-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V9VwoJSXQ3qe2eN/Hp2RguSVDN6mBkZAkfWyQxgSwkvzhbDIw7Ap80wXZrNNRhdX Lry64hHuf9HWa9EO0JMIfQ== 0000912057-01-007757.txt : 20010320 0000912057-01-007757.hdr.sgml : 20010320 ACCESSION NUMBER: 0000912057-01-007757 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 24 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WADDELL & REED FINANCIAL INC CENTRAL INDEX KEY: 0001052100 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 510261715 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13913 FILM NUMBER: 1571927 BUSINESS ADDRESS: STREET 1: 6300 LAMAR AVE STREET 2: P O BOX 29217 CITY: OVERLAND PARK STATE: KS ZIP: 66202-4200 BUSINESS PHONE: 9132362000 MAIL ADDRESS: STREET 1: P O BOX 29217 STREET 2: 6300 LAMAR AVE CITY: OVERLAND PARK STATE: KS ZIP: 66202-4200 10-K 1 a2041359z10-k.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 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 of (I.R.S. Employer incorporation or organization) 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 Class B Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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 ___. 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. ( ) The aggregate market value of the voting stock held by non-affiliates of the registrant (excludes officers, directors and stockholders holding 5% or greater of the registrant's common stock): $2,014,071,078 at March 6, 2001. Shares outstanding of each of the registrant's classes of common stock as of March 6, 2001: Class A Common Stock, $.01 par value: 43,461,511 Class B Common Stock, $.01 par value: 36,139,617 DOCUMENTS INCORPORATED BY REFERENCE In Part III of this Form 10-K, the definitive proxy statement for 2001 annual meeting of stockholders to be held April 25, 2001. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Index of Exhibits (Pages 60 through 62) Total Number of Pages Included Are 62 WADDELL & REED FINANCIAL, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
PAGE PART I -------- Item 1. Business.................................................... 3 Item 2. Properties.................................................. 14 Item 3. Legal Proceedings........................................... 15 Item 4. Submission of Matters to a Vote of Security Holders......... 15 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 15 Item 6. Selected Financial Data..................................... 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 18 Risk Factors............................................................. 29 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 32 Item 8. Financial Statements and Supplementary Data................. 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 33 PART III Item 10. Directors and Executive Officers of the Registrant.......... 33 Item 11. Executive Compensation...................................... 33 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 33 Item 13. Certain Relationships and Related Transactions.............. 33 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 33 SIGNATURES............................................................... 34 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................... 36 INDEX TO EXHIBITS........................................................ 60
2 PART I ITEM 1. BUSINESS BACKGROUND Waddell & Reed Financial, Inc. (hereinafter referred to as the "Company," "we," "our" or "us") is a Delaware holding company that conducts its business through its subsidiaries. One subsidiary, Waddell & Reed, Inc. ("W&R"), is a registered broker-dealer and registered investment advisor that acts primarily as the nationwide distributor and underwriter for the shares of our mutual funds and the distributor of insurance products issued primarily by United Investors Life Insurance Company ("UILIC") and by Nationwide Financial Services, Inc. ("Nationwide"). Another subsidiary, Waddell & Reed Investment Management Company ("WRIMCO"), is a registered investment advisor that provides investment management and advisory services to our mutual funds and to institutions and other private clients. Waddell & Reed Services Company ("WRSCO") provides transfer agency and accounting services to the mutual funds and their shareholders. On August 9, 1999, we completed the acquisition of Austin, Calvert & Flavin, Inc. ("ACF"), a privately-held investment management firm based in San Antonio, Texas. ACF was founded in 1981 and manages investments for trusts, high net worth families and individuals, and pension plans of corporations, hospitals, schools, labor unions, endowments and foundations. On March 31, 2000, we completed the acquisition of The Legend Group ("Legend"), a privately-held mutual fund distribution and retirement planning company based in Palm Beach Gardens, Florida. Through its network of over 300 financial advisors, Legend serves employees of school districts and other not-for-profit organizations. Waddell & Reed Financial, Inc., W&R, WRIMCO, WRSCO, ACF and Legend are hereafter collectively referred to as the "Company," "we, "us" or "our," unless the context requires otherwise. OVERVIEW We were founded in 1937 and are one of the oldest mutual fund complexes in the United States, having introduced the Waddell & Reed Advisors Funds (formerly, the United Group of Mutual Funds) in 1940. On June 30, 2000, we renamed two of our mutual fund families. The United Funds family was renamed the Waddell & Reed Advisors Funds (the "Advisors Funds") and the Waddell & Reed Fund family was renamed the W&R Funds (the "W&R Funds"). The Advisors Funds are available for sale primarily through our proprietary sales force. The W&R Funds are available for sale through both our proprietary sales force and through selected third-party distribution channels. On October 16, 2000, the Target/United Funds family was renamed the W&R Target Funds (the "Target Funds"). We sell our investment products primarily to middle income Americans through a virtually exclusive sales force and select third party channels. As of December 31, 2000, we had $36.7 billion of assets under management, of which $31.8 billion were mutual fund assets and $4.9 billion were separately managed accounts. We have over 648,000 mutual fund customers having an average investment of $43,000 and over 68,000 variable account customers having an average investment of $54,000. We are the exclusive underwriter and distributor of 43 mutual fund portfolios (the "Funds"), including 20 comprising the Advisors Funds, 12 comprising the W&R Funds and 11 comprising the Target Funds. As part of our financial planning services, we also distribute to our customers variable annuities and life insurance products, underwritten by UILIC and Nationwide. On October 23, 2000, we announced an agreement with Nationwide to provide a broad span of private label insurance and retirement products for use by our proprietary sales force. Our traditional market has generally been professionals and working families with annual incomes between $40,000 and $100,000 who are saving for retirement. We believe that demographic trends and shifts in attitudes toward retirement savings will continue to support increased consumer demand for our products and services. According to U.S. Census Bureau projections, the number of Americans between the ages of 45 and 64 will grow from 53.7 million in 1998 to 76.2 million in 2008, making this "pre-retirement" age group the fastest growing segment of the U.S. population. 3 We distribute the Funds and other financial products through a financial advisor sales force that represents us on a virtually exclusive basis. On December 31, 2000, our sales force consisted of 2,865 financial advisors, including 220 district managers and 70 district supervisors. Eight regional vice presidents and 148 division and associate managers operating from 219 division and district sales offices located throughout the United States manage the sales force. In addition, we have 182 individual advisor offices. For the year ended December 31, 2000, our financial advisor sales force sold over $2.8 billion of mutual fund and variable products. We believe, based on industry data, that our financial advisor sales force is currently one of the largest sales forces in the United States selling primarily mutual funds. As of December 31, 2000, 36% of our financial advisors have been with us for more than 5 years and 24% for more than 10 years. Our financial advisors are located primarily in smaller metropolitan areas and rural communities. On March 31, 2000, we acquired Legend, a privately-held mutual fund distribution and retirement planning company. Legend provides asset allocation advisory services and custodial services primarily for employees of school districts and other not-for-profit organizations nationwide. Legend has over 90,000 clients having an average investment of $31,000 per account. Assets under advisement at December 31, 2000 were $2.8 billion, of which $1.1 billion were in accounts for which Legend provides custodial and asset allocation services. As of December 31, 2000, Legend had 309 registered financial advisors in 22 Legend offices located primarily in the eastern part of the United States. In 2000, Legend advisors sold $38.1 million of our mutual fund products. The financial advisor industry is fragmented, consisting primarily of relatively small companies generally employing fewer than 100 investment professionals. Our sales force competes primarily with small broker-dealers and independent financial advisors. Our marketing efforts are currently focused on customers residing in smaller metropolitan areas and rural communities. We focus on underserved and retirement markets. We conduct investment seminars throughout the United States to reach a large number of potential clients. We also provide financial plans for clients offering one-on-one consultations emphasizing long-term relationships through continuing service, rather than a one-time sale. We believe that we are well-positioned to benefit from a developing industry trend toward "assisted sales" (sales of mutual fund products through a sales person) driven by the array of options now available to investors and the need for financial planning advice that has resulted from the increase in the average household's financial assets over the past decade. Our investment philosophy and financial planning approach emphasizes long-term investments. Our portfolio managers seek consistent long-term performance and downside protection in turbulent markets. As a result, we have developed a loyal customer base with clients maintaining their accounts for approximately 14 years on average as compared to 4 years for the mutual fund industry, according to the Investment Company Institute. This loyalty is evidenced by a relatively low retail fund redemption rate for the five years ended December 31, 2000 of 7.6% for the non-money market Funds, which is less than one-half of the industry average of 20.3% and a relatively high dividend reinvestment rate of 87.4% for those Funds for the same period, which has consistently been higher than the industry average. Approximately 51% of our mutual fund assets under management are in retirement accounts and an additional $3.7 billion are in variable annuities as of December 31, 2000. We believe we are relatively unique in the mutual fund industry in large part due to our proprietary sales force. Not only do the members of our sales force gain loyal customers, but they also create profit as they bring in assets for us to manage. By contrast, we believe that the vast majority of companies in the industry bear a significant cost to acquire assets to manage, due to the expense of either heavy advertising or the use of third-party distributors. In our opinion, other industry members are further challenged by the short period of time allowed them to recoup their asset-acquisition cost from investment management fees before losing the assets to redemptions. We not only do not have to recoup the asset acquisition cost since we make a distribution profit, but we are able to earn investment management fees on those assets for a much longer period of time than others in the industry. 4 We have a seasoned team of portfolio managers and an internal equity and fixed income investment research staff that have substantial resources available to them, including hundreds of on and off-site meetings annually with management of the companies in which they invest. In addition, we utilize research provided by brokerage firms and independent outside consultants. Generally, portfolio managers have had extensive experience as investment research analysts prior to acquiring money management assignments. The predominant style of our mutual funds is growth equity. As of December 31, 2000, approximately 87% of our mutual fund assets under management were invested in equity funds with the remainder in fixed income and money market funds. This investment strategy generally emphasizes investments at attractive valuations in companies that the portfolio managers believe can produce above average growth in earnings. OPERATIONS Revenues from operations for the last three years were:
FOR YEARS ENDED DECEMBER 31, ------------------------------ 2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Revenues from: Investment management..................................... $253,774 178,612 137,823 Underwriting and distribution............................. 202,879 126,318 106,615 Shareholder service....................................... 53,436 41,525 33,808 -------- ------- ------- Revenues excluding investment and other income............ 510,089 346,455 278,246 Investment income and other revenue....................... 10,613 10,202 9,043 -------- ------- ------- Total revenues............................................ $520,702 356,657 287,289 ======== ======= =======
SALES MANAGEMENT Since our initial public offering in March of 1998, we have undertaken initiatives to increase the retention and productivity of our proprietary sales force. Notably, the Bridge Income Program, which provides new advisors with a fixed source of income while they are building their client base, has played an important role in advisor retention. In 2000, 72% of advisors on the Bridge Income Program were still with us after one year, compared with 32% of advisors who did not participate in the program. In 2000, we retained 56% of our financial advisors after one year and 27% after three years. These retention statistics compare favorably to the pre-IPO 1997 retention rate of 41% for advisors after one year and 14% after three years. In addition to the Bridge Income Program, a number of other initiatives were undertaken. We have significantly enhanced the financial plans offered to clients by their financial advisors. These improved comprehensive plans have resulted in higher average initial investments, more frequent repeat investments and a higher close ratio. Since the IPO, we have penetrated 25 new geographic markets by adding new division offices each year in areas where we did not previously have a presence. We have also added new district offices and invested in existing offices by upgrading and expanding the facilities. In many cases, the additional space has been used by adding assistants to support the financial advisor sales force. Additional initiatives, such as the Career Development Conference and the New Manager Training Program, have also contributed to the increased productivity of our financial advisors. In 2000, our advisor sales productivity was $1.08 million per advisor compared to $738 thousand per advisor in 1997, representing a 14% compound annual growth rate. In the last few years, our efforts to improve sales productivity and advisor retention have also resulted in our sales force being more fully-committed. We consider advisors to be fully-committed to their careers when their investment product sales exceed $1 million per year. At the end of 2000, we had 1,159 fully-committed advisors who are responsible for a very significant portion of our sales. The number of fully-committed advisors has grown 5 from 662 at the end of 1997, representing a 21% compound annual growth rate. In order to emphasize the importance of recruiting and developing a sales force, we utilize a manager compensation system that ties compensation of division managers to the development of new financial advisors and to division sales, rather than personal sales. We provide training and motivational programs for our sales force. Sales training specialists provide training programs for new recruits as well as advanced training for experienced financial advisors. Programs for new recruits focus on prospecting techniques, product knowledge, and sales skills. Field office classes provide guidance in identifying target markets, practical exercises to learn interviewing skills and data collection, instruction in basic financial planning software and help in matching products with various client investment objectives. Sales presentation skills are taught and practiced in a classroom environment, as well as on joint sales calls with field sales management. The programs for experienced advisors focus on skills related to dealing with larger investment sums (such as IRA rollovers) and include training in the use of asset allocation and estate planning software. In addition, we offer new financial advisors the opportunity to participate in a week-long training program at the home office covering such subjects as product features, financial planning and the use of illustrative software packages. In 1998, we launched our first national advertising campaign in select markets throughout the country that focused on the important aspects of our business and was intended to increase our name recognition in those markets. This campaign continued throughout 1999 and 2000. In 2000, we launched an advisor website. The development of our secure intranet site, Advisors eSource, enhanced communication between our advisors and the home office. The site provides for the timely communication of information and offers information and other resources to help our advisors build and manage their sales more effectively. MARKETING--EXPANSION INTO ALTERNATIVE CHANNELS In late 1999, we decided to leverage our strong investment performance and back-office infrastructure by expanding our distribution efforts to include third party channels in order to accelerate sales growth and complement our proprietary sales force distribution. We began by creating a new position of Chief Marketing Officer, whose responsibility is to provide leadership for our proprietary marketing efforts and to lead our entry into non-proprietary channels. Our third-party efforts focus principally on seeking sub-advisory relationships and distributing funds from the W&R Funds family through channels that do not compete directly with our financial advisors, including: - 401(k) Platforms using multiple managers; - institutional fund supermarkets serving fee-based financial advisors; and - broker/dealer fee-based programs, including wrap programs. During 2000, we created a third party sales team, became a member of National Securities Clearing Corporation to facilitate selling into third party environments, expanded our operating and client service infrastructure and began negotiating selling agreements with select parties. A number of these agreements are now in effect and the opportunity for additional agreements is substantial. We also were appointed as a sub-advisor on two Nationwide equity products and, separately, began offering select W&R funds available for sale through their "Best of America Retirement Resource" program. FUNDS AND ASSET MANAGEMENT We serve as underwriter for, and investment advisor to, the Advisors Funds, the W&R Funds, and the Target Funds and distribute variable annuity and variable life insurance products related to the Target 6 Funds. We also serve as a registered investment advisor that provides investment management and advisory services to institutional clients and other separately managed accounts. We offer the Funds' shareholders a broad range of investment products designed to attract and retain clients with varying investment objectives. The predominant style of our mutual funds is growth equity. This investment strategy emphasizes investments at attractive valuations in companies that the portfolio managers believe can produce above average growth in earnings. According to an annual Barron's/Lipper fund-family survey which ranks investment performance of mutual fund complexes, overall our complex ranked in the top 27th percentile for 2000, while in the category of US Stock Funds (as defined by Barron's/Lipper) we ranked in the top 8th percentile for the same period. Overall, for the five-year and ten-year periods ended December 31, 2000, we also ranked in the top 8th percentile. For the twelve months ended December 31, 2000, our Funds had the following characteristics: - 87% of assets under management invested in equity funds, 10% invested in fixed income funds and 3% invested in money market funds. - 50% of our equity funds ranked in the top quartile of funds with similar objectives, as ranked by Lipper, Inc. - 36% of our equity funds ranked in the top 10% of funds with similar objectives, as ranked by Lipper, Inc. - 91% of our equity assets that are rated by Morningstar have four or five stars. This ranks us second out of the top 25 fund complexes. - 86% of our long-term assets (excluding money market assets) that are rated by Morningstar have four or five stars, which ranks us second if compared to the top 25 fund complexes in the country. Our largest mutual fund, the Advisors Core Investment Fund (formerly, the United Income Fund), is focused on large capitalization in core equity and had the following fees and net asset values: - management fees of $50.0 million (10% of total Company revenues) and a net asset value of $8.5 billion for or as of the year ended December 31, 2000. - management fees of $44.4 million (12% of total Company revenues) and a net asset value of $8.4 billion for or as of the year ended December 31, 1999. - management fees of $39.8 million (14% of total Company revenues) and a net asset value of $7.8 billion for or as of the year ended December 31, 1998. Our base of assets under management consists of a broad range of domestic and international stock, bond, and money market mutual funds that meet the varied needs and objectives of our individual and institutional investors. We periodically introduce new mutual funds designed to complement and expand our investment product offerings, to respond to competitive developments in the financial marketplace, and to meet the changing needs of clients. As part of broadening fund distribution, we added the following funds during 2000: - Advisors Value Fund (December 15, 2000) - Advisors Municipal Money Market Fund (December 15, 2000) - Advisors Tax-Managed Equity Fund (March 31, 2000) - W&R Large Cap Growth Fund (June 30, 2000) - W&R Mid Cap Growth Fund (June 30, 2000) - W&R Money Market Fund (June 30, 2000) 7 - W&R Tax-Managed Equity Fund (June 30, 2000) Several of our funds had name changes in 2000. Effective June 30, 2000, we renamed the W&R Growth Fund the "W&R Small Cap Growth Fund." Effective September 18, 2000, we renamed the Waddell & Reed Advisors High Income Fund II the "Waddell & Reed Advisors Global Bond Fund" and changed the strategy of the fund as well. On October 16, 2000, the Target Income Fund was renamed the "Target Core Equity Fund," the W&R Total Return fund was renamed the "W&R Core Equity Fund" and the Advisors Income Fund was renamed the "Advisors Core Investment Fund." In addition to performing investment management services for the Funds, we act as an investment advisor for institutional and other private investors. We receive a fee that is generally based on a percentage of assets under management for our services as an investment advisor. Assets under management for institutional and separate accounts totaled $4.9 billion at December 31, 2000. Investment management fees from institutional and separate accounts were approximately $28.7 million, or approximately 11%, of total investment management fees for the year ended December 31, 2000. Ending and average assets under management for the last three years were:
2000 1999 1998 ------------------- ------------------- ------------------- ENDING AVERAGE ENDING AVERAGE ENDING AVERAGE -------- -------- -------- -------- -------- -------- (IN MILLIONS) Advisors Funds Equity.......................................... $22,524 24,008 22,626 18,123 16,713 15,320 Fixed-income.................................... 2,815 2,925 3,190 3,464 3,637 3,652 Money market.................................... 1,045 827 812 693 644 572 ------- ------ ------ ------ ------ ------ 26,384 27,760 26,628 22,280 20,994 19,544 W&R Funds Equity.......................................... 1,590 1,776 1,785 1,261 1,050 906 Fixed-income.................................... 65 69 82 88 85 74 Money market.................................... 11 3 -- -- -- -- ------- ------ ------ ------ ------ ------ 1,666 1,848 1,867 1,349 1,135 980 Target Funds Equity.......................................... 3,465 3,456 3,113 2,415 2,127 1,859 Fixed-income.................................... 225 227 237 243 245 235 Money market.................................... 52 55 64 58 54 45 ------- ------ ------ ------ ------ ------ 3,742 3,738 3,414 2,716 2,426 2,139 Total Mutual Funds Equity.......................................... 27,579 29,240 27,524 21,799 19,890 18,085 Fixed-income.................................... 3,105 3,221 3,509 3,795 3,967 3,961 Money market.................................... 1,108 885 876 751 698 617 ------- ------ ------ ------ ------ ------ 31,792 33,346 31,909 26,345 24,555 22,663 Institutional and Separate Accounts............... 4,933 5,642 5,393 3,953 3,189 2,947 ------- ------ ------ ------ ------ ------ Total Assets Under Management..................... $36,725 38,988 37,302 30,298 27,744 25,610 ======= ====== ====== ====== ====== ======
8 INVESTMENT MANAGEMENT AGREEMENTS We provide investment advisory and management services pursuant to an investment management agreement with each Fund. While the specific terms of the agreements vary, the basic terms are similar. The agreements provide that we render overall management services to each of the Funds, subject to the oversight of each Fund's board of directors and in accordance with each Fund's fundamental investment objectives and policies. The agreements permit us to enter into separate agreements for shareholder services or accounting services with the respective Funds. Each Fund's board of directors, including a majority of the directors 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") and its shareholders must have approved 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 of directors, including a majority of the directors who are not parties to the agreements or "interested persons" of any such party, or (ii) the vote of a majority of the shareholders of the Fund and the vote of a majority of the Fund's directors who are not parties to the agreement or "interested persons" of any such party, 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 in the ICA or the Investment Advisers Act of 1940, as amended, (the "Advisers Act") and may be terminated without penalty by the Fund by giving us 60 days' written notice, if the termination has been approved by a majority of the Fund's directors or shareholders. We may terminate an investment management agreement without penalty on 120 days' written notice. SERVICE AGREEMENTS We provide various services to the Funds and their shareholders pursuant to a shareholder servicing agreement with each Fund (except the Target Funds) and an accounting service agreement with each Fund. Pursuant to the shareholder servicing agreements, we perform shareholder servicing functions for which the Funds pay us a monthly fee, including: - the maintenance of shareholder accounts; - the issuance, transfer, and redemption of shares, distribution of dividends and payment of redemptions; - furnishing information related to the Fund; 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: - maintenance of the Fund's records; - pricing of the Fund's shares; and - preparation of the prospectuses for existing shareholders, proxy statements, and certain shareholder reports. A Fund's shareholder servicing agreement and accounting service agreement may be adopted or amended with the approval of the Fund's directors who are not interested persons. Each of the shareholder servicing agreements and accounting service agreements have annually renewable terms of one year expiring on October 1st of each year. 9 UNDERWRITING AND DISTRIBUTION We distribute the Funds pursuant to an underwriting agreement with each Fund (except the Target Funds). Under each underwriting agreement, we offer and sell the Fund's shares on a continual basis and pay the costs of sales literature and printing of prospectuses, which are then either partially or fully reimbursed by the Fund. When a client purchases Class A shares, which are referred to as "front-end load," we charge a sales charge of between zero to 5.75% of the amount invested. The sales charge for the Class A shares typically declines as the net asset value of the account increases. In addition, investors may combine their purchases of these shares to qualify for the reduced sales charge. Class A shares (except for the money market funds) may also be charged a maximum of 0.25% of the average daily net assets of these shares under a 12b-1 distribution and service plan as compensation (for the W&R Funds) or reimbursement (for the Advisors Funds) for expenses in connection with distributing these shares, providing service to Class A shareholders and/or maintaining Class A shareholder accounts. When a client purchases Class B shares, which we refer to as "deferred-load," we do not charge an initial sales charge, but we do charge them on-going 12b-1 fees as well as a contingent deferred sales charge for six years. For both the Advisors and W&R Funds, Class B shares are charged a maximum of 0.75% of the average daily net assets of these shares under a 12b-1 distribution and service plan as compensation in connection with distributing shares of this class. Class B shares are also charged a maximum of 0.25% of the average daily net assets of these shares as compensation for expenses in connection with providing service to Class B shareholders and/or maintaining Class B shareholder accounts. Generally, clients are charged a contingent deferred sales charge upon early redemption of shares of up to 5% of the net asset value of the redeemed shares in the first year declining to zero for shares held for more than six years. Class B shares convert to Class A shares by the end of the eighth year. When a client purchases Class C shares, which we refer to as "level-load," we do not charge an initial sales charge, but we do charge them on-going 12b-1 fees as well as a contingent deferred sales charge for one year. For both the Advisors and W&R Funds, Class C shares are charged a maximum of 0.75% of the average daily net assets of these shares under a 12b-1 distribution and service plan as compensation in connection with distributing shares of this class. Class C shares are also charged a maximum of 0.25% of the average daily net assets of these shares as compensation for expenses in connection with providing service to Class C shareholders and/or maintaining Class C shareholder accounts. Investors who redeem their Class C shares in the first year are generally charged a contingent deferred sales charge of 1%. Class C shares do not convert to shares of any other class. Class Y shares, which we refer to as "institutional shares," are designed for institutional investors or others investing through certain intermediaries. Investors in Class Y shares do not pay a sales charge. W&R Funds Class Y shares are charged a maximum of 0.25% of the average daily net assets of these shares for 12b-1 distribution and service fees as compensation. The Advisors Funds Class Y shares do not pay a 12b-1 distribution and service fee. Each distribution and service plan is subject to annual approval by each Fund's board of directors, including a majority of the independent directors, cast in person at a meeting called for the purpose of voting on such approval. Each Fund may terminate the distribution and service plan at any time without penalty. We distribute variable products relating to the Target Funds pursuant to an underwriting agreement between us and certain insurance companies, namely Nationwide and UILIC. Commissions, marketing allowances and other compensation are paid to us as stipulated by these underwriting agreements. Under each agreement, we offer and sell the Target Funds on a continual basis. A significant portion of the commissions we receive are paid to our financial advisors and sales managers. Under a Rule 12b-1 service plan, the Target Funds may charge a maximum of 0.25% of the average daily net assets as compensation 10 for expenses in connection with providing service to shareholders and maintaining shareholder accounts of the Target Funds. The service plan is subject to annual approval by the Target Funds' board of directors, including a majority of the independent directors, cast in person at a meeting called for the purpose of voting on such approval. The service plan may be terminated at any time without penalty by the Funds. Besides distributing variable products, we distribute a number of other insurance products including individual and group term life, whole life, accident and health, Medicare supplement, and disability insurance. Commissions and compensation paid to us by UILIC for distributing variable and insurance products underwritten by them comprised 14%, 13% and 12% of our total revenues for each of the years ended 2000, 1999 and 1998, respectively. On February 28, 2001, UILIC terminated the Principal Underwriting Agreement by and between UILIC and the Company, effective April 30, 2001. As a result, beginning May 1, 2001, Nationwide will become the primary provider of variable products for distribution by our proprietary sales force. Management believes that the profitability on the two insurer's variables products lines are equivalent. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information. INVESTMENT PRODUCT SALES Investment product sales of proprietary products (excluding Legend and sales at net asset value) are summarized as follows:
2000 1999 1998 -------- -------- -------- (IN MILLIONS) Front End Load Sales (Class A)................... $1,590.3 1,329.0 1,266.8 Back End Load Sales (Class B).................... 367.5 355.8 252.3 Level Load Sales (Class C)....................... 233.5 51.3 -- Variable Products (Target)....................... 656.1 413.7 308.4 -------- ------- ------- Total Retail................................... $2,847.4 2,149.8 1,827.5 Institutional.................................... 1,077.1 1,096.0 491.4 -------- ------- ------- Total Sales.................................... $3,924.5 3,245.8 2,318.9 ======== ======= =======
Legend, acquired on March 31, 2000, earns revenue from commissions earned on sales of investment products and services provided for asset allocation advisory services and custodial services for certain investment accounts. Assets under advisement at December 31, 2000 were $2.8 billion, of which $1.1 billion were in accounts for which Legend provides custodial and asset allocation services. Since its acquisition on March 31, Legend's advisors have sold $38.1 million of our mutual fund products. 11 FUNDS SUMMARY The following table sets forth, for each management style, the net assets under management as of December 31, 2000, the name of the Funds and the year in which each Fund was first offered to the public.
