UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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 the latest practicable date:
Class Outstanding as of April 30, 2001*
------------------------------------ ---------------------------------
Class A common stock, $.01 par value 79,692,036
*The number of common shares reflects the combination of our two classes of
common stock as a result of the conversion of our shares of Class B common stock
into shares of Class A common stock on a one-for-one basis at the close of
business on April 30, 2001. As of May 1, 2001, all Class A common stock trades
on the New York Stock Exchange under the ticker symbol "WDR."
WADDELL & REED FINANCIAL, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2001
INDEX
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Balance Sheets at
March 31, 2001 and December 31, 2000 3
Consolidated Statements of Income
for the three months ended
March 31, 2001 and March 31, 2000 4
Consolidated Statements of Comprehensive
Income for the three months ended
March 31, 2001 and March 31, 2000 5
Consolidated Statements of Stockholders' Equity
for the three months ended March 31, 2001 6
Consolidated Statements of Cash Flows for
the three months ended March 31, 2001
and March 31, 2000 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 18
Part II. Other Information
Item 1. Legal Proceedings. 18
Item 2. Changes in Securities and Use of Proceeds. 18
Item 5. Other Information. 19
Item 6. Exhibits and Reports on Form 8-K. 19
Signatures 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
====================================================================================================================================
March 31, December 31,
2001 2000
ASSETS (unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 83,711 68,082
Investment securities, available-for-sale 55,381 57,639
Receivables:
Funds and separate accounts 13,664 13,963
Customers and other 21,955 21,477
Deferred income taxes 48 45
Prepaid expenses and other current assets 5,551 4,868
- ------------------------------------------------------------------------------------------------------------------------------------
Total current assets 180,310 166,074
Property and equipment, net 30,873 55,453
Deferred sales commissions, net 11,122 10,108
Goodwill (net of accumulated amortization of $33,647 and $31,995) 178,685 180,173
Deferred income taxes 2,948 1,026
Other assets 11,285 9,352
- ------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 415,223 422,186
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Current liabilities:
Accounts payable $ 35,686 41,558
Accrued sales force compensation 13,096 18,741
Accrued other compensation 7,172 11,774
Short term notes payable 74,303 --
Income taxes payable 17,503 126
Accrued purchase price liability for acquired subsidiaries -- 13,110
Other current liabilities 4,922 8,429
- ------------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 152,682 93,738
Long-term debt 201,165 175,320
Accrued pensions and post-retirement costs 11,736 11,295
Other 1,938 223
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 367,521 280,576
- ------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity :
Common stock (See table below) 997 997
Additional paid-in capital 250,745 251,990
Retained earnings 229,808 206,589
Deferred compensation (10,447) (10,950)
Treasury stock (See table below) (420,177) (305,008)
Accumulated other comprehensive income (3,224) (2,008)
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 47,702 141,610
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 415,223 422,186
====================================================================================================================================
Common stock ($.01 par value)
2001 2000
---- ----
Authorized ................................ 250,000,000 250,000,000
Issued .................................... 99,700,761 99,700,761
Outstanding ............................... 79,677,407 83,410,519
Treasury Stock ............................ 20,023,354 16,290,242
See accompanying notes to unaudited consolidated financial statements.
