asset management
balanced distribution
2010 A n n uA l R epoRt
f
i
n
a
n
c
i
a
l
p
l
a
n
n
i
n
g
s
e
r
v
i
c
e
s
W
a
d
d
e
l
l
&
R
e
e
d
F
i
n
a
n
c
i
a
l
,
I
n
c
.
2
0
1
0
A
n
n
u
a
l
R
e
p
o
r
t
6300 Lamar Avenue
Overland Park, KS 66202
800.532.2757
www.waddell.com
ANN-CORP-2010 (02/11)
4061_Cov.indd 1
2/16/11 10:54 PM
founded in 1937
financial highlights
Business Profile
& Financial
Business Profile
& Financial Highlights
Founded in 1937, Waddell & Reed is one of the most enduring financial
planning firms in the united States. For nearly 75 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, 2010,
total assets under management reached an all time high of $84 billion.
Financial Highlights (Dollars in thousands, except per share data)
operating Revenues
operating Income
net Income
diluted earnings per Share
operating Margin
See accompanying Form 10-K.
2010
2009
2008
CAGR
$1,044,885
$839,089
$ 919,120
250,470
169,812
156,959
105,505
1.83
24.0%
1.23
20.2%
165,329
96,163
1.12
18.0%
7%
23%
28%
28%
assets under Management (Dollars in millions)
advisors Channel
Wholesale Channel
Institutional Channel
total
2010
$33,181
40,883
9,609
$83,673
2009
2008
CAGR
$ 29,474
$ 23,472
32,818
7,491
17,489
6,523
$ 69,783
$ 47,484
19%
53%
21%
33%
Corporate
Information
Annual Meeting of Stockholders
April 6, 2011, 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 LL P
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.ivyfunds.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
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 information 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 corporate 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.
22
W a d d e l l & R e e d 2 0 1 0 a n n u a l R e p o R t
4061_Cov.indd 2
2/16/11 9:52 PM
25000
20000
15000
10000
5000
0
n
e
a
r
l
y
7
5
y
e
a
r
s
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 investment strategies for
retirement, education, insurance and estate planning needs.
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 broker/dealers, retirement platforms and
independent registered investment advisors.
Institutional Channel
Many of our investment strategies are offered to defined
benefit plans, pension plans and endowments. We also
provide subadvisory services to other distributors.
Our Distribution
Our Distribution
Channels
$21.7
$21.7
les
S
a
$19.7
)
s
n
o
i
l
l
i
b
n
i
s
r
a
l
l
o
D
(
40
35
30
‘10
‘09
25
‘08
Institutional Channel
Wholesale Channel
Advisors Channel
20
15
10
5
0
Organic
GROWTh RATE
Net Flows (Dollars in millions)
2010
2009
2008
Advisors Channel
$ 120
$ 282
$ 128
Wholesale Channel
4,372
9,068
6,932
Institutional Channel
944
(85)
917
Total
$ 5,436
$ 9,265
$ 7,977
WDR Organic Growth
Industry Organic Growth
7.8%
-2.5%
19.5%
12.3%
-1.6%
3.4%
h
t
i
w
o
r
G
c
n
a
g
r
O
R
D
W
h
t
i
w
o
r
G
c
n
a
g
r
O
s
y
r
t
s
u
d
n
'
I
2010
2009
2008
4061_Body.indd 3
2/18/11 9:34 PM
W A d d e l l & R e e d 2 0 1 0 A N N u A l R e p O R T
3
To our Stockholders
across financial markets, 2010 started out upbeat, but became subdued as concerns over
the potential for an economic double dip in the united States and debt problems in europe
unfolded. While those concerns didn’t disappear, they did moderate. overall, 2010 was a
good year for investors, with the S&p 500 Index increasing nearly 13 percent. despite a
lagging period in the spring, by late summer the financial markets began to turn upward
and economic growth in the united States, while not robust, improved. the Federal
Reserve’s announcement of an additional asset purchase program, combined with the
extension of the Bush tax cuts and reduction in federal employment tax withholdings,
provided reinforcement of positive trends into year-end. Investors began to demonstrate
more appetite for risk, with money flows going into emerging markets, commodities, lower
quality debt and domestic equities.
For Waddell & Reed Financial, Inc., despite the economic
recent three-year period ended December 31, 2010, 61
backdrop and market fluctuations, financial and
percent of our equity funds and 69 percent of our equity
operational results were strong. We ended 2010 with
assets beat their investment peers. In addition, over the
the highest level of assets under management in the
three-year period ended December 31, 2010, 40 percent of
organization’s history, reaching $84 billion, an increase of
our equity funds were rated 4 or 5 stars by Morningstar,
nearly 20 percent from a year ago. Earnings per share
Inc., with 66 percent rated 4 or 5 stars over the most
reached $1.83, a 49 percent increase over the prior year
recent 5-year period.
and an all-time high. Net income also reached historically
high levels, at $157 million, while operating revenues broke
$1 billion for the first time ever. Given our solid capital
position, we increased our quarterly dividend to
stockholders to $0.80 per share. The price of our common
stock increased by 16 percent from its year-end 2009 level.
For the third year in a row, Ivy Funds and Waddell & Reed
Advisors Funds ranked among the top of the “Best Mutual
Fund Families” over the last five years in an annual ranking
published by Barron’s. In the newspaper’s February 7, 2011
issue, Ivy Funds ranked first and Waddell & Reed Advisors
Funds ranked second in terms of performance over the
As an investment management company, our success
five-year period ended December 31, 2010, out of 53 fund
depends substantially upon consistent and highly
families ranked. Over the most recent one-year period,
competitive investment performance. Over the most
Waddell & Reed Advisors ranked fifth and Ivy Funds
4
W a d d e l l & R e e d 2 0 1 0 a n n u a l R e p o R t
4061_Body.indd 4
2/18/11 9:35 PM
Lipper
RankIngs
percentage of equity assets ranked in the top half of their peer group
67%
63%
76%
percentage of equity assets with 4 or 5 Star Rating
Mornin
star RatIngs
g
48%
39%
59%
1-Year
3-Year
5-Year
1-Year
3-Year
5-Year
ranked ninth, out of 57 firms. Over the most recent
unique value proposition. In a competitive marketplace,
10 years, Ivy Funds ranked fifth and Waddell & Reed
this initiative is an assertion of Ivy’s commitment to grow
Advisors 28th, out of 46 firms, according to Barron’s.
its position as an important, focused and successful
We believe the strength of our company stems from three
advantages: a collaborative, risk-management-focused
culture in our Investment Management Division; a
balanced distribution model; and our experienced, tenured
executive management team. If we execute as we expect
we will, these advantages should allow continued success
in 2011 and beyond.
In early 2011, Ivy Funds launched a comprehensive new
branding campaign designed to reinforce to financial
advisors and investors Ivy’s distinct and disciplined
investment process, global perspective, product breadth
and nearly 75-year heritage.
industry participant.
Investment management
Our investment management expertise covers nearly every
asset class and investment style in the industry, providing
a broad product line for diversified client portfolios.
Performance remained strong, as indicated by the
aforementioned Barron’s recognition as well as solid Lipper
and Morningstar ratings. Consistent results are dependent
upon a deep and tenured team, and supported by the
culture we have developed over several decades. Our team
of portfolio managers, analysts and economists meets daily
in a collaborative setting that fosters idea sharing and
brings together a broad range of market and industry
The campaign is innovative and unique, utilizing
insight. As a testament to our culture and capability, 80
documentary videos, social media, online advertising, print
percent of our portfolio managers have been with the firm
advertising with “quick response” codes that link to the
for 10 years or more. Our entire investment management
videos, a website featuring commentary and value add
team averages more than 20 years of investment experience
materials, all anchored by a new tagline and new graphics.
with an average tenure of 14 years with the firm. Our
After several years of rapid growth and product expansion,
we felt it important to further broaden the Ivy Funds brand
and bring a consistent emphasis to the fund family’s
personnel turnover rate is very low, which is unusual in
the money management industry and speaks to the respect
our investment management staff has for the culture and
cohesiveness of the team.
4061_Body.indd 5
2/18/11 9:35 PM
W a d d e l l & R e e d 2 0 1 0 a n n u a l R e p o R t
5
Our product lineup was further strengthened in 2010 with the
launch of the Ivy Asset Strategy New Opportunities fund, a
flexible portfolio that has a focus on small- and mid-cap
companies in emerging markets, but may access any asset class
as deemed appropriate by the portfolio manager. This fund,
which expands our expertise in the flexible portfolio category,
has been quite popular since its launch in May 2010, reaching
assets of $300 million by year-end.
Distribution
Advisors channel
While the equity markets showed strong returns over the year,
consumer sentiment remained cautious toward equities,
particularly domestic equities. Many investors moved into fixed
income securities, especially early in the year. Sentiment toward
equities began to improve late in the year as markets recovered.
In this uncertain environment, investors sought financial
guidance provided by qualified advisors.
For 2010, in the Advisors channel:
• Gross sales reached $3.6 billion, the second-highest level in
company history, and an increase of 13 percent over 2009;
• Net flows remained positive;
• The redemption rate was 9.3 percent, which compares
favorably to the industry average rate of 26.3 percent;
• Productivity reached an all-time high of $119,000 per advisor.
Total advisor headcount decreased over the year as we continued
to focus on productivity. Although our total advisor headcount
at year-end 2010 was 1,847 advisors, a decline of 23 percent,
productivity increased by 28 percent as annual sales reached
$3.6 billion. We strive to achieve or surpass industry
productivity levels as we attract financial advisors who
demonstrate an ability to be consistently successful. A retooled
infrastructure with a more robust platform for recruiting,
transitioning and training advisors is now in place and should
support the achievement of our goal.
ASSeTS UNder MANAGeMeNT
isors
Ad
v
$30.5
$25.2
$28.4
$29.5
$22.6
$33.2
$30.8
$28.2
)
s
n
o
i
l
l
i
b
n
i
s
r
a
l
l
o
D
(
1Q
'09
2Q
'09
3Q
'09
4Q
'09
1Q
'10
2Q
'10
3Q
'10
4Q
'10
AdvISOrS
SAleS
$783 $804
$695
$920
$886
$954
$935
$839
)
s
n
o
i
l
l
i
m
n
i
s
r
a
l
l
o
D
(
1Q
'09
2Q
'09
3Q
'09
4Q
'09
1Q
'10
2Q
'10
3Q
'10
4Q
'10
AdvISOrS
PrOdUCTIvITY
$34.2
$28.5 $29.1
$27.1
$25.8
$23.1 $22.8
$21.0
)
s
d
n
a
s
u
o
h
t
n
i
s
r
a
l
l
o
D
(
1Q
'09
2Q
'09
3Q
'09
4Q
'09
1Q
'10
2Q
'10
3Q
'10
4Q
'10
6
W a d d e l l & R e e d 2 0 1 0 a n n u a l R e p o R t
4061_Body.indd 6
2/18/11 9:35 PM
Wholesale channel
The Wholesale channel remains the source of rapid asset
accumulation for the company. Relative to the industry as a whole,
gross sales in 2010 were strong, especially considering investors’
risk aversion through much of the year. Results were generally on
par with a very strong 2009. The environment did provide an
opportunity for us to highlight a number of fixed-income
6000
products, many of which saw increased sales over the year.
For 2010, the Wholesale channel:
• Generated gross sales of $14.5 billion, by far the
largest source of company flows even while declining
by a modest 2 percent from 2009;
• Realized net flows of $4.4 billion;
• Steadily increased product sales diversification, as
$5.5 billion in sales, or 38 percent of total sales, came
from funds other than the Asset Strategy fund;
• Realized organic growth of 13 percent, compared
to the industry’s 2.5 percent rate of organic decay;
• Saw the Ivy Funds remain among the top 10 fund
families in total sales volume at most major wirehouses
and independent firms.
5000
4000
3000
2000
1000
0
Eight Ivy funds experienced sales in excess of $250 million
this year. These included Asset Strategy and Global Natural
Resources, at more than $1 billion; High Income and Science
and Technology, at more than $500 million; and International
Core Equity, Limited-Term Bond, Municipal High Income and
Mid Cap Growth at more than $250 million.
ASSETS uNdER MANAGEMENT
Wholes
le
a
$32.5
$32.8
$35.6
$29.0
$36.5
$23.1
$40.9
$18.6
)
s
n
o
i
l
l
i
b
n
i
s
r
a
l
l
o
D
(
1Q
'09
2Q
'09
3Q
'09
4Q
'09
1Q
'10
2Q
'10
3Q
'10
4Q
'10
WHOLESALE
SALES
$4.1
$4.1
$4.2
$4.4
$3.5
$3.6
$2.9
$2.4
)
s
n
o
i
l
l
i
b
n
i
s
r
a
l
l
o
D
(
1Q
'09
2Q
'09
3Q
'09
4Q
'09
1Q
'10
2Q
'10
3Q
'10
4Q
'10
WHOLESALE CHANNEL (diversifying sales)*
40
35
30
25
20
15
10
5
0
Our focus is on continuing to strengthen our relationships within
the firms with which we have solid partnerships. We have very
strong relationships with many firms across the distribution
spectrum. We are strategically well positioned, as our product
2008
2009
2010
breadth touches nearly every asset class, and our sales professionals
have proven themselves to be highly capable of competing
effectively and successfully raising assets.
$4,293 – 27.5% of total Sales
$5,190 – 35.3% of total Sales
$5,502 – 37.0% of total Sales
* Sales outside of Asset Strategy fund
4061_Body.indd 7
2/18/11 9:35 PM
W a d d e l l & R e e d 2 0 1 0 a n n u a l R e p o R t
7
Institutional channel
We saw strong growth in this channel over the course of
the year, as we captured new sales in the subadvisory
business, identified new defined benefit opportunities, and
grew relationships with important distributors of mutual
funds and insurance products.