NET ASSETS AT DECEMBER 31, 2000 YEAR OF MANAGEMENT STYLE (IN MILLIONS) FUND INCEPTION ---------------- ----------------- ------------------------------------------ ---------------- Large Capitalization Growth $ 1,258 Advisors Retirement Shares Fund 1972 2,587 Advisors Accumulative Fund 1940 3,317 Advisors Science and Technology Fund 1950 2,615 Advisors Vanguard Fund 1969 80 Advisors Tax-Managed Equity 2000 33 W&R Large Cap Growth 2000 188 W&R Science and Technology 1997 9 W&R Tax Managed Equity 2000 1,256 Target Growth 1987 295 Target Science and Technology 1997 ------- $11,638 Mid Capitalization Growth $ 1,641 Advisors New Concepts 1983 17 W&R Mid Cap Growth 2000 ------- $ 1,658 Small Capitalization Growth $ 404 Advisors Small Cap 1999 580 W&R Small Cap Growth 1992 345 Target Small Cap 1994 ------- $ 1,329 Large Capitalization Core Equity $ 8,518 Advisors Core Investment 1940 541 W&R Core Equity 1992 1,084 Target Core Equity 1991 ------- $10,143 Large Capitalization Value $ 11 Advisors Value Fund 2000 International Equity $ 1,399 Advisors International Growth 1970 161 W&R International Growth 1992 266 Target International 1994 ------- $ 1,826 Balanced and Asset Allocation $ 572 Advisors Continental Income 1970 122 Advisors Asset Strategy 1995 62 W&R Asset Strategy 1995 158 Target Balanced 1994 59 Target Asset Strategy 1995 ------- $ 973 Tax Exempt Bonds $ 758 Advisors Municipal Bond 1976 413 Advisors Municipal High Income 1986 27 W&R Municipal Bond 1992 ------- $ 1,198 High Yield Bonds $ 708 Advisors High Income 1979 19 W&R High Income 1997 102 Target High Income 1987 ------- $ 829 Taxable Investment Grade Bonds $ 531 Advisors Bond 1964 131 Advisors Government Securities 1982 274 Advisors Global Bond 1986 19 W&R Limited-Term Bond 1992 7 Target Limited-Term Bond 1994 117 Target Bond 1987 ------- $ 1,079 Money Markets $ 1,035 Advisors Cash Management 1979 10 Advisors Municipal Money Market 2000 11 W&R Money Market 2000 52 Target Money Market 1987 ------- $ 1,108 ------- TOTAL $31,792 =======
12 REGULATION 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 that regulate investment advisors and broker-dealers like us have broad administrative powers, including the power to limit, restrict, or prohibit an advisor or broker-dealer from carrying on its business in the event that it fails to comply with such laws and regulations. In such event, the possible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of investment advisor and other registrations, censures and fines. Our business is subject to regulation at both the federal and state level by the Securities and Exchange Commission (the "SEC") and other regulatory bodies. Certain of our subsidiaries are registered with the SEC under the Advisers Act and the Funds are registered with the SEC under the ICA and various filings are made with states under applicable state laws. The Advisers Act imposes numerous obligations on registered investment advisors including fiduciary duties, recordkeeping requirements, operational requirements and disclosure obligations. 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. The failure of one of our registered subsidiaries to comply with SEC requirements could have a material adverse effect on us. Two of our subsidiaries, W&R and Legend, are also registered as broker-dealers with the SEC and are subject to regulation by NASD Regulation, Inc. ("NASDR") and various states. Another of our subsidiaries, WRSCO, is registered under the Securities Exchange Act of 1934, as amended, as a transfer agent. 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, 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. W&R is also a member of the Securities Investor Protection Corporation. In its capacity as a broker-dealer, W&R is required to maintain certain minimum net capital and cash reserves for the benefit of its customers, which may limit its ability to pay dividends. W&R's net capital, as defined by NASD regulations, has consistently met or exceeded all minimum requirements. Various regulations cover certain investment strategies that may be used by the Funds for hedging purposes. To the extent that the Funds purchase futures contracts, the Funds are subject to the commodities and futures regulations of the Commodity Futures Trading Commission. Under the SEC rules and regulations promulgated pursuant to the Federal securities laws, we are subject to periodic examination by the SEC. We are also subject to periodic examination by NASDR. Our most recent examination by the SEC was in February 1999. Our most recent examination by NASDR was in November 1999. Legend, acquired on March 31, 2000, was examined by the NASDR in January 2000 and by the SEC in January 1999. ACF, acquired in August 1999, was examined by the SEC in March 2000. To date, no material issues resulting from those examinations have been raised. COMPETITION We are subject to substantial competition in all aspects of our business. 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 developed relationships with brokerage houses with large distribution networks, which may enable these fund complexes to reach broader client bases. We compete with firms offering similar services and 13 products to those of ours, such as American Express Financial Advisors Inc. and Edward Jones & Co. In addition, we compete with brokerage and investment banking firms, insurance companies, 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 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. Competition is based on the methods of distribution of fund shares, the ability to develop investment products for certain segments of the market, the ability to meet the changing needs of investors, the ability to achieve superior investment management performance, the type and quality of shareholder services and the success of sales promotion efforts. 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, and as a result of consolidation and acquisition activity within the industry. In addition, barriers to entry into the investment management business are relatively few, and thus we anticipate that we will face a growing number of competitors. Many of our competitors in the mutual fund industry are larger, better known, have penetrated more markets and have more resources than those of the Company. The distribution of mutual fund products has undergone significant developments in recent years, which has increased the competitive environment in which we operate. These developments include growth in the number of mutual funds, introduction of service fees payable to broker-dealers that provide continual service to clients in connection with their mutual fund investments and development of complex distribution systems with multiple classes of shares. Our financial advisors compete primarily with small broker-dealers and independent financial advisors. The market for financial advice and planning 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, the quality of financial planning products and services, the quality of the financial and insurance products offered, and the quality of service. Competition in this area is intense and some of the competitors of our financial advisors are larger, better known, and have more resources. EMPLOYEES At December 31, 2000, we had 1,341 full-time employees. Of our full-time employees, 600 were home office employees, 156 were division managers, associate managers or regional vice presidents, 171 were field office support personnel, 124 were employees of acquired subsidiaries and 290 were district managers and district supervisors who are also counted as financial advisors. Our proprietary sales force is comprised of 2,865 financial advisors who are independent contractors, and includes 290 district managers and district supervisors who are employees. Legend also had 309 retirement advisors considered to be independent contractors at December 31, 2000. The combined total of financial advisors and retirement advisors was 3,174. ITEM 2. PROPERTIES Through our subsidiary, W&R, we lease buildings that are used in the normal course of business. W&R occupies a 116,000 square foot office building at 6300 Lamar Avenue, Overland Park, Kansas and a 113,000 square foot office building at 6301 Glenwood Avenue, Overland Park, Kansas, which we utilize as our corporate headquarters. On March 7, 2001, we completed the sale of our two home office buildings to Mesirow Realty Sale-Leaseback ("Mesirow"). We also entered into an agreement with Mesirow to lease the buildings back for a period of fifteen years. The net proceeds from this sale were $28.2 million and resulted in a realized gain of approximately $1.8 million, which will be deferred and amortized over the term of the operating lease. Additional leased space is occupied in the immediate area for headquarters operations. W&R also leases division and district office space, totaling 584,583 square feet, for its proprietary sales force in various cities and towns in the United States. 14 ITEM 3. LEGAL PROCEEDINGS Certain of our subsidiaries are involved from time to time in various legal proceedings and claims incident to the normal conduct of their businesses. On the basis of information presently available and advice received from counsel, it is the opinion of management that such legal proceedings and claims, individually and in the aggregate, are not likely to have a material adverse effect on our financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the 2000 fiscal year to a vote of the security holders, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION Our Class A and Class B common stock are traded on the New York Stock Exchange (the "NYSE") under the symbols "WDR" and "WDR.B" respectively. The closing prices on March 6, 2001 were $31.49 for Class A common stock and $31.10 for Class B common stock. On February 23, 2000, we declared a three-for-two stock split on our Class A and Class B common stock payable on April 7, 2000 to stockholders of record as of March 17, 2000. All per-share and share outstanding data in the consolidated financial statements and related notes have been restated to reflect the stock split for all periods presented. On May 31, 2000, Standard & Poor's added Waddell & Reed Financial, Inc. to its S&P MidCap 400 Index of mid-range capitalization U.S. Stocks. Within the index, we are included in the Financial economic sector and the Investment Banking/Brokerage industry group. On January 25, 2001, we announced that our Board of Directors had approved the combination of our two classes of common stock by converting shares of our Class B common stock into shares of Class A common stock on a one-for-one basis. The combination will result from the merger of a wholly owned subsidiary into the Company that will be subject to the approval of a majority of the voting power of the Class A and Class B common stock, voting together as a single class, and a majority of the Class B common stock, voting as a separate class. The transaction will be submitted to stockholders at the upcoming annual meeting on April 25, 2001. We believe that the elimination of the dual classes of common stock will better align the voting rights of all stockholders with their ownership interests. We also believe that the combination will increase the overall liquidity of our common stock and eliminate the complexity, and resulting market confusion, of having two publicly traded classes of common stock. 15 The table sets forth, for the periods indicated, the reported high and low close sale prices of our Class A and Class B common stock, as reported on the NYSE, as well as the cash dividends paid for these time periods: CLASS A MARKET PRICE
2000 1999 ------------------------------- ------------------------------- DIVIDENDS DIVIDENDS PER PER QUARTER HIGH LOW SHARE HIGH LOW SHARE - ------- -------- -------- --------- -------- -------- --------- 1.................... $28.21 $16.63 $.0884 $15.92 $12.54 $.0884 2.................... 34.81 23.38 .0884 18.29 13.25 .0884 3.................... 40.00 29.63 .0884 18.63 14.79 .0884 4.................... 38.88 29.94 .0884 18.13 13.63 .0884
Year-end closing prices of the Class A common stock for 2000 and 1999, respectively were: $37.63 and $18.08. CLASS B MARKET PRICE
2000 1999 ------------------------------- ------------------------------- DIVIDENDS DIVIDENDS PER PER QUARTER HIGH LOW SHARE HIGH LOW SHARE - ------- -------- -------- --------- -------- -------- --------- 1.................... $26.00 $15.38 $.0884 $15.67 $12.38 $.0884 2.................... 31.75 21.38 .0884 18.00 13.25 .0884 3.................... 38.13 26.63 .0884 18.21 14.25 .0884 4.................... 37.50 28.94 .0884 16.75 13.33 .0884
Year-end closing prices of the Class B common stock for 2000 and 1999, respectively were: $37.50 and $16.75. STOCKHOLDERS According to the records of our transfer agent, we had 3,908 holders of record of Class A common stock as of March 6, 2001, compared to 4,029 on March 13, 2000 and 4,117 holders of record of Class B common stock as of March 6, 2001, compared to 4,430 on March 13, 2000. We believe that a substantially larger number of beneficial owners hold such shares in depository or nominee form. DIVIDENDS 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 requirements, compliance with covenants in our revolving credit facility and such other factors as the Board of Directors deems relevant. We anticipate that quarterly dividends will continue at a level comparable to past quarterly dividends. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth our selected consolidated financial data at the dates and for the periods indicated. Selected financial data should be read in conjunction with, and is qualified in its entirety by, 16 "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 YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------- ------------ ------------ ------------ ------------ (IN THOUSANDS EXCEPT PER SHARE DATA AND NUMBER OF FINANCIAL ADVISORS) Revenues from: Investment management................ $ 253,774 178,612 137,823 117,784 101,466 Underwriting and distribution........ 202,879 126,318 106,615 89,427 85,837 Shareholder service.................. 53,436 41,525 33,808 30,763 28,378 ---------- --------- --------- --------- --------- Revenues excluding investment and other income....................... 510,089 346,455 278,246 237,974 215,681 Total revenues....................... 520,702 356,657 287,289 241,772 220,976 Net income............................. 139,005 81,767 83,735 70,292 66,700 per common share--basic.............. 1.67 0.91 0.85 0.71 0.67 per common share--diluted............ 1.60 0.89 0.84 0.71 0.67 Net income excluding special items (1).................... 139,005 96,382 88,060 74,696 64,174 per common share--basic (1)(2)..... 1.67 1.08 0.89 0.75 0.65 per common share--diluted (1)(2)... 1.60 1.05 0.89 0.75 0.65 Dividends per common share............. $ 0.35 $ 0.35 $ 0.35 -- -- Advisor and productivity data (excluding Legend): Investment product sales--retail..... $2,847,447 2,149,842 1,827,526 1,518,257 1,505,100 Number of financial advisors (end of period)............................ 2,865 2,611 2,370 2,160 2,010 Average number of financial advisors........................... 2,632 2,432 2,175 2,072 2,072 Investment product sales per advisor............................ $ 1,081 884 840 733 726
AS OF DECEMBER 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (IN MILLIONS) Assets under management........................ $36,725 $37,302 $27,744 $23,417 $19,070 Balance sheet data: Goodwill..................................... 180.2 113.0 95.9 98.8 101.7 Total assets (3)............................. 422.2 335.1 327.2 447.0 429.3 Short-term debt.............................. -- 125.3 40.1 -- -- Long-term debt............................... 175.3 -- -- -- -- Total liabilities (4)........................ 280.6 208.7 120.0 676.9 196.7
- ------------------------ (1) Excludes a pre-tax write-off in 1999 of $19.0 million relating to restructuring mutual fund products and a pre-tax loss of $4.6 million from the sale of real estate properties, for a combined effect of $14.6 million (net of tax). Excludes impact of interest relating to notes with Torchmark Corporation ("Torchmark") for 1998, 1997 and 1996 that were prepaid with proceeds from the initial public offering. Excludes special charges in 1997 relating to discontinuation of internal systems and information systems outsourcing. (2) The number of shares used to compute earnings per share for 1997 and previous years was the number of shares outstanding at the initial public offering. (3) Includes amounts due from Torchmark of $192.7 and $184.5 million for 1997 and 1996, respectively. (4) Includes amounts due to Torchmark of $611.6 and $126.6 million for 1997 and 1996, respectively. 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIS ITEM INCLUDES STATEMENTS THAT ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING OUR EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS FORM 10-K REGARDING OUR FINANCIAL POSITION, BUSINESS STRATEGY AND OTHER PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE ASSUME NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH WE BELIEVE THAT THE ASSUMPTIONS AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT OR THAT WE WILL TAKE ANY ACTIONS THAT MAY PRESENTLY BE PLANNED. 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 IF OUR PRODUCTS' PERFORMANCE DECLINES, FAILURE TO RENEW INVESTMENT MANAGEMENT AGREEMENTS, ADVERSE RESULTS OF LITIGATION, COMPETITION, CHANGES IN GOVERNMENT REGULATION, AVAILABILITY AND TERMS OF CAPITAL AND ACQUISITION STRATEGY. ALL SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR PERSONS ACTING ON OUR BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS. 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. RESULTS OF OPERATIONS OVERVIEW We derive our revenues primarily from providing investment management, distribution and administrative services to the Funds and managed institutional and separate accounts. Investment management fees, our most substantial source of revenue, are based on the amount of assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Underwriting and distribution revenues consist of sales charges and commissions derived from sales of investment and insurance products, distribution fees, as well as advisory services of Legend. The products sold have various sales charge structures and the revenues received from sales of products vary based on the type and amount sold. Rule 12b-1 distribution fees earned for distributing certain mutual fund shares are based upon a percentage of assets and fluctuate based on sales, redemptions, and financial market conditions. Service fees include transfer agency fees, custodian fees for retirement plan accounts and portfolio accounting fees. On August 9, 1999, we acquired ACF, a privately-held investment management firm based in San Antonio, Texas. ACF manages investments for trusts, high net worth families and individuals, and pension plans of corporations, hospitals, schools, labor unions, endowments and foundations. In October 1999, we commenced restructuring our Advisors Funds and the W&R Funds. On October 4, 1999, the Advisors Funds began offering Class B shares ("back-end sales charge shares") and Class C shares ("level sales charge shares"). These were in addition to the already offered Class A shares ("front-end sales charge shares") and Class Y shares ("institutional shares"). Concurrently, the W&R Funds closed new sales of Class B shares due to their non-industry standard structure and began offering Class C shares in addition to the already offered Class Y shares. The discontinued W&R Funds' Class B shares were converted to W&R Fund Class C shares in March 2000 and a new W&R Fund Class B share was opened to investors in July 2000. As a result of the discontinuation of the W&R Funds Class B shares in 1999, no contingent deferred sales charges were collected on converted share redemptions. We expect that this restructuring of shares will enhance competitiveness and strategic distribution alternatives. 18 On February 23, 2000, we declared a three-for-two stock split on our Class A and Class B common stock payable on April 7, 2000 to stockholders of record as of March 17, 2000. All per-share and share outstanding data in the consolidated financial statements and related notes have been restated to reflect the stock split for all periods presented. On March 31, 2000, we acquired Legend, a privately-held mutual fund distribution and retirement planning company based in Palm Beach Gardens, Florida. Through its network of 309 financial advisors, Legend serves employees of school districts and other not-for-profit organizations nationwide. In July 2000, we renamed our two retail mutual fund families. The United Funds family was renamed the Waddell & Reed Advisors Funds which are available for sale primarily through Waddell & Reed's proprietary sales force. Concurrently, the Waddell & Reed Fund family was renamed the W&R Funds which are available for sale through both Waddell & Reed's proprietary sales force and selected third party distribution channels. At the same time the fund families were renamed, we added Class A and Class B shares to the W&R Funds, which had existing Class C and Class Y shares. On October 23, 2000, we executed an agreement with Nationwide Financial Services, Inc. ("Nationwide") to provide a broad span of private label insurance and retirement products for use by W&R's financial advisors. The selection of Nationwide to provide insurance and retirement products increases the breadth and competitiveness of such products available to our financial advisors. Nationwide has developed two variable annuities, a flexible premium variable universal life product, a survivorship life product and a qualified group retirement plan for distribution by our investment advisors. 19 SUMMARY OF OPERATING RESULTS For the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998 ------------------- ------------------- ------------------- % OF % OF % OF AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES -------- -------- -------- -------- -------- -------- (IN THOUSANDS) OPERATING REVENUES: Investment management fees.............. $253,774 48.7% 178,612 50.1 137,823 48.0 Underwriting and distribution fees...... 202,879 39.0 126,318 35.4 106,615 37.1 Shareholder service fees................ 53,436 10.3 41,525 11.6 33,808 11.8 -------- ----- ------- ----- ------- ----- Revenues excluding investment and other income...................... 510,089 98.0 346,455 97.1 278,246 96.9 Investment and other income............. 10,613 2.0 10,202 2.9 9,043 3.1 -------- ----- ------- ----- ------- ----- Total revenues.......................... 520,702 100.0 356,657 100.0 287,289 100.0 OPERATING EXPENSES: Underwriting and distribution........... 183,222 35.1 124,938 35.1 99,575 34.6 Compensation and related costs.......... 57,331 11.0 44,944 12.6 31,512 11.0 General and administrative.............. 28,498 5.5 19,245 5.4 8,551 3.0 Amortization of goodwill................ 5,502 1.1 3,224 0.9 2,903 1.0 Depreciation............................ 3,613 0.7 2,162 0.6 1,892 0.7 -------- ----- ------- ----- ------- ----- Total operating expenses (1)............ 278,166 53.4 194,513 54.6 144,433 50.3 OTHER ITEMS: Interest expense........................ 14,590 2.8 6,546 1.8 704 0.2 -------- ----- ------- ----- ------- ----- Total expenses.......................... 292,756 56.2 201,059 56.4 145,137 50.5 -------- ----- ------- ----- ------- ----- Income before affiliated items and income taxes (1).................. $227,946 43.8% 155,598 43.6 142,152 49.5 -------- ----- ------- ----- ------- -----
