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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2011

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                                      to                                 

 

Commission file number 001-13913

 

WADDELL & REED FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

51-0261715

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

 

6300 Lamar Avenue

Overland Park, Kansas  66202

(Address, including zip code, of Registrant’s principal executive offices)

 

(913) 236-2000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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 x No o.

 

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 x

 

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 x.

 

Shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date:

 

Class

 

Outstanding as of April 21, 2011

Class A common stock, $.01 par value

 

86,345,893

 

 

 



Table of Contents

 

WADDELL & REED FINANCIAL, INC.

INDEX TO QUARTERLY REPORT ON FORM 10-Q

Quarter Ended March 31, 2011

 

 

 

 

Page No.

Part I.

Financial Information

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2011 and December 31, 2010

3

 

 

 

 

 

 

Consolidated Statements of Income for the three months ended March 31, 2011 and March 31, 2010

4

 

 

 

 

 

 

Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2011

5

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2011 and March 31, 2010

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and March 31, 2010

7

 

 

 

 

 

 

Notes to the Unaudited Consolidated Financial Statements

8

 

 

 

 

Item 2.

 

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

16

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

25

 

 

 

 

Item 4.

 

Controls and Procedures

25

 

 

 

 

Part II.

Other Information

 

 

 

 

 

Item 1.

 

Legal Proceedings

26

 

 

 

 

Item 1A.

 

Risk Factors

26

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

26

 

 

 

 

Item 6.

 

Exhibits

27

 

 

 

 

 

 

Signatures

28

 

2



Table of Contents

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(unaudited)

 

 

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

203,004

 

195,315

 

Cash and cash equivalents - restricted

 

78,864

 

81,197

 

Investment securities

 

221,020

 

192,611

 

Receivables:

 

 

 

 

 

Funds and separate accounts

 

28,847

 

27,234

 

Customers and other

 

91,015

 

84,422

 

Deferred income taxes

 

7,739

 

10,622

 

Income taxes receivable

 

 

4,336

 

Prepaid expenses and other current assets

 

12,393

 

9,313

 

Total current assets

 

642,882

 

605,050

 

Property and equipment, net

 

72,799

 

71,248

 

Deferred sales commissions, net

 

68,292

 

64,710

 

Goodwill and identifiable intangible assets

 

221,210

 

221,210

 

Other non-current assets

 

15,001

 

14,713

 

Total assets

 

$

1,020,184

 

976,931

 

Liabilities:

 

 

 

 

 

Accounts payable

 

$

38,113

 

40,836

 

Payable to investment companies for securities

 

122,745

 

117,596

 

Accrued compensation

 

33,754

 

37,555

 

Income taxes payable

 

13,757

 

 

Other current liabilities

 

89,466

 

85,955

 

Total current liabilities

 

297,835

 

281,942

 

Long-term debt

 

190,000

 

189,999

 

Accrued pension and postretirement costs

 

13,984

 

22,492

 

Deferred income taxes

 

2,174

 

4,729

 

Other non-current liabilities

 

19,819

 

20,608

 

Total liabilities

 

523,812

 

519,770

 

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; 85,743 shares outstanding (85,751 shares outstanding at December 31, 2010)

 

997

 

997

 

Additional paid-in capital

 

212,598

 

201,442

 

Retained earnings

 

647,291

 

618,813

 

Cost of 13,958 common shares in treasury (13,950 at December 31, 2010)

 

(348,622

)

(346,064

)

Accumulated other comprehensive loss

 

(15,892

)

(18,027

)

Total stockholders’ equity

 

496,372

 

457,161

 

Total liabilities and stockholders’ equity

 

$

1,020,184

 

976,931

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3



Table of Contents

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Income

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

 

 

 

For the three months

 

 

 

ended March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

Investment management fees

 

$

131,644

 

109,663

 

Underwriting and distribution fees

 

132,763

 

113,136

 

Shareholder service fees

 

32,167

 

28,815

 

 

 

 

 

 

 

Total

 

296,574

 

251,614

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Underwriting and distribution

 

152,004

 

133,866

 

Compensation and related costs (including share-based compensation of $9,868 and $8,823, respectively)

 

40,475

 

32,925

 

General and administrative

 

17,631

 

15,686

 

Subadvisory fees

 

8,080

 

7,072

 

Depreciation

 

3,604

 

3,445

 

 

 

 

 

 

 

Total

 

221,794

 

192,994

 

 

 

 

 

 

 

Operating income

 

74,780

 

58,620

 

Investment and other income

 

1,003

 

891

 

Interest expense

 

(2,900

)

(3,558

)

 

 

 

 

 

 

Income before provision for income taxes

 

72,883

 

55,953

 

Provision for income taxes

 

27,250

 

20,044

 

 

 

 

 

 

 

Net income

 

$

45,633

 

35,909

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

Basic

 

$

0.53

 

0.42

 

Diluted

 

$

0.53

 

0.42

 

 

 

 

 

 

 

Weighted average shares outstanding:

 

 

 

 

 

Basic

 

85,814

 

85,629

 

Diluted

 

85,836

 

85,675

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4



Table of Contents

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

 

Consolidated Statement of  Stockholders’ Equity

For the Three Months Ended March 31, 2011

(Unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

Total

 

 

 

Common Stock

 

Paid-in

 

Retained

 

Treasury

 

