<PAGE>
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-43862
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 12, 2001)
$200,000,000
WADDELL & REED FINANCIAL, INC.
7 1/2% NOTES DUE JANUARY 18, 2006
-----------
We will pay interest on the notes on January 18 and July 18 of each year
beginning July 18, 2001. The notes will mature on January 18, 2006. We will not
redeem the notes before maturity.
We expect the notes to be rated "Baa2" by Moody's Investor's Service Inc.
and "BBB" by Standard & Poor's Ratings Group.
The notes will be unsecured and will rank equally with our other unsecured
senior indebtedness. We will issue the notes only in registered form in
denominations of $1,000 and integral multiples thereof.
INVESTING IN THE NOTES INVOLVES RISKS THAT ARE DESCRIBED IN THE "RISK
FACTORS" SECTION BEGINNING ON PAGE S-4 OF THIS PROSPECTUS SUPPLEMENT.
--------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
-------- -----
<S> <C> <C>
Public offering price(1).................................... 99.607% $199,214,000
Underwriting discount....................................... .6% $1,200,000
Proceeds, before expenses, to Waddell & Reed................ 99.007% $198,014,000
</TABLE>
(1) Plus accrued interest from January 18, 2001, if settlement occurs after
that date
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
The notes will be ready for delivery in book-entry form only through The
Depository Trust Company on or about January 18, 2001.
---------------
MERRILL LYNCH & CO.
JP MORGAN
MORGAN STANLEY DEAN WITTER
STEPHENS INC.
---------
The date of this prospectus supplement is January 12, 2001.
<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<S> <C>
Risk Factors................................................ S-4
Use of Proceeds............................................. S-7
Capitalization.............................................. S-7
Selected Consolidated Financial Data........................ S-8
Management's Discussion and Analysis of Financial Conditions
and Results of Operations................................. S-9
Business.................................................... S-20
Description of the Notes.................................... S-28
Underwriting................................................ S-30
Validity of the Notes....................................... S-32
Index To Consolidated Financial Statements.................. F-1
</TABLE>
Prospectus
<TABLE>
<S> <C>
Summary..................................................... 1
Where you can find more information about the Company and
Waddell & Reed Capital Trust I............................ 2
Forward-Looking Statements.................................. 3
The Company................................................. 5
Ratio of Earnings to Fixed Charges.......................... 6
Use of Proceeds............................................. 6
Waddell & Reed Capital Trust I.............................. 6
Description of Senior Debt Securities....................... 9
Description of Junior Subordinated Debt Securities.......... 15
Description of Warrants..................................... 20
Description of Capital Stock................................ 22
Description of the Trust Preferred Securities............... 29
Description of the Preferred Securities Guarantees.......... 32
Effect of obligations under the Junior Subordinated Debt
Securities and the Preferred Securities Guarantee......... 35
Plan of Distribution........................................ 36
Legal Matters............................................... 37
Experts..................................................... 37
</TABLE>
S-2
<PAGE>
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus in
considering your investment in the notes. We have not, and the underwriters have
not, authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not, and the underwriters are not, making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.
You should assume that the information in this prospectus supplement is accurate
only as of the date on the front cover of this prospectus supplement and that
the information in the accompanying prospectus is accurate only as of the date
on the first page of the accompanying prospectus. Our business, financial
condition, results of operations and prospects may have changed since those
dates.
When used in this prospectus supplement, the terms "we," "our", "us" and
"Waddell & Reed" refer to Waddell & Reed Financial, Inc., unless the context
otherwise requires.
S-3
<PAGE>
RISK FACTORS
Potential investors should carefully consider the risk factors set forth
below and the other information in this prospectus supplement and the
accompanying prospectus and in any documents incorporated herein and therein by
reference, before making an investment decision.
THERE MAY BE ADVERSE EFFECTS ON OUR REVENUES, EARNINGS AND PROSPECTS IF THE
SECURITIES MARKETS DECLINE.
Our results of operations are affected by certain economic factors,
including the level of the securities markets. We benefited from the favorable
performance of the securities markets in recent years which attracted a
substantial increase in investments in the securities markets. The securities
markets have declined in recent months, however, and the continuation of adverse
market conditions or continued volatility in the securities markets could result
in investors withdrawing from the markets or decreasing their rate of
investment, either of which could adversely affect our revenues, earnings and
growth prospects. Because our revenues are, to a large extent, based on the
value of assets under management, a decline in the value of these assets
adversely affects our revenues. Our growth is dependent to a significant degree
upon our ability to attract and retain mutual fund assets and, in an adverse
economic environment, this may prove difficult. Our growth rate has varied from
year to year and there can be no assurance that the average growth rates
sustained in the recent past will continue.
THERE MAY BE ADVERSE EFFECTS ON OUR REVENUES AND EARNINGS IF OUR FUNDS'
PERFORMANCE DECLINES.
Success in the investment management and mutual fund businesses is dependent
on the investment performance of client accounts. Good relative performance
stimulates sales of the shares of the 43 mutual fund portfolios (the "Funds")
for which we are the exclusive underwriter and distributor and tends to keep
redemptions low. Sales of the Funds' shares in turn generate higher management
fees and distribution revenues. Good relative performance also attracts private
separately managed accounts. Conversely, poor relative performance results in
decreased sales, increased redemptions of the Funds' shares, and the loss of
private separately managed accounts, resulting in decreases in revenues. Failure
of our Funds to perform well could, therefore, have a material adverse effect on
our revenues and earnings.
THERE MAY BE AN ADVERSE EFFECT ON OUR BUSINESS IF OUR INVESTORS REMOVE THE
ASSETS WE MANAGE ON SHORT NOTICE.
A substantial majority of our revenues are derived from investment
management agreements with our Funds that are terminable on 60 days notice. Each
investment management agreement must be approved and renewed annually by the
disinterested members of each Fund's board or its shareholders. Some of these
investment management agreements may be terminated or not renewed, and new
agreements may be unavailable. In addition, mutual fund investors may redeem
their investments in the Funds at any time without any prior notice. Investors
can terminate their relationship with us, reduce the aggregate amount of assets
under management, or shift their funds to other types of accounts with different
rate structures for any of a number of reasons, including investment
performance, changes in prevailing interest rates and financial market
performance. The decrease in revenues that could result from any such event
could have a material adverse effect on our business.
WE FACE INCREASED COMPETITION IN HIRING AND RETAINING KEY PERSONNEL AND SALES
FORCE.
Our continued success depends to a substantial degree on our ability to
attract and retain qualified personnel to conduct our fund management and
investment advisory business. The market for qualified fund managers, investment
analysts, and financial advisors is extremely competitive and has grown more so
in recent periods because of the growth in the industry. We are dependent on our
sales force to sell
S-4
<PAGE>
our mutual funds and other investment products. Our growth prospects will be
directly affected by the quality and quantity of financial advisors we are able
to successfully recruit and retain. There can be no assurances that we will be
successful in our efforts to recruit and retain the required personnel.
WE FACE STRONG COMPETITION FROM NUMEROUS AND SOMETIMES LARGER COMPANIES.
We compete with stock brokerage and investment banking firms, insurance
companies, banks, online and Internet investment sites and other financial
institutions. Many of these companies not only offer mutual fund investments and
services but also offer other financial products and services. Many of our
competitors have more products and product lines, services, and may also have
substantially greater assets under management. Many larger mutual fund complexes
have developed relationships with brokerage houses with large distribution
networks, which may enable these fund complexes to reach broader client bases.
In recent years, there has been a trend of consolidation in the mutual fund
industry resulting in stronger competitors with greater financial resources than
us. There has also been a trend toward online Internet financial services. If
existing customers stop investing with us and instead invest with our
competitors, or if potential customers decide to invest with our competitors, it
would cause our market share, revenues and income to decline.
POTENTIAL MISUSE OF FUNDS AND INFORMATION IN THE POSSESSION OF OUR ADVISORS
COULD RESULT IN LIABILITY TO OUR CLIENTS.
Our financial advisors handle a significant amount of funds and financial
and personal information for our clients. Although we have implemented a system
of controls to minimize the risk of fraudulent taking or misuse of funds and
information, there can be no assurance that our controls will be adequate or
that a taking or misuse by our employees can be prevented. We could have
liability in the event of a taking or misuse by our employees and we could also
be subject to regulatory sanctions. Although we believe that we have adequately
insured against these risks, there can be no assurance that our insurance will
be maintained or that it will be adequate to meet any future liability.
REGULATORY RISK IS SUBSTANTIAL IN OUR BUSINESS.
Our investment management business is heavily regulated. Noncompliance with
applicable laws or regulations could result in sanctions being levied against
us, including fines and censures, suspension or expulsion from a certain
jurisdiction or market or the revocation of licenses. Noncompliance with
applicable laws or regulations would adversely effect our reputation, prospects,
revenues and earnings. In addition, changes in current laws or regulations or in
governmental policies could adversely affect our operations, revenues and
earnings.
THE TERMS OF OUR CREDIT FACILITY IMPOSE RESTRICTIONS ON OUR OPERATIONS. THERE
ARE NO ASSURANCES WE WILL BE ABLE TO RAISE ADDITIONAL CAPITAL.
We have entered into a 364-day revolving credit facility with various banks
for a total of $220 million. The facility is expandable to $330 million, whereby
the banks could, at their option upon our request, increase the loans by
$110 million. At September 30, 2000, there was $45 million outstanding under
this line of credit. In August of 2000, we also began utilizing a money market
loan program, which functions similarly to commercial paper. At September 30,
2000, there was $155 million outstanding under the money market loan program.
The terms and conditions of the revolving credit facility and money market loan
program impose restrictions that affect, among other things, our ability to
incur debt, make capital expenditures, merge, sell assets, make distributions,
or create or incur liens. Availability of our credit facility is also subject to
certain financial covenants. Our ability to comply with the covenants can be
affected by events beyond our control and there can be no assurance that we will
achieve operating results that comply with the provisions of the credit
agreement. A breach of any of these covenants could result in a default under
our credit facility. In the event of a default, the banks
S-5
<PAGE>
could elect to declare the outstanding principal amount of our credit facility,
all interest thereon and all other amounts payable under our credit facility to
be immediately due and payable.
Our ability to satisfy our debt obligations will depend upon our future
operating performance, which will be affected by prevailing economic, financial
and business conditions and other factors, some of which are beyond our control.
We anticipate that borrowings from our existing revolving credit facility, or
the refinancing of our revolving credit facility, and cash provided by operating
activities, will provide sufficient funds to finance anticipated development
plans, meet our operating expenses and service our debt requirements as they
become due. However, in the event that we require additional capital, there can
be no assurance that we will be able to raise such capital when needed or on
satisfactory terms, if at all. Also, there can be no assurance that we will be
able to refinance our current credit facility upon its maturity or on favorable
terms. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources".
SYSTEMS FAILURE MAY DISRUPT OUR BUSINESS.
Our business is highly dependent on communications and information systems,
including our mutual fund transfer agency system maintained by a third-party
service provider. We are highly dependent on our ability to process a large
number of transactions on a daily basis, and also on the proper functioning of
computer systems of third parties. We rely heavily on financial, accounting and
other data processing systems. If any of these do not function properly, we
could suffer financial loss, business disruption, liability to clients,
regulatory intervention or damage to our reputation. If our systems are unable
to accommodate an increasing volume of transactions, our ability to expand could
be affected. Although we have back-up systems in place, we cannot be sure that
any systems failure or interruption, whether caused by a fire, other natural
disaster, power or telecommunications failure, act of war or otherwise will not
occur, or that back-up procedures and capabilities in the event of any failure
or interruption will be adequate.
THE RESTRUCTURING OF OUR MUTUAL FUND PRODUCTS TO ENHANCE OUR COMPETITIVENESS AND
DISTRIBUTION CHANNELS MAY NOT BE SUCCESSFUL.
In October 1999 and July 2000, we restructured our mutual fund products by
offering additional classes of mutual fund shares, closing non-industry standard
classes and adding new Funds in an effort to enhance our competitiveness and
strategic distribution alternatives and favorably impact our distribution
margin. We anticipate that the product restructuring will result in our product
line (1) being more consistent with the industry, (2) providing our clients with
more choices and greater value and (3) accommodating additional changes for
strategic distribution flexibility. There can be no assurances that the
restructuring of our mutual fund products will enhance our competitiveness and
distribution channels or that it will favorably impact our distribution margin.
OUR HOLDING COMPANY STRUCTURE RESULTS IN STRUCTURAL SUBORDINATION AND MAY AFFECT
OUR ABILITY TO MAKE PAYMENTS ON THE NOTES.
The notes are obligations exclusively of Waddell & Reed Financial, Inc. We
are a holding company and, accordingly, substantially all of our operations are
conducted through our subsidiaries. As a result, our cash flow and our ability
to service our debt, including the notes, is dependent upon the earnings of our
subsidiaries. In addition, we are dependent on the distribution of earnings,
loans or other payments by our subsidiaries to us.
Our subsidiaries are separate and distinct legal entities. Our subsidiaries
have no obligation to pay any amounts due on the notes or to provide us with
funds for our payment obligations, whether by dividends, distributions, loans or
other payments. In addition, any payment of dividends, distributions, loans or
advances by our subsidiaries to us could be subject to statutory or contractual
restrictions.
S-6
<PAGE>
Payments to us by our subsidiaries will also be contingent upon our
subsidiaries' earnings and business considerations.
Our right to receive any assets of any of our subsidiaries upon their
liquidation or reorganization, and therefore the right of the holders of the
notes to participate in those assets, would be effectively subordinated to the
claims of that subsidiary's creditors, including trade creditors. In addition,
even if we were a creditor of any of our subsidiaries, our rights as a creditor
would be subordinate to any security interest in the assets of our subsidiaries
and any indebtedness of our subsidiaries senior to that held by us.
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the notes that we
are selling in this offering will be approximately $197.6 million, after
deducting the underwriting discount and estimated expenses of this offering. The
net proceeds will be used to repay Waddell & Reed's short-term debt and for
general corporate purposes. The short-term debt was incurred for general
corporate purposes and acquisitions. As of September 30, 2000, Waddell & Reed
had outstanding approximately $200.3 million of short-term debt. The average
interest rate for Waddell & Reed's short-term credit facilities during the third
quarter of 2000 was 7.2%.
Pending the application of the net proceeds, we expect to invest the net
proceeds from the sale of the notes in short-term interest-bearing securities.
CAPITALIZATION
The following table sets forth our unaudited capitalization and short-term
debt as of September 30, 2000, (1) on a historical basis, and (2) as adjusted to
give effect to the issuance and sale of the notes offered hereby, net of our
estimated offering expenses and underwriting discounts, and the application of
such proceeds. You should read this table together with our financial statements
and notes thereto and other financial and operating data included elsewhere in
this prospectus supplement or in the prospectus or incorporated by reference
into this prospectus supplement or the prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt............................................. $200,341 2,777
Long-term liabilities....................................... 13,131 13,131
7 1/2% Notes offered hereby................................. -- 199,214
-------- --------
Total long-term liabilities................................. 13,131 212,345
-------- --------
Stockholders' equity........................................ 127,217 127,217
-------- --------
Total capitalization........................................ $340,689 $342,339
======== ========
</TABLE>
S-7
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data at the
dates and for the periods indicated. Selected financial data should be read in
conjunction with, and is qualified in its entirety by, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
Consolidated Financial Statements and the Notes thereto appearing elsewhere in
this prospectus supplement.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
(UNAUDITED) FOR THE YEARS ENDED DECEMBER 31,
----------------------- ---------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- --------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AND FINANCIAL ADVISORS DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from:
Investment management..................... $ 190,725 124,114 178,612 137,823 117,784 101,466 85,289
Underwriting and distribution............. 150,872 94,056 126,318 106,615 89,427 85,837 70,393
Shareholder service....................... 38,836 30,716 41,525 33,808 30,763 28,378 23,527
---------- ---------- --------- --------- --------- --------- ---------
Revenues excluding investment and other
income.................................. 380,433 248,886 346,455 278,246 237,974 215,681 179,209
Total revenues............................ 388,443 256,447 356,657 287,289 241,772 220,976 183,504
Net income.................................. 104,367 69,452 81,767 83,735 70,292 66,700 53,501
Net income excluding
special items(1).......................... 104,367 69,452 96,382 88,060 70,276 64,174 50,975
Retail investment product sales............. 2,240,284 1,611,987 2,149,842 1,827,526 1,518,257 1,505,100 1,187,609
Financial advisors (end of period).......... 2,713 2,483 2,611 2,370 2,160 2,010 2,335
Financial advisors (average)................ 2,578 2,392 2,432 2,175 2,072 2,072 2,251
Investment product sales-retail per
advisor................................... 869 674 884 840 733 726 528
Earnings before interest, taxes,
depreciation and amortization(1).......... $ 187,976 119,946 167,530 147,651 119,333 109,968 89,524
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, AS OF DECEMBER 31,
----------------------- ---------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- --------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets under management..................... $ 40,020 30,746 37,302 27,744 23,417 19,070 18,489
Balance sheet data:
Goodwill.................................. 169 114 113 96 99 102 105
Total assets(2)........................... 410 364 335 327 447 429 284
Short term debt........................... 200 155 125 40 0 0 0
Total liabilities(3)...................... 283 238 209 120 677 197 65
</TABLE>
------------------------------
(1) Excludes a write-off of of $19.0 million relating to restructuring mutual
fund products and a loss of $4.6 million from the sale of real estate
properties, combined net of taxes of $14.6 million, in 1999. Excludes impact
of interest relating to notes with Torchmark Corporation ("Torchmark"),
which were prepaid with proceeds from our initial public offering, for 1998,
1997, 1996, and 1995.
(2) Includes amounts due from Torchmark of $0, $0, $192.7, $184.5, and
$57.2 million for 1999, 1998, 1997, 1996, and 1995, respectively.
(3) Includes amounts due to Torchmark of $0, $0, $611.6, $126.6, and
$13.6 million for 1999, 1998, 1997, 1996, and 1995, respectively.
S-8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS ITEM INCLUDES STATEMENTS THAT ARE "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 OUR EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR STRATEGIES
REGARDING THE FUTURE. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS
INCLUDED IN THIS PROSPECTUS SUPPLEMENT REGARDING OUR FINANCIAL POSITION,
BUSINESS STRATEGY AND OTHER PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ARE
FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS
PROSPECTUS SUPPLEMENT ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE
HEREOF, AND WE ASSUME NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS.
ALTHOUGH WE BELIEVE THAT THE ASSUMPTIONS AND EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CAN GIVE NO ASSURANCE THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT OR THAT WE WILL TAKE ANY ACTIONS
THAT MAY PRESENTLY BE PLANNED. CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM OUR EXPECTATIONS ARE DISCLOSED IN THE "RISK
FACTORS" SECTION OF THIS PROSPECTUS SUPPLEMENT, WHICH INCLUDE, WITHOUT
LIMITATION, THE ADVERSE EFFECT FROM A DECLINE IN SECURITIES MARKETS OR IF OUR
PRODUCTS' PERFORMANCE DECLINES, FAILURE TO RENEW INVESTMENT MANAGEMENT
AGREEMENTS, ADVERSE RESULTS OF LITIGATION, COMPETITION, CHANGES IN GOVERNMENT
REGULATION AND AVAILABILITY AND TERMS OF CAPITAL. ALL SUBSEQUENT WRITTEN OR ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR PERSONS ACTING ON OUR BEHALF
ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS.
The following should be read in conjunction with the "Selected Consolidated
Financial Data" and our Consolidated Financial Statements and Notes thereto
appearing elsewhere in this prospectus supplement.
RESULTS OF OPERATIONS
OVERVIEW
We derive our revenues primarily from providing investment management,
distribution and administrative services to the Funds and separately managed
accounts. Investment management fees, our 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 sales of investment and insurance products and distribution fees.
The products sold have various sales charge structures and the revenues received
from sales of products vary based on the type and amount sold. Rule 12b-1
distribution fees earned for distributing shares of certain mutual 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.
In June of 1999, the Funds' boards of directors approved the proposal to
restructure the management fee arrangements of the Funds. This restructuring
replaced the group fee structure and specific fund add-on fee with a specific
fee schedule for each Fund. The Funds' fee schedules include breakpoints at
which fee rates decline as assets increase. These schedules more closely conform
with others in the mutual fund industry and, as of September 30, 2000, it had a
favorable impact on our overall management fee rate of approximately .08% of
mutual fund assets under management.
On August 9, 1999, we acquired Austin Calvert & Flavin, Inc. ("ACF"), a
privately-held investment management firm based in San Antonio, TX. ACF manages
investments for trusts, high net worth families and individuals, and pension
plans of corporations, hospitals, schools, labor unions, endowments and
foundations.
In October of 1999, we restructured our Advisors Funds and the W&R Funds.
Commencing October 4, 1999, the Advisors Funds began offering Class B shares
("back-end sales charge shares") and Class C shares ("level sales charge
shares"). These were in addition to the already offered Class A
S-9
<PAGE>
shares ("front-end sales charge shares") and Class Y shares ("institutional
shares"). Concurrently, the W&R Funds began offering Class C shares ("level
sales charge shares"). These were in addition to the already offered Class Y
shares ("institutional shares"). At the same time, the W&R Funds' Class B shares
were no longer offered for new sales due to their non-industry standard
structure. The existing W&R Funds' Class B shares converted to W&R Fund Class C
shares in the first quarter of 2000. Upon conversion of the W&R Funds' Class B
shares, no contingent deferred sales charges were collected for any converted
share redemptions. As a result of the discontinuation of the W&R Funds' Class B
shares, we wrote off $19.0 million (on a pretax basis) of deferred acquisition
costs in the fourth quarter of 1999. We expect that this restructuring of shares
will enhance competitiveness and strategic distribution alternatives.
On February 23, 2000, we declared a three-for-two stock split on our
Class A and Class B common stock payable on April 7, 2000 to stockholders of
record as of March 17, 2000. All per-share and share-outstanding data in the
consolidated financial statements and related notes have been restated to
reflect the stock split for all periods presented.
On March 31, 2000, we acquired The Legend Group ("Legend"), a privately held
mutual fund distribution and retirement planning company based in Palm Beach
Gardens, Florida. Through its network of 298 financial advisors, Legend serves
employees of school districts and other not-for-profit organizations nationwide.
In July of 2000, we renamed our two retail mutual fund families. The United
Funds family was renamed the "Waddell & Reed Advisors Funds". This family of
funds will continue to be available for sale only through Waddell & Reed's
proprietary sales force. Concurrently, the Waddell & Reed Funds family was
renamed the "W&R Funds". We plan to make this family of funds available for sale
through both Waddell & Reed's proprietary sales force and selected third-party
distribution channels. At the same time as we renamed our fund families, we
added W&R Funds' Class A and Class B shares to the existing Class C and Class Y
shares.
On October 23, 2000, we executed an agreement with Nationwide Financial to
provide a broad span of private label insurance and retirement products for use
by Waddell & Reed, Inc.'s financial advisors. The selection of Nationwide
Financial to provide insurance and retirement products increases the breadth and
competitiveness of such products available to its financial advisors. Nationwide
Financial has developed for distribution by our investment advisors two variable
annuities, a flexible-premium variable universal life product, a survivorship
life product, and a qualified group retirement plan. United Investors Life
Insurance Company, a subsidiary of Torchmark Corporation and formerly an
affiliate of the Company ("UILIC"), also provides insurance products for the
Company.
During the fourth quarter of 2000, the S&P 500 index, a broad measure of
stock market valuation, declined 8.1%. This is likely to impact firms in the
asset management industry, including our own, and effect our investment
management fees and our investment product sales growth during the quarter.
Because of our advice-based, retirement-focused business model, we historically
have been less impacted by market volatility than the industry in general and
expect, but can not assure, this will hold true in the current case.
S-10
<PAGE>
SUMMARY OF OPERATING RESULTS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
----------------------------------------- -----------------------------------------
SEPTEMBER 2000 SEPTEMBER 1999 DECEMBER 1999 DECEMBER 1998
------------------- ------------------- ------------------- -------------------
(UNAUDITED)
% OF % OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
-------- -------- -------- -------- -------- -------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Investment management fees........ $190,725 49.1% 124,114 48.4% 178,612 50.1% 137,823 48.0%
Underwriting and distribution
fees............................ 150,872 38.8 94,056 36.7 126,318 35.4 106,615 37.1
Shareholder service fees.......... 38,836 10.0 30,716 12.0 41,525 11.6 33,808 11.8
-------- ------- -------- -------
Total operating revenues.......... 380,433 97.9 248,886 97.1 346,455 97.1 278,246 96.9
Investment and other revenues..... 8,010 2.1 7,561 2.9 10,202 2.9 9,043 3.1
-------- ------- -------- -------
Total revenues.................... 388,443 100.0 256,447 100.0 356,657 100.0 287,289 100.0
OPERATING EXPENSES:
Underwriting and distribution..... 136,746 35.2 92,947 36.3 124,938 35.1 99,575 34.6
Compensation and related costs.... 42,550 11.0 29,734 11.6 44,944 12.6 31,512 11.0
General and administrative........ 21,171 5.5 13,820 5.4 19,245 5.4 8,551 3.0
Amortization of goodwill.......... 3,977 1.0 2,297 0.9 3,224 0.9 2,903 1.0
Depreciation...................... 2,433 0.6 1,613 0.6 2,162 0.6 1,892 0.7
-------- ------- -------- -------
Total operating expense(1)........ 206,877 53.3 140,411 54.8 194,513 54.6 144,433 50.3
OTHER ITEMS:
Interest expense.................. 10,825 2.7 3,910 1.5 6,546 1.8 704 0.2
-------- ------- -------- -------
Total expense..................... 217,702 56.0 144,321 56.3 201,059 56.4 145,137 50.5
-------- ------- -------- -------
Income before affiliated items and
income taxes(1)................. $170,741 44.0% 112,126 43.7% 155,598 43.6% 142,152 49.5%
<CAPTION>
FOR THE YEAR ENDED
-------------------
DECEMBER 1997
-------------------
% OF
AMOUNT REVENUE
-------- --------
($ IN THOUSANDS)
<S> <C> <C>
OPERATING REVENUES:
Investment management fees........ 117,784 48.7%
Underwriting and distribution
fees............................ 89,427 37.0
Shareholder service fees.......... 30,763 12.7
-------
Total operating revenues.......... 237,974 98.4
Investment and other revenues..... 3,798 1.6
-------
Total revenues.................... 241,772 100.0
OPERATING EXPENSES:
Underwriting and distribution..... 79,995 33.1
Compensation and related costs.... 26,618 11.0
General and administrative........ 15,826 6.5
Amortization of goodwill.......... 2,903 1.2
Depreciation...................... 1,307 0.6
-------
Total operating expense(1)........ 126,649 52.4
OTHER ITEMS:
Interest expense.................. 0 0.0
-------
Total expense..................... 126,649 52.4
-------
Income before affiliated items and
income taxes(1)................. 115,123 47.6%
</TABLE>
------------------------------
(1) Excludes a $19.0 million charge for write-off of deferred acquisition costs
and a $4.6 million loss on the sale of real estate in 1999.
TOTAL REVENUES
NINE MONTHS ENDED SEPTEMBER 30, 2000 OVER NINE MONTHS ENDED SEPTEMBER 30, 1999
Total operating revenues increased by $131.5 million or 53% to
$380.4 million in 2000 compared to 1999. Total revenues, which include
investment and other income, were $388.4 million in 2000, a 51% increase from
1999. Income before income taxes increased by 52% to $170.7 million in 2000 from
1999. Income before income taxes as a percentage of total revenues were 44.0% in
2000 and 43.7% in 1999.
1999 OVER 1998
Total operating revenues increased by $68.2 million, or 25%, to
$346.5 million in 1999 compared to 1998. Total revenues, which include
investment and other income, were $356.7 million in 1999, a 24% increase from
1998. Income before affiliated items and income taxes increased by 9% to
$155.6 million in 1999 compared to 1998. Income before affiliated items and
income taxes as a percentage of total revenues were 43.6% in 1999 and 49.5% in
1998.
1998 OVER 1997
Total operating revenues increased by $40.3 million or 17% to
$278.2 million in 1998 compared to 1997. Total revenues, which include
investment and other income, were $287.3 million in 1998, a 19% increase from
1997. Income before affiliated items and income taxes increased by 23% to
$142.2 million in 1998 when compared to 1997. Income before affiliated items and
income taxes as a percentage of total revenues were 49.5% and 47.6% in 1998 and
1997, respectively. In 1997, we
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incurred charges related to outsourcing transfer agency data processing
activities and the discontinuation of internally developed systems, which
resulted in a $6.8 million pretax expense.
INVESTMENT MANAGEMENT FEE REVENUES
INVESTMENT MANAGEMENT FEE REVENUES ARE EARNED FOR PROVIDING INVESTMENT
ADVISORY SERVICES TO THE FUNDS AND OTHER SEPARATELY MANAGED ACCOUNTS.