- ------------------------ (1) Excludes a $19.0 million pre-tax charge for write off of deferred selling costs and a $4.6 million pre-tax loss on sale of real estate in 1999. TOTAL REVENUES 2000 OVER 1999 Revenues excluding investment and other income increased by $163.6 million, or 47%, to $510.1 million in 2000 compared to 1999. Total revenues, which include investment and other income, were $520.7 million in 2000, a 46% increase from 1999. Income before income taxes and 1999 special charges increased by 46% to $227.9 million in 2000 compared to 1999. Income before income taxes and 1999 special charges as a percentage of total revenues was 43.8% in 2000 and 43.6% in 1999. Legend, acquired in March 2000, contributed $36.6 million to 2000 revenues. ACF, acquired in August 1999, contributed $10.8 million to 2000 revenues and $3.7 million to 1999 revenues. 1999 OVER 1998 Revenues excluding investment and other income increased by $68.2 million, or 25%, to $346.5 million in 1999 compared to 1998. Total revenues, which include investment and other income, were $356.7 million in 1999, a 24% increase from 1998. Income before affiliated items, income taxes and special charges increased by 9% to $155.6 million in 1999 compared to 1998. Income before affiliated items, income taxes and special charges as a percentage of revenue was 43.6% in 1999 and 49.5% in 1998. 20 INVESTMENT MANAGEMENT FEE REVENUE INVESTMENT MANAGEMENT FEE REVENUES ARE EARNED FOR PROVIDING INVESTMENT ADVISORY SERVICES TO THE FUNDS AND OTHER SEPARATELY-MANAGED ACCOUNTS. 2000 OVER 1999 The increase in management fee revenues came from both mutual fund and separately managed account business. Revenue from mutual fund management fees comprised 89% of total management fee revenue. In 2000, mutual fund revenue increased $60.3 million, or 37%, to $225.0 million. Average mutual fund assets under management increased 27% to $33.3 billion. Effective July 1, 1999, management fee arrangements were restructured, increasing the overall mutual fund management fee rates by approximately 8 basis points. In 2000, management fee revenue from mutual funds increased at a greater rate than that of mutual fund average assets due to a full year of benefit from the restructured rates. The average management fee rate for mutual funds improved from 62.5 basis points in 1999 to 67.5 basis points in 2000, representing approximately $16.7 million in management fee revenues. Management fee revenues from institutional and separately-managed account business accounted for 11% of total management fee revenue. Revenue from these accounts increased by $14.8 million, or 107%, to $28.7 million in 2000. Average institutional and separate account assets under management increased 43% to $5.6 billion. The average management fee rate for institutional and separately managed accounts increased from 30.6 basis points to 44.6 basis points. This increase was partially attributable to the acquisition of ACF in August of 1999, as well as new accounts added with higher fee rates. Certain managed accounts lost during the year had significantly lower rates than those currently in effect. Managed assets of ACF contributed $6.8 million, or 46%, to the increase in revenues from institutional and separately managed accounts. Certain separate accounts allow for additional fees contingent upon certain relative performance measurements being met. These performance fees were $2.8 million in 2000 and $1.2 million in 1999. 1999 OVER 1998 Investment management fee revenue in 1999 was $178.6 million, a 30% increase over 1998. Average assets under management were $30.3 billion for 1999, an increase of 18% compared with 1998. The increase in management fee revenues was due to several factors. First, the restructuring of the Fund's management fee arrangements that became effective July 1, 1999 added approximately $11.2 million to management fee revenue. Secondly, the acquisition of ACF in August of 1999 contributed approximately $3.6 million. Finally, strong market performance and relative performance resulted in a greater composition of average assets in equity funds, especially growth, small cap, and technology funds, which have higher management fee rates. UNDERWRITING AND DISTRIBUTION FEE REVENUE UNDERWRITING AND DISTRIBUTION FEE REVENUES ARE COMPRISED OF COMMISSIONS CHARGED ON SALES OF FRONT-LOAD MUTUAL FUNDS, VARIABLE PRODUCTS AND INSURANCE PRODUCTS; RULE 12B-1 ASSET-BASED DISTRIBUTION FEES AND CONTINGENT DEFERRED SALES CHARGES FROM BACK-END AND LEVEL LOAD FUNDS; AND FEES FROM ASSET ALLOCATION AND OTHER DISTRIBUTION SERVICES. 2000 OVER 1999 Underwriting and distribution fee revenue increased by 61% in 2000 to $202.9 million. Legend, acquired March 31, 2000, contributed $31.4 million to the current year's underwriting and distribution fee revenues. Excluding Legend's contribution, the increase was $45.1 million, or 36%. Certain investment product sales, namely Class A share mutual funds with front-end load charges and variable annuity products, generate commissions based on sales volume. These commissions increased by $27.4 million, or 21 30% in 2000 over 1999. Sales of these products increased by 28%. Over 90% of variable product sales are variable annuity products. Variable annuity product sales were especially strong in 2000, growing 57%, while Class A share sales grew 20%. Agency commissions paid by the underwriting insurance companies have higher commission rates than that of Class A share mutual funds causing revenues to increase at a higher rate than sales. The average commission rate for variable insurance products in 2000 was 7.67%, compared with the average commission rate for front-end mutual funds of 4.44%. In addition, an enhanced variable annuity compensation agreement with UILIC effective January 1, 2000 added $7.3 million of asset-based fees to revenues in 2000. Revenues from deferred load investment products (Class B and Class C shares) are primarily derived from a 0.75% 12b-1 distribution fee on these assets, and to a lesser extent from contingent deferred sales charges on early redemption of shares. These revenues increased by $5.5 million, or 49%, as average assets in these share classes increased by $779.9 million. The remaining increase in revenue came from higher revenues from insurance products, other mutual funds and fees from financial plans. 1999 OVER 1998 Underwriting and distribution fee revenue in 1999 increased by 18% to $126.3 million. This increase is primarily attributable to increases in sales volume of front-load investment products. Commission revenues from front-load investment products, primarily the Advisors Funds Class A shares and variable annuity products, accounted for 75%, or $14.7 million of this $19.7 million increase in 1999 over 1998. Distribution revenues from back-end and level-load share classes increased by $2.5 million or 28% to $11.3 million due to growth in the asset value of these classes, partially offset by lower contingent deferred sales charges. Commission revenues from insurance product sales were up by $2.5 million to $19.1 million for 1999 due to increased sales of variable universal life insurance. SHAREHOLDER SERVICE FEE REVENUE SHAREHOLDER SERVICE FEE REVENUES INCLUDE TRANSFER AGENCY FEES, CUSTODIAN FEES FROM RETIREMENT PLAN ACCOUNTS AND PORTFOLIO ACCOUNTING FEES. 2000 OVER 1999 In 2000, shareholder service fee revenues increased by $11.9 million, or 29%, to $53.4 million. Excluding Legend's custodial service fee revenue contribution of $5.1 million, shareholder service fees increased by 16% due primarily to a 15% increase in the average number of accounts serviced. Shareholder service fee revenue, excluding Legend's custodial contribution, comprised 82% of transfer agency revenue and 13% of custodial fee revenue, representing 95% of total service revenue. Transfer agency and retirement plan custodial fees are primarily based on annual charges per account and fluctuate based on the number of accounts serviced. The average number of shareholder accounts was 1.88 million in 2000 compared with 1.64 million in 1999. 1999 OVER 1998 The transfer agency and custodian fee revenue, which comprised 95% of the service fee revenues in 1999, are primarily based on annual charges per account and fluctuate based on the number of accounts serviced. In 1999, shareholder service fees increased by 23% to $41.5 million due primarily to a 12% increase in the average number of accounts. In addition, a fee increase in the fourth quarter of 1998, coinciding with the outsourcing of the data processing component of transfer agency activities, caused the increase in revenues to exceed the increase in number of accounts serviced. This fee increase contributed $4.8 million to the growth in revenue in 1999. 22 UNDERWRITING AND DISTRIBUTION EXPENSE UNDERWRITING AND DISTRIBUTION EXPENSE INCLUDES COSTS ASSOCIATED WITH THE MARKETING, PROMOTION, AND DISTRIBUTION OF OUR PRODUCTS. THE PRIMARY COSTS ARE COMMISSIONS AND OTHER COMPENSATION PAID TO FINANCIAL ADVISORS, SALES MANAGEMENT AND OTHER MARKETING PERSONNEL, PLUS OVERHEAD EXPENSES RELATING TO FIELD OFFICES, SALES PROGRAMS AND ADVERTISING. 2000 OVER 1999 Underwriting and distribution expenses for 2000 were $183.2 million, an increase of $58.3 million or 47% compared with 1999. Legend's operations contributed $25.2 million to underwriting and distribution expenses. Excluding Legend's contribution, the increase was 27%. Over 70% of underwriting and distribution expenses are direct expenses relating to sales volume such as commissions, advisor incentive compensation, and commission overrides paid to field management. These costs increased $23.7 million, or 26%, as sales volume increased 21%. Other indirect costs for sales offices, compensation to marketing support personnel, advertising and sales program costs do not fluctuate directly with sales volume or sales revenues. These costs increased by $6.3 million, or 18%, in 2000 compared with 1999. The major items included in indirect costs include sales program financing costs of $8.6 million, group health and accident insurance of $3.4 million, field office compensation of $5.8 million, and facilities costs for field offices of $11.6 million. Our distribution margin, excluding Legend, was 7.8% compared with 1.1% for the same period in 1999. Margin improvement was attributable to enhanced compensation agreements on certain products and also to the fact that growth in sales exceeded that of fixed costs such as sales support, which do not fluctuate with sales volume. 1999 OVER 1998 Underwriting and distribution expenses for 1999 were $124.9 million, an increase of $25.4 million or 25% compared with 1998. The largest contributor to the increase in distribution expenses was commission expense, and other sales force compensation related to sales volume. Other factors included higher production and asset retention incentive compensation of $6.0 million, higher net costs relating to field offices, marketing and national advertising of $5.5 million and increased sales program costs of $2.7 million. We began restructuring our mutual fund products in the fourth quarter of 1999. Due to their non-industry standard structure, the W&R Funds' Class B shares were closed for new sales and converted into Class C shares, which have an industry standard structure. Concurrently, the Advisors Funds began offering Class B shares and Class C shares. Upon conversion of the W&R Funds' Class B shares, no contingent deferred sales charges were collected for any converted share redemptions. The deferred selling costs of $19.0 million related to the W&R Funds' Class B share conversion were written off on November 30, 1999 concurrent with the necessary approvals for share conversion. It was estimated that underwriting and distribution expenses would be reduced by approximately $3.0 million per year as a result of the restructuring and related write-off, primarily through foregone amortization of deferred selling costs. COMPENSATION AND RELATED COSTS 2000 OVER 1999 Compensation and related costs for 2000 were $57.3 million, an increase of $12.4 million, or 28%, compared to 1999. ACF contributed $3.9 million in 2000 and $1.2 million from the time of acquisition in August 1999 through December 31, 1999. Legend, acquired March 31, 2000, contributed $1.3 million to these costs in 2000. Excluding these acquisitions, compensation increased 19%, or $8.4 million, from $43.7 million to $52.1 million. Salaries and incentive compensation account for over 80% of total compensation. Remaining costs included payroll taxes, group life and health insurance, and pension and savings plan costs. Salaries and incentive bonus compensation increased 21% and 22%, respectively, due 23 primarily to the increase in personnel and annual raises. Other compensation costs increased at a much lower rate of 11% due to lower expenses for group health and accident insurance as well as certain pension costs. 1999 OVER 1998 Compensation and related costs for 1999 were $44.9 million, an increase of $13.4 million, or 43%, compared to 1998. The growth in our operations added 25% to the average employee headcount. Additional performance based compensation accounted for $3.8 million of the increase in compensation costs due primarily to investment performance compensation paid to portfolio managers and, to a lesser extent, to the inclusion of middle management in incentive compensation plans. Higher pension and health insurance costs were additional factors for the increase in compensation costs. Pension and related costs were $0.8 million higher due to personnel additions and a higher rate of compensation increase. Higher health insurance costs contributed $1.1 million to the increase as reserves were increased to reflect higher claims exposure. GENERAL AND ADMINISTRATIVE EXPENSE 2000 OVER 1999 General and administrative expenses, which reflect operating costs other than those related to compensation and to distribution efforts, increased by $9.3 million, or 48%, to $28.5 million for 2000. ACF contributed $1.0 million in 2000 and $0.5 million from the time of acquisition in August 1999 through December 31, 1999. Legend, acquired March 31, 2000, contributed $3.2 million to these costs in 2000. Excluding these costs from recently acquired companies, general and administrative expenses increased by $5.6 million, or 29%, a result of investments made to facilitate growth, notably in computer systems and services and costs associated with implementing new funds and share classes. Also contributing to the increase were higher rental and facilities costs from expanding operations. 1999 OVER 1998 General and administrative expenses were up by $10.7 million, or 125%, to $19.2 million for 1999. Approximately $5.4 million of this increase was attributable to the implementation of a new transfer agency system in the fourth quarter of 1998. Higher shareholder service fee revenues coinciding with this implementation offset most of the increased costs. The growth of our operations added to higher administrative costs, including the acquisition of ACF, new consulting arrangements, proxy and shareholder meeting costs, and additional facilities rental to accommodate growth. INVESTMENT AND OTHER INCOME 2000 OVER 1999 Investment and other income increased by $0.4 million from $10.2 million in 1999 to $10.6 million in 2000. In 2000, investment and other income included $2.5 million of realized gains from the sale of investment securities sold to partially fund the Legend acquisition. In 1999, $1.0 million was attributable to net rental income from real estate properties which were sold in December of 1999. Excluding these items, interest income declined by $1.1 million, or 12%, to $8.1 million due to lower amounts invested in interest-bearing corporate and municipal bonds. Average invested cash and marketable securities were $136.7 million in 2000 compared with $142.1 million in 1999. 1999 OVER 1998 Investment and other income increased by $1.2 million to $10.2 million in 1999. Average invested cash and marketable securities were $142.1 million in 1999 compared with $144.8 million in 1998. Substantially 24 all of the increase in investment and other income was attributable to higher net rental income from investment in real estate properties. These properties were sold on December 28, 1999 for net proceeds of $16.5 million. Pretax income realized from rental operations of these properties in 1999 was $1.0 million. DEPRECIATION 2000 OVER 1999 Depreciation of property and equipment increased by $1.5 million, or 67%, in 2000 to $3.6 million. The acquisitions of ACF on August 9, 1999 and Legend on March 31, 2000 accounted for $320 thousand of the increase. The remaining difference was primarily the result of additions to furniture and equipment in field offices and information systems in our home office. Our new building, which was completed and placed into service in September 2000, was another contributing factor to the increase in depreciation expense. 1999 OVER 1998 Depreciation of property and equipment increased by $270 thousand, or 14% in 1999 to $2.2 million primarily due to furniture and equipment relating to opening additional field offices and upgrading and enhancing existing offices. INTEREST EXPENSE 2000 OVER 1999 We entered into a $200.0 million credit facility arrangement in October of 1998. This facility is renewable annually in October, was renewed in October 1999 and was increased to $220.0 million in March 2000. The facility is expandable to $330.0 million, whereby syndicates could, at their option upon our request, increase the loans by $110.0 million. The credit facility was used to fund share repurchases and facilitate the acquisitions of Legend and ACF. Beginning in the third quarter of 2000, we also implemented a money market loan program. The money market loan program, which is similar to commercial paper, was utilized to repay amounts borrowed under the credit facility. In October 2000, all amounts borrowed on the credit facility were repaid. On August 15, 2000, we filed a $400.0 million universal shelf registration whereby proceeds received could be used for general corporate purposes, including repaying short-term debt outstanding. On January 18, 2001, we issued $200.0 million in principal amount of 7.5% senior notes due 2006 resulting in net proceeds of approximately $197.6 million which was used to repay short-term debt outstanding and for general corporate purposes. As a result, for purposes of these financial statements, $175.3 million of short-term debt outstanding at December 31, 2000 was reclassified as long-term. During the year, the average balance on the combined short-term debt was $195.8 million for 2000 and $106.1 million for 1999. The average interest rate applied, excluding other costs, was 7.01% for 2000 and 5.73% for 1999. 1999 OVER 1998 The credit facility discussed above was used in 1999 to fund share repurchases during the year and acquire ACF in August of 1999. The average interest rate applied to this facility, excluding facility costs, was 5.73% in 1999. The average amount outstanding on this facility was $106.1 million. In 1999, interest expense and related facility costs were $6.5 million, compared to $704 thousand for 1998. At the end of 1999, we had an outstanding balance of $125.3 million under this credit facility, compared to $40.1 million at the end of 1998. 25 LOSS ON THE SALE OF REAL ESTATE On December 28, 1999, we completed the sale of all multi-tenant properties to unrelated third parties. Proceeds from the sale were $16.5 million resulting in a $4.6 million pretax loss. WRITE-OFF OF DEFERRED SELLING COSTS We began restructuring our mutual fund products in the fourth quarter of 1999. Due to their non-industry-standard structure, the W&R Funds' Class B shares were closed for new sales and were converted into Class C shares in March 2000, which have an industry standard structure. Concurrently, the Advisors Funds began offering Class B shares and Class C shares. Upon conversion of the W&R Class B shares, no contingent deferred sales charges were collected for any converted share redemptions. The deferred selling costs related to the W&R Funds' Class B shares in the amount of $19.0 million (pre-tax) were written off on November 30, 1999 concurrent with the necessary approvals for share conversion. By offering additional classes of mutual fund shares and closing funds with non-industry standard structures, our mutual funds are more consistent with that of the industry, provide our clients with more choices and greater value, and accommodate additional changes for strategic distribution flexibility. AFFILIATED INTEREST INCOME AND EXPENSE Prior to its initial public offering in March of 1998, we had various notes payable and notes receivable with Torchmark and certain subsidiaries of Torchmark. The affiliated interest income and expense as reported for 1998 pertain to these notes and were prepaid with proceeds from the offering. INCOME TAXES Our effective income tax rate was 39.0%, 38.1%, and 38.2%, in 2000, 1999, and 1998, respectively. FINANCIAL CONDITION At December 31, 2000, our total assets were $422.2 million, up $87.1 million from December 31, 1999. In 2000, we repurchased 5.1 million shares of our common stock at a total cost of $108.4 million compared to 8.7 million shares of our common stock at a total cost of $132.2 million during 1999. Cash flows from operations, the credit facility, and the money market loan program were utilized to fund these share repurchases. At December 31, 2000, our outstanding debt, including principal and accrued interest was $175.3 million compared to $125.3 million on December 31, 1999. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities increased by $60.5 million to $173.9 million for 2000 due to higher net income from operations, excluding non-cash items, as well as the timing of cash received and cash paid on assets and liabilities. Net cash used in investing activities in 2000 was $59.8 million, compared to $4.0 million net cash provided in 1999. Proceeds from the sale and maturity of investment securities exceeded purchases of investment securities by $30.9 million in 2000. At December 31, 2000, we had $125.7 million in cash and marketable investment securities, of which $21.9 million was restricted for the benefit of customers in compliance with securities industry regulations. Cash and marketable securities at December 31, 1999 were $148.0 million, of which $17.1 million was restricted. Other investing activities in 2000 used $30.4 million for the additions of property and equipment, and $60.3 million for the acquisition of subsidiaries. In 2000, we used $107.0 million in net financing activities, compared with $86.6 million in 1999. In 2000, we repurchased 3.3 million shares of Class A and 1.8 million shares of Class B common stock, the combined cost of which was $108.4 million, and paid $29.5 million in cash dividends. Net borrowings of $50.0 million on the credit facility were utilized in 2000 to finance share repurchases and the acquisition of Legend. The $220.0 million, 364-day revolving credit facility, expandable to $330.0 million at the syndicates' option upon our request, had no balance outstanding at December 31, 2000. 