UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________
Commission file number 001-13913
WADDELL & REED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0261715
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6300 LAMAR AVENUE
OVERLAND PARK, KANSAS
66202
(Address of principal executive offices)
(Zip Code)
(913) 236-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Shares outstanding of each of the registrant's classes of common stock
as of June 30, 2000:
Class Outstanding as of June 30, 2000
------------------------------------ -------------------------------
Class A Common stock, $.01 par value 41,877,828
Class B Common stock, $.01 par value 40,255,619
WADDELL & REED FINANCIAL, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 2000
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets at
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations
for the three months and six months
ended June 30, 2000 and June 30, 1999 4
Consolidated Statements of Comprehensive
Income for the three months and six months
ended June 30, 2000 and June 30, 1999 5
Consolidated Statements of Changes in Stockholders'
Equity for the six months ended June 30, 2000 6
Consolidated Statements of Cash Flows for
the six months ended June 30, 2000 and June 30, 1999 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
================================================================================================================================
June 30, December 31,
2000 1999
ASSETS (unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 80,666 60,977
Investment securities, available-for-sale 61,448 90,245
Receivables:
United funds and W&R funds 12,719 7,597
Customers and other 29,523 19,541
Deferred income taxes 0 37
Prepaid expenses and other current assets 4,675 7,111
- --------------------------------------------------------------------------------------------------------------------------------
Total current assets 189,031 185,508
Property and equipment, net 42,618 27,633
Deferred sales commissions, net 7,429 1,851
Goodwill (net of accumulated amortization of $28,945 and $26,493) 170,008 112,994
Deferred income taxes 0 5,665
Other assets 2,454 1,422
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $ 411,540 335,073
================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Current liabilities:
Accounts payable $ 37,136 34,002
Accrued sales force compensation 17,115 14,578
Short term notes payable 215,404 125,307
Income taxes payable 18,279 8,284
Other current liabilities 19,198 16,456
- --------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 307,132 198,627
Deferred income taxes 286 0
Accrued pensions and post-retirement costs 11,912 10,103
Other liabilities 254 0
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 319,584 208,730
- --------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity :
Common stock (See table below) 997 997
Additional paid-in capital 236,716 238,434
Retained earnings 152,085 97,129
Deferred compensation (10,527) (11,246)
Treasury stock (See table below) (287,165) (198,360)
Accumulated other comprehensive income (150) (611)
- --------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 91,956 126,343
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 411,540 335,073
================================================================================================================================
Common stock
($.01 Par value) 2000 1999
---------------- ---- ----
Class A Class B Class A Class B
------- ------- ------- -------
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..................................... 41,877,828 40,255,619 44,478,318 41,971,870
Treasury Stock.................................. 6,335,433 11,231,881 3,734,943 9,515,630
See accompanying notes to unaudited consolidated financial statements.
3
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Unaudited (in thousands, except for per share data)
============================================================================================ =============================
For the three months For the six months
ended June 30, ended June 30,
----------------------- ---------------------------
2000 1999 2000 1999
- -------------------------------------------------------------------------------------------- -----------------------------
Revenue:
Investment management fees $ 62,301 $ 39,707 $ 126,106 $ 77,023
Underwriting and distribution fees 55,891 33,058 101,372 63,590
Shareholder service fees 13,604 10,392 24,898 20,094
Investment and other revenue 1,979 2,548 6,141 5,471
- -------------------------------------------------------------------------------------------- -----------------------------
Total revenue 133,775 85,705 258,517 166,178
- -------------------------------------------------------------------------------------------- -----------------------------
Expenses:
Underwriting and distribution 49,914 32,432 91,310 62,244
Compensation and related costs 14,423 9,606 28,424 18,743
General and administrative 7,441 4,494 14,053 8,545
Depreciation 885 529 1,516 1,062
Interest expense 4,268 1,143 6,767 2,006
Amortization of goodwill 1,523 726 2,452 1,452
- -------------------------------------------------------------------------------------------- ---------------------------
Total expenses 78,454 48,930 144,522 94,052
- -------------------------------------------------------------------------------------------- -----------------------------
Income before provision for income taxes 55,321 36,775 113,995 72,126
Provision for income taxes 21,611 13,986 44,159 27,354
- -------------------------------------------------------------------------------------------- -----------------------------
Net income $ 33,710 $ 22,789 $ 69,836 $ 44,772
============================================================================================ =============================
Net income per share:
- Basic $ 0.41 $ 0.25 $ 0.84 $ 0.49
- Diluted $ 0.39 $ 0.24 $ 0.81 $ 0.48
============================================================================================ =============================
Weighted average shares outstanding:
- Basic 82,129 90,599 83,428 91,773
- Diluted 86,218 93,317 86,718 94,065
============================================================================================ =============================
Dividends declared per common share $ 0.0884 $ 0.0884 $ 0.1768 $ 0.1768
See accompanying notes to unaudited consolidated financial statements.