NINE MONTHS ENDED SEPTEMBER 30, 2000 OVER NINE MONTHS ENDED SEPTEMBER 30, 1999
Investment management fees in 2000 were $190.7 million, a 54% increase over
1999. Average assets under management were $39.5 billion for 2000, an increase
of 35% compared with 1999. The increase in management fee revenues came from
both mutual fund and separately managed account business. Mutual fund management
fees increased by 46% year over year, contributing $53.4 million or 80% of the
increase. Investment performance, net sales, plus reinvested dividends pushed
average mutual fund assets under management to $33.6 billion in the first nine
months of 2000, a 31% increase compared to the same period in 1999. Mutual fund
management fee revenues increased at a greater rate than average assets due
primarily to the restructuring of the fund management fee arrangements in
July 1999 and, secondly, due to the fact that a greater composition of assets
were in funds with higher management fee rates. Management fee revenues from
separately managed accounts increased by $12.9 million to $20.0 million in 2000.
Managed assets of ACF, acquired on August 9, 1999, contributed $6.4 million of
this increase. Also contributing to this increase in revenues was the addition
of institutional growth equity accounts during 1999 and 2000 that had higher
management fee rates.
1999 OVER 1998
Investment management fees in 1999 were $178.6 million, a 30% increase over
1998. Average assets under management were $30.3 billion for 1999, an increase
of 18% compared with 1998. The increase in management fee revenues were due to
several factors. First, the restructuring of the Fund's management fee
arrangements that became effective July 1, 1999 added approximately
$11.2 million to management fee revenues. Secondly, the acquisition of ACF in
August of 1999 contributed approximately $3.6 million. Finally, strong market
performance and relative performance resulted in a greater composition of
average assets in equity funds, especially growth, small cap, and technology
funds, which have higher management fee rates.
1998 OVER 1997
Investment management fees in 1998 were $137.8 million, a 17% increase over
1997. The increase in management fees was due primarily to growth in assets
related to market performance. Average assets under management were
$25.6 billion for 1998, an increase of 20% compared with 1997. The asset growth
rate exceeded the rate of increase in management fees due primarily to two
factors. First, certain mutual funds have breakpoints in their fee schedules
which provide for reduced fee rates as assets grow, resulting in a slower rate
of growth in revenues than growth in assets. Secondly, institutional assets,
which generally have a lower management fee rate than mutual funds, constituted
a higher percentage of total assets for 1998.
UNDERWRITING AND DISTRIBUTION FEE REVENUES
UNDERWRITING AND DISTRIBUTION FEE REVENUES ARE COMPRISED OF: COMMISSIONS
CHARGED ON SALES OF FRONT-LOAD MUTUAL FUNDS, VARIABLE PRODUCTS AND INSURANCE
PRODUCTS; RULE 12B-1 ASSET-BASED DISTRIBUTION FEES; AND CONTINGENT DEFERRED
SALES CHARGES FROM BACK-END AND LEVEL-LOAD FUNDS.
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NINE MONTHS ENDED SEPTEMBER 30, 2000 OVER NINE MONTHS ENDED SEPTEMBER 30, 1999
Underwriting and distribution fees in 2000 increased by 60% to
$150.9 million. Legend, acquired on March 31, 2000, contributed $20.8 million to
the current year's underwriting and distribution fee revenues. Excluding
Legend's contribution, the increase was 38%. This increase is primarily
attributable to a 39% increase in retail investment product sales growth, fueled
by new advisors and productivity gains.
1999 OVER 1998
Underwriting and distribution fees in 1999 increased by 18% to
$126.3 million. This increase is primarily attributable to increases in sales
volume of front-load investment products. Commission revenues from front-load
investment products, primarily the Advisors Funds and variable annuity products,
accounted for 75%, or $14.7 million of this $19.7 million increase in 1999 over
1998. Distribution revenues from back-end and level-load funds increased by
$2.5 million, or 28%, to $11.3 million due to growth in the asset value of these
funds, partially offset by lower contingent deferred sales charges. Commission
revenues from insurance product sales were up by $2.5 million to $19.1 million
for 1999 due to increased sales of variable universal life insurance.
1998 OVER 1997
Underwriting and distribution fees in 1998 increased by 19% to
$106.6 million. The higher fees were primarily due to increases in sales of
front-load investment products and Rule 12b-1 distribution fees. Sales of
front-load investment products were up by 17% from 1997 to $1.6 billion.
Distribution revenues from back-end sales charge shares, which consist primarily
of Rule 12b-1 distribution fees, increased 36% from $6.5 million in 1997 to
$8.8 million in 1998 due to growth in assets of these share classes.
SHAREHOLDER SERVICE FEE REVENUES
SHAREHOLDER SERVICE FEE REVENUES INCLUDE TRANSFER AGENCY FEES, CUSTODIAN
FEES FROM RETIREMENT PLAN ACCOUNTS AND PORTFOLIO ACCOUNTING FEES.
NINE MONTHS ENDED SEPTEMBER 30, 2000 OVER NINE MONTHS ENDED SEPTEMBER 30, 1999
In 2000, shareholder service fees increased by 26% to $38.8 million.
Excluding Legend's $3.4 million contribution to shareholder service fee revenues
in 2000, shareholder service fees increased by 15% due primarily to a 16%
increase in the average number of accounts serviced. Transfer agency and
retirement plan custodian fees are primarily based on annual charges per account
and fluctuate based on the number of accounts serviced.
1999 OVER 1998
The transfer agency and custodian fees, which comprised 95% of the service
fee revenues in 1999, are primarily based on annual charges per account and
fluctuate based on the number of accounts serviced. In 1999, shareholder service
fees increased by 23% to $41.5 million due primarily to a 12% increase in the
average number of accounts. In addition, a fee increase in the fourth quarter of
1998, coinciding with the outsourcing of the data processing component of
transfer agency activities, caused the increase in revenues to exceed the
increase in number of accounts serviced. This fee increase contributed
$4.8 million to the growth in revenue in 1999.
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<PAGE>
1998 OVER 1997
The transfer agency fees and custodian fees comprised 94% of the service fee
revenues in 1998. In 1998, shareholder service fees increased by 10% to
$33.8 million due primarily to an 8% increase in the average number of accounts
serviced. A fee increase in the fourth quarter of 1998, coinciding with the
outsourcing of the data processing component of transfer agency activities,
caused the increase in revenues to exceed the increase in number of accounts
serviced.
UNDERWRITING AND DISTRIBUTION EXPENSES
UNDERWRITING AND DISTRIBUTION EXPENSES INCLUDES COSTS ASSOCIATED WITH THE
MARKETING, PROMOTION, AND DISTRIBUTION OF OUR PRODUCTS. THE PRIMARY COSTS ARE
COMPENSATION PAID TO FINANCIAL ADVISORS, SALES MANAGEMENT, AND OTHER MARKETING
PERSONNEL, PLUS EXPENSES RELATING TO FIELD OFFICES, SALES PROGRAMS, AND
ADVERTISING.
NINE MONTHS ENDED SEPTEMBER 30, 2000 OVER NINE MONTHS ENDED SEPTEMBER 30, 1999
Underwriting and distribution expenses for 2000 were $136.7 million, an
increase of $43.8 million or 47% compared with 1999. Legend's operations
contributed $16.4 million to underwriting and distribution expenses. Excluding
Legend's contribution, the increase was 30%. This provided for a distribution
margin excluding Legend of 7.5%, compared with 1.2% for the same period in 1999.
Sales grew at a faster rate than that of fixed indirect costs contributing to
margin improvement.
1999 OVER 1998
Underwriting and distribution expenses for 1999 were $124.9 million, an
increase of $25.4 million, or 25%, compared with 1998. The largest contributor
to the increase in distribution expenses was commission expense, and other sales
force compensation related to sales volume. Other factors included higher
production and asset retention incentive compensation of $6.0 million, higher
net costs relating to field offices, marketing and national advertising of
$5.5 million and increased sales program costs of $2.7 million. We began
restructuring our mutual fund products in the fourth quarter of 1999. Due to
their non-industry standard structure, the W&R Funds' Class B shares were closed
for new sales and converted into Class C shares, which have an industry standard
structure. Concurrently, the Advisors Funds began offering Class B shares and
Class C shares. Upon conversion of the W&R Funds' Class B shares, no contingent
deferred sales charges will be collected for any converted share redemptions.
The deferred selling costs of $19.0 million related to the W&R Funds' Class B
share conversion were written off on November 30th, concurrent with the
necessary approvals for share conversion. It is estimated that underwriting and
distribution expenses will be reduced by approximately $3.0 million per year as
a result of the restructuring and related write-off, primarily through foregone
amortization of deferred selling costs.
1998 OVER 1997
Underwriting and distribution expenses for 1998 were $99.6 million, an
increase of $19.6 million, or 24%, compared with 1997. These costs were higher
than 1997 due primarily to growth in sales volume, an additional $1.5 million of
costs related to an advertising campaign that was implemented during the fourth
quarter of 1998, and an increase of approximately $2.0 million related to
enhancements to field compensation that were effective July 1, 1998.
S-14
<PAGE>
COMPENSATION AND RELATED COSTS
NINE MONTHS ENDED SEPTEMBER 30, 2000 OVER NINE MONTHS ENDED SEPTEMBER 30, 1999
Compensation and related costs for 2000 were $42.6 million, an increase of
$12.8 million, or 43%, compared to 1999. ACF contributed $2.9 million in the
first nine months of 2000 and $406 thousand from the time of its acquisition in
August of 1999 until September 30, 1999. Legend contributed $831 thousand in
2000. Excluding these acquisitions, compensation increased by 33%. The average
number of employees increased by 21% as we continued to invest in investment
management, client service, and support personnel. Annual raises in salaries and
performance incentive bonuses also contributed to the increase.
1999 OVER 1998
Compensation and related costs for 1999 were $44.9 million, an increase of
$13.4 million, or 43%, compared to 1998. The growth in our operations added 25%
to the average employee headcount. Additional performance-based compensation
accounted for $3.8 million of the increase in compensation costs due primarily
to investment performance compensation paid to portfolio managers and, to a
lesser extent, to the inclusion of middle management in incentive compensation
plans. Higher pension and health insurance costs were additional factors for the
increase in compensation costs. Pension and related costs were $0.8 million
higher due to personnel additions and a higher rate of compensation increase.
Higher health insurance costs contributed $1.1 million to the increase as
reserves were increased to reflect higher claims exposure.
1998 OVER 1997
Compensation and related costs were up 18% to $31.5 million in 1998 due to
an increase in the average number of employees of 8% as well as higher
performance-based compensation for investment management personnel. In late
1997, adjustments were made to make total compensation more competitive with
industry standards. Annual raises accounted for the remaining increase.
GENERAL AND ADMINISTRATIVE EXPENSES
NINE MONTHS ENDED SEPTEMBER 30, 2000 OVER NINE MONTHS ENDED SEPTEMBER 30, 1999
General and administrative expenses, which reflects operating costs other
than compensation and underwriting and distribution, increased by $7.4 million,
or 53%, to $21.2 million for 2000. ACF contributed $812 thousand in the first
nine months of 2000 and $160 thousand from the time of its acquisition, in
August of 1999, until September 30, 1999. Legend contributed $2.1 million in
2000. Excluding these acquisitions, general and administrative expenses
increased by 34%, a result of investments made to facilitate growth, notably in
computer systems and services and costs associated with implementing new funds
and share classes. Also contributing to the increase were higher rental and
facilities costs from expanding operations.
1999 OVER 1998
General and administrative expenses were up by $10.7 million, or 125%, to
$19.2 million for 1999. Approximately $5.4 million of this increase was
attributable to the implementation of a new transfer agency system in the fourth
quarter of 1998. Higher shareholder service fee revenues coinciding with this
implementation offset most of the increased costs. The growth of our operations
added to higher administrative costs, including the acquisition of ACF, new
consulting arrangements, proxy and shareholder meeting costs, and additional
facilities rental to accommodate growth.
S-15
<PAGE>
1998 OVER 1997
General and administrative expenses were down by 46% to $8.6 million for
1998 due primarily to charges of $6.8 million in 1997 related to the outsourcing
of the data processing component of transfer agency activities and the
discontinuation of internally developed systems.
INVESTMENT AND OTHER INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2000 OVER NINE MONTHS ENDED SEPTEMBER 30, 1999
Investment and other income increased by $0.4 million from $7.6 million in
1999 to $8.0 million in 2000. In 1999, approximately $793 thousand was
attributable to income from real estate investments which were sold. In 2000,
investment and other income included $2.5 million of realized gains from the
sale of investment securities sold to partially fund the Legend acquisition.
Excluding these items, interest income declined by $1.3 million to $5.5 million
due to lower amounts invested in interest bearing corporate and municipal bonds.
1999 OVER 1998
Investment and other income increased by $1.2 million to $10.2 million in
1999. Average invested cash and marketable securities were $149.3 million in
1999 compared with $144.8 million in 1998. Substantially all of the increase in
investment and other income was attributable to higher net rental income from
investment in real estate properties. These properties were sold on
December 28, 1999 for net proceeds of $16.5 million. Pretax income realized from
rental operations of these properties in 1999 was $1.0 million.
1998 OVER 1997
Investment and other income increased by $5.2 million to $9.0 million in
1998 due to the investment of operating cash flows. Average invested cash and
marketable securities were $144.8 million in 1998 compared with $82.4 million in
1997. All growth in average cash and marketable securities was in securities
which have higher investment yields than cash and cash equivalents.
DEPRECIATION
NINE MONTHS ENDED SEPTEMBER 30, 2000 OVER NINE MONTHS ENDED SEPTEMBER 30, 1999
Depreciation of property and equipment increased by $820 thousand or 51% in
2000 to $2.4 million. The acquisitions of ACF on August 9, 1999 and Legend on
March 31, 2000 accounted for $193 thousand of the increase. The remaining
difference was primarily the result of additions to furniture and equipment in
field offices and information systems in the home office.
1999 OVER 1998
Depreciation of property and equipment increased by $270 thousand or 14% in
1999 to $2.2 million primarily due to opening additional field offices and
upgrading and enhancing existing offices.
1998 OVER 1997
Depreciation of property and equipment increased by $585 thousand or 45%, to
$1.9 million due to additions of property and equipment in late 1998. Property
and equipment was $20.6 million at year end 1998, up $8.6 million from 1997. A
reclassification was made to transfer $3.0 million of land from investment in
real estate to property and equipment. The addition of depreciable assets in
1998 was $5.6 million.
S-16
<PAGE>
INTEREST EXPENSE
NINE MONTHS ENDED SEPTEMBER 30, 2000 OVER NINE MONTHS ENDED SEPTEMBER 30, 1999
We entered into a $200 million credit facility arrangement in October of
1998. This facility is renewable annually in October and has been increased to
$220.0 million. This facility is expandable to $330.0 million, whereby banks
could, at their option upon our request, increase the loans by $110.0 million.
The credit facility has been used to fund share repurchases and facilitate the
acquisitions of Legend and ACF. Additionally, a money market loan program was
implemented in August of 2000. The money market loan program, which is similar
to commercial paper, has been utilized to repay amounts borrowed under the
credit facility. At September 30, 2000, short term debt had an outstanding
balance of $200.0 million, comprised of $45.0 million on the credit facility and
$155.0 million under the money market loan program. In October 2000, all amounts
borrowed on the facility were repaid. We intend to use the credit facility as a
"back-up" source of capital. The average balance on combined short term debt was
$195.0 million for 2000 and $90.1 million for 1999. The average interest rate
applied, excluding other costs, was 6.99% for 2000 and 5.48% for 1999.
1999 OVER 1998
We utilized the credit facility in 1999 to fund share repurchases during the
year and acquire ACF in August of 1999. The average interest rate applied to
this facility, excluding facility costs, was 5.73% in 1999. The average amount
outstanding on this facility was $106.0 million. In 1999, interest expense and
related facility costs were $6.5 million, compared to $704 thousand for 1998. At
the end of 1999 we had an outstanding balance of $125.3 million under our credit
facility, compared to $40.1 million at the end of 1998.
LOSS ON THE SALE OF REAL ESTATE
On December 28, 1999, we completed the sale of all multi-tenant properties
to unrelated third parties. Proceeds from the sale were $16.5 million, resulting
in a $4.6 million pretax loss.
WRITE-OFF OF DEFERRED ACQUISITION COSTS
We began restructuring our mutual fund products in the fourth quarter of
1999. Due to their non-industry-standard structure, the W&R Funds' Class B
shares were closed for new sales and converted into Class C shares, which have
an industry standard structure. Concurrently, the Advisors Funds began offering
Class B shares and Class C shares. Upon conversion of the W&R Funds' Class B
shares, no contingent deferred sales charge were collected for any converted
share redemptions. The deferred selling costs related to the W&R Funds' Class B
shares in the amount of $19.0 million (pre-tax) were written off on
November 30, concurrent with the necessary approvals for share conversion. By
offering additional classes of mutual fund shares and closing funds with non
industry-standard structures, the restructuring is more consistent with that of
the industry, provides our clients with more choices and greater value, and
accommodates additional changes for strategic distribution flexibility.
AFFILIATED INTEREST INCOME AND EXPENSE
Prior to our initial public offering in March of 1998, we had various notes
payable and notes receivable with Torchmark and certain subsidiaries of
Torchmark. The affiliated interest income and expense as reported for 1998 and
1997 pertain to these notes and were prepaid with proceeds from the offering.
S-17
<PAGE>
INCOME TAXES
Our effective income tax rate was 38.9% and 38.1% at September 30, 2000 and
1999, respectively, and 38.1%, 38.2%, and 39.0% in 1999, 1998, and 1997,
respectively.
FINANCIAL CONDITION
At September 30, 2000, our total assets were $410.4 million, an increase of
$75.3 million from December 31, 1999. In the first nine months of 2000, we
repurchased 4.7 million shares of our common stock at a total cost of
$96.2 million, compared to 8.7 million shares of our common stock at a total
cost of $132.2 million in the full year 1999, and 5.5 million shares of our
common stock at a total cost of $74.8 million during the third and fourth
quarters of 1998. Cash flow from operations, the credit facility, and the money
market loan program were utilized to fund these share repurchases. At
September 30, 2000, our outstanding short term debt, including principal and
accrued interest, was $200.3 million, compared to $125.3 million on
December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased by $37.3 million to
$120.8 million for the first nine months of 2000 due to higher net income from
operations, excluding non-cash items, as well as the timing of cash received and
cash paid on assets and liabilities. Net cash used in investing activities in
the first nine months of 2000 was $60.4 million, compared to net cash used by
investing activities of $12.7 million used in the same period last year.
Proceeds from the sale and maturity of investment securities exceeded purchases
of investment securities by $22.0 million in the first nine months of 2000. At
September 30, 2000, we had $130.6 million in cash and marketable investment
securities, of which $13.7 million was restricted for the benefit of customers
in compliance with securities industry regulations. Cash and marketable
securities at December 31, 1999 were $151.2 million, of which $17.1 million was
restricted. Other investing activities in the first nine months of 2000 used
$22.2 million from the additions to property and equipment, and $60.3 million
for the acquisition of Legend. In the first nine months of 2000, we used
$62.3 million in net financing activities, compared with $43.1 million in 1999.
In 2000, we repurchased 3.0 million shares of Class A and 1.7 million shares of
Class B common stock, the combined cost of which was $96.2 million, and paid
$22.1 million in cash dividends. Net borrowings of $75.0 million on the credit
facility and the money market loan program were utilized in 2000 to finance
share repurchases and the acquisition of Legend. The $220 million, 364-day
revolving credit facility, expandable to $330 million at the bank's option upon
our request, had $45.0 million outstanding at September 30, 2000.
Management believes its available cash, marketable securities, and expected
cash flow from operations will be sufficient to fund dividends, operations,
advance sales commissions, obligations, and other reasonably foreseeable cash
needs. We may also continue to repurchase shares of our common stock from time
to time as management deems appropriate. The share repurchases could be financed
by our available cash and investments and/or the use of the money market loan
program and the credit facility.
SUBSEQUENT EVENTS
On October 23, 2000, we reached an agreement, subject to due diligence, with
Mesirow Realty Sale-Leaseback, Inc. to sell our two home office buildings and to
lease them back for a period of fifteen years. Net proceeds from the sale are
expected to be approximately $28.5 million, resulting in a gain of approximately
$2.0 million. This gain will be deferred and amortized over the term of the
operating lease. If the transaction closes, it is expected to be closed early in
the first quarter of 2001. It is estimated that, going forward we will incur
approximately $3.4 million annually in lease expense and additional operating
expenses that will be reflected in general and administrative expenses.
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<PAGE>
The sale of these properties and the sale of multi-tenant properties last
year were made because real estate is not viewed to be part of our core
business. The proceeds from the sale will initially be used to repay debt, but
will ultimately increase our capacity to invest in our core business and to
repurchase our common stock.
On October 23, 2000, we announced the execution of an agreement with
Nationwide to provide a broad span of private label insurance and retirement
products for use by Waddell & Reed, Inc.'s financial advisors. The selection of
Nationwide to provide insurance and retirement products increases the breadth
and competitiveness of such products available to our financial advisors.
Nationwide has developed for distribution by our investment advisors two
variable annuities, a flexible-premium variable universal life product, a
survivorship life product, and a qualified group retirement plan.
We are in litigation with UILIC and others over terms of a compensation
agreement signed in July 1999 by UILIC and Waddell & Reed, Inc. The compensation
is paid by UILIC to us on variable products underwritten by UILIC and
distributed by us. The agreement provides for us to be paid annual compensation
on all variable annuity policies issued after January 1, 2000, and a slightly
lower annual compensation on variable annuity policies issued before that date.
Payments are continuing, but that agreement has been challenged by UILIC in a
complaint filed in May 2000 in the Circuit Court of Jefferson County, Alabama.
We have subsequently named Torchmark as a third party defendant in that action
in a tortious interference claim. We believe that the court will uphold the
agreement as a contract, and that we will prevail on the merits of the case.
Moreover, we do not foresee any additional risk to existing variable policy
assets and anticipate continued growth in sales of variable annuity products.
In a related development, a number of Torchmark affiliates terminated
Waddell & Reed Investment Management Company as investment adviser for certain
insurance company general account assets and pension plan assets totaling
$768 million. These assets had an average management fee of 25 basis points (one
quarter of 1%) per annum. The accounts paid approximately $1.9 million in annual
investment management fees. The only other Torchmark-affiliated assets for which
Waddell & Reed Investment Management Company serves as investment adviser are
approximately $40 million in 401(k) plans of Torchmark affiliates.
RECENT ACCOUNTING DEVELOPMENTS
In June of 1998, the Financial Accounting Standards Board issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, which was
amended in June 2000 by SFAS No. 138. These Statements are not expected to have
a material impact on us.
SEASONABILITY AND INFLATION
We do not believe our operations are subject to significant seasonal
fluctuations. We do not believe that inflation has had a significant impact on
our operations.
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<PAGE>
BUSINESS
OVERVIEW
We were founded in 1937, and are one of the oldest mutual fund complexes in
the United States, having introduced the Waddell & Reed Advisors Funds (formerly
the United Funds) family in 1940. We sell our investment products primarily to
middle income Americans through a virtually exclusive sales force. As of
September 30, 2000, we had $40.0 billion of assets under management, of which
$34.1 billion were mutual fund assets and $5.9 billion were separately managed
accounts. We have over 641,500 mutual fund customers having an average
investment of $47,000 and 65,600 variable account customers having an average
investment of $59,300.
As of year-end 2000, we are the exclusive underwriter and distributor of 43
mutual fund portfolios, including 20 comprising the Waddell & Reed Advisors
Funds (the "Advisors Funds"), 12 comprising the W&R Funds (the "W&R Funds"), and
11 comprising our variable annuity-related funds, the W&R Target Funds (the
"Target Funds" and with the Advisors Funds and the W&R Funds, sometimes
collectively referred to as the "Funds."). On July 1, 2000, we renamed our two
retail mutual fund families. The United Funds family was renamed the "Waddell &
Reed Advisors Funds". This family of funds is available for sale only through
Waddell & Reed's proprietary sales force. Concurrently, the Waddell & Reed Funds
family was renamed the "W&R Funds". We plan to make this family of funds
available for sale through both our proprietary sales force and selected
third-party distribution channels. Both the Advisors Funds and the W&R Funds
families offer the customer multiple classes of shares consistent with industry
standards. As part of our financial planning services, we also distribute
variable annuities and life insurance products, underwritten primarily by United
Investors Life Insurance Company ("UILIC"), to our customers. On October 23,
2000, we announced the agreement for Nationwide Financial ("Nationwide") to
provide a broad span of private label insurance and retirement products for use
by our financial advisors.
Our traditional target market has been professionals and working families
with annual incomes between $40,000 and $100,000 who are saving for retirement.
We believe that demographic trends and shifts in attitudes toward retirement
savings will continue to support increased consumer demand for our products.
According to U.S. Census Bureau projections, the number of Americans between the
ages of 45 and 64 will grow from 57.3 million in 1998 to 76.2 million in 2008,
making this "preretirement" age group the fastest growing segment of the U.S.
population.
We distribute the Funds and other financial products through a financial
advisor sales force that represents us on a virtually exclusive basis. On
September 30, 2000, our sales force consisted of 2,713 financial advisors,
including 214 district managers and 64 district supervisors. The sales force is
managed by eight regional vice presidents, 143 division managers operating from
152 division and region sales offices located throughout the United States. In
addition to these division sales offices, there were another 63 NASD registered
branch offices representing districts or individual sales offices. For the nine
months ended September 30, 2000, our financial advisor sales force sold over
$2.2 billion of mutual fund and variable products. The Funds are also available
for sale to Legend's 298 retirement advisors operating from 22 sales offices. We
believe, based on industry data, that our financial advisor sales force is
currently one of the largest sales forces in the United States selling primarily
mutual funds. As of September 30, 2000, 39% of our financial advisors have been
with us for more than 5 years, and 25% for more than 10 years. Our financial
advisors are located primarily in smaller metropolitan areas and rural
communities.
The financial advisor industry is fragmented, consisting primarily of
relatively small companies employing fewer than 100 investment professionals.
Our sales force competes primarily with small broker-dealers and independent
financial advisors. Our marketing efforts are currently focused on customers
residing in smaller metropolitan areas and rural communities. We conduct
investment seminars throughout the United States to reach a large number of
potential clients. We also provide
S-20
<PAGE>
financial plans for clients offering one-on-one consultations emphasizing
long-term relationships through continuing service, rather than a one-time sale.
We believe that we are well-positioned to benefit from a continuing industry
trend toward "assisted sales" (sales of mutual fund products through a sales
person) driven by the array of options now available to investors and the need
for financial planning advice that has resulted from the recent increase in the
average household's financial assets.
Our investment philosophy and financial planning approach emphasize
long-term investments. Our portfolio managers seek consistent long-term
performance and downside protection in turbulent markets. As a result, we have
developed a loyal customer base with clients maintaining their accounts for
approximately 14 years on average as compared to four years for the mutual fund
industry, according to the Investment Company Institute. This loyalty is
evidenced by a relatively low retail fund redemption rate for the five years
ended September 30, 2000 of 7.7% for the Funds (other than money market funds),
which is less than one-half of the industry average of 20.0%. We have also
realized a relatively high dividend reinvestment rate of 86.8% for the Funds for
the same period, which has consistently been over 20% higher than the industry.
Approximately 50% of our assets under management are in retirement accounts as
of September 30, 2000. The historically low redemption and high reinvestment
rates have provided a stable source of asset and revenue growth at relatively
low cost.
We have a seasoned team of portfolio managers and an internal equity and
fixed income investment research staff that have substantial resources available
to them, including hundreds of meetings annually with company management both on
and off site. In addition, we utilize research provided by brokerage firms and
independent outside consultants. Portfolio managers usually were investment
research analysts for a substantial length of time prior to acquiring money
management assignments. The predominant style of our investments is growth
equity. As of September 30, 2000, approximately 88% of our mutual fund assets
under management were invested in equity funds and the remainder in fixed income
and money market funds. This investment strategy generally emphasizes investment
at attractive valuations in companies that the portfolio managers believe can
produce above average growth in earnings.
ACQUISITIONS
On March 31, 2000, we completed the acquisition of The Legend Group
("Legend"), a privately held mutual fund distribution and retirement planning
company based in Palm Beach Gardens, Florida. Through its network of 295
financial advisors, it serves employees of school districts and other
not-for-profit organizations nationwide. As of March 31, 2000, Legend had
approximately 61,000 clients with $3.1 billion in third-party mutual fund assets
under advisement. Formed in 1965, Legend is a leader in the 403(b) business and
its concentration in the kindergarten through 12th grade market aligns well with
our strategy of concentrating primarily on underserved middle-income and upper
middle-income Americans. Together, we have a very strong position in the public
education market, and are well positioned for continued expansion. The
acquisition of Legend, by increasing the number of advisors in the overall
Waddell & Reed family of companies by 298, provides us greater overall
asset-generating capacity. Together, we are developing numerous opportunities,
including the addition of our fund families to The Legend Group platform, and
the utilization of each other's proprietary products and systems with clients.
Waddell & Reed and Legend will work closely together in the recruitment and
training of financial advisors.
On August 9, 1999, we completed the acquisition of Austin, Calvert &
Flavin, Inc. ("ACF"), a privately held investment management firm based in San
Antonio, Texas. It was founded in 1981 and manages investments for trusts, high
net worth families and individuals, and pension plans of corporations,
hospitals, schools, labor unions, endowments, and foundations. The acquisition
of ACF added nine investment professionals to our investment team and
$1.5 billion of assets under management as of the date of our acquisition.
