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& Reed
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20 0 9 A n n uA l R epoRt
ANNuAuAu L
RePORtRtR
6300 Lamar Avenue
Overland Park, KS 66202
800.532.2757
www.waddell.com
ANN-CORP-2009 (02/10)
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Business
Profile &
financial
HigHligHts
Founded in 1937, Waddell & Reed is one of the most enduring asset manage-
ment and financial planning firms in the United States. For more than 70 years,
we have provided proven, professional investment management and financial
planning services to individuals and institutional investors. Today, we distribute
our investment products through three distinct distribution channels: the Advisors
channel, the Wholesale channel and the Institutional channel. At December 31,
2009, total assets under management were $70 billion and we served approxi-
mately 3.9 million mutual fund shareholder accounts.
Financial Highlights
(Dollars in thousands, except per share data)
2009
2008
2007
Operating Revenues
Operating Income
Net Income
Diluted Earnings Per Share
Operating Margin
See accompanying Form 10-K.
Assets Under Management
(Dollars in millions)
Advisors Channel
Wholesale Channel
Institutional Channel
Total
$ 839,089
$ 919,120
$ 837,554
169,812
165,329
194,632
$ 105,505
$ 96,163
$ 125,497
1.23
20.2%
1.12
18.0%
1.48
23.2%
2009
2008
2007
$ 29,474
$ 23,472
$ 34,562
32,818
7,491
17,489
6,523
21,537
8,769
$ 69,783
$ 47,484
$ 64,868
Dividend Reinvestment
Waddell & reed financial, inc. maintains a dividend
reinvestment plan for all holders of its common stock.
under the plan, stockholders may reinvest all or part of
their dividends in additional shares of common stock.
Participation is entirely voluntary. More information on
the plan can be obtained from our transfer agent.
Stockholder and Analyst Resources
We believe that in today’s digital world, the internet allows
us to disseminate our corporate information much more
quickly and efficiently. in addition to the standard infor-
mation typically found on corporate Web sites, such as
general, corporate and stock information, access to archived
press releases and sec filings, and answers to frequently
asked questions, we supply our stockholders and analysts
with timely supplemental data including quarterly corpo-
rate presentations, access to live and archived Web casts,
data tables and more. if you elect to request information
alerts, we will send you an e-mail when new information
is posted to our corporate Web site.
Cor por At e In For M At Ion
Annual Meeting of Stockholders
april 7, 2010, 10:00 a.m.
corporate Headquarters
Corporate Headquarters
Waddell & reed financial, inc.
6300 lamar avenue
overland Park, Ks 66202
Stock Exchange Listings
class a common stock
new York stock exchange symbol: WDr
Transfer Agent and Registrar
computershare trust company, n.a.
P.o. Box 43069
Providence, ri 02940-3070
toll free number: 877.498.8861
Hearing impaired: 800.952.9245
www.computershare.com
Independent Auditors
KPMg llP
1000 Walnut, suite 1000
Kansas city, Mo 64106
Stockholder Inquiries
for general information regarding your Waddell & reed
financial, inc. stock, call 800.532.2757 or visit our Web
site at www.waddell.com. for stock transfers, call
877.498.8861.
Mutual Fund Information
for information regarding our mutual funds, please
call 888.WaDDell or visit www.waddell.com or
www.ivy funds.com.
Questions about corporate information can be
directed to the attention of:
nicole Mcintosh
assistant Vice President
investor relations
913.236.1880
nmcintosh@waddell.com
2
W A D D E l l & R E ED 2 0 0 9 A N N U A l R E P O R T
2304_Cov.indd 2
2/19/10 10:37:50 PM
OUR
DISTRIbUTIOn
ChAnnElS
Advisors Channel
Our national network of Waddell & Reed financial advisors provides comprehensive,
personal financial planning services to clients across the United States. As more and more
middle-income and mass affluent individuals and families realize the importance of
planning for their financial futures, the demand for professional financial advice, like ours,
has grown markedly. Our advisors specialize in developing personal financial plans and
Sales
(Dollars in billions)
$21.7
$19.7
investment strategies for retirement, education, insurance and estate planning needs.
$14.9
Wholesale Channel
Through our national wholesaling efforts, we distribute our products – the Ivy Funds,
Ivy Funds Variable Insurance Portfolios and InvestEd Portfolios – to retail clients through
$8.7
broker/dealers, retirement platforms and independent registered investment advisors.
$5.4
Institutional Channel
Many of our investment strategies are offered to defined benefit plans, pension plans and
endowments. We also provide subadvisory services to other investment companies.
‘05 ‘06 ‘07 ‘08 ‘09
Net Flows
(Dollars in millions)
2009
2008
2007
2006
2005
advisors Channel
$ 282
$ 128
$ (213)
$ (71)
$ (581)
Wholesale Channel
9,068
6,932
6,824
2,827
1,289
Institutional Channel
(85)
917
(140)
(669)
(1,353)
total
$ 9,265
$ 7,977
$ 6,471
$ 2,087
$ (645)
organic Growth Rate
19.5%
12.3%
13.4%
5.0%
-1.7%
Institutional Channel
Wholesale Channel
advisors Channel
2304_Insert.indd 3
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W a d d e l l & R e e d 2 0 0 9 a n n u a l R e p o R t
3
3
Sales (dollars in millions)
25000
20000
15000
10000
5000
0
L et t er to Stock hoL der S
despite our entering 2009 in the midst of the worst u.S. recession since the 1930s, results
for our firm were solid, thanks to strong investment performance and continued growth in
our distribution channels amid what proved to be a dramatic market turnaround.
Following the financial market’s low point, a significant
redemption rate, once again, was one of the lowest in the
recovery began in mid-March, due in large part to mas-
industry. While sales here did not see as dramatic an
sive fiscal and monetary stimulus implemented by gov-
improvement as our Wholesale channel, sales volume
ernments around the globe. By the end of the year, early
increased sequentially each quarter of the year. This
losses had been recouped with stock market indexes
resulted in solid net flows for the year. To assist in growth,
posting double digit gains for 2009, and some posting
our initiative aimed at recruiting experienced advisors
record single-year gains.
began to gain traction during the year, as we added 59
For Waddell & Reed, a combination of sales growth and
experienced advisors for a total of 77 by year-end.
market action allowed our assets under management to
Our Institutional channel had a challenging year, particu-
recover quickly from the lows hit during the market
larly in the defined benefits portion. We see potential for
downturn. By year-end, our total assets under manage-
growth to accelerate, however. In recent years, we have
ment reached $70 billion, an increase of 49 percent from
developed subadvisory and defined contribution pension
year-end 2008. This level matched our previous record
mandates in this channel, which now make up 60 percent
high quarter-end level of total assets under management
of its assets. Recent wins are expected to lead to signifi-
achieved in June 2008.
As in years past, our balanced distribution model was an
asset to us during a difficult market environment. Over
the course of the year, our investment performance and
our strong relationships with our distribution partners
and their financial advisors translated into strong sales
growth in our Wholesale channel. We saw positive flows
every month of 2009, a notable achievement given an
environment in which the industry as a whole saw equity
fund outflows for much of the year.
At the same time, our Advisors channel experienced sta-
bility and steady profitability throughout the year, as cli-
ents continued to turn to financial advisors for guidance
in a very volatile period. The Advisors channel’s
cant flows in 2010. While new defined benefit mandates
remain scarce for us and for the industry in general, in
recent quarters we have seen modestly more activity.
AUM recovery
(Dollars in billions)
$70
$65
$70
$64
$60
$56
$47
$48
1Q
‘08
2Q
‘08
3Q
‘08
4Q
‘08
1Q
‘09
2Q
‘09
3Q
‘09
4Q
‘09
4
W a d d el l & R eed 2 0 0 9 a n n u a l R e p o R t
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2/23/10 11:04:35 AM
80
70
60
50
40
30
20
10
0
Further detail on each of our distribution channels can be
the housing market – we are optimistic about a gradual
found in the business discussion on the following pages.
recovery. Recovery is expected to lead to improved
Overall, our operational and financial performance in
2009 was better than that experienced in 2008. The
corporate profits. History shows financial asset prices
should appreciate as profits expand.
increase in asset levels, combined with careful expense
Whatever the market’s condition, we believe that the
control, has put us in a strong position to achieve the
strength of our processes and the depth of our talent will
profitability levels necessary to successfully pursue our
enable us to endure and succeed. With the future in
long-term strategic goals. By year-end, we:
mind, we added additional titles and responsibilities to
• Met our goal of returning to a 20 percent quarterly
operating margin by the fourth quarter;
• Achieved an industry-leading organic growth rate of
19.5 percent, versus an organic decay of 1.9 percent for
the industry as a whole;
• Returned to our previous peak asset level of $70 billion
by year-end, while equity markets remain approxi-
mately 20 percent below peak levels;
two of our senior executives – Michael L. Avery and
Thomas W. Butch – just after year-end. In addition, I
assumed the title of Chairman of the Board, and former
chairman Alan W. Kosloff became lead independent
director. We are fortunate that we will continue to benefit
from Alan’s guidance and insight, which have served us
well through some of the most dynamic and successful
years in our company’s history.
• Saw our common stock, which hit a low of $11.40 in
We constantly evaluate the financial markets, economic
March, end the year at $30.54, a notable recovery.
indicators and market sectors in order to adequately
The performance results from our highly skilled invest-
ment management team are especially noteworthy. This is
borne out by the fact that, once again, both the Waddell
& Reed Advisors Funds and Ivy Funds were listed at the
top of “Best Mutual Fund Families” over the latest five-year
period, as ranked and published by Barron’s. According to
measure risk and opportunity. As always, over time, we
endeavor to continue delivering highly competitive
investment products through our three growing distribu-
tion channels. Our overriding mandate is to create con-
sistent value for our mutual fund and institutional clients,
our advisors, our employees and our stockholders.
the publication’s article released in February 2010, the
Sincerely,
Waddell & Reed Advisors Funds ranked first and Ivy
Funds ranked second over the five-year period ended
December 31, 2009, out of 54 fund families listed.
As we look ahead, we do not expect recovery from the
recent recession to be consistently smooth, and we
believe that risks remain. Although the economy faces
numerous problems – painfully high unemployment,
restrained consumer spending and continued malaise in
Henry J. Herrmann
Chairman of the Board
Chief Executive Officer
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W a d d e l l & R e e d 2 0 0 9 a n n u a l R e p o R t
5
Bus in e s s Di sc us sion
the organization’s sales success in 2009 was closely linked to the consistent and highly
competitive investment performance delivered by our asset management team. over the
most recent three-year period ended december 31, 2009, 84 percent of our equity funds
and 86 percent of our equity assets ranked in the top half of their lipper peer group. In
addition, over the three-year period ended december 31, 2009, 87 percent of our equity
assets were rated 4 or 5 stars by Morningstar, Inc., with 89 percent rated 4 or 5 stars over
the most recent five-year period.
Our one-year investment results were tempered some-
with that effort, we recently began the process neces-
what because we avoided investing in the stock of low
sary to launch a new flexible portfolio fund, the Ivy
quality companies, which were the market’s performance
Asset Strategy New Opportunities Fund. Expected to
leaders in 2009.
As noted in the Chairman’s letter, the Waddell & Reed
Advisors Funds and the Ivy Funds were the top two fund
families over the past five years, out of 54 families, in the
become available during the second quarter of 2010,
this fund will have a mandate similar to our flagship
Ivy Asset Strategy Fund, but with an equity focus on
small- and mid-cap companies around the world.
most recent Barron’s “Best Mutual Fund Families” rank-
Our Investment Management Division is the foundation
ings, published in February 2010.
that drives our distribution success. We believe that the
We continually evaluate the breadth and depth of our
product line and have, over the years, worked aggres-
sively to fill out our mutual fund offerings. Consistent
combination of our broad product line and highly com-
petitive performance provides strong potential for con-
tinued growth across our three distribution channels.
Lipper Rankings
Morningstar Ratings
percentage of equity assets ranked in the top half
of their peer group
percentage of equity assets with 4 or 5 Star Rating
67%
86%
86%
88%
87%
89%
1-Year
3-Year
5-Year
1-Year
3-Year
5-Year
6
W a d d el l & R eed 2 0 0 9 a n n u a l R e p o R t
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2/23/10 11:06:14 AM
Advisors Channel
Although the financial markets recovered after the first
business in our Advisors channel. This approach
quarter of 2009, investors across the country remained
enhances our ability to recruit experienced, proven,
cautious following the most dramatic market downturn
successful advisors who, we believe, will find appeal in
since the Great Depression. By the end of 2009, we had
our service, support and culture.
experienced a strong recovery in sales volume in our
Advisors channel, as demonstrated by sales rising from
$695 million in the first quarter to $920 million in the
fourth quarter, a 32 percent improvement. Quarterly
Advisors Channel Sales
(Dollars in millions)
sales, however, remain below the peak level experienced
$1,100
$1,048
in the second quarter of 2008.
$871
$705 $695
$920
$783 $804
1Q
‘08
2Q
‘08
3Q
‘08
4Q
‘08
1Q
‘09
2Q
‘09
3Q
‘09
4Q
‘09
The Advisors channel has one of the lowest redemption
rates in the industry, at approximately 8.4 percent for
the year, compared with the industry’s 26.3 percent.
The Advisors channel saw:
• Gross sales reach $3.2 billion, a decline of 14 percent
from 2008;
• Net flows into the channel of $282 million, more than
double the net flows of 2008.
Our full-service brokerage platform, Waddell & Reed
Choice, became more established in 2009, as we
increased the number of advisors on the platform to
nearly 80. We view the Choice platform as an impor-
tant, long-term opportunity to continue expanding the
1200
1000
800
600
400
200
0
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W a d d e l l & R e e d 2 0 0 9 a n n u a l R e p o R t
7
BuSiN e S S Di SC uS SioN
Wholesale Channel
Sales results in our Wholesale channel were exceptional
and, along with market action, directly responsible for
the rapid recovery of our total assets under management
from the lows at year-end 2008 to the current level.
This channel saw positive asset flows every month of the
year, which is especially notable given the fact that the
industry experienced outflows from equity products
Wholesale Channel Net Sales
(Dollars in billions)
$4.3
$3.4
$1.0
$1.0
($1.8)
$2.9
$2.6 $2.6
during most of 2009.
The Wholesale channel saw:
• Gross sales of $14.7 billion;
• Net flows of $9.1 billion, the highest level in
our history;
• The Ivy Funds remain among the top 10 fund families
in total sales volume at the major wirehouses and
independent firms.
1Q
‘08
2Q
‘08
3Q
‘08
4Q
‘08
1Q
‘09
2Q
‘09
3Q
‘09
4Q
‘09
Our goal is to expand our presence with existing and
new distribution partners while diversifying our sales
and reducing flow concentration. Awareness and respect
Flows were concentrated in two funds, Ivy Asset Strategy
for the Ivy Funds name continues to grow, as evidenced
Fund and Ivy Global Natural Resources Fund. That said,
in 2009 by a series of surveys taken by industry research
we did gain important sales traction in a number of other
entities Horsesmouth and kasina through their FA Vision
funds over the course of 2009.
For the year, sales outside of the above two funds reached
$3.3 billion, which was 22 percent of gross sales and
represented an increase of 60 percent over 2008. Three
Ivy Funds – Ivy Science and Technology Fund, Ivy
service. In those surveys of advisors around the country,
Ivy Funds was ranked among the top fund firms for
“consistent performance,” “brand awareness,” “risk man-
agement,” and client satisfaction with our portfolio man-
ager conference calls. According to Horsesmouth and
kasina, the surveys were the industry’s largest-ever
Limited-Term Bond Fund, and Ivy Large Cap Growth
of their kind.
Fund – reached annual sales in excess of $400 million
and the Ivy High Income Fund reached $853 million.
5000
4000
3000
2000
1000
0
-1000
-2000
8
W a d d el l & R eed 2 0 0 9 a n n u a l R e p o R t
2304_Insert.indd 8
2/23/10 11:07:39 AM
At year-end, we took the step of restructuring our whole-
The Institutional channel saw:
saler territory assignments to ensure our team is in the
• Gross sales of $1.7 billion, a 28 percent decline from
best position to deliver needs-based, valuable product
the prior year;
and market knowledge efficiently to financial advisors.
• Total assets under management of $7 billion at
Our new structure has each wholesaler serving all
year-end, an increase of 15 percent from year-
clients in smaller territories across the channel system
end 2008.
– wirehouses, regional firms and independents. We
believe this makes us more efficient, more strategic,
provides more flexible skills to our clients and helps us
deepen all of our relationships.
We see substantial opportunities in the subadvisory and
defined contribution business, an area that is becoming
a growing part of our Institutional channel.
Institutional Channel
Our Institutional channel was impacted by the market
volatility that left clients indecisive, especially in the
defined benefit business, as allocations of mandates
slowed dramatically. We do, however, remain a strong
contender in many outstanding requests for proposal
(RFPs) in the defined benefit and subadvisory businesses,
and we believe there remains strong potential here as the
market recovers.
Asset flows from our largest client, Pictet & Cie, came
under pressure as investors began to reallocate away from
U.S. equities toward emerging markets, commodities and,
to a lesser extent, international developed markets.
As We Look Ahead
We are confident that the breadth of our business model
will continue to place us in an especially viable position
in the marketplace. Our balanced distribution model is
built around highly competitive investment products
and provides Waddell & Reed with a unique ability to
continue gathering assets and retaining clients.
The rapid recovery of our total asset levels in 2009, along
with our careful expense management, allows for gradual
improvement in our margins. As profitability improves,
so too will the measure of value we provide to our stock-
holders and clients.
2304_Insert.indd 9
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W a d d e l l & R e e d 2 0 0 9 a n n u a l R e p o R t
W a d d e l l & R e e d 2 0 0 9 a n n u a l R e p o R t
9
9
DIRECTORS
& OFFICERS
DIR EC T oR S
Henry J. Herrmann
Chairman of the Board and
Chief Executive Officer
of the Company
Director (since 1998)4
Alan W. Kosloff
Lead Independent Director
Chairman, Kosloff & Partners, LLC
Director (since 2003)3,4,5
Dennis E. Logue
Chairman,
Ledyard National Bank
Director (since 2002)1,3,5,6
of f IC ER S
Henry J. Herrmann
Chairman of the Board and
Chief Executive Officer
46 Years of Industry Experience
38 Years with Waddell & Reed
Michael L. Avery
President and
Chief Investment Officer
31 Years of Industry Experience
28 Years with Waddell & Reed
Thomas W. Butch
Executive Vice President and
Chief Marketing Officer
28 Years of Industry Experience
10 Years with Waddell & Reed
Daniel P. Connealy
Senior Vice President and
Chief Financial Officer
40 Years of Industry Experience
6 Years with Waddell & Reed
James M. Raines
President,
James M. Raines and Co.
Director (since 1998)1,2,3,6
Ronald C. Reimer
Advisor, Truman Medical Center
Director (since 2001)1,2,3,6
William L. Rogers
General Partner,
The Halifax Group
Director (since 1998)2,3,4,5
Jerry W. Walton
Consultant and Former
Chief Financial Officer,
J.B. Hunt Transport Services, Inc.
Director (since 2000)1,2,3
1 Audit Committee
2 Compensation Committee
3 Nominating and Corporate
Governance Committee
4 Executive Committee
5 Marketing Committee
6 Investment Committee
Mark A. Schieber
Senior Vice President
and Controller
29 Years of Industry Experience
29 Years with Waddell & Reed
Wendy J. Hills
Vice President, Secretary and
Associate General Counsel
12 Years of Industry Experience
12 Years with Waddell & Reed
Nicole McIntosh
Assistant Vice President
12 Years of Industry Experience
12 Years with Waddell & Reed
Daniel C. Schulte
Senior Vice President and
General Counsel
12 Years of Industry Experience
12 Years with Waddell & Reed
Michael D. Strohm
Senior Vice President and
Chief Operations Officer
37 Years of Industry Experience
37 Years with Waddell & Reed
John E. Sundeen, Jr.
Senior Vice President and
Chief Administrative
Officer—Investments
26 Years of Industry Experience
26 Years with Waddell & Reed
Brent K. Bloss
Senior Vice President—Finance,
Treasurer and Principal
Accounting Officer
10 Years of Industry Experience
8 Years with Waddell & Reed
10
W a d d e l l & R e e d 2 0 0 9 a n n u a l R e p o R t
2304_Insert.indd 10
2/19/10 10:22:53 PM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(cid:1) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
(cid:1) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2009
OR
Commission file number 001-13913
WADDELL & REED FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
51-0261715
(I.R.S. Employer
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Title of each class
Class A Common Stock, $.01 par value
Name of each exchange on which registered
New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. YES (cid:1) NO (cid:1)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act. YES (cid:1) NO (cid:1).
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 (cid:1) No (cid:1).
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web
site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes (cid:1) No (cid:1).
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.
)
(
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated Filer
Non-accelerated Filer
(Do not check if a smaller reporting company)
(cid:1)
(cid:1)
Accelerated Filer
Smaller Reporting Company
(cid:1)
(cid:1)
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange
Act). Yes (cid:1) No (cid:1).
The aggregate market value of the voting and non-voting common stock equity held by non-affiliates
(i.e. persons other than officers, directors and stockholders holding greater than 5% of the registrant’s common
stock) based on the closing sale price on June 30, 2009 was $2.196 billion.
Shares outstanding of each of the registrant’s classes of common stock as of February 18, 2010 Class A
common stock, $.01 par value: 85,528,188
In Part III of this Form 10-K, portions of the definitive proxy statement for the 2010 Annual Meeting of
DOCUMENTS INCORPORATED BY REFERENCE
Stockholders to be held April 7, 2010.
Index of Exhibits (Pages 86 through 95)
Total Number of Pages Included Are 95
WADDELL & REED FINANCIAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2009
Part I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . .
Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part IV
Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . .
INDEX TO EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
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2
ITEM 1. Business
General
PART I
Waddell & Reed Financial, Inc. (hereinafter referred to as the ‘‘Company,’’ ‘‘we,’’ ‘‘our’’ or ‘‘us’’) is a
corporation, incorporated in the state of Delaware in 1981, that conducts business through its subsidiaries.
Founded in 1937, we are one of the oldest mutual fund complexes in the United States, having introduced
the Waddell & Reed Advisors Group of Mutual Funds (the ‘‘Advisors Funds’’) in 1940. We launched our
Ivy Funds in 2003 in an effort to expand our distribution to third-party outlets. As of December 31, 2009,
we had $69.8 billion in assets under management and approximately 3.9 million mutual fund shareholder
accounts owned by individuals, plans or omnibus accounts at third parties.
We derive our revenues primarily from providing investment management, investment product
underwriting and distribution, and shareholder services administration to mutual funds and institutional
and separately managed accounts. Investment management fees are based on the amount of average assets
under management and are affected by sales levels, financial market conditions, redemptions and the
composition of assets. Our underwriting and distribution revenues consist of commissions derived from
sales of investment and insurance products, Rule 12b-1 asset-based service and distribution fees,
distribution fees on certain variable products, fees earned on fee-based asset allocation products, and
related advisory services. The products sold have various commission structures and the revenues received
from those sales vary based on the type and amount sold.
We operate our business through three distinct distribution channels. Our retail products are
distributed through our sales force of registered financial advisors (the ‘‘Advisors channel’’) or through
third-parties such as other broker/dealers, registered investment advisors (including the retirement
advisors of the Legend group of subsidiaries (‘‘Legend’’)) and various retirement platforms, (collectively,
the ‘‘Wholesale channel’’). We also market our investment advisory services to institutional investors,
either directly or through consultants (the ‘‘Institutional channel’’).
In the Advisors channel, our sales force focuses its efforts primarily on the sale of investment products
advised by the Company. We compete primarily with smaller broker/dealers and independent financial
advisors, as well as a span of other financial providers. Assets under management acquired through this
channel were $29.5 billion at December 31, 2009.
Our Wholesale channel efforts include retail fund distribution through broker/dealers (the largest
method of distributing mutual funds for the industry), registered investment advisors (fee-based financial
advisors who generally sell mutual funds through financial supermarkets) and retirement platforms (401(k)
platforms using multiple managers). Assets under management acquired through this channel were
$32.8 billion at the end of 2009.
Through our Institutional channel we manage assets for defined benefit pension plans, other
investment companies (as a subadvisor), defined contribution plans, endowments and high net worth
clients. Assets under management acquired through the Institutional channel were $7.5 billion at
December 31, 2009.
Organization
We operate our investment advisory business through our subsidiary companies, primarily Waddell &
Reed Investment Management Company (‘‘WRIMCO’’), a registered investment adviser and Ivy
Investment Management Company (‘‘IICO’’), the registered investment adviser for Ivy Funds, Inc. and the
Ivy Funds portfolios (collectively, the ‘‘Ivy Funds’’). Other investment advisory subsidiaries include Legend
Advisory Corporation (the registered investment adviser for Legend) and Austin, Calvert & Flavin, Inc.
(‘‘ACF’’), which was sold effective July 15, 2009.
3
Our underwriting and distribution business operates through three broker/dealers: Waddell &
Reed, Inc. (‘‘W&R’’), Ivy Funds Distributor, Inc. (‘‘IFDI’’) and Legend Equities Corporation (‘‘LEC’’).
W&R is a registered broker/dealer and investment adviser that acts primarily as the national distributor
and underwriter for shares of Advisors Funds and a distributor of variable annuities and other insurance
products issued by our business partners. In addition, W&R is the ninth largest distributor of our Ivy
Funds. IFDI, a registered broker/dealer, is the distributor and underwriter for the Ivy Funds. LEC is the
registered broker/dealer for Legend, a mutual fund distribution and retirement planning subsidiary based
in Palm Beach Gardens, Florida. Through its network of financial advisors, Legend primarily serves
employees of school districts and other not-for-profit organizations.
Waddell & Reed Services Company (‘‘WRSCO’’) provides transfer agency and accounting services to
the Advisors Funds, the Ivy Funds, Ivy Funds Variable Insurance Portfolios (the ‘‘Ivy Funds VIP’’) and
Waddell & Reed InvestEd Portfolios, our college savings plan (‘‘InvestEd’’). W&R, WRIMCO, WRSCO,
Legend, IICO and IFDI are hereafter collectively referred to as the ‘‘Company,’’ ‘‘we,’’ ‘‘us’’ or ‘‘our’’
unless the context requires otherwise.
Investment Management Operations
Our investment advisory business provides one of our largest sources of revenues and profits. We earn
investment management fee revenues by providing investment advisory and management services pursuant
to an investment management agreement with each fund within the Advisors Funds family, the Ivy Funds
families, the Ivy Funds VIP family, and InvestEd, (collectively, the ‘‘Funds’’). While the specific terms of
the agreements vary, the basic terms are similar. The agreements provide that we render overall
investment management services to each of the Funds, subject to the oversight of each Fund’s board of
directors/trustees and in accordance with each Fund’s investment objectives and policies. The agreements
permit us to enter into separate agreements for shareholder services or accounting services with each
respective Fund.
Each Fund’s board of directors/trustees, including a majority of the directors/trustees 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’’) (‘‘disinterested members’’) and the Fund’s shareholders must approve 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,
including a majority of the disinterested members, or (ii) the vote of a majority of both the shareholders of
the Fund and the disinterested members of each Fund’s board, 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 by the ICA or the Investment Advisers Act of 1940, as amended, (the ‘‘Advisers Act’’), and may be
terminated without penalty by any Fund by giving us 60 days’ written notice if the termination has been
approved by a majority of the Fund’s directors/trustees or the Fund’s shareholders. We may terminate an
investment management agreement without penalty on 120 days’ written notice.
In addition to performing investment management services for the Funds, we act as an investment
adviser for institutional and other private investors and we provide subadvisory services to other
investment companies. Our fee for these services is generally based on a percentage of assets under
management. Such services are provided pursuant to various written agreements.
Our investment management effort has a strong foundation based upon its people and resources. We
have 64 investment professionals including a team of 29 portfolio managers who average 19 years of
industry experience and 14 years of tenure with the Company. The team has substantial resources available
to them, including the efforts of internal equity and fixed income analysts who conduct primary
fundamental research. Our investment professionals attend numerous on and off-site meetings annually
with management of the companies in which they invest. In addition, we use research provided by
brokerage firms and independent outside consultants. Portfolio managers participate in a collaborative
process that blends their individual accountability with the ideas of their peers which, when backed by an
4
intensive research capability, supports our efforts to deliver consistent, long-term performance. Our
investment management team also includes a premier group of subadvisors who bring similar investment
philosophies and additional expertise in specific asset classes.
We have significant experience in virtually all major asset classes, several specialized asset classes and
a range of investment styles. Our ending assets under management are summarized below by broad asset
class, many of which incorporate multiple investment styles.
Ending Assets Under Management by Broad Asset Class
Investment Style:
Balanced & Flexible
Narrowly Diversified
Large Capitalization Growth Equities
Large Capitalization Core Equities
Taxable Investment Grade Fixed Income
International Equities
Small Capitalization Growth Equities
High Yield Fixed Income
Money Market
Multi-Capitalization Core Equities
Middle Capitalization Growth Equities
Tax Exempt Fixed Income
Value Equities
International Fixed Income
Total
December 31,
2009
Ending
Assets
Percentage
of Total
(in millions)
$
$
25,725
10,213
8,094
4,987
4,452
3,754
2,901
2,609
1,720
1,409
1,402
1,271
1,150
96
69,783
37%
15%
12%
7%
6%
5%
4%
4%
2%
2%
2%
2%
2%
0%
100%
Our investment strategy generally emphasizes investments in companies that the portfolio managers
believe can produce above average growth in earnings. Our portfolio managers also strive for consistent
long-term performance while seeking to provide downside protection in turbulent markets. Our investment
philosophy lends itself well to the financial planning approach used by our Advisors channel while our
consistent long-term investment performance record supports the distribution efforts in both our
Wholesale and Institutional channels.