26 Management believes its available cash, marketable securities, and expected cash flow from operations will be sufficient to fund dividends, operations, advance sales commissions, obligations, and other reasonably foreseeable cash needs. We may also continue to repurchase shares of our common stock from time to time, as management deems appropriate. The share repurchases could be financed by our available cash and investments and/or the use of our revolving credit facility or utilization of the money market loan program. SUBSEQUENT EVENTS On January 18, 2001, we completed an offering of $200.0 million in principal amount of 7.5% senior notes due 2006 resulting in net proceeds of approximately $197.6 million (net of discounts, commissions and estimated expenses.) The notes represent senior unsecured obligations and are rated "Baa2" by Moody's and "BBB" by Standard & Poor's. The notes pay interest semi-annually on January 18 and July 18 at a rate of 7.5% per annum. Proceeds from the notes will be used to repay short-term debt and for general corporate purposes. Total debt outstanding as of December 31, 2000 was $175.3 million. On March 2, 2001, we repurchased 4.0 million shares of our Class B common stock at an aggregate cost, including commissions, of $122.0 million. These shares were repurchased at $30.50 per share. On March 7, 2001, we completed the sale of our two home office buildings to Mesirow Realty Sale-Leaseback ("Mesirow"). We also entered into an agreement with Mesirow to lease the buildings back for a period of fifteen years. The net proceeds from this sale were $28.2 million and resulted in a realized gain of approximately $1.8 million, which will be deferred and amortized over the term of the operating lease. UNITED INVESTORS LIFE INSURANCE COMPANY LITIGATION Currently, we are in litigation with UILIC, one of our insurance providers, and other related parties over terms of a compensation agreement signed in July 1999 by UILIC and Waddell & Reed, Inc. The compensation is paid by UILIC to us on variable annuities underwritten by UILIC and distributed by us. The agreement provides for us to be paid annual compensation of 0.25% on all variable annuity policies' assets under management issued after January 1, 2000, and annual compensation of 0.20% on variable annuity policies' assets under management issued before that date. This agreement added $7.3 million of asset-based fees to revenues in 2000. Payments are continuing but the validity and duration of that agreement has been challenged by UILIC in a complaint filed in May 2000, in the Circuit Court of Jefferson County, Alabama in which we have subsequently named Torchmark as a third party defendant in a tortious interference claim. UILIC has taken the position that regardless of the validity of the compensation agreement, the compensation payable pursuant to this agreement terminates on April 30, 2001. Management believes that the Company will prevail on the merits of the litigation and that compensation pursuant to the July 1999 compensation agreement will continue, pursuant to the terms of the agreement, as long as the variable annuity policies' assets are in place and the variable annuity policies in question are in force. Moreover, we do not foresee any additional risk to existing variable policy assets and anticipate continued growth in sales of variable annuity products. As previously reported, a number of Torchmark affiliates terminated us as investment adviser for certain insurance company general account assets and pension plan assets totaling $768.0 million with an average management fee of 25 basis points. These accounts paid approximately $1.9 million in annual investment management fees. The only other Torchmark-affiliated assets for which we serve as investment adviser are approximately $37.9 million of mutual funds in 401(k) plans of Torchmark affiliates. TERMINATION OF AGREEMENTS BY UNITED INVESTORS LIFE INSURANCE COMPANY On February 28, 2001, UILIC terminated the Principal Underwriting Agreement by and between UILIC and the Company, effective April 30, 2001. This agreement provided for the sale of variable 27 products underwritten by UILIC by our financial advisors. As a result, beginning May 1, 2001, Nationwide will become the primary provider of variable products for distribution by our financial advisors. Management believes that the profitability of the two insurers' variable product lines is equivalent and does not anticipate any material adverse effects from the termination of the Principal Underwriting Agreement. In addition, on February 28, 2001, UILIC terminated the General Agent Contract by and between UILIC and the Company, effective December 31, 2001. This agreement provides for the sale of non-variable life insurance products underwritten by UILIC and distributed by our financial advisors. We are currently in the process of negotiating with several insurance carriers for the sale of their products by our financial advisors to complement the other non-UILIC life products currently available for distribution by our financial advisors. In addition, the Company has recently entered into an agreement with BISYS to provide our financial advisors with access to an extensive array of traditional life and disability insurance products for sale to our clients. As a result, management does not anticipate any material adverse effects from the termination of the UILIC General Agent Contract. RECENT ACCOUNTING DEVELOPMENTS In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS 133"). This statement, which is effective for all fiscal quarters of fiscal years beginning after June 15, 2000, establishes accounting and reporting standards for derivative financial instruments and for hedging activities. It requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for changes in fair value of a derivative depends on the intended use of the derivative and the resulting designation. This statement was amended in June 2000 with Statement of Financial Accounting Standards No. 138, "ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES" ("SFAS 138"). The FASB encourages early adoption of SFAS 133; however, the provisions of the standard should not be retroactively applied to financial statements of periods prior to adoption. The adoption of SFAS 133, as amended, is not expected to have a material impact on us. In December 1999, the Securities and Exchange Commission (the "SEC") issued Staff Accounting Bulletin No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" ("SAB101"), which among other guidance, clarifies certain conditions to be met in order to recognize revenue. SAB 101 summarizes some of the SEC interpretations of generally accepted accounting principles relating to revenue recognition. In June 2000, the SEC issued Staff Accounting Bulletin No. 101B which delayed the implementation of SAB 101 until the fourth quarter of fiscal years beginning after December 15, 1999 and the provisions are to be retroactively applied to the entire year. The implementation of SAB 101 did not have a material effect on our financial statements. In March 2000, the FASB issued Interpretation No. 44, "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF APB OPINION NO. 25" ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25") for certain issues. It does not address any issues related to the application of the fair value method set forth in Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS 123"). Among other issues, FIN 44 clarifies the definition of "employee" for purposes of applying APB 25, the criteria for determining whether a plan qualifies as a non-compensatory plan, the accounting effects of modifications to the terms of a previously fixed stock option or award and the accounting for an exchange of stock compensation awards in a business combination. For those issues that affect us, FIN 44 was effective July 1, 2000. We do not expect that the application of FIN 44 will have a material impact on the financial statements. SEASONABILITY AND INFLATION We do not believe our operations are subject to significant seasonal fluctuations. We do not believe that inflation has had a significant impact on operations. 28 RISK FACTORS THERE MAY BE ADVERSE EFFECTS ON OUR REVENUES, EARNINGS AND PROSPECTS IF THE SECURITIES MARKETS DECLINE. Our results of operations are affected by certain economic factors, including the level of the securities markets. We have benefited from the favorable performance of the securities markets in recent years that has attracted a substantial increase in the investments in the securities markets. A decline in the securities markets, failure of the securities markets to sustain their recent levels of growth or short-term volatility in the securities markets could result in investors withdrawing from the markets or decreasing their rate of investment, either of which could adversely affect our revenues, earnings and growth prospects. Because our revenues are, to a large extent, investment management fees based on the value of assets under management, a decline in the value of these assets would adversely affect our revenues. 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 difficult. Our growth rate has varied from year to year and there can be no assurance that the average growth rates sustained in the recent past will continue. The combination of adverse markets effecting sales and investment management fees could compound on each other and materially effect earnings. Adverse conditions in the U.S. domestic stock market are particularly material to us due to high concentration of assets under management in that market. 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. 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 private institutional accounts. Conversely, poor relative performance results in decreased sales, increased redemptions of the Funds' shares and the loss of private institutional 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. THERE MAY BE AN ADVERSE EFFECT ON OUR BUSINESS IF OUR INVESTORS REMOVE THE ASSETS WE MANAGE ON SHORT NOTICE. A majority of our revenues are derived from investment management agreements with our Funds that 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 or its shareholders. Some of these investment management agreements may be terminated or not renewed, and new agreements may be unavailable. In addition, mutual fund investors may redeem their investments in the Funds at any time without any prior notice. Investors can terminate their relationship with us, reduce the 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 decrease in revenues that could result from any such event could have a material adverse effect on our business. WE FACE INCREASED COMPETITION IN HIRING AND RETAINING KEY PERSONNEL AND FINANCIAL ADVISORS. Our continued success depends to a substantial degree on our ability to attract and retain qualified personnel to conduct our fund management and investment advisory business. The market for qualified fund managers, investment analysts, and financial advisors is extremely competitive and has grown more so in recent periods because of the growth in the industry. We are dependent on our sales force and select third party distributors to sell our mutual funds and other investment products. Our growth prospects will be directly affected by the quality and quantity of financial advisors we are able to successfully recruit and retain. There can be no assurances that we will be successful in our efforts to recruit and retain the required personnel. WE FACE STRONG COMPETITION FROM NUMEROUS AND SOMETIMES LARGER COMPANIES. We compete with stock brokerage and investment banking firms, insurance companies, banks, online and Internet investment sites and other financial institutions. Many of these companies not only offer mutual fund investments and services but also offer other financial products and services. Many of our competitors have more products 29 and product lines, services, and may also have substantially greater assets under management. Many larger mutual fund complexes have developed relationships with brokerage houses with large distribution networks, which may enable these fund complexes to reach broader client bases. In recent years, there has been a trend of consolidation in the mutual fund industry resulting in stronger competitors with greater financial resources than us. There has also been a trend toward online Internet financial services. If existing customers stop investing with us and instead invest with our competitors, or if potential customers decide to invest with our competitors, it would cause our market share, revenues and income to decline. POTENTIAL MISUSE OF FUNDS AND INFORMATION IN THE POSSESSION OF OUR ADVISORS COULD RESULT IN LIABILITY TO OUR CLIENTS. Our financial advisors handle a significant amount of funds and financial and personal information for our clients. Although we have implemented a system of controls to minimize the risk of fraudulent taking or misuse of funds and information, there can be no assurance that our controls will be adequate or that taking or misuse by our employees can be prevented. We could have liability in the event of a taking or misuse by our employees 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 future liability. THERE ARE NO ASSURANCES THAT WE WILL PAY FUTURE DIVIDENDS. Our Board of Directors currently intends to continue to declare quarterly dividends on both our Class A and Class B common stock. The declaration and payment of dividends is subject to the discretion of our Board. 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. REGULATORY RISK IS SUBSTANTIAL IN OUR BUSINESS. Our investment management business is heavily regulated. Noncompliance 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. Noncompliance with applicable laws or regulations would adversely affect our reputation, prospects, revenues and earnings. In addition, changes in current laws or regulations or in governmental policies could adversely affect our operations, revenues and earnings. PROVISIONS OF OUR ORGANIZATIONAL DOCUMENTS COULD DETER TAKEOVER ATTEMPTS. Under our Certificate of Incorporation, our Board of Directors has the authority, without action by our stockholders, to fix certain terms and issue shares of our Preferred Stock, par value $1.00 per share. Actions of our Board of Directors pursuant to this authority may have the effect of delaying, deterring, or preventing a change in control of the Company. Other provisions in our Certificate of Incorporation and in our Bylaws impose procedural and other requirements that could be deemed to have anti-takeover effects, including replacing incumbent directors. In addition, 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. 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 STOCKHOLDERS RIGHTS PLAN COULD DETER TAKEOVER ATTEMPTS. In 1999 we adopted a stockholders rights plan pursuant to which rights attached to each share of our then outstanding Class A and Class B common stock. Generally, the rights are exercisable only if a person or group acquires 15% or more of the voting power as represented by our Class A and Class B common stock. Under certain conditions, the rights entitle the holders to receive shares of our Class A common stock having a value equal to two times the exercise price of the right. Our stockholders rights plan could impede the completion of a merger, tender 30 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 transactions could result in our stockholders receiving a premium for their shares of our stock over the then current market price of our stock. THE TERMS OF OUR CREDIT FACILITY IMPOSE RESTRICTIONS ON OUR OPERATIONS. THERE ARE NO ASSURANCES WE WILL BE ABLE TO RAISE ADDITIONAL CAPITAL. We have entered into a loan agreement for a $220 million, 364-day revolving line of credit facility with various lenders. The facility is expandable to $330.0 million, whereby the banks could, at their option upon our request, increase the loans by $110.0 million. At December 31, 2000, there was no balance outstanding under this line of credit. In August 2000, we also began utilizing a money market loan program, which functions similarly to commercial paper. At December 31, 2000, the outstanding balance was $160.0 million. The terms and conditions of the revolving credit facility and the money market loan program impose restrictions that affect, among other things, our ability to incur debt, make capital expenditures, merge, sell assets, make distributions or create or incur liens. Availability of our credit facility is also subject to certain financial covenants. Our ability to comply with the covenants can be affected by events beyond our control and there can be no assurance that we will achieve operating results that comply with the provisions of the credit agreement. A breach of any of these covenants could result in a default under our credit facility. In the event of a default, the banks could elect to declare the outstanding principal amount of our credit facility, all interest thereon and all other amounts payable under our credit facility to be immediately due and payable. Our ability to satisfy our debt obligations will depend upon our future operating performance, which will be affected by prevailing economic, financial and business conditions and other factors, some of which are beyond our control. We anticipate that borrowings from our existing revolving credit facility, the refinancing of our revolving credit facility, and/or cash provided by operating activities, will provide sufficient funds to finance anticipated development plans, meet our operating expenses and service our debt requirements as they become due. However, in the event that we require additional capital, there can be no assurance that we will be able to raise such capital when needed or on satisfactory terms, if at all. Also, there can be no assurance that we will be able to refinance our current credit facility upon its maturity or on favorable terms. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources." THERE ARE NO ASSURANCES THAT THE COMBINATION OF OUR TWO CLASSES OF COMMON STOCK WILL BE APPROVED OR THAT THE EXPECTED EFFECTS WILL OCCUR. Our stockholders will consider and vote on a proposal to merge the Company and a wholly-owned subsidiary that will effect the combination of our two classes of common stock into a single class of stock. If the merger is approved, we anticipate that (1) the combination of our two classes of common stock will have no effect on our business or operations, as currently conducted or afterwards; (2) neither we nor the stockholders will recognize taxable gain or loss upon the conversion of the Class B stock and the aggregate tax basis in, and the holding period of, the newly issued shares of Class A common stock will be the same as the shares of Class B common stock exchanged; (3) the merger will not have any material impact on our stock option plans, other benefit plans or our rights agreement, except for technical amendments to the agreement to eliminate any references to the Class B common stock; (4) there will not be any effect on earnings per share or book value per share; (5) the analysis and valuation of a single class of stock will be facilitated; and (6) it will enhance interest in our stock and increase liquidity and trading efficiency. However, we cannot guarantee or insure that the merger will be approved or, if approved, that any of the anticipated effects, including an increase in liquidity and trading efficiency of the single class of common stock, will occur. SYSTEMS FAILURE MAY DISRUPT OUR BUSINESS. Our business is highly dependent on communications and information systems, including our mutual fund transfer agency system maintained by a third-party service provider. We are highly dependent on our ability to process a large number of transactions on a daily basis and also on the proper functioning of computer systems of third parties. We rely heavily on financial, 31 accounting and other data processing systems. If any of these 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 insure that any systems failure or interruption, whether caused by a fire, other natural disaster, power or telecommunications failure, act of war or otherwise will not occur, or that back-up procedures and capabilities in the event of any failure or interruption will be adequate. WE MAY HAVE DIFFICULTY EXECUTING OUR ACQUISITION STRATEGY. We have adopted a strategy to selectively pursue acquisitions and alliances that will add new products or alternative distribution systems. There can be no assurance that we will find suitable acquisition candidates at acceptable prices, have sufficient capital resources to realize our acquisition strategy or be successful in entering into definitive agreements for desired acquisitions. In addition, we have limited experience in finding, acquiring and integrating other companies and we may not be successful in the integration of acquired companies. An acquisition may not prove to add new products or distribution systems or otherwise be advantageous to us. THE RESTRUCTURING OF OUR MUTUAL FUND PRODUCTS TO ENHANCE OUR COMPETITIVENESS AND DISTRIBUTION CHANNELS MAY NOT BE SUCCESSFUL. In October 1999, we commenced restructuring our mutual fund products by offering additional classes of mutual fund shares and closing non-industry standard classes in an effort to enhance our competitiveness and strategic distribution alternatives and favorably impact our distribution margin. We anticipate that the product restructuring will result in our product line (1) being more consistent with the industry, (2) providing our clients with more choices and greater value, and (3) accommodating additional changes for strategic distribution flexibility. There can be no assurances that the restructuring of our mutual fund products will enhance our competitiveness and distribution channels or that it will favorably impact our distribution margin. OUR HOLDING COMPANY STRUCTURE RESULTS IN STRUCTURAL SUBORDINATION AND MAY AFFECT OUR ABILITY TO MAKE PAYMENTS ON OUR SENIOR UNSECURED NOTES. On January 18, 2001, we completed a universal shelf offering of $200.0 million principal amount of 7.5% senior notes due 2006. The notes represent senior unsecured obligations exclusively of Waddell & Reed Financial, Inc. 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 the notes, is dependent upon the earnings of our subsidiaries. In addition, we are dependent on the distribution of earnings, loans or other payments by our subsidiaries to us. Our subsidiaries are separate and distinct legal entities. Our subsidiaries have no obligation to pay any amounts due on the notes 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 by our subsidiaries could be subject to statutory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries' earnings and business considerations. Our right to receive any assets of any of our subsidiaries upon their liquidation or reorganization, and therefore the right of the holders of the notes to participate in those assets, would be effectively subordinated to the claims of that subsidiary's creditors, including trade creditors. In addition, even if we were a creditor of any of our subsidiaries, our rights as a creditor would subordinate to any security interest in the assets of our subsidiaries and any indebtedness of our subsidiaries senior to that held by us. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk from changes in interest rates. Our cash equivalents and short-term investments and our outstanding short-term debt bear variable interest rates. We have not used derivative instruments to offset the exposure to changes in interest rates. Changes in interest rates are not expected to have a material impact on our results of operations. 32 As noted in Item 7, our revenues and net income are based in part on the value of the investment portfolios managed. Accordingly, financial market declines will negatively impact our assets under management and, in turn, its revenues and profitability. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Consolidated Financial Statements referred to in the Index on page 36 setting forth our consolidated financial statements, together with the report of KPMG LLP dated January 24, 2001 on page 37. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure have been reported on a Form 8-K within the twenty-four months prior to the date of the most recent financial statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item 10 is incorporated herein by reference to our definitive proxy statement for our 2001 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (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 2001 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 Information required by this Item 12 is incorporated herein by reference to our definitive proxy statement for our 2001 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item 13 is incorporated herein by reference to our definitive proxy statement for our 2001 Annual Meeting of Stockholders to be filed pursuant to Regulation 14A under the Exchange Act. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements. Reference is made to the Index to Consolidated Financial Statements on page 36 for a list of all financial statements filed as part of this Report. (a)(2) Financial Statement Schedules. None. (b) Reports on Form 8-K. We filed no reports on Form 8-K during the fourth quarter of 2000. (c) Exhibits. Reference is made to the Index to Exhibits on page 60 for a list of all exhibits filed as part of this Report.