In 2010, our Institutional channel:
• Generated gross sales of $3.6 billion, a record high for
this channel, and representing a 111 percent increase
over 2009;
• Saw net flows of $944 million;
• Reached total assets under management of $9.6 billion at
year-end, an increase of 28 percent from year-end 2009
and also a record high.
Subadvisory mandates grew over the year, as we captured
several meaningful opportunities in key asset classes,
including flexible portfolio and large cap growth. We feel
we can compete aggressively in the subadvisory business,
as the breadth and depth of our experience across several
asset classes makes us an attractive partner. We see
substantial opportunity in the subadvisory business, an
area that is a growing part of our Institutional channel. The
defined contribution business also remains an important
part of our business in this channel, and continues to show
signs of promise.
ASSeTS UndeR MAnAGeMenT
nstitution
I
l
a
$8.7
$8.1
$7.5
$7.5
$7.2
$7.2
$6.3
$9.6
)
s
n
o
i
l
l
i
b
n
i
s
r
a
l
l
o
D
(
1Q
'09
2Q
'09
3Q
'09
4Q
'09
1Q
'10
2Q
'10
3Q
'10
4Q
'10
$1,097
InSTITUTIonAl
SAleS
$905
$819
$768
$526
$505
$395
$277
)
s
n
o
i
l
l
i
m
n
i
s
r
a
l
l
o
D
(
1Q
'09
2Q
'09
3Q
'09
4Q
'09
1Q
'10
2Q
'10
3Q
'10
4Q
'10
8
W a d d e l l & R e e d 2 0 1 0 a n n u a l R e p o R t
4061_Body.indd 8
2/17/11 12:53 AM
Creating long-term value
for stoCkholders
Our consistently competitive investment management
expertise, combined with the breadth of our product line
and distribution channels, allows us to occupy a very
distinct place in the financial marketplace. Waddell &
Reed has developed this model over nearly 75 years, and
across a variety of market environments. The growth of our
business and our solid capital position allowed us, in 2010,
to undertake significant share buyback activity and
markets that face inflation concerns, and Europe’s
sovereign debt issues likely will cause unrest periodically.
In this environment, we pledge to continue applying our
disciplined, globally minded insight to countries and
market sectors around the world. By doing so, we can
continue to gather assets, manage them with a genuine
sense of stewardship, grow our distribution, and continue
to create long-term value for our mutual fund investors,
our employees and our corporate stockholders.
increase the dividend to our stockholders. Our free cash
flow has grown over time, reaching $189 million in 2010.
Sincerely,
As we look ahead, our outlook for the global financial
markets is positive. There is likely to be volatility, as
continued high unemployment in the U.S., large emerging
Henry J. Herrmann
Chief Executive Officer
Chairman of the Board
4061_Body.indd 9
2/17/11 12:35 AM
W a d d e l l & R e e d 2 0 1 0 a n n u a l R e p o R t
9
Directors
& Officers
DIRECTORS
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)2,3,4,5
Sharilyn S. Gasaway
Former EVP and CFO,
Alltel Corporation
Director (since 2010)1,3,6
OffICERS
Henry J. Herrmann
Chairman of the Board and
Chief Executive Officer
47 Years of Industry Experience
39 Years with Waddell & Reed
Michael L. Avery
President and
Chief Investment Officer
32 Years of Industry Experience
29 Years with Waddell & Reed
Thomas W. Butch
Executive Vice President and
Chief Marketing Officer
29 Years of Industry Experience
11 Years with Waddell & Reed
Daniel P. Connealy
Senior Vice President and
Chief Financial Officer
41 Years of Industry Experience
7 Years with Waddell & Reed
Ronald C. Reimer
Former President,
Reimer & Koger Associates
Director (since 2001)3,5,6
Jerry W. Walton
Consultant and Former CFO,
J.B. Hunt Transport Services, Inc.
Director (since 2000)1,2,3,4
1Audit Committee
2Compensation Committee
3Nominating and Corporate
Governance Committee
4Executive Committee
5Marketing Committee
6Investment Committee
Mark A. Schieber
Senior Vice President
and Controller
30 Years of Industry Experience
30 Years with Waddell & Reed
Wendy J. Hills
Vice President, Secretary and
Associate General Counsel
13 Years of Industry Experience
13 Years with Waddell & Reed
Nicole McIntosh
Assistant Vice President
13 Years of Industry Experience
13 Years with Waddell & Reed
Thomas C. Godlasky
Former CEO,
Aviva North America
Director (since 2010)3,5,6
Dennis E. Logue
Chairman,
Ledyard Financial Group, Inc.
Director (since 2002)3,5,6
Michael F. Morrissey
Former Partner,
Ernst and Young, LLP
Director (since 2010)1,2,3
James M. Raines
President,
James M. Raines and Co.
Director (since 1998)2,3,6
Daniel C. Schulte
Senior Vice President and
General Counsel
13 Years of Industry Experience
13 Years with Waddell & Reed
Michael D. Strohm
Senior Vice President and
Chief Operations Officer
38 Years of Industry Experience
38 Years with Waddell & Reed
John E. Sundeen, Jr.
Senior Vice President and
Chief Administrative
Officer—Investments
27 Years of Industry Experience
27 Years with Waddell & Reed
Brent K. Bloss
Senior Vice President—Finance,
Treasurer and Principal
Accounting Officer
11 Years of Industry Experience
9 Years with Waddell & Reed
10
W a d d e l l & R e e d 2 0 1 0 a n n u a l R e p o R t
4061_Body.indd 10
2/18/11 11:43 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, 2010
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, 2010 was $1.590 billion.
Shares outstanding of each of the registrant’s classes of common stock as of February 17, 2011 Class A common
stock, $.01 par value: 85,912,544
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 6, 2011.
Index of Exhibits (Pages 84 through 91)
Total Number of Pages Included Are 91
WADDELL & REED FINANCIAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2010
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
3
10
16
16
16
17
18
21
23
43
44
44
44
46
46
46
46
46
46
46
47
48
84
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. As of December 31,
2010, we had $83.7 billion in assets under management.
We derive our revenues 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. Shareholder service fees revenue includes
transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and
administration fees, and is earned based on assets under management or number of accounts.
We operate our business through three distinct distribution channels. Our retail products are
distributed through our sales force of independent 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 financial planning, serving
primarily middle class and mass affluent clients. We compete with smaller broker/dealers and independent
financial advisors, as well as a span of other financial providers. Assets under management in this channel
were $33.2 billion at December 31, 2010.
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 and insurance
platforms. Assets under management in this channel were $40.9 billion at the end of 2010.
Through our Institutional channel, we manage assets in a variety of investment styles for a variety of
types of institutions. The largest client type is funds that hire us to act as subadvisor; they are typically
distributors who lack scale or the track record to manage internally, or choose to market multi-manager
styles. Assets under management in the Institutional channel were $9.6 billion at December 31, 2010.
Organization
We operate our investment advisory business through our subsidiary companies, primarily Waddell &
Reed Investment Management Company (‘‘WRIMCO’’), a registered investment adviser, Ivy Investment
Management Company (‘‘IICO’’), the registered investment adviser for Ivy Funds (the ‘‘Ivy Funds’’) and
Legend Advisory Corporation, the registered investment adviser for Legend.
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 the Advisors Funds and a distributor of variable annuities and other
3
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 investment management agreements with each fund within the Advisors Funds family, the Ivy Funds
family, 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 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 trustees, including a majority of the 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 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 team meets every morning in a collaborative setting that fosters idea
sharing, yet reinforces individual accountability. Through all market cycles, we remain dedicated to the
following investment principles:
(cid:127) Rigorous fundamental research — an enduring investment culture that dedicates itself to analyzing
companies on its own rather than relying exclusively on widely available research produced by
others.
(cid:127) Collaboration and accountability — a balance of collaboration and individual accountability, which
ensures the sharing and analysis of investment ideas among investment professionals while
empowering portfolio managers to shape their portfolios individually.
(cid:127) Focus on growing and protecting investors’ assets — a sound approach that seeks to capture asset
appreciation when market conditions are favorable and, especially, strives to manage risk during
difficult market periods.
4
investment organization has delivered consistently competitive
These three principles shape our investment philosophy and money management approach. Over
seven decades, our
investment
performance. Through bull and bear markets, our investment professionals have not strayed from what
works — a time-tested investment process and fundamental research. We believe investors turn to us
because they appreciate that our investment approach continues to identify and create opportunities for
wealth creation.
Our investment management team comprises 74 professionals including 29 portfolio managers who
average 20 years of industry experience and 14 years of tenure with our firm. We have significant
experience in virtually all major asset classes, several specialized asset classes and a range of investment
styles. At December 31, 2010, almost 80% of the Company’s $83.7 billion in assets under management
were invested in equities, of which 65% was domestic and 35% was international. In recent years, we have
supported growth of international investments by adding investment professionals native to countries that
we consider emerging markets. They, along with other members of the investment team, focus on
understanding foreign markets and capturing investment opportunities. Our investment management team
also includes subadvisors who bring similar investment philosophies and additional expertise in specific
asset classes.
Investment Management Products
Our mutual fund families offer a wide variety of investment options. We are the exclusive underwriter
and distributor of 82 registered open-end mutual fund portfolios, which include offerings in the Advisors
Funds, Ivy Funds, Ivy Funds VIP and 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 which channel
marketed the client account or is the broker of record.
We added three funds to our product line in 2010. We launched the Ivy Asset Strategy New
Opportunities fund for investors seeking high total return over the long term, and focus on small- and
mid-cap equity securities. We invest a majority of the fund’s assets among equity securities, bonds and
short-term instruments of issuers in markets around the globe, as well as investments in precious metals
and exposure to various foreign currencies. The fund may allocate its investments among these different
types of securities in different proportions at different times, including up to 100% of equity securities of
small- to mid-cap issuers, bonds or short-term instruments, respectively. The Ivy Funds VIP Global Bond
fund was added for investors interested in a high level of current income. The fund invests in a diversified
portfolio of debt securities of foreign and U.S. issuers, with at least 80% of its net assets in bonds during
normal market conditions. We added the Ivy Funds VIP Limited-Term Bond fund to provide investors an
opportunity for a high level of current income consistent with preservation of capital. The fund invests
primarily in investment grade, U.S. dollar-denominated, debt securities of primarily U.S. issuers.
Other Products
Through various business partners, we distribute in our Advisors channel certain of their variable
annuity products, which offer the Ivy Funds VIP as an investment vehicle. We also offer our Advisors
channel customers retirement and life insurance products underwritten by our business partners. Through
our insurance agency subsidiaries, Waddell & Reed financial advisors also sell life insurance and disability
products underwritten by various carriers.
In addition, we offer our Advisors channel customers fee-based asset allocation investment advisory
products, including Managed Allocation Portfolio (‘‘MAP’’), MAPPlus and Strategic Portfolio Allocation
(‘‘SPA’’), which utilize our Funds. As of December 31, 2010, clients have $4.5 billion invested in our MAP,
MAPPlus and SPA products. These assets are included in our mutual fund assets under management.
5
Distribution Channels
We distribute our investment products through the Advisors, Wholesale and Institutional channels.
Advisors Channel
Over the past year, we completed enhancements to our Choice brokerage platform technology and
offerings that should allow us to compete in the recruitment of experienced advisors. Historically, our
advisors have sold 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. As of December 31,
2010, our sales force consisted of 1,847 financial advisors who operate out of 167 offices located
throughout the United States and 258 individual advisor offices. We believe, based on industry data, that
our financial advisors are currently one of the largest sales forces 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, 2010, our Advisors channel had approximately 517,000 mutual fund
customers.
Over the past several years, we have instituted more stringent production requirements for our sales
force, which has resulted in a steady decline in our number of advisors. However, gross sales have not
declined over this period and this channel produced more in 2010 with 14% fewer advisors, on average,
compared to 2009. We utilize gross revenue per advisor to measure advisor productivity. For purposes of
this measure, gross revenue 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. Gross revenue per advisor was $119 thousand, $93 thousand and $103 thousand for the
years ended December 31, 2010, 2009 and 2008, respectively.
Wholesale Channel
Our Wholesale channel consists of sales garnered through various third-party distribution outlets and
Legend advisors. As a result of an increased demand for our funds in the Wholesale channel due to strong
investment performance and effective sales efforts, our assets under management from the Wholesale
channel have increased to $40.9 billion at December 31, 2010, including $5.7 billion in assets at
December 31, 2010 that are subadvised by other managers.
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 in 2010, reaching a total of 46 wholesalers by year-end. In 2010,
we restructured our wholesaler territories into smaller, more manageable areas that enabled our
wholesalers to focus on additional distribution partners in their territory.
During 2010, our Ivy Asset Strategy fund continued to play a lead role in the Wholesale channel’s
results, comprising 60% of the channel’s sales and 30% of assets under management as of December 31,
2010. While we recognize the success of this fund and anticipate its growth will continue into the future, we
are also aware of the concentration risks to our revenue streams created by the size of this fund, despite its
flexible mandate. Our compensation program for wholesalers encourages the sales of other products with
track records of strong performance. In 2010, we saw wholesalers successfully market additional products
to their financial advisor clients, which resulted in Wholesale channel sales for the Ivy Asset Strategy fund
decreasing from 63% in 2009 to 60% in 2010, and gross sales of funds other than Asset Strategy reaching a
6
record $5.8 billion. We plan to continue to stress diversification and sales within our focus firms as we enter
2011.
Institutional Channel
Through this channel, we manage assets in a variety of investment styles for a variety of institutions.
The largest client type is funds that hire us to act as subadvisor; they are typically distributors who lack
scale or the track record to manage internally, or choose to market multi-manager styles. Our diverse client
list also includes corporations, foundations, endowments, Taft-Hartley plans and public funds including
defined benefit plans and defined contribution plans. Over time, the Institutional channel has been
successful in developing subadvisory relationships. As of December 31, 2010, this type of business
comprised close to 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.
Service Agreements
We earn service fee revenues by providing various services to the Funds and their shareholders.