3
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited in thousands, except for per share data)
====================================================================================================================================
For the three months
ended March 31,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Revenues:
Investment management fees $ 56,203 $ 63,805
Underwriting and distribution fees 48,867 45,481
Shareholder service fees 14,372 11,294
Investment and other income 1,708 4,162
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 121,150 124,742
- ------------------------------------------------------------------------------------------------------------------------------------
Expenses:
Underwriting and distribution 43,720 41,396
Compensation and related costs 14,810 14,001
General and administrative 6,019 6,612
Depreciation 1,240 631
Interest expense 4,398 2,499
Amortization of goodwill 1,652 929
- ------------------------------------------------------------------------------------------------------------------------------------
Total expenses 71,839 66,068
- ------------------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 49,311 58,674
Provision for income taxes 18,715 22,548
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 30,596 $ 36,126
====================================================================================================================================
Net income per share:
-- Basic $ 0.37 $ 0.43
-- Diluted $ 0.36 $ 0.41
====================================================================================================================================
Weighted average shares outstanding:
-- Basic 82,219 84,713
-- Diluted 85,538 87,213
====================================================================================================================================
Dividends declared per common share $ 0.0884 $ 0.0884
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
ended March 31,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 30,596 $ 36,126
Other comprehensive income:
Net unrealized appreciation (depreciation) of
investments during the period, net of income
taxes of $(740) and $686 (1,207) 1,092
Reclassification adjustment for amounts included in
net income, net of income taxes of $(5) and $(818) (9) (1,306)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 29,380 $ 35,912
====================================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
5
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 2001
(Unaudited in thousands)
====================================================================================================================================
Accumulated
Common Stock Additional other Total
-------------- paid-in Retained Deferred Treasury comprehensive stockholders'
Shares Amount capital earnings Compensation Stock income equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 99,701 $997 251,990 206,589 (10,950) (305,008) (2,008) 141,610
Net income -- -- -- 30,596 -- -- -- 30,596
Recognition of deferred
compensation -- -- -- -- 503 -- -- 503
Dividends paid -- -- -- (7,377) -- -- -- (7,377)
Exercise of stock options -- -- (3,007) -- -- 6,871 -- 3,864
Tax benefit from exercise of
options -- -- 1,762 -- -- -- -- 1,762
Treasury stock repurchases -- -- -- -- -- (122,040) -- (122,040)
Unrealized loss on investment
securities -- -- -- -- -- -- (1,216) (1,216)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2001 99,701 $997 250,745 229,808 (10,447) (420,177) (3,224) 47,702
====================================================================================================================================
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 three months
ended March 31,
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 30,596 $ 36,126
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,911 1,577
Gain on sale of investments (14) (2,096)
Recognition of deferred compensation 503 357
Loss on sale and retirement of fixed assets 3 12
Capital gains and dividends reinvested (24) (43)
Deferred income taxes (1,178) 5,352
Changes in assets and liabilities (net of acquisition):
Receivables from funds and separate accounts 299 (3,999)
Other receivables (478) (9,624)
Other assets (3,631) (1,112)
Accounts payable (5,872) 17,453
Deferred gain on sale/leaseback transaction (1,753) --
Other liabilities 10,435 19,762
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 31,797 63,765
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to investment securities (1,048) (6,833)
Proceeds from sales of investment securities 950 37,761
Proceeds from maturity of investment securities 375 502
Proceeds from the sale of buildings 28,233 --
Additions to property and equipment (3,133) (5,604)
Acquisition of subsidiaries, (net of cash acquired) -- (60,005)
Additional purchase price payments for subsidiaries (13,110) --
Other 36 --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 12,303 (34,179)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings 97,082 95,000
Cash dividends (7,377) (7,616)
Purchase of treasury stock (122,040) (90,997)
Exercise of stock options 3,864 2,309
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (28,471) (1,304)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 15,629 28,282
Cash and cash equivalents at beginning of period 68,082 60,977
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 83,711 $ 89,259
====================================================================================================================================
See accompanying notes to unaudited consolidated financial statements.
7
WADDELL & REED FINANCIAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as
the "Company," "we," "us," or "our") derive revenues from investment management,
administration, distribution and related services provided primarily to the
Waddell & Reed Advisors Funds ("Advisors Funds"), W&R Funds ("W&R Funds"), W&R
Target Funds ("Target Funds") and institutional and separate accounts.
BASIS OF PRESENTATION
In our opinion, the accompanying unaudited balance sheets and related
interim statements of income, stockholders' equity, cash flows, and
comprehensive income reflect all adjustments consisting only of normal recurring
items necessary for their fair presentation in conformity with accounting
principles generally accepted in the United States. Preparing financial
statements requires us to make estimates and assumptions that affect the
reported amount of assets, liabilities, revenues and expenses. Actual results
may differ from these estimates. Interim results are not necessarily indicative
of results for a full year. The information in this Form 10-Q should be read in
conjunction with Management's Discussion and Analysis and our audited financial
statements and notes thereto included in our December 31, 2000 Form 10-K
included in our Annual Report.
EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average number
of common shares outstanding for the periods ended March 31, 2001 and 2000,
respectively. Diluted earnings per share for these periods are computed based on
the weighted average number of common shares outstanding plus the effect of the
dilutive impact of stock options.
The components of basic and diluted earnings per share were as follows (in
thousands except per share data):
THREE MONTHS ENDED
MARCH 31,
2001 2000
------- -------
Net income ....................................... $30,596 $36,126
======= =======
Weighted average shares outstanding-basic ........ 82,219 84,713
Incremental shares from assumed conversions ...... 3,319 2,500
------- -------
Weighted average shares outstanding-diluted ...... 85,538 87,213
======= =======
Earnings per share:
Basic ......................................... $ 0.37 0.43
Diluted ....................................... $ 0.36 0.41
8
2. STOCKHOLDERS' EQUITY
For the three month period ended March 31, 2001, we repurchased 4.0 million
Class B common shares for $30.50 per share at a total cost, including
commissions, of $122.0 million.
On March 6, 2001, we declared a dividend payable on May 1, 2001 in the
amount of $.0884 per share to stockholders of record as of April 17, 2001. The
total dividend paid was $7.0 million.
On April 25, 2001, our stockholders voted to combine our two classes of
common stock by converting shares of our Class B common stock into shares of
Class A common stock on a one-for-one basis. As of the close of business on
April 30, 2001, each share of our Class B common stock was reclassified into one
share of our Class A common stock. As of May 1, 2001, all Class A common shares
trade on the New York Stock Exchange under the ticker symbol "WDR." As a result,
all per share and shares outstanding data in the consolidated financial
statements and related notes have been restated to reflect the combination for
all periods presented.
3. DEBT
In January 2001, we issued $200.0 million in principal amount 7.5% senior
notes due 2006 for net proceeds of $197.6 million (net of discounts, commissions
and expenses) to repay amounts borrowed under the money market loan program and
for general corporate purposes. Our 2001 first quarter overall weighted average
interest rate was 8.0% compared to 6.7% for the same period in the prior year.
During the quarter, we had net borrowings of $97.1 million, an increase of $2.1
million from the same period in the prior year.
4. ACQUISITION OF SUBSIDIARIES
On March 31, 2000, we acquired The Legend Group, Inc. ("Legend") in a
business combination accounted for as a purchase. Legend was a privately-held
mutual fund distribution and retirement planning company based in Palm Beach
Gardens, FL. Legend serves employees of school districts and other
not-for-profit organizations nationwide and offers strategic asset allocation
services using proprietary systems. The results of operations of Legend are
included in the accompanying financial statements since the date of acquisition.
The total cost of the acquisition, including expenses, was $65.4 million, which
exceeded the fair value of the net assets of Legend by $63.6 million. The excess
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 for 2000, 2001 and 2002.
These payments could aggregate as much as $14.0 million. For the year 2000, the
specified earnings level was met; accordingly, a $4.0 million payment was
accrued and added to goodwill in 2000 and paid in the first quarter of 2001.
9
4. ACQUISITION OF SUBSIDIARIES (CONTINUED)
A summary of the net assets acquired is as follows (in thousands):
Assets acquired
Cash .................................................. $ 1,113
Accounts Receivable ................................... 7,156
Goodwill (including additional purchase payments) ..... 63,571
Other assets .......................................... 1,949
-------
Total ................................................. 73,789
Liabilities assumed ........................................ 8,386
-------
Total purchase price ....................................... 65,403
=======
The table below presents supplemental pro forma information (in thousands)
for the first quarter of 2000 as if the Legend acquisition were made on January
1, 2000 at the same purchase price, based on estimates and assumptions
considered appropriate:
For the three months ended
March 31, 2000
Revenues ................................................... $136,425
Net Income ................................................. $ 36,310
Net Income per common share
Basic ................................................. $ 0.43
Diluted ............................................... $ 0.42
Austin, Calvert & Flavin, Inc. ("ACF"), acquired August 9, 1999, is also
subject to additional purchase price payments contingent upon the achievement of
specified earnings levels. In 2000, ACF met this criteria and the full amount of
these payments of $9.1 million was accrued and added to goodwill at December 31,
2000 and paid in the first quarter of 2001. No further payments will be made
related to this acquisition.