33 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 March 19, 2001. WADDELL & REED FINANCIAL, INC. By: /s/ KEITH A. TUCKER ------------------------------------------ Keith A. Tucker 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/ KEITH A. TUCKER Chairman of the Board, ------------------------------------------- Chief Executive Officer March 19, 2001 Keith A. Tucker and Director (Principal Executive Officer) /s/ HENRY J. HERRMANN President, Chief ------------------------------------------- Investment Officer and March 19, 2001 Henry J. Herrmann Director /s/ ROBERT L. HECHLER* Executive Vice President ------------------------------------------- and Director March 19, 2001 Robert L. Hechler /s/ JOHN E. SUNDEEN, JR. Senior Vice President, ------------------------------------------- Chief Financial Officer March 19, 2001 John E. Sundeen, Jr. and Treasurer (Principal Financial Officer) /s/ D. TYLER TOWERY Vice President and ------------------------------------------- Controller (Principal March 19, 2001 D. Tyler Towery Accounting Officer) /s/ JERRY W. WALTON* ------------------------------------------- Director March 19, 2001 Jerry W. Walton* /s/ RONALD C. REIMER* ------------------------------------------- Director March 19, 2001 Ronald C. Reimer* /s/ WILLIAM L. ROGERS* ------------------------------------------- Director March 19, 2001 William L. Rogers*
34
NAME TITLE DATE ---- ----- ---- /s/ JAMES M. RAINES* ------------------------------------------- Director March 19, 2001 James M. Raines* /s/ DANIEL C. SCHULTE Vice President, General ------------------------------------------- Counsel and Secretary March 19, 2001 Daniel C. Schulte
*By: ATTORNEY-IN-FACT 35 WADDELL & REED FINANCIAL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- Waddell & Reed Financial, Inc.: Independent Auditors' Report................................ 37 Consolidated Balance Sheets at December 31, 2000 and December 31, 1999......................................... 38 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2000............. 40 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 2000...................................................... 41 Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 2000...................................................... 42 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2000.......... 43 Notes to Consolidated Financial Statements.................. 44
36 INDEPENDENT AUDITORS' REPORT The Board of Directors Waddell & Reed Financial, Inc.: We have audited the accompanying consolidated balance sheets of Waddell & Reed Financial, Inc. and subsidiaries, as of December 31, 2000 and 1999 and the related consolidated statements of income, stockholders' equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Kansas City, Missouri January 24, 2001 37 WADDELL & REED FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 ASSETS
2000 1999 -------- -------- (IN THOUSANDS) Assets: Cash and cash equivalents................................. $ 68,082 60,977 Investment securities, available-for-sale................. 57,639 87,045 Receivables: Funds and separate accounts............................. 13,963 12,528 Customers and other..................................... 21,477 14,610 Deferred income taxes....................................... 45 37 Prepaid expenses and other current assets................... 4,868 7,111 -------- ------- Total current assets.................................... 166,074 182,308 -------- ------- Property and equipment, net................................. 55,453 27,633 Deferred sales commissions, net............................. 10,108 1,851 Goodwill (net of accumulated amortization of $31,995 and $26,493).................................................. 180,173 112,994 Deferred income taxes....................................... 1,026 5,665 Other assets................................................ 9,352 4,622 -------- ------- Total assets............................................ $422,186 335,073 ======== =======
See accompanying notes to consolidated financial statements. 38 WADDELL & REED FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999 LIABILITIES AND STOCKHOLDERS' EQUITY
2000 1999 --------- -------- (IN THOUSANDS) Liabilities: Accounts payable.......................................... $ 41,558 34,002 Accrued sales force compensation.......................... 18,741 14,578 Accrued other compensation................................ 11,774 10,998 Short-term notes payable.................................. -- 125,307 Income taxes payable...................................... 126 8,284 Accrued purchase price liability for acquired subsidiaries............................................ 13,110 -- Other current liabilities................................. 8,429 5,458 --------- -------- Total current liabilities............................... 93,738 198,627 --------- -------- Long-term debt............................................ 175,320 -- Accrued pensions and post-retirement costs................ 11,295 10,103 Other..................................................... 223 -- --------- -------- Total liabilities....................................... 280,576 208,730 --------- -------- Stockholders' equity: Common stock (See table below)............................ 997 997 Additional paid-in capital................................ 251,990 238,434 Retained earnings......................................... 206,589 97,129 Deferred compensation..................................... (10,950) (11,246) Treasury stock (See table below).......................... (305,008) (198,360) Accumulated other comprehensive income.................... (2,008) (611) --------- -------- Total stockholders' equity.............................. 141,610 126,343 --------- -------- Total liabilities and stockholders' equity.................. $ 422,186 335,073 ========= ========
2000 1999 COMMON STOCK ------------------------- ------------------------- ($0.01 PAR VALUE) CLASS A CLASS B CLASS A CLASS B ----------------- ----------- ----------- ----------- ----------- Authorized................ 150,000,000 100,000,000 150,000,000 100,000,000 Issued.................... 48,213,261 51,487,500 48,213,261 51,487,500 Outstanding............... 43,270,902 40,139,617 44,478,318 41,971,870 Treasury stock............ 4,942,359 11,347,883 3,734,943 9,515,630
See accompanying notes to consolidated financial statements. 39 WADDELL & REED FINANCIAL, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998 -------- -------- -------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Revenues: Investment management fees.............................. $253,774 178,612 137,823 Underwriting and distribution fees...................... 202,879 126,318 106,615 Shareholder service fees................................ 53,436 41,525 33,808 Investment and other income............................. 10,613 10,202 9,043 -------- ------- ------- Total revenues........................................ 520,702 356,657 287,289 -------- ------- ------- Expenses: Underwriting and distribution........................... 183,222 124,938 99,575 Compensation and related costs.......................... 57,331 44,944 31,512 General and administrative.............................. 28,498 19,245 8,551 Depreciation............................................ 3,613 2,162 1,892 Amortization of goodwill................................ 5,502 3,224 2,903 Interest expense........................................ 14,590 6,546 704 Loss on sale of real estate............................. -- 4,592 -- Write-off of deferred selling costs..................... -- 18,981 -- -------- ------- ------- Total expenses........................................ 292,756 224,632 145,137 -------- ------- ------- Income before affiliated items and provision for income taxes........................................ 227,946 132,025 142,152 Affiliated items: Interest income......................................... -- -- 1,950 Interest expense........................................ -- -- (8,604) -------- ------- ------- Income before provision for income taxes................ 227,946 132,025 135,498 Provision for income taxes................................ 88,941 50,258 51,763 -------- ------- ------- Net income.............................................. $139,005 81,767 83,735 ======== ======= ======= Net income per share: Basic................................................... $ 1.67 0.91 0.85 ======== ======= ======= Diluted................................................. $ 1.60 0.89 0.84 ======== ======= ======= Weighted average shares outstanding--basic................ 83,362 89,456 98,681 --diluted................. 86,895 91,548 99,269 Dividends declared per common share....................... $ 0.35 0.35 0.35
See accompanying notes to consolidated financial statements. 40 WADDELL & REED FINANCIAL, INC. STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
DIVIDENDS IN EXCESS OF RETAINED EARNINGS AND COMMON STOCK ADDITIONAL ADDITIONAL ------------------- PAID-IN RETAINED PAID-IN DEFERRED TREASURY SHARES AMOUNT CAPITAL EARNINGS CAPITAL COMPENSATION STOCK -------- -------- ---------- -------- ------------ ------------ -------- (IN THOUSANDS) Balance at December 31, 1997........................ 63,450 $635 (212) -- (230,658) -- -- Net income.................... -- -- -- 73,712 10,023 -- -- Issuance of restricted shares and other................... 446 4 5,259 -- -- (12,494) -- IPO proceeds.................. 35,805 358 295,021 -- 220,635 -- -- Dividends paid................ -- -- -- (26,387) -- -- -- Other distributions........... -- -- (54,129) -- -- -- -- Treasury stock repurchases.... -- -- -- -- -- -- (74,833) Unrealized loss on investment securities.................. -- -- -- -- -- -- -- ------ ---- ------- ------- -------- ------- -------- Balance at December 31, 1998........................ 99,701 997 245,939 47,325 -- (12,494) (74,833) Net income.................... -- -- -- 81,767 -- -- -- Recognition of deferred compensation................ -- -- -- -- -- 1,370 -- Issuance of restricted shares and other................... -- -- 6 -- -- (122) 116 Dividends paid................ -- -- -- (31,963) -- -- -- Exercise of stock options..... -- -- (15,964) -- -- -- 8,537 Tax benefit from exercise of options..................... -- -- 8,453 -- -- -- -- Treasury stock repurchases.... -- -- -- -- -- -- (132,180) Unrealized loss on investment securities.................. -- -- -- -- -- -- -- ------ ---- ------- ------- -------- ------- -------- Balance at December 31, 1999........................ 99,701 997 238,434 97,129 -- (11,246) (198,360) Net income.................... -- -- -- 139,005 -- -- -- Recognition of deferred compensation................ -- -- -- -- -- 1,625 -- Issuance of restricted shares and other................... -- -- -- -- -- (1,329) -- Dividends paid................ -- -- -- (29,545) -- -- -- Exercise of stock options..... -- -- (19,499) -- -- -- 1,771 Tax benefit from exercise of options..................... -- -- 33,055 -- -- -- -- Treasury stock repurchases.... -- -- -- -- -- -- (108,419) Unrealized loss on investment securities.................. -- -- -- -- -- -- -- ------ ---- ------- ------- -------- ------- -------- Balance at December 31, 2000........................ 99,701 $997 251,990 206,589 -- (10,950) (305,008) ====== ==== ======= ======= ======== ======= ======== ACCUMULATED TOTAL OTHER STOCKHOLDER'S COMPREHENSIVE EQUITY INCOME (DEFICIT) ------------- ------------- (IN THOUSANDS) Balance at December 31, 1997........................ 344 (229,891) Net income.................... -- 83,735 Issuance of restricted shares and other................... -- (7,231) IPO proceeds.................. -- 516,014 Dividends paid................ -- (26,387) Other distributions........... -- (54,129) Treasury stock repurchases.... -- (74,833) Unrealized loss on investment securities.................. (142) (142) ------ -------- Balance at December 31, 1998........................ 202 207,136 Net income.................... -- 81,767 Recognition of deferred compensation................ -- 1,370 Issuance of restricted shares and other................... -- -- Dividends paid................ -- (31,963) Exercise of stock options..... -- (7,427) Tax benefit from exercise of options..................... -- 8,453 Treasury stock repurchases.... -- (132,180) Unrealized loss on investment securities.................. (813) (813) ------ -------- Balance at December 31, 1999........................ (611) 126,343 Net income.................... -- 139,005 Recognition of deferred compensation................ -- 1,625 Issuance of restricted shares and other................... -- (1,329) Dividends paid................ -- (29,545) Exercise of stock options..... -- (17,728) Tax benefit from exercise of options..................... -- 33,055 Treasury stock repurchases.... -- (108,419) Unrealized loss on investment securities.................. (1,397) (1,397) ------ -------- Balance at December 31, 2000........................ (2,008) 141,610 ====== ========
See accompanying notes to consolidated financial statements. 41 WADDELL & REED FINANCIAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Net income.................................................. $139,005 81,767 83,735 Other comprehensive income: Net unrealized appreciation (depreciation) of investments during the period, net of income taxes of $428, $(387) and $(150).................................................... 664 (616) (249) Reclassification adjustment for amounts included in net income, net of income taxes of $(1,290), $(124) and $64... (2,061) (197) 107 -------- ------ ------ Comprehensive income........................................ $137,608 80,954 83,593 ======== ====== ======
See accompanying notes to consolidated financial statements. 42 WADDELL & REED FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998 --------- -------- -------- (IN THOUSANDS) Cash flows from operating activities: Net income................................................ $ 139,005 81,767 83,735 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 9,268 5,386 4,795 (Gain) loss on sale of investments...................... (2,111) (375) 171 Recognition of deferred compensation.................... 1,625 1,370 1,333 Loss on sale and retirement of fixed assets............. 22 67 75 Write-off of deferred selling cost...................... -- 18,981 -- Loss on sale of real estate............................. -- 4,592 -- Capital gains and dividends reinvested.................. (1,394) (471) (399) Deferred income taxes................................... 5,559 (4,089) (1,988) Changes in assets and liabilities net of acquisition: Receivables from funds and separate accounts.......... (1,435) (6,788) (1,709) Other receivables..................................... 373 15,719 (15,254) Due to/from affiliates--operating..................... -- -- 4,509 Other assets.......................................... (10,291) (12,928) (3,661) Accounts payable...................................... 7,520 5,457 5,375 Other liabilities..................................... 25,794 4,699 10,237 --------- -------- -------- Net cash provided by operating activities................... 173,935 113,387 87,219 --------- -------- -------- Cash flows from investing activities: Additions to investment securities...................... (15,609) (13,001) (110,652) Proceeds from sales of investment securities............ 45,307 635 24,020 Proceeds from maturity of investment securities......... 1,185 27,995 2,424 Additions to property and equipment..................... (30,402) (9,096) (7,602) Investment in real estate............................... -- 551 (5,913) Proceeds from sale of real estate....................... -- 16,452 -- Acquisition of subsidiaries, (net of cash acquired)..... (60,290) (19,557) -- Other................................................... -- -- 7 --------- -------- -------- Net cash provided by (used in) investing activities......... (59,809) 3,979 (97,716) --------- -------- -------- Cash flows from financing activities: Proceeds from IPO....................................... -- -- 516,014 Net borrowings.......................................... 50,000 85,000 40,000 Cash dividends.......................................... (29,545) (31,963) (26,387) Change in due to/from affiliates--nonoperating.......... -- -- (479,373) Purchase of treasury stock.............................. (108,419) (132,180) (74,833) Exercise of stock options............................... 8,327 869 -- Other stock transactions................................ (27,384) (8,295) (8,564) --------- -------- -------- Net cash used in financing activities....................... (107,021) (86,569) (33,143) --------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 7,105 30,797 (43,640) Cash and cash equivalents at beginning of year.............. 60,977 30,180 73,820 --------- -------- -------- Cash and cash equivalents at end of year.................... $ 68,082 60,977 30,180 ========= ======== ======== Cash paid for: Income taxes.............................................. $ 55,346 50,551 48,830 Interest.................................................. 14,013 5,932 628
See accompanying notes to consolidated financial statements 43 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999, AND 1998 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES BUSINESS Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as the "Company," "we," "our" and "us") derive their revenues primarily from investment management, investment product underwriting and distribution, and shareholder services administration provided to the Waddell & Reed Advisors Funds (the "Advisors Funds"), the W&R Funds ("W&R Funds"), the W&R Target Funds ("Target Funds") (collectively, the "Funds"), and institutional and separate accounts. The Funds and the institutional and separate accounts operate under various rules and regulations set forth by the Securities and Exchange Commission (the "SEC"). Services to the Funds are provided under contracts that set forth the fees to be charged for these services. The majority of these contracts are subject to annual review and approval by each Fund's board of directors and shareholders. Our revenues are largely dependent on the total value and composition of assets under management, which include mainly domestic equity securities, but also include debt securities and international equities. Accordingly, fluctuations in financial markets and composition of assets under management impact revenues and results of operations. For 2000, management fees from the Advisors Core Investment Fund were $50.0 million or 10% of total Company revenues. The Advisors Core Investment Fund had a net asset value of $8.5 billion at December 31, 2000 and was our largest fund. Prior to December 1997, we were known as United Investors Management Company. In the first quarter of 1998, our insurance operations, United Investors Life Insurance Company, were distributed to Torchmark Corporation and a subsidiary of Torchmark Corporation (together, "Torchmark"). We were wholly owned by Torchmark until March 4, 1998, when we completed the initial public offering of our Class A common stock (the "Offering"), realizing net proceeds of approximately $516 million. Approximately $481 million of the proceeds were used to prepay notes payable to Torchmark. After giving effect to the Offering and prior to November 6, 1998, Torchmark controlled in excess of 60% of the outstanding Class A and Class B common stock, and in excess of 80% of the voting power of our outstanding Class A and Class B common stock. On November 6, 1998, Torchmark distributed its remaining ownership interest in us by means of a tax-free spin-off to the stockholders of Torchmark of all our common stock held by Torchmark. BASIS OF PRESENTATION The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and our 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. Certain amounts in the prior year's financial statements have been reclassified to conform to the 2000 presentation. STOCK SPLIT On February 23, 2000, we declared a three-for-two stock split effected in the form of a dividend on our Class A and Class B common stock payable April 7, 2000 to stockholders of record as of March 17, 2000. Accordingly, all per share and share outstanding data in the consolidated financial statements and related notes have been restated to reflect the stock split for all periods presented. 44 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES Accounting principles generally accepted in the United States of America require us to estimate certain amounts. We have made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with these principles. Actual results could differ from those estimates. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value for cash, short-term investments, debt, receivables and payables approximates carrying value. Fair values for investment securities are based on quoted market prices, where available. Otherwise, fair values are based on quoted market prices of comparable instruments. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and short-term investments. We consider all highly liquid debt instruments with original maturities of 90 days or less to be cash equivalents. INVESTMENT SECURITIES AND INVESTMENTS IN AFFILIATED MUTUAL FUNDS All investments in debt securities and mutual funds are classified as available-for-sale or trading. As a result, these investments are recorded at fair value. For available-for-sale securities, unrealized holding gains and losses, net of related tax effects, are excluded from earnings until realized and are reported as a separate component of comprehensive income. For trading securities, unrealized holding gains and losses, net of related tax effects, are included in earnings. Realized gains and losses are computed using the specific identification method for investment securities other than mutual funds. For mutual funds, realized gains and losses are computed using the average cost method. COMPREHENSIVE INCOME Comprehensive income consists of net income and unrealized gains (losses) on available-for-sale securities and is presented in a separate statement of comprehensive income. PROPERTY AND EQUIPMENT Property and equipment is carried at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. SOFTWARE DEVELOPED FOR INTERNAL USE Certain internal and external costs incurred in connection with developing or obtaining software for internal use are capitalized in accordance with the American Institute of Certified Public Accountants' Statement of Position No. 98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE." These capitalized costs are included in Property and Equipment, net on the Consolidated Balance Sheets and are amortized when the software project is complete, over the estimated useful life of the software that was put into production. 45 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired, arose in connection with our acquisition by Torchmark, our August 1999 acquisition of Austin Calvert & Flavin, Inc. ("ACF") and our March 2000 acquisition of The Legend Group ("Legend"). Amortization related to our acquisition by Torchmark is on a straight-line basis over 40 years. Amortization related to our acquisition of ACF and Legend is on a straight-line basis over 25 years. We assess the recoverability of goodwill by determining whether the unamortized balance can be recovered through undiscounted future operating cash flows over its remaining life. Impairment, if any, is measured by the excess of the unamortized balance over discounted future operating cash flows. DEFERRED SALES COMMISSIONS We defer certain costs, principally sales commissions and related compensation, which are paid to financial advisors in connection with the sale of certain shares of mutual funds. In October 1999, we commenced the restructuring of our mutual fund products at which time the (non-industry standard) W&R Funds Class B shares were closed for new sales. As a result of the discontinuation of these shares, we wrote off the balance of related deferred selling costs in the amount of $18,981,000 pre-tax in the fourth quarter of 1999. These discontinued W&R Funds' Class B shares were converted to W&R Funds Class C shares in March 2000. Upon conversion of the W&R Funds Class B shares, no contingent deferred sales charges were collected for any converted share redemptions. The deferred selling costs associated with the discontinued W&R Funds Class B shares were being amortized over the life of the shareholder investments not to exceed ten years. A new (industry standard) W&R Fund Class B share was opened to investors in July 2000. The deferred costs associated with the sale of these new Class B shares are amortized on a straight-line basis over the life of the shareholders' investments not to exceed six years. Also in October 1999, the Advisors Funds began selling Class B and Class C shares and the W&R Funds began selling Class C shares. The deferred costs associated with the sale of Class B shares are amortized on a straight-line basis over the life of the shareholders' investments not to exceed six years. The deferred costs associated with the sale of Class C shares are amortized on a straight-line basis not to exceed twelve months. We recover such costs through 12b-1 distribution fees, which are paid by the Advisors Funds and the W&R Funds Class B and C shares along with contingent deferred sales charges paid by shareholders who redeem their shares prior to completion of the required holding periods. REVENUE RECOGNITION Investment advisory and administrative service fees are recognized when earned. Commission revenues and expenses (and related receivables and payables) resulting from securities transactions are recorded on the date on which the order to buy or sell securities is executed. ADVERTISING AND PROMOTION We expense all advertising and promotion costs as incurred. 46 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE The weighted average number of shares used to compute basic earnings per share was 83,362,000, 89,456,000, and 98,681,000 for the years ended 2000, 1999 and 1998 respectively. The weighted average number of shares used in computing diluted earnings per share, which reflects the potential additional effect of stock option and restricted stock award exercises into common stock was 86,895,000, 91,548,000, and 99,269,000 for years 2000, 1999 and 1998, respectively. Earnings per share were computed as follows:
2000 1999 1998 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS Net income........................................ $139,005 81,767 83,735 Weighted average shares outstanding--basic........ 83,362 89,456 98,681 Incremental shares from assumed conversions....... 3,533 2,092 588 Weighted average shares outstanding--diluted...... 86,895 91,548 99,269 Earnings per share: Basic........................................... $ 1.67 0.91 0.85 Diluted......................................... $ 1.60 0.89 0.84
STOCK-BASED COMPENSATION As allowed under the provisions of Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("FAS 123"), we have elected to apply Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," ("APB 25") and related interpretations in accounting for our stock-based plans. In most cases, no compensation costs have been recognized with respect to stock options granted. 2. CASH AND CASH EQUIVALENTS Cash and cash equivalents at December 31, 2000 and 1999 include reserves of $21,898,000 and $17,114,000, respectively, for the benefit of customers in compliance with securities industry regulations. Substantially all such reserves are in excess of federal deposit insurance limits. 47 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 3. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE Investments at December 31, 2000 and 1999 are as follows:
AMORTIZED UNREALIZED UNREALIZED 2000 COST GAINS LOSSES FAIR VALUE - ---- --------- ---------- ---------- ---------- (IN THOUSANDS) United States government-backed mortgage securities................ $ 1,748 31 (30) 1,749 Municipal bonds...................... 22,326 92 (2,187) 20,231 Corporate bonds...................... 14,194 51 (538) 13,707 Affiliated mutual funds.............. 22,585 335 (1,075) 21,845 Other................................ 107 -- -- 107 ------- --- ------ ------ $60,960 509 (3,830) 57,639 ======= === ====== ======
AMORTIZED UNREALIZED UNREALIZED 1999 COST GAINS LOSSES FAIR VALUE - ---- --------- ---------- ---------- ---------- (IN THOUSANDS) United States government-backed mortgage securities................ $ 2,136 2 (3) 2,135 Municipal bonds...................... 39,225 7 (1,959) 37,273 Corporate bonds...................... 36,478 -- (822) 35,656 Affiliated mutual funds.............. 10,202 1,842 (63) 11,981 ------- ----- ------ ------ $88,041 1,851 (2,847) 87,045 ======= ===== ====== ======
Municipal and corporate bonds held as of December 31, 2000 mature as follows:
AMORTIZED FAIR COST VALUE --------- -------- (IN THOUSANDS) Within one year........................................... $ -- -- After one year but within five years...................... 20,056 20,180 After five years but within ten years..................... -- -- After ten years........................................... 16,464 13,758 ------- ------ $36,520 33,938 ======= ======
Investment securities with fair value of $45,307,000, $635,000, and $24,020,000 were sold in 2000, 1999 and 1998, respectively. These sales resulted in realized gains of $2,111,000 and $6,000 in 2000 and 1999, respectively, and realized losses in 1998 of $171,000. 4. ACQUISITION OF SUBSIDIARIES On March 31, 2000, we acquired Legend in a business combination accounted for as a purchase. Legend was a privately-held mutual fund distribution and retirement planning company based in Palm Beach Gardens, FL. Legend serves employees of school districts and other not-for-profit organizations nationwide and uses strategic asset allocation services using proprietary systems. The results of operations 48 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 4. ACQUISITION OF SUBSIDIARIES (CONTINUED) of Legend are included on the accompanying financial statements since the date of acquisition. The total cost of the acquisition, including expenses, was $65,403,000, which exceeded the fair value of the net assets of Legend by $63,571,000. The excess is being amortized on a straight-line basis over 25 years. The acquisition agreement provides for additional purchase price payments contingent upon the achievement by Legend of specified earnings levels for 2000, 2001 and 2002. These contingent payments could aggregate as much as $14.0 million. For the year 2000, the specified earnings level was met; accordingly, a $4.0 million contingent payment was accrued and added to goodwill. A summary of the net assets acquired is as follows (in thousands): Assets acquired Cash...................................................... $ 1,113 Accounts Receivable....................................... 7,156 Goodwill (including contingent payments).................. 63,571 Other assets.............................................. 1,949 ------- Total..................................................... 73,789 Liabilities assumed......................................... 8,386 ------- Total purchase price........................................ $65,403 =======