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.
Agreements with the Funds may be adopted or amended with the approval of the disinterested
members of each Fund’s board of trustees and have annually renewable terms of one year.
Competition
The financial services industry is a highly competitive global industry. According to the ICI, at the end
of 2010 there were more than 8,500 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
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
7
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.
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.
8
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
2010 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 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
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 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, 2010, 2009 and 2008,
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.
9
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.
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
At December 31, 2010, we had 1,485 full-time employees, consisting of 1,095 home office and Legend
employees and 390 employees responsible for advisor field supervision.
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.
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 ‘‘Investor Relations’’ 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 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
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.’’
10
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. Distribution fees paid to mutual fund distributors in accordance with
Rule 12b-1 promulgated under the Investment Company Act of 1940, as amended (‘‘Rule 12b-1’’) are an
important element of the distribution of the mutual funds we manage. The SEC has recently proposed
replacing Rule 12b-1 with a new regulation that would significantly change current fund distribution
practices in the industry. If this proposed regulation is adopted, it may have a material impact on the
compensation we pay to distributors for distributing the mutual funds we manage and/or our ability to
recover expenses related to the distribution of our funds, and thus could materially impact our revenue and
net income. 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.
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
11
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.
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% at December 31, 2003 to 49%
at December 31, 2010, and the percentage of our total sales represented by the Wholesale channel has
increased from 17% for the year ended December 31, 2003 to 67% for the year ended December 31, 2010.
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. Compared to the industry average
redemption rate of 26.3% for the years ended December 31, 2010 and 2009, the Wholesale channel had
redemption rates of 29.3% and 24.0% for the years ended December 31, 2010 and 2009, respectively.
Redemption rates were 9.3% and 8.4% 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
12
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, 2010, our total assets
were approximately $976.9 million, of which approximately $221.2 million, or 23%, consisted of goodwill
and identifiable intangible assets. We complete an ongoing review of goodwill and intangible assets for
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 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,
13
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.
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 And Senior Unsecured Notes Impose Restrictions On Our Operations That
May Adversely Impact Our Prospects And The Operations Of Our Business. There are no assurances that we
14
will be able to raise additional capital if needed, which could negatively impact our liquidity, prospects and
operations. We have entered into a 3-year 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 17, 2011, there was no balance outstanding under the revolving
credit facility. We also entered into a note purchase agreement with various purchasers for the sale and
issuance of $190.0 million of unsecured senior notes comprised of $95 million of 5.0% senior notes,
series A, due 2018 and $95 million of 5.75% senior notes, series B, due 2021, all of which were issued on
January 13, 2011. The terms and conditions of our revolving credit facility and note purchase agreement
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 and note purchase agreement 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 and note purchase agreement. In the event of a default under the credit facility and/or note
purchase agreement, 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, and the Company’s obligations under the senior unsecured notes could be accelerated and
become due and payable, including any make-whole amount, respectively.
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 funds generated by
the issuance of our senior unsecured notes and any borrowings from our existing credit facility 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 or senior unsecured notes upon their 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
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
15
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 Restated 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 Restated Certificate of Incorporation and in our Amended and Restated 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 $190 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.
ITEM 2. Properties
Our home offices lease approximately 396,000 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 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 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.
16
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 this 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 advisors as independent contractors instead of
employees. 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. 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.
17
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
2010
2009
Quarter
High
Low
Dividends
Per
Share
High
Low
1
2
3
4
$
36.80
39.24
28.55
36.47
$
29.68
21.80
21.52
26.89
$
0.19
0.19
0.19
0.20
$
19.64
28.00
29.27
31.50
$
11.40
17.16
23.25
26.76
Dividends
Per
Share
$
0.19
0.19
0.19
0.19
Year-end closing prices of our common stock were $35.29 and $30.54 for 2010 and 2009, respectively.
The closing price of our common stock on February 17, 2011 was $41.91.
According to the records of our transfer agent, we had 3,311 holders of record of common stock as of
February 17, 2011. 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, note purchase agreement and such other factors as the
Board of Directors deems relevant. 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, 2010, we
repurchased 2,043,545 shares in the open market and privately at an aggregate cost, including
commissions, of $65.9 million, including 426,665 shares from related parties to cover their tax withholdings
from the vesting of shares. The aggregate cost of shares obtained from related parties during 2010 was
$15.3 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.
18
The following table sets forth certain information about the shares of common stock we repurchased
during the fourth quarter of 2010.
Total Number of
Shares Purchased
(1)
Average
Price Paid
per Share
Total Number of Maximum Number (or
Shares
Purchased as
Part of Publicly
Announced
Program
Approximate Dollar
Value) of Shares That
May Yet Be
Purchased Under The
Program
-
3,602
123,646
127,248
$
$
-
31.27
35.43
35.31
-
3,602
123,646
127,248
n/a (1)
n/a (1)
n/a (1)
Period
October 1 - October 31
November 1 - November 30
December 1 - December 31
Total
(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 2010, all stock repurchases were made pursuant to the
repurchase program, including 127,248 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.
19
Total Return Performance
Comparison of Cumulative Total Return (1)
e
u
l
a
V
x
e
d
n
I
200
175
150
125
100
75
50
25
Waddell & Reed Financial, Inc.
SNL Asset Manager
S&P 500
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
19FEB201115541417
The above graph compares the cumulative total stockholder return on the Company’s Class A
common stock from December 31, 2005 through December 31, 2010, 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 31 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, 2005 with all dividends
being reinvested. The closing price of the Company’s Class A common stock on December 31, 2005 (the
last trading day of the year) was $20.97 per share. The stock price performance on the graph is not
necessarily indicative of future price performance.
Index
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
12/31/10
Waddell & Reed Financial, Inc.
SNL Asset Manager
S&P 500
100.00
100.00
100.00
134.04
115.97
115.79
181.31
132.01
122.16
80.60
62.74
76.96
164.29
101.78
97.33
194.81
117.15
111.99
Period Ending
(1) Cumulative Total Return assumes an initial investment of $100 on December 31, 2005, with the reinvestment of all
dividends through December 31, 2010.
20
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.
Revenues from:
Investment management fees
Underwriting and distribution fees
Shareholder service fees
Total revenues
Net income
Net income per share (basic)
Net income per share (diluted)
Dividends declared per common share
Advisor and productivity data:
Gross revenue per advisor
Number of financial advisors (end of
period)
Average number of financial advisors
Wholesale channel data:
Sales (net of commissions)
Number of external wholesalers
For the Year Ended December 31,
2010
2009 (1)
2008 (2)
2007
2006 (3)
(in thousands, except per share data and number of financial advisors)
$
$
$
457,538
468,057
119,290
1,044,885
156,959
1.83
1.83
0.77
118.9
1,847
2,019
354,593
378,678
105,818
839,089
105,505
1.23
1.23
0.76
92.8
2,393
2,336
399,863
416,762
102,495
919,120
96,163
1.12
1.12
0.76
103.0
2,366
2,297
372,345
371,085
94,124
837,554
125,497
1.49
1.48
0.68
108.7
2,293
2,190
311,525
317,458
89,672
718,655
46,112
0.55
0.54
0.60
99.7
2,255
2,290
$ 14,505,402
46
14,745,230
34
15,598,998
35
9,469,932
34
4,541,812
26
Institutional channel sales
$
3,588,260
1,703,470
2,358,104
1,882,908
968,106
Assets under management
$
83,673
69,783
(in millions)
47,484
64,868
48,401
2010
2009
2008
2007
2006
As of December 31,
Balance sheet data:
Goodwill and identifiable intangible
assets
Total assets
Long-term debt
Total liabilities
Stockholders’ equity
221.2
976.9
190.0
519.8
457.2
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
(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; 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 Austin Calvert & Flavin, Inc. (‘‘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.
21
(2)
(3)
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.
22
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 can have a material impact on our results of operations, financial condition and cash
flows.
Revenue Sources
We derive our revenues 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. Shareholder service fee revenue includes transfer
agency fees, custodian fees from retirement plan accounts, portfolio accounting and administration fees,
and is earned based on assets under management or number of accounts.
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.
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
23
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.
Our Advisors channel sales force consists of 1,847 independent financial advisors spread throughout
the United States. Our financial advisors carry out our mission of providing financial planning for
retirement, education funding, estate planning and other financial needs for our clients. A distinguishing
aspect of this channel is its industry low redemption rates, which can be attributed to the personal nature in
which our advisors provide service to their clients.
During 2010, we experienced a decline in our number of financial advisors; however, the decline was
not unexpected as we push for higher production from our advisors by increasing minimum production
requirements for them to stay licensed with us. Our gross revenue production per advisor increased to
$118.9 thousand, or 28%, and gross sales in the channel increased to $3.6 billion, or 13%, during 2010
compared to 2009 despite the decrease in advisor headcount. The recruiting and training of our advisors is
a significant effort, so we continue to focus our recruiting efforts on bringing in higher quality advisors.
Our Wholesale Channel efforts are lead by the solid performance record of the Ivy Funds family. We
distribute retail mutual funds through broker/dealers and registered investment advisors, including
Legend, and various retirement platforms, through a team of external, internal and hybrid wholesalers.
This is our fastest growing distribution channel with sales growth averaging 52% per year since 2006 while
assets under management have grown from $10.8 billion to $40.9 billion during the same period.
The Ivy Funds maintain strong positions on many of the leading third-party distribution platforms,
and we continue efforts to diversify our sales by offering to our partners other solid performing funds
besides our flagship Asset Strategy fund. During 2010, we had eight funds exceed gross sales of
$250 million compared to six in 2009. Sales of products other than our Asset Strategy fund accounted for
40% of total sales during 2010 compared to 37% for 2009. We expect the Wholesale Channel to be critical
to driving our organic growth rate in the coming years.
Through our Institutional channel we manage assets in a variety of investment styles for a variety of
types of institutions. The largest client type is funds that hire us to act as subadvisor; they are typically
distributors who lack scale or the track record to manage internally, or choose to market multi-manager
styles. This is the smallest of our three distribution channels but has recently experienced positive gross
sales and net flow trends due to our growing sub-advisory relationships. Our sub-advisory relationships
currently account for 60% of the channel’s $9.6 billion in assets at the end of 2010.
Operating Results
The company ended the year with record revenues, eclipsing the billion dollar mark for the first time
in its history. Revenue increases relative to fiscal 2009 were reflective of an increase in our average
managed assets due to improving equity markets and positive net flows. Average assets under management
were $74.0 billion in 2010 compared to $56.6 billion in 2009.
Net income increased 49% compared to 2009 while our operating margin improved to 24% during
2010, an improvement of 380 basis points compared to 2009. Leverage from higher asset levels coupled
with continued focus on cost controls resulted in improvements to our operating margin during 2010.
Our balance sheet remains strong, as we ended the year with cash and investments of $387.9 million.
We renewed our three-year unsecured line of credit in August of 2010 with commitments from a syndicate
of banks for $125.0 million, expandable to $200.0 million. We also entered into an agreement in August of
2010 to complete a $190.0 million private placement of Senior Notes, which contained a delayed funding
provision and allowed us to draw down the proceeds on January 13, 2011 when the existing senior notes
matured. The proceeds were used to refinance the senior unsecured notes that expired January 2011.
24
Assets Under Management
Assets under management of $83.7 billion on December 31, 2010 grew 20% compared to the
$69.8 billion reported a year earlier due to market appreciation of $8.5 billion and net sales of $4.7 billion,
generated primarily by the Wholesale channel.
Change in Assets Under Management (1)
Advisors
Channel
Wholesale
Channel
Institutional
Channel
Total
(in millions)
December 31, 2010
Beginning Assets
Sales (net of commissions)
Redemptions
Net Sales
Net Exchanges
Reinvested Dividends and Capital Gains
Net Flows
Market Appreciation
Ending Assets
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
$
29,474
3,616
(3,526)
90
(308)
338
120
3,587
32,818
14,505
(10,560)
3,945
190
237
4,372
3,693
33,181
40,883
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
21,537
15,599
(8,541)
7,058
145
(271)
6,932
(10,980)
17,489
$
$
$
$
7,491
3,588
(2,874)
714
116
114
944
1,174
9,609
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
69,783
21,709
(16,960)
4,749
(2)
689
5,436
8,454
83,673
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
(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.
25
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, increased by 31% as compared to 2009.
Average Assets Under Management
2010
2009
2008
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%
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
$
$
$
$
$
$
$
$
22,430
6,614
1,288
30,332
32,805
2,385
284
35,474
7,467
732
-
8,199
62,702
9,731
1,572
74,005
74%
22%
4%
100%
92%
7%
1%
100%
91%
9%
-
100%
85%
12%
3%
100%
26
The following table summarizes our five largest mutual funds as of December 31, 2010 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
2010
2009
2008
Ending
Percentage
of Total
Ending
Percentage
of Total
Ending
Percentage
of Total
By Assets Under Management:
Ivy Asset Strategy
Ivy Global Natural Resources
Advisors Asset Strategy
Advisors Core Investment
Advisors Science & Technology
Total
By Management Fees:
Ivy Asset Strategy
Ivy Global Natural Resources (1)
Advisors Asset Strategy
Advisors Science & Technology
Advisors Core Investment
Total
$
25,106
6,252
3,328
2,888
2,369
$
39,943
$ 123,638
43,839
20,402
18,379
16,976
$ 223,234
(in millions, except percentage data)
30%
7%
4%
3%
3%
47%
20,029
5,736
3,235
2,657
2,289
33,946
29%
8%
5%
4%
3%
49%
10,430
2,618
2,411
2,377
1,670
19,506
(in thousands, except percentage data)
27%
10%
4%
4%
4%
49%
82,313
34,353
18,139
15,953
15,118
165,876
23%
10%
5%
4%
4%
46%
71,957
56,247
19,966
19,202
21,053
188,425
22%
5%
5%
5%
4%
41%
18%
14%
5%
5%
5%
47%
(1) For the years ended December 31, 2010, 2009 and 2008, we paid subadvisory fees of $22.1 million, $17.3 million
and $28.8 million, respectively.
