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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, 2000
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
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): $2,014,071,078 at March 6, 2001.
Shares outstanding of each of the registrant's classes of common stock as of
March 6, 2001:
Class A Common Stock, $.01 par value: 43,461,511
Class B Common Stock, $.01 par value: 36,139,617
DOCUMENTS INCORPORATED BY REFERENCE
In Part III of this Form 10-K, the definitive proxy statement for 2001
annual meeting of stockholders to be held April 25, 2001.
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Index of Exhibits (Pages 60 through 62)
Total Number of Pages Included Are 62
WADDELL & REED FINANCIAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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....................................... 15
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 18
Risk Factors............................................................. 29
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 32
Item 8. Financial Statements and Supplementary Data................. 33
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 33
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 33
Item 11. Executive Compensation...................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 33
Item 13. Certain Relationships and Related Transactions.............. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 33
SIGNATURES............................................................... 34
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... 36
INDEX TO EXHIBITS........................................................ 60
2
PART I
ITEM 1. BUSINESS
BACKGROUND
Waddell & Reed Financial, Inc. (hereinafter referred to as the "Company,"
"we," "our" or "us") 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 our mutual funds
and the distributor of insurance products issued primarily by United Investors
Life Insurance Company ("UILIC") and by Nationwide Financial Services, Inc.
("Nationwide"). Another subsidiary, Waddell & Reed Investment Management Company
("WRIMCO"), is a registered investment advisor that provides investment
management and advisory services to our mutual funds and to institutions and
other private clients. Waddell & Reed Services Company ("WRSCO") provides
transfer agency and accounting services to the mutual funds and their
shareholders. On August 9, 1999, we completed the acquisition of Austin,
Calvert & Flavin, Inc. ("ACF"), a privately-held investment management firm
based in San Antonio, Texas. 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. On
March 31, 2000, we completed the acquisition of The Legend Group ("Legend"), a
privately-held mutual fund distribution and retirement planning company based in
Palm Beach Gardens, Florida. Through its network of over 300 financial advisors,
Legend serves employees of school districts and other not-for-profit
organizations. Waddell & Reed Financial, Inc., W&R, WRIMCO, WRSCO, ACF and
Legend are hereafter collectively referred to as the "Company," "we, "us" or
"our," unless the context requires otherwise.
OVERVIEW
We were founded in 1937 and are one of the oldest mutual fund complexes in
the United States, having introduced the Waddell & Reed Advisors Funds
(formerly, the United Group of Mutual Funds) in 1940. On June 30, 2000, we
renamed two of our mutual fund families. The United Funds family was renamed the
Waddell & Reed Advisors Funds (the "Advisors Funds") and the Waddell & Reed Fund
family was renamed the W&R Funds (the "W&R Funds"). The Advisors Funds are
available for sale primarily through our proprietary sales force. The W&R Funds
are available for sale through both our proprietary sales force and through
selected third-party distribution channels. On October 16, 2000, the
Target/United Funds family was renamed the W&R Target Funds (the "Target
Funds"). We sell our investment products primarily to middle income Americans
through a virtually exclusive sales force and select third party channels. As of
December 31, 2000, we had $36.7 billion of assets under management, of which
$31.8 billion were mutual fund assets and $4.9 billion were separately managed
accounts. We have over 648,000 mutual fund customers having an average
investment of $43,000 and over 68,000 variable account customers having an
average investment of $54,000.
We are the exclusive underwriter and distributor of 43 mutual fund
portfolios (the "Funds"), including 20 comprising the Advisors Funds, 12
comprising the W&R Funds and 11 comprising the Target Funds. As part of our
financial planning services, we also distribute to our customers variable
annuities and life insurance products, underwritten by UILIC and Nationwide. On
October 23, 2000, we announced an agreement with Nationwide to provide a broad
span of private label insurance and retirement products for use by our
proprietary sales force.
Our traditional market has generally been professionals and working families
with annual incomes between $40,000 and $100,000 who are saving for retirement.
We believe that demographic trends and shifts in attitudes toward retirement
savings will continue to support increased consumer demand for our products and
services. 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 1998 to
76.2 million in 2008, making this "pre-retirement" age group the fastest growing
segment of the U.S. population.
3
We distribute the Funds and other financial products through a financial
advisor sales force that represents us on a virtually exclusive basis. On
December 31, 2000, our sales force consisted of 2,865 financial advisors,
including 220 district managers and 70 district supervisors. Eight regional vice
presidents and 148 division and associate managers operating from 219 division
and district sales offices located throughout the United States manage the sales
force. In addition, we have 182 individual advisor offices. For the year ended
December 31, 2000, our financial advisor sales force sold over $2.8 billion of
mutual fund and variable products. We believe, based on industry data, that our
financial advisor sales force is currently one of the largest sales forces in
the United States selling primarily mutual funds. As of December 31, 2000, 36%
of our financial advisors have been with us for more than 5 years and 24% for
more than 10 years. Our financial advisors are located primarily in smaller
metropolitan areas and rural communities.
On March 31, 2000, we acquired Legend, a privately-held mutual fund
distribution and retirement planning company. Legend provides asset allocation
advisory services and custodial services primarily for employees of school
districts and other not-for-profit organizations nationwide. Legend has over
90,000 clients having an average investment of $31,000 per account. Assets under
advisement at December 31, 2000 were $2.8 billion, of which $1.1 billion were in
accounts for which Legend provides custodial and asset allocation services. As
of December 31, 2000, Legend had 309 registered financial advisors in 22 Legend
offices located primarily in the eastern part of the United States. In 2000,
Legend advisors sold $38.1 million of our mutual fund products.
The financial advisor industry is fragmented, consisting primarily of
relatively small companies generally employing fewer than 100 investment
professionals. Our sales force competes primarily with small broker-dealers and
independent financial advisors. Our marketing efforts are currently focused on
customers residing in smaller metropolitan areas and rural communities. We focus
on underserved and retirement markets. We conduct investment seminars throughout
the United States to reach a large number of potential clients. We also provide
financial plans for clients offering one-on-one consultations emphasizing
long-term relationships through continuing service, rather than a one-time sale.
We believe that we are well-positioned to benefit from a 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 increase in the average
household's financial assets over the past decade.
Our investment philosophy and financial planning approach emphasizes
long-term investments. Our portfolio managers seek consistent long-term
performance and downside protection in turbulent markets. As a result, we have
developed a loyal customer base with clients maintaining their accounts for
approximately 14 years on average as compared to 4 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, 2000 of 7.6% for the non-money market Funds, which is less
than one-half of the industry average of 20.3% and a relatively high dividend
reinvestment rate of 87.4% for those Funds for the same period, which has
consistently been higher than the industry average. Approximately 51% of our
mutual fund assets under management are in retirement accounts and an additional
$3.7 billion are in variable annuities as of December 31, 2000.
We believe we are relatively unique in the mutual fund industry in large
part due to our proprietary sales force. Not only do the members of our sales
force gain loyal customers, but they also create profit as they bring in assets
for us to manage. By contrast, we believe that the vast majority of companies in
the industry bear a significant cost to acquire assets to manage, due to the
expense of either heavy advertising or the use of third-party distributors. In
our opinion, other industry members are further challenged by the short period
of time allowed them to recoup their asset-acquisition cost from investment
management fees before losing the assets to redemptions. We not only do not have
to recoup the asset acquisition cost since we make a distribution profit, but we
are able to earn investment management fees on those assets for a much longer
period of time than others in the industry.
4
We have a seasoned team of portfolio managers and an internal equity and
fixed income investment research staff that have substantial resources available
to them, including hundreds of on and off-site meetings annually with management
of the companies in which they invest. In addition, we utilize research provided
by brokerage firms and independent outside consultants. Generally, portfolio
managers have had extensive experience as investment research analysts prior to
acquiring money management assignments. The predominant style of our mutual
funds is growth equity. As of December 31, 2000, approximately 87% of our mutual
fund assets under management were invested in equity funds with the remainder in
fixed income and money market funds. This investment strategy generally
emphasizes investments at attractive valuations in companies that the portfolio
managers believe can produce above average growth in earnings.
OPERATIONS
Revenues from operations for the last three years were:
FOR YEARS ENDED DECEMBER 31,
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2000 1999 1998
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(IN THOUSANDS)
Revenues from:
Investment management..................................... $253,774 178,612 137,823
Underwriting and distribution............................. 202,879 126,318 106,615
Shareholder service....................................... 53,436 41,525 33,808
-------- ------- -------
Revenues excluding investment and other income............ 510,089 346,455 278,246
Investment income and other revenue....................... 10,613 10,202 9,043
-------- ------- -------
Total revenues............................................ $520,702 356,657 287,289
======== ======= =======
SALES MANAGEMENT
Since our initial public offering in March of 1998, we have undertaken
initiatives to increase the retention and productivity of our proprietary sales
force. Notably, the Bridge Income Program, which provides new advisors with a
fixed source of income while they are building their client base, has played an
important role in advisor retention. In 2000, 72% of advisors on the Bridge
Income Program were still with us after one year, compared with 32% of advisors
who did not participate in the program. In 2000, we retained 56% of our
financial advisors after one year and 27% after three years. These retention
statistics compare favorably to the pre-IPO 1997 retention rate of 41% for
advisors after one year and 14% after three years.
In addition to the Bridge Income Program, a number of other initiatives were
undertaken. We have significantly enhanced the financial plans offered to
clients by their financial advisors. These improved comprehensive plans have
resulted in higher average initial investments, more frequent repeat investments
and a higher close ratio. Since the IPO, we have penetrated 25 new geographic
markets by adding new division offices each year in areas where we did not
previously have a presence. We have also added new district offices and invested
in existing offices by upgrading and expanding the facilities. In many cases,
the additional space has been used by adding assistants to support the financial
advisor sales force. Additional initiatives, such as the Career Development
Conference and the New Manager Training Program, have also contributed to the
increased productivity of our financial advisors.
In 2000, our advisor sales productivity was $1.08 million per advisor
compared to $738 thousand per advisor in 1997, representing a 14% compound
annual growth rate. In the last few years, our efforts to improve sales
productivity and advisor retention have also resulted in our sales force being
more fully-committed. We consider advisors to be fully-committed to their
careers when their investment product sales exceed $1 million per year. At the
end of 2000, we had 1,159 fully-committed advisors who are responsible for a
very significant portion of our sales. The number of fully-committed advisors
has grown
5
from 662 at the end of 1997, representing a 21% compound annual growth rate. In
order to emphasize the importance of recruiting and developing a sales force, we
utilize a manager compensation system that ties compensation of division
managers to the development of new financial advisors and to division sales,
rather than personal sales.
We provide training and motivational programs for our sales force. Sales
training specialists provide training programs for new recruits as well as
advanced training for experienced financial advisors. Programs for new recruits
focus on prospecting techniques, product knowledge, and sales skills. Field
office classes provide guidance in identifying target markets, practical
exercises to learn interviewing skills and data collection, instruction in basic
financial planning software and help in matching products with various client
investment objectives. Sales presentation skills are taught and practiced in a
classroom environment, as well as on joint sales calls with field sales
management. The programs for experienced advisors focus on skills related to
dealing with larger investment sums (such as IRA rollovers) and include training
in the use of asset allocation and estate planning software. In addition, we
offer new financial advisors the opportunity to participate in a week-long
training program at the home office covering such subjects as product features,
financial planning and the use of illustrative software packages.
In 1998, we launched our first national advertising campaign in select
markets throughout the country that focused on the important aspects of our
business and was intended to increase our name recognition in those markets.
This campaign continued throughout 1999 and 2000.
In 2000, we launched an advisor website. The development of our secure
intranet site, Advisors eSource, enhanced communication between our advisors and
the home office. The site provides for the timely communication of information
and offers information and other resources to help our advisors build and manage
their sales more effectively.
MARKETING--EXPANSION INTO ALTERNATIVE CHANNELS
In late 1999, we decided to leverage our strong investment performance and
back-office infrastructure by expanding our distribution efforts to include
third party channels in order to accelerate sales growth and complement our
proprietary sales force distribution. We began by creating a new position of
Chief Marketing Officer, whose responsibility is to provide leadership for our
proprietary marketing efforts and to lead our entry into non-proprietary
channels. Our third-party efforts focus principally on seeking sub-advisory
relationships and distributing funds from the W&R Funds family through channels
that do not compete directly with our financial advisors, including:
- 401(k) Platforms using multiple managers;
- institutional fund supermarkets serving fee-based financial advisors; and
- broker/dealer fee-based programs, including wrap programs.
During 2000, we created a third party sales team, became a member of
National Securities Clearing Corporation to facilitate selling into third party
environments, expanded our operating and client service infrastructure and began
negotiating selling agreements with select parties. A number of these agreements
are now in effect and the opportunity for additional agreements is substantial.
We also were appointed as a sub-advisor on two Nationwide equity products
and, separately, began offering select W&R funds available for sale through
their "Best of America Retirement Resource" program.
FUNDS AND ASSET MANAGEMENT
We serve as underwriter for, and investment advisor to, the Advisors Funds,
the W&R Funds, and the Target Funds and distribute variable annuity and variable
life insurance products related to the Target
6
Funds. We also serve as a registered investment advisor that provides investment
management and advisory services to institutional clients and other separately
managed accounts.
We offer the Funds' shareholders a broad range of investment products
designed to attract and retain clients with varying investment objectives. The
predominant style of our mutual funds is growth equity. This investment strategy
emphasizes investments 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, overall our complex ranked in the top 27th percentile for
2000, while in the category of US Stock Funds (as defined by Barron's/Lipper) we
ranked in the top 8th percentile for the same period. Overall, for the five-year
and ten-year periods ended December 31, 2000, we also ranked in the top 8th
percentile.
For the twelve months ended December 31, 2000, our Funds had the following
characteristics:
- 87% of assets under management invested in equity funds, 10% invested in
fixed income funds and 3% invested in money market funds.
- 50% of our equity funds ranked in the top quartile of funds with similar
objectives, as ranked by Lipper, Inc.
- 36% of our equity funds ranked in the top 10% of funds with similar
objectives, as ranked by Lipper, Inc.
- 91% of our equity assets that are rated by Morningstar have four or five
stars. This ranks us second out of the top 25 fund complexes.
- 86% of our long-term assets (excluding money market assets) that are rated
by Morningstar have four or five stars, which ranks us second if compared
to the top 25 fund complexes in the country.
Our largest mutual fund, the Advisors Core Investment Fund (formerly, the
United Income Fund), is focused on large capitalization in core equity and had
the following fees and net asset values:
- management fees of $50.0 million (10% of total Company revenues) and a net
asset value of $8.5 billion for or as of the year ended December 31, 2000.
- management fees of $44.4 million (12% of total Company revenues) and a net
asset value of $8.4 billion for or as of the year ended December 31, 1999.
- management fees of $39.8 million (14% of total Company revenues) and a net
asset value of $7.8 billion for or as of the year ended December 31, 1998.
Our base of assets under management consists of a broad range of domestic
and international stock, bond, and money market mutual funds that meet the
varied needs and objectives of our individual and institutional investors. We
periodically introduce new mutual funds designed to complement and expand our
investment product offerings, to respond to competitive developments in the
financial marketplace, and to meet the changing needs of clients. As part of
broadening fund distribution, we added the following funds during 2000:
- Advisors Value Fund (December 15, 2000)
- Advisors Municipal Money Market Fund (December 15, 2000)
- Advisors Tax-Managed Equity Fund (March 31, 2000)
- W&R Large Cap Growth Fund (June 30, 2000)
- W&R Mid Cap Growth Fund (June 30, 2000)
- W&R Money Market Fund (June 30, 2000)
7
- W&R Tax-Managed Equity Fund (June 30, 2000)
Several of our funds had name changes in 2000. Effective June 30, 2000, we
renamed the W&R Growth Fund the "W&R Small Cap Growth Fund." Effective
September 18, 2000, we renamed the Waddell & Reed Advisors High Income Fund II
the "Waddell & Reed Advisors Global Bond Fund" and changed the strategy of the
fund as well. On October 16, 2000, the Target Income Fund was renamed the
"Target Core Equity Fund," the W&R Total Return fund was renamed the "W&R Core
Equity Fund" and the Advisors Income Fund was renamed the "Advisors Core
Investment Fund."