Investment Management Products
Our mutual fund families offer a wide variety of investment options. We are the exclusive underwriter
and distributor of 80 registered open-end mutual fund portfolios, including 20 portfolios in the Advisors
Funds family, 32 portfolios in the Ivy Funds family, 25 portfolios in the Ivy Funds VIP family and three
portfolios in InvestEd. The Advisors Funds, variable products offering the Ivy Funds VIP, and InvestEd are
offered primarily through our financial advisors and Legend advisors; in some circumstances, certain of
these funds are also offered through the Wholesale channel. The Ivy Funds are offered through both our
Advisors channel and Wholesale channel. The Funds’ assets under management are included in either our
Advisors channel or our Wholesale channel depending on who marketed the client account or is the broker
of record.
We added three funds to our product line in 2009. We launched the Ivy Micro Cap Growth fund for
investors seeking long-term capital appreciation and we invest a majority of the fund’s net assets in equity
securities of primarily domestic and, to a lesser extent, foreign micro cap companies. The Ivy Municipal
High Income fund was added for investors interested in a high level of income that is not subject to federal
5
income tax. The fund invests the majority of net assets in a diversified portfolio of tax-exempt municipal
bonds. The Ivy Tax-Managed Equity fund’s objective is long-term capital growth while minimizing taxable
gains and income to shareholders. The fund invests primarily in a diversified portfolio of common stocks of
domestic and, to a lesser extent, foreign companies considered to be high in quality and attractive in their
long-term investment potential, with a majority of net assets in equity securities.
In addition to the introduction of these new products, we began direct management of three
previously subadvised funds during 2009, which will result in decreased subadvisory expenses on a forward
looking basis. The three funds now under direct management are: the Ivy International Balanced fund, the
Ivy VIP International Value fund and the Ivy European Opportunities fund.
Other Products
Pursuant to general agency arrangements with our business partners, we distribute certain of their
variable annuity products, which offer the Ivy Funds VIP as an investment vehicle. We also offer our
customers retirement and life insurance products underwritten by our business partners. Through our
insurance agency subsidiaries, our financial advisors also sell life insurance and disability products
underwritten by various carriers.
In addition, we offer asset allocation investment advisory products, including Managed Allocation
Portfolio (‘‘MAP’’) and Strategic Portfolio Allocation (‘‘SPA’’), which utilize our Funds. MAP includes two
mutual fund asset allocation programs, MAP and MAPPlus, that offer clients a selection of traditional
asset allocation models, as well as features such as systematic rebalancing and client participation in
determining (to a limited extent) asset allocation across asset classes. MAP and MAPPlus are fee-based
mutual fund asset allocation programs, structured to provide advisors and clients with advisory services, a
pricing option competitive with other firms’ fee-based products, and flexibility to allow advisors to assist
clients in selecting underlying funds based upon their individual needs. As of December 31, 2009, clients
have $2.5 billion invested in our MAP and MAPPlus products. These assets are included in our mutual
fund assets under management.
Using a variety of funds ranging from money market and fixed income funds to domestic and
international equity funds, SPA is a predictive, dynamic asset allocation system that reallocates asset classes
within model portfolios. Clients investing assets in SPA can choose from five available model portfolios
with objectives ranging from conservative to aggressive, based on their investment objectives, goals, risk
tolerance and other factors. Clients have $229 million invested in our SPA products as of December 31,
2009 and these assets are included in our mutual fund assets under management.
A primary difference between MAP and SPA is that advisors assist clients in selecting the underlying
mutual funds within MAP models in accordance with pre-established ranges, whereas for SPA, the
Company’s Investment Policy Committee determines the model compositions.
Underwriting and Distribution
We earn underwriting and distribution fee revenues primarily by distributing the Funds pursuant to an
underwriting agreement with each Fund (except the Ivy Funds VIP as explained below) and, to a lesser
extent, by distributing mutual funds offered by other companies not affiliated with us. Pursuant to each
agreement, we offer and sell the Funds’ shares on a continuous basis (open-end funds) and pay certain
costs associated with underwriting and distributing the Funds, including the costs of developing and
producing sales literature and printing of prospectuses, which may be either partially or fully reimbursed by
the Funds. The Funds are sold in various classes that are structured in ways that conform to industry
standards (i.e., ‘‘front-end load,’’ ‘‘back-end load,’’ ‘‘level-load’’ and institutional).
When a client purchases Class A shares (front-end load), the client pays an initial sales charge of up to
5.75% of the amount invested. The sales charge for Class A shares typically declines as the investment
amount increases. In addition, investors may combine their purchases of all fund shares to qualify for a
6
reduced sales charge. Class A shares purchased at net asset value are assessed a 1% contingent deferred
sales charge (‘‘CDSC’’) if the shares are redeemed within 12 months of purchase. When a client invests in
an asset allocation product, Class A shares are purchased at net asset value. We do not charge an initial
sales charge, but investors are assessed a CDSC upon early redemption of shares, up to 3% of the amount
originally invested and declining to zero for investments held more than three years. When a client
purchases Class B shares (back-end load), we do not charge an initial sales charge, but we do charge a
CDSC upon early redemption of shares, up to 5% of the lesser of the current market net asset value or the
purchase cost of the redeemed shares in the first year and declining to zero for shares held for more than
six years. Class B shares convert to Class A shares after seven years. When a client purchases Class C
shares (level-load), we do not charge an initial sales charge, but we do charge investors who redeem their
Class C shares in the first year a CDSC of 1% of the current market net asset value or the purchase cost of
the shares redeemed, whichever is less.
Under a Rule 12b-1 service plan, the Funds may charge a maximum fee of 0.25% of the average daily
net assets under management for expenses paid to broker/dealers and other sales professionals in
connection with providing ongoing services to the Funds’ shareholders and/or maintaining the Funds’
shareholder accounts. The Funds’ Class B and Class C shares may charge a maximum of 0.75% of the
average daily net assets under management under a Rule 12b-1 distribution plan to broker/dealers and
other sales professionals for their services in connection with distributing shares of that class. The
Rule 12b-1 plans are subject to annual approval by the Funds’ board of directors/trustees, including a
majority of the disinterested members, by votes cast in person at a meeting called for the purpose of voting
on such approval. All Funds may terminate the service plan at any time with approval of fund directors or
portfolio shareholders (a majority of either) without penalty.
We distribute variable products offering the Ivy Funds VIP as investment vehicles pursuant to general
agency arrangements with our business partners and receive commissions, marketing allowances and other
compensation as stipulated by such agreements. In connection with these arrangements, the Ivy Funds VIP
are offered and sold on a continuous basis.
In addition to distributing variable products, we distribute a number of other insurance products
through our insurance agency subsidiaries, including individual term life, group term life, whole life,
accident and health, long-term care, Medicare supplement and disability insurance. We receive
commissions and compensation from various underwriters for distributing these products. We are not an
underwriter for any insurance policies.
Distribution Channels
We distribute our investment products through the Advisors, Wholesale and Institutional channels.
Advisors Channel
Our advisors sell investment products primarily to middle-income and mass affluent individuals,
families and businesses across the country in geographic markets of all sizes. We assist clients on a wide
range of financial issues with a significant focus on helping them plan, generally, for long-term investments
such as retirement and education and offer one-on-one consultations that emphasize long-term
relationships through continued service. As a result of this approach, this channel has developed a loyal
customer base with clients maintaining their accounts significantly longer than the industry average. The
redemption rate in the Advisors channel for the year ended December 31, 2009 was 8.4%, compared to the
industry average of 26.3%, as derived from statistics provided by the Investment Company Institute
(‘‘ICI’’).
Our sales force consisted of 2,393 financial advisors, including 156 district managers, as of
December 31, 2009. Eight regional vice presidents and 102 managing principals oversee this sales force,
which operates out of 170 offices located throughout the United States and 288 individual advisor offices.
We believe, based on industry data, that our financial advisors are currently one of the largest sales forces
7
in the United States selling primarily mutual funds, and that W&R, our broker/dealer subsidiary, ranks
among the largest independent broker/dealers. As of December 31, 2009, our Advisors channel had
approximately 530,000 mutual fund customers with an average investment of $47,000 and approximately
76,000 variable account customers with an average investment of $57,000.
As of December 31, 2009, 38% of our financial advisors have been with us for more than five years
and 25% for more than ten years. Our New Advisor Career Transition program(s), designed to meet the
needs of the different audiences from which we recruit, such as college graduates, career changers and
industry experienced professionals, provide our new advisors with a unique transition experience until they
can develop the skills and client base necessary to earn a stable income from commissions alone. These
programs have played an important role in advisor retention and are designed to improve productivity of
our new advisors. We undertook technology initiatives in 2007, fully implemented in 2008, which allow us
to provide our clients consolidated statements and more robust brokerage capabilities. We believe these
efforts support the retention of existing advisors and our recruiting efforts, including those aimed at
experienced advisors. Sales per advisor (investment product sales divided by the average number of
advisors) were $1.0 million, $1.2 million and $1.2 million, for the years ended December 31, 2009, 2008 and
2007, respectively. This metric is important to us since investment product sales are invested in our Funds’
assets.
Gross production per advisor is an additional method of measuring advisor productivity that is more
closely aligned with industry standard methods, which use gross commissions per sales representative to
measure productivity. For purposes of this measure, gross production consists of front-end load sales and
distribution fee revenues, as would be received from an underwriter, from sales of both our Funds and
other mutual funds. It also includes fee revenues from our asset allocation products and financial plans,
and commission revenues earned on insurance products. This measure excludes Rule 12b-1 service fee
revenues, variable annuity distribution fee revenues and all revenues related to Class Y shares, all of which
do not relate to the distribution activities of our financial advisors. Gross production per advisor was
$59.9 thousand, $64.1 thousand and $64.7 thousand for the years ended December 31, 2009, 2008 and
2007, respectively.
Wholesale Channel
Our Wholesale channel consists of sales garnered through various third-party distribution outlets and
Legend advisors. In an effort to accelerate sales growth, we have focused on expanding our Wholesale
distribution efforts over the past several years. As a result of an increased demand for our funds in the
Wholesale channel due to strong investment performance, our assets under management from the
Wholesale channel have increased from $3.8 billion at December 31, 2003 to $32.8 billion at December 31,
2009, including $5.2 billion in assets at December 31, 2009 that are subadvised by other managers.
The following table summarizes certain components of the changes in the Wholesale channel’s assets
under management for the last three fiscal years.
2009
2008
2007
Sales (net of commissions)
Redemptions
$
Net Sales
Market Appreciation
(Depreciation)
Ending Assets Under
Management
14,745
(5,951)
8,794
(in millions)
15,599
(8,541)
7,058
6,261
(10,980)
$
32,818
17,489
9,470
(2,795)
6,675
3,894
21,537
During 2009, our mutual fund sales levels through wholesale distribution rivaled those achieved in the
previous, record-setting year, even through volatile market conditions. The Ivy Funds family increased its
8
presence in a number of broker/dealer platforms. These third parties have a client relationship with, and
maintain an account for, the investors. Typically, investors purchase our investment products at the
suggestion of third parties, thereby expanding our opportunities to gain new investors. Our wholesaling
efforts focus principally on distributing the Ivy Funds through three segments: broker/dealers (the largest
method of distributing mutual funds for the industry and for us), retirement platforms (401(k) platforms
using multiple managers) and registered investment advisors (fee-based financial advisors who generally
sell mutual funds through financial supermarkets). We continued to expand our team of national
wholesalers, reaching a total of 34 external wholesalers, six hybrid wholesalers and 33 internal wholesalers
by year-end. In 2010, we plan to restructure our wholesaler territories into smaller, more manageable areas
to enable our wholesalers to focus on additional distribution partners in their territory.
Legend advisors distribute our Funds, along with mutual funds managed by other investment
companies, through Legend’s retirement advisor sales force. At December 31, 2009, Legend had 423
registered retirement advisors in 193 offices, which are primarily individual advisor offices, located mainly
in the eastern part of the United States. These retirement advisors are not included in the discussion of our
financial advisors, nor in disclosures of the number of advisors we have licensed. For the years ended
December 31, 2009, 2008 and 2007, Legend advisors sold $82.1 million, $63.8 million and $74.2 million,
respectively, of our mutual funds, and $280.9 million, $262.4 million and $363.5 million, respectively, of
unaffiliated mutual funds. Sales per Legend advisor were $764 thousand in 2009. Legend had $4.6 billion
of client assets under administration as of December 31, 2009, including $490.3 million in our funds.
Institutional Channel
WRIMCO markets its investment advisory services to institutions directly or through consultants that
assist with the manager selection process. Most of our institutional business is in defined contribution
pension plans, defined benefit pension plans and subadvised mutual funds. A significant amount of assets
are also managed for foundations, endowments, Taft-Hartley plans, high net worth individuals and
insurance company general accounts.
Over time, WRIMCO’s business within the Institutional channel has been successful in developing
subadvisory and defined contribution pension mandates. This type of business now comprises 60% of the
Institutional channel’s assets, which management views as a positive development as it believes this type of
business is more likely to grow than the defined benefit business.
ACF, an investment advisory subsidiary previously operating in this channel, was sold effective July 15,
2009. Prior to the closing date, ACF had assets under management of $488.0 million. ACF was marketed
separately from WRIMCO.
Service Agreements
We earn service fee revenues by providing various services to the Funds and their shareholders
pursuant to shareholder servicing and accounting service agreements with each Fund. Pursuant to the
shareholder servicing agreements, we perform shareholder servicing functions for which the Funds pay us a
monthly fee, including: maintaining shareholder accounts; issuing, transferring and redeeming shares;
distributing dividends and paying redemptions; furnishing information related to the Funds; 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:
maintaining the Funds’ records; pricing Fund shares; and preparing prospectuses for existing shareholders,
proxy statements and certain other shareholder reports.
These agreements may be adopted or amended with the approval of the disinterested members of
each Fund’s board of directors/trustees and have annually renewable terms of one year.
9
Regulation
The securities industry is subject to extensive regulation and 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 and organizations that regulate investment advisers, broker/dealers, and
transfer agents like us have broad administrative powers, including the power to limit, restrict or prohibit
an investment adviser, broker/dealer or transfer agent from carrying on its business in the event that it fails
to comply with applicable laws and regulations. In such event, the possible sanctions that may be imposed
include, but are not limited to, the suspension of individual employees or agents, limitations on engaging in
certain lines of business for specified periods of time, censures, fines and the revocation of investment
adviser and other registrations.
The Securities and Exchange Commission (the ‘‘SEC’’) is the federal agency responsible for the
administration of federal securities laws. Certain of our subsidiaries are registered with the SEC as
investment advisers under the Advisers Act, which imposes numerous obligations on registered investment
advisers including, among other things, fiduciary duties, record-keeping and reporting requirements,
operational requirements and disclosure obligations, as well as general anti-fraud prohibitions. Investment
advisers are subject to periodic examination by the SEC, and 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.
Our Funds are registered as investment companies with the SEC under the ICA, and various filings
are made with states under applicable state rules and regulations. The ICA regulates the relationship
between a mutual fund and its investment adviser and prohibits or severely restricts principal transactions
and joint transactions. Various regulations cover certain investment strategies that may be used by the
Funds for hedging and/or speculative purposes. To the extent the Funds purchase futures contracts, options
on futures contracts and foreign currency contracts, they are subject to the commodities and futures
regulations of the Commodity Futures Trading Commission.
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, investment 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.
The Company is also subject to federal and state laws affecting corporate governance, including the
Sarbanes-Oxley Act of 2002 (‘‘S-OX’’), as well as rules adopted by the SEC. In 2004, we implemented
compliance with Section 404 of S-OX. Our related report on internal controls over financial reporting for
2009 is included in Part I, Item 9A.
As a publicly traded company, we are also subject to the rules of the New York Stock Exchange (the
‘‘NYSE’’), the exchange on which our stock is listed, including the corporate governance listing standards
approved by the SEC.
Three of our subsidiaries, W&R, LEC and IFDI, are also registered as broker/dealers with the SEC
and the states. Much of the broker/dealer regulation has been delegated by the SEC to self-regulatory
organizations, principally the Municipal Securities Rulemaking Board and the Financial Industry
Regulatory Authority (‘‘FINRA’’), which is the primary regulator of our broker/dealer activities. These
self-regulatory organizations adopt rules (subject to approval by the SEC) that govern the industry and
conduct periodic examinations of our operations over which they have jurisdiction. Securities firms are also
subject to regulation by state securities administrators in those states in which they conduct business.
Broker/dealers are subject to regulations that cover all aspects of the securities business, including sales
10
practices, market making and trading among broker/dealers, the use and safekeeping of clients’ funds and
securities, capital structure, record-keeping, and the conduct of directors, officers and employees.
Violation of applicable regulations can result in the revocation of broker/dealer licenses, the imposition of
censures or fines, and the suspension or expulsion of a firm, its officers or employees.
W&R, LEC and IFDI are also each subject to certain net capital requirements pursuant to the
Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’). Uniform Net Capital Rule 15c3-1 of
the Exchange Act (the ‘‘Net Capital Rule’’) specifies the minimum level of net capital a registered broker/
dealer must maintain and also requires that part of its assets be kept in a relatively liquid form. The Net
Capital Rule is designed to ensure the financial soundness and liquidity of broker/dealers. Any failure to
maintain the required minimum net capital may subject us to suspension or revocation of our registration
or other limitations on our activity by the SEC, and suspension or expulsion by FINRA or other regulatory
bodies, and ultimately could require the broker/dealer’s liquidation. The maintenance of minimum net
capital requirements may also limit our ability to pay dividends. As of December 31, 2009, 2008 and 2007,
net capital for W&R, LEC and IFDI exceeded all minimum requirements.
Pursuant to the requirements of the Securities Investor Protection Act of 1970, W&R and LEC are
members of the Securities Investor Protection Corporation (the ‘‘SIPC’’). IFDI is not a member of the
SIPC. The SIPC provides protection against lost, stolen or missing securities (but not loss in value due to a
rise or fall in market prices) for clients in the event of the failure of a broker/dealer. Accounts are
protected up to $500,000 per client with a limit of $100,000 for cash balances. However, since the Funds,
and not our broker/dealer subsidiaries, maintain customer accounts, SIPC protection would not cover
mutual fund shareholders.
Title III of the USA PATRIOT Act, the International Money Laundering Abatement and
Anti-Terrorist Financing Act of 2001, imposes significant anti-money laundering requirements on all
financial institutions, including domestic banks and domestic operations of foreign banks, broker/dealers,
futures commission merchants and investment companies.
Our businesses may be materially affected not only by regulations applicable to us as an investment
adviser, broker/dealer or transfer agent, but also by law and regulations of general application. For
example, the volume of our principal investment advisory business in a given time period could be affected
by, among other things, existing and proposed tax legislation and other governmental regulations and
policies (including the interest rate policies of the Federal Reserve Board), and changes in the
interpretation or enforcement of existing laws and rules that affect the business and financial communities.
Competition
The financial services industry is a highly competitive global industry. According to the ICI, at the end
of 2009 there were more than 8,600 open-end investment companies of varying sizes, investment policies
and objectives whose shares are being offered to the public in the United States alone. Factors affecting
our business include brand recognition, business reputation, investment performance, quality of service
and the continuity of both client relationships and assets under management. A majority of mutual fund
sales go to funds that are highly rated by a small number of well-known ranking services that focus on
investment performance. Competition is based on distribution methods, the type and quality of
shareholder services, the success of marketing efforts and the ability to develop investment products for
certain market segments to meet the changing needs of investors, and to achieve competitive investment
management performance.
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 significant advertising budgets and established relationships with
brokerage houses with large distribution networks, which enable these fund complexes to reach broad
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client bases. Many investment management firms offer services and products similar to ours, as well as
other independent financial advisors. We also compete with brokerage and investment banking firms,
insurance companies, commercial 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
consistently 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. 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. Additionally, barriers to
entry into the investment management business are relatively few, and thus, we face a potentially growing
number of competitors, especially during periods of strong financial and economic markets.
The distribution of mutual funds and other investment products has undergone significant
developments in recent years, which has intensified the competitive environment in which we operate.
These developments include the introduction of new products, increasingly complex distribution systems
with multiple classes of shares, the development of Internet websites providing investors with the ability to
invest on-line, the introduction of sophisticated technological platforms used by financial advisors to sell
and service mutual funds for their clients, the introduction of separately managed accounts—previously
available only to institutional investors—to individuals, and growth in the number of mutual funds offered.
We believe our business model targets customers seeking personal assistance from financial advisors or
planners where the primary competition is companies distributing products through a financial advisor or
broker/dealer sales force. Our financial advisors compete primarily with large and small broker/dealers,
independent financial advisors and insurance representatives. The market for financial planning and advice
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, and the quality of
financial planning products and services offered.
We also face competition in attracting and retaining qualified financial advisors and employees. The
ability to continue to compete effectively in our business depends in part on our ability to compete
effectively in the labor market. In order to maximize this ability, we offer competitive compensation, a wide
range of benefits and have several stock-based compensation incentive programs.
Intellectual Property
We regard our names as material to our business, and have registered certain service marks associated
with our business with the United States Patent and Trademark Office.
Employees and Financial Advisors
At December 31, 2009, we had 1,462 full-time employees, consisting of 905 home office employees,
121 Legend employees, 102 managing principals, eight regional vice presidents, 14 associate managers, 156
field office support personnel, and 156 district managers.
At December 31, 2009, our sales force (excluding Legend advisors) was comprised of 2,393 financial
advisors, including 2,237 financial advisors who are independent contractors and 156 district managers who
are considered employees. Legend, which is a part of our Wholesale channel, had 423 retirement advisors
who are independent contractors.
Available Information
We file reports, proxy statements, and other information with the SEC, copies of which can be
obtained from the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549.
Information on the operation of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330.
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Reports we file electronically with the SEC via the SEC’s Electronic Data Gathering, Analysis and
Retrieval system (‘‘EDGAR’’) may be accessed through the Internet. The SEC maintains an Internet site
that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC, at www.sec.gov. The Company makes available free of charge our proxy
statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and amendments to those reports under the
‘‘Corporate’’ section of our internet website at
www.waddell.com as soon as it is reasonably practical after such filing has been made with the SEC.
Also available under the ‘‘Corporate’’ section is information on corporate governance. Stockholders
can view our Corporate Code of Business Conduct and Ethics (the ‘‘Code of Ethics’’), which applies to
directors, officers and all employees of the Company, our Corporate Governance Guidelines, and the
charters of key committees (including the Audit, Compensation, and Nominating and Corporate
Governance Committees). Printed copies of these documents are available to any stockholder upon
request by calling the investor relations department at 1-800-532-2757. Any future amendments to or
waivers of the Code of Ethics will be posted to our website, as required.
ITEM 1A. Risk Factors
Our Revenues, Earnings And Prospects Could Be Adversely Affected If The Securities Markets Decline. Our
results of operations are affected by certain economic factors, including the level of the securities markets.
The on-going existence of adverse market conditions, which is particularly material to us due to our high
concentration of assets under management in the United States domestic stock market, and lack of
investor confidence could result in investors further withdrawing from the markets or decreasing their rate
of investment, either of which could adversely affect our revenues, earnings and growth prospects to a
greater extent. Because our revenues are, to a large extent, investment management fees that are based on
the value of assets under management, a decline in the value of these assets adversely affects our revenues
and earnings. 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 more difficult. Our growth rate has
varied from year to year and there can be no assurance that the average growth rates sustained in recent
years will continue. Declines in the securities markets could significantly reduce future revenues and
earnings. In addition, a decline in the market value of these assets could cause our clients to withdraw
funds in favor of investments they perceive as offering greater opportunity or lower risk, which could also
negatively impact our revenues and earnings. The combination of adverse markets reducing sales and
investment management fees could compound on each other and materially affect earnings.
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 relative to market conditions and the performance of competing funds.
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 institutional and separate accounts. Conversely, poor relative performance
results in decreased sales, increased redemptions of the Funds’ shares and the loss of institutional and
separate 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.
Our Financial Advisors Are Classified As Independent Contractors, And Changes To Their Classification May
Increase Our Operating Expenses. From time to time, various legislative or regulatory proposals are
introduced at the federal or state levels to change the status of independent contractors’ classification to
employees for either employment tax purposes (withholding, social security, Medicare and unemployment
taxes) or other benefits available to employees. Currently, most individuals are classified as employees or
independent contractors for employment tax purposes based on 20 ‘‘common law’’ factors, rather than any
definition found in the Internal Revenue Code or Treasury regulations. We classify the majority of our
financial advisors as independent contractors for all purposes, including employment tax and employee
13
benefit purposes. There can be no assurance that legislative, judicial or regulatory (including tax)
authorities will not introduce proposals or assert interpretations of existing rules and regulations that
would change the independent contractor/employee classification of those financial advisors currently
doing business with us. The costs associated with potential changes, if any, with respect to these
independent contractor classifications could have a material adverse effect on the Company, including our
results of operations and financial condition. See Part I, Item 3. ‘‘Legal Proceedings.’’
Our Business Is Subject To Substantial Risk From Litigation, Regulatory Investigations And Potential
Securities Laws Liability. Many aspects of our business involve substantial risks of litigation, regulatory
investigations and/or arbitration, and from time to time, we are involved in various legal proceedings in the
course of operating our business. The Company is exposed to liability under federal and state securities
laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the
SEC, FINRA and other regulatory bodies. We, our subsidiaries, and/or certain of our past and present
officers, have been named as parties in legal actions, regulatory investigations and proceedings, and
securities arbitrations in the past and have been subject to claims alleging violation of such laws, rules and
regulations, which have resulted in the payment of fines and settlements. An adverse resolution of any
lawsuit, legal or regulatory proceeding or claim against us could result in substantial costs or reputational
harm to the Company, and have a material adverse effect on the Company’s business, financial condition
or results of operations, which, in turn, may negatively affect the market price of our common stock and
our ability to pay dividends. In addition to these financial costs and risks, the defense of litigation or
arbitration may divert resources and management’s attention from operations. See Part I, Item 3. ‘‘Legal
Proceedings.’’
Regulatory Risk Is Substantial In Our Business And Non-Compliance With Regulations, Or Changes In
Regulations, Could Have A Significant Impact On The Conduct Of Our Business And Our Prospects, Revenues And
Earnings. Our investment advisory and broker/dealer businesses are heavily regulated, primarily at the
federal level. Non-compliance 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. Non-compliance with applicable laws or regulations could also adversely affect
our reputation, prospects, revenues and earnings. In addition, changes in current legal, regulatory,
accounting, tax or compliance requirements or in governmental policies could adversely affect our
operations, revenues and earnings by, among other things, increasing expenses and reducing investor
interest in certain products we offer. Additionally, our profitability could be affected by rules and
regulations that impact the business and financial communities generally, including changes to the laws
governing state and federal taxation.
In recent years, allegations of late trading, market timing and selective disclosure of portfolio
information in the mutual fund industry have prompted various legislative and regulatory proposals, some
of which have been adopted by the SEC, the United States Congress, the legislatures in states in which we
conduct operations and the various regulatory agencies that supervise our operations. In particular, new
rules and regulations adopted by the SEC and FINRA place greater regulatory compliance and
administrative burdens on us and could have a substantial impact on the regulation, operation and
distribution of mutual funds and variable products, and could adversely affect our ability to distribute and
retain the assets we manage and our revenues and net income. For example, recently adopted rules require
investment advisers and mutual funds to adopt, implement, review and administer written policies and
procedures reasonably designed to prevent violation of the federal securities laws. Similarly, public
disclosure requirements applicable to mutual funds have become more stringent. We may require
additional staff to satisfy these obligations, which would increase our operating expenses.
An Increasing Percentage Of Our Assets Under Management Are Distributed Through Our Wholesale
Channel, Which Has Higher Redemption Rates Than Our Traditional Advisors Channel.
In recent years, we
have focused on expanding distribution efforts relating to our Wholesale channel. The percentage of our
assets under management in the Wholesale channel has increased from 10.4% at December 31, 2003 to
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47.0% at December 31, 2009, and the percentage of our total sales represented by the Wholesale channel
has increased from 16.5% for the year ended December 31, 2003 to 75.0% for the year ended
December 31, 2009. The success of sales in our Wholesale channel depends upon our maintaining strong
relationships with institutional accounts, certain strategic partners and our third party distributors. Many of
those distribution sources also offer investors competing funds that are internally or externally managed,
which could limit the distribution of our products. The loss of any of these distribution channels and the
inability to continue to access new distribution channels could decrease our assets under management and
adversely affect our results of operations and growth. There are no assurances that these channels and
their client bases will continue to be accessible to us. The loss or diminution of the level of business we do
with those providers could have a material adverse effect on our business, especially with the high
concentration of assets in certain funds in this channel, namely the Asset Strategy fund. In addition, the
Wholesale channel had redemption rates of 24.0% and 35.5% for the years ended December 31, 2009 and
2008, respectively, compared to redemption rates of 8.4% and 8.9% for our Advisors channel in the same
periods, reflecting the higher rate of transferability of investment assets in the Wholesale channel.
There May Be An Adverse Effect On Our Revenues And Earnings If Our Investors Redeem The Assets We
Manage On Short Notice. Mutual fund investors may redeem their investments in our mutual funds at any
time without any prior notice. Additionally, our investment management agreements with institutions and
other non-mutual fund accounts are generally terminable upon relatively short notice. Investors can
terminate their relationship with us, reduce their 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 ability
of our investors to accomplish this on short notice has increased materially due to the growth of assets in
our Wholesale channel, and with the high concentration of assets in certain funds in this channel, including
the Asset Strategy fund. The decrease in revenues that could result from any such event could have a
material adverse effect on our business and earnings.
There Are No Assurances That We Will Pay Future Dividends, Which Could Adversely Affect Our Stock Price.
