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WADDELL & REED FINANCIAL, INC. Index to Consolidated Financial Statements

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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, 20092012

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 oý    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.(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, 20092012 was $2.196$2.32 billion.

        Shares outstanding of each of the registrant's classes of common stock as of February 18, 201015, 2013 Class A common stock, $.01 par value: 85,528,18885,595,304

DOCUMENTS INCORPORATED BY REFERENCE

        In Part III of this Form 10-K, portions of the definitive proxy statement for the 20102013 Annual Meeting of Stockholders to be held April 7, 2010.17, 2013.




Index of Exhibits (Pages 8684 through 95)88)
Total Number of Pages Included Are 9588


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WADDELL & REED FINANCIAL, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2009
2012

Part I
  
 Page

Part I

Item 1.

 

Business

 3

Item 1A.

 

Risk Factors

 1311

Item 1B.

 

Unresolved Staff Comments

 1817

Item 2.

 

Properties

 1917

Item 3.

 

Legal Proceedings

 1917

Item 4.

 

Submission of Matters to a Vote of Security Holders

 1918

Part II

    

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 2019

Item 6.

 

Selected Financial Data

 2322

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 2523

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 4543

Item 8.

 

Financial Statements and Supplementary Data

 4644

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 4644

Item 9A.

 

Controls and Procedures

 4644

Item 9B.

 

Other Information

 4846

Part III

    

Item 10.

 

Directors, Executive Officers and Corporate Governance

 4846

Item 11.

 

Executive Compensation

 4846

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 4846

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 4846

Item 14.

 

Principal Accounting Fees and Services

 4846

Part IV

    

Item 15.

 

Exhibits, Financial Statement Schedules

 4846

SIGNATURES

 
4947

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 5048

INDEX TO EXHIBITS

 8684

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PART I

ITEM 1.    Business

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 the Waddell & Reed Advisors Group of Mutual Funds (the "Advisors Funds") in 1940. We launched ourOver time we added additional mutual fund families: Ivy Funds in 2003 in an effort to expand(the "Ivy Funds"), Ivy Funds Variable Insurance Portfolios ("Ivy Funds VIP") and InvestEd Portfolios, our distribution to third-party outlets.529 college savings plan ("InvestEd"). As of December 31, 2009,2012, we had $69.8$96.4 billion in assets under management and approximately 3.9 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. Our underwriting and distribution revenues consist of commissions derived from sales of investment and insurance products, Rule 12b-1 asset-based service and distribution fees, distribution fees on certain variable products, fees earned on fee-based asset allocation products, and related advisory services. The products sold have various commission structures and the revenues received from those sales vary based on the type and amount sold. Shareholder service fees revenue includes transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and administration fees, and is earned based on assets under management or number of client accounts.

        We operate our business through three distinct distribution channels. Our retail products are distributed through our sales force of registered financial advisors (the "Advisors channel") or through third-parties such as other broker/dealers, registered investment advisors (including the retirement advisors of the Legend group of subsidiaries ("Legend")) and various retirement platforms, (collectively, the "Wholesale channel"). or through our sales force of independent financial advisors (the "Advisors channel") We also market our investment advisory services to institutional investors, either directly or through consultants (the "Institutional channel").

        In the Advisors channel, our sales force focuses its efforts primarily on the sale of investment products advised by the Company. We compete primarily with smaller broker/dealers and independent financial advisors, as well as a span of other financial providers. Assets under management acquired through this channel were $29.5 billion at December 31, 2009.

        Our Wholesale channel efforts include retail fund distribution through broker/dealers (the largest method of distributing mutual funds for the industry), registered investment advisors (fee-based financial advisors who generally sell mutual funds through financial supermarkets) and retirement platforms (401(k) platforms using multiple managers).and insurance platforms. Assets under management acquired throughin this channel were $32.8$48.9 billion at the end of 2009.2012.

        In the Advisors channel, our sales force focuses its efforts primarily on financial planning, serving primarily middle class and mass affluent clients. We compete with smaller broker/dealers and independent financial advisors, as well as a span of other financial service providers. Assets under management in this channel were $35.7 billion at December 31, 2012.

        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 $7.5$11.8 billion at December 31, 2009.2012.

Organization

        We operate our investment advisory business through our subsidiary companies, primarily Waddell & Reed Investment Management Company ("WRIMCO"), a registered investment adviser and Ivy Investment Management Company ("IICO"), the registered investment adviser for Ivy Funds, Inc. and the Ivy Funds portfolios (collectively, the "Ivy Funds"). Other investment advisory subsidiaries include Legend Advisory Corporation (the registered investment adviser for Legend) and Austin, Calvert & Flavin, Inc. ("ACF"), which was sold effective July 15, 2009.


Table of ContentsFunds.

        Our underwriting and distribution business operates through threetwo broker/dealers: Waddell & Reed, Inc. ("W&R"), and 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


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Funds, other mutual funds and a distributor of variable annuities and other insurance products issued by our business partners. In addition, W&R is the ninth largest distributor of our Ivy Funds. IFDI a registered broker/dealer, is the distributor and underwriter for the Ivy Funds. LEC

        During 2012, the Company committed to a plan to sell its Legend group of subsidiaries ("Legend"), and on October 29, 2012 the Company signed a definitive agreement to execute the transaction. The sale closed effective January 1, 2013. Legend is the registered broker/dealer for Legend, a mutual fund distribution and retirement planning subsidiary based in Palm Beach Gardens, Florida. Through its network of financial advisors, Legend primarily serves employees of school districts and other not-for-profit organizations. Legend Advisory Corporation, the registered investment adviser for the Legend group, and Legend Equities Corporation, a registered broker/dealer ("LEC"), were among the subsidiaries sold.

        Waddell & Reed Services Company ("WRSCO") provides transfer agency and accounting services to the Advisors Funds, the Ivy Funds, Ivy Funds Variable Insurance Portfolios (the "Ivy Funds VIP")VIP and Waddell & Reed InvestEd Portfolios, our college savings plan ("InvestEd").InvestEd. W&R, WRIMCO, WRSCO, Legend, IICO and IFDI are hereafter collectively referred to as the "Company," "we," "us" or "our" unless the context requires otherwise.

Investment Management Operations

        Our investment advisory business provides one of our largest sources of revenues and profits. We earn investment management fee revenues by providing investment advisory and management services pursuant to an investment management agreementagreements with each fund within the Advisors Funds family, the Ivy Funds families,family, the Ivy Funds VIP family, and InvestEd (collectively, the "Funds"). While the specific terms of the agreements vary, the basic terms are similar. The agreements provide that we render overall investment management services to each of the Funds, subject to the oversight of each Fund's board of directors/trustees and in accordance with each Fund's investment objectives and policies. The agreements permit us to enter into separate agreements for shareholder services or accounting services with each respective Fund.

        Each Fund's board of directors/trustees, including a majority of the directors/trustees who are not "interested persons" of the Fund or the Company within the meaning of the Investment Company Act of 1940, as amended (the "ICA") ("disinterested members") and the Fund's shareholders must approve the investment management agreement between the respective Fund and the Company. These agreements may continue in effect from year to year if specifically approved at least annually by (i) the Fund's board, including a majority of the disinterested members, or (ii) the vote of a majority of both the shareholders of the Fund and the disinterested members of each Fund's board, each vote being cast in person at a meeting called for such purpose. Each agreement automatically terminates in the event of its assignment, as defined by the ICA or the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and may be terminated without penalty by any Fund by giving us 60 days' written notice if the termination has been approved by a majority of the Fund's directors/trustees or the Fund's shareholders. We may terminate an investment management agreement without penalty on 120 days' written notice.

        In addition to performing investment management services for the Funds, we act as an investment adviser for institutional and other private investors and we provide subadvisory services to other investment companies. Our fee for theseSuch services isare provided pursuant to various written agreements and our fees are generally based on a percentage of assets under management. Such services are provided pursuant to various written agreements.

        Our investment management effort has a strong foundation based upon its people and resources. We have 64 investment professionals including a team of 29 portfolio managers who average 19 years of industry experience and 14 years of tenure with the Company. The team has substantial resources available to them, including the efforts of internal equity and fixed income analysts who conduct primary fundamental research. Our investment professionals attend numerous on and off-site meetings annually with management of the companies in which they invest. In addition, we use research provided by brokerage firms and independent outside consultants. Portfolio managers participatemeets every morning in a collaborative processsetting that blends theirfosters idea sharing, yet reinforces individual accountability withaccountability. Through all market cycles, we remain dedicated to the ideas of their peers which, when backedfollowing investment principles:


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intensive research capability, supports        These three principles shape our effortsinvestment 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 deliver consistent, long-term performance.us because they appreciate that our investment approach continues to identify and create opportunities for wealth creation.

        Our investment management team also includes a premier groupcomprises 79 professionals including 32 portfolio managers who average 21 years of subadvisors who bring similar investment philosophiesindustry experience and additional expertise in specific asset classes.

15 years of tenure with our firm. We have significant experience in virtually all major asset classes, several specialized asset classes and a range of investment styles. Our endingAt December 31, 2012, over 75% of the Company's $96.4 billion in assets under management are summarized below by broad asset class, manywere invested in equities, of which incorporate multiple72% was domestic and 28% 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,
2009
  
 Ending
Assets
 Percentage
of Total
  
 (in millions)
  
 

Investment Style:

      
  

Balanced & Flexible

   $25,725  37%
  

Narrowly Diversified

  10,213  15%
  

Large Capitalization Growth Equities

  8,094  12%
  

Large Capitalization Core Equities

  4,987  7%
  

Taxable Investment Grade Fixed Income

  4,452  6%
  

International Equities

  3,754  5%
  

Small Capitalization Growth Equities

  2,901  4%
  

High Yield Fixed Income

  2,609  4%
  

Money Market

  1,720  2%
  

Multi-Capitalization Core Equities

  1,409  2%
  

Middle Capitalization Growth Equities

  1,402  2%
  

Tax Exempt Fixed Income

  1,271  2%
  

Value Equities

  1,150  2%
  

International Fixed Income

  96  0%
      
   

Total

   $69,783  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 8081 registered open-end mutual fund portfolios including 20 portfolios in the Advisors Funds, family, 32 portfolios in the Ivy Funds, family, 25 portfolios in the Ivy Funds VIP family and three portfolios in InvestEd. The Advisors Funds, variable products offering the Ivy Funds VIP, and InvestEd are offered primarily through our financial advisors and Legend advisors; in some circumstances, certain of these funds are also offered through the Wholesale channel. The Ivy Funds are offered through both our AdvisorsWholesale channel and WholesaleAdvisors channel. The Funds' assets under management are included in either our AdvisorsWholesale channel or our WholesaleAdvisors channel depending on whowhich channel marketed the client account or is the broker of record.

        We added three fundsone fund to our product line in 2009.2012. We launched the Ivy Micro Cap GrowthGlobal Equity Income fund for investors seeking long-term capital appreciation and we investinterested in generating a majorityreasonable level of current income given current market conditions. The fund focuses on equity securities issued by companies located largely in developed markets, of any size. Under normal circumstances, the fund'sfund invests at least 80% of its net assets in equity securities. For this purpose, equity securities consist primarily of dividend-paying common stocks across the globe. The fund also may invest in preferred stock, convertible securities, or other instruments whose price is linked to the value of common stock. The fund may invest in U.S. and non-U.S. issuers. Although the fund primarily domesticinvests in large cap companies, it may invest in companies of any size.

        Additionally, in 2012, the Ivy International Balanced fund was renamed the Ivy Global Income Allocation fund. This fund seeks to provide total return through a combination of current income and capital appreciation. The fund invests principally in equity and debt securities issued by companies and governments of any size and under normal market conditions, invests primarily in income-producing securities across the globe. The fund may invest in U.S. and non-U.S. issuers. In an attempt to enhance return, the fund may also invest, to a lesser extent, foreign micro cap companies. The Ivy Municipal High Income fund was added for investors interested in a high level ofsecurities not currently providing income that is not subject to federalor in companies and governments in countries with new or comparatively undeveloped and emerging economies.


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income tax. The fund invests the majority of net assets in a diversified portfolio of tax-exempt municipal bonds. The Ivy Tax-Managed Equity fund's objective is long-term capital growth while minimizing taxable gains and income to shareholders. The fund invests primarily in a diversified portfolio of common stocks of domestic and, to a lesser extent, foreign companies considered to be high in quality and attractive in their long-term investment potential, with a majority of net assets in equity securities.

        In addition to the introduction of these new products, we began direct management of three previously subadvised funds during 2009, which will result in decreased subadvisory expenses on a forward looking basis. The three funds now under direct management are: the Ivy International Balanced fund, the Ivy VIP International Value fund and the Ivy European Opportunities fund.

Other Products

        Pursuant to general agency arrangements withIn our business partners,Advisors channel, we distribute certain of theirvarious business partners' variable annuity products, which offer the Ivy Funds VIP as an investment vehicle. We also offer our Advisors channel customers retirement and life insurance products underwritten by our business partners. Through our insurance agency subsidiaries, our financial advisors also sell life insurance and disability products underwritten by various carriers.

        In addition, we offer our Advisors channel customers fee-based asset allocation investment advisory products, including Managed Allocation Portfolio ("MAP"), MAPPlus and Strategic Portfolio Allocation ("SPA"), which utilize our Funds. MAP includes two mutual fund asset allocation programs, MAP and MAPPlus, that offer clients a selection of traditional asset allocation models, as well as features such as systematic rebalancing and client participation in determining (to a limited extent) asset allocation across asset classes. MAP and MAPPlus are fee-based mutual fund asset allocation programs, structured to provide advisors and clients with advisory services, a pricing option competitive with other firms' fee-based products, and flexibility to allow advisors to assist clients in selecting underlying funds based upon their individual needs. As of December 31, 2009,2012, clients have $2.5had $8.2 billion invested in our MAP, MAPPlus and MAPPlusSPA products. These assets are included in our mutual fund assets under management.

        Using a variety of funds ranging from money market and fixed income funds to domestic and international equity funds, SPA is a predictive, dynamic asset allocation system that reallocates asset classes within model portfolios. Clients investing assets in SPA can choose from five available model portfolios with objectives ranging from conservative to aggressive, based on their investment objectives, goals, risk tolerance and other factors. Clients have $229 million invested in our SPA products as of December 31, 2009 and these assets are included in our mutual fund assets under management.

        A primary difference between MAP and SPA is that advisors assist clients in selecting the underlying mutual funds within MAP models in accordance with pre-established ranges, whereas for SPA, the Company's Investment Policy Committee determines the model compositions.

Underwriting and Distribution

        We earn underwriting and distribution fee revenues primarily by distributing the Funds pursuant to an underwriting agreement with each Fund (except the Ivy Funds VIP as explained below) and, to a lesser extent, by distributing mutual funds offered by other companies not affiliated with us. Pursuant to each agreement, we offer and sell the Funds' shares on a continuous basis (open-end funds) and pay certain costs associated with underwriting and distributing the Funds, including the costs of developing and producing sales literature and printing of prospectuses, which may be either partially or fully reimbursed by the Funds. The Funds are sold in various classes that are structured in ways that conform to industry standards (i.e., "front-end load," "back-end load," "level-load" and institutional).

        When a client purchases Class A shares (front-end load), the client pays an initial sales charge of up to 5.75% of the amount invested. The sales charge for Class A shares typically declines as the investment amount increases. In addition, investors may combine their purchases of all fund shares to qualify for a


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reduced sales charge. Class A shares purchased at net asset value are assessed a 1% contingent deferred sales charge ("CDSC") if the shares are redeemed within 12 months of purchase. When a client invests in an asset allocation product, Class A shares are purchased at net asset value. We do not charge an initial sales charge, but investors are assessed a CDSC upon early redemption of shares, up to 3% of the amount originally invested and declining to zero for investments held more than three years. When a client purchases Class B shares (back-end load), we do not charge an initial sales charge, but we do charge a CDSC upon early redemption of shares, up to 5% of the lesser of the current market net asset value or the purchase cost of the redeemed shares in the first year and declining to zero for shares held for more than six years. Class B shares convert to Class A shares after seven years. When a client purchases Class C shares (level-load), we do not charge an initial sales charge, but we do charge investors who redeem their Class C shares in the first year a CDSC of 1% of the current market net asset value or the purchase cost of the shares redeemed, whichever is less.

        Under a Rule 12b-1 service plan, the Funds may charge a maximum fee of 0.25% of the average daily net assets under management for expenses paid to broker/dealers and other sales professionals in connection with providing ongoing services to the Funds' shareholders and/or maintaining the Funds' shareholder accounts. The Funds' Class B and Class C shares may charge a maximum of 0.75% of the average daily net assets under management under a Rule 12b-1 distribution plan to broker/dealers and other sales professionals for their services in connection with distributing shares of that class. The Rule 12b-1 plans are subject to annual approval by the Funds' board of directors/trustees, including a majority of the disinterested members, by votes cast in person at a meeting called for the purpose of voting on such approval. All Funds may terminate the service plan at any time with approval of fund directors or portfolio shareholders (a majority of either) without penalty.

        We distribute variable products offering the Ivy Funds VIP as investment vehicles pursuant to general agency arrangements with our business partners and receive commissions, marketing allowances and other compensation as stipulated by such agreements. In connection with these arrangements, the Ivy Funds VIP are offered and sold on a continuous basis.

        In addition to distributing variable products, we distribute a number of other insurance products through our insurance agency subsidiaries, including individual term life, group term life, whole life, accident and health, long-term care, Medicare supplement and disability insurance. We receive commissions and compensation from various underwriters for distributing these products. We are not an underwriter for any insurance policies.

Distribution Channels

        We distribute our investment products through the Wholesale, Advisors Wholesale and Institutional channels.

Wholesale Channel

        Our Wholesale channel generates sales through various third-party distribution outlets. Our assets under management in the Wholesale channel were $48.9 billion at December 31, 2012, including $2.6 billion in assets subadvised by other managers.

        Our team of 50 external wholesalers lead our wholesaling efforts, which focus principally on distributing the Ivy Funds through three segments: broker/dealers (the largest method of distributing mutual funds for the industry and for us), retirement platforms (401(k) platforms using multiple managers) and registered investment advisors (fee-based financial advisors who generally sell mutual funds through financial supermarkets).

        During 2012, our Ivy Asset Strategy fund continued to play a lead role in the Wholesale channel's results, comprising 32% of the channel's gross sales and 27% of total assets under management as of December 31, 2012. While we recognize the past success of this fund, 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. Over the past three years, our wholesalers successfully marketed additional products to their financial advisor clients, which resulted in Wholesale channel sales for the Ivy Asset Strategy fund decreasing from 60% in 2010 to 32% in 2012. We plan to continue to stress diversification of sales as we enter 2013.

Advisors Channel

        OurAssets under management in the Advisors channel were $35.7 billion at December 31, 2012. 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 inOver the Advisors channel for the year endedpast several years, we have expanded our Choice brokerage platform technology and offerings, which should allow us to competitively recruit experienced advisors.

        As of December 31, 2009 was 8.4%, compared to the industry average of 26.3%, as derived from statistics provided by the Investment Company Institute ("ICI").

        Our2012, our sales force consisted of 2,3931,763 financial advisors including 156 district managers, as of December 31, 2009. Eight regional vice presidents and 102 managing principals oversee this sales force, which operateswho operate out of 170165 offices located throughout the United States and 288263 individual advisor offices. We believe, based on industry data, that our financial advisors are currently one of the largest sales forces


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in the United States selling primarily mutual funds, and that W&R, our broker/dealer subsidiary, ranks among the largest


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independent broker/dealers. As of December 31, 2009,2012, our Advisors channel had approximately 530,000484 thousand mutual fund customerscustomers.

        Over the past several years, we have instituted more stringent production requirements for our sales force, which has resulted in a steady decline in our number of advisors. However, gross sales have not declined, and this channel produced 12% more in 2012 with an13% fewer advisors, on average, investment of $47,000 and approximately 76,000 variable account customers with an average investment of $57,000.

        As of December 31, 2009, 38% of our financial advisors have been with us for more than five years and 25% for more than ten years. Our New Advisor Career Transition program(s), designedcompared to meet the needs of the different audiences from which we recruit, such as college graduates, career changers and industry experienced professionals, provide our new advisors with a unique transition experience until they can develop the skills and client base necessary to earn a stable income from commissions alone. These programs have played an important role in advisor retention and are designed to improve productivity of our new advisors.2010. This headcount decline leveled off during 2012. We undertook technology initiatives in 2007, fully implemented in 2008, which allow us to provide our clients consolidated statements and more robust brokerage capabilities. We believe these efforts support the retention of existing advisors and our recruiting efforts, including those aimed at experienced advisors. Salesutilize gross revenue per advisor (investment product sales divided by the average number of advisors) were $1.0 million, $1.2 million and $1.2 million, for the years ended December 31, 2009, 2008 and 2007, respectively. This metric is important to us since investment product sales are invested in our Funds' assets.

        Gross production per advisor is an additional method of measuring advisor productivity that is more closely aligned with industry standard methods, which use gross commissions per sales representative to measure advisor productivity. For purposes of this measure, gross productionrevenue consists of front-end load sales and distribution fee revenues, as would be received from an underwriter, from sales of both our Funds and other mutual funds. It also includes fee revenues from our asset allocation products and financial plans, and commission revenues earned on insurance products. This measure excludes Rule 12b-1 service fee revenues, variable annuity distribution fee revenues and all revenues related to Class Y shares, all of which do not relate to the distribution activities of our financial advisors. Gross productionrevenue per advisor was $59.9$168 thousand, $64.1$156 thousand and $64.7$119 thousand for the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively.

Wholesale Channel

        Our Wholesale channel consists of sales garnered through various third-party distribution outlets and Legend advisors. In an effort to accelerate sales growth, we have focused on expanding our Wholesale distribution efforts over the past several years. As a result of an increased demand for our funds in the Wholesale channel due to strong investment performance, our assets under management from the Wholesale channel have increased from $3.8 billion at December 31, 2003 to $32.8 billion at December 31, 2009, including $5.2 billion in assets at December 31, 2009 that are subadvised by other managers.

        The following table summarizes certain components of the changes in the Wholesale channel's assets under management for the last three fiscal years.

  
 2009 2008 2007
  
 (in millions)
 

Sales (net of commissions)

   $14,745  15,599  9,470
 

Redemptions

  (5,951)  (8,541)  (2,795)
        
 

Net Sales

  8,794  7,058  6,675
        
 

Market Appreciation (Depreciation)

  6,261  (10,980)  3,894
 

Ending Assets Under Management

   $32,818  17,489  21,537

        During 2009, our mutual fund sales levels through wholesale distribution rivaled those achieved in the previous, record-setting year, even through volatile market conditions. The Ivy Funds family increased its


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presence in a number of broker/dealer platforms. These third parties have a client relationship with, and maintain an account for, the investors. Typically, investors purchase our investment products at the suggestion of third parties, thereby expanding our opportunities to gain new investors. Our wholesaling efforts focus principally on distributing the Ivy Funds through three segments: broker/dealers (the largest method of distributing mutual funds for the industry and for us), retirement platforms (401(k) platforms using multiple managers) and registered investment advisors (fee-based financial advisors who generally sell mutual funds through financial supermarkets). We continued to expand our team of national wholesalers, reaching a total of 34 external wholesalers, six hybrid wholesalers and 33 internal wholesalers by year-end. In 2010, we plan to restructure our wholesaler territories into smaller, more manageable areas to enable our wholesalers to focus on additional distribution partners in their territory.

        Legend advisors distribute our Funds, along with mutual funds managed by other investment companies, through Legend's retirement advisor sales force. At December 31, 2009, Legend had 423 registered retirement advisors in 193 offices, which are primarily individual advisor offices, located mainly in the eastern part of the United States. These retirement advisors are not included in the discussion of our financial advisors, nor in disclosures of the number of advisors we have licensed. For the years ended December 31, 2009, 2008 and 2007, Legend advisors sold $82.1 million, $63.8 million and $74.2 million, respectively, of our mutual funds, and $280.9 million, $262.4 million and $363.5 million, respectively, of unaffiliated mutual funds. Sales per Legend advisor were $764 thousand in 2009. Legend had $4.6 billion of client assets under administration as of December 31, 2009, including $490.3 million in our funds.

Institutional Channel

        WRIMCO markets itsThrough this channel, we manage assets in a variety of investment advisory servicesstyles for a variety of institutions. The largest client type is other asset managers that hire us to institutions directlyact as subadvisor; they are typically distributors who lack scale or through consultants that assist with the manager selection process. Most of our institutional business is in defined contribution pension plans, defined benefit pension plans and subadvised mutual funds. A significant amount of assets aretrack record to manage internally, or choose to market multi-manager styles. Our diverse client list also managed forincludes corporations, foundations, endowments, Taft-Hartley plans high net worth individuals and insurance company general accounts.

public funds, including defined benefit plans and defined contribution plans. Over time, WRIMCO's business within the Institutional channel has been successful in developing subadvisory and defined contribution pension mandates. Thisrelationships. As of December 31, 2012, this type of business now comprises 60%comprised more than 65% of the Institutional channel's assets, which management views as a positive development as it believes this type of business is more likely to growhas better growth potential than the defined benefit business.

        ACF, an investment advisory subsidiary previously operating in this channel, was sold effective July 15, 2009. Prior to the closing date, ACF had assets Assets under management of $488.0 million. ACF was marketed separately from WRIMCO.in the Institutional channel were $11.8 billion at December 31, 2012.

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.

Competition

        The financial services industry is a highly competitive global industry. According to the ICI, at the end of 2012 there were more than 8,700 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


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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 we effectively compete across multiple dimensions of the asset management and broker/dealer businesses. First, we market our products, primarily the Ivy Funds family, to unaffiliated broker/dealers and advisors and compete against other asset managers offering mutual fund products. This distribution method allows us to move beyond proprietary distribution and increases our potential pool of clients. Competition is based on sales techniques, personal relationships and skills, and the quality of financial planning products and services offered. We compete against asset managers that are both larger and smaller than our firm, but we believe that the breadth and depth of our products position us to compete in this environment. Second, our proprietary broker/dealer consists of a sales force of independent contractors affiliated with our company who have access to our proprietary financial products. We believe our business model targets customers seeking personal assistance from financial advisors or planners where the primary competition is companies distributing products through financial advisors. Our financial advisors compete primarily with large and small broker/dealers, independent financial advisors, registered investment advisors and insurance representatives. The market for financial advice is extremely broad and fragmented. Finally, we compete in the institutional marketplace, working with consultants who select asset managers for various opportunities, as well as working directly with plan sponsors, foundations, endowments and other asset managers who hire subadvisors. In this marketplace, we compete with a broad range of asset managers.

        We also face competition in attracting and retaining qualified financial advisors and employees. To maximize our ability to compete effectively in our business, we offer competitive compensation.

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


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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 20092012 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.

        ThreeTwo of our subsidiaries, W&R LEC and IFDI, are also registered as broker/dealers with the SEC and the states. A third broker/dealer subsidiary, LEC, was sold effective January 1, 2013. 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


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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


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Capital Rule is designed to ensure the financial soundness and liquidity of broker/dealers. Any failure to maintain the required minimum net capital may subject us to suspension or revocation of our registration or other limitations on our activity by the SEC, and suspension or expulsion by FINRA or other regulatory bodies, and ultimately could require the broker/dealer's liquidation. The maintenance of minimum net capital requirements may also limit our ability to pay dividends. As of December 31, 2009, 20082012, 2011 and 2007,2010, 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 membersis a member 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.shareholders whose accounts are maintained directly with the Funds.

        Title III of the USA PATRIOT Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, imposes significant anti-money laundering requirements on all financial institutions, including domestic banks and domestic operations of foreign banks, broker/dealers, futures commission merchants and investment companies.

        Our businesses may be materially affected not only by regulations applicable to us as an investment adviser, broker/dealer or transfer agent, but also by law and regulations of general application. For example, the volume of our principal investment advisory business in a given time period could be affected by, among other things, existing and proposed tax legislation and other governmental regulations and policies (including the interest rate policies of the Federal Reserve Board), and changes in the interpretation or enforcement of existing laws and rules that affect the business and financial communities.

Competition

        The financial services industry is a highly competitive global industry. According to the ICI, at the end of 2009 there were more than 8,600 open-end investment companies of varying sizes, investment policies and objectives whose shares are being offered to the public in the United States alone. Factors affecting our business include brand recognition, business reputation, investment performance, quality of service and the continuity of both client relationships and assets under management. A majority of mutual fund sales go to funds that are highly rated by a small number of well-known ranking services that focus on investment performance. Competition is based on distribution methods, the type and quality of shareholder services, the success of marketing efforts and the ability to develop investment products for certain market segments to meet the changing needs of investors, and to achieve competitive investment management performance.

        We compete with hundreds of other mutual fund management, distribution and service companies that distribute their fund shares through a variety of methods, including affiliated and unaffiliated sales forces, broker/dealers and direct sales to the public of shares offered at a low or no sales charge. Many larger mutual fund complexes have significant advertising budgets and established relationships with brokerage houses with large distribution networks, which enable these fund complexes to reach broad


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client bases. Many investment management firms offer services and products similar to ours, as well as other independent financial advisors. We also compete with brokerage and investment banking firms, insurance companies, commercial banks and other financial institutions and businesses offering other financial products in all aspects of their businesses. Although no single company or group of companies consistently dominates the mutual fund management and services industry, many are larger than us, have greater resources and offer a wider array of financial services and products. We believe that competition in the mutual fund industry will increase as a result of increased flexibility afforded to banks and other financial institutions to sponsor mutual funds and distribute mutual fund shares. Additionally, barriers to entry into the investment management business are relatively few, and thus, we face a potentially growing number of competitors, especially during periods of strong financial and economic markets.

        The distribution of mutual funds and other investment products has undergone significant developments in recent years, which has intensified the competitive environment in which we operate. These developments include the introduction of new products, increasingly complex distribution systems with multiple classes of shares, the development of Internet websites providing investors with the ability to invest on-line, the introduction of sophisticated technological platforms used by financial advisors to sell and service mutual funds for their clients, the introduction of separately managed accounts—previously available only to institutional investors—to individuals, and growth in the number of mutual funds offered. We believe our business model targets customers seeking personal assistance from financial advisors or planners where the primary competition is companies distributing products through a financial advisor or broker/dealer sales force. Our financial advisors compete primarily with large and small broker/dealers, independent financial advisors and insurance representatives. The market for financial planning and advice is extremely fragmented, consisting primarily of relatively small companies with fewer than 100 investment professionals. Competition is based on sales techniques, personal relationships and skills, and the quality of financial planning products and services offered.

        We also face competition in attracting and retaining qualified financial advisors and employees. The ability to continue to compete effectively in our business depends in part on our ability to compete effectively in the labor market. In order to maximize this ability, we offer competitive compensation, a wide range of benefits and have several stock-based compensation incentive programs.

Intellectual Property

        We regard our names as material to our business, and have registered certain service marks associated with our business with the United States Patent and Trademark Office.

Employees and Financial Advisors

        At December 31, 2009,2012 we had 1,4621,656 full-time employees, consisting of 9051,163 home office employees, 121123 Legend employees 102 managing principals, eight regional vice presidents, 14 associate managers, 156and 370 employees responsible for advisor field office support personnel,supervision and 156 district managers.

        At December 31, 2009, our sales force (excluding Legend advisors) was comprised of 2,393 financial advisors, including 2,237 financial advisors who are independent contractors and 156 district managers who are considered employees. Legend, which is a part of our Wholesale channel, had 423 retirement advisors who are independent contractors.administration.

Available Information

        We file reports, proxy statements, and other information with the SEC, copies of which can be obtained from the SEC's Public Reference Room at 100 F Street NE, Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.


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        Reports we file electronically with the SEC via the SEC's Electronic Data Gathering, Analysis and Retrieval system ("EDGAR") may be accessed through the Internet.internet. The SEC maintains an Internetinternet 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, current reports on Form 8-K and amendments to those reports under the "Corporate""Reports & SEC Filings" menu on the "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 underon the "Corporate" section"Corporate Governance" page in the "Our Firm" dropdown menu is information on corporate governance. Stockholders can view our Corporate Code of Business Conduct and Ethics (the "Code of Ethics"), which applies to directors, officers and all employees of the Company,


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our Corporate Governance Guidelines, and the charters of key committees (including the Audit, Compensation, and Nominating and Corporate Governance Committees). Printed copies of these documents are available to any stockholder upon request by calling the investor relations department at 1-800-532-2757. Any future amendments to or waivers of the Code of Ethics will be posted to our website, as required.

