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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission file number 001-13913
WADDELL & REED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0261715
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 Lamar Avenue
Overland Park, Kansas 66202
913-236-2000
(Address, including zip code, and telephone number of Registrant's principal
executive offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Class A Common Stock, $.01 par value New York Stock Exchange
Class B Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
(Title of class)
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 ___.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
registrant (excludes officers, directors and stockholders holding 5% or greater
of the registrant's common stock): $983,596,438 at March 3, 2000.
Shares outstanding of each of the registrant's classes of common stock as of
March 3, 2000:
Class A Common Stock, $.01 par value: 28,803,015
Class B Common Stock, $.01 par value: 27,145,647
DOCUMENTS INCORPORATED BY REFERENCE
In Part III of this Form 10-K, the definitive proxy statement for 2000
annual meeting of stockholders to be held April 26, 2000
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Index of Exhibits (Pages B-1 through B-3)
Total Number of Pages Included Are 56
WADDELL & REED FINANCIAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
PAGE
PART I --------
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 16
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Risk Factors................................................ 25
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 29
Item 8. Financial Statements and Supplementary Data................. 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 29
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 29
Item 11. Executive Compensation...................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 30
Item 13. Certain Relationships and Related Transactions.............. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 30
SIGNATURES............................................................... 31
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... A-1
INDEX TO EXHIBITS........................................................ B-1
2
PART I
ITEM 1. BUSINESS
BACKGROUND
Waddell & Reed Financial, Inc. (the "Company") is a Delaware holding company
that conducts its business through its subsidiaries. One subsidiary, Waddell &
Reed, Inc. ("W&R"), is a registered broker-dealer and registered investment
advisor that acts primarily as the nationwide distributor and underwriter for
the shares of mutual funds and distributor of insurance products issued
primarily by United Investors Life Insurance Company ("UILIC"). Another
subsidiary, Waddell & Reed Investment Management Company ("WRIMCO"), is a
registered investment advisor that provides investment management and advisory
services to the Company's mutual funds and to institutions and other private
clients. Waddell & Reed Services Company ("WRSCO") provides transfer agency and
accounting services to the funds and their shareholders. On August 9, 1999 the
Company completed the acquisition of Austin, Calvert & Flavin, Inc. ("ACF"), a
privately held investment management firm based out of San Antonio, Texas. ACF
was founded in 1981 and manages investments for trusts, high net worth families
and individuals, and pension plans of corporations, hospitals, schools, labor
unions, endowments, and foundations. The acquisition of ACF added nine
investment professionals to the Company's investment team and $1.7 billion of
assets under management as of December 31, 1999. Waddell & Reed
Financial, Inc., W&R, WRIMCO, WRSCO, and ACF are hereafter collectively referred
to as the "Company", unless the context requires otherwise.
OVERVIEW
The Company, founded in 1937, is one of the oldest mutual fund complexes in
the United States, having introduced the United family of funds in 1940. The
Company sells its investment products primarily to middle income Americans
through a virtually exclusive sales force. As of December 31, 1999, the Company
had $37.3 billion of assets under management, of which $31.9 billion were mutual
fund assets and $5.4 billion were managed institutional and private accounts.
The Company has over 608,000 mutual fund customers having an average investment
of $47,000 and 57,000 variable account customers having an average investment of
$60,000.
The Company is the exclusive underwriter and distributor of 36 mutual fund
portfolios (the "Funds"), including 17 comprising the United Funds (the "United
Funds"), 8 comprising the Waddell & Reed Funds (the "W&R Funds"), and 11
comprising the Target/United Funds (the "Target/United Funds"). As part of its
financial planning services, the Company also distributes variable annuities and
life insurance products, underwritten primarily by UILIC, to its customers.
Commencing October 4, 1999, the United Funds began offering Class B shares
("back-end sales charge shares") and Class C shares ("level sales charge
shares"). These are in addition to the already offered Class A shares
("front-end sales charge shares") and Class Y shares ("institutional shares").
Concurrently, the W&R Funds closed new sales of Class B shares and began
offering Class C shares in addition to the already offered Class Y shares. The
existing W&R Funds' Class B shares will combine with the W&R Fund Class C shares
in the first quarter of 2000.
The traditional market for the Company has generally been professionals and
working families with annual incomes between $40,000 and $100,000 who are saving
for retirement. The Company believes that demographic trends and shifts in
attitudes toward retirement savings will continue to support increased consumer
demand for its products. According to U.S. Census Bureau projections, the number
of Americans between the ages of 45 and 64 will grow from 53.7 million in 1996
to 71.1 million in 2005, making this "preretirement" age group the fastest
growing segment of the U.S. population.
The Company distributes the Funds and other financial products through a
financial advisor sales force that represents the Company on a virtually
exclusive basis. On December 31, 1999, the Company's sales force consisted of
2,611 financial advisors, including 239 district managers. The sales force is
managed
3
by eight regional vice presidents, and 136 division and associate managers
operating from 205 sales offices located throughout the United States. For the
year ended December 31, 1999, the Company's financial advisor sales force sold
over $2.1 billion of mutual fund and variable products. The Company believes,
based on industry data, that its financial advisor sales force is currently one
of the largest sales forces in the United States selling primarily mutual funds.
As of December 31, 1999, 37% of the Company's financial advisors have been with
the Company for more than 5 years and 25% for more than 10 years. The Company's
financial advisors are located primarily in smaller metropolitan areas and rural
communities.
The financial advisor industry is fragmented, consisting primarily of
relatively small companies generally employing fewer than 100 investment
professionals. The Company's sales force competes primarily with small
broker-dealers and independent financial advisors. The Company's marketing
efforts are currently focused on customers residing in smaller metropolitan
areas and rural communities. The Company conducts investment seminars throughout
the United States to reach a large number of potential clients. The Company also
provides financial plans for clients offering one-on-one consultations
emphasizing long-term relationships through continuing service, rather than a
one-time sale. The Company believes that it is well-positioned to benefit from a
developing industry trend toward "assisted sales" (sales of mutual fund products
through a sales person) driven by the array of options now available to
investors and the need for financial planning advice that has resulted from the
recent increase in the average household's financial assets.
The Company's investment philosophy and financial planning approach
emphasize long-term investments. The Company's portfolio managers seek
consistent long-term performance and downside protection in turbulent markets.
As a result, the Company has developed a loyal customer base with clients
maintaining their accounts for approximately 12 years on average as compared to
five years for the mutual fund industry, according to the Investment Company
Institute. This loyalty is evidenced by a relatively low retail fund redemption
rate for the five years ended December 31, 1999 of 7.9% for the Funds (other
than money market funds), which is less than one-half of the industry average of
18.9% and a relatively high dividend reinvestment rate of 87.3% for the Funds
for the same period which has constantly been over 20% higher than the industry.
Approximately 50% of the Company's assets under management are in retirement
accounts as of December 31, 1999. The historically low redemption and high
reinvestment rates have provided a stable source of asset and revenue growth at
relatively low cost.
The Company has a seasoned team of portfolio managers and an internal equity
and fixed income investment research staff that have substantial resources
available to them including hundreds of meetings annually with company
management both on and off site. In addition, the Company utilizes research
provided by brokerage firms and independent outside consultants. Portfolio
managers usually were investment research analysts for a substantial length of
time prior to acquiring money management assignments. The predominant style of
the Company's investments is growth equity. As of December 31, 1999
approximately 86.3% of the Company's mutual fund assets under management were
invested in equity funds and the remainder in fixed income and money market
funds. This investment strategy generally emphasizes investment at attractive
valuations in companies that the portfolio managers believe can produce above
average growth in earnings.
4
OPERATIONS
Revenues from operations for the last three years were (in thousands):
FOR YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Revenues from:
Investment management..................................... $178,612 137,823 117,784
Underwriting and distribution............................. 126,318 106,615 89,427
Shareholder service....................................... 41,525 33,808 30,763
-------- ------- -------
Revenue excluding investment income....................... 346,455 278,246 237,974
Investment income and other revenue....................... 10,202 9,043 3,798
-------- ------- -------
Total revenue............................................. $356,657 287,289 241,772
======== ======= =======
MARKETING
The Company has taken several steps to increase the productivity of its
sales force. Since 1992, the Company has been developing a more fully committed
sales force through recruiting and retention initiatives. These initiatives have
resulted in an increase of financial advisors having annual or annualized
production of more than $900,000 of investment product sales from 20% of the
sales force at December 31, 1993 to 36% at December 31, 1999. Prior to 1993,
division managers were engaged in personal sales production as well as sales
management. In order to emphasize the importance of recruiting and developing a
sales force, the Company implemented a compensation system that ties
compensation of division managers to the development of new financial advisors
and to division sales rather than personal sales.
The Company provides training and motivational programs for its sales force.
Sales training specialists provide training programs for new recruits as well as
advanced training for experienced financial advisors. Programs for new recruits
focus on prospecting techniques, product knowledge, and sales skills. Field
office classes provide guidance in identifying target markets, practical
exercises to learn interview skills and data collection, instruction in basic
financial planning software, and guidance in matching products with various
investment objectives. Sales presentation skills are taught and practiced in the
classroom environment as well as on joint sales calls with field sales
management. The programs for experienced advisors focus on skills related to
dealing with larger investment sums (such as IRA rollovers) and include training
in the use of asset allocation and estate planning software. In addition, the
Company offers new financial advisors the opportunity to participate in a week
long training program at the home office covering such subjects as product
features, financial planning, and the use of illustrative software packages.
In 1998, the Company launched its first national advertising campaign in
selected markets throughout the country which focused on the important aspects
of the Company's business and was intended to increase name recognition of the
Company in those markets. The campaign was continued in 1999 and will continue
in 2000. In November of 1999, the Company named Thomas W. Butch as Chief
Marketing Officer. In this newly created position, Mr. Butch is responsible for
marketing and distribution strategy, product development, and all core marketing
and communication activities.
FUNDS AND ASSET MANAGEMENT
The Company serves as underwriter for, and investment advisor to, the United
Funds, the W&R Funds, and the Target/United Funds and distributes variable
annuity and variable life insurance products related to the Target/United Funds.
The Company offers the Funds' shareholders a broad range of investment
products designed to attract and retain clients with varying investment
objectives. The predominant style of the Company's investments
5
is growth equity. The investment strategy emphasizes investment at attractive
valuations in companies that the portfolio managers believe can produce above
average growth in earnings. According to an annual Barron's/Lipper fund-family
survey which ranks investment performance of mutual fund complexes, the Company
ranked seventeenth out of 92 mutual fund complexes for 1999 and eleventh out of
68 complexes for the five year period ended December 31, 1999. As of
December 31, 1999, 86% of the mutual fund assets under management in the Funds
were invested in equity funds, 11% were invested in fixed income funds, and 3%
were invested in money market funds. Lipper, Inc. also ranked 48% of the
Company's equity funds in the top quartile and 14% in the top 10% when compared
to funds with similar objectives. Management fees from the United Income Fund,
the Company's largest mutual fund, were $44.4 million or 12% of total revenues,
$39.8 million or 14% of total revenues and $32.8 million or 14% of total
revenues for each of the years ended 1999, 1998 and 1997, respectively. The
United Income Fund had a net asset value of $8.4 billion, $7.8 billion and $6.5
billion for the years ended 1999, 1998, and 1997, respectively.
The Company periodically introduces new mutual funds designed to complement
and expand its investment product offerings, respond to competitive developments
in the financial marketplace, and meet the changing needs of clients. On
October 4, 1999, the Company introduced the new United Small Cap Fund. The
Company's base of assets under management consists of a broad range of domestic
and international stock, bond, and money market mutual funds that meet the
varied needs and objectives of its individual and institutional investors.
In addition to performing investment management services for the Funds, the
Company acts as an investment advisor and portfolio manager for institutional
and other private investors. The Company receives a fee that is generally based
on a percentage of assets under management for its services as an investment
advisor or portfolio manager. Assets under management for institutional and
private accounts totaled approximately $5.4 billion at December 31, 1999.
Investment management fees from institutional and private accounts were
approximately $9.6 million, or approximately 5%, of total investment management
fees, for the year ended December 31, 1999.
6
Ending and average assets under management for the last three years were:
1999 1998 1997
------------------- ------------------- -------------------
ENDING AVERAGE ENDING AVERAGE ENDING AVERAGE
-------- -------- -------- -------- -------- --------
(IN MILLIONS)
United Funds
Equity.......................................... $22,626 18,123 16,713 15,320 13,687 12,761
Fixed-income.................................... 3,190 3,464 3,637 3,652 3,632 3,499
Money market.................................... 812 693 644 572 529 498
------- ------ ------ ------ ------ ------
26,628 22,280 20,994 19,544 17,848 16,758
W&R Funds
Equity.......................................... 1,785 1,261 1,050 906 779 684
Fixed-income.................................... 82 88 85 74 66 58
------- ------ ------ ------ ------ ------
1,867 1,349 1,135 980 845 742
Target/United Funds
Equity.......................................... 3,113 2,415 2,127 1,859 1,627 1,452
Fixed-income.................................... 237 243 245 235 223 204
Money market.................................... 64 58 54 45 43 38
------- ------ ------ ------ ------ ------
3,414 2,716 2,426 2,139 1,893 1,694
Total Mutual Funds
Equity.......................................... 27,524 21,799 19,890 18,085 16,093 14,897
Fixed-income.................................... 3,509 3,795 3,967 3,961 3,921 3,761
Money market.................................... 876 751 698 617 572 536
------- ------ ------ ------ ------ ------
31,909 26,345 24,555 22,663 20,586 19,194
Institutional and Private Accounts................ 5,393 3,953 3,189 2,947 2,831 2,103
------- ------ ------ ------ ------ ------
Total Assets Under Management..................... $37,302 30,298 27,744 25,610 23,417 21,297
======= ====== ====== ====== ====== ======
INVESTMENT MANAGEMENT AGREEMENTS
The Company provides investment advisory and management services pursuant to
an investment management agreement with each Fund. While the specific terms of
the investment management agreements vary, the basic terms of the investment
management agreements are similar. The investment management agreements provide
that the Company renders overall management services to each of the Funds,
subject to the oversight of each Fund's board of directors and in accordance
with each Fund's fundamental investment objectives and policies. The investment
management agreements permit the Company to enter into separate agreements for
shareholder services or accounting services with the respective Funds.
Each Fund's board of directors, including a majority of the directors who
are not "interested persons", of the Fund or the Company within the meaning of
the Investment Company Act of 1940, as amended, (the "ICA") and its shareholders
must have approved the investment management agreement between the respective
Fund and the Company. These agreements may continue in effect from year to year
if specifically approved at least annually by (i) the Fund's board of directors,
including a majority vote of the directors who are not parties to the agreements
or "interested persons" of any such party, or (ii) the vote of the holders of a
majority of the outstanding voting securities of the Fund and the vote of a
majority of the Fund's directors who are not parties to the agreement or
"interested persons" of any such party, each vote being cast in person at a
meeting called for such purpose. Each agreement automatically terminates in the
event of its "assignment" as defined in the ICA or the Investment Advisers Act
of 1940, or amended, (the "Advisers Act") and may be terminated without penalty
by the Fund by giving the Company 60 days' written notice, if the termination
has been approved by a majority of the Fund's directors or shareholders. The
Company may terminate an investment management agreement without penalty on
120 days' written notice.
7
SERVICE AGREEMENTS
The Company provides various services to the Funds and their shareholders
pursuant to a shareholder servicing agreement with each Fund (except the
Target/United Funds) and an accounting service agreement with each Fund.
