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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 20072010
OR
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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 | Name of each exchange on which registered | |
Class A Common Stock, $.01 par value | New York Stock Exchange |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ý NO o
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 o NO ý.
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 ý No o.
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 ý No o.
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 | ý | Accelerated Filer | o | |||
Non-accelerated Filer | o | Smaller Reporting Company | o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No ý.
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, 20072010 was $1.739$1.590 billion.
Shares outstanding of each of the registrant's classes of common stock as of February 22, 200817, 2011 Class A common stock, $.01 par value: 86,222,61185,912,544
DOCUMENTS INCORPORATED BY REFERENCE
In Part III of this Form 10-K, portions of the definitive proxy statement for the 20082010 Annual Meeting of Stockholders to be held April 9, 2008.6, 2011.
Index of Exhibits (Pages 8584 through 89)91)
Total Number of Pages Included Are 8991
WADDELL & REED FINANCIAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 20072010
Part I | | Page | ||
---|---|---|---|---|
Item 1. | Business | 3 | ||
Item 1A. | Risk Factors | |||
Item 1B. | Unresolved Staff Comments | |||
Item 2. | Properties | |||
Item 3. | Legal Proceedings | |||
Item 4. | Submission of Matters to a Vote of Security Holders | |||
Part II | ||||
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |||
Item 6. | Selected Financial Data | |||
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |||
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |||
Item 8. | Financial Statements and Supplementary Data | |||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial 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 |
General
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 our largest family of mutual funds, the Waddell & Reed Advisors Group of Mutual Funds (the "Advisors Funds") in 1940. We launched our Ivy Funds in 2003 in an effort to expand our distribution to third-party outlets. As of December 31, 2007,2010, we had $64.9$83.7 billion in assets under management and approximately 3.3 million mutual fund shareholder accounts owned by individuals, plans or omnibus accounts at third parties.management.
We derive our revenues primarily from providing investment management, investment product underwriting and distribution, and shareholder services administration to mutual funds and institutional and separately managed accounts. Investment management fees are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. UnderwritingOur 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 productthose 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 registeredindependent 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 consists of 2,293 financial advisors who focus theirfocuses its efforts primarily on the sale of investment products advised by the Company.financial planning, serving primarily middle class and mass affluent clients. We compete primarily with smaller broker/dealers and independent financial advisors, as well as a span of other financial providers. Assets under management acquired throughin this channel were $34.6$33.2 billion at December 31, 2007.2010.
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 platforms (401(k) platforms using multiple managers). A team of 34 national wholesalers lead the efforts in this channel.and insurance platforms. Assets under management acquired throughin this channel were $21.5$40.9 billion at the end of 2007.2010.
Through our Institutional channel, we manage assets in a variety of investment styles for defined benefit pension plans, other investment companies (as a subadvisor), defined contribution plans, endowments and high net worth clients.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 acquired throughin the Institutional channel were $8.8$9.6 billion at December 31, 2007.2010.
Organization
We operate our investment advisory business through our subsidiary companies, primarily Waddell & Reed Investment Management Company ("WRIMCO"), a registered investment adviser, and Ivy Investment Management Company ("IICO"), the registered investment adviser for Ivy Funds Inc. and the Ivy Funds portfolios (collectively, the(the "Ivy Funds"). Other investment advisory subsidiaries include and Legend Advisory Corporation, (thethe registered investment adviser for Legend) and Austin, Calvert & Flavin, Inc. ("ACF").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 thea distributor of variable annuities and other
insurance products issued by Nationwide Life Insurance Company, a subsidiary of Nationwide Financial Services, Inc. ("Nationwide"), Minnesota Life Insurance Company ("Minnesota Life"), a subsidiary of Securian Financial Group, Inc. ("Securian"), and others.our business partners. In addition, W&R is the fifthninth 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 462 financial advisors, Legend primarily serves primarily 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, W&R TargetIvy Funds Inc.Variable Insurance Portfolios (the "Target Funds""Ivy Funds VIP") and Waddell & Reed InvestEd Portfolios, Inc., our college savings plan ("InvestEd"). W&R, WRIMCO, WRSCO, ACF, Legend, IICO and IFDI are hereafter collectively referred to as the "Company," "we," "us" or "our" unless the context requires otherwise.
Investment Management Operations
Our investment advisory business provides one of our largest sources of revenues and profits. We earn investment management fee revenues by providing investment advisory and management services pursuant to an investment management agreementagreements with each fund within the Advisors Funds family, the Ivy Funds families,family, the TargetIvy Funds VIP family, and InvestEd (collectively, the "Funds"). While the specific terms of the agreements vary, the basic terms are similar. The agreements provide that we render overall investment management services to each of the Funds, subject to the oversight of each Fund's board of directors/trustees and in accordance with each Fund's fundamental investment objectives and policies. The agreements permit us to enter into separate agreements for shareholder services or accounting services with each respective Fund.
Each Fund's board of directors/trustees, including a majority of the directors/trustees who are not "interested persons" of the Fund or the Company within the meaning of the Investment Company Act of 1940, as amended (the "ICA") ("disinterested members") and the Fund's shareholders must approve the investment management agreement between the respective Fund and the Company. These agreements may continue in effect from year to year if specifically approved at least annually by (i) the Fund's board, including a majority of the disinterested members, or (ii) the vote of a majority of both the shareholders of the Fund and the disinterested members of each Fund's board, each vote being cast in person at a meeting called for such purpose. Each agreement automatically terminates in the event of its assignment, as defined by the ICA or the Investment Advisers Act of 1940, as amended, (the "Advisers Act"), and may be terminated without penalty by any Fund by giving us 60 days' written notice if the termination has been approved by a majority of the Fund's directors/trustees or the Fund's shareholders. We may terminate an investment management agreement without penalty on 120 days' written notice.
In addition to performing investment management services for the Funds, we act as an investment adviser for institutional and other private investors and we provide subadvisory services to other investment companies. Our fee for these services is generally based on a percentage of assets under management. Such services are provided pursuant to various written agreements.
Our investment management effort hasteam meets every morning in a strong foundation based uponcollaborative setting that fosters idea sharing, yet reinforces individual accountability. Through all market cycles, we remain dedicated to the following investment principles:
These three principles shape our investment philosophy and money management approach. Over seven decades, our investment organization has delivered consistently competitive 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 a team of 3029 portfolio managers who average 1920 years of industry experience and 1314 years of tenure with the Company. They have substantial resources available to them, including the efforts of internal equity and fixed income analysts who conduct primary fundamental research and attend numerous on and off-site meetings annually with management of the companies in which they invest. In addition, we use research provided by brokerage firms and independent outside
consultants. Portfolio managers participate in a collaborative process that blends their individual accountability with the ideas of their peers which, when backed by an intensive research capability, supports our efforts to deliver consistent, long-term performance. Our investment management team also includes a premier group of subadvisors who bring similar investment philosophies and additional expertise in specific asset classes.
firm. We have significant experience in virtually all major asset classes, several specialized asset classes and a range of investment styles. Our endingAt December 31, 2010, almost 80% of the Company's $83.7 billion in assets under management are summarized below by broad asset class, manywere invested in equities, of which incorporate multiple65% was domestic and 35% was international. In recent years, we have supported growth of international investments by adding investment styles.
Ending Assets Under Management by Broad Asset Class
| December 31, 2007 | ||||||
---|---|---|---|---|---|---|---|
| Ending Assets | Percentage of Total | |||||
| (in millions) | ||||||
Investment Style: | |||||||
Balanced & Flexible | $ | 14,317 | 22% | ||||
Narrowly Diversified | 13,236 | 20% | |||||
Large Capitalization Growth Equities | 8,965 | 14% | |||||
Large Capitalization Core Equities | 7,019 | 11% | |||||
International Equities | 4,902 | 8% | |||||
Small Capitalization Growth Equities | 4,070 | 6% | |||||
Taxable Investment Grade Fixed Income | 2,836 | 4% | |||||
Multi-Capitalization Core Equities | 2,039 | 3% | |||||
Value Equities | 2,024 | 3% | |||||
Middle Capitalization Growth Equities | 1,655 | 3% | |||||
High Yield Fixed Income | 1,378 | 2% | |||||
Money Market | 1,306 | 2% | |||||
Tax Exempt Fixed Income | 1,038 | 2% | |||||
Other | 83 | 0% | |||||
Total | $ | 64,868 | 100% | ||||
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 strategy generally emphasizes investmentsmanagement team also includes subadvisors who bring similar investment philosophies and additional expertise in companies that the portfolio managers believe can produce above average growth in earnings. Our portfolio managers also strive for consistent long-term performance while seeking to provide downside protection in turbulent markets. Our investment philosophy lends itself well to the financial planning approach used by our Advisors channel while our consistent long-term investment performance record supports the distribution efforts in both our Wholesale and Institutional channels.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 7282 registered open-end mutual fund portfolios, including 21 portfolioswhich include offerings in the Advisors Funds, family, 28 portfolios in the Ivy Funds, families, 20 portfolios in the TargetIvy Funds familyVIP and three portfolios in InvestEd. The Advisors Funds, variable products offering the TargetIvy 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 whowhich 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
Pursuant to general agency arrangements with Nationwide and Minnesota Life,Through various business partners, we distribute in our Advisors channel certain of their variable annuity products, which offer the TargetIvy Funds VIP as an investment vehicle. We also offer our Advisors channel customers retirement and life insurance products underwritten by Nationwide and Minnesota Life.our business partners. Through our insurance agency subsidiaries, ourWaddell & Reed financial advisors also sell life insurance and disability products underwritten by various carriers through a general agency arrangement with BISYS Insurance Services, Inc.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 are comprised ofutilize our Funds. MAP is comprised of two mutual fund asset allocation programs, MAP and MAP Plus, that offer clients a selection of traditional asset allocation models, as well as features such as systematic rebalancing and client participation in determining (to a limited extent) asset allocation across asset classes. MAP and MAP Plus are fee-based mutual fund asset allocation programs, structured to provide advisors and clients with advisory services, a pricing option competitive with other firms' fee-based products, and flexibility to allow advisors to assist clients in selecting underlying funds based upon their individual needs. MAP Plus was introduced in the second quarter of 2007 along with a reintroduction of MAP, to include additional financial planning modules as a bundled offering. As of December 31, 2007 our2010, clients have over $1$4.5 billion invested in theour MAP, MAPPlus and MAP PlusSPA products. These assets are included in our mutual fund assets under management disclosed elsewhere.
Using a variety of funds ranging from money market and fixed income funds to domestic and international equity funds, SPA is a predictive, dynamic asset allocation system that reallocates asset classes within model portfolios. Clients investing assets in SPA can choose from five available model portfolios with objectives ranging from conservative to aggressive, based on their investment objectives, goals, risk tolerance and other factors.
A primary difference between MAP and SPA is that advisors assist clients in selecting the underlying mutual funds within MAP models in accordance with pre-established ranges, whereas for SPA, the Company's Investment Policy Committee determines the model compositions.
Underwriting and Distribution
We earn underwriting and distribution fee revenues primarily by distributing the Funds pursuant to an underwriting agreement with each Fund (except the Target Funds 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 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 eight 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 Cmanagement.
shares in the first year a CDSCTable 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 as compensation or reimbursement for expenses paid to broker/dealers and other sales professionals in connection with providing ongoing services to the Funds' shareholders and/or maintaining the Funds' shareholder accounts. The Funds' Class B and Class C shares may charge a maximum of 0.75% of the average daily net assets under management under a Rule 12b-1 distribution plan as either compensation or reimbursement 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 Target Funds as investment vehicles pursuant to general agency arrangements with Nationwide and Minnesota Life and receive commissions, marketing allowances and other compensation as stipulated by such agreements. In connection with these arrangements, the Target Funds 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.Contents
Distribution Channels
We distribute our investment products through the Advisors, Wholesale and Institutional channels.
Advisors Channel
OurOver 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 sellhave sold investment products primarily to middle-incomemiddle income and mass affluent individuals, families and businesses across the country in geographic markets of all sizes. We assist clients on a wide range of financial issues with a significant focus on helping them plan, generally, for long-term investments such as retirement and education and offer one-on-one consultations that emphasize long-term relationships through continued service. As a result of this approach, this channel has developed a loyal customer base with clients maintaining their accounts significantly longer than the industry average. The redemption rate in the Advisors channel for the year endedAs of December 31, 2007 was 9.1%, compared to the industry average of 22.3%, as derived from statistics provided by the Investment Company Institute ("ICI").
Our2010, our sales force consisted of 2,2931,847 financial advisors including 169 district managers and 176 district supervisors as of December 31, 2007. Eight regional vice presidents and 101 managing principals oversee this sales force, which operateswho operate out of 170167 offices located throughout the United States. This sales force also occupies 333States 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, 2007,2010, our Advisors channel had approximately 720,000517,000 mutual fund customers with an average investmentcustomers.
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 $68,000advisors. However, gross sales have not declined over this period and approximately 80,000 variable account customers with an average investment of $63,000.
The following table illustrates commissionable investment product sales by our financial advisors (including InvestEd) for the years ended December 31, 2007, 2006 and 2005. Sales are shown gross of
commissions and exclude sales by Legend advisors, sales of money market funds, non-proprietary funds, insurance products, and mutual funds sold at net asset value for which we receive no commission.
| 2007 | 2006 | 2005 | |||||
---|---|---|---|---|---|---|---|---|
| (in millions) | |||||||
Front-end load sales | $ | 1,406 | 1,700 | 1,370 | ||||
Variable annuity products | 464 | 331 | 297 | |||||
Front-load product total | 1,870 | 2,031 | 1,667 | |||||
Deferred-load sales | 134 | 186 | 203 | |||||
Fee-based allocation products | 628 | 59 | 31 | |||||
Total advisor sales | $ | 2,632 | 2,276 | 1,901 | ||||
As of December 31, 2007, 40% of our financial advisors have been with us for more than five years and 24% for more than ten years. Our New Advisor Career Transition program(s), designed to meet the needs of the different audiences from which we recruit, such as college graduates, career changers and industry experienced professionals, provide our new advisors with a unique transition experience until they can develop the skills and client base necessary to earn a stable income from commissions alone. These programs have played an important role in advisor retention and have contributed to an increase in the average productivity of our new associates. In addition, the introduction of a Sales Incentive Dashboard to this channel produced more in 2007 has made it easier for field leaders and2010 with 14% fewer advisors, on average, compared to keep track of their sales results daily with web based sales data.2009. We also undertook technology initiatives in 2007 that will allow us to provide our clients consolidated statements and more robust brokerage capabilities. We believe this effort will support the retention of existing advisors and our recruiting efforts, including those aimed at experienced advisors. Salesutilize gross revenue per advisor (investment product sales divided by the average number of advisors) were $1.2 million, $994 thousand and $776 thousand, for the years ended December 31, 2007, 2006 and 2005, respectively. Growth in this metric is important to our company since investment product sales are invested in our Funds' assets.
Gross production per advisor is an additional method of measuring advisor productivity that is more closely aligned with industry standard methods, which use gross commissions per sales representative to measure advisor productivity. For purposes of this measure, gross productionrevenue consists of front-end load sales and distribution fee revenues, as it would be received from an underwriter, from sales of both our Funds and other mutual funds. It also includes fee revenues from our asset allocation products and financial plans, and commission revenues earned on insurance products. This measure excludes underwriting fee revenues, Rule 12b-1 service fee revenues, variable annuity distribution fee revenues and all revenues related to Class Y shares, all of which do not relate to the distribution activities of our financial advisors. Gross productionrevenue per advisor was $64.7$119 thousand, $61.8$93 thousand and $53.5$103 thousand for the years 2007, 2006ended December 31, 2010, 2009 and 2005,2008, respectively.
Wholesale Channel
Our Wholesale channel consists of sales garnered through various third-party distribution outlets and Legend advisors. In an effort to accelerate sales growth, we have focused on expanding our Wholesale distribution efforts over the past four years. Our launch into this channel included acquiring Mackenzie Investment Management Inc. ("MIMI") in 2002 and entering into a strategic alliance agreement with Securian in 2003. MIMI was a Florida-based investment management subsidiary of Toronto-based Mackenzie Financial Corporation ("MFC") and adviser of the Ivy Funds sold in the United States. As part of our strategic alliance with Securian, we agreed to become the investment adviser for substantially all equity assets managed by Advantus Capital Management, Inc. ("Advantus"), a subsidiary of Securian and an affiliate of Minnesota Life, and to acquire the assets of Securian's Advantus Funds.
As a result of an increased demand for our funds in ourthe Wholesale channel due to strong investment and sales performance and assets gained through acquisitions,effective sales efforts, our assets under management from the Wholesale channel have increased from $3.8to $40.9 billion at December 31, 2003 to $21.52010, including $5.7 billion in assets at December 31, 2007, including $9.0 billion in assets2010 that are subadvised by other managers.
The following table summarizes certain components of the changes in the Wholesale channel's assets under management for the last three fiscal years.
| 2007 | 2006 | 2005 | |||
---|---|---|---|---|---|---|
| (in millions) | |||||
Sales (net of commissions) | 9,470 | 4,541 | 2,347 | |||
Redemptions | (2,795) | (1,915) | (1,149) | |||
Net Sales | 6,675 | 2,626 | 1,198 | |||
Market Appreciation | 3,894 | 1,263 | 738 | |||
Ending Assets Under Management | 21,537 | 10,819 | 6,729 |
During 2007, we achieved significant growth in mutual fund sales through wholesale distribution and built on our presence in the wholesale market. We continued to expand our team of national wholesalers, reaching a total of 34 by year-end. Throughout 2007, the Ivy Funds family increased its presence in a number of broker/dealer platforms. These third parties have a client relationship with, and maintain an account for, the investors. Typically, investors purchase our investment products at the suggestion of third parties, thereby expanding our opportunities to gain new investors. Our wholesaling efforts focus principally on distributing the Ivy Funds through three segments: broker/dealers (the largest method of distributing mutual funds for the industry and for us), retirement platforms (401(k) platforms using multiple managers) and registered investment advisors (fee-based financial advisors who generally sell institutional class 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.
Legend advisors distributeDuring 2010, our Funds, along with mutual funds managed by other investment companies, through Legend's retirement advisor sales force. At December 31, 2007, Legend had 462 registered retirement advisors in 95 offices, which are primarily individual advisor offices, located mainlyIvy Asset Strategy fund continued to play a lead role in the eastern partWholesale channel's results, comprising 60% of the United States. These retirement advisors are not included in the discussionchannel's sales and 30% of our financial advisors, nor in disclosures of the number of advisors we have licensed. For the years ended December 31, 2007, 2006 and 2005, Legend advisors sold $74.2 million, $74.0 million and $67.7 million of our mutual funds, respectively. For the years ended December 31, 2007, 2006 and 2005, Legend also sold $363.5 million, $382.5 million and $379.7 million, respectively, of unaffiliated mutual funds. Sales per Legend advisor were $890 thousand in 2007 and Legend had $5.1 billion of client assets under administrationmanagement as of December 31, 2007.2010. 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
record $5.8 billion. We plan to continue to stress diversification and sales within our focus firms as we enter 2011.
Institutional Channel
WRIMCO and ACFThrough 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 their investment advisory services to institutions directly or through consultants that assist with the manager selection process. Most of our institutional business is in defined benefit pension plans and subadvised mutual funds. A significant amount of assets aremulti-manager styles. Our diverse client list also managed for defined contribution pension plans,includes corporations, foundations, endowments, Taft-Hartley plans high-net worth individuals and insurance company general accounts. Duringpublic funds including defined benefit plans and defined contribution plans. Over time, the past two years, our institutional asset flows were negatively impacted by underperformance at ACF, although we maintain a solid reputationInstitutional channel has been successful in the institutional asset managementdeveloping subadvisory relationships. As of December 31, 2010, this type of business built on a good performance record and on our investment style, which over time has brought steady and consistent results.
Over the past five years, we have expanded our distribution efforts in this channel by entering into additional subadvisory agreements with certain strategic partners. As partcomprised close to 60% of the December 16, 2002 acquisitionInstitutional channel's assets, which management views as a positive development as it believes this type of MIMI's business we entered into new subadvisory and marketing agreements extending
MFC's subadvisory agreements with IICO and providing us with additional investment management opportunities in Canada. Pursuantis more likely to these subadvisory agreements, we receive investment management fees covering multiple funds. The subadvisory agreement with MFC expires in 2008 and is renewable on an annual basis.
Through our strategic alliance agreement with Securian, we agreed to become investment adviser for substantially all equity assets managed by Advantus. In addition,grow than the Company manages as separate accounts certain actively managed equities in the Minnesota Life and Securian Holding Company general accounts.
We also have a subadvisory relationship with Pictet & Cie of Switzerland, initially established in mid-2006, that employs our large-cap investment style. Assets under management for Pictet & Cie grew to $1.3 billion by December 31, 2007.defined benefit business.
Service Agreements
We earn service fee revenues by providing various services to the Funds and their shareholders pursuant to shareholder servicing and accounting service agreements with each Fund.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.
These agreementsAgreements with the Funds may be adopted or amended with the approval of the disinterested members of each Fund's board of directors/trustees and have annually renewable terms of one year.
Regulation
The securities industry is subject to extensive regulation and virtually all aspects of our business are subject to various federal and state laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients and shareholders of registered investment companies. Under such laws and regulations, agencies and organizations that regulate investment advisers, broker/dealers, and transfer agents like us have broad administrative powers, including the power to limit, restrict or prohibit an investment adviser, broker/dealer or transfer agent from carrying on its business in the event that it fails to comply with applicable laws and regulations. In such event, the possible sanctions that may be imposed include, but are not limited to, the suspension of individual employees or agents, limitations on engaging in certain lines of business for specified periods of time, censures, fines and the revocation of investment adviser and other registrations.
The Securities and Exchange Commission (the "SEC") is the federal agency responsible for the administration of federal securities laws. Certain of our subsidiaries are registered with the SEC as investment advisers under the Advisers Act, which imposes numerous obligations on registered investment advisers including, among other things, fiduciary duties, record-keeping and reporting requirements, operational requirements and disclosure obligations, as well as general anti-fraud prohibitions. Investment advisers are subject to periodic examination by the SEC, and the SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from censure to termination of an investment adviser's registration.
Our Funds are registered as investment companies with the SEC under the ICA, and various filings are made with states under applicable state rules and regulations. The ICA regulates the relationship between a mutual fund and its investment adviser and prohibits or severely restricts principal transactions and joint transactions. Various regulations cover certain investment strategies that may be used by the Funds for hedging and/or speculative purposes. To the extent the Funds purchase futures contracts, options on futures contracts and foreign currency contracts, they are subject to the commodities and futures regulations of the Commodity Futures Trading Commission.
We derive a large portion of our revenues from investment management agreements. Under the Advisers Act, our investment management agreements terminate automatically if assigned without the client's consent. Under the ICA, investment advisory agreements with registered investment companies such as the Funds terminate automatically upon assignment. The term "assignment" is broadly defined and includes direct assignments, as well as assignments that may be deemed to occur, under certain circumstances, upon the transfer, directly or indirectly, of a controlling interest in the Company.
The Company is also subject to federal and state laws affecting corporate governance, including the Sarbanes-Oxley Act of 2002 ("S-OX"), as well as rules adopted by the SEC. As a New York Stock Exchange (the "NYSE") listed company, we are also subject to the rules of the NYSE, including the corporate governance listing standards approved by the SEC.
Three of our subsidiaries, W&R, LEC and IFDI, are also registered as broker/dealers with the SEC and the states. Much of the regulation of broker/dealers 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 also each subject to certain net capital requirements pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Uniform Net Capital Rule 15c3-1 of the Exchange Act (the "Net Capital Rule") specifies the minimum level of net capital a registered broker/dealer must maintain and also requires that part of its assets be kept in a relatively liquid form. The Net Capital Rule is designed to ensure the financial soundness and liquidity of broker/dealers. Any failure to maintain the required minimum net capital may subject us to suspension or revocation of our registration or other limitations on our activity by the SEC, and suspension or expulsion by FINRA or other regulatory bodies, and ultimately could require the broker/dealer's liquidation. The maintenance of minimum net capital requirements may also limit our ability to pay dividends. As of December 31, 2007, 2006 and 2005, 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.
On October 26, 2001, President Bush signed the USA PATRIOT Act, aimed at giving the government new powers in the war on terrorism. Title III of this new legislation, the International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001, imposes significant new 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.
In 2004, we implemented compliance with Section 404 of S-OX. Our related report on internal controls over financial reporting for 2007 is included in Part I, Item 9A.
Our businesses may be materially affected not only by regulations applicable to us as an investment adviser, broker/dealer or transfer agent, but also by law and regulations of general application. For example, the volume of our principal investment advisory business in a given time period could be affected by, among other things, existing and proposed tax legislation and other governmental regulations and policies (including the interest rate policies of the Federal Reserve Board), and changes in the interpretation or enforcement of existing laws and rules that affect the business and financial communities.
Competition
The financial services industry is a highly competitive global industry. According to the ICI, at the end of 20072010 there were more than 8,7008,500 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
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.
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.
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 and Financial Advisors
At December 31, 2007,2010, we had 1,7021,485 full-time employees, consisting of 9371,095 home office employees, 145 employees of subsidiary companies in Florida and Texas, 101 managing principals, eight regional vice presidents, six associate managers, 160 field office support personnel, and 345 district managers and district supervisors; district managers and supervisors are counted as bothLegend employees and financial advisors.
At December 31, 2007, our sales force was comprised of 2,293 financial advisors, including 1,948 financial advisors who are independent contractors and 345 district managers and district supervisors who are considered employees. In addition, Legend, which is a part of our Wholesale channel, had 462 retirement advisors considered to be independent contractors.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 450 Fifth100 F Street N.W.,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, atwww.sec.gov. The Company makes available free of charge our proxy statements, annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and amendments to those reports under the "Corporate""Investor Relations" section of our internet website atwww.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 have the ability tocan view our Corporate Code of Business Conduct and Ethics (the "Code of Ethics"), which applies to directors, officers and all employees of the Company;Company, our Corporate Governance Guidelines;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.
