revolving credit facility, expandable to $300 million. The credit
facility is a 364-Day revolving facility at an interest rate of LIBOR plus
.35. As of March 31, 1999, the outstanding balance on this facility was $80.0
million. The primary use of the borrowed funds was to repurchase stock under
the stock repurchase program.
EARNINGS PER SHARE
Basic earnings per share for the 1999 and 1998 periods are based on the
average number of shares outstanding for the three month periods ended March
31, 1999 and 1998, respectively. Diluted earnings per share for these periods
also includes the dilutive impact of stock options.
SUBSEQUENT EVENT
On or about May 12, 1999, in connection with the adoption of a
stockholder rights plan, the Company filed a Certificate of Designation,
Preferences and Rights designating the rights, preferences and privileges of
a new Series A Junior Participating Preferred Stock. The Certificate of
Designation created a series of 750,000 shares of Series A Preferred Stock,
$1.00 par value, out of the total class of 5,000,000 shares of Preferred
Stock. Pursuant to the stockholder rights plan, the Company issued rights to
its stockholders of record as of May 12, 1999, entitling each stockholder to
the right to purchase one one-hundredth of a share (a "Unit") of Series A
Junior Participating Preferred Stock for each share of Common Stock held by
the stockholder. The purchase price of $85.00 per Unit is subject to
adjustment and is exercisable only upon the occurrence of certain events.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR STRATEGIES REGARDING
THE FUTURE. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT
INCLUDED IN THIS FORM 10-Q REGARDING THE COMPANY'S FINANCIAL POSITION,
BUSINESS STRATEGY AND OTHER PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ARE
FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
FORM 10-Q ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE
HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING
STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS AND
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT
CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT
OR THAT THE COMPANY WILL TAKE ANY ACTIONS THAT MAY PRESENTLY BE PLANNED AND
NEITHER THE COMPANY NOR ANY OTHER PERSON WILL BE RESPONSIBLE FOR THE ACCURACY
OR COMPLETENESS OF ANY SUCH FORWARD-LOOKING STATEMENTS. CERTAIN IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
COMPANY'S EXPECTATIONS ARE DISCLOSED IN THE "RISK FACTORS" SECTION OF THE
COMPANY'S FORM 10-K ANNUAL REPORT, WHICH INCLUDE, WITHOUT LIMITATION, THE
ADVERSE EFFECT FROM A DECLINE IN SECURITIES MARKETS OR IF THE COMPANY'S
PRODUCTS' PERFORMANCE DECLINES, FAILURE TO RENEW INVESTMENT MANAGEMENT
AGREEMENTS, COMPETITION, CHANGES IN GOVERNMENT REGULATION, AVAILABILITY AND
TERMS OF CAPITAL AND YEAR 2000 UNCERTAINTIES. ALL SUBSEQUENT WRITTEN OR ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON
ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS. UPDATED
INFORMATION WILL BE PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
OVERVIEW
The Company derives its revenues primarily from providing investment
management, distribution and administrative services to the United, W&R and
Target funds and institutional accounts. Investment management fees, the
Company's most substantial source of revenue, are based on the amount of
assets under management and are affected by sales levels, financial market
conditions, redemptions and the composition of assets. Underwriting and
distribution revenues consist of sales charges and commissions derived from
the sale of investment and insurance products and distribution fees earned
from the W&R Funds for distributing their shares. The products sold have
various sales charge structures and the revenues received from the sale of
products vary based on the type and amount sold. Rule 12b-1 distribution and
service fees earned for distributing shares of the W&R Funds are based upon a
percentage of assets and fluctuate based on sales, redemptions, and financial
market conditions. Service fees include transfer agency fees, custodian fees
for retirement plan accounts and portfolio accounting fees.
<PAGE>
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1999 AS COMPARED TO THREE
MONTHS ENDED MARCH 31, 1998
Total revenues for the first quarter of 1999 were $80.5 million, up
$15.4 million or 24% from the same period in 1998.