S-21
<PAGE>
MARKETING
We have taken several steps to increase the productivity of our sales force.
Since 1992, we have been developing a more fully committed sales force through
recruiting and retention initiatives. These initiatives have resulted in an
increase of financial advisors having annual or annualized production of more
than $900,000 of investment product sales--from 20% of the sales force at
December 31, 1993 to 44% at September 30, 2000. Prior to 1993, division managers
were engaged in personal sales production as well as sales management. In order
to emphasize the importance of recruiting and developing a sales force, we
implemented a compensation system that ties compensation of division managers to
the development of new financial advisors and to division sales rather than
personal sales.
We provide training and motivational programs for our sales force. Sales
training specialists provide training programs for new recruits as well as
advanced training for experienced financial advisors. Programs for new recruits
focus on prospecting techniques, product knowledge, and sales skills. Field
office classes provide guidance in identifying target markets, practical
exercises to learn interview skills and data collection, instruction in basic
financial planning software, and guidance in matching products with various
investment objectives. Sales presentation skills are taught and practiced in the
classroom environment as well as on joint sales calls with field sales
management. The programs for experienced advisors focus on skills related to
dealing with larger investment sums (such as IRA rollovers) and include training
in the use of asset allocation and estate planning software. In addition, we
offer new financial advisors the opportunity to participate in a week long
training program at the home office covering such subjects as product features,
financial planning, and the use of illustrative software packages.
In 1998, we launched our first national advertising campaign in selected
markets throughout the country which focused on the important aspects of our
business and was intended to increase our name recognition in those markets. The
campaign was continued in 1999 and 2000, and will continue throughout 2001. In
November of 1999, we named Thomas W. Butch as Chief Marketing Officer. In this
newly created position, Mr. Butch is responsible for marketing and distribution
strategy, product development, and all core marketing and communication
activities.
FUNDS AND ASSET MANAGEMENT
We serve as underwriter for, and investment advisor to, the Advisors Funds,
the W&R Funds, and the Target Funds. We also serve as distributor of the
Advisors Funds, the W&R Funds, and variable annuity and variable life insurance
products related to the Target Funds.
We offer the Funds' shareholders a broad range of investment products
designed to attract and retain clients with varying investment objectives. The
predominant style of our investments is growth equity. Our investment strategy
emphasizes investments at attractive valuations in companies that the portfolio
managers believe can produce above average growth in earnings. An annual
Barron's/Lipper fund-family survey which ranks investment performance of mutual
fund complexes, ranked us seventeenth out of 92 mutual fund complexes for 1999
and seventh out of 68 complexes for the five year period ended December 31,
1999.
Our funds had the following characteristics for the twelve months ended
September 30, 2000:
- 88% invested in equity funds, 9% in fixed-income funds and 3% in money
market funds
- 71% of our equity funds ranked in the top quartile of funds with similar
objectives, as ranked by Lipper, Inc.
- 38% of our equity funds ranked in the top 10% of funds with similar
objectives, as ranked by Lipper, Inc.
S-22
<PAGE>
- 88% of our mutual fund assets--excluding money market funds that are rated
by Morningstar have four or five stars. This is the second highest of the
25 largest fund complexes.
Our largest mutual fund, the Core Investment Fund, is focused on large
capitalization in core equity and had the following fees and net asset values:
- management fees of $37.6 million (10% of total revenues) and a net asset
value of $9.0 billion at or for the nine months ended September 30, 2000
- management fees of $44.4 million (12% of total revenues) and a net asset
value of $8.4 billion at or for the year ended 1999
- management fees of $39.8 million (14% of total revenues) and a net asset
value of $7.8 billion at or for the year ended 1998
- management fees of $32.8 million (14% of total revenues) and a net asset
value of $6.5 billion at or for the year ended 1997
Our base of assets under management consists of a broad range of domestic
and international stock, bond, and money market mutual funds that meet the
varied needs and objectives of its individual and institutional investors. We
periodically introduce new mutual funds designed to complement and expand our
investment product offerings, respond to competitive developments in the
financial marketplace, and meet the changing needs of our clients. As part of
broadening fund distribution, we have added the following funds:
- Advisors Value (December 15, 2000)
- Advisors Municipal Money Markets (December 15, 2000)
- W&R Large Cap Growth Fund (June 26,2000)
- W&R Mid Cap Growth Fund (June 26,2000)
- W&R Tax-Managed Equity Fund (June 26, 2000)
- W&R Money Market Fund (June 26, 2000)
- Advisors Tax Managed Equity (April 3, 2000)
- Advisors Small Cap (October 2, 1999)
Effective June 30, 2000, we also renamed the W&R Growth Fund the "W&R Small
Cap Growth Fund".
Effective September 18, 2000, we transformed the Waddell & Reed Advisors
High Income Fund II to the "Waddell & Reed Advisors Global Bond Fund" by
changing its name and its strategy.
In addition to performing investment management services for the Funds, we
act as an investment advisor and portfolio manager for institutional and other
private investors. We receive a fee that is generally based on a percentage of
assets under management for our services as an investment advisor or portfolio
manager. Assets under management for institutional and private accounts totaled
$5.9 billion at September 30, 2000. Investment management fees from
institutional and private accounts were $20.1 million, or 10.5%, of total
investment management fees, for the nine months ended September 30, 2000.
S-23
<PAGE>
Ending and average assets under management for the nine months ended
September 30, 2000 and 1999 and for last three years were:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------
2000 1999 1999
------------------- ------------------- --------
ENDING AVERAGE ENDING AVERAGE ENDING
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Advisors Funds
Equity.............................. $24,660 $24,219 $17,756 $17,527 $22,626
Fixed-income........................ 2,844 2,967 3,337 3,525 3,190
Money market........................ 889 800 728 677 812
------- ------- ------- ------- -------
28,393 27,986 21,821 21,729 26,628
W&R Funds
Equity.............................. 1,742 1,822 1,326 1,181 1,785
Fixed-income........................ 65 70 90 89 82
------- ------- ------- ------- -------
1,807 1,892 1,416 1,270 1,867
Target Funds
Equity.............................. 3,617 3,449 2,441 2,309 3,113
Fixed-income........................ 226 228 239 245 237
Money market........................ 50 58 60 56 64
------- ------- ------- ------- -------
3,893 3,735 2,740 2,610 3,414
Total Mutual Funds
Equity.............................. 30,019 29,490 21,523 21,017 27,524
Fixed-income........................ 3,135 3,265 3,666 3,859 3,509
Money market........................ 939 858 788 733 876
------- ------- ------- ------- -------
34,093 33,613 25,977 25,609 31,909
Institutional and Separate Accounts... 5,927 5,847 4,769 3,635 5,393
------- ------- ------- ------- -------
Total Assets Under Management......... $40,020 $39,460 $30,746 $29,244 $37,302
======= ======= ======= ======= =======
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997
-------- ------------------- -------------------
AVERAGE ENDING AVERAGE ENDING AVERAGE
-------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Advisors Funds
Equity.............................. $18,123 $16,713 $15,320 $13,687 $12,761
Fixed-income........................ 3,464 3,637 3,652 3,632 3,499
Money market........................ 693 644 572 529 498
------- ------- ------- ------- -------
22,280 20,994 19,544 17,848 16,758
W&R Funds
Equity.............................. 1,261 1,050 906 779 684
Fixed-income........................ 88 85 74 66 58
------- ------- ------- ------- -------
1,349 1,135 980 845 742
Target Funds
Equity.............................. 2,415 2,127 1,859 1,627 1,452
Fixed-income........................ 243 245 235 223 204
Money market........................ 58 54 45 43 38
------- ------- ------- ------- -------
2,716 2,426 2,139 1,893 1,694
Total Mutual Funds
Equity.............................. 21,799 19,890 18,085 16,093 14,897
Fixed-income........................ 3,795 3,967 3,961 3,921 3,761
Money market........................ 751 698 617 572 536
------- ------- ------- ------- -------
26,345 24,555 22,663 20,586 19,194
Institutional and Separate Accounts... 3,953 3,189 2,947 2,831 2,103
------- ------- ------- ------- -------
Total Assets Under Management......... $30,298 $27,744 $25,610 $23,417 $21,297
======= ======= ======= ======= =======
</TABLE>
INVESTMENT MANAGEMENT AGREEMENTS
We provide investment advisory and management services pursuant to an
investment management agreement with each Fund. While the specific terms of the
investment management agreements vary, the basic terms of the investment
management agreements are similar. The investment management agreements provide
that we render overall management services to each of the Funds, subject to the
oversight of each Fund's board of directors and in accordance with each Fund's
investment objectives and policies. The investment management agreements permit
us to enter into separate agreements for shareholder services or accounting
services with the respective Funds.
SERVICE AGREEMENTS
We provide various services to the Funds and their shareholders pursuant to
a shareholder servicing agreement with each Fund (except the Target Funds) and
an accounting service agreement with each Fund. Pursuant to the shareholder
servicing agreements, we perform shareholder servicing functions, including:
- the maintenance of shareholder accounts,
- the issuance, transfer, and redemption of shares, distribution of
dividends, and payment of redemptions,
- furnishing information related to the Fund, and
- handling shareholder inquiries.
S-24
<PAGE>
The Funds pay a monthly fee to us for such services. Pursuant to the
accounting service agreements, we provide the Funds with bookkeeping and
accounting services and assistance, including maintenance of the Fund's records,
pricing of the Fund's shares, and preparation of the prospectuses for existing
shareholders, proxy statements, and certain shareholder reports. The Funds pay
us a monthly fee for such services. A Fund's shareholder servicing agreement and
accounting service agreement may be adopted or amended with the approval of the
Fund's directors who are not interested persons. Each of the shareholder
servicing agreements and accounting service agreements has annually renewable
terms of one year expiring on October 1st of each year.
UNDERWRITING AND DISTRIBUTION
We distribute the Funds pursuant to an underwriting agreement with each Fund
(except the Target Funds). We distribute products relating to the Target Funds
under an underwriting agreement between Waddell & Reed and UILIC, and as
announced on October 23, 2000, we will distribute products relating to the
Target Funds under an underwriting agreement between Waddell & Reed and
Nationwide. Commissions paid to us by UILIC for distribution of these products
comprised 12% of our total revenues for the nine months ended September 30,
2000, and 13%, 12% and 12% of our total revenues for each of the years ended
1999, 1998 and 1997, respectively. In addition, the Target Funds will also be
sold through Nationwide. Under each underwriting agreement with a Fund, we offer
and sell the Fund's shares on a continual basis and pay the costs of sales
literature and printing of prospectuses furnished to it by the Fund. We receive
underwriting commissions for such services, a major portion of which is paid to
our financial advisors and sales managers. Class A shares have front-end sales
charges, Class B shares have back-end sales charges on early redemptions and
convert to Class A shares by the eighth year, Class C shares are level-load
shares with no conversion feature, and Class Y shares are shares intended for
institutional investors. We charge a sales charge to clients upon purchase of
Class A shares, which ranges from zero to 5.75% of the amount invested. The
sales charge for the Class A shares typically declines as the net asset value of
the account increases. In addition, investors may combine their purchases of the
Funds' shares to qualify for the reduced sales charge. Investors in the Class B
shares pay no sales charge at the point of sale, but generally pay contingent
deferred sales charges upon redemption of shares of up to 5% of the net asset
value of the redeemed shares declining to zero for shares held for more than six
years. Class B shares convert to Class A shares by the end of the eighth year.
Investors in the Class C shares pay no sales charge at the point of sale, but
generally pay a contingent deferred sales charge of 1% declining to zero for
shares held for more than 12 months. Class C shares do not convert.
Under a distribution and service plan, shareholders of the Class B and C
shares pay a Rule 12b-1 distribution fee of 1.00% (.75% distribution and .25%
service) of the average daily net assets as compensation for distributing shares
and servicing shares of those classes. Class A shareholders (except money market
funds) may pay up to a maximum Rule 12b-1 fee of .25% of the average daily net
assets as compensation and reimbursement for expenses in connection with
distributing shares, providing personal service to shareholders of the Funds,
and maintaining shareholder accounts of the Funds. Likewise, Class Y shares are
subject to a .25% fee pursuant to a distribution and service plan and
shareholders of the Target Funds may pay a .25% fee pursuant to a service plan,
both computed as stated above. Each distribution and/or service plan is subject
to annual approval by the Funds' board of directors, including a majority of the
independent directors, cast in person at a meeting called for the purpose of
voting on such approval. The Funds may terminate the distribution and service
plans at any time without penalty.
S-25
<PAGE>
Our investment product sales are summarized as follows:
INVESTMENT PRODUCT SALES
<TABLE>
<CAPTION>
NINE MONTHS ENDED, YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(IN $MILLIONS)
<S> <C> <C> <C> <C> <C>
Front-load (Class A)......................... $1,259.1 1,025.3 1,329.0 1,266.8 1,092.7
Back-load (Class B).......................... 303.3 289.3 355.8 252.3 175.7
Level-load (Class C)......................... 201.1 -- 51.3 -- --
Target Funds (variable Products)............. 476.8 297.4 413.7 308.4 249.8
-------- -------- -------- -------- --------
Total retail................................. $2,240.3 1,612.0 2,149.8 1,827.5 1,518.2
Institutional................................ 813.8 731.2 1,091.7 491.4 831.0
-------- -------- -------- -------- --------
Total........................................ $3,054.1 2,343.2 3,241.5 2,318.9 2,349.2
======== ======== ======== ======== ========
</TABLE>
FUNDS SUMMARY
The following table sets forth for each management style the net assets
under management as of September 30, 2000, the family and fund names as well as
the year in which each Fund was first offered to the public.
<TABLE>
<CAPTION>
ASSETS (IN $
MANAGEMENT STYLE MILLIONS) FUNDS YEAR OF INCEPTION
---------------- ------------ ----- -----------------
<S> <C> <C> <C>
Large Capitalization $ 1,448 Advisors Retirement Shares 1972
Growth 2,588 Advisors Accumulative 1940
3,972 Advisors Science and Technology 1950
3,049 Advisors Vanguard 1969
19 W&R Large Cap Growth 2000
224 W&R Science and Technology 1997
1,374 Target Growth 1987
319 Target Science and Technology 1997
26 Advisors Tax-Managed Equity 2000
3 W&R Tax-Managed 2000
-------
$13,022
Mid Capitalization $ 1,889 Advisors New Concepts 1983
Growth 10 W&R Mid Cap Growth 2000
-------
$ 1,899
Small Capitalization $ 385 Advisors Small Cap 1999
Growth 668 W&R Small Cap Growth 1992
363 Target Small Cap 1994
-------
$ 1,416
Large Capitalization $ 9,037 Core Investment 1940
Core Equity 574 W&R Core Equity 1992
1,088 Target Income 1991
-------
$10,699
</TABLE>
S-26
<PAGE>
<TABLE>
<CAPTION>
ASSETS (IN $
MANAGEMENT STYLE MILLIONS) FUNDS YEAR OF INCEPTION
---------------- ------------ ----- -----------------
<S> <C> <C> <C>
International Equity $ 1,590 Advisors International Growth 1970
186 W&R International Growth 1992
285 Target International 1994
-------
$ 2,061
Balanced and Asset Allocation $ 577 Advisors Continental Income 1970
98 Advisors Asset Strategy 1995
57 W&R Asset Strategy 1995
44 Target Asset Strategy 1995
145 Target Balanced 1994
-------
$ 921
Tax Exempt Bonds $ 741 Advisors Municipal Bond 1976
419 Advisors Municipal High Income 1986
26 W&R Municipal Bond 1992
-------
$ 1,186
High Yield Bonds $ 758 Advisors High Income 1979
302 Advisors Global Income 1986
20 W&R High Income 1997
109 Target High Income 1987
-------
$ 1,189
Taxable Investment-grade Bonds $ 504 Advisors Bond 1964
19 W&R Limited-Term Bond 1992
119 Advisors Government Securities 1982
6 Target Limited-Term Bond 1994
112 Target Bond 1987
-------
$ 760
Money Markets $ 886 Advisors Cash Management 1979
50 Target Money Market 1987
4 W&R Money Market 2000
-------
$ 940
-------
TOTAL $34,093
=======
</TABLE>
EMPLOYEES
At September 30, 2000, we had 1,283 full-time employees. Our 2,713 financial
advisors are made up of 2,435 independent contractors, and 278 district managers
and supervisors, that are employees. In addition, Legend has 298 retirement
advisors.
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<PAGE>
DESCRIPTION OF THE NOTES
We will issue the notes under a senior indenture to be dated as of
January 18, 2001, as supplemented by a supplemental indenture to be dated as of
January 18, 2001, between Waddell & Reed and Chase Manhattan Trust Company,
National Association, as trustee. When we refer to the indenture in this
prospectus supplement, we are referring to the senior indenture as supplemented
by the supplemental indenture. The following summarizes some of the material
provisions of the notes. The notes are a series of senior debt securities
described in the accompanying prospectus. The following description supplements,
and to the extent it is inconsistent, supercedes, the statements under
"Description of Senior Debt Securities" in the accompanying prospectus. We refer
you to the accompanying prospectus for a description of the debt securities and
the senior indenture. The following summary does not purport to be complete and
is subject to, and qualified by reference to, all of the provisions of the
indenture. As used in this description, the words "we," "us," "our" or
"Waddell & Reed" do not include any current or future subsidiary of Waddell &
Reed Financial, Inc.
GENERAL
The notes will be initially limited to $200,000,000 aggregate principal
amount at maturity. The notes will be issued only in fully registered form in
denominations of $1,000 and integral multiples of $1,000, and will bear interest
from and including January 18, 2001 to but excluding the date of maturity, at
the annual rate set forth on the cover page of this prospectus supplement. The
notes will mature on January 18, 2006. Waddell & Reed will pay interest twice a
year on January 18 and July 18 of each year, beginning July 18, 2001, to the
persons in whose names the notes (or any predecessor notes) are registered in
the security register at the close of business on the applicable regular record
date, which is the January 3 or July 3 next preceding such interest payment
date. Interest on the notes will be computed on the basis of a 360-day year of
twelve 30-day months. Waddell & Reed will have the ability to reopen the series
of notes and issue additional notes of the series. Waddell & Reed will not be
able to redeem the notes before their stated maturity date, and the notes do not
provide for any sinking fund.
RANKING OF NOTES
The notes will be unsecured and unsubordinated obligations. The notes will
rank equal in right of payment with all of our existing and future unsecured and
unsubordinated indebtedness. See "Risk Factors -- Our Holding Company Structure
Results in Structural Subordination and May Affect Our Ability to Make Payments
on the Notes".
RATING OF NOTES
We expect the notes to be rated "Baa2" by Moody's Investor's Service Inc.
and "BBB" by Standard & Poor's Ratings Group.
EVENTS OF DEFAULT
The following will be events of default for the notes:
(1) default in payment of any interest when it becomes due and payable and
such default continues for a period of 30 days;
(2) default in payment of the principal amount at maturity;
(3) default in the performance or breach by Waddell & Reed of any covenant
or warranty in the notes or the indenture upon receipt by Waddell & Reed of
notice of such default by the trustee or by holders of not less than 10% in
aggregate principal amount at maturity of the notes then outstanding,
S-28
<PAGE>
and Waddell & Reed's failure to cure (or obtain a waiver of) such default within
60 days after receipt by Waddell & Reed of such notice;
(4) (A) the failure of Waddell & Reed to make any payment by the end of any
applicable grace period after maturity of indebtedness, which term as used in
the indenture means obligations (other than nonrecourse obligations) of
Waddell & Reed for borrowed money or evidenced by bonds, debentures, notes or
similar instruments (in an amount (taken together with amounts in (B)) in excess
of $10 million and continuance of such failure, or (B) the acceleration of
indebtedness in an amount (taken together with the amounts in (A)) in excess of
$10 million because of a default with respect to such indebtedness without such
indebtedness having been discharged or such acceleration having been cured,
waived, rescinded or annulled in case of (A) or (B) above, for a period of
30 days after written notice to Waddell & Reed by the trustee or to Waddell &
Reed and the trustee by the holders of not less than 25% in aggregate principal
amount at maturity of the notes then outstanding; or
(5) certain events of bankruptcy, insolvency or reorganization affecting
Waddell & Reed.
If an event of default shall have happened and be continuing, either the
trustee or the holders of not less than 25% in aggregate principal amount at
maturity of the notes then outstanding may declare the issue price of the notes,
plus all accrued and unpaid interest, to be immediately due and payable.
However, in the event of a default described under (5), above, the issue price
of the notes, plus all accrued and unpaid interest, shall automatically become
and be immediately due and payable.
MODIFICATION
In addition to those modifications that require the consent of each holder
set forth under "Description of the Senior Debt Securities--Modification of the
Senior Indenture; Waiver of Covenants" in the accompanying prospectus, the
following modifications would require the consent of the holders of each
outstanding note affected:
- alter the rate of interest on any note;
- make any note payable in money or securities other than that stated in the
note;
- reduce the principal amount at maturity with respect to any note; and
- impair the right to institute suit for the enforcement of any payment with
respect to the notes.
GOVERNING LAW
The indenture and the notes will be governed by, and construed in accordance
with, the laws of the State of New York, without regard to conflicts of laws
principles.
INFORMATION CONCERNING THE TRUSTEE
Chase Manhattan Trust Company, National Association is the trustee.
BOOK-ENTRY SYSTEM
The notes will only be issued in the form of global securities held in
book-entry form. The Depositary Trust Company ("DTC") or its nominee will be the
sole registered holder of the notes for all purposes under the indenture. Owners
of beneficial interests in the notes represented by the global securities will
hold their interests pursuant to the procedures and practices of DTC. As a
result, beneficial interests in any such securities will be shown on, and
transfers will be effected only through, records maintained by DTC and its
direct and indirect participants and any such interest may not be exchanged for
certificated securities, except in limited circumstances. Owners of beneficial
interests must exercise any rights in respect of their interests in accordance
with the procedures and practices of
S-29
<PAGE>
DTC. Beneficial owners will not be holders and will not be entitled to any
rights under the global securities or the indenture provided to the holders of
the notes. Waddell & Reed and the trustee, and any of their respective agents,
may treat DTC as the sole holder and registered owner of the global securities.
EXCHANGE OF GLOBAL SECURITIES
Each of the notes represented by a global security will be exchangeable for
certificated securities with the same terms only if:
- DTC is unwilling or unable to continue as depositary or if DTC ceases to
be a clearing agency registered under the Securities Exchange Act of 1934
and a successor depositary is not appointed by us within 90 days;
- We decide to discontinue use of the system of book-entry transfer through
DTC (or any successor depositary); or
- a default under the indenture occurs and is continuing.
DTC has advised us as follows: DTC is a limited-purpose trust company
organized under the New York Banking Law, a "banking organization" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered participants, and it facilitates the settlement of transactions among
its participants in those securities through electronic computerized book-entry
changes in participants' accounts, eliminating the need for physical movement of
securities certificates. DTC's participants include securities brokers and
dealers, including the agents, banks, trust companies, clearing corporation and
other organizations, some of whom and/or their representatives own DTC. Access
to DTC's book-entry system is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
UNDERWRITING
We intend to offer our notes through the underwriters named below. Merrill
Lynch, Pierce, Fenner & Smith Incorporated is acting as representative of the
underwriters named below. Subject to the terms and conditions set forth in the
pricing agreement between us and the underwriters, we have agreed to sell to the
underwriters, and the underwriters severally have agreed to purchase from
Waddell & Reed, the principal amount of the notes set forth opposite their names
below.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................... $140,000,000
Chase Securities Inc. ...................................... 25,000,000
Morgan Stanley & Co. Incorporated .......................... 25,000,000
Stephens Inc. .............................................. 10,000,000
------------
Total............................................ $200,000,000
============
</TABLE>
The underwriters have agreed to purchase all of the notes sold pursuant to
the pricing agreement if any of these notes are purchased. If an underwriter
defaults, the pricing agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the pricing agreement may be
terminated.
Waddell & Reed has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.
S-30
<PAGE>
The underwriters are offering the notes, subject to prior sale, when, as and
if issued to and accepted by them, subject to approval of legal matters by their
counsel, including the validity of the notes and other conditions contained in
the pricing agreement, such as receipt by the underwriters of officers'
certificates and legal opinions. The underwriters reserve the right to withdraw,
cancel or modify offers to the public and to reject orders in whole or in part.
COMMISSIONS AND DISCOUNTS
The underwriters have advised us that they propose initially to offer the
notes to the public at the public offering price on the cover page of this
prospectus supplement, and to dealers at that price less a concession not in
excess of .35% of the principal amount of the notes. The underwriters may allow,
and the dealers may reallow, a discount not in excess of .25% of the principal
amount of the notes to other dealers. After the initial offering, the public
offering price, concession and discount may be changed.
The expenses of the offering, not including the underwriting discount, are
estimated at $450,000 and are payable by Waddell & Reed.
NEW ISSUE OF NOTES
The notes are a new issue of securities with no established trading market.
We do not intend to apply for listing of the notes on any national securities
exchange or for quotation of the notes on any automated dealer quotation system.
We have been advised by the underwriters that they presently intend to make a
market in the notes after the completion of the offering. However, they are
under no obligation to do so and may discontinue any market-making activities at
any time without any notice. We cannot assure the liquidity of the trading
market for the notes or that an active public market for the notes will develop.
If an active public trading market for the notes does not develop, the market
price and liquidity of the notes may be adversely affected.
PRICE STABILIZATION AND SHORT POSITIONS
In connection with the offering, the underwriters are permitted to engage in
transactions that stabilize the market price of the notes. Such transactions
consist of bids or purchases to peg, fix or maintain the price of the notes. If
the underwriters create a short position in the notes in connection with the
offering, that is, if they sell more notes than is set forth on the cover page
of this prospectus supplement, the underwriters may reduce that short position
by purchasing notes in the open market. Purchases of a security to stabilize the
price or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of such purchases.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the notes. In addition, neither
Waddell & Reed nor any of the underwriters makes any representation that the
underwriters will engage in these transactions or that these transactions, once
commenced, will not be discontinued without notice.
OTHER RELATIONSHIPS
In the ordinary course of their businesses, some of the underwriters and
their affiliates have engaged, and in the future may engage, in investment
banking or commercial banking transactions with us or our affiliated companies,
including acting as lenders under certain of Waddell & Reed's credit facilities.
A portion of the proceeds of the offering may be paid to affiliates of certain
of the underwriters. In the event that more than 10% of the net proceeds of the
offering are paid to affiliates of the underwriters, the offering will be made
pursuant to Rule 2710(c)(8) of the Conduct Rules of the
S-31
<PAGE>
National Association of Securities Dealers, Inc. Chase Manhattan Trust Company,
National Association, the trustee, is an affiliate of Chase Securities Inc.
VALIDITY OF THE NOTES
The validity of the notes offered hereby will be passed upon for us by
Daniel C. Schulte, Vice President and General Counsel of Waddell & Reed, and by
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, and for the
underwriters by Brown & Wood LLP, New York, New York.
S-32
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at December 31, 1999 and 1998... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and
1997...................................................... F-4
Statement of Changes in Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997.................... F-5
Consolidated Statements of Comprehensive Income for the
Years Ended December 31, 1999, 1998 and 1997.............. F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and
1997...................................................... F-7
Notes to Consolidated Financial Statements.................. F-8
Consolidated Balance Sheets at December 31, 1999 and
September 30, 2000 (Unaudited)............................ F-22
Consolidated Statements of Operations for the Three and Nine
Month Periods Ended September 30, 2000 and 1999
(Unaudited)............................................... F-23
Statement of Changes on Stockholders' Equity for the for the
Nine Month Period Ended September 30, 2000 (Unaudited).... F-24
Consolidated Statements of Comprehensive Income for the
Three and Nine Month Periods Ended September 30, 2000 and
1999 (Unaudited).......................................... F-25
Consolidated Statements of Cash Flows for the Nine Month
Period Ended September 30, 2000 and 1999 (Unaudited)...... F-26
Notes to Unaudited Consolidated Financial Statements........ F-27
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Waddell & Reed Financial, Inc.:
We have audited the accompanying consolidated balance sheets of Waddell &
Reed Financial, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, changes in stockholders' equity,
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Waddell &
Reed Financial, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Kansas City, Missouri
February 11, 2000, except as to note 16, which is as of April 7, 2000.