4
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Unaudited (in thousands)
===================================================================================================================================
For the three months For the six months
ended June 30, ended June 30,
----------------------- -----------------------
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 33,710 $ 22,789 $ 69,836 $ 44,772
Other comprehensive income:
Net unrealized appreciation (depreciation) of investments during
the period, net of income taxes of $417, $(421), $1,104, and $(625) 683 (678) 1,775 (1,006)
Reclassification adjustment for amounts included in net income, net of
income taxes of $(5), $81, $(822), and $(112) (8) 130 (1,314) (178)
- ---------------------------------------------------------------------------------------------------------- -----------------------
Comprehensive Income $ 34,385 $ 22,241 $ 70,297 $ 43,588
===================================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
5
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended June 30, 2000
Unaudited (in thousands)
====================================================================================================================================
Accumulated
Additional other Total
Common stock paid-in Retained Deferred Treasury Comprehensive stockholders'
Shares Amount capital earnings Compensation Stock Income equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 99,701 $ 997 238,434 97,129 (11,246) (198,360) (611) 126,343
Net income 0 0 0 69,836 0 0 0 69,836
Recognition of deferred compensation 0 0 0 0 719 0 0 719
Dividends paid 0 0 0 (14,880) 0 0 0 (14,880)
Exercise of stock options, net 0 0 (1,718) 0 0 7,372 0 5,654
Tax benefit from exercise of options 0 0 0 0 0 0 0 0
Treasury stock purchases 0 0 0 0 0 (96,177) 0 (96,177)
Unrealized loss on investment
securities 0 0 0 0 0 0 461 461
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 99,701 $ 997 236,716 152,085 (10,527) (287,165) (150) 91,956
====================================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
6
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited (in thousands)
====================================================================================================
For the six months ended June 30,
-------------------------------------
2000 1999
- ----------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 69,836 $ 44,772
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,005 2,514
Recognition of deferred compensation 719 679
(Gain)/Loss on sale of investments (2,096) 65
(Gain)/Loss on sale and retirement of fixed assets (17) 17
Capital gains and dividends reinvested (77) (61)
Deferred income taxes 5,773 1,988
Changes in assets and liabilities (net of acquisition):
Receivables from funds (5,122) (2,121)
Other receivables (2,826) 5,566
Other assets (3,737) (4,411)
Accounts payable 3,098 6,319
Other liabilities 8,994 (47)
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 78,550 55,280
- ----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to investment securities (7,756) (2,676)
Proceeds from sale of investment securities 37,761 7,278
Proceeds from maturity of investment securities 2,185 328
Additions of property and equipment (15,464) (4,130)
Investment in real estate 0 552
Acquisition of Legend (net of $1,113 cash acquired) (60,185) 0
- ----------------------------------------------------------------------------------------------------
Net cash (used in)/provided by investing activities (43,459) 1,352
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings on credit facility 90,000 50,000
Cash dividends (14,880) (16,411)
Purchase of treasury stock (96,177) (69,119)
Exercise of stock options 5,655 352
- ----------------------------------------------------------------------------------------------------
Net cash used in financing activities (15,402) (35,178)
- ----------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 19,689 21,454
Cash and cash equivalents at beginning of period 60,977 30,180
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 80,666 $ 51,634
====================================================================================================
See accompanying notes to unaudited consolidated financial statements.