The Waddell & Reed Financial, Inc. Board of Directors (the ‘‘Board of Directors’’) currently intends to
continue to declare quarterly dividends on our Class A common stock (our ‘‘common stock’’); however, the
declaration and payment of dividends is subject to the discretion of our Board of Directors. Any
determination as to the payment of dividends, as well as the level of such dividends, will depend on, among
other things, general economic and business conditions, our strategic plans, our financial results and
condition, 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(s). Any change in the level of
our dividends or the suspension of the payment thereof could adversely affect our stock price.
Our Ability To Hire And Retain Senior Executive Management And Other Key Personnel Is Significant To Our
Success And Growth. Our continued success depends to a substantial degree on our ability to attract and
retain qualified senior executive management and other key personnel to conduct our broker/dealer, fund
management and investment advisory businesses. The market for qualified fund managers, investment
analysts and financial advisors is extremely competitive. Additionally, we are dependent on our financial
advisors and select wholesale distributors to sell our mutual funds and other investment products. Our
growth prospects will be directly affected by the quality, quantity and productivity 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 Have Substantial Intangibles On Our Balance Sheet, And Any Impairment Of Our Intangibles Could
Adversely Affect Our Results of Operations And Financial Position. At December 31, 2009, our total assets
were approximately $983.4 million, of which approximately $221.2 million, or 22%, consisted of goodwill
and identifiable intangible assets. We complete an ongoing review of goodwill and intangible assets for
15
impairment on an annual basis or more frequently whenever events or a change in circumstances warrant.
Important factors in determining whether an impairment of goodwill or intangible assets might exist
include significant continued underperformance compared to peers, the likelihood of termination or
non-renewal of a mutual fund advisory or subadvisory contract or substantial changes in revenues earned
from such contracts, significant changes in our business and products, material and ongoing negative
industry or economic trends, or other factors specific to each asset or subsidiary being tested. Because of
the significance of goodwill and other intangibles to our consolidated balance sheets, the annual
impairment analysis is critical. Any changes in key assumptions about our business and our prospects, or
changes in market conditions or other externalities, could result in an impairment charge. Any such charge
could have a material effect on our results of operations and financial position.
There May Be Adverse Effects On Our Business And Earnings Upon The Termination Of, Or Failure To
Renew, Certain Agreements. A majority of our revenues are derived from investment management
agreements with the Funds that, as required by law, 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 of directors/trustees or its shareholders, as required by law. Additionally, our investment
management agreements provide for automatic termination in the event of assignment, which includes a
change of control, without the consent of our clients and, in the case of the Funds, approval of the Funds’
board of directors/trustees and shareholders to continue the agreements. There can be no assurances that
our clients will consent to any assignment of our investment management agreements, or that those and
other contracts will not be terminated or will be renewed on favorable terms, if at all, at their expiration
and new agreements may not be available. See ‘‘Business – Distribution Channels – Wholesale Channel,
Institutional Channel.’’ The decrease in revenues that could result from any such event could have a
material adverse effect on our business and earnings.
There Is No Assurance That New Information Systems Will be Implemented Successfully. A number of the
Company’s key information technology systems were developed solely to handle the Company’s particular
information technology infrastructure. The Company is in the process of evaluating and implementing new
information technology and systems that it believes could facilitate and improve our core businesses and
our productivity. There can be no assurance that the Company will be successful in implementing the new
information technology and systems or that their implementation will be completed in a timely or cost
effective manner. Failure to implement or maintain adequate information technology infrastructure could
impede our ability to support business growth.
Systems Failure May Disrupt Our Business And Result In Financial Loss And Liability To Our Clients. Our
business is highly dependent on financial, accounting and other data processing systems, and other
communications and information systems, including our mutual fund transfer agency system maintained by
a third-party service provider. We process a large number of transactions on a daily basis and rely upon the
proper functioning of computer systems of third parties. If any of these systems do not function properly,
we could suffer financial loss, business disruption, liability to clients, regulatory intervention or damage to
our reputation. If our systems are unable to accommodate an increasing volume of transactions, our ability
to expand could be affected. Although we have back-up systems in place, we cannot be sure that any
systems failure or
interruption, whether caused by a fire, other natural disaster, power or
telecommunications failure, acts of terrorism or war or otherwise will not occur, or that back-up
procedures and capabilities in the event of any failure or interruption will be adequate.
Regulations Restricting The Use Of ‘‘Soft Dollars’’ Could Result In An Increase In Our Expenses. On behalf
of our mutual fund and investment advisory clients, we make decisions to buy and sell securities for each
portfolio, select broker/dealers to execute trades, and negotiate brokerage commission rates. In connection
with these transactions, we may receive ‘‘soft dollar credits’’ from broker/dealers that we can use to defray
certain of our expenses. If regulations are adopted eliminating the ability of asset managers to use ‘‘soft
dollars,’’ our operating expenses could increase.
16
Fee Pressures Could Reduce Our Revenues And Profitability. There is a trend toward lower fees in some
segments of the investment management business. In addition, the SEC has adopted rules that are
designed to improve mutual fund corporate governance, which could result in further downward pressure
on investment advisory fees in the mutual fund industry. Accordingly, there can be no assurance that we
will be able to maintain our current fee structure. Fee reductions on existing or future new business could
have an adverse impact on our revenues and profitability.
We Could Experience Adverse Effects On Our Revenues, Profits And Market Share Due To Strong Competition
From Numerous And Sometimes Larger Companies. We compete with stock brokerage firms, mutual fund
companies, investment banking firms, insurance companies, banks, Internet investment sites, and other
financial institutions and individual registered investment advisers. Many of these companies not only offer
mutual fund investments and services, but also offer an ever-increasing number of other financial products
and services. Many of our competitors have more products and product lines, services and brand
recognition and may also have substantially greater assets under management. Many larger mutual fund
complexes have developed more extensive relationships with brokerage houses with large distribution
networks, which may enable those 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 or potential customers decide to invest with our competitors instead of with us, our market share,
revenues and income could decline.
The Terms Of Our Credit Facility Impose Restrictions On Our Operations That May Adversely Impact Our
Prospects And The Operations Of Our Business. There are no assurances that we will be able to raise
additional capital if needed, which could negatively impact our liquidity, prospects and operations. We
have entered into a 364-day revolving credit facility with various lenders providing for total loans of
$125.0 million. Under this facility, the lenders may, at their option upon our request, expand the facility to
$200.0 million. At February 18, 2010, there was no balance outstanding under the revolving credit facility.
The terms and conditions of our revolving credit facility and the money market loans impose restrictions
that affect, among other things, our ability to incur additional debt, make capital expenditures and
acquisitions, merge, sell assets, pay dividends and create or incur liens. Our ability to comply with the
financial covenants set forth in our credit facility could be affected by events beyond our control, and there
can be no assurance that we will achieve operating results that will comply with such terms and conditions,
a breach of which 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 meet our cash needs and satisfy our debt obligations will depend upon our future
operating performance, asset values, the perception of our creditworthiness and, indirectly, the market
value of our stock. These factors will be affected by prevailing economic, financial and business conditions
and other circumstances, some of which are beyond our control. We anticipate that any borrowings from
our existing credit facility, money market loans and/or cash provided by operating activities will provide
sufficient funds to finance our business plans, meet our operating expenses and service our debt
obligations 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, and there
can be no assurance that we will be able to renew or refinance our credit facility upon its maturity or on
favorable terms. If we are unable to raise capital or obtain financing, we may be forced to incur
unanticipated costs or revise our business plan.
Potential Misuse Of Funds And Information In The Possession Of Our Employees And/Or Advisors Could
Result In Liability To Our Clients, Subject Us To Regulatory Sanctions Or Otherwise Adversely Affect Our Revenues
and Profitability. Our business is based on the trust and confidence of our clients, for whom our financial
advisors handle a significant amount of funds, as well as financial and personal information. Although we
have implemented a system of internal controls to minimize the risk of fraudulent taking or misuse of
17
funds and information, there can be no assurance that our controls will be adequate or that a taking or
misuse by our employees or financial advisors can be prevented. We could be liable in the event of a taking
or misuse by our employees or financial advisors 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 liability. Any damage to the trust
and confidence placed in us by our clients may cause assets under management to decline, which could
adversely affect our revenues, financial condition, results of operations and business prospects.
Our Stockholders Rights Plan Could Deter Takeover Attempts, Which Some Of Our Stockholders May Believe
To Be In Their Best Interest. Under certain conditions, the rights under our stockholders rights plan entitle
the holders of such rights to receive shares of our common stock having a value equal to two times the
exercise price of the right. The rights are attached to each share of our outstanding common stock and
generally are exercisable only if a person or group acquires 15% or more of the voting power represented
by our common stock. Our stockholders rights plan could impede the completion of a merger, tender offer,
or other takeover attempt even though some or a majority of our stockholders might believe that a merger,
tender offer or takeover is in their best interests, and even if such a transaction could result in our
stockholders receiving a premium for their shares of our stock over the then current market price of our
stock.
Provisions Of Our Organizational Documents Could Deter Takeover Attempts, Which Some Of Our
Stockholders May Believe To Be In Their Best Interest. 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.
Our Board of Directors is divided into three classes, each of which is to serve for a staggered three-year
term after the initial classification and election, and incumbent directors may not be removed without
cause, all of which may make it more difficult for a third party to gain control of our Board of Directors. 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 Holding Company Structure Results In Structural Subordination And May Affect Our Ability To Fund
Our Operations And Make Payments On Our Debt. 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 $200 million of our senior notes, are dependent upon the earnings of our
subsidiaries and the distribution of earnings, loans or other payments by our subsidiaries to us. Our
subsidiaries are separate and distinct legal entities and have no obligation to pay any amounts due on our
debt 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 us 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 our debt to participate in those assets, would be effectively subordinated to the claims of those
subsidiaries’ creditors, including trade creditors. In addition, even if we were a creditor of any of our
subsidiaries, our rights as a creditor would be effectively subordinate to any security interest in the assets of
our subsidiaries and any indebtedness of our subsidiaries senior to that held by us.
ITEM 1B. Unresolved Staff Comments
None.
18
ITEM 2. Properties
Our home offices lease approximately 358,000 square feet for Waddell & Reed and Legend located in
Overland Park, Kansas and Palm Beach Gardens, Florida, respectively. This figure does not include office
space of 41,000 square feet formerly leased by Mackenzie Investment Management Inc. in Boca Raton,
Florida, which has been sublet. In addition, we lease office space for financial advisors and sales
management in various locations throughout the United States totaling approximately 639,000 square feet.
In the opinion of management, the office space leased by the Company is adequate for existing operating
needs.
ITEM 3. Legal Proceedings
The Company is involved from time to time in various legal proceedings, regulatory investigations and
claims incident to the normal conduct of business, which may include proceedings that are specific to us
and others generally applicable to the business practices within the industries in which we operate. A
substantial legal liability or a significant regulatory action against us could have an adverse effect on our
business, financial condition and on the results of operations in a particular quarter or year.
Michael E. Taylor, Kenneth B. Young, individuals, on behalf of themselves individually and on behalf of
others similarly situated v. Waddell & Reed, Inc., a Delaware Corporation; Waddell & Reed Financial, Inc., a
Delaware Corporation; Waddell & Reed Development, Inc., a Delaware Corporation; Waddell & Reed
Financial Advisors, a fictitious business name; and DOES 1 through 10 inclusive; Case No. 09-CV-2909 DMS
WVG; in the United States District Court for the Southern District of California.
In an action filed December 28, 2009, the Company, along with various of its affiliates, were sued in an
individual action, class action and Fair Labor Standards Act (‘‘FLSA’’) nationwide collective action by two
former advisors asserting misclassification of financial advisers as independent contractors. Plaintiffs assert
claims under the FLSA for minimum wages and overtime wages, and under California Labor Code
Statutes for timely pay wages, minimum wages, overtime compensation, meal periods, reimbursement of
losses and business expenses and itemized wage statements and a claim for Unfair Business Practices
under §17200 of the California Business & Professions Code. Plaintiffs seek declaratory and injunctive
relief and monetary damages. As yet, no responsive pleading has been filed, but the Company intends to
vigorously contest plaintiffs’ claims.
In the opinion of management, the ultimate resolution and outcome of this matter is uncertain. At this
stage of the litigation, the Company is unable to estimate the expense or exposure, if any, that it may
represent. The ultimate resolution of this matter, or an adverse determination against the Company, could
have a material adverse impact on the financial position and results of operations of the Company.
However, this possible impact is unknown and not reasonably determinable; therefore, no liability has been
recorded in the consolidated financial statements.
ITEM 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote
of the Company’s security holders, through the solicitation of proxies or otherwise.
19
PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Our Class A common stock (‘‘common stock’’) is traded on the NYSE under the ticker symbol
‘‘WDR.’’ The following table sets forth, for the periods indicated, the high and low sale prices of our
common stock, as reported by the NYSE, as well as the cash dividends declared for these time periods:
Market Price
2009
2008
Quarter
High
Low
Dividends Per
Share
High
Low
Dividends Per
Share
1
2
3
4
$
$
19.64
28.00
29.27
31.50
$
11.40
17.16
23.25
26.76
0.19
0.19
0.19
0.19
$
36.08
38.00
35.07
25.27
$
27.76
30.88
21.25
8.57
$
0.19
0.19
0.19
0.19
Year-end closing prices of our common stock were $30.54 and $15.46 for 2009 and 2008, respectively.
The closing price of our common stock on February 18, 2010 was $32.35.
According to the records of our transfer agent, we had 3,526 holders of record of common stock as of
February 18, 2010. We believe that a substantially larger number of beneficial stockholders hold such
shares in depository or nominee form.
Dividends
The declaration of dividends is subject to the discretion of the Board of Directors. 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 and capital requirements, compliance
with covenants in our revolving credit facility and such other factors as the Board of Directors deems
relevant. Our current credit facility does not limit our ability to pay cash dividends. To the extent assets are
used to meet minimum net capital requirements under the Net Capital Rule, they are not available for
distribution to stockholders as dividends. See Part I, Item 1. ‘‘Business—Regulation.’’ We anticipate that
quarterly dividends will continue to be paid.
Common Stock Repurchases
Our Board of Directors has authorized the repurchase of our common stock in the open market
and/or private purchases. The acquired shares may be used for corporate purposes, including shares issued
to employees in our stock-based compensation programs. During the year ended December 31, 2009, we
repurchased (i) 1,542,733 shares in the open market and privately at an aggregate cost, including
commissions, of $36.4 million, (ii) 6,493 mature shares from stock incentive plan participants to cover the
strike price of options exercised in connection with a Stock Option Restoration Program (the ‘‘SORP’’),
(iii) nine newly issued shares from SORP participants to cover their statutory minimum tax withholdings
on option exercises, and (iv) 327,301 shares from related parties to cover their tax withholdings from the
vesting of nonvested shares. The aggregate cost of shares obtained from related parties during 2009 was
$7.1 million. The purchase price paid by us for private repurchases of our common stock from related
parties is the closing market price on the purchase date.
20
The following table sets forth certain information about the shares of common stock we repurchased
during the fourth quarter of 2009.
Period
October 1 - October 31
November 1 - November 30
December 1 - December 31
Total Number of
Shares Purchased
(1)
-
10,000
93,693
Average
Price
Paid per
Share
$
-
31.00
30.15
Total
103,693
$
30.23
Total Number of
Shares Purchased
as Part of
Publicly
Announced
Program
Maximum Number (or
Approximate Dollar
Value) of Shares That
May Yet Be Purchased
Under The Program
-
10,000
93,693
103,693
n/a (1)
n/a (1)
n/a (1)
(1) On August 31, 1998, we announced that our Board of Directors approved a program to repurchase shares of our
common stock on the open market. Under the repurchase program, we are authorized to repurchase, in any
seven-day period, the greater of (i) 3% of our outstanding common stock or (ii) $50 million of our common stock.
We may repurchase our common stock through the NYSE, other national or regional market systems, electronic
communication networks or alternative trading systems such as POSIT, during regular or after-hours trading
sessions. POSIT is an alternative trading system that uses passive pricing to anonymously match buy and sell
orders. To date, we have not used electronic communication networks or alternative trading systems to
repurchase any of our common stock and do not intend to use such networks or systems in the foreseeable future.
Our stock repurchase program does not have an expiration date or an aggregate maximum number or dollar
value of shares that may be repurchased. Our Board of Directors reviewed and ratified the stock repurchase
program in July 2004. During the fourth quarter of 2009, all stock repurchases were made pursuant to the
repurchase program, including 71,193 shares, reflected in the table above, that were purchased in connection with
funding employee income tax withholding obligations arising from the vesting of nonvested shares.
21
Total Return Performance
Comparison of Cumulative Total Return (1)
e
u
l
a
V
x
e
d
n
I
180
160
140
120
100
80
60
40
Waddell & Reed Financial, Inc.
SNL Asset Manager
S&P 500
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
20FEB201005020010
12/31/09
The above graph compares the cumulative total stockholder return on the Company’s Class A
common stock from December 31, 2004 through December 31, 2009, with the cumulative total return of
the Standard & Poor’s 500 Stock Index and the SNL Asset Manager Index. The SNL Asset Manager Index
is a composite of 32 publicly traded asset management companies (including, among others, the companies
in the peer group reviewed by the Compensation Committee for executive compensation purposes)
prepared by SNL Financial, Charlottesville, Virginia. The graph assumes the investment of $100 in the
Company’s Class A common stock and in each of the two indices on December 31, 2004 with all dividends
being reinvested. The closing price of the Company’s Class A common stock on December 31, 2004 (the
last trading day of the year) was $23.89 per share. The stock price performance on the graph is not
necessarily indicative of future price performance.
Index
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
Waddell & Reed Financial, Inc.
SNL Asset Manager
S&P 500
100.00
100.00
100.00
90.46
127.18
104.91
121.25
147.49
121.48
164.01
167.89
128.16
72.92
79.79
80.74
148.62
129.44
102.11
Period Ending
(1) Cumulative Total Return assumes an initial investment of $100 on December 31, 2004, with the reinvestment of all dividends
through December 31, 2009.
22
ITEM 6. Selected Financial Data
The following table sets forth our selected consolidated financial and other 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, ‘‘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 Year Ended December 31,
2009 (1)
2008 (2)
2007
2006 (3)
2005 (4)
(in thousands, except per share data and number of financial advisors)
Revenues from:
Investment management fees
Underwriting and distribution fees
Shareholder service fees
Total revenues
$
Net income
per common share—basic
per common share—diluted
Dividends declared per common share
$
354,593
378,678
105,818
839,089
105,505
1.23
1.23
0.76
399,863
416,762
102,495
919,120
96,163
1.12
1.12
0.76
372,345
371,085
94,124
837,554
125,497
1.49
1.48
0.68
311,525
317,458
89,672
718,655
46,112
0.55
0.54
0.60
267,681
272,590
81,809
622,080
60,121
0.72
0.72
0.60
Advisor and productivity data
(excluding Legend):
Investment product sales (5)
Number of financial advisors
(end of period)
$
2,236,642
2,696,910
2,632,411
2,276,405
1,901,356
Average number of financial advisors
Investment product sales per advisor
$
2,393
2,336
957
2,366
2,297
1,174
2,293
2,190
1,189
2,255
2,290
994
2,409
2,453
776
Wholesale channel data:
Sales (net of commissions)
Number of external wholesalers
$ 14,745,230
34
15,598,998
35
9,469,932
34
4,541,812
26
2,346,749
23
Institutional channel sales
$
1,703,470
2,358,104
1,882,908
968,106
654,333
Assets under management
$
69,783
47,484
(in millions)
64,868
48,401
41,863
2009
2008
2007
2006
2005
As of December 31,
Balance sheet data:
Goodwill and identifiable intangible
assets
Total assets
Short-term debt
Long-term debt
Total liabilities
Stockholders’ equity
221.2
983.4
—
200.0
614.3
369.1
221.2
775.4
—
200.0
455.3
320.1
228.4
893.8
—
200.0
512.1
381.7
228.4
662.7
—
199.9
418.0
244.7
250.3
632.3
1.7
198.2
384.9
247.4
23
(1)
(2)
(3)
(4)
Includes a pre-tax charge of $3.7 million ($2.3 million net of tax) to reflect the ‘‘other than temporary’’ decline in value
of certain of the Company’s investments in affiliated mutual funds as the fair value of these investments had been below
cost for an extended period; a pre-tax charge of $1.1 million ($800 thousand net of tax) for severance and other
transaction costs in connection with the divestiture of our investment in ACF; and tax benefits of $1.6 million related to
carrying back a portion of the capital loss generated by the divestiture of our investment in ACF to fully offset capital
gains generated during the three year carryback period.
Includes a pre-tax charge of $16.5 million ($10.5 million net of tax) for restructuring charges consisting primarily of
severance costs associated with our voluntary separation program as well as costs associated with terminating various
projects under development; a charge of $7.2 million (not deductible for income tax purposes) to recognize the
impairment of goodwill associated with ACF; additional amortization of our deferred sales commission asset of
$6.5 million ($4.1 million net of tax) due to significant asset redemption activity and our review of the recoverability of
our deferred sales commission asset; and a pre-tax charge of $2.1 million ($1.4 million net of tax) related to the
settlement of miscellaneous litigation and other matters.
Includes a pre-tax charge of $55.0 million ($39.4 million net of tax) to recognize our settlement with the SEC, New York
Attorney General and Kansas Securities Commissioner related to market-timing allegations; a charge of $20.0 million
(not deductible for income tax purposes) to recognize the impairment of goodwill associated with ACF; charges
associated with the resolution of the Williams excessive fee litigation; expenses related to prior regulatory settlements;
and a pre-tax charge of $1.9 million ($1.3 million net of tax) related to employee separation costs at ACF in response to
a decline in investment performance and related loss of assets under management.
Includes pre-tax charges totaling $47.4 million ($30.8 million net of tax) recorded during 2005 related to settlements of
outstanding legal matters with Torchmark for actions in Alabama, California and Kansas, a settlement with the National
Association of Securities Dealers (‘‘NASD’’) and a consortium of states relating to variable annuity sales practices;
separation of employment payments to our former chief executive officer; a NASD arbitration settlement with a former
financial advisor; and other employee separation payments related to the restructuring of the Advisors channel.
(5)
Investment product sales are commissionable sales by our financial advisors, shown gross of commissions, and do not
include mutual funds sold at net asset value or sales of other wholesale mutual funds or insurance products.
24
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Item contains ‘‘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, which reflect the
current views and assumptions of management with respect to future events regarding our business and the
industry in general. These forward-looking statements include all statements, other than statements of historical
fact, regarding our financial position, business strategy and other plans and objectives for future operations,
including statements with respect to revenues and earnings, the amount and composition of assets under
management, distribution sources, expense levels, redemption rates and the financial markets and other
conditions. These statements are generally identified by the use of words such as ‘‘may,’’ ‘‘could,’’ ‘‘should,’’
‘‘would,’’ ‘‘believe,’’ ‘‘anticipate,’’ ‘‘forecast,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘intend,’’ ‘‘plan,’’ ‘‘project,’’ ‘‘outlook,’’
‘‘will,’’ ‘‘potential’’ and similar statements of a future or forward-looking nature. Readers are cautioned that any
forward-looking information provided by or on behalf of the Company is not a guarantee of future performance.
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 in the relative investment performance of our products, our inability to pay
future dividends, the loss of existing distribution channels or the inability to access new ones, a reduction of the
assets we manage on short notice, and adverse results of litigation and/or arbitration. All forward-looking
statements speak only as of the date on which they are made and we undertake no duty to update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
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.
Executive Overview
We are one of the oldest mutual fund and asset management firms in the country, with expertise in a
broad range of investment styles and across a variety of market environments. Our earnings and cash flows
are heavily dependent on financial market conditions. Significant increases or decreases in the various
securities markets, particularly United States equity markets, can have a material impact on our results of
operations, financial condition and cash flows.
Revenue Sources
We derive our revenues primarily from providing investment management, investment product
underwriting and distribution, and shareholder services administration to mutual funds and institutional
and separately managed accounts. Investment management fees, a substantial source of our revenues, are
based on the amount of average assets under management and are affected by sales levels, financial market
conditions, redemptions and the composition of assets. Underwriting and distribution revenues, another
substantial source of revenues, consist of commissions derived from sales of investment and insurance
products, distribution fees on certain variable products, and fees earned on fee-based asset allocation
products, as well as advisory services. The products sold have various commission structures and the
revenues received from product sales vary based on the type and amount sold. Rule 12b-1 service and
distribution fees earned for servicing and/or distributing certain mutual fund shares are based upon assets
under management and fluctuate based on sales, redemptions and financial market conditions. Other
service fees include transfer agency fees, custodian fees for retirement plan accounts and portfolio
accounting.
Expense Drivers
Our major expenses are underwriting and distribution-related commissions, employee compensation,
amortization of deferred sales commissions, subadvisory fee expenses and information technology expense.
25
Our Distribution Channels
One of our distinctive qualities is that we are a significant distributor of investment products. Our
retail products are distributed through our Advisors channel sales force of independent financial advisors
or through our Wholesale channel, which includes third-parties such as other broker/dealers, registered
investment advisors (including the retirement advisors of Legend) and various retirement platforms. We
also market our investment advisory services to institutional investors, either directly or through
consultants, in our Institutional channel.
In the Advisors channel, our sales force consists of 2,393 independent financial advisors providing
personal financial planning services to our clients across the United States, focusing on investment
strategies for retirement, education funding, insurance, estate planning and other specific needs.
In our Wholesale channel, we distribute retail mutual funds through broker/dealers, registered
investment advisors, including Legend, our Florida-based retirement planning subsidiary and various
retirement platforms. A team of 34 external wholesalers, six hybrid wholesalers and 33 internal wholesalers
lead the efforts in this channel.
Through our Institutional channel we manage assets for defined benefit pension plans, other
investment companies (as a subadvisor), defined contribution plans, endowments and high net worth
clients.
Sale of Austin, Calvert & Flavin, Inc.
On July 15, 2009, the Company completed the sale of its wholly-owned subsidiary, ACF, pursuant to a
stock purchase agreement dated June 26, 2009. The agreement includes an earnout provision based on a
percentage of revenues on existing accounts over the three-year period subsequent to the closing date.
Prior to the closing date, ACF had 10 employees and assets under management of $488.0 million.
We recorded charges for severance and other transaction costs of $1.1 million in connection with the
divestiture of our investment in ACF in 2009, which are included in general and administrative expenses in
the consolidated statement of income.
For tax purposes, this sale resulted in a capital loss of $28.1 million, which will generate future tax
benefits available to offset potential future and prior period capital gains. Due to the character of the loss
and the limited carryforward period permitted by law, the Company may not realize the full tax benefit of
the capital loss. We recorded tax benefits in 2009 of $1.6 million related to carrying back a portion of the
capital loss to fully offset capital gains generated during the applicable three-year carryback period.
Market Developments
During 2008, we operated in a period of high volatility in the financial markets—the Dow Jones
Industrial Average declined 34% and the Standard & Poor’s 500 Index declined 38%. Almost every class of
financial assets experienced significant price declines and high volatility. The U.S. government took steps
to stabilize the financial markets and the banking system to ensure continued availability of commercial
and consumer credit. Markets rallied in 2009; the Dow Jones Industrial Average increased 19% and the
Standard & Poor’s 500 Index increased 23%. Even with the recent market improvements, the economic
outlook remains uncertain and we anticipate a challenging business climate in the foreseeable future.
Consequences of Market Developments
We took steps in the fourth quarter of 2008 to manage our expenses in response to the deteriorating
market conditions. In December 2008, we offered a voluntary separation program to our employees that
included enhanced severance benefits. A total of 169 employees accepted the program, which for most was
effective by December 31, 2008. Related to this program, we recorded a restructuring charge of
$16.5 million in general and administrative expenses. During 2009 we focused on cost control, especially in
the areas of salaries and benefits, business meetings and travel, and convention costs.
26
Average assets under management during 2009 were down 9% compared to average assets under
management during 2008, which resulted in a significant decline in revenue in 2009 relative to 2008.
However, our assets under management as of December 31, 2009 have returned to the peak levels
achieved in 2008. We will continue to employ expense control in response to uncertain future market
conditions, but plan to add investment management, back office and sales personnel strategically to
support our current growth.
Current State
Our balance sheet remains strong, as we ended the year with cash and investments of $314.9 million.
We renewed our 364-day unsecured line of credit in October of 2009 with commitments from a syndicate
of banks for $125.0 million, expandable to $200.0 million. We believe that our current liquidity position will
allow us to manage through further possible market declines for the foreseeable future.
Our $200.0 million in outstanding senior notes are scheduled to mature in January 2011 and we are
currently evaluating our refinancing alternatives.
27
Assets Under Management
Assets under management of $69.8 billion on December 31, 2009 grew 47% compared to the
$47.5 billion reported a year earlier due to market appreciation of $13.5 billion and net sales of $8.7 billion
generated primarily by the Wholesale channel.
Change in Assets Under Management (1)
Advisors
Channel
Wholesale
Channel
Institutional
Channel
Total
(in millions)
December 31, 2009
Beginning Assets
Disposition of Assets
Sales (net of commissions)
Redemptions
Net Sales
Net Exchanges
Reinvested Dividends and Capital Gains
Net Flows
Market Appreciation
Ending Assets
December 31, 2008
Beginning Assets
Sales (net of commissions)
Redemptions
Net Sales
Net Exchanges
Reinvested Dividends and Capital Gains
Net Flows
Market Depreciation
Ending Assets
December 31, 2007
Beginning Assets
Sales (net of commissions)
Redemptions
Net Sales
Net Exchanges
Reinvested Dividends and Capital Gains
Net Flows
Market Appreciation
Ending Assets
$
23,472
17,489
-
3,202
(3,052)
150
(197)
329
282
5,720
-
14,745
(5,951)
8,794
150
124
9,068
6,261
29,474
32,818
34,562
3,724
(3,771)
(47)
(150)
325
128
(11,218)
23,472
29,905
3,551
(3,829)
(278)
(180)
245
(213)
4,870
21,537
15,599
(8,541)
7,058
145
(271)
6,932
(10,980)
17,489
10,819
9,470
(2,795)
6,675
173
(24)
6,824
3,894
$
$
$
$
$
34,562
21,537
6,523
(488)
1,703
(1,942)
(239)
41
113
(85)
1,541
7,491
8,769
2,359
(1,561)
798
-
119
917
(3,163)
6,523
7,677
1,883
(2,128)
(245)
-
105
(140)
1,232
8,769
47,484
(488)
19,650
(10,945)
8,705
(6)
566
9,265
13,522
69,783
64,868
21,682
(13,873)
7,809
(5)
173
7,977
(25,361)
47,484
48,401
14,904
(8,752)
6,152
(7)
326
6,471
9,996
64,868
(1)
Includes all activity of the Funds and institutional and separate accounts, including money market funds and
transactions at net asset value, accounts for which we receive no commissions.
