_____________________________________________________________
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, 1998
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 000-23124
WADDELL & REED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0261715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 Lamar Avenue
Overland Park, Kansas
66202
(Address of principal executive offices)
(Zip Code)
(913) 236-2000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
-------
Shares outstanding of each of the registrant's classes of common stock as of
March 31, 1998:
Class Outstanding as of March 31, 1998
----- --------------------------------
Class A Common stock, $.01 par value 32,142,174
Class B Common stock, $.01 par value 34,325,000
Waddell & Reed Financial, Inc.
Form 10-Q
Quarter Ended March 31, 1998
Index
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at
December 31, 1997 and March 31, 1998 3
Consolidated Statements of
Operations for the three months ended
March 31, 1997 and 1998 4
Consolidated Statements of Cash
Flows for the three months ended
March 31, 1997 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information 11
Signatures 13
Item 1. Financial Statements
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Unaudited
(Dollars In Thousands)
- ----------------------------------------------------------------------------------------------------
December 31, March 31,
Assets 1997 1998
- ----------------------------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 73,820 120,551
Investment securities, available-for-sale 18,977 46,607
Receivables:
United funds and W&R funds 4,031 5,926
Customers and other 11,840 12,726
Due from affiliates 17,232 1,571
Deferred income taxes 1,241 1,326
Prepaid expenses and other current assets 2,991 3,114
- ----------------------------------------------------------------------------------------------------
Total current assets 130,132 191,821
Due from affiliates 175,450 1,390
Property and equipment, net 12,058 12,358
Investment in real estate partnership 17,544 17,675
Deferred sales commissions, net 12,316 12,752
Goodwill (net of accumulated amortization of $17,479 and $18,205) 98,831 98,105
Other assets 633 633
- ----------------------------------------------------------------------------------------------------
Total assets $ 446,964 334,734
====================================================================================================
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------------------------------------------
Liabilities:
Current liabilities:
Accounts payable $ 22,929 35,813
Due to affiliates 102,459 4,210
Accrued sales force compensation 8,666 7,538
Income taxes payable 3,314 17,820
Other current liabilities 18,525 16,521
- ----------------------------------------------------------------------------------------------------
Total current liabilities 155,893 81,902
Due to affiliates 509,186 0
Deferred income taxes 2,246 2,441
Accrued pensions and post-retirement costs 9,530 9,820
- ----------------------------------------------------------------------------------------------------
Total liabilities 676,855 94,163
- ----------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock ($.01 par value; 42,300,000 shares authorized, issued and
outstanding - 1997; 32,142,174 Class A shares and 34,325,000 Class B
shares authorized, issued and outstanding - 1998) 423 665
Additional paid-in capital 0 246,270
Retained earnings 0 6,724
Dividends in excess of retained earnings and additional paid-in capital (230,658) 0
Deferred compensation 0 (13,589)
Accumulated other comprehensive income 344 501
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity (229,891) 240,571
- ----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 446,964 334,734
====================================================================================================
See accompanying notes to consolidated financial statements.
3
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Unaudited
(In Thousands, except for per share amounts)
- --------------------------------------------------------------------------------
Three months ended March 31,
1997 1998
- --------------------------------------------------------------------------------
Revenue:
Investment management fees $26,878 32,426
Underwriting and distribution fees:
United Funds and W&R Funds 14,046 15,850
Affiliates and others 7,040 7,611
Shareholder service fees 7,513 7,773
Investment and other revenue 933 1,439
- --------------------------------------------------------------------------------
Total revenue 56,410 65,099
- --------------------------------------------------------------------------------
Expenses:
Underwriting and distribution 18,396 20,283
Compensation and related costs 6,142 7,420
General and administrative 1,650 1,783
Depreciation 319 429
Amortization of goodwill 726 726
- --------------------------------------------------------------------------------
Total expenses 27,233 30,641
- --------------------------------------------------------------------------------
Income before interest and income taxes 29,177 34,458
Interest:
Income 2,830 1,950
Expense (1,862) (8,604)
- --------------------------------------------------------------------------------
Income before income taxes 30,145 27,804
Income taxes 11,707 11,057
- --------------------------------------------------------------------------------
Net income $18,438 16,747
================================================================================
Net income per share - basic and diluted $ 0.28 0.25
================================================================================
Weighted average number of shares outstanding 66,467 66,467
================================================================================
See accompanying notes to consolidated financial statements.