F-2
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Assets:
Cash and cash equivalents................................. $ 60,977 30,180
Investment securities, available-for-sale................. 90,245 103,153
Receivables:
United funds and W&R funds.............................. 7,597 5,740
Customers and other..................................... 19,541 28,865
Deferred income taxes..................................... 37 1,309
Prepaid expenses and other current assets................. 7,111 3,222
-------- -------
Total current assets.................................... 185,508 172,469
-------- -------
Property and equipment, net............................... 27,633 20,649
Investment in real estate................................. -- 21,754
Deferred sales commissions, net........................... 1,851 15,710
Goodwill (net of accumulated amortization of $26,493 and
$23,269)................................................ 112,994 95,928
Deferred income taxes..................................... 5,665 --
Other assets.............................................. 1,422 669
-------- -------
Total assets............................................ $335,073 327,179
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable.......................................... $ 34,002 28,304
Accrued sales force compensation.......................... 14,578 11,916
Short term notes payable.................................. 125,307 40,076
Income taxes payable...................................... 8,284 13,464
Other current liabilities................................. 16,456 16,034
-------- -------
Total current liabilities............................... 198,627 109,794
-------- -------
Deferred income taxes..................................... -- 208
Accrued pensions and post-retirement costs................ 10,103 10,041
-------- -------
Total liabilities....................................... 208,730 120,043
-------- -------
Stockholders' equity:
Common stock (See table below)............................ 997 997
Additional paid-in capital................................ 238,434 245,939
Retained earnings......................................... 97,129 47,325
Deferred compensation..................................... (11,246) (12,494)
Treasury stock (See table below).......................... (198,360) (74,833)
Accumulated other comprehensive income.................... (611) 202
-------- -------
Total stockholders' equity.............................. 126,343 207,136
-------- -------
Total liabilities and stockholders' equity.................. $335,073 327,179
======== =======
</TABLE>
<TABLE>
<CAPTION>
1999 1998
COMMON STOCK ------------------------- -------------------------
($.01 PAR VALUE) CLASS A CLASS B CLASS A CLASS B
---------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Authorized................................ 225,000,000 150,000,000 225,000,000 150,000,000
Issued.................................... 48,213,261 51,487,500 48,213,261 51,487,500
Outstanding............................... 44,478,318 41,971,870 46,359,668 47,867,934
Treasury Stock............................ 3,734,943 9,515,630 1,853,593 3,619,566
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Investment management fees................................ $178,612 $137,823 $117,784
Underwriting and distribution fees........................ 126,318 106,615 89,427
Shareholder service fees.................................. 41,525 33,808 30,763
Investment and other revenue.............................. 10,202 9,043 3,798
-------- -------- --------
Total revenue........................................... 356,657 287,289 241,772
-------- -------- --------
Expenses:
Underwriting and distribution............................. 124,938 99,575 79,995
Compensation and related costs............................ 44,944 31,512 26,618
General and administrative................................ 19,245 8,551 15,826
Depreciation.............................................. 2,162 1,892 1,307
Interest expense.......................................... 6,546 704 --
Amortization of goodwill.................................. 3,224 2,903 2,903
Loss on sale of real estate............................... 4,592 -- --
Write-off of deferred acquisition costs................... 18,981 -- --
-------- -------- --------
Total expenses.......................................... 224,632 145,137 126,649
-------- -------- --------
Income before affiliated items and provision for income
taxes..................................................... 132,025 142,152 115,123
Affiliated items:
Interest income........................................... -- 1,950 11,323
Interest expense.......................................... -- (8,604) (11,299)
-------- -------- --------
Income before provision for income taxes.................... 132,025 135,498 115,147
Provision for income taxes.................................. 50,258 51,763 44,855
-------- -------- --------
Net income.............................................. $ 81,767 $ 83,735 $ 70,292
======== ======== ========
Net income per share:
-- Basic.................................................. $ 0.91 $ 0.85 $ 0.71
======== ======== ========
-- Diluted................................................ $ 0.89 $ 0.84 $ 0.71
======== ======== ========
Weighted average shares outstanding:
-- Basic.................................................. 89,456 98,681 99,701
-- Diluted................................................ 91,548 99,269 99,701
Dividends declared per common share......................... $ 0.3536 $ 0.3536 $ 0.0000
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
DIVIDENDS IN
EXCESS OF
RETAINED EARNINGS
COMMON STOCK ADDITIONAL AND ADDITIONAL
------------------- PAID-IN RETAINED PAID-IN DEFERRED TREASURY
SHARES AMOUNT CAPITAL EARNINGS CAPITAL COMPENSATION STOCK
-------- -------- ---------- -------- ----------------- ------------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.... 63,450 $635 231,756 -- -- -- --
Net income...................... -- -- -- 70,292 -- -- --
Contributions from parent....... -- -- 47,980 -- -- -- --
Other distributions............. -- -- (279,948) (18,627) (230,658) -- --
Cash dividends to parent........ -- -- -- (51,665) -- -- --
Unrealized gain on investment
securities.................... -- -- -- -- -- -- --
------ ---- -------- ------- -------- ------- --------
Balance at December 31, 1997.... 63,450 635 (212) -- (230,658) -- --
Net income...................... -- -- -- 73,712 10,023 -- --
Issuance of restricted shares... 446 4 5,259 -- -- (12,494) --
IPO proceeds.................... 35,805 358 295,021 -- 220,635 -- --
Dividends paid.................. -- -- -- (26,387) -- -- --
Other distributions............. -- -- (54,129) -- -- -- --
Treasury stock repurchases...... -- -- -- -- -- -- (74,833)
Unrealized loss on investment
securities.................... -- -- -- -- -- -- --
------ ---- -------- ------- -------- ------- --------
Balance at December 31, 1998.... 99,701 997 245,939 47,325 -- (12,494) (74,833)
Net income...................... -- -- -- 81,767 -- -- --
Recognition of deferred
compensation.................. -- -- -- -- -- 1,370 --
Issuance of restricted shares... -- -- 6 -- -- (122) 116
Dividends paid.................. -- -- -- (31,963) -- -- --
Exercise of stock options....... -- -- (15,964) -- -- -- 8,537
Tax benefit from exercise of
options....................... -- -- 8,453 -- -- -- --
Treasury stock repurchases...... -- -- -- -- -- -- (132,180)
Unrealized loss on investment
securities.................... -- -- -- -- -- -- --
------ ---- -------- ------- -------- ------- --------
Balance at December 31, 1999.... 99,701 997 238,434 97,129 -- (11,246) (198,360)
====== ==== ======== ======= ======== ======= ========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY (DEFICIT)
------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Balance at December 31, 1996.... 164 232,555
Net income...................... -- 70,292
Contributions from parent....... -- 47,980
Other distributions............. -- (529,233)
Cash dividends to parent........ -- (51,665)
Unrealized gain on investment
securities.................... 180 180
---- --------
Balance at December 31, 1997.... 344 (229,891)
Net income...................... -- 83,735
Issuance of restricted shares... -- (7,231)
IPO proceeds.................... -- 516,014
Dividends paid.................. -- (26,387)
Other distributions............. -- (54,129)
Treasury stock repurchases...... -- (74,833)
Unrealized loss on investment
securities.................... (142) (142)
---- --------
Balance at December 31, 1998.... 202 207,136
Net income...................... -- 81,767
Recognition of deferred
compensation.................. -- 1,370
Issuance of restricted shares... -- --
Dividends paid.................. -- (31,963)
Exercise of stock options....... -- (7,427)
Tax benefit from exercise of
options....................... -- 8,453
Treasury stock repurchases...... -- (132,180)
Unrealized loss on investment
securities.................... (813) (813)
---- --------
Balance at December 31, 1999.... (611) 126,343
==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $81,767 83,735 70,292
Other comprehensive income:
Net unrealized appreciation (depreciation) of investments
during the period, net of income taxes of $(387),
$(150), and $110........................................ (616) (249) 180
Reclassification adjustment for amounts included in net
income, net of income taxes of $(124), $64, and $0...... (197) 107 --
------- ------ ------
Comprehensive Income........................................ $80,954 83,593 70,472
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 81,767 83,735 70,292
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 5,386 4,795 4,210
Recognition of deferred compensation.................... 1,370 1,333 --
(Gain)/loss on sale of investments...................... (375) 171 --
Loss on sale and retirement of fixed assets............. 67 75 65
Write-off of deferred acquisition cost.................. 18,981 -- --
Loss on sale of real estate............................. 4,592 -- --
Capital gains and dividends reinvested.................. (471) (399) (78)
Deferred income taxes................................... (4,089) (1,988) 27
Changes in assets and liabilities net of acquisition:
Receivables from funds................................ (1,857) (1,709) (452)
Other receivables..................................... 10,788 (23,818) (1,195)
Due to/from affiliates -- operating................... -- 4,509 (4,217)
Other assets.......................................... (9,728) (3,661) (5,383)
Accounts payable...................................... 5,457 5,375 (1,883)
Other liabilities..................................... (3,596) 10,237 898
-------- -------- -------
Net cash provided by operating activities................... 108,292 78,655 62,284
-------- -------- -------
Cash flows from investing activities:
Additions to investment securities........................ (16,201) (110,652) (40)
Proceeds from sales of investment securities.............. 635 24,020 1
Proceeds from maturity of investment securities........... 27,995 2,424 1,260
Additions to property and equipment....................... (9,096) (7,602) (3,218)
Investment in real estate................................. 551 (5,913) --
Proceeds from sale of real estate......................... 16,452 -- --
Investment in Austin, Calvert, and Flavin, (net of $1,611
cash acquired).......................................... (19,557) -- --
Other..................................................... -- 7 50
-------- -------- -------
Net cash used by/(used in) investing activities............. 779 (97,716) (1,947)
-------- -------- -------
Cash flows from financing activities:
Cash dividends to parent.................................. -- -- (51,665)
Proceeds from IPO......................................... -- 516,014 --
Net borrowings on credit facility......................... 85,000 40,000 --
Cash dividends............................................ (31,963) (26,387) --
Change in due to/from affiliates -- nonoperating.......... -- (479,373) (37,888)
Purchase of treasury stock................................ (132,180) (74,833) --
Exercise of stock options................................. 869 -- --
Cash contributions from parent............................ -- -- 44,033
-------- -------- -------
Net cash used in financing activities....................... (78,274) (24,579) (45,520)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents........ 30,797 (43,640) 14,817
Cash and cash equivalents at beginning of year.............. 30,180 73,820 59,003
-------- -------- -------
Cash and cash equivalents at end of year.................... $ 60,977 30,180 73,820
======== ======== =======
Cash paid for:
Income taxes.............................................. $ 50,551 48,830 65,754
Interest.................................................. 5,932 628 --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
1. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION
BUSINESS
Waddell & Reed Financial, Inc. and subsidiaries (the "Company") derive their
revenues primarily from investment management, investment product distribution,
and shareholder services administration provided to the United mutual funds,
Waddell & Reed mutual funds, Target/United mutual funds (collectively the
"Funds") and managed institutional accounts. The Funds and institutional
accounts operate under various rules and regulations set forth by the Securities
and Exchange Commission (the "Commission"). Services to the Funds are provided
under contracts that set forth the fees to be charged for these services. The
majority of these contracts are subject to annual review and approval by each
Fund's board of directors and shareholders. Company revenues are largely
dependent on the total value and composition of assets under management, which
include domestic and international equity and debt securities. Accordingly,
fluctuations in financial markets and composition of assets under management
impact revenues and results of operations. For 1999, management fees from the
United Income Fund were $44.4 million or 12% of total revenues. The United
Income Fund had a net asset value of $8.4 billion at December 31, 1999 and was
the Company's largest fund.
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 Corporation (together, "Torchmark").
The Company was wholly owned by Torchmark until March 4, 1998, when the Company
completed the initial public offering of its Class A Common Stock ("Offering"),
with the Company realizing net proceeds of approximately $516 million.
Approximately $481 million of the proceeds were used to prepay notes payable to
Torchmark. After giving effect to the Offering and prior to November 6, 1998,
Torchmark controlled in excess of 60% of the outstanding Class A and Class B
Common Stock, and in excess of 80% of the voting power of the outstanding
Class A and Class B Common Stock of the Company. 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 common stock of the
Company held by Torchmark.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. Amounts in the accompanying financial statements
and notes are rounded to the nearest thousand. Certain amounts in the prior year
financial statements have been reclassified to conform to the 1999 presentation.
USE OF ESTIMATES
The management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Given the nature of the Company's assets and liabilities, the Company
believes the amounts in the financial statements approximate fair value.
F-8
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
1. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION
(CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and short-term investments.
The Company considers all highly liquid debt instruments with original
maturities of 90 days or less to be cash equivalents.
INVESTMENT SECURITIES AND INVESTMENT IN AFFILIATED MUTUAL FUNDS
All investments in debt securities and mutual funds are classified as
available-for-sale. As a result, these investments are recorded at fair value.
Unrealized holding gains and losses, net of related tax effects, are excluded
from earnings until realized and are reported as a separate component of
comprehensive income. Realized gains and losses are computed using the specific
identification method for investment securities other than mutual funds. For
mutual funds, realized gains and losses are computed using the average cost
method.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk, as defined by SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH
CONCENTRATIONS OF CREDIT RISK, consist primarily of investments in U.S.
government and agency securities, municipal securities, corporate securities,
and affiliated money market and fixed income mutual funds and accounts
receivable. Credit risk is believed to be minimal in that the U.S. government
and agency securities are backed by the full faith and credit of the U.S.
government, municipal securities are backed by the full taxing power of the
issuing municipality or revenues from a specific project, corporate bonds are
backed by the assets of the corporations, and the affiliated mutual funds have
substantial net assets.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and unrealized gains (losses) on
available-for-sale securities and is presented in a separate statement of
comprehensive income.
PROPERTY AND EQUIPMENT AND INVESTMENT IN REAL ESTATE
Property and equipment and investment real estate are carried at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets.
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, arose in connection with the acquisition of the Company by
Torchmark and the August 1999 acquisition of Austin Calvert & Flavin, Inc.
("ACF") by the Company. Amortization related to the acquisition of the Company
by Torchmark is on a straight-line basis over 40 years. Amortization related to
the acquisition of ACF by the Company is on a straight-line basis over
25 years. The Company assesses the recoverability of goodwill by determining
whether the unamortized balance can be recovered through undiscounted future
operating cash flows over its remaining life. Impairment, if any, is measured by
the excess of the unamortized balance over discounted future operating cash
flows.
F-9
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
1. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION
(CONTINUED)
DEFERRED SALES COMMISSIONS
The Company defers certain costs, principally selling commissions, which are
paid to financial advisors in connection with the sale of certain shares of
Waddell & Reed funds and United funds. Beginning in the fourth quarter of 1999,
the Company began restructuring its mutual fund products at which time the
Waddell & Reed funds Class B shares were closed for new sales. Existing
Waddell & Reed funds Class B shares will be converted to Waddell & Reed funds
Class C shares in March 2000. The deferred acquisition costs associated with the
discontinued Waddell & Reed funds Class B shares were being amortized over the
life of the shareholder investments not to exceed ten years. As a result of the
discontinuation of these shares, the Company wrote off the balance of related
deferred acquisition costs in the amount of $18,981,000 in the fourth quarter of
1999. Upon conversion of the Waddell & Reed Class B shares, no contingent
deferred sales charge will be collected for any converted share redemptions.
Concurrent with the restructuring of mutual fund products, the United Funds
began selling Class B and Class C shares and the Waddell & Reed funds began
selling Class C shares. The deferred costs associated with the sale of United
funds Class B shares is amortized on a straight-line basis over the life of the
shareholders' investments not to exceed six years. The deferred costs associated
with the sale of United funds Class C shares and the Waddell & Reed funds
Class C shares are amortized on a straight-line basis not to exceed twelve
months. The Company recovers such costs through 12b-1 distribution fees, which
are paid by the Waddell & Reed funds and the United funds Class B and C shares
along with contingent deferred sales charges paid by shareholders who redeem
their shares prior to completion of the required holding periods.
REVENUE RECOGNITION
Investment advisory and administrative service fees are recognized when
earned. Commission revenues and expenses (and related receivables and payables)
resulting from securities transactions are recorded on the date on which the
order to buy or sell securities is executed.
ADVERTISING
Advertising costs are expensed as incurred. Amounts incurred were
$4,592,000, $2,845,000, and $1,046,000 for 1999, 1998 and 1997, respectively.
EARNINGS PER SHARE
The weighted average number of shares for basic earnings per share was
89,455,500, 98,680,500, and 99,700,500 for 1999, 1998 and 1997 respectively. The
weighted average number of shares used in computing diluted earnings per share,
which reflects the potential impact of stock options and restricted stock
awards, was 91,548,000, 99,268,500, and 99,700,500 for 1999, 1998 and 1997,
respectively. The average number of shares used for 1997 is the actual shares
outstanding at the Offering.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 1999 and 1998 include reserves of
$17,114,000 and $10,810,000, respectively, for the benefit of customers in
compliance with securities industry regulations. Substantially all such reserves
are in excess of federal deposit insurance limits.
F-10
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
3. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE
Investments at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
1999 COST GAINS LOSSES FAIR VALUE
---- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
United States government-backed
mortgage securities................ $ 2,136 2 (3) 2,135
Municipal bonds...................... 39,225 7 (1,959) 37,273
Corporate bonds...................... 36,478 0 (822) 35,656
Preferred stock...................... 3,200 0 0 3,200
Affiliated mutual funds.............. 10,202 1,842 (63) 11,981
------- ----- ------ ------
$91,241 1,851 (2,847) 90,245
======= ===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED
1998 COST GAINS LOSSES FAIR VALUE
---- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
United States government-backed
mortgage securities............... $ 2,944 50 0 2,994
Municipal bonds..................... 47,030 1,300 (56) 48,274
Corporate bonds..................... 41,012 120 (1,125) 40,007
Preferred stock..................... 8,292 119 0 8,411
Affiliated mutual funds............. 3,547 25 (105) 3,467
-------- ----- ------ -------
$102,825 1,614 (1,286) 103,153
======== ===== ====== =======
</TABLE>
Municipal and corporate bonds held as of December 31, 1999 mature as
follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Within one year........................................... $ 2,005 2,035
After one year but within five years...................... 29,663 29,470
After five years but within ten years..................... 19,262 19,064
After ten years........................................... 24,773 22,360
------- ------
$75,703 72,929
======= ======
</TABLE>
In 1999, investment securities with fair value of $635,000 were sold, which
resulted in realized gain of $6,000. In 1998, investment securities with fair
value of $24,020,000 were sold, which resulted in realized losses of $171,000.
4. ACQUISITION OF SUBSIDIARY
On August 9, 1999, the Company acquired Austin, Calvert & Flavin, Inc.
("ACF") in a business combination accounted for as a purchase. ACF, based in San
Antonio, TX, is primarily engaged in managing investments for trusts, high net
worth families and individuals, and pension plans of corporations, hospitals,
schools, labor unions, endowments, and foundations. The results of operations
F-11
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
4. ACQUISITION OF SUBSIDIARY (CONTINUED)
of ACF are included on the accompanying financial statements since the date of
acquisition. The total cost of the acquisition, including expenses, was
$21,168,000, which exceeded the fair value of the net assets of ACF by
$20,289,000. The excess is being amortized on a straight-line basis over
25 years. 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.
A summary of the net assets acquired is as follows (in thousands):
<TABLE>
<S> <C>
Assets acquired
Cash...................................................... $ 1,611
Accounts Receivable....................................... 1,464
Goodwill.................................................. 20,289
Other assets.............................................. 156
-------
Total..................................................... 23,520
Liabilities assumed......................................... 2,352
Total Purchase Price........................................ $21,168
=======
</TABLE>
The table below presents supplemental pro forma information for 1999 and
1998 as if the ACF acquisition were made on January 1, 1998 at the same purchase
price, based on estimates and assumptions considered appropriate:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues......................................... $360,593,000 $293,616,000
Net Income....................................... 81,808,000 83,744,000
Net Income per common share
Basic.......................................... 0.91 0.85
Diluted........................................ 0.89 0.85
</TABLE>
5. INVESTMENT IN REAL ESTATE
A summary of investment in real estate at December 31, 1998 is as follows
(in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C> <C>
Land.................................................... 3,886
Buildings............................................... 17,868 40 years
-------
Investment in real estate, at cost...................... 21,754
Less accumulated depreciation........................... 0
-------
Investment real estate, net............................. $21,754
=======
</TABLE>
Effective January 1, 1997, the Company contributed its investment in real
estate, which consisted of commercial properties located adjacent to its offices
in Overland Park, Kansas to TMK Income
F-12
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
5. INVESTMENT IN REAL ESTATE (CONTINUED)
Properties, LP ("TIP") in exchange for a limited partnership interest in TIP.
TIP is a limited partnership with Torchmark affiliates that was formed for the
purpose of acquiring, developing, and managing real estate property. The
property was transferred at its net book value. Effective July 1, 1997, the
Company contributed additional land and improvements with a net book value of
$5,113,000 for an additional 5% interest in TIP. In late 1998, the Company
ceased its participation in TIP. In exchange for its partnership interest, the
Company received the property which it had originally contributed. Additionally,
the Company reimbursed TIP $5,913,000 for improvements made to that property
while it was in the partnership.
Effective December 28, 1999, the Company sold its investments in
multi-tenant real estate properties to unrelated third parties. These properties
included four commercial buildings and land. Net proceeds from the sale were
$16,452,000 which resulted in a $4,592,000 pre-tax loss.
Net rental income was $1,026,000 for the year ended 1999 and real estate
partnership income was $465,000 and $199,000 for the years ended December 31,
1998 and 1997, respectively. Depreciation expense for the years ended
December 31, 1999, 1998 and 1997 was $0, $0 and $18,000, respectively.
6. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
ESTIMATED
1999 1998 USEFUL LIVES
-------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land............................................ $ 5,260 4,680 --
Building........................................ 10,240 6,258 40 years
Furniture and fixtures.......................... 11,229 6,992 3-10 years
Equipment and machinery......................... 14,718 13,903 3-10 years
------- ------
Property and equipment, at cost................. 41,447 31,833
Less accumulated depreciation................... 13,814 11,184
------- ------
Property and equipment, net..................... $27,633 20,649
======= ======
</TABLE>
7. REVOLVING CREDIT AGREEMENT
In October of 1999, the Company renewed its $220 million revolving credit
facility, expandable to $330 million, with a syndicate of eight banks. The
credit facility is a 364-day revolving facility with an interest rate of LIBOR
plus .625% plus an additional .125% fee when utilization of the facility exceeds
50%. The facility provides an additional source of capital to finance share
repurchases, acquisitions and other general corporate needs. As of December 31,
1999, the Company had $125 million outstanding on this facility. The credit
agreement stipulates two financial condition covenants. The consolidated
leverage ratio cannot exceed 3.0 to 1.0 for four consecutive quarters. The
consolidated leverage ratio is defined as consolidated total debt to
consolidated earnings before interest costs, income taxes, depreciation and
amortization ("EBITDA"). The consolidated interest coverage ratio cannot be less
than 4.0 to 1.0 for four consecutive quarters. Consolidated interest coverage
ratio is defined as consolidated EBITDA to consolidated interest expense. The
Company was in compliance with these covenants at December 31, 1999.
F-13
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
8. TRANSACTIONS WITH RELATED PARTIES
Until the Offering in March of 1998, the Company was 100% owned by
Torchmark. In November of 1998, Torchmark disposed of its remaining interest in
the Company through a tax-free distribution to its shareholders. The Company
serves as investment advisor to Torchmark and its affiliates and receives
advisory fees for this service. Advisory fees, which are based on assets under
management, amounted to $1,413,000, $2,401,000, and $1,241,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. These commissions were
earned under contracts, which have been renewed for 2000 with substantially the
same terms.
The Company earns commissions from UILIC, a Torchmark subsidiary, for
marketing life and health insurance products and variable annuities. For the
years ended December 31, 1999, 1998 and 1997, the commissions amounted to
$46,379,000, $36,724,000, and $30,612,000, respectively.
Prior to the Offering, Torchmark performed certain administrative services
for the Company. Charges for such services were allocated based on a defined
formula that prorated Torchmark's total costs for services provided based on
each affiliate's assets and compensation expense. These charges were $2,008,000
for the year ended December 31, 1997. During 1999 and 1998, no charges were made
pertaining to these administrative services because the Company is no longer an
affiliate of Torchmark.
Effective September 1997, Waddell & Reed Asset Management Company
("WRAMCO"), a subsidiary of the Company, was distributed to Torchmark at its net
book value of $2,977,000. WRAMCO provides investment management services to
institutional investors and privately managed accounts. Subsequent to the
distribution date, the Company provides investment advisory services to WRAMCO
and receives a fee based on assets under management.
At December 31, 1999 and 1998, there were no amounts due from Torchmark and
its affiliates other than normal non-interest bearing amounts for current fees
and commissions due from the sale of Torchmark products.
9. INCOME TAXES
The components of total income tax expense are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently payable:
Federal.......................................... $46,608 46,845 38,939
State............................................ 7,044 6,934 5,889
------- ------ ------
53,652 53,779 44,828
Deferred taxes..................................... (3,394) (2,016) 27
------- ------ ------
Income tax expense from operations................. $50,258 51,763 44,855
------- ------ ------
Stockholders' equity-unrealized gain (loss) on
investment securities available- for-sale........ (511) (86) 110
------- ------ ------
Total income taxes................................. $49,747 51,677 44,965
======= ====== ======
</TABLE>
F-14
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
9. INCOME TAXES (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of deferred tax liabilities and deferred tax assets at December 31,
1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax liabilities:
Deferred acquisition costs........................ $ (703) (5,732) (4,680)
Fixed assets...................................... (328) 0 (824)
Other............................................. (391) (648) (500)
------- ------ ------
Total gross deferred liabilities.................... (1,422) (6,380) (6,004)
------- ------ ------
Deferred tax assets:
Benefit plans..................................... 4,203 3,824 3,557
Accrued expenses.................................. 2,921 2,674 1,442
Fixed assets...................................... 0 983 0
------- ------ ------
Total gross deferred assets......................... 7,124 7,481 4,999
------- ------ ------
Net deferred tax asset (liability).................. $ 5,702 1,101 (1,005)
======= ====== ======
</TABLE>
A valuation allowance for deferred tax assets was not necessary at
December 31, 1999, 1998, and 1997. The following table reconciles the statutory
federal income tax rate to the Company's effective income tax rate:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate................... 35.0% 35.0 35.0
State income taxes, net of federal tax benefits..... 3.3 3.3 3.3
Other items......................................... (0.2) (0.1) 0.7
------- ------ ------
Effective income tax rate........................... 38.1% 38.2 39.0
======= ====== ======
</TABLE>
10. RETIREMENT PLAN
The Company participates in a noncontributory retirement plan which covers
substantially all employees of the Company and certain vested former employees
of Torchmark. Benefits payable under the plan are based on employees' years of
service and compensation during the final ten years of
F-15
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
10. RETIREMENT PLAN (CONTINUED)
employment. This plan invests in equity securities of large capitalization
companies, investment grade corporate and government bonds, and cash and cash
equivalents.
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year................... $31,254 28,979
Service cost.............................................. 2,328 1,612
Interest cost............................................. 2,387 2,294
Actuarial loss (gain)..................................... (847) 2,733
Benefits paid............................................. (1,294) (4,364)
------- ------
Benefit obligation at end of year......................... $33,828 31,254
======= ======
Change in plan assets:
Fair value of plan assets at beginning of year............ $28,066 25,689
Actual return on plan assets.............................. 6,859 5,249
Company contribution...................................... 3,456 1,492
Benefits paid............................................. (1,294) (4,364)
------- ------
Fair value of plan assets at end of year.................. $37,087 28,066
======= ======
Funded status of plan....................................... $ 3,260 (3,188)
Unrecognized actuarial gain................................. (8,036) (3,097)
Unrecognized prior service cost............................. 628 673
Unrecognized net transition obligation...................... 98 103
------- ------
Net amount recognized....................................... $(4,050) (5,509)
======= ======
Weighted average assumptions as of December 31:
Discount rate............................................. 8.00% 6.75%
Expected return on plan assets............................ 9.25% 9.25%
Rate of compensation increase............................. 5.50% 3.75%
Components of net periodic benefit cost:
Service cost.............................................. $ 2,328 1,612
Interest cost............................................. 2,387 2,294
Expected return on assets................................. (2,607) (2,407)
Prior service cost amortization........................... 44 44
Transition obligation amortization........................ 5 5
------- ------
Net periodic benefit cost................................. $ 2,157 1,548
======= ======
</TABLE>
F-16
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors an unfunded defined benefit postretirement medical plan
that covers substantially all employees. The plan is contributory with retiree
contributions adjusted annually.
<TABLE>
<CAPTION>
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year.................. $ 1,151 1,142
Service cost............................................. 76 64
Interest cost............................................ 90 92
Actuarial (gain) loss.................................... 28 (70)
Retiree contributions.................................... 71 75
Benefits and expenses paid............................... (147) (152)
------- ------
Benefit obligation at end of year........................ $ 1,269 1,151
======= ======
Change in plan assets:
Fair values of plan assets at beginning of year.......... $ 0 0
Company contribution..................................... 76 77
Retiree contributions.................................... 71 75
Benefits and expenses paid............................... (147) (152)
Fair value of plan assets at end of year................. $ 0 0
------- ------
Funded status.............................................. $(1,269) (1,151)
Unrecognized loss.......................................... 90 62
Unrecognized prior service cost............................ (160) (175)
------- ------
Accrued benefit cost at December 31...................... $(1,339) (1,264)
======= ======
Weighted average assumptions as of December 31:
Discount rate............................................ 7.75% 7.50%
Components of net periodic benefit cost:
Service cost............................................. 76 64
Interest cost............................................ 90 92
Unrecognized amortization of prior service cost.......... (15) (15)
Unrecognized net actuarial gain.......................... 0 0
------- ------
Net periodic benefit cost................................ $ 151 141
======= ======
</TABLE>
For measurement purposes, the health care cost trend rate was 7.5% and 8% in
1999 and 1998, respectively. The effect of a 1% annual increase in assumed cost
trend rates would increase the December 31, 1999 accumulated postretirement
benefit obligation by approximately $286,000, and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for the
year ended December 31, 1999 by approximately $56,000. The effect of a 1% annual
decrease in assumed cost trend rates would decrease the December 31, 1999
accumulated postretirement benefit obligation by approximately $249,000, and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended December 31, 1999 by
approximately $48,000.