28
Average assets under management, which are generally more indicative of trends in revenue for
providing investment management services than the year over year change in ending assets under
management, decreased by 9% as compared to 2008. However, average assets under management for the
fourth quarter of 2009 were $67.0 billion, a 38% increase from the fourth quarter average of $48.4 billion
in 2008. Our quarterly average assets under management have increased each quarter since a low mark in
the first quarter of 2009.
Average Assets Under Management
2009
2008
2007
Average
Percentage
of Total
Average
Percentage
of Total
Average
Percentage
of Total
(in millions, except percentage data)
$
$
$
$
$
$
$
$
18,916
5,211
1,600
25,727
22,556
1,147
301
24,004
6,208
658
-
6,866
47,680
7,016
1,901
56,597
74%
20%
6%
100%
94%
5%
1%
100%
90%
10%
-
100%
85%
12%
3%
100%
24,201
4,490
1,428
30,119
23,268
413
152
23,833
7,445
584
-
8,029
54,914
5,487
1,580
61,981
80%
15%
5%
100%
98%
2%
0%
100%
93%
7%
-
100%
89%
9%
2%
100%
27,048
4,154
1,046
32,248
14,395
380
64
14,839
7,199
614
-
7,813
48,642
5,148
1110
54,900
84%
13%
3%
100%
97%
3%
0%
100%
92%
8%
-
100%
89%
9%
2%
100%
Distribution Channel:
Advisors Channel
Equity
Fixed income
Money market
Total
Wholesale Channel
Equity
Fixed income
Money market
Total
Institutional Channel
Equity
Fixed income
Money market
Total
Total by Asset Class:
Equity
Fixed income
Money market
Total
29
The following table summarizes our five largest mutual funds as of December 31, 2009 by ending
assets under management and investment management fees for the last three years. The assets under
management and management fees of our five largest mutual funds are presented as a percentage of our
total assets under management and total management fees.
Five Largest Mutual Funds by Ending Assets Under Management and Investment Management Fees
2009
2008
2007
Ending
Percentage
of Total
Ending
Percentage
of Total
Ending
Percentage
of Total
(in millions, except percentage data)
By Assets Under Management:
Ivy Asset Strategy
Ivy Global Natural Resources
Advisors Asset Strategy
Advisors Core Investment
Advisors Science & Technology
$
20,029
5,736
3,235
2,657
2,289
29% $
8%
5%
4%
3%
10,430
2,618
2,411
2,377
1,670
Total
$
33,946
49% $
19,506
22%
5%
5%
5%
4%
41%
8,419
8,464
3,118
4,240
2,851
27,092
(in thousands, except percentage data)
By Management Fees:
Ivy Asset Strategy
Ivy Global Natural Resources (1)
Advisors Asset Strategy
Advisors Science & Technology
Advisors Core Investment
$
82,313
34,353
18,139
15,953
15,118
23% $
10%
5%
4%
4%
71,957
56,247
19,966
19,202
21,053
Total
$ 165,876
46% $ 188,425
18%
14%
5%
5%
5%
47%
24,802
50,944
15,696
22,310
25,861
139,613
14%
15%
5%
7%
5%
46%
7%
14%
4%
6%
7%
38%
(1) For the years ended December 31, 2009, 2008 and 2007, we paid subadvisory fees of $17.3 million, $28.8 million
and $25.6 million, respectively.
30
Results of Operations
Net Income
For the Year Ended
December 31,
2009
2008
2007
Variance
2009 vs.
2008
2008 vs.
2007
Net Income
Earnings per share:
Basic
Diluted
Operating Margin
$ 105,505
$
$
1.23
1.23
20%
(in thousands, except percentage data)
10%
125,497
96,163
1.12
1.12
18%
1.49
1.48
23%
10%
10%
2%
(cid:2)23%
(cid:2)25%
(cid:2)24%
(cid:2)5%
We reported net income of $105.5 million, or $1.23 per diluted share, in 2009 compared to
$96.2 million, or $1.12 per diluted share, in 2008 and $125.5 million, or $1.48 per diluted share, in 2007.
Operating results for 2009 include a first quarter charge of $3.7 million recorded in investment and
other income in the consolidated statement of income to reflect the ‘‘other than temporary’’ decline in
value of certain of the Company’s investments in affiliated mutual funds as the fair value of these
investments had been below cost for an extended period. Charges for severance and other transaction costs
of $1.1 million were recorded in 2009 in connection with the divestiture of our investment in ACF and are
included in general and administrative expenses in the consolidated statement of income. Tax benefits of
$1.6 million related to carrying back a portion of the capital loss to fully offset capital gains generated
during the applicable three-year carryback period based on the divestiture of ACF were also recorded in
2009’s operating results. Operating results for 2008 include a restructuring charge of $16.5 million, a
goodwill impairment charge of $7.2 million related to ACF based on declines in ACF’s assets under
management and the related adverse impact on its earnings potential, and $6.5 million in additional
amortization to reduce our deferred sales commission asset. Each of these items is described in detail
below.
During the fourth quarter of 2008 we offered a voluntary separation program to our employees that
included enhanced severance benefits. A total of 169 employees accepted the program, which for most was
effective by December 31, 2008. Related to this program, we recorded a restructuring charge of
$16.5 million, included in general and administrative expenses in the consolidated statement of income.
The restructuring charge includes $700 thousand for termination of various projects under development.
Due to significant asset redemption activity and our review of the recoverability of our deferred sales
commission assets in the fourth quarter of 2008, we recorded $6.5 million in additional amortization
($700 thousand related to Class B shares and $5.8 million related to Class C shares).
Based on a review of goodwill and intangibles in the fourth quarter of 2008, we recorded a goodwill
impairment charge of $7.2 million related to ACF based on declines in ACF’s assets under management
and the related adverse impact on its earnings potential.
Total Revenues
Total revenues decreased 9% in 2009 compared to 2008, attributable to a decline in average assets
under management of 9% and a decrease in gross sales of 9%, while revenues increased 10% in 2008
31
compared to 2007, based on growth in average assets under management of 13% and an increase in gross
sales of 45%.
For the Year Ended
December 31,
2009
2008
2007
Variance
2009 vs.
2008
2008 vs.
2007
Investment management fees
Underwriting and distribution fees
Shareholder service fees
Total revenues
$
354,593
378,678
105,818
$
839,089
Investment Management Fee Revenues
(in thousands, except percentage data)
(cid:2)11%
(cid:2)9%
3%
(cid:2)9%
399,863
416,762
102,495
372,345
371,085
94,124
919,120
837,554
7%
12%
9%
10%
Investment management fee revenues are earned for providing investment advisory services to the
Funds and to institutional and separate accounts. Investment management fee revenues decreased
$45.3 million, or 11%, in 2009 and increased $27.5 million, or 7%, in 2008.
Revenues from investment management services provided to our retail mutual funds, which are
distributed through the Advisors, Wholesale and Institutional channels, were $326.3 million in 2009 and
decreased $38.4 million, or 11%, compared to 2008, while the related retail average assets decreased 8%.
Revenues from investment management services provided to our retail mutual funds were $364.7 million in
2008 and increased $31.9 million, or 10%, compared to 2007, while the related retail average assets
increased 15%. Investment management fee revenues increased less than the related retail average assets
due to significant sales growth in our Asset Strategy funds, which have lower than average management fee
rates. Retail sales in 2009 were $17.9 billion and decreased 7% compared to $19.3 billion in 2008. Retail
sales in 2008 increased 48% compared to sales in 2007, with the majority of the growth in retail sales
occurring in our Wholesale channel.
Prior to the sale of ACF effective July 15, 2009, ACF had assets under management of $488.0 million,
which along with related investment management fee revenues, were previously included in the
Institutional channel.
Institutional and separate account revenues were $28.3 million, $35.2 million and $39.5 million in
2009, 2008 and 2007, respectively. While the decrease in account revenues in 2009 was partially due to the
sale of ACF, we experienced a further decline in average assets of 12%, and a management fee rate
decrease on certain institutional accounts. The decrease in account revenues in 2008 was primarily
attributable to a management fee rate decrease on certain institutional accounts.
Long-term redemption rates (which exclude money market fund redemptions) in the Advisors
channel improved to 8.4% in 2009 compared to 8.9% and 9.1% in 2008 and 2007, respectively. In the
Wholesale channel, long-term redemption rates were 24.0% in 2009, a decrease from 35.5% in 2008 and an
increase compared to 18.5% in 2007. The Wholesale channel’s elevated rate in 2008 is a direct
consequence of the volatility in the financial markets that occurred during the second half of the year. We
expect the Advisors channel long-term redemption rate to remain lower than that of the Wholesale
channel due to the personal and customized nature in which our financial advisors provide service to our
clients.
The long-term redemption rate for our Institutional channel was 28.3% in 2009 compared to 19.4% in
2008 and 27.2% in 2007. Subadvisory and defined contribution pension business comprise 60% of the
Institutional channel’s assets as of December 31, 2009 and unlike defined benefit pension accounts, the
32
active daily flows in or out of these accounts has resulted in an increase in contributions and withdrawals
and has impacted the channel’s redemption rate increase.
Underwriting and Distribution Fee Revenues and Expenses
The following tables illustrate our underwriting and distribution fee revenues and expenses segregated
by distribution channel for the years ended December 31, 2009, 2008 and 2007:
Total
2009
2008
2007
2009 vs.
2008
2008 vs.
2007
Revenue
Expenses:
Direct
Indirect
Total Expenses
$
378,678
(in thousands, except percentage data)
(cid:2)9%
416,762
371,085
325,836
124,089
449,925
361,005
135,817
496,822
300,929
121,345
422,274
12%
20%
12%
18%
(cid:2)56%
(cid:2)10%
(cid:2)9%
(cid:2)9%
11%
Net Underwriting & Distribution
$ (71,247)
(80,060)
(51,189)
Revenue
Expenses:
Direct
Indirect
Total Expenses
Advisors Channel
2009
2008
2007
$
213,258
235,343
238,210
147,469
83,917
231,386
163,183
92,384
255,567
163,513
84,777
248,290
Net Underwriting & Distribution
$ (18,128)
(20,224)
(10,080)
Revenue
Expenses:
Direct
Indirect
Total Expenses
Wholesale Channel
2009
2008
2007
$
165,420
181,419
132,875
178,367
40,172
218,539
197,822
43,433
241,255
137,416
36,568
173,984
Net Underwriting & Distribution
$ (53,119)
(59,836)
(41,109)
2009 vs.
2008
2008 vs.
2007
(cid:2)9%
(cid:2)10%
(cid:2)9%
(cid:2)9%
10%
(cid:2)1%
0%
9%
3%
(cid:2)101%
2009 vs.
2008
2008 vs.
2007
(cid:2)9%
(cid:2)10%
(cid:2)8%
(cid:2)9%
11%
37%
44%
19%
39%
(cid:2)46%
The Advisors channel is the largest source of underwriting and distribution revenue, given that a
significant amount of Wholesale mutual fund sales are load-waived, with the exception of investment
product sales by Legend advisors. A portion of underwriting and distribution fee revenues are derived
from sales commissions charged on front-end load products sold by our financial advisors, including
mutual fund Class A shares (those sponsored by the Company and those underwritten by other
non-proprietary mutual fund companies), variable annuities and financial planning fees. The remainder of
underwriting and distribution revenues are received from Rule 12b-1 asset-based distribution and service
fees earned on both load and load-waived and deferred-load products sold by our financial advisors and
33
third party intermediaries, asset-based fees earned on our asset allocation products, and commissions
earned on the sale of other insurance products.
We divide the costs of underwriting and distribution into two components—direct costs and indirect
costs. Direct selling costs fluctuate with sales volume, such as advisor commissions and commission
overrides paid to field management, advisor incentive compensation, commissions paid to third parties and
to our own wholesalers, and related overrides in our Wholesale channel. To a lesser extent, direct selling
costs fluctuate with assets under management, such as Rule 12b-1 service and distribution fees paid to the
same parties. Indirect selling costs are fixed costs that do not necessarily fluctuate with sales levels. Indirect
costs include expenses incurred by our home office and field offices such as wholesaler salaries, marketing
costs, promotion and distribution of our products through the Advisors and Wholesale channels; support
and management of our financial advisors such as field office overhead, sales programs and technology
infrastructure; and costs of managing and supporting our wholesale efforts through technology
infrastructure and personnel. While the Institutional channel does have marketing expenses, those
expenses are accounted for in our compensation and related costs and general and administrative expense
lines instead of underwriting and distribution because of the channel’s integration with our investment
management division, its relatively small size and the fact that there are no Rule 12b-1 fees, loads, CDSCs,
or any other charges to separate account clients except investment management fees.
We recover certain of our underwriting and distribution costs through Rule 12b-1 service and
distribution fees, which are paid by the Funds. All Rule 12b-1 service and distribution fee revenue received
from the Funds is recorded on a gross basis.
Underwriting and distribution revenues earned in 2009 decreased by $38.1 million, or 9%, compared
to 2008. A majority of the decrease in revenues was due to lower Rule 12b-1 asset-based service and
distribution fees of $23.8 million as a result of a decrease in average mutual fund assets under
management. Revenues from front-load product sales sold in the Advisors channel decreased by
$12.7 million, which included a decrease in Class A share revenues of $9.5 million and a decrease in
variable annuity revenues of $3.6 million year over year. Revenues from front-load product sales sold in the
Wholesale channel decreased $2.3 million. In the Wholesale channel, CDSC revenues decreased by
$3.3 million due to higher mutual fund redemptions in 2008, concentrated in the second half of the year.
Lower advisory fees and point of sale commissions earned by Legend decreased revenue by $3.3 million
compared to the prior year. Offsetting these decreases, revenues from fee-based allocation products
increased $7.0 million and insurance-related revenues increased $1.0 million.
Underwriting and distribution revenues increased by $45.7 million, or 12%, in 2008 compared to 2007.
A majority of the increase in revenues was due to higher Rule 12b-1 asset-based service and distribution
fees of $36.7 million as a result of an increase in average mutual fund assets under management.
Additionally, revenues from fee-based asset allocation products increased $11.5 million. CDSC revenues
increased in the Wholesale channel by $4.9 million due to higher redemptions in 2008, concentrated in the
second half of the year. Revenue on front-load product sales sold in the Wholesale channel increased by
$3.0 million but decreased in the Advisors channel by $4.5 million. Financial planning revenues decreased
by $1.6 million. Lower advisory fees, Rule 12b-1 service fee revenues and point of sale commissions earned
by Legend decreased revenue by $6.9 million compared to 2007 as their assets under administration
decreased from $5.1 billion at the beginning of 2008 to $3.5 billion at the end of the year.
Underwriting and distribution expenses in 2009 decreased by $46.9 million, or 9%, compared with the
prior year. A significant part of this decrease was attributed to lower direct expenses in the Wholesale
channel of $19.5 million. Specifically, we incurred lower amortization expense of deferred sales
commissions, lower dealer compensation paid to third party distributors and lower wholesaler
commissions, offset partially by higher Rule 12b-1 asset-based service and distribution expenses. During
2008, based on significant asset redemption activity in the latter part of the year and our review of the
recoverability of our deferred sales commission assets, we recorded $6.5 million in additional amortization
34
in the Wholesale channel ($700 thousand related to Class B shares and $5.8 million related to Class C
shares). Direct expenses in the Advisors channel decreased $15.7 million, or 10%, compared to 2008 due to
lower Rule 12b-1 asset-based service and distribution commissions of $11.9 million, lower point of sale
commissions on front-load product sales of $10.7 million and lower fee-based asset allocation expenses of
$1.1 million, offset partially by higher amortization expense of deferred sales commissions of $6.8 million
and higher insurance-related expenses of $600 thousand. The decrease in indirect expenses in the Advisors
channel of $8.5 million was due to decreased employee compensation and benefits expenses, lower
convention costs and lower business meetings and travel expenses, partially offset by higher field office
expenses, information technology costs and group health insurance costs. The indirect expenses decrease
of $3.3 million in the Wholesale channel was due to lower business meeting expenses and marketing and
promotion costs.
Underwriting and distribution expenses increased by $74.5 million, or 18%, in 2008, when compared
with 2007. A majority of this increase was attributed to higher direct expenses in the Wholesale channel of
$60.4 million as a result of higher sales volume and an increase in average wholesale assets under
management. Specifically, we incurred higher Rule 12b-1 asset-based service and distribution expenses,
increased dealer compensation paid to third party distributors, higher wholesaler commissions and higher
amortization expense of deferred sales commissions. As previously mentioned, 2008 includes $6.5 million
in additional amortization expense of deferred sales commission assets. This additional expense was
partially offset by higher CDSC revenue of $2.0 million received in the fourth quarter due to higher
redemptions. Direct expenses in the Advisors channel remained largely unchanged due to higher
amortization expense of deferred sales commissions of $1.8 million and higher Rule 12b-1 asset-based
service and distribution commissions of $1.4 million, offset by lower point of sale commissions on
front-load product sales of $2.6 million and a $1.2 million decrease in financial planning fee expenses. The
increase in indirect expenses in the Advisors channel of $7.6 million was due to increased convention,
employee compensation and benefits, information technology and field office expenses. The indirect
expenses increase of $6.9 million in the Wholesale channel was driven by higher costs associated with
developing our non-proprietary distribution outlets. These costs include a $4.2 million increase for higher
marketing costs for promotion and distribution of our products through the Wholesale channel based on
higher sales volume and a $2.7 million increase in compensation expenses, partially due to adding more
wholesalers during 2008.
Shareholder Service Fee Revenues
Shareholder service fee revenues primarily include transfer agency fees, custodian fees from
retirement plan accounts, and portfolio accounting and administration fees. Portfolio accounting and
administration fees are asset-based revenues while all other shareholder service fee revenues are based on
number of accounts. During 2009, shareholder service fee revenues increased $3.3 million, or 3%, over
2008, primarily due to a higher asset base year over year in certain share classes.
During 2008, shareholder service fee revenue increased by $8.4 million, or 9%, compared to 2007. Of
this increase, $2.8 million is due to a higher asset base compared to 2007 and $5.6 million is attributable to
account-based revenues, due to a 16% increase in the average number of accounts. The average number of
shareholder accounts grew to 3.56 million in 2008 compared to 3.06 million in 2007. Revenues did not
correlate with the increase in average number of accounts due to a lower fee structure for servicing certain
wholesale accounts. A portion of the fee reduction for wholesale accounts was offset by negotiating a
networking fee reimbursement with the Funds for amounts paid to third party broker/dealers.
35
Total Operating Expenses
Operating expenses decreased $84.5 million, or 11%, in 2009 compared to 2008 primarily due to
decreased underwriting and distribution expenses and subadvisory fees, as well as a $16.5 million
restructuring charge recorded in general and administrative and a goodwill impairment charge, both
recorded in 2008. Underwriting and distribution expenses are discussed above.
Operating expenses increased $110.9 million, or 17%, in 2008 compared to 2007 primarily due to
increased underwriting and distribution expense, a 2008 restructuring charge recorded in general and
administrative and a goodwill impairment charge recorded in 2008.
For the Year Ended
December 31,
2009
2008
2007
Variance
2009 vs.
2008
2008 vs.
2007
Underwriting and distribution
Compensation and related costs
General and administrative
Subadvisory fees
Depreciation
Goodwill impairment
$
449,925
124,463
58,034
23,202
13,653
-
Total operating expenses
$
669,277
Compensation and Related Costs
(in thousands, except percentage data)
(cid:2)9%
5%
(cid:2)24%
(cid:2)44%
3%
NM
(cid:2)11%
496,822
119,057
76,370
41,122
13,198
7,222
422,274
115,905
48,487
43,844
12,412
-
753,791
642,922
18%
3%
58%
(cid:2)6%
6%
NM
17%
Compensation and related costs in 2009 increased $5.4 million, or 5%, compared to 2008. An
incentive compensation expense increase of $8.8 million was the primary driver, as well as increased
pension plan costs of $2.2 million based on unfavorable investment returns on our pension assets
experienced during 2008. We also had decreased capitalized software development activities of $2.0 million
and increased group insurance costs of $300 thousand based on unfavorable claims experience. These
expense increases were offset by decreased base salaries and payroll taxes of $8.1 million, primarily due to
the voluntary separation program effective as of December 31, 2008 and the fact that there were no salary
increases in 2009. Savings plan costs also declined $1.3 million. Share-based compensation increased
$1.6 million compared to 2008 primarily due to higher amortization expense associated with our April
2008, December 2008 and April 2009 grants of nonvested stock compared to grants that became fully
vested in 2009 and, to a lesser extent, due to higher non-employee advisor (independent contractor) stock
award amortization expense in 2009. Non-employee stock awards are adjusted to market each period
based on the fluctuation in our share price. These share-based compensation increases were partially offset
by lower amortization expense in 2009 for shares vested under the voluntary separation program in 2008.
Compensation and related costs in 2008 increased $3.2 million, or 3%, compared to 2007. Base
salaries and payroll taxes contributed $6.3 million to the increase, primarily due to an increase in average
headcount of 8.3% and annual merit increases during 2008. Share-based compensation accounted for
$5.3 million of the increase primarily due to higher amortization expense associated with our April 2007,
December 2007 and April 2008 grants of nonvested stock compared to grants that became fully vested in
2008. Group insurance costs increased $1.9 million compared to 2007 based on unfavorable claims
experience. These expense increases were offset by decreased incentive compensation expense of
$7.5 million and increased capitalized software development activities of $2.3 million, primarily due to
technology initiatives associated with expansion of our brokerage capabilities and lower pension and
savings plan costs of $1.2 million based on favorable investment returns on our pension assets experienced
during 2007.
36
General and Administrative Expenses
General and administrative expenses are operating costs other than those related to compensation
and to distribution efforts, including, but not limited to, computer services and software costs,
telecommunications, facilities costs of our home offices, costs of professional services including legal and
accounting, and insurance.
General and administrative expenses decreased $18.3 million for the year ended December 31, 2009
compared to the prior year. Fiscal year 2008 included a $16.5 million restructuring charge related to the
voluntary separation of 169 employees and the termination of various projects under development. The
$16.5 million charge was comprised of $15.0 million in employee compensation and other benefit costs,
$795 thousand for accelerated vesting of nonvested stock and $717 thousand in project development costs,
including $500 thousand for the early termination of a contract. We also recorded a $1.6 million charge for
the settlement of miscellaneous litigation in 2008. Excluding these charges, general and administrative
expenses decreased $200 thousand compared to 2008. These lower costs are due to a focus on cost control
in the areas of business meetings and travel and personnel recruiting, offset partially by increased expenses
for third party subaccounting and networking fees and fund expenses.
General and administrative expenses increased $27.9 million in 2008 compared to 2007. Fiscal year
2008 included a total of $18.1 million of restructuring and litigation-related charges as noted above.
Excluding these charges, general and administrative expenses increased $9.8 million compared to 2007.
Higher costs for third party subaccounting, networking fees and computer services were primarily
responsible for the increase.
Goodwill Impairment
Due to the decline in the financial markets during the second half of 2008, we performed a review of
goodwill and intangibles in the fourth quarter. We recorded an impairment charge of $7.2 million to write
off the remaining balance of ACF’s goodwill based on declines in ACF’s assets under management and the
related adverse impact on its earnings potential. ACF was sold during the third quarter of 2009.
Subadvisory Fees
Subadvisory fees represent fees paid to other asset managers for providing advisory services for
certain mutual fund portfolios. These expenses reduce our operating margin since we pay out
approximately half of our management fee revenue received from subadvised products. Gross
management fee revenues for products subadvised by others were $46.0 million for the year ended
December 31, 2009 compared to $81.0 million and $85.4 million for 2008 and 2007, respectively, due to
declines in average assets of 45% and 2%, respectively. Subadvisory expenses followed the same declining
pattern for the past three years. We began direct management of three previously subadvised funds during
2009, which contributed to the decline in both subadvisory revenues and expenses in 2009.
Subadvised assets under management at December 31, 2009 were $7.0 billion compared to the annual
average of $5.6 billion for 2009. Since subadvisory expenses are a function of sales, redemptions and
market action for subadvised assets, the higher asset base will likely result in an increase to both gross
management fee revenues and subadvisory expenses for the coming year.
Other Income and Expenses
Investment and Other Income
Investment and other income increased $1.9 million in 2009 compared to the prior year. Included in
the current year is a non-cash charge of $3.7 million to reflect the ‘‘other than temporary’’ impairment of
certain of the Company’s investments in affiliated mutual funds as the fair value of those investments was
below cost for an extended period. Excluding the impairment in 2009, investment and other income
increased $5.6 million compared to 2008. Mark-to-market adjustments to our trading portfolio accounted
37
for an increase of $10.1 million year over year. Gains on mutual fund holdings in our trading portfolio were
$4.6 million compared to losses of $5.5 million in 2008. Gains from the sale of available-for-sale mutual
fund holdings in 2009 were $2.6 million and there were no gains from the sale of available-for-sale mutual
fund holdings in 2008. These increases were partially offset by lower investment income of $5.3 million due
to lower average balances and lower effective interest rates on cash and short-term investments in 2009,
other write-downs of $1.0 million and lower dividend income on available-for-sale mutual fund holdings of
$800 thousand.
Investment and other income for 2008 decreased by $13.3 million compared to 2007. Mark-to-market
adjustments to our trading portfolio accounted for $6.4 million of the decline. Losses in our trading
portfolio were $5.5 million compared to gains of $900 thousand in 2007. There were no gains from the sale
of available-for-sale mutual fund holdings in 2008 compared to $3.6 million in gains recorded on sales in
2007. Lower effective interest rates on cash and short-term investments in 2008, partially offset by higher
average balances, also resulted in a reduction to investment income of $3.3 million.
Interest Expense
Interest expense increased $600 thousand in 2009 compared to 2008 due to increased costs associated
with our $125.0 million credit facility, which was renewed in October 2009.
Interest expense increased $200 thousand in 2008 compared to the prior year due to increased costs
associated with our $175.0 million credit facility, which was renewed in October 2008.
Income Taxes
Our effective income tax rate was 34.9%, 38.5% and 37.0% in 2009, 2008 and 2007, respectively. The
lower effective tax rate in 2009 was primarily a result of recognizing the tax benefits for the carryback of
capital losses generated in connection with the sale of ACF and for the offset of capital gains recognized in
income during 2009. The higher effective tax rate in 2008 was primarily the result of the ACF goodwill
impairment charge, which was nondeductible for tax purposes. Our 2009 effective tax rate, removing the
effect of the loss on the sale of ACF, would have been 36.8%. Our 2008 effective tax rate, removing the
effect of the nondeductible goodwill impairment charge, would have been 36.9%. The effective income tax
rate, exclusive of the 2009 ACF loss and 2008 nondeductible goodwill impairment, decreased slightly in
2009 over that of 2008 due to the Company generating larger state tax incentives in 2009 than those
generated in 2008. The higher effective tax rate in 2008 as compared to 2007 was mainly a result of the
non-deductible goodwill impairment charge offset slightly by an increase in the state tax incentives
generated in 2008.
38
Liquidity and Capital Resources
The following table summarizes certain key financial data relating to our liquidity and capital
resources:
For the Year Ended
December 31,
2009
2008
2007
Variance
2009 vs.
2008
2008 vs.
2007
(in thousands, except percentage data)
Balance Sheet Data:
Cash and cash equivalents
Cash and cash equivalents - restricted
Investment Securities
$
244,359
72,941
70,524
210,328
48,713
58,684
263,914
99,886
50,913
Long-term debt
199,984
199,969
199,955
Cash Flow Data:
Operating cash flows
Investing cash flows
Financing cash flows
155,179
(29,488)
(91,660)
123,911
(23,963)
(153,534)
128,018
(5,053)
(22,938)
16%
50%
20%
0%
25%
23%
40%
(cid:2)20%
(cid:2)51%
15%
0%
(cid:2)3%
374%
(cid:2)569%
Our operations provide much of the cash necessary to fund our priorities, as follows:
(cid:127) Finance internal growth
(cid:127) Pay dividends
(cid:127) Repurchase our stock
Finance Internal Growth
We use cash to fund growth in our distribution channels. Our Wholesale channel, which has a higher
cost to gather assets, requires cash outlays for wholesaler commissions and commissions to third parties on
deferred load product sales. We continue to invest in our Advisors channel by providing additional support
to our advisors through training opportunities, wholesaling efforts and enhanced technology tools.
Pay Dividends
The Board of Directors approved an increase in the quarterly dividend on our common stock from
$.17 per share to $.19 per share beginning with our first quarter 2008 dividend, paid on May 1, 2008.
Dividends on our common stock resulted in financing cash outflows of $65.0 million, $63.7 million and
$55.4 million in 2009, 2008 and 2007, respectively.
Repurchase Our Stock
In 2009, we repurchased 1.9 million of our shares, compared to 3.8 million shares and 2.6 million
shares in 2008 and 2007, respectively, which included 327,301 shares, 430,145 shares and 234,162 shares
from employees who elected to tender shares to cover their minimum tax withholdings with respect to
vesting of stock awards during the years ended December 31, 2009, 2008 and 2007, respectively.