Pursuant to the shareholder servicing agreements, the Company performs
shareholder servicing functions, including the maintenance of shareholder
accounts, the issuance, transfer, and redemption of shares, distribution of
dividends and payment of redemptions, furnishing information related to the
Fund, and handling shareholder inquiries. The Funds pay a monthly fee to the
Company for such services. Pursuant to the accounting service agreements, the
Company provides the Funds with bookkeeping and accounting services and
assistance, including maintenance of the Fund's records, pricing of the Fund's
shares, and preparation of the prospectuses for existing shareholders, proxy
statements, and certain shareholder reports. The Funds pay the Company a monthly
fee for such services. A Fund's shareholder servicing agreement and accounting
service agreement may be adopted or amended with the approval of the Fund's
directors who are not interested persons. Each of the shareholder servicing
agreements and accounting service agreements have annually renewable terms of
one year expiring on October 1st of each year.
UNDERWRITING AND DISTRIBUTION
The Company distributes the Funds pursuant to an underwriting agreement with
each Fund (except the Target/United Funds). The Company distributes products
relating to the Target/United Funds under an underwriting agreement between the
Company and UILIC. Commissions paid to the Company by UILIC for distribution of
these products comprised 13%, 12% and 12% of the Company's total revenue for
each of the years ended 1999, 1998 and 1997, respectively. Under each
underwriting agreement with a Fund, the Company offers and sells the Fund's
shares on a continual basis and pays the costs of sales literature and printing
of prospectuses furnished to it by the Fund. The Company receives underwriting
commissions for such services, a major portion of which is paid to financial
advisors and sales managers of the Company. The Company charges a sales charge
to clients upon purchase of shares in the United Funds Class A shares, which are
front-end load funds, which ranges from zero to 5.75% of the amount invested.
The sales charge for the Class A shares of the United Funds typically declines
as the net asset value of the account increases. In addition, investors may
combine their purchases of these Funds' shares within the respective group of
Funds to qualify for the reduced sales charge. Investors in the United Funds
Class B shares generally pay contingent deferred sales charges upon redemption
of shares of up to 5% of the net asset value of the redeemed shares declining to
zero for shares held for more than six years. Class B shares convert to Class A
shares by the end of the eighth year. Investors in the United Funds and
Waddell & Reed Funds Class C shares generally pay a contingent deferred sales
charge of 1% declining to zero for shares held for more than 12 months. Class C
shares do not convert.
Under a distribution plan, shareholders of the United Funds Class B and C
shares as well as the Waddell & Reed Funds Class B and C shares pay a
Rule 12b-1 distribution fee of .75% of the average daily net assets as
compensation for distributing shares of those classes. Under a distribution and
service plan, the United Funds Class A, B and C shares (except the money market
fund), the Waddell & Reed Funds, and the Target/United Funds (service plan
only), may charge a maximum of .25% of the average daily net assets as
compensation for expenses in connection with providing personal service to
shareholders of the Fund, and maintaining shareholder accounts of the Funds.
Each distribution and service plan is subject to annual approval by the board of
directors, including a majority of the independent directors, cast in person at
a meeting called for the purpose of voting on such approval. The Fund may
terminate the distribution and service plan at any time without penalty.
8
The Company's investment product sales are summarized as follows:
INVESTMENT PRODUCT SALES
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
UNITED FUNDS
Class A................................................... $1,329.0 1,266.8 1,092.7
Class B................................................... 66.5 0 0
Class C................................................... 11.2 0 0
-------- ------- -------
Total United Funds.......................................... 1,406.7 1,266.8 1,092.7
Waddell & Reed Funds
Class B................................................... 289.3 252.3 175.7
Class C................................................... 40.1 0 0
-------- ------- -------
Total Waddell & Reed Funds.................................. 329.4 252.3 175.7
Variable Products (Target/United)........................... 413.7 308.4 249.8
-------- ------- -------
$2,149.8 1,827.5 1,518.2
======== ======= =======
FUNDS SUMMARY
The following table sets forth, for each fund within the Fund group, the
year that shares in such Fund were first offered to the public, the net assets
of such Fund or portfolio as of December 31, 1999 and a description of its
investment objective.
NET ASSETS AT
DECEMBER 31,
FIRST 1999
FUND NAME OFFERED (IN MILLIONS) INVESTMENT OBJECTIVE
--------- -------- ------------- -------------------------------------
UNITED FUNDS
Accumulative Fund...................... 1940 $2,254.5 Seeks capital growth, with a
secondary objective of current
income.
Asset Strategy Fund.................... 1995 $ 56.7 Seeks high total return over the
long-term by allocating its assets
among stocks, bonds and short-term
instruments.
Bond Fund.............................. 1964 $ 505.5 Seeks to achieve a reasonable return
with emphasis on preservation of
capital.
Cash Management........................ 1979 $ 812.1 Seeks to maximize current income to
the extent consistent with stability
of principal by investing in money
market instruments.
Continental Income Fund................ 1970 $ 600.0 Seeks to provide current income to
the extent that market and economic
conditions permit with a secondary
objective of seeking long-term
appreciation of capital.
Government Securities Fund............. 1982 $ 127.6 Seeks high current income consistent
with safety of principal by investing
in securities issued or guaranteed by
the
9
NET ASSETS AT
DECEMBER 31,
FIRST 1999
FUND NAME OFFERED (IN MILLIONS) INVESTMENT OBJECTIVE
--------- -------- ------------- -------------------------------------
U.S. Government or its agencies or
instrumentalities.
High Income Fund....................... 1979 $ 921.5 Seeks a high level of current income,
with a secondary objective of seeking
capital growth when consistent with
its primary objective.
High Income Fund II.................... 1986 $ 364.3 Seeks a high level of current income,
with a secondary objective of seeking
capital growth when consistent with
its primary objective.
Income Fund............................ 1940 $8,399.1 Seeks maintenance of current income,
subject to market conditions with a
secondary goal of capital growth.
International Growth Fund.............. 1970 $1,885.6 Seeks long-term capital appreciation,
with a secondary objective of
realization of income, by investing
in securities issued by companies or
governments of any nation.
Municipal Bond Fund.................... 1976 $ 805.4 Seeks income that is not subject to
Federal income taxation by investing
principally in tax-exempt municipal
bonds.
Municipal High Income Fund............. 1986 $ 465.3 Seeks a high level of income that is
not subject to Federal income
taxation by investing principally in
medium and lower quality tax-exempt
municipal bonds.
New Concepts Fund...................... 1983 $1,769.0 Seeks capital growth by investing in
a diversified holding of mid-sized
companies believed to offer above-
average growth potential.
Retirement Shares Fund................. 1972 $1,199.9 Seeks the highest long-term total
return consistent with reasonable
safety of capital.
Science and Technology Fund............ 1950 $3,795.5 Seeks long-term capital growth
through a portfolio emphasizing
science and technology securities.
Small Cap Fund......................... 1999 $ 97.7 Seeks capital growth by investing
primarily in new or unseasoned
companies, companies in the early
stages of development, or smaller
companies positioned in new or
emerging industries where there is an
opportunity for rapid growth.
10
NET ASSETS AT
DECEMBER 31,
FIRST 1999
FUND NAME OFFERED (IN MILLIONS) INVESTMENT OBJECTIVE
--------- -------- ------------- -------------------------------------
Vanguard Fund.......................... 1969 $2,568.1 Seeks capital appreciation through
diversified holdings of securities
issued primarily by companies that
have appreciation possibilities.
WADDELL & REED FUNDS
Asset Strategy Fund.................... 1995 $ 45.1 Seeks high total return over the
long-term by allocating assets among
stocks, bonds and short-term
instruments.
Growth Fund............................ 1992 $ 743.7 Seeks capital appreciation by
investing primarily in securities
issued by companies that offer
above-average growth potential,
including relatively new or
unseasoned companies.
High Income Fund....................... 1997 $ 25.9 Seeks a high level of current income,
with a secondary objective of seeking
capital growth when consistent with
its primary objective.
International Growth Fund.............. 1992 $ 205.5 Seeks long-term appreciation, with a
secondary goal of realization of
income, by investing in securities
issued by companies or governments of
any nation.
Limited-Term Bond Fund................. 1992 $ 23.0 Seeks a high level of current income
consistent with preservation of
capital by investing primarily in
debt securities of investment grade,
including U.S. government securities,
and maintaining a dollar-weighted
average maturity of the portfolio of
two to five years.
Municipal Bond Fund.................... 1992 $ 33.3 Seeks income that is not subject to
Federal income taxation by investing
primarily in municipal bonds.
Science and Technology Fund............ 1997 $ 226.8 Seeks long-term capital growth
through a portfolio emphasizing
science and technology securities.
Total Return Fund...................... 1992 $ 563.5 Seeks current income and capital
growth by investing primarily in
securities issued by companies that
have a record of paying regular
dividends on common stock or have the
potential for capital appreciation.
11
NET ASSETS AT
DECEMBER 31,
FIRST 1999
FUND NAME OFFERED (IN MILLIONS) INVESTMENT OBJECTIVE
--------- -------- ------------- -------------------------------------
TARGET/UNITED FUNDS
Asset Strategy Portfolio............... 1995 $ 21.6 Seeks high total return over the
long-term by allocating its assets
among stocks, bonds and short-term
instruments.
Balanced Portfolio..................... 1994 $ 117.2 Seeks current income with a secondary
objective of long-term appreciation
of capital.
Bond Portfolio......................... 1987 $ 110.5 Seeks reasonable return with emphasis
on preservation of capital.
Growth Portfolio....................... 1987 $1,162.7 Seeks capital growth with current
income as a secondary objective.
High Income Portfolio.................. 1987 $ 120.7 Seeks high current income, with a
secondary objective of capital
growth.
Income Portfolio....................... 1991 $ 940.5 Seeks maintenance of current income,
subject to market conditions with a
secondary objective of capital
growth.
International Portfolio................ 1994 $ 300.1 Seeks long-term appreciation of
capital, with current income as a
secondary objective by investing
principally in securities issued by
companies or governments of any
nation.
Limited-Term Bond Portfolio............ 1994 $ 6.0 Seeks a high level of current income
consistent with preservation of
capital by investing primarily in
debt securities of investment grade
and maintaining a dollar weighted
average maturity of the portfolio of
two to five years.
Money Market Portfolio................. 1987 $ 64.4 Seeks maximum current income
consistent with stability of
principal by investing in money
market securities.
Science and Technology Portfolio....... 1997 $ 252.7 Seeks long-term capital growth by
investing primarily in science and
technology securities.
Small Cap Portfolio.................... 1994 $ 318.0 Seeks capital growth by investing
primarily in securities issued by
relatively new or unseasoned
companies, companies in their early
stages of development or smaller
companies positioned in new and
emerging industries with above
average opportunity for rapid growth.
12
REGULATION
Virtually all aspects of the Company's businesses are subject to various
Federal and state laws and regulations. These laws and regulations are primarily
intended to protect investment advisory clients and shareholders of registered
investment companies. Under such laws and regulations, agencies that regulate
investment advisors and broker-dealers such as the Company have broad
administrative powers, including the power to limit, restrict, or prohibit such
an advisor or broker-dealer from carrying on its business in the event that it
fails to comply with such laws and regulations. In such event, the possible
sanctions that may be imposed include the suspension of individual employees,
limitations on engaging in certain lines of business for specified periods of
time, revocation of investment advisor and other registrations, censures, and
fines.
The business of the Company is subject to regulation at both the Federal and
state level by the Securities and Exchange Commission (the "Commission") and
other regulatory bodies. Certain subsidiaries of the Company are registered with
the Commission under the Advisers Act and the Funds are registered with the
Commission under the ICA and various filings are made with states under
applicable state laws. A subsidiary of the Company is also registered as a
broker-dealer with the Commission and is subject to regulation by the National
Association of Securities Dealers, Inc. (the "NASD") and various states.
Certain subsidiaries of the Company are registered with the Commission under
the Advisers Act and, as such, are regulated by and subject to examination by
the Commission. The Advisers Act imposes numerous obligations on registered
investment advisors including fiduciary duties, recordkeeping requirements,
operational requirements, and disclosure obligations. The Commission is
authorized to institute proceedings and impose sanctions for violations of the
Advisers Act, ranging from censure to termination of an investment advisor's
registration. The failure of a registered subsidiary of the Company to comply
with the requirements of the Commission could have a material adverse effect on
the Company.
The Company derives a large portion of its revenues from investment
management agreements. Under the Advisers Act, the Company's investment
management agreements terminate automatically if assigned without the client's
consent. Under the ICA, advisory agreements with registered investment companies
such as the Funds terminate automatically upon assignment. The term "assignment"
is broadly defined and includes direct assignments as well as assignments that
may be deemed to occur, under certain circumstances, upon the transfer, directly
or indirectly, of a controlling interest in the Company.
W&R, a subsidiary of the Company, is also a member of the Securities
Investor Protection Corporation. In its capacity as a broker-dealer, W&R is
required to maintain certain minimum net capital and cash reserves for the
benefit of its customers, which may limit its ability to pay dividends. W&R's
net capital, as defined, has consistently met or exceeded all minimum
requirements. Various regulations cover certain investment strategies that may
be used by the Funds for hedging purposes. To the extent that the Funds purchase
futures contracts, the Funds are subject to the commodities and futures
regulations of the Commodity Futures Trading Commission. Under the rules and
regulations of the Commission promulgated pursuant to the Federal securities
laws, the Company is subject to periodic examination by the Commission. The
Company is also subject to periodic examination by the NASD. A subsidiary of the
Company is registered under the Securities Exchange Act of 1934 as a transfer
agent. The most recent examination of the Company by the Commission was in
February 1999. The most recent examination of the Company by the NASD was in
November 1999. To date, no material issues resulting from those examinations
have been raised.
COMPETITION
The Company is subject to substantial competition in all aspects of its
business. The Company competes with hundreds of other mutual fund management,
distribution and service companies that distribute their fund shares through a
variety of methods including affiliated and unaffiliated sales forces,
13
broker-dealers, and direct sales to the public of shares offered at a low or no
sales charge. Many larger mutual fund complexes have developed relationships
with brokerage houses with large distribution networks, which may enable these
fund complexes to reach broader client bases. The Company competes with firms
offering similar services and products to those of the Company, such as American
Express Financial Advisors Inc. and Edward Jones & Co. In addition, the Company
competes with brokerage and investment banking firms, insurance companies,
banks, and other financial institutions and businesses offering other financial
products in all aspects of its business. Although no one company or group of
companies dominates the mutual fund management and services industry, many are
larger than the Company and have greater resources and offer a wider array of
financial services and products. Competition is based on the methods of
distribution of fund shares, the ability to develop investment products for
certain segments of the market, the ability to meet the changing needs of
investors, the ability to achieve superior investment management performance,
the type and quality of shareholder services, and the success of sales promotion
efforts. The Company believes that competition in the mutual fund industry will
increase as a result of increased flexibility afforded to banks and other
financial institutions to sponsor mutual funds and distribute mutual fund
shares, and as a result of consolidation and acquisition activity within the
industry. In addition, barriers to entry to the investment management business
are relatively few, and the Company thus anticipates that it will face a growing
number of competitors. Many of the Company's competitors in the mutual fund
industry are larger, better known, have penetrated more markets than the
Company, and have more resources than those of the Company.
The distribution of mutual fund products has undergone significant
developments in recent years, which has increased the competitive environment in
which the Company operates. These developments include growth in the number of
mutual funds, introduction of service fees payable to broker-dealers that
provide continual service to clients in connection with their mutual fund
investments, and development of complex distribution systems with multiple
classes of shares.