F-17
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
12. SAVINGS AND INVESTMENT PLANS
The Company has a savings and investment plan covering substantially all
employees. Until December 31, 1998, this plan provided for a matching Company
contribution of 50% of the employee's investment in mutual fund shares and/or
stock, not to exceed 3% of the employee's salary. The Company's contributions to
the savings and investment plan for the years ended December 31, 1998 and 1997
were $858,000, and $716,000, respectively. On January 1, 1999, the Company
adopted a 401(k) plan for employees. This plan provides for a 100% Company match
on the first 3% of income and 50% on the next 2% of income, not to exceed 4% of
the employee's eligible salary. The Company's contribution to the 401(k) plan
for the year ended December 31, 1999 was $1,413,000.
13. EMPLOYEE STOCK OPTIONS
The Company has a fixed employee stock-based compensation plan ("Option
Plan"), whereby the Company may grant options on its Class A Common Stock. The
exercise price of each option is equal to the market price of the stock on the
date of grant. The maximum term of the options is generally ten years and two
days and generally vests one-third in each of the three years starting two years
after grant date. In October 1995, the FASB issued Statement No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123), which was effective for the Company
beginning January 1, 1996. SFAS No. 123 defines the "fair value method" of
accounting for employee stock options. It also allows accounting for such
options under the "intrinsic value method" in accordance with Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB
No. 25) and related interpretations which is the method used by the Company. If
a company elects to use the intrinsic value method, pro forma disclosures of
earnings and earnings per share are required as if the fair value method of
accounting was applied.
Pursuant to SFAS No 123, the fair value of each option has been estimated
using a Black-Scholes option-pricing model with the following assumptions:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Dividend yield.............................................. 2.10% 2.34%
Risk-free interest rate..................................... 5.97 5.20
Expected volatility......................................... 28.60 29.70
Expected life (in years).................................... 4.71 4.71
</TABLE>
After the spin off from Torchmark, holders of Torchmark stock options
granted prior to 1998 were given a choice to retain their Torchmark options or
convert their options into options of the Company ("Conversion Options").
Employees and directors of the Company who held Torchmark options could elect to
convert all of their Torchmark options into Conversion Options. In total
5,541,150 Conversion Options were converted from Torchmark options. The
Conversion Options retained the same terms as the previous Torchmark options
except that the exercise price and the number of shares were adjusted so that
the aggregate intrinsic value of the options remained the same.
F-18
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
13. EMPLOYEE STOCK OPTIONS (CONTINUED)
Prior to 1998, there were no Company stock options outstanding. A summary of
stock option activity and related information for the year ended December 31,
1999 follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year.......... 12,124,782 $12.45 0 0
Granted................................. 3,151,646 16.62 6,583,632 $15.09
Granted in restoration.................. 1,887,594 16.76 0 0
Exercised............................... (116,213) 7.47 0 0
Exercised in restoration................ (2,599,208) 8.69 0 0
Expired................................. (100,776) 14.87 0 0
Converted............................... 0 0 5,541,150 9.31
---------- ------ ---------- ------
Outstanding, end of year................ 14,347,825 $14.63 12,124,782 $12.45
========== ====== ========== ======
Exercisable, end of year................ 2,853,326 $11.08 4,436,739 $ 9.61
========== ====== ========== ======
</TABLE>
The range of fair values of options granted during the year was $3.31 to
$4.95, with a weighted average fair value of $4.45.
Had compensation cost for the options granted been determined on the basis
of fair value pursuant to SFAS No. 123, net income and earnings per share would
have been as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net income (in thousands)
As reported............................................. $81,767 $83,735
Pro forma............................................... $77,141 $79,744
Basic earnings per share
As reported............................................. $ 0.91 $ 0.85
Pro forma............................................... $ 0.86 $ 0.81
Diluted earnings per share
As reported............................................. $ 0.89 $ 0.85
Pro forma............................................... $ 0.84 $ 0.81
</TABLE>
F-19
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
13. EMPLOYEE STOCK OPTIONS (CONTINUED)
Following is a summary of options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------
WEIGHTED AVERAGE EXERCISABLE OPTIONS
REMAINING ----------------------------
EXERCISE PRICE CONTRACTUAL LIFE WEIGHTED AVERAGE WEIGHTED AVERAGE
YEAR OF GRANT RANGE NUMBER (IN YEARS) EXERCISE PRICE NUMBER EXERCISE PRICE
------------- -------------- ---------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
*1991-1996........... $ 5.44-9.23 1,022,111 6.6 $ 7.68 1,006,778 $ 7.71
*1997................ $ 8.03-12.51 1,809,041 7.8 $11.25 1,378,980 $12.18
1998-1999........... $13.06-17.71 11,516,675 9.1 $15.77 467,568 $15.15
</TABLE>
------------------------
* Options granted prior to 1998 represented options on Torchmark common
stock granted by Torchmark prior to the Company's March 4, 1998 initial public
offering. These options were converted to options on the Company's common stock
on November 6, 1998, concurrent with Torchmark's distribution of the Company's
stock to its shareholders (spin-off).
14. UNIFORM CAPITAL RULE REQUIREMENTS
Waddell & Reed, Inc. ("W&R") a subsidiary of the Company, is a registered
broker-dealer and a member of the National Association of Securities
Dealers, Inc. and is therefore subject to a requirement of the Commission's
Uniform Net Capital Rule, requiring the maintenance of certain minimal capital
levels. At December 31, 1999, W&R had net capital, as defined by the Uniform
Capital Rule, of $13,013,000 which is $9,061,000 in excess of the required net
capital.
15. COMMITMENTS AND CONTINGENCIES
RENTAL EXPENSE AND LEASE COMMITMENTS
The Company rents certain sales and other office space under long-term
operating leases. Rent expense was $7,074,000, $4,937,000, and $4,397,000 and
for the years ended, December 31, 1999, 1998 and 1997, respectively. Future
minimum rental commitments under noncancelable operating leases are as follows:
The Company had minimum remaining rental commitments for the years ended
December 31 (in thousands):
<TABLE>
<S> <C>
2000........................................................ $4,767
2001........................................................ 1,988
2002........................................................ 1,068
2003........................................................ 503
2004........................................................ 234
Thereafter.................................................. 0
------
$8,560
======
</TABLE>
New leases are expected to be executed as existing leases expire. Thus,
future minimum lease commitments are not expected to be less than those in 2000.
F-20
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTINGENCIES
From time to time, the Company is a party to various claims arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, it is unlikely that any adverse determination in one or more
pending claims would have a material adverse effect on the Company's financial
position or results of operations.
16. SUBSEQUENT EVENTS
STOCK SPLIT
On February 23, 2000, the Company declared a three-for-two stock split on
the Company's Class A and Class B common stock payable April 7, 2000 to
stockholders of record as of March 17, 2000. All per share and share outstanding
data in the consolidated financial statements and related notes have been
restated to reflect the stock split for all periods presented.
F-21
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
ASSETS ------------- ------------
(UNAUDITED)
<S> <C> <C>
Assets:
Cash and cash equivalents................................. $ 59,103 60,977
Investment securities, available-for-sale................. 71,458 90,245
Receivables:
Mutual Funds............................................ 12,632 7,597
Customers and other..................................... 28,187 19,541
Current income taxes...................................... 4,717 --
Deferred income taxes..................................... 44 37
Prepaid expenses and other current assets................. 5,136 7,111
-------- --------
Total current assets.................................... 181,277 185,508
-------- --------
Property and equipment, net............................... 48,393 27,633
Deferred sales commissions, net........................... 9,191 1,851
Goodwill (net of accumulated amortization of $30,470 and
$26,493)................................................ 168,589 112,994
Deferred income taxes..................................... 192 5,665
Other assets.............................................. 2,724 1,422
-------- --------
Total assets............................................ $410,366 335,073
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable........................................ $ 30,778 34,002
Accrued sales force compensation........................ 17,231 14,578
Short term notes payable................................ 200,341 125,307
Income taxes payable.................................... -- 8,284
Other current liabilities............................... 21,668 16,456
-------- --------
Total current liabilities............................... 270,018 198,627
-------- --------
Accrued pensions and post-retirement costs................ 12,872 10,103
Other liabilities......................................... 259 --
-------- --------
Total liabilities....................................... 283,149 208,730
-------- --------
Stockholders' equity:
Common stock (See table below)............................ 997 997
Additional paid-in capital................................ 252,358 238,434
Retained earnings......................................... 179,351 97,129
Deferred compensation..................................... (10,177) (11,246)
Treasury stock (See table below).......................... (295,126) (198,360)
Accumulated other comprehensive income.................... (186) (611)
-------- --------
Total stockholders' equity.............................. 127,217 126,343
-------- --------
Total liabilities and stockholders' equity.................. $410,366 335,073
======== ========
</TABLE>
<TABLE>
<CAPTION>
2000 1999
COMMON STOCK ------------------------- -------------------------
($.01 PAR VALUE) CLASS A CLASS B CLASS A CLASS B
---------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Authorized.............................. 225,000,000 150,000,000 225,000,000 150,000,000
Issued.................................. 48,213,261 51,487,500 48,213,261 51,487,500
Outstanding............................. 43,471,008 40,245,617 44,478,318 41,971,870
Treasury Stock.......................... 4,742,253 11,241,883 3,734,943 9,515,630
</TABLE>
See accompanying notes to consolidated financial statements.
F-22
<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 FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Investment management fees.......................... $64,619 $47,091 $190,725 $124,114
Underwriting and distribution fees.................. 49,500 30,466 150,872 94,056
Shareholder service fees............................ 13,938 10,622 38,836 30,716
Investment and other revenue........................ 1,869 2,090 8,010 7,561
------- ------- -------- --------
Total revenue..................................... 129,926 90,269 388,443 256,447
------- ------- -------- --------
Expenses:
Underwriting and distribution....................... 45,436 30,703 136,746 92,947
Compensation and related costs...................... 14,126 10,991 42,550 29,734
General and administrative.......................... 7,118 5,275 21,171 13,820
Depreciation........................................ 917 551 2,433 1,613
Interest expense.................................... 4,058 1,904 10,825 3,910
Amortization of goodwill............................ 1,525 845 3,977 2,297
------- ------- -------- --------
Total expenses.................................... 73,180 50,269 217,702 144,321
------- ------- -------- --------
Income before provision for income taxes.............. 56,746 40,000 170,741 112,126
Provision for income taxes............................ 22,215 15,320 66,374 42,674
------- ------- -------- --------
Net income........................................ $34,531 $24,680 $104,367 $ 69,452
======= ======= ======== ========
Net income per share:
-- Basic............................................ $ 0.42 $ 0.28 $ 1.25 $ 0.77
-- Diluted.......................................... $ 0.40 $ 0.27 $ 1.20 $ 0.75
======= ======= ======== ========
Weighted average shares outstanding:
-- Basic............................................ 83,152 87,860 83,339 90,453
-- Diluted.......................................... 87,179 89,975 86,874 92,679
======= ======= ======== ========
Dividends declared per common share................... $0.0884 $0.0884 $ 0.2652 $ 0.2652
</TABLE>
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2000
UNAUDITED (IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED DEFERRED TREASURY
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION STOCK
-------- -------- ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999............... 99,701 $997 238,434 97,129 (11,246) (198,360)
Net income................................. -- -- -- 104,367 -- --
Recognition of deferred compensation....... -- -- -- -- 1,069 --
Dividends paid............................. -- -- -- (22,145) -- --
Exercise of stock options, net............. -- -- (18,392) -- -- (589)
Tax benefit from exercise of options....... -- -- 32,316 -- -- --
Treasury stock repurchases................. -- -- -- -- -- (96,177)
Unrealized loss on investment securities... -- -- -- -- -- --
------ ---- ------- ------- ------- --------
Balance at September 30, 2000.............. 99,701 $997 252,358 179,351 (10,177) (295,126)
====== ==== ======= ======= ======= ========
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
INCOME EQUITY
-------------- -------------
<S> <C> <C>
Balance at December 31, 1999............... (611) 126,343
Net income................................. -- 104,367
Recognition of deferred compensation....... -- 1,069
Dividends paid............................. -- (22,145)
Exercise of stock options, net............. -- (18,981)
Tax benefit from exercise of options....... -- 32,316
Treasury stock repurchases................. -- (96,177)
Unrealized loss on investment securities... 425 425
---- -------
Balance at September 30, 2000.............. (186) 127,217
==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ----------------------
2000 1999 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income............................................. $34,531 24,680 $104,367 69,452
Other comprehensive income:
Net unrealized appreciation (depreciation) of
investments during the period, net of income taxes
of $(17), $(301), $1,087 and $(926)................ (30) (485) 1,745 (1,491)
Reclassification adjustment for amounts included in
net income, net of income taxes of $(4), $72,
$(826),
and $(40).......................................... (6) 115 (1,320) (63)
------- ------ -------- ------
Comprehensive Income................................... $34,495 24,310 $104,792 67,898
======= ====== ======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $104,367 $ 69,452
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................... 6,460 3,910
Recognition of deferred compensation................ 1,069 1,030
(Gain)/loss on sale of investments.................. (2,096) 52
(Gain)/loss on sale and retirement of fixed
assets............................................ (1) 32
Capital gains and dividends reinvested.............. (106) (94)
Deferred income taxes............................... 5,272 2,176
Changes in assets and liabilities (net of
acquisition):
Receivables from funds.......................... (5,035) (2,378)
Other receivables............................... (1,406) 6,917
Other assets.................................... (6,219) (5,751)
Accounts payable................................ (3,260) 4,170
Other liabilities............................... 21,802 3,995
-------- ---------
Net cash provided by operating activities................. 120,847 83,511
-------- ---------
Cash flows from investing activities:
Additions to investment securities...................... (18,032) (2,776)
Proceeds from sale of investment securities............. 37,773 14,660
Proceeds from maturity of investment securities......... 2,299 856
Additions to property and equipment..................... (22,168) (6,612)
Investment in real estate............................... -- 551
Acquisition of subsidiaries (net of cash acquired)...... (60,290) (19,410)
-------- ---------
Net cash used in investing activities..................... (60,418) (12,731)
-------- ---------
Cash flows from financing activities:
Net borrowings on credit facility....................... 75,000 115,000
Cash dividends.......................................... (22,145) (24,303)
Purchase of treasury stock.............................. (96,177) (125,960)
Stock option exercises -- net payments.................. (26,055) (8,295)
Exercise of stock options............................... 7,074 462
-------- ---------
Net cash used in financing activities..................... (62,303) (43,096)
-------- ---------
Net increase/(decrease) in cash and cash equivalents...... (1,874) 27,684
Cash and cash equivalents at beginning of period.......... 60,977 30,180
-------- ---------
Cash and cash equivalents at end of period................ $ 59,103 57,864
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION:
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Waddell & Reed Financial, Inc. and subsidiaries (the "Company") derive their
revenues primarily from investment management, distribution, administration, and
related services provided to the Waddell & Reed Advisors Funds ("Advisors
Funds"), W&R Funds, W&R Target Funds ("Target Funds") and institutional accounts
in the United States.
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, 2000 and 1999 and its financial
position at September 30, 2000. These financial statements should be read in
conjunction with the Company's audited consolidated financial statements for the
year ended December 31, 1999, from which the accompanying balance sheet as of
December 31, 1999 was derived. The operating results and cash flows for the
periods ended September 30, 2000 are not necessarily indicative of the results
that will be achieved in future periods.
STOCK SPLIT
On February 23, 2000, the Company declared a three-for-two stock split on
the Company's Class A and Class B common stock payable April 7, 2000 to
stockholders of record as of March 17, 2000 and effected April 10, 2000. All per
share and share outstanding data in the consolidated financial statements and
related notes have been restated to reflect the stock split for all periods
presented.
ACQUISITION OF SUBSIDIARY
On March 31, 2000, the Company completed its acquisition of The Legend Group
("Legend"), a privately-held mutual fund distribution and retirement planning
company based in Palm Beach Gardens, Florida. The acquisition has been accounted
for as a purchase and, accordingly, the results of Legend are included with
those of the Company commencing on the date of acquisition. The purchase price
of $61,403,000, including direct costs, has been allocated to the assets
acquired and liabilities assumed resulting in goodwill of $59,571,000, which is
being amortized on a straight line basis over 25 years.
The purchase agreement provides for additional purchase price payments
contingent upon the achievement by Legend of specified earnings levels over the
next three years. These contingent payments could aggregate to as much as $14.0
million.
F-27
<PAGE>
WADDELL & REED FINANCIAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the net assets acquired is as follows (in thousands):
<TABLE>
<S> <C>
Assets acquired
Cash and cash equivalents................................. $ 1,113
Accounts receivable....................................... 7,156
Goodwill.................................................. 59,571
Other assets.............................................. 1,949
-------
Total..................................................... 69,789
Liabilities assumed......................................... 8,386
-------
Total purchase price........................................ $61,403
=======
</TABLE>
LIQUIDITY AND CAPITAL
On July 11, 2000, the Company declared a dividend payable on November 1,
2000 in the amount of $.0884 per share to shareholders of record as of October
11, 2000. The total dividend paid was $7,401,000.
Excluding share repurchases used to satisfy stock option exercises, the
Company did not repurchase shares of its common stock during the three month
period ended September 30, 2000. For the nine month period ended September 30,
2000, the Company repurchased 4,747,292 Class A and Class B common shares at an
average price of $20.24 per share, on a post-split basis.
EARNINGS PER SHARE
Basic earnings per share for the 2000 and 1999 periods are based on the
average number of shares outstanding for the periods ended September 30, 2000
and 1999, respectively. Diluted earnings per share for these periods also
includes the dilutive impact of stock options.
F-28
<PAGE>
P R O S P E C T U S
$400,000,000.00
WADDELL & REED FINANCIAL, INC.
SENIOR DEBT SECURITIES
JUNIOR SUBORDINATED DEBT SECURITIES
WARRANTS AND WARRANT SPREADS
COMMON STOCK
WADDELL & REED CAPITAL TRUST I
TRUST PREFERRED SECURITIES
(FULLY AND UNCONDITIONALLY GUARANTEED ON A SUBORDINATED BASIS, AS DESCRIBED
HEREIN, BY WADDELL & REED FINANCIAL, INC.)
This prospectus contains a general description of the securities which
WADDELL & REED FINANCIAL, INC. and/or WADDELL & REED Capital Trust I may offer
for sale. The specific terms of the securities will be contained in one or more
supplements to this prospectus. Read the prospectus and any supplement carefully
before you invest.
------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
This prospectus may not be used to sell securities unless accompanied by
a prospectus supplement.
------------------
The date of this prospectus is January 12, 2001.
<PAGE>
SUMMARY
This document is called a prospectus. This summary highlights selected
information from this prospectus and may not contain all of the information that
is important to you. To understand the terms of the securities, you should
carefully read this prospectus with the attached prospectus supplement. This
prospectus and the prospectus supplement together give the specific terms of the
securities being offered. You should also read the documents referred to under
the heading, "Where You Can Find More Information About the Company and
WADDELL & REED Capital Trust I" for information on WADDELL & REED FINANCIAL,
INC. and its financial statements. The Company has its principal offices at 6300
Lamar Avenue, Overland Park, Kansas 66202 (telephone: 913-236-2000). Certain
capitalized terms used in this summary are defined elsewhere in this prospectus.
WADDELL & REED FINANCIAL, INC., a Delaware corporation (also referred to
as the "Company", "WADDELL & REED", "us" or "we"), and WADDELL & REED Capital
Trust I, a statutory business trust formed under the laws of the State of
Delaware (also referred to as "WADDELL & REED Capital Trust I") has filed a
registration statement with the Securities and Exchange Commission under a
"shelf" registration procedure. Under this procedure the Company may offer and
sell from time to time, in one or more series, up to $400,000,000.00, or the
equivalent in one or more foreign currencies, including composite currencies
such as the Euro, of any of the following securities:
- senior debt securities,
- junior subordinated debt securities,
- warrants, including warrant spreads,
- common stock,
- trust preferred securities of WADDELL & REED Capital Trust I, and
- guarantees, described below, relating to the trust preferred securities
of WADDELL & REED Capital Trust I.
The securities may be sold for U.S. dollars, foreign-denominated currency
or currency units; amounts payable with respect to any such securities may be
payable in U.S. dollars or foreign-denominated currency or currency units.
This prospectus provides you with a general description of the securities
we may offer. Each time we offer securities, we will provide you with a
prospectus supplement that will describe the specific amounts, prices and terms
of the securities being offered. The prospectus supplement may also add, update
or change information contained in this prospectus.
The prospectus supplement will also contain information about certain
United States federal income tax considerations relating to the securities
covered by the prospectus supplement.
The Company and WADDELL & REED Capital Trust I may sell securities to
underwriters who will sell the securities to the public on terms fixed at the
time of sale. In addition, the securities may be sold by the Company and
WADDELL & REED Capital Trust I directly or through dealers or agents designated
from time to time, which agents may be affiliates of the Company and WADDELL &
REED Capital Trust I. If the Company, directly or through agents, solicits
offers to purchase the securities, the Company reserves the sole right to accept
and, together with its agents, to reject, in whole or in part, any such offer.
The prospectus supplement will also contain, with respect to the
securities being sold, the names of the underwriters, dealers or agents, if any,
together with the terms of offering, the compensation of such underwriters and
the net proceeds to the Company and WADDELL & REED Capital Trust I.
Any underwriters, dealers or agents participating in the offering may be
deemed "underwriters" within the meaning of the Securities Act of 1933.
1
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION ABOUT THE COMPANY
AND WADDELL & REED CAPITAL TRUST I
The Company and WADDELL & REED Capital Trust I have filed a registration
statement with the SEC. This prospectus is part of the registration statement
but the registration statement also contains additional information and
exhibits. The Company also files proxy statements, annual, quarterly and special
reports, and other information with the SEC. You may read and copy the
registration statement and any reports, proxy statements and other information
at the public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549 and the SEC's Regional Offices in New York, New
York and Chicago, Illinois.
You can call the SEC for further information about its public reference
rooms at 1-800-732-0330. Such material is also available at the SEC's website at
"http://www.sec.gov."
You can also inspect reports, proxy statements and other information
about the Company at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York.
The SEC allows the Company to incorporate documents by reference in this
prospectus. This means that by listing or referring to a document which the
Company has filed with the SEC in this prospectus, that document is considered
to be a part of this prospectus and should be read with the same care. When the
Company updates the information contained in documents which have been
incorporated by reference, by making future filings with the SEC, the
information incorporated by reference in this prospectus is considered to be
automatically updated.
The documents listed below are incorporated by reference into this
prospectus:
<TABLE>
<CAPTION>
COMPANY SEC FILINGS PERIOD
------------------- ------
<S> <C>
Annual Report on Form 10-K........... Year ended December 31, 1999
Quarterly Reports on Form 10-Q....... Quarter ended June 30, 2000
Current Reports on Form 8-K.......... Dated:
- February 28, 2000
- March 7, 2000
- March 31, 2000
Current Report on Form 8-K/A......... Dated March 31, 2000
</TABLE>
The Company also incorporates by reference additional documents that it
may file with the SEC between the date of this prospectus and the termination of
the offering of the securities. These documents include periodic reports, such
as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as well as proxy statements.
You can obtain any of the documents incorporated by reference in this
document through us, or from the SEC through the SEC's web site at the address
described above. Documents incorporated by reference are available from us
without charge, excluding any exhibits to those documents unless the exhibit is
specifically incorporated by reference as an exhibit in this prospectus. You can
obtain documents incorporated by reference in this prospectus by requesting them
in writing or by telephone from us at the following address and telephone
number:
Investor Relations
WADDELL & REED FINANCIAL, INC.
6300 Lamar Avenue
Overland Park, Kansas 66202
(913) 236-2000
If you request any incorporated documents from us, we will mail them to
you by first class mail, or another equally prompt means, after we receive your
request.
2
<PAGE>
YOU SHOULD ONLY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR
ANY PROSPECTUS SUPPLEMENT OR INCORPORATED BY REFERENCE. THE COMPANY HAS NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
No separate financial statements of WADDELL & REED Capital Trust I are
included in this prospectus. The Company and WADDELL & REED Capital Trust I do
not consider that such financial statements would be material to holders of the
trust preferred securities because WADDELL & REED Capital Trust I is a newly
formed special purpose entity, has no operating history or independent
operations and is not engaged in and does not propose to engage in any activity
other than holding as trust assets the Corresponding Junior Subordinated Debt
Securities (as defined below under the heading "WADDELL & REED Capital Trust I")
of the Company and issuing the trust securities.
Furthermore, taken together, the Company's obligations under each series
of Corresponding Junior Subordinated Debt Securities, the Junior Indenture under
which the Corresponding Junior Subordinated Debt Securities will be issued, the
related Declaration and the related Preferred Securities Guarantee provide, in
the aggregate, a full, irrevocable and unconditional guarantee of payments of
distributions and other amounts due on the related preferred securities of
WADDELL & REED Capital Trust. For a more detailed discussion see "WADDELL & REED
Capital Trust I," "Description of the Trust Preferred Securities," "Description
of Junior Subordinated Debt Securities," "Description of the Preferred
Securities Guarantees" and "Effect of Obligations under the Junior Subordinated
Debt Securities and Preferred Securities Guarantee." In addition, the Company
does not expect that WADDELL & REED Capital Trust I will be filing reports with
the SEC under the Securities Exchange Act of 1934.
The Company is not making an offer of its securities in any state or
country where the offer is not permitted. You should not assume that the
information in this prospectus or any prospectus supplement is accurate as of a
later date than the date of this prospectus or any prospectus supplement.
FORWARD-LOOKING STATEMENTS
This prospectus, including information included or incorporated by
reference in this prospectus, contains certain forward-looking statements with
respect to the financial condition, results of operations, plans, objectives,
future performance and business of the Company and its predecessors, including
without limitation, statements preceded by, followed by or that include the
words "believes," "expects," "anticipates," "estimates," or similar expressions.
These forward-looking statements involve certain risks and uncertainties. Actual
results may differ materially from those contemplated by such forward-looking
statements due to, among others, the following factors:
- changes in the interest rate environment may reduce margins;
- general economic or business conditions, either nationally or in the
states in which the Company is doing business, may be less favorable
than expected resulting in, among other things, a deterioration in
credit quality or a reduced demand for credit;
- legislative or regulatory changes may adversely affect the business in
which the Company is engaged;
- technological changes may be more difficult or expensive than
anticipated;
- changes may occur in the securities and capital markets;
- the impact of changes in financial services laws and regulations;
3
<PAGE>
- unanticipated regulatory or judicial proceedings;
- the impact of the Company's completed acquisitions; and
- possible adverse effect on the value of our Class A Common Stock due to
the different voting rights of our Class A Common Stock and our Class B
Common Stock.
If one or more of these risks or uncertainties occurs or if the
underlying assumptions prove incorrect, then the Company's actual results,
performance or achievements in 2000 and beyond could differ materially from
those expressed in, or implied by, the forward-looking statements.
The Registrants caution that the foregoing list of important factors is
not exclusive, and neither such list nor any such forward-looking statement
takes into account the impact that any future acquisition may have on us and any
such forward-looking statement. The Registrants do not undertake to update any
forward-looking statement, whether written or oral, that may be made from time
to time by or on behalf of the Registrants.
4
<PAGE>
THE COMPANY
Waddell & Reed Financial, Inc. (the "Company"), a Delaware holding
company founded in 1981, is the parent company of one of the oldest mutual fund
complexes in the United States, having introduced the United family of funds in
1940. Through its subsidiaries, the Company sells its investment products
primarily to middle income Americans through a virtually exclusive sales force.
As of June 30, 2000, the Company, through its subsidiaries, had $39.8 billion of
assets under management, of which $33.8 billion were mutual fund assets and $6.0
billion were managed institutional and private accounts. The Company, through
its subsidiaries, has over 633,700 mutual fund customers having an average
investment of $65,800 and 63,000 variable account customers having an average
investment of $60,500. The Company, through its subsidiaries, is the exclusive
underwriter and distributor of 41 mutual fund portfolios, including 19
comprising the Waddell & Reed Advisors Funds (the "Advisors Funds"), 11
comprising the W & R Funds (the "W&R Funds"), and 11 comprising the
Target/United Funds (the "Target/United Funds", and together with the Advisors
Funds and the W&R Funds, the "Funds"). The Company and its subsidiaries derive
their revenues primarily from investment management, investment product
distribution, and shareholder services administration provided to the Funds and
managed institutional accounts. As part of its financial planning services, the
Company, through its subsidiaries, also distributes variable annuities and life
insurance products, underwritten primarily by an unaffiliated third party, to
its customers.