In the future, we plan to repurchase shares, at a minimum, to offset dilution from shares issued for
employee share plans. Additionally, during 2010 we estimate that we will repurchase approximately
435,000 shares from employees who elect to tender shares to cover their minimum tax withholdings arising
from the vesting of nonvested shares.
39
Operating Cash Flows
Cash from operations is our primary source of funds and increased $31.3 million in the current year.
The increase is due to higher net income and lower non-cash amortization of deferred sales commissions
in 2009 combined with net sales of trading securities in 2009 compared to net purchases of trading
securities in 2008. From the end of 2008 to the end of 2009 there was a significant increase in Fund
shareholder investments received prior to the balance sheet date that were in the process of being invested
in the Funds. As a result, on our consolidated balance sheet there was an increase in both the payable to
investment companies and an increase in the cash and receivable accounts. On the statement of cash flows,
there were corresponding increases and decreases to cash from operations.
We pay our financial advisors and third parties upfront commissions on the sale of Class B shares,
Class C shares and certain fee-based asset allocation products. Funding of such commissions during the
years ended December 31, 2009, 2008 and 2007 totaled $54.7 million, $69.5 million and $49.6 million,
respectively. The primary driver of commission funding in all three years was Class C shares, for which
$29.8 million, $40.3 million and $26.9 million of commissions were funded in 2009, 2008 and 2007,
respectively. Management expects future cash requirements for sales commissions may exceed the level
experienced in previous years due to increased sales in our fee-based asset allocation products and sales
growth in the sale of Class B and Class C shares.
We anticipate that our 2010 contribution to our Pension Plan will be made from cash generated from
operations and will be in the range from $7.0 to $10.0 million, $5.0 million of which was contributed during
January 2010.
Investing Cash Flows
Investing activities consist primarily of the purchase and sale of available-for-sale investment
securities, as well as capital expenditures. We expect our 2010 capital expenditures to be in the range of
$13.0 to $15.0 million.
Financing Cash Flows
As noted previously, dividends and stock repurchases accounted for a majority of our financing cash
outflows in 2009. An increase in our stock price during 2007 resulted in substantial stock option exercises,
and cash provided by stock option exercises was $84.6 million for that year.
The Company entered into a 364-day revolving credit facility (the ‘‘Credit Facility’’) with various
lenders, effective October 5, 2009, which initially provides for borrowings of up to $125.0 million and
replaced the Company’s previous revolving credit facility. Lenders could, at their option upon the
Company’s request, expand the facility to $200.0 million. During 2009 and at December 31, 2009 there
were no borrowings outstanding under the Credit Facility. Borrowings under the Credit Facility bear
interest at various rates including adjusted LIBOR or an alternative base rate plus, in each case, an
incremental margin based on the Company’s credit rating. The Credit Facility also provides for a facility
fee on the aggregate amount of commitment under the revolving facility (whether or not utilized). The
facility fee is also based on the Company’s credit rating level. The Credit Facility contains financial
covenants with respect to leverage and interest coverage, both of which we were in compliance with
throughout fiscal 2009.
Short Term Liquidity and Capital Requirements
Management believes its available cash, marketable securities and expected cash flow from operations
will be sufficient to fund its short-term operating and capital requirements during 2010. Expected
short-term uses of cash include expected dividend payments, interest payments on outstanding debt,
income tax payments, share repurchases, payment of deferred commissions to our financial advisors and
third parties, capital expenditures, pension funding and home office leasehold improvements, and could
include strategic acquisitions.
40
Long Term Liquidity and Capital Requirements
Expected long-term capital requirements include indebtedness, operating leases and purchase
obligations, and potential recognition of tax liabilities, summarized in the following table as of
December 31, 2009. Purchase obligations include amounts that will be due for the purchase of goods and
services to be used in our operations under long-term commitments or contracts. The majority of our
purchase obligations are reimbursable to us by the Funds.
Long-term debt obligations, including interest
Non-cancelable operating lease commitments
Purchase obligations
Unrecognized tax benefits
Total
2010
2011-
2012
2013-
2014
Thereafter/
Indeterminate
$ 216,784
72,834
102,969
6,848
$ 399,435
(in thousands)
205,584
28,983
60,345
-
294,912
11,200
18,440
37,201
2,166
69,007
-
14,018
3,262
-
17,280
-
11,393
2,161
4,682
18,236
Other possible long-term discretionary uses of cash could include capital expenditures for
enhancement of technology infrastructure and home office expansion, strategic acquisitions, payment of
dividends, income tax payments, seed money for new products, payment of upfront fund commissions for
Class B shares, Class C shares and certain fee-based asset allocation products, and repurchases of our
common stock.
Off-Balance Sheet Arrangements
Other than operating leases, which are included in the table above, the Company does not have any
off-balance sheet financing. The Company has not created, and is not party to, any special-purpose or
off-balance sheet entities for the purpose of raising capital, incurring debt or operating its business.
Critical Accounting Policies and Estimates
Management believes the following critical accounting policies affect its more significant judgments
and estimates used in the preparation of its consolidated financial statements.
Accounting for Goodwill and Intangible Assets
As of December 31, 2009, our total goodwill and intangible assets were $221.2 million, or 22%, of our
total assets. Two significant considerations arise with respect to these assets that require management
estimates and judgment: (i) the valuation in connection with the initial purchase price allocation, and
(ii) the ongoing evaluation of impairment.
In connection with all of our acquisitions, an evaluation is completed to determine reasonable
purchase price allocations. The purchase price allocation process requires management estimates and
judgments as to expectations for the various products, distribution channels, and business strategies. For
example, certain growth rates and operating margins were assumed for different products and distribution
channels. If actual growth rates or operating margins, among other assumptions, differ from the estimates
and judgments used in the purchase price allocation, the amounts recorded in the financial statements for
identifiable intangible assets and goodwill could be subject to charges for impairment in the future.
We complete an ongoing review of the recoverability of goodwill and intangible assets using a
fair-value based approach on an annual basis or more frequently whenever events occur or circumstances
change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Intangible assets with indefinite lives, primarily acquired mutual fund advisory contracts, are also tested for
impairment annually by comparing their fair value to the carrying amount of the asset. We consider mutual
fund advisory contracts indefinite lived intangible assets as they are expected to be renewed without
41
significant cost or modification of terms. Factors that are considered important in determining whether an
impairment of goodwill or intangible assets might exist include significant continued underperformance
compared to peers, the likelihood of termination or non-renewal of a mutual fund advisory or subadvisory
contract or substantial changes in revenues earned from such contracts, significant changes in our business
and products, material and ongoing negative industry or economic trends, or other factors specific to each
asset or subsidiary being evaluated. Because of the significance of goodwill and other intangibles to our
consolidated balance sheets, the annual impairment analysis is critical. Any changes in key assumptions
about our business and our prospects, or changes in market conditions or other externalities, could result
in an impairment charge.
Accounting for Income Taxes
In the ordinary course of business, many transactions occur for which the ultimate tax outcome is
uncertain. In addition, respective tax authorities periodically audit our income tax returns. These audits
examine our significant tax filing positions, including the timing and amounts of deductions and the
allocation of income among tax jurisdictions. We adjust our income tax provision in the period in which we
determine the actual outcomes will likely be different from our estimates. The recognition or
derecognition of income tax expense related to uncertain tax positions is determined under the guidance as
prescribed by Accounting Standards Codification (‘‘ASC’’) ‘‘Income Taxes Topic,’’ ASC 740. During 2009,
2008, and 2007, the Company settled three open tax years, five open tax years, and six open tax years,
respectively, that were undergoing audit by state jurisdictions in which the Company operates. These audits
were settled in all material respects with no significant adjustments. The Company is currently undergoing
audits in various other state jurisdictions that have not yet been settled.
We recognize an asset or liability for the deferred tax consequences of temporary differences between
the tax basis of assets and liabilities and their reported amounts in the financial statements, including the
determination of any valuation allowance that might be required for deferred tax assets. These temporary
differences will result in taxable or deductible amounts in future years when the reported amounts of assets
are recovered or liabilities are settled. During 2009, the Company sold ACF, which generated a capital loss
available to offset potential future and prior period capital gains. Due to the character of the loss and the
limited carryforward period permitted by law, the Company may not realize the full tax benefit of the
capital loss. The capital loss carryforward, if not utilized, will expire in 2014. Management believes it is not
more likely than not that the Company will generate sufficient future capital gains to realize the full benefit
of this capital loss. Accordingly, a valuation allowance has been recorded on a portion of this capital loss as
of December 31, 2009. Also as of December 31, 2009, two of the Company’s subsidiaries have state net
operating loss carryforwards in certain states in which those companies file on a separate company basis.
These entities have recognized a deferred tax asset for such carryforwards. The carryforwards, if not
utilized, will expire between 2010 and 2029. Management believes it is not more likely than not that the
subsidiaries will generate sufficient future taxable income in these states to realize the benefit of these
state net operating loss carryforwards and, accordingly, a valuation allowance has been recorded at
December 31, 2009, December 31, 2008 and December 31, 2007. We have not recorded a valuation
allowance on any other deferred tax assets as of the current reporting period based on our belief that
operating income will, more likely than not, be sufficient to realize the benefit of these assets over time. In
the event that actual results differ from estimates or if our historical trend of positive operating income
changes, we may be required to record a valuation allowance on deferred tax assets, which could have a
significant effect on our consolidated financial condition and results of operations. Finally, income taxes
are recorded at the rates in effect in the various tax jurisdictions in which we operate. Tax law and rate
changes are reflected in the income tax provision in the period in which such changes are enacted.
Pension and Other Postretirement Benefits
Accounting for our pension and postretirement benefit plans requires us to estimate the cost of
benefits to be provided well into the future and the current value of our benefit obligations. Three critical
42
assumptions affecting these estimates are the discount rate, the expected return on assets, and the
expected health care cost trend rate. The discount rate assumption is based on the Mercer Bond Model,
which calculates the yield on a theoretical portfolio of high-grade corporate bonds with cash flows that
generally match our expected benefit payments. The expected return on plan assets and health care cost
trend rates are based upon an evaluation of our historical trends and experience, taking into account
current and expected future market conditions. Other assumptions include rates of future compensation
increases, participant withdrawals and mortality rates, and participant retirement ages. These estimates
and assumptions impact the amount of net pension expense or income recognized each year and the
measurement of our reported benefit obligation under the plans.
In 2009, we decreased the discount rate for our pension and postretirement plans to 6.25% from the
6.75% used in 2008 and 2007 to reflect market interest rates. We continue to assume long-term asset
returns of 7.75% on the assets in our pension plan, the same as our assumption in 2008 and 2007. Our
pension plan assets at December 31, 2009 were 100% invested in the Asset Strategy style and we have
targeted this same investment strategy going forward.
The effect of hypothetical changes to selected assumptions on the Company’s retirement benefit plans
would be as follows:
Assumptions
Change
December 31, December 31,
2009
2010
Increase
(Decrease)
PBO/APBO (1)
Increase
(Decrease)
Expense (2)
(in thousands)
Pension
Discount rate
Expected return on assets
OPEB
Discount rate
Health care cost trend rate
+/(cid:2)50 bps
+/(cid:2)50 bps
$ (5,499)/8,439
N/A
$ (649)/1161
(488)/488
+/(cid:2)50 bps
+/(cid:2)100 bps
(289)/314
612/(531)
(20)/21
105/(89)
(1) Projected benefit obligation (‘‘PBO’’) for pension plans and accumulated postretirement benefit
obligation (‘‘APBO’’) for Postretirement Benefits Other Than Pension Plans.
(2) Pre-tax impact on expense.
Deferred Sales Commissions
We pay upfront sales commissions to our financial advisors and third party intermediary broker/
dealers in connection with the sale of certain classes of mutual fund shares sold without a front-end sales
charge. These costs are capitalized and amortized over the period during which the shareholder is subject
to a CDSC, not to exceed five years. We recover these costs through Rule 12b-1 and other distribution plan
fees, which are paid by the applicable share classes of the Advisors Funds, Ivy Funds and InvestEd
portfolios, along with CDSCs paid by shareholders who redeem their shares prior to completion of the
required holding periods. Should we lose our ability to recover such sales commissions through distribution
plan payments and CDSCs, the value of these assets would immediately decline, as would future cash
flows. We periodically review the recoverability of deferred sales commission assets as events or changes in
circumstances indicate that the carrying amount of deferred sales commission assets may not be
recoverable and adjust the deferred assets accordingly.
43
Valuation of Investments
We record substantially all investments in our financial statements at fair value. Where available, we
use prices from independent sources such as listed market prices or broker/dealer price quotations. We
evaluate our investments for other than temporary declines in value on a periodic basis. This may exist
when the fair value of an investment security has been below the current value for an extended period of
time. As most of our investments are carried at fair value, if an other than temporary decline in value is
determined to exist, the unrealized investment loss recorded net of tax in accumulated other
comprehensive income is realized as a charge to net income, in the period in which the other than
temporary decline in value is determined. While we believe that we have accurately estimated the amount
of the other than temporary decline in the value of our portfolio, different assumptions could result in
changes to the recorded amounts in our financial statements.
Loss Contingencies
The likelihood that a loss contingency exists is evaluated using the criteria of ‘‘Contingencies Topic,’’
ASC 450 through consultation with legal counsel. A loss contingency is recorded if the contingency is
considered probable and reasonably estimable as of the date of the financial statements.
Accounting Pronouncements Not Yet Adopted
In January 2010, the FASB issued Accounting Standards Update No. 2010-06 to amend ‘‘Fair Value
Measurements and Disclosures Topic,’’ ASC 820. The guidance requires disclosure changes related to
recurring or nonrecurring fair value measurements. Specifically, companies are required to disclose
separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements,
describe the reasons for the transfers and provide additional detail related to the reconciliation of Level 3
fair value measurements. Additionally, the guidance clarifies existing disclosure requirements. The
guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except
for certain provisions related to the rollforward of activity in Level 3 fair value measurements, which are
effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal
years. The Company will adopt the applicable disclosure requirements effective with our first quarter 2010
reporting period.
In June 2009, the FASB issued SFAS No. 167, ‘‘Amendments to FASB Interpretation No. 46(R)’’ (‘‘SFAS
No. 167’’). SFAS No. 167 improves how enterprises account for and disclose their involvement with
variable interest entities (‘‘VIEs’’) and other entities whose equity at risk is insufficient or lacks certain
characteristics. SFAS No. 167 changes how an entity determines whether it is the primary beneficiary of a
VIE and whether that VIE should be consolidated and requires additional disclosures. In January 2010,
the FASB agreed to issue accounting guidance to indefinitely defer this standard’s consolidation
requirements, which were initially effective for fiscal years beginning after November 15, 2009 and interim
periods within those fiscal years, for reporting enterprises’ interests in entities that either have all of the
characteristics of investment companies or for which it is industry practice to apply measurement principles
for financial reporting purposes consistent with those that apply to investment companies. The Company
meets the criteria to defer this standard’s consolidation requirements. According to the FASB, this deferral
will continue until the FASB and the International Accounting Standards Board, in their joint
consolidation project, resolve the issue of how to determine whether an asset manager functions as a
principal or as an agent.
Seasonality and Inflation
We do not believe our operations are subject to significant seasonal fluctuation. We have historically
experienced increased sales activity in the first and fourth quarters of the year due to funding of retirement
accounts by our clients; however, the fourth quarter of 2008 did not reflect increased sales activity. The
Company has not suffered material adverse effects from inflation in the past. However, a substantial
increase in the inflation rate in the future may adversely affect customers’ purchasing decisions, may
44
increase the costs of borrowing, or may have an impact on the Company’s margins and overall cost
structure.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We use various financial instruments with certain inherent market risks, primarily related to interest
rates and securities prices. The principal risks of loss arising from adverse changes in market rates and
prices to which we are exposed relate to interest rates on debt and marketable securities. Generally, these
instruments have not been entered into for trading purposes. Management actively monitors these risk
exposures; however, fluctuations could impact our results of operations and financial position. As a matter
of policy, we only execute derivative transactions to manage exposures arising in the normal course of
business and not for speculative or trading purposes. The following information, together with information
included in other parts of Management’s Discussion and Analysis of Financial Condition and Results of
Operations, which are incorporated herein by reference, describe the key aspects of certain financial
instruments that have market risk to us.
Interest Rate Sensitivity
Our interest sensitive liabilities include our long-term fixed rate senior notes and obligations for any
balances outstanding under our credit facility or other short-term borrowings. Increases in market interest
rates would generally cause a decrease in the fair value of the senior notes and an increase in interest
expense associated with short-term borrowings and borrowings under the credit facility. Decreases in
market interest rates would generally cause an increase in the fair value of the senior notes and a decrease
in interest expense associated with short-term borrowings and borrowings under the credit facility. We had
no short-term borrowings outstanding as of December 31, 2009. On January 13, 2006, we issued
$200.0 million in principal amount of 5.60% fixed rate senior notes due 2011. Proceeds from the senior
notes were used to pay down our $200.0 million in 7.50% senior notes that matured on January 18, 2006.
Available for Sale Investments Sensitivity
We maintain an investment portfolio of various holdings, types and maturities. Our portfolio is
diversified and consists primarily of investment grade debt securities and equity mutual funds. A portion of
investments are classified as available-for-sale investments. At any time, a sharp increase in interest rates
or a sharp decline in the United States stock market could have a significant negative impact on the fair
value of our investment portfolio. If a decline in fair value is determined to be other than temporary by
management, the cost basis of the individual security or mutual fund is written down to fair value.
Conversely, declines in interest rates or a sizeable rise in the United States stock market could have a
significant positive impact on our investment portfolio. However, unrealized gains are not recognized on
available-for-sale securities until they are sold. We do not currently hedge these exposures.
Securities Price Sensitivity
Our revenues are dependent on the underlying assets under management in the Funds to which
investment advisory services are provided. The Funds include portfolios of investments comprised of
various combinations of equity, fixed income and other types of securities. Fluctuations in the value of
these securities are common and are generated by numerous factors, including, without limitation, market
volatility, the overall economy, inflation, changes in investor strategies, availability of alternative
investment vehicles, government regulations and others. Accordingly, declines in any one or a combination
of these factors, or other factors not separately identified, may reduce the value of investment securities
and, in turn, the underlying assets under management on which our revenues are earned. These declines
have an impact in our investment sales, thereby compounding the impact on our earnings.
45
ITEM 8. Financial Statements and Supplementary Data
Reference is made to the Consolidated Financial Statements referred to in the Index on page 50
setting forth our consolidated financial statements, together with the report of KPMG LLP dated
February 25, 2010 on page 51.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company maintains a system of disclosure
controls and procedures that is designed to provide reasonable assurance that information, which is
required to be timely disclosed, is accumulated and communicated to management in a timely fashion.
A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. The Company’s Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act
of 1934, as amended (the ‘‘Exchange Act’’)) as of the end of the period covered by this report, have
concluded that the Company’s disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act is accumulated and communicated to the Company’s management,
including its principal executive officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure and are effective to provide reasonable assurance that such
information is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.
(b) Management’s Report on Internal Control Over Financial Reporting. Our management is responsible
for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the
participation of our management, including our principal executive officer and our principal financial
officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting
based on the framework in ‘‘Internal Control-Integrated Framework’’ issued by the Committee of
Sponsoring Organizations of the Treadway Commission. All internal control systems, no matter how
well designed, have inherent limitations. Therefore, even those systems determined to be effective can
provide only reasonable, not absolute, assurance with respect to financial statement preparation and
presentation. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are
subject to the risks that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Based on our evaluation under the framework in
‘‘Internal Control-Integrated Framework,’’
management concluded that, as of December 31, 2009, our internal control over financial reporting
was effective. KPMG LLP, the independent registered public accounting firm that audited the
financial statements included in this Annual Report on Form 10-K, also audited the effectiveness of
our internal control over financial reporting as of December 31, 2009, as stated in their attestation
report which follows.
46
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Waddell & Reed Financial, Inc.:
We have audited Waddell & Reed Financial, Inc.’s (the Company) internal control over financial reporting
as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Waddell & Reed
Financial Inc.’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Waddell & Reed Financial, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on criteria established in Internal
Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Waddell & Reed Financial, Inc. and subsidiaries
as of December 31, 2009 and 2008, 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, 2009, and our report dated February 25, 2010 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Kansas City, Missouri
February 25, 2010
47
(c) Changes in Internal Control over Financial Reporting. The Company’s internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. There
were no changes in the Company’s internal control over financial reporting that occurred during the
Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
ITEM 9B. Other Information.
None.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
Information required by this Item 10. is incorporated herein by reference to our definitive proxy
statement for our 2010 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under 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 2010 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 and Related
Stockholder Matters
Information required by this Item 12. is incorporated herein by reference to our definitive proxy
statement for our 2010 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the
Exchange Act.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this Item 13. is incorporated herein by reference to our definitive proxy
statement for our 2010 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the
Exchange Act.
ITEM 14. Principal Accounting Fees and Services
Information required by this Item 14. is incorporated herein by reference to our definitive proxy
statement for our 2010 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the
Exchange Act.
ITEM 15. Exhibits, Financial Statement Schedules
PART IV
(a)(1)
Financial Statements.
Reference is made to the Index to Consolidated Financial Statements on page 50 for a
list of all financial statements filed as part of this Report.
(a)(2)
Financial Statement Schedules.
None.
(b)
Exhibits.
Reference is made to the Index to Exhibits beginning on page 86 for a list of all exhibits
filed as part of this Report.
48
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 February 26, 2010.
SIGNATURES
WADDELL & REED FINANCIAL, INC.
By: /s/ HENRY J. HERRMANN
Henry J. Herrmann
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/ HENRY J. HERRMANN
Henry J. Herrmann
Chief Executive Officer, Chairman of the Board
and Director (Principal Executive Officer)
February 26, 2010
/s/ DANIEL P. CONNEALY
Senior Vice President and Chief Financial Officer
February 26, 2010
Daniel P. Connealy
(Principal Financial Officer)
/s/ BRENT K. BLOSS
Senior Vice President – Finance and Treasurer
February 26, 2010
Brent K. Bloss
(Principal Accounting Officer)
/s/ ALAN W. KOSLOFF
Director
February 26, 2010
Alan W. Kosloff
/s/ DENNIS E. LOGUE
Director
February 26, 2010
Dennis E. Logue
/s/ JAMES M. RAINES
Director
February 26, 2010
James M. Raines
/s/ RONALD C. REIMER
Director
February 26, 2010
Ronald C. Reimer
/s/ WILLIAM L. ROGERS
Director
February 26, 2010
William L. Rogers
/s/ JERRY W. WALTON
Director
February 26, 2010
Jerry W. Walton
49
WADDELL & REED FINANCIAL, INC.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at December 31, 2009 and 2008 . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
51
52
Consolidated Statements of Income for each of the years in the three-year period ended
December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period
ended December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54
Consolidated Statements of Comprehensive Income for each of the years in the three-year
period ended December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
55
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
57
50
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Waddell & Reed Financial, Inc.:
We have audited the accompanying consolidated balance sheets of Waddell & Reed Financial, Inc. and
subsidiaries (the Company) as of December 31, 2009 and 2008, 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, 2009. 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 the standards of the Public Company Accounting Oversight
Board (United States). 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, 2009
and 2008, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2009 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Waddell & Reed Financial, Inc.’s internal control over financial reporting as of
December 31, 2009 based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
February 25, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
/s/ KPMG LLP
Kansas City, Missouri
February 25, 2010
51
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
Assets:
Cash and cash equivalents
Cash and cash equivalents - restricted
Investment securities
Receivables:
Funds and separate accounts
Customers and other
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Deferred sales commissions, net
Goodwill and identifiable intangible assets
Other non-current assets
Total assets
Liabilities:
Accounts payable
Payable to investment companies for securities
Accrued compensation
Income taxes payable
Other current liabilities
Total current liabilities
Long-term debt
Accrued pension and postretirement costs
Deferred income taxes
Other non-current liabilities
Total liabilities
Commitments and Contingencies (Note 18)
Stockholders’ equity:
Preferred stock—$1.00 par value: 5,000 shares authorized; none issued
Class A Common stock—$0.01 par value: 250,000 shares authorized;
99,701 shares issued; 85,807 shares outstanding (84,877 at
December 31, 2008)
Additional paid-in capital
Retained earnings
Cost of 13,894 common shares in treasury (14,824 at December 31,
2008)
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
2009
2008
(in thousands)
244,359
72,941
70,524
34,948
179,100
8,225
8,619
618,716
68,171
64,123
221,210
11,162
983,382
25,210
222,168
35,341
1,044
76,994
360,757
199,984
28,731
6,983
17,872
614,327
210,328
48,713
58,684
33,539
61,280
11,182
7,109
430,835
59,966
52,183
221,210
11,166
775,360
40,002
67,848
24,296
2,397
70,165
204,708
199,969
29,083
3,564
17,911
455,235
-
-
997
189,900
527,876
(328,154)
(21,564)
369,055
983,382
997
207,886
487,558
(350,463)
(25,853)
320,125
775,360
$
$
$
$
See accompanying notes to consolidated financial statements.
52
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2009, 2008 and 2007
Revenues:
Investment management fees
Underwriting and distribution fees
Shareholder service fees
Total
Operating expenses:
Underwriting and distribution
Compensation and related costs (including share-
based compensation of $30,573, $28,967 and
$23,704, respectively)
General and administrative
Subadvisory fees
Depreciation
Goodwill impairment
Total
Operating income
Investment and other income
Interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Net income per share:
Basic
Diluted
Weighted average shares outstanding
Dividends declared per common share
— basic
— diluted
2009
2008
2007
(in thousands, except per share data)
$
354,593
378,678
105,818
839,089
399,863
416,762
102,495
919,120
372,345
371,085
94,124
837,554
449,925
496,822
422,274
124,463
58,034
23,202
13,653
-
669,277
169,812
5,039
(12,695)
162,156
56,651
105,505
1.23
1.23
85,484
85,544
0.76
$
$
$
$
119,057
76,370
41,122
13,198
7,222
753,791
165,329
3,178
(12,087)
156,420
60,257
96,163
1.12
1.12
85,761
86,113
0.76
$
$
$
$
115,905
48,487
43,844
12,412
-
642,922
194,632
16,452
(11,924)
199,160
73,663
125,497
1.49
1.48
83,975
84,699
0.68
See accompanying notes to consolidated financial statements.
53
WADDELL & REED FINANCIAL, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2009, 2008 and 2007
(in thousands)
Common Stock
Additional
Retained
Shares Amount Paid-in Capital Earnings Treasury Stock
Accumulated Other
Comprehensive
Income (Loss)
Total Stockholders’
Equity
Balance at December 31, 2006
Net income
Recognition of equity compensation
Issuance of nonvested shares and other
Dividends accrued, $.68 per share
Exercise of stock options
Excess tax benefits from share-based payment
arrangements
Other stock transactions
Repurchase of common stock
Unrealized gain on available for sale investment
securities
Reclassification for amounts included in net
income
Pension and postretirement benefits
99,701 $
—
—
—
—
—
—
—
—
—
—
—
Balance at December 31, 2007
Net income
Recognition of equity compensation
Recognition of equity compensation related to
99,701
—
—
restructuring
Issuance of nonvested shares and other
Dividends accrued, $.76 per share
Exercise of stock options
Excess tax benefits from share-based payment
arrangements
Other stock transactions
Repurchase of common stock
Unrealized loss on available for sale investment
securities
Reclassification for amounts included in net
income
Pension and postretirement benefits
Balance at December 31, 2008
Net income
Recognition of equity compensation
Recognition of equity compensation related to
divestiture of ACF
Issuance of nonvested shares and other
Dividends accrued, $.76 per share
Exercise of stock options
Excess tax benefits from share-based payment
arrangements
Other stock transactions
Repurchase of common stock
Unrealized gain on available for sale investment
securities
Reclassification for amounts included in net
income
Pension and postretirement benefits
—
—
—
—
—
—
—
—
—
—
99,701
—
—
—
—
—
—
—
—
—
—
—
—
997
—
—
—
—
—
—
—
—
—
—
—
997
—
—
—
—
—
—
—
—
—
—
—
—
997
—
—
—
—
—
—
—
—
—
—
—
—
189,299
—
23,704
(24,517)
388,422
125,497
—
—
— (57,420)
—
7,805
12,919
—
—
—
—
—
—
—
—
—
—
—
209,210
—
28,933
456,499
96,163
34
795
(34,990)
—
— (65,138)
—
(3,533)
7,471
—
—
—
—
—
—
—
—
—
—
—
207,886
—
30,565
487,558
105,505
8
400
(46,345)
—
—
— (65,195)
—
(5,393)
2,787
—
—
—
—
—
—
—
—
—
—
—
(327,966)
—
—
24,517
—
76,757
—
(5,539)
(59,488)
—
—
—
(291,719)
—
—
—
34,990
—
11,581
—
(12,303)
(93,012)
—
—
—
(350,463)
—
—
—
46,345
—
19,529
—
(7,124)
(36,441)
—
—
—
(6,052)
—
—
—
—
—
—
—
—
2,345
(2,428)
12,766
6,631
—
—
—
—
—
—
—
—
—
(8,435)
(142)
(23,907)
(25,853)
—
—
—
—
—
—
—
—
—
4,974
264
(949)
244,700
125,497
23,704
—
(57,420)
84,562
12,919
(5,539)
(59,488)
2,345
(2,428)
12,766
381,618
96,163
28,967
795
—
(65,138)
8,048
7,471
(12,303)
(93,012)
(8,435)
(142)
(23,907)
320,125
105,505
30,573
400
—
(65,195)
14,136
2,787
(7,124)
(36,441)
4,974
264
(949)
Balance at December 31, 2009
99,701 $
997
189,900
527,876
(328,154)
(21,564)
369,055
See accompanying notes to consolidated financial statements.