7
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 ("Company") derive their
revenues primarily from investment management, administration, distribution and
related services provided to the Waddell & Reed Advisors Funds ("Advisors
Funds"), W&R Funds, Target/United 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 June 30, 2000 and 1999 and its financial
position at June 30, 2000. These financial statements should be read in
conjunction with the Company's audited 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
June 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. 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, 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 The Legend Group are included with
those of the Company commencing on the date of acquisition. The purchase price
of $61,298,000, including direct costs, has been allocated to the assets
acquired and liabilities assumed resulting in goodwill of $59,466,000, 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 The Legend Group of specified earnings levels
over the next three years. These contingent payments could aggregate to as much
as $14.0 million.
8
A summary of the net assets acquired is as follows (in thousands):
Assets acquired
Cash and cash equivalents $ 1,113
Accounts receivable 7,156
Goodwill 59,466
Other assets 1,949
----------
Total 69,684
Liabilities assumed 8,386
----------
Total purchase price $ 61,298
==========
LIQUIDITY AND CAPITAL
On April 26, 2000, the Company declared a dividend payable on August 1,
2000 in the amount of $.0884 per share to shareholders of record as of July 11,
2000. The total dividend paid was $7,261,000.
For the three month period ended June 30, 2000, the Company repurchased
223,000 Class A and Class B common shares at an average price of $23.17 per
share, on a post-split basis. For the six month period ended June 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 June 30, 2000 and
1999, respectively. Diluted earnings per share for these periods also includes
the dilutive impact of stock options.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q
CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE COMPANY'S
EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL
STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACT INCLUDED IN THIS FORM 10-Q
REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS STRATEGY AND OTHER PLANS
AND OBJECTIVES FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY
BELIEVES THAT THE ASSUMPTIONS AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL
PROVE TO HAVE BEEN CORRECT OR THAT THE COMPANY WILL TAKE ANY ACTIONS THAT MAY
PRESENTLY BE PLANNED AND NEITHER THE COMPANY NOR ANY OTHER PERSON WILL BE
RESPONSIBLE FOR THE ACCURACY OR COMPLETENESS OF ANY SUCH FORWARD-LOOKING
STATEMENTS. CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE DISCLOSED IN THE "RISK FACTORS"
SECTION OF THE COMPANY'S FORM 10-K ANNUAL REPORT AND ARE DISCUSSED BELOW IN THE
"FORWARD-LOOKING INFORMATION" SECTION. ALL SUBSEQUENT WRITTEN OR ORAL
FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS
BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS. UPDATED
INFORMATION WILL BE
9
PERIODICALLY PROVIDED BY THE COMPANY AS REQUIRED BY THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED.
OVERVIEW
The Company derives its revenues primarily from providing investment
management, distribution and administrative services to the Advisors Funds, W&R
Funds and Target Funds and institutional accounts. Investment management fees,
the Company's most substantial source of revenue, are based on the amount of
assets under management and the management fee rate charged and are affected by
sales levels, financial market conditions, redemptions and the composition of
assets. Underwriting and distribution revenues consist of sales charges and
commissions derived from the sale of investment and insurance products and
distribution fees earned for distributing Class B and Class C shares. The
products sold have various sales charge structures and the revenues received
from the sale of products vary based on the type and amount sold. Rule 12b-1
distribution and service fees earned for distributing certain shares of the
Advisors Funds and W&R Funds are based upon a percentage of assets and fluctuate
based on sales, redemptions, and financial market conditions. Service fees
include transfer agency fees, custodian fees for retirement plan accounts and
portfolio accounting fees.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2000 AS COMPARED TO THREE
MONTHS ENDED JUNE 30, 1999
Second quarter 2000 net income was $33.7 million or $0.39 per share on
a diluted basis, compared with net income of $22.8 million or $0.24 per share
for the prior year's second quarter, adjusted for April 2000's three-for-two
stock split. Net income per share increased 60.1% quarter over quarter.
Operating revenues, excluding investment and other income, for the second
quarter of 2000, were $131.8 million, up 58.5% over last year's second quarter.
Management fee revenues were $62.3 million for the second quarter of
2000, an increase of $22.6 million or 56.9% from 1999's second quarter. These
increases in management fee revenues came from both mutual fund and
institutional business. Mutual fund management fees increased 48.4% quarter over
quarter, contributing $18.1 million or 80.1% of the second quarter's increase.