The Company is a legal entity separate and distinct from its subsidiaries
(collectively, the "affiliates"). Accordingly, the right of the Company, and
thus the right of the Company's creditors and shareholders, to participate in
any distribution of the assets or earnings of any affiliate is necessarily
subject to the prior claims of creditors of the affiliate, except to the extent
that claims of the Company in its capacity as a creditor may be recognized.
Accordingly, the Senior Debt Securities and Junior Subordinated Debt Securities
will be effectively subordinated to all existing and future liabilities of the
Company's subsidiaries, and holders of Senior Debt Securities and Junior
Subordinated Debt Securities should look only to the assets of the Company for
payments on the Senior Debt Securities and Junior Subordinated Debt Securities.
The Company's executive offices are located at 6300 Lamar Avenue,
Overland Park, Kansas 66202, and the telephone number is (913) 236-2000.
5
<PAGE>
RATIO OF EARNINGS TO FIXED CHARGES
The ratios of earnings to fixed charges for the Company, which are
computed on the basis of the total enterprise (as defined by the SEC) by
dividing earnings before fixed charges and income taxes by fixed charges, are
set forth below for the periods indicated. Fixed charges consist principally of
interest expense on all long- and short-term borrowings.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings to Fixed Charges............. 17.8x 37.0x 21.2x 202.9x N/A (1) N/A (1) N/A (1)
</TABLE>
The schedule above excludes the impact of interest relating to notes with
Torchmark Corporation existing prior to the initial public offering in the first
quarter of 1998. Concurrent with the offering, all notes were prepaid.
------------------------
(1) During these periods, the Company had no long- or short-term
borrowings outstanding.
USE OF PROCEEDS
The Company intends to use the net proceeds from the sale of the
securities described in a prospectus supplement, for general corporate purposes.
These corporate purposes may include the funding of investments in, or
extensions of credit to, the Company's subsidiaries. Except as described in the
applicable prospectus supplement, specific allocations of the proceeds to such
purposes have not been made. Pending the uses described above, the Company may
temporarily invest the net proceeds in various short-term securities or apply
the net proceeds to reduce short-term indebtedness. Based upon the historic and
anticipated future growth of the Company and the financial needs of its
subsidiaries, the Company anticipates that it will, on an ongoing basis, engage
in additional financings in character and amount to be determined.
WADDELL & REED CAPITAL TRUST I
WADDELL & REED Capital Trust I is a statutory business trust created
under Delaware law pursuant to:
- a declaration of trust executed by the Company, as sponsor (the
"Sponsor") of WADDELL & REED Capital Trust I, and
- a certificate of trust filed with the Delaware Secretary of State.
The declaration of trust will be amended and restated in its entirety (as
so amended and restated, the "Declaration") substantially in the form filed as
an exhibit to the registration statement of which this prospectus forms a part.
The Declaration will be qualified as an indenture under the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act").
WADDELL & REED Capital Trust I may offer to the public, from time to
time, trust preferred securities (the "Trust Preferred Securities") representing
preferred beneficial interests in WADDELL & REED Capital Trust I.
WADDELL & REED Capital Trust I exists for the exclusive purposes of:
- issuing and selling its Trust Securities (as defined below),
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<PAGE>
- using the proceeds from the sale of such Trust Securities to acquire a
series of Corresponding Junior Subordinated Debt Securities (as defined
below) issued by the Company, and
- engaging in only those other activities necessary or incidental to the
above activities (such as registering the transfer of the Trust
Securities).
WADDELL & REED Capital Trust I will sell common securities representing
undivided beneficial ownership interests in WADDELL & REED Capital Trust I to
the Company (the "Common Securities") and Trust Preferred Securities
representing undivided beneficial ownership interests in such trust to the
public. The Common Securities and the Trust Preferred Securities together are
also referred to as the "Trust Securities."
When WADDELL & REED Capital Trust I sells its Trust Preferred Securities
to the public it will use the money it receives together with the money it
receives from the sale of its Common Securities to buy a series of the Company's
Junior Subordinated Debt Securities (the "Corresponding Junior Subordinated Debt
Securities"). The payment terms of the Corresponding Junior Subordinated Debt
Securities will be virtually the same as the terms of the WADDELL & REED Capital
Trust I's Trust Preferred Securities (the "Related Trust Preferred Securities").
WADDELL & REED Capital Trust I will own only the applicable series of
Corresponding Junior Subordinated Debt Securities. The only source of funds for
WADDELL & REED Capital Trust I will be the payments it receives from the Company
on the Corresponding Junior Subordinated Debt Securities. WADDELL & REED Capital
Trust I will use such funds to make cash payments to holders of the Trust
Preferred Securities.
WADDELL & REED Capital Trust I will also have the right to be reimbursed
by the Company for certain expenses.
All of the Common Securities of WADDELL & REED Capital Trust I will be
owned by the Company. The Common Securities of WADDELL & REED Capital Trust will
rank equally, and payments will be made on such securities PRO RATA, with the
Trust Preferred Securities of WADDELL & REED Capital Trust I, except that upon
the occurrence and continuance of an event of default under a Declaration
resulting from an event of default under the Junior Indenture, the rights of the
Company, as holder of the Common Securities, to payment in respect of
distributions and payments upon liquidation or redemption will be subordinated
to the rights of the holders of the Trust Preferred Securities of WADDELL & REED
Capital Trust I. See "Description of the Trust Preferred Securities." The
Company will acquire Common Securities in an aggregate liquidation amount equal
to not less than 3% of the total capital of WADDELL & REED Capital Trust I.
The prospectus supplement relating to any Trust Preferred Securities will
contain the details of the cash distributions to be made periodically to the
holders of the Trust Preferred Securities.
Under certain circumstances, the Company may redeem the Corresponding
Junior Subordinated Debt Securities which it sold to WADDELL & REED Capital
Trust I. If it does this, WADDELL & REED Capital Trust I will redeem a like
amount of the Trust Preferred Securities which it sold to the public and the
Common Securities which it sold to the Company.
Under certain circumstances the Company may terminate WADDELL & REED
Capital Trust I and cause the Corresponding Junior Subordinated Debt Securities
to be distributed to the holders of the Related Trust Preferred Securities. If
this happens, owners of the Related Trust Preferred Securities will no longer
have any interest in such WADDELL & REED Capital Trust I and will only own the
Corresponding Junior Subordinated Debt Securities.
7
<PAGE>
Unless otherwise specified in the applicable prospectus supplement:
- WADDELL & REED Capital Trust I will have a term of approximately 55
years from the date it issues its Trust Securities, but may terminate
earlier as provided in the Declaration.
- WADDELL & REED Capital Trust I's business and affairs will be conducted
by its trustees (collectively, the "WADDELL & REED Capital Trust I
Trustees").
- The trustees will be appointed by the Company as holder of the
WADDELL & REED Capital Trust I's Common Securities.
- The duties and obligations of the trustees are governed by the
Declaration for WADDELL & REED Capital Trust I.
- The trustees will be Chase Manhattan Trust Company National Association,
as the institutional Trustee (the "Institutional Trustee"), The Chase
Manhattan Bank U.S.A., N.A., as the Delaware Trustee (the "Delaware
Trustee"), and one or more individual trustees (the "Regular Trustees")
who are employees or officers of or affiliated with the Company. Chase
Manhattan Trust Company National Association, as Institutional Trustee,
will act as sole indenture trustee under the Declaration for purposes of
compliance with the Trust Indenture Act. Chase Manhattan Trust Company
National Association will also act as trustee under the Guarantees and
the Junior Indenture. See "Description of the Preferred Securities
Guarantees", "Description of Senior Debt Securities" and "Description of
Junior Subordinated Debt Securities."
- The Company will pay all fees and expenses related to each WADDELL &
REED Capital Trust I and the offering of the Trust Preferred Securities
and will pay, directly or indirectly, all ongoing costs, expenses and
liabilities of each WADDELL & REED Capital Trust I.
- No amendment or modification may be made to the Declaration which would
adversely affect the rights or preferences of the Trust Securities
without the approval of the majority in liquidation amount of the Trust
Securities (which may be only the Trust Preferred Securities or Common
Securities of such trust if only that class is affected).
The principal executive office of WADDELL & REED Capital Trust I is 6300
Lamar Avenue, Overland Park, Kansas 66202, and its telephone number is (913)
236-2000.
8
<PAGE>
DESCRIPTION OF SENIOR DEBT SECURITIES
GENERAL
The following description applies to the senior debt securities offered
by this prospectus (the "Senior Debt Securities"). The Senior Debt Securities
will be direct, unsecured obligations of the Company and will rank on a parity
with all outstanding unsecured senior indebtedness of the Company. The Senior
Debt Securities may be issued in one or more series. The Senior Debt Securities
will be issued under a Senior Indenture (the "Senior Indenture") by and between
the Company and the trustee specified in the applicable prospectus supplement
(the "Trustee").
The statements under this caption are brief summaries of certain
provisions contained in the Senior Indenture, do not claim to be complete and
are qualified in their entirety by reference to the Senior Indenture, a copy of
which is exhibit to, or incorporated by reference in, the registration statement
of which this prospectus forms a part. Whenever defined terms are used but not
defined in this prospectus, those terms have the meanings given to them in the
Senior Indenture.
The following material describes certain general terms and provisions of
the Senior Debt Securities to which any prospectus supplement may relate. The
particular terms of any Senior Security and the extent, if any, to which these
general provisions may apply to such Senior Debt Securities will be described in
the prospectus supplement relating to the Senior Debt Securities.
The Senior Indenture does not limit the aggregate principal amount of
Senior Debt Securities which may be issued under it. Rather, the Senior
Indenture provides that Senior Debt Securities of any series may be issued under
it up to the aggregate principal amount which may be authorized from time to
time by the Company. Senior Debt Securities may be denominated in any currency
or currency unit designated by the Company. Neither the Senior Indenture nor the
Senior Debt Securities will limit or otherwise restrict the amount of other debt
which may be incurred or the other securities which may be issued by the Company
or any of its subsidiaries.
Senior Debt Securities of a series may be issuable in registered form
without coupons ("Registered Securities"), in bearer form with or without
coupons attached ("Bearer Securities") or in the form of one or more global
securities in registered or bearer form (each a "Global Security"). Bearer
Securities, if any, will be offered only to non-United States persons and to
offices located outside the United States of certain United States financial
institutions.
You must review the prospectus supplement for a description of the
following terms, where applicable, of each series of Senior Debt Securities for
which this prospectus is being delivered:
- the title of the Senior Debt Securities;
- the limit, if any, on the aggregate principal amount or aggregate
initial public offering price of the Senior Debt Securities;
- the priority of payment of the Senior Debt Securities;
- the price or prices, which may be expressed as a percentage of the
aggregate principal amount, at which the Senior Debt Securities will be
issued;
- the date or dates on which the principal of the Senior Debt Securities
will be payable;
- the interest rate or rates, which may be fixed or variable, for the
Senior Debt Securities, if any, or the method of determining the same;
- the date or dates from which interest, if any, on the Senior Debt
Securities will accrue, the date or dates on which interest, if any,
will be payable, the date or dates on which payment of interest, if any,
will commence and the regular record dates for the interest payment
dates;
9
<PAGE>
- the extent to which any of the Senior Debt Securities will be issuable
in temporary or permanent global form, or the manner in which any
interest payable on a temporary or permanent global Senior Security will
be paid;
- each office or agency where the Senior Debt Securities may be presented
for registration of transfer or exchange;
- the place or places where the principal of, premium, if any, and
interest, if any, on the Senior Debt Securities will be payable;
- the date or dates, if any, after which the Senior Debt Securities may be
redeemed or purchased in whole or in part, (i) at the option of the
Company or (ii) mandatorily pursuant to any sinking, purchase or similar
fund or (iii) at the option of the holder, and the redemption or
repayment price or prices;
- the terms, if any, upon which the Senior Debt Securities may be
convertible into or exchanged for securities or indebtedness of any kind
of the Company or of any other issuer or obligor and the terms and
conditions upon which the conversion or exchange would be made,
including the initial conversion or exchange price or rate, the
conversion period and any other additional provisions;
- the authorized denomination or denominations for the Senior Debt
Securities;
- the currency, currencies or units based on or related to currencies for
which the Senior Debt Securities may be purchased and the currency,
currencies or currency units in which the principal of, premium, if any,
and any interest, if any, on the Senior Debt Securities may be payable;
- any index used to determine the amount of payments of principal of,
premium, if any, and interest, if any, on the Senior Debt Securities;
- whether any of the Senior Debt Securities are to be issuable as Bearer
Securities and/or Registered Securities, and if issuable as Bearer
Securities, any limitations on issuance of the Bearer Securities and any
provisions regarding the transfer or exchange of the Bearer Securities,
including exchange for registered Senior Debt Securities of the same
series;
- the payment of any additional amounts with respect to the Senior Debt
Securities;
- whether any of the Senior Debt Securities will be issued as Original
Issue Discount Securities (as defined below);
- information with respect to book-entry procedures, if any;
- any additional covenants or Events of Default not currently included in
the Senior Indenture; and
- any other terms of the Senior Debt Securities not inconsistent with the
provisions of the Senior Indenture.
If any of the Senior Debt Securities are sold for one or more foreign
currencies or foreign currency units or if the principal of, premium, if any, or
interest, if any, on any series of Senior Debt Securities is payable in one or
more foreign currencies or foreign currency units, the restrictions, elections,
tax consequences, specific terms and other information with respect to that
issue of Senior Debt Securities and those currencies or currency units will be
described in the applicable prospectus supplement.
A judgment for money damages by courts in the United States, including a
money judgment based on an obligation expressed in a foreign currency, will
ordinarily be rendered only in U.S. dollars.
10
<PAGE>
New York statutory law provides that a court shall render a judgment or decree
in the foreign currency of the underlying obligation and that the judgment or
decree shall be converted into U.S. dollars at the exchange rate prevailing on
the date of entry of the judgment or decree.
Senior Debt Securities may be issued as original issue discount Senior
Debt Securities which bear no interest or interest at a rate which at the time
of issuance is below market rates ("Original Issue Discount Securities"), to be
sold at a substantial discount below the stated principal amount thereof due at
the stated maturity of such Senior Debt Securities. There may be no periodic
payments of interest on Original Issue Discount Securities. In the event of an
acceleration of the maturity of any Original Issue Discount Security, the amount
payable to the holder of the Original Issue Discount Security upon acceleration
will be determined in accordance with the prospectus supplement, the terms of
the security and the Senior Indenture, but will be an amount less than the
amount payable at the maturity of the principal of the Original Issue Discount
Security. Federal income tax considerations with respect to Original Issue
Discount Securities will be described in the applicable prospectus supplement.
REGISTRATION AND TRANSFER
Unless otherwise indicated in the applicable prospectus supplement,
Senior Debt Securities will be issued only as Registered Securities. If Bearer
Securities are issued, the United States federal income tax consequences and
other special considerations, procedures and limitations relating to the Bearer
Securities will be described in the applicable prospectus supplement.
Senior Debt Securities issued as Registered Securities will not have
interest coupons. Senior Debt Securities issued as Bearer Securities will have
interest coupons attached, unless issued as zero coupon securities.
Registered Securities (other than a Global Security) may be presented for
transfer, with the form of transfer endorsed thereon duly executed, or exchanged
for other Senior Debt Securities of the same series at the office of the
security registrar specified in the Senior Indenture. The Company has agreed in
the Senior Indenture that, with respect to Registered Securities having The City
of New York as a place of payment, the Company will appoint a security registrar
or co-security registrar located in The City of New York for such transfer or
exchange. Transfer or exchange will be made without service charge, but the
Company may require payment of any taxes or other governmental charges.
Provisions relating to the exchange of Bearer Securities for other Senior Debt
Securities of the same series, including, if applicable, Registered Securities,
will be described in the applicable prospectus supplement. In no event, however,
will Registered Securities be exchangeable for Bearer Securities.
BOOK-ENTRY SENIOR DEBT SECURITIES
Senior Debt Securities of a series may be issued in whole or in part in
the form of one or more Global Securities. Each Global Security will be
deposited with, or on behalf of, a depositary (the "Depositary") identified in
the applicable prospectus supplement. Global Securities may be issued in either
registered or bearer form and in either temporary or permanent form. Until
exchanged in whole or in part for the individual securities which it represents,
a Global Security may not be transferred except as a whole by the Depositary for
the Global Security to a nominee of the Depositary or by a nominee of the
Depositary to the Depositary or another nominee of the Depositary or by the
Depositary or any nominee to a successor Depositary or any nominee of the
successor.
The specific terms of the depositary arrangement for a series of Senior
Debt Securities and certain limitations and restrictions relating to a series of
Bearer Securities in the form of one or more Global Securities will be described
in the applicable prospectus supplement.
11
<PAGE>
PAYMENT AND PAYING AGENTS
Unless otherwise indicated in an applicable prospectus supplement,
payment of principal of, premium, if any, and any interest on Registered
Securities will be made at the office of such paying agent or paying agents as
the Company may designate from time to time. In addition, at the option of the
Company, payment of any interest may be made (i) by check mailed to the address
of the person entitled to the payment at the address in the applicable security
register or (ii) by wire transfer to an account maintained by the person
entitled to the payment as specified in the applicable security register. Unless
otherwise indicated in an applicable prospectus supplement, payment of any
installment of interest on Registered Securities will be made to the person in
whose name such Senior Security is registered at the close of business on the
regular record date for such payment.
Unless otherwise indicated in an applicable prospectus supplement,
payment of principal of, premium, if any, and any interest on Bearer Securities
will be payable, subject to any applicable laws and regulations, at the offices
of such paying agents outside the United States as the Company may designate
from time to time, at the option of the holder, by check or by transfer to an
account maintained by the holder with a bank located outside the United States.
Unless otherwise indicated in an applicable prospectus supplement, payment of
interest on Bearer Securities will be made only against surrender of the coupon
for such interest payment date. Payment on any Bearer Security will not be made
at any office or agency of the Company in the United States or by check mailed
to any address in the United States or by transfer to an account maintained with
a bank located in the United States.
CONSOLIDATION, MERGER OR SALE OF ASSETS
The Senior Indenture provides that the Company may, without the consent
of the holders of any of the Senior Debt Securities outstanding under the Senior
Indenture, consolidate with, merge into or transfer its assets substantially as
an entirety to any person, provided that:
- any successor assumes the Company's obligations on the Senior Debt
Securities and under the Senior Indenture, and
- after giving effect to the consolidation, merger or transfer, no Event
of Default (as defined in the Senior Indenture) will have happened and
be continuing.
Any consolidation, merger or transfer of assets substantially as an entirety,
which meets the conditions described above, would not create any Event of
Default which would entitle holders of the Senior Debt Securities, or the
Trustee acting on their behalf, to take any of the actions described below under
"Description of Senior Debt Securities--Events of Default, Waivers, Etc."
LEVERAGED AND OTHER TRANSACTIONS
The Senior Indenture and the Senior Debt Securities do not contain
provisions which would protect holders of the Senior Debt Securities in the
event of a highly leveraged or other transaction involving the Company which
could adversely affect the holders of Senior Debt Securities.
MODIFICATION OF THE SENIOR INDENTURE; WAIVER OF COVENANTS
The Senior Indenture provides that, with the consent of the holders of
not less than a majority in aggregate principal amount of the outstanding Senior
Debt Securities of each affected series, modifications and alterations of the
Senior Indenture may be made which affect the rights of the holders of the
Senior Debt Securities. However, no such modification or alteration may be made
without the consent of the holder of each Senior Security affected which would,
among other things,
12
<PAGE>
- modify the terms of payment of principal, premium, if any, or interest
on the Senior Debt Securities; or
- reduce the percentage in principal amount of outstanding Senior Debt
Securities required to modify or alter the Senior Indenture.
EVENTS OF DEFAULT, WAIVERS, ETC.
An Event of Default with respect to Senior Debt Securities of any series
is defined in the Senior Indenture as
- default in the payment of principal of or premium, if any, on any of the
outstanding Senior Debt Securities of that series when due;
- default in the payment of interest on any of the outstanding Senior Debt
Securities of that series when due and continuance of such default for
30 days;
- default in the performance of any other covenant of the Company in the
Senior Indenture with respect to Senior Debt Securities of such series
and continuance of such default for 90 days after written notice;
- certain events of bankruptcy, insolvency or reorganization of the
Company; and
- any other event that may be specified in a prospectus supplement with
respect to any series of Senior Debt Securities.
If an Event of Default with respect to any series of outstanding Senior
Debt Securities occurs and is continuing, either the Trustee or the holders of
not less than 25% in aggregate principal amount of the outstanding Senior Debt
Securities of such series may declare the principal amount (or if such Senior
Debt Securities are Original Issue Discount Securities, the portion of the
principal amount as may be specified in the terms of that series) of all Senior
Debt Securities of that series to be immediately due and payable. The holders of
a majority in aggregate principal amount of the outstanding Senior Debt
Securities of any series may waive an Event of Default resulting in acceleration
of such Senior Debt Securities, but only if all Events of Default with respect
to Senior Debt Securities of such series have been remedied and all payments
due, other than those due as a result of acceleration, have been made.
If an Event of Default occurs and is continuing, the Trustee may, in its
discretion, and at the written request of holders of not less than a majority in
aggregate principal amount of the outstanding Senior Debt Securities of any
series and upon reasonable indemnity against the costs, expenses and liabilities
to be incurred in compliance with such request and subject to certain other
conditions set forth in the Senior Indenture will, proceed to protect the rights
of the holders of all the Senior Debt Securities of such series. Prior to
acceleration of maturity of the outstanding Senior Debt Securities of any
series, the holders of a majority in aggregate principal amount of the Senior
Debt Securities may waive any past default under the Senior Indenture except a
default in the payment of principal of, premium, if any, or interest on the
Senior Debt Securities of that series.
The Senior Indenture provides that upon the occurrence of an Event of
Default specified in clauses (1) or (2) of the first paragraph in this
subsection, the Company will, upon demand of the Trustee, pay to it, for the
benefit of the holder of any such Senior Security, the whole amount then due and
payable on the affected Senior Debt Securities for principal, premium, if any,
and interest. The Senior Indenture further provides that if the Company fails to
pay such amount upon such demand, the Trustee may, among other things, institute
a judicial proceeding for the collection of such amounts.
The Senior Indenture also provides that notwithstanding any of its other
provisions, the holder of any Senior Security of any series will have the right
to institute suit for the enforcement of any
13
<PAGE>
payment of principal of, premium, if any, and interest on the Senior Debt
Securities when due and that such right will not be impaired without the consent
of such holder.
The Company is required to file annually with the Trustee a written
statement of officers as to the existence or non-existence of defaults under the
Senior Indenture or the Senior Debt Securities.
GOVERNING LAW
The Senior Indenture and the Senior Debt Securities will be governed by,
and construed in accordance with, the laws of the State of New York.
REGARDING THE TRUSTEE
Information concerning the Trustee for a series of Senior Debt Securities
will be set forth in the prospectus supplement relating to such series of Senior
Debt Securities.
The Company and its affiliates have normal banking relationships with the
Trustee in the ordinary course of business.
14
<PAGE>
DESCRIPTION OF JUNIOR SUBORDINATED DEBT SECURITIES
Junior subordinated debt securities (the "Junior Subordinated Debt
Securities") may be issued from time to time in one or more series under an
Indenture (the "Junior Indenture"), between the Company and the trustee
specified in the applicable prospectus supplement (the "Trustee"). The terms of
the Junior Subordinated Debt Securities will include those stated in the Junior
Indenture and those made part of the Junior Indenture by reference to the Trust
Indenture Act. The following summary of certain provisions contained in the
Junior Indenture is not complete and is subject to the provisions of, and is
qualified in its entirety by, the Junior Indenture, which is filed or
incorporated by reference as an exhibit to the registration statement of which
this prospectus forms a part, and the Trust Indenture Act. Whenever particular
provisions or defined terms in the Junior Indenture are referred to herein, such
provisions or defined terms are incorporated by reference herein.
GENERAL
The Junior Subordinated Debt Securities will be unsecured, subordinated
obligations of the Company. The Junior Indenture does not limit the aggregate
principal amount of Junior Subordinated Debt Securities which may be issued
under it. The Junior Subordinated Debt Securities are issuable in one or more
series pursuant to an indenture supplemental to the Junior Indenture or a
resolution of the Company's Board of Directors or a committee appointed by the
Board.
In the event Junior Subordinated Debt Securities are issued to WADDELL &
REED Capital Trust I or a trustee of such trust in connection with the issuance
of Trust Securities by WADDELL & REED Capital Trust I, such Corresponding Junior
Subordinated Debt Securities subsequently may be distributed PRO RATA to the
holders of the Trust Securities in connection with the dissolution of WADDELL &
REED Capital Trust I, as described in the prospectus supplement relating to the
Trust Securities. Only one series of Corresponding Junior Subordinated Debt
Securities will be issued to WADDELL & REED Capital Trust I or a trustee of such
trust in connection with the issuance of Trust Securities by WADDELL & REED
Capital Trust I.
You must review the prospectus supplement relating to the particular
Junior Subordinated Debt Securities for the following terms:
- the specific designation of the Junior Subordinated Debt Securities;
- the aggregate principal amount of the Junior Subordinated Debt
Securities;
- the percentage of their principal amount at which the Junior
Subordinated Debt Securities will be issued;
- the date or dates on which the principal of and premium, if any, on the
Junior Subordinated Debt Securities will be payable and the right, if
any, to extend such date or dates;
- the interest rate or rates, which may be fixed or variable, if any, of
the Junior Subordinated Debt Securities, or the method of determination
of such rate or rates;
- the date or dates from which such interest will accrue, the interest
payment dates on which such interest will be payable or the manner of
determination of such interest payment dates and the record dates for
the determination of holders to whom interest is payable on such
interest payment dates;
- the right, if any, to extend the interest payment periods and the
duration of an extension;
- the period or periods, if any, within which, the price or prices of
which, and the terms and conditions upon which the Junior Subordinated
Debt Securities may be redeemed, in whole or in part;
15
<PAGE>
- the right and/or obligation, if any, of the Company to redeem or
purchase the Junior Subordinated Debt Securities pursuant to any sinking
fund or similar provisions or at the option of the holder of the
security and the period or periods for which, the price or prices at
which, and the terms and conditions upon which, the Junior Subordinated
Debt Securities will be redeemed or repurchased, in whole or in part,
pursuant to such right and/or obligation;
- the terms and conditions, if any, upon which the Junior Subordinated
Debt Securities may be converted into shares of the common stock of the
Company, including the conversion price and the circumstances, if any,
under which such conversion right will expire;
- the terms of subordination;
- the form of the Junior Subordinated Debt Securities; and
- any other specific terms of the Junior Subordinated Debt Securities.
If a prospectus supplement specifies that a series of Junior Subordinated
Debt Securities is denominated in a currency or currency unit other than United
States dollars, the prospectus supplement will also specify the denomination in
which the Junior Subordinated Debt Securities will be issued and the coin or
currency in which the principal, premium, if any, and interest, if any, on the
Junior Subordinated Debt Securities will be payable.
The Junior Indenture does not contain provisions that protect holders of
the Junior Subordinated Debt Securities in the event of a highly leveraged
transaction or other similar transaction involving the Company that may
adversely affect such holders.
FORM, EXCHANGE, REGISTRATION, TRANSFER AND PAYMENT
Unless otherwise specified in the applicable prospectus supplement, the
Junior Subordinated Debt Securities will be issued in fully registered form
without coupons and in denominations of $1,000 and multiples of $1,000. No
service charge will be made for any transfer or exchange of the Junior
Subordinated Debt Securities, but the Company or the Trustee may require payment
of a sum sufficient to cover any tax or other government charge payable in
connection with such transfer or exchange.
Unless otherwise provided in the applicable prospectus supplement,
principal and premium, if any, or interest, if any, will be payable and the
Junior Subordinated Debt Securities may be surrendered for payment or
transferred at the offices of the Trustee as paying and authenticating agent,
provided that payment of interest, if any, may be made at the option of the
Company (i) by check mailed to the address of the person entitled to such
payment as it appears in the security register or (ii) by wire transfer to an
account maintained by the person entitled to such payment as specified in the
applicable security register.
BOOK-ENTRY JUNIOR SUBORDINATED DEBT SECURITIES
The Junior Subordinated Debt Securities of a series may be issued in
whole or in part in the form of one or more Global Securities that will be
deposited with, or on behalf of, a Depositary, or its nominee, which will be
identified in the prospectus supplement relating to such series. In such a case,
one or more Global Securities will be issued in a denomination or aggregate
denomination equal to the portion of the aggregate principal amount of
outstanding Junior Subordinated Debt Securities of the series to be represented
by such Global Security or Securities. Until it is exchanged in whole or in part
for Junior Subordinated Debt Securities in definitive registered form, a Global
Security may not be registered for transfer or exchange except as a whole by the
Depositary for the Global Security to a nominee for the Depositary and except in
the circumstances described in the applicable prospectus supplement.
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The specific terms of the depositary arrangement for any portion of a
series of Junior Subordinated Debt Securities to be represented by a Global
Security and a description of the Depositary will be provided in the applicable
prospectus supplement.