54
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2009, 2008 and 2007
Net income
Other comprehensive income:
Net unrealized appreciation (depreciation) of
investment securities during the year, net of income
taxes of $2,950, $(4,855) and $1,354, respectively
Pension and postretirement benefits, net of income
taxes of $(821), $(13,764) and $7,178, respectively
Reclassification adjustments for amounts included in
net income, net of income taxes of $159, $(84) and
$(1,396), respectively
Comprehensive income
2009
2008
2007
$
105,505
(in thousands)
96,163
125,497
4,974
(8,435)
2,345
(949)
(23,907)
12,766
264
$
109,794
(142)
63,679
(2,428)
138,180
See accompanying notes to consolidated financial statements.
55
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2009, 2008 and 2007
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Other than temporary impairment of investments in affiliated mutual funds
Amortization of deferred sales commissions
Share-based compensation
Excess tax benefits from share-based payment arrangements
Gain on sale of available-for-sale investment securities
Net purchases and sales of trading securities
Unrealized (gain) loss on trading securities
Goodwill impairment
Loss on sale and retirement of property and equipment
Capital gains and dividends reinvested
Deferred income taxes
Changes in assets and liabilities:
Cash and cash equivalents - restricted
Receivables from funds and separate accounts
Other receivables
Other assets
Deferred sales commissions
Accounts payable and payable to investment companies
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
2009
2008
2007
(in thousands)
$
105,505
96,163
125,497
13,476
3,686
42,771
30,973
(2,787)
(2,623)
7,864
(4,779)
—
1,009
(1,141)
4,093
(24,228)
(1,409)
(117,820)
(1,480)
(54,711)
139,528
17,252
155,179
12,969
—
62,560
29,762
(7,471)
—
(26,885)
6,072
7,222
433
(1,880)
(2,040)
51,173
10,063
19,629
(2,943)
(69,453)
(73,534)
12,071
123,911
12,395
—
24,766
23,704
(12,919)
(3,598)
(926)
(1,001)
—
312
(2,135)
(3,171)
(67,257)
(4,796)
(21,046)
1,375
(49,594)
89,523
16,889
128,018
Purchases of available-for-sale investment securities
Proceeds from sales and maturities of available-for-sale investment
(21,364)
(100)
(5,650)
securities
Additions to property and equipment
Proceeds from sales of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Dividends paid
Repurchase of common stock
Exercise of stock options
Excess tax benefits from share-based payment arrangements
Other stock transactions
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Cash paid for:
Income taxes (net)
Interest
15,052
(30,861)
7,685
(29,488)
(65,018)
(36,441)
14,136
2,787
(7,124)
(91,660)
34,031
210,328
244,359
50,369
12,266
$
$
$
1,750
(26,079)
466
(23,963)
(63,738)
(93,012)
8,048
7,471
(12,303)
(153,534)
(53,586)
263,914
210,328
53,146
11,965
10,429
(9,925)
93
(5,053)
(55,392)
(59,488)
84,562
12,919
(5,539)
(22,938)
100,027
163,887
263,914
74,439
11,354
See accompanying notes to consolidated financial statements.
56
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
1. Description of Business
Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as the ‘‘Company,’’ ‘‘we,’’
‘‘our’’ and ‘‘us’’) derive revenues primarily from investment management, investment product underwriting
and distribution, and shareholder services administration provided to the Waddell & Reed Advisors Group
of Mutual Funds (the ‘‘Advisors Funds’’), Ivy Funds Variable Insurance Portfolios (the ‘‘Ivy Funds VIP’’),
Ivy Funds, Inc. and the Ivy Funds portfolios (collectively, the ‘‘Ivy Funds’’), and Waddell & Reed InvestEd
Portfolios (‘‘InvestEd’’) (collectively, the Advisors Funds, Ivy Funds VIP, Ivy Funds and InvestEd are
referred to as the ‘‘Funds’’), and institutional and separately managed accounts. The Funds and the
institutional and separately managed accounts operate under various rules and regulations set forth by the
United States Securities and Exchange Commission (the ‘‘SEC’’). Services to the Funds are provided
under investment management agreements that set forth the fees to be charged for these services. The
majority of these agreements are subject to annual review and approval by each Fund’s board of directors/
trustees 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 can significantly impact revenues and results of operations.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (‘‘GAAP’’) and include the accounts of the
Company and its 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 unless otherwise stated. Certain amounts in the prior years’ financial statements have been
reclassified for consistent presentation.
The Company has evaluated subsequent events through February 26, 2010, the date that these
financial statements were issued, and determined there are no other items to disclose.
Pursuant to SFAS No. 168, ‘‘The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162,’’ the FASB
Accounting Standards Codification (‘‘ASC’’) became the sole source of authoritative GAAP for interim
and annual periods ending after September 15, 2009, except for rules and interpretive releases of the SEC,
which are sources of authoritative GAAP for SEC registrants. The Company adopted this standard, now
codified as ‘‘Generally Accepted Accounting Principles Topic,’’ ASC 105, during the third quarter of 2009.
References to specific accounting standards in the footnotes to our consolidated financial statements have
been changed to refer to the appropriate section of the ASC.
Use of Estimates
GAAP requires us to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses in the consolidated financial statements and accompanying notes, and
related disclosures of commitments and contingencies. Estimates are used for, but are not limited to,
depreciation and amortization, taxes, valuation of assets, pension and postretirement obligations, and
contingencies. Management evaluates its estimates and assumptions on an ongoing basis using historical
experience and other factors, including the current economic environment. Actual results could differ from
our estimates.
57
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and short-term investments. We consider all highly
liquid investments with original or remaining maturities of 90 days or less at the date of purchase to be
cash equivalents. Cash and cash equivalents – restricted represents cash held for the benefit of customers
segregated in compliance with federal and other regulations. Substantially all cash balances are in excess of
federal deposit insurance limits.
Disclosures About Fair Value of Financial Instruments
Fair value of cash and cash equivalents, short-term investments, receivables, payables and long-term
debt 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.
The Company adopted ‘‘Fair Value Measurements and Disclosures Topic,’’ (‘‘ASC 820’’) effective
January 1, 2008. ASC 820 defines fair value, establishes a framework for measuring fair value and expands
disclosure of fair value measurements. The Company did not have a transition adjustment to beginning
retained earnings as a result of adopting this standard. ASC 820 applies to all financial instruments that are
measured and reported on a fair value basis. This includes those items reported in investment securities on
the consolidated balance sheets.
In conjunction with the adoption of ASC 820, the Company also adopted ‘‘Financial Instruments
Topic,’’ (‘‘ASC 825’’) as of January 1, 2008. ASC 825 provides companies the option to report select
financial assets and liabilities at fair value on an instrument-by-instrument basis with changes in fair value
reported in earnings. Additionally, the transition provisions of ASC 825 permit a one-time election for
existing positions at the adoption date with a cumulative-effect adjustment included in beginning retained
earnings and future changes in fair value reported in earnings. This statement also establishes presentation
and disclosure requirements designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. After the initial adoption, the election is
made at the acquisition of a financial asset or financial liability and it may not be revoked. The adoption of
ASC 825 did not result in a transition adjustment to beginning retained earnings.
Investment Securities and Investments in Affiliated Mutual Funds
Our investments are comprised of United States, state and government obligations, corporate debt
securities and investments in affiliated mutual funds. Investments are classified as available-for-sale or
trading. Unrealized holding gains and losses on securities available-for-sale, 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 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.
Our available-for-sale investments are reviewed each quarter and adjusted for other than temporary
declines in value. We consider factors affecting the issuer and the industry the issuer operates in, general
market trends including interest rates, and our ability and intent to hold an investment until it has
recovered. Consideration is given to the length of time an investment’s market value has been below
carrying value and prospects for recovery to carrying value. When a decline in the fair value of equity
securities is determined to be other than temporary, the unrealized loss recorded net of tax in other
comprehensive income is realized as a charge to net income and a new cost basis is established for financial
reporting purposes. Based on a change to ‘‘Investments – Debt and Equity Securities Topic,’’ ASC 320,
adopted in 2009, when a decline in the fair value of debt securities is determined to be other than
58
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
temporary, the amount of the impairment recognized in earnings depends on whether the Company
intends to sell the security or more likely than not will be required to sell the security before recovery of its
amortized cost basis less any current-period credit loss. If so, the other-than-temporary impairment
recognized in earnings is equal to the entire difference between the investment’s amortized cost basis and
its fair value at the balance sheet date. If not, the portion of the impairment related to the credit loss is
recognized in earnings while the portion of the impairment related to other factors is recognized in other
comprehensive income, net of tax.
Property and Equipment
Property and equipment are carried at cost. The costs of improvements that extend the life of a fixed
asset are capitalized, while the costs of repairs and maintenance are expensed as incurred. Depreciation
and amortization are calculated and recorded using the straight-line method over the estimated useful life
of the related asset (or lease term if shorter), generally five to ten years for furniture, fixtures, data
processing equipment and computer software; five to 26 years for equipment and machinery; and up to
15 years for leasehold improvements, which is the lesser of the lease term or expected life.
Software Developed for Internal Use
Certain internal costs incurred in connection with developing or obtaining software for internal use
are capitalized in accordance with ‘‘Intangibles – Goodwill and Other Topic,’’ ASC 350. Internal costs
capitalized are included in property and equipment, net on the consolidated balance sheets, and were
$11.8 million and $14.4 million as of December 31, 2009 and 2008, respectively. Amortization begins when
the software project is complete and ready for its intended use and continues over the estimated useful life,
generally five to ten years.
Goodwill and Identifiable Intangible Assets
Goodwill represents the excess of the cost of the Company’s investment in the net assets of acquired
companies over the fair value of the underlying identifiable net assets at the dates of acquisition. Goodwill
is not amortized, but is reviewed annually and when events or circumstances occur that indicate that
goodwill might be impaired. Impairment of goodwill is tested at the Company’s reporting unit level. To
determine fair value, our review process uses the income and market approaches. In performing the
analysis, we use the best information available under the circumstances, including reasonable and
supportable assumptions and projections. If the carrying amount of the reporting unit exceeds its implied
fair value, goodwill is considered impaired and a second step is performed to measure the amount of
impairment loss, if any.
Identifiable intangible assets with indefinite useful lives are not amortized. Indefinite life intangible
assets represent advisory and subadvisory management contracts for managed assets obtained in
acquisitions. We consider these contracts to be indefinite lived intangible assets as they are expected to be
renewed without significant cost or modification of terms. We complete an ongoing review of the
recoverability of identifiable intangible assets on an annual basis or more frequently whenever events occur
or circumstances change that would more likely than not reduce their fair value.
Factors that are considered important in determining whether an impairment of goodwill or intangible
assets might exist include significant continued underperformance compared to peers, the likelihood of
termination or non-renewal of a mutual fund advisory or subadvisory contract or substantial changes in
revenues earned from such contracts, significant changes in our business and products, material and
ongoing negative industry or economic trends, or other factors specific to each asset or subsidiary being
evaluated. Because of the significance of goodwill and other intangible assets to our consolidated balance
59
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
sheet, any changes in key assumptions about our business or prospects, or changes in market conditions or
other externalities, could result in an impairment charge and such a charge could have a material effect on
our financial condition and results of operations.
Deferred Sales Commissions
We defer certain costs, principally sales commissions and related compensation, which are paid to
financial advisors and broker/dealers in connection with the sale of certain mutual fund shares sold without
a front-end load sales charge. The costs incurred at the time of the sale of Class B shares are amortized on
a straight-line basis over five years, which approximates the expected life of the shareholders’ investments.
The costs incurred at the time of the sale of Class C shares are amortized on a straight-line basis over
12 months. In addition, the costs incurred at the time of the sale of shares for certain asset allocation
products are deferred and amortized on a straight-line basis, not to exceed three years. We recover these
deferred costs through Rule 12b-1 and other distribution fees, which are paid on the Class B and Class C
shares of the Advisors Funds and Ivy Funds, along with contingent deferred sales charges (‘‘CDSCs’’) paid
by shareholders who redeem their shares prior to completion of the required holding period (three years
for shares of certain asset allocation products, six years for a Class B share and 12 months for a Class C
share), as well as through client fees paid on the asset allocation products. Should we lose our ability to
recover such sales commissions through distribution fees or CDSCs, the value of these assets would
immediately decline, as would future cash flows. We periodically review the recoverability of the deferred
sales commission assets as events or changes in circumstances indicate that their carrying amount may not
be recoverable and adjust them accordingly. As part of our review in the fourth quarter of 2008, we
recorded $6.5 million in additional amortization ($700 thousand related to Class B shares and $5.8 million
related to Class C shares).
Revenue Recognition
We recognize investment management fees as earned over the period in which services are rendered.
We charge the Funds daily based upon average daily net assets under management in accordance with
investment management agreements between the Funds and the Company. In general, the majority of
investment management fees earned from institutional and separate accounts are charged either monthly
or quarterly based upon an average of net assets under management in accordance with such investment
management agreements.
Shareholder service fees are recognized monthly and are calculated based on the number of accounts
or assets under management as applicable. Other administrative service fee revenues are recognized when
contractual obligations are fulfilled or as services are provided.
Underwriting and distribution commission revenues resulting from the sale of investment products are
recognized on the trade date.
We also recognize distribution revenues monthly for certain types of investment products, primarily
variable annuity products that are generally calculated based upon average daily net assets under
management.
Advertising and Promotion
We expense all advertising and promotion costs as incurred. Advertising expense was $4.7 million,
$5.3 million and $4.8 million for the years ended December 31, 2009, 2008 and 2007, respectively, and is
classified in underwriting and distribution expense in the statement of income.
60
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
Share-Based Compensation
We account for share-based compensation expense using the fair value method. Under the fair value
method, share-based compensation expense reflects the fair value of share-based awards measured at grant
date, is recognized over the service period, and is adjusted each period for anticipated forfeitures. The fair
value of options granted are calculated using a Black-Scholes option-pricing model. The Black-Scholes
model incorporates assumptions as to dividend yield, risk-free interest rate, expected volatility and
expected life of the option.
Accounting for Income Taxes
Income tax expense is based on pre-tax financial accounting income, including adjustments made for
the recognition or derecognition related to uncertain tax positions. The recognition or derecognition of
income tax expense related to uncertain tax positions is determined under the guidance as prescribed by
‘‘Income Taxes Topic,’’ ASC 740. Deferred tax assets and liabilities are recognized for the future tax
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis. A valuation allowance is recognized for deferred tax assets if, based
on available evidence, it is more likely than not that all or some portion of the asset will not be realized.
Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the
period that includes the enactment date.
Earnings per Share
The Company adopted ‘‘Earnings Per Share Topic,’’ ASC 260 on January 1, 2009. This standard
provides that unvested share-based payment awards that contain nonforfeitable rights to dividends are
considered to be participating securities and must be included in the computation of earnings per share
pursuant to the two-class method. As required upon adoption, we retrospectively adjusted prior year
earnings per share data to conform to the provisions of this standard. See Note 13 for additional
information.
Derivatives and Hedging Activities
Derivative instruments are recorded on the balance sheet at fair value. The Company periodically uses
interest rate swaps to manage risks associated with interest rate volatility. All derivative instruments have
been designated as hedges, in accordance with GAAP. If the underlying hedged transaction ceases to exist,
all changes in fair value of the related derivatives that have not been settled are recognized in current
earnings or amortized over the term of the hedged transaction. Derivatives that do not qualify for hedge
accounting are marked to market with changes recognized in current earnings. The Company does not
hold or issue derivative financial instruments for trading purposes and is not a party to leveraged
derivatives.
3. Accounting Pronouncements Not Yet Adopted
In January 2010, the FASB issued Accounting Standards Update No. 2010-06 to amend ‘‘Fair Value
Measurements and Disclosures Topic,’’ ASC 820. The guidance requires disclosure changes related to
recurring or nonrecurring fair value measurements. Specifically, companies are required to disclose
separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements,
describe the reasons for the transfers and provide additional detail related to the reconciliation of Level 3
fair value measurements. Additionally, the guidance clarifies existing disclosure requirements. The
guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except
61
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
for certain provisions related to the rollforward of activity in Level 3 fair value measurements, which are
effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal
years. The Company will adopt the applicable disclosure requirements effective with our first quarter 2010
reporting period.
In June 2009, the FASB issued SFAS No. 167, ‘‘Amendments to FASB Interpretation No. 46(R)’’ (‘‘SFAS
No. 167’’). SFAS No. 167 improves how enterprises account for and disclose their involvement with
variable interest entities (‘‘VIEs’’) and other entities whose equity at risk is insufficient or lacks certain
characteristics. SFAS No. 167 changes how an entity determines whether it is the primary beneficiary of a
VIE and whether that VIE should be consolidated and requires additional disclosures. In January 2010,
the FASB agreed to issue accounting guidance to indefinitely defer this standard’s consolidation
requirements, which were initially effective for fiscal years beginning after November 15, 2009 and interim
periods within those fiscal years, for reporting enterprises’ interests in entities that either have all of the
characteristics of investment companies or for which it is industry practice to apply measurement principles
for financial reporting purposes consistent with those that apply to investment companies. The Company
meets the criteria to defer this standard’s consolidation requirements. According to the FASB, this deferral
will continue until the FASB and the International Accounting Standards Board, in their joint
consolidation project, resolve the issue of how to determine whether an asset manager functions as a
principal or as an agent.
62
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
4.
Investment Securities
Investment securities at December 31, 2009 and 2008 are as follows:
2009
Amortized
cost
Unrealized
gains
Unrealized
losses
Fair value
(in thousands)
$
$
10
4,959
29,817
34,786
2
-
3,241
3,243
-
(286)
(143)
(429)
Available-for-sale securities:
Mortgage-backed securities
Municipal bonds
Affiliated mutual funds
Trading securities:
Mortgage-backed securities
Municipal bonds
Corporate bonds
Common stock
Affiliated mutual funds
Total investment securities
12
4,673
32,915
37,600
107
478
94
30
32,215
32,924
70,524
2008
Amortized
cost
Unrealized
gains
Unrealized
losses
Fair value
Available-for-sale securities:
Mortgage-backed securities
Municipal bonds
Affiliated mutual funds
$
$
11
5,290
23,966
29,267
(in thousands)
1
-
459
460
-
(1,086)
(5,133)
(6,219)
Trading securities:
Mortgage-backed securities
Municipal bonds
Corporate bonds
Common stock
Affiliated mutual funds
Total investment securities
12
4,204
19,292
23,508
108
372
93
37
34,566
35,176
58,684
63
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
A summary of debt securities and affiliated mutual funds with fair values below carrying values at
December 31, 2009 is as follows:
Less than 12 months
12 months or longer
Total
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Fair value
Unrealized
losses
(in thousands)
Municipal bonds
Affiliated mutual funds
$
3,843
11,064
(125)
(64)
830
823
(161)
(79)
4,673
11,887
(286)
(143)
Total temporarily impaired
securities
$
14,907
(189)
1,653
(240)
16,560
(429)
Based upon our assessment of these municipal bonds and affiliated mutual funds, the time frame
investments have been in a loss position, our intent to hold the affiliated mutual funds until they have
recovered and our history of holding bonds until maturity, we determined that a write-down was not
necessary at December 31, 2009.
During the first quarter of 2009, we recorded a pre-tax charge of $3.7 million to reflect the ‘‘other than
temporary’’ decline in value of certain of the Company’s investments in affiliated mutual funds as the fair
value of these investments had been below cost for an extended period. This charge is recorded in
investment and other income in the consolidated statement of operations for 2009.
Mortgage-backed securities and municipal bonds accounted for as available-for-sale and held as of
December 31, 2009 mature as follows:
After one year but within ten years
After ten years
Amortized
cost
Fair value
(in thousands)
3,968
1,001
4,969
3,843
842
4,685
$
$
Mortgage-backed securities, municipal bonds and corporate bonds accounted for as trading and held
as of December 31, 2009 mature as follows:
After one year but within ten years
After ten years
Fair value
(in thousands)
572
$
107
$
679
Investment securities with fair values of $24.7 million, $1.1 million and $10.9 million were sold during
2009, 2008 and 2007, respectively. During 2009, a net gain of $2.6 million was recognized from the sale of
$14.7 million in available-for-sale securities and a net gain of $126 thousand was recognized from the sale
of $10.0 million in trading securities. In 2008, a net loss of $31 thousand was recognized from the sale of
64
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
$1.1 million in trading securities. A net gain of $3.6 million was recognized during 2007 from the sale of
$10.4 million in available-for-sale securities.
The aggregate carrying amount of our equity method investments, classified in other assets, was
$3.7 million and $3.9 million at December 31, 2009 and 2008, respectively. At December 31, 2009, our
investment consists of a limited partnership interest in venture capital funds.
We determine the fair value of our investments using broad levels of inputs as defined by related
accounting standards:
(cid:127) Level 1 – Quoted prices in active markets for identical securities
(cid:127) Level 2 – Other significant observable inputs (including quoted prices in active markets for similar
securities)
(cid:127) Level 3 – Significant unobservable inputs (including the Company’s own assumptions in
determining the fair value of investments)
The following table summarizes our investment securities as of December 31, 2009 and 2008 that are
recognized in our balance sheet using fair value measurements based on the differing levels of inputs:
Level 1
Level 2
Level 3
Total
2009
2008
(in thousands)
65,160
5,364
-
70,524
53,895
4,789
-
58,684
$
$
5.
Property and Equipment
A summary of property and equipment at December 31, 2009 and 2008 is as follows:
Leasehold improvements
Furniture and fixtures
Equipment and machinery
Computer software
Data processing equipment
Property and equipment, at cost
Accumulated depreciation
Property and equipment, net
Estimated
useful lives
1 - 15 years
5 - 10 years
5 - 26 years
5 - 10 years
5 - 10 years
$
2009
2008
(in thousands)
17,962
29,870
16,545
56,954
21,844
14,707
27,810
21,622
50,645
20,658
143,175
(75,004)
$
68,171
135,442
(75,476)
59,966
Depreciation expense was $13.7 million, $13.2 million and $12.4 million during the years ended
December 31, 2009, 2008 and 2007, respectively.
At December 31, 2009, we had property and equipment under capital leases with a cost of $1.5 million
and accumulated depreciation of $748 thousand. At December 31, 2008, we had property and equipment
under capital leases with a cost of $724 thousand and accumulated depreciation of $102 thousand.
65
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
6. Goodwill and Identifiable Intangible Assets
Goodwill represents the excess of purchase price over the tangible assets and identifiable intangible
assets of an acquired business. Our goodwill is not deductible for tax purposes. Goodwill and identifiable
intangible assets (all considered indefinite lived) at December 31, 2009 and 2008 are as follows:
Goodwill
Accumulated amortization
Total goodwill
Mutual fund management advisory contracts
Mutual fund subadvisory management contracts
Total indentifiable intangible assets
Total
December 31, December 31,
2009
2008
(in thousands)
$
202,518
(36,307)
166,211
38,699
16,300
54,999
$
221,210
202,518
(36,307)
166,211
38,699
16,300
54,999
221,210
Based on our annual review of goodwill in the second quarter of 2008 in accordance with applicable
accounting literature, the implied fair value of all reporting units exceeded their carrying amounts. Due to
the decline in the financial markets during the second half of 2008, we performed another review of
goodwill and intangibles in the fourth quarter of 2008. We recorded an impairment charge of $7.2 million
in the fourth quarter of 2008 to write off the remaining balance of goodwill related to our former
subsidiary, Austin Calvert & Flavin, Inc. (‘‘ACF’’) based on declines in ACF’s assets under management
and the related adverse impact on its earnings potential. The goodwill impairment charge related to ACF
was not deductible for income tax purposes and as a result, no tax benefit was recognized for the charge in
2008. See Note 8 for details relating to the sale of ACF in 2009.
The Company has recognized total goodwill impairment charges of $27.2 million, all related to ACF,
since its adoption of ‘‘Intangibles – Goodwill and Other Topic,’’ ASC 350 in 2002.
7. Restructuring
In the fourth quarter of 2008, we initiated a restructuring plan to reduce our operating costs. We
completed the restructuring by December 31, 2008, which included a voluntary separation of 169
employees and the termination of various projects under development. We recorded a pre-tax
restructuring charge of $16.5 million, consisting of $15.0 million in employee compensation and other
benefit costs, $795 thousand for accelerated vesting of nonvested stock and $717 thousand in project
development costs, including $500 thousand for the early termination of a contract. The restructuring
charge is included in general and administrative expenses in the consolidated statement of income in 2008.
66
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
The activity in the accrued restructuring liability for the year ended December 31, 2009 is summarized
as follows:
Employee compensation and
other benefit costs
Contract termination and
project development costs
Accrued Liability
as of
December 31, 2008
Cash
Payments
Non-cash
Settlements
and Other
Accrued Liability
as of
December 31, 2009
(in thousands)
$
$
14,530
(11,451)
500
15,030
-
(11,451)
(288)
-
(288)
2,791
500
3,291
We expect the remaining restructuring costs to be paid out in 2010. The restructuring liability of
$3.3 million is included in other current liabilities in the consolidated balance sheet.
8.
Sale of Austin, Calvert & Flavin, Inc.
On July 15, 2009, the Company completed the sale of its wholly-owned subsidiary, ACF, pursuant to a
stock purchase agreement dated June 26, 2009. The agreement includes an earnout provision based on a
percentage of revenues on existing accounts over the three-year period subsequent to the closing date.
Prior to the closing date, ACF had 10 employees and assets under management of $488.0 million.
We recorded charges for severance and other transaction costs of $1.1 million in connection with the
divestiture of our investment in ACF in 2009, which are included in general and administrative expenses in
the 2009 consolidated statement of income.
For tax purposes, this sale resulted in a capital loss of $28.1 million, a portion of which will be carried
back to recover taxes previously paid on capital gains in prior periods. The remaining loss will be carried
forward and will be available to offset potential future capital gains. Due to the character of the loss and
the limited carryforward period permitted by law, the Company may not realize the full tax benefit of the
capital loss carryforward. We recorded tax benefits in 2009 of $3.6 million. Of this amount, $1.6 million
relates to carrying back a portion of the capital loss to fully offset capital gains generated during the
applicable three-year carryback period. The remaining $2.0 million tax benefit relates to utilizing capital
losses to offset capital gains generated during 2009.
9.
Indebtedness
On January 13, 2006, the Company issued $200.0 million in principal amount 5.60% senior notes due
2011 (the ‘‘Notes’’) resulting in net proceeds of approximately $198.2 million (net of discounts,
commissions and estimated expenses). The Company used these proceeds, together with cash on hand, to
repay the entire $200.0 million aggregate principal amount outstanding of its prior $200.0 million notes.
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 15 and July 15 at a fixed rate of 5.60% per
annum. The Company may, at its option, call the Notes at any time pursuant to a make whole redemption
provision, which would compensate holders for any changes in interest rate levels of the notes upon early
extinguishment. The Company currently has no intention to call the Notes.
67
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
The following is a summary of long-term debt at December 31, 2009 and 2008:
Principal amount unsecured 5.60% senior notes due in 2011
Discount on unsecured 5.60% senior notes due in 2011
Total long-term debt
2009
2008
(in thousands)
$
$
200,000
(16)
199,984
200,000
(31)
199,969
The fair value of the long-term debt is approximately $204.5 million as of December 31, 2009
compared to the carrying value of $200.0 million.
On January 10, 2006, the Company terminated two forward interest rate swap agreements entered
into in 2005 upon the closing of the New Notes. The swaps, considered completely effective cash flow
hedges under ‘‘Derivatives and Hedging Topic,’’ ASC 815, were put in place to hedge against changes in
forecasted interest payments attributable to changes in the LIBOR swap rate between the time the
Company entered into the swap agreement and the time we anticipated refinancing our previously issued
7.50% notes in January 2006. In connection with the termination of the swap agreements, the Company
received a net cash settlement of $1.1 million. The Company’s gain on these transactions was deferred in
accumulated other comprehensive income and is being amortized into earnings as a reduction to interest
expense over the five year term of the Notes. As of December 31, 2009, the remaining unamortized
amount was approximately $200 thousand.
The Company entered into a 364-day revolving credit facility (the ‘‘Credit Facility’’) with various
lenders, effective October 5, 2009, which initially provides for borrowings of up to $125.0 million and
replaced the Company’s previous revolving credit facility. Lenders could, at their option upon the
Company’s request, expand the facility to $200.0 million. At December 31, 2009, there were no borrowings
outstanding under the Credit Facility. Borrowings under the Credit Facility bear interest at various rates
including adjusted LIBOR or an alternative base rate plus, in each case, an incremental margin based on
the Company’s credit rating. The Credit Facility also provides for a facility fee on the aggregate amount of
commitment under the revolving facility (whether or not utilized). The facility fee is also based on the
Company’s credit rating level. The most restrictive provisions of the credit agreement require the
Company to maintain a consolidated leverage ratio not to exceed 3.0 to 1.0 for four consecutive quarters
and a consolidated interest coverage ratio of not less than 4.0 to 1.0 for four consecutive quarters. The
Company was in compliance with these covenants and similar covenants in prior facilities for all years
presented.