Comprehensive

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

Stock

 

Income (Loss)

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2010

 

99,701

 

$

997

 

201,442

 

618,813

 

(346,064

)

(18,027

)

457,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

45,633

 

 

 

45,633

 

Recognition of equity compensation

 

 

 

9,868

 

 

 

 

9,868

 

Issuance of nonvested shares and other

 

 

 

(548

)

 

548

 

 

 

Dividends accrued, $0.20 per share

 

 

 

 

(17,155

)

 

 

(17,155

)

Exercise of stock options

 

 

 

917

 

 

3,619

 

 

4,536

 

Excess tax benefits from share-based payment arrangements

 

 

 

919

 

 

 

 

919

 

Repurchase of common stock

 

 

 

 

 

(6,725

)

 

(6,725

)

Unrealized appreciation on available for sale investment securities

 

 

 

 

 

 

1,134

 

1,134

 

Valuation allowance on investment securities’ deferred tax asset

 

 

 

 

 

 

659

 

659

 

Pension and postretirement benefits

 

 

 

 

 

 

342

 

342

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2011

 

99,701

 

$

997

 

212,598

 

647,291

 

(348,622

)

(15,892

)

496,372

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5



Table of Contents

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)

 

 

 

For the three months

 

 

 

ended March 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Net income

 

$

45,633

 

35,909

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net unrealized appreciation of investment securities during the period, net of income taxes of $662 and $437, respectively

 

1,134

 

752

 

 

 

 

 

 

 

Valuation allowance on investment securities’ deferred tax asset during the period

 

659

 

 

 

 

 

 

 

 

Pension and postretirement benefits, net of income taxes of $195 and $220, respectively

 

342

 

373

 

 

 

 

 

 

 

Reclassification adjustment for amounts included in net income, net of income taxes of $(21)

 

 

(36

)

 

 

 

 

 

 

Comprehensive income

 

$

47,768

 

36,998

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6



Table of Contents

 

WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited, in thousands)

 

 

 

For the three months

 

 

 

ended March 31,

 

 

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

45,633

 

35,909

 

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

 

 

 

 

 

Depreciation and amortization

 

3,629

 

3,393

 

Amortization of deferred sales commissions

 

13,381

 

14,450

 

Share-based compensation

 

9,868

 

8,823

 

Excess tax benefits from share-based payment arrangements

 

(919

)

(512

)

Net purchases and sales of trading securities

 

(2,294

)

(310

)

Unrealized gain on trading securities

 

(738

)

(697

)

Loss on sale and retirement of property and equipment

 

10

 

32

 

Capital gains and dividends reinvested

 

 

(203

)

Deferred income taxes

 

131

 

(1,810

)

Changes in assets and liabilities:

 

 

 

 

 

Cash and cash equivalents - restricted

 

2,333

 

(10,840

)

Receivables from funds and separate accounts

 

(1,613

)

408

 

Other receivables

 

(6,593

)

100,496

 

Other assets

 

(3,368

)

(476

)

Deferred sales commissions

 

(16,963

)

(17,373

)

Accounts payable and payable to investment companies

 

2,426

 

(96,287

)

Other liabilities

 

9,965

 

4,658

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

54,888

 

39,661

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of available for sale investment securities

 

(23,607

)

(10,000

)

Proceeds from sales and maturities of available for sale investment securities

 

 

185

 

Additions to property and equipment

 

(5,164

)

(3,750

)

 

 

 

 

 

 

Net cash used in investing activities

 

$

(28,771

)

(13,565

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Debt repayment

 

 

(9,996

)

Dividends paid

 

(17,158

)

(16,308

)

Repurchase of common stock

 

(6,725

)

(13,652

)

Exercise of stock options

 

4,536

 

5,480

 

Excess tax benefits from share-based payment arrangements

 

919

 

512

 

 

 

 

 

 

 

Net cash used in financing activities

 

$

(18,428

)

(33,964

)

Net increase (decrease) in cash and cash equivalents

 

7,689

 

(7,868

)

Cash and cash equivalents at beginning of period

 

195,315

 

244,359

 

Cash and cash equivalents at end of period

 

$

203,004

 

236,491

 

 

See accompanying notes to unaudited consolidated financial statements.

 

7



Table of Contents

 

WADDELL & REED FINANCIAL, INC.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.              Description of Business and Significant Accounting Policies

 

Waddell & Reed Financial, Inc. and Subsidiaries

 

Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as the “Company,” “we,” “our” and “us”) derive revenues from investment management, investment product underwriting and distribution, and shareholder services administration provided to the Waddell & Reed Advisors Group of Mutual Funds (the “Advisors Funds”), Ivy Funds (the “Ivy Funds”), Ivy Funds Variable Insurance Portfolios (the “Ivy Funds VIP”), and Waddell & Reed InvestEd Portfolios (“InvestEd”) (collectively, the Advisors Funds, Ivy Funds, Ivy Funds VIP and InvestEd are referred to as the “Funds”), and institutional and separately managed accounts.  The Funds and the institutional and separately managed accounts operate under various rules and regulations set forth by the United States Securities and Exchange Commission (the “SEC”). Services to the Funds are provided under investment management agreements, underwriting agreements and shareholder servicing and accounting service agreements that set forth the fees to be charged for these services. The majority of these agreements are subject to annual review and approval by each Fund’s board of trustees and shareholders. Our revenues are largely dependent on the total value and composition of assets under management.  Accordingly, fluctuations in financial markets and composition of assets under management can significantly impact revenues and results of operations.