27
Results of Operations
Net Income
Net Income
Earnings per share:
Basic
Diluted
Operating Margin
$
$
$
For the Year Ended
December 31,
2010
2009
2008
Variance
2010 vs.
2009
2009 vs.
2008
(in thousands, except percentage data)
49%
105,505
96,163
156,959
1.83
1.83
24%
1.23
1.23
20%
1.12
1.12
18%
49%
49%
4%
10%
10%
10%
2%
We reported net income of $157.0 million, or $1.83 per diluted share, in 2010 compared to
$105.5 million, or $1.23 per diluted share, in 2009 and $96.2 million, or $1.12 per diluted share, in 2008.
Special Items Included in 2009 and 2008 Results
On July 15, 2009, the Company completed the sale of its wholly-owned subsidiary, Austin Calvert &
Flavin, Inc. (‘‘ACF’’), pursuant to a stock purchase agreement dated June 26, 2009. Prior to the closing
date, ACF had 10 employees and assets under management of $488.0 million. The agreement included an
earnout provision based on a percentage of revenues on existing accounts over the three-year period
subsequent to the closing date. The earnout provision was fully settled with a payment received during
2010. For tax purposes, this sale resulted in a capital loss of $28.4 million, a portion of which was utilized to
offset capital gains in that and prior periods.
Operating results for 2009 include charges for severance and other transaction costs of $1.1 million in
connection with the divestiture of our investment in ACF and are included in general and administrative
expenses in the consolidated statement of income. We also recorded a charge of $3.7 million 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.
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 in the narrative that follows.
Total Revenues
Total revenues increased 25% in 2010 compared to 2009, attributable to an increase in average assets
under management of 31% and an increase in gross sales of 10%, while total revenues decreased 9% in
28
2009 compared to 2008, attributable to a decline in average assets under management of 9% and a
decrease in gross sales of 9%.
For the Year Ended
December 31,
2010
2009
2008
Variance
2010 vs.
2009
2009 vs.
2008
Investment management fees
Underwriting and distribution fees
Shareholder service fees
$
(in thousands, except percentage data)
29%
24%
13%
399,863
416,762
102,495
354,593
378,678
105,818
457,538
468,057
119,290
Total revenues
$ 1,044,885
839,089
919,120
25%
-11%
-9%
3%
-9%
Investment Management Fee Revenues
Investment management fee revenues are earned for providing investment advisory services to the
Funds and to institutional and separate accounts. Investment management fee revenues increased
$102.9 million, or 29%, in 2010 and decreased $45.3 million, or 11%, in 2009.
Revenues from investment management services provided to our retail mutual funds, which are
distributed through the Advisors, Wholesale and Institutional channels, were $424.1 million in 2010 and
increased $97.8 million, or 30%, compared to 2009, while the related retail average assets increased 32%.
Investment management fee revenues increased less than the related retail average assets due to the effect
of recording management fee waivers, mostly money market, as an offset to investment management fees
beginning in the third quarter of 2010. Revenues from investment management services provided to our
retail mutual funds were $326.3 million in 2009 and decreased $38.4 million, or 11%, compared to 2008,
while the related retail average assets decreased 8%. Retail sales were $18.1 billion, $17.9 billion and
$19.3 billion in 2010, 2009 and 2008, respectively.
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 $33.4 million, $28.3 million and $35.2 million in
2010, 2009 and 2008, respectively. The increase in account revenues in 2010 was primarily attributable to a
19% increase in average assets. While the decrease in account revenues in 2009 compared to the previous
year 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.
We ended the year with $83.7 billion in assets under management compared to the annual average for
2010 of $74.0 billion. This higher asset base, if combined with continued market improvement, would result
in an increase to investment management fee revenues for 2011.
Long-term redemption rates (which exclude money market fund redemptions) in the Advisors
channel were 9.3% in 2010 compared to 8.4% and 8.9% in 2009 and 2008, respectively. In the Wholesale
channel, long-term redemption rates were 29.3% in 2010, compared to 24.0% in 2009 and 35.5% in 2008.
The Wholesale channel’s elevated redemption rate in 2008 was a direct consequence of the volatility in the
financial markets that occurred during the second half of that 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 35.1% in 2010 compared to 28.3% in
2009 and 19.4% in 2008. Subadvisory and defined contribution pension business comprise close to 60% of
29
the Institutional channel’s assets as of December 31, 2010 and unlike defined benefit pension accounts, the
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
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
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, with the exception of the Funds’ Class R shares, for which the maximum fee is
0.50%. 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.
30
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, 2010, 2009 and 2008:
Total
2010
2009
2008
2010 vs.
2009
2009 vs.
2008
Revenue
Expenses:
Direct
Indirect
Total Expenses
$
468,057
(in thousands, except percentage data)
24%
416,762
378,678
409,912
133,692
543,604
325,836
124,089
449,925
361,005
135,817
496,822
Net Underwriting & Distribution
$ (75,547)
(71,247)
(80,060)
Revenue
Expenses:
Direct
Indirect
Total Expenses
Advisors Channel
2010
2009
2008
$
252,107
213,258
235,343
177,158
87,731
264,889
147,469
83,917
231,386
163,183
92,384
255,567
Net Underwriting & Distribution
$ (12,782)
(18,128)
(20,224)
Revenue
Expenses:
Direct
Indirect
Total Expenses
Wholesale Channel
2010
2009
2008
$
215,950
165,420
181,419
232,754
45,961
278,715
178,367
40,172
218,539
197,822
43,433
241,255
Net Underwriting & Distribution
$ (62,765)
(53,119)
(59,836)
-9%
-10%
-9%
-9%
11%
26%
8%
21%
-6%
2010 vs.
2009
2009 vs.
2008
18%
20%
5%
14%
29%
-9%
-10%
-9%
-9%
10%
2010 vs.
2009
2009 vs.
2008
31%
30%
14%
28%
-18%
-9%
-10%
-8%
-9%
11%
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
31
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. Direct selling costs also 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 compensation and related costs and general and administrative expense
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 2010 increased by $89.4 million, or 24%, compared
to 2009. A majority of the increase in revenues was due to higher Rule 12b-1 asset-based service and
distribution fees of $56.7 million as a result of an increase in average mutual fund assets under
management. Revenues from fee-based asset allocation products increased $20.5 million compared to the
prior year. Higher advisory fees and point of sale commissions earned by Legend increased revenue by
$7.9 million compared to the prior year. Revenues from front-load product sales sold in the Advisors
channel increased by $5.1 million, which included an increase in variable annuity revenues of $2.3 million
year over year. Offsetting these increases, insurance-related revenues decreased $2.7 million.
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 expenses in 2010 increased by $93.7 million, or 21%, compared to 2009.
A significant part of this increase was attributed to higher direct expenses in the Wholesale channel of
$54.4 million as a result of an increase in average wholesale assets under management, minimally offset by
lower sales volume year over year. We incurred higher dealer compensation paid to third party distributors,
increased Rule 12b-1 asset-based service and distribution expenses and higher amortization expense of
deferred sales commissions, partially offset by lower wholesaler commissions. Direct expenses in the
Advisors channel increased $29.7 million, or 20%, compared to 2009 due to increased commissions related
to the sale of fee-based asset allocation products of $13.8 million, higher Rule 12b-1 asset-based service
and distribution commissions of $12.3 million, higher point of sale commissions on front-load product sales
32
of $4.6 million, partially offset by lower commissions on insurance products of $1.7 million. Indirect
expenses increased a total of $9.6 million compared to 2009. The increase in indirect expenses in the
Advisors channel of $3.8 million was due to increased employee compensation and benefits expenses and
information technology costs. The indirect expenses increase of $5.8 million in the Wholesale channel was
due to increased employee compensation and benefits expenses, higher marketing costs and higher
business meeting and travel expenses.
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
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.
Shareholder Service Fee Revenues
Shareholder service fee revenues 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 or account-based revenues while transfer agency fees and custodian fees from
retirement plan accounts are based on the number of accounts. During 2010, shareholder service fee
revenues increased $13.5 million, or 13%, over 2009. Of this increase, $8.3 million was due to higher asset-
based fees year over year in certain share classes and $5.2 million was attributable to account-based
revenues, due to a 7% increase in the average number of accounts.
During 2009, shareholder service fee revenues increased $3.3 million, or 3%, over 2008, due to higher
asset-based fees of $2.2 million year over year in certain share classes and $1.1 million attributable to
account-based revenues, due to a 3% increase in the average number of accounts.
Total Operating Expenses
Operating expenses increased $125.1 million, or 19%, in 2010 compared to 2009 primarily due to
increased underwriting and distribution expenses and compensation and related costs. Underwriting and
distribution expenses are discussed above.
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
33
restructuring charge recorded in general and administrative and a $7.2 million goodwill impairment
charge, both recorded in 2008.
For the Year Ended
December 31,
2010
2009
2008
Variance
2010 vs.
2009
2009 vs.
2008
Underwriting and distribution
Compensation and related costs
General and administrative
Subadvisory fees
Depreciation
Goodwill impairment
$
543,604
142,255
66,703
27,823
14,030
-
(in thousands, except percentage data)
21%
14%
15%
20%
3%
NM
449,925
124,463
58,034
23,202
13,653
-
496,822
119,057
76,370
41,122
13,198
7,222
Total operating expenses
$
794,415
669,277
753,791
19%
-9%
5%
-24%
-44%
3%
NM
-11%
Compensation and Related Costs
Compensation and related costs in 2010 increased $17.8 million, or 14%, compared to 2009. Share-
based compensation accounted for $9.8 million of the increase primarily due to higher amortization
expense associated with our April 2009, December 2009 and April 2010 grants of nonvested stock
compared to grants that became fully vested in 2010. Base salaries and payroll taxes contributed
$5.8 million to the increase, due to an increase in average headcount of 6.1% and annual merit increases
during 2010. We also experienced higher incentive compensation expense of $2.8 million and higher
savings plan costs of $1.4 million. These expense increases were offset by increased capitalized software
development activities of $1.5 million, primarily due to technology and compliance initiatives, and lower
group insurance costs of $800 thousand compared to 2009 based on favorable claims experience.
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.
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.
34
General and administrative expenses increased $8.7 million in 2010 compared to 2009. Higher costs
for third party subaccounting and networking fees for certain share classes and computer services were
primarily responsible for the increase.
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 were 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.
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 $55.3 million for the year ended
December 31, 2010 compared to $46.0 million and $81.0 million for 2009 and 2008, respectively, due to a
22% increase in average assets from 2009 to 2010 and a decrease in average assets of 45% from 2008 to
2009. Subadvisory expenses followed the same 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 compared to the previous year.
Subadvised assets under management at December 31, 2010 were $7.8 billion compared to the annual
average of $6.8 billion for 2010. 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 for 2010 increased by $3.7 million compared to 2009. Included in 2009 is
a non-cash charge of $3.7 million to reflect the ‘‘other than temporary’’ impairment of certain of the
Company’s investments in available for sale 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
was unchanged from 2009 to 2010. We recorded realized gains on the sale of available for sale mutual
funds of $2.9 million during 2010 compared to $2.6 million in 2009. Increased gains on our trading
portfolio of $500 thousand compared to 2009 and the collection of notes receivable from a partnership that
were written off in previous years also contributed to the year over year change. Offsetting these gains was
a $1.5 million write-down of the Company’s investment in a limited partnership during 2010.
Investment and other income increased $1.9 million in 2009 compared to 2008. Excluding the
$3.7 million impairment in 2009, investment and other income increased $5.6 million compared to 2008.
Mark-to-market gains in our trading portfolio accounted for an increase of $10.1 million year over year.
35
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.
Interest Expense
Interest expense was $12.7 million in both 2010 and 2009. Higher costs associated with our
$125.0 million credit facility, which was renewed in October 2010, were offset by lower interest costs on our
senior unsecured notes. During the first quarter of 2010, we repurchased $10.0 million of these notes. In
January 2011 we completed a refinancing of our notes with more favorable terms, which will result in lower
interest expense in 2011 compared to 2010.
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.
Income Taxes
Our effective income tax rate was 36.3%, 34.9%, and 38.5% in 2010, 2009 and 2008, respectively.
During 2009, the Company’s sale of ACF generated a capital loss available for offsetting potential future
and prior period capital gains. Due to the character of the loss and the limited carryforward period
permitted by law, a valuation allowance was recorded on a portion of this capital loss. The higher effective
tax rate in 2010 was primarily a result of less utilization of the capital loss in 2010 as compared to 2009.
During 2010, realized capital gains and an increase in the fair value of our investment portfolios in 2010
allowed for the release of $3.6 million of the valuation allowance against deferred tax assets which are
capital in nature. Of this decrease to the valuation allowance, $2.7 million was recorded as a credit to tax
expense and, as a result, decreased our effective tax rate. In 2009, the Company was able to recognize the
tax benefits for the carryback of capital losses, which offset taxes paid on capital gains in previous years.
The higher effective tax rate in 2008 was primarily the result of the ACF goodwill impairment charge,
which was nondeductible for tax purposes. Our 2010 effective tax rate, removing the effect of the valuation
allowance, would have been 37.4%. Our 2009 effective tax rate, removing the effects of the loss on the sale
of ACF and the establishment of a corresponding valuation allowance, would have been 36.8%. Our 2008
effective tax rate, removing the effects of the nondeductible goodwill impairment charge, would have been
36.9%. The effective income tax rate, exclusive of the ACF loss and valuation allowance, increased in 2010
over that of 2009 due to fewer state tax incentives related to capital expenditures made by the Company in
2010 as compared to 2009 and changes in state legislation in jurisdictions in which the Company operates.
The effective tax rate in 2009 decreased slightly as compared to 2008 due to the Company generating
larger state tax incentives in 2009 than those generated in 2008.