Investment management fees, which comprised 46% of the total revenue for
the first quarter of 1999, were $37.3 million, an increase of $4.9 million or
15% from the comparable 1998 period. Average assets under management were
$27.9 billion for the three months ended March 31, 1999, up 14% from last
year's first quarter. Management fee revenue increased at a higher rate than
the rate of growth in average assets primarily because equity assets, which
bear a higher management fee than fixed income assets, as a percentage of
total assets increased. Total assets under management at March 31, 1999, in
the amount of $28.4 billion, were composed of $25.2 billion in mutual funds
and $3.2 billion in institutional accounts. Mutual fund assets were up 9.9%
from March 31, 1998 and 2.6% from December 31, 1998. For the three months
ended March 31, 1999, market performance accounted for $597 million of the
$631 million change in mutual fund assets with the remainder due to net cash
inflows.
The blended mutual funds' redemption rates were 10.2% for the first
quarter of 1999 and 8.2% for the first quarter of 1998. The redemption rate
for the first quarter of 1999 reflects the closing of a pension plan account
that resulted in a $76 million mutual fund redemption. Excluding this, the
redemption rate would have been 8.9%. Additional factors that the Company
believes contributed to the increase in the redemption rate include
significantly higher capital gain distributions in December 1998 resulting in
the need by shareholders to fund 1999 tax payments and a shift in mutual fund
product mix. Capital gain distributions in December 1998 were $2.3 billion or
26% more than in December 1997. Assets in the Waddell & Reed Funds (back-end
load funds) for 1999 were equal to 4.8% of total mutual fund assets compared
to 4.3% last year. Redemption rates on back-end load funds are generally
higher than front-end load funds. It is estimated that almost 1% of the
redemption rate is attributable to redemptions related to shareholders'
income tax needs and the change in product mix.
Underwriting and distribution revenues from product sales were $30.5
million for the first quarter of 1999, a 30.1% increase from the prior year's
first quarter. The revenue growth was primarily due to higher investment
product sales. Investment product sales increased to $530.2 million for the
first quarter of 1999, a 31% increase over the same period last year. The
rate of growth in revenues is less than that of sales because of changes in
the product mix. Sales of the Waddell & Reed Funds, which do not have an
initial sales charge, equaled 17.5% of investment product sales for 1999 as
compared to 11.8% for the same period last year.
Shareholder service fees include transfer agency fees, retirement plan
custodian fees, and portfolio accounting fees. Transfer agency and retirement
plan custodian fees typically increase in correlation to the number of client
accounts, which increased by 138,500 from March 31, 1998 to March 31, 1999.
Beginning in the fourth quarter of 1998, transfer agency fees also increased
for the recovery of costs relating to the conversion to a third party data
processing system. Approximately $1.3 million of the $1.9 million increase in
shareholder service fees was related to the fee increase.
<PAGE>
This increase in fee revenue was offset by a $1.3 million increase in
third-party processing costs recorded in general and administrative expenses.
Underwriting and distribution expenses consist of direct costs (notably,
commissions paid to financial advisors, incentive payments, manager
overrides, and sales program costs) and other costs such as advertising,
training, field office expenses, and marketing support. Underwriting and
distribution expenses were $29.8 million for the period, an increase of $9.5
million. The increase includes $6.2 million for direct costs related to sales
volume, $2.0 million for investments in advertising, field offices and
marketing support and approximately $1.3 million for sales force compensation
enhancements introduced in the third quarter of 1998 to further facilitate
asset retention and to improve sales force growth.
Compensation and related expense for the first quarter of 1999 was $1.7
million higher than the first quarter of 1998, representing an increase of
23.1%. Most of the increase is related to normal salary and fringe benefit
changes and the impact of staff additions made throughout 1998 to improve
investment management, shareholder services and back office operations.
General and administrative expense for the quarter ended 1999 was $4.1
million, a $2.3 million increase over last year's first quarter. As mentioned
above, $1.3 million was attributable to increased costs of outsourcing
transfer agency data processing, which was offset by increased shareholder
service fee revenue. Various miscellaneous items, including costs associated
with being a public company, accounted for the remaining increase.
SALES FORCE GROWTH AND PRODUCTIVITY
Two key strategies for accelerating growth are increasing the number of
financial advisors and improving sales productivity per advisor. On March 31,
1999, the number of financial advisors was 2,358, up 288 or 13.9% from 2,070
at March 31, 1998. Typically, a decrease in the number of advisors is
experienced in the first quarter of the year, as licenses are not renewed for
those failing to meet minimum production requirements. The decrease in the
number of advisors from December 31, 1998 to March 31, 1999 was 12 compared
with a decrease of 90 for last year's first quarter. Furthermore,
productivity as measured by sales per advisor increased 15.9% from $194
thousand for last year's first quarter to $225 thousand for the quarter ended
March 31, 1999.