ITEM 1A.    Risk Factors

        Our Financial Advisors Are Classified As Independent Contractors, And Changes To Their Classification May Increase Our Operating Expenses.    From time to time, various legislative or regulatory proposals are introduced at the federal or state levels to change the status of independent contractors' classification to employees for either employment tax purposes (withholding, social security, Medicare and unemployment taxes) or other benefits available to employees. Currently, most individuals are classified as employees or independent contractors for employment tax purposes based on 20 "common law" factors, rather than any definition found in the Internal Revenue Code or Treasury regulations. We classify the majority of our financial advisors as independent contractors for all purposes, including employment tax and employee benefit purposes. There can be no assurance that legislative, judicial or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change the independent contractor/employee classification of those financial advisors currently doing business with us. The costs associated with potential changes, if any, with respect to these independent contractor classifications could have a material adverse effect on the Company, including our results of operations and financial condition. See Part I, Item 3. "Legal Proceedings."

        Our Business Is Subject To Substantial Risk From Litigation, Regulatory Investigations And Potential Securities Laws Liability.    Many aspects of our business involve substantial risks of litigation, regulatory investigations and/or arbitration, and from time to time, we are involved in various legal proceedings in the course of operating our business. The Company is exposed to liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC, FINRA and other regulatory bodies. We, our subsidiaries, and/or certain of our past and present officers, have been named as parties in legal actions, regulatory investigations and proceedings, and securities arbitrations in the past and have been subject to claims alleging violation of such laws, rules and regulations, which have resulted in the payment of fines and settlements. An adverse resolution of any lawsuit, legal or regulatory proceeding or claim against us could result in substantial costs or reputational harm to the Company, and have a material adverse effect on the Company's business, financial condition or results of operations, which, in turn, may negatively affect the market price of our common stock and our ability to pay dividends. In addition to these financial costs and risks, the defense of litigation or arbitration may divert resources and management's attention from operations. See Part I, Item 3. "Legal Proceedings."

        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 51% at December 31, 2012, and the percentage of our total sales represented by the Wholesale channel has increased from 17% for the year ended December 31, 2003 to 70% for the year ended December 31, 2012. 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


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certain funds in this channel, namely the Ivy Asset Strategy fund. Compared to the industry average redemption rate of 24.5% and 27.0% for the years ended December 31, 2012 and 2011, respectively, the Wholesale channel had redemption rates of 30.2% and 29.5% for the years ended December 31, 2012 and 2011, respectively. Redemption rates were 9.9% and 10.0% 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 Ivy 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 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.

        Regulatory Risk Is Substantial In Our Business And Non-Compliance With Regulations, Or Changes In Regulations, Could Have A Significant Impact On The Conduct Of Our Business And Our Prospects, Revenues And Earnings.    Our investment advisory and broker/dealer businesses are heavily regulated, primarily at the federal level. Non-compliance with applicable laws or regulations could result in sanctions being levied against us, including fines and censures, suspension or expulsion from a certain jurisdiction or market, or the revocation of licenses. Non-compliance with applicable laws or regulations could also adversely affect our reputation, prospects, revenues and earnings. In addition, changes in current legal, regulatory, accounting, tax or compliance requirements or in governmental policies could adversely affect our operations, revenues and earnings by, among other things, increasing expenses and reducing investor interest in certain products we offer. Distribution fees paid to mutual fund distributors in accordance with Rule 12b-1 promulgated under the Investment Company Act of 1940, as amended ("Rule 12b-1") are an important element of the distribution of the mutual funds we manage. The SEC has proposed replacing Rule 12b-1 with a new regulation that would significantly change current fund distribution practices in the industry. If this proposed regulation is adopted, it may have a material impact on the compensation we pay to distributors for distributing the mutual funds we manage and/or our ability to recover expenses related to the distribution of our funds, and thus could materially impact our revenue and net income. Additionally, our profitability could be affected by rules and regulations that impact the business and financial communities generally, including changes to the laws governing state and federal taxation.


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        Our Revenues, Earnings And Prospects Could Be Adversely Affected If The Securities Markets Decline.    Our results of operations are affected by certain economic factors, including the level of the securities markets. The on-going existence of adverse market conditions, which is particularly material to us due to our high concentration of assets under management in the United States domestic stock market, and lack of investor confidence could result in investors further withdrawing from the markets or decreasing their rate of investment, either of which could adversely affect our revenues, earnings and growth prospects to a greater extent. Because our revenues are, to a large extent, investment management fees that are based on the value of assets under management, a decline in the value of these assets adversely affects our revenues and earnings. Our growth is dependent to a significant degree upon our ability to attract and retain mutual fund assets, and, in an adverse economic environment, this may prove more difficult. Our growth rate has varied from year to year and there can be no assurance that the average growth rates sustained in recent years will continue. Declines in the securities markets could significantly reduce future revenues and earnings. In addition, a decline in the market value of these assets could cause our clients to withdraw funds in favor of investments they perceive as offering greater opportunity or lower risk, which could also negatively impact our revenues and earnings. The combination of adverse markets reducing sales and investment management fees could compound on each other and materially affect earnings.

        There May Be Adverse Effects On Our Revenues And Earnings If Our Funds' Performance Declines.    Success in the investment management and mutual fund businesses is dependent on the investment performance of client accounts relative to market conditions and the performance of competing funds. Good relative performance stimulates sales of the Funds' shares and tends to keep redemptions low. Sales of the Funds' shares in turn generate higher management fees and distribution revenues. Good relative performance also attracts institutional and separate accounts. Conversely, poor relative performance results in decreased sales, increased redemptions of the Funds' shares and the loss of institutional and separate accounts, resulting in decreases in revenues. Failure of our Funds to perform well could, therefore, have a material adverse effect on our revenues and earnings.

        Our Financial Advisors Are Classified As Independent Contractors, And Changes To Their Classification May Increase Our Operating Expenses.    From time to time, various legislative or regulatory proposals are introduced at the federal or state levels to change the status of independent contractors' classification to employees for either employment tax purposes (withholding, social security, Medicare and unemployment taxes) or other benefits available to employees. Currently, most individuals are classified as employees or independent contractors for employment tax purposes based on 20 "common law" factors, rather than any definition found in the Internal Revenue Code or Treasury regulations. We classify the majority of our financial advisors as independent contractors for all purposes, including employment tax and employee


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benefit purposes. There can be no assurance that legislative, judicial or regulatory (including tax) authorities will not introduce proposals or assert interpretations of existing rules and regulations that would change the independent contractor/employee classification of those financial advisors currently doing business with us. The costs associated with potential changes, if any, with respect to these independent contractor classifications could have a material adverse effect on the Company, including our results of operations and financial condition. See Part I, Item 3. "Legal Proceedings."

        Our Business Is Subject To Substantial Risk From Litigation, Regulatory Investigations And Potential Securities Laws Liability.    Many aspects of our business involve substantial risks of litigation, regulatory investigations and/or arbitration, and from time to time, we are involved in various legal proceedings in the course of operating our business. The Company is exposed to liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC, FINRA and other regulatory bodies. We, our subsidiaries, and/or certain of our past and present officers, have been named as parties in legal actions, regulatory investigations and proceedings, and securities arbitrations in the past and have been subject to claims alleging violation of such laws, rules and regulations, which have resulted in the payment of fines and settlements. An adverse resolution of any lawsuit, legal or regulatory proceeding or claim against us could result in substantial costs or reputational harm to the Company, and have a material adverse effect on the Company's business, financial condition or results of operations, which, in turn, may negatively affect the market price of our common stock and our ability to pay dividends. In addition to these financial costs and risks, the defense of litigation or arbitration may divert resources and management's attention from operations. See Part I, Item 3. "Legal Proceedings."

        Regulatory Risk Is Substantial In Our Business And Non-Compliance With Regulations, Or Changes In Regulations, Could Have A Significant Impact On The Conduct Of Our Business And Our Prospects, Revenues And Earnings.    Our investment advisory and broker/dealer businesses are heavily regulated, primarily at the federal level. Non-compliance with applicable laws or regulations could result in sanctions being levied against us, including fines and censures, suspension or expulsion from a certain jurisdiction or market, or the revocation of licenses. Non-compliance with applicable laws or regulations could also adversely affect our reputation, prospects, revenues and earnings. In addition, changes in current legal, regulatory, accounting, tax or compliance requirements or in governmental policies could adversely affect our operations, revenues and earnings by, among other things, increasing expenses and reducing investor interest in certain products we offer. Additionally, our profitability could be affected by rules and regulations that impact the business and financial communities generally, including changes to the laws governing state and federal taxation.

        In recent years, allegations of late trading, market timing and selective disclosure of portfolio information in the mutual fund industry have prompted various legislative and regulatory proposals, some of which have been adopted by the SEC, the United States Congress, the legislatures in states in which we conduct operations and the various regulatory agencies that supervise our operations. In particular, new rules and regulations adopted by the SEC and FINRA place greater regulatory compliance and administrative burdens on us and could have a substantial impact on the regulation, operation and distribution of mutual funds and variable products, and could adversely affect our ability to distribute and retain the assets we manage and our revenues and net income. For example, recently adopted rules require investment advisers and mutual funds to adopt, implement, review and administer written policies and procedures reasonably designed to prevent violation of the federal securities laws. Similarly, public disclosure requirements applicable to mutual funds have become more stringent. We may require additional staff to satisfy these obligations, which would increase our operating expenses.

        An Increasing Percentage Of Our Assets Under Management Are Distributed Through Our Wholesale Channel, Which Has Higher Redemption Rates Than Our Traditional Advisors Channel.    In recent years, we have focused on expanding distribution efforts relating to our Wholesale channel. The percentage of our assets under management in the Wholesale channel has increased from 10.4% at December 31, 2003 to


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47.0% at December 31, 2009, and the percentage of our total sales represented by the Wholesale channel has increased from 16.5% for the year ended December 31, 2003 to 75.0% for the year ended December 31, 2009. The success of sales in our Wholesale channel depends upon our maintaining strong relationships with institutional accounts, certain strategic partners and our third party distributors. Many of those distribution sources also offer investors competing funds that are internally or externally managed, which could limit the distribution of our products. The loss of any of these distribution channels and the inability to continue to access new distribution channels could decrease our assets under management and adversely affect our results of operations and growth. There are no assurances that these channels and their client bases will continue to be accessible to us. The loss or diminution of the level of business we do with those providers could have a material adverse effect on our business, especially with the high concentration of assets in certain funds in this channel, namely the Asset Strategy fund. In addition, the Wholesale channel had redemption rates of 24.0% and 35.5% for the years ended December 31, 2009 and 2008, respectively, compared to redemption rates of 8.4% and 8.9% for our Advisors channel in the same periods, reflecting the higher rate of transferability of investment assets in the Wholesale channel.

        There May Be An Adverse Effect On Our Revenues And Earnings If Our Investors Redeem The Assets We Manage On Short Notice.    Mutual fund investors may redeem their investments in our mutual funds at any time without any prior notice. Additionally, our investment management agreements with institutions and other non-mutual fund accounts are generally terminable upon relatively short notice. Investors can terminate their relationship with us, reduce their aggregate amount of assets under management, or shift their funds to other types of accounts with different rate structures for any number of reasons, including investment performance, changes in prevailing interest rates and financial market performance. The ability of our investors to accomplish this on short notice has increased materially due to the growth of assets in our Wholesale channel, and with the high concentration of assets in certain funds in this channel, including the Asset Strategy fund. The decrease in revenues that could result from any such event could have a material adverse effect on our business and earnings.

        There Are No Assurances That We Will Pay Future Dividends, Which Could Adversely Affect Our Stock Price.    The Waddell & Reed Financial, Inc. Board of Directors (the "Board of Directors") currently intends to continue to declare quarterly dividends on our Class A common stock (our "common stock"); however, the declaration and payment of dividends is subject to the discretion of our Board of Directors. Any determination as to the payment of dividends, as well as the level of such dividends, will depend on, among other things, general economic and business conditions, our strategic plans, our financial results and condition, and contractual, legal, and regulatory restrictions on the payment of dividends by us or our subsidiaries. We are a holding company and, as such, our ability to pay dividends is subject to the ability of our subsidiaries to provide us with cash. There can be no assurance that the current quarterly dividend level will be maintained or that we will pay any dividends in any future period(s). Any change in the level of our dividends or the suspension of the payment thereof could adversely affect our stock price.

        Our Ability To Hire And Retain Senior Executive Management And Other Key Personnel Is Significant To Our Success And Growth.    Our continued success depends to a substantial degree on our ability to attract and retain qualified senior executive management and other key personnel to conduct our broker/dealer, fund management and investment advisory businesses. The market for qualified fund managers, investment analysts, and financial advisors and wholesalers 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 and wholesalers we are able to successfully recruit and retain. There can be no assurances that we will be successful in our efforts to recruit and retain the required personnel.

        We Have Substantial Intangibles On Our Balance Sheet, And Any Impairment Of Our Intangibles Could Adversely Affect Our Results of Operations And Financial Position.    At December 31, 2009,2012, our total assets were approximately $983.4 million,$1.2 billion, of which approximately $221.2$162.0 million, or 22%14%, consisted of goodwill and identifiable intangible assets. We complete an ongoing review of goodwill and intangible assets for


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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.


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        There May Be Adverse Effects On Our Business And Earnings Upon The Termination Of, Or Failure To Renew, Certain Agreements.    A majority of our revenues are derived from investment management agreements with the Funds that, as required by law, are terminable on 60 days' notice. Each investment management agreement must be approved and renewed annually by the disinterested members of each Fund's board of directors/trustees or its shareholders, as required by law. Additionally, our investment management agreements provide for automatic termination in the event of assignment, which includes a change of control, without the consent of our clients and, in the case of the Funds, approval of the Funds' board of directors/trustees and shareholders to continue the agreements. There can be no assurances that our clients will consent to any assignment of our investment management agreements, or that those and other contracts will not be terminated or will be renewed on favorable terms, if at all, at their expiration and new agreements may not be available. See "Business – "Business—Distribution Channels – 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 InformationA Failure In Or Breach Of Our Operational Or Security Systems Will be Implemented Successfully.Or Our Technology Infrastructure, Or Those Of Third Parties, Could Result In A Material Adverse Effect On Our Business, Reputation, Cash Flows and Results Of Operations.    A numberWe are highly dependent upon the use of the Company's key informationvarious proprietary and third-party software applications and other technology systems were developed solely to handle the Company's particular information technology infrastructure. The Company is in the processoperate our business. As part 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. Wenormal operations, we process a large number of transactions on a daily basis and relymaintain and transmit confidential client and employee information, the safety and security of which is dependent upon the proper functioningeffectiveness 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-upinformation security policies, procedures and capabilities to protect such systems and the data that reside on or are transmitted through them.

        Although we take protective measures and endeavor to modify these protective measures as circumstances warrant, technology is subject to rapid change and the nature of the threats continue to evolve. As a result, our operating and technology systems, software and networks may fail to operate properly or become disabled, or may be vulnerable to unauthorized access, inadvertent disclosure, loss or destruction of data (including confidential client information), computer viruses or other malicious code, cyber attacks and other events that could materially damage our operations, have an adverse security impact, or cause the disclosure or modification of sensitive or confidential information. Most of the software applications that we use in our business are licensed from, and supported, upgraded and maintained by, third-party vendors. A suspension or termination of certain of these licenses or the event of any failurerelated support, upgrades and maintenance could cause temporary system delays or interruptioninterruption. We also take precautions to password protect and/or encrypt our laptops and other mobile electronic hardware. If such hardware is stolen, misplaced or left unattended, it may become vulnerable to hacking or other unauthorized use, creating a possible security risk and resulting in potentially costly actions by us. Further, while we have in place a disaster recovery plan to address catastrophic and unpredictable events, there is no guarantee that this plan will be adequate.sufficient in responding to or ameliorating the effects of all disaster scenarios, and we may experience system delays and interruptions as a result of natural disasters, power failures, acts of war, and third-party failures.

        The breach of our operational or technology systems, software and networks, or those of third parties, due to one or more of these events could cause interruptions, malfunctions or failures in our operations and/or the loss or inadvertent disclosure of confidential client information could result in substantial financial loss or costs, liability for stolen assets or information, breach of client contracts, client dissatisfaction and/or loss, regulatory actions, remediation costs to repair damage caused by the breach, additional security costs to mitigate against future incidents and litigation costs resulting from the incident. These events, and those discussed above, could have a material adverse effect on our business, reputation, results of operations, financial position, cash flow, revenues and income.

        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


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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.


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        Fee Pressures Could Reduce Our Revenues And Profitability.    There is a trend toward lower fees in some segments of the investment management business. In addition, the SEC has adopted rules that are designed to improve mutual fund corporate governance, which could result in further downward pressure on investment advisory fees in the mutual fund industry. Accordingly, there can be no assurance that we will be able to maintain our current fee structure. Fee reductions on existing or future new business could have an adverse impact on our revenues and profitability.

        We Could Experience Adverse Effects On Our Revenues, Profits And Market Share Due To Strong Competition From Numerous And Sometimes Larger Companies.    We compete with stock brokerage firms, mutual fund companies, investment banking firms, insurance companies, banks, Internetinternet 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 Internetinternet financial services. If existing or potential customers decide to invest with our competitors instead of with us, our market share, revenues and income could decline.

        The Terms Of Our Credit Facility And Senior Unsecured Notes Impose Restrictions On Our Operations That May Adversely Impact Our Prospects And The Operations Of Our Business.    There are no assurances that we will be able to raise additional capital if needed, which could negatively impact our liquidity, prospects and operations. We have entered into a 364-day3-year revolving credit facility with various lenders providing for total loans of $125.0 million. Under this facility, the lenders may, at their option upon our request, expand the facility to $200.0 million. At February 18, 2010,15, 2013, there was no balance outstanding under the revolving credit facility. We also entered into a note purchase agreement with various purchasers for the sale and issuance of $190.0 million of unsecured senior notes comprised of $95 million of 5.0% senior notes, series A, due 2018 and $95 million of 5.75% senior notes, series B, due 2021, all of which were issued on January 13, 2011. The terms and conditions of our revolving credit facility and 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


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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


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funds and information, there can be no assurance that our controls will be adequate or that a taking or misuse by our employees or financial advisors can be prevented. We could be liable in the event of a taking or misuse by our employees or financial advisors and we could also be subject to regulatory sanctions. Although we believe that we have adequately insured against these risks, there can be no assurance that our insurance will be maintained or that it will be adequate to meet any liability. Any damage to the trust and confidence placed in us by our clients may cause assets under management to decline, which could adversely affect our revenues, financial condition, results of operations and business prospects.

        Our Stockholders Rights Plan Could Deter Takeover Attempts, Which Some Of Our Stockholders May Believe To Be In Their Best Interest.    Under certain conditions, the rights under our stockholders rights plan entitle the holders of such rights to receive shares of our common stock having a value equal to two times the exercise price of the right. The rights are attached to each share of our outstanding common stock and generally are exercisable only if a person or group acquires 15% or more of the voting power represented by our common stock. Our stockholders rights plan could impede the completion of a merger, tender offer, or other takeover attempt even though some or a majority of our stockholders might believe that a merger, tender offer or takeover is in their best interests, and even if such a transaction could result in our stockholders receiving a premium for their shares of our stock over the then current market price of our stock.

        Provisions Of Our Organizational Documents Could Deter Takeover Attempts, Which Some Of Our Stockholders May Believe To Be In Their Best Interest.    Under our 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$190.0 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


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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.

        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.

ITEM 1B.    Unresolved Staff Comments

        None.


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ITEM 2.    Properties

        OurWe own two buildings in the vicinity of buildings currently leased by our home officesoffices: a 50,000 square foot building located in Overland Park, KS and a 45,000 square foot building located in Mission, KS. Existing home office lease agreements cover approximately 358,000310,000 square feet for Waddell & Reed and Legend located in Overland Park, Kansas, 38,000 square feet for our disaster recovery facility and 39,000 square feet for Legend located in Palm Beach Gardens, Florida, respectively. This figure does not includeFlorida. The lease agreement for Legend was assumed by the purchaser, effective January 1, 2013. An additional lease covers office space of 41,000 square feet formerly leased by Mackenzie Investment Management Inc. in Boca Raton, Florida, whichFlorida. This space has been sublet.sublet and the lease agreement ends March 31, 2013. In addition, we lease office space for sales management, which is available to our financial advisors and sales managementfor use, in various locations throughout the United States totaling approximately 639,000661,000 square feet. In the opinion of management, the office space owned and leased by the Company is adequate for existing operating needs.

ITEM 3.    Legal Proceedings

        The Company is involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to the business practices within the industries in which we operate. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and on the results of operations in a particular quarter or year.

        The Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable, and the amount can be reasonably estimated. These amounts are not reduced by amounts that may be recovered under insurance or claims against third parties, but undiscounted receivables from insurers or other third parties may be accrued separately. The Company regularly revises such accruals in light of new information. For contingencies where an unfavorable outcome is reasonably possible and that are significant, the Company discloses the nature of the contingency and, where feasible, an estimate of the possible loss. For purposes of our litigation contingency disclosures, "significant" includes material matters as well as other items that management believes should be disclosed. Management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict.

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.


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        In anthis action filed December 28, 2009, the Company along with various of its affiliates, werewas sued in an individual action, class action and Fair Labor Standards Act ("FLSA") nationwide collective action by two former advisors asserting misclassification of financial advisersadvisors as independent contractors.contractors instead of employees. Plaintiffs, on behalf of themselves and a purported class of Waddell & Reed, Inc. financial advisors, assert claims under the FLSA for minimum wages and overtime wages, and under California Labor Code Statutes for timely paypayment of wages, minimum wages, overtime compensation, meal periods, reimbursement of losses and business expenses and itemized wage statements and a claim for Unfair Business Practices under §17200 of the California Business & Professions Code. Plaintiffs seek declaratory and injunctive relief and monetary damages. As

        Plaintiffs moved for conditional collective action certification under the FLSA. The Company opposed this motion and additionally moved for summary judgment on Plaintiffs' individual FLSA claims. The Court issued an order on January 3, 2012 granting the Company's summary judgment motions, holding that Plaintiffs' individual FLSA claims fail as a matter of law, and denying Plaintiffs' motion for conditional collective action certification under the FLSA as moot. This ruling effectively removes all nationwide FLSA claims from the case.

        Subsequently, the Company moved for summary judgment on Plaintiffs' individual California claims. The Court issued an order on August 20, 2012 granting the Company's summary judgment motions, holding that Plaintiffs' individual California claims fail as a matter of law. This order effectively dismissed Plaintiffs from the case, both individually and as putative class representatives.

        However, in its August 20, 2012 order, the Court also granted Plaintiffs' motion to add a new individual and putative class representative to the action, effectively replacing the originally named Plaintiffs. The newly named Plaintiff continued to pursue the California claims referenced above on behalf of the putative class, as well as newly added representative derivative claims under the California Private Attorney General Act.

        The Company moved for summary judgment, asking the Court to dismiss the newly named Plaintiff's individual claims. The arguments made in support of this request were the same as those that prevailed in the Taylor and Young motions for summary judgment. On February 1, 2013, the Court issued an order granting the Company's summary judgment motion. This ruling effectively dismisses all remaining claims in the case in their entirety, pending appeal. No appeal has yet no responsive pleading has been filed, but thefiled. The Company intends to continue to vigorously contest plaintiffs' claims.

        Indefend 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,at appeal, 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.any.

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.


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PART II

ITEM 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Our Class A common stock ("common stock") is traded on the NYSE under the ticker symbol "WDR." The following table sets forth, for the periods indicated, the high and low sale prices of our common stock, as reported by the NYSE, as well as the cash dividends declared for these time periods:


Market Price

  
 2009 2008 
 Quarter
 High
 Low
 
Dividends Per
Share

 High
 Low
 
Dividends Per
Share

 
             
 1 $19.64 $11.40 $0.19 $36.08 $27.76 $0.19 
 2  28.00  17.16  0.19  38.00  30.88  0.19 
 3  29.27  23.25  0.19  35.07  21.25  0.19 
 4  31.50  26.76  0.19  25.27  8.57  0.19 
 
 2012 2011 
Quarter
 High
 Low
 Dividends
Per
Share

 High
 Low
 Dividends
Per
Share

 
            
 1 $33.58 $24.40 $0.25 $42.20 $34.54 $0.20 
 2  33.53  26.55  0.25  42.49  34.45  0.20 
 3  34.04  27.02  0.25  40.04  24.78  0.20 
 4  35.77  30.91  1.28  29.78  22.85  0.25 

        The cash dividends declared during the fourth quarter of 2012 includes a special cash dividend on our common stock of $1.00 per share that was paid on December 6, 2012.

        Year-end closing prices of our common stock were $30.54$34.82 and $15.46$24.77 for 20092012 and 2008,2011, respectively. The closing price of our common stock on February 18, 201015, 2013 was $32.35.$42.73.

        According to the records of our transfer agent, we had 3,5263,001 holders of record of common stock as of February 18, 2010.15, 2013. 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." We anticipate that quarterly dividends will continue to be paid.

Common Stock Repurchases

        Our Board of Directors has authorized the repurchase of our common stock in the open market and/or private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in our stock-based compensation programs. During the year ended December 31, 2009,2012, we repurchased (i) 1,542,7331,536,968 shares in the open market and privately at an aggregate cost, including commissions, of $36.4$48.7 million, (ii) 6,493 mature shares from stock incentive plan participants to cover the strike price of options exercised in connection with a Stock Option Restoration Program (the "SORP"), (iii) nine newly issued shares from SORP participants to cover their statutory minimum tax withholdings on option exercises, and (iv) 327,301including 568,568 shares from related parties to cover their tax withholdings from the vesting of nonvested shares.shares granted under our stock-based compensation programs. The aggregate cost of shares obtained from related parties during 20092012 was $7.1$19.1 million. The purchase price paid by us for private repurchases of our common stock from related parties is the closing market price on the purchase date.


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        The following table sets forth certain information about the shares of common stock we repurchased during the fourth quarter of 2009.2012.

Period
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
 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

October 1 - October 31

 -   $- - n/a (1) 125,000 $32.17 125,000 n/a (1)

November 1 - November 30

November 1 - November 30

 10,000 31.00 10,000 n/a (1) 53,285 32.22 53,285 n/a (1)

December 1 - December 31

December 1 - December 31

 93,693 30.15 93,693 n/a (1) 199,963 34.74 199,963 n/a (1)
                 

Total

 378,248 $33.54 378,248   
 

Total

 103,693   $    30.23 103,693           
        

(1)
On August 31, 1998, we announced that our Board of Directors approved a program to repurchase shares of our common stock on the open market. Under the repurchase program, we are authorized to repurchase, in any seven-day period, the greater of (i) 3% of our outstanding common stock or (ii) $50 million of our common stock. We may repurchase our common stock through the NYSE,New York Stock Exchange, other national or regional market systems, electronic communication networks or alternative trading systems such as POSIT, during regular or after-hours trading sessions. POSIT is an alternative trading system that uses passive pricing to anonymously match buy and sell orders. To date, we have not used electronic communication networks or alternative trading systems to repurchase any of our common stock and do not intend to use such networks or systems in the foreseeable future.systems. Our stock repurchase program does not have an expiration date or an aggregate maximum number or dollar value of shares that may be repurchased. Our Board of Directors reviewed and ratified the stock repurchase program in July 2004.October 2012. During the fourth quarter of 2009,2012, all stock repurchases were made pursuant to the repurchase program including 71,193and 153,248 shares, reflected in the table above, that were purchased in connection with funding employee income tax withholding obligations arising from the vesting of nonvested shares.

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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, 20042007 through December 31, 2009,2012, 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 3236 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, 20042007 with all dividends being reinvested. The closing price of the Company's Class A common stock on December 31, 20042007 (the last trading day of the year) was $23.89$36.09 per share. The stock price performance on the graph is not necessarily indicative of future price performance.


 Period Ending  
 Period Ending  
Index
 12/31/04
 12/31/05
 12/31/06
 12/31/07
 12/31/08
 12/31/09
     
 12/31/07
 12/31/08
 12/31/09
 12/31/10
 12/31/11
 12/31/12
  
  

Waddell & Reed Financial, Inc.

 

100.00

 

90.46

 

121.25

 

164.01

 

72.92

 

148.62

  100.00 44.46 90.61 107.45 77.53 115.11 

SNL Asset Manager

 

100.00

 

127.18

 

147.49

 

167.89

 

79.79

 

129.44

  100.00 47.52 77.10 88.75 76.76 98.48 

S&P 500

 

100.00

 

104.91

 

121.48

 

128.16

 

80.74

 

102.11

  100.00 63.00 79.68 91.68 93.61 108.59 

 

Table of Contents

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.indicated, and reflects continuing operations data. 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, For the Year Ended December 31, 


 2009 (1) 2008 (2) 2007 2006 (3) 2005 (4) 2012 2011 2010 2009 2008 (1) 


 (in thousands, except per share data and number of financial advisors)
 (in thousands, except per share data and number of financial advisors)
 

Revenues from:

Revenues from:

  

Investment management fees

Investment management fees

   $354,593 399,863 372,345 311,525 267,681 $549,231 530,599 457,538 354,593 399,863 

Underwriting and distribution fees

Underwriting and distribution fees

 378,678 416,762 371,085 317,458 272,590 496,465 469,484 410,380 331,754 365,345 

Shareholder service fees

Shareholder service fees

 105,818 102,495 94,124 89,672 81,809 128,109 122,449 110,348 97,969 94,514 
                     

Total revenues

 839,089 919,120 837,554 718,655 622,080

Net income

 
105,505
 
96,163
 
125,497
 
46,112
 
60,121

per common share—basic

 1.23 1.12 1.49 0.55 0.72

per common share—diluted

 1.23 1.12 1.48 0.54 0.72

Total revenues

 1,173,805 1,122,532 978,266 784,316 859,722 

Income from continuing operations

 
192,528
 
172,205
 
153,428
 
104,051
 
96,210
 

Net income per share from continuing operations, basic and diluted

 
2.25
 
2.01
 
1.79
 
1.22
 
1.12
 

Dividends declared per common share

Dividends declared per common share

   $0.76 0.76 0.68 0.60 0.60 
$

2.03
 
0.85
 
0.77
 
0.76
 
0.76
 

Advisor and productivity data (excluding Legend):

 

Investment product sales (5)

   $2,236,642 2,696,910 2,632,411 2,276,405 1,901,356

Wholesale channel data:

 

Sales (net of commissions)

 $15,258,158 16,527,674 14,448,552 14,653,043 15,524,989 

Number of external wholesalers

 50 51 46 34 35 

Advisor channel data:

 

Sales (net of commissions)

 $4,050,418 3,799,077 3,615,654 3,201,867 3,724,165 

Gross revenue per advisor

 168.2 155.7 118.9 92.8 103.0 

Number of financial advisors
(end of period)

Number of financial advisors
(end of period)

 2,393 2,366 2,293 2,255 2,409 1,763 1,816 1,847 2,393 2,366 

Average number of financial advisors

Average number of financial advisors

 2,336 2,297 2,190 2,290 2,453 1,762 1,757 2,019 2,336 2,297 

Investment product sales per advisor

   $957 1,174 1,189 994 776

Wholesale channel data:

 

Sales (net of commissions)

   $14,745,230 15,598,998 9,469,932 4,541,812 2,346,749

Number of external wholesalers

 34 35 34 26 23

Institutional channel sales

Institutional channel sales

 
  $

1,703,470
 
2,358,104
 
1,882,908
 
968,106
 
654,333
 
$

2,501,643
 
3,413,748
 
3,588,260
 
1,703,470
 
2,358,104
 

 



 As of December 31, As of December 31, 


 2009 2008 2007 2006 2005 2012 2011 2010 2009 2008 


 (in millions)
 (in millions)
 

Assets under management

Assets under management

   $69,783 47,484 64,868 48,401 41,863 $96,365 83,157 83,673 69,783 47,484 

Balance sheet data:

Balance sheet data:

  

Goodwill and identifiable intangible assets

 221.2 221.2 228.4 228.4 250.3

Total assets

 983.4 775.4 893.8 662.7 632.3

Short-term debt

     1.7

Long-term debt

 200.0 200.0 200.0 199.9 198.2

Total liabilities

 614.3 455.3 512.1 418.0 384.9

Stockholders' equity

 369.1 320.1 381.7 244.7 247.4

Goodwill and identifiable intangible assets

 162.0 162.0 162.0 162.0 162.0 

Total assets

 1,152.8 1,082.4 976.9 983.4 775.4 

Long-term debt

 190.0 190.0 190.0 200.0 200.0 

Total liabilities

 642.6 558.8 519.8 614.3 455.3 

Stockholders' equity

 510.2 523.6 457.1 369.1 320.1 

Table of Contents

(1)
Includes a pre-tax charge of $3.7 million ($2.3 million net of tax) to reflect the "other than temporary" decline in value of certain of the Company's investments in affiliated mutual funds as the fair value of these investments had been below cost for an extended period; a pre-tax charge of $1.1 million ($800 thousand net of tax) for severance and other transaction costs in connection with the divestiture of our investment in ACF; and tax benefits of $1.6 million related to carrying back a portion of the capital loss generated by the divestiture of our investment in ACF to fully offset capital gains generated during the three year carryback period.