4
WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Unaudited
(In Thousands)
- --------------------------------------------------------------------------------
Three months ended March 31,
1997 1998
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $18,438 16,747
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,045 1,155
Interest expense 0 6,633
Recognition of deferred compensation 0 55
Loss on sale and retirement of fixed assets 0 4
Capital gains and dividends reinvested (15) (19)
Deferred income taxes 369 14
Changes in assets and liabilities:
Receivables from funds 198 (1,895)
Other receivables (216) (9,267)
Due to/from affiliates - operating (2,483) 2,286
Other assets 877 (559)
Accounts payable 3,895 12,884
Other liabilities 3,675 11,535
- --------------------------------------------------------------------------------
Net cash provided by operating activities 25,783 39,573
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to investments 0 (27,965)
Proceeds from maturity of investments 259 607
Purchase of property and equipment (416) (712)
Other 171 (23)
- --------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 14 (28,093)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 0 516,014
Cash dividends to parent (9,288) 0
Change in due to/from affiliates - nonoperating 1,110 (480,763)
Cash contributions from parent 13,306 0
- --------------------------------------------------------------------------------
Net cash used in financing activities 5,128 35,251
- --------------------------------------------------------------------------------
Net increase in cash and cash equivalents 30,925 46,731
Cash and cash equivalents at beginning of period 59,003 73,820
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $89,928 120,551
================================================================================
See accompanying notes to consolidated financial statements.
5
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Waddell & Reed Financial, Inc. and Subsidiaries and Basis of Presentation:
Waddell & Reed Financial, Inc. and Subsidiaries
Waddell & Reed Financial, Inc. and subsidiaries ("Company") derive their
revenue primarily from investment management, administration, distribution and
related services provided to the United mutual funds and Waddell & Reed mutual
funds and institutional accounts in the United States. Prior to December 1997,
the Company was known as United Investors Management Company. In the first
quarter of 1998, the insurance operations of the Company, United Investors Life
Insurance Company, were distributed to Torchmark Corporation and a subsidiary of
Torchmark (together, "Torchmark"). Until March 1998, the Company was wholly
owned by Torchmark. In March 1998, the Company completed the initial public
offering ("Offering") of its Class A common stock, with the Company realizing
net proceeds of approximately $516 million. Approximately $481 million of the
proceeds were used to prepay notes payable to Torchmark. After giving effect to
the initial public offering and as of March 31, 1998, Torchmark controls in
excess of 60% of the outstanding Class A common stock and Class B common stock
and in excess of 80% of the voting power of the outstanding Class A common stock
and Class B common stock of the Company. Torchmark has advised the Company
that, subject to certain conditions, it currently intends to divest its
ownership interest in the Company by means of a special dividend to the
stockholders of Torchmark of all shares of common stock of the Company currently
held by Torchmark. The spin-off is conditioned upon regulatory approvals, the
receipt of a ruling by the Internal Revenue Service to the effect that the spin-
off will qualify as a tax free distribution and other conditions.
Basis of Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
results of its
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operations and its cash flows for the three-month periods ended March 31, 1997
and 1998 and its financial position at March 31, 1998. These financial
statements should be read in conjunction with the Company's audited financial
statements for the year ended December 31, 1997, from which the accompanying
balance sheet as of December 31, 1997 was derived. The operating results and
cash flows for the three months ended March 31, 1998 are not necessarily
indicative of the results that will be achieved in future periods.
Deferred Compensation and Employee Stock Options Plan
Deferred compensation at March 31, 1998 includes $5.2 million related to
restricted stock that was awarded upon consummation of the Offering pursuant to
the Company's Stock Incentive Plan. The restricted stock awards generally vest
in equal one-third increments on the second, third and fourth anniversaries of
the date awarded.
In conjunction with the Offering and pursuant to a Directed Share Program, the
Company loaned $8.4 million to key financial advisors and sales force management
personnel to encourage ownership of the Company. The loans bear interest at an
annual rate of 5.6% and are due and payable five years from the date issued.