36
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,
2010
2009
2008
Variance
2010 vs.
2009
2009 vs.
2008
(in thousands, except percentage data)
Balance Sheet Data:
Cash and cash equivalents
Cash and cash equivalents - restricted
Investment securities
$
195,315
81,197
192,611
244,359
72,941
70,524
210,328
48,713
58,684
-20%
11%
173%
Long-term debt
189,999
199,984
199,969
-5%
Cash Flow Data:
Operating cash flows
Investing cash flows
Financing cash flows
140,643
(67,806)
(121,881)
155,179
(29,488)
(91,660)
123,911
(23,963)
(153,534)
-9%
130%
-33%
16%
50%
20%
0%
25%
23%
40%
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 wholesaling efforts and enhanced technology tools.
Pay Dividends
The Board of Directors approved an increase in the quarterly dividend on our common stock from
$0.19 per share to $0.20 per share beginning with our fourth quarter 2010 dividend, paid on February 1,
2011. Dividends on our common stock resulted in financing cash outflows of $65.2 million, $65.0 million
and $63.7 million in 2010, 2009 and 2008, respectively.
Repurchase Our Stock
In 2010, we repurchased 2.0 million of our shares, compared to 1.9 million shares and 3.8 million
shares in 2009 and 2008, respectively, which included 426,665 shares, 327,301 shares and 430,145 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, 2010, 2009 and 2008, respectively.
In the future, we plan to repurchase shares, at a minimum, to offset dilution from shares issued for
employee share plans. During 2011, we estimate that we will repurchase approximately 482,000 shares
from employees who elect to tender shares to cover their minimum tax withholdings arising from the
vesting of nonvested shares.
37
Operating Cash Flows
Cash from operations is our primary source of funds and decreased $14.5 million in the current year.
The decrease is due to the purchase of trading securities in 2010 and an increase in deferred sales
commission payments related to sales of deferred load and fee based products, partially offset by higher
net income, higher non-cash amortization of deferred sales commissions in 2010 and higher non-cash
share-based compensation expense.
The payable to investment companies for securities account can fluctuate significantly based on
trading activity at the end of a reporting period, and from December 31, 2009 to December 31, 2010 there
was a significant decrease in Fund shareholder investments received prior to the balance sheet date that
were in the process of being invested in the Funds. On December 31, 2009, the Company changed the
trustee of its 401(k) plan. Approximately $100 million of the payable to investment companies for
securities balance was due to the transfer of assets between trustees. As a result, on our consolidated
balance sheet there was a decrease in both the payable to investment companies and a decrease in the
receivable account from December 31, 2009 to December 31, 2010. On the statement of cash flows, there
were corresponding increases and decreases to cash from operations. There is no impact to the Company’s
liquidity and operations for the variations in these accounts.
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, 2010, 2009 and 2008 totaled $59.0 million, $54.7 million and $69.5 million,
respectively. The drivers of commission funding in 2010 were Class C shares, for which $25.9 million was
funded, and fee-based asset allocation products, for which $24.8 million was funded. The primary driver of
commission funding in 2009 and 2008 was Class C shares, for which $29.8 million and $40.3 million of
commissions were funded, 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 C shares.
We made a $10.0 million contribution to our non-contributory retirement plan in January 2011 and do
not expect to make an additional contribution for the remainder of the year.
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 2011 capital expenditures to be in the range of
$15.0 to $20.0 million.
Financing Cash Flows
As noted previously, dividends and stock repurchases accounted for a majority of our financing cash
outflows in 2010.
Additionally, during 2010 we repurchased $10.0 million of our $200.0 million aggregate principal
amount 5.6% senior notes due January 2011 (the ‘‘Notes’’). On August 31, 2010, the Company entered into
an agreement to complete a $190.0 million private placement of Senior Notes (the ‘‘Senior Notes’’). The
agreement contained a delayed funding provision which allowed the Company to draw down the proceeds
in January, 2011 when the existing Notes matured. The Company used the proceeds of the issuance and
sale of the Senior Notes to repay in full the Notes expiring in January 2011. The Senior Notes are
unsecured and were issued in two tranches: $95.0 million bearing interest at 5% and maturing January 13,
2018 (the ‘‘Series A Notes’’) and $95.0 million bearing interest of 5.75% and maturing January 13, 2021
(the ‘‘Series B Notes’’) (collectively, the ‘‘Senior Notes’’). Interest will be payable semi-annually in January
and July of each year.
Simultaneous with the refinancing of our senior notes, the Company entered into a three year
revolving credit facility (the ‘‘New Credit Facility’’) with various lenders, effective August 31, 2010, which
38
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, 2010, there were no borrowings outstanding under the New Credit
Facility. Both the New Credit Facility and Senior Notes contain financial covenants with respect to leverage
and interest coverage, both of which we were in compliance with throughout fiscal 2010.
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 2011. Expected
short-term uses of cash include dividend payments, interest payments on outstanding debt, income tax
payments, seed money for new products, share repurchases, payment of deferred commissions to our
financial advisors and third parties, capital expenditures and home office leasehold improvements, and
could include strategic acquisitions.
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, 2010. 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
2011
2012-
2013
2014-
2015
Thereafter/
Indeterminate
(in thousands)
$ 195,320
195,320
-
-
100,240
85,204
6,613
20,281
40,814
-
$ 387,377
256,415
30,965
38,464
-
69,429
16,501
4,731
-
21,232
-
32,493
1,195
6,613
40,301
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, pension funding 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, 2010, our total goodwill and intangible assets were $221.2 million, or 23%, of our
total assets. Two significant considerations arise with respect to these assets that require management
39
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
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 2010,
2009, and 2008, the Company settled nine open tax years, three open tax years, and five 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 which 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 a subsidiary which generated a
capital loss 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.
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, 2010 and December 31, 2009. Also as of December 31, 2010, two of the Company’s
subsidiaries have state net operating loss carryforwards in certain states in which those companies file on a
40
separate company basis. These entities have recognized a deferred tax asset for such carryforwards. The
carryforwards, if not utilized, will expire between 2011 and 2030. 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, 2010 and December 31, 2009. 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
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 2010, we decreased the discount rate for our pension and postretirement plans to 6.00% from
6.25% used in 2009 and 6.75% used in 2008 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 2009 and
2008. Our pension plan assets at December 31, 2010 were 100% invested in the Asset Strategy style and we
have targeted this same investment strategy going forward.
41
The effect of hypothetical changes to selected assumptions on the Company’s retirement benefit plans
would be as follows:
Assumptions
Change
December 31,
2010
Increase
(Decrease)
PBO/APBO (1)
December 31,
2011
Increase
(Decrease)
Expense (2)
(in thousands)
Pension
Discount rate
Expected return on assets
OPEB
Discount rate
Health care cost trend rate
+/-50 bps
+/-50 bps
$
(6,092)/11,856
N/A
$
(693)/1,713
(564)/564
+/-50 bps
+/-100 bps
(266)/288
562/(487)
(46)/47
98/(83)
(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.
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.
42
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.
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. 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 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, 2010.
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. We do
not currently hedge these exposures. 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 in operations on available for sale securities until they are sold.
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 and commodities. Fluctuations
in the value of these securities are common and are generated by numerous factors, including, without
43
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.
ITEM 8. Financial Statements and Supplementary Data
Reference is made to the Consolidated Financial Statements referred to in the Index on page 48
setting forth our consolidated financial statements, together with the report of KPMG LLP dated
February 24, 2011 on page 49.
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, 2010, 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, 2010, as stated in their attestation
report which follows.
44
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, 2010, 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, 2010, 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, 2010 and 2009, 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, 2010, and our report dated February 24, 2011 expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Kansas City, Missouri
February 24, 2011
45
(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.
ITEM 10. Directors, Executive Officers and Corporate Governance
PART III
Information required by this Item 10. is incorporated herein by reference to our definitive proxy
statement for our 2011 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 2011 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 2011 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 2011 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 2011 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 48 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 84 for a list of all exhibits
filed as part of this Report.
46
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 25, 2011.
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 25, 2011
/s/ DANIEL P. CONNEALY
Senior Vice President and Chief Financial Officer
February 25, 2011
Daniel P. Connealy
(Principal Financial Officer)
/s/ BRENT K. BLOSS
Senior Vice President – Finance and Treasurer
February 25, 2011
Brent K. Bloss
(Principal Accounting Officer)
/s/ SHARILYN S. GASAWAY
Director
February 25, 2011
Sharilyn S. Gasaway
/s/ THOMAS C. GODLASKY
Director
February 25, 2011
Thomas C. Godlasky
/s/ ALAN W. KOSLOFF
Director
February 25, 2011
Alan W. Kosloff
/s/ DENNIS E. LOGUE
Director
February 25, 2011
Dennis E. Logue
/s/ MICHAEL F. MORRISSEY
Director
February 25, 2011
Michael F. Morrissey
/s/ JAMES M. RAINES
Director
February 25, 2011
James M. Raines
/s/ RONALD C. REIMER
Director
February 25, 2011
Ronald C. Reimer
/s/ JERRY W. WALTON
Director
February 25, 2011
Jerry W. Walton
47
WADDELL & REED FINANCIAL, INC.
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at December 31, 2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
49
50
Consolidated Statements of Income for each of the years in the three-year period ended
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51
Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period
ended December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
52
Consolidated Statements of Comprehensive Income for each of the years in the three-year
period ended December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
Consolidated Statements of Cash Flows for each of the years in the three-year period ended
December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54
55
48
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, 2010 and 2009, 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, 2010. 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, 2010
and 2009, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2010 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, 2010 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 24, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
/s/ KPMG LLP
Kansas City, Missouri
February 24, 2011
49
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2010 and 2009
Assets:
Cash and cash equivalents
Cash and cash equivalents - restricted
Investment securities
Receivables:
Funds and separate accounts
Customers and other
Deferred income taxes
Income taxes receivable
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
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; 85,751 shares outstanding (85,807 at
December 31, 2009)
Additional paid-in capital
Retained earnings
Cost of 13,950 common shares in treasury (13,894 at December 31,
2009)
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
2010
2009
(in thousands)
195,315
81,197
192,611
27,234
84,422
10,622
4,336
9,313
605,050
71,248
64,710
221,210
14,713
976,931
40,836
117,596
37,555
-
85,955
281,942
189,999
22,492
4,729
20,608
519,770
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
-
-
997
201,442
618,813
(346,064)
(18,027)
457,161
976,931
997
189,900
527,876
(328,154)
(21,564)
369,055
983,382
$
$
$
$
See accompanying notes to consolidated financial statements.
50
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2010, 2009 and 2008
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 $40,338, $30,573 and
$28,967, 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:
Basic
Diluted
2010
2009
2008
(in thousands, except per share data)
$
457,538
468,057
119,290
1,044,885
354,593
378,678
105,818
839,089
399,863
416,762
102,495
919,120
543,604
449,925
496,822
142,255
66,703
27,823
14,030
-
794,415
250,470
8,737
(12,723)
246,484
89,525
156,959
124,463
58,034
23,202
13,653
-
669,277
169,812
5,039
(12,695)
162,156
56,651
105,505
119,057
76,370
41,122
13,198
7,222
753,791
165,329
3,178
(12,087)
156,420
60,257
96,163
1.83
1.83
$
$
1.23
1.23
1.12
1.12
85,618
85,647
85,484
85,544
85,761
86,113
$
$
$
See accompanying notes to consolidated financial statements.
51
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2010, 2009 and 2008
(in thousands)
Additional
Retained
Paid-in Capital Earnings Treasury Stock
Accumulated Other
Comprehensive
Income (Loss)
Total Stockholders’
Equity
Common Stock
Shares
Amount
99,701
—
—
$
997
—
—
6,631
—
—
—
—
—
—
—
—
(8,435)
(23,907)
(142)
(25,853)
—
—
—
—
—
—
—
—
4,974
(949)
264
(21,564)
—
—
—
—
—
—
—
3,493
963
1,061
(1,980)
(18,027)
381,618
96,163
28,967
795
—
(65,138)
8,048
7,471
(105,315)
(8,435)
(23,907)
(142)
320,125
105,505
30,573
400
—
(65,195)
14,136
2,787
(43,565)
4,974
(949)
264
369,055
156,959
40,338
—
(66,041)
13,057
6,128
(65,872)
3,493
963
1,061
(1,980)
457,161
Balance at December 31, 2007
Net income
Recognition of equity compensation
Recognition of equity compensation related to
restructuring
Issuance of nonvested shares and other
Dividends accrued, $.76 per share
Exercise of stock options
Excess tax benefits from share-based payment
arrangements
Repurchase of common stock
Unrealized depreciation on available for sale
investment securities
Pension and postretirement benefits
Reclassification for amounts included in net
income
—
—
—
—
—
—
—
—
—
Balance at December 31, 2008
Net income
Recognition of equity compensation
Recognition of equity compensation related to
99,701
—
—
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
Repurchase of common stock
Unrealized appreciation on available for sale
investment securities
Pension and postretirement benefits
Reclassification for amounts included in net
income
Balance at December 31, 2009
Net income
Recognition of equity compensation
Issuance of nonvested shares and other
Dividends accrued, $.77 per share
Exercise of stock options
Excess tax benefits from share-based payment
arrangements
Repurchase of common stock
Unrealized apprciation on available for sale
investment securities
Valuation allowance on investment securities’
deferred tax asset
Pension and postretirement benefits
Reclassification for amounts included in net
income
—
—
—
—
—
—
—
—
—
99,701
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
997
—
—
—
—
—
—
—
—
—
—
—
997
—
—
—
—
—
—
—
—
—
—
—
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
—
—
—
—
—
—
—
—
—
189,900
—
40,319
(37,631)
527,876
156,959
19
—
— (66,041)
—
2,726
6,128
—
—
—
—
—
—
—
—
—
—
—
(291,719)
—
—
—
34,990
—
11,581
—
(105,315)
—
—
—
(350,463)
—
—
—
46,345
—
19,529
—
(43,565)
—
—
—
(328,154)
—
—
37,631
—
10,331
—
(65,872)
—
—
—
—
Balance at December 31, 2010
99,701
$
997
201,442
618,813
(346,064)
See accompanying notes to consolidated financial statements.