 

Basis of Presentation

 

We have prepared the accompanying unaudited consolidated financial statements included herein pursuant to the rules and regulations of the SEC.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to enable a reasonable understanding of the information presented.  The information in this Quarterly Report on Form 10-Q should be read in conjunction with Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”).

 

The accompanying unaudited consolidated financial statements are prepared consistently with the accounting policies described in Note 2 to the consolidated financial statements included in our 2010 Form 10-K, which include the following: use of estimates, cash and cash equivalents, disclosures about fair value of financial instruments, investment securities and investments in mutual funds, property and equipment, software developed for internal use, goodwill and identifiable intangible assets, deferred sales commissions, revenue recognition, advertising and promotion, share-based compensation, accounting for income taxes and derivatives and hedging activities.

 

In our opinion, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only a normal and recurring nature) necessary to present fairly our financial position at March 31, 2011, the results of operations for the three months ended March 31, 2011 and 2010, and cash flows for the three months ended March 31, 2011 and 2010 in conformity with accounting principles generally accepted in the United States.

 

8



Table of Contents

 

2.              Cash and Cash Equivalents

 

Cash and cash equivalents include cash on hand and short-term investments.  We consider all highly liquid investments with maturities upon acquisition of 90 days or less 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.

 

3.              Investment Securities

 

Investment securities at March 31, 2011 and December 31, 2010 are as follows:

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

March 31, 2011

 

cost

 

gains

 

losses

 

Fair value

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

U.S. treasury bills

 

$

69,953

 

 

 

69,953

 

Mortgage-backed securities

 

10

 

2

 

 

12

 

Municipal bonds

 

2,730

 

 

(212

)

2,518

 

Corporate bonds

 

10,616

 

 

 

10,616

 

Mutual funds

 

28,633

 

7,491

 

(43

)

36,081

 

 

 

$

111,942

 

7,493

 

(255

)

119,180

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

 

 

 

 

 

4,997

 

U.S. treasury bills

 

 

 

 

 

 

 

47,967

 

Mortgage-backed securities

 

 

 

 

 

 

 

71

 

Municipal bonds

 

 

 

 

 

 

 

483

 

Corporate bonds

 

 

 

 

 

 

 

5,318

 

Common stock

 

 

 

 

 

 

 

246

 

Mutual funds

 

 

 

 

 

 

 

42,758

 

 

 

 

 

 

 

 

 

101,840

 

 

 

 

 

 

 

 

 

 

 

Total investment securities

 

 

 

 

 

 

 

221,020

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

December 31, 2010

 

cost

 

gains

 

losses

 

Fair value

 

 

 

(in thousands)

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

U.S. treasury bills

 

$

56,961

 

 

 

56,961

 

Mortgage-backed securities

 

10

 

2

 

 

12

 

Municipal bonds

 

2,729

 

 

(185

)

2,544

 

Mutual funds

 

28,633

 

5,662

 

(37

)

34,258

 

 

 

$

88,333

 

5,664

 

(222

)

93,775

 

 

 

 

 

 

 

 

 

 

 

Trading securities:

 

 

 

 

 

 

 

 

 

Commercial paper

 

 

 

 

 

 

 

4,997

 

U.S. treasury bills

 

 

 

 

 

 

 

60,958

 

Mortgage-backed securities

 

 

 

 

 

 

 

73

 

Municipal bonds

 

 

 

 

 

 

 

487

 

Corporate bonds

 

 

 

 

 

 

 

50

 

Common stock

 

 

 

 

 

 

 

201

 

Mutual funds

 

 

 

 

 

 

 

32,070

 

 

 

 

 

 

 

 

 

98,836

 

 

 

 

 

 

 

 

 

 

 

Total investment securities

 

 

 

 

 

 

 

192,611

 

 

Purchases and sales of trading securities during the three months ended March 31, 2011 were $15.3 million and $13.0 million, respectively.

 

9



Table of Contents

 

A summary of available for sale debt securities and mutual funds with fair values below carrying values at March 31, 2011 and December 31, 2010 is as follows:

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

March 31, 2011

 

Fair value

 

losses

 

value

 

losses

 

value

 

losses

 

 

 

(in thousands)

 

Municipal bonds

 

$

 

 

2,518

 

(212

)

2,518

 

(212

)

Mutual funds

 

802

 

(18

)

315

 

(25

)

1,117

 

(43

)

Total temporarily impaired securities

 

$

802

 

(18

)

2,833

 

(237

)

3,635

 

(255

)

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

 

 

 

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

December 31, 2010

 

Fair value

 

losses

 

value

 

losses

 

value

 

losses

 

 

 

(in thousands)

 

Municipal bonds

 

$

 

 

2,544

 

(185

)

2,544

 

(185

)

Mutual funds

 

810

 

(10

)

313

 

(27

)

1,123

 

(37

)

Total temporarily impaired securities

 

$

810

 

(10

)

2,857

 

(212

)

3,667

 

(222

)

 

Based upon our assessment of these municipal bonds and mutual funds, the time frame investments have been in a loss position, our intent to hold mutual funds until they have recovered and our history of holding bonds until maturity, we determined that a write-down was not necessary at March 31, 2011.