SUBORDINATION
The Junior Subordinated Debt Securities will be subordinated and junior
in right of payment to certain other indebtedness of the Company (which may
include senior indebtedness for money borrowed) to the extent described in the
applicable prospectus supplement.
CERTAIN COVENANTS OF THE COMPANY
In the event Corresponding Junior Subordinated Debt Securities are issued
to WADDELL & REED Capital Trust I or its trustee in connection with the issuance
of Trust Securities of WADDELL & REED Capital Trust I, for so long as the Trust
Securities remain outstanding, the Company will covenant:
- to maintain directly or indirectly 100% ownership of the Common
Securities of WADDELL & REED Capital Trust I, provided that certain
successors which are permitted under the Junior Indenture may succeed to
the Company's ownership of the Common Securities;
- as holder of the Common Securities, not to voluntarily terminate,
wind-up or liquidate WADDELL & REED Capital Trust I, except (a) in
connection with a distribution of Corresponding Junior Subordinated Debt
Securities to the holders of the Trust Securities in liquidation of
WADDELL & REED Capital Trust I or (b) in connection with certain
mergers, consolidations or amalgamations permitted by the Declaration of
WADDELL & REED Capital Trust I; and
- to use its reasonable efforts, consistent with the terms and provisions
of the Declaration of WADDELL & REED Capital Trust I, to cause
WADDELL & REED Capital Trust I to remain classified as a grantor trust
and not as an association taxable as a corporation for United States
federal income tax purposes.
LIMITATION ON MERGERS AND SALES OF ASSETS
The Company will not consolidate with, or merge into, any corporation or
convey or transfer its properties and assets substantially as an entirety to any
person unless:
- the successor entity expressly assumes the obligations of the Company
under the Junior Indenture, and
- after giving effect thereto, no Event of Default, and no event which,
after notice or lapse of time, or both, would become an Event of
Default, will have occurred and be continuing under the Junior
Indenture.
EVENTS OF DEFAULT, WAIVER AND NOTICE
The Junior Indenture provides that any one or more of the following
events which has occurred and is continuing constitutes an "Event of Default"
with respect to each series of Junior Subordinated Debt Securities:
- default for 30 days in payment of any interest on the Junior
Subordinated Debt Securities of that series, when due; provided,
however, that a valid extension of the interest payment period by the
Company will not constitute a default in the payment of interest for
this purpose; or
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- default in payment of principal and premium, if any, on the Junior
Subordinated Debt Securities of that series when due either at maturity,
upon redemption, by declaration or otherwise; provided, however, that a
valid extension of the maturity of such Junior Subordinated Debt
Securities will not constitute a default for this purpose; or
- default by the Company in the performance, or breach, in any material
respect of any other of the covenants or agreements in the Junior
Indenture which will not have been remedied for a period of 90 days
after notice; or
- certain events of bankruptcy, insolvency or reorganization of the
Company; or
- any other Event of Default provided with respect to a particular series
of Junior Subordinated Debt Securities as described in the related
prospectus supplement.
The Junior Indenture provides that the Trustee may withhold notice to the
holders of a series of Junior Subordinated Debt Securities, except in payment of
principal or of interest or premium on the Junior Subordinated Debt Securities,
if the Trustee considers it in the interest of such holders to do so.
The Junior Indenture provides that if an Event of Default with respect to
any series of Junior Subordinated Debt Securities has occurred and is
continuing, either the Trustee or the holders of 25 percent in principal amount
of the outstanding Junior Subordinated Debt Securities of such affected series
may declare the principal of all Junior Subordinated Debt Securities of the
series to be due and payable immediately, but upon certain conditions such
declaration may be annulled and past defaults may be waived, except defaults in
payment of principal of or interest or premium, if any, on the Junior
Subordinated Debt Securities, by the holders of a majority in principal amount
of the outstanding Junior Subordinated Debt Securities of the series.
The holders of a majority in principal amount of the outstanding Junior
Subordinated Debt Securities of any affected series will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee under the Junior Indenture with respect to the series,
provided that the holders of the Junior Subordinated Debt Securities will have
offered to the Trustee reasonable indemnity against expenses and liabilities.
The Junior Indenture also provides that notwithstanding any of its other
provisions, the holder of any Junior Subordinated Debt Security of any series,
will have the right to institute suit for the enforcement of any payment of
principal of, premium, if any, and interest on the Junior Subordinated Debt
Security on the stated maturity or upon repayment or redemption of such Junior
Subordinated Debt Security and that this right will not be impaired without the
consent of such holder.
The Junior Indenture requires the annual filing by the Company with the
Trustee of a certificate as to the absence of certain defaults under the Junior
Indenture.
MODIFICATION OF THE JUNIOR INDENTURE
The Junior Indenture contains provisions permitting the Company and the
Trustee, with the consent of the holders of not less than a majority in
principal amount of the Junior Subordinated Debt Securities of all series
affected by the modification at the time outstanding, to modify the Junior
Indenture or the rights of the holders of the Junior Subordinated Debt
Securities. However, no such modification will:
- modify the terms of payment of principal, premium, if any, or interest
on any Junior Subordinated Senior Debt Securities, or impair or affect
the right of any holder of Junior Subordinated Debt Securities to
institute suit for the payment of the security or the right of
prepayment, if any, at the option of the holder, without the consent of
the holder of each Junior Subordinated Debt Security so affected, or
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- reduce the percentage of holders of Junior Subordinated Debt Securities
whose consent is required for any such modification, unless the consent
of the holders of each Junior Subordinated Debt Security affected is
obtained.
If Junior Subordinated Debt Securities of a series are held by WADDELL &
REED Capital Trust I or a trustee of such trust, a supplemental indenture
requiring such consent will not be effective until the holders of a majority in
liquidation amount of the Trust Securities of WADDELL & REED Capital Trust I
consent to such supplemental indenture. If the consent of the holders of each
outstanding Junior Subordinated Debt Security of a series is required, such
supplemental indenture will not be effective until each holder of the Trust
Securities of WADDELL & REED Capital Trust I consents to such supplemental
indenture.
As a result of these pass through voting rights with respect to
modifications to the Junior Indenture, no modification to such indenture will be
effective until the holders of a majority in liquidation amount of the Trust
Securities consent to such modification and no modification described in clauses
(1) and (2) above will be effective without the consent of each holder of Trust
Preferred Securities and each holder of Common Securities of WADDELL & REED
Capital Trust I.
SATISFACTION AND DISCHARGE
The Junior Indenture provides, among other things, that when all Junior
Subordinated Debt Securities not previously delivered to the Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at their stated maturity within one year, the Company may deposit or cause to be
deposited with the Trustee funds, in trust, for the purpose and in an amount
sufficient to pay and discharge the entire indebtedness on the Junior
Subordinated Debt Securities not previously delivered to the Trustee for
cancellation, for the principal, premium, if any, and interest to the date of
the deposit or to the stated maturity, as the case may be. Upon such deposit,
the Junior Indenture will cease to be of further effect except as to the
Company's obligations to pay all other sums due pursuant to the Junior Indenture
and to provide the officers' certificates and opinions of counsel required under
the Junior Indenture, and the Company will be deemed to have satisfied and
discharged the Junior Indenture.
GOVERNING LAW
The Junior Indenture and the Junior Subordinated Debt Securities will be
governed by, and construed in accordance with, the laws of the State of New
York.
REGARDING THE TRUSTEE
Information concerning the Trustee for a series of Junior Subordinated
Debt Securities will be set forth in the prospectus supplement relating to such
series of Junior Subordinated Debt Securities.
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DESCRIPTION OF WARRANTS
OFFERED WARRANTS
We may issue warrants that are debt warrants or equity warrants. We may
offer warrants separately or together with one or more additional warrants or
debt securities or any combination of those securities in the form of units, as
described in the applicable prospectus supplement. If we issue warrants as part
of a unit, the accompanying prospectus supplement will specify whether those
warrants may be separated from the other securities in the unit prior to the
warrants' expiration date.
DEBT WARRANTS
We may issue, together with debt securities or separately, warrants for
the purchase of debt securities on terms to be determined at the time of sale.
We refer to this type of warrant as a "Debt Warrant."
EQUITY WARRANTS
We may also issue warrants to purchase, including warrant spreads, on
terms to be determined at the time of sale, shares of our Class A Common Stock.
GENERAL TERMS OF WARRANTS
The applicable prospectus supplement will contain, where applicable, the
following terms of and other information relating to the warrants and warrant
spreads:
- the specific designation and aggregate number of, and the price at which
we will issue, the warrants;
- the currency with which the warrants may be purchased;
- the date on which the right to exercise the warrants will begin and the
date on which that right will expire or, if you may not continuously
exercise the warrants throughout that period, the specific date or dates
on which you may exercise the warrants;
- whether the warrants will be issued in fully registered form or bearer
form, in definitive or global form or in any combination of these forms,
although, in any case, the form of a warrant included in a unit will
correspond to the form of the unit and of any debt security included in
that unit;
- any applicable material United States federal income tax consequences;
- the identity of the warrant agent for the warrants and of any other
depositaries, execution or paying agents, transfer agents, registrars,
determination, or other agents;
- the proposed listing, if any, of the warrants or any securities
purchasable upon exercise of the warrants on any securities exchange;
- if applicable, the minimum or maximum amount of the warrants that may be
exercised at any one time;
- information with respect to book-entry procedures, if any;
- the terms of the securities issuable upon exercise of the warrants;
- the antidilution provisions of the warrants, if any;
- any redemption or call provisions;
- the exercise price and procedures for exercise of the warrants;
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- the terms of any warrant spread and the market price of the Company's
common stock which will trigger the Company's obligation to issue shares
of its common stock in settlement of a warrant spread;
- whether the warrants are to be sold separately or with other securities
as part of units; and
- any other terms of the warrants.
SIGNIFICANT PROVISIONS OF THE WARRANT AGREEMENTS
We will issue the warrants under one or more warrant agreements to be
entered into between us and a bank or trust company, as warrant agent, in one or
more series, which will be described in the prospectus supplement for the
warrants. The forms of warrant agreements are filed as exhibits to the
registration statement. The following summaries of significant provisions of the
warrant agreements and the warrants are not intended to be comprehensive and
holders of warrants should review the detailed provisions of the relevant
warrant agreement for a full description and for other information regarding the
warrants.
MODIFICATIONS WITHOUT CONSENT OF WARRANTHOLDERS
We and the warrant agent may amend the terms of the warrants and the
warrant certificates without the consent of the holders to:
- cure any ambiguity;
- cure, correct or supplement any defective or inconsistent provision; or
- amend the terms in any other manner which we may deem necessary or
desirable and which will not adversely affect the interests of the
affected holders in any material respect.
ENFORCEABILITY OF RIGHTS OF WARRANTHOLDERS
The warrant agents will act solely as our agents in connection with the
warrant certificates and will not assume any obligation or relationship of
agency or trust for or with any holders of warrant certificates or beneficial
owners of warrants. Any holder of warrant certificates and any beneficial owner
of warrants may, without the consent of any other person, enforce by appropriate
legal action, on its own behalf, its right to exercise the warrants evidenced by
the warrant certificates in the manner provided for in that series of warrants
or pursuant to the applicable warrant agreement. No holder of any warrant
certificate or beneficial owner of any warrants will be entitled to any of the
rights of a holder of the debt securities or any other warrant property, if any,
purchasable upon exercise of the warrants, including, without limitation, the
right to receive the payments on those debt securities or other warrant property
or to enforce any of the covenants or rights in the relevant indenture or any
other similar agreement.
REGISTRATION AND TRANSFER OF WARRANTS
Subject to the terms of the applicable warrant agreement, warrants in
registered, definitive form may be presented for exchange and for registration
of transfer at the corporate trust office of the warrant agent for that series
of warrants, or at any other office indicated in the prospectus supplement
relating to that series of warrants, without service charge. However, the holder
will be required to pay any taxes and other governmental charges as described in
the warrant agreement. The transfer or exchange will be effected only if the
warrant agent for the series of warrants is satisfied with the documents of
title and identity of the person making the request.
NEW YORK LAW TO GOVERN
The warrants and each warrant agreement will be governed by, and
construed in accordance with, the laws of the State of New York.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 150,000,000
shares of Class A Common Stock, 100,000,000 shares of Class B Common Stock, and
5,000,000 shares of Preferred Stock. No Preferred Stock is outstanding as of the
date of this Prospectus. The following summary description of the capital stock
of the Company is qualified by reference to the Certificate of Incorporation and
Bylaws of the Company, copies of which are filed as exhibits to the Registration
Statement.
COMMON STOCK
VOTING RIGHTS
The holders of Class A Common Stock and Class B Common Stock have
identical rights except that:
- holders of Class A Common Stock are entitled to one vote per share while
holders of Class B Common Stock are entitled to five votes per share on
all matters to be voted on by stockholders, and
- holders of Class A Common Stock are not eligible to vote on any
alteration or change in the powers, preferences, or special rights of
the Class B Common Stock or vice versa.
Holders of shares of Class A Common Stock and Class B Common Stock are
not entitled to cumulate their votes in the election of directors. Generally,
all matters to be voted on by stockholders must be approved by a majority (or,
in the case of election of directors, by a plurality) of the votes entitled to
be cast by all shares of Class A Common Stock and Class B Common Stock present
in person or represented by proxy, voting together as a single class, subject to
any voting rights granted to holders of any Preferred Stock. Except as otherwise
provided by law, and subject to any voting rights granted to holders of any
outstanding Preferred Stock, amendments to the Company's Certificate of
Incorporation generally must be approved by a majority of the combined voting
power of all Class A Common Stock and Class B Common Stock voting together as a
single class. Amendments to the Company's Certificate of Incorporation that
would alter or change the powers, preferences, or special rights of the Class A
Common Stock or the Class B Common Stock so as to affect them adversely also
must be approved by a majority of the votes entitled to be cast by the holders
of the shares affected by the amendment, voting as a separate class.
Notwithstanding the foregoing, any amendment to the Company's Certificate of
Incorporation to increase the authorized shares of any class or classes of stock
will be deemed not to affect adversely the powers, preferences, or special
rights of the Class A Common Stock or Class B Common Stock.
DIVIDENDS
Holders of Class A Common Stock and Class B Common Stock will receive an
equal amount per share in any dividend declared by the Board of Directors,
subject to any preferential rights of any outstanding Preferred Stock. Dividends
consisting of shares of Class A Common Stock and Class B Common Stock may be
paid only as follows:
- shares of Class A Common Stock may be paid only to holders of Class A
Common Stock and shares of Class B Common Stock may be paid only to
holders of Class B Common Stock, and
- shares will be paid proportionally with respect to each outstanding
share of Class A Common Stock and Class B Common Stock.
OTHER RIGHTS
On liquidation, dissolution, or winding up of the Company, after payment
in full of the amounts required to be paid to holders of Preferred Stock, if
any, all holders of Common Stock,
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regardless of class, are entitled to share ratably in any assets available for
distribution to holders of shares of Common Stock. No shares of Common Stock are
subject to redemption or have preemptive rights to purchase additional shares of
Common Stock. Upon consummation of the Offering, all the outstanding shares of
Class A Common Stock and Class B Common Stock will be validly issued, fully
paid, and nonassessable.
PREFERRED STOCK
As of the date of this Prospectus, no shares of Preferred Stock are
outstanding. The Board of Directors may authorize the issuance of Preferred
Stock in one or more series and may determine, with respect to any such series,
the designations, powers, preferences, and rights of such series, and its
qualifications, limitations, and restrictions, including, without limitation,
- the designation of the series;
- the number of shares of the series, which number the Board of Directors
may thereafter (except where otherwise provided in the designations for
such series) increase or decrease (but not below the number of shares of
such series then outstanding);
- whether dividends, if any, will be cumulative or noncumulative and the
dividend rate of the series;
- the conditions upon which and the dates at which dividends, if any, will
be payable, and the relation that such dividends, if any, will bear to
the dividends payable on any other class or classes of stock;
- the redemption rights and price or prices, if any, for shares of the
series;
- the terms and amounts of any sinking fund provided for the purchase or
redemption of shares of the series;
- the amounts payable on and the preferences, if any, of shares of the
series, in the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the affairs of the Company;
- whether the shares of the series will be convertible into shares of any
other class or series, or any other security, of the Company or any
other corporation, and, if so, the specification of such other class or
series or such other security, the conversion price or prices or rate or
rates, any adjustments thereof, the date or dates as of which such
shares will be convertible and all other terms and conditions upon which
such conversion may be made; and
- the voting rights, if any, of the holders of shares of such series.
The Company believes that the ability of the Board of Directors to issue
one or more series of Preferred Stock will provide the Company with flexibility
in structuring possible future financings and acquisitions and in meeting other
corporate needs that might arise. The authorized shares of Preferred Stock will
be available for issuance without further action by the Company's stockholders,
unless such action is required by applicable law or the rules of any stock
exchange or automated quotation system on which the Company's securities may be
listed or traded. The New York Stock Exchange, Inc. (the "NYSE") currently
requires stockholder approval as a prerequisite to listing shares in several
instances, including where the present or potential issuance of shares could
result in an increase in the number of shares of common stock outstanding, or in
the amount of voting securities outstanding, of at least 20%.
Although the Board of Directors has no current intention of doing so, it
could issue a series of Preferred Stock that could, depending on the terms of
such series, impede the completion of a merger, tender offer, or other takeover
attempt. The Board of Directors will make any determination to issue such shares
based on its judgment as to the best interests of the Company and its
stockholders. The Board of Directors, in so acting, could issue Preferred Stock
having terms that could discourage a
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potential acquirer from making, without first negotiating with the Board of
Directors, an acquisition attempt through which such acquirer may be able to
change the composition of the Board of Directors, including a tender offer or
other transaction that some, or a majority, of the Company's stockholders might
believe to be in their best interests or in which stockholders might receive a
premium for their stock over the then current market price of such stock.
RIGHTS PLAN
On April 28, 1999, the Board of Directors of the Company declared a
dividend distribution of one Right for each outstanding share of Class A Common
Stock, $.01 par value, and Class B Common Stock, $.01 par value, of the Company
(collectively, the "Common Stock"). The distribution was payable to the
stockholders of record at the close of business on May 12, 1999. Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
a share of a series of the Company's preferred stock designated as Series A
Junior Participating Preferred Stock ("Preferred Stock") at a price of $85.00
per one one-hundredth of a share (the "Purchase Price"), subject to adjustment.
The description and terms of the Rights are set forth in a Rights Agreement (the
"Rights Agreement") between the Company and First Chicago Trust Company of New
York, as Rights Agent (the "Rights Agent").
Initially, the Rights were attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates were
distributed. Subject to certain exceptions specified in the Rights Agreement,
the Rights will separate from the Common Stock and a Distribution Date will
occur upon the earlier of (i) 10 business days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 15% or more of the Voting Power as
represented by the outstanding shares of Common Stock (the "Stock Acquisition
Date"), other than as a result of repurchases of stock by the Company or certain
inadvertent actions by institutional or certain other stockholders, or (ii) 10
business days (or such later date as the Board shall determine prior to any
person becoming an Acquiring Person) following the commencement of a tender
offer or exchange offer that would result in a person or group becoming an
Acquiring Person. Voting Power is defined as the total number of votes entitled
to be cast in the general election of the directors of the Company. Until the
Distribution Date, (i) the Rights will be evidenced by the Common Stock
certificates and will be transferred with and only with such Common Stock
certificates, (ii) new Common Stock certificates issued after the Record Date
will contain a notation incorporating the Rights Agreement by reference and
(iii) the surrender for transfer of any certificates for Common Stock
outstanding will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificate. Pursuant to the Rights Agreement,
the Company reserves the right to require prior to the occurrence of a
Triggering Event (as defined below) that, upon any exercise of Rights, a number
of Rights be exercised so that only whole shares of Preferred Stock will be
issued.
The Rights are not exercisable until the Distribution Date and will
expire at 5:00 P.M. (New York City time) on April 28, 2009 (the "Expiration
Date"), unless such date is extended or the Rights are earlier redeemed or
exchanged by the Company as described below.
As soon as practicable after the Distribution Date, Rights Certificates
will be mailed to holders of record of the Common Stock as of the close of
business on the Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except as otherwise determined by
the Board of Directors, only shares of Common Stock issued prior to the
Distribution Date will be issued with Rights.
In the event that a Person becomes an Acquiring Person, except pursuant
to an offer for all outstanding shares of Common Stock which the independent
directors determine to be fair and not inadequate and to otherwise be in the
best interests of the Company and its stockholders, after receiving advice from
one or more investment banking firms (a "Qualified Offer"), each holder of a
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Right will thereafter have the right to receive, upon exercise, Class A Common
Stock (or, in certain circumstances, cash, property or other securities of the
Company) having a value equal to two times the exercise price of the Right.
Notwithstanding any of the foregoing, following the occurrence of the event set
forth in this paragraph, all Rights that are, or (under certain circumstances
specified in the Rights Agreement) were, beneficially owned by any Acquiring
Person will be null and void. However, Rights are not exercisable following the
occurrence of the event set forth above until such time as the Rights are no
longer redeemable by the Company as set forth below.
For example, at an exercise price of $85.00 per Right, each Right not
owned by an Acquiring Person (or by certain related parties) following an event
set forth in the preceding paragraph would entitle its holder to purchase
$170.00 worth of Class A Common Stock (or other consideration, as noted above)
for $85.00. Assuming that the Class A Common Stock had a per share value of
$17.00 at such time, the holder of each valid Right would be entitled to
purchase 10 shares of Class A Common Stock for $85.00.
In the event that, on or at any time after a Stock Acquisition Date, the
Company (i) engages in a merger or other business combination transaction in
which the Company is not the surviving corporation (other than with an entity
which acquired the shares pursuant to a Qualified Offer), (ii) the Company
engages in a merger or other business combination transaction in which the
Company is the surviving corporation and any shares of the Company's Common
Stock are changed into or exchanged for other securities or assets or (iii) 50%
or more of the assets, cash flow or earning power of the Company and its
subsidiaries (taken as a whole) are sold or transferred so that each holder of a
Right (except as noted below) shall thereafter have the right to receive, upon
the exercise thereof at the then current exercise price of the Right, that
number of shares of common stock of the acquiring Company which at the time of
such transaction would have a market value (determined as provided in the Rights
Agreement) of two times the exercise price of the Right. The events set forth in
this paragraph and in the second preceding paragraph are referred to as the
"Triggering Events."
At any time until the tenth business day after a Stock Acquisition Date,
the Company may redeem the Rights in whole, but not in part, at a price of $.01
per Right, (payable in cash, Class A Common Stock or other consideration deemed
appropriate by the Board of Directors). Immediately upon the action of the Board
of Directors of the Company electing to redeem the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
$.01 redemption price.
At any time after a person becomes an Acquiring Person and prior to the
acquisition by such person or group of fifty percent (50%) or more of the Voting
Power as represented by the outstanding Common Stock, the Board may exchange the
Rights (other than Rights owned by such person or group which have become void),
in whole or in part, for Class A Common Stock at an exchange ratio of one share
of Class A Common Stock, or one one-hundredth of a share of Preferred Stock (or
of a share of a class or series of the Company's preferred stock having
equivalent rights, preferences and privileges), per Right (subject to
adjustment).
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Class A Common Stock (or other consideration) of the Company or
for common stock of the acquiring company or in the event of the redemption of
the Rights as set forth above.
Any of the provisions of the Rights Agreement may be amended by the Board
of Directors of the Company prior to the Distribution Date. After the
Distribution Date, the provisions of the Rights Agreement may be amended by the
Board in order to cure any ambiguity, to make changes which do not adversely
affect the interests of holders of Rights, or to shorten or lengthen any time
period under the Rights Agreement. The foregoing notwithstanding, no amendment
may be made at such time as the Rights are not redeemable.
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BUSINESS COMBINATION STATUTE
As a corporation organized under the laws of the State of Delaware, the
Company will be subject to Section203 of the Delaware General Corporation Law (
the "DGCL"), which restricts certain business combinations between the Company
and an "interested stockholder" (in general, a stockholder owning 15% or more of
the Company's outstanding voting stock) or its affiliates or associates for a
period of three years following the time that the stockholder becomes an
"interested stockholder." The restrictions do not apply if
- prior to an interested stockholder becoming such, the Board of Directors
approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in any person
becoming an interested stockholder, such interested stockholder owns at
least 85% of the voting stock of the Company outstanding at the time the
transaction commenced (excluding shares owned by certain employee stock
ownership plans and persons who are both directors and officers of the
Company); or
- at or subsequent to the time an interested stockholder becomes such, the
business combination is both approved by the Board of Directors and
authorized at an annual or special meeting of the Company's
stockholders, not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock not owned by the
interested stockholder.
Under certain circumstances, Section203 of the DGCL makes it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three-year period,
although the stockholders may elect to exclude a corporation from the
restrictions imposed under Section203. The Certificate of Incorporation of the
Company does not exclude the Company from the restrictions imposed under
Section203 of the DGCL. It is anticipated that the provisions of Section203 of
the DGCL may encourage companies interested in acquiring the Company to
negotiate in advance with the Board of Directors, since the stockholder approval
requirement would be avoided if a majority of the directors then in office
approves, prior to the date on which a stockholder becomes an interested
stockholder, either the business combination or the transaction that results in
the stockholder becoming an interested stockholder.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Certain of the provisions of the Certificate of Incorporation and Bylaws
discussed below may have the effect, either alone or in combination with the
provisions of Section203 discussed above, of making more difficult or
discouraging a tender offer, proxy contest, or other takeover attempt that is
opposed by the Board of Directors but that a stockholder might consider to be in
such stockholder's best interest. Those provisions include
- the classification of the Company's Board of Directors;
- restrictions on the rights of stockholders to remove or elect directors;
and
- prohibitions against stockholders calling a special meeting of
stockholders or acting by unanimous written consent in lieu of a
meeting.
CLASSIFIED BOARD; NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Certificate of Incorporation and Bylaws of the Company provide that
the Board of Directors--except for directors who may be elected by the holders
of Preferred Stock--will be divided into three classes of directors, initially
with four directors in two of the classes and two directors in the third class.
One class is to be originally elected for a term expiring at the annual meeting
of
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stockholders to be held in 1999, another class is to be originally elected for a
term expiring at the annual meeting of stockholders to be held in 2000, and
another class is to be originally elected for a term expiring at the annual
meeting of stockholders to be held in 2001. Each director is to hold office
until his or her successor is duly elected and qualified. Commencing with the
1999 annual meeting of stockholders, directors elected to succeed directors
whose terms then expire will be elected for a term of office to expire at the
third succeeding annual meeting of stockholders after their election, with each
director to hold office until such person's successor is duly elected and
qualified.
The Certificate of Incorporation provides that, subject to any rights of
holders of Preferred Stock to elect directors under specified circumstances, the
number of directors will be fixed from time to time exclusively pursuant to a
resolution adopted by directors constituting a majority of the total number of
directors that the Company would have if there were no vacancies on the Board of
Directors (the "Whole Board"), with the Whole Board consisting of not more than
15 nor less than seven directors. The Certificate of Incorporation also provides
that, subject to any rights of holders of Preferred Stock or any other series or
class of stock, and unless the Board of Directors otherwise determines, any
vacancies will be filled only by the affirmative vote of a majority of the
remaining directors, even if less than a quorum. Accordingly, absent an
amendment to the Certificate of Incorporation, the Board of Directors could
prevent any stockholder from enlarging the Board of Directors and filling the
new directorships with such stockholder's own nominees.
The Certificate of Incorporation and Bylaws of the Company provide that,
subject to the rights of holders of Preferred Stock to elect directors under
specified circumstances, directors may be removed only for cause and only upon
the affirmative vote of holders of at least 80% of the voting power of all the
then outstanding shares of stock entitled to vote generally in the election of
directors ("Voting Stock"), voting together as a single class.
The classification of directors will have the effect of making it more
difficult for stockholders to change the composition of the Board of Directors.
At least two annual meetings of stockholders, instead of one, will generally be
required to effect a change in a majority of the Board of Directors. Such a
delay may help ensure that the Company's directors, if confronted by a holder
attempting to force a proxy contest, a tender or exchange offer, or an
extraordinary corporate transaction, would have sufficient time to review the
proposal as well as any available alternatives to the proposal and to act in
what they believe to be the best interest of the stockholders. The
classification provisions will apply to every election of directors, however,
regardless of whether a change in the composition of the Board of Directors
would be beneficial to the Company and its stockholders and whether or not a
majority of the Company's stockholders believe that such a change would be
desirable. The classification provisions could also have the effect of
discouraging a third party from initiating a proxy contest, making a tender
offer or otherwise attempting to obtain control of the Company, even though such
an attempt might be beneficial to the Company and its stockholders. The
classification of the Board of Directors could thus increase the likelihood that
incumbent directors will retain their positions. In addition, because the
classification provisions may discourage accumulations of large blocks of the
Company's stock by purchasers whose objective is to take control of the Company
and remove a majority of the Board of Directors, the classification of the Board
of Directors could tend to reduce the likelihood of fluctuations in the market
price of the common stock that might result from accumulations of large blocks.