An Increasing Percentage Of Our Assets Under ManagementFinancial Advisors Are Distributed ThroughClassified As Independent Contractors, And Changes To Their Classification May Increase Our Wholesale Channel, Which Reflects Higher Redemption Rates Than Our Traditional Advisors Channel.Operating Expenses. In recent years, we have focusedFrom 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 expanding distribution efforts relating to our Wholesale channel. The percentage20 "common law" factors, rather than any definition found in the Internal Revenue Code or Treasury regulations. We classify the majority of our assets under management infinancial 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 Wholesale channel has increased from 10.4% at December 31, 2003 to 33.2% at December 31, 2007, and the percentage of our total sales represented by the Wholesale channel has increased from 16.5% for the year ended December 31, 2003 to 63.5% for the year ended December 31, 2007. 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. Manyindependent contractor/employee classification 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. We cannot assure you that these channels and their client bases will continue to be accessible tofinancial advisors currently doing business with us. The loss or diminution of the level of business we docosts associated with those providerspotential changes, if any, with respect to these independent contractor classifications could have a material adverse effect on the Company, including our business, especially with the high concentrationresults of assets in certain funds in this channel. In addition, the Wholesale channel had redemption ratesoperations and financial condition. See Part I, Item 3. "Legal Proceedings."
There May Be An Adverse Effect On Our RevenuesBusiness Is Subject To Substantial Risk From Litigation, Regulatory Investigations And Earnings If Our Investors Remove The Assets We Manage On Short Notice.Potential Securities Laws Liability. Mutual fund investors may redeem their investmentsMany 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 mutual funds at any time without any prior notice. Additionally, our investment management agreements with institutionsbusiness. 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 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, regulatory bodies. We, our subsidiaries, and/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 abilitycertain of our investorspast 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 accomplish this on short notice has increased materially dueclaims 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 growth of assets in our Wholesale channel,Company, and with the high concentration of assets in certain funds in this channel. The decrease in revenues that could result from any such event could 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 businesscommon stock and earnings.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."
There May Be Adverse Effects OnRegulatory Risk Is Substantial In Our Business And Earnings UponNon-Compliance With Regulations, Or Changes In Regulations, Could Have A Significant Impact On The TerminationConduct Of Or Failure To Renew, Certain Agreements.Our Business And Our Prospects, Revenues And Earnings. A majorityOur 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 derived from investment management agreementsan important element of the distribution of the mutual funds we manage. The SEC has recently proposed replacing Rule 12b-1 with the Fundsa new regulation that as required by law, are terminable on 60 days' notice. Each investment management agreement must be approved and renewed annually by the disinterested members of each Fund's board of directors/trustees or its shareholders, as required by law. Additionally, our investment management agreements provide for automatic terminationwould significantly change current fund distribution practices in the event of assignment, which includesindustry. If this proposed regulation is adopted, it may have 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. The Company also has co-exclusive arrangements with Nationwide and Minnesota Life/Securian to distribute their variable annuities containing the Target Funds managed by the Company, which are currently set to expire in the fall of 2008, and our subadvisory agreement with MFC, which is renewable annually, expires in December 2008. 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. Failure to renew the Minnesota Life/Securian arrangement could have an adversematerial impact on the strategic alliance agreement with Securian wherebycompensation we pay to distributors for distributing the mutual funds we manage equity assets for their asset management affiliates. See "Business – Distribution Channels – Wholesale Channel, Institutional Channel." The decreaseand/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 revenuesthe 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 could result from any such eventsupervise 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 material adverse effectsubstantial impact on the regulation, operation and distribution of mutual funds and variable products, and could adversely affect our businessability to distribute and earnings.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, (whichwhich is particularly material to us due to our high
concentration of assets under management in the United States domestic stock market)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.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 the recent pastyears 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
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,
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.
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 management and broker/dealer businesses are heavily regulated, primarily at the federal level. Non-compliance with applicable laws or regulations could result in sanctions being levied against us, including fines and censures, suspension or expulsion from a certain jurisdiction or market, or the revocation of licenses. Non-compliance with applicable laws or regulations could also adversely affect
our reputation, prospects, revenues and earnings. In addition, changes in current legal, regulatory, accounting, tax or compliance requirements or in governmental policies could adversely affect our operations, revenues and earnings by, among other things, increasing expenses and reducing investor interest in certain products we offer. Additionally, our profitability could be affected by rules and regulations that impact the business and financial communities generally, including changes to the laws governing state and federal taxation.
In recent years, allegations of late trading, market timing and selective disclosure of portfolio information in the mutual fund industry have prompted various legislative and regulatory proposals, some of which have been adopted by the SEC, the United States Congress, the legislatures in states in which we conduct operations and the various regulatory agencies that supervise our operations. In particular, new rules and regulations adopted by the SEC and FINRA place greater regulatory compliance and administrative burdens on us and could have a substantial impact on the regulation, operation and distribution of mutual funds, and 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 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 Class A common stock (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.
Our Financial Advisors Are Classified As Independent Contractors, And Changes To Their Classification Costs 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 Internal Revenue Service 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, if we were unable to reflect them in our compensation arrangements with the financial advisors.
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.
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 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.
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, 2007, our total assets were approximately $893.8 million, of which approximately $228.4 million, or 26%, 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.
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
will be able to raise additional capital if needed, which could negatively impact our liquidity, prospects and operations. We have entered into a three-year3-year revolving credit facility with various lenders providing for total loans of $200.0$125.0 million. Under this facility, the lenders may, at their option upon our request, expand the facility to $300.0$200.0 million. We also utilize money market loans, which function similarly to commercial paper. At February 22, 2008,17, 2011, there was no balance outstanding under either the revolving credit facility orfacility. We also entered into a note purchase agreement with various purchasers for the money market loan program.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 the money market loansnote 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.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.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 money market loans and/or cash provided by operating activities will provide sufficient funds to finance our business plans, meet our operating expenses and service our debt obligations as they become due. However, in the event that we require additional capital, there can be no assurance that we will be able to raise such capital when needed or on satisfactory terms, if at all, and there can be no assurance that we will be able to renew or refinance our credit facility or senior unsecured notes upon itstheir 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.
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 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 Stockholders Rights Plan Could Deter Takeover Attempts, Which Some Of Our Stockholders May Believe To Be In Their Best Interest. Under certain conditions, the rights under our stockholders rights plan entitle the holders of such rights to receive shares of our common stock having a value equal to two times the exercise price of the right. The rights are attached to each share of our outstanding common stock and generally are exercisable only if a person or group acquires 15% or more of the voting power represented by our common stock. Our stockholders rights plan could impede the completion of a merger, tender offer, or other takeover attempt even though some or a majority of our stockholders might believe that a merger, tender offer or takeover is in their best interests, and even if such a transaction could result in our
stockholders receiving a premium for their shares of our stock over the then current market price of our stock.
Provisions Of Our Organizational Documents Could Deter Takeover Attempts, Which Some Of Our Stockholders May Believe To Be In Their Best Interest. Under our 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 $200$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.
Our home offices lease approximately 360,000396,000 square feet for Waddell & Reed Legend, and ACFLegend located in Overland Park, Kansas and Palm Beach Gardens, Florida, and San Antonio, Texas, respectively. This figure does not include office space of 41,000 square feet formerly leased by MIMI 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 610,000639,000 square feet. In the opinion of management, the office space leased by the Company is adequate for existing operating needs.
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.
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.
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:
| 2007 | 2006 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Quarter | High | Low | Dividends Per Share | High | Low | Dividends Per Share | ||||||||||||
1 | $ | 27.58 | $ | 21.91 | $ | 0.17 | $ | 23.60 | $ | 20.57 | $ | 0.15 | ||||||
2 | 27.69 | 22.74 | 0.17 | 24.80 | 19.65 | 0.15 | ||||||||||||
3 | 29.35 | 21.52 | 0.17 | 25.05 | 19.23 | 0.15 | ||||||||||||
4 | 37.65 | 26.71 | 0.17 | 27.80 | 23.97 | 0.15 |
| 2010 | 2009 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Quarter | High | Low | Dividends Per Share | High | Low | Dividends Per Share | ||||||||||||||
1 | $ | 36.80 | $ | 29.68 | $ | 0.19 | $ | 19.64 | $ | 11.40 | $ | 0.19 | ||||||||
2 | 39.24 | 21.80 | 0.19 | 28.00 | 17.16 | 0.19 | ||||||||||||||
3 | 28.55 | 21.52 | 0.19 | 29.27 | 23.25 | 0.19 | ||||||||||||||
4 | 36.47 | 26.89 | 0.20 | 31.50 | 26.76 | 0.19 |
Year-end closing prices of our common stock were $35.29 and $30.54 for 20072010 and 2006, respectively were $36.09 and $27.36.2009, respectively. The closing price of our common stock on February 22, 200817, 2011 was $32.24.$41.91.
According to the records of our transfer agent, we had 4,0543,311 holders of record of common stock as of February 22, 2008.17, 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. Our current credit facility does not limit our ability to pay cash dividends. To the extent assets are used to meet minimum net capital requirements under the Net Capital Rule, they are not available for distribution to stockholders as dividends. See Part I, Item 1. "Business—Regulation."
The Board of Directors approved an increase in the quarterly dividend on our common stock from $.17 per share to $.19 per share beginning with our first quarter 2008 dividend, payable on May 1, 2008. We anticipate that quarterly dividends will continue to be paid.
The Board of Directors approved an increase in the quarterly dividend on our common stock from $.15 per share to $.17 per share beginning with our first quarter 2007 dividend, paid on May 1, 2007.
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, 2007,2010, we repurchased (i) 2,350,0542,043,545 shares in the open market and privately at an aggregate cost, including commissions, of $59.5$65.9 million, (ii) 7,121 mature shares from stock incentive plan participants to cover the strike price of options exercised in connection with a Stock Option Restoration Program (the "SORP"), (iii) 1,010 newly issued shares from SORP participants to cover their statutory minimum tax withholdings on option exercises, and (iv) 234,162including 426,665 shares from related parties to cover their tax withholdings from the vesting of nonvested shares. The aggregate cost of shares obtained from related parties during 20072010 was $5.5$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.
The following table sets forth certain information about the shares of common stock we repurchased during the fourth quarter of 2007.2010.
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under The Program | |||||
---|---|---|---|---|---|---|---|---|---|
October 1 - October 31 | 626 | $ 28.31 | 626 | n/a (1) | |||||
November 1 - November 30 | 155,454 | 33.00 | 155,454 | n/a (1) | |||||
December 1 - December 31 | - | - | - | n/a (1) | |||||
Total | 156,080 | $ 32.98 | 156,080 | ||||||
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Program | Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under The Program | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
October 1 - October 31 | - | $ | - | - | n/a | (1) | ||||||||
November 1 - November 30 | 3,602 | 31.27 | 3,602 | n/a | (1) | |||||||||
December 1 - December 31 | 123,646 | 35.43 | 123,646 | n/a | (1) | |||||||||
Total | 127,248 | $ | 35.31 | 127,248 | ||||||||||
Total Return Performance
Comparison of Cumulative Total Return (1)
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.
| Period Ending | | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Index | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | | |||||||||||||
| ||||||||||||||||||||
Waddell & Reed Financial, Inc. | 100.00 | 134.04 | 181.31 | 80.60 | 164.29 | 194.81 | ||||||||||||||
SNL Asset Manager | 100.00 | 115.97 | 132.01 | 62.74 | 101.78 | 117.15 | ||||||||||||||
S&P 500 | 100.00 | 115.79 | 122.16 | 76.96 | 97.33 | 111.99 | ||||||||||||||
ITEM 6. Selected Financial Data
The following table sets forth our selected consolidated financial and other data at the dates and for the periods indicated. Selected financial data should be read in conjunction with, and is qualified in its entirety by, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our Consolidated Financial Statements and the Notes thereto appearing elsewhere in this report.
| For the Year Ended December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006(1) | 2005(2) | 2004 | 2003(3) | ||||||
| (in thousands, except per share data and number of financial advisors) | ||||||||||
Revenues from: | |||||||||||
Investment management fees | $ 372,345 | 311,525 | 267,681 | 240,282 | 203,918 | ||||||
Underwriting and distribution fees | 371,085 | 317,458 | 272,590 | 252,883 | 231,662 | ||||||
Shareholder service fees | 94,124 | 89,672 | 81,809 | 76,522 | 70,678 | ||||||
Total revenues | 837,554 | 718,655 | 622,080 | 569,687 | 506,258 | ||||||
Net income | 125,497 | 46,112 | 60,121 | 102,165 | 54,265 | ||||||
per common share—basic | 1.55 | 0.57 | 0.74 | 1.27 | 0.67 | ||||||
per common share—diluted | 1.52 | 0.55 | 0.73 | 1.25 | 0.66 | ||||||
Dividends declared per common share | $ 0.68 | 0.60 | 0.60 | 0.60 | 0.57 | ||||||
Advisor and productivity data (excluding Legend): | |||||||||||
Investment product sales(4) | $ 2,632,411 | 2,276,405 | 1,901,356 | 1,811,960 | 1,796,244 | ||||||
Number of financial advisors (end of period) | 2,293 | 2,255 | 2,409 | 2,623 | 2,929 | ||||||
Average number of financial advisors | 2,190 | 2,290 | 2,453 | 2,556 | 3,049 | ||||||
Investment product sales per advisor | $ 1,189 | 994 | 776 | 709 | 589 | ||||||
Wholesale channel data: | |||||||||||
Sales (net of commissions) | $ 9,469,932 | 4,541,812 | 2,346,749 | 1,375,222 | 932,600 | ||||||
Number of wholesalers | 34 | 26 | 23 | 19 | 15 | ||||||
Institutional channel sales | $ 1,882,908 | 968,106 | 654,333 | 1,276,614 | 2,388,881 |
| As of December 31, | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2004 | 2003 | ||||||
| (in millions) | ||||||||||
Assets under management | $ 64,868 | 48,401 | 41,863 | 38,658 | 36,573 | ||||||
Balance sheet data: | |||||||||||
Goodwill and identifiable intangible assets | 228.4 | 228.4 | 250.3 | 250.3 | 250.1 | ||||||
Total assets | 893.8 | 662.7 | 632.3 | 619.9 | 565.8 | ||||||
Short-term debt | - | - | 1.7 | 35.0 | 25.0 | ||||||
Long-term debt | 200.0 | 199.9 | 198.2 | 202.9 | 209.7 | ||||||
Total liabilities | 512.1 | 418.0 | 384.9 | 401.0 | 390.4 | ||||||
Stockholders' equity | 381.7 | 244.7 | 247.4 | 218.9 | 175.4 |
| 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) | ||||||||||||||||
Revenues from: | |||||||||||||||||
Investment management fees | $ | 457,538 | 354,593 | 399,863 | 372,345 | 311,525 | |||||||||||
Underwriting and distribution fees | 468,057 | 378,678 | 416,762 | 371,085 | 317,458 | ||||||||||||
Shareholder service fees | 119,290 | 105,818 | 102,495 | 94,124 | 89,672 | ||||||||||||
Total revenues | 1,044,885 | 839,089 | 919,120 | 837,554 | 718,655 | ||||||||||||
Net income | 156,959 | 105,505 | 96,163 | 125,497 | 46,112 | ||||||||||||
Net income per share (basic) | 1.83 | 1.23 | 1.12 | 1.49 | 0.55 | ||||||||||||
Net income per share (diluted) | 1.83 | 1.23 | 1.12 | 1.48 | 0.54 | ||||||||||||
Dividends declared per common share | $ | 0.77 | 0.76 | 0.76 | 0.68 | 0.60 | |||||||||||
Advisor and productivity data: | |||||||||||||||||
Gross revenue per advisor | $ | 118.9 | 92.8 | 103.0 | 108.7 | 99.7 | |||||||||||
Number of financial advisors (end of period) | 1,847 | 2,393 | 2,366 | 2,293 | 2,255 | ||||||||||||
Average number of financial advisors | 2,019 | 2,336 | 2,297 | 2,190 | 2,290 | ||||||||||||
Wholesale channel data: | |||||||||||||||||
Sales (net of commissions) | $ | 14,505,402 | 14,745,230 | 15,598,998 | 9,469,932 | 4,541,812 | |||||||||||
Number of external wholesalers | 46 | 34 | 35 | 34 | 26 | ||||||||||||
Institutional channel sales | $ | 3,588,260 | 1,703,470 | 2,358,104 | 1,882,908 | 968,106 |
| As of December 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||
| (in millions) | ||||||||||||||||
Assets under management | $ | 83,673 | 69,783 | 47,484 | 64,868 | 48,401 | |||||||||||
Balance sheet data: | |||||||||||||||||
Goodwill and identifiable intangible assets | 221.2 | 221.2 | 221.2 | 228.4 | 228.4 | ||||||||||||
Total assets | 976.9 | 983.4 | 775.4 | 893.8 | 662.7 | ||||||||||||
Long-term debt | 190.0 | 200.0 | 200.0 | 200.0 | 199.9 | ||||||||||||
Total liabilities | 519.8 | 614.3 | 455.3 | 512.1 | 418.0 | ||||||||||||
Stockholders' equity | 457.2 | 369.1 | 320.1 | 381.7 | 244.7 |
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Item includes statements that arecontains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statementswhich reflect the current views and assumptions of management with respect to future events regarding our expectations, hopes, beliefs, intentions or strategies regardingbusiness and the future. Allindustry in general. These forward-looking statements include all statements, other than statements of historical fact, included in this Form 10-K regarding our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. All forward-lookingincluding statements included in this Form 10-K are based on information availablewith respect to us onrevenues and earnings, the date hereof,amount and we assume no obligation to update such forward-looking statements. Although we believe thatcomposition of assets under management, distribution sources, expense levels, redemption rates and the assumptionsfinancial markets and expectations reflected in such forward-lookingother conditions. These statements are reasonable, we can give no assurancegenerally 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 such expectations will prove to have been correctany forward-looking information provided by or that we will take any actions that may presently be planned.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 decline in our products' performance, failure to renew investment management agreements,reduction of the assets we manage on short notice, and adverse results of litigation and/or arbitration, acts of terrorism and/or war, competition, changes in government regulation, and availability and terms of capital.arbitration. All subsequent written or oral forward-looking statements attributablespeak only as of the date on which they are made and we undertake no duty to usupdate or persons acting on our behalf are expressly qualified in their entirety by such factors.revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following should be read in conjunction with the "Selected Financial Data" and our Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.
Executive Overview
We are one of the oldest mutual fund and asset management firms in the country, with expertise in a broad range of investment styles and across a variety of market environments. Our earnings and cash flows are heavily dependent on financial market conditions. Significant increases or decreases in the various securities markets particularly United States equity markets, can have a material impact on our results of operations, financial condition and cash flows.
Revenue Sources
We derive our revenues primarily from providing investment management, investment product underwriting and distribution, and shareholder services administration to mutual funds and institutional and separately managed accounts. Investment management fees a substantial source of our revenues, are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. UnderwritingOur underwriting and distribution revenues, another substantial source of 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, and fees earned on fee-based asset allocation products, as well asand related advisory services. The products sold have various commission structures and the revenues received from productthose sales vary based on the type and amount sold. Rule 12b-1Shareholder service and distribution fees earned for servicing and/or distributing certain mutual fund shares are based upon assets under management and fluctuate based on sales, redemptions and financial market conditions. Other service fees includefee revenue includes transfer agency fees, custodian fees forfrom retirement plan accounts, portfolio accounting and portfolio accounting.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 (the "Advisors channel") or through our Wholesale channel, which includes third-parties such as other broker/dealers, registered
investment advisors (including the retirement advisors of Legend) and various retirement platforms, (the "Wholesale channel").platforms. We also market our investment advisory services to institutional investors, either directly or through consultants, (the "Institutional channel").in our Institutional channel.
In theOur Advisors channel our sales force consists of 2,2931,847 independent financial advisors spread throughout the United States. Our financial advisors carry out our mission of providing personal financial planning services to our clients across the United States, focusing on investment strategies for retirement, education funding, insurance, estate planning and other specific needs.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.
InDuring 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, weChannel 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, our Florida-based retirement planning subsidiary and various retirement platforms. Aplatforms, through a team of 34 national wholesalers leadexternal, 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 this channel.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 defined benefit pension plans, other investment companies (as a subadvisor), defined contribution plans, endowmentsvariety 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 high net worth clients.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.
2007Operating Results
The company ended the year with record revenues, eclipsing the billion dollar mark for the first time in Review
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 combinationsyndicate of organic growthbanks 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 market action.
Assets Under Management
Assets under management of $64.9$83.7 billion on December 31, 2007 were 34% higher than2010 grew 20% compared to the $48.4$69.8 billion reported a year earlier primarily due to market appreciation of $10.0$8.5 billion and net sales of $6.2 billion. The$4.7 billion, generated primarily by the Wholesale channel was the net sales driver in 2007.channel.
Change in Assets Under Management(1) (1)
| Advisors Channel | Wholesale Channel | Institutional Channel | Total | |||||
---|---|---|---|---|---|---|---|---|---|
| (in millions) | ||||||||
December 31, 2007 | |||||||||
Beginning Assets | $ | 29,905 | 10,819 | 7,677 | 48,401 | ||||
Sales (net of commissions) | 3,551 | 9,470 | 1,883 | 14,904 | |||||
Redemptions | (3,829) | (2,795) | (2,128) | (8,752) | |||||
Net Sales | (278) | 6,675 | (245) | 6,152 | |||||
Net Exchanges | (180) | 173 | - | (7) | |||||
Reinvested Dividends and Capital Gains | 245 | (24) | 105 | 326 | |||||
Net Flows | (213) | 6,824 | (140) | 6,471 | |||||
Market Appreciation | 4,870 | 3,894 | 1,232 | 9,996 | |||||
Ending Assets | $ | 34,562 | 21,537 | 8,769 | 64,868 | ||||
December 31, 2006 | |||||||||
Beginning Assets | $ | 27,187 | 6,729 | 7,947 | 41,863 | ||||
Sales (net of commissions) | 3,216 | 4,541 | 968 | 8,725 | |||||
Redemptions | (3,325) | (1,915) | (1,748) | (6,988) | |||||
Net Sales | (109) | 2,626 | (780) | 1,737 | |||||
Net Exchanges | (194) | 185 | - | (9) | |||||
Reinvested Dividends and Capital Gains | 232 | 16 | 111 | 359 | |||||
Net Flows | (71) | 2,827 | (669) | 2,087 | |||||
Market Appreciation | 2,789 | 1,263 | 399 | 4,451 | |||||
Ending Assets | $ | 29,905 | 10,819 | 7,677 | 48,401 | ||||
December 31, 2005 | |||||||||
Beginning Assets | $ | 25,297 | 4,702 | 8,659 | 38,658 | ||||
Sales (net of commissions) | 2,406 | 2,347 | 654 | 5,407 | |||||
Redemptions | (3,060) | (1,149) | (2,121) | (6,330) | |||||
Net Sales | (654) | 1,198 | (1,467) | (923) | |||||
Net Exchanges | (88) | 78 | - | (10) | |||||
Reinvested Dividends and Capital Gains | 161 | 13 | 114 | 288 | |||||
Net Flows | (581) | 1,289 | (1,353) | (645) | |||||
Market Appreciation | 2,471 | 738 | 641 | 3,850 | |||||
Ending Assets | $ | 27,187 | 6,729 | 7,947 | 41,863 | ||||
| Advisors Channel | Wholesale Channel | Institutional Channel | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in millions) | ||||||||||||
December 31, 2010 | |||||||||||||
Beginning Assets | $ | 29,474 | 32,818 | 7,491 | 69,783 | ||||||||
Sales (net of commissions) | 3,616 | 14,505 | 3,588 | 21,709 | |||||||||
Redemptions | (3,526) | (10,560) | (2,874) | (16,960) | |||||||||
Net Sales | 90 | 3,945 | 714 | 4,749 | |||||||||
Net Exchanges | (308) | 190 | 116 | (2) | |||||||||
Reinvested Dividends and Capital Gains | 338 | 237 | 114 | 689 | |||||||||
Net Flows | 120 | 4,372 | 944 | 5,436 | |||||||||
Market Appreciation | 3,587 | 3,693 | 1,174 | 8,454 | |||||||||
Ending Assets | $ | 33,181 | 40,883 | 9,609 | 83,673 | ||||||||
December 31, 2009 | |||||||||||||
Beginning Assets | $ | 23,472 | 17,489 | 6,523 | 47,484 | ||||||||
Disposition of Assets | - - | - - | (488) | (488) | |||||||||
Sales (net of commissions) | 3,202 | 14,745 | 1,703 | 19,650 | |||||||||
Redemptions | (3,052) | (5,951) | (1,942) | (10,945) | |||||||||
Net Sales | 150 | 8,794 | (239) | 8,705 | |||||||||
Net Exchanges | (197) | 150 | 41 | (6) | |||||||||
Reinvested Dividends and Capital Gains | 329 | 124 | 113 | 566 | |||||||||
Net Flows | 282 | 9,068 | (85) | 9,265 | |||||||||
Market Appreciation | 5,720 | 6,261 | 1,541 | 13,522 | |||||||||
Ending Assets | $ | 29,474 | 32,818 | 7,491 | 69,783 | ||||||||
December 31, 2008 | |||||||||||||
Beginning Assets | $ | 34,562 | 21,537 | 8,769 | 64,868 | ||||||||
Sales (net of commissions) | 3,724 | 15,599 | 2,359 | 21,682 | |||||||||
Redemptions | (3,771) | (8,541) | (1,561) | (13,873) | |||||||||
Net Sales | (47) | 7,058 | 798 | 7,809 | |||||||||
Net Exchanges | (150) | 145 | - - | (5) | |||||||||
Reinvested Dividends and Capital Gains | 325 | (271) | 119 | 173 | |||||||||
Net Flows | 128 | 6,932 | 917 | 7,977 | |||||||||
Market Depreciation | (11,218) | (10,980) | (3,163) | (25,361) | |||||||||
Ending Assets | $ | 23,472 | 17,489 | 6,523 | 47,484 | ||||||||
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 22%31% as compared to 2006.2009.