Investment performance, net sales, plus reinvested dividends pushed average
mutual fund assets under management to $33.2 billion in the second quarter of
2000, a 28.8% increase compared to the second quarter of 1999. Mutual fund
management fee revenues increased at a greater rate than average assets because
of the restructuring of the fund management fee arrangements implemented in July
1999 and a shift of assets to funds with higher management fee rates, such as
small cap, technology and international funds. The average mutual fund
management fee rates rose to 67.4 basis points for the second quarter of 2000,
from 58.3 basis points from last year's second quarter. Second quarter 2000 net
sales were $154.6 million versus net sales of $144.5 million for the second
quarter of 1999. Redemption rates on retail mutual funds continued to fall in
the second quarter of 2000 to 6.3% compared with 7.7% for the second quarter
1999.
Management fee revenues from institutional and privately managed
accounts increased by $4.4 million to $6.6 million for the three months ended
June 30, 2000. Managed assets of Austin, Calvert & Flavin ("ACF"), acquired in
August 1999, contributed $2.4 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.
Institutional and privately-managed
10
account net sales were $7.6 million this quarter versus net redemptions of
$183.8 million for 1999's second quarter.
Underwriting and distribution fee revenues were $55.9 million for the
second quarter of 2000, a 69.1% increase from the previous year's second
quarter. In the second quarter of 2000, The Legend Group ("Legend"), acquired in
March 2000, contributed $11.2 million to underwriting and distribution fee
revenues. Excluding Legend's contribution, the increase was 35.2%. Retail
investment product sales growth of 34.3% quarter over quarter was fueled by new
advisors and productivity gains.
Investment Product Sales ($ in thousands)
2Q00 2Q99 % change
---- ---- --------
Front-load (Class A) $ 432,889 $ 363,704 19.0
Back-load (Class B) 101,956 99,115 2.9
Level-load (Class C) 63,779 -- --
Target/United funds (variable products) 165,245 106,149 55.7
------- ------- ----
Total retail 763,869 568,968 34.3
Institutional 265,644 251,762 5.5
------- ------- ---
Total $1,029,513 $ 820,730 25.4
========== ========= ====
Underwriting and distribution expenses, consisting of direct costs and
indirect costs, increased $17.5 million or 53.9% in the second quarter of 2000.
Legend contributed $8.8 million to underwriting and distribution expenses.
Excluding Legend's contribution, the increase was 26.7%. This provided for a
distribution margin of 7.8% compared with 1.9% for last year's second quarter.
Sales grew at a much faster rate than that of fixed indirect direct costs
contributing to margin improvement.
Sales force productivity, as measured by retail investment product
sales per advisor, increased 25.3% from $240 thousand in the second quarter of
1999 to $300 thousand in the second quarter of 2000. Second quarter sales
productivity for financial advisors with two years or more of tenure increased
by $ 72.8 thousand or 20.6% from the second quarter of 1999. The number of
financial advisors was 2,554, up 154 or 6.4% from last year's second quarter.
Shareholder service fees from transfer agency, custodian, and
accounting services were $13.6 million for the second quarter of 2000, up 30.9%
from last year's second quarter. Legend contributed $1.7 million to shareholder
service fee revenues. Excluding Legend's contribution, the increase was 14.2%.
The increase was due primarily to the 261 thousand increase in the average
number of customer accounts, representing a 16.3% increase over the year before.
The number of shareholder accounts was 1.88 million at June 30, 2000, compared
with 1.62 million at June 30, 1999.
Compensation and related costs increased $4.8 million or 50.2% from
last year's second quarter. ACF and Legend contributed $926 thousand and $404
thousand, respectively. Excluding these acquisitions, compensation increased
36.3%. The growth in the Company's operations added 20.8% to the average
employee headcount from the second quarter of last year to this year's second
quarter. Annual raises in salaries and performance incentive bonuses also
contributed to the increase.
11
General and administrative expenses increased $2.9 million or 65.5% in
the second quarter of 2000 when compared with last year's second quarter. ACF
and Legend contributed $0.3 million and $1.1 million, respectively. Excluding
these acquisitions, general and administrative expenses increased 35.6%, a
result of investments made to facilitate growth, notably in computer systems and
services and costs associated with implementing new funds and share classes.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 AS COMPARED TO SIX MONTHS
ENDED JUNE 30, 1999
For the six months ended June 30, 2000, net income was $69.8 million or
$0.81 per share on a diluted basis, compared with net income of $44.8 million or
$0.48 per share for the same period in 1999, adjusted for April 2000's
three-for-two stock split. Net income per share increased 69.2% year over year.