(2)
Includes a pre-tax charge of $16.5 million ($10.5 million net of tax) for restructuring charges consisting primarily of severance costs associated with our voluntary separation program as well as costs associated with terminating various projects under development; a charge of $7.2 million (not deductible for income tax purposes) to recognize the impairment of goodwill associated with ACF;Austin Calvert & Flavin, Inc., a subsidiary sold in 2009; additional amortization of our deferred sales commission asset of $6.5 million ($4.1 million net of tax) due to significant asset redemption activity and our review of the recoverability of our deferred sales commission asset; and a pre-tax charge of $2.1 million ($1.4 million net of tax) related to the settlement of miscellaneous litigation and other matters.

(3)
Includes a pre-tax charge of $55.0 million ($39.4 million net of tax) to recognize our settlement with the SEC, New York Attorney General and Kansas Securities Commissioner related to market-timing allegations; a charge of $20.0 million (not deductible for income tax purposes) to recognize the impairment of goodwill associated with ACF; charges associated with the resolution of the Williams excessive fee litigation; expenses related to prior regulatory settlements; and a pre-tax charge of $1.9 million ($1.3 million net of tax) related to employee separation costs at ACF in response to a decline in investment performance and related loss of assets under management.

(4)
Includes pre-tax charges totaling $47.4 million ($30.8 million net of tax) recorded during 2005 related to settlements of outstanding legal matters with Torchmark for actions in Alabama, California and Kansas, a settlement with the National Association of Securities Dealers ("NASD") and a consortium of states relating to variable annuity sales practices; separation of employment payments to our former chief executive officer; a NASD arbitration settlement with a former financial advisor; and other employee separation payments related to the restructuring of the Advisors channel.

(5)
Investment product sales are commissionable sales by our financial advisors, shown gross of commissions, and do not include mutual funds sold at net asset value or sales of other wholesale mutual funds or insurance products.

Table of Contents

ITEM 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations

        This Item contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect the current views and assumptions of management with respect to future events regarding our business and the industry in general. These forward-looking statements include all statements, other than statements of historical fact, regarding our financial position, business strategy and other plans and objectives for future operations, including statements with respect to revenues and earnings, the amount and composition of assets under management, distribution sources, expense levels, redemption rates and the financial markets and other conditions. These statements are generally identified by the use of words such as "may," "could," "should," "would," "believe," "anticipate," "forecast," "estimate," "expect," "intend," "plan," "project," "outlook," "will," "potential" and similar statements of a future or forward- lookingforward-looking nature. Readers are cautioned that any forward-looking information provided by or on behalf of the Company is not a guarantee of future performance. Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the "Risk Factors" section of this Form 10-K, which include, without limitation, the adverse effect from a decline in securities markets or in the relative investment performance of our products, our inability to pay future dividends, the loss of existing distribution channels or the inability to access new ones, a reduction of the assets we manage on short notice, and adverse results of litigation and/or arbitration. All forward-looking statements speak only as of the date on which they are made and we undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

        The following should be read in conjunction with the "Selected Financial Data" and our Consolidated Financial Statements and Notes thereto appearing elsewhere in this report.

Executive Overview

        We are one of the oldest mutual fund and asset management firms in the country, with expertise in a broad range of investment styles and across a variety of market environments. Our earnings and cash flows are heavily dependent on financial market conditions. Significant increases or decreases in the various securities markets particularly United States equity markets, can have a material impact on our results of operations, financial condition and cash flows.

Revenue Sources

        We derive our revenues primarily from providing investment management, investment product underwriting and distribution, and shareholder services administration to mutual funds and institutional and separately managed accounts. Investment management fees a substantial source of our revenues, are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. 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 client 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.


Table of Contents

Our Distribution Channels

        One of our distinctive qualities is that we are a significant distributor of investment products. Our retail products are distributed through our Advisors channel sales force of independent financial advisors or through our Wholesale channel, which includes third-parties such as other broker/dealers, registered investment advisors (including the retirement advisors of Legend) and various retirement platforms.platforms or through our Advisors


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channel sales force of independent financial advisors. We also market our investment advisory services to institutional investors, either directly or through consultants, in our Institutional channel.

        InOur Wholesale Channel is our fastest growing distribution channel. Channel efforts are led by the Advisors channel, our sales force consistssolid performance record of 2,393 independent financial advisors providing personal financial planning services to our clients across the United States, focusing on investment strategies for retirement, education funding, insurance, estate planning and other specific needs.

        In our Wholesale channel, weIvy 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 external, wholesalers, sixinternal and hybrid wholesalers as well as a team dedicated to national accounts.

        The Ivy Funds maintain strong positions on many of the leading third-party distribution platforms, and 33 internal wholesalers leadwe continue efforts to diversify our sales by offering other solid performing funds besides our flagship Ivy Asset Strategy fund to our partners. During 2012, we had nine funds exceed gross sales of $250 million. Sales of products other than our Ivy Asset Strategy fund accounted for 68% of total sales during 2012 compared to 53% during 2011 and 40% for 2010. We expect the Wholesale Channel to be critical in driving our organic growth rate in the coming years.

        Our Advisors channel sales force consists of 1,763 independent financial advisors spread throughout the United States, who carry out our mission of providing financial advice for retirement, education funding, estate planning and other financial needs for our clients. A distinguishing aspect of this channel is its industry low redemption rate, which can be attributed to the personal nature in which our advisors provide service to their clients.

        Over the past three years, we have experienced a decline in our number of financial advisors; however, the decline was not unexpected as we continue to 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 41%, to $168 thousand, and gross sales in the channel increased 12%, to $4.1 billion, during the past two years, despite the 13% decrease in advisor headcount. This headcount decline leveled off during 2012. We continue to focus our recruiting efforts on bringing in this channel.experienced advisors.

        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.

Salevariety of Austin, Calvert & Flavin, Inc.

        On July 15, 2009, the Company completed the saletypes of its wholly-owned subsidiary, ACF, pursuant to a stock purchase agreement dated June 26, 2009.institutions. The agreement includes an earnout provision based on alargest percentage of revenues on existing accountsour clients hire us to act as subadvisor for their branded products; 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 it has experienced positive gross sales and net flow trends over the three-year period subsequentpast two years due to the closing date. Prior to the closing date, ACF had 10 employees and assets under management of $488.0 million.

        We recorded chargesour growing subadvisory relationships. Our subadvisory relationships currently account for severance and other transaction costs of $1.1 million in connection with the divestiture of our investment in ACF in 2009, which are included in general and administrative expenses in the consolidated statement of income.

        For tax purposes, this sale resulted in a capital loss of $28.1 million, which will generate future tax benefits available to offset potential future and prior period capital gains. Due to the charactermore than 65% of the loss andchannel's $11.8 billion in assets at the limited carryforward period permitted by law, the Company may not realize the full tax benefitend of the capital loss. We recorded tax benefits in 2009 of $1.6 million related to carrying back a portion of the capital loss to fully offset capital gains generated during the applicable three-year carryback period.2012.

Market Developments

        During 2008, we operated in a period of high volatility in the financial markets—the Dow Jones Industrial Average declined 34% and the Standard & Poor's 500 Index declined 38%. Almost every class of financial assets experienced significant price declines and high volatility. The U.S. government took steps to stabilize the financial markets experienced strong gains in 2012 despite ongoing uncertainty surrounding government policy and global economic growth. Retail investors were willing to accept minimal returns rather than expose themselves to the banking systemhighly unpredictable equity market, which led to ensure continued availabilitymeaningful outflows of commercialactively managed equity funds. Through this volatile year, the Company generated net flows of $2.3 billion and consumer credit. Markets ralliedmaintained stable redemption rates compared to industry averages. Strong market appreciation combined with positive flows contributed to a 16% increase in 2009; the Dow Jones Industrial Average increased 19% and the Standard & Poor's 500 Index increased 23%. Even with the recent market improvements, the economic outlook remains uncertain andassets under management compared to December 31, 2011, as we anticipate a challenging business climate in the foreseeable future.reached assets under management of $96.4 billion at December 31, 2012.

ConsequencesSale of Market DevelopmentsLegend

        We took steps inDuring 2012, the fourth quarterCompany committed to a plan to sell its Legend subsidiaries and on October 29, 2012 the Company signed a definitive agreement to execute the transaction. The sale closed effective January 1, 2013. Based on the value of 2008the consideration the Company expected to manage our expenses in responsereceive upon closing, which is less than the carrying value of net assets to be sold, the deteriorating market conditions. In December 2008, we offered a voluntary separation program to our employees that included enhanced severance benefits. A total of 169 employees accepted the program, which for most was effective by December 31, 2008. Related to this program, weCompany recorded a restructuringnon-cash impairment charge of $16.5$42.4 million, which is reflected in general and administrative expenses. During 2009 we focusedincome (loss) from discontinued operations on cost control, especially in the areas of salaries and benefits, business meetings and travel, and convention costs.statement


Table of Contents

of income. The consideration received was subject to working capital and regulatory capital adjustments through the closing date. The Company retained $7.7 million of Legend's excess working capital as part of the agreement. The agreement also includes an earnout provision based on asset retention for a period of two years following the closing date.

        The operational results of Legend have been presented as discontinued operations in the consolidated financial statements for all periods presented. Unless otherwise stated, references in Management's Discussion and Analysis of Financial Condition and Results of Operations refers to continuing operations.

Operating Results

        The company ended the year with $1.2 billion in revenues. The revenue increase of 5% relative to fiscal 2011 was reflective of an increase in our average managed assets and positive net flows. Average assets under management during 2009 were down 9%$91.7 billion in 2012 compared to average assets under management during 2008, which resulted$87.1 billion in a significant decline in revenue in 2009 relative2011.

        Income from continuing operations increased 12% compared to 2008. However,2011 while our assets under management as of December 31, 2009 have returnedoperating margin improved slightly from 25.5% to the peak levels achieved in 2008.25.8%. We will continue to employ expense control in response to uncertain future market conditions, but plan to add investment management, back office and sales personnel strategically to supportcontinue our current growth.

Current Statefocus on cost controls during 2013.

        Our balance sheet remains strong, as we ended the year with cash and investments of $314.9 million. We renewed$504.2 million, after payment of an $85.4 million special dividend in December. At December 31, 2012, we had no borrowings outstanding under our 364-day unsecured linethree year revolving credit facility, which provides for initial borrowings of credit in October of 2009 with commitments from a syndicate of banks forup to $125.0 million expandableand can be expanded to $200.0 million. We believe that our current liquidity position will allow us to manage through further possible market declines for the foreseeable future.

        Our $200.0 million in outstanding senior notes are scheduled to mature in January 2011 and we are currently evaluating our refinancing alternatives.


Table of Contents

Assets Under Management

        Assets under management of $69.8$96.4 billion on December 31, 2009 grew 47%2012 increased $13.2 billion, or 16%, compared to the $47.5$83.2 billion reported a year earlier due to marketago. Market appreciation of $13.5$10.9 billion across the complex, and net sales of $8.7$1.4 billion generated primarily by the Wholesale channel.channel were the primary contributors to this increase.

Change in Assets Under Management (1)


 Advisors
Channel
 Wholesale
Channel
 Institutional
Channel
 Total Wholesale
Channel
 Advisors
Channel
 Institutional
Channel
 Total 

 (in millions)
 (in millions)
 

December 31, 2009

 

December 31, 2012

 

Beginning Assets

   $23,472 17,489 6,523 47,484 $40,954 31,709 10,494 83,157 

Disposition of Assets

 
- -
 
- -
 
(488)
 
(488)

Sales (net of commissions)

 
3,202
 
14,745
 
1,703
 
19,650
 
15,325
 
4,051
 
2,502
 
21,878
 

Redemptions

 (3,052) (5,951) (1,942) (10,945) (13,896) (4,156) (2,760) (20,812) 
                 

Net Sales

 150 8,794 (239) 8,705 1,429 (105) (258) 1,066 

Net Exchanges

 
(197)
 
150
 
41
 
(6)
 
155
 
(158)
 
-
 
(3)
 

Reinvested Dividends and Capital Gains

 329 124 113 566 605 454 218 1,277 
                 

Net Flows

 282 9,068 (85) 9,265 2,189 191 (40) 2,340 

Market Appreciation

 
5,720
 
6,261
 
1,541
 
13,522
 
5,787
 
3,760
 
1,321
 
10,868
 
                 

Ending Assets

   $29,474 32,818 7,491 69,783 $48,930 35,660 11,775 96,365 
                 

December 31, 2008

 

December 31, 2011

 

Beginning Assets

   $34,562 21,537 8,769 64,868 $40,883 33,181 9,609 83,673 

Sales (net of commissions)

 
3,724
 
15,599
 
2,359
 
21,682
 
16,594
 
3,800
 
3,413
 
23,807
 

Redemptions

 (3,771) (8,541) (1,561) (13,873) (12,995) (4,047) (2,479) (19,521) 
                 

Net Sales

 (47) 7,058 798 7,809 3,599 (247) 934 4,286 

Net Exchanges

 
(150)
 
145
 
- -
 
(5)
 
261
 
(262)
 
-
 
(1)
 

Reinvested Dividends and Capital Gains

 325 (271) 119 173 279 353 112 744 
                 

Net Flows

 128 6,932 917 7,977 4,139 (156) 1,046 5,029 

Market Depreciation

 
(11,218)
 
(10,980)
 
(3,163)
 
(25,361)
 
(4,068)
 
(1,316)
 
(161)
 
(5,545)
 
                 

Ending Assets

   $23,472 17,489 6,523 47,484 $40,954 31,709 10,494 83,157 
                 

December 31, 2007

 

December 31, 2010

 

Beginning Assets

   $29,905 10,819 7,677 48,401 $32,818 29,474 7,491 69,783 

Sales (net of commissions)

 
3,551
 
9,470
 
1,883
 
14,904
 
14,505
 
3,616
 
3,588
 
21,709
 

Redemptions

 (3,829) (2,795) (2,128) (8,752) (10,560) (3,526) (2,874) (16,960) 
                 

Net Sales

 (278) 6,675 (245) 6,152 3,945 90 714 4,749 

Net Exchanges

 
(180)
 
173
 
- -
 
(7)
 
190
 
(308)
 
116
 
(2)
 

Reinvested Dividends and Capital Gains

 245 (24) 105 326 237 338 114 689 
                 

Net Flows

 (213) 6,824 (140) 6,471 4,372 120 944 5,436 

Market Appreciation

 
4,870
 
3,894
 
1,232
 
9,996
 
3,693
 
3,587
 
1,174
 
8,454
 
                 

Ending Assets

   $34,562 21,537 8,769 64,868 $40,883 33,181 9,609 83,673 
                 
(1)
Includes all activity of the Funds and institutional and separate accounts, including money market funds and transactions at net asset value, accounts for which we receive no commissions.

Table of Contents

        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, decreasedincreased by 9% as5% compared to 2008. However, average assets under management for the fourth quarter of 2009 were $67.0 billion, a 38% increase from the fourth quarter average of $48.4 billion in 2008. Our quarterly average assets under management have increased each quarter since a low mark in the first quarter of 2009.2011.

Average Assets Under Management



 2009 2008 2007 2012 2011 2010 


 Average Percentage
of Total
 Average Percentage
of Total
 Average Percentage
of Total
 Average Percentage
of Total
 Average Percentage
of Total
 Average Percentage
of Total
 


 (in millions, except percentage data)
 (in millions, except percentage data)
 

Distribution Channel:

Distribution Channel:

  

Wholesale Channel

 

Equity

 $37,924 83% 39,387 91% 32,805 92% 

Fixed income

 7,684 17% 3,684 8% 2,385 7% 

Money market

 191 0% 320 1% 284 1% 

Advisors Channel

              

Total

 $45,799 100% 43,391 100% 35,474 100% 
 

Equity

   $18,916 74% 24,201 80% 27,048 84%             

Advisors Channel

 

Equity

 $24,227 70% 24,477 73% 22,430 74% 

Fixed income

 8,933 26% 7,629 23% 6,614 22% 

Money market

 1,318 4% 1,203 4% 1,288 4% 
 

Fixed income

 5,211 20% 4,490 15% 4,154 13%             

Total

 $34,478 100% 33,309 100% 30,332 100% 
 

Money market

 1,600 6% 1,428 5% 1,046 3%             

Institutional Channel

 

Equity

 $10,630 93% 9,627 93% 7,467 91% 

Fixed income

 784 7% 780 7% 732 9% 

Money market

 - - - - - - 
                         

Total

   $25,727 100% 30,119 100% 32,248 100%
            

Wholesale Channel

 
 

Equity

   $22,556 94% 23,268 98% 14,395 97%
 

Fixed income

 1,147 5% 413 2% 380 3%
 

Money market

 301 1% 152 0% 64 0%
            

Total

   $24,004 100% 23,833 100% 14,839 100%
            

Institutional Channel

 
 

Equity

   $6,208 90% 7,445 93% 7,199 92%
 

Fixed income

 658 10% 584 7% 614 8%
 

Money market

 - - - - - -
            

Total

   $6,866 100% 8,029 100% 7,813 100%

Total

 $11,414 100% 10,407 100% 8,199 100% 
                         

Total by Asset Class:

Total by Asset Class:

  

Equity

 $72,781 84% 73,491 84% 62,702 85% 

Fixed income

 17,401 14% 12,093 14% 9,731 13% 

Money market

 1,509 2% 1,523 2% 1,572 2% 
 

Equity

   $47,680 85% 54,914 89% 48,642 89%             

Total

 $91,691 100% 87,107 100% 74,005 100% 
 

Fixed income

 7,016 12% 5,487 9% 5,148 9%             
 

Money market

 1,901 3% 1,580 2% 1110 2%
            

Total

   $56,597 100% 61,981 100% 54,900 100%
            

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        The following table summarizes our five largest mutual funds as of December 31, 20092012 by ending assets under management and investment management fees for the last three years. The assets under management and management fees of our five largest mutual funds are presented as a percentage of our total assets under management and total management fees.

Five Largest Mutual Funds by Ending Assets Under Management and Investment Management Fees



 2009 2008 2007 2012 2011 2010 


 Ending Percentage
of Total
 Ending Percentage
of Total
 Ending Percentage
of Total
 Ending Percentage
of Total
 Ending Percentage
of Total
 Ending Percentage
of Total
 


 (in millions, except percentage data)
 (in millions, except percentage data)
 

By Assets Under Management:

By Assets Under Management:

  

Ivy Asset Strategy

 $25,981 27% 23,642 28% 25,106 30% 

Ivy High Income

 7,228 8% 3,197 4% 1,694 2% 

Advisors Asset Strategy

 3,076 3% 2,772 3% 3,328 4% 

Advisors Core Investment

 3,067 3% 2,724 3% 2,888 3% 

Ivy Mid Cap Growth

 2,777 3% 1,500 2% 543 1% 

Ivy Asset Strategy

   $20,029 29%   $10,430 22% 8,419 14%             

Ivy Global Natural Resources

 5,736 8% 2,618 5% 8,464 15%

Advisors Asset Strategy

 3,235 5% 2,411 5% 3,118 5%

Advisors Core Investment

 2,657 4% 2,377 5% 4,240 7%

Advisors Science & Technology

 2,289 3% 1,670 4% 2,851 5%
            
 

Total

   $33,946 49%   $19,506 41% 27,092 46%

Total

 $42,129 44% 33,835 40% 33,559 40% 
                         

 

(in thousands, except percentage data)


 

(in thousands, except percentage data)


 

By Management Fees:

By Management Fees:

  

Ivy Asset Strategy

 $142,701 26% 146,649 28% 123,638 27% 

Ivy Global Natural Resources (1)

 28,886 5% 46,324 9% 43,839 10% 

Ivy High Income

 28,182 5% 12,843 2% 7,925 2% 

Advisors Asset Strategy

 19,248 4% 20,465 4% 20,402 4% 

Advisors Science & Technology

 19,007 3% 19,208 3% 18,379 4% 

Ivy Asset Strategy

   $82,313 23%   $71,957 18% 24,802 7%             

Total

 $238,024 43% 245,489 46% 214,183 47% 

Ivy Global Natural Resources (1)

 34,353 10% 56,247 14% 50,944 14%             

Advisors Asset Strategy

 18,139 5% 19,966 5% 15,696 4%

Advisors Science & Technology

 15,953 4% 19,202 5% 22,310 6%

Advisors Core Investment

 15,118 4% 21,053 5% 25,861 7%
            
 

Total

   $165,876 46%   $188,425 47% 139,613 38%
            
(1)
For the years ended December 31, 2009, 20082012, 2011 and 2007,2010, we paid subadvisory fees of $17.3$14.6 million, $28.8$23.4 million and $25.6$22.1 million, respectively.

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Results of Operations

Net Income from Continuing Operations

 
 For the Year Ended
December 31,
 Variance
 
 2009 2008 2007 2009 vs.
2008
 2008 vs.
2007
 
 (in thousands, except percentage data)

Net Income

   $105,505  96,163  125,497  10%  -23%

Earnings per share:

               
 

Basic

   $1.23  1.12  1.49  10%  -25%
 

Diluted

   $1.23  1.12  1.48  10%  -24%

Operating Margin

  20%  18%  23%  2%  -5%
 
 For the Year Ended
December 31,
 Variance 
 
 2012 vs.
2011
 2011 vs.
2010
 
 
 2012 2011 2010 
 
 (in thousands, except percentage data)
 

Income from continuing operations

 $192,528  172,205  153,428  12%  12% 

Net income per share from continuing operations, basic and diluted

 
$

2.25
  
2.01
  
1.79
  
12%
  
12%
 

Operating Margin

  
26%
  
25%
  
25%
  
1%
  
0%
 

        We reported net income from continuing operations of $105.5$192.5 million, or $1.23$2.25 per diluted share, in 20092012 compared to $96.2$172.2 million, or $1.12$2.01 per diluted share, in 20082011 and $125.5$153.4 million, or $1.48$1.79 per diluted share, in 2007.

        Operating results for 2009 include a first quarter charge of $3.7 million recorded in investment and other income in the consolidated statement of income to reflect the "other than temporary" decline in value of certain of the Company's investments in affiliated mutual funds as the fair value of these investments had been below cost for an extended period. Charges for severance and other transaction costs of $1.1 million were recorded in 2009 in connection with the divestiture of our investment in ACF and are included in general and administrative expenses in the consolidated statement of income. Tax benefits of $1.6 million related to carrying back a portion of the capital loss to fully offset capital gains generated during the applicable three-year carryback period based on the divestiture of ACF were also recorded in 2009's operating results. Operating results for 2008 include a restructuring charge of $16.5 million, a goodwill impairment charge of $7.2 million related to ACF based on declines in ACF's assets under management and the related adverse impact on its earnings potential, and $6.5 million in additional amortization to reduce our deferred sales commission asset. Each of these items is described in detail below.

        During the fourth quarter of 2008 we offered a voluntary separation program to our employees that included enhanced severance benefits. A total of 169 employees accepted the program, which for most was effective by December 31, 2008. Related to this program, we recorded a restructuring charge of $16.5 million, included in general and administrative expenses in the consolidated statement of income. The restructuring charge includes $700 thousand for termination of various projects under development.

        Due to significant asset redemption activity and our review of the recoverability of our deferred sales commission assets in the fourth quarter of 2008, we recorded $6.5 million in additional amortization ($700 thousand related to Class B shares and $5.8 million related to Class C shares).

        Based on a review of goodwill and intangibles in the fourth quarter of 2008, we recorded a goodwill impairment charge of $7.2 million related to ACF based on declines in ACF's assets under management and the related adverse impact on its earnings potential.2010.

Total Revenues

        Total revenues decreased 9%increased 5% in 20092012 compared to 2008,2011, attributable to a declinean increase in average assets under management of 9% and5%, partially offset by a decrease in gross sales of 9%8%, while total revenues increased 10%15% in 2008


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2011 compared to 2007, based on growth2010, attributable to an increase in average assets under management of 13%18% and an increase in gross sales of 45%10%.

 For the Year Ended
December 31,
 Variance 


 For the Year Ended
December 31,
 Variance 2012 vs.
2011
 2011 vs.
2010
 


 2009 2008 2007 2009 vs.
2008
 2008 vs.
2007
 2012 2011 2010 


 (in thousands, except percentage data)
 (in thousands, except percentage data)
 

Investment management fees

Investment management fees

   $354,593 399,863 372,345 -11% 7% $549,231 530,599 457,538 4% 16% 

Underwriting and distribution fees

Underwriting and distribution fees

 378,678 416,762 371,085 -9% 12% 496,465 469,484 410,380 6% 14% 

Shareholder service fees

Shareholder service fees

 105,818 102,495 94,124 3% 9% 128,109 122,449 110,348 5% 11% 
                  

Total revenues

 $1,173,805 1,122,532 978,266 5% 15% 

Total revenues

   $839,089 919,120 837,554 -9% 10%         
         

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 decreased $45.3increased $18.6 million, or 11%4%, in 20092012 and increased $27.5$73.1 million, or 7%16%, in 2008.2011.

        Revenues from investment management services provided to our retail mutual funds, which are distributed through the Wholesale, Advisors Wholesale and Institutional channels, were $326.3$506.1 million in 20092012 and decreased $38.4increased $16.1 million, or 11%3%, compared to 2008, while the related retail average assets decreased 8%. Revenues from investment management services provided to our retail mutual funds were $364.7 million in 2008 and increased $31.9 million, or 10%, compared to 2007,2011, while the related retail average assets increased 15%5%. 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.waivers as an offset to investment management fees beginning in the third quarter of 2010. Of the total management fee waivers recorded in 2012 of $8.7 million, $5.5 million related to money market accounts. Revenues from investment management services provided to our retail mutual


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funds were $490.0 million in 2011 and increased $65.9 million, or 16%, compared to 2010, while the related retail average assets increased 17%. Retail sales in 2009 were $17.9$19.4 billion, $20.4 billion and decreased 7% compared to $19.3$18.1 billion in 2008. Retail sales in 2008 increased 48% compared to sales in 2007, with the majority of the growth in retail sales occurring in our Wholesale channel.

        Prior to the sale of ACF effective July 15, 2009, ACF had assets under management of $488.0 million, which along with related investment management fee revenues, were previously included in the Institutional channel.2012, 2011 and 2010, respectively.

        Institutional and separate account revenues were $28.3$43.2 million, $35.2$40.6 million and $39.5$33.4 million in 2009, 20082012, 2011 and 2007,2010, respectively. While the decreaseThe increase in account revenues in 2009 was partially due2012 compared to the sale of ACF, we experienced a further decline in average assets of 12%, and a management fee rate decrease on certain institutional accounts. The decrease in account revenues in 20082011 was primarily attributable to a management fee rate decrease on certain institutional accounts.10% increase in average assets while the increase in revenues in 2011 compared to 2010 was a result of a 27% increase in average assets.

        In the Wholesale channel, long-term redemption rates were 30.2% in 2012, compared to 29.5% in 2011 and 29.3% in 2010. Long-term redemption rates (which exclude money market fund redemptions) in the Advisors channel improved to 8.4%were 9.9% in 20092012 compared to 8.9%10.0% and 9.1%9.3% in 20082011 and 2007,2010, respectively. In the Wholesale channel, long-term redemption rates were 24.0% in 2009, a decrease from 35.5% in 2008 and an increase compared to 18.5% in 2007. The Wholesale channel's elevated rate in 2008 is a direct consequence of the volatility in the financial markets that occurred during the second half of the year. We expect the Advisors channel long-term redemption rate to remain lower than that of the Wholesale channel due to the personal and customized nature in which our financial advisors provide service to our clients.

        The long-term redemption rate for our Institutional channel was 28.3%24.2% in 20092012 compared to 19.4%23.8% in 20082011 and 27.2%35.1% in 2007.2010. Subadvisory and defined contribution pension business comprise 60%more than 65% of the Institutional channel's assets as of December 31, 20092012 and unlike defined benefit pension accounts, the active daily flows in or out of these accounts can result in an increase in contributions and withdrawals and impact the channel's redemption rate.

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 unaffiliated companies. Pursuant to each agreement, we offer and sell the Funds' shares on a continuous basis (open-end funds) and pay certain costs associated with underwriting and distributing the Funds, including the costs of developing and producing sales literature and printing of prospectuses, which may be either partially or fully reimbursed by the Funds. The Funds are sold in various classes that are structured in ways that conform to industry standards (i.e., "front-end load," "back-end load," "level-load" and institutional).

        When a client purchases Class A shares (front-end load), the client pays an initial sales charge of up to 5.75% of the amount invested. The sales charge for Class A shares typically declines as the investment amount increases. In addition, investors may combine their purchases of all fund shares to qualify for a reduced sales charge. Class A shares purchased at net asset value are assessed a 1% contingent deferred sales charge ("CDSC") if the shares are redeemed within 12 months of purchase. When a client invests in an asset allocation product, Class A shares are purchased at net asset value. We do not charge an initial sales charge, but investors are assessed a CDSC upon early redemption of shares, up to 3% of the amount originally invested and declining to zero for investments held more than three years. When a client purchases Class B shares (back-end load), we do not charge an initial sales charge, but we do charge a CDSC upon early redemption of shares, up to 5% of the lesser of the current market net asset value or the purchase cost of the redeemed shares in the first year and declining to zero for shares held for more than six years. Class B shares convert to Class A shares after seven years. When a client purchases Class C shares (level-load), we do not charge an initial sales charge, but we do charge investors who redeem their Class C shares in the first year a CDSC of 1% of the current market net asset value or the purchase cost of the shares redeemed, whichever is less.

        Under a Rule 12b-1 service plan, the Funds may charge a maximum fee of 0.25% of the average daily net assets under management for expenses paid to broker/dealers and other sales professionals in connection with providing ongoing services to the Funds' shareholders and/or maintaining the Funds' shareholder accounts, with the exception of the Funds' Class R shares, for which the maximum fee is 0.50%. The Funds' Class B and Class C shares may charge a maximum of 0.75% of the average daily net


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active daily flowsassets 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 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 trustees or outportfolio shareholders (a majority of either) without penalty.

        We offer asset allocation investment advisory products that utilize our Funds. These products offer clients a selection of traditional asset allocation models, as well as features such as systematic rebalancing and client and advisor participation in determining asset allocation across asset classes. We earn asset-based fees on our asset allocation investment advisory products.

        We distribute variable products offering the Ivy Funds VIP as investment vehicles pursuant to general agency arrangements with our business partners and receive commissions, marketing allowances and other compensation as stipulated by such agreements. In connection with these accounts has resulted inarrangements, the Ivy Funds VIP are offered and sold on a continuous basis.

        In addition to distributing variable products, we distribute a number of other insurance products through our insurance agency subsidiaries, including individual term life, group term life, whole life, accident and health, long-term care, Medicare supplement and disability insurance. We receive commissions and compensation from various underwriters for distributing these products. We are not an increase in contributions and withdrawals and has impacted the channel's redemption rate increase.underwriter for any insurance policies.

Underwriting and Distribution Fee Revenues and Expenses

        The following tables illustrate our underwriting and distribution fee revenues and expenses segregated by distribution channel for the years ended December 31, 2009, 20082012, 2011 and 2007:2010:



 Total  
  
 Total  
  


 2009 2008 2007 2009 vs.
2008
 2008 vs.
2007
 2012 2011 2010 2012 vs.
2011
 2011 vs.
2010


 (in thousands, except percentage data)
 (in thousands, except percentage data)

Revenue

Revenue

   $378,678 416,762 371,085 -9% 12% $496,465 469,484 410,380 6% 14%

Expenses:

Expenses:

  

Direct

 325,836 361,005 300,929 -10% 20%

Indirect

 124,089 135,817 121,345 -9% 12%

Direct

 444,854 428,447 372,537 4% 15%

Indirect

 145,127 131,772 120,919 10% 9%
                  

Total Expenses

Total Expenses

 449,925 496,822 422,274 -9% 18% 589,981 560,219 493,456 5% 14%
                  

Net Underwriting & Distribution

Net Underwriting & Distribution

   $(71,247) (80,060) (51,189) 11% -56% $(93,516) (90,735) (83,076) -3% -9%
                  

 



 Advisors Channel  
  
 Wholesale Channel  
  


 2009 2008 2007 2009 vs.
2008
 2008 vs.
2007
 2012 2011 2010 2012 vs.
2011
 2011 vs.
2010

Revenue

Revenue

   $213,258 235,343 238,210 -9% -1% $178,700 179,407 158,273 0% 13%

Expenses:

Expenses:

  

Direct

 147,469 163,183 163,513 -10% 0%

Indirect

 83,917 92,384 84,777 -9% 9%

Direct

 224,744 224,089 195,379 0% 15%

Indirect

 39,929 34,358 33,188 16% 4%
                

Total Expenses

Total Expenses

 231,386 255,567 248,290 -9% 3% 264,673 258,447 228,567 2% 13%
                

Net Underwriting & Distribution

Net Underwriting & Distribution

   $(18,128) (20,224) (10,080) 10% -101% $(85,973) (79,040) (70,294) -9% -12%
                

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 Wholesale Channel  
  
 Advisors Channel  
  


 2009 2008 2007 2009 vs.
2008
 2008 vs.
2007
 2012 2011 2010 2012 vs.
2011
 2011 vs.
2010

Revenue

Revenue

   $165,420 181,419 132,875 -9% 37% $317,765 290,077 252,107 10% 15%

Expenses:

Expenses:

  

Direct

 178,367 197,822 137,416 -10% 44%

Indirect

 40,172 43,433 36,568 -8% 19%

Direct

 220,110 204,358 177,158 8% 15%

Indirect

 105,198 97,414 87,731 8% 11%
                

Total Expenses

Total Expenses

 218,539 241,255 173,984 -9% 39% 325,308 301,772 264,889 8% 14%
                

Net Underwriting & Distribution

Net Underwriting & Distribution

   $(53,119) (59,836) (41,109) 11% -46% $(7,543) (11,695) (12,782) 36% 9%
                

        The Advisors channel is the largest sourceA significant portion of underwriting and distribution revenue, given that a significant amountrevenues 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. Underwriting and distribution revenues also include asset-based fees earned on our asset allocation products and commissions earned on the sale of Wholesale mutual fund sales are load-waived, with the exception of investment product sales by Legend advisors.other insurance products. A portion of underwriting and distribution fee revenues in our Advisors channel are derived from sales commissions charged on front-end load products sold by our financial advisors, including mutual fund Class A shares (those sponsored by the Company and those underwritten by other non-proprietary mutual fund companies), variable annuities and financial planning fees. The remainderA significant amount of underwriting and distribution revenuesWholesale mutual fund sales 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


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third party intermediaries, asset-based fees earned on our asset allocation products, and commissions earned on the sale of other insurance products.load-waived.