Average Assets Under Management
| 2007 | 2006 | 2005 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average | Percentage of Total | Average | Percentage of Total | Average | Percentage of Total | |||||||||
| (in millions) | ||||||||||||||
Distribution Channel: | |||||||||||||||
Advisors Channel | |||||||||||||||
Equity | $ | 27,048 | 84% | 23,821 | 84% | 21,051 | 82% | ||||||||
Fixed income | 4,154 | 13% | 3,901 | 14% | 3,947 | 15% | |||||||||
Money market | 1,046 | 3% | 798 | 2% | 684 | 3% | |||||||||
Total | $ | 32,248 | 100% | 28,520 | 100% | 25,682 | 100% | ||||||||
Wholesale Channel | |||||||||||||||
Equity | $ | 14,395 | 97% | 8,499 | 95% | 5,181 | 93% | ||||||||
Fixed income | 380 | 3% | 344 | 4% | 325 | 6% | |||||||||
Money market | 64 | 0% | 70 | 1% | 58 | 1% | |||||||||
Total | $ | 14,839 | 100% | 8,913 | 100% | 5,564 | 100% | ||||||||
Institutional Channel | |||||||||||||||
Equity | $ | 7,199 | 92% | 7,120 | 92% | 7,589 | 92% | ||||||||
Fixed income | 614 | 8% | 624 | 8% | 619 | 8% | |||||||||
Money market | - | - | - | - | - | - | |||||||||
Total | $ | 7,813 | 100% | 7,744 | 100% | 8,208 | 100% | ||||||||
Total by Asset Class: | |||||||||||||||
Equity | $ | 48,642 | 89% | 39,440 | 87% | 33,821 | 86% | ||||||||
Fixed income | 5,148 | 9% | 4,869 | 11% | 4,891 | 12% | |||||||||
Money market | 1,110 | 2% | 868 | 2% | 742 | 2% | |||||||||
Total | $ | 54,900 | 100% | 45,177 | 100% | 39,454 | 100% | ||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Average | Percentage of Total | Average | Percentage of Total | Average | Percentage of Total | |||||||||||||||
| (in millions, except percentage data) | ||||||||||||||||||||
Distribution Channel: | |||||||||||||||||||||
Advisors Channel | |||||||||||||||||||||
Equity | $ | 22,430 | 74% | 18,916 | 74% | 24,201 | 80% | ||||||||||||||
Fixed income | 6,614 | 22% | 5,211 | 20% | 4,490 | 15% | |||||||||||||||
Money market | 1,288 | 4% | 1,600 | 6% | 1,428 | 5% | |||||||||||||||
Total | $ | 30,332 | 100% | 25,727 | 100% | 30,119 | 100% | ||||||||||||||
Wholesale Channel | |||||||||||||||||||||
Equity | $ | 32,805 | 92% | 22,556 | 94% | 23,268 | 98% | ||||||||||||||
Fixed income | 2,385 | 7% | 1,147 | 5% | 413 | 2% | |||||||||||||||
Money market | 284 | 1% | 301 | 1% | 152 | 0% | |||||||||||||||
Total | $ | 35,474 | 100% | 24,004 | 100% | 23,833 | 100% | ||||||||||||||
Institutional Channel | |||||||||||||||||||||
Equity | $ | 7,467 | 91% | 6,208 | 90% | 7,445 | 93% | ||||||||||||||
Fixed income | 732 | 9% | 658 | 10% | 584 | 7% | |||||||||||||||
Money market | - | - | - | - | - | - | |||||||||||||||
Total | $ | 8,199 | 100% | 6,866 | 100% | 8,029 | 100% | ||||||||||||||
Total by Asset Class: | |||||||||||||||||||||
Equity | $ | 62,702 | 85% | 47,680 | 85% | 54,914 | 89% | ||||||||||||||
Fixed income | 9,731 | 12% | 7,016 | 12% | 5,487 | 9% | |||||||||||||||
Money market | 1,572 | 3% | 1,901 | 3% | 1,580 | 2% | |||||||||||||||
Total | $ | 74,005 | 100% | 56,597 | 100% | 61,981 | 100% | ||||||||||||||
The following table summarizes our five largest mutual funds as of December 31, 20072010 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
| 2007 | 2006 | 2005 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Ending | Percentage of Total | Ending | Percentage of Total | Ending | Percentage of Total | |||||||||
| (in millions) | ||||||||||||||
By Assets Under Management: | |||||||||||||||
Ivy Global Natural Resources | $ | 8,464 | 15% | 4,519 | 9% | 2,469 | 6% | ||||||||
Ivy Asset Strategy | 8,419 | 14% | 2,008 | 4% | 312 | 1% | |||||||||
Advisors Core Investment | 4,240 | 7% | 4,155 | 9% | 4,054 | 10% | |||||||||
Advisors Asset Strategy | 3,118 | 5% | 1,899 | 4% | 1,110 | 3% | |||||||||
Advisors Science & Technology | 2,851 | 5% | 2,521 | 5% | 2,502 | 6% | |||||||||
Total | $ | 27,092 | 46% | 15,102 | 31% | 10,447 | 26% | ||||||||
(in thousands) | |||||||||||||||
By Management Fees: | |||||||||||||||
Ivy Global Natural Resources(1) | $ | 50,944 | 14% | 31,454 | 10% | 14,612 | 5% | ||||||||
Advisors Core Investment | 25,861 | 7% | 25,635 | 8% | 25,646 | 10% | |||||||||
Ivy Asset Strategy | 24,802 | 7% | 7,094 | 2% | 1,082 | 0% | |||||||||
Advisors Science & Technology | 22,310 | 6% | 20,676 | 7% | 19,291 | 7% | |||||||||
Advisors Asset Strategy | 15,696 | 4% | 10,654 | 3% | 5,663 | 2% | |||||||||
Total | $ | 139,613 | 38% | 95,513 | 30% | 66,294 | 24% | ||||||||
| 2010 | 2009 | 2008 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Ending | Percentage of Total | Ending | Percentage of Total | Ending | Percentage of Total | |||||||||||||||
| (in millions, except percentage data) | ||||||||||||||||||||
By Assets Under Management: | |||||||||||||||||||||
Ivy Asset Strategy | $ | 25,106 | 30% | 20,029 | 29% | 10,430 | 22% | ||||||||||||||
Ivy Global Natural Resources | 6,252 | 7% | 5,736 | 8% | 2,618 | 5% | |||||||||||||||
Advisors Asset Strategy | 3,328 | 4% | 3,235 | 5% | 2,411 | 5% | |||||||||||||||
Advisors Core Investment | 2,888 | 3% | 2,657 | 4% | 2,377 | 5% | |||||||||||||||
Advisors Science & Technology | 2,369 | 3% | 2,289 | 3% | 1,670 | 4% | |||||||||||||||
Total | $ | 39,943 | 47% | 33,946 | 49% | 19,506 | 41% | ||||||||||||||
(in thousands, except percentage data) | |||||||||||||||||||||
By Management Fees: | |||||||||||||||||||||
Ivy Asset Strategy | $ | 123,638 | 27% | 82,313 | 23% | 71,957 | 18% | ||||||||||||||
Ivy Global Natural Resources (1) | 43,839 | 10% | 34,353 | 10% | 56,247 | 14% | |||||||||||||||
Advisors Asset Strategy | 20,402 | 4% | 18,139 | 5% | 19,966 | 5% | |||||||||||||||
Advisors Science & Technology | 18,379 | 4% | 15,953 | 4% | 19,202 | 5% | |||||||||||||||
Advisors Core Investment | 16,976 | 4% | 15,118 | 4% | 21,053 | 5% | |||||||||||||||
Total | $ | 223,234 | 49% | 165,876 | 46% | 188,425 | 47% | ||||||||||||||
Results of Operations
Net Income
| For the Year Ended December 31, | Variance | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2007 vs. 2006 | 2006 vs. 2005 | |||||||
| (in thousands, except percentage data) | |||||||||||
Net Income | $ | 125,497 | 46,112 | 60,121 | 172% | -23% | ||||||
Earnings per share: | ||||||||||||
Basic | $ | 1.55 | 0.57 | 0.74 | 172% | -23% | ||||||
Diluted | $ | 1.52 | 0.55 | 0.73 | 176% | -25% | ||||||
Operating Margin | 23% | 12% | 17% | 11% | -5% |
| For the Year Ended December 31, | Variance | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||
| (in thousands, except percentage data) | ||||||||||||||||
Net Income | $ | 156,959 | 105,505 | 96,163 | 49% | 10% | |||||||||||
Earnings per share: | |||||||||||||||||
Basic | $ | 1.83 | 1.23 | 1.12 | 49% | 10% | |||||||||||
Diluted | $ | 1.83 | 1.23 | 1.12 | 49% | 10% | |||||||||||
Operating Margin | 24% | 20% | 18% | 4% | 2% |
We reported net income of $125.5$157.0 million, or $1.52$1.83 per diluted share, in 20072010 compared to $46.1$105.5 million, or $0.55$1.23 per diluted share, in 20062009 and $60.1$96.2 million, or $.73$1.12 per diluted share, in 2005.2008.
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 20062009 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 $55.0$3.7 million relatedin investment and other income in the consolidated statement of income to our settlement withreflect the SEC,"other than temporary" decline in value of certain of the New York Attorney General andCompany's investments in affiliated mutual funds as the Kansas Securities Commission regarding market timing allegations, $12.0fair value of these investments had been below cost for an extended period.
Operating results for 2008 include a restructuring charge of $16.5 million, of which represented non-deductible penalties. During 2006 we also recorded a goodwill impairment charge of $20.0$7.2 million related to our subsidiary ACF based on the negative impact of the continued declinedeclines in ACF's assets under management and diminished involvement of ACF's investment staff in mutual fund advisory responsibilities, which adversely impactedthe related adverse impact on its earnings potential. Fiscal 2006 also included a restructuring charge of $1.9 million at ACF for employee separation costs, in response to a decline in investment performancepotential, and related loss of assets under management.
In 2005, we recorded a $35.0 million charge for the settlement of outstanding legal matters with Torchmark for various actions and the NASD and a consortium of states relating to variable annuity sales practices, as well as a $6.1 million charge for additional expenses related to a settlement of an NASD arbitration case with a former advisor and $3.2$6.5 million in costs relatedadditional amortization to reduce our deferred sales commission asset. Each of these items is described in detail in the resignation of our former chief executive officer.narrative that follows.
Total Revenues
Total revenues increased 17% and 16% for the fiscal years 2007 and 2006, respectively,25% in 2010 compared to 2009, attributable to growthan increase in average assets under management of 22%31% and 15% for the two years.an increase in gross sales of 10%, while total revenues decreased 9% in
| For the Year Ended December 31, | Variance | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2007 vs. 2006 | 2006 vs. 2005 | |||||||
| (in thousands, except percentage data) | |||||||||||
Investment management fees | $ | 372,345 | 311,525 | 267,681 | 20% | 16% | ||||||
Underwriting and distribution fees | 371,085 | 317,458 | 272,590 | 17% | 16% | |||||||
Shareholder service fees | 94,124 | 89,672 | 81,809 | 5% | 10% | |||||||
Total revenues | $ | 837,554 | 718,655 | 622,080 | 17% | 16% | ||||||
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, | Variance | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||||
| (in thousands, except percentage data) | ||||||||||||||||
Investment management fees | $ | 457,538 | 354,593 | 399,863 | 29% | -11% | |||||||||||
Underwriting and distribution fees | 468,057 | 378,678 | 416,762 | 24% | -9% | ||||||||||||
Shareholder service fees | 119,290 | 105,818 | 102,495 | 13% | 3% | ||||||||||||
Total revenues | $ | 1,044,885 | 839,089 | 919,120 | 25% | -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 $60.8$102.9 million, or 20%29%, in 20072010 and $43.8decreased $45.3 million, or 16%11%, in 2006.2009.
Revenues from investment management services provided to our retail mutual funds, which are distributed through the Advisors, Wholesale and the WholesaleInstitutional channels, were $332.8$424.1 million in 20072010 and increased $62.6$97.8 million, or 23%30%, compared to 2006,2009, while the related retail average assets increased 26%32%. Investment management fee revenues increased less than the related retail average assets due to significant sales growth in our Asset Strategy funds, which have lower than averagethe effect of recording management fee rates. Investmentwaivers, mostly money market, as an offset to investment management fee revenues in both 2007 and 2006 were also impacted by the decrease in management fee rates on certain funds in compliance with the New York Attorney General settlement that took placefees beginning in the fourththird quarter of 2006 and has reduced management fees by approximately $5.0 million on an annual basis.2010. Revenues from investment management services provided to our retail mutual funds were $270.2$326.3 million in 2009 and increased $46.2decreased $38.4 million, or 21%11%, in 2006 compared to 2005,2008, while the related retail average assets increased 20%decreased 8%. Retail sales in 2007 and 2006 were $13.0$18.1 billion, $17.9 billion and $7.8$19.3 billion respectively, representing a 68%in 2010, 2009 and 63% increase over sales2008, 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 2006 and 2005, respectively, with the majority of the growth in retail sales occurring in our WholesaleInstitutional channel.
Institutional and separate account revenues were $39.5$33.4 million, $41.3$28.3 million and $43.7$35.2 million in 2007, 20062010, 2009 and 2005,2008, 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 20072009 compared to the previous year was attributablepartially due to the sale of ACF, we experienced a further decline in ACF's average assets by 27%of 12%, and a management fee rate decrease on certain institutional accounts. The decrease
We ended the year with $83.7 billion in accountassets 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 in 2006 was primarily attributable to ACF, based on a decline in their average assets by 42%.for 2011.
Long-term redemption rates (which exclude money market fund redemptions) in the Advisors channel improved to 9.1%were 9.3% in 20072010 compared to 9.2%8.4% and 9.6%8.9% in 20062009 and 2005,2008, respectively. In the Wholesale channel, long-term redemption rates were 18.5%29.3% in 2007,2010, compared to 24.0% in 2009 and 35.5% in 2008. The Wholesale channel's elevated redemption rate in 2008 was a decrease from 21.0%direct consequence of the volatility in 2006 and 20.3% in 2005.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 27.2%35.1% in 20072010 compared to 22.6%28.3% in 20062009 and 25.8%19.4% in 2005. The higher institutional2008. Subadvisory and defined contribution pension business comprise close to 60% of
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 2007 comparedvarious classes that are structured in ways that conform to 2006,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 based on total redemptions0.50%. 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 periodpurpose of $2.1 billion, reflected redemptions across multiplevoting 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 disciplines,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 large cap growth, small cap growth, core equityindividual term life, group term life, whole life, accident and international growth. The elevated redemption rate in 2005 is due to the loss of one block of client assets moving tohealth, long-term care, Medicare supplement and disability insurance. We receive commissions and compensation from various underwriters for distributing these products. We are not an alternative investment as well as performance driven outflows at ACF. ACF's redemptions were $174.6 million in 2007 compared to $545.4 million in 2006 and $558.9 million in 2005.underwriter for any insurance policies.
Underwriting and Distribution Fee Revenues and Expenses
The following table illustratestables illustrate our underwriting and distribution fee revenues and expenses segregated by distribution channel for the years ended December 31, 2007, 20062010, 2009 and 2005:2008:
| Total | | | | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2007 vs. 2006 | 2006 vs. 2005 | | ||||||||
| (in thousands, expect percentage data) | | ||||||||||||
Revenue | $ | 371,085 | 317,458 | 272,590 | 17% | 16% | ||||||||
Expenses: | ||||||||||||||
Direct | 300,929 | 244,454 | 202,162 | 23% | 21% | |||||||||
Indirect | 121,345 | 112,084 | 101,175 | 8% | 11% | |||||||||
Total Expenses | 422,274 | 356,538 | 303,337 | 18% | 18% | |||||||||
Net Underwriting & Distribution | $ | (51,189) | (39,080) | (30,747) | -31% | -27% | ||||||||
| Advisors Channel | | | | ||||||||||
2007 | 2006 | 2005 | 2007 vs. 2006 | 2006 vs. 2005 | ||||||||||
Revenue | $ | 238,210 | 225,313 | 206,582 | 6% | 9% | ||||||||
Expenses: | ||||||||||||||
Direct | 163,513 | 154,580 | 141,102 | 6% | 10% | |||||||||
Indirect | 84,777 | 82,337 | 76,001 | 3% | 8% | |||||||||
Total Expenses | 248,290 | 236,917 | 217,103 | 5% | 9% | |||||||||
Net Underwriting & Distribution | $ | (10,080) | (11,604) | (10,521) | 13% | -10% | ||||||||
| Wholesale Channel | | | | ||||||||||
2007 | 2006 | 2005 | 2007 vs. 2006 | 2006 vs. 2005 | ||||||||||
Revenue | $ | 132,875 | 92,145 | 66,008 | 44% | 40% | ||||||||
Expenses: | ||||||||||||||
Direct | 137,416 | 89,874 | 61,060 | 53% | 47% | |||||||||
Indirect | 36,568 | 29,747 | 25,174 | 23% | 18% | |||||||||
Total Expenses | 173,984 | 119,621 | 86,234 | 45% | 39% | |||||||||
Net Underwriting & Distribution | $ | (41,109) | (27,476) | (20,226) | -50% | -36% | ||||||||
| Total | | | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 vs. 2009 | 2009 vs. 2008 | ||||||||||||||
| 2010 | 2009 | 2008 | |||||||||||||
| (in thousands, except percentage data) | |||||||||||||||
Revenue | $ | 468,057 | 378,678 | 416,762 | 24% | -9% | ||||||||||
Expenses: | ||||||||||||||||
Direct | 409,912 | 325,836 | 361,005 | 26% | -10% | |||||||||||
Indirect | 133,692 | 124,089 | 135,817 | 8% | -9% | |||||||||||
Total Expenses | 543,604 | 449,925 | 496,822 | 21% | -9% | |||||||||||
Net Underwriting & Distribution | $ | (75,547) | (71,247) | (80,060) | -6% | 11% | ||||||||||
| Advisors Channel | | | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 vs. 2009 | 2009 vs. 2008 | ||||||||||||||
| 2010 | 2009 | 2008 | |||||||||||||
Revenue | $ | 252,107 | 213,258 | 235,343 | 18% | -9% | ||||||||||
Expenses: | ||||||||||||||||
Direct | 177,158 | 147,469 | 163,183 | 20% | -10% | |||||||||||
Indirect | 87,731 | 83,917 | 92,384 | 5% | -9% | |||||||||||
Total Expenses | 264,889 | 231,386 | 255,567 | 14% | -9% | |||||||||||
Net Underwriting & Distribution | $ | (12,782) | (18,128) | (20,224) | 29% | 10% | ||||||||||
| Wholesale Channel | | | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 vs. 2009 | 2009 vs. 2008 | ||||||||||||||
| 2010 | 2009 | 2008 | |||||||||||||
Revenue | $ | 215,950 | 165,420 | 181,419 | 31% | -9% | ||||||||||
Expenses: | ||||||||||||||||
Direct | 232,754 | 178,367 | 197,822 | 30% | -10% | |||||||||||
Indirect | 45,961 | 40,172 | 43,433 | 14% | -8% | |||||||||||
Total Expenses | 278,715 | 218,539 | 241,255 | 28% | -9% | |||||||||||
Net Underwriting & Distribution | $ | (62,765) | (53,119) | (59,836) | -18% | 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. The majorityA 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. To a lesser extent,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
third party intermediaries, asset-based fees earned on our asset allocation products, and commissions earned on the sale of other insurance products.
We divide the costs of underwriting and distribution into two components—direct costs and indirect costs. Direct selling costs fluctuate with sales volume, such as advisor commissions and commission overrides paid to field management, advisor incentive compensation, commissions paid to third parties and to our own wholesalers, and related overrides in our Wholesale channel. To a lesser extent, directDirect 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,channels; support and management of our financial advisors such as field office overhead, sales programs and technology infrastructure,infrastructure; and costs of managing and supporting our Wholesalewholesale efforts through technology infrastructure and personnel. While the Institutional channel does have marketing expenses, those expenses are accounted for in our compensation and related costs and general and administrative expense lines instead of underwriting and distribution because of the channel's integration with our investment management division, and its relatively small size.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. Rule 12b-1 service and distribution fees are received predominantly from the Advisors Funds Class A shares under a sales and servicing reimbursement plan agreement. This agreement allows reimbursement to us from the Advisors Funds Class A shares of certain Rule 12b-1 eligible expenses, not to exceed a maximum of 25 basis points of average daily net assets under management. We also have compensatory or reimbursement Rule 12b-1 service and/or distribution plans for the Ivy Funds, Target Funds, InvestEd and Advisor Funds. All Rule 12b-1 service and distribution fee revenue received from the Funds is recorded on a gross basis.
We anticipate operating margin pressure in 2008 based on strong sales growth in our Wholesale channel, which has a higher cost to gather assets and requires cash outlays for wholesaler commissions and commissions to third parties on deferred load product sales. The growth we have experienced in our Wholesale channel also requires that we add additional resources and infrastructure to manage this growth. During the fourth quarter of 2007, we had a 70% annualized organic growth rate in this channel.
Underwriting and distribution revenues earned in 2010 increased by $53.6$89.4 million, or 17%24%, when compared with the prior year.to 2009. A majority of the increase in revenues was due to higher Rule 12b-1 asset-based service and distribution fees of $45.7$56.7 million as a result of an increase in average mutual fund assets under management. Additionally, revenuesRevenues from fee-based asset allocation products increased $3.6$20.5 million primarily attributablecompared to modified fee-based asset allocation products introduced in April 2007. The introduction of these products was a contributing factor to a decline in front-load product sales and a resulting decrease of $2.5 million related to revenue on front-load product sales sold in the Advisors channel.prior year. Higher advisory fees Rule 12b-1 service fee revenues and point of sale commissions earned by Legend added another $6.8increased revenue by $7.9 million in revenue 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 as their assets under administration increased.over year. Offsetting these increases, insurance-related revenues decreased $2.7 million.
Underwriting and distribution revenues increasedearned in 2009 decreased by $44.9$38.1 million, or 16%9%, in 2006 compared to 2005.2008. A majority of the increasedecrease in revenues was due to higherlower Rule 12b-1 asset-based service and distribution fees of $31.1$23.8 million as a result of an increasea decrease in average mutual fund assets under management. Underwriting revenue onRevenues from front-load product sales sold in the Advisors channel contributed an additional $10.0decreased 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 sales during 2006. Highermutual fund redemptions in 2008, concentrated in the second half of the year. Lower advisory fees Rule 12b-1 service fee revenues and point of sale commissions earned by Legend added another $6.9decreased revenue by $3.3 million in revenue compared to the prior year as their assets under administration increased.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 $65.7$93.7 million, or 18%21%, in 2007, when compared with the prior year.to 2009. A majoritysignificant part of this increase was attributed to higher direct expenses in the Wholesale channel of $47.5$54.4 million as a result of higher sales volume and an increase in average Wholesalewholesale assets under management. Specifically, wemanagement, 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 increased dealer compensation paid to third party distributors, higher wholesaler commissions and higher amortization expense of deferred sales commissions, partially offset by lower wholesaler commissions. Direct expenses in the Advisors channel
increased $8.9$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 $23.3$12.3 million, higher point of sale commissions on front-load product sales
of $4.6 million, partially offset by $12.6lower commissions on insurance products of $1.7 million. Indirect expenses increased a total of $9.6 million of deferred sales commissions capitalized in 2007 in association with our fee-based asset allocation products and a $1.8 million decrease in financial planning fee expenses.compared to 2009. The increase in indirect expenses in the Advisors channel of $2.4$3.8 million was due to increased sales supportemployee compensation and field officebenefits expenses partially offset by decreases in convention and recruiting expenses.information technology costs. The indirect expenses increase of $6.8$5.8 million in the Wholesale channel was driven by higher costs associated with developing our non-proprietary distribution outlets. These costs include a $5.2 million increase fordue to increased employee compensation and benefits expenses, higher marketing costs for promotion and distribution of our products through the Wholesale channel based on higher sales volumebusiness meeting and a $1.6 million increase in base salaries and payroll taxes primarily as a result of adding more wholesalers during 2007.travel expenses.
Underwriting and distribution expenses increasedin 2009 decreased by $53.2$46.9 million, or 18%9%, in 2006 compared to 2005.with the prior year. A majoritysignificant part of this increasedecrease was attributed to higherlower direct expenses in the Wholesale channel of $28.8 million as a result$19.5 million. Specifically, we incurred lower amortization expense of higherdeferred sales volume and an increase in average Wholesale assets under management. Specifically, higher Rule 12b-1 asset-based service and distribution expenses, additionalcommissions, lower dealer compensation paid to third party distributors and higherlower wholesaler commissions, were paid to our wholesalers. Direct expenses in the Advisors channel increased $13.5 million due to an increase in point-of-sale commissions paid on front-load product sales andoffset 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 paid.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 increasedecrease in indirect expenses in the Advisors channel of $6.3$8.5 million was due to increaseddecreased employee compensation and benefits expenses, lower convention costs and lower business meetings and travel expenses, partially offset by higher field office expenses, information technology sales supportcosts and convention expenses.group health insurance costs. The indirect expenses increasedecrease of $4.6$3.3 million in the Wholesale channel was driven by higher costs associated with developing our non-proprietary distribution outlets. These costs include a $3.6 million increase for higher marketing costs for promotion and distribution of our products through the Wholesale channel based on higher sales volume and higherdue to lower business meeting and travel expenses and a $1.0 million increase in base salariesmarketing and payroll taxes primarily as a result of adding more wholesalers during 2006.promotion costs.