Operating revenues, excluding investment and other income, for the six months
ended June 30, 2000, were $252.4 million, up 57.0% over the same period last
year.
Management fee revenues were $126.1 million for the six months ended
June 30, 2000, an increase of $49.1 million or 63.7% over the same period last
year. These increases in management fee revenues came from both mutual fund and
institutional business. Mutual fund management fees increased 54.0% year over
year, contributing $39.3 million or 80.2% of the increase. Investment
performance, net sales, plus reinvested dividends pushed average mutual fund
assets under management to $33.3 billion in the first half of 2000, a 32.0%
increase compared to the first six months of 1999. Mutual fund management fee
revenues increased at a greater rate than average assets because of the
restructuring of the fund management fee arrangements implemented in July 1999
and a shift of assets to funds with higher management fee rates, such as small
cap, technology and international funds. The average mutual fund management fee
rates rose to 67.7 basis points for the first six months of 2000, from 58.2
basis points for the same period last year. Net retail mutual fund sales were
$295.4 million in the first six months of 2000 compared with net sales of $126.0
million for the same period last year. Redemption rates on retail mutual funds
have continued to fall. For the six months ended June 30, 2000 the redemption
rate on retail mutual funds was 7.0% compared with 8.3% for the same period in
1999.
Management fee revenues from institutional and privately managed
accounts increased by $9.5 million to $13.5 million for the six months ended
June 30, 2000. Managed assets of ACF contributed $5.2 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. Institutional and privately-managed account net sales were $128.6 million
for the six months ended June 30, 2000 compared with net redemptions of $246.8
million for the same period in 1999.
Underwriting and distribution fee revenues were $101.4 million for the
first six months of 2000, a 59.4% increase from the same period last year.
Legend contributed $11.2 million to the current year's underwriting and
distribution fee revenues. Excluding Legend's contribution, the increase was
41.8%. Retail investment product sales growth of 44.2% year over year was fueled
by new advisors and productivity gains.
12
Investment Product Sales ($ in thousands)
YTD 2000 YTD 1999 % change
-------- -------- --------
Front-load (Class A) $ 889,143 $ 704,958 26.1
Back-load (Class B) 213,175 191,873 11.1
Level-load (Class C) 161,681 -- --
Target/United funds (variable products) 320,625 202,317 58.5
------- ------- ----
Total retail 1,584,624 1,099,148 44.2
Institutional 583,181 506,782 15.1
------- ------- ----
Total $2,167,805 $1,605,930 35.0
========== ========== ====
Underwriting and distribution expenses, consisting of direct costs and
indirect costs, increased $29.1 million or 46.7% in the first six months of
2000. Legend contributed $8.8 million to underwriting and distribution expenses.
Excluding Legend's contribution, the increase was 32.5%. This provided for a
distribution margin of 8.4% compared with 2.1% for the same period in 1999.
Sales grew at a much faster rate than that of fixed indirect costs contributing
to margin improvement.
Sales force productivity, as measured by retail investment product
sales per advisor, increased 33.9% from $465 thousand in the six months ended
June 30, 1999 to $622 thousand for the same period in 2000. For the six month
period ended June 30, sales productivity for financial advisors with two years
or more of tenure increased by $192 thousand or 27.9% year over year.
Shareholder service fees from transfer agency, custodian, and
accounting services were $24.9 million for the six months ended June 30, 2000,
up 23.9% from the same period last year. Legend contributed $1.7 million to
shareholder service fee revenues. Excluding Legend's contribution, the increase
was 15.3%. The increase was due primarily to the 254 thousand increase in the
average number of customer accounts, representing a 16.1% increase over the
previous year.
Compensation and related costs increased $9.7 million in the first six
months of 2000, a 51.7% increase over the same period last year. ACF and Legend
contributed $1.9 million and $404 thousand, respectively. Excluding these
acquisitions, compensation increased 39.3%. The growth in the Company's
operations added 23.7% to the average employee headcount year over year. Annual
raises in salaries and performance incentive bonuses also contributed to the
increase.