52
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2010, 2009 and 2008
Net income
Other comprehensive income:
2010
2009
2008
$
156,959
(in thousands)
105,505
96,163
Net unrealized appreciation (depreciation) of
investment securities during the year, net of income
taxes of $2,028, $2,950 and $(4,855), respectively
3,493
4,974
(8,435)
Valuation allowance on investment securities’ deferred
tax asset during the year
963
-
-
Pension and postretirement benefits, net of income
taxes of $628, $(821) and $(13,764), respectively
Reclassification adjustments for amounts included in
net income, net of income taxes of $(1,139), $159
and $(84), respectively
1,061
(949)
(23,907)
(1,980)
264
(142)
Comprehensive income
$
160,496
109,794
63,679
See accompanying notes to consolidated financial statements.
53
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2010, 2009 and 2008
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:
2010
2009
2008
(in thousands)
$
156,959
105,505
96,163
13,834
—
58,381
40,338
(6,128)
(2,893)
(60,623)
(5,101)
—
201
(365)
(5,200)
(8,256)
7,714
94,678
(4,245)
(58,968)
(88,946)
9,263
140,643
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
Purchases of available for sale investment securities
Proceeds from sales and maturities of available for sale investment
(76,961)
(21,364)
(100)
securities
Additions to property and equipment
Proceeds from sales of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Debt repayment
Dividends paid
Repurchase of common stock
Exercise of stock options
Excess tax benefits from share-based payment arrangements
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
26,463
(17,313)
5
(67,806)
(10,000)
(65,194)
(65,872)
13,057
6,128
(121,881)
(49,044)
244,359
195,315
92,038
10,920
$
$
$
15,052
(30,861)
7,685
(29,488)
-
(65,018)
(43,565)
14,136
2,787
(91,660)
34,031
210,328
244,359
50,369
12,266
1,750
(26,079)
466
(23,963)
-
(63,738)
(105,315)
8,048
7,471
(153,534)
(53,586)
263,914
210,328
53,146
11,965
See accompanying notes to consolidated financial statements.
54
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009 and 2008
1. Description of Business
Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as the ‘‘Company,’’ ‘‘we,’’
‘‘our’’ and ‘‘us’’) derive revenues 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 (the ‘‘Ivy Funds’’), Ivy Funds Variable Insurance
Portfolios (the ‘‘Ivy Funds VIP’’) and Waddell & Reed InvestEd Portfolios (‘‘InvestEd’’) (collectively, the
Advisors Funds, Ivy Funds, Ivy Funds VIP 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,
underwriting agreements and shareholder servicing and accounting service 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 trustees and shareholders. Our revenues are largely dependent on the
total value and composition of assets under management. 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.
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, income 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.
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.
55
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
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.
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. When a decline in the fair value of debt securities is determined to be other than
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
$14.0 million and $11.8 million as of December 31, 2010 and 2009, 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 10 years.
56
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
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 for impairment in the second quarter of each year and when
events or circumstances occur that indicate that goodwill might be impaired. Factors that the Company
considers 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 being evaluated.
The Company has two reporting units for goodwill, (i) investment management and related services
and (ii) our Legend group of subsidiaries (‘‘Legend’’). The investment management and related services
reporting unit’s goodwill was recorded as part of the spin-off of the Company from its former parent, and
to a lesser extent, was recorded as part of subsequent business combinations that were merged into the
existing investment management operations. Legend, our second reporting unit for goodwill, is currently a
stand-alone investment management subsidiary and goodwill associated with this acquisition can be
assessed apart from other investment management operations.
To determine fair values of the reporting units, our review process uses the market and income
approaches. In performing the analyses, the Company uses the best information available under the
circumstances, including reasonable and supportable assumptions and projections.
The market approach employs market multiples for comparable companies in the financial services
industry. Estimates of fair values of the reporting units are established using multiples of earnings before
interest, taxes, depreciation and amortization (‘‘EBITDA’’). The Company believes that fair values
calculated based on multiples of EBITDA are an accurate estimation of fair value.
If the fair value coverage margin calculated under the market approach is not considered significant,
the Company utilizes a second approach, the income approach, to estimate fair values and averages the
results under both methodologies. The income approach employs a discounted free cash flow approach
that takes into account current actual results, projected future results, and the Company’s estimated
weighted average cost of capital.
The Company compares the fair values of the reporting units to their carrying amounts, including
goodwill. 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.
Indefinite-life intangible assets represent advisory and subadvisory management contracts for
managed assets obtained in acquisitions. The Company considers these contracts to be indefinite-life
intangible assets as they are expected to be renewed without significant cost or modification of terms. The
Company also tests these assets for impairment annually by comparing their fair values to the carrying
amount of the assets.
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
57
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
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 $5.6 million,
$4.7 million and $5.3 million for the years ended December 31, 2010, 2009 and 2008, respectively, and is
classified in underwriting and distribution expense in the consolidated statements of income.
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.
58
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
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.
Derivatives and Hedging Activities
Derivative instruments are recorded on the consolidated 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 December 2010, the FASB issued ASU 2010-28, Intangibles—Goodwill and Other (Topic 350): When
to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying
Amounts, a consensus of the FASB Emerging Issues Task Force (Issue No. 10-A). ASU 2010-28 modifies Step
1 of the goodwill impairment test under ASC Topic 350 for reporting units with zero or negative carrying
amounts to require an entity to perform Step 2 of the goodwill impairment test if it is more likely than not
that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill
impairment exists, an entity should consider whether there are adverse qualitative factors, in determining
whether an interim goodwill impairment test between annual test dates is necessary. The ASU allows an
entity to use either the equity or enterprise valuation premise to determine the carrying amount of a
reporting unit. ASU 2010-28 is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2010. The Company expects that the adoption of ASU 2010-28 in 2011 will not have a
material impact on its consolidated financial statements.
59
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
4.
Investment Securities
Investment securities at December 31, 2010 and 2009 are as follows:
2010
Amortized
cost
Unrealized
gains
Unrealized
losses
Fair value
$
$
56,961
10
2,729
28,633
88,333
(in thousands)
-
2
-
5,662
5,664
-
-
(185)
(37)
(222)
Available for sale securities:
U.S. treasury bills
Mortgage-backed securities
Municipal bonds
Affiliated mutual funds
Trading securities:
Commercial paper
U.S. treasury bills
Mortgage-backed securities
Municipal bonds
Corporate bonds
Common stock
Affiliated mutual funds
Total investment securities
56,961
12
2,544
34,258
93,775
4,997
60,958
73
487
50
201
32,070
98,836
192,611
2009
Amortized
cost
Unrealized
gains
Unrealized
losses
Fair value
Available for sale securities:
Mortgage-backed securities
Municipal bonds
Affiliated mutual funds
$
$
10
4,959
29,817
34,786
(in thousands)
2
-
3,241
3,243
-
(286)
(143)
(429)
Trading securities:
Mortgage-backed securities
Municipal bonds
Corporate bonds
Common stock
Affiliated mutual funds
Total investment securities
60
12
4,673
32,915
37,600
107
478
94
30
32,215
32,924
70,524
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
A summary of available for sale debt securities and affiliated mutual funds with fair values below
carrying values at December 31, 2010 is as follows:
Less than 12 months
12 months or longer
Total
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Fair value
Unrealized
losses
Municipal bonds
Affiliated mutual funds
Total temporarily impaired
securities
$
$
-
810
810
-
(10)
(10)
(in thousands)
2,544
313
(185)
(27)
2,544
1,123
(185)
(37)
2,857
(212)
3,667
(222)
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 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, 2010.
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 income for 2009.
Mortgage-backed securities, U.S. treasury bills and municipal bonds accounted for as available for
sale and held as of December 31, 2010 mature as follows:
Within one year
After one year but within 10 years
After 10 years
Amortized
cost
Fair value
(in thousands)
56,961
1,738
1,001
59,700
56,961
1,678
878
59,517
$
$
Mortgage-backed securities, commercial paper, U.S. treasury bills and municipal bonds and corporate
bonds accounted for as trading and held as of December 31, 2010 mature as follows:
Within one year
After one year but within 10 years
After 10 years
Fair value
$
(in thousands)
65,955
537
73
$
66,565
61
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
Investment securities with fair values of $45.1 million, $24.7 million and $1.1 million were sold during
2010, 2009 and 2008, respectively. During 2010, net realized gains of $2.9 million and $2.9 million were
recognized from the sale of $24.2 million in available for sale securities and the sale of $20.9 million in
trading securities, respectively. During 2009, net gains of $2.6 million and $126 thousand were recognized
from the sale of $14.7 million in available for sale securities and the sale of $10.0 million in trading
securities, respectively. In 2008, a net loss of $31 thousand was recognized from the sale of $1.1 million in
trading securities.
The aggregate carrying amount of our equity method investments, classified in other assets, was
$6.9 million and $3.7 million at December 31, 2010 and 2009, respectively. At December 31, 2010, our
investments consist of limited partnership interests in venture capital funds.
We determine the fair value of our investments using broad levels of inputs as defined by related
accounting standards as follows:
(cid:127) Level 1 – Investments are valued using quoted prices in active markets for identical securities at the
reporting date. Assets classified as Level 1 include affiliated mutual funds classified as available for
sale and affiliated mutual funds and common stock classified as trading.
(cid:127) Level 2 – Investments are valued using other significant observable inputs, including quoted prices
in active markets for similar securities. Assets classified as Level 2 include mortgage-backed
securities, municipal bonds and corporate bonds.
(cid:127) Level 3 – Investments are valued using 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, 2010 and 2009 that are
recognized in our consolidated balance sheets using fair value measurements based on the differing levels
of inputs:
Level 1
Level 2
Level 3
Total
2010
2009
(in thousands)
$
$
189,445
3,166
-
192,611
65,160
5,364
-
70,524
62
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
5.
Property and Equipment
A summary of property and equipment at December 31, 2010 and 2009 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
$
2010
2009
(in thousands)
19,827
30,137
17,366
67,830
22,190
17,962
29,870
16,545
56,954
21,844
157,350
(86,102)
$
71,248
143,175
(75,004)
68,171
Depreciation expense was $14.0 million, $13.7 million and $13.2 million during the years ended
December 31, 2010, 2009 and 2008, respectively.
At December 31, 2010, we had property and equipment under capital leases with a cost of $1.8 million
and accumulated depreciation of $1.0 million. 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.
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, 2010 and 2009 are as follows:
Goodwill
Accumulated amortization
Total goodwill
Mutual fund management advisory contracts
Mutual fund subadvisory management contracts
Total indentifiable intangible assets
Total
2010
2009
(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
In 2010, the Company’s annual impairment test indicated that goodwill and identifiable intangible
assets were not impaired. Related to goodwill, the fair value of the investment management and related
services reporting unit exceeded its carrying value by more than 100% and the fair value of the Legend
63
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
reporting unit exceeded its carrying value by more than 65%. The fair value of our indefinite-life intangible
assets exceeded their respective carrying values by more than 50%.
Due to the decline in the financial markets during the second half 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.
All restructuring costs were paid or settled by June 30, 2010.
The activity in the accrued restructuring liability for the year ended December 31, 2010 is summarized
as follows:
Employee compensation and
other benefit costs
Contract termination and
project development costs
Accrued Liability
as of
December 31, 2009
Cash
Payments
Non-cash
Settlements
and Other
Accrued Liability
as of
December 31, 2010
(in thousands)
$
$
2,791
500
3,291
(2,791)
-
(2,791)
-
(500)
(500)
-
-
-
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. Prior to the closing date, ACF had 10 employees and assets
under management of $488.0 million. The agreement included an earnout provision based on a percentage
of revenues on existing accounts over the three-year period subsequent to the closing date. The earnout
provision was fully settled with a payment received during 2010.
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.
64
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
For tax purposes, this sale resulted in a capital loss of $28.4 million, a portion of which was utilized to
offset capital gains in that and prior periods. See Note 10 for information related to the capital loss.
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). Interest was payable semi-annually on January 15 and July 15 at a
fixed rate of 5.60% per annum. During the first quarter of 2010, we repurchased $10.0 million of the Notes.
The retirement resulted in a loss of approximately $400 thousand, which is included in interest expense in
the consolidated statement of income.
On August 31, 2010, the Company entered into an agreement to complete a $190.0 million private
placement of Senior Notes. The agreement contained a delayed funding provision which allowed the
Company to draw down the proceeds in January, 2011 when the Notes matured. The Company used the
proceeds of the issuance and sale of the Senior Notes to repay in full the Notes. The Senior Notes are
unsecured and were issued in two tranches: $95.0 million bearing interest at 5% and maturing January 13,
2018 (the ‘‘Series A Notes’’) and $95.0 million bearing interest of 5.75% and maturing January 13, 2021
(the ‘‘Series B Notes’’) (collectively, the ‘‘Senior Notes’’). Interest will be payable semi-annually in January
and July of each year. The most restrictive provisions of the agreement will 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 entered into a 364-day revolving credit facility (the ‘‘Credit Facility’’) with various
lenders, effective October 5, 2009, which initially provided for borrowings of up to $125.0 million and
replaced the Company’s previous revolving credit facility.
The Company entered into a three year revolving credit facility (the ‘‘New Credit Facility’’) with
various lenders, effective August 31, 2010, which initially provides for borrowings of up to $125.0 million
and replaced the Credit Facility. Lenders could, at their option upon the Company’s request, expand the
New Credit Facility to $200.0 million. At December 31, 2010 and 2009, there were no borrowings
outstanding under the facilities. Borrowings under the New 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 New Credit Facility also provides for a facility fee on the aggregate
amount of commitments under the revolving facility (whether or not utilized). The facility fee is also based
on the Company’s credit rating level. The New Credit Facility’s covenants match those outlined above for
the Senior Notes. The Company was in compliance with these covenants and similar covenants in prior
facilities for all years presented.