 

Mortgage-backed securities, U.S. treasury bills, municipal bonds and corporate bonds accounted for as available for sale and held as of March 31, 2011 mature as follows:

 

 

 

Amortized
cost

 

Fair value

 

 

 

(in thousands)

 

Within one year

 

$

69,953

 

69,953

 

After one year but within 10 years

 

12,355

 

12,282

 

After 10 years

 

1,001

 

864

 

 

 

$

83,309

 

83,099

 

 

Mortgage-backed securities, commercial paper, U.S. treasury bills, municipal bonds and corporate bonds accounted for as trading and held as of March 31, 2011 mature as follows:

 

 

 

Fair value

 

 

 

(in thousands)

 

Within one year

 

$

52,964

 

After one year but within 10 years

 

5,801

 

After 10 years

 

71

 

 

 

$

58,836

 

 

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We determine the fair value of our investments using broad levels of inputs as defined by related accounting standards as follows:

 

·                  Level 1 — Investments are valued using quoted prices in active markets for identical securities at the reporting date.  Assets classified as Level 1 include mutual funds classified as available for sale and mutual funds and common stock classified as trading.

 

·                  Level 2 — Investments are valued using other significant observable inputs, including quoted prices in active markets for similar securities.  Assets classified as Level 2 include mortgage-backed securities, municipal bonds and corporate bonds.

 

·                  Level 3 — Investments are valued using significant unobservable inputs, including the Company’s own assumptions in determining the fair value of investments.

 

The following table summarizes our investment securities recognized on our balance sheet using fair value measurements based on the differing levels of inputs:

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

Level 1

 

$

202,002

 

189,445

 

Level 2

 

19,018

 

3,166

 

Level 3

 

 

 

Total

 

$

221,020

 

192,611

 

 

4.              Goodwill and Identifiable Intangible Assets

 

Goodwill represents the excess of the 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) are as follows:

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

 

 

 

 

 

 

Goodwill

 

$

202,518

 

202,518

 

Accumulated amortization

 

(36,307

)

(36,307

)

Total goodwill

 

166,211

 

166,211

 

 

 

 

 

 

 

Mutual fund management advisory contracts

 

38,699

 

38,699

 

Mutual fund subadvisory management contracts

 

16,300

 

16,300

 

Total identifiable intangible assets

 

54,999

 

54,999

 

 

 

 

 

 

 

Total

 

$

221,210

 

221,210

 

 

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5.              Indebtedness

 

On January 13, 2006, the Company issued $200.0 million in principal amount 5.60% senior notes due 2011 (the “Notes”) resulting in net proceeds of approximately $198.2 million (net of discounts, commissions and estimated expenses).  Interest was payable semi-annually on January 15 and July 15 at a fixed rate of 5.60% per annum.  During the first quarter of 2010, we repurchased $10.0 million of the Notes.

 

On August 31, 2010, the Company entered into an agreement to complete a $190.0 million private placement of senior unsecured notes that were issued and sold in two tranches:  $95.0 million bearing interest at 5% and maturing January 13, 2018 (the “Series A Notes”) and $95.0 million bearing interest of 5.75% and maturing January 13, 2021 (the “Series B Notes”) (collectively, the “Senior Notes”).  The agreement contained a delayed funding provision that allowed the Company to draw down the proceeds in January 2011 when the Notes matured.  The Company used the proceeds of the issuance and sale of the Senior Notes to repay in full the Notes.  Interest is payable semi-annually in January and July of each year.  The most restrictive provisions of the 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.

 

Debt is reported at its carrying amount on the consolidated balance sheet.  The fair value of the Company’s outstanding indebtedness is approximately $186.2 million as of March 31, 2011 compared to the carrying value of $190.0 million.  The following is a summary of long-term debt at March 31, 2011 and December 31, 2010:

 

 

 

March 31,

 

December 31,

 

 

 

2011

 

2010

 

 

 

(in thousands)

 

Principal amount unsecured 5.0% senior notes due in 2018

 

$

95,000

 

 

Principal amount unsecured 5.75% senior notes due in 2021

 

95,000

 

 

Principal amount unsecured 5.60% senior notes due in 2011

 

 

190,000

 

Discount on unsecured 5.60% senior notes due in 2011

 

 

(1

)

Total

 

$

190,000

 

189,999

 

 

6.              Income Tax Uncertainties

 

As of January 1, 2011 and March 31, 2011, the Company had unrecognized tax benefits, including penalties and interest, of $6.6 million ($4.6 million net of federal benefit) and $6.9 million ($4.8 million net of federal benefit), respectively, that if recognized, would impact the Company’s effective tax rate.  Unrecognized tax benefits that are not expected to be settled within the next 12 months are included in other liabilities in the consolidated balance sheets; unrecognized tax benefits that are expected to be settled within the next 12 months are included in income taxes payable.

 

The Company’s accounting policy with respect to interest and penalties related to income tax uncertainties is to classify these amounts as income taxes.  As of January 1, 2011, the total amount of accrued interest and penalties related to uncertain tax positions recognized in the consolidated balance sheet was $1.9 million ($1.5 million net of federal benefit).  The total amount of penalties and interest, net of federal benefit, related to income tax uncertainties recognized in the statement of income for the three month period ended March 31, 2011 was $50 thousand.  The total amount of accrued penalties and interest related to uncertain tax positions at March 31, 2011 of $1.9 million ($1.5 million net of federal benefit) is included in the total unrecognized tax benefits described above.