Shareholder Service Fee Revenues
Shareholder service fee revenues primarily include transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and administration fees. Portfolio accounting and administration fees are asset-based revenues or account-based revenues while transfer agency fees and custodian fees from retirement plan accounts are based on the number of accounts. During 2007 and 2006,2010, shareholder service fee revenuerevenues increased by 5%$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 10%, respectively, compared$5.2 million was attributable to 10% increases each yearaccount-based revenues, due to a 7% increase in the average number of accounts. The
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 shareholder accounts grew to 3.06 million in 2007 compared to 2.79 million in 2006 and 2.53 million in 2005. Effective September 1, 2006, our servicing contract with the Funds was renegotiated, resulting in reduced fees received by us for servicing wholesale accounts. Historically our account growth has mirrored our growth in revenue; however, with this reduced fee structure for wholesale accounts, our future revenue growth will not necessarily be tied to overall account growth. A portion of the fee reduction for wholesale accounts was offset by negotiating a networking fee reimbursement with the Funds for amounts paid to third party broker/dealers.
Total Operating Expenses
Operating expenses increased $13.2$125.1 million, or 2%19%, in 20072010 compared to 20062009 primarily due to increased underwriting and distribution expenses and subadvisory fees, offset by litigation-related charges recorded in 2006 in generalcompensation and administrative and an impairment charge related to goodwill, also recorded in 2006. Operating expenses increased $111.2 million, or 21%, in 2006 compared to 2005 due to increased underwriting and distribution expenses, subadvisory fees, litigation-related charges recorded in general and administrative in both years and an impairment charge related to goodwill recorded in 2006.costs. Underwriting and distribution expenses are discussed above.
| For the Year Ended December 31, | Variance | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2007 vs. 2006 | 2006 vs. 2005 | |||||||
| (in thousands, except percentage data) | |||||||||||
Underwriting and distribution | $ | 422,274 | 356,538 | 303,337 | 18% | 18% | ||||||
Compensation and related costs | 115,905 | 110,101 | 99,673 | 5% | 10% | |||||||
General and administrative | 48,487 | 100,604 | 87,029 | -52% | 16% | |||||||
Subadvisory fees | 43,844 | 30,758 | 18,218 | 43% | 69% | |||||||
Depreciation | 12,412 | 11,725 | 10,275 | 6% | 14% | |||||||
Goodwill impairment | - | 20,000 | - | NM | NM | |||||||
Total operating expenses | $ | 642,922 | 629,726 | 518,532 | 2% | 21% | ||||||
Operating expenses decreased $84.5 million, or 11%, in 2009 compared to 2008 primarily due to decreased underwriting and distribution expenses and subadvisory fees, as well as a $16.5 million
restructuring charge recorded in general and administrative and a $7.2 million goodwill impairment charge, both recorded in 2008.
| For the Year Ended December 31, | Variance | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 vs. 2009 | 2009 vs. 2008 | ||||||||||||||
| 2010 | 2009 | 2008 | |||||||||||||
| (in thousands, except percentage data) | |||||||||||||||
Underwriting and distribution | $ | 543,604 | 449,925 | 496,822 | 21% | -9% | ||||||||||
Compensation and related costs | 142,255 | 124,463 | 119,057 | 14% | 5% | |||||||||||
General and administrative | 66,703 | 58,034 | 76,370 | 15% | -24% | |||||||||||
Subadvisory fees | 27,823 | 23,202 | 41,122 | 20% | -44% | |||||||||||
Depreciation | 14,030 | 13,653 | 13,198 | 3% | 3% | |||||||||||
Goodwill impairment | - | - | 7,222 | NM | NM | |||||||||||
Total operating expenses | $ | 794,415 | 669,277 | 753,791 | 19% | -11% | ||||||||||
Compensation and Related Costs
Compensation and related costs in 20072010 increased $5.8$17.8 million, or 5%14%, compared to 2006. During 2006, we incurred charges of $1.9 million (which included $1.5 million of share-based compensation expense) at ACF in response to a decline in investment performance and related loss of assets under management. Excluding this charge, compensation and related costs increased by $7.7 million. Base salaries and payroll taxes contributed $3.8 million to the increase, primarily due to an increase in headcount of 4.3% and annual merit increases during the current year.2009. Share-based compensation accounted for $3.3$9.8 million of the increase primarily due to higher amortization expense associated with our April 2009, December 20062009 and April 20072010 grants of nonvested stock compared to grants whichthat became fully vested in December 20062010. Base salaries and throughout 2007. Incentive compensation also increased $2.0payroll taxes contributed $5.8 million during 2007to the increase, due to investment performance incentives earned by our investment management divisionan increase in average headcount of 6.1% and increased executive management bonuses.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 $1.0$1.5 million, primarily due to technology and compliance initiatives, associated with expansionand lower group insurance costs of our brokerage capabilities.$800 thousand compared to 2009 based on favorable claims experience.
Compensation and related costs in 20062009 increased $10.4$5.4 million, or 10%5%, compared to 2005. During 2005, we recorded $2.72008. An incentive compensation expense increase of $8.8 million in charges associated withwas the resignationprimary driver, as well as increased pension plan costs of $2.2 million based on unfavorable investment returns on our former CEO. Excluding this chargepension 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 ACF charge recordedfact that there were no salary increases in 2006 mentioned previously, compensation and related2009. Savings plan costs increased by $11.2also declined $1.3 million. Share-based compensation accounted for $4.8increased $1.6 million of this increasecompared to 2008 primarily due to higher amortization expense associated with our April 2006 grant2008, December 2008 and April 2009 grants of nonvested stock. Fiscal 2006 was the first yearstock compared to grants that became fully vested in which the expense from four years of grants (all with2009 and, to a four-year vesting period) is reflected in compensation and related costs. Additionally, base salaries and payroll taxes contributed $3.6 million to the increase, primarilylesser extent, due to an increasehigher non-employee advisor (independent contractor) stock award amortization expense in headcount of 3.4% and annual merit2009. Non-employee stock awards are adjusted to market each period based on the fluctuation in our share price. These share-based compensation increases during 2006. Incentive compensation increased $3.7 million during 2006, principally due to a changewere partially offset by lower amortization expense in 2009 for shares vested under the compensation structure for our CEO and investment performance incentives earned by our investment management division.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.
General and administrative expenses decreased $52.1increased $8.7 million in 20072010 compared to 2006. Fiscal year 2006 included a $55.0 million charge for the settlement with the SEC and state regulators. Excluding this charge, general and administrative expenses increased $2.9 million compared to 2006.2009. Higher costs for third party subaccounting and networking fees for certain share classes and computer services and fund expenses were primarily responsible for current yearthe increase.
General and administrative expenses increased $13.6decreased $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 2006 compared to 2005. Both years included chargesemployee compensation and other benefit costs, $795 thousand for legal settlements: $55.0 millionaccelerated vesting of nonvested stock and $717 thousand in 2006project development costs, including $500 thousand for the settlement with the SEC and state regulators; $35.0early termination of a contract. We also recorded a $1.6 million in 2005charge for the settlement of outstanding legal matters with Torchmark for various actions and the NASD and a consortium of states relating to variable annuity sales practices; $6.1 millionmiscellaneous litigation in 2005 in additional expenses related to a settlement of an NASD arbitration case with a former advisor; and $3.2 million in costs related to the resignation of our former chief executive officer.2008. Excluding these charges, for litigation, regulatory and other matters, general and administrative expenses increased $2.9 milliondecreased $200 thousand compared to 2005. Higher2008. 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 computer services contributed to the increase.third party subaccounting and networking fees and fund expenses.
Goodwill Impairment
In 2006,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 $20.0$7.2 million related to ACF. Factors that led to this conclusion included, but were not limited to,write off the negative impactremaining balance of the continued declineACF's goodwill based on declines in ACF's assets under management and diminished involvement of ACF's investment staff in mutual fund advisory responsibilitiesthe related adverse impact on its earnings potential. ACF was sold during the secondthird quarter of 2006. Continued asset redemptions placed significant risk on ACF's ability to achieve and maintain profitability, and therefore had adversely impacted its earnings potential.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. Our salesGross 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 the Wholesale channel broadenedaverage assets from 2009 to 2010 and a decrease in both 2006 and 2007average assets of 45% from 2008 to include a larger percentage of sales of our own managed products. The growth trend in sales of our own managed products should help to improve our future operating margin.
2009. Subadvisory expenses forfollowed the years ended 2007, 2006 and 2005 were $43.8 million, $30.8 million and $18.2 million, respectively. Significant sales growth in our Wholesale channel oversame pattern for the past three years, particularly salesyears. We began direct management of ourthree previously subadvised specialty mutual fund products, has driven increased expenses. As this expense isfunds 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, a continuation of the growth trend for these assets wouldhigher asset base will likely result in future increasesan increase to both gross management fee revenues and subadvisory expenses. Subadvised average assets under management were $10.4 billion, $7.1 billion and $4.0 billionexpenses for the years ended December 31, 2007, 2006 and 2005, respectively.coming year.
Other Income and Expenses
Investment and Other Income
Investment and other income for 20072010 increased by $4.0$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 2006. The increaseyear change. Offsetting these gains was primarily attributable to $2.1 million related to increased interest on cash balances, a $1.0$1.5 million write-down of other investmentsthe Company's investment in 2006 and higher earnings of $0.5 million from mutual funds in the trading portfolio.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 2006 increased by $5.8an increase of $10.1 million year over 2005, primarily reflecting increased interestyear.
Gains on short-term commercial paper investmentsmutual fund holdings in our trading portfolio were $4.6 million compared to losses of $3.3$5.5 million due to a combinationin 2008. Gains from the sale of higher average balancesavailable for sale mutual fund holdings in 2009 were $2.6 million and interest rates. We also recordedthere were no gains from the sale of available-for-sale securities of $3.3 millionavailable for sale mutual fund holdings in 2006.2008. These increases were partially offset by a decreaselower 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 trading portfolio returnsholdings of $1.2 million recorded during 2006.$800 thousand.
Interest Expense
Interest expense decreased $0.3was $12.7 million in 2007both 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 the prior year due to the refinancing of $200 million in senior notes in January of 2006, which had a lower interest rate than the old notes.2010.
Interest expense decreased $2.1 millionincreased $600 thousand in 20062009 compared to 2005, partially2008 due to interest incurred on short-term borrowingsincreased costs associated with our $125.0 million credit facility, which was renewed in 2005 of $0.9 million. There were no short-term borrowings in 2006. In 2006, we refinanced $200 million in senior notes at a rate of 5.6%, compared to an average interest rate of 6.25% (including the benefit of our interest rate swap) in 2005, resulting in decreased 2006 interest expense of $1.2 million.October 2009.
Income Taxes
Our effective income tax rate was 37.0%36.3%, 48.3%34.9%, and 37.3%38.5% in 2007, 20062010, 2009 and 2005,2008, 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 2007 decreased2010 was primarily a result of less utilization of the capital loss in 2010 as compared to 2006 primarily2009. 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 non-deductibleACF goodwill impairment charge, and non-deductible fines recorded during 2006.which was nondeductible for tax purposes. Our 20062010 effective tax rate, removing the effect of these non-deductible chargesthe 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 recordedrelated to capital expenditures made by the Company in 2006, would have been 36.4%. The effective tax rate in 2007 has increased slightly from the 2006 rate excluding non-deductible charges2010 as compared to 2009 and state tax incentives due to changes in state legislation in jurisdictions in which the Company operates. The effective tax rate in 2005 also reflected2009 decreased slightly as compared to 2008 due to the effectCompany generating larger state tax incentives in 2009 than those generated in 2008.
Table of non-deductible fines recorded during 2005.Contents
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, | Variance | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2007 vs. 2006 | 2006 vs. 2005 | ||||||
| (in thousands, except percentage data) | ||||||||||
Balance Sheet Data: | |||||||||||
Cash and cash equivalents | $ | 263,914 | 163,887 | 136,694 | 61% | 20% | |||||
Cash and cash equivalents - restricted | 99,886 | 32,629 | 26,081 | 206% | 25% | ||||||
Investment Securities | 50,913 | 48,129 | 51,701 | 6% | -7% | ||||||
Short-term debt | - - | - - | 1,746 | NA | NA | ||||||
Long-term debt | 199,955 | 199,942 | 198,230 | 0% | 1% | ||||||
Cash Flow Data: | |||||||||||
Operating cash flows | 128,111 | 93,011 | 100,787 | 38% | -8% | ||||||
Investing cash flows | (5,146) | (2,332) | 66,140 | -121% | -104% | ||||||
Financing cash flows | (22,938) | (63,486) | (91,487) | 64% | 31% |
| For the Year Ended December 31, | Variance | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 vs. 2009 | 2009 vs. 2008 | |||||||||||||
| 2010 | 2009 | 2008 | ||||||||||||
| (in thousands, except percentage data) | ||||||||||||||
Balance Sheet Data: | |||||||||||||||
Cash and cash equivalents | $ | 195,315 | 244,359 | 210,328 | -20% | 16% | |||||||||
Cash and cash equivalents - restricted | 81,197 | 72,941 | 48,713 | 11% | 50% | ||||||||||
Investment securities | 192,611 | 70,524 | 58,684 | 173% | 20% | ||||||||||
Long-term debt | 189,999 | 199,984 | 199,969 | - -5% | 0% | ||||||||||
Cash Flow Data: | |||||||||||||||
Operating cash flows | 140,643 | 155,179 | 123,911 | -9% | 25% | ||||||||||
Investing cash flows | (67,806) | (29,488) | (23,963) | 130% | 23% | ||||||||||
Financing cash flows | (121,881) | (91,660) | (153,534) | -33% | 40% |
Our operations provide much of the cash necessary to fund our priorities, as follows:
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. The growth we have experienced in our Wholesale channel also requires that we add additional resources and infrastructure to manage this growth. We also continue to invest in our Advisors channel by providing additional support to our advisors through training, wholesaling efforts and enhanced technology tools.
Pay Dividends
The Board of Directors approved an increase in the quarterly dividend on our common stock from $.15$0.19 per share to $.17$0.20 per share beginning with our firstfourth quarter 20072010 dividend, paid on MayFebruary 1, 2007.
2011. Dividends on our common stock resulted in financing cash outflows of over $55.0$65.2 million, $65.0 million and $63.7 million in 20072010, 2009 and approximately $50.0 million in both 2006 and 2005.
The Board of Directors approved an increase in the quarterly dividend on our common stock from $.17 per share to $.19 per share beginning with our first quarter 2008, dividend, payable on May 1, 2008.respectively.
Repurchase Our Stock
In 2007,2010, we purchased 2.4repurchased 2.0 million of our shares, compared to 1.11.9 million shares and 0.33.8 million shares in 20062009 and 2005,2008, 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 will plan to repurchase shares, at a minimum, to replace thoseoffset dilution from shares issued for employee share plans (approximately one million shares each year).plans. During 2008,2011, we also expect toestimate that we will repurchase approximately 290,000482,000 shares from employees who elect to tender shares to cover their minimum tax withholdings.withholdings arising from the vesting of nonvested shares.
Operating Cash Flows
Cash from operations is our primary source of funds and increaseddecreased $14.5 million in the current year. Increased revenues combined withThe 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,expense.
The payable to investment companies for securities account can fluctuate significantly based on trading activity at the end of a reporting period, and timing of litigation and regulatory settlement paymentsfrom December 31, 2009 to December 31, 2010 there was a significant decrease in 2006 and 2005, partially offsetFund shareholder investments received prior to the impact of considerably lower net earnings in 2006 and 2005 compared to 2007.
We anticipatebalance sheet date that our 2008 contribution to our Pension Plan will be made from cash generated from operations and will bewere in the rangeprocess of $5.0 to $10.0 million.
Investing Cash Flows
Investing activities consist primarilybeing invested in the Funds. On December 31, 2009, the Company changed the trustee of its 401(k) plan. Approximately $100 million of the purchase and sale of available-for-salepayable to investment companies for securities as well as capital expenditures. The increase in cash provided by investing activities in fiscal 2005 reflects the return of a $57.4 million cash appeal bondbalance was due to the transfer of assets between trustees. As a legal settlement with Torchmarkresult, on our consolidated balance sheet there was a decrease in both the payable to investment companies and proceeds from sales and maturities of available-for-sale mutual funds and debt securities.
We expect our 2008 capital expenditures to increase by $10.0 - 12.0 million due to upgrades of our home office facilities and other equipment.
Financing Cash Flows
As noted previously, dividends and stock repurchases accounted for a majority of our financing cash outflows in 2007. An increase in our stock price during 2007 resulted in substantial stock option exercises, and cash provided by stock option exercises increased to $84.6 milliondecrease in the current year.
receivable account from December 31, 2009 to December 31, 2010. On January 13, 2006, we issued $200 million in principal amount 5.60% senior notes due 2011 resulting in net proceedsthe statement of approximately $198.2 million (net of discounts, commissionscash flows, there were corresponding increases and estimated expenses). We used these proceeds, together withdecreases to cash on hand,from operations. There is no impact to repay the entire $200 million aggregate principal amount outstanding of our 7.50% senior notes due January 18, 2006. The notes represent senior unsecured obligations and are rated "Baa2" by Moody's and "BBB" by Standard & Poor's. Interest is payable semi-annually on January 15 and July 15 at a rate of 5.60% per annum. The Company, at its option, may call these notes at any time pursuant to a make whole redemption provision, which would compensate holders for any changes in interest rate levels of the notes upon early extinguishment. The Company currently has no intention to call these notes.
In 2005, we entered into a three year revolving credit facility (the "Credit Facility") with various lenders, which provides for initial borrowings of up to $200 million. Borrowings under the Credit Facility bear interest at various rates including adjusted LIBOR or an alternate base rate plus, in each case, an incremental margin based on the Company's credit rating. The Credit Facility also providesliquidity and operations for a facility fee on the daily aggregate amount of commitment under the revolving facility (whether or not utilized). The facility fee is also based on the Company's credit rating level. The Credit Facility contains financial covenants with respect to leverage and interest coverage, both of which we werevariations in compliance with throughout fiscal 2007. At December 31, 2007, there were no borrowings outstanding under the Credit Facility.
Uses of cash in 2005 included payments on short-term borrowings of $35.0 million.
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 2008. Expected short-term uses of cash include expected dividend payments, interest payments on outstanding debt, income tax payments, share repurchases, payment of deferred commissions to our financial advisors and third parties, capital expenditures, pension funding and home office leasehold improvements and could include strategic acquisitions.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, 2007, 20062010, 2009 and 20052008 totaled $49.6$59.0 million, $19.9$54.7 million and $11.8$69.5 million, respectively. The primary drivers of the increasecommission funding in 20072010 were Class C shares, for which $25.9 million was funded, and fee-based asset allocation products, for which $26.9$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 $14.4$40.3 million of commissions were funded, in 2007, respectively. Management expects future cash requirements for sales commissions tomay exceed the level experienced in previous years due to increased sales in our fee-based asset allocation products and steady sales growth in the sale of Class B and 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
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, 2007.2010. 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.
| Total | 2008 | 2009- 2010 | 2011- 2012 | Thereafter/ Indeterminate | |||||
---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||||
Long-term debt obligations, including interest | $ 239,155 | 11,200 | 22,400 | 205,555 | - - | |||||
Non-cancelable operating lease commitments | 65,288 | 15,041 | 22,840 | 13,195 | 14,212 | |||||
Purchase obligations | 160,634 | 33,126 | 51,099 | 50,345 | 26,064 | |||||
Unrecognized tax benefits | 6,195 | 1,996 | - | - | 4,199 | |||||
$ 471,272 | 61,363 | 96,339 | 269,095 | 44,475 | ||||||
| Total | 2011 | 2012- 2013 | 2014- 2015 | Thereafter/ Indeterminate | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||||||||||
Long-term debt obligations, including interest | $ | 195,320 | 195,320 | - | - | - | ||||||||||
Non-cancelable operating lease commitments | 100,240 | 20,281 | 30,965 | 16,501 | 32,493 | |||||||||||
Purchase obligations | 85,204 | 40,814 | 38,464 | 4,731 | 1,195 | |||||||||||
Unrecognized tax benefits | 6,613 | - | - | - | 6,613 | |||||||||||
$ | 387,377 | 256,415 | 69,429 | 21,232 | 40,301 | |||||||||||
Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure and home office improvements,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 among others, 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, 2007,2010, our total goodwill and intangible assets were $228.4$221.2 million, or 26%23%, of our total assets. Two significant considerations arise with respect to these assets that require management
estimates and judgment: (i) the valuation in connection with the initial purchase price allocation, and (ii) the ongoing evaluation of impairment.
In connection with all of our acquisitions, an evaluation is completed to determine reasonable purchase price allocations. The purchase price allocation process requires management estimates and judgments as to expectations for the various products, distribution channels, and business strategies. For example, certain growth rates and operating margins were assumed for different products and distribution channels. If actual growth rates or operating margins, among other assumptions, differ from the estimates and judgments used in the purchase price allocation, the amounts recorded in the financial statements for identifiable intangible assets and goodwill could be subject to charges for impairment in the future.
We complete an ongoing review of the recoverability of goodwill and intangible assets using a fair-value based approach on an annual basis or more frequently whenever events occur or circumstances change whichthat 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 Financial Accounting Standards BoardCodification ("FASB"ASC") Interpretation No. 48,"Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.Topic," ASC 740. During 20072010, 2009, and 2008, the Company settled twonine open tax years, three open tax years, and five open tax years, respectively, that were undergoing audit by a state jurisdictionjurisdictions in which the Company operates. In 2006 the Company settled five open tax years, 2000 through 2004, that were undergoing audit by the United States Internal Revenue Service. 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. AsDuring 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, 2007,2010 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
separate company basis. These entities have recognized a deferred tax asset for such carryforwards. As of
December 31, 2006 and 2005, only one of the Company's subsidiaries has state net operating loss carryforwards and has recognized a deferred tax asset for such loss carryforwards. The carryforwards, if not utilized, will expire between 20092011 and 2027.2030. 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 in the full amount of the deferred tax asset has been establishedrecorded at December 31, 2007, 20062010 and 2005.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.
PensionsPension 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.
To reflect market interest rates, in 2007In 2010, we increaseddecreased the discount rate for our pension and postretirement plans to 6.75%6.00% from the 6.0%6.25% used in 20062009 and the 5.75%6.75% used in 2005.2008 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 20062009 and 2005. Plan2008. Our pension plan assets areat December 31, 2010 were 100% invested in styles including large cap growth, assetthe Asset Strategy style and we have targeted this same investment strategy core plus fixed income and science and technology. Our portfolio mix at year-end was 44% asset strategy, 35% large cap growth, 10% core plus fixed income, 9% science and technology and 2% cash. Our targeted allocation percentages are 40% asset strategy, 35% large cap growth, 13% core plus fixed income, 10% science and technology and 2% cash.going forward.
The effect of hypothetical changes to selected assumptions on the Company's retirement benefit plans would be as follows:
| | December 31, | December 31, | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Assumptions | Change | Increase (Decrease) PBO/APBO (1) | Increase (Decrease) Expense (2) | |||||||
| (in thousands) | |||||||||
Pension | ||||||||||
Discount rate | +/-50 bps | $ | (6,092)/ | $ | (693)/ | |||||
Expected return on assets | +/-50 bps | N/A | | (564)/ | ||||||
OPEB | ||||||||||
Discount rate | +/-50 bps | | (266)/ | | (46)/ | |||||
Health care cost trend rate | +/-100 bps | | 562/(487) | | 98/(83) |
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,Portfolios, along with CDSC'sCDSCs 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.
Loss Contingencies
The likelihood that a loss contingency exists is evaluated using the criteria of Statement of Financial Accounting Standards ("SFAS") No. 5,"Accounting for Contingencies"Contingencies Topic," ASC 450 through consultation with legal counsel. A loss contingency is recorded if the contingency is considered probable and reasonably estimable as of the date of the financial statements.
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160,"Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51." SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for noncontrolling interests in subsidiaries and for the deconsolidation of subsidiaries. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest that should be reported as equity in the consolidated financial statements. The provisions of SFAS No. 160 are effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years, and the standard is to be applied prospectively. The Company does not have a non-controlling interest in any of its consolidated reporting entities and therefore this standard does not currently apply. It is not expected that the adoption of this standard on January 1, 2009 will significantly affect our results of operations or financial condition.
In December 2007, the FASB amended SFAS No. 141,"Business Combinations" which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. These provisions are effective for fiscal years beginning on or after December 15, 2008. Adoption of this standard on January 1, 2009 will affect our results of operations and financial condition only if the Company acquires the assets of another entity subsequent to adoption date.
In June 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force ("EITF") in EITF Issue No. 06-11,"Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards." Under the provisions of EITF 06-11, a realized income tax benefit from dividends and dividend equivalents that are charged to retained earnings and are paid to employees for equity classified nonvested equity shares, nonvested equity share units and outstanding equity share options should be recognized as an increase to additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 is required to be applied prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. It is not expected that the adoption of this standard on January 1, 2008 will significantly affect our results of operations or financial condition.
In February 2007, the FASB issued SFAS No. 159,"The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of SFAS No. 115," ("SFAS No. 159"), which provides companies with an option to report select financial assets and liabilities at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. It is not expected that the adoption of SFAS No. 159 on January 1, 2008 will have a material impact on our results of operations or financial condition.
In September 2006, the FASB issued SFAS No. 157,"Fair Value Measurements" ("SFAS No. 157"). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. It is not expected that the adoption of SFAS No. 157 on January 1, 2008 will have a material impact on our results of operations or financial condition.
In June 2006, the EITF reached a consensus on EITF Issue No. 06-4,"Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements" ("EITF 06-4") which requires the application of the provisions of SFAS No. 106,"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS No. 106") to split-dollar life insurance
arrangements. SFAS No. 106 requires the recognition of a liability for the discounted future benefit obligation that an entity would have to pay upon the death of an underlying insured employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. We have an insurance policy subject to the provisions of this new pronouncement; however, we have evaluated the policy and determined there will be no impact upon the adoption of EITF 06-4 on our results of operations or financial condition.