The Company's financial advisors compete primarily with small broker-dealers
and independent financial advisors. The market for financial advice and planning
is extremely fragmented, consisting primarily of relatively small companies with
fewer than 100 investment professionals. Competition is based on sales
techniques, personal relationships and skills, the quality of financial planning
products and services, the quality of the financial and insurance products
offered, and the quality of service. Competition in this area is intense and
some of the competitors of the Company's financial advisors are larger, better
known, and have more resources.
EMPLOYEES
At December 31, 1999, the Company had 649 full-time employees. Its 2,611
financial advisors are independent contractors.
ITEM 2. PROPERTIES
The Company, through its subsidiary, W&R, owns or leases buildings that are
used in the normal course of business. W&R owns and occupies a 116,000 square
foot office building utilized as its corporate headquarters at 6300 Lamar
Avenue, Overland Park, Kansas. The Company is in the process of constructing an
additional 110,000 square foot office building which should be completed in the
third quarter of 2000. When completed, this building will be used primarily for
additional Company occupancy. The Company intends to sell the corporate
headquarters properties in 2000 and to enter into a lease on the same properties
for its occupancy needs. Additional leased space is occupied in the immediate
area for headquarters operations. W&R also leases division and district office
space for its agency sales personnel in various cities and towns in the United
States. The Company also owned land and four income producing multi-tenant
buildings adjacent to the Company's headquarters. All of these multi-tenant
properties were sold to an unrelated party on December 28, 1999.
14
ITEM 3. LEGAL PROCEEDINGS
Certain of the Company's subsidiaries are involved from time to time in
various legal proceedings and claims incident to the normal conduct of their
businesses. On the basis of information presently available and advice received
from counsel, it is the opinion of management that such legal proceedings and
claims, individually and in the aggregate, are not likely to have a material
adverse effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Class A and Class B Common Stock are traded on the New York
Stock Exchange under the symbols "WDR" and "WDR.B", respectively. The closing
prices on March 3, 2000, were $29.9375 for Class A Common Stock and $27.875 for
Class B Common Stock.
The table sets forth, for the periods indicated, the reported high and low
close sale prices of the Company's Class A and Class B Common Stock, as reported
on the New York Stock Exchange, as well as the cash dividends paid for these
time periods:
CLASS A
MARKET PRICE
1999 1998
------------------------------- -------------------------------
DIVIDENDS DIVIDENDS
QUARTER HIGH LOW PER SHARE HIGH LOW PER SHARE
- ------- -------- -------- --------- -------- -------- ---------
1.................... $23.8750 $18.8125 $.1325 $27.1250 $25.3750 $.1325
2.................... 27.4375 19.8750 .1325 26.5000 21.8125 .1325
3.................... 27.9375 22.1875 .1325 24.5000 16.6250 .1325
4.................... 27.1875 20.4375 .1325 24.3750 17.0625 .1325
Year-end closing price for 1999 and 1998, respectively were: $27.1250 and
$23.6875
CLASS B
MARKET PRICE
1999 1998
------------------------------- -------------------------------
DIVIDENDS DIVIDENDS
PER PER
QUARTER HIGH LOW SHARE HIGH LOW SHARE
- ------- -------- -------- --------- -------- -------- ---------
1.................... $23.5000 $18.5625 $.1325 $ -- $ -- $.1325
2.................... 27.0000 19.8750 .1325 -- -- .1325
3.................... 27.3125 21.3750 .1325 -- -- .1325
4.................... 25.1250 20.0000 .1325 24.0000 $19.7500 .1325
Year-end closing price for 1999 and 1998, respectively were: $25.1250 and
$23.2500
STOCKHOLDERS
According to the records of the Company's transfer agent, the Company had
4,029 holders of record of the Class A Common Stock as of March 13, 2000,
compared to 5,403 on March 8, 1999 and 4,430 holders of record of the Class B
Common Stock as of March 13, 2000, compared to 5,853 on March 8, 1999. The
Company believes that a substantially larger number of beneficial owners hold
such shares in depository or nominee form.
DIVIDENDS
The Company intends, from time to time, to pay cash dividends on its common
stock as its Board of Directors deems appropriate, after consideration of the
Company's operating results, financial condition, cash requirements, compliance
with covenants in its revolving credit facility and such other factors as the
Board of Directors deems relevant. The Company anticipates that quarterly
dividends will continue at a level comparable to past quarterly dividends.
16
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company at the dates and for the periods indicated. Selected financial data
should be read in conjunction with, and is qualified in its entirety by,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and the
Notes thereto appearing elsewhere in this report.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS EXCEPT PER SHARE AND FINANCIAL ADVISORS DATA)
Revenues from:
Investment management............ $ 178,612 $ 137,823 $ 117,784 $ 101,466 $ 85,289
Underwriting and distribution.... 126,318 106,615 89,427 85,837 70,393
Shareholder service.............. 41,525 33,808 30,763 28,378 23,527
Revenue excluding investment
Income......................... 346,455 278,246 237,974 215,681 179,209
Total revenue.................... 356,657 287,289 241,772 220,976 183,504
Net income......................... 81,767 83,735 70,292 66,700 53,501
per common share-basic........... 1.37 1.27 1.06 1.00 .80
per common share-diluted......... 1.34 1.27 1.06 1.00 .80
Net income excluding
Nonrecurring items (1)........... 96,382 88,060 74,696 64,174 50,975
per common share--basic (1)(2)... 1.62 1.34 1.12 0.97 0.77
per common share--diluted
(1)(2)......................... 1.58 1.33 1.12 0.97 0.77
Dividends per common share......... $0.53 $0.53 0 0 0
Investment product sales........... $2,149,842 $1,827,526 $1,518,257 $1,505,100 $1,187,609
Financial advisors (end of
period).......................... 2,611 2,370 2,160 2,010 2,335
Financial advisors (average)....... 2,329 2,175 2,072 2,072 2,251
Investment product sales per
advisor.......................... $884 $840 $733 $726 $528
AS OF DECEMBER 31,
----------------------------------------------------
------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN MILLIONS)
Assets under management........................ $37,302 $27,744 $23,417 $19,070 $18,489
Balance sheet data:
Goodwill..................................... 113.0 95.9 98.8 101.7 104.6
Total assets (3)............................. 335.1 327.2 447.0 429.3 283.34
Short term debt.............................. 125.3 40.1 0 0 0
Total liabilities (4)........................ 208.7 120.0 676.9 196.7 65.1
- ------------------------
(1) Excludes nonrecurring charges in 1999 of $14.6 million relating to
restructuring mutual fund products and a loss from the sale of real estate
properties. Excludes impact of nonrecurring interest relating to notes with
Torchmark Corporation ("Torchmark") which were prepaid with proceeds from
the initial public offering for 1998, 1997, 1996, and 1995. Excludes
nonrecurring 1997 charges related to information systems outsourcing.
(2) The number of shares used to compute earnings per share for 1997 and
previous years was the number of shares outstanding at the initial public
offering.
(3) Includes amounts due from Torchmark of $0, $0, $192.7, $184.5, and
$57.2 million for 1999, 1998, 1997, 1996, and 1995, respectively.
(4) Includes amounts due to Torchmark of $0, $0, $611.6, $126.6, and
$13.6 million for 1999, 1998, 1997, 1996, and 1995, respectively.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS ITEM INCLUDES STATEMENTS THAT ARE "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING
STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR
STRATEGIES REGARDING THE FUTURE. ALL STATEMENTS, OTHER THAN STATEMENTS OF
HISTORICAL FACTS INCLUDED IN THIS FORM 10-K 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-K 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. CERTAIN
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
COMPANY'S EXPECTATIONS ARE DISCLOSED IN THE "RISK FACTORS" SECTION OF THIS
FORM 10-K ANNUAL REPORT, WHICH INCLUDE, WITHOUT LIMITATION, THE ADVERSE EFFECT
FROM A DECLINE IN SECURITIES MARKETS OR IF THE COMPANY'S PRODUCTS' PERFORMANCE
DECLINES, FAILURE TO RENEW INVESTMENT MANAGEMENT AGREEMENTS, COMPETITION,
CHANGES IN GOVERNMENT REGULATION, AVAILABILITY AND TERMS OF CAPITAL AND
ACQUISITION STRATEGY. 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.
The following should be read in conjunction with the "Selected Financial
Data" and the Company's Consolidated Financial Statements and Notes thereto
appearing elsewhere in this report.
RESULTS OF OPERATIONS
OVERVIEW
The Company derives its revenues primarily from providing investment
management, distribution and administrative services to the United, W&R and
Target/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 sales of
investment and insurance products and distribution fees. The products sold have
various sales charge structures and the revenues received from sales of products
vary based on the type and amount sold. Rule 12b-1 distribution fees earned for
distributing shares of certain mutual funds are based upon a percentage of
assets and fluctuate based on sales, redemptions, and financial market
conditions. Service fees include transfer agency fees, custodian fees for
retirement plan accounts and portfolio accounting fees.
In June of 1999, the Funds boards of directors approved the proposal to
restructure the management fee arrangements of the Funds. This restructuring
replaced the group fee structure and specific fund add-on fee with a specific
fee schedule for each Fund. The Funds' fee schedules include breakpoints at
which fee rates decline as assets increase. These schedules more closely conform
with others in the mutual fund industry and as of year end it had a favorable
impact on the Company's overall management fee rate of approximately .08% of
mutual fund assets under management, which is expected to continue.
In October of 1999, the Company restructured its United Funds and the W&R
Funds. Commencing October 4, the United Funds began offering Class B shares
(back-end sales charges) and Class C shares ("level sales charge shares"). These
are in addition to the already offered Class A shares ("front-end sales charge
shares") and Class Y shares ("institutional shares"). Concurrently, the W&R
Funds began offering Class C shares ("level sales charge shares"). These are in
addition to the already offered Class Y shares ("institutional shares"). At the
same time, the W&R Funds Class B shares were no longer offered for new sales due
to their non-industry standard structure. The existing W&R Funds' Class B shares
will convert to W&R Fund Class C shares in the first quarter of 2000. Upon
conversion of the W&R Fund Class B shares, no contingent deferred sales charges
will be collected for any converted share redemptions. As a result of
18
the discontinuation of the W&R Funds Class B shares, the Company wrote off
$19.0 million of deferred acquisition costs in the fourth quarter of 1999. The
Company expects that this restructuring of shares will enhance competitiveness
and strategic distribution alternatives.
SUMMARY OF OPERATING RESULTS
1999 1998 1997
------------------- ------------------- -------------------
% OF % OF % OF
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
-------- -------- -------- -------- -------- --------
($ IN THOUSANDS)
OPERATING REVENUES:
Investment management fees............. $178,612 50.1% 137,823 48.0% 117,784 48.7%
Underwriting and distribution fees..... 126,318 35.4 106,615 37.1 89,427 37.0
Shareholder service fees............... 41,525 11.6 33,808 11.8 30,763 12.7
-------- ----- ------- ----- ------- -----
Total operating revenues............... 346,455 97.1 278,246 96.9 237,974 98.4
Investment and other income............ 10,202 2.9 9,043 3.1 3,798 1.6
-------- ----- ------- ----- ------- -----
Total revenue.......................... 356,657 100.0 287,289 100.0 241,772 100.0
OPERATING EXPENSES:
Underwriting and distribution.......... 124,938 35.1 99,575 34.6 79,995 33.1
Compensation and related costs......... 44,944 12.6 31,512 11.0 26,618 11.0
General and administrative............. 19,245 5.4 8,551 3.0 15,826 6.5
Amortization of goodwill............... 3,224 0.9 2,903 1.0 2,903 1.2
Depreciation........................... 2,162 0.6 1,892 0.7 1,307 0.6
-------- ----- ------- ----- ------- -----
Total operating expense (1)............ 194,513 54.6 144,433 50.3 126,649 52.4
OTHER ITEMS:
Interest expense....................... 6,546 1.8 704 0.2 0 0.0
-------- ----- ------- ----- ------- -----
Total expense.......................... 201,059 56.4 145,137 50.5 126,649 52.4
-------- ----- ------- ----- ------- -----
Income before affiliated items and
income taxes (1)..................... $155,598 43.6% 142,152 49.5% 115,123 47.6%
-------- ----- ------- ----- ------- -----
- ------------------------
(1) Excludes a $19.0 million charge for write off of deferred acquisition costs
and a $4.6 million loss on sale of real estate in 1999.
TOTAL REVENUES
1999 OVER 1998
Total operating revenues increased $68.2 million or 25% to $346.5 million in
1999 compared to 1998. Total revenues, which include investment and other
income, were $356.7 million in 1999, a 24% increase from 1998. Income before
affiliated items and income taxes increased 9% to $155.6 million in 1999
compared to 1998. Income before affiliated items and income taxes as a
percentage of revenue was 43.6% in 1999 and 49.5% in 1998.
1998 OVER 1997
Total operating revenues increased $40.3 million or 17% to $278.2 million in
1998 compared to 1997. Total revenues, which include investment and other
income, were $287.3 million in 1998, a 19% increase from 1997. Income before
affiliated items and income taxes increased 23% to $142.2 million in 1998 when
compared to 1997. Income before affiliated items and income taxes as a
percentage of revenue was 49.5% and 47.6% in 1998 and 1997, respectively. In
1997, the Company incurred charges related to outsourcing
19
transfer agency data processing activities and the discontinuation of internally
developed systems, which resulted in a $6.8 million pretax expense.
INVESTMENT MANAGEMENT FEES
1999 OVER 1998
Investment management fees are earned for providing investment advisory
services to the Funds and institutional and privately managed accounts.
Investment management fees in 1999 were $178.6 million, a 30% increase over
1998. Average assets under management were $30.3 billion for 1999, an increase
of 18% compared with 1998. The increase in management fee revenue was due to
several factors. First, the restructuring of the Fund's management fee
arrangements that became effective July 1, 1999 added approximately
$11.2 million to management fee revenue. Secondly, the acquisition of ACF in
August of 1999 contributed approximately $3.6 million. Finally, strong market
performance and relative performance resulted in a greater composition of
average assets in equity funds, especially growth, small cap, and technology
funds, which have higher management fee rates.
1998 OVER 1997
Investment management fees in 1998 were $137.8 million, a 17% increase over
1997. The increase in management fees was due primarily to growth in assets
related to market performance. Average assets under management were
$25.6 billion for 1998, an increase of 20% compared with 1997. The asset growth
rate exceeded the rate of increase in management fees due primarily to two
factors. First, certain mutual funds have breakpoints in their fee schedules
which provide for reduced fee rates as assets grow, resulting in a slower rate
of growth in revenues than growth in assets. Secondly, institutional assets,
which generally have a lower management fee rate than mutual funds, constituted
a higher percentage of total assets for 1998.
UNDERWRITING AND DISTRIBUTION FEES
1999 OVER 1998
Underwriting and distribution fees are comprised of: commissions charged on
sales of front-load mutual funds, variable products and insurance products; and
Rule 12b-1 asset based distribution fees and contingent deferred sales charges
from back-end and level load funds. Underwriting and distribution fees in 1999
increased 18% to $126.3 million. This increase is primarily attributable to
increases in sales volume of front-load investment products. Commission revenues
from front-load investment products, primarily the United Funds and variable
annuity products, accounted for 75%, or $14.7 million of this $19.7 million
increase in 1999 over 1998. Distribution revenue from back-end and level load
funds increased $2.5 million or 28% to $11.3 million due to growth in the asset
value of these funds, partially offset by lower contingent deferred sales
charges. Commission revenue from insurance product sales was up $2.5 million to
$19.1 million for 1999 due to increased sales of variable universal life
insurance.
1998 OVER 1997
Underwriting and distribution fees in 1998 increased 19% to $106.6 million.