        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 AdvisorsWholesale and WholesaleAdvisors channels; support and management of our financial advisors such as field office overhead, sales programs and technology infrastructure; and costs of managing and supporting our wholesale efforts through technology infrastructure and personnel. While the Institutional channel does have marketing expenses, those expenses are accounted for in our compensation and related costs and general and administrative expense lines instead of underwriting and distribution because of the channel's integration with our investment management division, its relatively small size and the fact that there are no Rule 12b-1 fees, loads, CDSCs, or any other charges to separate account clients except investment management fees.

        We recover certain of our underwriting and distribution costs through Rule 12b-1 service and distribution fees, which are paid by the Funds. All Rule 12b-1 service and distribution fee revenue received from the Funds is recorded on a gross basis.

        Underwriting and distribution revenues earned in 2009 decreased2012 increased by $38.1$27.0 million, or 9%6%, compared to 2008. A majority2011. During 2012, revenues from fee-based asset allocation products continued to be a meaningful contributor to revenues, increasing to 23% of underwriting and distribution revenues in 2012 compared to 18% in 2011. Assets grew from $6.0 billion to $8.2 billion year over year and revenues generated from these assets increased $33.1 million. Technology fees collected from our advisors increased revenues $3.0 million. Prior to the decreasefourth quarter of 2011, these fees were netted in revenues was due to loweroperating expenses. Increased Rule 12b-1 asset-based service and distribution fees of $23.8$2.2 million resulted from the increase in average mutual fund assets under management. Offsetting these increases, revenues from variable annuity products


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sold in the Advisors channel decreased by $10.5 million. Insurance-related revenues and revenues from financial plans each decreased $1.1 million compared to 2011.

        Underwriting and distribution revenues earned in 2011 increased by $59.1 million, or 14%, compared to 2010. Revenues from fee-based asset allocation products increased $33.3 million compared to 2010 as assets grew from $4.5 billion to $6.0 billion year over year. Rule 12b-1 asset-based service and distribution fees increased $28.5 million compared to 2010 as a result of a decreasean increase in average mutual fund assets under management. Revenues from front-load product sales sold in the Advisors channel decreased by $12.7 million, which$4.5 million; however, this overall decrease included a decrease in Class A share revenues of $9.5 million and a decreasean increase in variable annuity revenues of $3.6$7.5 million. Insurance-related revenues decreased $1.1 million year over year. Revenues from front-load product sales soldcompared to 2010.

        Underwriting and distribution expenses in 2012 increased by $29.8 million, or 5%, compared to 2011. Direct expenses in the Wholesale channel decreased $2.3 million. In the Wholesale channel, CDSC revenues decreased by $3.3 million due to higher mutual fund redemptions in 2008, concentrated in the second half of the year. Lower advisory fees and point of sale commissions earned by Legend decreased revenue by $3.3increased $0.7 million compared to the prior year. Offsetting these decreases, revenues from fee-based allocation products increased $7.0 million and insurance-related revenues increased $1.0 million.

        Underwriting and distribution revenues increased by $45.7 million, or 12%, in 2008 compared to 2007. A majority2011 as a result of thean increase in revenues was dueaverage wholesale assets under management, partially offset by lower sales volume year over year. We incurred higher dealer compensation paid to higherthird party distributors and increased Rule 12b-1 asset-based service and distribution feesexpenses, partially offset by lower wholesaler commissions. Direct expenses in the Advisors channel increased $15.8 million, or 8% due to increased commissions related to the sale of $36.7fee-based asset allocation products of $25.1 million, partially offset by lower commissions on variable annuity products of $6.1 million. Expenses related to financial plans and insurance products decreased $1.0 million and $0.5 million, respectively. Indirect expenses increased a total of $13.4 million compared to 2011. The indirect expenses increase of $5.6 million in the Wholesale channel was due to increased marketing costs and employee compensation and benefits expenses. The increase in indirect expenses in the Advisors channel of $7.8 million was due to costs associated with our electronic books and records conversion project and increased employee compensation and benefits expenses.

        Underwriting and distribution expenses in 2011 increased by $66.8 million, or 14%, compared to 2010. A significant part of this increase was attributable to higher direct expenses in the Wholesale channel of $28.7 million as a result of an increase in average mutual fundwholesale assets under management. Additionally, revenues from fee-based asset allocation products increased $11.5 million. CDSC revenues increased in the Wholesale channel by $4.9 million due tomanagement year over year. We incurred higher redemptions in 2008, concentrated in the second half of the year. Revenue on front-load product sales sold in the Wholesale channel increased by $3.0 million but decreased in the Advisors channel by $4.5 million. Financial planning revenues decreased by $1.6 million. Lower advisory fees, Rule 12b-1 service fee revenues and point of sale commissions earned by Legend decreased revenue by $6.9 million compared to 2007 as their assets under administration decreased from $5.1 billion at the beginning of 2008 to $3.5 billion at the end of the year.

        Underwriting and distribution expenses in 2009 decreased by $46.9 million, or 9%, compared with the prior year. A significant part of this decrease was attributed to lower direct expenses in the Wholesale channel of $19.5 million. Specifically, we incurred lower amortization expense of deferred sales commissions, lower dealer compensation paid to third party distributors, and lower wholesaler commissions, offset partially by higher Rule 12b-1 asset-based service and distribution expenses. During 2008, based on significant asset redemption activity in the latter part of the year and our review of the recoverability of our deferred sales commission assets, we recorded $6.5 million in additional amortization


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in the Wholesale channel ($700 thousand related to Class B shares and $5.8 million related to Class C shares). Direct expenses in the Advisors channel decreased $15.7 million, or 10%, compared to 2008 due to lower Rule 12b-1 asset-based service and distribution commissions of $11.9 million, lower point of sale commissions on front-load product sales of $10.7 million and lower fee-based asset allocation expenses of $1.1 million, offset partially by higher amortization expense of deferred sales commissions of $6.8 million and higher insurance-related expenses of $600 thousand. The decrease in indirect expenses in the Advisors channel of $8.5 million was due to decreased employee compensation and benefits expenses, lower convention costs and lower business meetings and travel expenses, partially offset by higher field office expenses, information technology costs and group health insurance costs. The indirect expenses decrease of $3.3 million in the Wholesale channel was due to lower business meeting expenses and marketing and promotion costs.

        Underwriting and distribution expenses increased by $74.5 million, or 18%, in 2008, when compared with 2007. A majority of this increase was attributed to higher direct expenses in the Wholesale channel of $60.4 million as a result of higher sales volume and an increase in average wholesale assets under management. Specifically, we incurred higher Rule 12b-1 asset-based service and distribution expenses increased dealer compensation paid to third party distributors,and higher wholesaler commissions, and higherpartially offset by lower amortization expense of deferred sales commissions. As previously mentioned, 2008 includes $6.5 million in additional amortization expense of deferred sales commission assets. This additional expense was partially offset by higher CDSC revenue of $2.0 million received in the fourth quarter due to higher redemptions. Direct expenses in the Advisors channel remained largely unchangedincreased $27.2 million, or 15%, compared to 2010 due to higher amortization expensefee-based asset allocation expenses of deferred sales commissions of $1.8$23.8 million, and higher Rule 12b-1 asset-based service and distribution commissions of $1.4$6.3 million and higher amortization expense of deferred sales commissions of $0.9 million, partially offset by lower point of sale commissions on front-load product sales of $2.6 million and ainsurance expenses of $0.6 million. The indirect expenses increase of $1.2 million decrease in financial planning fee expenses.the Wholesale channel was mostly due to higher employee compensation and benefits expense. The increase in indirect expenses in the Advisors channel of $7.6$9.7 million was due to increased convention, employee compensation and benefits information technology andexpenses, higher convention costs, increased field office expenses. The indirect expenses increase of $6.9 million in the Wholesale channel was driven byand higher costs associated with developingexpenses incurred beginning mid-year 2011 related to our non-proprietary distribution outlets. These costs include a $4.2 million increase for higher marketing costs for promotionelectronic books and distribution of our products through the Wholesale channel based on higher sales volume and a $2.7 million increase in compensation expenses, partially due to adding more wholesalers during 2008.records conversion project.

Shareholder Service Fee RevenuesFees Revenue

        Shareholder service fee revenuesrevenue primarily includeincludes transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and administration fees. PortfolioTransfer agency fees and portfolio accounting and administration fees are asset-based revenues or account-based revenues, while all other shareholder service fee revenuescustodian fees from retirement plan accounts are based on the number of client accounts.

        During 2009,2012, shareholder service fee revenuesfees revenue increased $3.3$5.7 million, or 3%5%, over 2008, primarily2011, due to a higher asset baseasset-based fees of $4.5 million year over year in certain share classes.

        During 2008, shareholder service fee revenue increased by $8.4classes and $1.2 million or 9%, compared to 2007. Of this increase, $2.8 million is due to a higher asset base compared to 2007 and $5.6 million is attributable to account-based revenues, due to a 16%1% increase in the average number of client accounts. The average number of shareholder accounts grew to 3.56 million in 2008 compared to 3.06 million in 2007. Revenues did not correlate with the increase in average number of accounts due to a lower fee structure for servicing certain wholesale accounts. A portion of the fee reduction for wholesale accounts was offset by negotiating a networking fee reimbursement with the Funds for amounts paid to third party broker/dealers.


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        During 2011, shareholder service fees revenue increased $12.1 million, or 11%, over 2010, due to higher asset-based fees of $8.6 million year over year in certain share classes and $3.5 million attributable to account-based revenues, due to a 2% increase in the average number of client accounts.

Total Operating Expenses

        Operating expenses decreased $84.5increased $35.0 million, or 11%4%, in 20092012 compared to 20082011 primarily due to decreasedincreased underwriting and distribution expenses and compensation and related costs, partially offset by decreased subadvisory fees, as well as a $16.5 million restructuring charge recorded in general and administrative and a goodwill impairment charge, both recorded in 2008.fees. Underwriting and distribution expenses are discussed above.

        Operating expenses increased $110.9$102.5 million, or 17%14%, in 20082011 compared to 20072010 primarily due to increased underwriting and distribution expense, a 2008 restructuring charge recorded inexpenses, compensation and related costs, and general and administrative and a goodwill impairment charge recorded in 2008.expenses.



 For the Year Ended
December 31,
 Variance For the Year Ended
December 31,
 Variance


 2009 2008 2007 2009 vs.
2008
 2008 vs.
2007
 2012 2011 2010 2012 vs.
2011
 2011 vs.
2010


 (in thousands, except percentage data)
 (in thousands, except percentage data)

Underwriting and distribution

Underwriting and distribution

   $449,925 496,822 422,274 -9% 18% $589,981 560,219 493,456 5% 14%

Compensation and related costs

Compensation and related costs

 124,463 119,057 115,905 5% 3% 171,775 157,332 138,207 9% 14%

General and administrative

General and administrative

 58,034 76,370 48,487 -24% 58% 75,332 74,110 60,785 2% 22%

Subadvisory fees

Subadvisory fees

 23,202 41,122 43,844 -44% -6% 21,009 29,885 27,823 -30% 7%

Depreciation

Depreciation

 13,653 13,198 12,412 3% 6% 13,211 14,764 13,525 -11% 9%

Goodwill impairment

 - 7,222 - NM NM
                  

Total operating expenses

 $871,308 836,310 733,796 4% 14%

Total operating expenses

   $669,277 753,791 642,922 -11% 17%         
         

Compensation and Related Costs

        Compensation and related costs in 20092012 increased $5.4$14.4 million, or 5%9%, compared to 2008. An incentive compensation expense increase of $8.8 million was the primary driver, as well as increased pension plan costs of $2.2 million based on unfavorable investment returns on our pension assets experienced during 2008. We also had decreased capitalized software development activities of $2.0 million and increased group insurance costs of $300 thousand based on unfavorable claims experience. These expense increases were offset by decreased base2011. Base salaries and payroll taxes of $8.1contributed $6.1 million primarilyto the increase, due to the voluntary separation program effective asan increase in average headcount of December 31, 20086% and the fact that there were no salaryannual merit increases in 2009. Savings plan costs also declined $1.3 million.during 2012. Share-based compensation increased $1.6$3.4 million compared to 20082011 primarily due to higher amortization expense associated with our April 2008,2012, December 20082011 and April 20092011 grants of nonvested stock compared to grants that became fully vested in 20092012. Pension costs increased $3.2 million year over year, incentive compensation expense increased $0.9 million and to a lesser extent, due to higher non-employee advisor (independent contractor) stock award amortization expense in 2009. Non-employee stock awards are adjusted to market each periodgroup insurance costs increased $0.6 million based on the fluctuation in our share price. These share-based compensation increases were partially offset by lower amortization expense in 2009 for shares vested under the voluntary separation program in 2008.unfavorable claims experience.

        Compensation and related costs in 20082011 increased $3.2$19.1 million, or 3%14%, compared to 2007.2010. Base salaries and payroll taxes contributed $6.3$6.8 million to the increase, primarily due to an increase in average headcount of 8.3%12% and annual merit increases during 2008.2011. Share-based compensation accounted for $5.3increased $6.3 million of the increasecompared to 2010 primarily due to higher amortization expense associated with our April 2007,2011, December 20072010 and April 20082010 grants of nonvested stock compared to grants that became fully vested in 2008. Group insurance costs increased $1.9 million compared to 2007 based on unfavorable claims experience. These expense increases were offset by decreased incentive compensation expense of $7.5 million and increased2011. We had a decrease in capitalized software development activities of $2.3$2.7 million, primarily due to technology initiatives associated with expansionhigher commission expense on managed and institutional accounts of our brokerage capabilities$1.5 million and lower pensionexperienced higher incentive compensation expense of $0.8 million and savings plangroup insurance costs of $1.2 million based on favorable investment returns on our pension assets experienced during 2007.


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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.


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        General and administrative expenses decreased $18.3increased $1.2 million for the year ended December 31, 20092012 compared to 2011. During 2012, we recorded a charge of $5.0 million to reflect the prior year. Fiscal year 2008impairment of certain capitalized software development costs. Our ongoing assessment and changes to our enterprise information technology infrastructure and software resulted in the decision to discontinue the usage of certain software. Also included in 2012 was an adjustment to lower general and administrative expenses by $3.5 million to reflect lower estimated costs of distributing an SEC market timing settlement dating back to 2006, and a $16.5reduction in the estimated legal costs related to an ongoing class action suit. Included in 2011 is a $1.8 million restructuring charge related to the voluntary separationwrite-off of 169 employees and the termination of various projects under development. The $16.5 million charge was comprised of $15.0 million in employee compensation and other benefitsoftware capitalization costs $795 thousand for accelerated vesting of nonvested stock and $717 thousand in project development costs, including $500 thousand for the early termination of a contract. We also recorded a $1.6 million charge for the settlement of miscellaneous litigation in 2008. Excluding these charges, general and administrative expenses decreased $200 thousand compared to 2008. These lower costs are due to a focus on cost control in the areasdiscontinuation of business meetings and travel and personnel recruiting, offset partially by increased expenses for third party subaccounting and networking fees and fund expenses.

        General and administrative expenses increased $27.9 million in 2008 compared to 2007. Fiscal year 2008 included a totaluse of $18.1 million of restructuring and litigation-related charges as noted above.certain software licenses. Excluding these charges, general and administrative expenses increased $9.8$1.5 million, compareddue primarily to 2007. Higherincreased costs incurred for third party subaccounting, networking fees andservicing of our shareholder accounts of $3.1 million, higher computer services were primarily responsibleand software costs and increased costs for temporary office staff related to our electronic books and records conversion project. Costs decreased related to our national branding campaign launched in 2011 year over year. We expect computer services and software costs to increase in the increase.

Goodwill Impairmentcoming year based on our current project plan.

        DueGeneral and administrative expenses increased $13.3 million in 2011 compared to 2010. Included in 2011 is a $1.8 million charge related to the declinewrite-off of software capitalization costs due to the discontinuation of use of certain software licenses. The remaining variance is due to increased costs incurred for third party servicing of our shareholder accounts of $4.1 million, costs incurred for our national branding campaign launched in the financial markets during the second halffirst quarter of 2008, we performed a review2011, higher computer services and software costs of goodwill$2.7 million and intangibles in the fourth quarter. Weincreased legal expenses of $2.4 million, partially offset by lower fund expenses of $0.7 million. Fee waivers were recorded an impairment chargeas part of $7.2 millionfund expenses prior to write off the remaining balance of ACF's goodwill based on declines in ACF's assets under management and the related adverse impact on its earnings potential. ACF was sold during the third quarter of 2009.2010. Fee waivers are now netted against management fee revenues.

Subadvisory Fees

        Subadvisory fees represent fees paid to other asset managers for providing advisory services for certain mutual fund portfolios. These expenses reduce our operating margin since we pay out approximately half of our management fee revenue received from subadvised products. Gross management fee revenues for products subadvised by others were $46.0$41.7 million for the year ended December 31, 20092012 compared to $81.0$59.3 million and $85.4$55.3 million for 20082011 and 2007,2010, respectively, due to declinesa 31% decrease in average assets of 45%from 2011 to 2012 and 2%, respectively.a 8% increase in average assets from 2010 to 2011. Subadvisory expenses followed the same declining pattern for the past three years. We began direct management of three previously subadvised funds during 2009, which contributed to the decline in both subadvisory revenues and expenses in 2009.

        Subadvised assets under management at December 31, 20092012 were $7.0$4.3 billion compared to the annual average of $5.6$5.0 billion for 2009.2012. Since subadvisory expenses are a function of sales, redemptions and market action for subadvised assets, assuming a flat market in 2013, the higherlower asset base will likely result in an increasea decrease to both gross management fee revenues and subadvisory expenses for the coming year.

Other Income and Expenses

Investment and Other Income

        Investment and other income increased $1.9$7.7 million in 20092012 compared to the prior year. Included in the2011. The current year is a non-cash charge of $3.7 million to reflect the "other than temporary" impairment of certain of the Company's investments in affiliated mutual funds as the fair value of those investments was below cost for an extended period. Excluding the impairment in 2009, investment and other income increased $5.6 million compared to 2008. Mark-to-market adjustments to our trading portfolio accounted


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for an increase of $10.1 million year over year. Gainsincluded mark-to-market gains on mutual fund holdings in our trading portfolio were $4.6of $4.8 million compared to losses in 2011 of $5.5 million in 2008. Gains from$1.1 million. We recorded realized gains on the sale of available-for-saleavailable for sale mutual fund holdingsfunds of $3.2 million during 2012 compared to $2.2 million in 2009 were $2.62011. Interest and gains related to our corporate bond portfolio increased $0.8 million compared to the prior year. In 2012 and 2011, we recorded write-downs of our investment in limited partnerships of $2.0 million and there were no gains from the sale of available-for-sale mutual fund holdings in 2008. These increases were partially offset by lower investment income of $5.3$1.5 million, due to lower average balances and lower effective interest rates on cash and short-term investments in 2009, other write-downs of $1.0 million and lower dividend income on available-for-sale mutual fund holdings of $800 thousand.respectively.

        Investment and other income for 2008 decreased by $13.3$6.5 million in 2011 compared to 2007. Mark-to-market adjustments2010. The most significant contributor to our trading portfolio accounted for $6.4 million of the decline. Lossesthis decrease related to mark-to-market losses on mutual fund holdings in our trading portfolio were $5.5of $1.1 million in 2011 compared to gains in 2010 of $900 thousand in 2007. There were no$5.1 million. We recorded realized gains fromon the sale of available-for-saleavailable for sale mutual funds of $2.2 million during 2011 compared to $2.9 million in 2010. Higher dividend income on available for sale mutual fund holdings of $1.0 million in 20082011 compared to $3.62010 partially offset these declines. We recorded write-downs of our investment in a limited partnership of $1.5 million in gains recorded on sales in 2007. Lower effective interest rates on cash and short-term investments in 2008, partially offset by higher average balances, also resulted in a reduction to investment incomeboth years.


Table of $3.3 million.Contents

Interest Expense

        Interest expense increased $600 thousandwas $11.3 million, $11.4 million and $12.7 million in 20092012, 2011 and 2010, respectively. In January 2011, we completed the refinancing of our senior notes with more favorable terms, which resulted in lower interest expense in 2011 compared to 2008 due to increased2010. We also experienced lower costs associated with our $125.0 million credit facility, which was renewedentered into in October 2009.

        Interest expense increased $200 thousand in 2008 compared to the prior year due to increased costs associated with our $175.0 million credit facility, which was renewed in October 2008.August 2010.

Income Taxes

        Our effective income tax rate from continuing operations was 34.9%36.0%, 38.5%37.8% and 37.0%36.2% in 2012, 2011 and 2010, respectively. During 2009, 2008the Company sold a subsidiary, which generated a capital loss available to offset potential future and 2007, respectively.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 lower effective tax rate in 20092012 was primarily the result of additional utilization of the capital loss in 2012 as compared to 2011. During 2012 and 2011, realized capital gains allowed for a release of the valuation allowance of $2.3 million and $0.4 million, respectively. In both years, this release of the valuation allowance was recorded as a reduction to income tax expense and, as a result, of recognizing thedecreased our effective tax benefits for the carryback of capital losses generated in connection with the sale of ACF and for the offset of capital gains recognized in income during 2009.rate. The higher effective tax rate in 20082011 over 2010 was primarily the result of less utilization of the ACF goodwill impairment charge, which was nondeductible for tax purposes.capital loss in 2011 as compared to 2010.

        Our 20092012, 2011 and 2010 effective tax rate,rates from continuing operations, removing the effecteffects of the loss on the sale of ACF,valuation allowance, would have been 36.8%. Our 2008 effective tax rate, removing the effect of the nondeductible goodwill impairment charge, would have been 36.9%., 38.0% and 37.3%, respectively. The effective income tax rate, exclusive of the 2009 ACF loss and 2008valuation allowance, decreased in 2012 as compared to 2011 due to the lapse of the statute of limitations in tax years, which allowed for the recognition of tax benefits previously considered partially uncertain. Also in 2012, the Company identified favorable treatment on expenses previously considered nondeductible goodwill impairment, decreased slightlyfor income tax purposes in 2009years for which the statute of limitations remains open. The effective income tax rate, exclusive of the valuation allowance, increased in 2011 over that of 20082010 due to changes in state legislation in jurisdictions in which the Company generating larger stateoperates as well as a charge to tax incentivesexpense in 2009 than those generated2011 on tax positions for which the outcome is uncertain in 2008. The higher effective tax rateyears in 2008 as compared to 2007 was mainly a resultwhich the statute of the non-deductible goodwill impairment charge offset slightly by an increase in the state tax incentives generated in 2008.


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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 
 
 2012 vs.
2011
 2011 vs.
2010
 
 
 2012 2011 2010 
 
 (in thousands, except percentage data)
 

Balance Sheet Data:(2)

                

Cash and cash equivalents

 $328,027  323,916  190,070  1%  70% 

Cash and cash equivalents - restricted

  92,980  50,556  71,689  84%  -29% 

Investment securities

  176,142  134,262  191,322 (1) 31%  -30% 

Long-term debt

  
190,000
  
190,000
  
189,999
  
0%
  
0%
 

Cash Flow Data:

                

Cash flows from operating activities

  233,435  283,139 (1) 140,643  -18%  101% 

Cash flows from investing activities

  (17,129)  (30,242)  (67,806)  -43%  -55% 

Cash flows from financing activities

  (213,059)  (121,129)  (121,881)  -76%  1% 

 
 For the Year Ended
December 31,
 Variance
 
 2009 2008 2007 2009 vs.
2008
 2008 vs.
2007
 
 (in thousands, except percentage data)

Balance Sheet Data:

               

Cash and cash equivalents

   $244,359  210,328  263,914  16%  -20%

Cash and cash equivalents - restricted

  72,941  48,713  99,886  50%  -51%

Investment Securities

  70,524  58,684  50,913  20%  15%

Long-term debt

  
199,984
  
199,969
  
199,955
  
0%
  
0%

Cash Flow Data:

               

Operating cash flows

  155,179  123,911  128,018  25%  -3%

Investing cash flows

  (29,488)  (23,963)  (5,053)  23%  374%

Financing cash flows

  (91,660)  (153,534)  (22,938)  40%  -569%
(1)
At December 31, 2010, investment securities included U.S. treasury bills of $117.9 million and commercial paper of $5.0 million with maturities of less than 180 days at the date of purchase.

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(2)
Balance sheet data excludes discontinued operations held for sale for all periods presented.

        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. We continue to invest in our Advisors channel by providing additional support to our advisors through training opportunities, wholesaling efforts and enhanced technology tools.

Pay Dividends

        The Board of Directors approved a special cash dividend on our common stock of $1.00 per share that was paid on December 6, 2012, and an increase in the quarterly dividend on our common stock from $.17$0.25 per share to $.19$0.28 per share beginning with our firstfourth quarter 20082012 dividend, paid on MayFebruary 1, 2008.2013. Dividends on our common stock resulted in financing cash outflows of $65.0$171.3 million, $63.7$68.8 million and $55.4$65.2 million in 2009, 20082012, 2011 and 2007,2010, respectively.

Repurchase Our Stock

        In 2009,2012, we repurchased 1.9purchased 1.5 million of our shares, compared to 3.8 million shares and 2.62.0 million shares in 2008both 2011 and 2007, respectively, which2010. These share repurchase amounts included 327,301568,568 shares, 430,145494,207 shares and 234,162426,665 shares from employees who elected to tender shares to cover their minimum tax withholdings with respect to vesting of stock awards during the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively.

        In the future, we plan to repurchase shares, at a minimum, to offset dilution from shares issued for employee share plans. Additionally, during 2010During 2013, we estimate that we will repurchase approximately 435,000670 thousand shares from employees who elect to tender shares to cover their minimum tax withholdings arising from the vesting of nonvested shares.


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Operating Cash Flows

        CashExcluding the cash flows from operations is our primary sourceoperating activities generated from the maturity of fundsU.S. treasuries and commercial paper in 2011 of $66.0 million, net cash provided by operating activities increased $31.3$16.3 million in the current year.from 2011 to 2012.

        The increase is due to higher net income and lower non-cash amortization of deferred sales commissions in 2009 combined with net sales of trading securities in 2009 compared to net purchases of trading securities in 2008. From the end of 2008 to the end of 2009 there was a significant increase in Fund shareholder investments received prior to the balance sheet date that were in the process of being invested in the Funds. As a result, on our consolidated balance sheet there was an increase in both the payable to investment companies for securities and an increaseother receivables accounts can fluctuate significantly based on trading activity at the end of a reporting period. Changes in thethese accounts result in variances within cash and receivable accounts. Onfrom operations on the statement of cash flows,flows; however, there were corresponding increasesis no impact to the Company's liquidity and decreases to cash from operations.operations for the variances in these accounts.

        We pay our financial advisors and third parties upfront commissions on the sale of Class B shares, Classand C shares and certain fee-based asset allocation products. Funding of such commissions during the years ended December 31, 2009, 20082012, 2011 and 20072010 totaled $54.7$54.4 million, $69.5$57.9 million and $49.6$59.0 million, respectively. The primary driverdrivers of commission funding in all three years2012 were fee-based asset allocation products, for which $28.0 million was funded, and Class C shares, for which $29.8$19.0 million $40.3was funded. The drivers of commission funding in 2011 were fee-based asset allocation products, for which $26.5 million was funded, and $26.9Class C shares, for which $23.0 million was funded. The drivers of commissionscommission funding in 2010 were Class C shares, for which $25.9 million was funded, in 2009, 2008 and 2007, respectively.fee-based asset allocation products, for which $24.8 million was funded. Management expects future cash requirements for sales commissions may


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exceed the level experienced in previous years due to increased sales in our fee-based asset allocation products and sales growth in the sale of Class B and Class C shares.products.

        We anticipate that our 2010 contributionContributions to our Pension Plan will bepension plan are not expected to exceed $20 million for 2013. A contribution of $10 million was made from cash generated from operations and will beto the plan in the range from $7.0 to $10.0 million, $5.0 million of which was contributed during January 2010.2013.

Investing Cash Flows

        Investing activities consist primarily of the purchase and sale of available-for-saleavailable for sale investment securities, as well as capital expenditures. We expect our 20102013 capital expenditures to be in the range of $13.0$15.0 to $15.0$20.0 million.

Financing Cash Flows

        As noted previously, dividends and stock repurchases accounted for a majority of our financing cash outflows in 2009. An increase2012.

        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 that allowed the Company to draw down the proceeds in our stock price during 2007 resultedJanuary 2011 when the existing Notes matured. The Company used the proceeds of the issuance and sale of the Senior Notes to repay in substantial stock option exercises,full the Notes expiring in January 2011. The Senior Notes are unsecured and cash provided by stock option exercises was $84.6were issued in two tranches: $95.0 million for thatbearing interest at 5% and maturing January 13, 2018, Series A, and $95.0 million bearing interest of 5.75% and maturing January 13, 2021, Series B. Interest is payable semi-annually in January and July of each year.

        TheSimultaneous with the refinancing of our senior notes, the Company entered into a 364-daythree year revolving credit facility (the "Credit Facility") with various lenders, effective October 5, 2009,August 31, 2010, which initially provides for initial borrowings of up to $125.0 million and replaced the Company's previous revolving credit facility. Lenders could, at their option upon the Company's request, expand the facility to $200.0 million. During 2009 and atAt December 31, 20092012, there were no borrowings outstanding under the Credit Facility. Borrowings underBoth the Credit Facility bear interest at various rates including adjusted LIBOR or an alternative base rate plus, in each case, an incremental margin based on the Company's credit rating. The Credit Facility also provides for a facility fee on the aggregate amount of commitment under the revolving facility (whether or not utilized). The facility fee is also based on the Company's credit rating level. The Credit Facility containsand Senior Notes contain financial covenants with respect to leverage and interest coverage, both of which we were in compliance with throughout fiscal 2009.2012.

Short Term Liquidity and Capital Requirements

        Management believes its available cash, marketable securities and expected cash flow from operations will be sufficient to fund its short-term operating and capital requirements during 2010.2013. Expected short-term uses of cash include expected 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 pension funding and home office leasehold improvements, and could include strategic acquisitions.


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Long Term Liquidity and Capital Requirements

        Expected long-term capital requirements include indebtedness, operating leases and purchase obligations, and potential recognition of tax liabilities, summarized in the following table as of December 31, 2009.2012. Purchase obligations include amounts that will be due for the purchase of goods and


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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 2010 2011-
2012
 2013-
2014
 Thereafter/
Indeterminate
 Total 2013 2014-
2015
 2016-
2017
 Thereafter/
Indeterminate
 

 (in thousands)
 (in thousands)
 

Long-term debt obligations, including interest

   $216,784 11,200 205,584 - - $262,557 10,213 20,425 20,425 211,494 

Non-cancelable operating lease commitments

 72,834 18,440 28,983 14,018 11,393 89,386 20,498 29,998 17,313 21,577 

Purchase obligations

 102,969 37,201 60,345 3,262 2,161 261,419 38,358 63,714 59,087 100,260 

Unrecognized tax benefits

 6,848 2,166 - - 4,682 10,788 329 - - 10,459 
                     

   $399,435 69,007 294,912 17,280 18,236 $624,150 69,398 114,137 96,825 343,790 
                     

        Other possible long-term discretionary uses of cash could include capital expenditures for enhancement of technology infrastructure and home office expansion, strategic acquisitions, payment of dividends, income tax payments, seed money for new products, payment of upfront fund commissions for Class B shares, Class C shares and certain fee-based asset allocation products, pension funding and repurchases of our common stock.