The table below presents supplemental pro forma information for 2000 and 1999 as if the Legend and ACF acquisitions were made on January 1, 1999 at the same purchase price, based on estimates and assumptions considered appropriate:
YEAR ENDED DECEMBER 31, ------------------- 2000 1999 -------- -------- (IN THOUSANDS) Revenues................................................. $532,592 399,817 Net Income............................................... $138,915 81,297 Net Income per common share Basic.................................................. $ 1.66 0.91 Diluted................................................ $ 1.60 0.89
ACF, acquired August 9, 1999, is also subject to additional purchase price payments contingent upon the achievement of specified earnings levels. In 2000, ACF met these levels and the full amount of the contingent payment was accrued and added to goodwill at December 31, 2000 in the amount of $9.1 million. No further contingent payments will be made related to this acquisition. 5. LOSS ON SALE OF REAL ESTATE During 1998, we were participating in a limited partnership with TMK Income Properties, LP ("TIP"). We contributed land and four income producing multi-tenant commercial buildings adjacent to our headquarters in Overland Park, Kansas in exchange for a limited partnership interest in TIP in 1997. This transaction was classified as Investment in Real Estate in our consolidated balance sheets. In late 1998, we ceased participation in TIP. In exchange for our limited partnership interest, we received the 49 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 5. LOSS ON SALE OF REAL ESTATE (CONTINUED) property we had originally contributed to TIP. We also reimbursed TIP $5,913,000 for improvements made to that property while it was in the partnership. Effective December 28, 1999, we sold this investment in multi-tenant real estate properties to unrelated third parties. Net proceeds from the sale were $16,452,000, which resulted in a $4,592,000 pre-tax loss. Net rental income was $0 and $1,026,000 for the years ended 2000 and 1999, respectively. Real estate partnership income was $465,000 for the year ended December 31, 1998. 6. PROPERTY AND EQUIPMENT A summary of property and equipment at December 31, 2000 and 1999 is as follows:
ESTIMATED 2000 1999 USEFUL LIVES -------- -------- ------------ (IN THOUSANDS) Land............................................ $ 5,516 5,260 -- Buildings and tenant improvements............... 22,501 10,605 40 years Furniture and fixtures.......................... 19,287 10,688 5-10 years Equipment and machinery......................... 10,793 5,642 5-20 years Data processing equipment....................... 13,981 9,252 3-5 years ------- ------ Property and equipment, at cost................. 72,078 41,447 Less accumulated depreciation................... 16,625 13,814 ------- ------ Property and equipment, net..................... $55,453 27,633 ======= ======
7. DEBT In October 2000, we renewed our $220.0 million revolving credit facility, expandable to $330.0 million, with a syndicate of eight banks, whereby syndicates could, at their option upon our request, increase the loans by $110.0 million. The credit facility is a 364-day revolving facility with an interest rate of LIBOR plus 0.425% plus an additional 0.10% fee when utilization of the facility exceeds 25% and 0.20% fee when utilization exceeds 50%. The facility provides an additional source of capital to finance share repurchases, acquisitions and other general corporate needs. Beginning in the third quarter of 2000, we also implemented a money market loan program. The money market loan program, which is similar to commercial paper, was utilized to repay amounts borrowed under the credit facility. In October 2000, all amounts borrowed on the credit facility were repaid. The credit agreement stipulates two financial condition covenants. The consolidated leverage ratio cannot exceed 3.0 to 1.0 for four consecutive quarters. The consolidated leverage ratio is defined as consolidated total debt to consolidated earnings before interest costs, income taxes, depreciation and amortization ("EBITDA"). The consolidated interest coverage ratio cannot be less than 4.0 to 1.0 for four consecutive quarters. Consolidated interest coverage ratio is defined as consolidated EBITDA to consolidated interest expense. We were in compliance with these covenants at December 31, 2000. During the year, the average balance on the combined short-term debt was $195.8 million for 2000 and $106.1 million for 1999. As discussed below, the short-term debt outstanding at December 31, 2000 50 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 7. DEBT (CONTINUED) was reclassified as long-term. The average interest rate applied, excluding other costs, was 7.01% for 2000 and 5.73% for 1999. On August 15, 2000, we filed a $400.0 million shelf registration whereby proceeds received could be used for general corporate purposes, including repaying short-term debt outstanding. On January 18, 2001, we issued $200.0 million in principal amount of 7.5% senior notes due 2006 resulting in net proceeds of approximately $197.6 million (net of discounts, commissions and estimated expenses) to repay short-term debt outstanding and for general corporate purposes. As a result, for purposes of these financial statements, $175.3 million of short-term debt outstanding at December 31, 2000 was reclassified as long-term. The notes represent senior unsecured obligations and are rated "Baa2" by Moody's and "BBB" by Standard & Poor's. Interest is payable semi-annually on January 18 and July 18 at a rate of 7.5% per annum. These notes are not redeemable prior to maturity. 8. TRANSACTIONS WITH RELATED PARTIES Until the Offering in March of 1998, we were 100% owned by Torchmark. In November of 1998, Torchmark disposed of its remaining interest in us through a tax-free distribution to its shareholders. We serve as investment advisor to Torchmark and its affiliates and receive advisory fees for this service. Advisory fees, which are based on assets under management, amounted to $1,063,000, $1,413,000, and $2,401,000 for the years ended December 31, 2000, 1999 and 1998, respectively. In the third quarter, we were terminated by a number of Torchmark affiliates as investment advisor for certain insurance company general account assets and pension plan assets totaling $768.0 million with an average management fee of 25 basis points. The only other Torchmark affiliated assets for which we serve as investment advisor are approximately $37.9 million of mutual funds in 401(k) plans of Torchmark affiliates. We are in litigation with one of our insurance providers, United Investors Life Insurance Company ("UILIC"), and other related parties over terms of a compensation agreement signed in July 1999 by UILIC and Waddell & Reed, Inc. The compensation is paid by UILIC to us on variable products underwritten by UILIC and distributed by us. The agreement provides for us to be paid annual compensation of 0.25% on all variable annuity policies' assets under management issued after January 1, 2000 and annual compensation of 0.20% on variable annuity policies' assets under management issued before that date. This agreement added $7.3 million of asset based fees to revenue for 2000. Payments are continuing but the validity and duration of that agreement has been challenged by UILIC in a complaint filed in May 2000, in the Circuit Court of Jefferson County, Alabama in which we have subsequently named Torchmark as a third party defendant in a tortious interference claim. We are confident that the court will uphold the agreement as a contract and that we will prevail on the merits of the case. Moreover, we do not foresee any additional risk to existing variable policy assets and anticipate continued growth in sales of variable annuity products. We earn commissions from UILIC, a Torchmark subsidiary, for marketing life insurance products and variable annuities. For the years ended December 31, 2000, 1999 and 1998, the commissions amounted to $63,164,000, $46,379,000, and $36,724,000, respectively. In addition, an enhanced variable annuity compensation agreement with UILIC effective January 1, 2000 added $7.3 million of asset-based fees to revenues in 2000. Please see "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information. 51 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 9. INVESTMENT INCOME The components of investment and other income are as follows:
2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Interest and amortization of (premium) discount..... $ 7,276 8,119 8,081 Dividends........................................... 492 498 423 Realized gains (losses), net........................ 2,111 375 (171) Other............................................... 734 1,210 710 ------- ------ ----- Total investment and other income................... $10,613 10,202 9,043 ======= ====== =====
In 2000, investment and other income included $2.5 million of realized gains from the sale of investment securities sold to partially fund the Legend acquisition. In 1999, $1.0 million was attributable to net rental income from real estate properties which were sold in December of 1999. Average invested cash and marketable securities were $136.7 million in 2000 compared with $142.1 million in 1999. 10. INCOME TAXES The components of total income tax expense are as follows:
2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Currently payable: Federal.......................................... $71,698 46,608 46,845 State............................................ 11,750 7,044 6,934 ------- ------ ------ 83,448 53,652 53,779 Deferred taxes..................................... 5,493 (3,394) (2,016) ------- ------ ------ Income tax expense from operations................. 88,941 50,258 51,763 ======= ====== ======
52 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 10. INCOME TAXES (CONTINUED) The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998 -------- -------- -------- (IN THOUSANDS) Deferred tax liabilities: Deferred selling costs............................ $(3,847) (703) (5,732) Fixed assets...................................... (588) (328) -- Other............................................. -- -- (125) ------- ------ ------ Total gross deferred liabilities.................... (4,435) (1,031) (5,857) ------- ------ ------ Deferred tax assets: Benefit plans..................................... 4,546 4,203 3,824 Accrued expenses.................................. 822 1,966 2,151 Fixed assets...................................... -- -- 983 Other............................................. 138 564 -- ------- ------ ------ Total gross deferred assets......................... 5,506 6,733 6,958 ------- ------ ------ Net deferred tax asset (liability).................. $ 1,071 5,702 1,101 ------- ------ ------
A valuation allowance for deferred tax assets was not necessary at December 31, 2000, 1999 and 1998. The following table reconciles the statutory federal income tax rate with our effective income tax rate:
2000 1999 1998 -------- -------- -------- Statutory federal income tax rate....................... 35.0% 35.0 35.0 State income taxes, net of federal tax benefits......... 3.5 3.3 3.3 Other items............................................. 0.5 (0.2) (0.1) ---- ---- ---- Effective income tax rate............................... 39.0% 38.1 38.2 ==== ==== ====
11. PENSION PLAN AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS We participate in a noncontributory retirement plan that covers substantially all employees and certain vested former employees of Torchmark. Benefits payable under the plan are based on employees' years of service and compensation during the final ten years of employment. This plan invests in equity securities of large capitalization companies, investment grade corporate and government bonds, and cash 53 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 11. PENSION PLAN AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) and cash equivalents. We also sponsor an unfunded defined benefit postretirement medical plan that covers substantially all employees. The plan is contributory with retiree contributions adjusted annually.
POSTRETIREMENT PENSION BENEFITS BENEFITS ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (IN THOUSANDS) Change in benefit obligation Benefit obligation at beginning of year................... $33,828 31,254 1,269 1,151 Service cost.............................................. 2,737 2,328 94 76 Interest cost............................................. 2,963 2,387 104 90 Actuarial (gain) loss..................................... 3,512 (847) 882 28 Benefits and expenses paid................................ (2,834) (1,294) (222) (147) Retiree contributions..................................... -- -- 66 71 ------- ------ ------ ------ Benefit obligation at end of year......................... $40,206 33,828 2,193 1,269 ======= ====== ====== ====== Change in plan assets: Fair value of plan assets at beginning of year............ $37,087 28,066 -- -- Actual return on plan assets.............................. 3,315 6,859 -- -- Company contribution...................................... 1,900 3,456 156 76 Benefits paid............................................. (2,834) (1,294) (222) (147) Retiree contributions..................................... -- -- 66 71 ------- ------ ------ ------ Fair value of plan assets at end of year.................. $39,468 37,087 -- -- ======= ====== ====== ====== Funded status of plan....................................... $ (738) 3,260 (2,193) (1,269) Unrecognized actuarial (gain) loss.......................... (4,295) (8,036) 1,113 90 Unrecognized prior service cost............................. 584 628 (286) (160) Unrecognized net transition obligation...................... 93 98 -- -- ------- ------ ------ ------ Accrued benefit cost........................................ $(4,356) (4,050) (1,366) (1,339) ======= ====== ====== ====== Weighted average assumptions as of December 31: Discount rate............................................. 7.75% 6.75 8.00 7.75 Expected return on plan assets............................ 9.25% 9.25 N/A N/A Rate of compensation increase............................. 4.50% 3.75 N/A N/A Components of net periodic benefit cost: Service cost.............................................. $ 2,737 2,328 94 76 Interest cost............................................. 2,963 2,387 104 90 Expected return on plan assets............................ (3,448) (2,607) -- -- Actuarial (gain) loss amortization........................ (95) -- -- -- Prior service cost amortization........................... 44 44 (15) (15) Transition obligation amortization........................ 5 5 -- -- ------- ------ ------ ------ Net periodic benefit cost................................. $ 2,206 2,157 183 151 ======= ====== ====== ======
For measurement purposes, the health care cost trend rate was 7.0% and 7.5% in 2000 and 1999, respectively. The effect of a 1% annual increase in assumed cost trend rates would increase the December 31, 2000 accumulated postretirement benefit obligation by approximately $434,000, and the 54 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 11. PENSION PLAN AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2000 by approximately $94,000. The effect of a 1% annual decrease in assumed cost trend rates would decrease the December 31, 2000 accumulated postretirement benefit obligation by approximately $379,000, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2000 by approximately $80,000. 12. SAVINGS AND INVESTMENT PLANS We have a savings and investment plan covering substantially all employees. Until December 31, 1998, this plan provided for a matching Company contribution of 50% of the employee's investment in mutual fund shares and/or our Class A or Class B common stock, not to exceed 3% of the employee's salary. Our contributions to the savings and investment plan for the year ended December 31, 1998 was $858,000. On January 1, 1999, this plan was amended to add a 401(k) salary deferral option. The amended plan provides for a 100% Company match on the first 3% of income and 50% on the next 2% of income, not to exceed 4% of the employee's eligible salary. Our contributions to the 401(k) plan for the years ended December 31, 2000 and 1999 were $2,196,000 and $1,413,000, respectively. 13. STOCK COMPENSATION PLANS We have a fixed employee Stock Incentive Plan ("Option Plan"), as part of our overall compensation program to attract and retain personnel and encourage a greater personal financial investment in the Company. The exercise price of each option is equal to the market price of the stock on the date of grant. The maximum term of the options is ten years and two days and generally vests one-third in each of the three years starting two years after grant date. The number of options authorized for grant under this plan is 30,000,000. We also have an Executive Deferred Compensation Stock Option Plan and a Non-employee Director Stock Option Plan to promote the long-term growth of the Company. The number of options authorized for grant under these plans is 3,750,000 and 1,200,000, respectively. The exercise price of each option is equal to the market price of the stock on the date of grant. The maximum term of these options is ten years and two days and generally vests 10% each year, starting one year after the grant date. In October 1995, the FASB issued Statement No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS No. 123"), which was effective beginning January 1, 1996. SFAS No. 123 defines the "fair value method" of accounting for employee stock options. It also allows accounting for such options under the "intrinsic value method" in accordance with Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB No. 25") and related interpretations, which is the method we use. If a company elects to use the intrinsic value method, pro forma disclosures of earnings and earnings per share are required as if the fair value method of accounting was applied. 55 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 13. STOCK COMPENSATION PLANS (CONTINUED) Pursuant to SFAS No. 123, the fair value of each option has been estimated using a Black-Scholes option-pricing model with the following assumptions:
2000 1999 1998 -------- -------- -------- Dividend yield..................................... 1.10% 2.10% 2.34% Risk-free interest rate............................ 5.43% 5.97% 5.20% Expected volatility................................ 35.80% 28.60% 29.70% Expected life (in years)........................... 4.71 4.71 4.71
For purposes of pro forma disclosures, the estimated fair value of options is amortized to expense over the vesting period of the options. Pro forma effects on net income and earnings per share follow:
2000 1999 1998 -------- -------- -------- Net income As reported..................................... $139,005 81,767 83,735 Pro forma....................................... $133,435 77,141 79,744 Basic earnings per share As reported..................................... $1.67 $0.91 $0.85 Pro forma....................................... $1.60 $0.86 $0.81 Diluted earnings per share As reported..................................... $1.60 $0.89 $0.84 Pro forma....................................... $1.54 $0.84 $0.81
After the spin-off from Torchmark, holders of Torchmark stock options granted prior to 1998 were given a choice to retain their Torchmark options or convert their options into Waddell & Reed Financial, Inc. options ("Conversion Options"). Our employees and directors who held Torchmark options could elect to convert their Torchmark options into Conversion Options. A total of 5,541,215 Conversion Options were converted from Torchmark options. The Conversion Options retained the same terms as the previous Torchmark options except that the exercise price and the number of shares were adjusted so that the aggregate intrinsic value of the options remained the same. Our option plan includes a Stock Option Restoration Program ("SORP") that allows, on a specific date set by the Company, an optionholder to pay the exercise price on vested options by surrendering common stock of the Company that the optionholder has owned at least six months. A reduced number of options are then granted to the optionholder at the current market price. The SORP, which facilitates ownership of the Company's common stock by management and key employees, results in a net issuance of shares of common stock and fewer stock options outstanding. The Company receives a current income tax benefit for exercises of stock options. 56 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 13. STOCK COMPENSATION PLANS (CONTINUED) Prior to 1998, there were no stock options outstanding. A summary of stock option activity and related information for the years ended December 31, 1998, 1999 and 2000 follows:
2000 1999 1998 --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- -------- ---------- -------- ---------- -------- Outstanding, beginning of year........ 14,506,774 $14.65 12,112,890 12.43 -- -- Granted............................... 3,821,966 31.70 3,295,655 16.63 6,583,675 $15.07 Exercised............................. (621,201) 13.41 (116,220) 7.47 -- -- Granted in restoration................ 2,241,614 34.19 1,887,603 16.76 -- -- Exercised in restoration.............. (3,725,838) 13.57 (2,599,228) 8.69 -- -- Expired............................... (253,800) 15.51 (73,926) 14.84 (12,000) 15.33 Converted............................. -- -- -- -- 5,541,215 9.31 ---------- ------ ---------- ------ ---------- ------ Outstanding, end of year.............. 15,969,515 $21.76 14,506,774 $14.65 12,112,890 $12.43 ========== ====== ========== ====== ========== ====== Exercisable, end of year.............. 2,530,619 $14.57 2,853,326 $11.09 4,436,739 $ 9.61 ========== ====== ========== ====== ========== ======
The weighted average fair value of options granted during the years ended December 31, 2000, 1999 and 1998 were $10.36, $4.45 and $3.83, respectively. Following is a summary of options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS ------------------------------------------------ ---------------------------- WEIGHTED AVERAGE REMAINING EXERCISE PRICE CONTRACTUAL LIFE WEIGHTED AVERAGE WEIGHTED AVERAGE RANGE NUMBER (IN YEARS) EXERCISE PRICE NUMBER EXERCISE PRICE - --------------------- ---------- ---------------- ---------------- --------- ---------------- $5.44-$8.04 313,214 4.8 $ 7.39 296,598 $ 7.43 8.28-9.23 369,070 7.0 8.29 5,434 9.23 12.51-17.71 9,363,576 8.2 15.67 2,178,587 15.35 19.46-25.44 98,750 9.3 22.48 50,000 23.63 32.50-34.19 5,824,905 9.9 33.15 -- -- - --------------------- ---------- --- ------ --------- ------ $5.44-$34.19 15,969,515 8.7 21.76 2,530,619 $14.57 ===================== ========== === ====== ========= ======
Options granted prior to 1998 represented options on Torchmark common stock granted by Torchmark prior to our March 4, 1998 initial public offering. These options were converted to options on the Company's common stock on November 6, 1998, concurrent with Torchmark's distribution of our stock to its shareholders (spin-off). In March 1998, we affected promissory notes with a select group of 266 financial advisors and sales managers to facilitate the acquisition of our stock at the IPO. The current balance of these promissory notes is $8.4 million, which is reflected as unearned compensation in stockholders' equity. They were issued for amounts ranging from $11,500 to $57,500, bear interest at 5.59% and mature in March 2003. We have agreed to forgive these notes if certain conditions are met, including, but not limited to, the 57 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 13. STOCK COMPENSATION PLANS (CONTINUED) achievement of Company-stipulated annual productivity requirements for years through 2002 and continued association with the Company's sales efforts through March 2003. 14. UNIFORM CAPITAL RULE REQUIREMENTS Waddell & Reed, Inc. ("W&R"), one of our subsidiaries, is a registered broker-dealer and a member of NASD Regulation, Inc. ("NASDR") and is therefore subject to a requirement of the NASD's Uniform Net Capital Rule, requiring the maintenance of certain minimal capital levels. At December 31, 2000, W&R had net capital, as defined by the Uniform Capital Rule, of $23,202,000, which is $18,388,000 in excess of the required net capital. 15. COMMITMENTS AND CONTINGENCIES RENTAL EXPENSE AND LEASE COMMITMENTS We rent certain sales and other office space under long-term operating leases. Rent expense was $9,473,000, $7,074,000, and $4,937,000, for the years ended, December 31, 2000, 1999 and 1998, respectively. Future minimum rental commitments under noncancelable operating leases are for the years ended December 31 are as follows (in thousands): 2001........................................................ $ 7,481 2002........................................................ 3,004 2003........................................................ 2,140 2004........................................................ 1,392 2005........................................................ 677 Thereafter.................................................. 1,998 ------- $16,692 =======
New leases are expected to be executed as existing leases expire. Thus, future minimum lease commitments are not expected to be less than those in 2000. CONTINGENCIES From time to time, we are a party to various claims arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, it is unlikely that any adverse determination in one or more pending claims would have a material adverse effect on our financial position or results of operations. 58 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 2000, 1999, AND 1998 18. SELECTED QUARTERLY INFORMATION (UNAUDITED)
QUARTER FIRST SECOND THIRD FOURTH - ------- -------- -------- -------- -------- (IN THOUSANDS) 2000 Revenues............................................. $124,742 133,775 129,926 132,259 Operating revenues................................... 120,580 131,796 128,057 129,656 Net income........................................... 36,126 33,710 34,531 34,639 Earnings per share: Basic.............................................. $ 0.43 0.41 0.42 0.42 Diluted............................................ 0.41 0.39 0.40 0.40 1999 Revenues............................................. $ 80,473 85,705 90,269 100,210 Operating revenues................................... 77,550 83,157 88,179 97,569 Net income........................................... 21,983 22,789 24,680 12,315 Earnings per share: Basic.............................................. $ 0.24 0.25 0.28 0.14 Diluted............................................ 0.23 0.24 0.27 0.14
- ------------------------ Note: Quarterly per share amounts will not necessarily add up to annual amounts due to rounding. 59 WADDELL & REED FINANCIAL, INC. INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION - --------------------- ------------------- 2.1 Agreement and Plan of Merger, dated as of February 14, 2001, by and between Waddell & Reed Financial, Inc. and WDR Sub, Inc. 2.2 Purchase Agreement, dated as of February 28, 2000, by and among Waddell & Reed Financial, Inc., Freemark Investment Management, Inc., Legend Financial Corporation, Advisory Services Corporation, The Legend Group, Inc., Philip C. Restino, Restino Family Trust, 01/02/94 Trust FBO John J. Restino, 01/02/94 Trust FBO Robert R. Restino, Mark J. Spinello, Glenn T. Ferris and David L. Phillips. Filed as Exhibit 2.1 to the Company's Current Report on Form 8-K, dated April 14, 2000 and incorporated herein by reference. 3.1 Amended and Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the Company's Form S-1 Registration Statement Number 333-43687 (the "Registration Statement") and incorporated herein by reference. 3.2 Amended and Restated Bylaws of the Company. 4.1 Specimen of Class A Common Stock Certificate. Filed as Exhibit 4.1 to the Company's Registration Statement and incorporated herein by reference. 4.2 Specimen of Class B Common Stock Certificate. Filed as Exhibit 4.1 to the Company's Form 8-A Registration Statement, Accession Number 0000930661-98-002062, dated October 1, 1998 and incorporated herein by reference. 4.3 Rights Agreement, dated as of April 28, 1999, by and between Waddell & Reed Financial, Inc. and 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 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 First Chicago Trust Company of New York. 4.5 Indenture, dated as of January 18, 2001, by and between Waddell & Reed Financial, Inc. and Chase Manhattan Trust Company, National Association. Filed as Exhibit 4.1(a) to the Company's Current Report on Form 8-K dated February 5, 2001 and incorporated herein by reference. 4.6 First Supplemental Indenture, dated as of January 18, 2001 by and between Waddell & Reed Financial, Inc. and Chase Manhattan Trust Company, 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 dated February 5, 2001 and incorporated herein by reference. 10.1 Public Offering and Separation Agreement, dated as of March 3, 1998, by and between the Company and Torchmark Corporation. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.2 Tax Disaffiliation Agreement, dated as of March 3, 1998, by and between Waddell & Reed Financial, Inc. and Torchmark Corporation. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.3 General Agent Contract, dated as of January 1, 1985, by and between United Investors Life Insurance Company and W & R Insurance Agency, Inc. Filed as Exhibit 10.4 to the Company's Registration Statement and incorporated herein by reference.