Seasonality and Inflation
We do not believe our operations are subject to significant seasonal fluctuations; however, wefluctuation. 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 affectseffects 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, 2007. On January 13, 2006, we issued $200 million in principal amount of 5.60% fixed rate senior notes due 2011. Proceeds from the new senior notes were used to pay down our $200 million in 7.50% senior notes which matured on January 18, 2006.
During 2005, the Company entered into two forward starting interest rate swap agreements that had five year fixed swap rates of 4.57% and 4.84%, respectively, on notional amounts of $100 million for each swap. The swaps were put in place to hedge against changes in forecasted interest payments attributable to changes in the LIBOR swap rate between the time we entered into the swap agreement and the time we anticipated refinancing the notes in January 2006. We assessed the effectiveness of the swaps as hedges at their inception and at December 31, 2005, and we consider these swaps to be completely effective cash flow hedges under SFAS No. 133,"Accounting for Derivative Instruments and Hedging Activities." As of December 31, 2007, net unrealized gains attributed to the forward swap cash flow hedges were approximately $0.7 million and were included as a component of other comprehensive income.
On January 10, 2006, the Company terminated these forward interest rate swap agreements upon the completion of its new offering in January 2006 of $200 million in principal amount 5.60% senior notes due January 2011. In connection with the termination of the swap agreements, the Company received a net cash settlement of $1.1 million. The Company's gain on this transaction will be deferred in accumulated
other comprehensive income and will be amortized into earnings as a decrease to interest expense over the five year term of the new notes.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 substantial portion of investments are classified as available-for-saleavailable 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-saleavailable for sale securities until they are sold. We do not currently hedge these exposures.
Securities Price Sensitivity
Our revenues are dependent on the underlying assets under management in the Funds to which investment advisory services are provided. The Funds include portfolios of investments comprised of various combinations of equity, fixed income and other types of securities.securities and commodities. Fluctuations in the value of these securities are common and are generated by numerous factors, including, without
limitation, market volatility, the overall economy, inflation, changes in investor strategies, availability of alternative investment vehicles, government regulations and others. Accordingly, declines in any one or a combination of these factors, or other factors not separately identified, may reduce the value of investment securities and, in turn, the underlying assets under management on which our revenues are earned. These declines have an impact in our investment sales, thereby compounding the impact on our earnings.
ITEM 8. Financial Statements and Supplementary Data
Reference is made to the Consolidated Financial Statements referred to in the Index on page 5048 setting forth our consolidated financial statements, together with the report of KPMG LLP dated February 28, 200824, 2011 on page 51.49.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Based on our evaluation under the framework in"Internal Control-Integrated Framework," management concluded that, as of December 31, 2007,2010, 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, 2007,2010, as stated in their attestation report which follows.
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, 2007,2010, based on criteria established inInternal 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, 2007,2010, based on criteria established inInternal 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, 20072010 and 2006,2009, 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, 2007,2010, and our report dated February 28, 200824, 2011 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Kansas City, Missouri
February 28, 200824, 2011
(c)
None.
ITEM 10. Directors, Executive Officers and Corporate Governance
Information required by this Item 10. is incorporated herein by reference to our definitive proxy statement for our 20082011 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 20082011 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 20082011 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 20082011 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 20082011 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 15. Exhibits, Financial Statement Schedules
(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. |
Table of all financial statements filed as part of this Report.
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 29, 2008.25, 2011.
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 | February | ||
Daniel P. Connealy | Senior Vice President and Chief Financial Officer | February | ||
Brent K. Bloss | Senior Vice President – Finance and Treasurer | February | ||
Sharilyn S. Gasaway | Director | February 25, 2011 | ||
/s/ THOMAS C. GODLASKY Thomas C. Godlasky | Director | February 25, 2011 | ||
/s/ ALAN W. KOSLOFF Alan W. Kosloff | Director | February | ||
Dennis E. Logue | Director | February | ||
Michael F. Morrissey | Director | February 25, 2011 | ||
/s/ JAMES M. RAINES James M. Raines | Director | February | ||
Ronald C. Reimer | Director | February | ||
| ||||
Jerry W. Walton | Director | February |
WADDELL & REED FINANCIAL, INC.
Index to Consolidated Financial Statements
| Page | |
---|---|---|
Report of Independent Registered Public Accounting Firm | ||
Consolidated Balance Sheets at December 31, | ||
Consolidated Statements of Income for each of the years in the three-year period ended December 31, | ||
Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, | ||
Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, | ||
Consolidated Statements of Cash Flows for each of the years in the three-year period ended | ||
Notes to Consolidated Financial Statements |
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, 20072010 and 2006,2009, 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, 2007.2010. 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, 20072010 and 2006,2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 20072010 in conformity with U.S. generally accepted accounting principles.
As discussed in note 10 to the consolidated financial statements, the Company changed its method of accounting for pension plan and postretirement obligations in 2006.
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, 20072010 based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 200824, 2011 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ KPMG LLP
Kansas City, Missouri
February 28, 200824, 2011
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 20072010 and 20062009
| 2007 | 2006 | |||||
---|---|---|---|---|---|---|---|
| (in thousands) | ||||||
Assets: | |||||||
Cash and cash equivalents | $ | 263,914 | 163,887 | ||||
Cash and cash equivalents – restricted | 99,886 | 32,629 | |||||
Investment securities | 50,913 | 48,129 | |||||
Receivables: | |||||||
Funds and separate accounts | 43,602 | 38,806 | |||||
Customers and other | 80,909 | 59,863 | |||||
Deferred income taxes | 2,559 | 2,923 | |||||
Prepaid expenses and other current assets | 6,165 | 5,766 | |||||
Total current assets | 547,948 | 352,003 | |||||
Property and equipment, net | 47,984 | 50,875 | |||||
Deferred sales commissions, net | 45,290 | 20,462 | |||||
Goodwill and identifiable intangible assets | 228,432 | 228,432 | |||||
Pension benefits | 14,929 | – | |||||
Other assets | 9,167 | 10,942 | |||||
Total assets | $ | 893,750 | 662,714 | ||||
Liabilities: | |||||||
Accounts payable | $ | 22,233 | 16,256 | ||||
Payable to investment companies for securities | 159,151 | 75,607 | |||||
Accrued compensation | 38,310 | 33,153 | |||||
Income taxes payable | 271 | 14,804 | |||||
Other current liabilities | 52,637 | 44,710 | |||||
Total current liabilities | 272,602 | 184,530 | |||||
Long-term debt | 199,955 | 199,942 | |||||
Accrued pension and post-retirement costs | 7,230 | 12,663 | |||||
Deferred income taxes | 15,682 | 12,082 | |||||
Other | 16,663 | 8,797 | |||||
Total liabilities | 512,132 | 418,014 | |||||
Commitments and Contingencies (Note 18) | |||||||
Stockholders' equity: | |||||||
Preferred stock–$1.00 par value: 5,000 shares authorized; none issued | – | – | |||||
Class A Common stock – $0.01 par value: 250,000 shares authorized; 99,701 shares issued; 86,630 shares outstanding (84,660 at December 31, 2006) | 997 | 997 | |||||
Additional paid-in capital | 209,210 | 189,299 | |||||
Retained earnings | 456,499 | 388,422 | |||||
Cost of 13,071 shares in treasury (15,041 in 2006) | (291,719) | (327,966) | |||||
Accumulated other comprehensive income (loss) | 6,631 | (6,052) | |||||
Total stockholders' equity | 381,618 | 244,700 | |||||
Total liabilities and stockholders' equity | $ | 893,750 | 662,714 | ||||
| 2010 | 2009 | ||||||
---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||
Assets: | ||||||||
Cash and cash equivalents | $ | 195,315 | 244,359 | |||||
Cash and cash equivalents - restricted | 81,197 | 72,941 | ||||||
Investment securities | 192,611 | 70,524 | ||||||
Receivables: | ||||||||
Funds and separate accounts | 27,234 | 34,948 | ||||||
Customers and other | 84,422 | 179,100 | ||||||
Deferred income taxes | 10,622 | 8,225 | ||||||
Income taxes receivable | 4,336 | - | ||||||
Prepaid expenses and other current assets | 9,313 | 8,619 | ||||||
Total current assets | 605,050 | 618,716 | ||||||
Property and equipment, net | 71,248 | 68,171 | ||||||
Deferred sales commissions, net | 64,710 | 64,123 | ||||||
Goodwill and identifiable intangible assets | 221,210 | 221,210 | ||||||
Other non-current assets | 14,713 | 11,162 | ||||||
Total assets | $ | 976,931 | 983,382 | |||||
Liabilities: | ||||||||
Accounts payable | $ | 40,836 | 25,210 | |||||
Payable to investment companies for securities | 117,596 | 222,168 | ||||||
Accrued compensation | 37,555 | 35,341 | ||||||
Income taxes payable | - | 1,044 | ||||||
Other current liabilities | 85,955 | 76,994 | ||||||
Total current liabilities | 281,942 | 360,757 | ||||||
Long-term debt | 189,999 | 199,984 | ||||||
Accrued pension and postretirement costs | 22,492 | 28,731 | ||||||
Deferred income taxes | 4,729 | 6,983 | ||||||
Other non-current liabilities | 20,608 | 17,872 | ||||||
Total liabilities | 519,770 | 614,327 | ||||||
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) | 997 | 997 | ||||||
Additional paid-in capital | 201,442 | 189,900 | ||||||
Retained earnings | 618,813 | 527,876 | ||||||
Cost of 13,950 common shares in treasury (13,894 at December 31, 2009) | (346,064) | (328,154) | ||||||
Accumulated other comprehensive loss | (18,027) | (21,564) | ||||||
Total stockholders' equity | 457,161 | 369,055 | ||||||
Total liabilities and stockholders' equity | $ | 976,931 | 983,382 | |||||
See accompanying notes to consolidated financial statements.
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2007, 20062010, 2009 and 20052008
| | 2007 | 2006 | 2005 | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|
(in thousands, except per share data) | |||||||||||
Revenues: | |||||||||||
Investment management fees | $ | 372,345 | 311,525 | 267,681 | |||||||
Underwriting and distribution fees | 371,085 | 317,458 | 272,590 | ||||||||
Shareholder service fees | 94,124 | 89,672 | 81,809 | ||||||||
Total | 837,554 | 718,655 | 622,080 | ||||||||
Operating expenses: | |||||||||||
Underwriting and distribution | 422,274 | 356,538 | 303,337 | ||||||||
Compensation and related costs (including share-based compensation of $23,704, $21,862 and $17,786, respectively) | 115,905 | 110,101 | 99,673 | ||||||||
General and administrative | 48,487 | 100,604 | 87,029 | ||||||||
Subadvisory fees | 43,844 | 30,758 | 18,218 | ||||||||
Depreciation | 12,412 | 11,725 | 10,275 | ||||||||
Goodwill impairment | – | 20,000 | – | ||||||||
Total | 642,922 | 629,726 | 518,532 | ||||||||
Operating income | 194,632 | 88,929 | 103,548 | ||||||||
Investment and other income | 16,452 | 12,498 | 6,680 | ||||||||
Interest expense | (11,924) | (12,227) | (14,278) | ||||||||
Income before provision for income taxes | 199,160 | 89,200 | 95,950 | ||||||||
Provision for income taxes | 73,663 | 43,088 | 35,829 | ||||||||
Net income | $ | 125,497 | 46,112 | 60,121 | |||||||
Net income per share: | |||||||||||
Basic | $ | 1.55 | 0.57 | 0.74 | |||||||
Diluted | $ | 1.52 | 0.55 | 0.73 | |||||||
Weighted average shares outstanding | —basic | 80,781 | 81,353 | 80,908 | |||||||
—diluted | 82,824 | 83,212 | 82,045 | ||||||||
Dividends declared per common share | $ | 0.68 | 0.60 | 0.60 |
| 2010 | 2009 | 2008 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share data) | ||||||||||
Revenues: | |||||||||||
Investment management fees | $ | 457,538 | 354,593 | 399,863 | |||||||
Underwriting and distribution fees | 468,057 | 378,678 | 416,762 | ||||||||
Shareholder service fees | 119,290 | 105,818 | 102,495 | ||||||||
Total | 1,044,885 | 839,089 | 919,120 | ||||||||
Operating expenses: | |||||||||||
Underwriting and distribution | 543,604 | 449,925 | 496,822 | ||||||||
Compensation and related costs (including share-based compensation of $40,338, $30,573 and $28,967, respectively) | 142,255 | 124,463 | 119,057 | ||||||||
General and administrative | 66,703 | 58,034 | 76,370 | ||||||||
Subadvisory fees | 27,823 | 23,202 | 41,122 | ||||||||
Depreciation | 14,030 | 13,653 | 13,198 | ||||||||
Goodwill impairment | - | - | 7,222 | ||||||||
Total | 794,415 | 669,277 | 753,791 | ||||||||
Operating income | 250,470 | 169,812 | 165,329 | ||||||||
Investment and other income | 8,737 | 5,039 | 3,178 | ||||||||
Interest expense | (12,723) | (12,695) | (12,087) | ||||||||
Income before provision for income taxes | 246,484 | 162,156 | 156,420 | ||||||||
Provision for income taxes | 89,525 | 56,651 | 60,257 | ||||||||
Net income | $ | 156,959 | 105,505 | 96,163 | |||||||
Net income per share: | |||||||||||
Basic | $ | 1.83 | $ | 1.23 | 1.12 | ||||||
Diluted | $ | 1.83 | $ | 1.23 | 1.12 | ||||||
Weighted average shares outstanding: | |||||||||||
Basic | 85,618 | 85,484 | 85,761 | ||||||||
Diluted | 85,647 | 85,544 | 86,113 |
See accompanying notes to consolidated financial statements.
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2007, 20062010, 2009 and 20052008
(in thousands)
| Common Stock | | | | Accumulated Other Comprehensive Income (Loss) | | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Additional Paid-in Capital | Retained Earnings | | Total Stockholders' Equity | |||||||||||
| Shares | Amount | Treasury Stock | ||||||||||||
Balance at December 31, 2004 | 99,701 | $ | 997 | 204,913 | 383,155 | (365,892) | (4,296) | 218,877 | |||||||
Net income | — | — | — | 60,121 | — | — | 60,121 | ||||||||
Recognition of equity compensation | — | — | 17,926 | — | — | — | 17,926 | ||||||||
Issuance of nonvested shares and other | — | — | (27,655) | — | 27,655 | — | — | ||||||||
Dividends accrued, $.60 per share | — | — | — | (50,233) | — | — | (50,233) | ||||||||
Exercise of stock options | — | — | (1,542) | — | 3,602 | — | 2,060 | ||||||||
Excess tax benefits from share-based payment arrangements | — | — | 1,673 | — | — | — | 1,673 | ||||||||
Other stock transactions | — | — | — | — | (2,468) | — | (2,468) | ||||||||
Repurchase of common stock | — | — | — | — | (5,997) | — | (5,997) | ||||||||
Unrealized gain on available for sale investment securities | — | — | — | — | — | 1,344 | 1,344 | ||||||||
Reclassification for amounts included in net income | — | — | — | — | — | (648) | (648) | ||||||||
Change in fair value of derivatives | — | — | — | — | — | 1,010 | 1,010 | ||||||||
Minimum pension liability adjustment | — | — | — | — | — | 3,709 | 3,709 | ||||||||
Balance at December 31, 2005 | 99,701 | 997 | 195,315 | 393,043 | (343,100) | 1,119 | 247,374 | ||||||||
Net income | — | — | — | 46,112 | — | — | 46,112 | ||||||||
Recognition of equity compensation | — | — | 21,854 | 8 | — | 21,862 | |||||||||
Issuance of nonvested shares and other | — | — | (26,934) | — | 26,934 | — | — | ||||||||
Dividends accrued, $.60 per share | — | — | — | (50,741) | — | — | (50,741) | ||||||||
Exercise of stock options | — | — | (5,295) | — | 21,483 | — | 16,188 | ||||||||
Excess tax benefits from share-based payment arrangements | — | — | 4,359 | — | — | — | 4,359 | ||||||||
Other stock transactions | — | — | — | — | (5,640) | — | (5,640) | ||||||||
Repurchase of common stock | — | — | — | — | (27,643) | — | (27,643) | ||||||||
Unrealized gain on available for sale investment securities | — | — | — | — | — | 1,569 | 1,569 | ||||||||
Reclassification for amounts included in net income | — | — | — | — | — | (2,199) | (2,199) | ||||||||
Change in fair value of derivatives | — | — | — | — | — | (283) | (283) | ||||||||
Reversal of minimum pension liability | — | — | — | — | — | 5,146 | 5,146 | ||||||||
Additional pension and postretirement plan liability | — | — | — | — | — | (11,404) | (11,404) | ||||||||
Balance at December 31, 2006 | 99,701 | 997 | 189,299 | 388,422 | (327,966) | (6,052) | 244,700 | ||||||||
Net income | — | — | — | 125,497 | — | — | 125,497 | ||||||||
Recognition of equity compensation | — | — | 23,704 | — | — | 23,704 | |||||||||
Issuance of nonvested shares and other | — | — | (24,517) | — | 24,517 | — | — | ||||||||
Dividends accrued, $.68 per share | — | — | — | (57,420) | — | — | (57,420) | ||||||||
Exercise of stock options | — | — | 7,805 | — | 76,757 | — | 84,562 | ||||||||
Excess tax benefits from share-based payment arrangements | — | — | 12,919 | — | — | — | 12,919 | ||||||||
Other stock transactions | — | — | — | — | (5,539) | — | (5,539) | ||||||||
Repurchase of common stock | — | — | — | — | (59,488) | — | (59,488) | ||||||||
Unrealized gain on available for sale investment securities | — | — | — | — | — | 2,345 | 2,345 | ||||||||
Reclassification for amounts included in net income | — | — | — | — | — | (2,428) | (2,428) | ||||||||
Pension and postretirement benefits | — | — | — | — | — | 12,766 | 12,766 | ||||||||
Balance at December 31, 2007 | 99,701 | $ | 997 | 209,210 | 456,499 | (291,719) | 6,631 | 381,618 | |||||||
| Common Stock | | | | | | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Additional Paid-in Capital | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||
| Shares | Amount | Treasury Stock | ||||||||||||||||||
Balance at December 31, 2007 | 99,701 | $ | 997 | 209,210 | 456,499 | (291,719) | 6,631 | 381,618 | |||||||||||||
Net income | — | — | — | 96,163 | — | — | 96,163 | ||||||||||||||
Recognition of equity compensation | — | — | 28,933 | 34 | — | — | 28,967 | ||||||||||||||
Recognition of equity compensation related to restructuring | — | — | 795 | — | — | 795 | |||||||||||||||
Issuance of nonvested shares and other | — | — | (34,990) | — | 34,990 | — | — | ||||||||||||||
Dividends accrued, $.76 per share | — | — | — | (65,138) | — | — | (65,138) | ||||||||||||||
Exercise of stock options | — | — | (3,533) | — | 11,581 | — | 8,048 | ||||||||||||||
Excess tax benefits from share-based payment arrangements | — | — | 7,471 | — | — | — | 7,471 | ||||||||||||||
Repurchase of common stock | — | — | — | — | (105,315) | — | (105,315) | ||||||||||||||
Unrealized depreciation on available for sale investment securities | — | — | — | — | — | (8,435) | (8,435) | ||||||||||||||
Pension and postretirement benefits | — | — | — | — | — | (23,907) | (23,907) | ||||||||||||||
Reclassification for amounts included in net income | — | — | — | — | — | (142) | (142) | ||||||||||||||
Balance at December 31, 2008 | 99,701 | 997 | 207,886 | 487,558 | (350,463) | (25,853) | 320,125 | ||||||||||||||
Net income | — | — | — | 105,505 | — | — | 105,505 | ||||||||||||||
Recognition of equity compensation | — | — | 30,565 | 8 | — | — | 30,573 | ||||||||||||||
Recognition of equity compensation related to divestiture of ACF | — | — | 400 | — | — | — | 400 | ||||||||||||||
Issuance of nonvested shares and other | — | — | (46,345) | — | 46,345 | — | — | ||||||||||||||
Dividends accrued, $.76 per share | — | — | — | (65,195) | — | — | (65,195) | ||||||||||||||
Exercise of stock options | — | — | (5,393) | — | 19,529 | — | 14,136 | ||||||||||||||
Excess tax benefits from share-based payment arrangements | — | — | 2,787 | — | — | — | 2,787 | ||||||||||||||
Repurchase of common stock | — | — | — | — | (43,565) | — | (43,565) | ||||||||||||||
Unrealized appreciation on available for sale investment securities | — | — | — | — | — | 4,974 | 4,974 | ||||||||||||||
Pension and postretirement benefits | — | — | — | — | — | (949) | (949) | ||||||||||||||
Reclassification for amounts included in net income | — | — | — | — | — | 264 | 264 | ||||||||||||||
Balance at December 31, 2009 | 99,701 | 997 | 189,900 | 527,876 | (328,154) | (21,564) | 369,055 | ||||||||||||||
Net income | — | — | — | 156,959 | — | — | 156,959 | ||||||||||||||
Recognition of equity compensation | — | — | 40,319 | 19 | — | — | 40,338 | ||||||||||||||
Issuance of nonvested shares and other | — | — | (37,631) | — | 37,631 | — | — | ||||||||||||||
Dividends accrued, $.77 per share | — | — | — | (66,041) | — | — | (66,041) | ||||||||||||||
Exercise of stock options | — | — | 2,726 | — | 10,331 | — | 13,057 | ||||||||||||||
Excess tax benefits from share-based payment arrangements | — | — | 6,128 | — | — | — | 6,128 | ||||||||||||||
Repurchase of common stock | — | — | — | — | (65,872) | — | (65,872) | ||||||||||||||
Unrealized apprciation on available for sale investment securities | — | — | — | — | — | 3,493 | 3,493 | ||||||||||||||
Valuation allowance on investment securities' deferred tax asset | — | — | — | — | — | 963 | 963 | ||||||||||||||
Pension and postretirement benefits | — | — | — | — | — | 1,061 | 1,061 | ||||||||||||||
Reclassification for amounts included in net income | — | — | — | — | — | (1,980) | (1,980) | ||||||||||||||
Balance at December 31, 2010 | 99,701 | $ | 997 | 201,442 | 618,813 | (346,064) | (18,027) | 457,161 | |||||||||||||
See accompanying notes to consolidated financial statements.
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2007, 20062010, 2009 and 20052008
| 2007 | 2006 | 2005 | ||||
---|---|---|---|---|---|---|---|
| (in thousands) | ||||||
Net income | $ | 125,497 | 46,112 | 60,121 | |||
Other comprehensive income: | |||||||
Available-for-sale investments: | |||||||
Net unrealized appreciation of investments during the period, net of income taxes of $1,354, $719 and $789, respectively | 2,345 | 1,569 | 1,344 | ||||
Derivatives: | |||||||
Net unrealized gain (loss) on derivatives during the period, net of income taxes of $0, $(188) and $593, respectively | – | (283) | 1,010 | ||||
Pension and postretirement benefits: | |||||||
Pension and postretirement benefits, net of income taxes of $7,178, $3,022 and $2,179, respectively | 12,766 | 5,146 | 3,709 | ||||
Reclassification adjustments for amounts included in net income, net of income taxes of $(1,396), $(1,226) and $(381), respectively | (2,428) | (2,199) | (648) | ||||
Comprehensive income | $ | 138,180 | 50,345 | 65,536 | |||
| 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||||
Net income | $ | 156,959 | 105,505 | 96,163 | ||||||
Other comprehensive income: | ||||||||||
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 | 1,061 | (949) | (23,907) | |||||||
Reclassification adjustments for amounts included in net income, net of income taxes of $(1,139), $159 and $(84), respectively | (1,980) | 264 | (142) | |||||||
Comprehensive income | $ | 160,496 | 109,794 | 63,679 | ||||||
See accompanying notes to consolidated financial statements.