Fair value of the Company’s outstanding indebtedness approximates its carrying value. The following
is a summary of long-term debt at December 31, 2010 and 2009:
Principal amount unsecured 5.60% senior notes due in 2011
Discount on unsecured 5.60% senior notes due in 2011
Total long-term debt
2010
2009
(in thousands)
$
$
190,000
(1)
189,999
200,000
(16)
199,984
65
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
10. Income Taxes
The provision for income taxes for the years ended December 31, 2010, 2009 and 2008 consists of the
following:
Currently payable:
Federal
State
Deferred taxes
Provision for income taxes
2010
2009
2008
(in thousands)
$
$
87,350
7,381
94,731
(5,206)
89,525
48,249
4,312
52,561
4,090
56,651
59,149
3,149
62,298
(2,041)
60,257
The following table reconciles the statutory federal income tax rate with our effective income tax rate
for the years ended December 31, 2010, 2009 and 2008:
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
2010
2009
2008
35.0%
2.1
(0.2)
—
(1.1)
—
0.5
36.3%
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%
66
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities
and deferred tax assets at December 31, 2010 and 2009 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
2010
2009
(in thousands)
$
$
(7,880)
(10,489)
(5,651)
(8,449)
-
(2,002)
(5,793)
(1,600)
(22)
(41,886)
1,308
13,171
12,120
1,375
3,631
14,974
1,131
5,464
2,838
56,012
(8,233)
5,893
(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
During 2009, the Company sold ACF, which generated a capital loss 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. The capital loss carryforward, if not
utilized, will expire in 2014. As of December 31, 2010, the Company had a deferred tax asset, net of federal
tax effect, for a capital loss carryforward of $3.6 million and other net deferred tax liabilities that were
capital in nature of $600 thousand. As of December 31, 2009, the Company had a deferred tax asset, net of
federal tax effect, for a capital loss carryforward of $6.3 million and other net deferred tax assets which
were capital in nature of 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 $3.0 million and $6.6 million has been
recorded at December 31, 2010 and 2009, respectively. During 2010, realized capital gains and increases in
the fair value of the Company’s investment portfolios allowed for the release of $3.6 million of the
valuation allowance against deferred tax assets that are capital in nature. Of this decrease to the valuation
67
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
allowance, $2.7 million was recorded as a reduction of tax expense, with the remaining amount recorded as
an increase to accumulated other comprehensive income. 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 net operating loss carryforwards as of
December 31, 2010 and 2009 is approximately $5.5 million and $5.0 million, respectively. The
carryforwards, if not utilized, will expire between 2011 and 2030. 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
$5.2 million and $4.7 million has been recorded at December 31, 2010 and 2009, respectively. The
Company has state tax credit carryforwards of $1.1 million and $1.0 million as of December 31, 2010 and
2009, respectively. Certain of these state tax credit carryforwards will expire between 2019 and 2020 if not
utilized. The Company anticipates these credits will be fully utilized prior to their expiration date.
As of January 1, 2010, 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. As of December 31, 2010, the Company had unrecognized tax benefits, including penalties and
interest, of $6.6 million ($4.6 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 sheets;
unrecognized tax benefits that are expected to be settled within the next 12 months are included in income
taxes payable.
The Company’s accounting policy with respect to interest and penalties related to income tax
uncertainties is to classify these amounts as income taxes. As of January 1, 2010, the total amount of
accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance
sheet was $2.0 million ($1.6 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, 2010 was $42 thousand. The total amount of accrued penalties and interest related to
uncertain tax positions at December 31, 2010 of $1.9 million ($1.5 million net of federal benefit) is
included in the total unrecognized tax benefits described above.
The following table summarizes the Company’s reconciliation of unrecognized tax benefits, excluding
penalties and interest, for the years ended December 31, 2010, 2009 and 2008:
2010
2009
2008
(in thousands)
Balance at January 1
Increases during the year:
Gross increases - tax positions in prior period
Gross increases - current-period tax positions
Decreases during the year:
Gross decreases - tax positions in prior period
Decreases due to settlements with taxing
authorities
Decreases due to lapse of statute of limitations
Balance at December 31
$
68
$
4,857
189
981
(490)
(629)
(149)
4,759
3,332
1,071
636
4,495
761
607
(7)
(293)
(1)
(174)
4,857
(2,062)
(176)
3,332
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
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. During 2010, the Company settled nine open tax years that
were undergoing audits by state jurisdictions 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 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. The 2007, 2008 and 2009 federal income tax
returns are open tax years that remain subject to potential future audit. The 2005 and 2006 federal tax
years also remain open to a limited extent due to capital loss carryback claims. State income tax returns for
all years after 2006 and, in certain states, income tax returns prior to 2007, are subject to potential future
audit by tax authorities in the Company’s major state tax jurisdictions.
The Company is currently being audited in various 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 $700 thousand to $1.7 million ($468 thousand to $1.2 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.
69
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
A reconciliation of the funded status of these plans and the assumptions related to the obligations at
December 31, 2010, 2009 and 2008 follows:
Pension Benefits
Other
Postretirement Benefits
2010
2009
2008
2010
2009
2008
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
$ 110,962
6,140
6,596
(6,589)
1,751
—
98,594
5,276
6,386
(11,692)
12,398
—
Net benefit obligation at end of year
$ 118,860
110,962
(in thousands)
94,893
5,727
6,326
(6,553)
(1,799)
—
98,594
5,945
443
364
(528)
389
237
6,850
5,205
371
343
(493)
362
157
5,945
3,975
296
262
(616)
1,126
162
5,205
The accumulated benefit obligation for the Pension Plan was $102.7 million and $94.9 million at
December 31, 2010 and 2009, respectively.
Pension Benefits
Other
Postretirement Benefits
2010
2009
2008
2010
2009
2008
(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
$
91,551
9,106
12,500
—
(6,589)
78,020
15,223
10,000
—
(11,692)
109,822
(30,249)
5,000
—
(6,553)
Fair value of plan assets at end of year
$ 106,568
91,551
78,020
—
—
291
237
(528)
—
—
—
336
157
(493)
—
—
—
454
162
(616)
—
Funded status at end of year
$ (12,292)
(19,411)
(20,574)
(6,850)
(5,945)
(5,205)
70
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
Pension Benefits
Other
Postretirement Benefits
2010
2009
2008
2010
2009
2008
(in thousands, except percentage data)
Amounts recognized in the statement of
financial position:
Current liabilities
Noncurrent liabilities
$
-
(12,292)
-
(19,411)
-
(20,574)
Net amount recognized at end of year
$ (12,292)
(19,411)
(20,574)
(303)
(6,547)
(6,850)
(250)
(5,695)
(5,945)
(252)
(4,953)
(5,205)
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
$
(42)
(3,486)
(31,369)
(47)
(4,041)
(32,842)
(52)
(4,596)
(30,835)
-
(238)
(469)
-
(284)
(79)
-
(323)
283
(loss)
(34,897)
(36,930)
(35,483)
(707)
(363)
(40)
Cumulative employer contributions in excess
of net periodic benefit cost
22,605
17,519
14,909
Net amount recognized at end of year
$ (12,292)
(19,411)
(20,574)
(6,143)
(6,850)
(5,582)
(5,945)
(5,165)
(5,205)
Weighted average assumptions used to
determine benefit obligation at December 31:
Discount rate
Rate of compensation increase
6.00%
3.86%
6.25%
3.86%
6.75%
(1)
6.00%
6.25%
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.
71
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
Our Pension Plan asset allocation at December 31, 2010 and 2009 is as follows:
Plan assets by category
Cash
Equity securities:
Domestic
International
Gold bullion
Total
Percentage of
Plan Assets at
December 31, 2010
Percentage of
Plan Assets at
December 31, 2009
5%
34%
47%
14%
100%
3%
21%
60%
16%
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, 2010, our Pension Plan assets were invested in our Asset Strategy
style, and 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, 2010, 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
47% international equities, of which almost a third was invested in Chinese equities. The Pension Plan also
had 14% of plan assets invested in gold bullion.
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 Pension 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
Pension 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.
72
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
We determine the fair value of our Pension 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 tables summarize our Pension Plan assets as of December 31, 2010 and 2009:
2010
Level 1
Level 2
Level 3
Total
Equity securities:
Domestic
International
Fixed income securities:
Foreign bonds
Mortgage-backed security
Gold bullion
Total investment securities
Cash and other
$
36,488
49,864
-
-
14,382
100,734
(in thousands)
-
-
73
130
-
203
Total
2009
Equity securities:
Domestic
International
Fixed income securities:
Foreign bonds
Industrial bond
Mortgage-backed security
Gold bullion
Total investment securities
Cash and other
Total
Level 1
Level 2
Level 3
(in thousands)
$
20,340
6,430
-
-
-
14,438
41,208
-
47,663
68
12
195
-
47,938
-
-
-
-
-
-
-
-
-
-
-
-
-
36,488
49,864
73
130
14,382
100,937
5,631
$
106,568
Total
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 and Poor’s 500 Index movement of more
than 100 basis points on the valuation date. International equity securities are classified as Level 1 in the
fair value hierarchy at December 31, 2010.
73
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
The table that follows summarizes the activity of plan assets categorized as Level 3 for the year ended
December 31, 2009. There was no Level 3 activity during the year ended December 31, 2010.
Balance at December 31, 2008
Options
(in thousands)
(11)
$
Purchases, issuances and settlements
Actual return on plan assets, sold during the period
Proceeds from sales
Balance at December 31, 2009
$
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.
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, 2010, 2009 and 2008:
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
2010
2009
2008
2010
2009
2008
(in thousands)
$
6,140
6,596
(7,499)
1,617
555
5
$
7,414
5,276
6,387
(6,428)
1,595
555
5
7,390
5,727
6,326
(8,614)
—
555
5
3,999
443
364
—
—
45
—
852
371
343
—
—
39
—
753
296
262
—
(80)
39
—
517
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 2011 are
$1.5 million, $555 thousand and $5 thousand, respectively. The estimated prior service cost for the
74
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
postretirement medical plan that will be amortized from accumulated other comprehensive income into
net periodic benefit cost in 2011 is $55 thousand.
Pension Benefits
Other
Postretirement Benefits
2010
2009
2008
2010
2009
2008
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
6.25%
7.75%
3.86%
6.75%
7.75%
(1)
6.75%
7.75%
3.86%
6.25%
6.75%
6.75%
Not applicable
Not applicable
(1) Rate of compensation increase was 0% for 2009, 2.5% for 2010 and 3.86% for 2011 and after.
We expect the following benefit payments to be paid which reflect future service, as appropriate:
2011
2012
2013
2014
2015
2016 through 2020
Pension
Benefits
Other
Postretirement
Benefits
$
(in thousands)
6,130
6,487
7,187
8,384
8,050
40,569
$
76,807
303
358
426
435
458
2,287
4,267
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 2010 and 2009 were voluntary.
We made a $10.0 million contribution to our Pension Plan in January 2011 and do not expect to make an
additional contribution for the remainder of the year.
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 2011 expected contribution with cash generated from operations. Contributions by
participants to the postretirement plan were $237 thousand, $157 thousand and $162 thousand for the
years ended December 31, 2010, 2009 and 2008, respectively.
For measurement purposes, the initial health care cost trend rate was 10% for 2010, 9% for 2009 and
10% for 2008. The health care cost trend rate reflects anticipated increases in health care costs. The initial
75
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
assumed growth rate of 10% for 2010 is assumed to gradually decline over the next 17 years to a rate of
4.5%. The effect of a 1% annual increase in assumed cost trend rates would increase the December 31,
2010 accumulated postretirement benefit obligation by approximately $562 thousand, and the aggregate of
the service and interest cost components of net periodic postretirement benefit cost for the year ended
December 31, 2010 by approximately $98 thousand. The effect of a 1% annual decrease in assumed cost
trend rates would decrease the December 31, 2010 accumulated postretirement benefit obligation by
approximately $487 thousand, and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year ended December 31, 2010 by approximately $83 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
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 2010. 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, 2010 and 2009, the aggregate liability to
participants was $3.7 million and $3.6 million, respectively.
At December 31, 2010, the accrued pension and postretirement liability recorded on the balance sheet
was comprised of accrued pension costs of $12.3 million, an accrued liability for SERP benefits of
$3.7 million and a liability for postretirement benefits in the amount of $6.5 million. The current portion of
postretirement liability of $0.3 million is included in other current liabilities on the balance sheet. 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.
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, 2010, 2009
and 2008 were $4.4 million, $1.6 million and $4.0 million, respectively.
76
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
13. Stockholders’ Equity
Earnings per Share
For the years ended December 31, 2010, 2009 and 2008, earnings per share were computed as follows:
2010
2009
2008
(in thousands, except per share amounts)
Net income
$
156,959
105,505
Weighted average shares outstanding — basic
Dilutive potential shares from stock options
Weighted average shares outstanding — diluted
Earnings per share:
Basic
Diluted
Anti-dilutive Securities
85,618
29
85,647
1.83
1.83
$
$
85,484
60
85,544
1.23
1.23
96,163
85,761
352
86,113
1.12
1.12
Options to purchase 203 thousand shares, 777 thousand shares and 688 thousand shares of Class A
common stock (‘‘common stock’’) were excluded from the diluted earnings per share calculation for the
years ended December 31, 2010, 2009 and 2008, respectively, because they were anti-dilutive.
Dividends
We declared dividends on our common stock of $0.77 per share for the year ended December 31, 2010
and $0.76 per share for the years ended December 31, 2009 and 2008. As of December 31, 2010 and 2009,
other current liabilities included $17.1 million and $16.3 million, respectively, for dividends payable to
stockholders.