The higher fees are primarily due to increases in sales of front-load investment
products and Rule 12b-1 distribution fees. Sales of front-load investment
products were up 17% from 1997 to $1.6 billion. Distribution revenue, which
consists primarily of Rule 12b-1 distribution fees from the W&R Funds, increased
36% from $6.5 million in 1997 to $8.8 million in 1998 due to growth in assets of
these funds.
20
SHAREHOLDER SERVICE FEES
1999 OVER 1998
Shareholder service fees include transfer agency fees, custodian fees from
retirement plan accounts and portfolio accounting fees. The transfer agency and
custodian fees, which comprised 95% of the service fee revenues in 1999, are
primarily based on annual charges per account and fluctuate based on the number
of accounts. In 1999, shareholder service fees increased 23% to $41.5 million
due primarily to a 12% increase in the average number of accounts. In addition,
a fee increase in the fourth quarter of 1998, coinciding with the outsourcing of
the data processing component of transfer agency activities, caused the increase
in revenues to exceed the increase in number of accounts serviced. This fee
increase contributed $4.8 million to the growth in revenue in 1999.
1998 OVER 1997
The transfer agency fees and custodian fees comprised 94% of the service fee
revenue in 1998. In 1998, shareholder service fees increased 10% to
$33.8 million due primarily to an 8% increase in the average number of accounts.
A fee increase in the fourth quarter of 1998, coinciding with the outsourcing of
the data processing component of transfer agency activities, caused the increase
in revenues to exceed the increase in number of accounts serviced.
UNDERWRITING AND DISTRIBUTION EXPENSE
1999 OVER 1998
Underwriting and distribution expense includes costs associated with the
marketing, promotion, and distribution of the Company's products. The primary
costs are compensation paid to financial advisors, sales management and other
marketing personnel, plus expenses relating to field offices, sales programs and
advertising. Underwriting and distribution expense for 1999 was $124.9 million,
an increase of $25.4 million or 25% compared with 1998. The largest contributor
to the increase in distribution expenses was commission expense and related
sales force payouts related to sales volume. Other factors included higher
production and asset retention incentive compensation of $6.0 million, higher
net costs relating to field offices, marketing and national advertising of
$5.5 million and increased sales program costs of $2.7 million. The Company
began restructuring its mutual fund products in the fourth quarter of 1999. Due
to their non-industry standard structure, the W&R Funds' Class B shares were
closed for new sales and will convert into Class C shares, which have an
industry standard structure. Concurrently, the United Funds began offering
Class B shares and Class C shares. Upon conversion of the W&R Class B shares, no
contingent deferred sales charges will be collected for any converted share
redemptions. The deferred selling costs of $19.0 million related to the W&R
Class B share conversion were written off on November 30(th), concurrent with
the necessary approvals for share conversion. It is estimated that underwriting
and distribution expenses will be reduced by approximately $3.0 million per year
as a result of the restructuring and related write-off, primarily through
foregone amortization of deferred selling costs.
1998 OVER 1997
Underwriting and distribution expense for 1998 was $99.6 million, an
increase of $19.6 million or 24% compared with 1997. These costs were higher
than 1997 due primarily to growth in sales volume, an additional $1.5 million of
costs related to an advertising campaign that was implemented during the fourth
quarter of 1998, and an increase of approximately $2.0 million related to
enhancements to field compensation that were effective July 1, 1998.
21
COMPENSATION AND RELATED COSTS
1999 OVER 1998
Compensation and related costs for 1999 were $44.9 million, an increase of
$13.4 million or 43% compared to 1998. The average number of employees increased
by 25% as the Company continued to invest in investment management, client
service, and support personnel. Additional performance based compensation
accounted for $3.8 million of the increase in compensation costs due primarily
to investment performance compensation paid to portfolio managers and to a
lesser extent to the inclusion of middle management in incentive compensation
plans. Higher pension and health insurance costs were additional factors for the
increase in compensation costs. Pension and related costs were $.8 million
higher due to personnel additions and a higher rate of compensation increase.
Higher health insurance costs contributed $1.1 million to the increase as
reserves were increased to reflect higher claims exposure
1998 OVER 1997
Compensation and related costs were up 18% to $31.5 million in 1998 due
primarily to an increase in the average number of employees of 8%. Higher
performance based compensation and raises accounted for the remaining increase.
GENERAL AND ADMINISTRATIVE EXPENSE
1999 OVER 1998
General and administrative expense, which reflects operating costs other
than compensation and marketing, was up $10.7 million or 125% to $19.2 million
for 1999. Approximately $5.4 million of this increase was attributable to the
implementation of a new transfer agency system in the fourth quarter of 1998.
Higher shareholder service fee revenue coinciding with this implementation
offset most of the increased costs. The growth of the Company's operations added
to higher administrative costs, including the acquisition of ACF, new consulting
arrangements, proxy and shareholder meeting costs, and additional facilities
rental to accommodate growth.
1998 OVER 1997
General and administrative expense was down 46% to $8.6 million for 1998 due
primarily to non-recurring charges of $6.8 million in 1997 related to the
outsourcing of the data processing component of transfer agency activities and
the discontinuation of internally developed systems.
INVESTMENT AND OTHER INCOME
1999 OVER 1998
Investment and other income increased $1.2 million to $10.2 million in 1999.
Average invested cash and marketable securities were $149.3 million in 1999
compared with $144.8 million in 1998. Substantially all of the increase in
investment and other income was attributable to higher net rental income from
investment in real estate properties. These properties were sold on
December 28, 1999 for net proceeds of $16.5 million. Pretax income realized from
rental operations of these properties in 1999 was $1.0 million.
1998 OVER 1997
Investment and other income increased $5.2 million to $9.0 million in 1998
due to the investment of operating cash flows. Average invested cash and
marketable securities were $144.8 million in 1998 compared with $82.4 million in
1997. All growth in average cash and marketable securities was in securities
which have higher investment yields than cash and cash equivalents.
22
DEPRECIATION
1999 OVER 1998
Depreciation of property and equipment increased by $270,000 or 14% in 1999
to $2.2 million. Property and equipment increased by $7.0 million or 34% to
$27.6 million. This increase was primarily the result of $3.8 million in
expenditures related to the ongoing construction of a building to be used for
the Company's home office operations and a $3.0 million reclassification of land
for the new building site previously classified as investment in real estate. As
previously disclosed, the Company intends to sell the home office properties to
a third party in 2000 and will enter into a lease for its home office
operations. The sale is expected to generate a gain, which will be deferred over
the lease term.
1998 OVER 1997
Depreciation of property and equipment increased by $585,000 or 45% to
$1.9 million due to additions of property and equipment in late 1998. Property
and equipment was $20.6 million at year end 1998, up $8.6 million from 1997. A
reclassification was made to transfer $3.0 million of land from investment in
real estate to property and equipment. The addition of depreciable assets in
1998 was $5.6 million.
INTEREST EXPENSE
1999 OVER 1998
The Company entered into a $200 million credit facility arrangement in
October of 1998. This facility was renewed in October of 1999, when it was
expanded to $220 million. The Company utilized this facility in 1999 to fund
share repurchases during the year and acquire ACF in August of 1999. The average
interest rate applied to this facility, excluding facility costs, was 5.73% in
1999. The average amount outstanding on this facility was $106.0 million. In
1999, interest expense and related facility costs were $6.5 million compared to
$704,000 for 1998. At the end of 1999 the Company had an outstanding balance of
$125.3 million under its credit facility, compared to $40.1 million at the end
of 1998.
LOSS ON THE SALE OF REAL ESTATE
On December 28, 1999, the Company completed the sale of all multi-tenant
properties to unrelated third parties. Proceeds from the sale were
$16.5 million resulting in a $4.6 million pretax loss.
WRITE-OFF OF DEFERRED ACQUISITION COSTS
The Company began restructuring its mutual fund products in the fourth
quarter of 1999. Due to their non-industry-standard structure, the W&R Funds'
Class B shares were closed for new sales and will convert into Class C shares,
which have an industry standard structure. Concurrently, the United Funds began
offering Class B shares and Class C shares. Upon conversion of the W&R Class B
shares, no contingent deferred sales charge will be collected for any converted
share redemptions. The deferred selling costs related to the W&R Funds' Class B
shares in the amount of $19.0 million were written off on November 30(th),
concurrent with the necessary approvals for share conversion. By offering
additional classes of mutual fund shares and closing funds with non-industry
standard structure, the restructuring will: 1) be more consistent with that of
the industry, 2) provide its clients with more choices and greater value, and
3) accommodate additional changes for strategic distribution flexibility.
AFFILIATED INTEREST INCOME AND EXPENSE
Prior to its initial public offering in March of 1998, the Company had
various notes payable and notes receivable with Torchmark and certain
subsidiaries of Torchmark. The affiliated interest income and expense as
reported for 1998 and 1997 pertain to these notes and were prepaid with proceeds
from the offering.
23
INCOME TAXES
The Company's effective income tax rate was 38.1%, 38.2%, and 39.0% in 1999,
1998, and 1997, respectively.
FINANCIAL CONDITION
At December 31, 1999, the Company's total assets were $335.1 million, up
$7.9 million from December 31, 1998. In 1999, the Company repurchased
5.8 million shares of its common stock at a total cost of $132.2 million
compared to 3.6 million shares of its common stock at a total cost of
$74.8 million during the third and fourth quarters of 1998. The credit facility
was utilized to fund these share repurchases. At December 31, 1999, the
Company's outstanding debt, including principal and accrued interest was
$125.3 million compared to $40.1 million on December 31, 1998. The average
interest rate on the amount outstanding was 6.98% and 5.94% for 1999 and 1998,
respectively. Interest and related costs related to the facility were
$6.5 million during 1999 and $.7 million during 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased $29.6 million to
$108.3 million for 1999 due to higher net income from operations, excluding
non-cash items as well as the timing of cash received and cash paid on assets
and liabilities. Net cash provided by investing activities in 1999 was $779,000,
compared to a net $97.7 million used in 1998. Proceeds from the sale and
maturity of investments exceeded purchases of investments by $12.4 million in
1999. In 1998, the Company had net additions to investments of $84.2 million. At
December 31, 1999, the Company had $151.2 million in cash and marketable
investment securities, of which $17.1 million was restricted for the benefit of
customers in compliance with securities industry regulations. Cash and
marketable securities at December 31, 1998 were $133.3 million, of which
$10.8 million was restricted. Other investing activities in 1999 provided
proceeds of $16.5 million from the sale of real estate and used $21.7 million
for the acquisition of ACF. In 1999, the Company used $78.3 million in net
financing activities compared with $24.6 million in 1998. In 1999, the Company
repurchased 2.0 million shares of Class A and 3.8 million shares of Class B
common stock, the combined cost of which was $132.2 million, and paid
$32.0 million in cash dividends. Net borrowings of $85.0 million on the credit
facility were utilized in 1999 to finance share repurchases and the acquisition
of ACF. The $220 million, 364-day revolving credit facility, expandable to
$330 million, had $125.0 million outstanding at December 31, 1999.
Management believes its available cash, marketable securities, and expected
cash flow from operations will be sufficient to fund dividends, operations,
advance sales commissions, obligations, and other reasonably foreseeable cash
needs. The Company may also continue to repurchase shares of its common stock
from time to time as management deems appropriate. The share repurchases could
be financed by the Company's available cash and investments and/or the use of
the Company's revolving credit facility.
SUBSEQUENT EVENTS
From January 1, 2000 through March 3, 2000, the Company repurchased 922,000
Class A shares and 836,000 Class B shares at an aggregate cost of
$51.3 million.
The Company had previously expected to enter into a written agreement for
the sale and leaseback of the home office properties to an unrelated party. That
particular transaction was not completed; however, the Company plans to pursue
other buyers for its home office properties in 2000.
On February 28, 2000, the Company announced a definitive agreement to
acquire The Legend Group in a business combination to be accounted for as a
purchase. The Legend Group, through its network of more than 300 financial
advisors, serves employees of school districts and other not-for-profit
organizations nationwide by providing distribution and retirement planning,
primarily in the 403(b) market. The
24
Company expects to acquire The Legend Group for a purchase price of $61 million
in cash and contingent cash payments over 3 years of up to $14 million. The
excess of the purchase price over the fair market value of the net assets of The
Legend Group will be amortized on a straight-line basis over 25 years. The
Legend Group has approximately 61,000 clients with $3.1 billion in third-party
mutual fund assets, primarily in retirement plans. For the year 1999, The Legend
Group had $39.1 million of revenue and $7.7 million of earnings before interest,
taxes, depreciation, amortization expenses and adjustments for the cancellation
of certain management contracts. The results of operations of The Legend Group
will be included with the results of the Company from the date of acquisition,
which is expected to be March 31, 2000.
On February 23, 2000, the Board of Directors authorized a three-for-two
stock split, to be effected as a dividend, on both its Class A and Class B
common stock to stockholders of record as of March 17, 2000. On April 7, 2000
the additional shares will be distributed along with checks for the value of any
remaining fractional shares. Earnings per share, when restated for this stock
split, in 1999 would have been $0.91 for basic EPS and $0.89 for diluted EPS.
Earnings per share, when restated for this stock split, in 1998 would have been
$0.84 for both basic and diluted EPS.
RECENT ACCOUNTING DEVELOPMENTS
In June of 1998, the Financial Accounting Standards Board issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
Statement is not expected to have a material impact on the Company.
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 operations 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 anticipate that
these costs will be material in the future, there can be no assurance that these
costs will not be material.
SEASONABILITY AND INFLATION
The Company does not believe its operations are subject to significant
seasonal fluctuations. The Company does not believe that inflation has had a
significant impact on operations.
RISK FACTORS
THERE MAY BE ADVERSE EFFECTS ON OUR REVENUES, EARNINGS AND PROSPECTS IF THE
SECURITIES MARKETS DECLINE. Our results of operations are affected by certain
economic factors, including the level of the securities markets. We have
benefited from the favorable performance of the securities markets in recent
years which has attracted a substantial increase in the investments in the
securities markets. A decline in the securities markets, failure of the
securities markets to sustain their recent levels of growth or short-term
volatility in the securities markets could result in investors withdrawing from
the markets or decreasing their rate of
25
investment, either of which could adversely affect our revenues, earnings and
growth prospects. Because our revenues are, to a large extent, based on the
value of assets under management, a decline in the value of these assets would
adversely affect our revenues. Our growth is dependent to a significant degree
upon our ability to attract and retain mutual fund assets and in an adverse
economic environment, this may prove difficult. Our growth rate has varied from
year to year and there can be no assurance that the average growth rates
sustained in the recent past will continue.
THERE MAY BE ADVERSE EFFECTS ON OUR REVENUES AND EARNINGS IF OUR FUNDS'
PERFORMANCE DECLINES. Success in the investment management and mutual fund
businesses is dependent on the investment performance of client accounts. Good
performance stimulates sales of the Funds' shares and tends to keep redemptions
low. Sales of the Funds' shares in turn generate higher management fees and
distribution revenues. Good performance also attracts private institutional
accounts. Conversely, poor performance results in decreased sales, increased
redemptions of the Funds' shares, and the loss of private institutional
accounts, resulting in decreases in revenues. Failure of our Funds to perform
well could, therefore, have a material adverse effect on our revenues and
earnings.
THERE MAY BE AN ADVERSE EFFECT ON OUR BUSINESS IF OUR INVESTORS REMOVE THE
ASSETS WE MANAGE ON SHORT NOTICE. A substantial majority of our revenues are
derived from investment management agreements with our funds that are terminable
on 60 days' notice. Each investment management agreement must be approved and
renewed annually by the disinterested members of each fund's board or its
shareholders. Some of these investment management agreements may be terminated
or not renewed, and new agreements may be unavailable. In addition, mutual fund
investors may redeem their investments in the funds at any time without any
prior notice. Investors can terminate their relationship with us, reduce the
aggregate amount of assets under management, or shift their funds to other types
of accounts with different rate structures for any of a number of reasons,
including investment performance, changes in prevailing interest rates and
financial market performance. The decrease in revenues that could result from
any such event could have a material adverse effect on our business.