INVESTMENTS TO ACCELERATE GROWTH
Following the Company's initial public offering on March 4, 1998,
management implemented strategies to accelerate growth. Investments made
during 1998 and 1999 included investments in new sales offices, sales force
compensation, advertising, training and additional investment management,
shareholder service and back-office personnel. While these investments
generally affect operating costs immediately, their benefits in the form of
sales force growth, improved productivity, increased sales and assets under
management are not fully realized until future periods.
The ramping up of our investment costs to date have reduced margins in
advance of increased benefits. Distribution margin was 2.4% for the first
quarter of 1999 compared to 13.5% for the same period last year. Most of this
decline was due to expenses incurred for advertising, training, sales
<PAGE>
force compensation enhancements and marketing support. Pretax operating
margin was further affected by the costs of the 1998 staff additions for
investment management, shareholder services and back-office operations.
Pretax operating margin was 43.9% for the first quarter of 1999 compared to
53.0% for the first quarter of 1998.
The Company is clearly beginning to benefit from the investments as
reflected by the first quarter growth of investment product sales, increase
in the number of advisors and improvement of sales force productivity. Most
of the investments were made during the later half of 1998 and as a result,
the rate of growth in expenses will moderate by the end of 1999.
Consequently, the Company's operating and distribution margins should
substantially strengthen during the second half of 1999 if revenues
accelerate as expected.
STOCK REPURCHASE PROGRAM
The Company continued acquiring shares of its common stock by
repurchasing 1.8 million Class A and Class B common shares at an aggregate
cost of $35.5 million during the quarter. These repurchases were funded by an
additional $40 million borrowing against a credit facility. The outstanding
balance on this facility at March 31, 1999 was $80 million.
The total number of common shares outstanding at March 31, 1999 was 61.0
million.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and liquid marketable securities were $168.2
million at March 31, 1999, an increase of $34.9 million from December 31,
1998. Cash and cash equivalents at March 31, 1999 and December 31, 1998
include reserves of $18.6 million and $10.8 million, respectively, for the
benefit of customers in compliance with securities regulations. The increase
is primarily related to cash flow from operations.
Cash flow provided by operations was $40.8 million and $39.6 million for
the first three months of 1999 and 1998, respectively. Investing activities
used $3.3 million of cash during the three months ended March 31, 1999, due
primarily to $2.2 million in investments in marketable securities and $1.6
million invested in property and equipment. As mentioned, the Company
repurchased $35.5 million of its common stock through the stock repurchase
program during the first quarter of 1999, funded by the credit facility. The
Company is considering selling its investment in real estate and its home
office properties during the latter half of 1999 to an unrelated party.
Proceeds from this sale are expected to approximately equal the book and tax
basis in these properties ($35 million -$40 million). The Company also has
plans to expand its existing home office facilities commencing in 1999 at an
estimated cost of $12.0 million. The plan for the sale provides that the
buyer would assume responsibility for completing the expansion. The proceeds
from the sale of these properties would be available for share repurchases,
debt repayment, or other corporate purposes. Subsequent to the sale of these
properties, the Company would enter into a lease agreement to lease back
sufficient space to accommodate its home office operations. Other than the
expansion of the home office facilities, the Company has no material
commitments for capital expenditures.
<PAGE>
Management believes its available cash, marketable securities, and
expected cash flow from operations will be sufficient to fund dividends,
obligations, and operations as well as advance sales commissions and meet any
other reasonably foreseeable cash needs. The $300 million credit facility is
also available for the Company's use. The outstanding balance on the facility
at March 31, 1999 was $80.0 million.
INFORMATION SYSTEMS AND YEAR 2000 READINESS
Some computers, software, and other equipment include computer code in
which the calendar year data is abbreviated to only two digits. As a result,
some of these systems will not operate correctly after 1999 because they may
interpret "00" to mean 1900, rather than 2000. These problems are widely
expected to increase in frequency and severity as the year 2000 approaches,
and are commonly referred to as the "Year 2000 Problem".