10. Income Taxes
The provision for income taxes for the years ended December 31, 2009, 2008 and 2007 consists of the
following:
Currently payable:
Federal
State
Deferred taxes
2009
2008
2007
(in thousands)
$
48,249
4,312
52,561
4,090
59,149
3,149
62,298
(2,041)
60,257
72,760
5,092
77,852
(4,189)
73,663
Provision for income taxes
$
56,651
68
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
The following table reconciles the statutory federal income tax rate with our effective income tax rate
for the years ended December 31, 2009, 2008 and 2007:
Statutory federal income tax rate
State income taxes, net of federal tax benefits
State tax incentives
Sale of ACF
Valuation allowance on losses capital in nature
Nondeductible goodwill impairment expense
Other items
Effective income tax rate
2009
2008
2007
35.0%
1.9
(0.7)
(6.0)
4.1
—
0.6
34.9%
35.0%
1.4
(0.3)
—
—
1.6
0.8
38.5%
35.0%
2.1
(0.1)
—
—
—
—
37.0%
The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities
and deferred tax assets at December 31, 2009 and 2008 are as follows:
Deferred tax liabilities:
Deferred sales commissions
Property and equipment
Benefit plans
Identifiable intangible assets
Unrealized gains on derivatives
Unrealized gains on available for sale investment securities
Purchase of fund assets
Prepaid expenses
Other
Total gross deferred liabilities
Deferred tax assets:
Acquisition lease liability
Additional pension and postretirement liability
Accrued expenses
Unrealized losses on investment securities
Capital loss carryforwards
Nonvested stock
Unused state tax credits
State net operating loss carryforwards
Other
Total gross deferred assets
Valuation allowance
Net deferred tax asset
69
2009
2008
(in thousands)
$
(7,895)
(11,372)
(4,289)
(8,463)
(83)
(1,036)
(5,022)
(1,886)
(342)
(40,388)
949
13,799
8,598
1,402
6,264
12,935
1,018
5,034
2,967
52,966
(11,336)
$
1,242
(6,019)
(9,213)
(3,609)
(8,359)
(165)
-
(4,189)
(1,544)
(323)
(33,421)
784
12,978
11,225
2,333
-
10,827
337
4,698
2,242
45,424
(4,385)
7,618
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
During 2009, the Company sold ACF, which generated a capital loss available to offset potential
future and prior period capital gains. Due to the character of the loss and the limited carryforward period
permitted by law, the Company may not realize the full tax benefit of the capital loss. The deferred tax
asset, net of federal tax effect, relating to the capital losses as of December 31, 2009 is approximately
$6.3 million. The capital loss carryforward, if not utilized, will expire in 2014. As of December 31, 2009,
other net deferred tax assets that are capital in nature are approximately $300 thousand. Management
believes it is not more likely than not that the Company will generate sufficient future capital gains to
realize the full benefit of these capital losses and accordingly, a valuation allowance in the amount of
$6.6 million has been recorded at December 31, 2009. Certain subsidiaries of the Company have net
operating loss carryforwards in certain states in which these companies file on a separate company basis.
The deferred tax asset, net of federal tax effect, relating to the carryforwards as of December 31, 2009 and
December 31, 2008 is approximately $5.0 million and $4.7 million, respectively. The carryforwards, if not
utilized, will expire between 2010 and 2029. Management believes it is not more likely than not that these
subsidiaries will generate sufficient future taxable income in these states to realize the benefit of the net
operating loss carryforwards and, accordingly, a valuation allowance in the amount of $4.7 million and
$4.4 million has been recorded at December 31, 2009 and December 31, 2008, respectively. The Company
generated state tax credits in 2008 and 2009 that will expire in 2018 and 2019, respectively, if not utilized.
The Company anticipates these credits will be fully utilized prior to their expiration date.
As of January 1, 2009, the Company had unrecognized tax benefits, including penalties and interest, of
$4.9 million ($3.4 million net of federal benefit) that, if recognized, would impact the Company’s effective
tax rate. As of December 31, 2009, the Company had unrecognized tax benefits, including penalties and
interest, of $6.8 million ($4.7 million net of federal benefit) that, if recognized, would impact the
Company’s effective tax rate. The unrecognized tax benefits that are not expected to be settled within the
next 12 months are included in other liabilities in the accompanying consolidated balance sheet;
unrecognized tax benefits that are expected to be settled within the next 12 months are included in income
taxes payable.
The Company’s historical accounting policy with respect to interest and penalties related to tax
uncertainties has been to classify these amounts as income taxes, and the Company continued this
classification upon the adoption of ‘‘Income Taxes Topic,’’ ASC 740. As of January 1, 2009, the total amount
of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance
sheet was $1.6 million ($1.2 million net of federal benefit). The total amount of penalties and interest, net
of federal benefit, related to tax uncertainties recognized in the statement of income for the period ended
December 31, 2009 was $307 thousand. The total amount of accrued penalties and interest related to
uncertain tax positions at December 31, 2009 of $2.0 million ($1.6 million net of federal benefit) is
included in the total unrecognized tax benefits described above.
70
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
The following table summarizes the Company’s reconciliation of unrecognized tax benefits, excluding
penalties and interest, for the year ended December 31, 2009:
Unrecognized
Tax Benefits
(in thousands)
3,332
$
1,064
636
(1)
(174)
4,857
Balance at January 1, 2009
Increases during the year:
Gross increases - tax positions in prior period
Gross increases - current-period tax positions
Decreases during the year:
Decreases due to settlements with taxing authorities
Decreases due to lapse of statute of limitations
Balance at December 31, 2009
$
In the ordinary course of business, many transactions occur for which the ultimate tax outcome is
uncertain. In addition, respective tax authorities periodically audit our income tax returns. These audits
examine our significant tax filing positions, including the timing and amounts of deductions and the
allocation of income among tax jurisdictions. In 2009, the Company settled three open tax years that were
undergoing audit by a state jurisdiction in which the Company operates. During 2008, the Company settled
five open tax years that were undergoing audit by a state jurisdiction in which the Company operates. The
Company also received notification of a favorable outcome on a tax position in which the Company had
previously considered partially uncertain, and therefore, had not previously recognized the full tax benefit.
During 2007, the Company settled six open tax years that were undergoing audit by a state jurisdiction in
which the Company operates. The 2006, 2007 and 2008 federal income tax returns are open tax years that
remain subject to potential future audit. The 2005 federal tax year also remains open to a limited extent
due to a capital loss carryback claim. State income tax returns for all years after 2005 and, in certain states,
income tax returns for 2005, are subject to potential future audit by tax authorities in the Company’s major
state tax jurisdictions.
The Company is currently being audited in three state jurisdictions. It is reasonably possible that the
Company will settle the audits in these jurisdictions within the next 12-month period. It is estimated that
the Company’s liability for unrecognized tax benefits, including penalties and interest, could decrease by
approximately $1.9 million to $3.3 million ($1.3 million to $2.2 million net of federal benefit) upon
settlement of these audits. Such settlements are not anticipated to have a significant impact on the results
of operations.
11. Pension Plan and Postretirement Benefits Other Than Pension
We provide a non-contributory retirement plan that covers substantially all employees and certain
vested employees of our former parent company (the ‘‘Pension Plan’’). Benefits payable under the Pension
Plan are based on employees’ years of service and compensation during the final ten years of employment.
We also sponsor an unfunded defined benefit postretirement medical plan that covers substantially all
employees, including Waddell & Reed and Legend advisors. The medical plan is contributory with retiree
contributions adjusted annually. The medical plan does not provide for post age 65 benefits with the
exception of a small group of employees that were grandfathered when such plan was established.
71
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
A reconciliation of the funded status of these plans and the assumptions related to the obligations at
December 31, 2009, 2008 and 2007 follows:
Pension Benefits
Other
Postretirement Benefits
2009
2008
2007
2009
2008
2007
(in thousands)
Change in projected benefit
obligation:
Net benefit obligation at
beginning of year
Service cost
Interest cost
Benefits and expenses paid
Actuarial (gain) loss
Retiree contributions
$
98,594
5,276
6,386
(11,692)
12,398
—
94,893
5,727
6,326
(6,553)
(1,799)
—
88,320
5,718
5,490
(3,690)
(945)
—
Net benefit obligation at end of
year
$ 110,962
98,594
94,893
5,205
371
343
(493)
362
157
5,945
3,975
296
262
(616)
1,126
162
5,205
4,174
292
244
(313)
(570)
148
3,975
The accumulated benefit obligation for the Pension Plan was $94.9 million and $86.9 million at
December 31, 2009 and 2008, respectively.
Pension Benefits
Other
Postretirement Benefits
2009
2008
2007
2009
2008
2007
(in thousands)
Change in plan assets:
Fair value of plan assets at
beginning of year
Actual return on plan assets
Employer contributions
Retiree contributions
Benefits paid
Fair value of plan assets at
$
78,020
15,223
10,000
—
(11,692)
109,822
(30,249)
5,000
—
(6,553)
end of year
$
91,551
78,020
Funded status at end of year
$ (19,411)
(20,574)
82,889
23,622
7,000
—
(3,689)
109,822
14,929
—
—
336
157
(493)
—
—
—
454
162
(616)
—
—
—
165
148
(313)
—
(5,945)
(5,205)
(3,975)
72
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
Pension Benefits
Other
Postretirement Benefits
2009
2008
2007
2009
2008
2007
(in thousands, except percentage data)
Amounts recognized in the statement of
financial position:
Noncurrent assets
Current liabilities
Noncurrent liabilities
$
-
-
(19,411)
Net amount recognized at end of year
$
(19,411)
-
-
(20,574)
(20,574)
14,929
-
-
14,929
-
(250)
(5,695)
-
(252)
(4,953)
-
(192)
(3,783)
(5,945)
(5,205)
(3,975)
Amounts not yet reflected in net periodic
benefit cost and included in accumulated other
comprehensive income:
Transition obligation
Prior service cost
Accumulated gain (loss)
Accumulated other comprehensive income
$
(47)
(4,041)
(32,842)
(52)
(4,596)
(30,835)
(57)
(3,714)
4,792
-
(284)
(79)
-
(323)
283
-
(362)
1,489
(loss)
(36,930)
(35,483)
1,021
(363)
(40)
1,127
Cumulative employer contributions in excess
of net periodic benefit cost
17,519
Net amount recognized at end of year
$
(19,411)
14,909
(20,574)
13,908
14,929
(5,582)
(5,165)
(5,102)
(5,945)
(5,205)
(3,975)
Weighted average assumptions used to
determine benefit obligation at December 31:
Discount rate
Rate of compensation increase
6.25%
3.86%
6.75%
(1)
6.75%
3.86%
6.25%
6.75%
6.75%
Not applicable
(1) Rate of compensation increase was 0% for 2009, 2.5% for 2010 and 3.86% for 2011 and after.
The discount rate assumptions used to determine the postretirement obligations and expense were
based on the Mercer Bond Model. This model was designed by Mercer Human Resource Consulting to
provide a means for plan sponsors to value the liabilities of their postretirement benefit plans. The Mercer
Bond Model calculates the yield on a theoretical portfolio of high-grade corporate bonds (rated ‘‘Aa’’ or
better) with cash flows that generally match our expected benefit payments. To the extent scheduled bond
proceeds exceed the estimated benefit payments in a given period, the yield calculation assumes those
excess proceeds are reinvested at the one-year forward rates implied by the Citigroup Pension Discount
Curve.
73
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
Our Pension Plan asset allocation at December 31, 2009 and 2008 is as follows:
Plan assets by category
Cash
Equity securities:
Domestic
International
Debt securities
Gold bullion
Total
Percentage of
Plan Assets at
December 31, 2009
Percentage of
Plan Assets at
December 31, 2008
3%
21%
60%
-
16%
100%
14%
53%
7%
19%
7%
100%
The primary investment objective is to maximize growth of the Pension Plan assets to meet the
projected obligations to the beneficiaries over a long period of time, and to do so in a manner that is
consistent with the Company’s earnings strength and risk tolerance. Asset allocation is the most important
decision in managing the assets and it is reviewed regularly. The asset allocation policy considers the
Company’s financial strength and long-term asset class risk/return expectations since the obligations are
long-term in nature. As of December 31, 2009, our Pension Plan assets were invested in our Asset Strategy
style, and our Plan assets are managed by our in-house investment professionals.
Asset Strategy invests in the domestic or foreign market that is believed to offer the greatest
probability of return or, alternatively, that provides the highest degree of safety in uncertain times. This
style may allocate its assets among stocks, bonds and short-term investments and since the allocation is
dynamically managed and able to take advantage of opportunities as they are presented by the market,
there is not a predetermined asset allocation. Dependent on the outlook for the U.S. and global
economies, our investment managers make top-down allocations among stocks, bonds, cash, precious
metals and currency markets around the globe. After determining allocations, we seek the best
opportunities within each market. Derivative instruments play an important role in this style’s investment
process, to manage risk and maximize stability of the assets in the portfolio.
At December 31, 2009, the Plan had multiple investment concentrations that are not typical of a
classic pension plan, including a significant weighting of plan assets invested in equity securities, including
60% international equities, of which almost half was invested in Chinese equities. The Plan also had 16%
of plan assets invested in gold bullion. During 2009, the Plan also had a significant concentration in
derivative instruments.
Risk management is primarily the responsibility of the investment portfolio manager, who
incorporates it with their day-to-day research and management. Although investment flexibility is essential
to this style’s investment process, the Plan does not invest in a number of asset classes that are commonly
referred to as alternative investments, namely venture capital, private equity, direct real estate properties,
timber, or oil, gas or other mineral explorations or development programs or leases. The Plan also has a
number of specific guidelines that serve to manage investment risk by placing limits on net securities
exposure and concentration of assets within specific companies or industries.
74
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
We determine the fair value of our plan assets using broad levels of inputs as defined by related
accounting standards and categorized as Level 1, Level 2 or Level 3, as previously defined in Note 4. The
following table summarizes our plan assets as of December 31, 2009:
Level 1
Level 2
Level 3
Total
(in thousands)
Equity securities:
Domestic
International
Fixed income securities:
Foreign bonds
Industrial bond
Mortgage-backed security
Gold bullion
Total investment securities
Cash and other
Total
$
20,340
6,430
-
-
-
14,438
41,208
-
47,663
68
12
195
-
47,938
-
-
-
-
-
-
-
$
20,340
54,093
68
12
195
14,438
89,146
2,405
91,551
The international equity securities classification as Level 2 as of December 31, 2009 of $47.7 million is
due to the use of fair value pricing, triggered by the Standard & Poor’s 500 Index movement of more than
100 basis points on the valuation date. Without this change, international equity securities would be
classified as Level 1 in the fair value hierarchy.
The following table summarizes the activity of plan assets categorized as Level 3 for the year ended
December 31, 2009:
Balance at December 31, 2008
Purchases, issuances and settlements
Actual return on plan assets, sold during the period
Proceeds from sales
Balance at December 31, 2009
Options
$
(in thousands)
(11)
262
(123)
(128)
$
-
The 7.75% expected long-term rate of return on Pension Plan assets reflects management’s
expectations of long-term average rates of return on funds invested to provide for benefits included in the
projected benefit obligations. The Plan expects a relatively high return because of the types of investment
the portfolio incorporates, the success the portfolio managers have had with generating returns in excess of
passive management in those types of investments, and the past history of returns. The ability to use a high
concentration of equities, especially international equities, within the Plan’s investment policy presents
portfolio managers the opportunity to earn higher returns than other investment strategies that are
restricted to owning lower returning assets classes. The expected return is based on the outlook for
inflation, fixed income returns and equity returns, while also considering historical returns, asset allocation
and investment strategy.
75
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
The components of net periodic pension and other postretirement costs and the assumptions related
to those costs consisted of the following for the years ended December 31, 2009, 2008 and 2007:
Components of net periodic benefit
cost:
Service cost
Interest cost
Expected return on plan assets
Actuarial (gain) loss amortization
Prior service cost amortization
Transition obligation amortization
Net periodic benefit cost
Pension Benefits
Other
Postretirement Benefits
2009
2008
2007
2009
2008
2007
(in thousands)
$
5,276
6,387
(6,428)
1,595
555
5
$
7,390
5,727
6,326
(8,614)
—
555
5
3,999
5,718
5,490
(6,442)
808
436
5
6,015
371
343
—
—
39
—
753
296
262
—
(80)
39
—
517
292
244
—
(39)
38
—
535
The estimated net loss, prior service cost and transition obligation for the Pension Plan that will be
amortized from accumulated other comprehensive income into net periodic benefit cost in 2010 are
$1.8 million, $555 thousand and $5 thousand, respectively. The estimated prior service cost for the
postretirement medical plan that will be amortized from accumulated other comprehensive income into
net periodic benefit cost in 2010 is $46 thousand.
Pension Benefits
Other
Postretirement Benefits
2009
2008
2007
2009
2008
2007
Weighted average assumptions used to
determine net periodic benefit cost for
the years ended December 31:
Discount rate
Expected return on plan assets
Rate of compensation increase
6.75%
7.75%
(1)
6.75%
7.75%
3.86%
6.00%
7.75%
3.86%
6.75
6.75%
6.00%
Not applicable
Not applicable
(1) Rate of compensation increase was 0% for 2009, 2.5% for 2010 and 3.86% for 2011 and after.
76
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
We expect the following benefit payments to be paid which reflect future service, as appropriate:
2010
2011
2012
2013
2014
2015 through 2019
Pension
Benefits
Other
Postretirement
Benefits
$
(in thousands)
4,581
7,187
6,971
7,600
9,806
52,320
$
88,465
258
332
388
438
447
2,599
4,462
Our policy with respect to funding the Pension Plan is to fund at least the minimum required by the
Employee Retirement Income Security Act of 1974, as amended, and not more than the maximum amount
deductible for tax purposes. All contributions made to the Pension Plan for 2009 and 2008 were voluntary.
We anticipate that our 2010 contribution to our Pension Plan will be made from cash generated from
operations and will be in the range from $7.0 to $10.0 million, $5.0 million of which was contributed during
January 2010.
All Company contributions to other postretirement medical benefits are voluntary, as the
postretirement medical plan is not funded and is not subject to any minimum regulatory funding
requirements. The contributions for each year represent claims paid for medical expenses, and we
anticipate making the 2010 expected contribution with cash generated from operations. Contributions by
participants to the postretirement plan were $157 thousand and $162 thousand for the years ended
December 31, 2009 and 2008, respectively.
For measurement purposes, the initial health care cost trend rate was 9% for 2009 and 10% for 2008
and 2007. The health care cost trend rate reflects anticipated increases in health care costs. The initial
assumed growth rate of 9% for 2009 is assumed to gradually decline over the next four years to a rate of
5% in the fourth year. The effect of a 1% annual increase in assumed cost trend rates would increase the
December 31, 2009 accumulated postretirement benefit obligation by approximately $612 thousand, and
the aggregate of the service and interest cost components of net periodic postretirement benefit cost for
the year ended December 31, 2009 by approximately $105 thousand. The effect of a 1% annual decrease in
assumed cost trend rates would decrease the December 31, 2009 accumulated postretirement benefit
obligation by approximately $531 thousand, and the aggregate of the service and interest cost components
of net periodic postretirement benefit cost for the year ended December 31, 2009 by approximately
$89 thousand.
We also sponsor the Waddell & Reed Financial, Inc. Supplemental Executive Retirement Plan, as
amended and restated (the ‘‘SERP’’), a non-qualified deferred compensation plan covering eligible
employees. The SERP provides certain benefits for Company officers that the Pension Plan is prevented
from providing because of compensation and benefit limits in the Internal Revenue Code.
The SERP was adopted to supplement the annual pension paid to certain senior executive officers.
Each calendar year, the Compensation Committee of the Board of Directors (the ‘‘Compensation
77
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
Committee’’) credits participants’ SERP accounts with (i) an amount equal to 4% of the executive’s base
salary, less the amount of the maximum employer matching contribution available under our 401(k) plan,
and (ii) a non-formula award, if any, as determined by the Compensation Committee in its discretion.
There were no discretionary awards made to participants during 2009. Additionally, each calendar year,
participants’ accounts are credited (or charged) with an amount equal to the performance of certain
hypothetical or investment vehicles since the last preceding year. Upon a participant’s separation, or at
such other time based on a pre-existing election by a participant, benefits accumulated under the SERP are
payable in installments or in a lump sum. As of December 31, 2009 and 2008, the aggregate liability to
participants was $3.6 million and $3.5 million, respectively.
At December 31, 2009, the accrued pension and postretirement liability recorded on the balance sheet
was comprised of accrued pension costs of $19.4 million, a liability for postretirement benefits in the
amount of $5.7 million and an accrued liability for SERP benefits of $3.6 million. The current portion of
postretirement liability of $0.3 million is included in other current liabilities on the balance sheet. At
December 31, 2008, the accrued pension and postretirement liability recorded on the balance sheet was
comprised of accrued pension costs of $20.6 million, an accrued liability for SERP benefits of $3.5 million
and a liability for postretirement benefits in the amount of $5.0 million. The current portion of
postretirement liability of $0.3 million is included in other current liabilities on the balance sheet.
12. Employee Savings Plan
We sponsor a defined contribution plan that qualifies under Section 401(k) of the Internal Revenue
Code to provide retirement benefits to substantially all of our employees following the completion of an
eligibility period. As allowed under Section 401(k), the plan provides tax-deferred salary deductions for
eligible employees. Our matching contributions to the plan for the years ended December 31, 2009, 2008
and 2007 were $1.6 million, $4.0 million and $3.7 million, respectively.
13. Stockholders’ Equity
Earnings per Share
For the years ended December 31, 2009, 2008 and 2007, earnings per share were computed as follows:
2009
2008
2007
(in thousands, except per share amounts)
Net income
$
105,505
Weighted average shares outstanding — basic
Dilutive potential shares from stock options
Weighted average shares outstanding — diluted
Earnings per share:
Basic
Diluted
85,484
60
85,544
1.23
1.23
$
$
96,163
85,761
352
86,113
1.12
1.12
125,497
83,975
724
84,699
1.49
1.48
Effective January 1, 2009, we adopted ‘‘Earnings Per Share Topic,’’ ASC 260. This standard provides
that unvested share-based payment awards that contain nonforfeitable rights to dividends are considered
to be participating securities and must be included in the computation of earnings per share pursuant to
the two-class method. As required upon adoption, we retrospectively adjusted prior year earnings per
78
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
share data to conform to the provisions of this standard. Stock options are included in the calculation of
diluted earnings per share using the treasury stock method.
Anti-dilutive Securities
Options to purchase 777 thousand shares, 688 thousand shares and 659 thousand shares of Class A
common stock (‘‘common stock’’) were excluded from the diluted earnings per share calculation for years
ended December 31, 2009, 2008 and 2007, respectively, because they were anti-dilutive.
Dividends
We declared dividends on our common stock of $0.76 per share, $0.76 per share and $0.68 per share
for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009 and 2008,
other current liabilities included $16.3 million and $16.1 million, respectively, for dividends payable to
stockholders.
Common Stock Repurchases
The Board of Directors has authorized the repurchase of our common stock in the open market
and/or private purchases. The acquired shares may be used for corporate purposes, including shares issued
to employees in our stock-based compensation programs. There were 1,870,034 shares, 3,779,953 shares
and 2,584,216 shares repurchased in the open market or privately during the years ended December 31,
2009, 2008 and 2007, respectively, which includes 327,301 shares, 430,145 shares and 234,162 shares
repurchased from employees who elected to tender shares to cover their minimum tax withholdings with
respect to vesting of stock awards during the years ended December 31, 2009, 2008 and 2007, respectively.
14. Share-Based Compensation
The Company has three stock-based compensation plans: the Company 1998 Stock Incentive Plan, as
amended and restated (the ‘‘SI Plan’’), the Company 1998 Executive Stock Award Plan, as amended and
restated (the ‘‘ESA Plan’’) and the Company 1998 Non-Employee Director Stock Award Plan, as amended
and restated (the ‘‘NED Plan’’) (collectively, the ‘‘Stock Plans’’).
The SI Plan allows us to grant equity compensation awards, including, among other awards,
non-qualified stock options and nonvested stock as part of our overall compensation program to attract
and retain key personnel and encourage a greater personal financial investment in the Company. All of the
Stock Plans also allow us to grant non-qualified stock options and/or nonvested stock to promote the
long-term growth of the Company. A maximum of 30,000,000 shares of common stock are authorized for
issuance under the SI Plan. A maximum of 3,750,000 and 1,200,000 shares of common stock are authorized
for issuance under the ESA Plan and NED Plan, respectively. In total, 11,834,808 shares of common stock
are available for issuance as of December 31, 2009 under these plans. In addition, we make incentive
payments under the Company 2003 Executive Incentive Plan, as amended and restated (the ‘‘EIP’’) in the
form of cash, stock options, nonvested stock or a combination thereof. Incentive awards paid under the
EIP in the form of stock options or nonvested stock are issued out of shares reserved for issuance under
the SI and ESA Plans. Generally, shares of common stock covered by terminated, surrendered or cancelled
options, by forfeited nonvested stock, or by the forfeiture of other awards that do not result in issuance of
shares of common stock are again available for awards under the plan from which they were terminated,
surrendered, cancelled or forfeited.
79
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
Under our Stock Plans, the exercise price of a stock option is equal to the closing market price of
Company common stock on the date of grant. The maximum term of non-qualified options granted under
the SI Plan is ten years and two days and the options generally vest in 331⁄3% increments on the second,
third and fourth anniversaries of the grant date. The maximum term of non-qualified options granted
under the ESA Plan and NED Plan is 11 years and the options generally vest 10% each year, beginning on
the first anniversary of the grant date. Our Stock Plans include a Stock Option Restoration Program
feature (the ‘‘SORP’’) that allows, on the first trading day of August, a holder to pay the exercise price on
vested in-the-money options by surrendering common stock of the Company that has been owned for at
least six months. This feature also permits a holder exercising an option to be granted new options in an
amount equal to the number of common shares used to satisfy both the exercise price and withholding
taxes due upon exercise. New options are granted with an expiration date equal to that of the original
option and vest six months after the grant date. The SORP results in a net issuance of shares of common
stock and fewer stock options outstanding. We receive a current income tax benefit for stock option
exercises.
Nonvested stock awards are valued on the date of grant, have no purchase price and generally vest
over four years in 331⁄3% increments on the second, third and fourth anniversaries of the grant date. The
Company also issues nonvested stock awards to our financial advisors (our sales force) who are
independent contractors. These awards have the same terms as awards issued to employees; however,
changes in the Company’s share price result in variable compensation expense over the vesting period.
Under the Stock Plans, nonvested shares are forfeited upon the termination of employment with the
Company or service on the Board, dependent upon the circumstances of termination. Except for
restrictions placed on the transferability of nonvested stock, holders of nonvested stock have full
stockholders’ rights during the term of restriction, including voting rights and the rights to receive cash
dividends.
(a) Stock Options
A summary of stock option activity and related information for the year ended December 31, 2009
follows:
Outstanding at December 31, 2008
Granted
Exercised
Granted in restoration
Exercised in restoration
Terminated/Canceled
Outstanding at December 31, 2009
Exercisable at December 31, 2009
Weighted
average
exercise
price
23.44
—
17.00
28.01
26.76
19.66
30.65
30.67
Options
2,021,844
—
(831,600)
6,502
(6,793)
(292,450)
897,503
891,802
$
$
$
Weighted
average
remaining
contractual term
(in years)
1.40
1.12
1.12
80
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
The aggregate intrinsic value of outstanding options and exercisable options as of December 31, 2009
was $1.6 million. The total intrinsic value (on date of exercise) of options exercised during the years ended
December 31, 2009, 2008 and 2007 was $7.3 million, $9.4 million and $31.9 million, respectively. The
related income tax benefit recognized was $2.5 million, $3.3 million and $11.6 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
SORP options with vesting periods of six months were the only options granted during 2009, 2008 and
2007. Compensation expense related to options issued under the SORP of $90 thousand, $217 thousand
and $19 thousand was recorded for the years ended December 31, 2009, 2008 and 2007, respectively.
The weighted average fair value of options granted during the years ended December 31, 2009, 2008
and 2007 were $8.68, $5.47 and $2.76, respectively. The grant date fair value of options granted has been
calculated using a Black-Scholes option-pricing model with assumptions as follows:
Dividend yield
Risk-free interest rate
Expected volatility
Expected life (in years)
(b) Nonvested Stock
2009
2008
2007
2.71%
0.88%
64.90%
1.79
2.24%
2.05%
32.10%
1.89
2.70%
4.57%
24.50%
1.21
A summary of nonvested share activity and related fair value for the year ended December 31, 2009
follows:
Nonvested at December 31, 2008
Granted
Vested
Forfeited
Nonvested at December 31, 2009
Nonvested
Stock Shares
3,562,598
1,990,060
(1,094,007)
(22,807)
4,435,844
$
Weighted
Average
Grant Date
Fair Value
$
25.92
21.24
23.60
23.42
24.40
For the years ended December 31, 2009, 2008 and 2007, compensation expense related to nonvested
stock totaled $30.5 million, $29.0 million and $23.7 million, respectively. In 2009, we also recognized
compensation expense of $400 thousand related to nonvested stock that was immediately vested for
employees in connection with the divestiture of our investment in ACF. These costs are included in general
and administrative expenses in the consolidated statement of income. In 2008, we recognized
$795 thousand related to nonvested stock that was immediately vested under the voluntary separation
program, discussed in Note 7 and included in general and administrative expense in the consolidated
statement of income.
The related income tax benefit was $11.2 million, $10.5 million and $8.6 million for the years ended
December 31, 2009, 2008 and 2007, respectively, which may be recognized upon vesting. As of
81
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
December 31, 2009, the remaining unamortized expense of $73.0 million is expected to be recognized over
a weighted average period of 2.5 years.
The total fair value of shares vested (at vest date) during the years ended December 31, 2009, 2008
and 2007 was $23.3 million, $40.0 million and $21.0 million, respectively. The Company permits employees
the right to tender a portion of their vested shares to the Company to satisfy the minimum tax withholding
obligations of the Company with respect to vesting of the shares. During 2010, we expect to repurchase
approximately 435,000 shares from employees who elect to tender shares to cover their minimum tax
withholdings.
For nonvested stock awards granted prior to the adoption of ‘‘Compensation — Stock Compensation
Topic,’’ ASC 718, the Company will continue to recognize compensation expense over the contractual
vesting period. Had compensation expense for nonvested stock awards issued prior to January 1, 2006 been
determined based on the date a participant first becomes eligible for retirement, the Company’s net
income would have been increased by $66 thousand for the year ended December 31, 2009, increased by
$372 thousand for the year ended December 31, 2008 and decreased by $45 thousand for the year ended
December 31, 2007.