10
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 OUR EXPECTATIONS, HOPES,
BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL STATEMENTS, OTHER
THAN STATEMENTS OF HISTORICAL FACT INCLUDED IN THIS FORM 10-Q 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 FORM 10-Q ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE
HEREOF, AND WE ASSUME NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. 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 AND NEITHER US 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 OUR
EXPECTATIONS ARE DISCLOSED IN THE "RISK FACTORS" SECTION OF OUR FORM 10-K ANNUAL
REPORT, 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, AVAILABILITY AND TERMS OF CAPITAL, ACQUISITION
STRATEGY AND OTHER RISKS AS SET OUT IN THE REPORTS FILED BY US WITH THE
SECURITIES AND EXCHANGE COMMISSION. SHOULD ONE OR MORE OF THESE RISKS
MATERIALIZE OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE FORECASTED OR EXPECTED. 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 INFORMATION CONTAINED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN THIS FORM
10-Q AND THE AUDITED FINANCIAL STATEMENTS AND NOTES THERETO IN OUR ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000.
OVERVIEW
We derive our revenues from providing investment management,
distribution and administrative services primarily to the Advisors Funds, W&R
Funds and Target Funds, as well as to institutional and separate accounts.
Investment management fees, our most substantial source of revenues, are
based on the amount of average assets under management and the management fee
rates charged. Sales levels, financial market conditions, redemptions and the
composition of assets affect these fees. Underwriting and distribution
revenues consist of sales charges and commissions derived from the sale of
investment and insurance products and distribution fees. The products sold
have various sales charge structures and the revenues received from product
sales vary based on the type and amount sold. Rule 12b-1 distribution and
service fees earned for distributing shares of certain mutual fund share
classes are based upon a percentage of assets and fluctuate based on
financial market conditions, sales, and redemptions. Shareholder service fees
include transfer agency fees, custodian fees for retirement plan accounts and
mutual fund accounting fees.
11
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001 AS COMPARED WITH THREE
MONTHS ENDED MARCH 31, 2000
First quarter 2001 net income was $30.6 million, or $0.36 per share on a
diluted basis, compared with net income of $36.1 million, or $0.41 per share,
for the first quarter of 2000. Quarter over quarter, net income per share
decreased 12%. The Legend acquisition, which occurred March 31, 2000, did not
have a significant impact on our first quarter 2001 consolidated net income.
During the first quarter of 2000, $2.1 million of net pre-tax gains were
realized from investment security sales to facilitate the acquisition of Legend.
Excluding these net gains, last year's first quarter net income would have been
$34.9 million, or $0.40 per share on a diluted basis.
Investment management fee revenues declined $7.6 million, or 12%, from
2000's first quarter. Adverse market conditions in late 2000 and the first
quarter of 2001 caused total average assets under management to decline by 10%
from the first quarter of 2000. Investment management fees from mutual funds
decreased $6.6 million, or 12%, driven primarily by a 9% decline in average
mutual fund assets. The management fee rate for mutual funds decreased to 66.9
basis points in 2001's first quarter from 68.1 basis points for 2000's period.
The decline in equity markets led to equity mutual funds comprising a smaller
percentage of total mutual fund assets under management when compared with the
prior year. Equity funds typically have higher fee rate structures than fixed
income funds.
Investment management fee revenues from institutional and separate accounts
declined by $1.0 million, or 15%. Average institutional and separate account
assets under management declined by 14%. In the first quarter of 2000, we earned
$0.6 million in performance fees related to one of our separately-managed
accounts. Excluding the 2000 performance fee, the average management fee rate
for institutional and separate accounts improved to 48.6 basis points from 44.2
basis points as new business with higher fee rates offset lost business with
substantially lower rates.
Total net sales, including institutional and separate account business,
were $165.8 million for this year's first quarter compared with $261.6 million
for the same period last year. Redemption rates on retail mutual funds increased
slightly in the first quarter of 2001 to 8.7% compared with 7.7% for the first
quarter of 2000. The quarter-to-date redemption rate through February 2001 was
7.4%. Net sales in March fell from January and February's pace as redemptions by
shareholders rose to pay income taxes. These retail redemption rates exclude all
exchanges, including commissionable variable annuity exchanges.