WE FACE INCREASED COMPETITION IN HIRING AND RETAINING KEY PERSONNEL AND
SALES FORCE. Our continued success depends to a substantial degree on our
ability to attract and retain qualified personnel to conduct our fund management
and investment advisory business. The market for qualified fund managers,
investment analysts, and financial advisors is extremely competitive and has
grown more so in recent periods because of the growth in the industry. We are
dependent on our sales force to sell our mutual funds and other investment
products. Our growth prospects will be directly affected by the quality and
quantity of financial advisors we are able to successfully recruit and retain.
There can be no assurances that we will be successful in our efforts to recruit
and retain the required personnel.
WE FACE STRONG COMPETITION FROM NUMEROUS AND SOMETIMES LARGER COMPANIES. We
compete with stock brokerage and investment banking firms, insurance companies,
banks, online and Internet investment sites and other financial institutions.
Many of these companies not only offer mutual fund investments and services but
also offer other financial products and services. Many of our competitors have
more products and product lines, services, and may also have substantially
greater assets under management. Many larger mutual fund complexes have
developed relationships with brokerage houses with large distribution networks,
which may enable these fund complexes to reach broader client bases. In recent
years, there has been a trend of consolidation in the mutual fund industry
resulting in stronger competitors with greater financial resources than us.
There has also been a trend toward online Internet financial services. If
existing customers stop investing with us and instead invest with our
competitors, or if potential customers decide to invest with our competitors, it
would cause our market share, revenues and income to decline.
POTENTIAL MISUSE OF FUNDS AND INFORMATION IN THE POSSESSION OF OUR ADVISORS
COULD RESULT IN LIABILITY TO OUR CLIENTS. Our financial advisors handle a
significant amount of funds and financial and personal information for our
clients. Although we have implemented a system of controls to minimize the risk
of fraudulent taking or misuse of funds and information, there can be no
assurance that our controls will be
26
adequate or that a taking or misuse by our employees can be prevented. We could
have liability in the event of a taking or misuse by our employees and we could
also be subject to regulatory sanctions. Although we believe that we have
adequately insured against these risks, there can be no assurance that our
insurance will be maintained or that it will be adequate to meet any future
liability.
THERE ARE NO ASSURANCES THAT WE WILL PAY FUTURE DIVIDENDS. Our Board of
Directors currently intends to continue to declare quarterly dividends on both
our Class A Common Stock and our Class B Common Stock. The declaration and
payment of dividends is subject to the discretion of our Board of Directors. Any
determination as to the payment of dividends, as well as the level of such
dividends, will depend on, among other things, general economic and business
conditions, our strategic plans, our financial results and condition,
contractual, legal, and regulatory restrictions on the payment of dividends by
us or our subsidiaries. We are a holding company and, as such, our ability to
pay dividends is subject to the ability of our subsidiaries to provide us cash.
There can be no assurance that the current quarterly dividend level will be
maintained or that we will pay any dividends in any future period.
REGULATORY RISK IS SUBSTANTIAL IN OUR BUSINESS. Our investment management
business is heavily regulated. Noncompliance with applicable laws or regulations
could result in sanctions being levied against us, including fines and censures,
suspension or expulsion from a certain jurisdiction or market or the revocation
of licenses. Noncompliance with applicable laws or regulations would adversely
effect our reputation, prospects, revenues and earnings. In addition, changes in
current laws or regulations or in governmental policies could adversely affect
our operations, revenues and earnings.
PROVISIONS OF OUR ORGANIZATIONAL DOCUMENTS COULD DETER TAKEOVER
ATTEMPTS. Under our certificate of incorporation, our Board of Directors has
the authority, without action by our stockholders, to fix certain terms and
issue shares of our Preferred Stock, par value $1.00 per share. Actions of our
Board of Directors pursuant to this authority may have the effect of delaying,
deterring, or preventing a change in control of the company. Other provisions in
our certificate of incorporation and in our bylaws impose procedural and other
requirements that could be deemed to have anti-takeover effects, including
replacing incumbent directors. In addition, our Board of Directors is divided
into three classes, each of which is to serve for a staggered three-year term
after the initial classification and election and, incumbent directors may not
be removed without cause, all of which may make it more difficult for a third
party to gain control of our Board of Directors.
As a Delaware corporation we are subject to section 203 of the Delaware
General Corporation Law. With certain exceptions, section 203 imposes
restrictions on mergers and other business combinations between us and any
holder of 15% or more of our voting stock.
OUR STOCKHOLDERS RIGHTS PLAN COULD DETER TAKEOVER ATTEMPTS. In 1999 we
adopted a stockholders rights plan pursuant to which rights attached to each
share of our then outstanding Class A Common Stock and Class B Common Stock. The
rights generally are exercisable only if a person or group acquires 15% or more
of the voting power as represented by our Class A and Class B Common Stock.
Under certain conditions, the rights entitle the holders to receive shares of
our Class A Common Stock having a value equal to two times the exercise price of
the right. Our stockholders rights plan could impede the completion of a merger,
tender offer, or other takeover attempt even though some or a majority of our
stockholders might believe that a merger, tender offer or takeover is in their
best interests and even if such transactions could result in our stockholders
receiving a premium for their shares of our stock over the then current market
price of our stock.
THE TERMS OF OUR CREDIT FACILITY IMPOSE RESTRICTIONS ON OUR OPERATIONS.
THERE ARE NO ASSURANCES WE WILL BE ABLE TO RAISE ADDITIONAL CAPITAL. We have
entered into a loan agreement for a $220 million, expandable to $330 million,
364-day revolving line of credit facility with various lenders. At December 31,
1999, there was $125.3 million outstanding under this line of credit. The terms
and conditions of the revolving credit facility impose restrictions that affect,
among other things, our ability to incur debt, make capital
27
expenditures, merge, sell assets, make distributions, or create or incur liens.
Availability of our credit facility is also subject to certain financial
covenants. Our ability to comply with the covenants can be affected by events
beyond our control and there can be no assurance that we will achieve operating
results that comply with the provisions of the credit agreement. A breach of any
of these covenants could result in a default under our credit facility. In the
event of a default, the banks could elect to declare the outstanding principal
amount of our credit facility, all interest thereon and all other amounts
payable under our credit facility to be immediately due and payable.
Our ability to satisfy our debt obligations will depend upon our future
operating performance, which will be affected by prevailing economic, financial
and business conditions and other factors, some of which are beyond our control.
We anticipate that borrowings from our existing revolving credit facility, or
the refinancing of our revolving credit facility, and cash provided by operating
activities, will provide sufficient funds to finance anticipated development
plans, meet our operating expenses and service our debt requirements as they
become due. However, in the event that we require additional capital, there can
be no assurance that we will be able to raise such capital when needed or on
satisfactory terms, if at all. Also, there can be no assurance that we will be
able to refinance our current credit facility upon its maturity or on favorable
terms. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources".
SYSTEMS FAILURE MAY DISRUPT OUR BUSINESS. Our business is highly dependent
on communications and information systems, including our mutual fund transfer
agency system maintained by a third-party service provider. We are highly
dependent on our ability to process a large number of transactions on a daily
basis and also on the proper functioning of computer systems of third parties.
We rely heavily on financial, accounting and other data processing systems. If
any of these do not function properly, we could suffer financial loss, business
disruption, liability to clients, regulatory intervention or damage to our
reputation. If our systems are unable to accommodate an increasing volume of
transactions, our ability to expand could be affected. Although we have back-up
systems in place, we cannot be sure that any systems failure or interruption,
whether caused by a fire, other natural disaster, power or telecommunications
failure, act of war or otherwise will not occur, or that back-up procedures and
capabilities in the event of any failure or interruption will be adequate.
THERE MAY BE AN ADVERSE EFFECT ON THE VALUE OF OUR CLASS A COMMON STOCK DUE
TO THE DISPARATE VOTING RIGHTS OF OUR CLASS A COMMON STOCK AND OUR CLASS B
COMMON STOCK. The holders of our Class A Common Stock and our Class B Common
Stock have identical rights except that (1) holders of our Class A Common Stock
are entitled to one vote per share while holders of our Class B Common Stock are
entitled to five votes per share on all matters to be voted on by our
stockholders and (2) holders of our Class A Common Stock are not eligible to
vote on any alteration of the powers, preferences, or special rights of our
Class B Common Stock that would not adversely affect our Class A Common Stock
and vice versa. For example, holders of our Class A Common Stock would not be
entitled to vote on proposals to decrease the voting power of the Class B Common
Stock, to decrease the right of Class B Common Stock to receive dividends, or to
diminish the rights of the our Class B Common Stock in liquidation, and vice
versa. The differential in the voting rights could adversely affect the value of
the Class A Common Stock to the extent that investors or any potential future
purchaser of the Company views the superior voting rights of the Class B Common
Stock to have value. The existence of two separate classes of common stock could
result in less liquidity for either class of common stock than if we had only
one class of common stock.
WE MAY HAVE DIFFICULTY EXECUTING OUR ACQUISITION STRATEGY. We have adopted
a strategy to selectively pursue acquisitions and alliances that will add new
products or alternative distribution systems. There can be no assurance that we
will find suitable acquisition candidates at acceptable prices, have sufficient
capital resources to realize our acquisition strategy or be successful in
entering into definitive agreements for desired acquisitions. In addition, we
have limited experience in finding, acquiring and integrating other
28
companies and we may not be successful in the integration of acquired companies.
An acquisition may not prove to add new products or distribution systems or
otherwise be advantageous to us.
WE MAY NOT BE ABLE TO SELL AND LEASE-BACK OUR HOME OFFICE PROPERTIES. In
connection with our decision to sell certain of our investments in real estate,
we are attempting to sell and lease-back our home office properties. There can
be no assurances that we will be successful in our efforts to sell and
lease-back our home office properties on acceptable terms or be successful in
entering into definitive agreements for such a sale and lease-back.
THE RESTRUCTURING OF OUR MUTUAL FUND PRODUCTS TO ENHANCE OUR COMPETITIVENESS
AND DISTRIBUTION CHANNELS MAY NOT BE SUCCESSFUL. In October 1999, we
restructured our mutual fund products by offering additional classes of mutual
fund shares and closing non-industry standard classes in an effort to enhance
our competitiveness and strategic distribution alternatives and favorably impact
our distribution margin. We anticipate that the product restructuring will
result in our product line (1) being more consistent with the industry,
(2) providing our clients with more choices and greater value and
(3) accommodating additional changes for strategic distribution flexibility.
There can be no assurances that the restructuring of our mutual fund products
will enhance our competitiveness and distribution channels or that it will
favorably impact our distribution margin.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. The
Company's cash equivalents and short-term investments and its outstanding debt
bear variable interest rates. The Company has not used derivative instruments to
offset the exposure to changes in interest rates. Changes in interest rates are
not expected to have a material impact on the Company's results of operations.
As noted in Item 7, the Company's revenues and net income are based in part
on the value of the investment portfolios managed. Accordingly, financial market
declines will negatively impact the Company's assets under management and, in
turn, its revenues and profitability.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Consolidated Financial Statements referred to in
the Index on page A-1 setting forth the consolidated financial statements of the
Company, together with the report of KPMG LLP dated February 11, 2000.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disagreements with accountants on any matter of accounting principles or
practices or financial statement disclosure have been reported on a Form 8-K
within the twenty-four months prior to the date of the most recent financial
statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this Item 10 is incorporated herein by reference to
the Company's definitive proxy statement for the Company's 2000 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is incorporated herein by reference to
the Company's definitive proxy statement for the Company's 2000 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.
29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is incorporated herein by reference to
the Company's definitive proxy statement for the Company's 2000 Annual Meeting
of Stockholders to be filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is incorporated herein by reference to
the Company's definitive proxy statement for the Company's 2000 Annual Meeting
of Stockholders Stockholders to be filed pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. Reference is made to the Index to
Consolidated Financial Statements on page A-1 for a list of
all financial statements filed as part of this Report.
(a)(2) Financial Statement Schedules. None.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by
the Company during the fourth quarter of 1999.
(c) Exhibits. Reference is made to the Index to Exhibits on page
B-1 for a list of all exhibits filed as part of this Report.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Overland Park, State of Kansas, on March 23, 2000.
WADDELL & REED FINANCIAL, INC.
By: /s/ KEITH A. TUCKER
-----------------------------------------
Keith A. Tucker
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons on behalf of
the Company and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
Chairman of the Board,
/s/ KEITH A. TUCKER Chief Executive Officer
------------------------------------------- and Director (Principal March 23, 2000
Keith A. Tucker Executive Officer)
/s/ HENRY J. HERRMANN
------------------------------------------- President, Chief Investment March 23, 2000
Henry J. Herrmann Officer and Director
/s/ ROBERT L. HECHLER Chief Operating Officer,
------------------------------------------- Executive Vice President March 23, 2000
Robert L. Hechler and Director
Senior Vice President,
/s/ JOHN E. SUNDEEN, JR. Chief Financial Officer
------------------------------------------- and Treasurer (Principal March 23, 2000
John E. Sundeen, Jr. Financial Officer)
/s/ D. TYLER TOWERY Vice President and
------------------------------------------- Controller (Principal March 23, 2000
D. Tyler Towery Accounting Officer)
/s/ HAROLD T. MCCORMICK*
------------------------------------------- Director March 23, 2000
Harold T. McCormick*
/s/ LOUIS T. HAGOPIAN*
------------------------------------------- Director March 23, 2000
Louis T. Hagopian*
/s/ R.K. RICHEY*
------------------------------------------- Director March 23, 2000
R.K. Richey*
31
NAME TITLE DATE
---- ----- ----
/s/ JOSEPH L. LANIER, JR.*
------------------------------------------- Director March 23, 2000
Joseph L. Lanier, Jr.*
/s/ WILLIAM L. ROGERS*
------------------------------------------- Director March 23, 2000
William L. Rogers*
/s/ JAMES M. RAINES*
------------------------------------------- Director March 23, 2000
James M. Raines*
/s/ GEORGE J. RECORDS, SR.*
------------------------------------------- Director March 23, 2000
George J. Records, Sr.*
/s/ DAVID L. BOREN*
------------------------------------------- Director March 23, 2000
David L. Boren*
/s/ JOSEPH M. FARLEY*
------------------------------------------- Director March 23, 2000
Joseph M. Farley*
*By: /s/ DANIEL C. SCHULTE
-------------------------------------- Vice President and General
Daniel C. Schulte Counsel March 23, 2000
ATTORNEY-IN-FACT
32
WADDELL & REED FINANCIAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Waddell & Reed Financial, Inc.:
Independent Auditors' Report................................ A-2
Consolidated Balance Sheets at December 31, 1999 and
December 31, 1998......................................... A-3
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1999.......... A-5
Consolidated Statements of Changes in Stockholders' Equity
for each of the years in the three-year period ended
December 31, 1999......................................... A-6
Consolidated Statements of Comprehensive Income for each of
the years in the three-year period ended December 31,
1999...................................................... A-7
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1999.......... A-8
Notes to Consolidated Financial Statements.................. A-9
A-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Waddell & Reed Financial, Inc.:
We have audited the accompanying consolidated balance sheets of Waddell &
Reed Financial, Inc. and subsidiaries, as of December 31, 1999 and 1998 and the
related consolidated statements of operations, changes in stockholders' equity,
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Waddell &
Reed Financial, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Kansas City, Missouri
February 11, 2000
A-2
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
-------- --------
(IN THOUSANDS)
Assets:
Cash and cash equivalents................................. $ 60,977 30,180
Investment securities, available-for-sale................. 90,245 103,153
Receivables:
United Funds and W&R Funds.............................. 7,597 5,740
Customers and other..................................... 19,541 28,865
Deferred income taxes....................................... 37 1,309
Prepaid expenses and other current assets................... 7,111 3,222
-------- -------
Total current assets.................................... 185,508 172,469
-------- -------
Property and equipment, net................................. 27,633 20,649
Investment in real estate................................... 0 21,754
Deferred sales commissions, net............................. 1,851 15,710
Goodwill (net of accumulated amortization of $26,493 and
$23,269).................................................. 112,994 95,928
Deferred income taxes....................................... 5,665 0
Other assets................................................ 1,422 669
-------- -------
Total assets............................................ $335,073 327,179
======== =======
See accompanying notes to consolidated financial statements.