In addition to performing investment management services for the Funds, we
act as an investment advisor for institutional and other private investors. We
receive a fee that is generally based on a percentage of assets under management
for our services as an investment advisor. Assets under management for
institutional and separate accounts totaled $4.9 billion at December 31, 2000.
Investment management fees from institutional and separate accounts were
approximately $28.7 million, or approximately 11%, of total investment
management fees for the year ended December 31, 2000.
Ending and average assets under management for the last three years were:
2000 1999 1998
------------------- ------------------- -------------------
ENDING AVERAGE ENDING AVERAGE ENDING AVERAGE
-------- -------- -------- -------- -------- --------
(IN MILLIONS)
Advisors Funds
Equity.......................................... $22,524 24,008 22,626 18,123 16,713 15,320
Fixed-income.................................... 2,815 2,925 3,190 3,464 3,637 3,652
Money market.................................... 1,045 827 812 693 644 572
------- ------ ------ ------ ------ ------
26,384 27,760 26,628 22,280 20,994 19,544
W&R Funds
Equity.......................................... 1,590 1,776 1,785 1,261 1,050 906
Fixed-income.................................... 65 69 82 88 85 74
Money market.................................... 11 3 -- -- -- --
------- ------ ------ ------ ------ ------
1,666 1,848 1,867 1,349 1,135 980
Target Funds
Equity.......................................... 3,465 3,456 3,113 2,415 2,127 1,859
Fixed-income.................................... 225 227 237 243 245 235
Money market.................................... 52 55 64 58 54 45
------- ------ ------ ------ ------ ------
3,742 3,738 3,414 2,716 2,426 2,139
Total Mutual Funds
Equity.......................................... 27,579 29,240 27,524 21,799 19,890 18,085
Fixed-income.................................... 3,105 3,221 3,509 3,795 3,967 3,961
Money market.................................... 1,108 885 876 751 698 617
------- ------ ------ ------ ------ ------
31,792 33,346 31,909 26,345 24,555 22,663
Institutional and Separate Accounts............... 4,933 5,642 5,393 3,953 3,189 2,947
------- ------ ------ ------ ------ ------
Total Assets Under Management..................... $36,725 38,988 37,302 30,298 27,744 25,610
======= ====== ====== ====== ====== ======
8
INVESTMENT MANAGEMENT AGREEMENTS
We provide investment advisory and management services pursuant to an
investment management agreement with each Fund. While the specific terms of the
agreements vary, the basic terms are similar. The agreements provide that we
render overall management services to each of the Funds, subject to the
oversight of each Fund's board of directors and in accordance with each Fund's
fundamental investment objectives and policies. The agreements permit us 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 of the directors who are not parties to the agreements or
"interested persons" of any such party, or (ii) the vote of a majority of the
shareholders 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, as amended, (the "Advisers Act") and may
be terminated without penalty by the Fund by giving us 60 days' written notice,
if the termination has been approved by a majority of the Fund's directors or
shareholders. We may terminate an investment management agreement without
penalty on 120 days' written notice.
SERVICE AGREEMENTS
We provide various services to the Funds and their shareholders pursuant to
a shareholder servicing agreement with each Fund (except the Target Funds) and
an accounting service agreement with each Fund. Pursuant to the shareholder
servicing agreements, we perform shareholder servicing functions for which the
Funds pay us a monthly fee, 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.
Pursuant to the accounting service agreements, we provide the Funds with
bookkeeping and accounting services and assistance for which the Funds pay us a
monthly fee, 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.
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.
9
UNDERWRITING AND DISTRIBUTION
We distribute the Funds pursuant to an underwriting agreement with each Fund
(except the Target Funds). Under each underwriting agreement, we offer and sell
the Fund's shares on a continual basis and pay the costs of sales literature and
printing of prospectuses, which are then either partially or fully reimbursed by
the Fund.
When a client purchases Class A shares, which are referred to as "front-end
load," we charge a sales charge of between zero to 5.75% of the amount invested.
The sales charge for the Class A shares typically declines as the net asset
value of the account increases. In addition, investors may combine their
purchases of these shares to qualify for the reduced sales charge. Class A
shares (except for the money market funds) may also be charged a maximum of
0.25% of the average daily net assets of these shares under a 12b-1 distribution
and service plan as compensation (for the W&R Funds) or reimbursement (for the
Advisors Funds) for expenses in connection with distributing these shares,
providing service to Class A shareholders and/or maintaining Class A shareholder
accounts.
When a client purchases Class B shares, which we refer to as
"deferred-load," we do not charge an initial sales charge, but we do charge them
on-going 12b-1 fees as well as a contingent deferred sales charge for six years.
For both the Advisors and W&R Funds, Class B shares are charged a maximum of
0.75% of the average daily net assets of these shares under a 12b-1 distribution
and service plan as compensation in connection with distributing shares of this
class. Class B shares are also charged a maximum of 0.25% of the average daily
net assets of these shares as compensation for expenses in connection with
providing service to Class B shareholders and/or maintaining Class B shareholder
accounts. Generally, clients are charged a contingent deferred sales charge upon
early redemption of shares of up to 5% of the net asset value of the redeemed
shares in the first year 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.
When a client purchases Class C shares, which we refer to as "level-load,"
we do not charge an initial sales charge, but we do charge them on-going 12b-1
fees as well as a contingent deferred sales charge for one year. For both the
Advisors and W&R Funds, Class C shares are charged a maximum of 0.75% of the
average daily net assets of these shares under a 12b-1 distribution and service
plan as compensation in connection with distributing shares of this class.
Class C shares are also charged a maximum of 0.25% of the average daily net
assets of these shares as compensation for expenses in connection with providing
service to Class C shareholders and/or maintaining Class C shareholder accounts.
Investors who redeem their Class C shares in the first year are generally
charged a contingent deferred sales charge of 1%. Class C shares do not convert
to shares of any other class.
Class Y shares, which we refer to as "institutional shares," are designed
for institutional investors or others investing through certain intermediaries.
Investors in Class Y shares do not pay a sales charge. W&R Funds Class Y shares
are charged a maximum of 0.25% of the average daily net assets of these shares
for 12b-1 distribution and service fees as compensation. The Advisors Funds
Class Y shares do not pay a 12b-1 distribution and service fee.
Each distribution and service plan is subject to annual approval by each
Fund's 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.
Each Fund may terminate the distribution and service plan at any time without
penalty.
We distribute variable products relating to the Target Funds pursuant to an
underwriting agreement between us and certain insurance companies, namely
Nationwide and UILIC. Commissions, marketing allowances and other compensation
are paid to us as stipulated by these underwriting agreements. Under each
agreement, we offer and sell the Target Funds on a continual basis. A
significant portion of the commissions we receive are paid to our financial
advisors and sales managers. Under a Rule 12b-1 service plan, the Target Funds
may charge a maximum of 0.25% of the average daily net assets as compensation
10
for expenses in connection with providing service to shareholders and
maintaining shareholder accounts of the Target Funds. The service plan is
subject to annual approval by the Target Funds' board of directors, including a
majority of the independent directors, cast in person at a meeting called for
the purpose of voting on such approval. The service plan may be terminated at
any time without penalty by the Funds.
Besides distributing variable products, we distribute a number of other
insurance products including individual and group term life, whole life,
accident and health, Medicare supplement, and disability insurance. Commissions
and compensation paid to us by UILIC for distributing variable and insurance
products underwritten by them comprised 14%, 13% and 12% of our total revenues
for each of the years ended 2000, 1999 and 1998, respectively.
On February 28, 2001, UILIC terminated the Principal Underwriting Agreement
by and between UILIC and the Company, effective April 30, 2001. As a result,
beginning May 1, 2001, Nationwide will become the primary provider of variable
products for distribution by our proprietary sales force. Management believes
that the profitability on the two insurer's variables products lines are
equivalent. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for more information.
INVESTMENT PRODUCT SALES
Investment product sales of proprietary products (excluding Legend and sales
at net asset value) are summarized as follows:
2000 1999 1998
-------- -------- --------
(IN MILLIONS)
Front End Load Sales (Class A)................... $1,590.3 1,329.0 1,266.8
Back End Load Sales (Class B).................... 367.5 355.8 252.3
Level Load Sales (Class C)....................... 233.5 51.3 --
Variable Products (Target)....................... 656.1 413.7 308.4
-------- ------- -------
Total Retail................................... $2,847.4 2,149.8 1,827.5
Institutional.................................... 1,077.1 1,096.0 491.4
-------- ------- -------
Total Sales.................................... $3,924.5 3,245.8 2,318.9
======== ======= =======
Legend, acquired on March 31, 2000, earns revenue from commissions earned on
sales of investment products and services provided for asset allocation advisory
services and custodial services for certain investment accounts. Assets under
advisement at December 31, 2000 were $2.8 billion, of which $1.1 billion were in
accounts for which Legend provides custodial and asset allocation services.
Since its acquisition on March 31, Legend's advisors have sold $38.1 million of
our mutual fund products.
11
FUNDS SUMMARY
The following table sets forth, for each management style, the net assets
under management as of December 31, 2000, the name of the Funds and the year in
which each Fund was first offered to the public.
NET ASSETS AT
DECEMBER 31, 2000 YEAR OF
MANAGEMENT STYLE (IN MILLIONS) FUND INCEPTION
---------------- ----------------- ------------------------------------------ ----------------
Large Capitalization Growth $ 1,258 Advisors Retirement Shares Fund 1972
2,587 Advisors Accumulative Fund 1940
3,317 Advisors Science and Technology Fund 1950
2,615 Advisors Vanguard Fund 1969
80 Advisors Tax-Managed Equity 2000
33 W&R Large Cap Growth 2000
188 W&R Science and Technology 1997
9 W&R Tax Managed Equity 2000
1,256 Target Growth 1987
295 Target Science and Technology 1997
-------
$11,638
Mid Capitalization Growth $ 1,641 Advisors New Concepts 1983
17 W&R Mid Cap Growth 2000
-------
$ 1,658
Small Capitalization Growth $ 404 Advisors Small Cap 1999
580 W&R Small Cap Growth 1992
345 Target Small Cap 1994
-------
$ 1,329
Large Capitalization Core Equity $ 8,518 Advisors Core Investment 1940
541 W&R Core Equity 1992
1,084 Target Core Equity 1991
-------
$10,143
Large Capitalization Value $ 11 Advisors Value Fund 2000
International Equity $ 1,399 Advisors International Growth 1970
161 W&R International Growth 1992
266 Target International 1994
-------
$ 1,826
Balanced and Asset Allocation $ 572 Advisors Continental Income 1970
122 Advisors Asset Strategy 1995
62 W&R Asset Strategy 1995
158 Target Balanced 1994
59 Target Asset Strategy 1995
-------
$ 973
Tax Exempt Bonds $ 758 Advisors Municipal Bond 1976
413 Advisors Municipal High Income 1986
27 W&R Municipal Bond 1992
-------
$ 1,198
High Yield Bonds $ 708 Advisors High Income 1979
19 W&R High Income 1997
102 Target High Income 1987
-------
$ 829
Taxable Investment Grade Bonds $ 531 Advisors Bond 1964
131 Advisors Government Securities 1982
274 Advisors Global Bond 1986
19 W&R Limited-Term Bond 1992
7 Target Limited-Term Bond 1994
117 Target Bond 1987
-------
$ 1,079
Money Markets $ 1,035 Advisors Cash Management 1979
10 Advisors Municipal Money Market 2000
11 W&R Money Market 2000
52 Target Money Market 1987
-------
$ 1,108
-------
TOTAL $31,792
=======
12
REGULATION
Virtually all aspects of our business 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 like us have broad administrative powers, including
the power to limit, restrict, or prohibit 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.
Our business is subject to regulation at both the federal and state level by
the Securities and Exchange Commission (the "SEC") and other regulatory bodies.
Certain of our subsidiaries are registered with the SEC under the Advisers Act
and the Funds are registered with the SEC under the ICA and various filings are
made with states under applicable state laws. The Advisers Act imposes numerous
obligations on registered investment advisors including fiduciary duties,
recordkeeping requirements, operational requirements and disclosure obligations.
The SEC is authorized to institute proceedings and impose sanctions for
violations of the Advisers Act, ranging from censure to termination of an
investment adviser's registration. The failure of one of our registered
subsidiaries to comply with SEC requirements could have a material adverse
effect on us. Two of our subsidiaries, W&R and Legend, are also registered as
broker-dealers with the SEC and are subject to regulation by NASD
Regulation, Inc. ("NASDR") and various states. Another of our subsidiaries,
WRSCO, is registered under the Securities Exchange Act of 1934, as amended, as a
transfer agent.
We derive a large portion of our revenues from investment management
agreements. Under the Advisers Act, our 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 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 by NASD regulations, 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 SEC rules and regulations promulgated pursuant to
the Federal securities laws, we are subject to periodic examination by the SEC.
We are also subject to periodic examination by NASDR. Our most recent
examination by the SEC was in February 1999. Our most recent examination by
NASDR was in November 1999. Legend, acquired on March 31, 2000, was examined by
the NASDR in January 2000 and by the SEC in January 1999. ACF, acquired in
August 1999, was examined by the SEC in March 2000. To date, no material issues
resulting from those examinations have been raised.
COMPETITION
We are subject to substantial competition in all aspects of our business. We
compete 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, 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. We compete with firms offering similar services and
13
products to those of ours, such as American Express Financial Advisors Inc. and
Edward Jones & Co. In addition, we compete with brokerage and investment banking
firms, insurance companies, banks and other financial institutions and
businesses offering other financial products in all aspects of their businesses.
Although no single company or group of companies dominates the mutual fund
management and services industry, many are larger than us, 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. We believe 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 into the investment
management business are relatively few, and thus we anticipate that we will face
a growing number of competitors. Many of our competitors in the mutual fund
industry are larger, better known, have penetrated more markets 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 we operate. 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.
Our 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 our financial advisors are larger, better known, and
have more resources.
EMPLOYEES
At December 31, 2000, we had 1,341 full-time employees. Of our full-time
employees, 600 were home office employees, 156 were division managers, associate
managers or regional vice presidents, 171 were field office support personnel,
124 were employees of acquired subsidiaries and 290 were district managers and
district supervisors who are also counted as financial advisors.
Our proprietary sales force is comprised of 2,865 financial advisors who are
independent contractors, and includes 290 district managers and district
supervisors who are employees. Legend also had 309 retirement advisors
considered to be independent contractors at December 31, 2000. The combined
total of financial advisors and retirement advisors was 3,174.
ITEM 2. PROPERTIES
Through our subsidiary, W&R, we lease buildings that are used in the normal
course of business. W&R occupies a 116,000 square foot office building at 6300
Lamar Avenue, Overland Park, Kansas and a 113,000 square foot office building at
6301 Glenwood Avenue, Overland Park, Kansas, which we utilize as our corporate
headquarters. On March 7, 2001, we completed the sale of our two home office
buildings to Mesirow Realty Sale-Leaseback ("Mesirow"). We also entered into an
agreement with Mesirow to lease the buildings back for a period of fifteen
years. The net proceeds from this sale were $28.2 million and resulted in a
realized gain of approximately $1.8 million, which will be deferred and
amortized over the term of the operating lease. Additional leased space is
occupied in the immediate area for headquarters operations. W&R also leases
division and district office space, totaling 584,583 square feet, for its
proprietary sales force in various cities and towns in the United States.