Underwriting and distribution fee revenues are derived primarily from sales
commissions from front-load products, and to a lesser extent from asset-based
fees earned on deferred-load products. Underwriting and distribution revenues
were $48.9 million, 7% higher than last year's first quarter. Legend, acquired
on March 31, 2000, contributed $8.4 million to underwriting and distribution
revenues for the first quarter of 2001. Excluding Legend's contribution,
revenues were down $5.0 million, or 11%, driven primarily by the 7% decline in
front-load investment product sales (see table below). The first quarter of 2000
was a record sales quarter, making for a difficult quarter-over-quarter
comparison. The strength of last year's quarter, coupled with adverse market
volatility this year, led to the decline in sales quarter over quarter.
12
INVESTMENT PRODUCT SALES
Investment product sales of proprietary products (excludes Legend sales,
money market fund sales and sales at net asset value) are summarized as follows
($ in millions):
1Q01 1Q00 % change
---------- ---------- ----------
Front-load (Class A) $ 394.0 $ 456.3 (13.7)%
W&R Target funds (variable products)* 173.0 155.4 11.3%
---------- ----------
Front load product total 567.0 611.7 (7.3)%
---------- ----------
Back-load (Class B) 72.0 111.2 (35.3)%
Level-load (Class C) 31.6 97.9 (67.7)%
---------- ----------
Deferred load product total 103.6 209.1 (50.5)%
---------- ----------
Total retail product sales 670.6 820.8 (18.3)%
Institutional and separate accounts 355.2 317.5 11.9%
---------- ----------
Total investment product sales $ 1,025.8 $ 1,138.3 (9.9)%
========== ==========
* First quarter 2001 includes $34.5 million of commissionable
variable annuity exchanges.
Underwriting and distribution expenses were $43.7 million for this year's
first quarter, an increase of 6% over the same period last year. Legend
contributed $6.9 million to the increase in underwriting and distribution
expense. Excluding Legend's contribution, these expenses were down $4.6 million,
or 11%, in correlation with the decline in related revenues. Indirect
distribution costs declined as advertising and marketing programs were
significantly reduced, more overhead expenses were reimbursed from mutual funds,
and sales-related legal costs declined. Distribution margin, excluding Legend's
contribution, was 9.0% in both 2000 and 2001's first quarter. Including Legend's
contribution, distribution margin was 10.5% for this year's first quarter.
With the overall 18% decrease in retail investment product sales came a
decrease in sales force productivity, as measured by retail investment sales per
advisor. Sales force productivity decreased 26% to $239 thousand in the first
quarter of 2001 from $323 thousand in the first quarter of 2000. The total
number of financial advisors increased 12% to 2,835, up 313 from last year's
first quarter.
Shareholder service fee revenues from transfer agency, custodian and
accounting services were $14.4 million for the first quarter of 2000, up 27%
over the same period last year. Legend's custodial services fee revenue, which
is based on a percentage of the applicable assets, contributed $1.4 million to
service fee revenue during the first quarter of 2001. Non-Legend shareholder
service fee revenue was $12.9 million, an increase of 15% over last year's first
quarter. Over 80% of this revenue is comprised of transfer agency fees charged
for shareholder accounts, while the remainder comes from retirement plan fees
and mutual fund accounting service fees. The number of shareholder accounts
increased 12% to 2.04 million at March 31, 2001, compared with 1.82 million at
March 31, 2000.
Investment and other income, which consists primarily of interest income
from investment securities, included realized gains from the sales of securities
of $2.1 million in the first quarter of 2000. Excluding this gain, investment
and other income decreased $0.4 million due primarily to lower balances in
commercial paper and fixed income securities.
13
Compensation and related costs increased $0.8 million, or 6%, from last
year's first quarter. Base salaries increased $1.8 million due largely to last
year's increase in personnel and annual raises; however, this was somewhat
offset by a reduction in amounts accrued for incentive-based compensation and
bonuses.