A-3
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
--------- --------
(IN THOUSANDS)
Liabilities:
Accounts payable.......................................... $ 34,002 28,304
Accrued salesforce compensation........................... 14,578 11,916
Short term notes payable.................................. 125,307 40,076
Income taxes payable...................................... 8,284 13,464
Other current liabilities................................. 16,456 16,034
--------- -------
Total current liabilities............................... 198,627 109,794
--------- -------
Deferred income taxes..................................... 0 208
Accrued pensions and post-retirement costs................ 10,103 10,041
--------- -------
Total liabilities....................................... 208,730 120,043
--------- -------
Stockholders' equity:
Common stock (See table below)............................ 665 665
Additional paid-in capital................................ 238,766 246,271
Retained earnings......................................... 97,129 47,325
Deferred compensation..................................... (11,246) (12,494)
Treasury stock (See table below).......................... (198,360) (74,833)
Accumulated other comprehensive income.................... (611) 202
--------- -------
Total stockholders' equity.............................. 126,343 207,136
--------- -------
Total liabilities and stockholders' equity.................. $ 335,073 327,179
========= =======
1999 1998
COMMON STOCK ------------------------- -------------------------
($.01 PAR VALUE) CLASS A CLASS B CLASS A CLASS B
---------------- ----------- ----------- ----------- -----------
Authorized................ 150,000,000 100,000,000 150,000,000 100,000,000
Issued.................... 32,142,174 34,325,000 32,142,174 34,325,000
Outstanding............... 29,652,212 27,981,247 30,906,445 31,911,956
Treasury Stock............ 2,489,962 6,343,753 1,235,729 2,413,044
See accompanying notes to consolidated financial statements.
A-4
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenue:
Investment management fees............................. $178,612 137,823 117,784
Underwriting and distribution fees..................... 126,318 106,615 89,427
Shareholder service fees............................... 41,525 33,808 30,763
Investment and other revenue........................... 10,202 9,043 3,798
-------- -------- --------
Total revenue........................................ 356,657 287,289 241,772
-------- -------- --------
Expenses:
Underwriting and distribution.......................... 124,938 99,575 79,995
Compensation and related costs......................... 44,944 31,512 26,618
General and administrative............................. 19,245 8,551 15,826
Depreciation........................................... 2,162 1,892 1,307
Amortization of goodwill............................... 3,224 2,903 2,903
Interest expense....................................... 6,546 704 --
Loss on sale of real estate............................ 4,592 -- --
Write-off of deferred acquisition costs................ 18,981 -- --
-------- -------- --------
Total expenses....................................... 224,632 145,137 126,649
-------- -------- --------
Income before affiliated items and provision for
income taxes....................................... 132,025 142,152 115,123
Affiliated items:
Interest income........................................ -- 1,950 11,323
Interest expense....................................... -- (8,604) (11,299)
-------- -------- --------
Income before provision for income taxes............... 132,025 135,498 115,147
Provision for income taxes............................... 50,258 51,763 44,855
-------- -------- --------
Net income............................................. $ 81,767 83,735 70,292
======== ======== ========
Net income per share:
Basic.................................................. $ 1.37 1.27 1.06
======== ======== ========
Diluted................................................ $ 1.34 1.27 1.06
======== ======== ========
Weighted average shares outstanding--basic............... 59,637 65,787 66,467
--diluted................ 61,032 66,179 66,467
Dividends declared per common share...................... 0.53 0.53 --
See accompanying notes to consolidated financial statements.
A-5
WADDELL & REED FINANCIAL, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
DIVIDENDS IN
EXCESS OF
RETAINED
EARNINGS AND
COMMON STOCK ADDITIONAL ADDITIONAL
------------------- PAID-IN RETAINED PAID-IN DEFERRED TREASURY
SHARES AMOUNT CAPITAL EARNINGS CAPITAL COMPENSATION STOCK
-------- -------- ---------- -------- ------------ ------------ --------
(IN THOUSANDS)
Balance at December 31,
1996........................ 42,300 $423 231,968 -- -- -- --
Net income.................... -- -- -- 70,292 -- -- --
Contributions from parent..... -- -- 47,980 -- -- -- --
Other distributions........... -- -- (279,948) (18,627) (230,658) -- --
Cash dividends to parent...... -- -- -- (51,665) -- -- --
Unrealized gain on investment
securities.................. -- -- -- -- -- -- --
------ ---- -------- ------- -------- ------- --------
Balance at December 31,
1997........................ 42,300 423 -- -- (230,658) -- --
Net income.................... -- -- -- 73,712 10,023 -- --
Issuance of restricted
shares...................... 297 3 5,260 -- -- (12,494) --
IPO proceeds.................. 23,870 239 295,140 -- 220,635 -- --
Dividends paid................ -- -- -- (26,387) -- -- --
Other distributions........... -- -- (54,129) -- -- -- --
Treasury stock repurchases.... (3,649) -- -- -- -- -- (74,833)
Unrealized loss on investment
securities.................. -- -- -- -- -- -- --
------ ---- -------- ------- -------- ------- --------
Balance at December 31,
1998........................ 62,818 665 246,271 47,325 -- (12,494) (74,833)
Net income.................... -- -- -- 81,767 -- -- --
Recognition of deferred
compensation................ -- -- -- -- -- 1,370 --
Issuance of restricted
shares...................... -- -- 6 -- -- (122) 116
Dividends paid................ -- -- -- (31,963) -- -- --
Exercise of stock options..... -- -- (15,964) -- -- -- 8,537
Tax benefit from exercise of
options..................... -- -- 8,453 -- -- -- --
Treasury stock repurchases.... -- -- -- -- -- -- (132,180)
Unrealized loss on investment
securities.................. -- -- -- -- -- -- --
------ ---- -------- ------- -------- ------- --------
Balance at December 31,
1999........................ 66,467 $665 238,766 97,129 -- (11,246) (198,360)
====== ==== ======== ======= ======== ======= ========
ACCUMULATED TOTAL
OTHER STOCKHOLDER'S
COMPREHENSIVE EQUITY
INCOME (DEFICIT)
------------- -------------
(IN THOUSANDS)
Balance at December 31,
1996........................ 164 232,555
Net income.................... -- 70,292
Contributions from parent..... -- 47,980
Other distributions........... -- (529,233)
Cash dividends to parent...... -- (51,665)
Unrealized gain on investment
securities.................. 180 180
---- --------
Balance at December 31,
1997........................ 344 (229,891)
Net income.................... -- 83,735
Issuance of restricted
shares...................... -- (7,231)
IPO proceeds.................. -- 516,014
Dividends paid................ -- (26,387)
Other distributions........... -- (54,129)
Treasury stock repurchases.... -- (74,833)
Unrealized loss on investment
securities.................. (142) (142)
---- --------
Balance at December 31,
1998........................ 202 207,136
Net income.................... -- 81,767
Recognition of deferred
compensation................ -- 1,370
Issuance of restricted
shares...................... -- --
Dividends paid................ -- (31,963)
Exercise of stock options..... -- (7,427)
Tax benefit from exercise of
options..................... -- 8,453
Treasury stock repurchases.... -- (132,180)
Unrealized loss on investment
securities.................. (813) (813)
---- --------
Balance at December 31,
1999........................ (611) 126,343
==== ========
See accompanying notes to consolidated financial statements.
A-6
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Net income.................................................. $81,767 83,735 70,292
Other comprehensive income:
Net unrealized appreciation (depreciation) of investments
during the period, net of income taxes of $(387), $(150)
and $110.................................................. (616) (249) 180
Reclassification adjustment for amounts included in net
income, net of income taxes of $(124), $64 and $0......... (197) 107 0
------- ------ ------
Comprehensive income........................................ $80,954 83,593 70,472
======= ====== ======
See accompanying notes to consolidated financial statements.
A-7
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income................................................ $ 81,767 83,735 70,292
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 5,386 4,795 4,210
Recognition of deferred compensation.................... 1,370 1,333 --
(Gain)/loss on sale of investments...................... (375) 171 --
Loss on sale and retirement of fixed assets............. 67 75 65
Write-off of deferred acquisition cost.................. 18,981 -- --
Loss on sale of real estate............................. 4,592 -- --
Capital gains and dividends reinvested.................. (471) (399) (78)
Deferred income taxes................................... (4,089) (1,988) 27
Changes in assets and liabilities net of acquisition:
Receivables from funds................................ (1,857) (1,709) (452)
Other receivables..................................... 10,788 (23,818) (1,195)
Due to/from affiliates--operating..................... -- 4,509 (4,217)
Other assets.......................................... (9,728) (3,661) (5,383)
Accounts payable...................................... 5,457 5,375 (1,883)
Other liabilities..................................... (3,596) 10,237 898
-------- -------- --------
Net cash provided by operating activities................... 108,292 78,655 62,284
-------- -------- --------
Cash flows from investing activities:
Additions to investment securities........................ (16,201) (110,652) (40)
Proceeds from sales of investment securities.............. 635 24,020 1
Proceeds from maturity of investment securities........... 27,995 2,424 1,260
Additions to property and equipment....................... (9,096) (7,602) (3,218)
Investment in real estate................................. 551 (5,913) --
Proceeds from sale of real estate......................... 16,452 -- --
Acquisition of Austin, Calvert & Flavin, (net of $1,611
cash acquired).......................................... (19,557) -- --
Other..................................................... -- 7 50
-------- -------- --------
Net cash provided by/(used in) investing activities......... 779 (97,716) (1,947)
-------- -------- --------
Cash flows from financing activities:
Cash dividends to parent.................................. -- -- (51,665)
Proceeds from IPO......................................... -- 516,014 --
Net borrowings on credit facility......................... 85,000 40,000 --
Cash dividends............................................ (31,963) (26,387) --
Change in due to/from affiliates--nonoperating............ -- (479,373) (37,888)
Purchase of treasury stock................................ (132,180) (74,833) --
Exercise of stock options................................. 869 -- --
Cash contributions from parent............................ -- -- 44,033
-------- -------- --------
Net cash used in financing activities....................... (78,274) (24,579) (45,520)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 30,797 (43,640) 14,817
Cash and cash equivalents at beginning of year.............. 30,180 73,820 59,003
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 60,977 30,180 73,820
======== ======== ========
Cash paid for:
Income taxes.............................................. $ 50,551 48,830 65,754
Interest.................................................. 5,932 628 0
See accompanying notes to consolidated financial statements
A-8
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
1. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION
BUSINESS
Waddell & Reed Financial, Inc. and subsidiaries (the "Company") derive their
revenues primarily from investment management, investment product distribution,
and shareholder services administration provided to the United mutual funds,
Waddell & Reed mutual funds, Target/United mutual funds (collectively the
"Funds") and managed institutional accounts. The Funds and institutional
accounts operate under various rules and regulations set forth by the Securities
and Exchange Commission (the "Commission"). Services to the Funds are provided
under contracts that set forth the fees to be charged for these services. The
majority of these contracts are subject to annual review and approval by each
Fund's board of directors and shareholders. Company revenues are largely
dependent on the total value and composition of assets under management, which
include domestic and international equity and debt securities. Accordingly,
fluctuations in financial markets and composition of assets under management
impact revenues and results of operations. For 1999, management fees from the
United Income Fund were $44.4 million or 12% of total revenues. The United
Income Fund had a net asset value of $8.4 billion at December 31, 1999 and was
the Company's largest fund.
Prior to December 1997, the Company was known as United Investors Management
Company. In the first quarter of 1998, the insurance operations of the Company,
United Investors Life Insurance Company, were distributed to Torchmark
Corporation and a subsidiary of Torchmark Corporation (together, "Torchmark").
The Company was wholly owned by Torchmark until March 4, 1998, when the Company
completed the initial public offering of its Class A Common Stock ("Offering"),
with the Company realizing net proceeds of approximately $516 million.
Approximately $481 million of the proceeds were used to prepay notes payable to
Torchmark. After giving effect to the Offering and prior to November 6, 1998,
Torchmark controlled in excess of 60% of the outstanding Class A and Class B
Common Stock, and in excess of 80% of the voting power of the outstanding
Class A and Class B Common Stock of the Company. On November 6, 1998 Torchmark
distributed its remaining ownership interest in the Company by means of a tax
free spin-off to the stockholders of Torchmark of all common stock of the
Company held by Torchmark.
BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions are
eliminated in consolidation. Amounts in the accompanying financial statements
and notes are rounded to the nearest thousand. Certain amounts in the prior year
financial statements have been reclassified to conform to the 1999 presentation.
USE OF ESTIMATES
The management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
A-9
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
1. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION
(CONTINUED)
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Given the nature of the Company's assets and liabilities, the Company
believes the amounts in the financial statements approximate fair value.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and short-term investments.
The Company considers all highly liquid debt instruments with original
maturities of 90 days or less to be cash equivalents.
INVESTMENT SECURITIES AND INVESTMENT IN AFFILIATED MUTUAL FUNDS
All investments in debt securities and mutual funds are classified as
available-for-sale. As a result, these investments are recorded at fair value.
Unrealized holding gains and losses, net of related tax effects, are excluded
from earnings until realized and are reported as a separate component of
comprehensive income. Realized gains and losses are computed using the specific
identification method for investment securities other than mutual funds. For
mutual funds, realized gains and losses are computed using the average cost
method.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations
of credit risk, as defined by SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH
CONCENTRATIONS OF CREDIT RISK, consist primarily of investments in U.S.
government and agency securities, municipal securities, corporate securities,
and affiliated money market and fixed income mutual funds and accounts
receivable. Credit risk is believed to be minimal in that the U.S. government
and agency securities are backed by the full faith and credit of the U.S.
government, municipal securities are backed by the full taxing power of the
issuing municipality or revenues from a specific project, corporate bonds are
backed by the assets of the corporations, and the affiliated mutual funds have
substantial net assets.
COMPREHENSIVE INCOME
Comprehensive income consists of net income and unrealized gains (losses) on
available-for-sale securities and is presented in a separate statement of
comprehensive income.
PROPERTY AND EQUIPMENT AND INVESTMENT IN REAL ESTATE
Property and equipment and investment real estate are carried at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets.
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, arose in connection with the acquisition of the Company by
Torchmark and the August 1999 acquisition of Austin Calvert & Flavin, Inc.
("ACF") by the Company. Amortization related to the acquisition of the Company
by Torchmark is on a straight-line basis over 40 years. Amortization related to
the acquisition of ACF by
A-10
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
1. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION
(CONTINUED)
the Company is on a straight-line basis over 25 years. The Company assesses the
recoverability of goodwill by determining whether the unamortized balance can be
recovered through undiscounted future operating cash flows over its remaining
life. Impairment, if any, is measured by the excess of the unamortized balance
over discounted future operating cash flows.