Off-Balance Sheet Arrangements

        Other than operating leases, which are included in the table above, the Company does not have any off-balance sheet financing. The Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating its business.

Critical Accounting Policies and Estimates

        Management believes the following critical accounting policies affect its more significant judgmentsestimates and estimatesjudgments used in the preparation of its consolidated financial statements.

Accounting for Goodwill and Intangible Assets

        As of December 31, 2009,2012, our total goodwill and intangible assets were $221.2$162.0 million, or 22%14%, of our total assets. Two significant considerations arise with respect to these assets that require management estimates and judgment: (i) the valuation in connection with the initial purchase price allocation, and (ii) the ongoing evaluation of impairment.

        In connection with all of our acquisitions, an evaluation is completed to determine reasonable purchase price allocations. The purchase price allocation process requires management estimates and judgments as to expectations for the various products, distribution channels and business strategies. For example, certain growth rates and operating margins were assumed for different products and distribution channels. If actual growth rates or operating margins, among other assumptions, differ from the estimates and judgments used in the purchase price allocation, the amounts recorded in the financial statements for identifiable intangible assets and goodwill could be subject to charges for impairment in the future.

        We complete an ongoing review of the recoverability of goodwill and intangible assets using a fair-value based approach on an annual basis or more frequently whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Intangible assets with indefinite lives, primarily acquired mutual fund advisory contracts, are also tested for impairment annually by comparing their fair value to the carrying amount of the asset. We consider mutual fund advisory contracts indefinite lived intangible assets as they are expected to be renewed without


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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


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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.

        As of June 30, 2012, the Company's annual impairment test indicated that the fair value of the Legend reporting unit exceeded its carrying value, which resulted in no goodwill impairment. During preliminary due diligence conducted in the third quarter regarding a possible sale of Legend, several significant issues arose regarding executive leadership, advisor retention and employee morale. As due diligence discussions progressed into formal negotiations throughout the third quarter, the Company's concerns regarding these matters escalated, the depth and consequence of which led us to determine that a change in the strategic direction of Legend was necessary, and as a result, the Company decided to move forward with a sale of Legend at a price lower than the fair value utilized in the annual impairment analysis in the second quarter. During the third quarter of 2012, $59.2 million of goodwill related to Legend was allocated to assets of discontinued operations held for sale and $42.4 million of goodwill related to Legend was written down and is included in the loss from discontinued operations in the statement of income.

        The Company's annual impairment test indicated that remaining 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%. The fair value of our indefinite-life intangible assets exceeded their respective carrying values by more than 80%.

Accounting for Income Taxes

        In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit our income tax returns. These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. We adjust our income tax provision in the period in which we determine the actual outcomes will likely be different from our estimates. The recognition or derecognition of income tax expense related to uncertain tax positions is determined under the guidance as prescribed by Accounting Standards Codification ("ASC")"Income Taxes Topic,"Topic" ASC 740. During 2009, 2008,2012 and 2007,2010, the Company settled three open tax years, five open tax years, and sixnine open tax years, respectively, that were undergoing audit by state jurisdictions in which the Company operates. These audits were settled in all material respects with no significant adjustments. The Company is currently undergoing audits in various other state jurisdictions that have not yet been settled.

        We recognize an asset or liability for the deferred tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, including the determination of any valuation allowance that might be required for deferred tax assets. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of assets are recovered or liabilities are settled. During


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        In 2009, the Company sold ACF, whicha subsidiary that generated a capital loss available to offset potential future and prior period capital gains. Due to the character of the loss and the limited carryforward period permitted by law, the Company may not realize the full tax benefit of the capital loss. The capital loss carryforward generated in 2009, if not utilized, will expire in 2014. During 2012, the Company recorded a non-cash impairment charge for its investment in the Legend subsidiaries. The impairment created excess tax basis in its investment in Legend that will be characterized as a capital loss upon the sale of Legend. Capital losses generated by the Legend sale will expire five years from when the loss is realized. Management believes it is not more likely than not that the Company will generate sufficient future capital gains to realize the full benefit of thisthese capital loss.losses. Accordingly, a valuation allowance has been recorded on a portion of thisthe deferred tax assets that were capital lossin nature as of December 31, 2009.2012 and December 31, 2011.

        Also as of December 31, 2009, two2012, four of the Company's subsidiaries have state net operating loss carryforwards in certain states in which those companies file on a separate company basis. These entities have recognized a deferred tax asset for such carryforwards. The carryforwards, if not utilized, will expire between 20102013 and 2029.2032. Management believes it is not more likely than not that three of the subsidiaries will generate sufficient future taxable income in these states to realize the benefit of these state net operating loss carryforwards and, accordingly, a valuation allowance has been recorded at December 31, 2009, December 31, 20082012 and December 31, 2007.2011. 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

        Income taxes are recorded at the rates in effect in the various tax jurisdictions in which we operate. Tax law and rate changes are reflected in the income tax provision in the period in which such changes are enacted.

Pension and Other Postretirement Benefits

        Accounting for our pension and postretirement benefit plans requires us to estimate the cost of benefits to be provided well into the future and the current value of our benefit obligations. Three critical


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assumptions affecting these estimates are the discount rate, the expected return on assets, and the expected health care cost trend rate. TheIn 2012 and 2011, the discount rate assumption iswas based on the Aon Hewitt AA Only Above Median Yield Curve. This discount rate was determined separately for each plan by plotting the expected benefit payments from each plan against a yield curve of high quality, zero coupon bonds and calculating the single rate that would produce the same present value of liabilities as the yield curve. Prior to 2011, the discount rate assumption was based on the Mercer Bond Model, which calculatescalculated the yield on a theoretical portfolio of high-grade corporate bonds with cash flows that generally matchmatched our expected benefit payments. The expected return on plan assets and health care cost trend rates are based upon an evaluation of our historical trends and experience, taking into account current and expected future market conditions. Other assumptions include rates of future compensation increases, participant withdrawals and mortality rates, and participant retirement ages. These estimates and assumptions impact the amount of net pension expense or income recognized each year and the measurement of our reported benefit obligation under the plans.

        In 2009,2012, we decreased the discount rate for our pension and postretirement plansplan to 6.25%4.22% from the 6.75%4.99% used in 20082011 and 20076.00% used in 2010, and decreased the discount rate for our postretirement plan to 4.18% from 5.00% used in 2011 and 6.00% used in 2010, 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 20082011 and 2007.2010. Our pension plan assets at December 31, 20092012 were 100% invested in the Asset Strategy style and we have targeted this same investment strategy going forward.


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        The effect of hypothetical changes to selected assumptions on the Company's retirement benefit plans would be as follows:

 
  
 December 31,
20092012
 December 31,
20102013
Assumptions
 Change
 Increase
(Decrease)
PBO/APBO (1)

 Increase
(Decrease)
Expense (2)

 
 
  
 (in thousands)

Pension

        

Discount rate

 +/-50 bps $(5,499)(11,388)/8,43912,626 $(649)(1,281)/11611,407

Expected return on assets

 +/-50-100 bps  N/A      (488)(1,396)/4881,396

OPEBSalary scale

 +/-100 bps9,060/(8,440)2,090/(1,901)

Other Postretirement

        

Discount rate

 +/-50 bps      (289)(550)/314605      (20)(47)/2180

Health care cost trend rate

 +/-100 bps      612/(531)1,162/(985)      105/(89)260/(163)

(1)
Projected benefit obligation ("PBO") for pension plans and accumulated postretirement benefit obligation ("APBO") for Postretirement Benefits Other Than Pension Plans.other postretirement plans.

(2)
Pre-tax impact on expense.

Deferred Sales Commissions

        We pay upfront sales commissions to our financial advisors and third party intermediary broker/dealers in connection with the sale of certain classes of mutual fund shares sold without a front-end sales charge. These costs are capitalized and amortized over the period during which the shareholder is subject to a CDSC, not to exceed five years. We recover these costs through Rule 12b-1 and other distribution plan fees, which are paid by the applicable share classes of the Advisors Funds, Ivy Funds and InvestEd portfolios,Portfolios, along with CDSCs paid by shareholders who redeem their shares prior to completion of the requiredspecified 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.


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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.


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Loss Contingencies

        The likelihood that a loss contingency exists is evaluated using the criteria of"Contingencies Topic," ASC 450 through consultation with legal counsel. A loss contingency is recorded if the contingency is considered probable and reasonably estimable as of the date of the financial statements.

Accounting Pronouncements Not Yet Adopted

        In January 2010, the FASB issued Accounting Standards Update No. 2010-06 to amend"Fair Value Measurements and Disclosures Topic," ASC 820. The guidance requires disclosure changes related to recurring or nonrecurring fair value measurements. Specifically, companies are required to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements, describe the reasons for the transfers and provide additional detail related to the reconciliation of Level 3 fair value measurements. Additionally, the guidance clarifies existing disclosure requirements. The guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for certain provisions related to the rollforward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company will adopt the applicable disclosure requirements effective with our first quarter 2010 reporting period.

        In June 2009, the FASB issued SFAS No. 167,"Amendments to FASB Interpretation No. 46(R)" ("SFAS No. 167"). SFAS No. 167 improves how enterprises account for and disclose their involvement with variable interest entities ("VIEs") and other entities whose equity at risk is insufficient or lacks certain characteristics. SFAS No. 167 changes how an entity determines whether it is the primary beneficiary of a VIE and whether that VIE should be consolidated and requires additional disclosures. In January 2010, the FASB agreed to issue accounting guidance to indefinitely defer this standard's consolidation requirements, which were initially effective for fiscal years beginning after November 15, 2009 and interim periods within those fiscal years, for reporting enterprises' interests in entities that either have all of the characteristics of investment companies or for which it is industry practice to apply measurement principles for financial reporting purposes consistent with those that apply to investment companies. The Company meets the criteria to defer this standard's consolidation requirements. According to the FASB, this deferral will continue until the FASB and the International Accounting Standards Board, in their joint consolidation project, resolve the issue of how to determine whether an asset manager functions as a principal or as an agent.

Seasonality and Inflation

        We do not believe our operations are subject to significant seasonal fluctuation. We have historically experienced increased sales activity in the first and fourth quarters of the year due to funding of retirement accounts by our clients; however, the fourth quarter of 2008 did not reflect increased sales activity.clients. The Company has not suffered material adverse effects from inflation in the past. However, a substantial increase in the inflation rate in the future may adversely affect customers' purchasing decisions, may


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increase the costs of borrowing, or may have an impact on the Company's margins and overall cost structure.

ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk

        We use various financial instruments with certain inherent market risks, primarily related to interest rates and securities prices. The principal risks of loss arising from adverse changes in market rates and prices to which we are exposed relate to interest rates on debt and marketable securities. Generally, these instruments have not been entered into for trading purposes. Management actively monitors these risk exposures; however, fluctuations could impact our results of operations and financial position. As a matter of policy, we only execute derivative transactions to manage exposures arising in the normal course of business and not for speculative or trading purposes. The following information, together with information included in other parts of Management's Discussion and Analysis of Financial Condition and Results of Operations, which are incorporated herein by reference, describe the key aspects of certain financial instruments that have market risk to us.

Interest Rate Sensitivity

        Our interest sensitive liabilities include our long-term fixed rate senior notes and obligations for any balances outstanding under our credit facility or other short-term borrowings. Increases in market interest rates would generally cause a decrease in the fair value of the senior notes and an increase in interest expense associated with short-term borrowings and borrowings under the credit facility. Decreases in market interest rates would generally cause an increase in the fair value of the senior notes and a decrease in interest expense associated with short-term borrowings and borrowings under the credit facility. We had no short-term borrowings outstanding as of December 31, 2009. On January 13, 2006, we issued $200.0 million in principal amount of 5.60% fixed rate senior notes due 2011. Proceeds from the senior notes were used to pay down our $200.0 million in 7.50% senior notes that matured on January 18, 2006.2012.

Available for Sale Investments Sensitivity

        We maintain an investment portfolio of various holdings, types and maturities. Our portfolio is diversified and consists primarily of investment grade debt securities and equity mutual funds. A portion of investments are classified as available-for-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


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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 and our trading portfolio, thereby compounding the impact on our earnings.


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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 25, 201027, 2013 on page 51.49.

ITEM 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

ITEM 9A.    Controls and Procedures

(a)
Evaluation of Disclosure Controls and Procedures.    The Company maintains a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The Company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report, have concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

(b)
Management's Report on Internal Control Over Financial Reporting.    Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in"Internal Control-Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and ShareholdersStockholders
Waddell & Reed Financial, Inc.:

We have audited Waddell & Reed Financial, Inc.'s (the Company) internal control over financial reporting as of December 31, 2009,2012, 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, 2009,2012, based on criteria established inInternal Control—Integrated Framework issued by COSO.the Committee of Sponsoring Organizations of the Treadway Commission.

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, 20092012 and 2008,2011, and the related consolidated statements of income, comprehensive income, stockholders' equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009,2012, and our report dated February 25, 201027, 2013 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Kansas City, Missouri
February 25, 201027, 2013


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(c)
Changes in Internal Control over Financial Reporting.    The Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B.    Other Information.Information

        None.


PART III

ITEM 10.    Directors, Executive Officers and Corporate Governance

        Information required by this Item 10. is incorporated herein by reference to our definitive proxy statement for our 20102013 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 20102013 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 20102013 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 20102013 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 20102013 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act.


PART IV

ITEM 15.    Exhibits, Financial Statement Schedules



(a)(1)

 Financial Statements.
  Reference is made to the Index to Consolidated Financial Statements on page 5048 for a list of all financial statements filed as part of this Report.

(a)(2)

 
(a)(2)


Financial Statement Schedules.

  None.

(b)

 
(b)


Exhibits.

  Reference is made to the Index to Exhibits beginning on page 8684 for a list of all exhibits filed as part of this Report.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Overland Park, State of Kansas, on February 26, 2010.27, 2013.

  WADDELL & REED FINANCIAL, INC.

 

 

By:

 

/s/ HENRY J. HERRMANN

Henry J. Herrmann
Chairman of the Board and Chief Executive Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

  Name  
 
  Title  
 
  Date  

 

 

 

 

 

/s/ HENRY J. HERRMANN


Henry J. Herrmann

 

Chief Executive Officer, Chairman of the Board and Director (Principal Executive Officer)

 February 26, 201027, 2013


/s/ DANIEL P. CONNEALY


Daniel P. Connealy


 


Senior Vice President and Chief Financial Officer
(Principal Financial Officer)


 


February 26, 201027, 2013


/s/ BRENT K. BLOSS


Brent K. Bloss


 


Senior Vice President – Finance and Treasurer
(Principal Accounting Officer)


 


February 26, 201027, 2013


/s/ SHARILYN S. GASAWAY


Sharilyn S. Gasaway



Director



February 27, 2013


/s/ THOMAS C. GODLASKY


Thomas C. Godlasky



Director



February 27, 2013


/s/ ALAN W. KOSLOFF


Alan W. Kosloff


 


Director


 


February 26, 201027, 2013


/s/ DENNIS E. LOGUE


Dennis E. Logue


 


Director


 


February 26, 201027, 2013


/s/ MICHAEL F. MORRISSEY


Michael F. Morrissey



Director



February 27, 2013


/s/ JAMES M. RAINES


James M. Raines


 


Director


 


February 26, 201027, 2013


/s/ RONALD C. REIMER


Ronald C. Reimer


 


Director


 


February 26, 201027, 2013

/s/ WILLIAM L. ROGERS


William L. Rogers

Director

February 26, 2010

/s/ JERRY W. WALTON


Jerry W. Walton


 


Director


 


February 26, 201027, 2013


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WADDELL & REED FINANCIAL, INC.

Index to Consolidated Financial Statements

 
 Page

Report of Independent Registered Public Accounting Firm

 5149

Consolidated Balance Sheets at December 31, 20092012 and 20082011

 5250

Consolidated Statements of Income for each of the years in the three-year period ended December 31, 20092012

 5351

Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2012

52

Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 20092012

 5453

Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2009

55

Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 20092012

 5654

Notes to Consolidated Financial Statements

 5755

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Report of Independent Registered Public Accounting Firm

The Board of Directors and ShareholdersStockholders
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, 20092012 and 2008,2011, and the related consolidated statements of income, comprehensive income, stockholders' equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2009.2012. 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, 20092012 and 2008,2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 20092012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Waddell & Reed Financial, Inc.'s internal control over financial reporting as of December 31, 20092012, 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 25, 201027, 2013 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ KPMG LLP

Kansas City, Missouri
February 25, 201027, 2013


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WADDELL & REED FINANCIAL, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 20092012 and 20082011



 2009 2008 2012 2011


 (in thousands)
 (in thousands)

Assets:

Assets:

  

Cash and cash equivalents

 $328,027 323,916

Cash and cash equivalents - restricted

 92,980 50,556

Investment securities

 176,142 134,262

Receivables:

 

Funds and separate accounts

 33,886 31,842

Customers and other

 136,073 107,125

Deferred income taxes

 7,978 11,900

Income taxes receivable

 5,577 15,067

Prepaid expenses and other current assets

 9,080 10,042

Assets of discontinued operations held for sale

 15,150 14,901

Cash and cash equivalents

   $244,359 210,328    

Total current assets

 804,893 699,611

Property and equipment, net

 69,328 73,143

Deferred sales commissions, net

 69,355 68,788

Goodwill and identifiable intangible assets

 161,969 161,969

Deferred income taxes

 17,797 5,046

Other non-current assets

 11,491 13,533

Assets of discontinued operations held for sale

 18,010 60,274

Cash and cash equivalents - restricted

 72,941 48,713    

Investment securities

 70,524 58,684

Receivables:

 
 

Funds and separate accounts

 34,948 33,539
 

Customers and other

 179,100 61,280

Deferred income taxes

 8,225 11,182

Prepaid expenses and other current assets

 8,619 7,109
    
 

Total current assets

 618,716 430,835

Property and equipment, net

 68,171 59,966

Deferred sales commissions, net

 64,123 52,183

Goodwill and identifiable intangible assets

 221,210 221,210

Other non-current assets

 11,162 11,166
    
 

Total assets

   $983,382 775,360

Total assets

 $1,152,843 1,082,364
        

Liabilities:

Liabilities:

  

Accounts payable

 $68,977 51,951

Payable to investment companies for securities

 152,749 104,304

Accrued compensation

 46,347 42,670

Payable to third party brokers

 46,169 41,125

Other current liabilities

 43,504 42,298

Liabilities of discontinued operations held for sale

 7,587 6,550

Accounts payable

   $25,210 40,002    

Total current liabilities

 365,333 288,898

Long-term debt

 190,000 190,000

Accrued pension and postretirement costs

 62,458 56,548

Other non-current liabilities

 24,531 23,068

Liabilities of discontinued operations held for sale

 281 207

Payable to investment companies for securities

 222,168 67,848    

Total liabilities

 642,603 558,721

Accrued compensation

 35,341 24,296    

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; 85,679 shares outstanding (85,564 at December 31, 2011)

 997 997

Additional paid-in capital

 230,021 216,426

Retained earnings

 698,423 721,281

Cost of 14,022 common shares in treasury (14,137 at December 31, 2011)

 (372,404) (366,954)

Accumulated other comprehensive loss

 (46,797) (48,107)

Income taxes payable

 1,044 2,397    

Total stockholders' equity

 510,240 523,643

Other current liabilities

 76,994 70,165    

Total liabilities and stockholders' equity

 $1,152,843 1,082,364
        
 

Total current liabilities

 360,757 204,708

Long-term debt

 199,984 199,969

Accrued pension and postretirement costs

 28,731 29,083

Deferred income taxes

 6,983 3,564

Other non-current liabilities

 17,872 17,911
    
 

Total liabilities

 614,327 455,235
    

Commitments and Contingencies (Note 18)

 

Stockholders' equity:

 

Preferred stock—$1.00 par value: 5,000 shares authorized; none issued

 - -

Class A Common stock—$0.01 par value: 250,000 shares authorized; 99,701 shares issued; 85,807 shares outstanding (84,877 at December 31, 2008)

 997 997

Additional paid-in capital

 189,900 207,886

Retained earnings

 527,876 487,558

Cost of 13,894 common shares in treasury (14,824 at December 31, 2008)

 (328,154) (350,463)

Accumulated other comprehensive loss

 (21,564) (25,853)
    
 

Total stockholders' equity

 369,055 320,125
    
 

Total liabilities and stockholders' equity

   $983,382 775,360
    

See accompanying notes to consolidated financial statements.


Table of Contents


WADDELL & REED FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2009, 20082012, 2011 and 20072010



  
 2009 2008 2007 2012 2011 2010


  
 (in thousands, except per share data)
 (in thousands, except per share data)

Revenues:

Revenues:

   

Investment management fees

 $549,231 530,599 457,538

Underwriting and distribution fees

 496,465 469,484 410,380

Shareholder service fees

 128,109 122,449 110,348

Investment management fees

   $354,593 399,863 372,345      

Total

 1,173,805 1,122,532 978,266

Operating expenses:

 

Underwriting and distribution

 589,981 560,219 493,456

Compensation and related costs (including share-based compensation of $48,748, $45,384 and $39,128, respectively)

 171,775 157,332 138,207

General and administrative

 75,332 74,110 60,785

Subadvisory fees

 21,009 29,885 27,823

Depreciation

 13,211 14,764 13,525

Underwriting and distribution fees

  378,678 416,762 371,085      

Shareholder service fees

  105,818 102,495 94,124
      
 

Total

  839,089 919,120 837,554


Operating expenses:


 

 

Underwriting and distribution

  449,925 496,822 422,274

Compensation and related costs (including share-based compensation of $30,573, $28,967 and $23,704, respectively)

  124,463 119,057 115,905

General and administrative

  58,034 76,370 48,487

Subadvisory fees

  23,202 41,122 43,844

Depreciation

  13,653 13,198 12,412

Goodwill impairment

  - 7,222 -
      
 

Total

  669,277 753,791 642,922

Total

 871,308 836,310 733,796
            

Operating income

Operating income

  169,812 165,329 194,632 
302,497
 
286,222
 
244,470

Investment and other income

Investment and other income

  5,039 3,178 16,452 9,817 2,105 8,619

Interest expense

Interest expense

  (12,695) (12,087) (11,924) (11,311) (11,408) (12,728)
            

Income before provision for income taxes

  162,156 156,420 199,160

Income from continuing operations before provision for income taxes

 
301,003
 
276,919
 
240,361

Provision for income taxes

Provision for income taxes

  56,651 60,257 73,663 108,475 104,714 86,933
            

Income from continuing operations

 
192,528
 
172,205
 
153,428

Income (loss) from discontinued operations net of tax expense of $1,058, $2,556 and $2,592, respectively

 (41,576) 3,254 3,531

Net income

   $105,505   $96,163 125,497      

Net income

 $150,952 175,459 156,959
            

Net income per share:

  

Net income per share, basic and diluted:

 

Income from continuing operations

 $2.25 2.01 1.79

Income (loss) from discontinued operations

 (0.49) 0.04 0.04

Basic

   $1.23   $1.12 1.49      

Net income

 $1.76 $2.05 $1.83
            

Diluted

   $1.23   $1.12 1.48
      

Weighted average shares outstanding

 — basic  85,484 85,761 83,975

 — diluted  85,544 86,113 84,699

Dividends declared per common share

   $0.76   $0.76 0.68

Weighted average shares outstanding:

 

Basic

 85,726 85,783 85,618

Diluted

 85,728 85,793 85,647

See accompanying notes to consolidated financial statements.


Table of Contents


WADDELL & REED FINANCIAL, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

Years ended December 31, 2009, 2008 and 2007

(in thousands)

 
 Common Stock  
  
  
  
  
 
 Additional
Paid-in Capital
 Retained
Earnings
  
 Accumulated Other
Comprehensive
Income (Loss)
 Total Stockholders'
Equity
 
 Shares Amount Treasury Stock

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

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

Other stock transactions

          (12,303)    (12,303)

Repurchase of common stock

          (93,012)    (93,012)

Unrealized loss on available for sale investment securities

            (8,435)  (8,435)

Reclassification for amounts included in net income

            (142)  (142)

Pension and postretirement benefits

            (23,907)  (23,907)
               

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

Other stock transactions

          (7,124)    (7,124)

Repurchase of common stock

          (36,441)    (36,441)

Unrealized gain on available for sale investment securities

            4,974  4,974

Reclassification for amounts included in net income

            264  264

Pension and postretirement benefits

            (949)  (949)
               

Balance at December 31, 2009

  99,701 $997  189,900  527,876  (328,154)  (21,564)  369,055
               

See accompanying notes to consolidated financial statements.


Table of Contents


WADDELL & REED FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years ended December 31, 2009, 20082012, 2011 and 20072010

 
 2009 2008 2007
 
 (in thousands)

Net income

   $105,505  96,163  125,497

Other comprehensive income:

         

Net unrealized appreciation (depreciation) of investment securities during the year, net of income taxes of $2,950, $(4,855) and $1,354, respectively

  
4,974
  
(8,435)
  
2,345

Pension and postretirement benefits, net of income taxes of $(821), $(13,764) and $7,178, respectively

  
(949)
  
(23,907)
  
12,766

Reclassification adjustments for amounts included in net income, net of income taxes of $159, $(84) and $(1,396), respectively

  
264
  
(142)
  
(2,428)
       
 

Comprehensive income

   $109,794  63,679  138,180
       
 
 2012 2011 2010
 
 (in thousands)

Net income

 $150,952  175,459  156,959

Other comprehensive income:

         

Net unrealized appreciation (depreciation) of investment securities during the year, net of income taxes of $3,195, $(2,120) and $2,028, respectively

  
5,444
  
(3,635)
  
3,493

Valuation allowance on investment securities' deferred tax asset during the year

  
2,024
  
(2,955)
  
963

Pension and postretirement benefits, net of income taxes of $(2,532), $(13,232) and $628, respectively

  
(4,157)
  
(22,062)
  
1,061

Reclassification adjustments for amounts included in net income, net of income taxes of $(1,162), $(830) and $(1,139), respectively

  
(2,001)
  
(1,428)
  
(1,980)
       

Total other comprehensive income

  
1,310
  
(30,080)
  
3,537
       

Comprehensive income

 
$

152,262
  
145,379
  
160,496
       

See accompanying notes to consolidated financial statements.


Table of Contents


WADDELL & REED FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years ended December 31, 2012, 2011 and 2010

(in thousands)

 
 Common Stock  
  
  
  
  
 
 Additional
Paid-in Capital
 Retained
Earnings
  
 Accumulated Other
Comprehensive
Income (Loss)
 Total Stockholders'
Equity
 
 Shares Amount Treasury Stock

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 appreciation 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

Net income

        175,459      175,459

Recognition of equity compensation

      46,457  16      46,473

Issuance of nonvested shares

      (40,442)    40,442    

Dividends accrued, $.85 per share

        (73,007)      (73,007)

Exercise of stock options

      949    4,131    5,080

Excess tax benefits from share-based payment arrangements

      8,020        8,020

Repurchase of common stock

          (65,463)    (65,463)

Unrealized depreciation on available for sale investment securities

            (3,635)  (3,635)

Valuation allowance on investment securities' deferred tax asset

            (2,955)  (2,955)

Pension and postretirement benefits

            (22,062)  (22,062)

Reclassification for amounts included in net income

            (1,428)  (1,428)
               

Balance at December 31, 2011

  99,701  997  216,426  721,281  (366,954)  (48,107)  523,643

Net income

        150,952      150,952

Recognition of equity compensation

      49,937  56      49,993

Issuance of nonvested shares

      (43,106)    43,106    

Dividends accrued, $2.03 per share

        (173,866)      (173,866)

Exercise of stock options

      (27)    132    105

Excess tax benefits from share-based payment arrangements

      6,791        6,791

Repurchase of common stock

          (48,688)    (48,688)

Unrealized appreciation on available for sale investment securities

            5,444  5,444

Valuation allowance on investment securities' deferred tax asset

            2,024  2,024

Pension and postretirement benefits

            (4,157)  (4,157)

Reclassification for amounts included in net income

            (2,001)  (2,001)
               

Balance at December 31, 2012

  99,701 $997  230,021  698,423  (372,404)  (46,797)  510,240
               

See accompanying notes to consolidated financial statements.


Table of Contents


WADDELL & REED FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2009, 20082012, 2011 and 20072010



 2009 2008 2007 2012 2011 2010


 (in thousands)
 (in thousands)

Cash flows from operating activities:

Cash flows from operating activities:

  

Net income

   $105,505 96,163 125,497

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation and amortization

 13,476 12,969 12,395

Other than temporary impairment of investments in affiliated mutual funds

 3,686  

Amortization of deferred sales commissions

 42,771 62,560 24,766

Share-based compensation

 30,973 29,762 23,704

Excess tax benefits from share-based payment arrangements

 (2,787) (7,471) (12,919)

Gain on sale of available-for-sale investment securities

 (2,623)  (3,598)

Net purchases and sales of trading securities

 7,864 (26,885) (926)

Unrealized (gain) loss on trading securities

 (4,779) 6,072 (1,001)

Goodwill impairment

  7,222 

Loss on sale and retirement of property and equipment

 1,009 433 312

Capital gains and dividends reinvested

 (1,141) (1,880) (2,135)

Deferred income taxes

 4,093 (2,040) (3,171)

Changes in assets and liabilities:

 
 

Cash and cash equivalents - restricted

 (24,228) 51,173 (67,257)
 

Receivables from funds and separate accounts

 (1,409) 10,063 (4,796)
 

Other receivables

 (117,820) 19,629 (21,046)
 

Other assets

 (1,480) (2,943) 1,375
 

Deferred sales commissions

 (54,711) (69,453) (49,594)
 

Accounts payable and payable to investment companies

 139,528 (73,534) 89,523
 

Other liabilities

 17,252 12,071 16,889

Net income

 $150,952 175,459 156,959

Adjustments to reconcile net income to net cash provided by operating activities:

 

Write-down of impaired assets

 42,373  

Depreciation and amortization

 15,093 16,332 13,834

Amortization of deferred sales commissions

 53,863 53,855 58,381

Share-based compensation

 49,993 46,473 40,338

Excess tax benefits from share-based payment arrangements

 (6,791) (8,020) (6,128)

Gain on sale of available for sale investment securities

 (3,163) (2,258) (2,893)

Net purchases and sales or maturities of trading securities

 (27,470) 59,034 (60,623)

Unrealized (gain) loss on trading securities

 (5,470) 1,231 (5,101)

Loss on sale and retirement of property and equipment

 5,326 2,059 201

Capital gains and dividends reinvested

   (365)

Deferred income taxes

 (6,236) 2,395 (5,200)

Changes in assets and liabilities:

 

Cash and cash equivalents - restricted

 (42,812) 30,628 (8,256)

Receivables from funds and separate accounts

 (2,044) (4,608) 7,714

Other receivables

 (29,422) (32,260) 94,678

Other assets

 2,872 (512) (4,245)

Deferred sales commissions

 (54,430) (57,933) (58,968)

Accounts payable and payable to investment companies

 65,753 (2,002) (88,946)

Other liabilities

 25,048 3,266 9,263
            

Net cash provided by operating activities

Net cash provided by operating activities

 155,179 123,911 128,018 233,435 283,139 140,643
            

Cash flows from investing activities:

Cash flows from investing activities:

  

Purchases of available-for-sale investment securities

 (21,364) (100) (5,650)

Proceeds from sales and maturities of available-for-sale investment securities

 15,052 1,750 10,429

Additions to property and equipment

 (30,861) (26,079) (9,925)

Proceeds from sales of property and equipment

 7,685 466 93

Purchases of available for sale investment securities

 (51,676) (102,451) (76,961)

Proceeds from sales and maturities of available for sale investment securities

 49,809 92,282 26,463

Additions to property and equipment

 (15,300) (20,078) (17,313)

Proceeds from sales of property and equipment

 38 5 5
            

Net cash used in investing activities

Net cash used in investing activities

 (29,488) (23,963) (5,053) (17,129) (30,242) (67,806)
            

Cash flows from financing activities:

Cash flows from financing activities:

  

Dividends paid

 (65,018) (63,738) (55,392)

Repurchase of common stock

 (36,441) (93,012) (59,488)

Exercise of stock options

 14,136 8,048 84,562

Excess tax benefits from share-based payment arrangements

 2,787 7,471 12,919

Other stock transactions

 (7,124) (12,303) (5,539)

Debt repayment

   (10,000)

Dividends paid

 (171,267) (68,766) (65,194)

Repurchase of common stock

 (48,688) (65,463) (65,872)

Exercise of stock options

 105 5,080 13,057

Excess tax benefits from share-based payment arrangements

 6,791 8,020 6,128
            

Net cash used in financing activities

Net cash used in financing activities

 (91,660) (153,534) (22,938) (213,059) (121,129) (121,881)
            

Net increase (decrease) in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

 34,031 (53,586) 100,027 3,247 131,768 (49,044)

Cash and cash equivalents at beginning of year

Cash and cash equivalents at beginning of year

 210,328 263,914 163,887 327,083 195,315 244,359
            

Cash and cash equivalents at end of year

Cash and cash equivalents at end of year

   $244,359 210,328 263,914 330,330 327,083 195,315

Less cash and cash equivalents of discontinued operations at end of year

 2,303 3,167 5,245
      

Cash and cash equivalents of continuing operations at end of year

 $328,027 $323,916 $190,070
            

Cash paid for:

Cash paid for:

  

Income taxes (net)

   $50,369 53,146 74,439

Interest

   $12,266 11,965 11,354

Income taxes (net)

 $98,181 105,080 92,038

Interest

 $10,286 10,426 10,920

See accompanying notes to consolidated financial statements.