General and administrative expenses were $6.0 million, a 9% decrease over
the first quarter of 2000. Legend contributed $0.8 million to general and
administrative costs in the current year's first quarter. Excluding Legend's
contribution, these costs were down $1.4 million or 22%. A greater portion of
information systems support was dedicated to underwriting and distribution
efforts during the year, the costs of which are included in underwriting and
distribution expense. In addition, costs incurred in 2000 associated with
restructuring and renaming our fund families and adding additional share classes
were not incurred in 2001, resulting in a favorable comparison. Costs also were
lower for professional services and consulting, and client service costs.
Interest expense increased $1.9 million, or 76%, over last year's first
quarter. Total average outstanding debt for the first quarter of 2001 was $221.7
million compared with $150.2 million for the first quarter of 2000. The increase
was due to the issuance of long-term debt in the first quarter of 2001 of $200.0
million in principal amount 7.5% senior notes on January 18, 2001. Our 2001
first quarter overall weighted average interest rate was 8.0% compared to 6.7%
for the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and liquid marketable securities were $139.1 million
at March 31, 2001, an increase of $13.4 million from December 31, 2000. Cash and
cash equivalents included reserves of $16.9 million and $21.9 million for the
benefit of customers in compliance with securities regulations at March 31, 2001
and December 31, 2000, respectively. Liquid assets, which consist of cash and
cash equivalents, investments available-for-sale and current receivables
increased to $174.7 million at March 31, 2001 from $161.2 million at December
31, 2000.
Cash flow provided from operations was $31.8 million and $63.8 million for
the first quarters of 2001 and 2000, respectively. A greater reduction in
accounts payable and other liabilities when compared with the same period last
year contributed to less cash flow provided by operations. In the first quarter
of 2000, larger changes in accounts payable and other receivables were realized
due to the timing of customer receipts and payments for mutual fund
transactions. Cash flow provided from investing activities was $12.3 million
compared with net cash used of $34.2 million for the same period in the prior
year. Cash flow from investing activities in the first quarter of 2001 included
net proceeds of $28.2 million related to the sale of our two home office
buildings, which were subsequently leased back for a period of fifteen years. A
gain on this transaction of $1.8 million will be amortized over the operating
lease term. Proceeds from this sale were used to pay down short-term borrowings
and for general corporate purposes. In the first quarter of 2000, we acquired
Legend for $61.1 million, which was facilitated somewhat by the sale of
investment securities of $37.8 million during the period. In the first quarter
of 2001, additional purchase price payments of $13.1 million were made to
previous owners of acquired companies for attaining specified earnings levels as
stipulated in the purchase agreements. Cash flow used in financing activities
during the first quarter of 2001 was $28.5 million, an increase of $27.2 million
from the same period last year. The increase was principally attributable to
larger repurchases of our common stock in the current year's quarter.
14
We have a $220 million 364-Day revolving credit facility available to us at
an interest rate of LIBOR plus 0.425%. This facility is expandable to $330
million with a syndicate of eight banks, whereby syndicates could, at their
option upon our request, increase the loan by $110 million. We also utilize a
money market loan program, which is similar to commercial paper. As of March 31,
2001, there was no outstanding balance on the credit facility and the
outstanding balance related to the money market loan program was $74.0 million,
excluding accrued interest. In January 2001, we also issued $200.0 million in
principal amount 7.5% senior notes due 2006 for net proceeds of $197.6 million
(net of discounts, commissions and expenses) to repay amounts borrowed under the
money market loan program and for general corporate purposes. During the
quarter, we had net borrowings of $97.1 million, an increase of $2.1 million
from the same period in the prior year. The ratio of total debt to total
capitalization was 0.85 and 0.55 at March 31, 2001 and December 31, 2000,
respectively. The primary use of the borrowed funds in the current period was to
repurchase stock under our stock repurchase program.
We believe our available cash, marketable securities and expected cash flow
from operations will be sufficient to fund dividends, obligations and operations
as well as advance sales commissions and to meet any other reasonably
foreseeable cash needs.
ADDITIONAL PRODUCT OFFERINGS THROUGH NATIONWIDE
The steps taken last year to provide broader depth to our insurance product
offerings are continuing to progress. Nationwide Financial Services, Inc.
("Nationwide") now underwrites substantially all of the variable annuity and
variable universal life products sold by our sales force. Nationwide's
reputation for quality products and superior service enhances the attractiveness
of these products to our advisors and clients. Nationwide also has developed a
survivorship life product, a qualified group retirement plan and term insurance
for distribution by our financial advisors.