14
ITEM 3. LEGAL PROCEEDINGS
Certain of our 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 our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the 2000 fiscal year to
a vote of the security holders, through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our Class A and Class B common stock are traded on the New York Stock
Exchange (the "NYSE") under the symbols "WDR" and "WDR.B" respectively. The
closing prices on March 6, 2001 were $31.49 for Class A common stock and $31.10
for Class B common stock.
On February 23, 2000, we declared a three-for-two stock split on our
Class A and Class B common stock payable on April 7, 2000 to stockholders of
record as of March 17, 2000. All per-share and share outstanding data in the
consolidated financial statements and related notes have been restated to
reflect the stock split for all periods presented.
On May 31, 2000, Standard & Poor's added Waddell & Reed Financial, Inc. to
its S&P MidCap 400 Index of mid-range capitalization U.S. Stocks. Within the
index, we are included in the Financial economic sector and the Investment
Banking/Brokerage industry group.
On January 25, 2001, we announced that our Board of Directors had approved
the combination of our two classes of common stock by converting shares of our
Class B common stock into shares of Class A common stock on a one-for-one basis.
The combination will result from the merger of a wholly owned subsidiary into
the Company that will be subject to the approval of a majority of the voting
power of the Class A and Class B common stock, voting together as a single
class, and a majority of the Class B common stock, voting as a separate class.
The transaction will be submitted to stockholders at the upcoming annual meeting
on April 25, 2001. We believe that the elimination of the dual classes of common
stock will better align the voting rights of all stockholders with their
ownership interests. We also believe that the combination will increase the
overall liquidity of our common stock and eliminate the complexity, and
resulting market confusion, of having two publicly traded classes of common
stock.
15
The table sets forth, for the periods indicated, the reported high and low
close sale prices of our Class A and Class B common stock, as reported on the
NYSE, as well as the cash dividends paid for these time periods:
CLASS A
MARKET PRICE
2000 1999
------------------------------- -------------------------------
DIVIDENDS DIVIDENDS
PER PER
QUARTER HIGH LOW SHARE HIGH LOW SHARE
- ------- -------- -------- --------- -------- -------- ---------
1.................... $28.21 $16.63 $.0884 $15.92 $12.54 $.0884
2.................... 34.81 23.38 .0884 18.29 13.25 .0884
3.................... 40.00 29.63 .0884 18.63 14.79 .0884
4.................... 38.88 29.94 .0884 18.13 13.63 .0884
Year-end closing prices of the Class A common stock for 2000 and 1999,
respectively were: $37.63 and $18.08.
CLASS B
MARKET PRICE
2000 1999
------------------------------- -------------------------------
DIVIDENDS DIVIDENDS
PER PER
QUARTER HIGH LOW SHARE HIGH LOW SHARE
- ------- -------- -------- --------- -------- -------- ---------
1.................... $26.00 $15.38 $.0884 $15.67 $12.38 $.0884
2.................... 31.75 21.38 .0884 18.00 13.25 .0884
3.................... 38.13 26.63 .0884 18.21 14.25 .0884
4.................... 37.50 28.94 .0884 16.75 13.33 .0884
Year-end closing prices of the Class B common stock for 2000 and 1999,
respectively were: $37.50 and $16.75.
STOCKHOLDERS
According to the records of our transfer agent, we had 3,908 holders of
record of Class A common stock as of March 6, 2001, compared to 4,029 on
March 13, 2000 and 4,117 holders of record of Class B common stock as of
March 6, 2001, compared to 4,430 on March 13, 2000. We believe that a
substantially larger number of beneficial owners hold such shares in depository
or nominee form.
DIVIDENDS
We intend, from time to time, to pay cash dividends on our common stock as
our Board of Directors deems appropriate, after consideration of our operating
results, financial condition, cash requirements, compliance with covenants in
our revolving credit facility and such other factors as the Board of Directors
deems relevant. We anticipate that quarterly dividends will continue at a level
comparable to past quarterly dividends.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth our selected consolidated financial data at
the dates and for the periods indicated. Selected financial data should be read
in conjunction with, and is qualified in its entirety by,
16
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements and the Notes thereto
appearing elsewhere in this report.
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------ ------------ ------------ ------------
(IN THOUSANDS EXCEPT PER SHARE DATA AND NUMBER OF FINANCIAL ADVISORS)
Revenues from:
Investment management................ $ 253,774 178,612 137,823 117,784 101,466
Underwriting and distribution........ 202,879 126,318 106,615 89,427 85,837
Shareholder service.................. 53,436 41,525 33,808 30,763 28,378
---------- --------- --------- --------- ---------
Revenues excluding investment and
other income....................... 510,089 346,455 278,246 237,974 215,681
Total revenues....................... 520,702 356,657 287,289 241,772 220,976
Net income............................. 139,005 81,767 83,735 70,292 66,700
per common share--basic.............. 1.67 0.91 0.85 0.71 0.67
per common share--diluted............ 1.60 0.89 0.84 0.71 0.67
Net income excluding
special items (1).................... 139,005 96,382 88,060 74,696 64,174
per common share--basic (1)(2)..... 1.67 1.08 0.89 0.75 0.65
per common share--diluted (1)(2)... 1.60 1.05 0.89 0.75 0.65
Dividends per common share............. $ 0.35 $ 0.35 $ 0.35 -- --
Advisor and productivity data
(excluding Legend):
Investment product sales--retail..... $2,847,447 2,149,842 1,827,526 1,518,257 1,505,100
Number of financial advisors (end of
period)............................ 2,865 2,611 2,370 2,160 2,010
Average number of financial
advisors........................... 2,632 2,432 2,175 2,072 2,072
Investment product sales per
advisor............................ $ 1,081 884 840 733 726
AS OF DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN MILLIONS)
Assets under management........................ $36,725 $37,302 $27,744 $23,417 $19,070
Balance sheet data:
Goodwill..................................... 180.2 113.0 95.9 98.8 101.7
Total assets (3)............................. 422.2 335.1 327.2 447.0 429.3
Short-term debt.............................. -- 125.3 40.1 -- --
Long-term debt............................... 175.3 -- -- -- --
Total liabilities (4)........................ 280.6 208.7 120.0 676.9 196.7
- ------------------------
(1) Excludes a pre-tax write-off in 1999 of $19.0 million relating to
restructuring mutual fund products and a pre-tax loss of $4.6 million from
the sale of real estate properties, for a combined effect of $14.6 million
(net of tax). Excludes impact of interest relating to notes with Torchmark
Corporation ("Torchmark") for 1998, 1997 and 1996 that were prepaid with
proceeds from the initial public offering. Excludes special charges in 1997
relating to discontinuation of internal systems and 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 $192.7 and $184.5 million for 1997
and 1996, respectively.
(4) Includes amounts due to Torchmark of $611.6 and $126.6 million for 1997 and
1996, 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 OUR EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR STRATEGIES
REGARDING THE FUTURE. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS
INCLUDED IN THIS FORM 10-K REGARDING OUR FINANCIAL POSITION, BUSINESS STRATEGY
AND OTHER PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING
STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K ARE BASED
ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE ASSUME NO OBLIGATION
TO UPDATE SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH WE BELIEVE THAT THE
ASSUMPTIONS AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, WE CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE
BEEN CORRECT OR THAT WE WILL TAKE ANY ACTIONS THAT MAY PRESENTLY BE PLANNED.
CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM OUR EXPECTATIONS ARE DISCLOSED IN THE "RISK FACTORS" SECTION OF THIS
FORM 10-K, WHICH INCLUDE, WITHOUT LIMITATION, THE ADVERSE EFFECT FROM A DECLINE
IN SECURITIES MARKETS OR IF OUR PRODUCTS' PERFORMANCE DECLINES, FAILURE TO RENEW
INVESTMENT MANAGEMENT AGREEMENTS, ADVERSE RESULTS OF LITIGATION, COMPETITION,
CHANGES IN GOVERNMENT REGULATION, AVAILABILITY AND TERMS OF CAPITAL AND
ACQUISITION STRATEGY. ALL SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO US OR PERSONS ACTING ON OUR BEHALF ARE EXPRESSLY QUALIFIED IN
THEIR ENTIRETY BY SUCH FACTORS.
The following should be read in conjunction with the "Selected Financial
Data" and our Consolidated Financial Statements and Notes thereto appearing
elsewhere in this report.
RESULTS OF OPERATIONS
OVERVIEW
We derive our revenues primarily from providing investment management,
distribution and administrative services to the Funds and managed institutional
and separate accounts. Investment management fees, our most substantial source
of revenue, are based on the amount of assets under management and are affected
by sales levels, financial market conditions, redemptions and the composition of
assets. Underwriting and distribution revenues consist of sales charges and
commissions derived from sales of investment and insurance products,
distribution fees, as well as advisory services of Legend. 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 certain mutual fund shares 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.
On August 9, 1999, we acquired ACF, a privately-held investment management
firm based in San Antonio, Texas. ACF manages investments for trusts, high net
worth families and individuals, and pension plans of corporations, hospitals,
schools, labor unions, endowments and foundations.
In October 1999, we commenced restructuring our Advisors Funds and the W&R
Funds. On October 4, 1999, the Advisors Funds began offering Class B shares
("back-end sales charge shares") and Class C shares ("level sales charge
shares"). These were in addition to the already offered Class A shares
("front-end sales charge shares") and Class Y shares ("institutional shares").
Concurrently, the W&R Funds closed new sales of Class B shares due to their
non-industry standard structure and began offering Class C shares in addition to
the already offered Class Y shares. The discontinued W&R Funds' Class B shares
were converted to W&R Fund Class C shares in March 2000 and a new W&R Fund
Class B share was opened to investors in July 2000. As a result of the
discontinuation of the W&R Funds Class B shares in 1999, no contingent deferred
sales charges were collected on converted share redemptions. We expect that this
restructuring of shares will enhance competitiveness and strategic distribution
alternatives.
18
On February 23, 2000, we declared a three-for-two stock split on our
Class A and Class B common stock payable on April 7, 2000 to stockholders of
record as of March 17, 2000. All per-share and share outstanding data in the
consolidated financial statements and related notes have been restated to
reflect the stock split for all periods presented.
On March 31, 2000, we acquired Legend, a privately-held mutual fund
distribution and retirement planning company based in Palm Beach Gardens,
Florida. Through its network of 309 financial advisors, Legend serves employees
of school districts and other not-for-profit organizations nationwide.
In July 2000, we renamed our two retail mutual fund families. The United
Funds family was renamed the Waddell & Reed Advisors Funds which are available
for sale primarily through Waddell & Reed's proprietary sales force.
Concurrently, the Waddell & Reed Fund family was renamed the W&R Funds which are
available for sale through both Waddell & Reed's proprietary sales force and
selected third party distribution channels. At the same time the fund families
were renamed, we added Class A and Class B shares to the W&R Funds, which had
existing Class C and Class Y shares.
On October 23, 2000, we executed an agreement with Nationwide Financial
Services, Inc. ("Nationwide") to provide a broad span of private label insurance
and retirement products for use by W&R's financial advisors. The selection of
Nationwide to provide insurance and retirement products increases the breadth
and competitiveness of such products available to our financial advisors.
Nationwide has developed two variable annuities, a flexible premium variable
universal life product, a survivorship life product and a qualified group
retirement plan for distribution by our investment advisors.
19
SUMMARY OF OPERATING RESULTS
For the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998
------------------- ------------------- -------------------
% OF % OF % OF
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
OPERATING REVENUES:
Investment management fees.............. $253,774 48.7% 178,612 50.1 137,823 48.0
Underwriting and distribution fees...... 202,879 39.0 126,318 35.4 106,615 37.1
Shareholder service fees................ 53,436 10.3 41,525 11.6 33,808 11.8
-------- ----- ------- ----- ------- -----
Revenues excluding investment
and other income...................... 510,089 98.0 346,455 97.1 278,246 96.9
Investment and other income............. 10,613 2.0 10,202 2.9 9,043 3.1
-------- ----- ------- ----- ------- -----
Total revenues.......................... 520,702 100.0 356,657 100.0 287,289 100.0
OPERATING EXPENSES:
Underwriting and distribution........... 183,222 35.1 124,938 35.1 99,575 34.6
Compensation and related costs.......... 57,331 11.0 44,944 12.6 31,512 11.0
General and administrative.............. 28,498 5.5 19,245 5.4 8,551 3.0
Amortization of goodwill................ 5,502 1.1 3,224 0.9 2,903 1.0
Depreciation............................ 3,613 0.7 2,162 0.6 1,892 0.7
-------- ----- ------- ----- ------- -----
Total operating expenses (1)............ 278,166 53.4 194,513 54.6 144,433 50.3
OTHER ITEMS:
Interest expense........................ 14,590 2.8 6,546 1.8 704 0.2
-------- ----- ------- ----- ------- -----
Total expenses.......................... 292,756 56.2 201,059 56.4 145,137 50.5
-------- ----- ------- ----- ------- -----
Income before affiliated items
and income taxes (1).................. $227,946 43.8% 155,598 43.6 142,152 49.5
-------- ----- ------- ----- ------- -----
- ------------------------
(1) Excludes a $19.0 million pre-tax charge for write off of deferred selling
costs and a $4.6 million pre-tax loss on sale of real estate in 1999.
TOTAL REVENUES
2000 OVER 1999
Revenues excluding investment and other income increased by $163.6 million,
or 47%, to $510.1 million in 2000 compared to 1999. Total revenues, which
include investment and other income, were $520.7 million in 2000, a 46% increase
from 1999. Income before income taxes and 1999 special charges increased by 46%
to $227.9 million in 2000 compared to 1999. Income before income taxes and 1999
special charges as a percentage of total revenues was 43.8% in 2000 and 43.6% in
1999. Legend, acquired in March 2000, contributed $36.6 million to 2000
revenues. ACF, acquired in August 1999, contributed $10.8 million to 2000
revenues and $3.7 million to 1999 revenues.
1999 OVER 1998
Revenues excluding investment and other income increased by $68.2 million,
or 25%, to $346.5 million in 1999 compared to 1998. Total revenues, which
include investment and other income, were $356.7 million in 1999, a 24% increase
from 1998. Income before affiliated items, income taxes and special charges
increased by 9% to $155.6 million in 1999 compared to 1998. Income before
affiliated items, income taxes and special charges as a percentage of revenue
was 43.6% in 1999 and 49.5% in 1998.
20
INVESTMENT MANAGEMENT FEE REVENUE
INVESTMENT MANAGEMENT FEE REVENUES ARE EARNED FOR PROVIDING INVESTMENT
ADVISORY SERVICES TO THE FUNDS AND OTHER SEPARATELY-MANAGED ACCOUNTS.
2000 OVER 1999
The increase in management fee revenues came from both mutual fund and
separately managed account business. Revenue from mutual fund management fees
comprised 89% of total management fee revenue. In 2000, mutual fund revenue
increased $60.3 million, or 37%, to $225.0 million. Average mutual fund assets
under management increased 27% to $33.3 billion. Effective July 1, 1999,
management fee arrangements were restructured, increasing the overall mutual
fund management fee rates by approximately 8 basis points. In 2000, management
fee revenue from mutual funds increased at a greater rate than that of mutual
fund average assets due to a full year of benefit from the restructured rates.
The average management fee rate for mutual funds improved from 62.5 basis points
in 1999 to 67.5 basis points in 2000, representing approximately $16.7 million
in management fee revenues.