Accordingly, stockholders could be deprived of certain opportunities to sell
their shares of common stock at a higher market price than might otherwise be
the case.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Certificate of Incorporation and Bylaws provide that, and subject to
the rights of any holders of Preferred Stock to elect additional directors under
specified circumstances, stockholder action can be taken only at an annual or
special meeting of stockholders and stockholder action may not be taken by
written consent in lieu of a meeting. The Bylaws provide that, subject to the
rights of holders of any series of Preferred Stock to elect additional directors
under specified circumstances,
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special meetings of stockholders can be called only by the Board of Directors
pursuant to a resolution adopted by a majority of the Whole Board or the
Chairman of the Board. Moreover, the business permitted to be conducted at any
special meeting of stockholders is limited to the business brought before the
meeting pursuant to the notice of meeting given by the Company.
The provisions of the Certificate of Incorporation and Bylaws of the
Company prohibiting stockholder action by written consent and permitting special
meetings to be called only by the Chairman or at the request of a majority of
the Whole Board may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting. The provisions would also prevent the
holders of a majority of the voting power of the Voting Stock from unilaterally
using the written consent procedure to take stockholder action. Moreover, a
stockholder could not force stockholder consideration of a proposal over the
opposition of the Chairman or a majority of the Whole Board by calling a special
meeting of stockholders prior to the time such parties believe such
consideration to be appropriate.
LIABILITY OF DIRECTORS; INDEMNIFICATION
The Certificate of Incorporation provides that a director will not be
personally liable for monetary damages to the Company or its stockholders for
breach of fiduciary duty as a director, except for liability
- for any breach of the director's duty of loyalty to the Company or its
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- for paying a dividend or approving a stock repurchase in violation of
Section174 of the DGCL; or
- for any transaction from which the director derived an improper personal
benefit. Any amendment or repeal of such provision will not adversely
affect any right or protection of a director existing under such
provision for any act or omission occurring prior to such amendment or
repeal.
The Certificate of Incorporation provides that the Company will indemnify
any person who was or is a party to any threatened, pending, or completed
action, suit, or proceeding because he or she is or was a director or officer of
the Company, or is or was serving at the request of the Company as a director or
officer of another corporation, partnership, or other enterprise. The
Certificate of Incorporation provides that this indemnification will be from and
against expenses, judgments, fines, and amounts paid in settlement by the
indemnitee. However, this indemnification will only be provided if the
indemnitee acted in good faith and in a manner he or she reasonably believed to
be in, or not opposed to, the best interests of the Company.
LISTING
The Class A Common Stock is listed on the NYSE under the trading symbol
"WDR." The Class B Common Stock is listed on the NYSE under the trading symbol
"WDR.B."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is EquiServe.
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DESCRIPTION OF THE TRUST PREFERRED SECURITIES
WADDELL & REED Capital Trust I may issue only one series of Trust
Preferred Securities and such series will have the terms described in the
applicable prospectus supplement. The Declaration of WADDELL & REED Capital
Trust I authorizes the Regular Trustees of WADDELL & REED Capital Trust I to
issue on behalf of WADDELL & REED Capital Trust I one series of Trust Preferred
Securities. The Declaration will be qualified as an indenture under the Trust
Indenture Act. The Trust Preferred Securities will have terms, including with
respect to distributions, redemption, voting, liquidation rights and such other
preferred, deferred or other special rights or such restrictions as described in
the Declaration or made part of the Declaration by the Trust Indenture Act and
which will mirror the terms of the Corresponding Junior Subordinated Debt
Securities held by WADDELL & REED Capital Trust I and described in the
applicable prospectus supplement.
You must review the prospectus supplement relating to the Trust Preferred
Securities of WADDELL & REED Capital Trust I for specific terms, including:
- the distinctive designation of the Trust Preferred Securities;
- the number and the initial public offering price of Trust Preferred
Securities issued by WADDELL & REED Capital Trust I;
- the annual distribution rate (or method of determining such rate) for
the Trust Preferred Securities, the date or dates upon which the
distributions will be payable and the date or dates from which
distributions will accrue;
- whether distributions on the Trust Preferred Securities will be
cumulative, and, in the case of Trust Preferred Securities having
cumulative distribution rights, the date or dates or method of
determining the date or dates from which the distributions on the Trust
Preferred Securities will be cumulative;
- the amount or amounts which will be paid out of the assets of WADDELL &
REED Capital Trust I to the holders of Trust Preferred Securities of
WADDELL & REED Capital Trust I upon voluntary or involuntary
dissolution, winding-up or termination of WADDELL & REED Capital Trust
I;
- the obligation, if any, of WADDELL & REED Capital Trust I to purchase or
redeem Trust Preferred Securities issued by WADDELL & REED Capital Trust
I and the price or prices at which, the period or periods within which,
and the terms and conditions upon which, the Trust Preferred Securities
will be purchased or redeemed, in whole or in part, pursuant to such
obligation;
- the voting rights, if any, of the Trust Preferred Securities in addition
to those required by law, including the number of votes per Trust
Preferred Security and any requirement for the approval by the holders
of Trust Preferred Securities, as a condition to specified action or
amendments to the Declaration of WADDELL & REED Capital Trust I;
- the terms and conditions, if any, upon which the Corresponding Junior
Subordinated Debt Securities may be distributed to holders of Trust
Preferred Securities;
- the right and/or obligation, if any, of the Company to redeem or
purchase the Trust Preferred Securities pursuant to any sinking fund or
similar provisions or at the option of the holder of the Trust Preferred
Securities and the period or periods for which, the price or prices at
which, and the terms and conditions upon which, the Trust Preferred
Securities will be redeemed or repurchased, in whole or in part,
pursuant to such right and/or obligation;
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- the terms and conditions, if any, upon which the Trust Preferred
Securities may be converted into shares of the common stock of the
Company, including the conversion price and the circumstances, if any,
under which the conversion right will expire;
- if applicable, any securities exchange upon which the Trust Preferred
Securities will be listed; and
- any other relevant rights, preferences, privileges, limitations or
restrictions of Trust Preferred Securities issued by WADDELL & REED
Capital Trust I not inconsistent with the Declaration of WADDELL & REED
Capital Trust I or with applicable law.
All Trust Preferred Securities will be guaranteed by the Company to the
extent described below under "Description of the Preferred Securities
Guarantees."
Certain United States federal income tax considerations applicable to any
offering of Trust Preferred Securities will be described in the applicable
prospectus supplement.
In connection with the issuance of Trust Preferred Securities, WADDELL &
REED Capital Trust I will issue one series of Common Securities. The Declaration
of WADDELL & REED Capital Trust I authorizes the Regular Trustees of the trust
to issue on behalf of WADDELL & REED Capital Trust I one series of Common
Securities. The Common Securities will have the terms relating to distributions,
redemption, voting, liquidation rights or such restrictions as are described in
the Declaration. Except for voting rights, the terms of the Common Securities
issued by WADDELL & REED Capital Trust I will be substantially identical to the
terms of the Trust Preferred Securities issued by the trust. The Common
Securities will rank on a parity, and payments will be made on the Common
Securities PRO RATA, with the Trust Preferred Securities except that, upon an
Event of Default under the Declaration, the rights of the holders of the Common
Securities to payment for distributions and payments upon liquidation,
redemption and otherwise will be subordinated to the rights of the holders of
the Trust Preferred Securities. Except in certain limited circumstances, the
Common Securities will also carry the right to vote to appoint, remove or
replace any of the WADDELL & REED Capital Trustees of WADDELL & REED Capital
Trust I. All of the Common Securities of WADDELL & REED Capital Trust I will be
directly or indirectly owned by the Company.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If an Event of Default under the Declaration of WADDELL & REED Capital
Trust I occurs and is continuing, then the holders of Trust Preferred Securities
of WADDELL & REED Capital Trust I will rely on the enforcement by the
Institutional Trustee of its rights as a holder of the applicable series of
Junior Subordinated Debt Securities against the Company. In addition, the
holders of a majority in liquidation amount of the Trust Preferred Securities of
WADDELL & REED Capital Trust I will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
Institutional Trustee or to direct the exercise of any trust or power conferred
upon the Institutional Trustee under the applicable Declaration, including the
right to direct the Institutional Trustee to exercise the remedies available to
it as a holder of the Junior Subordinated Debt Securities.
If the Institutional Trustee fails to enforce its rights under the
applicable series of Junior Subordinated Debt Securities, a holder of Trust
Preferred Securities of WADDELL & REED Capital Trust I may institute a legal
proceeding directly against the Company to enforce the Institutional Trustee's
rights without first instituting any legal proceeding against the Institutional
Trustee or any other person or entity. However, if an Event of Default under the
applicable Declaration has occurred and is continuing and such event is
attributable to the failure of the Company to pay interest or principal on the
applicable series of Junior Subordinated Debt Securities on the date such
interest or principal is otherwise payable (or in the case of redemption, on the
redemption date), then a holder of Trust Preferred Securities of WADDELL & REED
Capital Trust I may directly institute a proceeding
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for enforcement of payment to the holder of the principal of or interest on the
applicable series of Junior Subordinated Debt Securities having a principal
amount equal to the aggregate liquidation amount of the Trust Preferred
Securities of such holder (a "Direct Action") on or after the respective due
date. In connection with a Direct Action, the Company will be subrogated to the
rights of such holder of Trust Preferred Securities under the applicable
Declaration to the extent of any payment made by the Company to a holder of
Trust Preferred Securities in a Direct Action. This means that the Company will
be entitled to payment of amounts that a holder of Trust Preferred Securities
receives in respect of an unpaid distribution that resulted in the bringing of
the Direct Action to the extent that such holder receives or has already
received full payment relating to such unpaid distribution from WADDELL & REED
Capital Trust I.
INFORMATION CONCERNING THE INSTITUTIONAL TRUSTEE
For information concerning the relationship between the Institutional
Trustee and the Company, see "Description of Junior Subordinated Debt
Securities--Regarding the Trustee" and "Description of Senior Debt
Securities--Regarding the Trustee" in this prospectus.
INFORMATION CONCERNING THE DELAWARE TRUSTEE
For information concerning the relationship between the Delaware Trustee,
and the Company, see "Description of Senior Debt Securities--Regarding the
Trustee" in this prospectus.
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DESCRIPTION OF THE PREFERRED SECURITIES GUARANTEES
The guarantees with respect to the Trust Preferred Securities (the
"Preferred Securities Guarantees") will be executed and delivered by the Company
for the benefit of the holders from time to time of Trust Preferred Securities.
Each Preferred Securities Guarantee will be qualified as an indenture under the
Trust Indenture Act. An institutional trustee will act as indenture trustee
under each Preferred Securities Guarantee for purposes of the Trust Indenture
Act (the "Preferred Guarantee Trustee"). The terms of each Preferred Securities
Guarantee will be those in such Preferred Securities Guarantee and those made
part of such Preferred Securities Guarantee by the Trust Indenture Act. The
summary of the terms and provisions of the Preferred Securities Guarantees in
this section does not claim to be complete and is subject in all respects to the
provisions of, and is qualified in its entirety by reference to, the form of
Preferred Securities Guarantee, which is filed as an exhibit to the registration
statement of which this prospectus forms a part, and the Trust Indenture Act.
Each Preferred Securities Guarantee will be held by the Preferred Guarantee
Trustee for the benefit of the holders of the Trust Preferred Securities of
WADDELL & REED Capital Trust I.
GENERAL
Under each Preferred Securities Guarantee, the Company will irrevocably
and unconditionally agree, to the extent set forth in the guarantee, to pay in
full, to the holders of the Trust Preferred Securities issued by WADDELL & REED
Capital Trust I, the Guarantee Payments (as defined below), except to the extent
paid by WADDELL & REED Capital Trust I, as and when due, regardless of any
defense, right of set-off or counterclaim which WADDELL & REED Capital Trust I
may have or claim to have.
The following payments with respect to Trust Preferred Securities issued
by WADDELL & REED Capital Trust I, to the extent not paid by WADDELL & REED
Capital Trust I (the "Guarantee Payments"), will be subject to the applicable
Preferred Securities Guarantee (without duplication):
- any accrued and unpaid distributions which are required to be paid on
the Trust Preferred Securities, to the extent WADDELL & REED Capital
Trust I has funds available for such payments;
- the redemption price, including all accrued and unpaid distributions to
the date of payment (the "Redemption Price"), to the extent WADDELL &
REED Capital Trust I has funds available for such payments with respect
to any Trust Preferred Securities called for redemption by WADDELL &
REED Capital Trust I; and
- upon a voluntary or involuntary dissolution, winding-up or termination
of WADDELL & REED Capital Trust I, other than in connection with the
distribution of Corresponding Junior Subordinated Debt Securities to the
holders of Trust Preferred Securities or the redemption of all of the
Trust Preferred Securities, the lesser of (a) the aggregate of the
liquidation amount and all accrued and unpaid distributions on the Trust
Preferred Securities to the date of payment to the extent WADDELL & REED
Capital Trust I has funds available for the payment and (b) the amount
of assets of WADDELL & REED Capital Trust I remaining available for
distribution to holders of the Trust Preferred Securities in liquidation
of WADDELL & REED Capital Trust I.
The redemption price and liquidation amount will be fixed at the time the
Trust Preferred Securities are issued.
The Company's obligation to make a Guarantee Payment may be satisfied by
direct payment of the required amounts by the Company to the holders of Trust
Preferred Securities or by causing WADDELL & REED Capital Trust I to pay such
amounts to the holders.
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Each Preferred Securities Guarantee will not apply to any payment of
distributions except to the extent WADDELL & REED Capital Trust I has funds
available for the payments. If the Company does not make interest payments on
the Junior Subordinated Debt Securities purchased by WADDELL & REED Capital
Trust I, WADDELL & REED Capital Trust I will not pay distributions on the Trust
Preferred Securities issued by WADDELL & REED Capital Trust I and will not have
funds available for such a payment. See "Description of Junior Subordinated Debt
Securities--Certain Covenants of the Company." The Preferred Securities
Guarantee, when taken together with the Company's obligations under the Junior
Subordinated Debt Securities, the Junior Indenture and the Declaration,
including its obligations to pay costs, expenses, debts and liabilities of
WADDELL & REED Capital Trust I, other than with respect to the Trust Securities,
will provide a full and unconditional guarantee on a subordinated basis by the
Company of payments due on the Trust Preferred Securities.
The Company has also agreed separately to irrevocably and unconditionally
guarantee the obligations of WADDELL & REED Capital Trust I with respect to the
Common Securities (the "Common Securities Guarantees") to the same extent as the
Preferred Securities Guarantees, except that upon an Event of Default under the
Junior Indenture, holders of Trust Preferred Securities will have priority over
holders of Common Securities with respect to distributions and payments on
liquidation, redemption or otherwise.
MODIFICATION OF THE PREFERRED SECURITIES GUARANTEES; ASSIGNMENT
Except with respect to any changes which do not adversely affect the
rights of holders of Trust Preferred Securities (in which case no vote will be
required), each Preferred Securities Guarantee may be amended only with the
prior approval of the holders of not less than a majority in liquidation amount
of the outstanding Trust Preferred Securities issued by WADDELL & REED Capital
Trust I. The manner of obtaining the approval of holders of the Trust Preferred
Securities will be described in the applicable prospectus supplement. All
guarantees and agreements contained in a Preferred Securities Guarantee will
bind the successors, assigns, receivers, trustees and representatives of the
Company and will benefit the holders of the outstanding Trust Preferred
Securities of WADDELL & REED Capital Trust I.
TERMINATION
Each Preferred Securities Guarantee will terminate as to the Trust
Preferred Securities issued by WADDELL & REED Capital Trust I:
- upon full payment of the Redemption Price of all Trust Preferred
Securities of WADDELL & REED Capital Trust I;
- upon distribution of the Corresponding Junior Subordinated Debt
Securities held by WADDELL & REED Capital Trust I to the holders of the
Trust Preferred Securities of that WADDELL & REED Capital Trust I; or
- upon full payment of the amounts payable under the Declaration of
WADDELL & REED Capital Trust I upon liquidation of WADDELL & REED
Capital Trust I.
Each Preferred Securities Guarantee will continue to be effective or will
be reinstated, as the case may be, if at any time any holder of Trust Preferred
Securities issued by WADDELL & REED Capital Trust I must restore payment of any
sums paid under the Trust Preferred Securities or the Preferred Securities
Guarantee.
EVENTS OF DEFAULT
An event of default under a Preferred Securities Guarantee will occur
upon the failure of the Company to perform any of its payment or other
obligations under the guarantee.
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The holders of a majority in liquidation amount of the Trust Preferred
Securities relating to a Preferred Securities Guarantee have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Preferred Guarantee Trustee in respect of the Preferred Securities
Guarantee or to direct the exercise of any trust or power conferred upon the
Preferred Guarantee Trustee under such Trust Preferred Securities. If the
Preferred Guarantee Trustee fails to enforce the Preferred Securities Guarantee,
any holder of Trust Preferred Securities relating to the Preferred Securities
Guarantee may institute a legal proceeding directly against the Company to
enforce the Preferred Guarantee Trustee's rights under the Preferred Securities
Guarantee, without first instituting a legal proceeding against WADDELL & REED
Capital Trust I, the Preferred Guarantee Trustee or any other person or entity.
However, if the Company has failed to make a Guarantee Payment, a holder of
Trust Preferred Securities may directly institute a proceeding against the
Company for enforcement of the Preferred Securities Guarantee for the payment.
The Company waives any right or remedy to require that any action be brought
first against WADDELL & REED Capital Trust I or any other person or entity
before proceeding directly against the Company.
STATUS OF THE PREFERRED SECURITIES GUARANTEES
Unless otherwise provided in the applicable prospectus supplement, the
Preferred Securities Guarantees with respect to the Trust Preferred Securities
of WADDELL & REED Capital Trust I will constitute unsecured obligations of the
Company and will rank (i) subordinate and junior in right of payment to certain
other liabilities of the Company, as described in the prospectus supplement and
(ii) on a parity with any guarantee now or hereafter entered into by the Company
in respect of WADDELL & REED Capital Trust I or any other similar financing
vehicle sponsored by the Company.
The terms of the Trust Preferred Securities provide that each holder of
Trust Preferred Securities issued by WADDELL & REED Capital Trust I by
acceptance of the Trust Preferred Securities agrees to the subordination
provisions and other terms of the Preferred Securities Guarantee as described in
the applicable prospectus supplement.
The Preferred Securities Guarantees will constitute a guarantee of
payment and not of collection, meaning that the guaranteed party may institute a
legal proceeding directly against the guarantor to enforce its rights under the
Preferred Securities Guarantee without instituting a legal proceeding against
any other person or entity.
INFORMATION CONCERNING THE PREFERRED GUARANTEE TRUSTEE
Prior to the occurrence of a default with respect to a Preferred
Securities Guarantee, the Preferred Guarantee Trustee will undertake to perform
only the duties that are specifically described in the Preferred Securities
Guarantee and, after default, will exercise the same degree of care as a prudent
individual would exercise in the conduct of his or her own affairs. Subject to
such provisions, the Preferred Guarantee Trustee will be under no obligation to
exercise any of the powers given it by a Preferred Securities Guarantee at the
request of any holder of Trust Preferred Securities, unless the Preferred
Guarantee Trustee is offered reasonable indemnity against the costs, expenses
and liabilities which it might incur in exercising the powers.
For information concerning the relationship between the Preferred
Guarantee Trustee and the Company, see "Description of Junior Subordinated Debt
Securities--Regarding Trustee" and "Description of Senior Debt
Securities--Regarding the Trustee" in this prospectus.
GOVERNING LAW
The Preferred Securities Guarantees will be governed by and construed in
accordance with the laws of the State of New York.
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EFFECT OF OBLIGATIONS UNDER THE JUNIOR SUBORDINATED DEBT SECURITIES
AND THE PREFERRED SECURITIES GUARANTEE
The sole purpose of WADDELL & REED Capital Trust I is to issue the Trust
Securities evidencing undivided beneficial ownership interests in the assets of
WADDELL & REED Capital Trust I, and to invest the proceeds from the issuance and
sale in the Corresponding Junior Subordinated Debt Securities.
As long as payments of interest and other payments are made when due on
the Junior Subordinated Debt Securities, the payments will be sufficient to
cover distributions and payments due on the Trust Securities because of the
following factors:
- the aggregate principal amount of Junior Subordinated Debt Securities
will be equal to the sum of the aggregate stated liquidation amount of
the Trust Securities;
- the interest rate and the interest and other payment dates on the Junior
Subordinated Debt Securities will match the distribution rate and
distribution and other payment dates for the Trust Preferred Securities;
- the Company will pay, and WADDELL & REED Capital Trust I will not be
obligated to pay, directly or indirectly, all costs, expenses, debt, and
obligations of WADDELL & REED Capital Trust I, other than with respect
to the Trust Securities; and
- the Declaration provides that WADDELL & REED Capital Trust I Trustees
will not take or cause or permit WADDELL & REED Capital Trust I to,
among other things, engage in any activity that is not consistent with
the purposes of WADDELL & REED Capital Trust I.
Payments of distributions, to the extent funds are available, and other
payments due on the Trust Preferred Securities, to the extent funds are
available, are guaranteed by the Company as and to the extent described under
"Description of the Preferred Securities Guarantees". If the Company does not
make interest payments on the Corresponding Junior Subordinated Debt Securities
purchased by WADDELL & REED Capital Trust I, it is expected that WADDELL & REED
Capital Trust I will not have sufficient funds to pay distributions on the Trust
Preferred Securities. The Preferred Securities Guarantee does not apply to any
payment of distributions unless and until WADDELL & REED Capital Trust I has
sufficient funds for the payment of such distributions.
The Preferred Securities Guarantee covers the payment of distributions
and other payments on the Trust Preferred Securities only if and to the extent
that the Company has made a payment of interest or principal on the Junior
Subordinated Debt Securities held by WADDELL & REED Capital Trust I as its sole
asset. The Preferred Securities Guarantee, when taken together with the
Company's obligations under the Junior Subordinated Debt Securities and the
Junior Indenture and its obligations under the Declaration, including its
obligations to pay costs, expenses, debts and liabilities of WADDELL & REED
Capital Trust I (other than with respect to the Trust Securities), provide a
full and unconditional guarantee on a subordinated basis of amounts due on the
Trust Preferred Securities.
If the Company fails to make interest or other payments on the Junior
Subordinated Debt Securities when due, taking account of any extension period,
the Declaration provides a mechanism whereby the holders of the Trust Preferred
Securities may direct the Institutional Trustee to enforce its rights under the
Junior Subordinated Debt Securities. If the Institutional Trustee fails to
enforce its rights under the Junior Subordinated Debt Securities, a holder of
Trust Preferred Securities may institute a legal proceeding against the Company
to enforce the Institutional Trustee's rights under the Junior Subordinated Debt
Securities without first instituting any legal proceeding against the
Institutional Trustee or any other person or entity. However, if an Event of
Default under the Declaration has occurred and is continuing and such event is
due to the failure of the Company to pay interest or principal on the Junior
Subordinated Debt Securities on the date such interest or principal is otherwise
payable (or in the case of redemption on the redemption date), then a holder of
Trust Preferred Securities may institute a Direct Action for payment on or after
the respective due date.
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In connection with a Direct Action, the Company will be subrogated to the
rights of such holder of Trust Preferred Securities under the Declaration to the
extent of any payment made by the Company to such holder of Trust Preferred
Securities in a Direct Action. The Company, under the Preferred Securities
Guarantee, acknowledges that the Guarantee Trustee will enforce the Preferred
Securities Guarantee on behalf of the holders of the Trust Preferred Securities.
If the Company fails to make payments under the Preferred Securities Guarantee,
the Preferred Securities Guarantee provides a mechanism whereby the holders of
the Trust Preferred Securities may direct the Guarantee Trustee to enforce its
rights under the guarantee. Any holder of Trust Preferred Securities may
institute a legal proceeding directly against the Company to enforce the
Preferred Guarantee Trustee's rights under the Preferred Securities Guarantee
without first instituting a legal proceeding against WADDELL & REED Capital
Trust I, the Guarantee Trustee, or any other person or entity.
The Company and WADDELL & REED Capital Trust I believe that the
mechanisms and obligations described above, taken together, provide a full and
unconditional guarantee by the Company on a subordinated basis of payments due
on the Trust Preferred Securities. See "Description of the Preferred Securities
Guarantees--General."
PLAN OF DISTRIBUTION
The securities offered under this prospectus may be sold in a public
offering to or through agents, underwriters or dealers designated from time to
time or directly to purchasers. The Company and WADDELL & REED Capital Trust I
may sell their securities as soon as practicable after effectiveness of the
registration statement of which this prospectus forms a part. The names of any
underwriters or dealers involved in the sale of the securities in respect of
which this prospectus is delivered, the amount or number of securities to be
purchased by any such underwriters and any applicable commissions or discounts
will be described in the applicable prospectus supplement.
Underwriters may offer and sell securities at a fixed price or prices,
which may be changed, or from time to time at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. In connection with the sale of the securities, underwriters
may be deemed to have received compensation from the Company and/or WADDELL &
REED Capital Trust I in the form of underwriting discounts or commissions and
may also receive commissions. Underwriters may sell securities to or through
dealers, and such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters.
Any underwriters may engage in stabilizing transactions and syndicate
covering transactions in accordance with Rule 104 under the Exchange Act.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Such stabilizing transactions and syndicate covering transactions may cause the
price of the securities to be higher than it would otherwise be in the absence
of such transactions.
Any underwriting compensation paid by the Company and/or WADDELL & REED
Capital Trust I to underwriters in connection with the offering of securities,
and any discounts, concessions or commissions allowed by such underwriters to
participating dealers, will be described in an accompanying prospectus
supplement. Any such compensation will not exceed 8%. Underwriters and dealers
participating in the distribution of securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of such securities may be deemed to be underwriting
discounts and commissions, under the Securities Act. Underwriters and dealers
may be entitled under agreements with the Company and WADDELL & REED Capital
Trust I, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act, and to
reimbursement by the Company for certain expenses.
36
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In connection with the offering of the securities of the Company or
WADDELL & REED Capital Trust I, the Company or WADDELL & REED Capital Trust I
may grant to the underwriters an option to purchase additional securities to
cover over-allotments, if any, at the initial public offering price (with an
additional underwriting commission), as may be described in the accompanying
prospectus supplement. If the Company or WADDELL & REED Capital Trust I grants
any over-allotment option, the terms of such over-allotment option will be
described in the prospectus supplement for such securities.
Underwriters and dealers may engage in transactions with, or perform
services for, the Company and/or WADDELL & REED Capital Trust I and/or any of
their affiliates in the ordinary course of business. Certain of the underwriters
and their associates may be customers of, including borrowers from, engage in
transactions with, and perform services for, the Company, the Banks and other
subsidiaries of the Company in the ordinary course of business.
Securities will be new issues of securities and will have no established
trading market. Any underwriters to whom such securities are sold for public
offering and sale may make a market in such securities, but such underwriters
will not be obligated to do so and may discontinue any market making at any time
without notice. Such securities may or may not be listed on a national
securities exchange or the Nasdaq National Market. No assurance can be given as
to the liquidity of or the existence of trading markets for any securities.
One or more direct or indirect subsidiaries of the Company may from time
to time act as an agent or underwriter in connection with the sale of the
securities to the extent permitted by law. The participation of any such
subsidiary will comply with Rule 2720 of the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "NASD"). The offer and sale of the
securities will comply with Rule 2810 of the Rules of Conduct of the NASD. In
addition, no NASD member participating in offers and sales of securities will
execute a transaction in the securities in a discretionary account without the
prior specific written approval of the member's customer.
This prospectus and the related prospectus supplement may be used by
direct or indirect subsidiaries of the Company in connection with offers and
sales related to secondary market transactions. Such subsidiaries may act as
principal or agent in such transactions. Such sales may be made at prices
related to prevailing market prices at the time of sale.
LEGAL MATTERS
Unless otherwise indicated in the applicable prospectus supplement,
certain matters of Delaware law relating to the validity of the Trust Preferred
Securities will be passed upon on behalf of WADDELL & REED Capital Trust I by
Skadden, Arps, Slate, Meagher & Flom LLP, special Delaware counsel to the
Company and WADDELL & REED Capital Trust I. Unless otherwise indicated in the
applicable prospectus supplement, the validity of the Senior Debt Securities,
the Junior Subordinated Debt Securities and the Preferred Securities Guarantee
and certain matters relating thereto will be passed upon for the Company by
Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to the Company. Unless
otherwise indicated in the applicable prospectus supplement, certain United
States federal income taxation matters will be passed upon for the Company and
WADDELL & REED Capital Trust I by Skadden, Arps, Slate, Meagher & Flom LLP,
special tax counsel to the Company and WADDELL & REED Capital Trust I.
EXPERTS
The consolidated financial statements of the Company included in the
Annual Report on Form 10-K for the year ended December 31, 1999, incorporated
herein by reference have been audited by KPMG LLP, independent public
accountants, as indicated in their report with respect thereto, and are
incorporated herein by reference in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report.
37
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$200,000,000
WADDELL & REED FINANCIAL, INC.
7 1/2% NOTES DUE JANUARY 18, 2006
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P R O S P E C T U S S U P P L E M E N T
-----------------------------------
MERRILL LYNCH & CO.
JP MORGAN
MORGAN STANLEY DEAN WITTER
STEPHENS INC.
JANUARY 12, 2001
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