Subject to certain conditions, including continued affiliation with the Company,
the notes may be forgiven on the maturity date.
The Company also issued options to purchase 2.4 million shares of Class A
common stock to employees upon consummation of the Offering pursuant to the
Stock Incentive Plan. The options are exercisable at the initial public offering
price and generally vest in equal one-third increments on the second, third and
fourth anniversaries of the consummation of the Offering.
Earnings per Share
Earnings per share for the 1997 period are based on the number of shares
outstanding as of the close of the Offering.
Summary of Significant Accounting Policies
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, on January 1, 1998. This statement requires the
reporting of comprehensive income and its components. Comprehensive income is
defined as the change in equity from transactions and other events and
circumstances from non-owner sources, and excludes investments by and
distributions to owners. Comprehensive income includes net income and other
items of comprehensive income meeting the above criteria. The Company's only
component of other comprehensive is the unrealized holding gains and losses on
available-for-sale securities.
7
For the Three Months
Ended March 31
1997 1998
------- -------
Net earnings $18,438 $16,747
Change in unrealized gain (loss), net (164) 157
------- -------
Comprehensive income $18,274 $16,904
Subsequent Event
On April 14, 1998, the Company declared a dividend payable on May 1, 1998 in
the amount of $.1325 per share to shareholders of record as of April 21. The
total dividend paid was $8.8 million.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The Company derives its revenues primarily from providing investment
management, distribution and administrative services to the United, Waddell &
Reed ("W&R") and TMK/United funds and institutional accounts. Investment
management fees, the Company's most substantial source of revenue, are based on
the amount of assets under management and are affected by sales levels,
financial market conditions, redemptions and the composition of assets.
Underwriting and distribution revenues consist of sales charges and commissions
derived from the sale of investment and insurance products and distribution fees
earned from the W&R funds for distributing their shares. The products sold have
various sales charge structures and the revenues received from the sale of
products vary based on the type and amount sold. Rule 12b-1 distribution and
service fees earned for distributing shares of the W&R funds are based upon a
percentage of assets and fluctuate based on sales, redemptions, and financial
market conditions. Service fees include transfer agency fees, custodian fees for
retirement plan accounts and portfolio accounting fees.
Results of Operations - Three Months Ended March 31, 1998 as Compared to Three
Months Ended March 31,1997
Total revenues for the first quarter of 1998 were $65.1 million, up $8.7
million or 15% from the same period in 1997.
Investment management fees, which comprised 50% of total revenue for the first
quarter of 1998, increased $5.5 million or 21% to $32.4 million for the
comparable 1997 period. Assets under management were up due to increased sales,
investment performance and strong financial markets. Total assets under
management were $25.9 billion at March 31, 1998 compared to $23.4 billion at
December 31, 1997 and $19.0
8
billion at March 31, 1997. Average assets under management were up $4.8 billion
or 25% from that of the three months ended March 31, 1997 to $24.5 billion for
the three months ended March 31, 1998. The rate of increase in average assets
was greater than the growth rate in management fees due, partly, to the group
fee rate on the United funds. Under various management agreements, the annual
management fee rates generally decline as the average net assets of the
portfolios exceed certain thresholds. Average institutional assets for the first
quarter of 1998 were $2.9 billion, an increase of $1.0 billion when compared
with the first quarter of 1997. The rate of increase in average institutional
assets exceeded the growth rate of management fees because most of the asset
growth was due to the addition of fixed income managed accounts in the latter
half of 1997. Fixed income accounts typically have lower management fee rates
than equity accounts. In addition, institutional accounts generally have a lower
management fee rate than mutual funds.
Underwriting revenue, which accounted for 36% of total operating revenue for
the first quarter of 1998, rose to $23.5 million for the period, an increase of
$2.4 million or 11% compared to the same period last year due to higher sales
volume of investment products, primarily of the United funds. Total investment
product sales increased 12% to $404.8 million for the first quarter of 1998
compared with $363.0 million for the same period last year.
Service fees for the first quarter were $7.8 million, up $300,000 from the
first quarter of 1997 due primarily to growth in the number of mutual fund
accounts.