Management fee revenues from institutional and separately-managed account
business accounted for 11% of total management fee revenue. Revenue from these
accounts increased by $14.8 million, or 107%, to $28.7 million in 2000. Average
institutional and separate account assets under management increased 43% to
$5.6 billion. The average management fee rate for institutional and separately
managed accounts increased from 30.6 basis points to 44.6 basis points. This
increase was partially attributable to the acquisition of ACF in August of 1999,
as well as new accounts added with higher fee rates. Certain managed accounts
lost during the year had significantly lower rates than those currently in
effect. Managed assets of ACF contributed $6.8 million, or 46%, to the increase
in revenues from institutional and separately managed accounts. Certain separate
accounts allow for additional fees contingent upon certain relative performance
measurements being met. These performance fees were $2.8 million in 2000 and
$1.2 million in 1999.
1999 OVER 1998
Investment management fee revenue in 1999 was $178.6 million, a 30% increase
over 1998. Average assets under management were $30.3 billion for 1999, an
increase of 18% compared with 1998. The increase in management fee revenues 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.
UNDERWRITING AND DISTRIBUTION FEE REVENUE
UNDERWRITING AND DISTRIBUTION FEE REVENUES ARE COMPRISED OF COMMISSIONS
CHARGED ON SALES OF FRONT-LOAD MUTUAL FUNDS, VARIABLE PRODUCTS AND INSURANCE
PRODUCTS; RULE 12B-1 ASSET-BASED DISTRIBUTION FEES AND CONTINGENT DEFERRED SALES
CHARGES FROM BACK-END AND LEVEL LOAD FUNDS; AND FEES FROM ASSET ALLOCATION AND
OTHER DISTRIBUTION SERVICES.
2000 OVER 1999
Underwriting and distribution fee revenue increased by 61% in 2000 to
$202.9 million. Legend, acquired March 31, 2000, contributed $31.4 million to
the current year's underwriting and distribution fee revenues. Excluding
Legend's contribution, the increase was $45.1 million, or 36%. Certain
investment product sales, namely Class A share mutual funds with front-end load
charges and variable annuity products, generate commissions based on sales
volume. These commissions increased by $27.4 million, or
21
30% in 2000 over 1999. Sales of these products increased by 28%. Over 90% of
variable product sales are variable annuity products. Variable annuity product
sales were especially strong in 2000, growing 57%, while Class A share sales
grew 20%. Agency commissions paid by the underwriting insurance companies have
higher commission rates than that of Class A share mutual funds causing revenues
to increase at a higher rate than sales. The average commission rate for
variable insurance products in 2000 was 7.67%, compared with the average
commission rate for front-end mutual funds of 4.44%. In addition, an enhanced
variable annuity compensation agreement with UILIC effective January 1, 2000
added $7.3 million of asset-based fees to revenues in 2000. Revenues from
deferred load investment products (Class B and Class C shares) are primarily
derived from a 0.75% 12b-1 distribution fee on these assets, and to a lesser
extent from contingent deferred sales charges on early redemption of shares.
These revenues increased by $5.5 million, or 49%, as average assets in these
share classes increased by $779.9 million. The remaining increase in revenue
came from higher revenues from insurance products, other mutual funds and fees
from financial plans.
1999 OVER 1998
Underwriting and distribution fee revenue in 1999 increased by 18% to
$126.3 million. This increase is primarily attributable to increases in sales
volume of front-load investment products. Commission revenues from front-load
investment products, primarily the Advisors Funds Class A shares and variable
annuity products, accounted for 75%, or $14.7 million of this $19.7 million
increase in 1999 over 1998. Distribution revenues from back-end and level-load
share classes increased by $2.5 million or 28% to $11.3 million due to growth in
the asset value of these classes, partially offset by lower contingent deferred
sales charges. Commission revenues from insurance product sales were up by
$2.5 million to $19.1 million for 1999 due to increased sales of variable
universal life insurance.
SHAREHOLDER SERVICE FEE REVENUE
SHAREHOLDER SERVICE FEE REVENUES INCLUDE TRANSFER AGENCY FEES, CUSTODIAN
FEES FROM RETIREMENT PLAN ACCOUNTS AND PORTFOLIO ACCOUNTING FEES.
2000 OVER 1999
In 2000, shareholder service fee revenues increased by $11.9 million, or
29%, to $53.4 million. Excluding Legend's custodial service fee revenue
contribution of $5.1 million, shareholder service fees increased by 16% due
primarily to a 15% increase in the average number of accounts serviced.
Shareholder service fee revenue, excluding Legend's custodial contribution,
comprised 82% of transfer agency revenue and 13% of custodial fee revenue,
representing 95% of total service revenue. Transfer agency and retirement plan
custodial fees are primarily based on annual charges per account and fluctuate
based on the number of accounts serviced. The average number of shareholder
accounts was 1.88 million in 2000 compared with 1.64 million in 1999.
1999 OVER 1998
The transfer agency and custodian fee revenue, which comprised 95% of the
service fee revenues in 1999, are primarily based on annual charges per account
and fluctuate based on the number of accounts serviced. In 1999, shareholder
service fees increased by 23% to $41.5 million due primarily to a 12% increase
in the average number of accounts. In addition, a fee increase in the fourth
quarter of 1998, coinciding with the outsourcing of the data processing
component of transfer agency activities, caused the increase in revenues to
exceed the increase in number of accounts serviced. This fee increase
contributed $4.8 million to the growth in revenue in 1999.
22
UNDERWRITING AND DISTRIBUTION EXPENSE
UNDERWRITING AND DISTRIBUTION EXPENSE INCLUDES COSTS ASSOCIATED WITH THE
MARKETING, PROMOTION, AND DISTRIBUTION OF OUR PRODUCTS. THE PRIMARY COSTS ARE
COMMISSIONS AND OTHER COMPENSATION PAID TO FINANCIAL ADVISORS, SALES MANAGEMENT
AND OTHER MARKETING PERSONNEL, PLUS OVERHEAD EXPENSES RELATING TO FIELD OFFICES,
SALES PROGRAMS AND ADVERTISING.
2000 OVER 1999
Underwriting and distribution expenses for 2000 were $183.2 million, an
increase of $58.3 million or 47% compared with 1999. Legend's operations
contributed $25.2 million to underwriting and distribution expenses. Excluding
Legend's contribution, the increase was 27%. Over 70% of underwriting and
distribution expenses are direct expenses relating to sales volume such as
commissions, advisor incentive compensation, and commission overrides paid to
field management. These costs increased $23.7 million, or 26%, as sales volume
increased 21%. Other indirect costs for sales offices, compensation to marketing
support personnel, advertising and sales program costs do not fluctuate directly
with sales volume or sales revenues. These costs increased by $6.3 million, or
18%, in 2000 compared with 1999. The major items included in indirect costs
include sales program financing costs of $8.6 million, group health and accident
insurance of $3.4 million, field office compensation of $5.8 million, and
facilities costs for field offices of $11.6 million. Our distribution margin,
excluding Legend, was 7.8% compared with 1.1% for the same period in 1999.
Margin improvement was attributable to enhanced compensation agreements on
certain products and also to the fact that growth in sales exceeded that of
fixed costs such as sales support, which do not fluctuate with sales volume.
1999 OVER 1998
Underwriting and distribution expenses for 1999 were $124.9 million, an
increase of $25.4 million or 25% compared with 1998. The largest contributor to
the increase in distribution expenses was commission expense, and other sales
force compensation related to sales volume. Other factors included higher
production and asset retention incentive compensation of $6.0 million, higher
net costs relating to field offices, marketing and national advertising of
$5.5 million and increased sales program costs of $2.7 million. We began
restructuring our mutual fund products in the fourth quarter of 1999. Due to
their non-industry standard structure, the W&R Funds' Class B shares were closed
for new sales and converted into Class C shares, which have an industry standard
structure. Concurrently, the Advisors Funds began offering Class B shares and
Class C shares. Upon conversion of the W&R Funds' Class B shares, no contingent
deferred sales charges were collected for any converted share redemptions. The
deferred selling costs of $19.0 million related to the W&R Funds' Class B share
conversion were written off on November 30, 1999 concurrent with the necessary
approvals for share conversion. It was estimated that underwriting and
distribution expenses would 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.
COMPENSATION AND RELATED COSTS
2000 OVER 1999
Compensation and related costs for 2000 were $57.3 million, an increase of
$12.4 million, or 28%, compared to 1999. ACF contributed $3.9 million in 2000
and $1.2 million from the time of acquisition in August 1999 through
December 31, 1999. Legend, acquired March 31, 2000, contributed $1.3 million to
these costs in 2000. Excluding these acquisitions, compensation increased 19%,
or $8.4 million, from $43.7 million to $52.1 million. Salaries and incentive
compensation account for over 80% of total compensation. Remaining costs
included payroll taxes, group life and health insurance, and pension and savings
plan costs. Salaries and incentive bonus compensation increased 21% and 22%,
respectively, due
23
primarily to the increase in personnel and annual raises. Other compensation
costs increased at a much lower rate of 11% due to lower expenses for group
health and accident insurance as well as certain pension 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 growth in our operations added 25%
to the average employee headcount. Additional performance based compensation
accounted for $3.8 million of the increase in compensation costs due primarily
to investment performance compensation paid to portfolio managers and, to a
lesser extent, to the inclusion of middle management in incentive compensation
plans. Higher pension and health insurance costs were additional factors for the
increase in compensation costs. Pension and related costs were $0.8 million
higher due to personnel additions and a higher rate of compensation increase.
Higher health insurance costs contributed $1.1 million to the increase as
reserves were increased to reflect higher claims exposure.
GENERAL AND ADMINISTRATIVE EXPENSE
2000 OVER 1999
General and administrative expenses, which reflect operating costs other
than those related to compensation and to distribution efforts, increased by
$9.3 million, or 48%, to $28.5 million for 2000. ACF contributed $1.0 million in
2000 and $0.5 million from the time of acquisition in August 1999 through
December 31, 1999. Legend, acquired March 31, 2000, contributed $3.2 million to
these costs in 2000. Excluding these costs from recently acquired companies,
general and administrative expenses increased by $5.6 million, or 29%, a result
of investments made to facilitate growth, notably in computer systems and
services and costs associated with implementing new funds and share classes.
Also contributing to the increase were higher rental and facilities costs from
expanding operations.
1999 OVER 1998
General and administrative expenses were up by $10.7 million, or 125%, to
$19.2 million for 1999. Approximately $5.4 million of this increase was
attributable to the implementation of a new transfer agency system in the fourth
quarter of 1998. Higher shareholder service fee revenues coinciding with this
implementation offset most of the increased costs. The growth of our operations
added to higher administrative costs, including the acquisition of ACF, new
consulting arrangements, proxy and shareholder meeting costs, and additional
facilities rental to accommodate growth.
INVESTMENT AND OTHER INCOME
2000 OVER 1999
Investment and other income increased by $0.4 million from $10.2 million in
1999 to $10.6 million in 2000. In 2000, investment and other income included
$2.5 million of realized gains from the sale of investment securities sold to
partially fund the Legend acquisition. In 1999, $1.0 million was attributable to
net rental income from real estate properties which were sold in December of
1999. Excluding these items, interest income declined by $1.1 million, or 12%,
to $8.1 million due to lower amounts invested in interest-bearing corporate and
municipal bonds. Average invested cash and marketable securities were
$136.7 million in 2000 compared with $142.1 million in 1999.
1999 OVER 1998
Investment and other income increased by $1.2 million to $10.2 million in
1999. Average invested cash and marketable securities were $142.1 million in
1999 compared with $144.8 million in 1998. Substantially
24
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.
DEPRECIATION
2000 OVER 1999
Depreciation of property and equipment increased by $1.5 million, or 67%, in
2000 to $3.6 million. The acquisitions of ACF on August 9, 1999 and Legend on
March 31, 2000 accounted for $320 thousand of the increase. The remaining
difference was primarily the result of additions to furniture and equipment in
field offices and information systems in our home office. Our new building,
which was completed and placed into service in September 2000, was another
contributing factor to the increase in depreciation expense.
1999 OVER 1998
Depreciation of property and equipment increased by $270 thousand, or 14% in
1999 to $2.2 million primarily due to furniture and equipment relating to
opening additional field offices and upgrading and enhancing existing offices.
INTEREST EXPENSE
2000 OVER 1999
We entered into a $200.0 million credit facility arrangement in October of
1998. This facility is renewable annually in October, was renewed in
October 1999 and was increased to $220.0 million in March 2000. The facility is
expandable to $330.0 million, whereby syndicates could, at their option upon our
request, increase the loans by $110.0 million. The credit facility was used to
fund share repurchases and facilitate the acquisitions of Legend and ACF.
Beginning in the third quarter of 2000, we also implemented a money market loan
program. The money market loan program, which is similar to commercial paper,
was utilized to repay amounts borrowed under the credit facility. In
October 2000, all amounts borrowed on the credit facility were repaid. On
August 15, 2000, we filed a $400.0 million universal shelf registration whereby
proceeds received could be used for general corporate purposes, including
repaying short-term debt outstanding. On January 18, 2001, we issued
$200.0 million in principal amount of 7.5% senior notes due 2006 resulting in
net proceeds of approximately $197.6 million which was used to repay short-term
debt outstanding and for general corporate purposes. As a result, for purposes
of these financial statements, $175.3 million of short-term debt outstanding at
December 31, 2000 was reclassified as long-term. During the year, the average
balance on the combined short-term debt was $195.8 million for 2000 and
$106.1 million for 1999. The average interest rate applied, excluding other
costs, was 7.01% for 2000 and 5.73% for 1999.
1999 OVER 1998
The credit facility discussed above was used 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 $106.1 million. In
1999, interest expense and related facility costs were $6.5 million, compared to
$704 thousand for 1998. At the end of 1999, we had an outstanding balance of
$125.3 million under this credit facility, compared to $40.1 million at the end
of 1998.
25
LOSS ON THE SALE OF REAL ESTATE
On December 28, 1999, we completed the sale of all multi-tenant properties
to unrelated third parties. Proceeds from the sale were $16.5 million resulting
in a $4.6 million pretax loss.
WRITE-OFF OF DEFERRED SELLING COSTS
We began restructuring our mutual fund products in the fourth quarter of
1999. Due to their non-industry-standard structure, the W&R Funds' Class B
shares were closed for new sales and were converted into Class C shares in
March 2000, which have an industry standard structure. Concurrently, the
Advisors Funds began offering Class B shares and Class C shares. Upon conversion
of the W&R Class B shares, no contingent deferred sales charges were collected
for any converted share redemptions. The deferred selling costs related to the
W&R Funds' Class B shares in the amount of $19.0 million (pre-tax) were written
off on November 30, 1999 concurrent with the necessary approvals for share
conversion. By offering additional classes of mutual fund shares and closing
funds with non-industry standard structures, our mutual funds are more
consistent with that of the industry, provide our clients with more choices and
greater value, and accommodate additional changes for strategic distribution
flexibility.
AFFILIATED INTEREST INCOME AND EXPENSE
Prior to its initial public offering in March of 1998, we had various notes
payable and notes receivable with Torchmark and certain subsidiaries of
Torchmark. The affiliated interest income and expense as reported for 1998
pertain to these notes and were prepaid with proceeds from the offering.
INCOME TAXES
Our effective income tax rate was 39.0%, 38.1%, and 38.2%, in 2000, 1999,
and 1998, respectively.