The Company believes that it has identified all significant data,
computer hardware, software applications and related equipment, as well as
office and facilities equipment such as telephone switches and security
systems used in connection with its internal operations that must be
modified, upgraded or replaced to minimize the possibility of a material
disruption to its business. The Company is currently in the process of
modifying, upgrading and replacing major systems that have been assessed as
adversely affected, and expects to complete this process before the
occurrence of any material disruption of its business. However, there can be
no assurance in this regard.
The Company's Year 2000 plan prioritizes the Year 2000 readiness of
mission critical systems over non-mission critical systems. Because the Year
2000 project is an ongoing Company-wide endeavor, the state of the Company's
progress changes daily. The information provided in this Form 10-Q about our
Year 2000 progress is provided as of May 1, 1999.
Internal and external resources are being used to make the required
modifications and test Year 2000 compliance. The Company has completed
compliance activities for all internal mission critical items and estimates
that its compliance activities will be completed no later than the second
quarter of 1999 for all non-mission critical items. Verification will
continue through 1999 to ensure that no new date related problems are
introduced into previously tested or newly developed systems. Newly purchased
software and systems are required to be Year 2000 compliant and are subject
to the same verification standards as existing systems. The Company estimates
that the total costs of this effort will be $4.4 million for the five year
period ending June 30, 2000. Total costs incurred to date are approximately
$3.7 million.
The Company is dependent on several mission critical systems, including
those maintained by third-party service providers, to perform its core
business activities. Mission critical investment management systems have been
remediated and tested. The mutual fund transfer agency system is maintained
by a third-party service provider and interfaces with other Company systems.
As of December 31, 1998 this service provider has represented that their
transfer agency systems have been updated for Year 2000 compliance.
Integrated testing of these systems is in process and includes transaction
processing in a Year 2000 environment. The Company plans to complete this
testing no later than the end of the second quarter of 1999. Verification
testing will continue through the end of the year to ensure that no new date
related problems are introduced into previously tested systems.
The following chart summarizes the Company's estimated timetable and
current state of completion for its mission critical and non-mission critical
systems.
<PAGE>
<TABLE>
<CAPTION>
Mission Critical % of Mission
Stages Target Date Critical 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 6/30/99 51%
Non-Mission % of Non-Mission
Critical Stages Target Date Critical Complete
--------------- ----------- -----------------
Awareness Complete 100%
Inventory Complete 100%
Risk Assessment Complete 100%
Compliance Assessment Complete 100%
Remediation 6/15/99 88%
Validation* 6/30/99 86%
Contingency Planning 8/31/99 47%
</TABLE>
- ---------
* Internal Testing
The Year 2000 Problem also affects some of the Company's vendors and
suppliers of data, computers, software and other equipment. The Company has
been actively contacting all vendors and suppliers to inquire about their
Year 2000 readiness. However, the Company has limited or no control over the
actions of these vendors and suppliers. Accordingly, the Company cannot
guarantee that these vendors and suppliers will resolve any or all Year 2000
Problems. If the Company's vendors and suppliers fail to resolve Year 2000
Problems, the Company's business could be materially disrupted.
The Company expects to identify and resolve all Year 2000 Problems that
could materially adversely affect its business operations. However, due to
the number of interactions with internal and external systems, equipment and
data, management believes that it is not possible to determine with complete
certainty that all Year 2000 Problems affecting the Company or its clients
have been identified or corrected. In addition, no one can accurately predict
how many Year 2000 Problem-related failures will occur or the severity,
duration or financial consequences of these potential failures. As a result,
management expects that the Company could suffer a small number of
operational inconveniences and inefficiencies for the Company and its clients
that will divert some of management's time and attention and financial and
human resources from its ordinary business activities.
In order to minimize the risk of the Company's products and services
being affected by Year 2000 issues, the Company intends to suspend the
implementation of new hardware and software between October 1, 1999 and
December 31, 1999. This precautionary measure should allow the Company to
preserve the compliant status of remediated systems and to further assess the
stability of its internal systems environment prior to year end.