 

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.  The 2007, 2008, 2009 and 2010 federal income tax returns are open tax years that remain subject to potential future audit. The 2005 and 2006 federal tax years also remain open to a limited extent due to capital loss carryback claims.  State income tax returns for all years after

 

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2006, and in certain states, income tax returns for 2005 and 2006, are subject to potential future audit by tax authorities in the Company’s major state tax jurisdictions.

 

The Company is currently being audited in various state jurisdictions.  It is reasonably possible that the Company will settle the audits in these jurisdictions within the next 12-month period.  It is estimated that the Company’s liability for unrecognized tax benefits, including penalties and interest, could decrease by approximately $0.7 million to $1.7 million ($0.5 million to $1.2 million net of federal benefit) upon settlement of these audits.  Such settlements are not anticipated to have a significant impact on the results of operations.

 

7.     Pension Plan and Postretirement Benefits Other Than Pension

 

We provide a non-contributory retirement plan that covers substantially all employees and certain vested employees of our former parent company (the “Pension Plan”).  Benefits payable under the Pension Plan are based on employees’ years of service and compensation during the final ten years of employment.  We also sponsor an unfunded defined benefit postretirement medical plan that covers substantially all employees, including Waddell & Reed and Legend advisors.  The medical plan is contributory with retiree contributions adjusted annually.  The medical plan does not provide for post age 65 benefits with the exception of a small group of employees that were grandfathered when such plan was established.

 

The components of net periodic pension and other postretirement costs related to these plans are as follows:

 

 

 

Pension Benefits

 

Other Postretirement
Benefits

 

 

 

Three months ended
March 31,

 

Three months ended
March 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands)

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,701

 

1,509

 

139

 

110

 

Interest cost

 

1,737

 

1,698

 

101

 

91

 

Expected return on plan assets

 

(2,186

)

(1,892

)

 

 

Actuarial loss amortization

 

384

 

441

 

 

 

Prior service cost amortization

 

139

 

139

 

14

 

12

 

Transition obligation amortization

 

1

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,776

 

1,896

 

254

 

213

 

 

During the three months ended March 31, 2011, we made a $10.0 million contribution to the Pension Plan.  We do not expect to make additional contributions to the Pension Plan for the remainder of 2011.

 

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8.     Stockholders’ Equity

 

Earnings per Share

 

The components of basic and diluted earnings per share were as follows:

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2011

 

2010

 

 

 

(in thousands, except per share amounts)

 

 

 

 

 

 

 

Net income

 

$

45,633

 

35,909

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

85,814

 

85,629

 

Dilutive potential shares from stock options

 

22

 

46

 

Weighted average shares outstanding - diluted

 

85,836

 

85,675

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic

 

$

0.53

 

0.42

 

Diluted

 

$

0.53

 

0.42

 

 

Anti-dilutive Securities

 

Options to purchase 212 thousand shares of our common stock were excluded from the diluted earnings per share calculation for the three months ended March 31, 2010 because they were anti-dilutive.

 

Dividends

 

On February 23, 2011, the Board of Directors approved a dividend on our common stock in the amount of $0.20 per share to stockholders of record as of April 4, 2011 to be paid on May 2, 2011.  The total dividend to be paid is approximately $17.1 million.

 

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 175,357 shares and 427,544 shares repurchased in the open market or privately during the three months ended March 31, 2011 and 2010, respectively, which included 357 shares and 564 shares repurchased from employees who elected to tender shares to cover their minimum income tax withholdings with respect to vesting of stock awards during the three months ended March 31, 2011 and 2010, respectively.

 

In April 2011 the Company repurchased 338,941 shares from employees who elected to tender shares to cover their minimum income tax withholdings with respect to vesting of stock awards during the period.

 

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9.             Share-Based Compensation

 

A summary of stock option activity and related information for the three months ended March 31, 2011 is presented in the table below.  All options outstanding expire prior to December 31, 2013.

 

 

 

Options

 

Weighted
average
exercise price

 

Outstanding, December 31, 2010

 

298,295

 

$

29.98

 

Granted

 

 

 

Exercised

 

(145,858

)

31.10

 

Terminated/Cancelled

 

(74,998

)

29.14

 

Outstanding, March 31, 2011

 

77,439

 

$

28.67

 

Exercisable, March 31, 2011

 

77,439

 

$

28.67

 

 

In the first quarter of 2011, we granted 30,547 shares of nonvested stock with a fair value of $35.91 per share under the Company’s 1998 Stock Incentive Plan, as amended and restated (the “SI Plan”).  The value of those shares at the grant date, aggregating $1.1 million, will be amortized to expense over a four year vesting period.

 

On April 2, 2011, we granted 1,107,589 shares of nonvested stock with a fair value of $41.28 per share under the SI Plan.  The value of those shares at the grant date, aggregating $45.7 million, will be amortized to expense over a four year vesting period.