TERMINATION OF AGREEMENTS BY UNITED INVESTORS LIFE INSURANCE COMPANY
On February 28, 2001, United Investors Life Insurance Company ("UILIC")
terminated the Principal Underwriting Agreement by and between UILIC and the
Company, effective April 30, 2001. This agreement provided for the sale of
variable products underwritten by UILIC by our financial advisors. As a result,
beginning May 1, 2001, Nationwide is the sole provider of variable products
invested in our mutual funds for distribution by our financial advisors.
In addition, on February 28, 2001, UILIC terminated the General Agent
Contract between UILIC and the Company, effective December 31, 2001. This
agreement provides for the sale of non-variable life insurance products
underwritten by UILIC and distributed by our financial advisors. We are
currently in the process of negotiating with several insurance carriers for the
sale of their products by our financial advisors to complement the other
non-UILIC life products currently available for distribution by our financial
advisors. In addition, we recently have entered into an agreement with BISYS
Insurance Services, Inc. to provide our financial advisors with access to an
extensive array of traditional life and disability insurance products for sale
to our clients. As a result, management does not anticipate any material adverse
effects from the termination of the UILIC General Agent Contract.
15
OTHER INFORMATION
ASSETS UNDER MANAGEMENT
(amounts in millions)
ENDING
1Q 01 1Q 00 % change
---------- ---------- ----------
Mutual Fund
Equity $ 23,229 $ 31,186 (25.5)%
Fixed Income 3,184 3,289 (3.2)%
Money Market 1,191 873 36.4%
---------- ----------
Total $ 27,604 $ 35,348 (21.9)%
Institutional and separate accounts 4,645 6,132 (24.2)%
---------- ----------
Total $ 32,249 $ 41,480 (22.3)%
========== ==========
AVERAGE*
1Q 01 1Q 00 % change
---------- ---------- ----------
Mutual Funds
Equity $ 26,125 $ 29,270 (10.7)%
Fixed Income 3,171 3,403 (6.8)%
Money Market 1,072 825 29.9%
---------- ----------
Total $ 30,368 $ 33,498 (9.3)%
Institutional and separate accounts 4,934 5,722 (13.8)%
---------- ----------
Total $ 35,302 $ 39,220 (10.0)%
========== ==========
* Average calculated using daily ending balances for mutual funds and
monthly ending balances for institutional and private accounts.
1Q 01 1Q 00 % change
---------- ---------- ----------
Retail Redemption Rate [1] 8.7% 7.7%
Sales per advisor (000s) [2]
- ----------------------------
Total 239 323 (26.0)%
2+ Years [3] 328 460 (28.7)%
0 to 2 Years [4] 55 95 (42.1)%
Other 119 164 (27.4)%
Number of financial advisors [2] 2,835 2,522 12.4%
Average number of financial advisors [2] 2,809 2,544 10.4%
Number of shareholder accounts 2,035,449 1,820,771 11.8%
[1] Excludes all exchanges including commissionable variable annuity exchanges
of $34.5 million in the first quarter of 2001.
[2] Excludes Legend Retirement Advisors
[3] Advisors licensed with the Company for two or more years.
[4] Advisors licensed with the Company for less than two years.
16
FORWARD LOOKING INFORMATION
From time-to-time, information or statements provided by or on behalf of
the Company, including those within this quarterly report on Form 10-Q 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 contained in these forward-looking statements
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 or revise 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, whether as a result of new information,
future developments or otherwise.
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 W&R Target 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 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. In addition, our future operating results may
also be impacted by our ability to incur additional debt and by adverse
litigation. 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.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Since December 31, 2000, there has been no material change in the
information provided in Item 7A of the 2000 Form 10-K Annual Report.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
UNITED INVESTORS LIFE INSURANCE COMPANY LITIGATION
As previously disclosed, we are in litigation with UILIC, and other related
parties 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
annuities underwritten by UILIC and distributed by us. The agreement provides
for us to be paid annual compensation of 0.25% on all variable annuity policies'
assets under management issued after January 1, 2000 ("post-1999 assets"), and
annual compensation of 0.20% on variable annuity policies' assets under
management issued before that date ("pre-2000 assets"). The validity and
duration of 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 Corporation as a third-party defendant in a
tortious interference claim.