WADDELL & REED FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2007, 20062010, 2009 and 20052008
| 2007 | 2006 | 2005 | ||||||
---|---|---|---|---|---|---|---|---|---|
| (in thousands) | ||||||||
Cash flows from operating activities: | |||||||||
Net income | $ | 125,497 | 46,112 | 60,121 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||
Depreciation and amortization | 12,395 | 11,937 | 11,497 | ||||||
Share-based compensation | 23,704 | 21,862 | 17,786 | ||||||
Excess tax benefits from share-based payment arrangements | (12,919) | (4,359) | — | ||||||
Gain on sale of available-for-sale investment securities | (3,598) | (3,260) | (1,029) | ||||||
Net purchases and sales of trading securities | (926) | (749) | 1,791 | ||||||
Unrealized gain on trading securities | (1,001) | (283) | (586) | ||||||
Goodwill impairment | — | 20,000 | — | ||||||
Loss on sale and retirement of property and equipment | 405 | 592 | 175 | ||||||
Capital gains and dividends reinvested | (2,135) | (1,317) | (784) | ||||||
Deferred income taxes | (3,171) | (1,423) | (2,866) | ||||||
Changes in assets and liabilities: | |||||||||
Cash and cash equivalents – restricted | (67,257) | (6,548) | (3,435) | ||||||
Receivables from funds and separate accounts | (4,796) | (5,401) | (8,654) | ||||||
Other receivables | (21,046) | (16,632) | (5,225) | ||||||
Other assets | (23,453) | (4,741) | 2,878 | ||||||
Accounts payable and payable to investment companies | 89,523 | 31,091 | 4,186 | ||||||
Other liabilities | 16,889 | 6,130 | 24,932 | ||||||
Net cash provided by operating activities | 128,111 | 93,011 | 100,787 | ||||||
Cash flows from investing activities: | |||||||||
Purchases of available-for-sale investment securities | (5,650) | (7,350) | (600) | ||||||
Proceeds from sales of available-for-sale investment securities | 10,429 | 14,812 | 9,096 | ||||||
Proceeds from maturities of available-for-sale investment securities | — | 435 | 9,275 | ||||||
Additions to property and equipment | (9,925) | (10,229) | (8,984) | ||||||
Cash paid for acquisitions | — | — | (15) | ||||||
Appeal bond deposits | — | — | 57,368 | ||||||
Net cash provided by (used in) investing activities | (5,146) | (2,332) | 66,140 | ||||||
Cash flows from financing activities: | |||||||||
Proceeds from long term debt and interest rate swap termination | — | 199,863 | — | ||||||
Repayment of long term debt | — | (200,000) | — | ||||||
Net short term repayments | — | — | (35,000) | ||||||
Dividends paid | (55,392) | (50,613) | (50,082) | ||||||
Repurchase of common stock | (59,488) | (27,643) | (5,997) | ||||||
Exercise of stock options | 84,562 | 16,188 | 2,060 | ||||||
Excess tax benefits from share-based payment arrangements | 12,919 | 4,359 | — | ||||||
Other stock transactions | (5,539) | (5,640) | (2,468) | ||||||
Net cash used in financing activities | (22,938) | (63,486) | (91,487) | ||||||
Net increase in cash and cash equivalents | 100,027 | 27,193 | 75,440 | ||||||
Cash and cash equivalents at beginning of year | 163,887 | 136,694 | 61,254 | ||||||
Cash and cash equivalents at end of year | $ | 263,914 | 163,887 | 136,694 | |||||
Cash paid for: | |||||||||
Income taxes (net) | $ | 74,439 | 29,922 | 33,234 | |||||
Interest | $ | 11,200 | 6,845 | 12,752 |
| 2010 | 2009 | 2008 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | ||||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | 156,959 | 105,505 | 96,163 | |||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 13,834 | 13,476 | 12,969 | ||||||||
Other than temporary impairment of investments in affiliated mutual funds | — | 3,686 | — | ||||||||
Amortization of deferred sales commissions | 58,381 | 42,771 | 62,560 | ||||||||
Share-based compensation | 40,338 | 30,973 | 29,762 | ||||||||
Excess tax benefits from share-based payment arrangements | (6,128) | (2,787) | (7,471) | ||||||||
Gain on sale of available for sale investment securities | (2,893) | (2,623) | — | ||||||||
Net purchases and sales of trading securities | (60,623) | 7,864 | (26,885) | ||||||||
Unrealized (gain) loss on trading securities | (5,101) | (4,779) | 6,072 | ||||||||
Goodwill impairment | — | — | 7,222 | ||||||||
Loss on sale and retirement of property and equipment | 201 | 1,009 | 433 | ||||||||
Capital gains and dividends reinvested | (365) | (1,141) | (1,880) | ||||||||
Deferred income taxes | (5,200) | 4,093 | (2,040) | ||||||||
Changes in assets and liabilities: | |||||||||||
Cash and cash equivalents - restricted | (8,256) | (24,228) | 51,173 | ||||||||
Receivables from funds and separate accounts | 7,714 | �� | (1,409) | 10,063 | |||||||
Other receivables | 94,678 | (117,820) | 19,629 | ||||||||
Other assets | (4,245) | (1,480) | (2,943) | ||||||||
Deferred sales commissions | (58,968) | (54,711) | (69,453) | ||||||||
Accounts payable and payable to investment companies | (88,946) | 139,528 | (73,534) | ||||||||
Other liabilities | 9,263 | 17,252 | 12,071 | ||||||||
Net cash provided by operating activities | 140,643 | 155,179 | 123,911 | ||||||||
Cash flows from investing activities: | |||||||||||
Purchases of available for sale investment securities | (76,961) | (21,364) | (100) | ||||||||
Proceeds from sales and maturities of available for sale investment securities | 26,463 | 15,052 | 1,750 | ||||||||
Additions to property and equipment | (17,313) | (30,861) | (26,079) | ||||||||
Proceeds from sales of property and equipment | 5 | 7,685 | 466 | ||||||||
Net cash used in investing activities | (67,806) | (29,488) | (23,963) | ||||||||
Cash flows from financing activities: | |||||||||||
Debt repayment | (10,000) | - | - | ||||||||
Dividends paid | (65,194) | (65,018) | (63,738) | ||||||||
Repurchase of common stock | (65,872) | (43,565) | (105,315) | ||||||||
Exercise of stock options | 13,057 | 14,136 | 8,048 | ||||||||
Excess tax benefits from share-based payment arrangements | 6,128 | 2,787 | 7,471 | ||||||||
Net cash used in financing activities | (121,881) | (91,660) | (153,534) | ||||||||
Net increase (decrease) in cash and cash equivalents | (49,044) | 34,031 | (53,586) | ||||||||
Cash and cash equivalents at beginning of year | 244,359 | 210,328 | 263,914 | ||||||||
Cash and cash equivalents at end of year | $ | 195,315 | 244,359 | 210,328 | |||||||
Cash paid for: | |||||||||||
Income taxes (net) | $ | 92,038 | 50,369 | 53,146 | |||||||
Interest | $ | 10,920 | 12,266 | 11,965 |
See accompanying notes to consolidated financial statements.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 20062010, 2009 and 20052008
1. Description of Business
Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as the "Company," "we," "our" and "us") derive revenues primarily from investment management, investment product underwriting and distribution, and shareholder services administration provided to the Waddell & Reed Advisors Group of Mutual Funds (the "Advisors Funds"), W&R TargetIvy Funds Inc. (the "Target"Ivy Funds"), Ivy Funds Inc. and the IvyVariable Insurance Portfolios (the "Ivy Funds portfolios (collectively, the "Ivy Funds"VIP"), and Waddell & Reed InvestEd Portfolios Inc.("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 directors/trustees and shareholders. Our revenues are largely dependent on the total value and composition of assets under management, which include mainly domestic equity securities, but also include debt securities and international equities.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 thoseour 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.
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.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 2006 and 2005
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-saleavailable for sale or trading. Unrealized holding gains and losses on securities available-for-sale,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 net of related tax effects, are included in earnings. Realized gains and losses are computed using the specific identification method for investment securities, other than mutual funds. For mutual funds, realized gains and losses are computed using the average cost method.
Our available-for-saleavailable 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 an available for sale investmentequity 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 threefive to ten years for furniture, fixtures, data processing equipment and computer software; threefive to 2026 years for equipment and machinery; and up to 15 years for leasehold improvements.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 the American Institute of Certified Public Accountants' Statement of Position No. 98-1,"Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.Intangibles – Goodwill and Other Topic," The costs of designing and implementing software are expensed as incurred.ASC 350. Internal costs capitalized are included in "Propertyproperty and equipment, net"net on the consolidated balance sheets, and were $9.3$14.0 million and $8.5$11.8 million as of December 31, 20072010 and 2006,2009, 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 ten10 years.
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 tested at leastreviewed annually for impairment.
Identifiable intangible assets with indefinite useful lives are not amortized. Indefinite life intangible assets represent advisoryimpairment in the second quarter of each year and subadvisory management contracts for managed assets obtained in acquisitions. We consider these contracts to be indefinite lived intangible assets as they are expected to be renewed without significant cost or modification of terms. We complete an ongoing review of the recoverability of identifiable intangible assets on an annual basis or more frequently wheneverwhen events occur or circumstances changeoccur that would more likely than not reduce their fair value.
indicate that goodwill might be impaired. Factors that are consideredthe 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
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 2006 and 2005
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
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 significancespin-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 our consolidated balance sheet, any changes in key assumptions about our business or prospects, or changes in market conditions or other externalities, could result in an impairment charge and such a charge could have a material effect on our financial condition and results of operations. Based on our annual review of goodwill in the second quarter of 2006, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,"Goodwill and Other Intangible Assets," ("SFAS No. 142") we recorded an impairment charge of $20.0 million related to our subsidiary, Austin Calvert & Flavin, Inc. ("ACF"). The impairment charge is described in Note 6. It was determined that no impairment existed during our annual reviews of goodwill during 2007 or of identifiablebe indefinite-life intangible assets during 2007as they are expected to be renewed without significant cost or 2006.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 shares for certain asset allocation products are deferred and amortized on a straight-line basis, not to exceed three years. The costs incurred at the time of the sale of Class B shares are also deferredamortized on
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and then amortized on 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 deferred and 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.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 2006 and 2005
We also recognize distribution revenues monthly for certain types of investment products, primarily variable annuity products whichthat are generally calculated based upon average daily net assets under management.
Advertising and Promotion
We expense all advertising and promotion costs as incurred. Advertising expense was $4.8$5.6 million, $2.9$4.7 million and $3.5$5.3 million for the years ended December 31, 2007, 20062010, 2009 and 2005, respectively.2008, respectively, and is classified in underwriting and distribution expense in the consolidated statements of income.
Share-Based Compensation
Prior to January 1, 2006, We account for share-based compensation expense using the Company usedfair value method. Under the intrinsicfair value method, as described in Accounting Principles Board Opinion No. 25,"Accounting for Stock Issued to Employees" ("APB 25") to measure employee stock-based compensation as permitted by SFAS No. 123,"Accounting for Stock-Based Compensation" ("SFAS No. 123"). Under this method,share-based compensation expense related to stock options was measured as the difference between the exercise price andreflects the fair value of the shares on theshare-based awards measured at grant date, if any, and wasis recognized over the vestingservice period, which approximated theand is adjusted each period for anticipated service period.
Had compensation cost for the Company's stock-based compensation plans been determined using the fair value method as described in SFAS No. 123, the Company's net income and earnings per share for the year ended December 31, 2005 would have been reduced to the following pro forma amounts (amounts in thousands, expect per share data):
forfeitures. The weighted-average fair value of each stock option included in the preceding pro forma information was estimatedoptions granted are calculated using a Black-Scholes option pricingoption-pricing model. The Black-Scholes model incorporates assumptions as to dividend yield, risk-free interest rate, expected volatility and was amortized over the vesting periodexpected life of the underlying options.
Effective January 1, 2006, the Company adopted SFAS No. 123R,"Share-Based Payment, (revised 2004)" ("SFAS No. 123R"). The revised standard eliminated the intrinsic value method of accounting required under APB 25. The Company adopted SFAS No. 123R using the modified prospective transition method of adoption, which did not require restatement of prior periods. Under that transition method, compensation expense recognized in 2006 and 2007 for all share-based awards granted after December 31, 2005 is based on the grant date fair value of the awards, net of estimated forfeitures.
In its computation of stock-based compensation expense under APB 25, the Company recognized actual forfeitures when they occurred. Under SFAS No. 123R, the Company is required to estimate forfeitures at the grant date. The Company recognized a cumulative effect of change in accountingoption.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 20052008
principle of $503 thousand ($321 thousand increase to net income after tax) upon adoption, in order to adjust for expected forfeitures on all nonvested stock awards outstanding on January 1, 2006. This cumulative effect of change in accounting principle is classified in compensation and related costs in the consolidated statement of income for the year ended December 31, 2006.
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 Financial Accounting Standards Board ("FASB") Interpretation No. 48,"Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109"Topic, " ("FIN 48").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 2007,2010, the FASB issued SFASASU 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. 160,"Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51"10-A ("SFAS No. 160"), which amends ARB No. 51. 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 establish accounting and reporting standards for noncontrolling interests in subsidiaries and forrequire an entity to perform Step 2 of the deconsolidation of subsidiaries. It clarifiesgoodwill impairment test if it is more likely than not that a noncontrolling interestgoodwill 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 subsidiaryreporting unit. ASU 2010-28 is an ownership interest that should be reported as equity in the consolidated financial statements. The provisions of SFAS No. 160 are effective for fiscal years, beginning on or after December 15, 2008, and interim periods within those fiscal years, and the standard is to be applied prospectively.beginning after December 15, 2010. The Company does not have a non-controlling interest in any of its consolidated reporting entities and therefore this standard does not currently apply. It is not expectedexpects that the adoption of this standardASU 2010-28 in 2011 will not have a material impact on January 1, 2009 will significantly affect our results of operations orits consolidated financial condition.
In December 2007, the FASB amended SFAS No. 141,"Business Combinations" ("SFAS No. 141"). SFAS No. 141, as amended, establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The provisions of SFAS No. 141, as amended, are effective for fiscal years beginning on or after December 15, 2008. Adoption of this standard on January 1, 2009 will affect our results of operations and financial condition only if the Company acquires the assets of another entity subsequent to adoption date.statements.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 20052008
In June 2007, the FASB ratified the consensus reached by the Emerging Issues Task Force ("EITF") in EITF Issue No. 06-11,4. Investment Securities
Investment securities at December 31, 2010 and 2009 are as follows:
2010 | Amortized cost | Unrealized gains | Unrealized losses | Fair value | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||||||
Available for sale securities: | ||||||||||||
U.S. treasury bills | $ | 56,961 | - | - | 56,961 | |||||||
Mortgage-backed securities | 10 | 2 | - | 12 | ||||||||
Municipal bonds | 2,729 | - | (185) | 2,544 | ||||||||
Affiliated mutual funds | 28,633 | 5,662 | (37) | 34,258 | ||||||||
$ | 88,333 | 5,664 | (222) | 93,775 | ||||||||
Trading securities: | ||||||||||||
Commercial paper | 4,997 | |||||||||||
U.S. treasury bills | 60,958 | |||||||||||
Mortgage-backed securities | 73 | |||||||||||
Municipal bonds | 487 | |||||||||||
Corporate bonds | 50 | |||||||||||
Common stock | 201 | |||||||||||
Affiliated mutual funds | 32,070 | |||||||||||
98,836 | ||||||||||||
Total investment securities | 192,611 | |||||||||||
2009 | Amortized cost | Unrealized gains | Unrealized losses | Fair value | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||||||
Available for sale securities: | ||||||||||||
Mortgage-backed securities | $ | 10 | 2 | - | 12 | |||||||
Municipal bonds | 4,959 | - | (286) | 4,673 | ||||||||
Affiliated mutual funds | 29,817 | 3,241 | (143) | 32,915 | ||||||||
$ | 34,786 | 3,243 | (429) | 37,600 | ||||||||
Trading securities: | ||||||||||||
Mortgage-backed securities | 107 | |||||||||||
Municipal bonds | 478 | |||||||||||
Corporate bonds | 94 | |||||||||||
Common stock | 30 | |||||||||||
Affiliated mutual funds | 32,215 | |||||||||||
32,924 | ||||||||||||
Total investment securities | 70,524 | |||||||||||
"Accounting for Income Tax BenefitsTable of Dividends on Share-Based Payment Awards" ("EITF No. 06-11"). Under the provisions of EITF 06-11, a realized income tax benefit from dividends and dividend equivalents that are charged to retained earnings and are paid to employees for equity classified nonvested equity shares, nonvested equity share units and outstanding equity share options should be recognized as an increase to additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. EITF 06-11 is required to be applied prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. It is not expected that the adoption of this standard on January 1, 2008 will significantly affect our results of operations or financial condition.Contents
In February 2007, the FASB issued SFAS No. 159,"The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of SFAS No. 115" ("SFAS No. 159"), which provides companies with an option to report select financial assets and liabilities at fair value. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. It is not expected that the adoption of SFAS No. 159 on January 1, 2008 will have a material impact on our results of operations or financial condition.
In September 2006, the FASB issued SFAS No. 157,"Fair Value Measurements" ("SFAS No. 157"). This Statement defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and accordingly, does not require any new fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. It is not expected that the adoption of SFAS No. 157 on January 1, 2008 will have a material impact on our results of operations or financial condition.
In June 2006, the EITF reached a consensus on EITF Issue No. 06-4,"Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements" ("EITF 06-4"), which requires the application of the provisions of SFAS No. 106,"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS No. 106") to split-dollar life insurance arrangements. SFAS No. 106 requires the recognition of a liability for the discounted future benefit obligation that an entity would have to pay upon the death of an underlying insured employee. EITF 06-4 is effective for fiscal years beginning after December 15, 2007. We have an insurance policy subject to the provisions of this new pronouncement; however we have evaluated the policy and determined there will be no impact upon the adoption of EITF 06-4 on our results of operations or financial condition.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 2005
4. Investment Securities
Investment securities at December 31, 2007 and 2006 are as follows:
2007 | Amortized cost | Unrealized gains | Unrealized (losses) | Fair value | ||||
---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||
Available-for-sale securities: | ||||||||
Mortgage-backed securities | $ 11 | 1 | – | 12 | ||||
Municipal bonds | 6,991 | 128 | (73) | 7,046 | ||||
Affiliated mutual funds | 22,912 | 7,596 | (121) | 30,387 | ||||
29,914 | 7,725 | (194) | 37,445 | |||||
Trading securities: | ||||||||
Mortgage-backed securities | 118 | – | – | 118 | ||||
Municipal bonds | 502 | – | – | 502 | ||||
Corporate bonds | 156 | – | – | 156 | ||||
Common stock | 74 | – | – | 74 | ||||
Affiliated mutual funds | 12,618 | – | – | 12,618 | ||||
13,468 | – | – | 13,468 | |||||
Total investment securities | $ 43,382 | 7,725 | (194) | 50,913 | ||||
2006 | Amortized cost | Unrealized gains | Unrealized (losses) | Fair value | ||||
---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||
Available-for-sale securities: | ||||||||
Mortgage-backed securities | $ 12 | 1 | – | 13 | ||||
Municipal bonds | 6,985 | 199 | – | 7,184 | ||||
Affiliated mutual funds | 22,486 | 7,346 | (116) | 29,716 | ||||
29,483 | 7,546 | (116) | 36,913 | |||||
Trading securities: | ||||||||
Mortgage-backed securities | 124 | – | – | 124 | ||||
Municipal bonds | 510 | – | – | 510 | ||||
Corporate bonds | 340 | – | – | 340 | ||||
Common stock | 46 | – | – | 46 | ||||
Affiliated mutual funds | 10,196 | – | – | 10,196 | ||||
11,216 | – | – | 11,216 | |||||
Total investment securities | $ 40,699 | 7,546 | (116) | 48,129 | ||||
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 2006 and 20052008
A summary of available for sale debt securities and affiliated mutual funds with marketfair values below carrying values at December 31, 20072010 is as follows:
| Less than 12 months | 12 months or longer | Total | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fair value | Unrealized (losses) | Fair value | Unrealized (losses) | Fair value | Unrealized (losses) | |||||||
| (in thousands) | ||||||||||||
Municipal bonds | $ | 2,983 | (73) | – | – | 2,983 | (73) | ||||||
Affiliated mutual funds | 1,301 | (121) | – | – | 1,301 | (121) | |||||||
Total temporarily impaired securities | $ | 4,284 | (194) | – | – | 4,284 | (194) | ||||||
We assess the carrying value of investments in debt and equity securities each quarter to determine whether an other than temporary decline in fair value exists. 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.
| Less than 12 months | 12 months or longer | Total | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | ||||||||||||
| (in thousands) | |||||||||||||||||
Municipal bonds | $ | - | - | 2,544 | (185) | 2,544 | (185) | |||||||||||
Affiliated mutual funds | 810 | (10) | 313 | (27) | 1,123 | (37) | ||||||||||||
Total temporarily impaired securities | $ | 810 | (10) | 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 the affiliated mutual funds until they have recovered and our history of holding bonds until maturity, we determined that a write-down was not appropriatenecessary at this time.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-foravailable for sale and held as of December 31, 20072010 mature as follows:
| Amortized cost | Fair value | ||
---|---|---|---|---|
| (in thousands) | |||
After ten years | $ 7,002 | 7,058 | ||
$ 7,002 | 7,058 | |||
| Amortized cost | Fair value | ||||
---|---|---|---|---|---|---|
| (in thousands) | |||||
Within one year | $ | 56,961 | 56,961 | |||
After one year but within 10 years | 1,738 | 1,678 | ||||
After 10 years | 1,001 | 878 | ||||
$ | 59,700 | 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, 20072010 mature as follows:
| Amortized cost | Fair value | ||
---|---|---|---|---|
| (in thousands) | |||
After ten years | $ 776 | 776 | ||
$ 776 | 776 | |||
Investment securities with fair value of $10.9 million, $15.5 million and $68.7 million were sold during 2007, 2006 and 2005, respectively. A net gain of $3.6 million was recognized during 2007 from the sale of $10.4 million in available-for-sale securities. During 2006, a net gain of $3.3 million was recognized from the sale of $14.8 million in available-for-sale securities. During 2005, $59.6 million of trading securities were sold, of which approximately $57.4 million were proceeds from the sale of certificates of deposit
| Fair value | | ||||
---|---|---|---|---|---|---|
| (in thousands) | |||||
Within one year | $ | 65,955 | ||||
After one year but within 10 years | 537 | |||||
After 10 years | 73 | |||||
$ | 66,565 | |||||
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 20052008
previously held as an appeal bond related to a legal matter. A 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 gainrealized gains of $1.0$2.9 million wasand $2.9 million were recognized during 2005 from the sale of $9.1$24.2 million in available-for-saleavailable 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 $3.6$6.9 million and $3.7 million at December 31, 20072010 and 2006.2009, respectively. At December 31, 2007,2010, our investment consistsinvestments consist of a limited partnership interestinterests in venture capital funds. During 2005, we sold
We determine the fair value of our interestinvestments using broad levels of inputs as defined by related accounting standards as follows:
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:
| 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
| (in thousands) | ||||||
Level 1 | $ | 189,445 | 65,160 | ||||
Level 2 | 3,166 | 5,364 | |||||
Level 3 | - | - | |||||
Total | $ | 192,611 | 70,524 | ||||
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:
| 2010 | 2009 | Estimated useful lives | ||||||
---|---|---|---|---|---|---|---|---|---|
| (in thousands) | | |||||||
Leasehold improvements | $ | 19,827 | 17,962 | 1 - 15 years | |||||
Furniture and fixtures | 30,137 | 29,870 | 5 - 10 years | ||||||
Equipment and machinery | 17,366 | 16,545 | 5 - 26 years | ||||||
Computer software | 67,830 | 56,954 | 5 - 10 years | ||||||
Data processing equipment | 22,190 | 21,844 | 5 - 10 years | ||||||
Property and equipment, at cost | 157,350 | 143,175 | |||||||
Accumulated depreciation | (86,102) | (75,004) | |||||||
Property and equipment, net | $ | 71,248 | 68,171 | ||||||
Depreciation expense was $14.0 million, $13.7 million and recognized$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 gain on the salecost of $0.6$1.8 million and accumulated depreciation of $1.0 million.
5. Acquisitions
Securian Strategic Alliance Agreement
In 2003, the Company entered into At December 31, 2009, we had property and equipment under capital leases with a Strategic Alliance Agreement with Securian Financial Group, Inc. ("Securian"), through which we agreed to become investment advisercost of substantially all managed equity assets$1.5 million and accumulated depreciation of Advantus Capital Management, Inc. ("Advantus"). Advantus is a subsidiary of Securian and is an affiliate of Minnesota Life Insurance Company.
In 2003, we paid $31.8 million (inclusive of acquisition costs) to purchase the rights to manage nine actively managed equity funds of the Advantus Series Funds, a mutual fund family used within variable insurance products and 11 actively managed retail funds of the Advantus Funds. As a result of this purchase, we recorded $31.8 million of indefinite life intangible assets.
The purchase agreements contained provisions whereby the initial purchase price may be reduced based upon a calculation using certain levels of assets under management determinations made no later than 30 days after each of the first, second and third anniversaries of the closing date of each transaction. Assets at each anniversary date were at levels that did not require a reduction to the purchase price.$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. Gross goodwill was $212.0 million at December 31, 2007 and 2006 and accumulated amortization of goodwill was $38.6 million at December 31, 2007 and 2006. Our goodwill is not deductible for tax purposes.
Goodwill is not amortized, but instead is reviewed annually and when events or circumstances occur which indicate that goodwill might be impaired. Impairment of goodwill is tested at the Company's reporting unit level. To determine fair value, our review process uses the income and market approaches. In performing the analysis, we use the best information available under the circumstances, including reasonable and supportable assumptions and projections. If the carrying amount of the reporting unit exceeds its implied fair value, goodwill isidentifiable intangible assets (all considered impaired and a second step is performed to measure the amount of impairment loss, if any.
Based on our annual review of goodwill in the second quarter of 2006, in accordance with SFAS No. 142, we recorded an impairment charge of $20.0 million related to our subsidiary, ACF. Factors that led to this conclusion included, but were not limited to, the negative impact of the decline in ACF's assets under management and diminished involvement of ACF's investment staff in mutual fund advisory responsibilities. Asset redemptions significantly impacted ACF's ability to achieve and maintain profitability, and therefore adversely impacted its earnings potential. ACF's remaining unamortized goodwill balanceindefinite lived) at December 31, 2007 was $7.2 million.2010 and 2009 are as follows:
| 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
| (in thousands) | ||||||
Goodwill | $ | 202,518 | 202,518 | ||||
Accumulated amortization | (36,307) | (36,307) | |||||
Total goodwill | 166,211 | 166,211 | |||||
Mutual fund management advisory contracts | 38,699 | 38,699 | |||||
Mutual fund subadvisory management contracts | 16,300 | 16,300 | |||||
Total indentifiable intangible assets | 54,999 | 54,999 | |||||
Total | $ | 221,210 | 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
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 20052008
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 has beenwas 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 charge.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 carrying value of identifiable intangible assets (all considered indefinite lived) atactivity in the accrued restructuring liability for the year ended December 31, 2007 and 2006 are2010 is summarized as follows:
| 2007 | 2006 | |||
---|---|---|---|---|---|
| (in thousands) | ||||
Unamortized intangible assets: | |||||
Mutual fund management advisory contracts | $ 38,699 | 38,699 | |||
Mutual fund subadvisory management contracts | 16,300 | 16,300 | |||
Total | $ 54,999 | 54,999 | |||
7. Property and Equipment
A summary of property and equipment at December 31, 2007 and 2006 is as follows:
| 2007 | 2006 | Estimated useful lives | |||
---|---|---|---|---|---|---|
| (in thousands) | | ||||
Leasehold improvements | $ 7,337 | 5,481 | 1 - 15 years | |||
Furniture and fixtures | 23,726 | 22,795 | 3 - 10 years | |||
Equipment and machinery | 21,675 | 21,431 | 3 - 20 years | |||
Data processing equipment and computer software | 58,853 | 53,923 | 3 - 10 years | |||
Property and equipment, at cost | 111,591 | 103,630 | ||||
Accumulated depreciation | (63,607) | (52,755) | ||||
Property and equipment, net | $ 47,984 | 50,875 | ||||
Depreciation expense was $12.4 million, $11.7 million and $10.3 million during the years ended December 31, 2007, 2006 and 2005, respectively.
| Accrued Liability as of December 31, 2009 | Cash Payments | Non-cash Settlements and Other | Accrued Liability as of December 31, 2010 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||||||
Employee compensation and other benefit costs | $ | 2,791 | (2,791) | - | - | |||||||
Contract termination and project development costs | 500 | - | (500) | - | ||||||||
$ | 3,291 | (2,791) | (500) | - | ||||||||
8. IndebtednessSale of Austin, Calvert & Flavin, Inc.
On AugustJuly 15, 2000,2009, the Company filedcompleted the sale of its wholly-owned subsidiary, ACF, pursuant to a $400.0 million shelf registration, whereby proceedsstock 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 could be usedduring 2010.