FINANCIAL CONDITION
At December 31, 2000, our total assets were $422.2 million, up
$87.1 million from December 31, 1999. In 2000, we repurchased 5.1 million shares
of our common stock at a total cost of $108.4 million compared to 8.7 million
shares of our common stock at a total cost of $132.2 million during 1999. Cash
flows from operations, the credit facility, and the money market loan program
were utilized to fund these share repurchases. At December 31, 2000, our
outstanding debt, including principal and accrued interest was $175.3 million
compared to $125.3 million on December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities increased by $60.5 million to
$173.9 million for 2000 due to higher net income from operations, excluding
non-cash items, as well as the timing of cash received and cash paid on assets
and liabilities. Net cash used in investing activities in 2000 was
$59.8 million, compared to $4.0 million net cash provided in 1999. Proceeds from
the sale and maturity of investment securities exceeded purchases of investment
securities by $30.9 million in 2000. At December 31, 2000, we had
$125.7 million in cash and marketable investment securities, of which
$21.9 million was restricted for the benefit of customers in compliance with
securities industry regulations. Cash and marketable securities at December 31,
1999 were $148.0 million, of which $17.1 million was restricted. Other investing
activities in 2000 used $30.4 million for the additions of property and
equipment, and $60.3 million for the acquisition of subsidiaries. In 2000, we
used $107.0 million in net financing activities, compared with $86.6 million in
1999. In 2000, we repurchased 3.3 million shares of Class A and 1.8 million
shares of Class B common stock, the combined cost of which was $108.4 million,
and paid $29.5 million in cash dividends. Net borrowings of $50.0 million on the
credit facility were utilized in 2000 to finance share repurchases and the
acquisition of Legend. The $220.0 million, 364-day revolving credit facility,
expandable to $330.0 million at the syndicates' option upon our request, had no
balance outstanding at December 31, 2000.
26
Management believes its available cash, marketable securities, and expected
cash flow from operations will be sufficient to fund dividends, operations,
advance sales commissions, obligations, and other reasonably foreseeable cash
needs. We may also continue to repurchase shares of our common stock from time
to time, as management deems appropriate. The share repurchases could be
financed by our available cash and investments and/or the use of our revolving
credit facility or utilization of the money market loan program.
SUBSEQUENT EVENTS
On January 18, 2001, we completed an offering of $200.0 million in principal
amount of 7.5% senior notes due 2006 resulting in net proceeds of approximately
$197.6 million (net of discounts, commissions and estimated expenses.) The notes
represent senior unsecured obligations and are rated "Baa2" by Moody's and "BBB"
by Standard & Poor's. The notes pay interest semi-annually on January 18 and
July 18 at a rate of 7.5% per annum. Proceeds from the notes will be used to
repay short-term debt and for general corporate purposes. Total debt outstanding
as of December 31, 2000 was $175.3 million.
On March 2, 2001, we repurchased 4.0 million shares of our Class B common
stock at an aggregate cost, including commissions, of $122.0 million. These
shares were repurchased at $30.50 per share.
On March 7, 2001, we completed the sale of our two home office buildings to
Mesirow Realty Sale-Leaseback ("Mesirow"). We also entered into an agreement
with Mesirow to lease the buildings back for a period of fifteen years. The net
proceeds from this sale were $28.2 million and resulted in a realized gain of
approximately $1.8 million, which will be deferred and amortized over the term
of the operating lease.
UNITED INVESTORS LIFE INSURANCE COMPANY LITIGATION
Currently, we are in litigation with UILIC, one of our insurance providers,
and other related parties over terms of a compensation agreement signed in
July 1999 by UILIC and Waddell & Reed, Inc. The compensation is paid by UILIC to
us on variable annuities underwritten by UILIC and distributed by us. The
agreement provides for us to be paid annual compensation of 0.25% on all
variable annuity policies' assets under management issued after January 1, 2000,
and annual compensation of 0.20% on variable annuity policies' assets under
management issued before that date. This agreement added $7.3 million of
asset-based fees to revenues in 2000. Payments are continuing but the validity
and duration of that agreement has been challenged by UILIC in a complaint filed
in May 2000, in the Circuit Court of Jefferson County, Alabama in which we have
subsequently named Torchmark as a third party defendant in a tortious
interference claim. UILIC has taken the position that regardless of the validity
of the compensation agreement, the compensation payable pursuant to this
agreement terminates on April 30, 2001. Management believes that the Company
will prevail on the merits of the litigation and that compensation pursuant to
the July 1999 compensation agreement will continue, pursuant to the terms of the
agreement, as long as the variable annuity policies' assets are in place and the
variable annuity policies in question are in force. Moreover, we do not foresee
any additional risk to existing variable policy assets and anticipate continued
growth in sales of variable annuity products.
As previously reported, a number of Torchmark affiliates terminated us as
investment adviser for certain insurance company general account assets and
pension plan assets totaling $768.0 million with an average management fee of 25
basis points. These accounts paid approximately $1.9 million in annual
investment management fees. The only other Torchmark-affiliated assets for which
we serve as investment adviser are approximately $37.9 million of mutual funds
in 401(k) plans of Torchmark affiliates.
TERMINATION OF AGREEMENTS BY UNITED INVESTORS LIFE INSURANCE COMPANY
On February 28, 2001, UILIC terminated the Principal Underwriting Agreement
by and between UILIC and the Company, effective April 30, 2001. This agreement
provided for the sale of variable
27
products underwritten by UILIC by our financial advisors. As a result, beginning
May 1, 2001, Nationwide will become the primary provider of variable products
for distribution by our financial advisors. Management believes that the
profitability of the two insurers' variable product lines is equivalent and does
not anticipate any material adverse effects from the termination of the
Principal Underwriting Agreement.
In addition, on February 28, 2001, UILIC terminated the General Agent
Contract by and between UILIC and the Company, effective December 31, 2001. This
agreement provides for the sale of non-variable life insurance products
underwritten by UILIC and distributed by our financial advisors. We are
currently in the process of negotiating with several insurance carriers for the
sale of their products by our financial advisors to complement the other
non-UILIC life products currently available for distribution by our financial
advisors. In addition, the Company has recently entered into an agreement with
BISYS to provide our financial advisors with access to an extensive array of
traditional life and disability insurance products for sale to our clients. As a
result, management does not anticipate any material adverse effects from the
termination of the UILIC General Agent Contract.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133 "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133"). This statement, which is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000,
establishes accounting and reporting standards for derivative financial
instruments and for hedging activities. It requires companies to recognize all
derivatives as either assets or liabilities, with the instruments measured at
fair value. The accounting for changes in fair value of a derivative depends on
the intended use of the derivative and the resulting designation. This statement
was amended in June 2000 with Statement of Financial Accounting Standards
No. 138, "ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING
ACTIVITIES" ("SFAS 138"). The FASB encourages early adoption of SFAS 133;
however, the provisions of the standard should not be retroactively applied to
financial statements of periods prior to adoption. The adoption of SFAS 133, as
amended, is not expected to have a material impact on us.
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS"
("SAB101"), which among other guidance, clarifies certain conditions to be met
in order to recognize revenue. SAB 101 summarizes some of the SEC
interpretations of generally accepted accounting principles relating to revenue
recognition. In June 2000, the SEC issued Staff Accounting Bulletin No. 101B
which delayed the implementation of SAB 101 until the fourth quarter of fiscal
years beginning after December 15, 1999 and the provisions are to be
retroactively applied to the entire year. The implementation of SAB 101 did not
have a material effect on our financial statements.
In March 2000, the FASB issued Interpretation No. 44, "ACCOUNTING FOR
CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF APB
OPINION NO. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") for certain issues. It
does not address any issues related to the application of the fair value method
set forth in Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" ("SFAS 123"). Among other issues, FIN 44 clarifies the definition
of "employee" for purposes of applying APB 25, the criteria for determining
whether a plan qualifies as a non-compensatory plan, the accounting effects of
modifications to the terms of a previously fixed stock option or award and the
accounting for an exchange of stock compensation awards in a business
combination. For those issues that affect us, FIN 44 was effective July 1, 2000.
We do not expect that the application of FIN 44 will have a material impact on
the financial statements.
SEASONABILITY AND INFLATION
We do not believe our operations are subject to significant seasonal
fluctuations. We do not believe that inflation has had a significant impact on
operations.
28
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 that 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 investment, either of which could
adversely affect our revenues, earnings and growth prospects. Because our
revenues are, to a large extent, investment management fees 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. The combination of adverse markets
effecting sales and investment management fees could compound on each other and
materially effect earnings. Adverse conditions in the U.S. domestic stock market
are particularly material to us due to high concentration of assets under
management in that market.
THERE MAY BE ADVERSE EFFECTS ON OUR REVENUES AND EARNINGS IF OUR FUNDS'
PERFORMANCE DECLINES. Success in the investment management and mutual fund
businesses is dependent on the investment performance of client accounts. Good
relative performance stimulates sales of the Funds' shares and tends to keep
redemptions low. Sales of the Funds' shares in turn generate higher management
fees and distribution revenues. Good relative performance also attracts private
institutional accounts. Conversely, poor relative 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 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 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
FINANCIAL ADVISORS. 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 and select third party distributors 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
29
and product lines, services, and may also have substantially greater assets
under management. Many larger mutual fund complexes have developed relationships
with brokerage houses with large distribution networks, which may enable these
fund complexes to reach broader client bases. In recent years, there has been a
trend of consolidation in the mutual fund industry resulting in stronger
competitors with greater financial resources than us. There has also been a
trend toward online Internet financial services. If existing customers stop
investing with us and instead invest with our competitors, or if potential
customers decide to invest with our competitors, it would cause our market
share, revenues and income to decline.
POTENTIAL MISUSE OF FUNDS AND INFORMATION IN THE POSSESSION OF OUR ADVISORS
COULD RESULT IN LIABILITY TO OUR CLIENTS. Our financial advisors handle a
significant amount of funds and financial and personal information for our
clients. Although we have implemented a system of controls to minimize the risk
of fraudulent taking or misuse of funds and information, there can be no
assurance that our controls will be adequate or that 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 and Class B common stock. The declaration and payment of dividends
is subject to the discretion of our Board. 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 and 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 with 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
affect 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. In addition, 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 and Class B common stock. Generally, the
rights 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
30
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, 364-day revolving line of
credit facility with various lenders. The facility is expandable to
$330.0 million, whereby the banks could, at their option upon our request,
increase the loans by $110.0 million. At December 31, 2000, there was no balance
outstanding under this line of credit. In August 2000, we also began utilizing a
money market loan program, which functions similarly to commercial paper. At
December 31, 2000, the outstanding balance was $160.0 million. The terms and
conditions of the revolving credit facility and the money market loan program
impose restrictions that affect, among other things, our ability to incur debt,
make capital expenditures, merge, sell assets, make distributions or create or
incur liens. Availability of our credit facility is also subject to certain
financial covenants. Our ability to comply with the covenants can be affected by
events beyond our control and there can be no assurance that we will achieve
operating results that comply with the provisions of the credit agreement. A
breach of any of these covenants could result in a default under our credit
facility. In the event of a default, the banks 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, the
refinancing of our revolving credit facility, and/or 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."
THERE ARE NO ASSURANCES THAT THE COMBINATION OF OUR TWO CLASSES OF COMMON
STOCK WILL BE APPROVED OR THAT THE EXPECTED EFFECTS WILL OCCUR. Our
stockholders will consider and vote on a proposal to merge the Company and a
wholly-owned subsidiary that will effect the combination of our two classes of
common stock into a single class of stock. If the merger is approved, we
anticipate that (1) the combination of our two classes of common stock will have
no effect on our business or operations, as currently conducted or afterwards;
(2) neither we nor the stockholders will recognize taxable gain or loss upon the
conversion of the Class B stock and the aggregate tax basis in, and the holding
period of, the newly issued shares of Class A common stock will be the same as
the shares of Class B common stock exchanged; (3) the merger will not have any
material impact on our stock option plans, other benefit plans or our rights
agreement, except for technical amendments to the agreement to eliminate any
references to the Class B common stock; (4) there will not be any effect on
earnings per share or book value per share; (5) the analysis and valuation of a
single class of stock will be facilitated; and (6) it will enhance interest in
our stock and increase liquidity and trading efficiency. However, we cannot
guarantee or insure that the merger will be approved or, if approved, that any
of the anticipated effects, including an increase in liquidity and trading
efficiency of the single class of common stock, will occur.
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,
31
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
insure 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.
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 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.
THE RESTRUCTURING OF OUR MUTUAL FUND PRODUCTS TO ENHANCE OUR COMPETITIVENESS
AND DISTRIBUTION CHANNELS MAY NOT BE SUCCESSFUL. In October 1999, we commenced
restructuring 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.
OUR HOLDING COMPANY STRUCTURE RESULTS IN STRUCTURAL SUBORDINATION AND MAY
AFFECT OUR ABILITY TO MAKE PAYMENTS ON OUR SENIOR UNSECURED NOTES. On
January 18, 2001, we completed a universal shelf offering of $200.0 million
principal amount of 7.5% senior notes due 2006. The notes represent senior
unsecured obligations exclusively of Waddell & Reed Financial, Inc. We are a
holding company and, accordingly, substantially all of our operations are
conducted through our subsidiaries. As a result, our cash flow and our ability
to service our debt, including the notes, is dependent upon the earnings of our
subsidiaries. In addition, we are dependent on the distribution of earnings,
loans or other payments by our subsidiaries to us. Our subsidiaries are separate
and distinct legal entities. Our subsidiaries have no obligation to pay any
amounts due on the notes or provide us with funds for our payment obligations,
whether by dividends, distributions, loans or other payments. In addition, any
payment of dividends, distributions, loans or advances to by our subsidiaries
could be subject to statutory or contractual restrictions. Payments to us by our
subsidiaries will also be contingent upon our subsidiaries' earnings and
business considerations. Our right to receive any assets of any of our
subsidiaries upon their liquidation or reorganization, and therefore the right
of the holders of the notes to participate in those assets, would be effectively
subordinated to the claims of that subsidiary's creditors, including trade
creditors. In addition, even if we were a creditor of any of our subsidiaries,
our rights as a creditor would subordinate to any security interest in the
assets of our subsidiaries and any indebtedness of our subsidiaries senior to
that held by us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk from changes in interest rates. Our cash
equivalents and short-term investments and our outstanding short-term debt bear
variable interest rates. We have 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 our results of operations.
32
As noted in Item 7, our revenues and net income are based in part on the
value of the investment portfolios managed. Accordingly, financial market
declines will negatively impact our 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 36 setting forth our consolidated financial statements,
together with the report of KPMG LLP dated January 24, 2001 on page 37.
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
our definitive proxy statement for our 2001 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is incorporated herein by reference to
our definitive proxy statement for our 2001 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A under the Exchange Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this Item 12 is incorporated herein by reference to
our definitive proxy statement for our 2001 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A under the Exchange Act.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item 13 is incorporated herein by reference to
our definitive proxy statement for our 2001 Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A under the Exchange Act.
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 36 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. We filed no reports on Form 8-K during
the fourth quarter of 2000.
(c) Exhibits. Reference is made to the Index to Exhibits on page
60 for a list of all exhibits filed as part of this Report.
33
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 19, 2001.