The Company is developing contingency plans to minimize the impact of
potential Year 2000 Problems on its mission critical and non-mission critical
systems for which it is practical to develop contingency plans. The Company
expects to complete its contingency plans by the end of the third quarter of
1999. However, in an operation as complex as providing investment advisory
services,
<PAGE>
there are limited alternatives to certain mission critical systems and
third-party providers, including electrical power and communications
services. If these services or mission critical systems such as the mutual
fund transfer agency system fail for an extended period of time, there would
likely be a material adverse affect on the Company's business, results of
operations and financial condition. Although the Company is investigating
alternative solutions, it is unlikely that any adequate contingency plan can
be developed for any prolonged failure of these mission critical services and
systems. Additionally, the investment portfolios from which the Company
derives the majority of its revenue could be subject to increased credit,
market and liquidity risk arising from the impact of Year 2000 issues on
individual securities. Additionally, governments and financial markets around
the world could be affected by Year 2000 issues. To the extent that the
market prices of securities are negatively affected by these or other Year
2000 issues, the Company's investment advisory revenues, results of
operations and financial condition could be materially adversely affected.
The discussion of the Company's efforts, and management's expectations,
relating to Year 2000 compliance constitutes forward-looking statements. The
Company's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith, could be adversely affected by, among
other things, the availability and cost of programming and testing resources,
vendor ability to modify proprietary software and unanticipated problems
identified in the ongoing compliance review.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On or about May 12, 1999, in connection with the adoption of a
stockholder rights plan, the Company filed a Certificate of Designation,
Preferences and Rights ("Certificate of Designation") designating the rights,
preferences and privileges of a new Series A Junior Participating Preferred
Stock. The Certificate of Designation created a series of 750,000 shares of
Series A Preferred Stock, $1.00 par value, out of the total class of
5,000,000 shares of Preferred Stock. Pursuant to the stockholder rights plan,
the Company issued rights to its stockholders of record as of May 12, 1999,
entitling each stockholder to the right to purchase one one-hundredth of a
share (a "Unit") of Series A Junior Participating Preferred Stock for each
share of Common Stock held by the shareholder. The purchase price of $85.00
per Unit is subject to adjustment and is exercisable only upon the occurrence
of certain events.
ITEM 5. OTHER INFORMATION
Forward-Looking Statements
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). The
1995 Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide information without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those projected. Although the
Company does not anticipate that it will make forward-looking statements as a
general policy, the Company will make forward-looking statements as required
by law or regulation, and from time to time may make such statements with
respect to management's estimation of the future operating results and
business of the Company.
The Company hereby incorporates into this report by reference to its
Form 10-K for the year ended December 31, 1998, the cautionary statements
found on pages 16-18 of such Form 10-K.
Stockholder Proposals
Proposals of stockholders intended to be presented at the Company's 2000
annual meeting of stockholders must be received at the Company's principal
executive offices no later than November 26, 1999 in order to be included in
the Company's proxy statement and form of proxy relating to the 2000 annual
meeting.
Pursuant to Rule 14a-4(c) of the Securities Exchange Act of 1934, as
amended, if a stockholder who intends to present a proposal at the 2000
annual meeting of stockholders does not notify the Company of such proposal
on or prior to 45 days before the date on which the Company first mailed
proxy materials for the 2000 annual meeting of stockholders, then management
proxies would be allowed to use their discretionary voting authority to vote
on the proposal when the proposal is raised at the annual meeting, even
though there is no discussion of the proposal in the 2000 proxy statement. If
a stockholder proposal is submitted outside the proposal process mandated by
<PAGE>
Securities and Exchange Commission rules, it will be considered untimely if
received after February 11, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10 Rights Agreement, dated April 28, 1999, by and between the
Company and First Chicago Trust Company of New York, as
Rights Agent, including the form of Certificate of
Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock of the Company as Exhibit A
and the form of Rights Certificates as Exhibit B. Filed as
Exhibit 1 to the Company's Registration Statement on Form
8-A12B, Accession Number 0000950172-99-000526, filed with
the Securities and Exchange Commission on May 6, 1999.
27 Financial Data Schedule.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
period subject to this Quarterly Report on Form 10-Q.
<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 May, 1999.
WADDELL & REED FINANCIAL, INC.
By: /s/ Keith A. Tucker
-------------------
Chairman of the Board and
Chief Executive Officer
(Principal Financial Officer)
By: /s/ Michael D. Strohm
---------------------
Senior Vice President
(Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS AS REPORTED IN THE QUARTERLY REPORT ON FORM
10-Q FOR THE QUARTER ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
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