General and administrative expenses increased $5.5 million in the first
six months of 2000, a 64.5% from the same period last year. ACF and Legend
contributed $0.5 million and $1.1 million, respectively. Excluding these
acquisitions, general and administrative expenses increased 45.5%, a result of
investments made to facilitate growth, notably in computer systems and services
and costs associated with implementing new funds and share classes.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and liquid marketable securities were $142.1
million at June 30, 2000, a $9.1 million decrease from December 31, 1999. Cash
and cash equivalents at June 30, 2000 and December 31, 1999 include reserves of
$16.3 million and $17.1 million, respectively, for the benefit of customers in
compliance with securities regulations.
13
Cash flow provided from operations was $78.6 million and $55.3 million
for the first six months of 2000 and 1999, respectively. Cash flows used in
investing activities increased by $44.8 million during the first six months of
2000 compared with the same period in the prior year. The increase was
attributed to cash used by the Company to acquire Legend of $60.2 million, which
was somewhat offset by the sale of investment securities of $37.8 million during
the period. Cash flows used in financing activities during the first six months
of 2000 included net borrowings of $90.0 million on the Company's credit
facility which were used to fund stock repurchases and the Legend acquisition.
Management believes its available cash, marketable securities and
expected cash flows from operations will be sufficient to fund dividends,
obligations and operations as well as advance sales commissions and meet any
other reasonably foreseeable cash needs. The $220 million credit facility,
expandable to $330 million, is also available for the Company's use. The
outstanding balance on the facility at June 30, 2000 was $215.0 million.
RENAMING FUND FAMILIES AND BROADENING FUND DISTRIBUTION
On July 1, 2000, the Company renamed its two retail mutual fund
families. The United Funds family was renamed the "Waddell & Reed Advisors
Funds" ("Advisors Funds"). This family of funds will continue to be available
for sale only through Waddell & Reed's sales forces. Concurrently, the Waddell &
Reed Funds family was renamed the "W&R Funds". The Company plans to make this
family of funds available for sale through both Waddell & Reed's sales forces
and selected third-party distribution channels.
WADDELL & REED SHARES ADDED TO S&P MIDCAP 400 INDEX
On May 31, 2000, Standard & Poor's added Waddell & Reed Financial, Inc.
to its S&P MidCap 400 Index of mid-range capitalization United States Common
Stocks. Within the index, Waddell & Reed is included in the Financial economic
sector and the Investment Banking/Brokerage industry group.
THE LEGEND GROUP
On March 31, 2000, the Company completed its acquisition of Legend, a
privately-held mutual fund distribution and retirement planning company based in
Palm Beach Gardens, Florida. Through its network of approximately 300 financial
advisors, Legend serves employees of school districts and other not-for-profit
organizations nationwide.
The acquisition has been accounted for as a purchase and, accordingly,
the results of Legend are included with those of the Company commencing with the
date of acquisition. The purchase price of $61.3 million, including direct
costs, has been allocated to the assets acquired and liabilities assumed
resulting in goodwill of $59.5 million which 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 Legend of specified
earnings levels over the next three years. These payments could aggregate as
much as $14.0 million.
14
Beginning in May 2000, the Company began to offer its Advisors Funds
and W&R Funds through Legend's financial advisors. These funds are being sold
into Legend's various account types, including 403(b) plans and asset allocation
accounts.
STOCK REPURCHASE PROGRAM
The Company continues to acquire shares of its common stock. In the
second quarter of 2000, the Company repurchased 223,000 shares of its common
stock at an aggregate cost of $5.2 million. For the six month period ended June
30, the Company repurchased 4.7 million shares of its common stock at an
aggregate cost of $96.2 million. The total number of shares outstanding at June
30, 2000 was 82.1 million, comprised of 41.9 million Class A shares and 40.2
million Class B shares.