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
---- ----- ----
/s/ KEITH A. TUCKER Chairman of the Board,
------------------------------------------- Chief Executive Officer March 19, 2001
Keith A. Tucker and Director (Principal
Executive Officer)
/s/ HENRY J. HERRMANN President, Chief
------------------------------------------- Investment Officer and March 19, 2001
Henry J. Herrmann Director
/s/ ROBERT L. HECHLER* Executive Vice President
------------------------------------------- and Director March 19, 2001
Robert L. Hechler
/s/ JOHN E. SUNDEEN, JR. Senior Vice President,
------------------------------------------- Chief Financial Officer March 19, 2001
John E. Sundeen, Jr. and Treasurer (Principal
Financial Officer)
/s/ D. TYLER TOWERY Vice President and
------------------------------------------- Controller (Principal March 19, 2001
D. Tyler Towery Accounting Officer)
/s/ JERRY W. WALTON*
------------------------------------------- Director March 19, 2001
Jerry W. Walton*
/s/ RONALD C. REIMER*
------------------------------------------- Director March 19, 2001
Ronald C. Reimer*
/s/ WILLIAM L. ROGERS*
------------------------------------------- Director March 19, 2001
William L. Rogers*
34
NAME TITLE DATE
---- ----- ----
/s/ JAMES M. RAINES*
------------------------------------------- Director March 19, 2001
James M. Raines*
/s/ DANIEL C. SCHULTE Vice President, General
------------------------------------------- Counsel and Secretary March 19, 2001
Daniel C. Schulte
*By: ATTORNEY-IN-FACT
35
WADDELL & REED FINANCIAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Waddell & Reed Financial, Inc.:
Independent Auditors' Report................................ 37
Consolidated Balance Sheets at December 31, 2000 and
December 31, 1999......................................... 38
Consolidated Statements of Income for each of the years in
the three-year period ended December 31, 2000............. 40
Consolidated Statements of Stockholders' Equity for each of
the years in the three-year period ended December 31,
2000...................................................... 41
Consolidated Statements of Comprehensive Income for each of
the years in the three-year period ended December 31,
2000...................................................... 42
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 2000.......... 43
Notes to Consolidated Financial Statements.................. 44
36
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, 2000 and 1999 and the
related consolidated statements of income, stockholders' equity, comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Kansas City, Missouri
January 24, 2001
37
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS
2000 1999
-------- --------
(IN THOUSANDS)
Assets:
Cash and cash equivalents................................. $ 68,082 60,977
Investment securities, available-for-sale................. 57,639 87,045
Receivables:
Funds and separate accounts............................. 13,963 12,528
Customers and other..................................... 21,477 14,610
Deferred income taxes....................................... 45 37
Prepaid expenses and other current assets................... 4,868 7,111
-------- -------
Total current assets.................................... 166,074 182,308
-------- -------
Property and equipment, net................................. 55,453 27,633
Deferred sales commissions, net............................. 10,108 1,851
Goodwill (net of accumulated amortization of $31,995 and
$26,493).................................................. 180,173 112,994
Deferred income taxes....................................... 1,026 5,665
Other assets................................................ 9,352 4,622
-------- -------
Total assets............................................ $422,186 335,073
======== =======
See accompanying notes to consolidated financial statements.
38
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
2000 1999
--------- --------
(IN THOUSANDS)
Liabilities:
Accounts payable.......................................... $ 41,558 34,002
Accrued sales force compensation.......................... 18,741 14,578
Accrued other compensation................................ 11,774 10,998
Short-term notes payable.................................. -- 125,307
Income taxes payable...................................... 126 8,284
Accrued purchase price liability for acquired
subsidiaries............................................ 13,110 --
Other current liabilities................................. 8,429 5,458
--------- --------
Total current liabilities............................... 93,738 198,627
--------- --------
Long-term debt............................................ 175,320 --
Accrued pensions and post-retirement costs................ 11,295 10,103
Other..................................................... 223 --
--------- --------
Total liabilities....................................... 280,576 208,730
--------- --------
Stockholders' equity:
Common stock (See table below)............................ 997 997
Additional paid-in capital................................ 251,990 238,434
Retained earnings......................................... 206,589 97,129
Deferred compensation..................................... (10,950) (11,246)
Treasury stock (See table below).......................... (305,008) (198,360)
Accumulated other comprehensive income.................... (2,008) (611)
--------- --------
Total stockholders' equity.............................. 141,610 126,343
--------- --------
Total liabilities and stockholders' equity.................. $ 422,186 335,073
========= ========
2000 1999
COMMON STOCK ------------------------- -------------------------
($0.01 PAR VALUE) CLASS A CLASS B CLASS A CLASS B
----------------- ----------- ----------- ----------- -----------
Authorized................ 150,000,000 100,000,000 150,000,000 100,000,000
Issued.................... 48,213,261 51,487,500 48,213,261 51,487,500
Outstanding............... 43,270,902 40,139,617 44,478,318 41,971,870
Treasury stock............ 4,942,359 11,347,883 3,734,943 9,515,630
See accompanying notes to consolidated financial statements.
39
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Revenues:
Investment management fees.............................. $253,774 178,612 137,823
Underwriting and distribution fees...................... 202,879 126,318 106,615
Shareholder service fees................................ 53,436 41,525 33,808
Investment and other income............................. 10,613 10,202 9,043
-------- ------- -------
Total revenues........................................ 520,702 356,657 287,289
-------- ------- -------
Expenses:
Underwriting and distribution........................... 183,222 124,938 99,575
Compensation and related costs.......................... 57,331 44,944 31,512
General and administrative.............................. 28,498 19,245 8,551
Depreciation............................................ 3,613 2,162 1,892
Amortization of goodwill................................ 5,502 3,224 2,903
Interest expense........................................ 14,590 6,546 704
Loss on sale of real estate............................. -- 4,592 --
Write-off of deferred selling costs..................... -- 18,981 --
-------- ------- -------
Total expenses........................................ 292,756 224,632 145,137
-------- ------- -------
Income before affiliated items and provision for
income taxes........................................ 227,946 132,025 142,152
Affiliated items:
Interest income......................................... -- -- 1,950
Interest expense........................................ -- -- (8,604)
-------- ------- -------
Income before provision for income taxes................ 227,946 132,025 135,498
Provision for income taxes................................ 88,941 50,258 51,763
-------- ------- -------
Net income.............................................. $139,005 81,767 83,735
======== ======= =======
Net income per share:
Basic................................................... $ 1.67 0.91 0.85
======== ======= =======
Diluted................................................. $ 1.60 0.89 0.84
======== ======= =======
Weighted average shares outstanding--basic................ 83,362 89,456 98,681
--diluted................. 86,895 91,548 99,269
Dividends declared per common share....................... $ 0.35 0.35 0.35
See accompanying notes to consolidated financial statements.
40
WADDELL & REED FINANCIAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
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,
1997........................ 63,450 $635 (212) -- (230,658) -- --
Net income.................... -- -- -- 73,712 10,023 -- --
Issuance of restricted shares
and other................... 446 4 5,259 -- -- (12,494) --
IPO proceeds.................. 35,805 358 295,021 -- 220,635 -- --
Dividends paid................ -- -- -- (26,387) -- -- --
Other distributions........... -- -- (54,129) -- -- -- --
Treasury stock repurchases.... -- -- -- -- -- -- (74,833)
Unrealized loss on investment
securities.................. -- -- -- -- -- -- --
------ ---- ------- ------- -------- ------- --------
Balance at December 31,
1998........................ 99,701 997 245,939 47,325 -- (12,494) (74,833)
Net income.................... -- -- -- 81,767 -- -- --
Recognition of deferred
compensation................ -- -- -- -- -- 1,370 --
Issuance of restricted shares
and other................... -- -- 6 -- -- (122) 116
Dividends paid................ -- -- -- (31,963) -- -- --
Exercise of stock options..... -- -- (15,964) -- -- -- 8,537
Tax benefit from exercise of
options..................... -- -- 8,453 -- -- -- --
Treasury stock repurchases.... -- -- -- -- -- -- (132,180)
Unrealized loss on investment
securities.................. -- -- -- -- -- -- --
------ ---- ------- ------- -------- ------- --------
Balance at December 31,
1999........................ 99,701 997 238,434 97,129 -- (11,246) (198,360)
Net income.................... -- -- -- 139,005 -- -- --
Recognition of deferred
compensation................ -- -- -- -- -- 1,625 --
Issuance of restricted shares
and other................... -- -- -- -- -- (1,329) --
Dividends paid................ -- -- -- (29,545) -- -- --
Exercise of stock options..... -- -- (19,499) -- -- -- 1,771
Tax benefit from exercise of
options..................... -- -- 33,055 -- -- -- --
Treasury stock repurchases.... -- -- -- -- -- -- (108,419)
Unrealized loss on investment
securities.................. -- -- -- -- -- -- --
------ ---- ------- ------- -------- ------- --------
Balance at December 31,
2000........................ 99,701 $997 251,990 206,589 -- (10,950) (305,008)
====== ==== ======= ======= ======== ======= ========
ACCUMULATED TOTAL
OTHER STOCKHOLDER'S
COMPREHENSIVE EQUITY
INCOME (DEFICIT)
------------- -------------
(IN THOUSANDS)
Balance at December 31,
1997........................ 344 (229,891)
Net income.................... -- 83,735
Issuance of restricted shares
and other................... -- (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
and other................... -- --
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
Net income.................... -- 139,005
Recognition of deferred
compensation................ -- 1,625
Issuance of restricted shares
and other................... -- (1,329)
Dividends paid................ -- (29,545)
Exercise of stock options..... -- (17,728)
Tax benefit from exercise of
options..................... -- 33,055
Treasury stock repurchases.... -- (108,419)
Unrealized loss on investment
securities.................. (1,397) (1,397)
------ --------
Balance at December 31,
2000........................ (2,008) 141,610
====== ========
See accompanying notes to consolidated financial statements.
41
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Net income.................................................. $139,005 81,767 83,735
Other comprehensive income:
Net unrealized appreciation (depreciation) of investments
during the period, net of income taxes of $428, $(387) and
$(150).................................................... 664 (616) (249)
Reclassification adjustment for amounts included in net
income, net of income taxes of $(1,290), $(124) and $64... (2,061) (197) 107
-------- ------ ------
Comprehensive income........................................ $137,608 80,954 83,593
======== ====== ======
See accompanying notes to consolidated financial statements.
42
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
--------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net income................................................ $ 139,005 81,767 83,735
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 9,268 5,386 4,795
(Gain) loss on sale of investments...................... (2,111) (375) 171
Recognition of deferred compensation.................... 1,625 1,370 1,333
Loss on sale and retirement of fixed assets............. 22 67 75
Write-off of deferred selling cost...................... -- 18,981 --
Loss on sale of real estate............................. -- 4,592 --
Capital gains and dividends reinvested.................. (1,394) (471) (399)
Deferred income taxes................................... 5,559 (4,089) (1,988)
Changes in assets and liabilities net of acquisition:
Receivables from funds and separate accounts.......... (1,435) (6,788) (1,709)
Other receivables..................................... 373 15,719 (15,254)
Due to/from affiliates--operating..................... -- -- 4,509
Other assets.......................................... (10,291) (12,928) (3,661)
Accounts payable...................................... 7,520 5,457 5,375
Other liabilities..................................... 25,794 4,699 10,237
--------- -------- --------
Net cash provided by operating activities................... 173,935 113,387 87,219
--------- -------- --------
Cash flows from investing activities:
Additions to investment securities...................... (15,609) (13,001) (110,652)
Proceeds from sales of investment securities............ 45,307 635 24,020
Proceeds from maturity of investment securities......... 1,185 27,995 2,424
Additions to property and equipment..................... (30,402) (9,096) (7,602)
Investment in real estate............................... -- 551 (5,913)
Proceeds from sale of real estate....................... -- 16,452 --
Acquisition of subsidiaries, (net of cash acquired)..... (60,290) (19,557) --
Other................................................... -- -- 7
--------- -------- --------
Net cash provided by (used in) investing activities......... (59,809) 3,979 (97,716)
--------- -------- --------
Cash flows from financing activities:
Proceeds from IPO....................................... -- -- 516,014
Net borrowings.......................................... 50,000 85,000 40,000
Cash dividends.......................................... (29,545) (31,963) (26,387)
Change in due to/from affiliates--nonoperating.......... -- -- (479,373)
Purchase of treasury stock.............................. (108,419) (132,180) (74,833)
Exercise of stock options............................... 8,327 869 --
Other stock transactions................................ (27,384) (8,295) (8,564)
--------- -------- --------
Net cash used in financing activities....................... (107,021) (86,569) (33,143)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 7,105 30,797 (43,640)
Cash and cash equivalents at beginning of year.............. 60,977 30,180 73,820
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 68,082 60,977 30,180
========= ======== ========
Cash paid for:
Income taxes.............................................. $ 55,346 50,551 48,830
Interest.................................................. 14,013 5,932 628
See accompanying notes to consolidated financial statements
43
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999, AND 1998
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as
the "Company," "we," "our" and "us") derive their revenues primarily from
investment management, investment product underwriting and distribution, and
shareholder services administration provided to the Waddell & Reed Advisors
Funds (the "Advisors Funds"), the W&R Funds ("W&R Funds"), the W&R Target Funds
("Target Funds") (collectively, the "Funds"), and institutional and separate
accounts. The Funds and the institutional and separate accounts operate under
various rules and regulations set forth by the Securities and Exchange
Commission (the "SEC"). 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. Our revenues are largely dependent on the total
value and composition of assets under management, which include mainly domestic
equity securities, but also include debt securities and international equities.
Accordingly, fluctuations in financial markets and composition of assets under
management impact revenues and results of operations. For 2000, management fees
from the Advisors Core Investment Fund were $50.0 million or 10% of total
Company revenues. The Advisors Core Investment Fund had a net asset value of
$8.5 billion at December 31, 2000 and was our largest fund.
Prior to December 1997, we were known as United Investors Management
Company. In the first quarter of 1998, our insurance operations, United
Investors Life Insurance Company, were distributed to Torchmark Corporation and
a subsidiary of Torchmark Corporation (together, "Torchmark"). We were wholly
owned by Torchmark until March 4, 1998, when we completed the initial public
offering of our Class A common stock (the "Offering"), 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 our outstanding Class A and Class B common stock. On November 6, 1998,
Torchmark distributed its remaining ownership interest in us by means of a
tax-free spin-off to the stockholders of Torchmark of all our common stock held
by Torchmark.
BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America and include the accounts of the Company and our subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Amounts in the accompanying financial statements and notes are
rounded to the nearest thousand. Certain amounts in the prior year's financial
statements have been reclassified to conform to the 2000 presentation.
STOCK SPLIT
On February 23, 2000, we declared a three-for-two stock split effected in
the form of a dividend on our Class A and Class B common stock payable April 7,
2000 to stockholders of record as of March 17, 2000. Accordingly, all per share
and share outstanding data in the consolidated financial statements and related
notes have been restated to reflect the stock split for all periods presented.
44
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
Accounting principles generally accepted in the United States of America
require us to estimate certain amounts. We have 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 these principles. Actual results could differ from
those estimates.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value for cash, short-term investments, debt, receivables and payables
approximates carrying value. Fair values for investment securities are based on
quoted market prices, where available. Otherwise, fair values are based on
quoted market prices of comparable instruments.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and short-term investments.
We consider all highly liquid debt instruments with original maturities of
90 days or less to be cash equivalents.
INVESTMENT SECURITIES AND INVESTMENTS IN AFFILIATED MUTUAL FUNDS
All investments in debt securities and mutual funds are classified as
available-for-sale or trading. As a result, these investments are recorded at
fair value. For available-for-sale securities, 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. For trading
securities, unrealized holding gains and losses, net of related tax effects, are
included in earnings. 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.
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
Property and equipment is carried at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets.
SOFTWARE DEVELOPED FOR INTERNAL USE
Certain internal and external costs incurred in connection with developing
or obtaining software for internal use are capitalized in accordance with the
American Institute of Certified Public Accountants' Statement of Position
No. 98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE." These capitalized costs are included in Property and
Equipment, net on the Consolidated Balance Sheets and are amortized when the
software project is complete, over the estimated useful life of the software
that was put into production.
45
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, arose in connection with our acquisition by Torchmark, our
August 1999 acquisition of Austin Calvert & Flavin, Inc. ("ACF") and our
March 2000 acquisition of The Legend Group ("Legend"). Amortization related to
our acquisition by Torchmark is on a straight-line basis over 40 years.