Investment and other revenue for the first three months of 1998 was $1.4
million, an increase of $500,000 or 54%. The increase is attributable to the
growth in invested balances related to $35 million of net proceeds from the
Offering that were retained and the retention of earnings in the first quarter
of 1998. In previous periods, substantially all of the Company's earnings were
paid to Torchmark as a dividend.
Underwriting and distribution expenses were $20.3 million for the first three
months of 1998, up $1.9 million or 10% from that of the same period last year,
primarily due to costs related to growth in investment product sales.
Compensation and related costs were $7.4 million for the first quarter of 1998,
an increase of $1.3 million or 21% over the same period last year. The increase
is related to normal salary and fringe benefit changes, staff additions and the
impact of adjustments made to make total compensation more competitive within
the market. General and administrative expenses were $1.8 million for the
quarter compared to $1.7 million for the first three months of 1997, an increase
of 8% due primarily to growth in business activity.
Net interest income (expense) was ($6.7) million and $1.0 million for the
first three months of 1998 and 1997, respectively. The net interest expense in
the first quarter of 1998 is due to interest costs related to a $480.0 million
dividend that was evidenced by two 8% promissory notes to Torchmark. During the
first quarter of 1998, the notes were prepaid from the proceeds of the Offering.
9
Income tax expense was $11.1 million and $11.7 million for the first quarter
of 1998 and 1997, respectively, representing effective tax rates of 39.8 % and
38.8%. The effective tax rate varies based upon the amount of federally tax-
exempt interest and the tax rates that apply to income taxable within various
states.
The Company has considered the effect of year 2000 on its computer systems and
application software programs and has developed a plan to become year 2000
compliant. The Company estimates that its compliance activities will be
completed no later than the first quarter of 1999. The Company estimates the
total costs of this effort to be $4.1 million for the four year period ending
December 31, 1999.
Liquidity and Capital Resources
Cash, cash equivalents and short term investments were $120.6 million at March
31, 1998, an increase of $46.8 million from December 31, 1997. Cash and cash
equivalents at March 31, 1998 and December 31, 1997 includes reserves of $24.4
million and $14.9 million, respectively, for the benefit of customers in
compliance with securities regulations.
Cash flow provided from operations was $39.6 million and $25.8 million for the
first quarter of 1998 and 1997, respectively. Other than net income and related
adjustments, the most significant sources of cash from operations resulted from
the timing of payments. The timing of tax payments and mutual fund trade
settlements provided $14.5 million and $12.5 million, respectively, of cash
during the first quarter. Approximately $8.4 million of cash was used for
interest bearing loans related to the Offering.
Investing activities used $28.1 million of cash during the quarter, due
primarily to additional investments in longer-term securities. Although the
Company has not entered into formal commitments, it is considering an expansion
of its home office building. The capitalized cost of this proposed expansion is
now estimated to be $12.0 million. Except for this possible expansion the
Company has no material commitments for capital expenditures.
The net cash provided by financing activities in the first quarter of 1998 was
$36.8 million. The increase is related to the Company's initial public offering
that closed on March 10, 1998. Net proceeds from the sale of 23.9 million shares
were $516 million, of which the Company retained for working capital purposes
approximately $35 million. The remainder of the proceeds were used to prepay
notes payable to Torchmark.
On April 14, 1998, the Company's Board of Directors declared a quarterly cash
dividend on the Common Stock of approximately $8.8 million to be paid May 1,
1998 to shareholders of record on April 21. Management believes its available
cash, cash equivalents, investment securities available-for-sale and expected
continuing cash flow from operations will be sufficient to fund dividend
payments, operations and other reasonably foreseeable cash needs.
10
Forward Looking Information
Certain statements contained in this Quarterly Report on Form 10-Q constitute
forward-looking statements, which involve known and unknown risks,
uncertainties, and other factors that may cause the actual results, levels of
activity, performance, or achievements of the Company, or industry results, to
be materially different from any future results, levels of activity,
performance, or achievements expressed or implied by such forward-looking
statements. Forward-looking statements include all statements relating to
future events and all statements of belief and opinion with respect to matters
that are not historical facts. The risks, uncertainties, and other factors to
which forward-looking statements are subject include, among others, those set
forth under the caption "Risk Factors" in the prospectus of the Company dated
March 4, 1998, which is available form the Securities and Exchange Commission at
prescribed rates and at the Securities and Exchange Commission's website,
www.sec.gov. As a result of the foregoing and other factors, no assurance can
be given as to future results, levels of activity, or achievements, and neither
the Company nor any other person will be responsible for the accuracy or
completeness of any such forward-looking statements.