15
OTHER INFORMATION
ASSETS UNDER MANAGEMENT
(amounts in millions)
ENDING
2Q 00 2Q 99 % change 1Q 00 % change
------------------------- --------
Mutual Fund
Equity $29,685 $21,880 35.7% $31,186 -4.8%
Fixed Income 3,202 3,809 -15.9% 3,289 -2.6%
Money Market 854 732 16.7% 873 -2.2%
------- ------- --------
Total 33,741 26,421 27.7% 35,348 -4.5%
Institutional and private accounts 6,010 3,174 89.4% 6,132 -2.0%
------- ------- --------
Total $39,751 $29,595 34.3% $41,480 -4.2%
======= ======= ========
AVERAGE
2Q 00 2Q 99 % change 1Q 00 % change
------------------------- --------
Mutual Funds
Equity $29,067 $21,123 37.6% $29,270 -0.7%
Fixed Income 3,206 3,888 -17.5% 3,403 -5.8%
Money Market 885 733 20.7% 825 7.3%
------- ------- --------
Total 33,158 25,744 28.8% 33,498 -1.0%
Institutional and private accounts 5,947 3,187 86.6% 5,722 3.9%
------- ------- --------
Total $39,105 $28,931 35.2% $39,220 -0.3%
======= ======= ========
OTHER ITEMS
2Q 00 2Q 99 % change YTD 2000 YTD 1999 % change
------------------------- ------------------------
Retail Redemption Rate 6.32% 7.74% 7.01% 8.25%
SALES PER ADVISOR (000s)
Total 300 240 25.3% 622 465 33.9%
2+ Years * 425 353 20.6% 881 689 27.9%
0 to 2 Years ** 95 79 21.4% 183 137 33.4%
Other 167 77 117.5% 212 96 119.9%
Number of advisors 2,554 2,400 6.4%
Number of shareholder accounts 1,880,644 1,620,488 16.1%
* Advisors licensed with the Company for two or more years.
** Advisors licensed with the Company for less than two years.
16
INFORMATION SYSTEMS AND YEAR 2000 READINESS
The Company believes its software programs and operating systems are
year 2000 compliant and ready for use beyond the year 2000.
The Company is not currently aware of any material year 2000 problem
relating to any of its material internal software programs or operating systems.
Its internal operation and business are also dependent upon the
computer-controlled systems of third parties such as our suppliers, customers
and other service providers. The Company believes that, absent a systemic
failure outside its control, such as a prolonged loss of electrical or
telecommunications service, year 2000 problems at third parties will not have a
material impact on its operations. The failure of the Company's internal systems
or the systems of third parties to be year 2000 ready could temporarily prevent
the Company from providing service to its customers and could require the
Company to devote significant resources to correct such problems. The costs
associated with remediating any year 2000 problems have not, in the opinion of
management, been material to date. Although the Company does not anticipate that
these costs will be material in the future, there can be no assurance that these
costs will not be material.
FORWARD-LOOKING INFORMATION
From time-to-time, information or statements provided by or on behalf
of the Company, including those within this Form 10-Q Quarterly Report, may
contain certain "forward-looking information," including information relating to
anticipated growth in our revenues or earnings, anticipated changes in the
amount and composition of assets under management, our anticipated expense
levels, and our expectations regarding financial markets and other conditions.
Readers are cautioned that any forward-looking information provided by or on
behalf of the Company is not a guarantee of future performance. Actual results
may differ materially from those in forward-looking information as a result of
various factors, including but not limited to those discussed below.
Further, such forward-looking statements speak only as of the date on
which such statements are made, and the Company undertakes no obligation to
update any forward-looking statement to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.
Our future revenues will fluctuate due to many factors, such as the
total value and composition of assets under our management and related cash
inflows or outflows in the Advisors, W&R and Target/United mutual funds (the
"Funds") and other investment portfolios; fluctuations in national and worldwide
financial markets resulting in appreciation or depreciation of assets under our
management; the relative investment performance of the Funds and other
investment portfolios as compared to competing offerings; the expense ratios of
the Funds; investor sentiment and investor confidence; the ability to maintain
our investment management and administrative fees at appropriate levels;
competitive conditions in the mutual fund, asset management, and broader
financial services sectors; our introduction of new mutual funds and investment
portfolios; our ability to contract with the Funds for payment for investment
advisory-related administrative services provided to the Funds and their
shareholders; the continuation of trends in the retirement
17
plan marketplace favoring defined contribution plans and participant-directed
investments; potential misuse of client funds and information in the possession
of our financial advisors; and the risk that the restructuring of our mutual
fund products and development of additional distribution channels may not be
successful. Our revenues are substantially dependent on fees earned under
contracts with the Funds and could be adversely affected if the independent
directors of one or more of the Funds determined to terminate or significantly
alter the terms of the investment management or related administrative services
agreements.