Amortization related to our acquisition of ACF and Legend is on a straight-line
basis over 25 years. We assess 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
We defer certain costs, principally sales commissions and related
compensation, which are paid to financial advisors in connection with the sale
of certain shares of mutual funds. In October 1999, we commenced the
restructuring of our mutual fund products at which time the (non-industry
standard) W&R Funds Class B shares were closed for new sales. As a result of the
discontinuation of these shares, we wrote off the balance of related deferred
selling costs in the amount of $18,981,000 pre-tax in the fourth quarter of
1999. These discontinued W&R Funds' Class B shares were converted to W&R Funds
Class C shares in March 2000. Upon conversion of the W&R Funds Class B shares,
no contingent deferred sales charges were collected for any converted share
redemptions. The deferred selling costs associated with the discontinued W&R
Funds Class B shares were being amortized over the life of the shareholder
investments not to exceed ten years. A new (industry standard) W&R Fund Class B
share was opened to investors in July 2000. The deferred costs associated with
the sale of these new Class B shares are amortized on a straight-line basis over
the life of the shareholders' investments not to exceed six years.
Also in October 1999, the Advisors Funds began selling Class B and Class C
shares and the W&R Funds began selling Class C shares. The deferred costs
associated with the sale of Class B shares are 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 Class C shares are amortized on a
straight-line basis not to exceed twelve months. We recover such costs through
12b-1 distribution fees, which are paid by the Advisors Funds and the W&R 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 AND PROMOTION
We expense all advertising and promotion costs as incurred.
46
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
The weighted average number of shares used to compute basic earnings per
share was 83,362,000, 89,456,000, and 98,681,000 for the years ended 2000, 1999
and 1998 respectively. The weighted average number of shares used in computing
diluted earnings per share, which reflects the potential additional effect of
stock option and restricted stock award exercises into common stock was
86,895,000, 91,548,000, and 99,269,000 for years 2000, 1999 and 1998,
respectively.
Earnings per share were computed as follows:
2000 1999 1998
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS
Net income........................................ $139,005 81,767 83,735
Weighted average shares outstanding--basic........ 83,362 89,456 98,681
Incremental shares from assumed conversions....... 3,533 2,092 588
Weighted average shares outstanding--diluted...... 86,895 91,548 99,269
Earnings per share:
Basic........................................... $ 1.67 0.91 0.85
Diluted......................................... $ 1.60 0.89 0.84
STOCK-BASED COMPENSATION
As allowed under the provisions of Statement of Financial Accounting
Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("FAS 123"), we
have elected to apply Accounting Principles Board Opinion No. 25, "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES," ("APB 25") and related interpretations in
accounting for our stock-based plans. In most cases, no compensation costs have
been recognized with respect to stock options granted.
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents at December 31, 2000 and 1999 include reserves of
$21,898,000 and $17,114,000, respectively, for the benefit of customers in
compliance with securities industry regulations. Substantially all such reserves
are in excess of federal deposit insurance limits.
47
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
3. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE
Investments at December 31, 2000 and 1999 are as follows:
AMORTIZED UNREALIZED UNREALIZED
2000 COST GAINS LOSSES FAIR VALUE
- ---- --------- ---------- ---------- ----------
(IN THOUSANDS)
United States government-backed
mortgage securities................ $ 1,748 31 (30) 1,749
Municipal bonds...................... 22,326 92 (2,187) 20,231
Corporate bonds...................... 14,194 51 (538) 13,707
Affiliated mutual funds.............. 22,585 335 (1,075) 21,845
Other................................ 107 -- -- 107
------- --- ------ ------
$60,960 509 (3,830) 57,639
======= === ====== ======
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 -- (822) 35,656
Affiliated mutual funds.............. 10,202 1,842 (63) 11,981
------- ----- ------ ------
$88,041 1,851 (2,847) 87,045
======= ===== ====== ======
Municipal and corporate bonds held as of December 31, 2000 mature as
follows:
AMORTIZED FAIR
COST VALUE
--------- --------
(IN THOUSANDS)
Within one year........................................... $ -- --
After one year but within five years...................... 20,056 20,180
After five years but within ten years..................... -- --
After ten years........................................... 16,464 13,758
------- ------
$36,520 33,938
======= ======
Investment securities with fair value of $45,307,000, $635,000, and
$24,020,000 were sold in 2000, 1999 and 1998, respectively. These sales resulted
in realized gains of $2,111,000 and $6,000 in 2000 and 1999, respectively, and
realized losses in 1998 of $171,000.
4. ACQUISITION OF SUBSIDIARIES
On March 31, 2000, we acquired Legend in a business combination accounted
for as a purchase. Legend was a privately-held mutual fund distribution and
retirement planning company based in Palm Beach Gardens, FL. Legend serves
employees of school districts and other not-for-profit organizations nationwide
and uses strategic asset allocation services using proprietary systems. The
results of operations
48
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
4. ACQUISITION OF SUBSIDIARIES (CONTINUED)
of Legend are included on the accompanying financial statements since the date
of acquisition. The total cost of the acquisition, including expenses, was
$65,403,000, which exceeded the fair value of the net assets of Legend by
$63,571,000. The excess is being amortized on a straight-line basis over
25 years. The acquisition agreement provides for additional purchase price
payments contingent upon the achievement by Legend of specified earnings levels
for 2000, 2001 and 2002. These contingent payments could aggregate as much as
$14.0 million. For the year 2000, the specified earnings level was met;
accordingly, a $4.0 million contingent payment was accrued and added to
goodwill.
A summary of the net assets acquired is as follows (in thousands):
Assets acquired
Cash...................................................... $ 1,113
Accounts Receivable....................................... 7,156
Goodwill (including contingent payments).................. 63,571
Other assets.............................................. 1,949
-------
Total..................................................... 73,789
Liabilities assumed......................................... 8,386
-------
Total purchase price........................................ $65,403
=======
The table below presents supplemental pro forma information for 2000 and
1999 as if the Legend and ACF acquisitions were made on January 1, 1999 at the
same purchase price, based on estimates and assumptions considered appropriate:
YEAR ENDED
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Revenues................................................. $532,592 399,817
Net Income............................................... $138,915 81,297
Net Income per common share
Basic.................................................. $ 1.66 0.91
Diluted................................................ $ 1.60 0.89
ACF, acquired August 9, 1999, is also subject to additional purchase price
payments contingent upon the achievement of specified earnings levels. In 2000,
ACF met these levels and the full amount of the contingent payment was accrued
and added to goodwill at December 31, 2000 in the amount of $9.1 million. No
further contingent payments will be made related to this acquisition.
5. LOSS ON SALE OF REAL ESTATE
During 1998, we were participating in a limited partnership with TMK Income
Properties, LP ("TIP"). We contributed land and four income producing
multi-tenant commercial buildings adjacent to our headquarters in Overland Park,
Kansas in exchange for a limited partnership interest in TIP in 1997. This
transaction was classified as Investment in Real Estate in our consolidated
balance sheets. In late 1998, we ceased participation in TIP. In exchange for
our limited partnership interest, we received the
49
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
5. LOSS ON SALE OF REAL ESTATE (CONTINUED)
property we had originally contributed to TIP. We also reimbursed TIP $5,913,000
for improvements made to that property while it was in the partnership.
Effective December 28, 1999, we sold this investment in multi-tenant real estate
properties to unrelated third parties. Net proceeds from the sale were
$16,452,000, which resulted in a $4,592,000 pre-tax loss.
Net rental income was $0 and $1,026,000 for the years ended 2000 and 1999,
respectively. Real estate partnership income was $465,000 for the year ended
December 31, 1998.
6. PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31, 2000 and 1999 is as
follows:
ESTIMATED
2000 1999 USEFUL LIVES
-------- -------- ------------
(IN THOUSANDS)
Land............................................ $ 5,516 5,260 --
Buildings and tenant improvements............... 22,501 10,605 40 years
Furniture and fixtures.......................... 19,287 10,688 5-10 years
Equipment and machinery......................... 10,793 5,642 5-20 years
Data processing equipment....................... 13,981 9,252 3-5 years
------- ------
Property and equipment, at cost................. 72,078 41,447
Less accumulated depreciation................... 16,625 13,814
------- ------
Property and equipment, net..................... $55,453 27,633
======= ======
7. DEBT
In October 2000, we renewed our $220.0 million revolving credit facility,
expandable to $330.0 million, with a syndicate of eight banks, whereby
syndicates could, at their option upon our request, increase the loans by
$110.0 million. The credit facility is a 364-day revolving facility with an
interest rate of LIBOR plus 0.425% plus an additional 0.10% fee when utilization
of the facility exceeds 25% and 0.20% fee when utilization exceeds 50%. The
facility provides an additional source of capital to finance share repurchases,
acquisitions and other general corporate needs. Beginning in the third quarter
of 2000, we also implemented a money market loan program. The money market loan
program, which is similar to commercial paper, was utilized to repay amounts
borrowed under the credit facility. In October 2000, all amounts borrowed on the
credit facility were repaid. 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. We were in compliance with these covenants at
December 31, 2000.
During the year, the average balance on the combined short-term debt was
$195.8 million for 2000 and $106.1 million for 1999. As discussed below, the
short-term debt outstanding at December 31, 2000
50
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
7. DEBT (CONTINUED)
was reclassified as long-term. The average interest rate applied, excluding
other costs, was 7.01% for 2000 and 5.73% for 1999.
On August 15, 2000, we filed a $400.0 million shelf registration whereby
proceeds received could be used for general corporate purposes, including
repaying short-term debt outstanding. On January 18, 2001, we issued
$200.0 million in principal amount of 7.5% senior notes due 2006 resulting in
net proceeds of approximately $197.6 million (net of discounts, commissions and
estimated expenses) to repay short-term debt outstanding and for general
corporate purposes. As a result, for purposes of these financial statements,
$175.3 million of short-term debt outstanding at December 31, 2000 was
reclassified as long-term. The notes represent senior unsecured obligations and
are rated "Baa2" by Moody's and "BBB" by Standard & Poor's. Interest is payable
semi-annually on January 18 and July 18 at a rate of 7.5% per annum. These notes
are not redeemable prior to maturity.
8. TRANSACTIONS WITH RELATED PARTIES
Until the Offering in March of 1998, we were 100% owned by Torchmark. In
November of 1998, Torchmark disposed of its remaining interest in us through a
tax-free distribution to its shareholders. We serve as investment advisor to
Torchmark and its affiliates and receive advisory fees for this service.
Advisory fees, which are based on assets under management, amounted to
$1,063,000, $1,413,000, and $2,401,000 for the years ended December 31, 2000,
1999 and 1998, respectively. In the third quarter, we were terminated by a
number of Torchmark affiliates as investment advisor for certain insurance
company general account assets and pension plan assets totaling $768.0 million
with an average management fee of 25 basis points. The only other Torchmark
affiliated assets for which we serve as investment advisor are approximately
$37.9 million of mutual funds in 401(k) plans of Torchmark affiliates.
We are in litigation with one of our insurance providers, United Investors
Life Insurance Company ("UILIC"), and other related parties over terms of a
compensation agreement signed in July 1999 by UILIC and Waddell & Reed, Inc. The
compensation is paid by UILIC to us on variable products underwritten by UILIC
and distributed by us. The agreement provides for us to be paid annual
compensation of 0.25% on all variable annuity policies' assets under management
issued after January 1, 2000 and annual compensation of 0.20% on variable
annuity policies' assets under management issued before that date. This
agreement added $7.3 million of asset based fees to revenue for 2000. Payments
are continuing but the validity and duration of that agreement has been
challenged by UILIC in a complaint filed in May 2000, in the Circuit Court of
Jefferson County, Alabama in which we have subsequently named Torchmark as a
third party defendant in a tortious interference claim. We are confident that
the court will uphold the agreement as a contract and that we will prevail on
the merits of the case. Moreover, we do not foresee any additional risk to
existing variable policy assets and anticipate continued growth in sales of
variable annuity products.
We earn commissions from UILIC, a Torchmark subsidiary, for marketing life
insurance products and variable annuities. For the years ended December 31,
2000, 1999 and 1998, the commissions amounted to $63,164,000, $46,379,000, and
$36,724,000, respectively. In addition, an enhanced variable annuity
compensation agreement with UILIC effective January 1, 2000 added $7.3 million
of asset-based fees to revenues in 2000. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for more information.
51
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
9. INVESTMENT INCOME
The components of investment and other income are as follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Interest and amortization of (premium) discount..... $ 7,276 8,119 8,081
Dividends........................................... 492 498 423
Realized gains (losses), net........................ 2,111 375 (171)
Other............................................... 734 1,210 710
------- ------ -----
Total investment and other income................... $10,613 10,202 9,043
======= ====== =====
In 2000, investment and other income included $2.5 million of realized gains
from the sale of investment securities sold to partially fund the Legend
acquisition. In 1999, $1.0 million was attributable to net rental income from
real estate properties which were sold in December of 1999. Average invested
cash and marketable securities were $136.7 million in 2000 compared with
$142.1 million in 1999.
10. INCOME TAXES
The components of total income tax expense are as follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Currently payable:
Federal.......................................... $71,698 46,608 46,845
State............................................ 11,750 7,044 6,934
------- ------ ------
83,448 53,652 53,779
Deferred taxes..................................... 5,493 (3,394) (2,016)
------- ------ ------
Income tax expense from operations................. 88,941 50,258 51,763
======= ====== ======
52
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
10. INCOME TAXES (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of deferred tax liabilities and deferred tax assets at December 31,
2000, 1999 and 1998 are as follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Deferred tax liabilities:
Deferred selling costs............................ $(3,847) (703) (5,732)
Fixed assets...................................... (588) (328) --
Other............................................. -- -- (125)
------- ------ ------
Total gross deferred liabilities.................... (4,435) (1,031) (5,857)
------- ------ ------
Deferred tax assets:
Benefit plans..................................... 4,546 4,203 3,824
Accrued expenses.................................. 822 1,966 2,151
Fixed assets...................................... -- -- 983
Other............................................. 138 564 --
------- ------ ------
Total gross deferred assets......................... 5,506 6,733 6,958
------- ------ ------
Net deferred tax asset (liability).................. $ 1,071 5,702 1,101
------- ------ ------
A valuation allowance for deferred tax assets was not necessary at
December 31, 2000, 1999 and 1998. The following table reconciles the statutory
federal income tax rate with our effective income tax rate:
2000 1999 1998
-------- -------- --------
Statutory federal income tax rate....................... 35.0% 35.0 35.0
State income taxes, net of federal tax benefits......... 3.5 3.3 3.3
Other items............................................. 0.5 (0.2) (0.1)
---- ---- ----
Effective income tax rate............................... 39.0% 38.1 38.2
==== ==== ====
11. PENSION PLAN AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
We participate in a noncontributory retirement plan that covers
substantially all employees 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
53
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
11. PENSION PLAN AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
and cash equivalents. We also sponsor an unfunded defined benefit postretirement
medical plan that covers substantially all employees. The plan is contributory
with retiree contributions adjusted annually.