DEFERRED SALES COMMISSIONS
The Company defers certain costs, principally selling commissions, which are
paid to financial advisors in connection with the sale of certain shares of
Waddell & Reed funds and United funds. Beginning in the fourth quarter of 1999,
the Company began restructuring its mutual fund products at which time the
Waddell & Reed funds Class B shares were closed for new sales. Existing
Waddell & Reed funds Class B shares will be converted to Waddell & Reed funds
Class C shares in March 2000. The deferred acquisition costs associated with the
discontinued Waddell & Reed funds Class B shares were being amortized over the
life of the shareholder investments not to exceed ten years. As a result of the
discontinuation of these shares, the Company wrote off the balance of related
deferred acquisition costs in the amount of $18,981,000 in the fourth quarter of
1999. Upon conversion of the Waddell & Reed Class B shares, no contingent
deferred sales charge will be collected for any converted share redemptions.
Concurrent with the restructuring of mutual fund products, the United Funds
began selling Class B and Class C shares and the Waddell & Reed funds began
selling Class C shares. The deferred costs associated with the sale of United
funds Class B shares is amortized on a straight-line basis over the life of the
shareholders' investments not to exceed six years. The deferred costs associated
with the sale of United funds Class C shares and the Waddell & Reed funds
Class C shares are amortized on a straight-line basis not to exceed twelve
months. The Company recovers such costs through 12b-1 distribution fees, which
are paid by the Waddell & Reed funds and the United funds Class B and C shares
along with contingent deferred sales charges paid by shareholders who redeem
their shares prior to completion of the required holding periods.
REVENUE RECOGNITION
Investment advisory and administrative service fees are recognized when
earned. Commission revenues and expenses (and related receivables and payables)
resulting from securities transactions are recorded on the date on which the
order to buy or sell securities is executed.
ADVERTISING
Advertising costs are expensed as incurred. Amounts incurred were
$4,592,000, $2,845,000, and $1,046,000 for 1999, 1998 and 1997, respectively.
EARNINGS PER SHARE
The weighted average number of shares for basic earnings per share was
59,637,000, 65,787,000, and 66,467,000 for 1999, 1998 and 1997 respectively. The
weighted average number of shares used in computing diluted earnings per share,
which reflects the potential impact of stock options and restricted stock
awards, was 61,032,000, 66,179,000, and 66,467,000 for 1999, 1998 and 1997,
respectively. The average number of shares used for 1997 is the actual shares
outstanding at the Offering.
A-11
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 1999 and 1998 include reserves of
$17,114,000 and $10,810,000, respectively, for the benefit of customers in
compliance with securities industry regulations. Substantially all such reserves
are in excess of federal deposit insurance limits.
3. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE
Investments at December 31, 1999 and 1998 are as follows:
AMORTIZED UNREALIZED UNREALIZED
1999 COST GAINS LOSSES FAIR VALUE
- ---- --------- ---------- ---------- ----------
(IN THOUSANDS)
United States government-backed
mortgage securities................ $ 2,136 2 (3) 2,135
Municipal bonds...................... 39,225 7 (1,959) 37,273
Corporate bonds...................... 36,478 0 (822) 35,656
Preferred stock...................... 3,200 0 0 3,200
Affiliated mutual funds.............. 10,202 1,842 (63) 11,981
------- ----- ------ ------
$91,241 1,851 (2,847) 90,245
======= ===== ====== ======
AMORTIZED UNREALIZED UNREALIZED
1998 COST GAINS LOSSES FAIR VALUE
- ---- --------- ---------- ---------- ----------
(IN THOUSANDS)
United States government-backed
mortgage securities............... $ 2,944 50 0 2,994
Municipal bonds..................... 47,030 1,300 (56) 48,274
Corporate bonds..................... 41,012 120 (1,125) 40,007
Preferred stock..................... 8,292 119 0 8,411
Affiliated mutual funds............. 3,547 25 (105) 3,467
-------- ----- ------ -------
$102,825 1,614 (1,286) 103,153
======== ===== ====== =======
Municipal and corporate bonds held as of December 31, 1999 mature as
follows:
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
Within one year........................................... $ 2,005 2,035
After one year but within five years...................... 29,663 29,470
After five years but within ten years..................... 19,262 19,064
After ten years........................................... 24,773 22,360
------- ------
$75,703 72,929
======= ======
In 1999, investment securities with fair value of $635,000 were sold, which
resulted in realized gain of $6,000. In 1998, investment securities with fair
value of $24,020,000 were sold, which resulted in realized losses of $171,000.
A-12
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
4. ACQUISITION OF SUBSIDIARY
On August 9, 1999, the Company acquired Austin, Calvert & Flavin, Inc.
("ACF") in a business combination accounted for as a purchase. ACF, based in San
Antonio, TX, is primarily engaged in managing investments for trusts, high net
worth families and individuals, and pension plans of corporations, hospitals,
schools, labor unions, endowments, and foundations. The results of operations of
ACF are included on the accompanying financial statements since the date of
acquisition. The total cost of the acquisition, including expenses, was
$21,168,000, which exceeded the fair value of the net assets of ACF by
$20,289,000. The excess is being amortized on a straight-line basis over
25 years. The acquisition agreement provides for additional purchase price
payments based upon the achievement by ACF of specified earnings levels over the
next five years. These payments could aggregate as much as $8.7 million.
A summary of the net assets acquired is as follows (in thousands):
Assets acquired
Cash...................................................... $ 1,611
Accounts Receivable....................................... 1,464
Goodwill.................................................. 20,289
Other assets.............................................. 156
-------
Total..................................................... 23,520
Liabilities assumed......................................... 2,352
-------
Total Purchase Price........................................ $21,168
=======
The table below presents supplemental pro forma information for 1999 and
1998 as if the ACF acquisition were made on January 1, 1998 at the same purchase
price, based on estimates and assumptions considered appropriate:
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998
------------ ------------
Revenues......................................... $360,593,000 $293,616,000
Net Income....................................... 81,808,000 83,744,000
Net Income per common share
Basic.......................................... 1.37 1.27
Diluted........................................ 1.34 1.27
A-13
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
5. INVESTMENT IN REAL ESTATE
A summary of investment in real estate at December 31, 1998 is as follows
(in thousands):
ESTIMATED
USEFUL
LIVES
---------
Land.................................................... 3,886
Buildings............................................... 17,868 40 years
-------
Investment in real estate, at cost...................... 21,754
Less accumulated depreciation........................... 0
-------
Investment real estate, net............................. $21,754
=======
Effective January 1, 1997, the Company contributed its investment in real
estate, which consisted of commercial properties located adjacent to its offices
in Overland Park, Kansas to TMK Income Properties, LP ("TIP") in exchange for a
limited partnership interest in TIP. TIP is a limited partnership with Torchmark
affiliates that was formed for the purpose of acquiring, developing, and
managing real estate property. The property was transferred at its net book
value. Effective July 1, 1997, the Company contributed additional land and
improvements with a net book value of $5,113,000 for an additional 5% interest
in TIP. In late 1998, the Company ceased its participation in TIP. In exchange
for its partnership interest, the Company received the property which it had
originally contributed. Additionally, the Company reimbursed TIP $5,913,000 for
improvements made to that property while it was in the partnership.
Effective December 28, 1999, the Company sold its investments in
multi-tenant real estate properties to unrelated third parties. These properties
included four commercial buildings and land. Net proceeds from the sale were
$16,452,000 which resulted in a $4,592,000 pre-tax loss.
Net rental income was $1,026,000 for the year ended 1999 and real estate
partnership income was $465,000 and $199,000 for the years ended December 31,
1998 and 1997, respectively. Depreciation expense for the years ended
December 31, 1999, 1998 and 1997 was $0, $0 and $18,000, respectively.
6. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 1999 and 1998 is as
follows:
ESTIMATED
1999 1998 USEFUL LIVES
-------- -------- ------------
(IN THOUSANDS)
Land............................................ $ 5,260 4,680 --
Building........................................ 10,240 6,258 40 years
Furniture and fixtures.......................... 11,229 6,992 3-10 years
Equipment and machinery......................... 14,718 13,903 3-10 years
------- ------
Property and equipment, at cost................. 41,447 31,833
Less accumulated depreciation................... 13,814 11,184
------- ------
Property and equipment, net..................... $27,633 20,649
======= ======
A-14
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
7. REVOLVING CREDIT AGREEMENT
In October of 1999, the Company renewed its $220 million revolving credit
facility, expandable to $330 million, with a syndicate of eight banks. The
credit facility is a 364-day revolving facility with an interest rate of LIBOR
plus .625% plus an additional .125% fee when utilization of the facility exceeds
50%. The facility provides an additional source of capital to finance share
repurchases, acquisitions and other general corporate needs. As of December 31,
1999, the Company had $125 million outstanding on this facility. The credit
agreement stipulates two financial condition covenants. The consolidated
leverage ratio cannot exceed 3.0 to 1.0 for four consecutive quarters. The
consolidated leverage ratio is defined as consolidated total debt to
consolidated earnings before interest costs, income taxes, depreciation and
amortization ("EBITDA"). The consolidated interest coverage ratio cannot be less
than 4.0 to 1.0 for four consecutive quarters. Consolidated interest coverage
ratio is defined as consolidated EBITDA to consolidated interest expense. The
Company was in compliance with these covenants at December 31, 1999.
8. TRANSACTIONS WITH RELATED PARTIES
Until the Offering in March of 1998, the Company was 100% owned by
Torchmark. In November of 1998, Torchmark disposed of its remaining interest in
the Company through a tax-free distribution to its shareholders. The Company
serves as investment advisor to Torchmark and its affiliates and receives
advisory fees for this service. Advisory fees, which are based on assets under
management, amounted to $1,413,000, $2,401,000, and $1,241,000 for the years
ended December 31, 1999, 1998 and 1997, respectively. These commissions were
earned under contracts, which have been renewed for 2000 with substantially the
same terms.
The Company earns commissions from UILIC, a Torchmark subsidiary, for
marketing life and health insurance products and variable annuities. For the
years ended December 31, 1999, 1998 and 1997, the commissions amounted to
$46,379,000, $36,724,000, and $30,612,000, respectively.
Prior to the Offering, Torchmark performed certain administrative services
for the Company. Charges for such services were allocated based on a defined
formula that prorated Torchmark's total costs for services provided based on
each affiliate's assets and compensation expense. These charges were $2,008,000
for the year ended December 31, 1997. During 1999 and 1998, no charges were made
pertaining to these administrative services because the Company is no longer an
affiliate of Torchmark.
Effective September 1997, Waddell & Reed Asset Management Company
("WRAMCO"), a subsidiary of the Company, was distributed to Torchmark at its net
book value of $2,977,000. WRAMCO provides investment management services to
institutional investors and privately managed accounts. Subsequent to the
distribution date, the Company provides investment advisory services to WRAMCO
and receives a fee based on assets under management.
At December 31, 1999 and 1998, there were no amounts due from Torchmark and
its affiliates other than normal non-interest bearing amounts for current fees
and commissions due from the sale of Torchmark products.
A-15
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998, AND 1997
9. INCOME TAXES
The components of total income tax expense are as follows:
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Currently payable:
Federal.......................................... $46,608 46,845 38,939
State............................................ 7,044 6,934 5,889
------- ------ ------
53,652 53,779 44,828
Deferred taxes..................................... (3,394) (2,016) 27
------- ------ ------
Income tax expense from operations................. $50,258 51,763 44,855
------- ------ ------
Stockholders' equity--unrealized gain (loss) on
investment securities available-for-sale......... (511) (86) 110
------- ------ ------
Total income taxes................................. $49,747 51,677 44,965
======= ====== ======
The tax effect of temporary differences that give rise to significant
portions of deferred tax liabilities and deferred tax assets at December 31,
1999, 1998 and 1997 are as follows:
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Deferred tax liabilities:
Deferred acquisition costs........................ $ (703) (5,732) (4,680)
Fixed assets...................................... (328) 0 (824)
Other............................................. (391) (648) (500)
------- ------ ------
Total gross deferred liabilities.................... (1,422) (6,380) (6,004)
------- ------ ------
Deferred tax assets:
Benefit plans..................................... 4,203 3,824 3,557
Accrued expenses.................................. 2,921 2,674 1,442
Fixed assets...................................... 0 983 0
------- ------ ------
Total gross deferred assets......................... 7,124 7,481 4,999
------- ------ ------
Net deferred tax asset (liability).................. $ 5,702 1,101 (1,005)
======= ====== ======
A valuation allowance for deferred tax assets was not necessary at
December 31, 1999, 1998, and 1997. The following table reconciles the statutory
federal income tax rate to the Company's effective income tax rate:
1999 1998 1997
-------- -------- --------
Statutory federal income tax rate..................... 35.0% 35.0 35.0
State income taxes, net of federal tax benefits....... 3.3 3.3 3.3
Other items........................................... (0.2) (0.1) 0.7
---- ---- ----
Effective income tax rate............................. 38.1% 38.2 39.0
==== ==== ====
A-16
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
10. RETIREMENT PLAN
The Company participates in a noncontributory retirement plan which covers
substantially all employees of the Company and certain vested former employees
of Torchmark. Benefits payable under the plan are based on employees' years of
service and compensation during the final ten years of employment. This plan
invests in equity securities of large capitalization companies, investment grade
corporate and government bonds, and cash and cash equivalents.
1999 1998
-------- --------
(IN THOUSANDS)
Change in benefit obligation
Benefit obligation at beginning of year.................. $31,254 28,979
Service cost............................................. 2,328 1,612
Interest cost............................................ 2,387 2,294
Actuarial loss (gain).................................... (847) 2,733
Benefits paid............................................ (1,294) (4,364)
------- ------
Benefit obligation at end of year........................ $33,828 31,254
======= ======
Change in plan assets:
Fair value of plan assets at beginning of year........... $28,066 25,689
Actual return on plan assets............................. 6,859 5,249
Company contribution..................................... 3,456 1,492
Benefits paid............................................ (1,294) (4,364)
------- ------
Fair value of plan assets at end of year................. $37,087 28,066
======= ======
Funded status of plan...................................... $ 3,260 (3,188)
Unrecognized actuarial gain................................ (8,036) (3,097)
Unrecognized prior service cost............................ 628 673
Unrecognized net transition obligation..................... 98 103
------- ------
Net amount recognized...................................... $(4,050) (5,509)
======= ======
Weighted average assumptions as of December 31:
Discount rate............................................ 8.00% 6.75%
Expected return on plan assets........................... 9.25% 9.25%
Rate of compensation increase............................ 5.50% 3.75%
Components of net periodic benefit cost:
Service cost............................................. $ 2,328 1,612
Interest cost............................................ 2,387 2,294
Expected return on assets................................ (2,607) (2,407)
Prior service cost amortization.......................... 44 44
Transition obligation amortization....................... 5 5
------- ------
Net periodic benefit cost................................ $ 2,157 1,548
======= ======
A-17
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company sponsors an unfunded defined benefit postretirement medical plan
that covers substantially all employees. The plan is contributory with retiree
contributions adjusted annually.