Part II. Other Information
(a) Exhibits.
Exhibit Number Description of Exhibit
- -------------- ----------------------
3.1 Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the
Company's Registration Statement No. 333-43687 and incorporated herein by
reference).
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's Registration
Statement No. 333-43687 and incorporated herein by reference).
10.1* Public Offering and Separation Agreement, dated as of March 3, 1998,
between Torchmark Corporation and Waddell & Reed Financial, Inc.
10.2* Tax Disaffiliation Agreement, dated as of March 3, 1998, between
Torchmark Corporation and Waddell & Reed Financial, Inc.
10.3* Investment Services Agreement, dated as of March 3, 1998, between Waddell
& Reed Investment Management Company and Waddell & Reed Asset Management
Company.
10.4 General Agent Contract, dated January 1, 1985, between United Investors
Life Insurance Company and W&R Insurance Agency, Inc. (filed as Exhibit 10.4 to
the Company's Registration Statement No. 333-43687 and incorporated herein by
reference).
10.5* Amendment Extending General Agent Contract, dated as of March 3, 1998,
between United Investors Life Insurance Company and W & R Insurance Agency, Inc.
10.6 Independent Agent Contract, dated June 25, 1997, between United American
11
Insurance Company, W & R Insurance Agency, Inc., and affiliates identified
therein (filed as Exhibit 10.6 to the Company's Registration Statement No. 333-
43687 and incorporated herein by reference).
10.7* Amendment Extending Independent Agent Contract, dated as of March 3,
1998, between United American Insurance Company, W & R Insurance Agency, Inc.,
and affiliates identified therein.
10.8* The 1998 Stock Incentive Plan.
10.9* The 1998 Non-Employee Director Stock Option Plan.
10.10* The 1998 Executive Deferred Compensation Stock Option Plan.
10.11* Waddell & Reed Financial, Inc. Savings and Investment Plan.
10.12* Waddell & Reed Financial, Inc. Retirement Income Plan.
10.13* Waddell & Reed, Inc. Career Field Retirement Plan.
10.14 Form of Administration Contract between United Investors Park Owners'
Association and Waddell & Reed Property Management Division.
10.15* Agreement Amending Distribution Contract, dated as of March 3, 1998,
between United Investors Life Insurance Company and TMK/United Funds, Inc.
10.16 Distribution Contract, dated April 4, 1997, between United Investors
Life Insurance Company and TMK/United Funds, Inc. (filed as Exhibit 10.16 to the
Company's Registration Statement No. 333-43687 and incorporated herein by
reference).
10.17* Agreement Amending Principal Underwriting Agreement, dated as of March
3, 1998, between United Investors Life Insurance Company and Waddell & Reed,
Inc.
10.18 Principal Underwriting Agreement, dated May 1, 1990, between United
Investors Life Insurance Company and Waddell & Reed, Inc. (filed as Exhibit
10.18 to the Company's Registration Statement No. 333-43687 and incorporated
herein by reference).
10.19* Services Agreement, dated as of March 3, 1998, between Waddell & Reed
Investment Management Company and Waddell & Reed Asset Management Company.
10.20* Reciprocity Agreement, dated as of March 3, 1998, between Torchmark
Corporation and Waddell & Reed Financial, Inc.
10.21* Administrative Services Agreement, dated as of March 3, 1998, between
Torchmark Corporation and Waddell & Reed Financial, Inc.
27.1* Financial Data Schedule.
___________________
* Filed herewith
All other items are omitted as not applicable.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the period
subject to this Quarterly Report on Form 10-Q.
12
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
WADDELL & REED FINANCIAL, INC.
(Registrant)
By: /s/ Keith A. Tucker
------------------------
Keith A. Tucker
Chairman of the Board and
Chief Executive Officer
Date: May 15, 1998
/s/ Michael D. Strohm
------------------------
Michael D. Strohm
Principal Accounting Officer
13