On April 9, 2001, the Circuit Court of Jefferson County, Alabama, issued
two orders. In the first order on the issue of the contract being valid, our
motion for summary judgment was denied. This issue is currently set for trial in
September 2001. In the second order on the issue of whether annual compensation
of 0.20% on pre-2000 assets terminates with the Principal Underwriting
Agreement, UILIC's motion for summary judgment was granted. The annual
compensation of 0.25% on post-1999 assets was not addressed by these orders.
These completely incongruous orders prevent us from collecting fees on pre-2000
assets after May 2001 unless our efforts for immediate legal relief are
successful or we prevail at and after the September 2001 proceedings. While
management believes that the Company will ultimately prevail on this issue, if
it does not, the revenue impact at current market levels is estimated to be $2.4
million over the remaining three quarters of 2001. In the future, this impact
should be mitigated by a pre-2000 asset balance that is expected to decline as
clients migrate their variable policies to other products with superior features
and service.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On April 25, 2001, our stockholders approved an Agreement and Plan of
Merger by and between the Company and WDR Sub, Inc., one of the Company's
wholly-owned subsidiaries, with the Company to remain as the surviving
corporation. The merger effected a combination of our Class A and Class B common
stock on a one-for-one basis. Prior to the merger, our Class A and Class B
common stock had the same rights, powers and preferences, except that the Class
A common stock was entitled to one vote per share and the Class B common stock
was entitled to five votes per share. Effective as of the end of business on
April 30, 2001, each share of our Class B common stock was converted into one
share of Class A common stock and the number of Class A authorized shares
increased from 150,000,000 to 250,000,000 to account for the elimination of the
18
100,000,000 authorized Class B shares. We terminated the Class B common stock
registration under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and it is no longer listed or traded on the New York Stock
Exchange (the "NYSE"). Our Class A common stock will continue to be registered
under the Exchange Act and will continue to be listed and traded on the NYSE
under the symbol "WDR."
ITEM 5. OTHER INFORMATION.
Forward-Looking Statements
We desire 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 we do not anticipate that we
will make forward-looking statements as a general policy, we 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 our
future operating results and business.
We hereby incorporate into this report by reference to our Form 10-K for
the year ended December 31, 2000, the cautionary statements found on pages 29-32
of such Form 10-K.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
2.1 Agreement and Plan of Merger, dated as of February 14, 2001, by
and between Waddell & Reed Financial, Inc. and WDR Sub, Inc.
Filed as Exhibit 2.1 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2000 and incorporated herein by
reference.
3.1 Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws of the Company.
4.1 First Amendment to Rights Agreement, dated as of February 14,
2001, by and between Waddell & Reed Financial, Inc. and First
Chicago Trust Company of New York. Filed as Exhibit 4.4 to the
Company's Annual Report on Form 10-K for the year ended December
31, 2000 and incorporated herein by reference.
4.2 Indenture, dated as of January 18, 2001, by and between Waddell &
Reed Financial, Inc. and Chase Manhattan Trust Company, National
Association. Filed as Exhibit 4.5 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference.
4.3 First Supplemental Indenture, dated as of January 18, 2001 by and
between Waddell & Reed Financial, Inc. and Chase Manhattan Trust
Company, National Association,
19
including the form of the 7.5% notes due January 2006 as Exhibit
A. Filed as Exhibit 4.6 to the Company's Annual Report on Form
10-K for the year ended December 31, 2000 and incorporated herein
by reference.
10.1 Administrative Agreement, dated as of March 9, 2001 by and among
W&R Insurance Agency, Inc., Waddell & Reed, Inc., and BISYS
Insurance Services, Inc.
(b) REPORTS ON FORM 8-K:
A Form 8-K dated February 5, 2001 was filed to announce that on
January 18, 2001, we completed our sale of $200.0 million aggregate
principal amount of our 7.50% senior notes due January 18, 2006 under
an effective registration statement filed with the Securities and
Exchange Commission. No financial statements were required to be
filed.
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 15th day of May, 2001.
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