POSTRETIREMENT
PENSION BENEFITS BENEFITS
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(IN THOUSANDS)
Change in benefit obligation
Benefit obligation at beginning of year................... $33,828 31,254 1,269 1,151
Service cost.............................................. 2,737 2,328 94 76
Interest cost............................................. 2,963 2,387 104 90
Actuarial (gain) loss..................................... 3,512 (847) 882 28
Benefits and expenses paid................................ (2,834) (1,294) (222) (147)
Retiree contributions..................................... -- -- 66 71
------- ------ ------ ------
Benefit obligation at end of year......................... $40,206 33,828 2,193 1,269
======= ====== ====== ======
Change in plan assets:
Fair value of plan assets at beginning of year............ $37,087 28,066 -- --
Actual return on plan assets.............................. 3,315 6,859 -- --
Company contribution...................................... 1,900 3,456 156 76
Benefits paid............................................. (2,834) (1,294) (222) (147)
Retiree contributions..................................... -- -- 66 71
------- ------ ------ ------
Fair value of plan assets at end of year.................. $39,468 37,087 -- --
======= ====== ====== ======
Funded status of plan....................................... $ (738) 3,260 (2,193) (1,269)
Unrecognized actuarial (gain) loss.......................... (4,295) (8,036) 1,113 90
Unrecognized prior service cost............................. 584 628 (286) (160)
Unrecognized net transition obligation...................... 93 98 -- --
------- ------ ------ ------
Accrued benefit cost........................................ $(4,356) (4,050) (1,366) (1,339)
======= ====== ====== ======
Weighted average assumptions as of December 31:
Discount rate............................................. 7.75% 6.75 8.00 7.75
Expected return on plan assets............................ 9.25% 9.25 N/A N/A
Rate of compensation increase............................. 4.50% 3.75 N/A N/A
Components of net periodic benefit cost:
Service cost.............................................. $ 2,737 2,328 94 76
Interest cost............................................. 2,963 2,387 104 90
Expected return on plan assets............................ (3,448) (2,607) -- --
Actuarial (gain) loss amortization........................ (95) -- -- --
Prior service cost amortization........................... 44 44 (15) (15)
Transition obligation amortization........................ 5 5 -- --
------- ------ ------ ------
Net periodic benefit cost................................. $ 2,206 2,157 183 151
======= ====== ====== ======
For measurement purposes, the health care cost trend rate was 7.0% and 7.5%
in 2000 and 1999, respectively. The effect of a 1% annual increase in assumed
cost trend rates would increase the December 31, 2000 accumulated postretirement
benefit obligation by approximately $434,000, and the
54
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
11. PENSION PLAN AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended December 31, 2000 by
approximately $94,000. The effect of a 1% annual decrease in assumed cost trend
rates would decrease the December 31, 2000 accumulated postretirement benefit
obligation by approximately $379,000, and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the
year ended December 31, 2000 by approximately $80,000.
12. SAVINGS AND INVESTMENT PLANS
We have 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 our Class A or
Class B common stock, not to exceed 3% of the employee's salary. Our
contributions to the savings and investment plan for the year ended
December 31, 1998 was $858,000. On January 1, 1999, this plan was amended to add
a 401(k) salary deferral option. The amended 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. Our contributions to the 401(k) plan for
the years ended December 31, 2000 and 1999 were $2,196,000 and $1,413,000,
respectively.
13. STOCK COMPENSATION PLANS
We have a fixed employee Stock Incentive Plan ("Option Plan"), as part of
our overall compensation program to attract and retain personnel and encourage a
greater personal financial investment in the Company. 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 ten years and two days and generally vests
one-third in each of the three years starting two years after grant date. The
number of options authorized for grant under this plan is 30,000,000.
We also have an Executive Deferred Compensation Stock Option Plan and a
Non-employee Director Stock Option Plan to promote the long-term growth of the
Company. The number of options authorized for grant under these plans is
3,750,000 and 1,200,000, respectively. The exercise price of each option is
equal to the market price of the stock on the date of grant. The maximum term of
these options is ten years and two days and generally vests 10% each year,
starting one year after the grant date.
In October 1995, the FASB issued Statement No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION" ("SFAS No. 123"), which was effective 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 we use. 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.
55
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
13. STOCK COMPENSATION PLANS (CONTINUED)
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:
2000 1999 1998
-------- -------- --------
Dividend yield..................................... 1.10% 2.10% 2.34%
Risk-free interest rate............................ 5.43% 5.97% 5.20%
Expected volatility................................ 35.80% 28.60% 29.70%
Expected life (in years)........................... 4.71 4.71 4.71
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the vesting period of the options. Pro forma
effects on net income and earnings per share follow:
2000 1999 1998
-------- -------- --------
Net income
As reported..................................... $139,005 81,767 83,735
Pro forma....................................... $133,435 77,141 79,744
Basic earnings per share
As reported..................................... $1.67 $0.91 $0.85
Pro forma....................................... $1.60 $0.86 $0.81
Diluted earnings per share
As reported..................................... $1.60 $0.89 $0.84
Pro forma....................................... $1.54 $0.84 $0.81
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 Waddell & Reed Financial, Inc. options ("Conversion
Options"). Our employees and directors who held Torchmark options could elect to
convert their Torchmark options into Conversion Options. A total of 5,541,215
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.
Our option plan includes a Stock Option Restoration Program ("SORP") that
allows, on a specific date set by the Company, an optionholder to pay the
exercise price on vested options by surrendering common stock of the Company
that the optionholder has owned at least six months. A reduced number of options
are then granted to the optionholder at the current market price. The SORP,
which facilitates ownership of the Company's common stock by management and key
employees, results in a net issuance of shares of common stock and fewer stock
options outstanding. The Company receives a current income tax benefit for
exercises of stock options.
56
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
13. STOCK COMPENSATION PLANS (CONTINUED)
Prior to 1998, there were no stock options outstanding. A summary of stock
option activity and related information for the years ended December 31, 1998,
1999 and 2000 follows:
2000 1999 1998
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- ---------- --------
Outstanding, beginning of year........ 14,506,774 $14.65 12,112,890 12.43 -- --
Granted............................... 3,821,966 31.70 3,295,655 16.63 6,583,675 $15.07
Exercised............................. (621,201) 13.41 (116,220) 7.47 -- --
Granted in restoration................ 2,241,614 34.19 1,887,603 16.76 -- --
Exercised in restoration.............. (3,725,838) 13.57 (2,599,228) 8.69 -- --
Expired............................... (253,800) 15.51 (73,926) 14.84 (12,000) 15.33
Converted............................. -- -- -- -- 5,541,215 9.31
---------- ------ ---------- ------ ---------- ------
Outstanding, end of year.............. 15,969,515 $21.76 14,506,774 $14.65 12,112,890 $12.43
========== ====== ========== ====== ========== ======
Exercisable, end of year.............. 2,530,619 $14.57 2,853,326 $11.09 4,436,739 $ 9.61
========== ====== ========== ====== ========== ======
The weighted average fair value of options granted during the years ended
December 31, 2000, 1999 and 1998 were $10.36, $4.45 and $3.83, respectively.
Following is a summary of options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------------------------------------ ----------------------------
WEIGHTED AVERAGE
REMAINING
EXERCISE PRICE CONTRACTUAL LIFE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE NUMBER (IN YEARS) EXERCISE PRICE NUMBER EXERCISE PRICE
- --------------------- ---------- ---------------- ---------------- --------- ----------------
$5.44-$8.04 313,214 4.8 $ 7.39 296,598 $ 7.43
8.28-9.23 369,070 7.0 8.29 5,434 9.23
12.51-17.71 9,363,576 8.2 15.67 2,178,587 15.35
19.46-25.44 98,750 9.3 22.48 50,000 23.63
32.50-34.19 5,824,905 9.9 33.15 -- --
- --------------------- ---------- --- ------ --------- ------
$5.44-$34.19 15,969,515 8.7 21.76 2,530,619 $14.57
===================== ========== === ====== ========= ======
Options granted prior to 1998 represented options on Torchmark common stock
granted by Torchmark prior to our 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 our stock to its shareholders
(spin-off).
In March 1998, we affected promissory notes with a select group of 266
financial advisors and sales managers to facilitate the acquisition of our stock
at the IPO. The current balance of these promissory notes is $8.4 million, which
is reflected as unearned compensation in stockholders' equity. They were issued
for amounts ranging from $11,500 to $57,500, bear interest at 5.59% and mature
in March 2003. We have agreed to forgive these notes if certain conditions are
met, including, but not limited to, the
57
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
13. STOCK COMPENSATION PLANS (CONTINUED)
achievement of Company-stipulated annual productivity requirements for years
through 2002 and continued association with the Company's sales efforts through
March 2003.
14. UNIFORM CAPITAL RULE REQUIREMENTS
Waddell & Reed, Inc. ("W&R"), one of our subsidiaries, is a registered
broker-dealer and a member of NASD Regulation, Inc. ("NASDR") and is therefore
subject to a requirement of the NASD's Uniform Net Capital Rule, requiring the
maintenance of certain minimal capital levels. At December 31, 2000, W&R had net
capital, as defined by the Uniform Capital Rule, of $23,202,000, which is
$18,388,000 in excess of the required net capital.
15. COMMITMENTS AND CONTINGENCIES
RENTAL EXPENSE AND LEASE COMMITMENTS
We rent certain sales and other office space under long-term operating
leases. Rent expense was $9,473,000, $7,074,000, and $4,937,000, for the years
ended, December 31, 2000, 1999 and 1998, respectively. Future minimum rental
commitments under noncancelable operating leases are for the years ended
December 31 are as follows (in thousands):
2001........................................................ $ 7,481
2002........................................................ 3,004
2003........................................................ 2,140
2004........................................................ 1,392
2005........................................................ 677
Thereafter.................................................. 1,998
-------
$16,692
=======
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.
CONTINGENCIES
From time to time, we are 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 our financial position or results
of operations.
58
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000, 1999, AND 1998
18. SELECTED QUARTERLY INFORMATION (UNAUDITED)
QUARTER FIRST SECOND THIRD FOURTH
- ------- -------- -------- -------- --------
(IN THOUSANDS)
2000
Revenues............................................. $124,742 133,775 129,926 132,259
Operating revenues................................... 120,580 131,796 128,057 129,656
Net income........................................... 36,126 33,710 34,531 34,639
Earnings per share:
Basic.............................................. $ 0.43 0.41 0.42 0.42
Diluted............................................ 0.41 0.39 0.40 0.40
1999
Revenues............................................. $ 80,473 85,705 90,269 100,210
Operating revenues................................... 77,550 83,157 88,179 97,569
Net income........................................... 21,983 22,789 24,680 12,315
Earnings per share:
Basic.............................................. $ 0.24 0.25 0.28 0.14
Diluted............................................ 0.23 0.24 0.27 0.14
- ------------------------
Note: Quarterly per share amounts will not necessarily add up to annual amounts
due to rounding.
59
WADDELL & REED FINANCIAL, INC.
INDEX TO EXHIBITS
EXHIBIT
NO. EXHIBIT DESCRIPTION
- --------------------- -------------------
2.1 Agreement and Plan of Merger, dated as of February 14, 2001,
by and between Waddell & Reed Financial, Inc. and WDR
Sub, Inc.
2.2 Purchase Agreement, dated as of February 28, 2000, by and
among Waddell & Reed Financial, Inc., Freemark Investment
Management, Inc., Legend Financial Corporation, Advisory
Services Corporation, The Legend Group, Inc., Philip C.
Restino, Restino Family Trust, 01/02/94 Trust FBO John J.
Restino, 01/02/94 Trust FBO Robert R. Restino, Mark J.
Spinello, Glenn T. Ferris and David L. Phillips. Filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K,
dated April 14, 2000 and incorporated herein by reference.
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.
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.
4.4 First Amendment to Rights Agreement, dated as of
February 14, 2001, by and between Waddell & Reed
Financial, Inc. and First Chicago Trust Company of New
York.
4.5 Indenture, dated as of January 18, 2001, by and between
Waddell & Reed Financial, Inc. and Chase Manhattan Trust
Company, National Association. Filed as Exhibit 4.1(a) to
the Company's Current Report on Form 8-K dated February 5,
2001 and incorporated herein by reference.
4.6 First Supplemental Indenture, dated as of January 18, 2001
by and between Waddell & Reed Financial, Inc. and Chase
Manhattan Trust Company, National Association, including
the form of the 7.50% notes due January 2006 as Exhibit A.
Filed as Exhibits 4.1(b) and 4.2 to the Company's Current
Report on Form 8-K dated February 5, 2001 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 Waddell & Reed Financial, Inc. 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 General Agent Contract, dated as of 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.
60
WADDELL & REED FINANCIAL, INC.
INDEX TO EXHIBITS
EXHIBIT
NO. EXHIBIT DESCRIPTION
- --------------------- -------------------
10.4 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.
10.5 General Agent Contract, dated as of October 20, 2000, by and
among Nationwide Life Insurance Company, Nationwide Life
and Annuity Insurance Company and Waddell & Reed, Inc. and
its affiliated insurance companies.
10.6 Fund Participation Agreement, dated as of December 1, 2000,
by and among Nationwide Life Insurance Company and/or
Nationwide Life and Annuity Insurance Company, Waddell &
Reed Services Company and Waddell & Reed, Inc.
10.7 Principal Underwriting Agreement, dated as of 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.
10.8 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.
10.9 Letter Agreement Amending Principal Underwriting Agreement,
dated as of July 8, 1999, by and between the United
Investors Life Insurance Company and Waddell & Reed, Inc.,
effective January 1, 2000.
10.10 The Waddell & Reed Financial, Inc. 1998 Stock Incentive
Plan, As Amended and Restated. Filed as Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2000 and incorporated herein by reference.
10.11 The Waddell & Reed Financial, Inc. 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.
10.12 First Amendment to 1998 Non-Employee Director Stock Option
Plan. Filed as Exhibit 10.23 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference.
10.13 The Waddell & Reed Financial, Inc. 1998 Executive Deferred
Compensation Stock Option Plan, as Amended and Restated.
Filed as Exhibit 10.2 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000 and
incorporated herein by reference.
10.14 Credit Agreement, dated as of October 13, 2000 by and among
Waddell & Reed Financial, Inc., Lenders and The Chase
Manhattan Bank.
10.15 Fixed Rate Promissory Note for Multiple Loans dated as of
August 15, 2000, by and between Waddell & Reed
Financial, Inc. and the Chase Manhattan Bank.
10.16 The Waddell & Reed Financial, Inc. 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.
10.17 The Waddell & Reed Financial, Inc. 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.
10.18 Form of Accounting Services Agreement by and between each of
the Funds and Waddell & Reed Services Company.
10.19 Form of Investment Management Agreement by and between each
of the Advisors Funds and Waddell & Reed Investment
Management Company.
61
WADDELL & REED FINANCIAL, INC.
INDEX TO EXHIBITS
EXHIBIT
NO. EXHIBIT DESCRIPTION
- --------------------- -------------------
10.20 Investment Management Agreement by and between the W&R Funds
and Waddell & Reed Investment Management Company.
10.21 Investment Management Agreement by and between the Target
Funds and Waddell & Reed Investment Management Company.
10.22 Form of Shareholder Servicing Agreement by and between each
of the Funds and Waddell & Reed Services Company.
10.23 Form of Underwriting Agreement by and between each of the
Advisors 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.
10.24 Form of Underwriting Agreement by and between each of the
W&R 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.
10.25 Form of Distribution and Service Plan for Class A Shares by
and between each of the Advisors Funds and Waddell &
Reed, Inc.
10.26 Distribution and Service Plan for Class A Shares, adopted
May 17, 2000 by and between W&R Funds, Inc. and Waddell &
Reed, Inc.
10.27 Form of Distribution and Service Plan for Class B Shares by
and between each of the Advisors and W&R Funds and
Waddell & Reed, Inc.
10.28 Form of Distribution and Service Plan for Class C Shares by
and between each of the Advisors and W&R Funds and
Waddell & Reed, Inc.
10.29 Distribution and Service Plan for Class Y Shares, adopted
December 27, 1995 by and between W&R Funds, Inc. and
Waddell & Reed, Inc.
10.30 Service Plan, adopted August 21, 1998 by and between W&R
Target Funds, Inc. and Waddell & Reed, Inc.
11 Statement regarding computation of per share earnings.
21 Subsidiaries of the Company.
23 Consent of KPMG LLP.
24 Powers of Attorney.
62