Our future operating results are also dependent upon the level of our
operating expenses, which are subject to fluctuation for the following or other
reasons: variations in the level of compensation expense due to, among other
things, performance-based bonuses, changes in our employee count and mix, and
competitive factors; unanticipated costs that may be incurred to protect
investor accounts and the goodwill of our clients; and disruptions of services,
including those provided by third parties such as communications, power, and the
mutual fund transfer agent system.
The Company's business is also subject to substantial governmental
regulation, and changes in legal, regulatory, accounting, tax, and compliance
requirements may have a substantial effect on our operations and results,
including but not limited to effects on costs we incur and effects on investor
interest in mutual funds and investing in general or in particular classes of
mutual funds or other investments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since December 31, 1999, there has been no material change in the
information provided in Item 7A of the 1999 Form 10-K Annual Report.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting of Stockholders held on April 26, 2000.
(b) Directors re-elected to additional three year terms at the
Annual Meeting:
David L. Boren, Joseph M. Farley, Robert L. Hechler and
Harold T. McCormick
Other Directors whose terms of office continued after the
Annual Meeting:
Louis T. Hagopian, Henry J. Herrmann, Joseph L. Lanier, Jr.,
George J. Records, Sr., William L. Rogers, James M. Raines,
Keith A. Tucker and Jerry W. Walton.
(c) Election of Directors
---------------------
For Withheld
--------------- ---------
David L. Boren 148,102,107 6,168,790
Joseph M. Farley 148,114,817 6,156,080
18
Robert L. Hechler 148,148,371 6,122,526
Harold T. McCormick 148,098,940 6,171,957
APPROVAL OF 1998 STOCK INCENTIVE PLAN -The plan was submitted
to the stockholders for approval to comply with Section 162(m)
of the Internal Revenue Code relating to deductibility of
compensation.
For Against Abstain
--- ------- -------
146,970,228 6,779,922 520,747
No broker non-votes on this proposal.
APPROVAL OF 1998 STOCK INCENTIVE PLAN -The plan was submitted
to the stockholders for approval to increase the aggregate
number of shares authorized for issuance under the plan.
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
101,458,752 21,498,447 424,555 30,890,766
APPROVAL OF 1998 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION
PLAN -The plan was submitted to the stockholders for approval
to comply with Section 162(m) of the Internal Revenue Code
relating to deductibility of compensation.
For Against Abstain
--- ------- -------
148,526,213 5,281,043 463,641
No broker non-votes on this proposal.
RATIFY APPOINTMENT OF KPMG LLP AS INDEPENDENT AUDITORS FOR
2000
For Against Abstain
--- ------- -------
153,234,999 810,356 225,242
No broker non-votes on this proposal.
ITEM 5. OTHER INFORMATION
Forward-Looking Statements
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). The 1995
Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide information without fear of litigation so long as those
statements are identified as forward-looking and are accompanied by meaningful
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected. Although the Company does not
anticipate that it will make forward-looking statements as a general policy, the
Company will make forward-looking statements as required by law or regulation,
and from time to time may make such statements with respect to management's
estimation of the future operating results and business of the Company.
19
The Company hereby incorporates into this report by reference to its Form
10-K for the year ended December 31, 1999, the cautionary statements found on
pages 25-29 of such Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K dated March 31, 2000 was filed on April 14, 2000 to report the
acquisition of the Legend Group of Companies, a Palm Beach Gardens, Florida
based private mutual fund distribution and retirement planning company. No
financial statements were filed.
A Form 8-K/A dated March 31, 2000 was filed on June 12, 2000, amending the
April 14, 2000 Form 8-K filing to include the required audited combined
financial statements of The Legend Group of Companies and the required unaudited
pro forma consolidated financial statements of the Company, including the Legend
Group of Companies.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 9th day of August, 2000.
WADDELL & REED FINANCIAL, INC.
By: /s/ John E. Sundeen, Jr.
------------------------
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
By: /s/ D. Tyler Towery
-------------------
Vice President and
Controller
(Principal Accounting Officer)
21