Table of Contents


WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009, 20082012, 2011 and 20072010


1.     Description of Business

        Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as the "Company," "we," "our" and "us") derive revenues primarily from investment management, investment product underwriting and distribution, and shareholder services administration provided to the Waddell & Reed Advisors Group of Mutual Funds (the "Advisors Funds"), Ivy Funds (the "Ivy Funds"), Ivy Funds Variable Insurance Portfolios (the "Ivy Funds VIP"), Ivy Funds, Inc. and the Ivy Funds portfolios (collectively, the "Ivy Funds"), and Waddell & Reed InvestEd Portfolios ("InvestEd") (collectively, the Advisors Funds, Ivy Funds, VIP, Ivy Funds 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.

        The Company has evaluated subsequent events through February 26, 2010,operates in one business segment. Although the dateCompany does provide supplemental disclosure regarding assets under management and underwriting revenues and expenses by distribution channel, the Company's determination that theseit operates in one business segment is based on the fact that the Company's Chief Executive Officer, who is the chief operating decision maker, reviews financial statements were issued,results, assesses performance and determined there are no other items to disclose.allocates resources at the consolidated level.

        Pursuant to SFAS No. 168,"The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162," the FASB Accounting Standards Codification ("ASC") became the sole source of authoritative GAAP for interim and annual periods ending after September 15, 2009, except for rules and interpretive releases of the SEC, which are sources of authoritative GAAP for SEC registrants. The Company adopted this standard, now codified as"Generally Accepted Accounting Principles Topic," ASC 105, during        During the third quarter of 2009. References2012, the Company committed to specific accounting standardsa plan to sell its Legend group of subsidiaries ("Legend") and on October 29, 2012 the Company signed a definitive agreement to execute the transaction. The sale closed effective January 1, 2013. The operational results of Legend have been reclassified as discontinued operations in the footnotes to our consolidated financial statements have been changed tofor all periods presented. Unless otherwise stated, footnote references refer to the appropriate section of the ASC.continuing operations.

Use of Estimates

        GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the consolidated financial statements and accompanying notes, and related disclosures of commitments and contingencies. Estimates are used for, but are not limited to, depreciation and amortization, income taxes, valuation of assets, pension and postretirement obligations, and contingencies. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Actual results could differ from our estimates.


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010

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 upon acquisition of 90 days or less at the date of purchase to be cash equivalents. Cash and cash equivalents – restricted represents cash held for the benefit of customers segregated in compliance with federal and other regulations. Substantially all cash balances are in excess of federal deposit insurance limits.

Disclosures About Fair Value of Financial Instruments

        Fair value of cash and cash equivalents, short-term investments, receivables and payables andapproximates carrying value. Fair value of long-term debt approximates carrying value.is disclosed in the indebtedness footnote. Fair values for investment securities are based on quoted market prices, where available. Otherwise, fair values for investment securities are based on quoted market prices of comparable instruments.

        The Company adopted"Fair Value Measurements and Disclosures Topic," ("ASC 820") effective January 1, 2008. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosure of fair value measurements. The Company did not have a transition adjustment to beginning retained earnings as a result of adopting this standard. ASC 820 applies to all financial instruments that are measured and reported on a fair value basis. This includes those items reported in investment securities on the consolidated balance sheets.

        In conjunction with the adoption of ASC 820, the Company also adopted"Financial Instruments Topic," ("ASC 825") as of January 1, 2008. ASC 825 provides companies the option to report select financial assets and liabilities at fair value on an instrument-by-instrument basis with changes in fair value reported in earnings. Additionally, the transition provisions of ASC 825 permit a one-time election for existing positions at the adoption date with a cumulative-effect adjustment included in beginning retained earnings and future changes in fair value reported in earnings. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. After the initial adoption, the election is made at the acquisition of a financial asset or financial liability and it may not be revoked. The adoption of ASC 825 did not result in a transition adjustment to beginning retained earnings.

Investment Securities and Investments in Affiliated Mutual Funds

        Our investments are comprised of United States, state and government obligations, corporate debt securities and investments in affiliated mutual funds. Investments are classified as available-for-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 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 equity securities is determined to be other than temporary, the unrealized loss recorded net of tax in other comprehensive income is realized as a charge to net income and a new cost basis is established for financial reporting purposes. Based on a change to"Investments – Debt and Equity Securities Topic," ASC 320, adopted in 2009, whenWhen a decline in the fair value of debt securities is determined to be other than


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007


temporary, the amount of the impairment recognized in earnings depends on whether the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current-period credit loss. If so, the other-than-temporaryother 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 fivethree to ten10 years for furniture fixtures,and fixtures; one to 10 years for computer software; two to five years for data processing equipment and computer software; fiveequipment; 10 to 30 years for buildings; three to 26 years for equipment and machinery;other equipment; and up to 15 years for leasehold improvements, which is the lesser of the lease term or expected life.


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012, 2011 and 2010

Software Developed for Internal Use

        Certain internal costs incurred in connection with developing or obtaining software for internal use are capitalized in accordance with"Intangibles – Goodwill and Other Topic," ASC 350. Internal costs capitalized are included in property and equipment, net onin the consolidated balance sheets, and were $11.8$9.6 million and $14.4$12.5 million as of December 31, 20092012 and 2008,2011, respectively. Amortization begins when the software project is complete and ready for its intended use and continues over the estimated useful life, generally fiveone to ten10 years.

Goodwill and Identifiable Intangible Assets

        Goodwill represents the excess of the cost of the Company's investment in the net assets of acquired companies over the fair value of the underlying identifiable net assets at the dates of acquisition. Goodwill is not amortized, but is reviewed annually for impairment in the second quarter of each year and when events or circumstances occur that indicate that goodwill might be impaired. Impairment of goodwill is tested at the Company's reporting unit level. To determine fair value, our review process uses the income and market approaches. In performing the analysis, we use the best information available under the circumstances, including reasonable and supportable assumptions and projections. If the carrying amount of the reporting unit exceeds its implied fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any.

        Identifiable intangible assets with indefinite useful lives are not amortized. Indefinite life intangible assets represent advisory and subadvisory management contracts for managed assets obtained in acquisitions. We consider these contracts to be indefinite lived intangible assets as they are expected to be renewed without significant cost or modification of terms. We complete an ongoing review of the recoverability of identifiable intangible assets on an annual basis or more frequently whenever events occur or circumstances change that would more likely than not reduce their fair value.

Factors that are 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 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

        During the period covered by these financial statements, the Company had two reporting units for goodwill: (i) investment management and related services and (ii) 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 existing investment management operations. Legend, our second reporting unit for goodwill, was a stand-alone investment management subsidiary and goodwill associated with Legend could be assessed separately from other intangible assetsinvestment management operations. During the third quarter of 2012, the Company committed to a plan to sell Legend. Additional information is included below in Notes 6 and 7.

        To determine fair values of the reporting units, our consolidated balancereview 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.


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010


sheet, any changes        Indefinite-life intangible assets represent advisory and subadvisory management contracts for managed assets obtained in key assumptions about our businessacquisitions. The Company considers these contracts to be indefinite-life intangible assets as they are expected to be renewed without significant cost or prospects, or changes in market conditions or other externalities, could result in anmodification of terms. The Company also tests these assets for impairment charge and such a charge could have a material effect on our financial condition and resultsannually by comparing their fair values to the carrying amount of operations.the assets.

Deferred Sales Commissions

        We defer certain costs, principally sales commissions and related compensation, which are paid to financial advisors and broker/dealers in connection with the sale of certain mutual fund shares sold without a front-end load sales charge. The costs incurred at the time of the sale of Class B shares are amortized on a straight-line basis over five years, which approximates the expected life of the shareholders' investments. The costs incurred at the time of the sale of Class C shares are amortized on a straight-line basis over 12 months. In addition, the costs incurred at the time of the sale of shares for certain asset allocation products are deferred and amortized on a straight-line basis, not to exceed three years. We recover these deferred costs through Rule 12b-1 and other distribution fees, which are paid on the Class B and Class C shares of the Advisors Funds and Ivy Funds, along with contingent deferred sales charges ("CDSCs") paid by shareholders who redeem their shares prior to completion of the requiredspecified 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, theThe 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.

        Underwriting and distribution commission revenues resulting from the sale of investment products are recognized on the trade date. Fee-based asset allocation revenues are charged quarterly based upon average daily net assets under management. We also recognize distribution revenues monthly for certain types of investment products, primarily variable annuity products that are generally calculated based upon average daily net assets under management.

        Shareholder service fees are recognized monthly and are calculated based on the number of accounts or assets under management as applicable. Other administrative service fee revenues are recognized when contractual obligations are fulfilled or as services are provided.

        Underwriting and distribution commission revenues resulting from the sale of investment products are recognized on the trade date.

        We also recognize distribution revenues monthly for certain types of investment products, primarily variable annuity products that are generally calculated based upon average daily net assets under management.

Advertising and Promotion

        We expense all advertising and promotion costs as incurred. Advertising expense was $4.7$9.9 million, $5.3$10.0 million and $4.8$5.4 million for the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively, and is classified in underwriting and distribution expense in the statement of income.


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010

classified in both underwriting and distribution expense and general and administrative expense in the consolidated statements of income.

Share-Based Compensation

        We account for share-based compensation expense using the fair value method. Under the fair value method, share-based compensation expense reflects the fair value of share-based awards measured at grant date, is recognized over the service period, and is adjusted each period for anticipated forfeitures. The Company also issues share-based awards to our financial advisors (our sales force) who are independent contractors. Changes in the Company's share price result in variable compensation expense over the vesting period. The fair value of options granted are calculated using a Black-Scholes option-pricing model. The Black-Scholes model incorporates assumptions as to dividend yield, risk-free interest rate, expected volatility and expected life of the option.

Accounting for Income Taxes

        Income tax expense is based on pre-tax financial accounting income, including adjustments made for the recognition or derecognition related to uncertain tax positions. The recognition or derecognition of income tax expense related to uncertain tax positions is determined under the guidance as prescribed by"Income Taxes Topic, " ASC 740. Deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. A valuation allowance is recognized for deferred tax assets if, based on available evidence, it is more likely than not that all or some portion of the asset will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.

Earnings per Share

        The Company adopted "Earnings Per Share Topic," ASC 260 on January 1, 2009. This standard provides that unvested share-based payment awards that contain nonforfeitable rights to dividends are considered to be participating securities and must be included in the computation of earnings per share pursuant to the two-class method. As required upon adoption, we retrospectively adjusted prior year earnings per share data to conform to the provisions of this standard. See Note 13 for additional information.

Derivatives and Hedging Activities

        Derivative instruments are recorded on the balance sheet at fair value. The Company periodically uses interest rate swaps to manage risks associated with interest rate volatility. All derivative instruments have been designated as hedges, in accordance with GAAP. If the underlying hedged transaction ceases to exist, all changes in fair value of the related derivatives that have not been settled are recognized in current earnings or amortized over the term of the hedged transaction. Derivatives that do not qualify for hedge accounting are marked to market with changes recognized in current earnings. The Company does not hold or issue derivative financial instruments for trading purposes and is not a party to leveraged derivatives.

3. Accounting Pronouncements Not Yet Adopted

        In January 2010,July 2011, the FASBFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2010-06("ASU") 2011-06, "Other Topics (Topic 720): Fees Paid to amend"Fair Value Measurements and Disclosures Topic,"the Federal Government by Health Insurers" ASC 820.("ASU 2011-06"). This ASU was issued to address questions about how health insurers should recognize and classify in their income statements fees mandated by the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (the "Acts"). The guidance requires disclosure changes related to recurringActs impose an annual fee on health insurers for each calendar year beginning on or nonrecurring fair value measurements. Specifically, companies are required to disclose separatelyafter January 1, 2014. A health insurer's portion of the amountsannual fee is payable no later than September 30 of significant transfers inthe applicable calendar year and out of Level 1 and Level 2 fair value measurements, describeis not tax deductible. The ASU specifies that the reasonsliability for the transfersfee should be estimated and provide additional detail relatedrecorded in full once the entity provides qualifying health insurance in the applicable calendar year in which the fee is payable with a corresponding deferred cost that is amortized to expense using a straight-line method of allocation unless another method better allocates the reconciliation of Level 3 fair value measurements. Additionally,fee over the guidance clarifies existing disclosure requirements. The guidancecalendar year that it is payable. ASU 2011-06 is effective for interim and annual reporting periodscalendar years beginning after December 15, 2009, except


Table31, 2013. The Company is evaluating the impact the adoption of ContentsASU 2011-06 in 2014 will have on its consolidated financial statements.


WADDELL & REED FINANCIAL, INC.
        In July 2012, the FASB issued ASU 2012-02,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008"Intangibles – Goodwill and 2007


Other (Topic 350): Testing Indefinite-Lived Intangible Assets for certain provisions relatedImpairment" ("ASU 2012-02"). This ASU permits an entity to make a qualitative assessment of whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the rollforward of activityquantitative impairment test in Level 3 fair value measurements, which areaccordance with Subtopic 350-30, "Intangibles—Goodwill and Other—General Intangibles Other than Goodwill." ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after DecemberSeptember 15, 2010 and for interim periods within those fiscal years.2012. The Company will adopt the applicable disclosure requirements effectivecomply with our first quarter 2010 reporting period.

        In June 2009, the FASB issued SFAS No. 167,"Amendments to FASB Interpretation No. 46(R)" ("SFAS No. 167"). SFAS No. 167 improves how enterprises account for and disclose their involvement with variable interest entities ("VIEs") and other entities whose equity at risk is insufficient or lacks certain characteristics. SFAS No. 167 changes how an entity determines whether it is the primary beneficiary of a VIE and whether that VIE should be consolidated and requires additional disclosures. In January 2010, the FASB agreed to issue accounting guidance to indefinitely defer this standard's consolidation requirements, which were initially effective for fiscal years beginning after November 15, 2009 and interim periods within those fiscal years, for reporting enterprises' interestsstandard upon adoption in entities that either have all of the characteristics of investment companies or for which it is industry practice to apply measurement principles for financial reporting purposes consistent with those that apply to investment companies. The Company meets the criteria to defer this standard's consolidation requirements. According to the FASB, this deferral will continue until the FASB and the International Accounting Standards Board, in their joint consolidation project, resolve the issue of how to determine whether an asset manager functions as a principal or as an agent.2013.


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010

4.     Investment Securities

        Investment securities at December 31, 20092012 and 20082011 are as follows:

2009
 Amortized
cost
 Unrealized
gains
 Unrealized
losses
 Fair value
2012
 Amortized
cost
 Unrealized
gains
 Unrealized
losses
 Fair value

 (in thousands)
 (in thousands)

Available-for-sale securities:

 

Available for sale securities:

 

Mortgage-backed securities

   $10 2 - 12 $9 1 - 10

Municipal bonds

 4,959 - (286) 4,673

Corporate bonds

 30,408 248 (3) 30,653

Affiliated mutual funds

 29,817 3,241 (143) 32,915 73,443 3,749 (1,090) 76,102
                

   $34,786 3,243 (429) 37,600 $103,860 3,998 (1,093) 106,765
                

Trading securities:

  

Mortgage-backed securities

       107       44

Municipal bonds

       478       501

Corporate bonds

       94       12,112

Common stock

       30       37

Affiliated mutual funds

       32,215       56,683
    

       32,924       69,377
    

Total investment securities

       
70,524
       176,142
    


2008
 Amortized
cost
 Unrealized
gains
 Unrealized
losses
 Fair value
2011
 Amortized
cost
 Unrealized
gains
 Unrealized
losses
 Fair value

 (in thousands)
 (in thousands)

Available-for-sale securities:

 

Available for sale securities:

 

Mortgage-backed securities

   $11 1 - 12 $9 2 - 11

Municipal bonds

 5,290 - (1,086) 4,204 2,549 - (13) 2,536

Corporate bonds

 45,893 170 (89) 45,974

Affiliated mutual funds

 23,966 459 (5,133) 19,292 51,456 2,738 (5,379) 48,815
                

   $29,267 460 (6,219) 23,508 $99,907 2,910 (5,481) 97,336
                

Trading securities:

  

Mortgage-backed securities

       108       63

Municipal bonds

       372       500

Corporate bonds

       93       17,319

Common stock

       37       37

Affiliated mutual funds

       34,566       19,007
    

       35,176       36,926
    

Total investment securities

       58,684       134,262
    

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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010

        A summary of available for sale debt securities and affiliated mutual funds with fair values below carrying values at December 31, 20092012 is as follows:


 Less than 12 months 12 months or longer Total Less than 12 months 12 months or longer Total

 Fair value Unrealized
losses
 Fair value Unrealized
losses
 Fair value Unrealized
losses
 Fair value Unrealized
losses
 Fair value Unrealized
losses
 Fair value Unrealized
losses

 (in thousands)
 (in thousands)

Municipal bonds

   $3,843 (125) 830 (161) 4,673 (286)

Corporate bonds

 $997 (3) - - 997 (3)

Affiliated mutual funds

 11,064 (64) 823 (79) 11,887 (143) 23,478 (469) 5,604 (621) 29,082 (1,090)
                        

Total temporarily impaired securities

 
  $

14,907
 
(189)
 
1,653
 
(240)
 
16,560
 
(429)
 $24,475 (472) 5,604 (621) 30,079 (1,093)
                        

        Based upon our assessment of these municipalcorporate bonds and affiliated mutual funds, the time frame investments have been in a loss position, our intent to hold the affiliated mutual funds until they have recovered and our history of holding bonds until maturity, we determined that a write-down was not necessary at December 31, 2009.

        During the first quarter of 2009, we recorded a pre-tax charge of $3.7 million to reflect the "other than temporary" decline in value of certain of the Company's investments in affiliated mutual funds as the fair value of these investments had been below cost for an extended period. This charge is recorded in investment and other income in the consolidated statement of operations for 2009.2012.

        Mortgage-backed securities and municipalcorporate bonds accounted for as available-for-saleavailable for sale and held as of December 31, 20092012 mature as follows:

 
 Amortized cost Fair value
 
 (in thousands)

After one year but within ten years

   $3,968  3,843

After ten years

  1,001  842
     

   $4,969  4,685
     
 
 Amortized
cost
 Fair value
 
 (in thousands)

Within one year

 $15,488  15,529

After one year but within 10 years

  14,929  15,134
     

 $30,417  30,663
     

        Mortgage-backed securities, municipal bonds and corporate bonds accounted for as trading and held as of December 31, 20092012 mature as follows:


Fair value

(in thousands)

After one year but within ten years

  $572

After ten years

107

  $679
 
 Fair value  
 
 (in thousands)

Within one year

 $2,531   

After one year but within 10 years

  10,126   
      

 $12,657   
      

        Investment securities with fair values of $24.7$79.9 million, $1.1$55.7 million and $10.9$45.1 million were sold during 2009, 20082012, 2011 and 2007,2010, respectively. During 2009, a2012, net gainrealized gains of $2.6$3.2 million wasand $5.3 million were recognized from the sale of $14.7$32.9 million in available-for-saleavailable for sale securities and athe sale of $47.0 million in trading securities, respectively. During 2011, net gainrealized gains of $126 thousand was$2.3 million and $1.4 million were recognized from the sale of $10.0$22.1 million in available for sale securities and the sale of $33.6 million in trading securities. In 2008, asecurities, respectively. During 2010, net lossgains of $31 thousand was$2.9 million and $2.9 million were recognized from the sale of


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010


$1.1 million in trading securities. A net gain of $3.6 million was recognized during 2007 from the sale of $10.4$24.2 million in available-for-sale securities.available for sale securities and the sale of $20.9 million in trading securities, respectively.

        The aggregate carrying amount of our equity method investments, classified in other assets, was $3.7$4.6 million and $3.9$5.6 million at December 31, 20092012 and 2008,2011, respectively. At December 31, 2009,2012, our investment consistsinvestments consist of a limited partnership interestinterests in venture capital funds.

        We determine theAccounting standards establish a framework for measuring fair value of our investments using broad levelsand a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of the asset. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset. An individual investment's fair value measurement is assigned a level based upon the observability of the inputs that are significant to the overall valuation. The three-tier hierarchy of inputs is summarized as defined by related accounting standards:follows:

        Assets classified as Level 2 can have a variety of observable inputs. These observable inputs are collected and utilized, primarily by an independent pricing service, in different evaluated pricing approaches depending upon the specific asset to determine a value. The fair value of municipal bonds is measured based on pricing models that take into account, among other factors, information received from market makers and broker/dealers, current trades, bid-wants lists, offerings, market movements, the callability of the bond, state of issuance and benchmark yield curves. The fair value of corporate bonds is measured using various techniques, which consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (where observable), bond spreads and fundamental data relating to the issuer.

        Securities' values classified as Level 3 are primarily determined through the use of a single quote (or multiple quotes) from dealers in the securities using proprietary valuation models. These quotes involve significant unobservable inputs, and thus, the related securities are classified as Level 3 securities.

        The following table summarizestables summarize our investment securities as of December 31, 20092012 and 20082011 that are recognized in our consolidated balance sheetsheets using fair value measurements based on the differing levels of inputs:inputs. There were no transfers between levels for the years ended December 31, 2012 or 2011.

 
 2009 2008
 
 (in thousands)

Level 1

   $65,160  53,895

Level 2

  5,364  4,789

Level 3

  -  -
     
 

Total

   $70,524  58,684
     
2012
 Level 1
 Level 2
 Level 3
 Total
       
 
 (in thousands)

Mortgage-backed securities

 $-  54  -  54

Municipal bonds

  -  501  -  501

Corporate bonds

  -  42,765  -  42,765

Common stock

  37  -  -  37

Affiliated mutual funds

  132,785  -  -  132,785
   

Total

 $132,822 $43,320 $- $176,142
         

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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012, 2011 and 2010


2011
 Level 1
 Level 2
 Level 3
 Total
       
 
 (in thousands)

Mortgage-backed securities

  -  74  -  74

Municipal bonds

  -  3,036  -  3,036

Corporate bonds

  -  63,293  -  63,293

Common stock

  37  -  -  37

Affiliated mutual funds

  67,822  -  -  67,822
   

Total

 $67,859 $66,403 $- $134,262
         

5.     Property and Equipment

        A summary of property and equipment at December 31, 20092012 and 20082011 is as follows:


 2009 2008 Estimated
useful lives
 2012 2011 Estimated
useful lives

 (in thousands)
  
 (in thousands)
  

Leasehold improvements

   $17,962 14,707 1 - 15 years $19,610 19,345 1 - 15 years

Furniture and fixtures

 29,870 27,810 5 - 10 years 30,670 30,590 3 - 10 years

Equipment and machinery

 16,545 21,622 5 - 26 years

Equipment

 19,660 18,482 3 - 26 years

Computer software

 56,954 50,645 5 - 10 years 74,081 72,184 1 - 10 years

Data processing equipment

 21,844 20,658 5 - 10 years 20,207 19,692 2 - 5 years

Buildings

 5,284 3,765 10 - 30 years

Land

 1,940 1,940  
            

Property and equipment, at cost

 143,175 135,442   171,452 165,998  

Accumulated depreciation

 (75,004) (75,476)   (102,124) (92,855)  
            

Property and equipment, net

   $68,171 59,966   $69,328 73,143  
            

        Depreciation expense was $13.7 million, $13.2 million, $14.8 million and $12.4$13.5 million during the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively.

        At December 31, 2009,2012, we had property and equipment under capital leases with a cost of $1.5$1.9 million and accumulated depreciation of $748 thousand.$0.8 million. At December 31, 2008,2011, we had property and equipment under capital leases with a cost of $724 thousand$1.8 million and accumulated depreciation of $102 thousand.$1.0 million.

6.     Discontinued Operations

        During the third quarter of 2012, the Company committed to a plan to sell Legend. On October 29, 2012, the Company signed a definitive agreement with First Allied Holdings Inc. to sell all of the common interests of Legend Group Holdings, LLC and the sale closed effective January 1, 2013. Based on the value of the consideration the Company expected to receive upon closing, which is less than the carrying value of net assets to be sold, the Company recorded a non-cash impairment charge of $42.4 million, which is reflected in income (loss) from discontinued operations on the statement of income. The consideration received was subject to working capital and regulatory capital adjustments through the closing date. The Company retained $7.7 million of Legend's excess working capital as part of the agreement. The


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010

agreement also includes an earnout provision based on asset retention for a period of two years following the closing date.

        The operational results of Legend have been presented as discontinued operations in the consolidated financial statements for all periods presented. Legend's revenues and income (loss) before provision for income taxes follow:

 
 2012 2011 2010
 
 (in thousands)

Revenues

 $74,033  72,644  66,619

Income (loss) before provision for income taxes

 $(40,518)  5,810  6,123

        For income tax purposes, the sale will result in a $48.3 million capital loss that may only be utilized to offset future capital gains. Due to the character of the loss and the limited carry forward period permitted by law, the Company may not realize the full tax benefit of the capital loss.

        The assets and liabilities of Legend, classified as discontinued operations held for sale in the consolidated balance sheets are as follows:

 
 December 31,
2012
 December 31,
2011
 
 (in thousands)

Assets

      

Cash and cash equivalents

 $2,303  3,167

Cash and cash equivalents - restricted

  401  13

Investment securities

  1,352  1,235

Receivables

  10,345  9,871

Prepaid expenses and other current assets

  749  615
     

Total current assets

  15,150  14,901

Property and equipment, net

  
992
  
885

Goodwill

  16,868  59,241

Other non-current assets

  150  148
     

Total non-current assets

  18,010  60,274
     

Total assets

  33,160  75,175
     

Liabilities

      

Accounts payable

  464  -

Accrued compensation

  6,243  5,812

Other current liabilities

  880  738
     

Total current liabilities

  7,587  6,550

Non-current liabilities

  
281
  
207
     

Total liabilities

  7,868  6,757
     

Assets less liabilities

 $25,292  68,418
     

6.Table of Contents


WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012, 2011 and 2010

7.     Goodwill and Identifiable Intangible Assets

        Goodwill represents the excess of purchase price over the tangible assets and identifiable intangible assets of an acquired business. Our goodwill is not deductible for tax purposes. Goodwill and identifiable intangible assets (all considered indefinite lived) at December 31, 20092012 and 20082011 are as follows:



 December 31,
2009
 December 31,
2008
 2012 2011


 (in thousands)
 (in thousands)

Goodwill

Goodwill

 $202,518 202,518 $138,947 138,947

Accumulated amortization

Accumulated amortization

 (36,307) (36,307) (31,977) (31,977)
        

Total goodwill

 106,970 106,970

Mutual fund management advisory contracts

 
38,699
 
38,699

Mutual fund management subadvisory contracts

 16,300 16,300

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 identifiable intangible assets

 54,999 54,999
        

Total

Total

 $221,210 221,210 $161,969 161,969
        

        Based on our annual review of goodwill inDuring the secondthird quarter of 2008 in accordance with applicable accounting literature, the implied fair value of all reporting units exceeded their carrying amounts. Due to the decline in the financial markets during the second half of 2008, we performed another review of goodwill and intangibles in the fourth quarter of 2008. We recorded an impairment charge of $7.22012, $59.2 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 declinesLegend was allocated to assets of discontinued operations held for sale. Amounts at December 31, 2011 have been adjusted to reflect this change.

        As of June 30, 2012, the Company's annual impairment test indicated that the fair value of the Legend reporting unit exceeded its carrying value, which resulted in ACF's assets under managementno goodwill impairment. During preliminary due diligence conducted in the third quarter regarding a possible sale of Legend, several significant issues arose regarding executive leadership, advisor retention and employee morale. As due diligence discussions progressed into formal negotiations throughout the related adverse impact on its earnings potential. The goodwill impairment charge relatedthird quarter, the Company's concerns regarding these matters escalated, the depth and consequence of which led us to ACFdetermine that a change in the strategic direction of Legend was not deductible for income tax purposesnecessary, and as a result, no tax benefit was recognized for the charge in 2008. See Note 8 for details relatingCompany decided to themove forward with a sale of ACFLegend at a price lower than the fair value utilized in 2009.

        The Company has recognized totalthe annual impairment analysis in the second quarter. During the third quarter of 2012, $42.4 million of goodwill impairment charges of $27.2 million, all related to ACF, since its adoption of"Intangibles – GoodwillLegend was written down 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 expensesthe loss from discontinued operations in the consolidated statement of income in 2008.


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

        The activity in the accrued restructuring liability for the year ended December 31, 2009 is summarized as follows:

 
 Accrued Liability
as of
December 31, 2008
 Cash
Payments
 Non-cash
Settlements
and Other
 Accrued Liability
as of
December 31, 2009
 
 (in thousands)

Employee compensation and other benefit costs

   $14,530  (11,451)  (288)  2,791

Contract termination and project development costs

  500  -  -  500
         

   $15,030  (11,451)  (288)  3,291
         

        We expect the remaining restructuring costs to be paid out in 2010. The restructuring liability of $3.3 million is included in other current liabilities in the consolidated balance sheet.

8.     Sale of Austin, Calvert & Flavin, Inc.

        On July 15, 2009, the Company completed the sale of its wholly-owned subsidiary, ACF, pursuant to a stock purchase agreement dated June 26, 2009. The agreement includes an earnout provision based on a percentage of revenues on existing accounts over the three-year period subsequent to the closing date. Prior to the closing date, ACF had 10 employees and assets under management of $488.0 million.

        We recorded charges for severance and other transaction costs of $1.1 million in connection with the divestiture of our investment in ACF in 2009, which are included in general and administrative expenses in the 2009 consolidated statement of income.

        For tax purposes, this sale resulted in a capital loss of $28.1 million, a portion of which will be carried back to recover taxes previously paid on capital gains in prior periods. The remaining loss will be carried forward and will be available to offset potential future capital gains. Due to the character of the loss and the limited carryforward period permitted by law, the Company may not realize the full tax benefit of the capital loss carryforward. We recorded tax benefits in 2009 of $3.6 million. Of this amount, $1.6 million relates to carrying back a portion of the capital loss to fully offset capital gains generated during the applicable three-year carryback period. The remaining $2.0 million tax benefit relates to utilizing capital losses to offset capital gains generated during 2009.

9.8.     Indebtedness

        On January 13, 2006, the Company issued $200.0 million in principal amount 5.60% senior notes due 2011 (the "Notes") resulting in net proceeds of approximately $198.2 million (net of discounts, commissions and estimated expenses). The Company used these proceeds, together with cash on hand, to repay the entire $200.0 million aggregate principal amount outstanding of its prior $200.0 million notes. The Notes represent senior unsecured obligations and are rated "Baa2" by Moody's and "BBB" by Standard & Poor's. Interest iswas payable semi-annually on January 15 and July 15 at a fixed rate of 5.60% per annum. Upon issuance of these Notes, the Company terminated two forward interest rate swap agreements entered into in 2005. In connection with the termination, we received a net cash settlement of $1.1 million. The Company may, at its option, callCompany's gain was amortized into earnings as a reduction to interest expense over the five year term of the Notes at any time pursuant to a make whole redemption provision, which would compensate holders for any changes in interest rate levelsand was fully amortized as of December 31, 2010. During the first quarter of 2010, we repurchased $10.0 million of the Notes.

        On August 31, 2010, the Company entered into an agreement to complete a $190.0 million private placement of senior unsecured notes upon early extinguishment. The Company currently has no intention to call the Notes.that were issued and sold in two tranches: $95.0 million bearing interest at 5.0% and maturing January 13, 2018, Series A, and $95.0 million bearing interest of 5.75% and


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010

maturing January 13, 2021, Series B. The following isagreement contained a summary of long-term debt at December 31, 2009 and 2008:

 
 2009 2008
 
 (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

  (16)  (31)
     
 

Total long-term debt

   $199,984  199,969
     

delayed funding provision that allowed the Company to draw down the proceeds in January 2011 when the Notes matured. The fair valueCompany used the proceeds of the long-term debt is approximately $204.5 million as of December 31, 2009 compared to the carrying value of $200.0 million.