 

10.  Contingencies

 

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

 

Michael E. Taylor, Kenneth B. Young, individuals, on behalf of themselves individually and on behalf of others similarly situated v. Waddell & Reed, Inc., a Delaware Corporation; Waddell & Reed Financial, Inc., a Delaware Corporation; Waddell & Reed Development, Inc., a Delaware Corporation; Waddell & Reed Financial Advisors, a fictitious business name; and DOES 1 through 10 inclusive; Case No. 09-CV-2909 DMS WVG; in the United States District Court for the Southern District of California.

 

In this action filed December 28, 2009, the Company, along with various of its affiliates, were sued in an individual action, class action and Fair Labor Standards Act (“FLSA”) nationwide collective action by two former advisors asserting misclassification of financial advisors as independent contractors instead of employees.  Plaintiffs assert claims under the FLSA for minimum wages and overtime wages, and under California Labor Code Statutes for timely pay wages, minimum wages, overtime compensation, meal periods, reimbursement of losses and business expenses and itemized wage statements and a claim for Unfair Business Practices under §17200 of the California Business & Professions Code.  Plaintiffs seek declaratory and injunctive relief and monetary damages.  The Company intends to vigorously contest plaintiffs’ claims.

 

In the opinion of management, the ultimate resolution and outcome of this matter is uncertain.  At this stage of the litigation, the Company is unable to estimate the expense or exposure, if any, that it may represent.   The ultimate resolution of this matter, or an adverse determination against the Company, could have a material adverse impact on the financial position and results of operations of the Company.  However, this possible impact is unknown and not reasonably determinable; therefore, no liability has been recorded in the consolidated financial statements.

 

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Table of Contents

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This Quarterly Report on Form 10-Q 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 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 such words as “may,” “could,” “should,” “would,” “believe,” “anticipate,” “forecast,” “estimate,” “expect,” “intend,” “plan,” “project,” “outlook,” “will,” “potential” and similar statements of a future or forward-looking nature.  Readers are cautioned that any forward-looking information provided by or on behalf of the Company is not a guarantee of future performance.  Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to those discussed below.  If one or more events related to these or other risks, contingencies or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from those forecasted or expected.  Certain important factors that could cause actual results to differ materially from our expectations are disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2010, which include, without limitation:

 

·              The introduction of legislative or regulatory proposals or judicial rulings that change the independent contractor classification of our financial advisors at the federal or state level for employment tax or other employee benefit purposes;

 

·              The adverse ruling or resolution of any litigation, regulatory investigations and proceedings, or securities arbitrations by a federal or state court or regulatory body;

 

·              Non-compliance with applicable laws or regulations and changes in current legal, regulatory, accounting, tax or compliance requirements or governmental policies;

 

·              A decline in the securities markets or in the relative investment performance of our Funds and other investment portfolios and products as compared to competing funds;

 

·              The loss of existing distribution channels or inability to access new distribution channels;

 

·              A reduction in assets under our management on short notice, through increased redemptions in our distribution channels or our Funds, particularly those Funds with a high concentration of assets, or investors terminating their relationship with us or shifting their funds to other types of accounts with different rate structures;

 

·              A decrease in, or the elimination of, any future quarterly dividend paid to stockholders; and

 

·              Our inability to hire and retain senior executive management and other key personnel.

 

The foregoing factors should not be construed as exhaustive and should be read together with other cautionary statements included in this and other reports and filings we make with the Securities and Exchange Commission, including the information in Item 1 “Business” and Item 1A “Risk Factors” of Part I and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II to our Annual Report on Form 10-K for the year ended December 31, 2010 and as updated in our quarterly reports on Form 10-Q for the year ending December 31, 2011.  All forward-looking statements speak only as 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.

 

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Table of Contents

 

Overview

 

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

 

We derive our revenues from providing investment management, investment product underwriting and distribution, and shareholder services administration primarily to mutual funds and institutional and separately managed accounts. Investment management fees are based on the amount of average assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Our underwriting and distribution revenues consist of commissions derived from sales of investment and insurance products, Rule 12b-1 asset-based service and distribution fees, distribution fees on certain variable products, fees earned on fee-based asset allocation products, and related advisory services. The products sold have various commission structures and the revenues received from those sales vary based on the type and amount sold.  Shareholder service fee revenue includes transfer agency fees, custodian fees from retirement plan accounts, portfolio accounting and administration fees, and is earned based on assets under management or number of accounts.

 

One of our distinctive qualities is that we are a significant distributor of investment products.  Our retail products are distributed through our Advisors channel sales force of independent financial advisors or through our Wholesale channel, which includes third-parties such as other broker/dealers, registered investment advisors (including the retirement advisors of Legend) and various retirement platforms.  We also market our investment advisory services to institutional investors, either directly or through consultants, in our Institutional channel.

 

First Quarter Highlights

 

Our average assets under management of $86.7 billion during the first quarter of 2011 were 22% higher than our average assets under management during the first quarter of 2010, resulting in a significant increase in revenues for the current year.  Ending assets under management of $90.1 billion as of March 31, 2011 increased 8% over our previous record high of $83.7 billion at December 31, 2010.

 

Net income increased 27% compared to the first quarter of 2010 while our operating margin increased to 25.2% during 2011, an improvement of 190 basis points compared to the same quarter in the prior year.  Leverage from higher asset levels combined with continued focus on cost controls led to this margin improvement.

 

In our Wholesale channel, our continuing efforts to diversify sales resulted in sales of products other than Asset Strategy accounting for 50% of total sales during the first quarter of 2011 as compared to 40% of total sales for fiscal 2010.