We recorded charges for general corporate purposes, including the repaymentseverance and other transaction costs of short-term debt outstanding. On January 18, 2001, the Company issued $200.0$1.1 million in principal amount 7.50% senior notes dueconnection with the divestiture of our investment in January 2006 (the "7.50% Notes"), resultingACF in net proceeds of approximately $197.6 million (net of discounts, commissions2009, which are included in general and expenses). Interest was payable semi-annually on January 18 and July 18 at a fixed rate of 7.50% per annum.
On March 12, 2002, the 7.50% Notes were effectively converted to variable rate debt by entering into an interest rate swap agreement whereby we agreed with another party to exchange, at specified intervals, the difference between the fixed-rate and various floating-rate interest amounts, calculated using a notional amount of $200.0 million. The differenceadministrative expenses in the floating-rate interest paid and the 7.50% fixed-rate interest received was recorded as an adjustment to interest expense during the period that the2009 consolidated statement of income.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 2005
related debt was outstanding. The change in the fair value of the interest rate swap was recorded on the consolidated balance sheet by adjusting the carrying amounts of the 7.50% Notes by an offsetting amount for the swap.
Under SFAS No. 133,"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), we accounted for the interest rate swap as a fair value hedge of the Notes. This interest rate swap was considered 100% effective in hedging the changes in the fair value of the 7.50% Notes arising from changes in interest rates, and accordingly, there was no impact on earnings resulting from any ineffectiveness associated with this transaction. No fair value adjustment was necessary for the swap at December 31, 2005 as the term of the swap expired on January 18, 2006.2008
During 2005, the Company entered into two forward starting interest rate swap agreementsFor 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 had five year fixed swap rates of 4.57% and 4.84%, respectively, on notional amounts of $100 millionprior periods. See Note 10 for each swap. The swaps were put in place to hedge against changes in forecasted interest payments attributable to changes in the LIBOR swap rate between the time the Company entered into the swap agreement and the time we anticipated refinancing the 7.50% Notes in January 2006. The Company assessed the effectiveness of the swaps as hedges at their inception and at December 31, 2005, and we considered those swaps to be completely effective cash flow hedges under SFAS No. 133. As of December 31, 2005, net unrealized gains attributedinformation related to the forward swap cash flow hedges were approximately $1.6 million and were included as a component of other comprehensive income.capital loss.
9. Indebtedness
On January 13, 2006, the Company issued $200$200.0 million in principal amount 5.60% senior notes due 2011 (the "New Notes""Notes") resulting in net proceeds of approximately $198.2 million (net of discounts, commissions and estimated expenses). The Company used these proceeds, together with cash on hand, to repay the entire $200 million aggregate principal amount outstanding of its 7.50% Notes. The New Notes represent senior unsecured obligations and are rated "Baa2" by Moody's and "BBB" by Standard & Poor's. Interest iswas 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 Company may, at its option, call the New Notes at any time pursuant toretirement resulted in a make whole redemption provision,loss of approximately $400 thousand, which would compensate holders for any changesis included in interest rate levelsexpense in the consolidated statement of the notes upon early extinguishment. The Company currently has no intention to call the New Notes.income.
On January 10, 2006,August 31, 2010, the Company terminatedentered into an agreement to complete a $190.0 million private placement of Senior Notes. The agreement contained a delayed funding provision which allowed the two 2005 forward interest rate swap agreements uponCompany to draw down the closingproceeds in January, 2011 when the Notes matured. The Company used the proceeds of the New Notes. In connection with the terminationissuance and sale of the swap agreements,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 receivedto maintain a net cash settlementconsolidated leverage ratio not to exceed 3.0 to 1.0 for four consecutive quarters and a consolidated interest coverage ratio of $1.1 million. The Company's gain on these transactions was deferred in accumulated other comprehensive income and is being amortized into earnings as a reductionnot less than 4.0 to interest expense over the five year term of the New Notes. As of December 31, 2007, the remaining unamortized amount was approximately $0.7 million.1.0 for four consecutive quarters.
The Company entered into a three-year364-day revolving credit facility (the "Credit Facility") with various lenders, effective October 7, 2005,5, 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 $200$125.0 million and replaced the Credit Facility. Lenders could, at their option upon the Company's previous 364-day revolving credit facility.request, expand the New Credit Facility to $200.0 million. At December 31, 20072010 and 2006,2009, there were no borrowings outstanding under the Credit Facility.facilities. Borrowings under the New Credit Facility bear interest at various rates including adjusted LIBOR or an alternatealternative 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 daily aggregate amount of commitmentcommitments under the revolving facility (whether or not utilized). The facility fee is also based on the Company's credit rating level. The most restrictive provisions ofNew Credit Facility's covenants match those outlined above for the credit agreement require the Company to maintain a consolidated leverage ratio not to exceed 3.0 to 1.0
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 2006 and 2005
for four consecutive quarters and a consolidated interest coverage ratio of not less than 4.0 to 1.0 for four consecutive quarters.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, 20072010 and 2006:2009:
| 2007 | 2006 | ||
---|---|---|---|---|
| (in thousands) | |||
Principal amount unsecured 5.60% senior notes due in 2011 | $ 200,000 | 200,000 | ||
Discount on unsecured 5.60% senior notes due in 2011 | (45) | (58) | ||
Total long-term debt | $ 199,955 | 199,942 | ||
| 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
| (in thousands) | ||||||
Principal amount unsecured 5.60% senior notes due in 2011 | $ | 190,000 | 200,000 | ||||
Discount on unsecured 5.60% senior notes due in 2011 | (1) | (16) | |||||
Total long-term debt | $ | 189,999 | 199,984 | ||||
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, 2007, 20062010, 2009 and 20052008 consists of the following:
| 2007 | 2006 | 2005 | ||||
---|---|---|---|---|---|---|---|
| (in thousands) | ||||||
Currently payable: | |||||||
Federal | $ 72,760 | 39,770 | 35,362 | ||||
State | 5,092 | 3,823 | 3,333 | ||||
77,852 | 43,593 | 38,695 | |||||
Deferred taxes | (4,189) | (505) | (2,866) | ||||
Provision for income taxes | $ 73,663 | 43,088 | 35,829 | ||||
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 2006 and 2005
| 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | |||||||||
Currently payable: | ||||||||||
Federal | $ | 87,350 | 48,249 | 59,149 | ||||||
State | 7,381 | 4,312 | 3,149 | |||||||
94,731 | 52,561 | 62,298 | ||||||||
Deferred taxes | (5,206) | 4,090 | (2,041) | |||||||
Provision for income taxes | $ | 89,525 | 56,651 | 60,257 | ||||||
The following table reconciles the statutory federal income tax rate with our effective income tax rate for the years ended December 31, 2007, 20062010, 2009 and 2005:2008:
| 2007 | 2006 | 2005 | |||
---|---|---|---|---|---|---|
Statutory federal income tax rate | 35.0% | 35.0% | 35.0% | |||
State income taxes, net of federal tax benefits | 2.1 | 1.7 | 1.4 | |||
Favorable resolution of outstanding income tax matters | — | — | (2.4) | |||
State tax incentives | (0.1) | (1.2) | — | |||
Nondeductible fines | — | 4.7 | 0.8 | |||
Nondeductible goodwill impairment expense | — | 7.8 | — | |||
Other items | — | 0.3 | 2.5 | |||
Effective income tax rate | 37.0% | 48.3% | 37.3% | |||
| 2010 | 2009 | 2008 | ||||||
---|---|---|---|---|---|---|---|---|---|
Statutory federal income tax rate | 35.0% | 35.0% | 35.0% | ||||||
State income taxes, net of federal tax benefits | 2.1 | 1.9 | 1.4 | ||||||
State tax incentives | (0.2) | (0.7) | (0.3) | ||||||
Sale of ACF | — | (6.0) | — | ||||||
Valuation allowance on losses capital in nature | (1.1) | 4.1 | — | ||||||
Nondeductible goodwill impairment expense | — | — | 1.6 | ||||||
Other items | 0.5 | 0.6 | 0.8 | ||||||
Effective income tax rate | 36.3% | 34.9% | 38.5% | ||||||
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, 20072010 and 20062009 are as follows:
| 2007 | 2006 | |||
---|---|---|---|---|---|
| (in thousands) | ||||
Deferred tax liabilities: | |||||
Unrealized pension benefits | $ (785) | — | |||
Deferred sales commissions | (6,754) | (5,711) | |||
Property and equipment | (8,794) | (10,319) | |||
Benefit plans | (3,037) | (2,867) | |||
Identifiable intangible assets | (8,374) | (8,306) | |||
Unrealized gains on derivatives | (248) | (324) | |||
Unrealized gains on available for sale investment securities | (2,753) | (2,660) | |||
Purchase of fund assets | (3,423) | (2,629) | |||
Prepaid expenses | (1,413) | (1,349) | |||
Other | (242) | (249) | |||
Total gross deferred liabilities | (35,823) | (34,414) | |||
Deferred tax assets: | |||||
Acquisition lease liability | 1,029 | 1,026 | |||
Additional pension and postretirement liability | — | 6,392 | |||
Accrued expenses | 6,753 | 7,276 | |||
Unrealized losses on investment securities | 676 | 705 | |||
Nonvested stock | 11,240 | 9,593 | |||
Unused state tax credits | 174 | 263 | |||
State net operating loss carryover | 3,527 | 2,908 | |||
Other | 2,828 | — | |||
Total gross deferred assets | 26,227 | 28,163 | |||
Valuation allowance | (3,527) | (2,908) | |||
Net deferred tax liability | $ (13,123) | (9,159) | |||
| 2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
| (in thousands) | ||||||
Deferred tax liabilities: | |||||||
Deferred sales commissions | $ | (7,880) | (7,895) | ||||
Property and equipment | (10,489) | (11,372) | |||||
Benefit plans | (5,651) | (4,289) | |||||
Identifiable intangible assets | (8,449) | (8,463) | |||||
Unrealized gains on derivatives | - | (83) | |||||
Unrealized gains on available for sale investment securities | (2,002) | (1,036) | |||||
Purchase of fund assets | (5,793) | (5,022) | |||||
Prepaid expenses | (1,600) | (1,886) | |||||
Other | (22) | (342) | |||||
Total gross deferred liabilities | (41,886) | (40,388) | |||||
Deferred tax assets: | |||||||
Acquisition lease liability | 1,308 | 949 | |||||
Additional pension and postretirement liability | 13,171 | 13,799 | |||||
Accrued expenses | 12,120 | 8,598 | |||||
Unrealized losses on investment securities | 1,375 | 1,402 | |||||
Capital loss carryforwards | 3,631 | 6,264 | |||||
Nonvested stock | 14,974 | 12,935 | |||||
Unused state tax credits | 1,131 | 1,018 | |||||
State net operating loss carryforwards | 5,464 | 5,034 | |||||
Other | 2,838 | 2,967 | |||||
Total gross deferred assets | 56,012 | 52,966 | |||||
Valuation allowance | (8,233) | (11,336) | |||||
Net deferred tax asset | $ | 5,893 | 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
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 20052008
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's subsidiariesCompany 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, 20072010 and 20062009 is approximately $3.5$5.5 million and $2.9$5.0 million, respectively. The carryforwards, if not utilized, will expire between 20082011 and 2027.2030. 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 $3.5$5.2 million and $2.9$4.7 million has been establishedrecorded at December 31, 20072010 and 2006,2009, respectively. The Company generatedhas state tax credits in 2006credit carryforwards of $1.1 million and 2007$1.0 million as of $263 thousandDecember 31, 2010 and $174 thousand that2009, respectively. Certain of these state tax credit carryforwards will expire between 20162019 and 2029, respectively,2020 if not utilized. The Company anticipates these credits will be fully utilized prior to their expiration dates.
In June 2006, the FASB issued FIN 48 to clarify certain aspects of accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax provision is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted FIN 48 on January 1, 2007.date.
As of January 1, 2007,2010, the Company had unrecognized tax benefits, including penalties and interest, of $5.1$6.8 million ($3.54.7 million net of federal benefit) that, if recognized, would impact the Company's effective tax rate. As of December 31, 2007,2010, the Company had unrecognized tax benefits, including penalties and interest, of $6.2$6.6 million ($4.24.6 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 sheet;sheets; unrecognized tax benefits that are expected to be settled within the next 12 months are included in income taxes payable. The Company had no cumulative effect of adopting FIN 48, and therefore, no adjustment was recorded to retained earnings upon such adoption.
The following table summarizes the Company's reconciliation of unrecognized tax benefits for the year ended December 31, 2007:
The Company's historical accounting policy with respect to interest and penalties related to income tax uncertainties has beenis to classify these amounts as income taxes, and the Company continued this classification upon the adoption of FIN 48.taxes. As of January 1, 2007,2010, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $1.9$2.0 million ($1.31.6 million net of federal benefit). The total amount of penalties and interest, net of federal benefit,
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 2006 and 2005
related to tax uncertainties recognized in the statement of income for the yearperiod ended December 31, 20072010 was $423$42 thousand. The total amount of accrued penalties and interest related to uncertain tax positions at December 31, 20072010 of $1.7$1.9 million ($1.31.5 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 | $ | 4,857 | 3,332 | 4,495 | ||||||
Increases during the year: | ||||||||||
Gross increases - tax positions in prior period | 189 | 1,071 | 761 | |||||||
Gross increases - current-period tax positions | 981 | 636 | 607 | |||||||
Decreases during the year: | ||||||||||
Gross decreases - tax positions in prior period | (490) | (7) | (293) | |||||||
Decreases due to settlements with taxing authorities | (629) | (1) | (2,062) | |||||||
Decreases due to lapse of statute of limitations | (149) | (174) | (176) | |||||||
Balance at December 31 | $ | 4,759 | 4,857 | 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 2006,2010, the Company settled five open tax years, 2000 through 2004, that were undergoing audit by the United States Internal Revenue Service. The 2005 and 2006 federal income tax returns are the onlynine open tax years that remain subject to potential future audit. In late 2007,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 twothree 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 20022006 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 three othervarious 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 FIN 48 liability for unrecognized tax benefits, including penalties and interest, could decrease by approximately $1.8$700 thousand to $1.7 million ($468 thousand to $2.5 million ($1.2 million to $1.6$1.2 million net of federal benefit) upon settlement of these audits. Such settlements are not anticipated to have a significant impact on reported income.the results of operations.
10.11. Pension Plan and Postretirement Benefits Other Than PensionsPension
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.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 20052008
A reconciliation of the funded status of these plans and the assumptions related to the obligations at December 31, 2007, 20062010, 2009 and 20052008 follows:
| Pension Benefits | Other Postretirement Benefits | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||
| (in thousands) | ||||||||||||
Change in projected benefit obligation: | |||||||||||||
Net benefit obligation at beginning of year | $ 88,320 | 86,530 | 82,829 | 4,174 | 3,715 | 5,441 | |||||||
Service cost | 5,718 | 5,446 | 5,598 | 292 | 299 | 422 | |||||||
Interest cost | 5,490 | 4,830 | 4,824 | 244 | 209 | 306 | |||||||
Plan amendments | — | — | — | — | 165 | — | |||||||
Benefits and expenses paid | (3,690) | (3,496) | (6,604) | (313) | (244) | (144) | |||||||
Actuarial gain | (945) | (4,990) | (117) | (570) | (107) | (2,418) | |||||||
Retiree contributions | — | — | — | 148 | 137 | 108 | |||||||
Net benefit obligation at end of year | $ 94,893 | 88,320 | 86,530 | 3,975 | 4,174 | 3,715 | |||||||
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||
| (in thousands) | ||||||||||||||||||
Change in projected benefit obligation: | |||||||||||||||||||
Net benefit obligation at beginning of year | $ | 110,962 | 98,594 | 94,893 | 5,945 | 5,205 | 3,975 | ||||||||||||
Service cost | 6,140 | 5,276 | 5,727 | 443 | 371 | 296 | |||||||||||||
Interest cost | 6,596 | 6,386 | 6,326 | 364 | 343 | 262 | |||||||||||||
Benefits and expenses paid | (6,589) | (11,692) | (6,553) | (528) | (493) | (616) | |||||||||||||
Actuarial (gain) loss | 1,751 | 12,398 | (1,799) | 389 | 362 | 1,126 | |||||||||||||
Retiree contributions | — | — | — | 237 | 157 | 162 | |||||||||||||
Net benefit obligation at end of year | $ | 118,860 | 110,962 | 98,594 | 6,850 | 5,945 | 5,205 | ||||||||||||
The accumulated benefit obligation for the Pension Plan was $81.3$102.7 million and $77.1$94.9 million at December 31, 20072010 and 2006,2009, respectively.
| Pension Benefits (1) | Other Postretirement Benefits (1) | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||
| (in thousands) | ||||||||||||||
Change in plan assets: | |||||||||||||||
Fair value of plan assets at beginning of year | $ | 82,889 | 74,445 | 68,629 | — | — | — | ||||||||
Actual return on plan assets | 23,622 | 4,940 | 5,420 | — | — | — | |||||||||
Employer contributions | 7,000 | 7,000 | 7,000 | 165 | 107 | 36 | |||||||||
Retiree contributions | — | — | — | 148 | 137 | 108 | |||||||||
Benefits paid | (3,689) | (3,496) | (6,604) | (313) | (244) | (144) | |||||||||
Fair value of plan assets at end of year | $ | 109,822 | 82,889 | 74,445 | — | — | — | ||||||||
Funded status at end of year | $ | 14,929 | (5,431) | (12,085) | (3,975) | (4,174) | (3,715) | ||||||||
Unrecognized transition obligation | NA | NA | 67 | NA | NA | — | |||||||||
Unrecognized prior service cost | NA | NA | 4,585 | NA | NA | 258 | |||||||||
Unrecognized net actuarial loss | NA | NA | 19,333 | NA | NA | (889) | |||||||||
Net asset (liability) recognized at end of year | NA | NA | 11,900 | NA | NA | (4,346) | |||||||||
| 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 | $ | 91,551 | 78,020 | 109,822 | — | — | — | |||||||||||||
Actual return on plan assets | 9,106 | 15,223 | (30,249) | — | — | — | ||||||||||||||
Employer contributions | 12,500 | 10,000 | 5,000 | 291 | 336 | 454 | ||||||||||||||
Retiree contributions | — | — | — | 237 | 157 | 162 | ||||||||||||||
Benefits paid | (6,589) | (11,692) | (6,553) | (528) | (493) | (616) | ||||||||||||||
Fair value of plan assets at end of year | $ | 106,568 | 91,551 | 78,020 | — | — | — | |||||||||||||
Funded status at end of year | $ | (12,292) | (19,411) | (20,574) | (6,850) | (5,945) | (5,205) | |||||||||||||
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 20052008
| Pension Benefits (1) | Other Postretirement Benefits (1) | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||
| (in thousands) | |||||||||||||
Amounts recognized in the statement of financial position prior to SFAS No. 158: | ||||||||||||||
Accrued benefit cost | NA | NA | (920) | NA | NA | (4,346) | ||||||||
Intangible asset | NA | NA | 4,652 | NA | NA | – | ||||||||
Accumulated other comprehensive income | NA | NA | 8,168 | NA | NA | – | ||||||||
Net asset (liability) recognized at end of year | NA | NA | 11,900 | NA | NA | (4,346) | ||||||||
Amounts recognized in the statement of financial position under SFAS No. 158: | ||||||||||||||
Noncurrent assets | $ | 14,929 | – | NA | – | – | NA | |||||||
Current liabilities | – | – | NA | (192) | (209) | NA | ||||||||
Noncurrent liabilities | – | (5,431) | NA | (3,783) | (3,965) | NA | ||||||||
Net amount recognized at end of year | $ | 14,929 | (5,431) | NA | (3,975) | (4,174) | NA | |||||||
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income: | ||||||||||||||
Transition obligation | $ | (57) | (62) | NA | – | – | NA | |||||||
Prior service cost | (3,714) | (4,149) | NA | (362) | (400) | NA | ||||||||
Accumulated gain (loss) | 4,792 | (14,143) | NA | 1,489 | 958 | NA | ||||||||
Accumulated other comprehensive income | 1,021 | (18,354) | NA | 1,127 | 558 | NA | ||||||||
Cumulative employer contributions in excess of net periodic benefit cost | 13,908 | 12,923 | NA | (5,102) | (4,732) | NA | ||||||||
Net amount recognized at end of year | $ | 14,929 | (5,431) | NA | (3,975) | (4,174) | NA | |||||||
Weighted average assumptions used to determine benefit obligation at December 31: | ||||||||||||||
Discount rate | 6.75% | 6.00% | 5.75% | 6.75% | 6.00% | 5.75% | ||||||||
Rate of compensation increase | 3.86% | 3.86% | 3.86% | Not applicable |
| 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 | $ | - | - | - | (303) | (250) | (252) | ||||||||||||
Noncurrent liabilities | (12,292) | (19,411) | (20,574) | (6,547) | (5,695) | (4,953) | |||||||||||||
Net amount recognized at end of year | $ | (12,292) | (19,411) | (20,574) | (6,850) | (5,945) | (5,205) | ||||||||||||
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income: | |||||||||||||||||||
Transition obligation | $ | (42) | (47) | (52) | - | - | - | ||||||||||||
Prior service cost | (3,486) | (4,041) | (4,596) | (238) | (284) | (323) | |||||||||||||
Accumulated gain (loss) | (31,369) | (32,842) | (30,835) | (469) | (79) | 283 | |||||||||||||
Accumulated other comprehensive income (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 | (6,143) | (5,582) | (5,165) | |||||||||||||
Net amount recognized at end of year | $ | (12,292) | (19,411) | (20,574) | (6,850) | (5,945) | (5,205) | ||||||||||||
Weighted average assumptions used to determine benefit obligation at December 31: | |||||||||||||||||||
Discount rate | 6.00% | 6.25% | 6.75% | 6.00% | 6.25% | 6.75% | |||||||||||||
Rate of compensation increase | 3.86% | 3.86% | (1) | Not applicable |
The discount rate assumptions used to determine the postretirement obligations at December 31, 2007 and 2006 and the postretirement expenses in 2007expense 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.
We adopted SFAS No. 158 for the fiscal year ended December 31, 2006. SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined benefit post-retirement plan as an asset or liability in its statement of financial position, measured as the difference between the fair value of plan assets and the benefit obligation. Further, this statement requires employers to recognize changes in that funded status in the year in which the changes occur through comprehensive income.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 20052008
Our Pension Plan asset allocation at December 31, 20072010 and 2006 and our target allocation for 2008 are2009 is as follows:
Plan assets by investment style | Target Allocation at January 1, 2008 | Percentage of Plan Assets at December 31, 2007 | |||
---|---|---|---|---|---|
Asset Strategy | 40% | 44% | |||
Large Cap Growth | 35% | 35% | |||
Core Plus Fixed Income | 13% | 10% | |||
Science and Technology | 10% | 9% | |||
Cash Reserves | 2% | 2% | |||
Total | 100% | 100% | |||
Plan assets by category | Percentage of Plan Assets at December 31, 2007 | Percentage of Plan Assets at December 31, 2006 | |||
---|---|---|---|---|---|
Equity securities | 75% | 62% | |||
Debt securities | 15% | 26% | |||
Cash | 10% | 12% | |||
Total | 100% | 100% | |||
Plan assets by category | Percentage of Plan Assets at December 31, 2010 | Percentage of Plan Assets at December 31, 2009 | |||||
---|---|---|---|---|---|---|---|
Cash | 5% | 3% | |||||
Equity securities: | |||||||
Domestic | 34% | 21% | |||||
International | 47% | 60% | |||||
Gold bullion | 14% | 16% | |||||
Total | 100% | 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. The target allocations for pensionAs of December 31, 2010, our Pension Plan assets are as summarizedwere invested in the table above. The assets are well diversifiedour Asset Strategy style, and are managed by our in-house investment professionals.
Large Cap Growth consists of a diversified portfolio of common stocks issued by higher-quality growth-oriented large to medium sized domestic and, to a lesser extent, foreign companies. Asset Strategy invests in most anythe 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. Although thisThis style may allocate its assets among stocks, bonds and short-term investments and since the allocation is typically weighted toward stocks. Core Plus Fixed Income invests primarilydynamically 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 investment-grade debt securities issuedthis style's investment process, to manage risk and maximize stability of the assets in the United States. Science and Technology concentrates its investments primarilyportfolio.