        On January 10, 2006, the Company terminated two forward interest rate swap agreements entered into in 2005 upon the closingissuance and sale of the NewSenior Notes to repay in full the Notes. The swaps, considered completely effective cash flow hedges under "Derivatives and Hedging Topic," ASC 815, were put in place to hedge against changes in forecasted interest payments attributable to changes in the LIBOR swap rate between the time the Company entered into the swap agreement and the time we anticipated refinancing our previously issued 7.50% notesInterest is payable semi-annually in January 2006. In connection with the terminationand July of the swap agreements, the Company received a net cash settlement of $1.1 million. The Company's gain on these transactions was deferred in accumulated other comprehensive income and is being amortized into earnings as a reduction to interest expense over the five year term of the Notes. As of December 31, 2009, the remaining unamortized amount was approximately $200 thousand.

        The Company entered into a 364-day revolving credit facility (the "Credit Facility") with various lenders, effective October 5, 2009, which initially provides for borrowings of up to $125.0 million and replaced the Company's previous revolving credit facility. Lenders could, at their option upon the Company's request, expand the facility to $200.0 million. At December 31, 2009, there were no borrowings outstanding under the Credit Facility. Borrowings under the Credit Facility bear interest at various rates including adjusted LIBOR or an alternative base rate plus, in each case, an incremental margin based on the Company's credit rating. The Credit Facility also provides for a facility fee on the aggregate amount of commitment under the revolving facility (whether or not utilized). The facility fee is also based on the Company's credit rating level.year. The most restrictive provisions of the credit agreement require the Company to maintain a consolidated leverage ratio not to exceed 3.0 to 1.0 for four consecutive quarters and a consolidated interest coverage ratio of not less than 4.0 to 1.0 for four consecutive quarters. The Company was in compliance with these covenants and similar covenants in prior facilities for all yearsperiods presented.

        The Company entered into a three year revolving credit facility (the "Credit Facility") with various lenders, effective August 31, 2010, which provides for initial 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 Credit Facility to $200.0 million. At December 31, 2012 and 2011, there were no borrowings outstanding under the facility. Borrowings under the Credit Facility bear interest at various rates including adjusted LIBOR or an alternative base rate plus, in each case, an incremental margin based on the Company's credit rating. The Credit Facility also provides for a facility fee on the aggregate amount of commitments under the revolving facility (whether or not utilized). The facility fee is also based on the Company's credit rating level. The Credit Facility's covenants match those outlined above for the Senior Notes.

        Debt is reported at its carrying amount in the consolidated balance sheet. The fair value of the Company's outstanding indebtedness is approximately $208.8 million at December 31, 2012 compared to the carrying value of $190.0 million. The following is a summary of long-term debt at December 31, 2012 and 2011:

 
 2012 2011
 
 (in thousands)

Principal amount unsecured 5.0% senior notes due in 2018

 $95,000 $95,000

Principal amount unsecured 5.75% senior notes due in 2021

  95,000  95,000
     

Total

 $190,000  190,000
     

10.9.     Income Taxes

        The provision for income taxes from continuing operations for the years ended December 31, 2009, 20082012, 2011 and 20072010 consists of the following:

 
 2009 2008 2007
 
 (in thousands)
Currently payable:      
 Federal $      48,249 59,149 72,760
 State 4,312 3,149 5,092
       
  52,561 62,298 77,852
Deferred taxes 4,090 (2,041) (4,189)
       
 Provision for income taxes $      56,651 60,257 73,663
       

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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

        The following table reconciles the statutory federal income tax rate with our effective income tax rate for the years ended December 31, 2009, 2008 and 2007:

 
 2009 2008 2007

Statutory federal income tax rate

  35.0%  35.0%  35.0%

State income taxes, net of federal tax benefits

  1.9  1.4  2.1

State tax incentives

  (0.7)  (0.3)  (0.1)

Sale of ACF

  (6.0)    

Valuation allowance on losses capital in nature

  4.1    

Nondeductible goodwill impairment expense

    1.6  

Other items

  0.6  0.8  
       

Effective income tax rate

  34.9%  38.5%  37.0%
       

        The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at December 31, 2009 and 2008 are as follows:

  
 2009 2008
  
 (in thousands)
 Deferred tax liabilities:    
  Deferred sales commissions $    (7,895) (6,019)
  Property and equipment (11,372) (9,213)
  Benefit plans (4,289) (3,609)
  Identifiable intangible assets (8,463) (8,359)
  Unrealized gains on derivatives (83) (165)
  Unrealized gains on available for sale investment securities (1,036) -
  Purchase of fund assets (5,022) (4,189)
  Prepaid expenses (1,886) (1,544)
  Other (342) (323)
      
 Total gross deferred liabilities (40,388) (33,421)
      
  Deferred tax assets:    
  Acquisition lease liability 949 784
  Additional pension and postretirement liability 13,799 12,978
  Accrued expenses 8,598 11,225
  Unrealized losses on investment securities 1,402 2,333
  Capital loss carryforwards 6,264 -
  Nonvested stock 12,935 10,827
  Unused state tax credits 1,018 337
  State net operating loss carryforwards 5,034 4,698
  Other 2,967 2,242
      
 Total gross deferred assets 52,966 45,424
 Valuation allowance (11,336) (4,385)
      
 Net deferred tax asset $      1,242 7,618
      
 
 2012 2011 2010
 
 (in thousands)

Currently payable:

         

Federal

 $104,922  93,677  85,394

State

  9,335  9,033  6,730
       

  114,257  102,710  92,124

Deferred taxes

  (5,782)  2,004  (5,191)
       

Provision for income taxes

 $108,475  104,714  86,933
       

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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010

        DuringThe following table reconciles the statutory federal income tax rate with our effective income tax rate from continuing operations for the years ended December 31, 2012, 2011 and 2010:

 
 2012 2011 2010

Statutory federal income tax rate

  35.0%  35.0%  35.0%

State income taxes, net of federal tax benefits

  2.2  2.4  1.9

State tax incentives

  (0.2)  (0.2)  (0.2)

Valuation allowance on losses capital in nature

  (0.8)  (0.2)  (1.1)

Other items

  (0.2)  0.8  0.6
       

Effective income tax rate

  36.0%  37.8%  36.2%
       

        The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at December 31, 2012 and 2011 are as follows:

 
 2012 2011
 
 (in thousands)

Deferred tax liabilities:

      

Deferred sales commissions

 $(7,405)  (7,861)

Property and equipment

  (8,010)  (13,017)

Benefit plans

  (9,723)  (9,617)

Identifiable intangible assets

  (8,583)  (8,523)

Unrealized gains on investment securities

  (1,084)  -

Purchase of fund assets

  (7,458)  (6,631)

Prepaid expenses

  (2,138)  (2,430)
     

Total gross deferred liabilities

  (44,401)  (48,079)
     

Deferred tax assets:

      

Acquisition lease liability

  953  1,108

Additional pension and postretirement liability

  28,935  26,403

Accrued expenses

  12,705  13,285

Unrealized losses on investment securities

  843  2,318

Unrealized losses on investment in partnerships

  789  196

Capital loss carryforwards

  169  3,022

Excess tax basis on investment in subsidiary

  17,921  -

Nonvested stock

  21,070  19,051

Unused state tax credits

  972  1,123

State net operating loss carryforwards

  6,284  5,893

Other

  4,230  3,817
     

Total gross deferred assets

  94,871  76,216

Valuation allowance

  (24,695)  (11,191)
     

Net deferred tax asset

 $25,775  16,946
     

Table of Contents


WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012, 2011 and 2010

        In 2009, the Company sold ACF,one of its subsidiaries, Austin Calvert & Flavin, Inc., which generated a capital loss available to offset potential future and prior period capital gains. Due to the character of the loss and the limited carryforward period permitted by law, the Company may not realize the full tax benefit of the capital loss. The deferred tax asset, net of federal tax effect, relating to the capital losses as of December 31, 2009 is approximately $6.3 million. The capital loss carryforward, if not utilized, will expire in 2014. As of December 31, 2009,2012, the Company had a deferred tax asset, net of federal tax effect, for a capital loss carryforward of $0.2 million, excess tax basis in Legend of $17.9 million, and other net deferred tax assets that arewere capital in nature areof $0.5 million. As of December 31, 2011, the Company had a deferred tax asset, net of federal tax effect, for a capital loss carryforward of $3.0 million and other net deferred tax liabilities which were capital in nature of approximately $300 thousand.$2.5 million. Management believes it is not more likely than not that the Company will generate sufficient future capital gains to realize the full benefit of these capital losses and accordingly, a valuation allowance in the amount of $6.6$18.6 million and $5.5 million has been recorded at December 31, 2009.2012 and 2011, respectively. During 2012, a non-cash impairment charge to Legend resulted in an increase in the valuation allowance of $17.9 million. Losses from partnership investments also increased the valuation allowance by $0.6 million. These increases were partially offset by realized capital gains on securities classified as available for sale and appreciation in the fair value of the Company's investment portfolios, which reduced the valuation allowance by $3.4 million. The remaining $2.0 million decrease in the valuation allowance resulted from appreciation in the fair value of the Company's available for sale securities portfolio, which was recorded as an increase to accumulated other comprehensive income.

        Certain subsidiaries of the Company have net operating loss carryforwards in certain states in which these companies file on a separate company basis. The deferred tax asset, net of federal tax effect, relating to the carryforwards as of December 31, 20092012 and December 31, 20082011 is approximately $5.0$6.3 million and $4.7$5.9 million, respectively. The carryforwards, if not utilized, will expire between 20102013 and 2029.2032. Management believes it is not more likely than not that these subsidiaries will generate sufficient future taxable income in these states to realize the benefit of the net operating loss carryforwards and, accordingly, a valuation allowance in the amount of $4.7$6.1 million and $4.4$5.7 million has been recorded at December 31, 20092012 and December 31, 2008,2011, respectively. The Company generatedhas state tax credits in 2008credit carryforwards of $1.0 million and 2009 that$1.1 million as of December 31, 2012 and 2011, respectively. Of these state tax credit carryforwards, $0.7 million will expire between 2024 and 2028 if not utilized and $0.3 million will expire in 2018 and 2019, respectively,2026 if not utilized. The Company anticipates these credits will be fully utilized prior to their expiration date.

        As of January 1, 2009,2012, the Company had unrecognized tax benefits, including penalties and interest, of $4.9$9.8 million ($3.46.9 million net of federal benefit) that, if recognized, would impact the Company's effective tax rate. As of December 31, 2009,2012, the Company had unrecognized tax benefits, including penalties and interest, of $6.8$10.8 million ($4.77.5 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'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"Income Taxes Topic," ASC 740.taxes. As of January 1, 2009,2012, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $1.6$2.3 million ($1.21.8 million net of federal benefit). The total amount of penalties and interest, net of federal benefit, related to tax uncertainties recognized in the statement of income for the period ended December 31, 20092012 was $307 thousand.$0.2 million. The total amount of accrued penalties and interest related to uncertain tax positions at December 31, 20092012 of $2.0$2.5 million ($1.62.0 million net of federal benefit) is included in the total unrecognized tax benefits described above.


Table of Contents


WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010

        The following table summarizes the Company's reconciliation of unrecognized tax benefits, excluding penalties and interest, for the yearyears ended December 31, 2009:2012, 2011 and 2010:



 Unrecognized
Tax Benefits
 2012 2011 2010


 (in thousands)
 (in thousands)

Balance at January 1, 2009

   $3,332

Balance at January 1

 $7,467 4,759 4,857

Increases during the year:

Increases during the year:

  

Gross increases - tax positions in prior period

 275 1,684 189

Gross increases - current-period tax positions

 2,215 1,844 981

Decreases during the year:

 

Gross decreases - tax positions in prior period

 (429) (183) (490)

Decreases due to settlements with taxing authorities

 - - (629)

Decreases due to lapse of statute of limitations

 (1,206) (637) (149)

Gross increases - tax positions in prior period

 1,064      

Balance at December 31

 $8,322 7,467 4,759

Gross increases - current-period tax positions

 636      

Decreases during the year:

 

Decreases due to settlements with taxing authorities

 (1)

Decreases due to lapse of statute of limitations

 (174)
  

Balance at December 31, 2009

 $4,857
  

        In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit our income tax returns. These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. In 2009,During 2012, the Company settled three open tax years that were undergoing audit by a state jurisdiction in which the Company operates. No audits were settled in 2011. During 2008,2010, the Company settled fivenine open tax years that were undergoing auditaudits by a state jurisdictionjurisdictions in which the Company operates. The Company also received notification of a favorable outcome on a tax position in whichthat the Company had previously considered partially uncertain, and therefore, had not previously recognized the full tax benefit. During 2007, the Company settled six open tax years that were undergoing audit by a state jurisdiction in which the Company operates. The 2006, 20072009, 2010 and 20082011 federal income tax returns are open tax years that remain subject to potential future audit. The 20052006 and 2007 federal tax yearyears also remainsremain open to a limited extent due to a capital loss carryback claim.claims. State income tax returns for all years after 20052008 and, in certain states, income tax returns for 2005,prior to 2009, are subject to potential future audit by tax authorities in the Company's major state tax jurisdictions.

        The Company is currently being audited in threevarious state jurisdictions. It is reasonably possible that the Company will settle the audits in these jurisdictions within the next 12-month period. It is estimated that the Company's liability for unrecognized tax benefits, including penalties and interest, could decrease by approximately $1.9$0.4 million to $3.3$2.5 million ($1.30.3 million to $2.2$1.6 million net of federal benefit) upon settlement of these audits. Such settlements are not anticipated to have a significant impact on the results of operations.

11.10.   Pension Plan and Postretirement Benefits Other Than Pension

        We provide a non-contributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the "Pension Plan"). Benefits payable under the Pension Plan are based on employees' years of service and compensation during the final ten years of employment. We also sponsor an unfunded defined benefit postretirement medical plan that covers substantially all employees, including Waddell & Reed and Legend advisors. The medical plan is contributory with retiree


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012, 2011 and 2010

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.


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

        A reconciliation of the funded status of these plans and the assumptions related to the obligations at December 31, 2009, 20082012, 2011 and 20072010 follows:

 
 Pension Benefits Other
Postretirement Benefits
 
 2009 2008 2007 2009 2008 2007
 
 (in thousands)
Change in projected benefit obligation:            
 Net benefit obligation at beginning of year $    98,594 94,893 88,320 5,205 3,975 4,174
 Service cost 5,276 5,727 5,718 371 296 292
 Interest cost 6,386 6,326 5,490 343 262 244
 Benefits and expenses paid (11,692) (6,553) (3,690) (493) (616) (313)
 Actuarial (gain) loss 12,398 (1,799) (945) 362 1,126 (570)
 Retiree contributions    157 162 148
             
 Net benefit obligation at end of year $  110,962 98,594 94,893 5,945 5,205 3,975
             
 
 Pension Benefits Other
Postretirement Benefits
 
 2012 2011 2010 2012 2011 2010
 
 (in thousands)
Change in projected benefit obligation:                  

Net benefit obligation at beginning of year

 $148,412  118,860  110,962  8,145  6,850  5,945

Service cost

  9,373  7,101  6,140  693  558  443

Interest cost

  7,570  7,195  6,596  400  402  364

Benefits paid

  (5,760)  (6,522)  (6,589)  (560)  (554)  (528)

Actuarial (gain) loss

  24,570  21,778  1,751  (223)  530  389

Retiree contributions

        337  359  237
             

Net benefit obligation at end of year

 $184,165  148,412  118,860  8,792  8,145  6,850
             

        The accumulated benefit obligation for the Pension Plan was $94.9$150.8 million and $86.9$124.7 million at December 31, 20092012 and 2008,2011, respectively.

        As part of the agreement to sell Legend, the Company retained the liability for pension and other postretirement benefits related to Legend, and these liabilities are included in the tables above.



 Pension Benefits Other
Postretirement Benefits
 Pension Benefits Other
Postretirement Benefits


 2009 2008 2007 2009 2008 2007 2012 2011 2010 2012 2011 2010


 (in thousands)
 (in thousands)
Change in plan assets:Change in plan assets:  

Fair value of plan assets at beginning of year

 $103,404 106,568 91,551   

Actual return on plan assets

 21,267 (6,642) 9,106   

Employer contributions

 15,000 10,000 12,500 223 195 291

Retiree contributions

    337 359 237

Benefits paid

 (5,760) (6,522) (6,589) (560) (554) (528)
Fair value of plan assets at beginning of year $      78,020 109,822 82,889               
Actual return on plan assets 15,223 (30,249) 23,622   
Employer contributions 10,000 5,000 7,000 336 454 165
Retiree contributions    157 162 148
Benefits paid (11,692) (6,553) (3,689) (493) (616) (313)
            
 Fair value of plan assets at end of year $      91,551 78,020 109,822   

Fair value of plan assets at end of year

 $133,911 103,404 106,568   
                        
Funded status at end of yearFunded status at end of year $   (19,411) (20,574) 14,929 (5,945) (5,205) (3,975) $(50,254) (45,008) (12,292) (8,792) (8,145) (6,850)
                        

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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010

 

  
 Pension Benefits Other
Postretirement Benefits
  
 2009  
 2008 2007 2009 2008 2007
  
 (in thousands, except percentage data)
 Amounts recognized in the statement of financial position:                    
  Noncurrent assets   $-    -  14,929  -  -  -
  Current liabilities  -    -  -  (250)  (252)  (192)
  Noncurrent liabilities  (19,411)    (20,574)  -  (5,695)  (4,953)  (3,783)
                
  Net amount recognized at end of year   $(19,411)    (20,574)  14,929  (5,945)  (5,205)  (3,975)
                

 

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Transition obligation   $(47)    (52)  (57)  -  -  -
  Prior service cost  (4,041)    (4,596)  (3,714)  (284)  (323)  (362)
  Accumulated gain (loss)  (32,842)    (30,835)  4,792  (79)  283  1,489
                
  Accumulated other comprehensive income (loss)  (36,930)    (35,483)  1,021  (363)  (40)  1,127
  Cumulative employer contributions in excess of net periodic benefit cost  17,519    14,909  13,908  (5,582)  (5,165)  (5,102)
                
  Net amount recognized at end of year   $(19,411)    (20,574)  14,929  (5,945)  (5,205)  (3,975)
                

 

Weighted average assumptions used to determine benefit obligation at December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Discount rate  6.25%    6.75%  6.75%  6.25%  6.75%  6.75%
  Rate of compensation increase  3.86%    (1)        3.86%  Not applicable
 
 Pension Benefits Other
Postretirement Benefits
 
 2012 2011 2010 2012 2011 2010
 
 (in thousands, except percentage data)
Amounts recognized in the statement of financial position:                  

Current liabilities

 $-  -  -  (304)  (289)  (303)

Noncurrent liabilities

  (50,254)  (45,008)  (12,292)  (8,488)  (7,856)  (6,547)
             

Net amount recognized at end of year

 $(50,254)  (45,008)  (12,292)  (8,792)  (8,145)  (6,850)
             

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transition obligation

 $(32)  (37)  (42)  -  -  -

Prior service cost

  (2,377)  (2,932)  (3,486)  (127)  (183)  (238)

Accumulated loss

  (74,286)  (66,747)  (31,369)  (765)  (999)  (469)
             

Accumulated other comprehensive loss

  (76,695)  (69,716)  (34,897)  (892)  (1,182)  (707)

Cumulative employer contributions in excess of net periodic benefit cost

  26,441  24,708  22,605  (7,900)  (6,963)  (6,143)
             

Net amount recognized at end of year

 $(50,254)  (45,008)  (12,292)  (8,792)  (8,145)  (6,850)
             

Weighted average assumptions used to determine benefit obligation at December 31:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount rate

  4.22%  4.99%  6.00%  4.18%  5.00%  6.00%

Rate of compensation increase

  3.99%  4.04%  3.86%  Not applicable

(1)
Rate of compensation increase was 0% for 2009, 2.5% for 2010

        In 2012 and 3.86% for 2011, and after.

        Thethe discount rate assumptionsassumption used to determine the pension and other postretirement benefits obligations was based on the Aon Hewitt AA Only Above Median Yield Curve. This discount rate was determined separately for each plan by plotting the expected benefit payments from each plan against a yield curve of high quality, zero coupon bonds and expense werecalculating the single rate that would produce the same present value of liabilities as the yield curve. Prior to 2011, the discount rate assumption was 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, calculateswhich calculated the yield on a theoretical portfolio of high-grade corporate bonds (rated "Aa" or better) with cash flows that generally matchmatched our expected benefit payments. To the extent scheduled bond proceeds exceedexceeded the estimated benefit payments in a given period, the yield calculation assumesassumed those excess proceeds arewere reinvested at the one-year forward rates implied by the Citigroup Pension Discount Curve.


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010

        Our Pension Plan asset allocation at December 31, 20092012 and 20082011 is as follows:

Plan assets by category
Plan assets by category
 Percentage of
Plan Assets at
December 31, 2009
 Percentage of
Plan Assets at
December 31, 2008
 Percentage of
Plan Assets at
December 31, 2012
 Percentage of
Plan Assets at
December 31, 2011


 

Cash

Cash

 3% 14% 11% 7%

Equity securities:

Equity securities:

  

Domestic

 21% 53%

International

 60% 7%

Debt securities

 - 19%

Domestic

 38% 43%

International

 40% 38%

Private equity

 1% -

Gold bullion

Gold bullion

 16% 7% 10% 12%
        

Total

 100% 100%

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. As of December 31, 2009,2012, our Pension Plan assets were invested in our Asset Strategy style and our Plan assets are managed by our in-house investment professionals.

        Asset Strategy invests in the domestic or foreign market that is believed to offer the greatest probability of return or, alternatively, that provides the highest degree of safety in uncertain times. This style may allocate its assets among stocks, bonds and short-term investments and since the allocation is dynamically managed and able to take advantage of opportunities as they are presented by the market, there is not a predetermined asset allocation. Dependent on the outlook for the U.S. and global economies, our investment managers make top-down allocations among stocks, bonds, cash, precious metals and currency markets around the globe. After determining allocations, we seek the best opportunities within each market. Derivative instruments play an important role in this style's investment process, to manage risk and maximize stability of the assets in the portfolio.

        At December 31, 2009,2012, the Pension Plan had multiple investment concentrations that are not typical of a classic pension plan, including a significant weighting of plan assets invested in equity securities, including 60%40% international equities, of which almost halfa third was invested in Chinese equities. The Pension Plan also had 16%10% of plan assets invested in gold bullion. During 2009, the Plan also had a significant concentration in derivative instruments.

        Risk management is primarily the responsibility of the investment portfolio manager, who incorporates it with their day-to-day research and management. Although investment flexibility is essential to this style's investment process, the Pension Plan does not invest in a number of asset classes that are commonly referred to as alternative investments, namely venture capital, private equity funds, direct real estate properties, timber, or oil, gas or other mineral explorations or development programs or leases. The Pension Plan also has a number of specific guidelines that serve to manage investment risk by placing limits on net securities exposure and concentration of assets within specific companies or industries.


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012, 2011 and 2010

        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 above in Note 4. The following tables summarize our Pension Plan assets as of December 31, 2012 and 2011. There were no transfers between levels for the years ended December 31, 2012 or 2011.

2012
 Level 1
 Level 2
 Level 3
 Total
       
 
 (in thousands)

Equity securities:

            

Domestic

 $51,289  -  -  51,289

International

  53,291  -  -  53,291

Fixed income securities:

            

Mortgage-backed securities

  -  50  -  50

Private equity

  -  -  1,772  1,772

Gold bullion

  13,452  -  -  13,452
   

Total investment securities

  118,032  50  1,772  119,854

Cash and other

           14,057
            

Total

          $133,911
            


2011
 Level 1
 Level 2
 Level 3
 Total
       
 
 (in thousands)

Equity securities:

            

Domestic

 $44,818  -  -  44,818

International

  38,942  -  -  38,942

Fixed income securities:

            

Mortgage-backed securities

  -  98  -  98

Gold bullion

  12,857  -  -  12,857
   

Total investment securities

  96,617  98  -  96,715

Cash and other

           6,689
            

Total

          $103,404
            

        The fair value of the private equity investment classified as Level 3 as of December 31, 2012 was determined to be the investment cost. As a result, this investment's valuation had no effect on the plan's asset value in 2012. There was no Level 3 activity during the year ended December 31, 2011.


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010

        We determine the fair value of our plan assets using broad levels of inputs as defined by related accounting standards and categorized as Level 1, Level 2 or Level 3, as previously defined in Note 4. The following table summarizes our plan assets as of December 31, 2009:

 
 Level 1 Level 2 Level 3 Total
 
 (in thousands)

Equity securities:

            
 

Domestic

   $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 & Poor's 500 Index movement of more than 100 basis points on the valuation date. Without this change, international equity securities would be classified as Level 1 in the fair value hierarchy.

        The following table summarizes the activity of plan assets categorized as Level 3 for the year ended December 31, 2009:2012:


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

  $-
  
 Private Equity
  
 (in thousands)
 

Balance at December 31, 2011

 $-
 

Purchases, issuances and settlements

  
1,772
 

Actual return on plan assets, sold during the period

  -
 

Proceeds from sales

  -
    
 

Balance at December 31, 2012

 $1,772
    

        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 Planexpected 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 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'splan's investment policy presents portfolio managers the opportunity to earn higher returns than other investment strategies that are restricted to owning lower returning assetsasset 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.


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

        The components of net periodic pension and other postretirement costs and the assumptions related to those costs consisted of the following for the years ended December 31, 2009, 20082012, 2011 and 2007:2010:

 
 Pension Benefits Other
Postretirement Benefits
 
 2009 2008 2007 2009 2008 2007
 
 (in thousands)

Components of net periodic benefit cost:

                  
 

Service cost

   $5,276  5,727  5,718  371  296  292
 

Interest cost

  6,387  6,326  5,490  343  262  244
 

Expected return on plan assets

  (6,428)  (8,614)  (6,442)      
 

Actuarial (gain) loss amortization

  1,595    808    (80)  (39)
 

Prior service cost amortization

  555  555  436  39  39  38
 

Transition obligation amortization

  5  5  5      
             
 

Net periodic benefit cost

   $7,390  3,999  6,015  753  517  535
             
 
 Pension Benefits Other
Postretirement Benefits
 
 2012 2011 2010 2012 2011 2010
 
 (in thousands)

Components of net periodic benefit cost:

                  

Service cost

 $9,373  7,101  6,140  693  558  443

Interest cost

  7,570  7,195  6,596  400  402  364

Expected return on plan assets

  (8,799)  (8,764)  (7,499)      

Actuarial loss amortization

  4,563  1,805  1,617  12    

Prior service cost amortization

  555  555  555  55  55  45

Transition obligation amortization

  5  5  5      
             

Net periodic benefit cost (1)

 $13,267  7,897  7,414  1,160  1,015  852
             
(1)
Net periodic pension benefit cost related to discontinued operations and included in the table above was $738 thousand, $525 thousand and $489 thousand for the years ended December 31, 2012, 2011 and 2010, respectively. Net periodic cost for the postretirement medical plan related to discontinued operations and included in the table above was $11 thousand, $18 thousand and $20 thousand for the years ended December 31, 2012, 2011 and 2010, respectively.

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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012, 2011 and 2010

        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 20102013 are $1.8$4.4 million, $555 thousand and $5 thousand, respectively. The estimated prior service cost for the postretirement medical plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 20102013 is $46$55 thousand.

 
 Pension Benefits Other
Postretirement Benefits
 
 2009 2008 2007 2009 2008 2007
Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:                  
 Discount rate  6.75%  6.75%  6.00%  6.75  6.75%  6.00%
 Expected return on plan assets  7.75%  7.75%  7.75%  Not applicable
 Rate of compensation increase  (1)  3.86%  3.86%  Not applicable
(1)
Rate of compensation increase was 0% for 2009, 2.5% for 2010 and 3.86% for 2011 and after.

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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 2008 and 2007

 
 Pension Benefits Other
Postretirement Benefits
 
 2012 2011 2010 2012 2011 2010
Weighted average assumptions used to determine net periodic benefit cost for the years ended December 31:                  

Discount rate

  4.99%  6.00%  6.25%  5.00%  6.00%  6.25%

Expected return on plan assets

  7.75%  7.75%  7.75%  Not applicable   

Rate of compensation increase

  4.04%  3.86%  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)

2010

   $4,581  258

2011

  7,187  332

2012

  6,971  388

2013

  7,600  438

2014

  9,806  447

2015 through 2019

  52,320  2,599
     

   $88,465  4,462
     
 
 Pension
Benefits
 Other
Postretirement
Benefits
 
 (in thousands)

2013

 $7,985  304

2014

  9,567  317

2015

  8,022  349

2016

  10,691  377

2017

  10,147  402

2018 through 2022

  60,647  2,961
     

 $107,059  4,710
     

        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 20092012, 2011 and 20082010 were voluntary. We anticipate that our 2010Contributions are not expected to exceed $20 million for 2013. A contribution of $10 million was made to ourthe Pension Plan will be made from cash generated from operations and will be in the range from $7.0 to $10.0 million, $5.0 million of which was contributed during January 2010.2013.

        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 20102013 expected contribution with cash generated from operations. Contributions by participants to the postretirement plan were $157$337 thousand, $359 thousand and $162$237 thousand for the years ended December 31, 20092012, 2011 and 2008,2010, respectively.

        For measurement purposes, the initial health care cost trend rate was 9%9.01% for 20092012, 9.51% for 2011 and 10% for 2008 and 2007.2010. The health care cost trend rate reflects anticipated increases in health care costs. The


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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012, 2011 and 2010

initial assumed growth rate of 9%9.01% for 20092012 is assumed to gradually decline over the next four15 years to a rate of 5% in the fourth year.4.5%. The effect of a 1% annual increase in assumed cost trend rates would increase the December 31, 20092012 accumulated postretirement benefit obligation by approximately $612$1.2 million, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2012 by approximately $180 thousand. The effect of a 1% annual decrease in assumed cost trend rates would decrease the December 31, 2012 accumulated postretirement benefit obligation by approximately $985 thousand, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 20092012 by approximately $105 thousand. The effect of a 1% annual decrease in assumed cost trend rates would decrease the December 31, 2009 accumulated postretirement benefit obligation by approximately $531 thousand, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2009 by approximately $89$150 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


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December 31, 2009, 2008 and 2007


Committee") credits participants' SERP accounts with (i) an amount equal to 4% of the executive's base salary, less the amount of the maximum employer matching contribution available under our 401(k) plan, and (ii) a non-formula award, if any, as determined by the Compensation Committee in its discretion. There were no discretionary awards made to participants during 2009.2012, 2011 or 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, 20092012 and 2008,2011, the aggregate liability to participants was $3.6 million and $3.5 million, respectively.$3.7 million.

        At December 31, 2009,2012, the accrued pension and postretirement liability recorded onin the consolidated balance sheet was comprised of accrued pension costs of $19.4$50.3 million, a liability for postretirement benefits in the amount of $5.7$8.5 million and an accrued liability for SERP benefits of $3.6$3.7 million. The current portion of postretirement liability of $0.3 million is included in other current liabilities on the balance sheet. At December 31, 2008,2011, the accrued pension and postretirement liability recorded on the balance sheet was comprised of accrued pension costs of $20.6$45.0 million, an accrued liability for SERP benefits of $3.5 million and a liability for postretirement benefits in the amount of $5.0$7.8 million and an accrued liability for SERP benefits of $3.7 million. The current portion of postretirement liability of $0.3 million is included in other current liabilities on the balance sheet.

12.11.   Employee Savings Plan

        We sponsor a defined contribution plan that qualifies under Section 401(k) of the Internal Revenue Code to provide retirement benefits to substantially all of our employees following the completion of an eligibility period. As allowed under Section 401(k), the plan provides tax-deferred salary deductions for eligible employees. Our matching contributions to the plan for the years ended December 31, 2009, 20082012, 2011 and 20072010 were $1.6$4.7 million, $4.0$4.5 million and $3.7$4.1 million, respectively.