The Board of Directors approved an increase in the quarterly dividend on our common stock from
$0.19 per share to $0.20 per share beginning with our fourth quarter 2010 dividend, paid on February 1,
2011.
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 2,043,545 shares, 1,870,034 shares
and 3,779,953 shares repurchased in the open market or privately during the years ended December 31,
2010, 2009 and 2008, respectively, which includes 426,665 shares, 327,301 shares and 430,145 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, 2010, 2009 and 2008, 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’’).
77
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
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, 10,872,173 shares of common stock
are available for issuance as of December 31, 2010 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.
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.
78
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
(a) Stock Options
A summary of stock option activity and related information for the year ended December 31, 2010
follows:
Outstanding at December 31, 2009
Granted
Exercised
Granted in restoration
Exercised in restoration
Terminated/Canceled
Outstanding at December 31, 2010
Exercisable at December 31, 2010
Weighted
average
exercise
price
$
$
$
30.65
—
30.59
—
—
31.97
29.98
29.98
Options
897,503
—
(426,824)
—
—
(172,384)
298,295
298,295
Weighted
average
remaining
contractual term
(in years)
1.12
0.69
0.69
The aggregate intrinsic value of outstanding options and exercisable options as of December 31, 2010
was $1.6 million. The total intrinsic value (on date of exercise) of options exercised during the years ended
December 31, 2010, 2009 and 2008 was $2.0 million, $7.3 million and $9.4 million, respectively. The related
income tax benefit recognized was $600 thousand, $2.5 million and $3.3 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
SORP options with vesting periods of six months were the only options granted during 2009 and 2008.
There were no options granted in 2010. Compensation expense related to options issued under the SORP
of $9 thousand, $90 thousand and $217 thousand was recorded for the years ended December 31, 2010,
2009 and 2008, respectively.
The weighted average fair value of options granted during the years ended December 31, 2009 and
2008 were $8.68 and $5.47, 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)
2009
2.71%
0.88%
64.90%
1.79
2008
2.24%
2.05%
32.10%
1.89
79
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
(b) Nonvested Stock
A summary of nonvested share activity and related fair value for the year ended December 31, 2010
follows:
Nonvested at December 31, 2009
Granted
Vested
Forfeited
Nonvested at December 31, 2010
Nonvested
Stock Shares
4,435,844
1,601,429
(1,300,319)
(39,745)
4,697,209
$
Weighted
Average
Grant Date
Fair Value
$
24.40
36.18
26.36
26.10
27.86
For the years ended December 31, 2010, 2009 and 2008, compensation expense related to nonvested
stock totaled $40.3 million, $30.5 million and $29.0 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 $14.9 million, $11.2 million and $10.5 million for the years ended
December 31, 2010, 2009 and 2008, respectively, which may be recognized upon vesting. As of
December 31, 2010, the remaining unamortized expense of $90.2 million is expected to be recognized over
a weighted average period of 2.4 years.
The total fair value of shares vested (at vest date) during the years ended December 31, 2010, 2009
and 2008 was $46.5 million, $23.3 million and $40.0 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 2011, we expect to repurchase
approximately 482,000 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 and $372 thousand for the year ended December 31,
2009 and 2008, respectively.
80
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
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, 2010 or 2009.
Net capital and aggregated indebtedness information for our broker/dealer subsidiaries is presented in
the following table as of December 31, 2010 and 2009 (in thousands):
Net capital
Required capital
Excess of required capital
Ratio of aggregate
indebtedness to net
capital
W&R
$
$
39,563
250
39,313
Not
applicable
2010
LEC
2,547
185
2,362
IFDI
W&R
38,663
2,425
36,238
21,579
250
21,329
2009
LEC
1,948
229
1,719
IFDI
17,093
2,089
15,004
1.09 to 1.0
0.94 to 1.0
Not
applicable
1.76 to 1.0
1.83 to 1.0
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 $23.0 million, $22.0 million and $20.1 million, for the years
ended December 31, 2010, 2009 and 2008, respectively. Future minimum rental commitments under
non-cancelable operating leases are as follows (in thousands):
2011
2012
2013
2014
2015
Thereafter
$
20,281
17,346
13,619
9,926
6,575
32,493
$
100,240
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 2010.
81
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
17. Related Party Transactions
We earn investment management fee revenues 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 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 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 this 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 advisors as independent contractors instead of
employees. 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. 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.
82
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
19. Selected Quarterly Information (Unaudited)
2010
Total revenues
Net income
Earnings per share:
Basic
Diluted
2009
Total revenues
Net income
Earnings per share:
Basic
Diluted
Quarter
First
Second
Third
Fourth
(in thousands)
$
$
$
$
$
$
251,614
35,909
257,219
34,152
254,807
40,533
281,245
46,365
0.42
0.42
0.40
0.40
0.47
0.47
0.54
0.54
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
0.39
0.39
0.39
0.39
(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
$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.
83
Exhibit
No.
Exhibit Description
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
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 February 25, 2011 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 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.
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.
84
Exhibit
No.
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Exhibit Description
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.
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 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.
10.10
Credit Agreement, dated August 31, 2010, by and among Waddell & Reed Financial, Inc., the
lenders party thereto, Bank of America, N.A. as Administrative Agent, Bank of America
Securities LLC as Lead Arranger and Book Manager, UMB Bank, N.A. and The Bank of
Nova Scotia as Co-Syndication Agents, and Citibank, N.A. and Wells Fargo Bank, N.A. as Co-
Documentation Agents. Filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K,
File No. 333-43687, on September 7, 2010 and incorporated herein by reference.
85
Exhibit
No.
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
Exhibit Description
Note Purchase Agreement, dated August 31, 2010, by and among Waddell & Reed
Financial, Inc. and the purchasers party thereto. Filed as Exhibit 10.2 to the Company’s
Current Report on Form 8-K, File No. 333-43687, on September 7, 2010 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.*
Accounting Services Agreement, dated January 30, 2009, by and between the Advisors Funds
and Waddell & Reed Services 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, 2009 and
incorporated herein by reference.
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. 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, 2009 and incorporated herein by reference.
Accounting and Administrative Services Agreement, dated November 29, 2006, by and
between the Ivy Funds portfolios and Waddell & Reed Services Company. Filed as Exhibit
10.17 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for the year ended
December 31, 2009 and incorporated herein by reference.
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. 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, 2009 and incorporated herein by reference.
Accounting Services Agreement, dated April 30, 2009, by and between Ivy Funds VIP and
Waddell & Reed Services Company. 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, 2009 and incorporated
herein by reference.
Investment Management Agreement, dated January 30, 2009, by and between the Advisors
Funds and Waddell & Reed Investment Management Company. 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, 2009 and incorporated herein by reference.
Investment Management Agreement, dated April 9, 2003, as amended February 13, 2008, by
and between the Ivy Funds portfolios and Ivy Investment Management Company. Filed as
Exhibit 10.22 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for the
year ended December 31, 2009 and incorporated herein by reference.
86
Exhibit
No.
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
Exhibit Description
Investment Management Agreement, dated July 23, 2003, as amended November 12, 2008, by
and between the Ivy Funds portfolios and Ivy Investment Management Company. Filed as
Exhibit 10.23 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for the
year ended December 31, 2009 and incorporated herein by reference.
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. Filed as Exhibit 10.24 to the Company’s
Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2009 and
incorporated herein by reference.
Investment Management Agreement, dated April 10, 2009, by and between Ivy Funds VIP
and Waddell & Reed Investment Management Company. 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, 2009 and incorporated herein by reference.
Investment Management Agreement, dated April 10, 2009, by and between Ivy Funds VIP
and Waddell & Reed Investment Management Company. Filed as Exhibit 10.27 to the
Company’s Annual Report on Form 10-K, File No. 333-43687, for the year ended
December 31, 2009 and incorporated herein by reference.
Shareholder Servicing Agreement, dated January 30, 2009, by and between the Advisors
Funds and Waddell & Reed Services Company. 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, 2009 and
incorporated herein by reference.
Shareholder Servicing Agreement, dated April 9, 2003, as amended May 31, 2009, by and
between the Ivy Funds portfolios and Waddell & Reed Services Company. 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, 2009 and incorporated herein by reference.
Shareholder Servicing Agreement, dated April 1, 1996, as amended May 31, 2009, by and
between Ivy Funds, Inc. and Waddell & Reed Services Company. Filed as Exhibit 10.31 to the
Company’s Annual Report on Form 10-K, File No. 333-43687, for the year ended
December 31, 2009 and incorporated herein by reference.
Underwriting Agreement, dated January 30, 2009, by and between the Advisors Funds and
Waddell & Reed, Inc. 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, 2009 and incorporated herein by
reference.
Underwriting Agreement, dated April 15, 2009, by and between Ivy Funds VIP and Waddell &
Reed, Inc. Filed as Exhibit 10.35 to the Company’s Annual Report on Form 10-K, File No.
333-43687, for the year ended December 31, 2009 and incorporated herein by reference.
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.
87
Exhibit
No.
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
Exhibit Description
Distribution Agreement, dated September 3, 2003, by and between the Ivy Funds portfolios
and Ivy Funds Distributor, Inc. Filed as Exhibit 10.37 to the Company’s Annual Report on
Form 10-K, File No. 333-43687, for the year ended December 31, 2009 and incorporated
herein by reference.
Distribution and Service Plan, effective January 30, 2009, for the Advisors Funds Class A
shares. Filed as Exhibit 10.39 to the Company’s Annual Report on Form 10-K, File No.
333-43687, for the year ended December 31, 2009 and incorporated herein by reference.
Distribution and Service Plan, effective January 30, 2009, for the Advisors Funds Class B
shares. Filed as Exhibit 10.40 to the Company’s Annual Report on Form 10-K, File No.
333-43687, for the year ended December 31, 2009 and incorporated herein by reference.
Distribution and Service Plan, effective January 30, 2009, for the Advisors Funds Class C
shares. Filed as Exhibit 10.41 to the Company’s Annual Report on Form 10-K, File No.
333-43687, for the year ended December 31, 2009 and incorporated herein by reference.
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. Filed as
Exhibit 10.42 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for the
year ended December 31, 2009 and incorporated herein by reference.
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. Filed as Exhibit 10.43 to the Company’s
Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2009 and
incorporated herein by reference.
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. Filed as Exhibit 10.44 to the
Company’s Annual Report on Form 10-K, File No. 333-43687, for the year ended
December 31, 2009 and incorporated herein by reference.
Ivy Funds VIP Service Plan, dated April 30, 2009. Filed as Exhibit 10.46 to the Company’s
Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2009 and
incorporated herein by reference.
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).
Filed as Exhibit 10.47 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for
the year ended December 31, 2009 and incorporated herein by reference.
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.
88
Exhibit
No.
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
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. Filed as Exhibit
10.52 to the Company’s Annual Report on Form 10-K, File No. 333-43687, for the year ended
December 31, 2009 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 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.*
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.*
89
Exhibit
No.
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
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 10.2 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.*
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.*
90
Exhibit
No.
10.63
10.64
10.65
10.66
10.67
10.68
10.69
10.70
10.71
11
12
21
23
31.1
31.2
32.1
32.2
101
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 10.4 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.*
Portfolio Managers Revenue Sharing Plan for Flow Accounts.*
Portfolio Managers Revenue Sharing Schedule.*
Form of Indemnification Agreement. Filed as Exhibit 10.1 to the Company’s Current Report
on Form 8-K, File No. 333-43687, on November 16, 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.*
2011 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 25, 2011 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.
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.
Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.
Section 1350 Certification of the Chief Executive Officer.
Section 1350 Certification of the Chief Financial Officer.
Materials from the Waddell & Reed Financial, Inc. Annual Report on Form 10-K for the year
ended December 31, 2010, formatted in Extensible Business Reporting Language (XBRL):
(i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated
Statements of Stockholders’ Equity, (iv) Consolidated Statements of Comprehensive Income,
(v) Consolidated Statements of Cash Flows, and (vi) related Notes to the Consolidated
Financial Statements, tagged as blocks of text.
*
Indicates management contract or compensatory plan, contract or arrangement.
91
founded in 1937
financial highlights
Business Profile
& Financial
Business Profile
& Financial Highlights
Founded in 1937, Waddell & Reed is one of the most enduring financial
planning firms in the united States. For nearly 75 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, 2010,
total assets under management reached an all time high of $84 billion.
Financial Highlights (Dollars in thousands, except per share data)
operating Revenues
operating Income
net Income
diluted earnings per Share
operating Margin
See accompanying Form 10-K.
2010
2009
2008
CAGR
$1,044,885
$839,089
$ 919,120
250,470
169,812
156,959
105,505
1.83
24.0%
1.23
20.2%
165,329
96,163
1.12
18.0%
7%
23%
28%
28%
assets under Management (Dollars in millions)
advisors Channel
Wholesale Channel
Institutional Channel
total
2010
$33,181
40,883
9,609
$83,673
2009
2008
CAGR
$ 29,474
$ 23,472
32,818
7,491
17,489
6,523
$ 69,783
$ 47,484
19%
53%
21%
33%
Corporate
Information
Annual Meeting of Stockholders
April 6, 2011, 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 LL P
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.ivyfunds.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
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 information 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 corporate 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.
22
W a d d e l l & R e e d 2 0 1 0 a n n u a l R e p o R t
4061_Cov.indd 2
2/16/11 9:52 PM
asset management
balanced distribution
2010 A n n uA l R epoRt
f
i
n
a
n
c
i
a
l
p
l
a
n
n
i
n
g
s
e
r
v
i
c
e
s
W
a
d
d
e
l
l
&
R
e
e
d
F
i
n
a
n
c
i
a
l
,
I
n
c
.
2
0
1
0
A
n
n
u
a
l
R
e
p
o
r
t
6300 Lamar Avenue
Overland Park, KS 66202
800.532.2757
www.waddell.com
ANN-CORP-2010 (02/11)
4061_Cov.indd 1
2/16/11 9:52 PM