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 domesticwhich 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 foreignmanagement. 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 that benefit by the application of science and technological discoveries.or industries.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 20052008
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 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | ||||||||||||
Equity securities: | |||||||||||||
Domestic | $ | 36,488 | - | - | 36,488 | ||||||||
International | 49,864 | - | - | 49,864 | |||||||||
Fixed income securities: | |||||||||||||
Foreign bonds | - | 73 | - | 73 | |||||||||
Mortgage-backed security | - | 130 | - | 130 | |||||||||
Gold bullion | 14,382 | - | - | 14,382 | |||||||||
Total investment securities | 100,734 | 203 | - | 100,937 | |||||||||
Cash and other | 5,631 | ||||||||||||
Total | $ | 106,568 | |||||||||||
2009 | Level 1 | Level 2 | Level 3 | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | ||||||||||||
Equity securities: | |||||||||||||
Domestic | $ | 20,340 | - | - | 20,340 | ||||||||
International | 6,430 | 47,663 | - | 54,093 | |||||||||
Fixed income securities: | |||||||||||||
Foreign bonds | - | 68 | - | 68 | |||||||||
Industrial bond | - | 12 | - | 12 | |||||||||
Mortgage-backed security | - | 195 | - | 195 | |||||||||
Gold bullion | 14,438 | - | - | 14,438 | |||||||||
Total investment securities | 41,208 | 47,938 | - | 89,146 | |||||||||
Cash and other | 2,405 | ||||||||||||
Total | $ | 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.
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.
Options | ||||
---|---|---|---|---|
(in thousands) | ||||
Balance at December 31, 2008 | $ | (11) | ||
Purchases, issuances and settlements | 262 | |||
Actual return on plan assets, sold during the period | (123) | |||
Proceeds from sales | (128) | |||
Balance at December 31, 2009 | $ | - | ||
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, 2007, 20062010, 2009 and 2005.2008:
| Pension Benefits | Other Postretirement Benefits | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | ||||||||
| (in thousands) | |||||||||||||
Components of net periodic benefit cost: | ||||||||||||||
Service cost | $ | 5,718 | 5,446 | 5,598 | 292 | 299 | 422 | |||||||
Interest cost | 5,490 | 4,830 | 4,824 | 244 | 209 | 306 | ||||||||
Expected return on plan assets | (6,442) | (5,694) | (5,208) | — | — | — | ||||||||
Actuarial (gain) loss amortization | 808 | 954 | 1,434 | (39) | (38) | 88 | ||||||||
Prior service cost amortization | 436 | 436 | 436 | 38 | 23 | 23 | ||||||||
Transition obligation amortization | 5 | 5 | 5 | — | — | — | ||||||||
Net periodic benefit cost | $ | 6,015 | 5,977 | 7,089 | 535 | 493 | 839 | |||||||
Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31: | ||||||||||||||
Discount rate | 6.00% | 5.75% | 5.75% | 6.00% | 5.75% | 5.75% | ||||||||
Expected return on plan assets | 7.75% | 7.75% | 7.75% | Not applicable | ||||||||||
Rate of compensation increase | 3.86% | 3.86% | 3.86% | Not applicable |
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||
| (in thousands) | ||||||||||||||||||
Components of net periodic benefit cost: | |||||||||||||||||||
Service cost | $ | 6,140 | 5,276 | 5,727 | 443 | 371 | 296 | ||||||||||||
Interest cost | 6,596 | 6,387 | 6,326 | 364 | 343 | 262 | |||||||||||||
Expected return on plan assets | (7,499) | (6,428) | (8,614) | — | — | — | |||||||||||||
Actuarial (gain) loss amortization | 1,617 | 1,595 | — | — | — | (80) | |||||||||||||
Prior service cost amortization | 555 | 555 | 555 | 45 | 39 | 39 | |||||||||||||
Transition obligation amortization | 5 | 5 | 5 | — | — | — | |||||||||||||
Net periodic benefit cost | $ | 7,414 | 7,390 | 3,999 | 852 | 753 | 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
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 | 6.25% | 6.75% | 6.75% | 6.25% | 6.75% | 6.75% | |||||||||||||
Expected return on plan assets | 7.75% | 7.75% | 7.75% | Not applicable | |||||||||||||||
Rate of compensation increase | 3.86% | (1) | 3.86% | Not applicable |
We expect the following benefit payments to be paid which reflect future service, as appropriate:
| Pension Benefits | Other Postretirement Benefits | |||
---|---|---|---|---|---|
| (in thousands) | ||||
2008 | $ | 5,075 | 192 | ||
2009 | 5,318 | 223 | |||
2010 | 5,219 | 277 | |||
2011 | 7,029 | 308 | |||
2012 | 8,231 | 331 | |||
2013 through 2017 | 50,795 | 1,876 | |||
$ | 81,667 | 3,207 | |||
| Pension Benefits | Other Postretirement Benefits | ||||
---|---|---|---|---|---|---|
| (in thousands) | |||||
2011 | $ | 6,130 | 303 | |||
2012 | 6,487 | 358 | ||||
2013 | 7,187 | 426 | ||||
2014 | 8,384 | 435 | ||||
2015 | 8,050 | 458 | ||||
2016 through 2020 | 40,569 | 2,287 | ||||
$ | 76,807 | 4,267 | ||||
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 2006 and 2005
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 20072010 and 20062009 were voluntary. We anticipate thatmade a $10.0 million contribution to our Pension Plan in January 2011 and do not expect to make an additional contribution for the 2008 contribution will be made from cash generated from operations and will be inremainder of the range of $5.0 to $10.0 million.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 20082011 expected contribution with cash generated from operations. Contributions by participants to the postretirement plan were $148$237 thousand, $157 thousand and $137$162 thousand for the years endingended December 31, 20072010, 2009 and 2006,2008, respectively.
For measurement purposes, the initial health care cost trend rate was 10% for 2008, 20072010, 9% for 2009 and 2006.10% for 2008. The health care cost trend rate reflects anticipated increases in health care costs. The initial
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
assumed growth rate of 10% in the first yearfor 2010 is assumed to gradually decline over the next five17 years to a rate of 5% in the fifth year.4.5%. The effect of a 1% annual increase in assumed cost trend rates would increase the December 31, 20072010 accumulated postretirement benefit obligation by approximately $393$562 thousand, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 20072010 by approximately $72$98 thousand. The effect of a 1% annual decrease in assumed cost trend rates would decrease the December 31, 20072010 accumulated postretirement benefit obligation by approximately $342$487 thousand, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 20072010 by approximately $61$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 2007.2010. 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, 20072010 and 2006,2009, the aggregate liability to participants was $3.4$3.7 million and $3.3$3.6 million, respectively.
At December 31, 2007, the accrued pension and postretirement liability recorded on the balance sheet was comprised of an accrued liability for SERP benefits of $3.4 million and a liability for postretirement benefits in the amount of $3.8 million. The current portion of postretirement liability of $0.2 million is included in other current liabilities on the balance sheet. At December 31, 2006,2010, the accrued pension and postretirement liability recorded on the balance sheet was comprised of accrued pension costs of
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 2006 and 2005
$5.4 $12.3 million, an accrued liability for SERP benefits of $3.3$3.7 million and a liability for postretirement benefits in the amount of $4.0$6.5 million. The current portion of postretirement liability of $0.2$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.
11.12. 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, 2007, 20062010, 2009 and 20052008 were $3.7$4.4 million, $3.4$1.6 million and $3.1$4.0 million, respectively.
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, 2007, 20062010, 2009 and 20052008, earnings per share were computed as follows:
| 2007 | 2006 | 2005 | | ||||||
---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share amounts) | | ||||||||
Net income | $ | 125,497 | 46,112 | 60,121 | ||||||
Weighted average shares outstanding — basic | 80,781 | 81,353 | 80,908 | |||||||
Dilutive potential shares from stock options and certain nonvested stock awards | 2,043 | 1,859 | 1,137 | |||||||
Weighted average shares outstanding — diluted | 82,824 | 83,212 | 82,045 | |||||||
Earnings per share: | ||||||||||
Basic | $ | 1.55 | 0.57 | 0.74 | ||||||
Diluted | $ | 1.52 | 0.55 | 0.73 |
| 2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
| (in thousands, except per share amounts) | |||||||||
Net income | $ | 156,959 | 105,505 | 96,163 | ||||||
Weighted average shares outstanding — basic | 85,618 | 85,484 | 85,761 | |||||||
Dilutive potential shares from stock options | 29 | 60 | 352 | |||||||
Weighted average shares outstanding — diluted | 85,647 | 85,544 | 86,113 | |||||||
Earnings per share: | ||||||||||
Basic | $ | 1.83 | 1.23 | 1.12 | ||||||
Diluted | $ | 1.83 | 1.23 | 1.12 |
Anti-dilutive Securities
Options to purchase 659203 thousand shares, 2.79 million777 thousand shares and 2.81 million688 thousand shares of Class A common stock ("common stock") were excluded from the dilutive earnings per share calculation for years ended December 31, 2007, 2006 and 2005, respectively because they were anti-dilutive. Also excluded from the diluted earnings per share calculation were approximately 265 thousand shares, 236 thousand shares and 40 thousand shares of anti-dilutive nonvested stock for the years ended December 31, 2007, 20062010, 2009 and 2005, respectively.2008, respectively, because they were anti-dilutive.
Dividends
We declared dividends on our common stock of $.68$0.77 per share $.60 per sharefor the year ended December 31, 2010 and $.60$0.76 per share for the years ended December 31, 2007, 20062009 and 2005, respectively.2008. As of December 31, 20072010 and 2006,2009, other current liabilities included $14.7$17.1 million and $12.7$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 $.17$0.19 per share to $.19$0.20 per share beginning with our firstfourth quarter 20082010 dividend, payablepaid on MayFebruary 1, 2008.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 2006 and 20052011.
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 2,350,0542,043,545 shares, 1,139,1161,870,034 shares and 292,6003,779,953 shares repurchased in the open market or privately during the years ended December 31, 2007, 20062010, 2009 and 2005,2008, 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.
13.14. 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").
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. TheAll 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, 14,155,95110,872,173 shares of common stock are available for issuance as of December 31, 20072010 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.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 2006 and 2005
Restricted shares issued in the stock option tender offer were fully vested upon issuance, but remained subject to transfer restrictions that lapsed in 331/3% increments annually beginning March 14, 2005. The Company also issues nonvested stock awards to our financial advisors (our sales force) who are considered 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.
On April 25, 2005, the Compensation Committee of the Board approved the accelerated vesting of all then outstanding unvested options previously awarded to employees, financial advisors, officers and directors. This resulted in the accelerated vesting of 624,267 options. Of these options, 447,497 were "in-the-money" options having an exercise price less than the then current market price of the Company's common stock and a weighted average exercise price of $13.90 per share. In order to prevent unintended personal benefits to directors and executive officers, the Board of Directors imposed restrictions on any shares received through the exercise of accelerated options held by those individuals. These restrictions prevent the sale of any stock obtained through exercise of an accelerated option prior to its original vesting date, other than the disposition of stock as payment for the exercise price of options and associated income taxes, if any.
The Board approved the accelerated vesting of these options based on the belief that it was in the best interest of the stockholders to reduce future compensation expense that the Company would otherwise be required to report in its statement of operations upon adoption of SFAS No. 123R on January 1, 2006. We anticipate that holders of "in-the-money" accelerated options will remain employed with the Company throughout the original vesting term of such options, and therefore, no expense will be recorded for these options unless option holders are able to exercise an option that would have expired unexercisable pursuant to its original terms. Subsequent to the Compensation Committee's decision to accelerate the vesting of outstanding options, the separation of employment of the Company's former chief executive officer triggered the remeasurement of compensation cost. This remeasurement resulted in additional compensation cost of $1.4 million during 2005.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 20052008
A summary of stock option activity and related information for the year ended December 31, 20072010 follows:
| Options | Weighted average exercise price | Weighted average remaining contractual term (in years) | | |||||
---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2006 | 6,118,559 | $ | 23.22 | 2.32 | |||||
Granted | — | — | |||||||
Exercised | (3,447,723) | 24.53 | |||||||
Granted in restoration | 8,131 | 24.88 | |||||||
Exercised in restoration | (9,959) | 17.78 | |||||||
Terminated/Canceled | (23,342) | 19.46 | |||||||
Outstanding at December 31, 2007 | 2,645,666 | $ | 21.58 | 2.10 | |||||
Exercisable at December 31, 2007 | 2,637,535 | $ | 21.57 | 2.10 | |||||
| Options | Weighted average exercise price | Weighted average remaining contractual term (in years) | ||||||
---|---|---|---|---|---|---|---|---|---|
Outstanding at December 31, 2009 | 897,503 | $ | 30.65 | 1.12 | |||||
Granted | — | — | |||||||
Exercised | (426,824) | 30.59 | |||||||
Granted in restoration | — | — | |||||||
Exercised in restoration | — | — | |||||||
Terminated/Canceled | (172,384) | 31.97 | |||||||
Outstanding at December 31, 2010 | 298,295 | $ | 29.98 | 0.69 | |||||
Exercisable at December 31, 2010 | 298,295 | $ | 29.98 | 0.69 | |||||
The aggregate intrinsic value of outstanding options and exercisable options as of December 31, 20072010 was $38.4 million and $38.3 million, respectively.$1.6 million. The total intrinsic value (on date of exercise) of options exercised during the years ended December 31, 2007, 20062010, 2009 and 20052008 was $31.9$2.0 million, $8.7$7.3 million and $2.6$9.4 million, respectively. The related income tax benefit recognized was $11.5 million, $3.1$600 thousand, $2.5 million and $1.0$3.3 million for the years ended December 31, 2007, 20062010, 2009 and 2005,2008, respectively.
SORP options with vesting periods of six months were the only options granted during 2007, 20062009 and 2005.2008. There were no options granted in 2010. Compensation expense related to options issued under the SORP of $19$9 thousand, $90 thousand and $157$217 thousand was recorded for the years ended December 31, 20072010, 2009 and December 31, 2006,2008, respectively. There was no compensation expense recorded in 2005.
The weighted average fair value of options granted during the years ended December 31, 2007, 20062009 and 20052008 were $2.76, $2.94$8.68 and $3.01,$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:
| 2009 | 2008 | ||||
---|---|---|---|---|---|---|
Dividend yield | 2.71% | 2.24% | ||||
Risk-free interest rate | 0.88% | 2.05% | ||||
Expected volatility | 64.90% | 32.10% | ||||
Expected life (in years) | 1.79 | 1.89 |
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 20052008
The grant date fair value of options granted in 2007, 2006 and 2005 have been calculated using a Black-Scholes option-pricing model with assumptions as follows:
| 2007 | 2006 | 2005 | |||
---|---|---|---|---|---|---|
Dividend yield | 2.70% | 2.80% | 3.10% | |||
Risk-free interest rate | 4.57% | 4.92% | 4.03% | |||
Expected volatility | 24.50% | 22.50% | 27.10% | |||
Expected life (in years) | 1.21 | 2.09 | 2.24 |
A summary of nonvested share activity and related fair value for the year ended December 31, 20072010 follows:
| Nonvested Stock Shares | Weighted Average Grant Date Fair Value | |||
---|---|---|---|---|---|
Nonvested at December 31, 2006 | 3,209,573 | $ | 22.46 | ||
Granted | 1,145,459 | 26.52 | |||
Vested | (887,403) | 21.66 | |||
Forfeited | (40,708) | 22.63 | |||
Nonvested at December 31, 2007 | 3,426,921 | $ | 24.02 | ||
| Nonvested Stock Shares | Weighted Average Grant Date Fair Value | ||||
---|---|---|---|---|---|---|
Nonvested at December 31, 2009 | 4,435,844 | $ | 24.40 | |||
Granted | 1,601,429 | 36.18 | ||||
Vested | (1,300,319) | 26.36 | ||||
Forfeited | (39,745) | 26.10 | ||||
Nonvested at December 31, 2010 | 4,697,209 | $ | 27.86 | |||
For the years ended December 31, 2007, 20062010, 2009 and 2005,2008, compensation expense related to nonvested stock totaled $23.7$40.3 million, $21.7$30.5 million and $17.8$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 recognized was $8.6$14.9 million, $7.9$11.2 million and $6.6$10.5 million for the years ended December 31, 2007, 20062010, 2009 and 2005, respectively.2008, respectively, which may be recognized upon vesting. As of December 31, 2007,2010, the remaining unamortized expense of $51.6$90.2 million is expected to be recognized over a weighted average period of 2.32.4 years.
The total fair value of shares vested (at vest date) during the years ended December 31, 2007, 20062010, 2009 and 20052008 was $21.0$46.5 million, $16.9$23.3 million and $6.5$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 2008,2011, we expect to repurchase approximately 290,000482,000 shares from employees who elect to tender shares to cover their minimum tax withholdings.
For nonvested stock awards granted prior to the adoption of SFAS No. 123R,"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 decreasedincreased by $45$66 thousand and $372 thousand for the year ended December 31, 2007, increased by $280 thousand for the year ended 2009 and 2008, respectively.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 20062010, 2009 and decreased by $206 thousand for the year ended December 31, 2005.2008
14.15. 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
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 2006 and 2005
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, 20072010 and 20062009 (in thousands):
| 2007 | 2006 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| W&R | LEC | IFDI | W&R | LEC | IFDI | |||||||
Net capital | $ | 41,187 | 2,136 | 12,328 | 45,748 | 893 | 8,159 | ||||||
Required capital | 13,117 | 173 | 1,333 | 7,756 | 243 | 674 | |||||||
Excess of required capital | $ | 28,070 | 1,963 | 10,995 | 37,992 | 650 | 7,485 | ||||||
Ratio of aggregate indebtedness to net capital | 4.78 to 1.0 | 1.22 to 1.0 | 1.62 to 1.0 | 2.54 to 1.0 | 4.07 to 1.0 | 1.24 to 1.0 | |||||||
| 2010 | 2009 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| W&R | LEC | IFDI | W&R | LEC | IFDI | ||||||||||||
Net capital | $ | 39,563 | 2,547 | 38,663 | 21,579 | 1,948 | 17,093 | |||||||||||
Required capital | 250 | 185 | 2,425 | 250 | 229 | 2,089 | ||||||||||||
Excess of required capital | $ | 39,313 | 2,362 | 36,238 | 21,329 | 1,719 | 15,004 | |||||||||||
Ratio of aggregate indebtedness to net capital | Not | 1.09 to 1.0 | 0.94 to 1.0 | Not | 1.76 to 1.0 | 1.83 to 1.0 |
15.16. Rental Expense and Lease Commitments
We lease our home office buildings, and certain sales and other office space and equipment under long-term operating leases. Rent expense was $18.6$23.0 million, $18.3$22.0 million and $18.0$20.1 million, for the years ended December 31, 2007, 20062010, 2009 and 2005,2008, respectively. Future minimum rental commitments under non-cancelable operating leases are as follows (in thousands):
2008 | $ | 15,041 | |
2009 | 12,639 | ||
2010 | 10,201 | ||
2011 | 7,692 | ||
2012 | 5,503 | ||
Thereafter | 14,212 | ||
$ | 65,288 | ||
2011 | $ | 20,281 | |
2012 | 17,346 | ||
2013 | 13,619 | ||
2014 | 9,926 | ||
2015 | 6,575 | ||
Thereafter | 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 2007.2010.
16.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2010, 2009 and 2008
17. Related Party Transactions
We earn investment management feesfee 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 Target Funds)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
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 2006 and 2005
which we act as an investment adviser. These agreements are approved or renewed on an annual basis by each Fund's board of directors/trustees, including a majority of the disinterested members. Funds and separate accounts receivable includes amounts due from the Funds for aforementioned services.
17. Litigation and Regulatory Settlements
SEC/New York Attorney General/Kansas Securities Commission
During 2006, we recorded a charge of $55.0 million related to settlement with the SEC, the New York Attorney General and the Kansas Securities Commission regarding market timing allegations, $12 million of which represented non-deductible penalties. The charge is included in general and administrative expenses.
Williams Excessive Fee Litigation
On May 30, 2006, the investment advisor and underwriter subsidiaries of the Company for the Ivy Funds were dismissed from the case with prejudice. On September 25, 2006, the remainder of this case was dismissed with prejudice. The negotiations and discussions leading up to, and the terms of, the dismissal are confidential.
Torchmark Corporation and National Association of Securities Dealers Enforcement Action
During 2005, we recorded a charge of $38.2 million related to settlements of outstanding litigation, including matters with the Enforcement Department of the National Association of Securities Dealers and Torchmark Corporation ("Torchmark"). The charge is included in general and administrative expenses.
During 2006, the Arbitration Panel adjudicating the Torchmark matter ruled against the Company and determined that the Company owed Torchmark $7.4 million. A reserve previously established largely covered this exposure and the remaining amount was immaterial to the Company's 2006 earnings.
Sawtelle Arbitration
During 2005, the Company settled this matter in its entirety for $7.9 million and recorded a pre-tax charge of $6.1 million in 2005 related thereto.
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.
WADDELL & REED FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2007, 20062010, 2009 and 20052008
19. Selected Quarterly Information (Unaudited)
| Quarter | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| First | Second | Third | Fourth | |||||||
| (in thousands) | ||||||||||
2007 | |||||||||||
Total revenues | $ | 189,499 | 201,286 | 210,652 | 236,117 | ||||||
Net income | 28,727 | 29,706 | 31,967 | 35,097 | |||||||
Earnings per share: | |||||||||||
Basic | $ | 0.36 | 0.37 | 0.40 | 0.43 | ||||||
Diluted | $ | 0.35 | 0.36 | 0.39 | 0.42 |
| Quarter | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
| First | Second | Third | Fourth | |||||||
| (in thousands) | ||||||||||
2006 | |||||||||||
Total revenues | $ | 173,070 | 181,311 | 178,582 | 185,692 | ||||||
Net income (loss) | 24,592 (1) | (33,022) (2) | 24,591 (3) | 29,951 | |||||||
Earnings (loss) per share: | |||||||||||
Basic | $ | 0.30 (1) | (0.40) (2) | 0.30 (3) | 0.37 | ||||||
Diluted | $ | 0.30 (1) | (0.40) (2) | 0.30 (3) | 0.36 |
| Quarter | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First | Second | Third | Fourth | |||||||||||
| (in thousands) | ||||||||||||||
2010 | |||||||||||||||
Total revenues | $ | 251,614 | 257,219 | 254,807 | 281,245 | ||||||||||
Net income | 35,909 | 34,152 | 40,533 | 46,365 | |||||||||||
Earnings per share: | |||||||||||||||
Basic | $ | 0.42 | 0.40 | 0.47 | 0.54 | ||||||||||
Diluted | $ | 0.42 | 0.40 | 0.47 | 0.54 |
| Quarter | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| First | Second | Third | Fourth | |||||||||||
| (in thousands) | ||||||||||||||
2009 | |||||||||||||||
Total revenues | $ | 176,672 | 199,628 | 217,976 | 244,813 | ||||||||||
Net income | 15,466 | (1) | 23,374 | (2) | 33,413 | (3) | 33,252 | ||||||||
Earnings per share: | |||||||||||||||
Basic | $ | 0.18 | 0.27 | 0.39 | 0.39 | ||||||||||
Diluted | $ | 0.18 | 0.27 | 0.39 | 0.39 |
WADDELL & REED FINANCIAL, INC.Index to Exhibits
Exhibit No. | Exhibit Description | |
---|---|---|
3.1 | 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. | |
3.2 | 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 | |
4.1 | 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. | |
4.2 | 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. | |
4.3 | Rights Agreement, dated as of April | |
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. | ||
4.5 | 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. | |
4.6 | 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. |
WADDELL & REED FINANCIAL, INC.Index to Exhibits
4.7 | 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. |
Exhibit No. | Exhibit Description | |
---|---|---|
10.1 | 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. | |
10.2 | 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. | |
10.3 | 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 | ||
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 | ||
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 | ||
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. |
Exhibit No. | Exhibit Description | |
---|---|---|
10.11 | 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. |
WADDELL & REED FINANCIAL, INC.Index to Exhibits
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 | ||
Waddell & Reed Financial, Inc. 2003 Executive Incentive Plan, as amended and restated. Filed as Exhibit | ||
10.15 | 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, | |
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 | ||
10.18 | 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. | |
10.19 | 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. | |
10.20 | Investment Management Agreement, | |
Investment Management Agreement, dated April 9, 2003, as amended |
Exhibit No. | Exhibit Description | |
---|---|---|
10.22 | 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. | |
10.23 | 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, | ||
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 | ||
10.26 | Shareholder Servicing Agreement, | |
10.28 | 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. | |
10.29 | 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. | |
10.30 | 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. | |
Exhibit No. | Exhibit Description | |
---|---|---|
10.32 | 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 | |
10.33 | 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. | |
10.34 | 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. | |
10.35 | 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. | |
10.36 | 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. | |
10.37 | 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. | |
10.38 | Distribution and Service Plan, amended and restated |
WADDELL & REED FINANCIAL, INC.Index to Exhibits
Ivy Funds VIP Service Plan, | ||
10.40 | Master Business Management and Investment Advisory Agreement, dated December 31, 2002, as amended August 26, 2009, by and between the | |
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. |
Exhibit No. | Exhibit Description | |
---|---|---|
10.43 | 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.* | |
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.* | ||
10.47 | 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.* | |
10.48 | 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 * | ||
10.50 | 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.* | |
10.51 | 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.* | |
10.52 | 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.* |
Exhibit No. | Exhibit Description | |
---|---|---|
10.53 | 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.* | ||
10.55 | 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.* | |
10.56 | 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.* | |
10.57 | 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.* | |
10.58 | 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 * | |
10.59 | 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.* | |
10.60 | 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.* | |
10.61 | 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.* | |
10.62 | 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.* |
WADDELL & REED FINANCIAL, INC.Index to ExhibitsTable of Contents
Exhibit | Exhibit Description | |
---|---|---|
10.63 | 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.* | ||
10.65 | Portfolio Managers Revenue Sharing Schedule.* | |
10.66 | Form of | |
10.67 | 2010 Performance Goals established pursuant to the Waddell & Reed Financial, Inc. | |
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. | ||
11 | Statement regarding computation of per share earnings. | |
Statement re computation of ratios of earnings to fixed charges. | ||
21 | Subsidiaries of Waddell & Reed Financial, Inc. | |
23 | Consent of KPMG LLP. | |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer. | |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer. | |
32.1 | Section 1350 Certification of the Chief Executive Officer. | |
32.2 | Section 1350 Certification of the Chief Financial Officer. | |
101 | 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. |