15. Uniform Net Capital Rule Requirements
Three of our subsidiaries, Waddell & Reed, Inc. (‘‘W&R’’), Legend Equities Corporation (‘‘LEC’’),
and Ivy Funds Distributor, Inc. (‘‘IFDI’’) are registered broker/dealers and members of the Financial
Industry Regulatory Authority. Broker/dealers are subject to the SEC’s Uniform Net Capital Rule
(Rule 15c3-1), which requires the maintenance of minimum net capital and requires that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed 15.0 to 1.0. The primary difference
between net capital and stockholders’ equity is the non-allowable assets that are excluded from net capital.
A broker/dealer may elect not to be subject to the Aggregate Indebtedness Standard of
paragraph (a)(1)(i) of Rule 15c3-1, in which case net capital must exceed the greater of $250 thousand or
2% of aggregate debit items computed in accordance with the Formula for Determination of Reserve
Requirements for broker/dealers. W&R made this election and thus is not subject to the aggregate
indebtedness ratio as of December 31, 2009 or 2008.
Net capital and aggregated indebtedness information for our broker/dealer subsidiaries is presented in
the following table as of December 31, 2009 and 2008 (in thousands):
Net capital
Required capital
Excess of required capital
Ratio of aggregate
indebtedness to net
capital
W&R
$
$
21,579
250
21,329
Not
applicable
2009
LEC
1,948
229
1,719
IFDI
W&R
17,093
2,089
15,004
7,494
250
7,244
2008
LEC
2,148
172
1,976
IFDI
25,108
1,298
23,810
1.76 to 1.0
1.83 to 1.0
Not
applicable
1.20 to 1.0
0.78 to 1.0
82
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
16. Rental Expense and Lease Commitments
We lease our home office buildings, certain sales and other office space and equipment under
long-term operating leases. Rent expense was $22.0 million, $20.1 million and $18.6 million, for the years
ended December 31, 2009, 2008 and 2007, respectively. Future minimum rental commitments under
non-cancelable operating leases are as follows (in thousands):
2010
2011
2012
2013
2014
Thereafter
$
$
18,440
15,738
13,245
8,594
5,424
11,393
72,834
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 2009.
17. Related Party Transactions
We earn investment management fees from the Funds for which we also act as an investment adviser,
pursuant to an investment management agreement with each Fund. In addition, we have agreements with
the Funds pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, pursuant to
which distribution and service fees are collected from the Funds for distribution of mutual fund shares, for
costs such as advertising and commissions paid to broker/dealers, and for providing ongoing services to
shareholders of the Funds and/or maintaining shareholder accounts. We also earn service fee revenues by
providing various services to the Funds and their shareholders pursuant to a shareholder servicing
agreement with each Fund (except the Ivy Funds VIP) and an accounting service agreement with each
Fund. Certain of our officers and directors are also officers, directors and/or trustees for the various Funds
for which we act as an investment adviser. These agreements are approved or renewed on an annual basis
by each Fund’s board of directors/trustees, including a majority of the disinterested members. Funds and
separate accounts receivable includes amounts due from the Funds for aforementioned services.
18. Contingencies
The Company is involved from time to time in various legal proceedings, regulatory investigations and
claims incident to the normal conduct of business, which may include proceedings that are specific to us
and others generally applicable to the business practices within the industries in which we operate. A
substantial legal liability or a significant regulatory action against us could have an adverse effect on our
business, financial condition and on the results of operations in a particular quarter or year.
Michael E. Taylor, Kenneth B. Young, individuals, on behalf of themselves individually and on behalf of
others similarly situated v. Waddell & Reed, Inc., a Delaware Corporation; Waddell & Reed Financial, Inc., a
Delaware Corporation; Waddell & Reed Development, Inc., a Delaware Corporation; Waddell & Reed
Financial Advisors, a fictitious business name; and DOES 1 through 10 inclusive; Case No. 09-CV-2909 DMS
WVG; in the United States District Court for the Southern District of California.
In an action filed December 28, 2009, the Company, along with various of its affiliates, were sued in an
individual action, class action and Fair Labor Standards Act (‘‘FLSA’’) nationwide collective action by two
83
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
former advisors asserting misclassification of financial advisers as independent contractors. Plaintiffs assert
claims under the FLSA for minimum wages and overtime wages, and under California Labor Code
Statutes for timely pay wages, minimum wages, overtime compensation, meal periods, reimbursement of
losses and business expenses and itemized wage statements and a claim for Unfair Business Practices
under §17200 of the California Business & Professions Code. Plaintiffs seek declaratory and injunctive
relief and monetary damages. As yet, no responsive pleading has been filed, but the Company intends to
vigorously contest plaintiffs’ claims.
In the opinion of management, the ultimate resolution and outcome of this matter is uncertain. At this
stage of the litigation, the Company is unable to estimate the expense or exposure, if any, that it may
represent. The ultimate resolution of this matter, or an adverse determination against the Company, could
have a material adverse impact on the financial position and results of operations of the Company.
However, this possible impact is unknown and not reasonably determinable; therefore, no liability has been
recorded in the consolidated financial statements.
19. Selected Quarterly Information (Unaudited)
2009
Total revenues
Net income
Earnings per share:
Basic
Diluted
2008
Total revenues
Net income
Earnings per share:
Basic
Diluted
Quarter
First
Second
Third
Fourth
(in thousands)
176,672
15,466 (1)
199,628
23,374 (2)
217,976
33,413 (3)
244,813
33,252
0.18
0.18
0.27
0.27
Quarter
0.39
0.39
0.39
0.39
First
Second
Third
Fourth
(in thousands)
234,069
28,341
0.33
0.33
252,783
35,187
0.41
0.40
241,224
33,365
0.39
0.39
191,044
(730) (4)
(0.01)
(0.01)
$
$
$
$
$
$
(1) Includes a pre-tax charge of $3.7 million ($2.3 million net of tax) to reflect the ‘‘other than temporary’’
decline in value of certain of the Company’s investments in affiliated mutual funds as the fair value of
these investments had been below cost for an extended period.
(2) Includes a pre-tax charge of $548 thousand ($395 thousand net of tax) for severance and other
transaction costs in connection with the divestiture of our investment in ACF.
(3) Includes a pre-tax charge of $543 thousand ($423 thousand net of tax) for severance and other
transaction costs in connection with the divestiture of our investment in ACF; and tax benefits of
84
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2009, 2008 and 2007
$1.6 million related to carrying back a portion of the capital loss generated by the divestiture of our
investment in ACF to fully offset capital gains generated during the three year carryback period.
(4) Includes a pre-tax charge of $16.5 million ($10.5 million net of tax) for restructuring charges consisting
primarily of severance costs associated with our voluntary separation program as well as costs
associated with terminating various projects under development; a charge of $7.2 million (not
deductible for income tax purposes) to recognize the impairment of goodwill associated with ACF;
additional amortization of our deferred sales commission asset of $6.5 million ($4.1 million net of tax)
due to significant asset redemption activity and our review of the recoverability of our deferred sales
commission asset; and a pre-tax charge of $2.1 million ($1.4 million net of tax) related to the
settlement of miscellaneous litigation and other matters. These charges were offset by the reversal of
bonus accruals of $7.9 million ($5.1 million net of tax) to reflect lower annual awards.
85
WADDELL & REED FINANCIAL, INC.
Index to Exhibits
Exhibit
No.
Exhibit Description
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
Restated Certificate of Incorporation of Waddell & Reed Financial, Inc. Filed as Exhibit 3.1
to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687, for the quarter ended
June 30, 2006 and incorporated herein by reference.
Amended and Restated Bylaws of Waddell & Reed Financial, Inc. Filed as Exhibit 3.1 to the
Company’s Current Report on Form 8-K, File No. 333-43687, filed September 17, 2008 and
incorporated herein by reference.
Specimen of Class A Common Stock Certificate, par value $0.01 per share. Filed as
Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A, File No. 333-43687, on
February 27, 1998 and incorporated herein by reference.
Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred
Stock of Waddell & Reed Financial, Inc., as filed on April 9, 2009 with the Secretary of State
of the State of Delaware. Filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K,
File No. 333-43687, on April 10, 2009 and incorporated herein by reference.
Rights Agreement, dated as of April 28, 1999, by and between Waddell & Reed Financial, Inc.
and Computershare Trust Company, N.A., as successor to 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, File No. 001-13913, for
the quarter ended June 30, 1999 and incorporated herein by reference.
First Amendment to Rights Agreement, dated as of February 14, 2001, by and between
Waddell & Reed Financial, Inc. and Computershare Trust Company, N.A., as successor to
First Chicago Trust Company of New York. Filed as Exhibit 4.4 to the Company’s Annual
Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2000 and
incorporated herein by reference.
Rights Agreement, dated as of April 8, 2009, by and between Waddell & Reed Financial, Inc.
and Computershare Trust Company, N.A., which includes the Certificate of Designation,
Preferences and Rights of Series A Junior Participating Preferred Stock of the Company, as
filed on April 9, 2009 with the Secretary of State of Delaware, as Exhibit A and the form of
Rights Certificate as Exhibit B. Filed as Exhibit 4.2 to the Company’s Current Report on
Form 8-K, File No. 333-43687, on April 10, 2009 and incorporated herein by reference.
Indenture, dated as of January 18, 2001, by and between Waddell & Reed Financial, Inc. and
The Bank of New York Mellon Trust Company, National Association, as successor in interest
to JPMorgan Chase Bank, National Association. Filed as Exhibit 4.1(a) to the Company’s
Current Report on Form 8-K, File No. 001-13913, on February 5, 2001 and incorporated
herein by reference.
86
Exhibit
No.
4.7
4.8
4.9
10.1
10.2
10.3
10.4
WADDELL & REED FINANCIAL, INC.
Index to Exhibits
Exhibit Description
First Supplemental Indenture, dated as of January 18, 2001 by and between Waddell & Reed
Financial, Inc. and The Bank of New York Mellon Trust Company, National Association, as
successor in interest to JPMorgan Chase Bank, 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, File No. 333-43687, on February 5, 2001 and
incorporated herein by reference.
Second Supplemental Indenture, dated as of January 13, 2006, between Waddell & Reed
Financial, Inc. and The Bank of New York Mellon Trust Company, National Association, as
successor in interest to JP Morgan Trust Company, National Association, as trustee, and the
form of the Global Note for the Company’s 5.60% Notes due 2011 as Exhibit A. Filed as
Exhibits 4.1 and 4.2 to the Company’s Current Report on Form 8-K, File No. 333-43687, on
January 13, 2006 and incorporated herein by reference.
Form of Indenture to be used in connection with the issuance of the Subordinated Debt
Securities. Filed as Exhibit 4.7 to the Company’s Form S-3/A, File No. 333-43682, on
September 7, 2000 and incorporated herein by reference.
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. Filed as Exhibit 10.5 to the Company’s
Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2000 and
incorporated herein by reference.
Administrative Services Agreement, dated as of October 20, 2008, by and among Nationwide
Life Insurance Company, Nationwide Life and Annuity Insurance Company and Waddell &
Reed, Inc. and its affiliated insurance companies. Filed as Exhibit 10.2 to the Company’s
Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2008 and
incorporated herein by reference.
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. Filed as Exhibit 10.6 to the Company’s
Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2000 and
incorporated herein by reference.
Fund Participation Agreement, dated as of September 19, 2003, by and among Minnesota Life
Insurance Company, Waddell & Reed, Inc. and Ivy Funds VIP. Filed as Exhibit 10.3 to the
Company’s Annual Report on Form 10-K, File No. 333-43687, for the year ended
December 31, 2007 and incorporated herein by reference.
87
Exhibit
No.
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
WADDELL & REED FINANCIAL, INC.
Index to Exhibits
Exhibit Description
Variable Products Distribution Agreement, dated as of December 12, 2003, by and among
Minnesota Life Insurance Company, Securian Financial Services, Inc. and Waddell &
Reed, Inc. and its affiliated insurance companies. Filed as Exhibit 10.4 to the Company’s
Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2004 and
incorporated herein by reference.
Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as
Exhibit 10.6 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for the year
ended December 31, 2008 and incorporated herein by reference.*
Waddell & Reed Financial, Inc. 1998 Executive Stock Award Plan, as amended and restated.
Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687,
for the quarter ended September 30, 2005 and incorporated herein by reference.*
Waddell & Reed Financial, Inc. 1998 Non-Employee Director Stock Award Plan, as amended
and restated. Filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, File
No. 333-43687, for the quarter ended September 30, 2005 and incorporated herein by
reference.*
Credit Agreement, dated as of October 6, 2008, by and among Waddell & Reed
Financial, Inc., the Lenders, Bank of America, N.A. and Bank of America Securities LLC.
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, File No. 333-43687, on
October 6, 2008 and incorporated herein by reference.
Credit Agreement, dated as of October 5, 2009, by and among Waddell & Reed
Financial, Inc., the Lenders, Bank of America, N.A. and Bank of America Securities LLC.
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, File No. 333-43687, on
October 7, 2009 and incorporated herein by reference.
Fixed Rate Promissory Note for Multiple Loans, dated as of August 15, 2000, by and between
Waddell & Reed Financial, Inc. and Chase Manhattan Bank. Filed as Exhibit 10.15 to the
Company’s Annual Report on Form 10-K, File No. 001-13913, for the year ended
December 31, 2000 and incorporated herein by reference.
Waddell & Reed Financial, Inc. Supplemental Executive Retirement Plan, as amended and
restated. Filed as Exhibit 10.11 to the Company’s Annual Report on Form 10-K, File
No. 333-43687, for the year ended December 31, 2008 and incorporated herein by reference.*
Waddell & Reed Financial, Inc. 2003 Executive Incentive Plan, as amended and restated.
Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, File No. 333-43687, on
April 11, 2008 incorporated herein by reference.*
88
Exhibit
No.
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
WADDELL & REED FINANCIAL, INC.
Index to Exhibits
Exhibit Description
Form of Accounting Services Agreement, amended and restated as of July 1, 2003, by and
between the Funds and Waddell & Reed Services Company. Filed as Exhibit 10.12 to the
Company’s Annual Report on Form 10-K, File No. 333-43687, for the year ended
December 31, 2007 and incorporated herein by reference.
Accounting Services Agreement, dated January 30, 2009, by and between the Advisors Funds
and Waddell & Reed Services Company.
Accounting and Administrative Services Agreement, dated August 25, 2004, as amended
February 13, 2008, by and between the Ivy Funds portfolios and Waddell & Reed Services
Company.
Accounting and Administrative Services Agreement, dated November 29, 2006, by and
between the Ivy Funds portfolios and Waddell & Reed Services Company.
Accounting and Administrative Services Agreement, dated August 25, 2004, as amended
May 31, 2009, by and between Ivy Funds, Inc. and Waddell & Reed Services Company.
Accounting Services Agreement, dated April 30, 2009, by and between Ivy Funds VIP and
Waddell & Reed Services Company.
Form of Investment Management Agreement, amended and restated as of November 9, 2005,
by and between each of the Advisors Funds and Waddell & Reed Investment Management
Company. Filed as Exhibit 10.13 to the Company’s Annual Report on Form 10-K, File
No. 333-43687, for the year ended December 31, 2007 and incorporated herein by reference.
Investment Management Agreement, dated January 30, 2009, by and between the Advisors
Funds and Waddell & Reed Investment Management Company.
Investment Management Agreement, dated April 9, 2003, as amended February 13, 2008, by
and between the Ivy Funds portfolios and Ivy Investment Management Company.
Investment Management Agreement, dated July 23, 2003, as amended November 12, 2008, by
and between the Ivy Funds portfolios and Ivy Investment Management Company.
Investment Management Agreement, dated August 31, 1992, as amended May 15, 2009, by
and between Ivy Funds, Inc. and Waddell & Reed Investment Management Company and
assigned to Ivy Investment Management Company.
Investment Management Agreement, amended as of November 9, 2005, by and between Ivy
Funds VIP and Waddell & Reed, Inc., assigned to Waddell & Reed Investment Management
Company. Filed as Exhibit 10.15 to the Company’s Annual Report on Form 10-K, File
No. 333-43687, for the year ended December 31, 2007 and incorporated herein by reference.
89
Exhibit
No.
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
WADDELL & REED FINANCIAL, INC.
Index to Exhibits
Exhibit Description
Investment Management Agreement, dated April 10, 2009, by and between Ivy Funds VIP
and Waddell & Reed Investment Management Company.
Investment Management Agreement, dated April 10, 2009, by and between Ivy Funds VIP
and Waddell & Reed Investment Management Company.
Form of Shareholder Servicing Agreement, amended as of August 22, 2001, by and between
each of the Advisors Funds or the Ivy Funds and Waddell & Reed Services Company. Filed as
Exhibit 10.16 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for the
year ended December 31, 2007 and incorporated herein by reference.
Shareholder Servicing Agreement, dated January 30, 2009, by and between the Advisors
Funds and Waddell & Reed Services Company.
Shareholder Servicing Agreement, dated April 9, 2003, as amended May 31, 2009, by and
between the Ivy Funds portfolios and Waddell & Reed Services Company.
Shareholder Servicing Agreement, dated April 1, 1996, as amended May 31, 2009, by and
between Ivy Funds, Inc. and Waddell & Reed Services Company.
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, File
No. 001-13913, for the year ended December 31, 1998 and incorporated herein by reference.
Form of Amendment to Underwriting Agreement, dated July 24, 2002, by and between each
of the Advisors Funds and Waddell & Reed, Inc. Filed as Exhibit 10.18 to the Company’s
Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2007 and
incorporated herein by reference.
Underwriting Agreement, dated January 30, 2009, by and between the Advisors Funds and
Waddell & Reed, Inc.
Underwriting Agreement, dated April 15, 2009, by and between Ivy Funds VIP and Waddell &
Reed, Inc.
Distribution Agreement, amended and restated as of September 3, 2003, by and between Ivy
Funds, Inc. and Waddell & Reed, Inc., assigned to Ivy Funds Distributor, Inc. Filed as
Exhibit 10.19 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for the
year ended December 31, 2007 and incorporated herein by reference.
10.37
Distribution Agreement, dated September 3, 2003, by and between the Ivy Funds portfolios
and Ivy Funds Distributor, Inc.
90
Exhibit
No.
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
WADDELL & REED FINANCIAL, INC.
Index to Exhibits
Exhibit Description
Form of Distribution and Service Plan, amended and restated as of November 29, 2006, by
and between each of the Advisors Funds or Ivy Funds and Waddell & Reed, Inc. or Ivy Funds
Distributor, Inc., respectively. Filed as Exhibit 10.20 to the Company’s Annual Report on
Form 10-K, File No. 333-43687, for the year ended December 31, 2007 and incorporated
herein by reference.
Distribution and Service Plan, effective January 30, 2009, for the Advisors Funds Class A
shares.
Distribution and Service Plan, effective January 30, 2009, for the Advisors Funds Class B
shares.
Distribution and Service Plan, effective January 30, 2009, for the Advisors Funds Class C
shares.
Distribution and Service Plan, dated November 29, 2006, as amended November 12, 2008, for
the Ivy Funds portfolios Class A, Class B, Class C, Class E, and Class Y Shares.
Distribution and Service Plan, dated November 14, 2007, for the Ivy Funds portfolios Class A,
Class B, Class C, Class E, Class R and Class Y Shares.
Distribution and Service Plan, amended and restated May 18, 2009, for Ivy Funds, Inc.
Class A, Class B, Class C, Class E, Class R and Class Y Shares.
Service Plan, revised as of May 16, 2001, by and between Ivy Funds VIP and Waddell &
Reed, Inc. Filed as Exhibit 10.21 to the Company’s Annual Report on Form 10-K, File
No. 333-43687, for the year ended December 31, 2007 and incorporated herein by reference.
10.46
Ivy Funds VIP Service Plan, dated April 30, 2009.
10.47
10.48
10.49
Master Business Management and Investment Advisory Agreement, dated December 31,
2002, as amended August 26, 2009, by and between the Ivy Funds portfolios and Ivy
Investment Management Company (formerly, Waddell & Reed Ivy Investment Company).
Administrative Agreement, dated as of March 9, 2001, by and among W&R Insurance
Agency, Inc., Waddell & Reed, Inc., BISYS Insurance Services, Inc. and Underwriters Equity
Corp. Filed as Exhibit 10.28 to the Company’s Annual Report on Form 10-K, File
No. 333-43687, for the year ended December 31, 2001 and incorporated herein by reference.
Consulting Agreement, dated May 25, 2005, by and between Waddell & Reed Financial, Inc.
and Keith A. Tucker. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K,
File No. 333-43687, on May 26, 2005 and incorporated herein by reference.
91
Exhibit
No.
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
WADDELL & REED FINANCIAL, INC.
Index to Exhibits
Exhibit Description
Form of Change in Control Employment Agreement, dated December 14, 2001, by and
between Henry J. Herrmann and Waddell & Reed Financial, Inc. Filed as Exhibit 10.30 to the
Company’s Annual Report on Form 10-K, File No. 333-43687, for the year ended
December 31, 2001 and incorporated herein by reference.*
First Amendment to Change in Control Employment Agreement, dated December 17, 2008,
by and between Henry J. Herrmann and Waddell & Reed Financial, Inc. Filed as Exhibit 10.26
to the Company’s Annual Report on Form 10-K, File No. 333-43687, for the year ended
December 31, 2008 and incorporated herein by reference.*
Second Amendment to Change in Control Employment Agreement, dated December 17,
2009, by and between Henry J. Herrmann and Waddell & Reed Financial, Inc.
Form of Restricted Stock Award Agreement for awards to Employees pursuant to the
Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as
Exhibit 10.2 to the Company’s Current Report on Form 8-K, File No. 333-43687, on March 7,
2005 and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards to Employees pursuant to the
Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as
Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687, for the
quarter ended September 30, 2005 and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards to Employees pursuant to the
Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as
Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687, for the
quarter ended September 30, 2007 and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards to Employees pursuant to the
Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as
Exhibit 10.29 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for the
year ended December 31, 2008 and incorporated herein by reference *
Form of Restricted Stock Award Agreement for awards to Employees pursuant to the
Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as
Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687, for the
quarter ended March 31, 2009 and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards to Non-Employee Directors pursuant
to the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated.
Filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K, File No. 333-43687, on
March 7, 2005 and incorporated herein by reference.*
92
Exhibit
No.
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
10.67
WADDELL & REED FINANCIAL, INC.
Index to Exhibits
Exhibit Description
Form of Restricted Stock Award Agreement for awards to Non-Employee Directors pursuant
to the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated.
Filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687,
for the quarter ended September 30, 2005 and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards to Non-Employee Directors pursuant
to the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated.
Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687,
for the quarter ended September 30, 2007 and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards to Non-Employee Directors pursuant
to the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated.
Filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687,
for the quarter ended September 30, 2007 and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed
Financial, Inc. 1998 Executive Stock Award Plan, as amended and restated. Filed as
Exhibit 10.1 to the Company’s Current Report on Form 8-K, File No. 333-43687, on March 7,
2005 and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed
Financial, Inc. 1998 Executive Stock Award Plan, as amended and restated. Filed as
Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687, for the
quarter ended September 30, 2005 and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed
Financial, Inc. 1998 Executive Stock Award Plan, as amended and restated. Filed as
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687, for the
quarter ended September 30, 2007 and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed
Financial, Inc. 1998 Executive Stock Award Plan, as amended and restated. Filed as
Exhibit 10.29 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for the
year ended December 31, 2008 and incorporated herein by reference *
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed
Financial, Inc. 1998 Executive Stock Award Plan, as amended and restated. Filed as
Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687, for the
quarter ended March 31, 2009 and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed
Financial, Inc. 1998 Non-Employee Director Stock Award Plan, as amended and restated.
Filed as Exhibit 10.5 to the Company’s Current Report on Form 8-K, File No. 333-43687, on
March 7, 2005 and incorporated herein by reference.*
93
WADDELL & REED FINANCIAL, INC.
Index to Exhibits
Exhibit Description
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed
Financial, Inc. 1998 Non-Employee Director Stock Award Plan, as amended and restated.
Filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687,
for the quarter ended September 30, 2005 and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed
Financial, Inc. 1998 Non-Employee Director Stock Award Plan, as amended and restated.
Filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687,
for the quarter ended September 30, 2007 and incorporated herein by reference.*
Form of Restricted Stock Award Agreement for awards pursuant to the Waddell & Reed
Financial, Inc. 1998 Non-Employee Director Stock Award Plan, as amended and restated.
Filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q, File No. 333-43687,
for the quarter ended September 30, 2007 and incorporated herein by reference.*
Form of Non-Qualified Stock Option Grant Agreement for awards pursuant to the Waddell &
Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as
Exhibit 10.33 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for the
year ended December 31, 2007 and incorporated herein by reference.*
First Amendment to the Waddell & Reed Financial, Inc. Non-Qualified Stock Option Grant
Agreement, dated November 7, 2007, by and between Waddell & Reed Financial, Inc. and
Henry J. Herrmann. Filed as Exhibit 10.34 to the Company’s Annual Report on Form 10-K,
File No. 333-43687, for the year ended December 31, 2007 and incorporated herein by
reference.*
2009 Performance Goals established pursuant to the Waddell & Reed Financial, Inc. 2003
Executive Incentive Plan, as amended and restated. Filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K, File No. 333-43687, on February 19, 2009 and incorporated
herein by reference.*
2010 Performance Goals established pursuant to the Waddell & Reed Financial, Inc. 2003
Executive Incentive Plan, as amended and restated. Filed as Exhibit 10.1 to the Company’s
Current Report on Form 8-K, File No. 333-43687, on February 19, 2010 and incorporated
herein by reference.*
Offer of Settlement. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, File
No. 333-43687, on July 24, 2006 and incorporated herein by reference.
Assurance of Discontinuance. Filed as Exhibit 10.2 to the Company’s Current Report on
Form 8-K, File No. 333-43687, on July 24, 2006 and incorporated herein by reference.
Stipulation for Consent Order. Filed as Exhibit 10.3 to the Company’s Current Report on
Form 8-K, File No. 333-43687, on July 24, 2006 and incorporated herein by reference.
Exhibit
No.
10.68
10.69
10.70
10.71
10.72
10.73
10.74
10.75
10.76
10.77
94
WADDELL & REED FINANCIAL, INC.
Index to Exhibits
Exhibit Description
Statement regarding computation of per share earnings.
Statement re computation of ratios of earnings to fixed charges.
Subsidiaries of Waddell & Reed Financial, Inc.
Consent of KPMG LLP.
Exhibit
No.
11
12
21
23
31.1
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
31.2
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
32.1
Section 1350 Certification of the Chief Executive Officer.
32.2
Section 1350 Certification of the Chief Financial Officer.
*
Indicates management contract or compensatory plan, contract or arrangement.
95
Business
Profile &
financial
HigHligHts
Founded in 1937, Waddell & Reed is one of the most enduring asset manage-
ment and financial planning firms in the United States. For more than 70 years,
we have provided proven, professional investment management and financial
planning services to individuals and institutional investors. Today, we distribute
our investment products through three distinct distribution channels: the Advisors
channel, the Wholesale channel and the Institutional channel. At December 31,
2009, total assets under management were $70 billion and we served approxi-
mately 3.9 million mutual fund shareholder accounts.
Financial Highlights
(Dollars in thousands, except per share data)
2009
2008
2007
Operating Revenues
Operating Income
Net Income
Diluted Earnings Per Share
Operating Margin
See accompanying Form 10-K.
Assets Under Management
(Dollars in millions)
Advisors Channel
Wholesale Channel
Institutional Channel
Total
$ 839,089
$ 919,120
$ 837,554
169,812
165,329
194,632
$ 105,505
$ 96,163
$ 125,497
1.23
20.2%
1.12
18.0%
1.48
23.2%
2009
2008
2007
$ 29,474
$ 23,472
$ 34,562
32,818
7,491
17,489
6,523
21,537
8,769
$ 69,783
$ 47,484
$ 64,868
Dividend Reinvestment
Waddell & reed financial, inc. maintains a dividend
reinvestment plan for all holders of its common stock.
under the plan, stockholders may reinvest all or part of
their dividends in additional shares of common stock.
Participation is entirely voluntary. More information on
the plan can be obtained from our transfer agent.
Stockholder and Analyst Resources
We believe that in today’s digital world, the internet allows
us to disseminate our corporate information much more
quickly and efficiently. in addition to the standard infor-
mation typically found on corporate Web sites, such as
general, corporate and stock information, access to archived
press releases and sec filings, and answers to frequently
asked questions, we supply our stockholders and analysts
with timely supplemental data including quarterly corpo-
rate presentations, access to live and archived Web casts,
data tables and more. if you elect to request information
alerts, we will send you an e-mail when new information
is posted to our corporate Web site.
Cor por At e In For M At Ion
Annual Meeting of Stockholders
april 7, 2010, 10:00 a.m.
corporate Headquarters
Corporate Headquarters
Waddell & reed financial, inc.
6300 lamar avenue
overland Park, Ks 66202
Stock Exchange Listings
class a common stock
new York stock exchange symbol: WDr
Transfer Agent and Registrar
computershare trust company, n.a.
P.o. Box 43069
Providence, ri 02940-3070
toll free number: 877.498.8861
Hearing impaired: 800.952.9245
www.computershare.com
Independent Auditors
KPMg llP
1000 Walnut, suite 1000
Kansas city, Mo 64106
Stockholder Inquiries
for general information regarding your Waddell & reed
financial, inc. stock, call 800.532.2757 or visit our Web
site at www.waddell.com. for stock transfers, call
877.498.8861.
Mutual Fund Information
for information regarding our mutual funds, please
call 888.WaDDell or visit www.waddell.com or
www.ivy funds.com.
Questions about corporate information can be
directed to the attention of:
nicole Mcintosh
assistant Vice President
investor relations
913.236.1880
nmcintosh@waddell.com
2
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ANN-CORP-2009 (02/10)
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