 

Our balance sheet remains strong, and we ended the quarter with cash and investments of over $424.0 million.  In January 2011, the Company drew down the proceeds from a $190.0 million private placement of Senior Notes and used the proceeds to repay in full its existing senior notes.

 

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Table of Contents

 

Assets Under Management

 

Assets under management increased to $90.1 billion on March 31, 2011 compared to $83.7 billion on December 31, 2010 due to market appreciation of $4.5 billion and net flows of $1.9 billion.

 

Change in Assets Under Management(1)

 

 

 

First Quarter 2011

 

 

 

Advisors

 

Wholesale

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

33,181

 

40,883

 

9,609

 

83,673

 

 

 

 

 

 

 

 

 

 

 

Sales (net of commissions)

 

1,064

 

4,719

 

776

 

6,559

 

Redemptions

 

(990

)

(3,162

)

(530

)

(4,682

)

Net Sales

 

74

 

1,557

 

246

 

1,877

 

 

 

 

 

 

 

 

 

 

 

Net Exchanges

 

(62

)

62

 

 

 

Reinvested Dividends & Capital Gains

 

54

 

 

16

 

70

 

Net Flows

 

66

 

1,619

 

262

 

1,947

 

 

 

 

 

 

 

 

 

 

 

Market Appreciation

 

1,675

 

2,240

 

536

 

4,451

 

Ending Assets

 

$

34,922

 

44,742

 

10,407

 

90,071

 

 

 

 

First Quarter 2010

 

 

 

Advisors

 

Wholesale

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Beginning Assets

 

$

29,474

 

32,818

 

7,491

 

69,783

 

 

 

 

 

 

 

 

 

 

 

Sales (net of commissions)

 

886

 

4,430

 

819

 

6,135

 

Redemptions

 

(762

)

(2,106

)

(517

)

(3,385

)

Net Sales

 

124

 

2,324

 

302

 

2,750

 

 

 

 

 

 

 

 

 

 

 

Net Exchanges

 

(35

)

34

 

 

(1

)

Reinvested Dividends & Capital Gains

 

57

 

(6

)

23

 

74

 

Net Flows

 

146

 

2,352

 

325

 

2,823

 

 

 

 

 

 

 

 

 

 

 

Market Appreciation

 

881

 

434

 

311

 

1,626

 

Ending Assets

 

$

30,501

 

35,604

 

8,127

 

74,232

 

 


(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.

 

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Table of Contents

 

Average assets under management, which are generally more indicative of trends in revenue for providing investment management services than the quarter over quarter change in ending assets under management, are presented below.

 

Average Assets Under Management

 

 

 

First Quarter 2011

 

 

 

Advisors

 

Wholesale

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Asset Class:

 

 

 

 

 

 

 

 

 

Equity

 

$

25,591

 

39,226

 

9,317

 

$

74,134

 

Fixed Income

 

7,249

 

3,081

 

769

 

11,099

 

Money Market

 

1,234

 

270

 

 

1,504

 

Total

 

$

34,074

 

42,577

 

10,086

 

$

86,737

 

 

 

 

First Quarter 2010

 

 

 

Advisors

 

Wholesale

 

Institutional

 

Total

 

 

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

Asset Class:

 

 

 

 

 

 

 

 

 

Equity

 

$

22,236

 

31,671

 

6,925

 

$

60,832

 

Fixed Income

 

6,037

 

1,815

 

710

 

8,562

 

Money Market

 

1,307

 

296

 

 

1,603

 

Total

 

$

29,580

 

33,782

 

7,635

 

$

70,997

 

 

Results of Operations — Three Months Ended March 31, 2011 as Compared with Three Months Ended March 31, 2010

 

Net Income

 

 

 

Three months ended

 

 

 

 

 

March 31,

 

 

 

 

 

2011

 

2010

 

Variance

 

 

 

(in thousands, except per share amounts
and percentage data)

 

 

 

 

 

 

 

 

 

Net Income

 

$

45,633

 

35,909

 

27

%

Earnings per share:

 

 

 

 

 

 

 

Basic

 

$

0.53

 

0.42

 

26

%

Diluted

 

$

0.53

 

0.42

 

26

%

 

 

 

 

 

 

 

 

Operating Margin

 

25.2

%

23.3

%

8

%

 

We reported net income of $45.6 million, or $0.53 per diluted share, for the first quarter of 2011 compared to $35.9 million, or $0.42 per diluted share, for the first quarter of 2010.

 

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Table of Contents

 

Total Revenues

 

Total revenues increased 18% to $296.6 million for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 due to a rise in average assets under management of 22% and an increase in gross sales of 7%.

 

 

 

Three months ended

 

 

 

 

 

March 31,

 

 

 

 

 

2011

 

2010

 

Variance

 

 

 

(in thousands, except percentage data)

 

 

 

 

 

 

 

 

 

Investment management fees

 

$

131,644

 

109,663

 

20

%

Underwriting and distribution fees

 

132,763

 

113,136

 

17

%

Shareholder service fees

 

32,167

 

28,815

 

12

%

Total revenues

 

$

296,574

 

251,614

 

18

%

 

Investment Management Fee Revenues

 

Investment management fee revenues are earned for providing investment advisory services to the Funds and to institutional and separate accounts.  Investment management fee revenues increased $22.0 million, or 20%, from last year’s first quarter.