1999 1998
-------- --------
(IN THOUSANDS)
Change in benefit obligation
Benefit obligation at beginning of year................... $ 1,151 1,142
Service cost.............................................. 76 64
Interest cost............................................. 90 92
Actuarial (gain) loss..................................... 28 (70)
Retiree contributions..................................... 71 75
Benefits and expenses paid................................ (147) (152)
------- ------
Benefit obligation at end of year......................... $ 1,269 1,151
======= ======
Change in plan assets:
Fair values of plan assets at beginning of year........... $ 0 0
Company contribution...................................... 76 77
Retiree contributions..................................... 71 75
Benefits and expenses paid................................ (147) (152)
Fair value of plan assets at end of year.................. $ 0 0
------- ------
Funded status............................................... $(1,269) (1,151)
Unrecognized loss........................................... 90 62
Unrecognized prior service cost............................. (160) (175)
------- ------
Accrued benefit cost at December 31....................... $(1,339) (1,264)
======= ======
Weighted average assumptions as of December 31:
Discount rate............................................. 7.75% 7.50%
Components of net periodic benefit cost:
Service cost.............................................. 76 64
Interest cost............................................. 90 92
Unrecognized amortization of prior service cost........... (15) (15)
Unrecognized net actuarial gain........................... 0 0
------- ------
Net periodic benefit cost................................. $ 151 141
======= ======
For measurement purposes, the health care cost trend rate was 7.5% and 8% in
1999 and 1998, respectively. The effect of a 1% annual increase in assumed cost
trend rates would increase the December 31, 1999 accumulated postretirement
benefit obligation by approximately $286,000, and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for the
year ended December 31, 1999 by approximately $56,000. The effect of a 1% annual
decrease in assumed cost trend rates would decrease the December 31, 1999
accumulated postretirement benefit obligation by approximately $249,000, and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended December 31, 1999 by
approximately $48,000.
A-18
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
12. SAVINGS AND INVESTMENT PLANS
The Company has a savings and investment plan covering substantially all
employees. Until December 31, 1998, this plan provided for a matching Company
contribution of 50% of the employee's investment in mutual fund shares and/or
stock, not to exceed 3% of the employee's salary. The Company's contributions to
the savings and investment plan for the years ended December 31, 1998 and 1997
were $858,000, and $716,000, respectively. On January 1, 1999, the Company
adopted a 401(k) plan for employees. This plan provides for a 100% Company match
on the first 3% of income and 50% on the next 2% of income, not to exceed 4% of
the employee's eligible salary. The Company's contribution to the 401(k) plan
for the year ended December 31, 1999 was $1,413,000.
13. EMPLOYEE STOCK OPTIONS
The Company has a fixed employee stock-based compensation plan ("Option
Plan"), whereby the Company may grant options on its Class A Common Stock. The
exercise price of each option is equal to the market price of the stock on the
date of grant. The maximum term of the options is generally ten years and two
days and generally vests one-third in each of the three years starting two years
after grant date. In October 1995, the FASB issued Statement No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123), which was effective for the Company
beginning January 1, 1996. SFAS No. 123 defines the "fair value method" of
accounting for employee stock options. It also allows accounting for such
options under the "intrinsic value method" in accordance with Accounting
Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB
No. 25) and related interpretations which is the method used by the Company. If
a company elects to use the intrinsic value method, pro forma disclosures of
earnings and earnings per share are required as if the fair value method of
accounting was applied.
Pursuant to SFAS No 123, the fair value of each option has been estimated
using a Black-Scholes option-pricing model with the following assumptions:
1999 1998
-------- --------
Dividend yield.............................................. 2.10% 2.34%
Risk-free interest rate..................................... 5.97 5.20
Expected volatility......................................... 28.60 29.70
Expected life (in years).................................... 4.71 4.71
After the spin off from Torchmark, holders of Torchmark stock options
granted prior to 1998 were given a choice to retain their Torchmark options or
convert their options into options of the Company ("Conversion Options").
Employees and directors of the Company who held Torchmark options could elect to
convert all of their Torchmark options into Conversion Options. In total
3,694,100 Conversion Options were converted from Torchmark options. The
Conversion Options retained the same terms as the previous Torchmark options
except that the exercise price and the number of shares were adjusted so that
the aggregate intrinsic value of the options remained the same.
A-19
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
13. EMPLOYEE STOCK OPTIONS (CONTINUED)
Prior to 1998, there were no Company stock options outstanding. A summary of
stock option activity and related information for the year ended December 31,
1999 follows:
1999 1998
----------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------------- --------- ----------------
Outstanding, beginning of year........... 8,083,188 $18.67 0 0
Granted.................................. 2,101,097 24.93 4,389,088 $22.63
Granted in restoration................... 1,258,396 25.14 0 0
Exercised................................ (77,475) 11.20 0 0
Exercised in restoration................. (1,732,805) 13.04 0 0
Expired.................................. (67,184) 22.30 0 0
Converted................................ 0 0 3,694,100 13.96
---------- ------ --------- ------
Outstanding, end of year................. 9,565,217 $21.95 8,083,188 $18.67
========== ====== ========= ======
Exercisable, end of year................. 1,902,217 $16.63 2,957,826 $14.42
========== ====== ========= ======
The range of fair values of options granted during the year was $4.97 to
$7.42, with a weighted average fair value of $6.68.
Had compensation cost for the options granted been determined on the basis
of fair value pursuant to SFAS No. 123, net income and earnings per share would
have been as follows:
1999 1998
-------- --------
Net income
As reported............................................. $81,767 $83,735
Pro forma............................................... $77,141 $79,744
Basic earnings per share
As reported............................................. $1.37 $1.27
Pro forma............................................... $1.29 $1.21
Diluted earnings per share
As reported............................................. $1.34 $1.27
Pro forma............................................... $1.26 $1.21
A-20
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
13. EMPLOYEE STOCK OPTIONS (CONTINUED)
Following is a summary of options outstanding at December 31, 1999:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
----------------------------------------------- ---------------------------
WEIGHTED AVERAGE
REMAINING
EXERCISE PRICE CONTRACTUAL LIFE WEIGHTED AVERAGE WEIGHTED AVERAGE
YEAR OF GRANT RANGE NUMBER (IN YEARS) EXERCISE PRICE NUMBER EXERCISE PRICE
- ------------- -------------- --------- ---------------- ---------------- -------- ----------------
*1991-1996 $8.16-13.85 681,407 6.6 $11.52 671,185 $11.56
*1997 $12.05-18.77 1,206,027 7.8 $16.88 919,320 $18.27
1998-1999 $19.59-26.56 7,677,783 9.1 $23.66 311,712 $22.72
- ------------------------
* Options granted prior to 1998 represented options on Torchmark common stock
granted by Torchmark prior to the Company's March 4, 1998 initial public
offering. These options were converted to options on the Company's common
stock on November 6, 1998, concurrent with Torchmark's distribution of the
Company's stock to its shareholders (spin-off).
14. UNIFORM CAPITAL RULE REQUIREMENTS
Waddell & Reed, Inc. ("W&R") a subsidiary of the Company, is a registered
broker-dealer and a member of the National Association of Securities
Dealers, Inc. and is therefore subject to a requirement of the Commission's
Uniform Net Capital Rule, requiring the maintenance of certain minimal capital
levels. At December 31, 1999, W&R had net capital, as defined by the Uniform
Capital Rule, of $13,013,000 which is $9,061,000 in excess of the required net
capital.
15. COMMITMENTS AND CONTINGENCIES
RENTAL EXPENSE AND LEASE COMMITMENTS
The Company rents certain sales and other office space under long-term
operating leases. Rent expense was $7,074,000, $4,937,000, and $4,397,000 and
for the years ended, December 31, 1999, 1998 and 1997, respectively. Future
minimum rental commitments under noncancelable operating leases are as follows:
The Company had minimum remaining rental commitments for the years ended
December 31 (in thousands):
2000........................................................ $4,767
2001........................................................ 1,988
2002........................................................ 1,068
2003........................................................ 503
2004........................................................ 234
Thereafter.................................................. 0
------
$8,560
======
New leases are expected to be executed as existing leases expire. Thus,
future minimum lease commitments are not expected to be less than those in 2000.
A-21
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999, 1998, AND 1997
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTINGENCIES
From time to time, the Company is a party to various claims arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, it is unlikely that any adverse determination in one or more
pending claims would have a material adverse effect on the Company's financial
position or results of operations.
A-22
WADDELL & REED FINANCIAL, INC.
INDEX TO EXHIBITS
EXHIBIT
NO. EXHIBIT DESCRIPTION
- --------------------- -------------------
3.1 Amended and Restated Certificate of Incorporation of the
Company. Filed as Exhibit 3.1 to the Company's Form S-1
Registration Statement Number 333-43687 (the "Registration
Statement") and incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Company. Filed as Exhibit
3.2 to the Company's Registration Statement and
incorporated herein by reference.
4.1 Specimen of Class A Common Stock Certificate. Filed as
Exhibit 4.1 to the Company's Registration Statement and
incorporated herein by reference.
4.2 Specimen of Class B Common Stock Certificate. Filed as
Exhibit 4.1 to the Company's Form 8-A Registration
Statement, Accession Number 0000930661-98-002062, dated
October 1, 1998 and incorporated herein by reference.
4.3 Rights Agreement, dated as of April 28, 1999, by and between
Waddell & Reed Financial, Inc. and First Chicago Trust
Company of New York, which includes the Certificate of
Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock of the Company, as filed on
May 13, 1999 with the Secretary of State of Delaware, as
Exhibit A and the form of Rights Certificate as Exhibit B.
Filed as Exhibit 4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999 and
incorporated herein by reference.
10.1 Public Offering and Separation Agreement, dated as of March
3, 1998, by and between the Company and Torchmark
Corporation. Filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 and incorporated herein by reference.
10.2 Tax Disaffiliation Agreement, dated as of March 3, 1998, by
and between the Company and Torchmark Corporation. Filed as
Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 and
incorporated herein by reference.
10.3 Investment Services Agreement, dated as of March 3, 1998, by
and between Waddell & Reed Investment Management Company
and Waddell & Reed Asset Management Company. Filed as
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998 and incorporated
herein by reference.
10.4 General Agent Contract, dated January 1, 1985, by and
between United Investors Life Insurance Company and W & R
Insurance Agency, Inc. Filed as Exhibit 10.4 to the
Company's Registration Statement and incorporated herein by
reference.
10.5 Amendment Extending General Agent Contract, dated as of
March 31, 1998, by and between United Investors Life
Insurance Company and W & R Insurance Agency, Inc. Filed as
Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998 and incorporated
herein by reference.
10.6 Second Amendment of General Agent Contract, dated as of
December 21, 1998, by and between United Investors Life
Insurance Company and W & R Insurance Agency, Inc. Filed as
Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference.
10.7 Independent Agent Contract, dated June 25, 1997, by and
among United American Insurance Company, W & R Insurance
Agency, Inc., and affiliates identified therein. Filed as
Exhibit 10.6 to the Company's Registration Statement and
incorporated herein by reference.
10.8 Amendment Extending Independent Agent Contract, dated as of
March 3, 1998 by and among United American Insurance
Company, W & R Insurance Agency, Inc., and affiliates
identified therein. Filed as Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 and incorporated herein by reference.
B-1
WADDELL & REED FINANCIAL, INC.
INDEX TO EXHIBITS
10.9 Second Amendment of Independent Agent Contract, dated as of
December 31, 1998, by and among United American Insurance
Company, W & R Insurance Agency, Inc. and affiliates
identified therein. Filed as Exhibit 10.9 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference.
10.10 Distribution Contract, dated April 4, 1997, by and between
United Investors Life Insurance Company and Target/United
Funds, Inc. Filed as Exhibit 10.16 to the Company's
Registration Statement and incorporated herein by
reference.
10.11 Agreement Amending Distribution Contract, dated as of March
3, 1998, by and between United Investors Life Insurance
Company and Target/United Funds, Inc. Filed as
Exhibit 10.15 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 and incorporated
herein by reference.
10.12 Second Amendment of Distribution Contract, dated as of
December 31, 1998, by and between United Investors Life
Insurance Company and Target/United Funds, Inc. Filed as
Exhibit 10.12 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference.
10.13 Principal Underwriting Agreement, dated May 1, 1990, by and
between United Investors Life Insurance Company and Waddell
& Reed, Inc. Filed as Exhibit 10.18 to the Company's
Registration Statement and incorporated herein by
reference.
10.14 Agreement Amending Principal Underwriting Agreement, dated
as of March 3, 1998, by and between United Investors Life
Insurance Company and Waddell & Reed, Inc. Filed as
Exhibit 10.17 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 and incorporated
herein by reference.
10.15 Second Amendment of Principal Underwriting Agreement, dated
as of December 31, 1998, by and between United Investors
Life Insurance Company and Waddell & Reed, Inc. Filed as
Exhibit 10.15 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference.
10.16 Services Agreement, dated as of March 3, 1998, by and
between Waddell & Reed Investment Management Company and
Waddell & Reed Asset Management Company. Filed as
Exhibit 10.19 to the Company's Quarterly Report on a Form
10-Q for the quarter ended March 31, 1998 and incorporated
herein by reference.
10.17 Addendum to Services Agreement, dated as of December 31,
1998, by and between Waddell & Reed Investment Management
Company and Waddell & Reed Asset Management Company. Filed
as Exhibit 10.17 to the Company's Annual Report on Form
10-K for the year ended December 31, 1998 and incorporated
herein by reference.
10.18 Reciprocity Agreement, dated as of March 3, 1998, by and
between the Company and Torchmark Corporation. Filed as
Exhibit 10.20 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 and
incorporated herein by reference.
10.19 Administrative Services Agreement, dated as of March 3,
1998, by and between the Company and Torchmark Corporation.
Filed as Exhibit 10.21 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 and
incorporated herein by reference.
10.20 The Company 1998 Stock Incentive Plan. Filed as Exhibit
10.20 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by
reference.
10.21 First Amendment to 1998 Stock Incentive Plan.
10.22 The Company 1998 Non-Employee Director Stock Option Plan.
Filed as Exhibit 10.9 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998 and
incorporated herein by reference.
B-2
WADDELL & REED FINANCIAL, INC.
INDEX TO EXHIBITS
10.23 First Amendment to 1998 Non-Employee Director Stock Option
Plan.
10.24 The Company 1998 Executive Deferred Compensation Stock
Option Plan. Filed as Exhibit 10.10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1998 and incorporated herein by reference.
10.25 First Amendment to 1998 Executive Deferred Compensation
Stock Option Plan. Filed as Exhibit 10.23 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference.
10.26 Second Amendment to 1998 Executive Deferred Compensation
Stock Option Plan.
10.27 Credit Agreement dated October 14, 1999, by and among the
Company, Lenders and The Chase Manhattan Bank.
10.28 The Company Supplemental Executive Retirement Plan. Filed as
Exhibit 10.27 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference.
10.29 The Company Management Incentive Plan of 1999. Filed as
Exhibit 10.29 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference.
10.30 Form of Accounting Services Agreement by and between each of
the Funds and Waddell & Reed Services Company. Filed as
Exhibit 10.30 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference.
10.31 Form of Investment Management Agreement by and between each
of the United Funds and Waddell & Reed, Inc. Filed as
Exhibit 10.31 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference.
10.32 Form of Investment Management Agreement by and between the
Waddell & Reed Funds and Waddell & Reed Investment
Management Company. Filed as Exhibit 10.32 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference.
10.33 Form of Investment Management Agreement by and between the
Target/United Funds and Waddell & Reed, Inc. Filed as
Exhibit 10.33 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference.
10.34 Form of Shareholder Servicing Agreement by and between each
of the Funds and Waddell & Reed Services Company. Filed as
Exhibit 10.34 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference.
10.35 Form of Underwriting Agreement by and between each of the
United Funds and Waddell & Reed, Inc. Filed as Exhibit
10.35 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 and incorporated herein by
reference.
10.36 Form of Underwriting Agreement by and between each of the
Waddell & Reed Funds and Waddell & Reed, Inc. Filed as
Exhibit 10.36 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 and incorporated
herein by reference.
11 Statement regarding computation of per share earnings.
21 Subsidiaries of the Company.
23 Consent of KPMG LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
B-3