13.   Stockholders' Equity

Earnings per Share

        For the years ended December 31, 2009, 2008 and 2007, earnings per share were computed as follows:

 
 2009 2008 2007
 
 (in thousands, except per share amounts)

Net income

   $105,505  96,163  125,497
       

Weighted average shares outstanding — basic

  85,484  85,761  83,975

Dilutive potential shares from stock options

  60  352  724
       

Weighted average shares outstanding — diluted

  85,544  86,113  84,699
       

Earnings per share:

         
 

Basic

   $1.23  1.12  1.49
 

Diluted

   $1.23  1.12  1.48

        Effective January 1, 2009, we adopted "Earnings Per Share Topic," ASC 260. This standard provides that unvested share-based payment awards that contain nonforfeitable rights to dividends are considered to be participating securities and must be included in the computation of earnings per share pursuant to the two-class method. As required upon adoption, we retrospectively adjusted prior year earnings per


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010


share data to conform to12.   Stockholders' Equity

Earnings per Share

        For the provisions of this standard. Stock options are included in the calculation of dilutedyears ended December 31, 2012, 2011 and 2010, earnings per share using the treasury stock method.from continuing operations were computed as follows:

 
 2012 2011 2010
 
 (in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations

 $192,528  172,205  153,428
       

Weighted average shares outstanding — basic

  
85,726
  
85,783
  
85,618

Dilutive potential shares from stock options

  2  10  29
       

Weighted average shares outstanding — diluted

  85,728  85,793  85,647
       

Earnings per share from continuing operations, basic and diluted

 $2.25  2.01  1.79

Anti-dilutive Securities

        There were no anti-dilutive options for the year ended December 31, 2012. Options to purchase 777 thousand shares, 68816 thousand shares and 659203 thousand shares of Class A common stock ("common stock") were excluded from the diluted earnings per share calculation for the years ended December 31, 2009, 20082011 and 2007,2010, respectively, because they were anti-dilutive.

Dividends

        We declared dividends on our common stock of $0.76$2.03 per share, $0.76$0.85 per share and $0.68$0.77 per share for the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively. The Board of Directors approved a special cash dividend on our common stock of $1.00 per share (included in the 2012 total above) that was paid on December 6, 2012, and an increase in the quarterly dividend on our common stock from $0.25 per share to $0.28 per share beginning with our fourth quarter 2012 dividend, paid on February 1, 2013. As of December 31, 20092012 and 2008,2011, other current liabilities included $16.3$24.0 million and $16.1$21.4 million, respectively, for dividends payable to stockholders.

Common Stock Repurchases

        The Board of Directors has authorized the repurchase of our common stock in the open market and/or private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in our stock-based compensation programs. There were 1,870,0341,536,968 shares, 3,779,9531,951,331 shares and 2,584,2162,043,545 shares repurchased in the open market or privately during the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively, which includes 327,301568,568 shares, 430,145494,207 shares and 234,162426,665 shares repurchased from employees who elected to tender shares to cover their minimum tax withholdings with respect to vesting of stock awards during the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively.

14.13.   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


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December 31, 2012, 2011 and 2010

restated (the "ESA Plan") and the Company 1998 Non-Employee Director Stock Award Plan, as amended and restated (the "NED Plan") (collectively, the "Stock Plans").

        The SI Plan allows us to grant equity compensation awards, including, among other awards, non-qualified stock options and nonvested stock as part of our overall compensation program to attract and retain key personnel and encourage a greater personal financial investment in the Company. All of the Stock Plans also allow us to grant non-qualified stock options and/or nonvested stock to promote the long-term growth of the Company. A maximum of 30,000,00030.0 million shares of common stock are authorized for issuance under the SI Plan. A maximum of 3,750,0003.75 million and 1,200,0001.2 million shares of common stock are authorized for issuance under the ESA Plan and NED Plan, respectively. In total, 11,834,8088,811,318 shares of common stock are available for issuance as of December 31, 20092012 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, or granted following the conversion of cash bonus amounts into stock options and/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.


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December 31, 2009, 2008 and 2007

        Under our Stock Plans, the exercise price of a stock option is equal to the closing market price of Company common stock on the date of grant. The maximum term of non-qualified options granted under the SI Plan is ten years and two days and the options generally vest in 331/3% increments on the second, third and fourth anniversaries of the grant date. The maximum term of non-qualified options granted under the ESA Plan and NED Plan is 11 years and the options generally vest 10% each year, beginning on the first anniversary of the grant date. Our Stock Plans include a Stock Option Restoration Program feature (the "SORP") that allows, on the first trading day of August, a holder to pay the exercise price on vested in-the-money options by surrendering common stock of the Company that has been owned for at least six months. This feature also permits a holder exercising an option to be granted new options in an amount equal to the number of common shares used to satisfy both the exercise price and withholding taxes due upon exercise. New options are granted with an expiration date equal to that of the original option and vest six months after the grant date. The SORP results in a net issuance of shares of common stock and fewer stock options outstanding. We receive a current income tax benefit for stock option exercises.

        Nonvested stock awards are valued on the date of grant, have no purchase price and generally vest over four years in 331/3% increments on the second, third and fourth anniversaries of the grant date. The Company also issues nonvested stock awards to our financial advisors (our sales force) who are independent contractors. These awards have the same terms as awards issued to employees; however, changes in the Company's share price result in variable compensation expense over the vesting period. Under the Stock Plans, nonvested shares are forfeited upon the termination of employment with or service to the Company, as applicable, or service on the Board of Directors, dependent upon the circumstances of termination. Except for restrictions placed on the transferability of nonvested stock, holders of nonvested stock have full stockholders' rights during the term of restriction, including voting rights and the rights to receive cash dividends.

(a)
Stock Options

        A summary of stock option activity and related information for the year ended December 31, 2009 follows:

 
 Options Weighted
average
exercise
price
 Weighted
average
remaining
contractual term
(in years)

Outstanding at December 31, 2008

  2,021,844   $23.44  1.40

Granted

       

Exercised

  (831,600)  17.00   

Granted in restoration

  6,502  28.01   

Exercised in restoration

  (6,793)  26.76   

Terminated/Canceled

  (292,450)  19.66   
        

Outstanding at December 31, 2009

  897,503   $30.65  1.12
        

Exercisable at December 31, 2009

  891,802   $30.67  1.12
        

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WADDELL & REED FINANCIAL, INC.

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December 31, 2009, 20082012, 2011 and 20072010

(a)
Stock Options

        A summary of stock option activity and related information for the year ended December 31, 2012 is presented in the table below. All options outstanding expire in 2013.

 
 Options Weighted
average
exercise
price
 Weighted
average
remaining
contractual term
(in years)

Outstanding at December 31, 2011

  27,595 $28.64  0.62

Granted

       

Exercised

  (5,000)  21.09   

Terminated/Canceled

  (16,224)  33.94   
        

Outstanding at December 31, 2012

  6,371 $21.09  0.50
        

Exercisable at December 31, 2012

  6,371 $21.09  0.50
        

        The aggregate intrinsic value of outstanding options and exercisable options as of December 31, 20092012 was $1.6 million.$87 thousand. The total intrinsic value (on date of exercise) of options exercised during the years ended December 31, 2009, 20082012, 2011 and 20072010 was $7.3 million, $9.4$72 thousand, $1.4 million and $31.9$2.0 million, respectively. The related income tax benefit recognized was $2.5 million, $3.3$26 thousand, $0.5 million and $11.6$0.6 million for the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively.

        SORP options with vesting periods of six months were the only options granted during 2009, 2008 and 2007. Compensation expense related to options issued under the SORP of $90 thousand, $217 thousand and $19 thousand was recorded for the years ended December 31, 2009, 2008 and 2007, respectively.

        The weighted average fair value of options granted during the years ended December 31, 2009, 2008 and 2007 were $8.68, $5.47 and $2.76, respectively. The grant date fair value of options granted has been calculated using a Black-Scholes option-pricing model with assumptions as follows:

 
 2009 2008 2007

Dividend yield

  2.71%  2.24%  2.70%

Risk-free interest rate

  0.88%  2.05%  4.57%

Expected volatility

  64.90%  32.10%  24.50%

Expected life (in years)

  1.79  1.89  1.21
(b)
Nonvested Stock

        A summary of nonvested share activity and related fair value for the year ended December 31, 20092012 follows:


 Nonvested Stock Shares Weighted Average Grant Date Fair Value Nonvested
Stock Shares
 Weighted
Average
Grant Date
Fair Value

Nonvested at December 31, 2008

 3,562,598   $25.92

Nonvested at December 31, 2011

 4,868,017 $31.52

Granted

 1,990,060 21.24 1,739,775 33.43

Vested

 (1,094,007) 23.60 (1,600,553) 27.89

Forfeited

 (22,807) 23.42 (93,159) 33.69
        

Nonvested at December 31, 2009

 4,435,844   $24.40

Nonvested at December 31, 2012

 4,914,080 $33.34
        

        For the years ended December 31, 2009, 20082012, 2011 and 2007,2010, compensation expense for continuing operations related to nonvested stock totaled $30.5$48.7 million, $29.0$45.4 million and $23.7$39.1 million, respectively. In 2009, we also recognized compensation expense of $400 thousand related to nonvested stock that was immediately vested for employees in connection with the divestiture of our investment in ACF. These costs are included in general and administrative expenses in the consolidated statement of income. In 2008, we recognized $795 thousand related to nonvested stock that was immediately vested under the voluntary separation program, discussed in Note 7 and included in general and administrative expense in the consolidated statement of income.

        The related income tax benefit was $11.2 million, $10.5 million and $8.6 million forFor the years ended December 31, 2009, 20082012, 2011, and 2007, respectively, which may be recognized upon vesting. As of2010, compensation expense for discontinued operations related to nonvested stock totaled $1.2 million, $1.1 million and $1.2 million, respectively.


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December 31, 2009, 20082012, 2011 and 20072010


        The related income tax benefit was $17.9 million, $16.7 million and $14.4 million for the years ended December 31, 2009,2012, 2011 and 2010, respectively. These benefits will be recognized upon vesting and may increase or decrease depending on the fair value of the shares on the date of vesting. As of December 31, 2012, the remaining unamortized expense of $73.0$107.2 million is expected to be recognized over a weighted average period of 2.52.3 years.

        The total fair value of shares vested (at vest date) during the years ended December 31, 2009, 20082012, 2011 and 20072010 was $23.3$53.5 million, $40.0$52.5 million and $21.0$46.5 million, respectively. The Company permits employees the right to tender a portion of their vested shares to the Company to satisfy the minimum tax withholding obligations of the Company with respect to vesting of the shares. During 2010,2013, we expect to repurchase approximately 435,000670 thousand shares from employees who elect to tender shares to cover their minimum tax withholdings.

        For nonvested stock awards granted prior to the adoption of "Compensation — Stock Compensation Topic," ASC 718, the Company will continue to recognize compensation expense over the contractual vesting period. Had compensation expense for nonvested stock awards issued prior to January 1, 2006 been determined based on the date a participant first becomes eligible for retirement, the Company's net income would have been increased by $66 thousand for the year ended December 31, 2009, increased by $372 thousand for the year ended December 31, 2008 and decreased by $45 thousand for the year ended December 31, 2007.

15.14.   Uniform Net Capital Rule Requirements

        ThreeTwo of our subsidiaries, Waddell & Reed, Inc. ("W&R"), Legend Equities Corporation ("LEC"), and Ivy Funds Distributor, Inc. ("IFDI") are registered broker/dealers and members of the Financial Industry Regulatory Authority. A third broker/dealer subsidiary, Legend Equities Corporation ("LEC"), was sold as part of the Legend transaction, effective January 1, 2013. 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, 20092012 or 2008.2011.

        Net capital and aggregated indebtedness information for our broker/dealer subsidiaries is presented in the following table as of December 31, 20092012 and 2008 (in thousands):2011:

 2012 2011

 2009 2008 (in thousands)

 W&R LEC IFDI W&R LEC IFDI W&R LEC IFDI W&R LEC IFDI

Net capital

   $21,579 1,948 17,093 7,494 2,148 25,108 $24,690 782 19,681 34,524 1,654 45,579

Required capital

 250 229 2,089 250 172 1,298 250 268 2,648 250 251 2,353
                        

Excess of required capital

   $21,329 1,719 15,004 7,244 1,976 23,810 $24,440 514 17,033 34,274 1,403 43,226
                        

Ratio of aggregate indebtedness to net capital

 Not
applicable
 1.76 to 1.0 1.83 to 1.0 Not
applicable
 1.20 to 1.0 0.78 to 1.0 

Not
applicable

 
5.14 to 1.0
 
2.02 to 1.0
 

Not
applicable

 
2.28 to 1.0
 
0.77 to 1.0

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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010

16.15.   Rental Expense and Lease Commitments

        We lease our home office buildings, certain sales and other office space and equipment under long-term operating leases. Rent expense was $22.0$21.9 million, $20.1$21.6 million and $18.6$21.5 million, for the years ended December 31, 2009, 20082012, 2011 and 2007,2010, respectively. Future minimum rental commitments under non-cancelable operating leases are as follows (in thousands):follows:

2010

   $18,440

2011

 15,738

2012

 13,245
Year
 Commitments

 (in thousands)

2013

 8,594 $20,498

2014

 5,424 16,749

2015

 13,249

2016

 10,164

2017

 7,149

Thereafter

 11,393 21,577
    

   $72,834 $89,386
    

        New leases are expected to be executed as existing leases expire. Thus, future minimum lease commitments are not expected to be lessmaterially different than those in 2009.2012.

17.16.   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 Ivy Funds VIP) and an accounting service agreement with each Fund. Certain of our officers and directors are also officers directors and/or trustees for the various Funds for which we act as an investment adviser. These agreements are approved or renewed on an annual basis by each Fund's board of directors/trustees, including a majority of the disinterested members. Funds and separate accounts receivable includes amounts due from the Funds for aforementioned services.

18.17.   Contingencies

        The Company is involved from time to time in various legal proceedings, regulatory investigations and claims incident to the normal conduct of business, which may include proceedings that are specific to us and others generally applicable to the business practices within the industries in which we operate. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and on the results of operations in a particular quarter or year.

        The Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable, and the amount can be reasonably estimated. These amounts are not reduced by amounts that may be recovered under insurance or claims against third parties, but undiscounted receivables from insurers or other third parties may be accrued separately. The Company regularly revises such accruals in


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December 31, 2012, 2011 and 2010

light of new information. For contingencies where an unfavorable outcome is reasonably possible and that are significant, the Company discloses the nature of the contingency and, where feasible, an estimate of the possible loss. For purposes of our litigation contingency disclosures, "significant" includes material matters as well as other items that management believes should be disclosed. Management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict.

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 anthis action filed December 28, 2009, the Company along with various of its affiliates, werewas sued in an individual action, class action and Fair Labor Standards Act ("FLSA") nationwide collective action by two


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December 31, 2009, 2008 and 2007


former advisors asserting misclassification of financial advisersadvisors as independent contractors.contractors instead of employees. Plaintiffs, on behalf of themselves and a purported class of Waddell & Reed, Inc. financial advisors, assert claims under the FLSA for minimum wages and overtime wages, and under California Labor Code Statutes for timely paypayment of wages, minimum wages, overtime compensation, meal periods, reimbursement of losses and business expenses and itemized wage statements and a claim for Unfair Business Practices under §17200 of the California Business & Professions Code. Plaintiffs seek declaratory and injunctive relief and monetary damages. As

        Plaintiffs moved for conditional collective action certification under the FLSA. The Company opposed this motion and additionally moved for summary judgment on Plaintiffs' individual FLSA claims. The Court issued an order on January 3, 2012 granting the Company's summary judgment motions, holding that Plaintiffs' individual FLSA claims fail as a matter of law, and denying Plaintiffs' motion for conditional collective action certification under the FLSA as moot. This ruling effectively removes all nationwide FLSA claims from the case.

        Subsequently, the Company moved for summary judgment on Plaintiffs' individual California claims. The Court issued an order on August 20, 2012 granting the Company's summary judgment motions, holding that Plaintiffs' individual California claims fail as a matter of law. This order effectively dismissed Plaintiffs from the case, both individually and as putative class representatives.

        However, in its August 20, 2012 order, the Court also granted Plaintiffs' motion to add a new individual and putative class representative to the action, effectively replacing the originally named Plaintiffs. The newly named Plaintiff continued to pursue the California claims referenced above on behalf of the putative class, as well as newly added representative derivative claims under the California Private Attorney General Act.

        The Company moved for summary judgment, asking the Court to dismiss the newly named Plaintiff's individual claims. The arguments made in support of this request were the same as those that prevailed in the Taylor and Young motions for summary judgment. On February 1, 2013, the Court issued an order granting the Company's summary judgment motion. This ruling effectively dismisses all remaining claims in the case in their entirety, pending appeal. No appeal has yet no responsive pleading has been filed, but thefiled. The Company intends to continue to vigorously contest plaintiffs' claims.

        Indefend 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,at appeal, 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.any.

19.   Selected Quarterly Information (Unaudited)

 
 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 


 
 Quarter 
 
 First Second Third Fourth 
 
 (in thousands)
 

2008

             
 

Total revenues

   $234,069  252,783  241,224  191,044 
 

Net income

  28,341  35,187  33,365  (730) (4)
 

Earnings per share:

             
  

Basic

   $0.33  0.41  0.39  (0.01) 
  

Diluted

   $0.33  0.40  0.39  (0.01) 

(1)
Includes a pre-tax charge of $3.7 million ($2.3 million net of tax) to reflect the "other than temporary" decline in value of certain of the Company's investments in affiliated mutual funds as the fair value of these investments had been below cost for an extended period.

(2)
Includes a pre-tax charge of $548 thousand ($395 thousand net of tax) for severance and other transaction costs in connection with the divestiture of our investment in ACF.

(3)
Includes a pre-tax charge of $543 thousand ($423 thousand net of tax) for severance and other transaction costs in connection with the divestiture of our investment in ACF; and tax benefits of

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WADDELL & REED FINANCIAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2009, 20082012, 2011 and 20072010

(4)
Includes a pre-tax charge of $16.5 million ($10.5 million net of tax) for restructuring charges consisting primarily of severance costs associated with our voluntary separation program as well as costs associated with terminating various projects under development; a charge of $7.2 million (not deductible for income tax purposes) to recognize the impairment of goodwill associated with ACF; additional amortization of our deferred sales commission asset of $6.5 million ($4.1 million net of tax) due to significant asset redemption activity and our review of the recoverability of our deferred sales commission asset; and a pre-tax charge of $2.1 million ($1.4 million net of tax) related to the settlement of miscellaneous litigation and other matters. These charges were offset by the reversal of bonus accruals of $7.9 million ($5.1 million net of tax) to reflect lower annual awards.Legend.

Table of Contents



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. 333-43687,001-13913, filed September 17, 2008February 25, 2011 and incorporated herein by reference.

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 28, 1999, by and between Waddell & Reed Financial, Inc. and Computershare Trust Company, N.A., as successor to First Chicago Trust Company of New York, which includes the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Company, as filed on May 13, 1999 with the Secretary of State of Delaware, as Exhibit A and the form of Rights Certificate as Exhibit B. Filed as Exhibit 4 to the Company's Quarterly Report on Form 10-Q, File No. 001-13913, for the quarter ended June 30, 1999 and incorporated herein by reference.

4.4


First Amendment to Rights Agreement, dated as of February 14, 2001, by and between Waddell & Reed Financial, Inc. and Computershare Trust Company, N.A., as successor to First Chicago Trust Company of New York. Filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2000 and incorporated herein by reference.

4.5


Rights Agreement, dated as of April 8, 2009, by and between Waddell & Reed Financial, Inc. and Computershare Trust Company, N.A., which includes the Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Company, as filed on April 9, 2009 with the Secretary of State of Delaware, as Exhibit A and the form of Rights Certificate as Exhibit B. Filed as Exhibit 4.2 to the Company's Current Report on Form 8-K, File No. 333-43687, on April 10, 2009 and incorporated herein by reference.

4.6


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.

Table of Contents


WADDELL & REED FINANCIAL, INC.

Index to Exhibits

Exhibit
No.
Exhibit Description



4.7First 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.

4.8


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.

4.94.5

 

Form of Indenture to be used in connection with the issuance of the SubordinatedSenior Debt Securities. Filed as Exhibit 4.74.4 to the Company's Form S-3/A,S-3ASR, File No. 333-43682,333-179111, on September 7, 2000January 20, 2012 and incorporated herein by reference.

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 and Marketing Services Agreement, dated as of October 20, 2008,January 1, 2012, 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.

10.4

 

Fund Participation Agreement, dated as of September 19, 2003, by and among Minnesota Life Insurance Company, Waddell & Reed, Inc. and Ivy Funds VIP. Filed as Exhibit 10.3 to the Company's Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2007 and incorporated herein by reference.

Table of Contents


WADDELL & REED FINANCIAL, INC.

Index to Exhibits

Exhibit
No.
 Exhibit Description

 

 

 
10.5 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.

10.6

 

Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2008 and incorporated herein by reference.*

10.7

 

Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated. Filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2011 and incorporated herein by reference.*

10.8


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.*

10.810.9


Waddell & Reed Financial, Inc. 1998 Executive Stock Award Plan, as amended and restated. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q, File No. 001-13913, for the quarter ended September 30, 2012 and incorporated herein by reference.*

10.10

 

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.*

10.910.11


Waddell & Reed Financial, Inc. 1998 Non-Employee Director Stock Award Plan, as amended and restated. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q, File No. 001-13913, for the quarter ended September 30, 2012 and incorporated herein by reference.*

10.12

 

Credit Agreement, dated as of October 6, 2008,August 31, 2010, by and among Waddell & Reed Financial, Inc., the Lenders,lenders party thereto, Bank of America, N.A. andas Administrative Agent, Bank of America Securities LLC.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. 333-43687,001-13913, on October 6, 2008September 7, 2010 and incorporated herein by reference.

10.1010.13

 

CreditNote Purchase Agreement, dated as of October 5, 2009,August 31, 2010, by and among Waddell & Reed Financial, Inc., and the Lenders, Bank of America, N.A. and Bank of America Securities LLC.purchasers party thereto. Filed as Exhibit 10.110.2 to the Company's Current Report on Form 8-K, File No. 333-43687,001-13913, on OctoberSeptember 7, 20092010 and incorporated herein by reference.

10.1110.14

 

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.

10.1210.15

 

Waddell & Reed Financial, Inc. Supplemental Executive Retirement Plan, as amended and restated. Filed as Exhibit 10.11 to the Company's Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2008 and incorporated herein by reference.*

Table of Contents

Exhibit
No.
Exhibit Description

10.13

 

10.16Waddell & Reed Financial, Inc. 2003 Executive Incentive Plan, as amended and restated. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, File No. 333-43687, on April 11, 2008 incorporated herein by reference.*

Table of Contents


WADDELL & REED FINANCIAL, INC.

Index to Exhibits

Exhibit
No.
Exhibit Description



10.14Form of Accounting Services Agreement, amended and restated as of July 1, 2003, by and between the Funds and Waddell & Reed Services Company. Filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2007 and incorporated herein by reference.

10.15


Accounting Services Agreement, dated January 30, 2009, by and between the Advisors Funds and Waddell & Reed Services Company.

10.16


Accounting and Administrative Services Agreement, dated August 25, 2004, as amended February 13, 2008, by and between the Ivy Funds portfolios and Waddell & Reed Services Company.*

10.17


Accounting and Administrative Services Agreement, dated November 29, 2006, by and between the Ivy Funds portfolios and Waddell & Reed Services Company.

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.

10.19


Accounting Services Agreement, dated April 30, 2009, by and between Ivy Funds VIP and Waddell & Reed Services Company.

10.20


Form of Investment Management Agreement, amended and restated as of November 9, 2005, by and between each of the Advisors Funds and Waddell & Reed Investment Management Company. Filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2007 and incorporated herein by reference.

10.21

 

Investment Management Agreement, dated January 30, 2009, by and between the Advisors Funds and Waddell & Reed Investment Management Company.

10.22


Investment Management Agreement, dated April 9, 2003, as amended February 13, 2008, by and between the Ivy Funds portfolios and Ivy Investment Management Company.

10.23


Investment Management Agreement, dated July 23, 2003, as amended November 12, 2008, by and between the Ivy Funds portfolios and Ivy Investment Management Company.

10.24


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.

10.25


Investment Management Agreement, amended as of November 9, 2005, by and between Ivy Funds VIP and Waddell & Reed, Inc., assigned to Waddell & Reed Investment Management Company. Filed as Exhibit 10.1510.21 to the Company's Annual Report on Form 10-K, File No. 333-43687,001-13913, for the year ended December 31, 20072009 and incorporated herein by reference.

Table of Contents


WADDELL & REED FINANCIAL, INC.

Index to Exhibits

Exhibit
No.
Exhibit Description



10.26Investment Management Agreement, dated April 10, 2009, by and between Ivy Funds VIP and Waddell & Reed Investment Management Company.

10.2710.18

 

Investment Management Agreement, dated April 10, 2009, by and between Ivy Funds VIP and Waddell & Reed Investment Management Company.

10.28


Form of Shareholder Servicing Agreement, amended as of August 22, 2001, by and between each of the Advisors Funds or the Ivy Funds and Waddell & Reed Services Company. Filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2007 and incorporated herein by reference.

10.29


Shareholder Servicing Agreement, dated January 30, 2009, by and between the Advisors Funds and Waddell & Reed Services Company.

10.30


Shareholder Servicing Agreement, dated April 9, 2003, as amended May 31, 2009, by and between the Ivy Funds portfolios and Waddell & Reed Services Company.

10.31


Shareholder Servicing Agreement, dated April 1, 1996, as amended May 31, 2009, by and between Ivy Funds, Inc. and Waddell & Reed Services Company.

10.32


Form of Underwriting Agreement, by and between each of the Advisors Funds and Waddell & Reed, Inc. Filed as Exhibit 10.3510.26 to the Company's Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 19982009 and incorporated herein by reference.

10.3310.19

 

Form of Amendment to UnderwritingInvestment Management Agreement, dated July 24, 2002,April 10, 2009, by and between each of the AdvisorsIvy Funds VIP and Waddell & Reed Inc.Investment Management Company. Filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2009 and incorporated herein by reference.

10.20


Investment Management Agreement, dated November 13, 2008, by and between Ivy Funds and Ivy Investment Management Company. Filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K, File No. 333-43687,001-13913, for the year ended December 31, 20072011 and incorporated herein by reference.

10.3410.21

 

UnderwritingInvestment Management Agreement, dated JanuaryApril 30, 2009, by and between the Advisors FundsWaddell & Reed InvestEd Portfolios and Waddell & Reed Inc.Investment Management Company.

10.35


Underwriting Agreement, dated April 15, 2009, by and between Ivy Funds VIP and Waddell & Reed, Inc.

10.36


Distribution Agreement, amended and restated as of September 3, 2003, by and between Ivy Funds, Inc. and Waddell & Reed, Inc., assigned to Ivy Funds Distributor, Inc. Filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2007 and incorporated herein by reference.

10.37


Distribution Agreement, dated September 3, 2003, by and between the Ivy Funds portfolios and Ivy Funds Distributor, Inc.

Table of Contents


WADDELL & REED FINANCIAL, INC.

Index to Exhibits

Exhibit
No.
Exhibit Description



10.38Form of Distribution and Service Plan, amended and restated as of November 29, 2006, by and between each of the Advisors Funds or Ivy Funds and Waddell & Reed, Inc. or Ivy Funds Distributor, Inc., respectively. Filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2007 and incorporated herein by reference.

10.39


Distribution and Service Plan, effective January 30, 2009, for the Advisors Funds Class A shares.

10.40


Distribution and Service Plan, effective January 30, 2009, for the Advisors Funds Class B shares.

10.41


Distribution and Service Plan, effective January 30, 2009, for the Advisors Funds Class C shares.

10.42


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.

10.43


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.

10.44


Distribution and Service Plan, amended and restated May 18, 2009, for Ivy Funds, Inc. Class A, Class B, Class C, Class E, Class R and Class Y Shares.

10.45


Service Plan, revised as of May 16, 2001, by and between Ivy Funds VIP and Waddell & Reed, Inc. Filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2007 and incorporated herein by reference.

10.46


Ivy Funds VIP Service Plan, dated April 30, 2009.

10.47


Master Business Management and Investment Advisory Agreement, dated December 31, 2002, as amended August 26, 2009, by and between the Ivy Funds portfolios and Ivy Investment Management Company (formerly, Waddell & Reed Ivy Investment Company).

10.4810.22

 

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.

10.4910.23

 

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 26,27, 2005 and incorporated herein by reference.

Table of Contents


WADDELL & REED FINANCIAL, INC.

Index to Exhibits

Exhibit
No.
Exhibit Description

10.24

 

10.50Form 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.*

10.5110.25

 

First Amendment to Change in Control Employment Agreement, dated December 17, 2008, by and between Henry J. Herrmann and Waddell & Reed Financial, Inc. Filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K, File No. 333-43687, for the year ended December 31, 2008 and incorporated herein by reference.*

10.5210.26

 

Second Amendment to Change in Control Employment Agreement, dated December 17, 2009, by and between Henry J. Herrmann and Waddell & Reed Financial, Inc. Filed as Exhibit 10.52 to the Company's Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2009 and incorporated herein by reference.*

Table of Contents

Exhibit
No.
Exhibit Description

10.53

 

10.27Form 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.*

10.54


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.*

10.55


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.*

10.5610.28

 

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 reference.*

10.5710.29

 

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. 333-43687,001-13913, for the quarter ended March 31, 2009 and incorporated herein by reference.*

10.5810.30

 

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 10.410.28 to the Company's CurrentAnnual Report on Form 8-K,10-K, File No. 333-43687, on March 7, 2005001-13913, for the year ended December 31, 2011 and incorporated herein by reference.*

Table of Contents


WADDELL & REED FINANCIAL, INC.

Index to Exhibits

Exhibit
No.
Exhibit Description



10.59Form 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.*

10.6010.31

 

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.*

10.61


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.*

10.62


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.*

10.63


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.*

10.6410.32

 

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. 333-43687,001-13913, for the quarter ended September 30, 20072012 and incorporated herein by reference.*

10.65


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 *

10.66


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.*

10.67


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.*

Table of Contents


WADDELL & REED FINANCIAL, INC.

Index to Exhibits

Exhibit
No.
Exhibit Description



10.68Form 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.*

10.6910.33

 

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.*

10.7010.34

 

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. 333-43687,001-13913, for the quarter ended September 30, 20072012 and incorporated herein by reference.*

10.7110.35

 

Form of Non-Qualified Stock Option Grant AgreementPortfolio Managers Revenue Sharing Plan for awards pursuant to the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, as amended and restated.Flow Accounts. Filed as Exhibit 10.3310.64 to the Company's Annual Report on Form 10-K, File No. 333-43687,001-13913, for the year ended December 31, 20072010 and incorporated herein by reference.*

10.7210.36

 

First Amendment to the Waddell & Reed Financial, Inc. Non-Qualified Stock Option Grant Agreement, dated November 7, 2007, by and between Waddell & Reed Financial, Inc. and Henry J. Herrmann.Portfolio Managers Revenue Sharing Schedule. Filed as Exhibit 10.3410.65 to the Company's Annual Report on Form 10-K, File No. 333-43687,001-13913, for the year ended December 31, 20072010 and incorporated herein by reference.*

10.7310.37

 

Portfolio Managers Revenue Sharing Schedule—Large Cap Growth. Filed as Exhibit 10.36 to the Company's Annual Report on Form 10-K, File No. 001-13913, for the year ended December 31, 2011 and incorporated herein by reference.*

Table of Contents

Exhibit
No.
Exhibit Description



10.38Form of Indemnification Agreement. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, File No. 001-13913, on November 16, 2009 and incorporated herein by reference.*

10.39


2012 Performance Goals established pursuant to the Waddell & Reed Financial, Inc. 2003 Executive Incentive Plan, as amended and restated. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, File No. 333-43687,001-13913, on February 19, 200916, 2012 and incorporated herein by reference.*

10.7410.40

 

20102013 Performance Goals established pursuant to the Waddell & Reed Financial, Inc. 2003 Executive Incentive Plan, as amended and restated. Filed as Exhibit 10.1 to the Company's Current Report on Form 8-K, File No. 333-43687,001-13913, on February 19, 20102013 and incorporated herein by reference.*

10.7510.41

 

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.

10.7610.42

 

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.

10.7710.43

 

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.

Table of Contents


WADDELL & REED FINANCIAL, INC.

Index to Exhibits

Exhibit
No.
Exhibit Description

11

 

11Statement regarding computation of per share earnings.earnings

12

 

Statement re computation of ratios of earnings to fixed charges.charges

21

 

Subsidiaries of Waddell & Reed Financial, Inc.

23

 

Consent of KPMG LLP.LLP

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer.Officer

31.2

 

Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer.Officer

32.1

 

Section 1350 Certification of the Chief Executive Officer.Officer

32.2

 

Section 1350 Certification of the Chief Financial Officer.Officer

101


Materials from the Waddell & Reed Financial, Inc. Annual Report on Form 10-K for the year ended December 31, 2012, formatted in Extensible Business Reporting Language (XBRL): (i)  Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) related Notes to the Consolidated Financial Statements, tagged in detail.

*
Indicates management contract or compensatory plan, contract or arrangement.