 

Revenues from investment management services provided to our retail mutual funds, which are distributed through the Advisors, Wholesale and Institutional channels, were $121.5 million for the quarter ended March 31, 2011.  Revenues increased $19.5 million, or 19%, compared to the first quarter of 2010, while the related retail average assets increased 21% to $76.7 billion.  Investment management fee revenues increased less than the related retail average assets due to the effect of recording management fee waivers, mostly for money market funds, as an offset to investment management fees beginning in the second half of 2010.

 

Institutional account revenues were $10.1 million for the first quarter of 2011, representing an increase of $2.5 million, or 33%, from last year’s first quarter, due to an increase in average assets of 32% and an increase in the average management fee rate.

 

We ended the first quarter with $90.1 billion in assets under management compared to the 2010 annual average of $74.0 billion.  This higher asset base, if combined with continued market improvement, would result in an increase to investment management fee revenues for the remainder of 2011.

 

Long-term redemption rates (which exclude money market fund redemptions) in the Advisors channel were 9.6% in this year’s first quarter, compared to 8.2% in the first quarter of 2010.  In the Wholesale channel, long-term redemption rates were 29.7% for the quarter ended March 31, 2011, compared to 24.6% in the first quarter of 2010.  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.  Our overall redemption rate of 21.0% remains low compared to the industry average.

 

Long-term redemption rates for our Institutional channel were 21.3% and 27.4% for the first quarter of 2011 and 2010, respectively.  Subadvisory and defined contribution business comprised over 60% of the Institutional channel’s assets as of March 31, 2011 and unlike defined benefit pension accounts, the active daily flows in or out of these accounts resulted in an increase in contributions and withdrawals, impacting the channel’s redemption rate.

 

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Underwriting and Distribution Fee Revenues and Expenses

 

The following tables summarize our underwriting and distribution fee revenues and expenses segregated by distribution method within the respective Advisors or Wholesale channel:

 

 

 

First Quarter 2011

 

 

 

Advisors

 

Wholesale

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Revenue

 

$

72,555

 

60,208

 

132,763

 

Expenses

 

 

 

 

 

 

 

Direct

 

50,872

 

66,591

 

117,463

 

Indirect

 

22,791

 

11,750

 

34,541

 

 

 

73,663

 

78,341

 

152,004

 

Net Underwriting & Distribution

 

$

(1,108

)

(18,133

)

(19,241

)

 

 

 

First Quarter 2010

 

 

 

Advisors

 

Wholesale

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Revenue

 

$

60,537

 

52,599

 

113,136

 

Expenses

 

 

 

 

 

 

 

Direct

 

42,540

 

57,141

 

99,681

 

Indirect

 

22,845

 

11,340

 

34,185

 

 

 

65,385

 

68,481

 

133,866

 

Net Underwriting & Distribution

 

$

(4,848

)

(15,882

)

(20,730

)

 

Underwriting and distribution revenues earned in this year’s first quarter increased $19.6 million, or 17%, compared with the first quarter of 2010.  A majority of the increase in revenues was due to higher Rule 12b-1 asset-based service and distribution fee revenues of $10.1 million as a result of an increase in average mutual fund assets under management.  Revenues from fee-based asset allocation products increased $7.7 million compared to the prior year.  Variable annuity revenues increased $3.3 million compared to 2010, but the increase was offset by a decrease in other front-load product sales revenue period over period.

 

Underwriting and distribution expenses increased by $18.1 million, or 14%, compared to the first quarter of 2010.  A significant portion of this increase was attributed to higher direct expenses in the Wholesale channel of $9.5 million as a result of an increase in average wholesale assets under management and higher sales volume year over year.  We incurred higher dealer compensation paid to third party distributors and increased Rule 12b-1 asset-based service and distribution expenses.  Wholesaler commissions expense increased due to higher sales volumes.  These increases were partially offset by lower amortization expense of deferred sales commissions.  Direct expenses in the Advisors channel increased $8.3 million, or 20%, compared to the first quarter of 2010 due to increased commissions related to the sale of fee-based asset allocation products of $5.0 million and higher Rule 12b-1 asset-based service and distribution commissions of $2.9 million.  Indirect expenses increased $400 thousand in aggregate quarter over quarter related to increased employee compensation and benefits expenses.

 

Shareholder Service Fees Revenue

 

Shareholder service fees revenue primarily includes transfer agency fees, custodian fees from retirement plan accounts, and portfolio accounting and administration fees.  Portfolio accounting and administration fees are asset-based revenues or account-based revenues while transfer agency fees and custodian fees from retirement plan accounts are based on the number of accounts.  During the first quarter of 2011, shareholder service fees revenue increased $3.4 million, or 12%, over the first quarter of 2010.  Of this increase, $2.1

 

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million is due to higher asset-based fees quarter over quarter in certain share classes and $1.3 million is attributable to account-based revenues due to a 1% increase in the average number of accounts.

 

Total Operating Expenses

 

Operating expenses increased $28.8 million, or 15%, in the first quarter of 2011 compared to the first quarter of 2010.  Expenses increased primarily due to increased underwriting and distribution expenses and compensation and related costs.  Underwriting and distribution expenses are discussed above.

 

 

 

Three Months Ended
March 31,