60 WADDELL & REED FINANCIAL, INC. INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION - --------------------- ------------------- 10.4 Second Amendment of General Agent Contract, dated as of December 21, 1998, by and between United Investors Life Insurance Company and W & R Insurance Agency, Inc. Filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. 10.5 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. 10.6 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. 10.7 Principal Underwriting Agreement, dated as of May 1, 1990, by and between United Investors Life Insurance Company and Waddell & Reed, Inc. Filed as Exhibit 10.18 to the Company's Registration Statement and incorporated herein by reference. 10.8 Second Amendment of Principal Underwriting Agreement, dated as of December 31, 1998, by and between United Investors Life Insurance Company and Waddell & Reed, Inc. Filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. 10.9 Letter Agreement Amending Principal Underwriting Agreement, dated as of July 8, 1999, by and between the United Investors Life Insurance Company and Waddell & Reed, Inc., effective January 1, 2000. 10.10 The Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan, As Amended and Restated. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference. 10.11 The Waddell & Reed Financial, Inc. 1998 Non-Employee Director Stock Option Plan. Filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.12 First Amendment to 1998 Non-Employee Director Stock Option Plan. Filed as Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference. 10.13 The Waddell & Reed Financial, Inc. 1998 Executive Deferred Compensation Stock Option Plan, as Amended and Restated. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 and incorporated herein by reference. 10.14 Credit Agreement, dated as of October 13, 2000 by and among Waddell & Reed Financial, Inc., Lenders and The Chase Manhattan Bank. 10.15 Fixed Rate Promissory Note for Multiple Loans dated as of August 15, 2000, by and between Waddell & Reed Financial, Inc. and the Chase Manhattan Bank. 10.16 The Waddell & Reed Financial, Inc. Supplemental Executive Retirement Plan. Filed as Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. 10.17 The Waddell & Reed Financial, Inc. Management Incentive Plan of 1999. Filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. 10.18 Form of Accounting Services Agreement by and between each of the Funds and Waddell & Reed Services Company. 10.19 Form of Investment Management Agreement by and between each of the Advisors Funds and Waddell & Reed Investment Management Company.
61 WADDELL & REED FINANCIAL, INC. INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION - --------------------- ------------------- 10.20 Investment Management Agreement by and between the W&R Funds and Waddell & Reed Investment Management Company. 10.21 Investment Management Agreement by and between the Target Funds and Waddell & Reed Investment Management Company. 10.22 Form of Shareholder Servicing Agreement by and between each of the Funds and Waddell & Reed Services Company. 10.23 Form of Underwriting Agreement by and between each of the Advisors Funds and Waddell & Reed, Inc. Filed as Exhibit 10.35 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. 10.24 Form of Underwriting Agreement by and between each of the W&R Funds and Waddell & Reed, Inc. Filed as Exhibit 10.36 to the Company's Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference. 10.25 Form of Distribution and Service Plan for Class A Shares by and between each of the Advisors Funds and Waddell & Reed, Inc. 10.26 Distribution and Service Plan for Class A Shares, adopted May 17, 2000 by and between W&R Funds, Inc. and Waddell & Reed, Inc. 10.27 Form of Distribution and Service Plan for Class B Shares by and between each of the Advisors and W&R Funds and Waddell & Reed, Inc. 10.28 Form of Distribution and Service Plan for Class C Shares by and between each of the Advisors and W&R Funds and Waddell & Reed, Inc. 10.29 Distribution and Service Plan for Class Y Shares, adopted December 27, 1995 by and between W&R Funds, Inc. and Waddell & Reed, Inc. 10.30 Service Plan, adopted August 21, 1998 by and between W&R Target Funds, Inc. and Waddell & Reed, Inc. 11 Statement regarding computation of per share earnings. 21 Subsidiaries of the Company. 23 Consent of KPMG LLP. 24 Powers of Attorney.
62 EX-2.1 2 a2041359zex-2_1.txt AGREEMENT AND PLAN OF MERGER Exhibit 2.1 AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of February 14, 2001 (the "Agreement"), by and between Waddell and Reed Financial, Inc., a Delaware corporation (the "Company"), and WDR Sub, Inc., a Delaware corporation wholly-owned by the Company ("Sub"). WITNESSETH: WHEREAS, the Board of Directors of the Company has determined that it is in the best interests of the Company and its stockholders for the Company to enter into this Agreement and to effect the merger of Sub with and into the Company, with the Company as the surviving corporation (the "Merger"), pursuant to the terms and conditions set out in this Agreement, and to recommend and submit this Agreement for approval by the Company's stockholders; WHEREAS, the Board of Directors of Sub has unanimously approved this Agreement and deems the execution of this Agreement and the consummation of the Merger to be in the best interests of its stockholder; WHEREAS, as of the date of this Agreement, the authorized and outstanding capital stock of the Company is as follows: (1) 250,000,000 shares of common stock, par value $.01 per share (the "Company Common Stock), consisting of 150,000,000 shares designated Class A Common Stock (the "Class A Common Stock"), of which 43,383,361 shares are issued and outstanding, and 100,000,000 shares designated Class B Common Stock (the "Class B Common Stock"), of which 40,139,617 shares are issued and outstanding; and (2) 5,000,000 shares of preferred stock, par value $1.00 per share, of which 750,000 shares are designated Series A Junior Participating Preferred Stock, none of which are issued or outstanding. WHEREAS, the authorized and outstanding capital stock of Sub consists of 100 shares of common stock, par value $.01 per share (the "Sub Common Stock"), all of which are issued and outstanding and owned by the Company; WHEREAS, the Company and Sub are entering into this Agreement to set forth the terms and conditions of the Merger. NOW, THEREFORE, in consideration of the mutual promises herein contained and intending to be legally bound, the parties hereto agree as follows: 1. MERGER 1.1 THE MERGER. At the Effective Time (as defined in Section 1.3 below), Sub shall be merged with and into the Company under the terms of this Agreement and in accordance with the provisions of the Delaware General Corporation Law ("Delaware Law"), and the separate existence of Sub shall cease and the Company shall continue as the surviving corporation (the "Surviving Corporation"). 1.2 EFFECTS OF THE MERGER. a. GENERALLY. The Merger shall have the effects as provided by Delaware Law and other applicable law. b. CERTIFICATE OF INCORPORATION AND BYLAWS. The certificate of incorporation of the Company as in effect immediately prior to the Effective Time shall be the certificate of incorporation of the Surviving Corporation, except that the certificate of incorporation shall, as a result of the Merger, be amended and restated as set forth in the form amended and restated certificate of incorporation attached to this Agreement as EXHIBIT A (the "Charter"). The bylaws of the Company as in effect immediately prior to the Effective Time shall be the bylaws of the Surviving Corporation, except that the bylaws shall, as a result of the Merger, be amended and restated as set forth in the form amended and restated bylaws attached to this Agreement as EXHIBIT B (the "Bylaws"). c. BOARD OF DIRECTORS; OFFICERS. At the Effective Time, the Board of Directors of the Surviving Corporation shall be identical to the Board of Directors of the Company and the officers of the Surviving Corporation shall be identical to the officers of the Company, in each case until their respective successors have been duly elected or appointed and qualified and subject to the Charter and Bylaws. 1.3. EFFECTIVE TIME. As soon as practicable following the satisfaction or waiver of the conditions set forth in Article 3 of this Agreement, the parties shall file with the Secretary of State of the State of Delaware a certificate of merger (the "Certificate of Merger") executed in accordance with the relevant provisions of Delaware Law. The Merger shall become effective at such time as the Certificate of Merger is duly filed with the Secretary of State of the State of Delaware, or at such other time as is permissible in accordance with Delaware Law and as the Company and Sub shall agree and as specified in the Certificate of Merger (the time the Merger becomes effective being the "Effective Time"). 2. CONVERSION OF STOCK; TERMINATION OF CONVERTIBLE SECURITIES 2.1 CONVERSION OF CLASS A COMMON STOCK. At the Effective Time, each share of issued Class A Common Stock, along with the right (a "Right") attached to such share pursuant to that certain Rights Agreement, dated as of April 28, 1999, between the Company and First Chicago Trust Company of New York, a New York trust company (the "Rights Agent"), as amended by that certain First Amendment to Rights Agreement, dated as of February 14, 2001, between the Company and the Rights Agent (the "Rights Agreement"), shall, by virtue of the Merger and without any action on the part of the holder thereof, remain one fully paid and validly issued, non-assessable share of Class A Common Stock of the Surviving Corporation and shall retain the Right attached to such share pursuant to the Rights Agreement. 2.2 CONVERSION OF CLASS B COMMON STOCK. At the Effective Time, each issued share of Class B Common Stock shall, by virtue of the Merger and without any action on the part of the holder thereof, become and be converted into one fully paid and validly issued, non-assessable share of Class A Common Stock (a "Converted Share"). Simultaneously, upon the conversion of each share of Class B Common Stock into a Converted Share, the Right attached to such share of Class B Common Stock under the Rights Agreement shall be cancelled, and a new Right shall be issued for each Converted Share in accordance with Section 3(c) of the Rights Agreement (except that the legend referred to therein shall only be required to be borne by a new certificate issued for such Converted Share). 2.3 CANCELLATION OF SUB COMMON STOCK. At the Effective Time, each share of Sub Common Stock issued and outstanding immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, be canceled and extinguished without any payment or other consideration made with respect thereto. 2.4 EXCHANGE OF CERTIFICATES. a. Prior to the Effective Time, the Company shall appoint an exchange agent (the "Exchange Agent"), which may be the Company's stock transfer agent, to act as the Company's agent for the issuance of Class A Common Stock to holders of Class B Common Stock in the Merger. b. As soon as practicable after the Effective Time, the Exchange Agent shall mail to each holder of record of a certificate or certificates, which immediately prior to the Effective Time represented outstanding shares of Class B Common Stock, a letter of transmittal (which will specify that delivery will be effected, and risk of loss and title to such certificates will pass, only upon proper delivery of such certificates to the Exchange Agent and shall be in such form and have such other provisions as the Exchange Agent may reasonable specify), and instructions for use in effecting the surrender of the certificates representing such shares of Class B Common Stock, in exchange for the shares of Class A Common Stock payable as a result of the Merger. Upon surrender to the Exchange Agent of a certificate or certificates formerly representing shares of Class B Common Stock and acceptance thereof by the Exchange Agent, the holder thereof shall be entitled to receive either a 2 certificate or certificates representing the shares of Class A Common into which such shares of Class B Common Stock, formerly represented by such surrendered certificate or certificates, shall have been converted at the Effective Time pursuant to the Merger. The Exchange Agent shall accept such certificates upon compliance with such reasonable terms and conditions as the Exchange Agent may impose to effect an orderly exchange thereof in accordance with normal exchange practices. After the Effective Time, there shall be no further transfer on the records of the Company or its transfer agent of certificates representing shares of Class B Common Stock and if such certificates are presented to the Company for transfer, they shall be canceled against delivery of certificates representing shares of Class A Common Stock allocable to the shares of Class B Common Stock represented by such certificate or certificates. If any certificate representing shares of Class A Common Stock is to be issued to a name other than that in which the certificate for the Class B Common Stock surrendered for exchange is registered, it shall be a condition of such exchange that the certificate so surrendered shall be properly endorsed, with signature guaranteed, or otherwise in proper form for transfer and that the person requesting such exchange shall pay to the Company, or its transfer agent, any transfer or other taxes required by reason of the issuance of certificates in, or payment of cash to, a name other than that of the registered holder of the certificate surrendered, or establish to the satisfaction of the Company or its transfer agent that such tax has been paid or is not applicable. c. After the Effective Time and until surrendered as set forth in this Section 2.4, certificates theretofore representing shares of Class B Common Stock shall be deemed for all purposes as evidencing ownership of the number of shares of Class A Common Stock into which such shares shall have been converted by virtue of the Merger and the Rights attaching thereto pursuant to the Rights Agreement (as described in Section 2.2 of this Agreement). d. The Company and the Exchange Agent shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Class B Common Stock such amounts as the Company or the Exchange Agent is required to deduct and withhold with respect to the making of such payment under the United States Internal Revenue Code of 1986, as amended (the "Code"), or any provision of state, local or foreign tax law applicable to the making of such payment. To the extent that amounts are so withheld by the Company or the Exchange Agent, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holders of the shares of Class B Common Stock in respect of which such deduction and withholding was made by the Company or the Exchange Agent. e. No party to this Agreement shall be liable to any person or entity in respect of any shares or amounts paid or delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. f. In the event any certificate or certificates formerly representing shares of Class B Common Stock shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such certificate or certificates to be lost, stolen or destroyed, and if required by the Surviving Corporation and the Exchange Agent, the posting by such person of a bond in such amount as the Surviving Corporation may reasonably require as indemnity against any claim that may be made against it with respect to such certificate, the Exchange Agent will issue in exchange for such lost, stolen or destroyed certificate the consideration deliverable in respect thereof as determined in accordance with this Article 2. 3 3. CONDITIONS. The obligations of the parties hereto to consummate the Merger are subject to the satisfaction of each of the following conditions: 3.1 STOCKHOLDER APPROVAL. This Agreement and the Merger contemplated hereby shall have been duly approved by a majority of the voting power of the outstanding shares of Class A Common Stock and Class B Common Stock voting together as one class and by a majority of the outstanding shares of Class B Common Stock voting as a separate Class. In addition, this Agreement and the Merger shall have been duly approved and adopted by the Company, as the sole holder of Sub Common Stock. 3.2 NO INJUNCTION OR PROCEEDING. No preliminary or permanent injunction, temporary restraining order or other decree of a court, legislature or other agency or instrumentality of federal, state or local government (a "Governmental Entity") shall be in effect, no statute, rule or regulation shall have been enacted by a Governmental Entity and no action, suit or proceeding by any Governmental Entity shall have been instituted or threatened, which prohibits or materially challenges the consummation of the Merger. 3.3 OTHER APPROVALS. All other filings, consents and approvals and the satisfaction of all other requirements that are necessary, in the opinion of the Company, for the consummation of the Merger and other transactions contemplated by this Agreement shall have been obtained. 3.4 APPROVAL OF NYSE. The New York Stock Exchange shall have approved the listing of the additional shares of Class A Common Stock issuable pursuant to Section 2.2 of this Agreement. 4. TERMINATION; AMENDMENT 4.1 TERMINATION OF AGREEMENT. This Agreement may be terminated by the Company at any time before the Effective Time if for any reason consummation of the Merger is inadvisable in the sole discretion of its Board of Directors. Such termination shall be effected by written notice by the Company to Sub. Upon the giving of such notice, this Agreement shall be terminated and there shall be no liability hereunder or on account of such termination on the part of the Company or Sub or the directors, officers, employees, agents or stockholders of any of them. 4.2 AMENDMENT. This Agreement may be amended or modified at any time by mutual written agreement of the parties (a) in any respect prior to the approval hereof by the stockholders of the Company entitled to vote hereon, and (b) in any respect subsequent to such approval, provided that any such amendment or modification subsequent to such approval shall not (i) change the method of converting shares of Class B Common Stock into shares of Class A Common Stock, (ii) alter or change any provision of the Charter or Bylaws of the Surviving Corporation that would require the approval of stockholders, or (iii) otherwise materially adversely affect the stockholders of the Company. 5. MISCELLANEOUS 5.1 SUCCESSORS. This Agreement shall be binding on the successors of the Company and Sub. 5.2 COUNTERPARTS. This Agreement may be executed in one or more counterparts. 5.3 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of laws principles thereof. 5.4 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement is intended to confer upon any person or entity not a party to this Agreement any rights or remedies under or by reason of this Agreement. 4 IN WITNESS WHEREOF, the Boards of Directors of the parties hereto have approved this Agreement and the duly authorized officers of each have executed this Agreement on their behalf as of the date first above written. WADDELL & REED FINANCIAL, INC. By: /s/ KEITH A. TUCKER ----------------------------------------- Name: Keith A. Tucker Title: Chairman of the Board and CEO WDR SUB, INC. By: /s/ ROBERT L. HECHLER ----------------------------------------- Name: Robert L. Hechler Title: President
5 EXHIBIT A FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF WADDELL & REED FINANCIAL, INC. AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF WADDELL & REED FINANCIAL, INC. Waddell & Reed Financial, Inc., a corporation incorporated by the filing of its original Certificate of Incorporation with the Secretary of State of the State of Delaware on December 24, 1981, under the name of LIBFIN Company desiring to amend and restate its Certificate of Incorporation, does hereby certify as follows: 1. Said Certificate of Incorporation is hereby amended and restated so as to read as follows: FIRST: NAME. The name of the corporation (which is hereinafter referred to as the "CORPORATION") is: WADDELL & REED FINANCIAL, INC. SECOND: REGISTERED OFFICE AND AGENT. The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware, 19801, in the County of New Castle. The name of the Corporation's registered agent at such address is The Corporation Trust Company. THIRD: PURPOSE. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH: CAPITAL STOCK. 4.1 AUTHORIZED SHARES. The total number of shares of all classes of stock which the Corporation shall have authority to issue shall be two hundred fifty-five million (255,000,000), of which two hundred fifty million (250,000,000) shares are to be Class A Common Stock, having a par value of one cent ($0.01) each; and five million (5,000,000) shares are to be Preferred Stock, having a par value of one dollar ($1.00) each. 4.2 COMMON STOCK. 4.2.1 As used herein, the term "COMMON STOCK" means the Class A Common Stock. 4.2.2 The holder of each outstanding share of Common Stock shall be entitled to one vote in person or by proxy for each share on all matters upon which the stockholders of the Corporation are entitled to vote. 4.2.3 Authority is hereby expressly granted to the Board of Directors or any duly authorized committee thereof from time to time to issue any authorized but unissued shares of Common Stock for such consideration and on such terms as it may determine. 4.2.4 At any meeting of stockholders, the presence in person or by proxy of the holders of shares entitled to cast a majority of all the votes which could be cast at such meeting by the holders of all of the outstanding shares of stock of the Corporation entitled to vote on every matter that is to be voted on at such meeting shall constitute a quorum. 4.2.5 At every meeting of stockholders, (i) in all matters other than the election of directors, a majority of the votes which could be cast at such meeting upon a given question and (ii) in the case of the election of directors, a plurality of the votes which could be cast at such meeting upon such election, by such holders who are present in person or by proxy, shall be necessary, in addition to any vote or other action that may be expressly required by the provisions of this Certificate of Incorporation, the Bylaws of the Corporation, or by the law of the State of Delaware, to decide such question or election, and shall decide such question or election if no such additional vote or other action is so required. 4.2.6 Subject to the rights of any holders of Preferred Stock to elect directors as provided in this Certificate of Incorporation, stockholder action can be taken only at an annual or special meeting of stockholders and stockholder action may not be taken by written consent in lieu of a meeting. 4.3 PREFERRED STOCK. 4.3.1 Authority is hereby expressly granted to the Board of Directors from time to time to issue Preferred Stock, for such consideration and on such terms as it may determine, as Preferred Stock of one or more series and in connection with the creation of any such series to fix by the resolution or resolutions providing for the issue of shares thereof the designation, powers and relative participating, optional, or other special rights of such series, and the qualifications, limitations, or restrictions thereof. Such authority of the Board of Directors with respect to each such series shall include, but not be limited to, the determination of the following: (a) the distinctive designation of, and the number of shares comprising, such series, which number may be (except where otherwise provided by the Board of Directors in creating such series) increased or decreased (but not below the number of shares thereof then outstanding) from time to time by like action of the Board of Directors; (b) the dividend rate or amount for such series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends bear to the dividends payable on any other class or classes or any other series of any class or classes of stock, and whether such dividends shall be cumulative, and if so, from which date or dates for such series; (c) whether or not the shares of such series shall be subject to redemption by the Corporation and the times, prices, and other terms and conditions of such redemption; (d) whether or not the shares of such series shall be subject to the operation of a sinking fund or purchase fund to be applied to the redemption or purchase of such shares and if such a fund be established, the amount thereof and the terms and provisions relative to the application thereof; (e) whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or classes, or of any other series of any class or classes, of stock of the Corporation and if provision be made for conversion or exchange, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange; (f) whether or not the shares of such series shall have voting rights, in addition to the voting rights provided by law, and if they are to have such additional voting rights, the extent thereof; (g) the rights of the shares of such series in the event of any liquidation, dissolution, or winding up of the Corporation or upon any distribution of its assets; and (h) any other powers, preferences, and relative, participating, optional, or other special rights of the shares of such series, and the qualifications, limitations, or restrictions thereof, to the full extent now or hereafter permitted by law and not inconsistent with the provisions hereof. 4.3.2 All shares of any one series of Preferred Stock shall be identical in all respects except as to the dates from which dividends thereon may be cumulative. All series of the Preferred Stock shall rank equally and be identical in all respects except as otherwise provided in the resolution or resolutions providing for the issue of any series of Preferred Stock. 4.3.3 Except as otherwise required by law, Section 4.3.4 hereof, or provided by a resolution or resolutions of the Board of Directors creating any series of Preferred Stock, the holders of Common Stock shall have the exclusive power to vote; and the holders of Preferred Stock shall have no voting power whatsoever. Except as otherwise provided in such a resolution or resolutions or in Section 4.3.4 A-2 hereof, the number of authorized shares of the Preferred Stock may be increased or decreased by the affirmative vote of a majority of the outstanding shares of capital stock of the Corporation entitled to vote. 4.3.4 DESIGNATION OF THE RIGHTS AND PREFERENCES OF THE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK. 750,000 shares of the authorized Preferred Stock are hereby designated Series A Junior Participating Preferred Stock ("Series A Junior Participating Preferred Stock"). The rights and preferences of the Series A Junior Participating Preferred Stock are as follows: (a) DIVIDENDS. (1) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of February, May, August and November in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after April 28, 1999 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (2) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in Paragraph 4.3.4(a)(1) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (3) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first A-3 Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. (b) VOTING RIGHTS. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights: (1) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on the Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (2) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (3) If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Junior Participating Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) directors. (4) During any default period, the voting right described in section 4.3.4(b)(3) of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to section 4.3.4(b)(5) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of directors shall be exercised A-4 unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) directors or, if such right is exercised at an annual meeting, to elect two (2) directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect directors in any default period and during the continuance of such period, the number of directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or PARI PASSU with the Series A Junior Participating Preferred Stock. (5) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this section 4.3.4(b)(5) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this section 4.3.4(b)(5), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders. (6) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of directors until the holders of Preferred Stock shall have exercised their right to elect two (2) directors voting as a class, after the exercise of which right (x) the directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in Section 4.3.4(b)(4)) be filled by vote of a majority of the remaining directors theretofore elected by the holders of the class of stock which elected the director whose office shall have become vacant. References in this Section 4.3.4(b) to directors elected by the holders of a particular class of stock shall include directors elected by such directors to fill vacancies as provided in clause (y) of the foregoing sentence. (7) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect directors shall cease, (y) the term of any directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number A-5 of directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of section 4.3.4(b)(4) (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining directors. (8) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. (c) CERTAIN RESTRICTIONS. (1) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 4.3.4(a) are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (2) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Section (1) of this 4.3.4(c), purchase or otherwise acquire such shares at such time and in such manner. A-6 (d) REACQUIRED SHARES. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. (e) LIQUIDATION, DISSOLUTION OR WINDING UP. (1) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received an amount equal to $100 per share of Series A Junior Participating Preferred Stock, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph (3) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (2) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of the Series A Junior Participating Preferred Stock and such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (3) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. A-7 (f) CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (g) NO REDEMPTION. The shares of Series A Junior Participating Preferred Stock shall not be redeemable. (h) RANKING. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. (i) AMENDMENT. At any time when any shares of Series A Junior Participating Preferred Stock are outstanding, the Amended and Restated Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class. (j) FRACTIONAL SHARES. Series A Junior Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock. 4.4 DIVIDENDS. Whenever dividends upon the Preferred Stock are at the time outstanding and the dividend preference to which such stock is entitled shall have been paid in full or declared and set apart for payment for all past dividend periods, and after the provisions for any sinking or purchase fund or funds for any series of Preferred Stock shall have been complied with, the Board of Directors may declare and pay dividends on the Common Stock, payable in cash, stock or otherwise; and the holders of shares of Preferred Stock shall not be entitled to share therein, subject to the provisions of Section 4.3.4 hereof and the provisions of the resolution or resolutions creating any series of Preferred Stock. 4.5 LIQUIDATION. In the event of any liquidation, dissolution, or winding up of the Corporation or upon the distribution of the assets of the Corporation remaining, after the payment to the holders of the Preferred Stock of the full preferential amounts to which they shall be entitled as provided in the resolution or resolutions creating any series thereof, the remaining assets of the Corporation shall be divided and distributed among the holders of the Common Stock ratably, except as may otherwise be provided in any such resolution or resolutions. Neither the merger or consolidation of the Corporation with another corporation nor the sale or lease of all or substantially all the assets of the Corporation shall be deemed to be a liquidation, dissolution, or winding up of the Corporation or a distribution of its assets. A-8 4.6 AMENDMENT OF CERTIFICATE OF INCORPORATION. Except as otherwise provided by law or by this Certificate of Incorporation, and subject to any rights of the holders of Preferred Stock, the provisions of this Certificate of Incorporation shall not be modified, revised, altered or amended, repealed or rescinded in whole or in part, without the approval of a majority of the shares of the Common Stock entitled to vote. FIFTH: DIRECTORS. 5.1 STAGGERED BOARD. The Board of Directors shall consist of not less than seven nor more than 15 persons. Subject to any rights of holders of Preferred Stock to elect directors under specified circumstances, the exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III. Each class shall consist initially of four Class I directors, four Class II directors and two Class III directors. Class I directors shall be elected initially for a one-year term, Class II directors initially for a two-year term and Class III directors initially for a three-year term. At each succeeding annual meeting of stockholders beginning in 1999, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his or her term expires or until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. Any vacancy on the Board of Directors that results from an increase in the number of directors shall be filled by a majority of the Board of Directors then in office, provided that a quorum is present, and any other vacancy occurring in the Board of Directors shall be filled by a majority of the Board of Directors then in office, even if less than a quorum or a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his or her predecessor. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article Fifth unless expressly provided by such terms. 5.2 ELECTION. No holder of Common Stock shall have the right to exercise cumulative voting rights. Unless and except to the extent that the Bylaws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. 5.3 REMOVAL. Subject to the rights of holders of Preferred Stock to elect directors under specified circumstances, directors may be removed only for cause and only upon the affirmative vote of holders of at least 80% of the outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class. SIXTH: BYLAWS. The Board of Directors is expressly authorized and empowered to make, alter and repeal the Bylaws of the Corporation, subject to the power of the stockholders of the Corporation to alter or repeal any Bylaws made by the Board of Directors. SEVENTH: PREEMPTIVE RIGHTS. No holder of Preferred Stock or Common Stock of the Corporation shall have any preemptive right as such holder (other than such right, if any, as the Board of Directors in its discretion may by resolution A-9 determine pursuant to this Article Seventh) to purchase, subscribe for or otherwise acquire any shares of stock of the Corporation of any class now or hereafter authorized, or any securities convertible into or exchangeable for any such shares, or any warrants or any instruments evidencing rights or options to subscribe for, purchase or otherwise acquire any such shares, whether such shares, securities, warrants or other instruments are now, or shall hereafter be, authorized, unissued or issued and thereafter acquired by the Corporation. EIGHTH: 8.1 ELIMINATION OF CERTAIN LIABILITY OF DIRECTORS. The directors of the Corporation shall be entitled to the benefits of all limitations on the liability of directors generally that are now or hereafter become available under the General Corporation Law of Delaware. Without limiting the generality of the foregoing, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (a) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) for paying a dividend or approving a stock repurchase in violation of Section 174 of the Delaware General Corporation Law, or (d) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Section 8.1 shall be prospective only, and shall not affect, to the detriment of any director, any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. 8.2 INDEMNIFICATION AND INSURANCE. 8.2.1 RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "PROCEEDING"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer, of the Corporation or is or was serving at the request of the Corporation as a director or officer of another company, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Section 8.2.2 hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The A-10 Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. 8.2.2 RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section 8.2.1 is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. 8.2.3 NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of this Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise. 8.2.4 INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. 2. This Amended and Restated Certificate of Incorporation has been duly adopted by the Board of Directors of the Corporation in accordance with the provisions of Section 242, of the General Corporation Law of the State of Delaware and has been duly adopted in accordance with the provisions of the Certificate of Incorporation of the Corporation heretofore amended. 3. This Amended and Restated Certificate of Incorporation shall become effective at the time it is filed in the office of the Secretary of State of the State of Delaware. A-11 IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed hereto and this instrument to be signed in its name by its Chairman and attested by its Secretary. WADDELL & REED FINANCIAL, INC. By: ----------------------------------------- Name: Keith A. Tucker Title: Chairman of the Board and Chief Executive Officer
ATTESTED: ----------------------------------------- Name: Daniel C. Schulte Title: General Counsel and Secretary By:
A-12 EXHIBIT B FORM OF AMENDED AND RESTATED BYLAWS OF WADDELL AND REED FINANCIAL, INC. AMENDED AND RESTATED BYLAWS OF WADDELL & REED FINANCIAL, INC. EFFECTIVE AS OF APRIL , 2001 ARTICLE I. OFFICES Section 1. REGISTERED OFFICE: The registered office shall be established and maintained at the office of the Corporation Trust Company, in the City of Wilmington, in the County of New Castle, in the State of Delaware, and said corporation shall be the registered agent of this corporation in charge thereof. Section 2. OTHER OFFICES: The Corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the Corporation may require. The principal place of business of the Corporation shall be in Overland Park, Kansas. ARTICLE II. MEETINGS OF STOCKHOLDERS Section 1. STOCKHOLDER ACTION: Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. Subject to rights of holders of Preferred Stock to elect additional directors under specified circumstances, special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors or the Chairman of the Board, upon not less than ten nor more than sixty days' written notice. Section 2. ANNUAL MEETINGS: Annual meetings of stockholders shall be held at such place, either within or without the State of Delaware, and at such time and date as the Board of Directors, by resolution, shall determine and as set forth in the notice of the meeting. In the event the Board of Directors fails to so determine the time, date and place of meeting, the annual meeting of stockholders shall be held at the principal executive offices of the Corporation in Kansas on the last Wednesday of April. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. At each annual meeting, the stockholders entitled to vote shall elect members of a class of the Board of Directors, and they may transact such other corporate business as may properly come before the meeting. If the presiding officer at an annual meeting determines that business was not properly brought before the annual meeting, the presiding officer shall declare to the meeting that such business was not properly brought before the meeting and such business shall not be transacted. Section 3. VOTING AND PROXIES: In accordance with the terms of the Certificate of Incorporation and in accordance with the provisions of these Bylaws each holder of Class A Common Stock shall be entitled to one vote, in person or by proxy, per share. No proxy shall be voted after eleven months from its date unless such proxy provides for a longer period. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. Voting at meetings of stockholders need not be by written ballot unless such is demanded at the meeting before voting begins by any stockholder. If a vote is taken by written ballot, then each such ballot shall state the name of the stockholder or proxy voting and such other information as the chairperson of the meeting deems appropriate, and if authorized by the Board of Directors, the ballot may be submitted by electronic transmission in the manner provided by law. All elections for directors shall be decided by a plurality of votes cast; all other questions shall be decided by a majority of votes cast, except as otherwise provided by these Bylaws, the Certificate of Incorporation or the laws of the State of Delaware. A complete list of the stockholders entitled to vote at the ensuing election, arranged in alphabetical order, with the address of each, and the number of shares held by each, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days prior to the meeting on a reasonably accessible electronic network as permitted by law (provided that the information required to gain access to the list is provided with the notice of the meeting) or during the ordinary business hours at the principal place of business of the Corporation. If the meeting is held at a place, the list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is held solely by means of remote communication, then the list shall be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access the list shall be provided with the notice of the meeting. Section 4. QUORUM: A majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at meetings of stockholders. In determining whether a quorum is present treasury shares shall not be counted. If less than a majority of the outstanding shares are represented, a majority of the shares so represented may adjourn the meeting from time to time without further notice, but until a quorum is secured no other business may be transacted. The stockholders present at a duly organized meeting may continue to transact business until an adjournment notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Section 5. NOTICE OF MEETINGS: Notice, stating the place, if any, date and time of the special or annual meeting, and the general nature of the business to be considered, shall be given in writing or by electronic transmission in the manner provided by law (including, without limitation, as set forth in Article VI, Section 11 of these Bylaws) to each stockholder entitled to vote thereat at such stockholder's address as it appears on the records of the Corporation, not less than ten nor more than sixty days before the date of the meeting. No business shall be transacted at any special meeting other than that stated in the notice of such special meeting. No business shall be transacted at any annual meeting other than that stated in the notice of such annual meeting or brought before the annual meeting by or at the direction of the Board. A stockholder proposal of business to be considered at an annual meeting will be included in the notice of such annual meeting and considered by the stockholders thereat if: (a) such proposal is delivered, in writing, to the Secretary of the Corporation at the principal executive offices of the Corporation not less than 120 days in advance of the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting has been changed by more than 30 days from the date of the previous year's annual meeting, delivery of such proposal by the stockholder, to be timely, must be so delivered not earlier than the close of business on the later of: (i) the 120th day prior to such meeting, or (ii) the 10th day following the day on which public announcement of the date of such meeting is first made, (b) such proposal is a proper matter for stockholder action and (c) the stockholder complies with all requirements of applicable law, including without limitation, the Securities and Exchange Act of 1934, as amended. ARTICLE III. DIRECTORS Section 1. NUMBER, ELECTION AND TERMS: The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than seven nor more than 15 persons. Subject to any rights of holders of Preferred Stock to elect directors under specified circumstances, the exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by B-2 the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The initial Board of Directors elected following the filing of this Certificate of Incorporation shall consist of four Class I directors, four Class II directors and two Class III directors. Class I directors shall be elected initially for a one-year term, Class II directors initially for a two-year term and Class III directors initially for a three-year term. At each succeeding annual meeting of stockholders beginning in 1999, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. Directors need not be stockholders. Section 2. RESIGNATIONS: Any director, member of a committee or other officer may resign at any time upon notice given in writing or by electronic transmission, and such resignation shall take effect at the time of its receipt by the Chief Executive Officer or Secretary or at such other time as may be specified therein. The acceptance of a resignation shall not be necessary to make it effective. Section 3. NEWLY CREATED DIRECTORSHIPS AND VACANCIES: Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall, unless the Board of Directors otherwise determine, be filled by a majority vote of the directors then in office even if less than a quorum remain on the Board of Directors, or if all of the directors shall have been removed, by stockholders with a majority of the outstanding shares of stock, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which they have been elected expires. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. If the office of any member of a committee or other officer becomes vacant, the directors in office, by a majority vote, may appoint any qualified person to fill such vacancy, who shall hold office for the unexpired term and until his successor shall be duly chosen. Subject to the rights of holders of Preferred Stock to elect directors under specified circumstances, directors may be removed only for cause and only upon the affirmative vote of holders of at least 80% of the then outstanding shares of stock entitled to vote generally in the election of directors. If the holders of any series of Preferred Stock then outstanding are entitled to elect one or more directors, these provisions shall not apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that series and the rights of the holders of such shares shall be as set out in the Certificate of Designations, Preferences and Rights for such shares. Section 4. POWERS: The Board of Directors shall exercise all the powers of the Corporation except such as are by law, or by the Certificate of Incorporation of the Corporation or by these Bylaws conferred upon or reserved to the stockholders. B-3 Section 5. ELECTION OF COMMITTEE MEMBERS: At each annual meeting or at any regular meeting of the Board of Directors, the directors may, by resolution or resolutions passed by a majority of the whole Board, designate directors to serve as members of the executive committee, the compensation committee, the finance committee, the nominating committee, and the audit committee until the next annual meeting of the Board of Directors or until their successors shall be duly elected and qualified or their earlier resignation or removal. At any regular or special meeting of the Board of Directors, the directors may elect additional advisors for these committees. Such advisors may or may not be members of the Board of Directors and shall serve until the next annual meeting of the Board of Directors or for the period of time designated by the Board. The Board of Directors may from time to time provide for such other committees as may be deemed necessary and assign to such committees such authority and duties as are appropriate and allowed by Delaware law. Section 6. MEETINGS: The directors may hold their annual meeting for the purpose of organization and the transaction of business, if a quorum be present, immediately after the annual meeting of the stockholders; or the time and place of such meeting may be fixed by resolution of the directors. Annual meetings of the directors may be held without notice at such places and times as shall be determined from time to time by resolution of the directors. Special meetings of the Board of Directors may be called by the Chief Executive Officer at any time or by the Secretary on the written request of any two directors upon at least twelve hours personal notice to each director. Notice of the time, date and place of such meeting shall be given, orally, in writing or by electronic transmission (including electronic mail), by the person or persons calling the meeting. Such special meetings shall be held at such place or places as may be determined by the Chief Executive Officer or the directors calling the meeting, and shall be stated in the notice of the call of the meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 7. QUORUM: A majority of the directors shall constitute a quorum for the transaction of business. If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given other than by announcement at the meeting which shall be so adjourned. Section 8. COMPENSATION: Directors shall not receive any stated salary for their services as directors or as members of committees, except that by resolution of the Board of Directors, retainer fees, meeting fees, expenses of attendance at meetings and other benefits and payments may be authorized. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefore. Section 9. ACTION WITHOUT MEETING: Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or such committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or B-4 committee, respectively. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. Section 10. AMENDMENT, REPEAL AND ADOPTION: Notwithstanding anything contained in these Bylaws to the contrary the shareholders may only amend or repeal, or adopt any provision inconsistent with this Article III, with the affirmative vote of the holders of at least 80% of the shares of the Corporation entitled to vote generally in the election of directors. ARTICLE IV. STANDING COMMITTEES Section 1. EXECUTIVE COMMITTEE: The executive committee of the Board of Directors shall consist of the Chairman of the Board, the president, and not less than three nor more than eight members elected by the directors from their own number. The chairman of this committee shall be appointed by the Chairman of the Board. The executive committee in the interim between meetings of the Board of Directors shall exercise all of the powers of the Board of Directors. Section 2. COMPENSATION COMMITTEE: The compensation committee shall consist of not less than two nor more than eight members. The chairman of this committee shall be appointed by the Chairman of the Board. The compensation committee shall prescribe the compensation of all officers having an annual compensation of one hundred fifty thousand dollars ($150,000) or more and administer all of the Corporations benefit and stock option plans. The compensation of all other officers shall be determined by the Chief Executive Officer. Section 3. AUDIT COMMITTEE: The audit committee shall consist of not less than three nor more than eight members elected by the directors from among their own number; provided, however, that a majority of the members of the committee shall be outside directors. The chairman of this committee shall be elected by the full Board of Directors, or if the chairman is not so elected by the full Board of Directors or if the chairman elected by the full Board of Directors is not present at a particular meeting, the members of the audit committee may designate a chairman by majority vote of the committee membership in attendance. The audit committee shall recommend to the Board the firm to be employed by the Corporation as its external auditor; shall consult with the persons chosen to be the external auditors with regard to the plan of audit; shall review the fees of the external auditors for audit and non-audit services; shall review, in consultation with the external auditors, their report of audit, or proposed report of audit, and the accompanying management letter, if any; shall review with management and the external auditor before publication or issuance, the annual financial statements, and any annual reports to be filed with the Securities and Exchange Commission; shall consult with the external auditors (periodically, as appropriate, out of the presence of management) with regard to the adequacy of the internal auditing and general accounting functions of the Corporation; shall consult with the internal auditors (periodically, as appropriate, out of the presence of management) with regard to cooperation of corporate divisions with the internal auditing and accounting departments and the adequacy of corporate systems of accounting and controls; shall serve as a communications liaison between the Board of Directors, the external auditors, and the internal auditors; and shall perform such other duties not inconsistent with the spirit and purpose of the committee as are delegated to it by the Board of Directors. Section 4. FINANCE COMMITTEE: The Board of Directors may elect from its membership a finance committee of not less than three nor more than eight members elected by the directors from among their own number. The chairman of this committee shall be appointed by the Chairman of the Board. The finance committee shall have special charge and control of all financial affairs of the Company. The principal functions and responsibilities of B-5 the finance committee are to: review and approve investment and loan policies; review and approve asset-liability management policies; monitor corporate financial results; recommend corporate financial actions, including dividends and capital financing. The finance committee shall make recommendations to the Board of Directors with respect to the terms and provisions of any issue of securities of the Company, including equity and debt securities, and shall serve as the pricing committee in connection with any such financing and shall authorize the execution of such underwriting agreements as may be necessary or desirable to effectuate such issue. Section 5. NOMINATING COMMITTEE: The nominating committee shall consist of all non-employee (outside) directors of the Company. The chairman of this committee shall be appointed by the Chairman of the Board. The nominating committee shall meet periodically to review the qualifications of potential Board candidates from whatever source received; shall report its findings to the Board and propose nominations for Board membership for approval by the Board and for submission to stockholders for approval; and shall review and make recommendations to the Board, where appropriate, concerning the size of the Board and the frequency of meetings. The nominating committee shall have and exercise all such power as it shall deem necessary for the performance of its duties. Section 6. MEETINGS: Meetings of the executive committee, the finance committee, the nominating committee, the compensation committee, and the audit committee shall be held on call of the Chairman of the Board or any committee member. Meetings may be held informally, by telephone, or by mail, and it is not necessary that members of the committee be physically present together in order for a meeting to be held. The greater of two or one-third of the members of a committee shall constitute a quorum. ARTICLE V. OFFICERS Section 1. OFFICERS: The officers of the Corporation shall be a President, such Vice-Presidents as shall from time to time be deemed necessary, a Secretary, a Treasurer, and such other officers as may be deemed appropriate. A Chairman of the Board and a Vice Chairman of the Board may also be elected. All such officers shall be elected by the Board of Directors and shall hold office until their successors are elected and qualified. None of the officers of the Corporation need be directors. More than one office may be held by the same person. Section 2. CHAIRMAN OF THE BOARD: In the event that there is a Chairman of the Board, he shall preside at all meetings of the Board of Directors and stockholders. He shall have and perform such duties as usually devolve upon his office and such other duties as are prescribed by the Bylaws and by the Board of Directors. Section 3. VICE CHAIRMAN OF THE BOARD: The Vice Chairman of the Board shall in the absence or inability to act of the Chairman of the Board preside at all meetings of the Board of Directors and stockholders, and exercise and discharge the responsibilities and duties of the Chairman of the Board. He shall have and perform such other duties as may be prescribed or assigned by the Board of Directors or the Chairman of the Board. Section 4. PRESIDENT: The President shall perform such duties as usually devolve upon his office and such other duties as are prescribed by these Bylaws, by the Board of Directors, and by the Chairman. In the absence or inability to act of the Chairman of the Board and the Vice Chairman of the Board or if the offices of Chairman of the Board and Vice Chairman of the Board shall be vacant, the President shall have and exercise all the B-6 powers and duties of such office. If the Chairman of the Board, Vice Chairman of the Board or the President is absent from any meeting of the Board of Directors or stockholders where either was to have presided, the other directors shall elect one of their number to preside at the meeting. Section 5. EXECUTIVE VICE PRESIDENT: The Executive Vice President shall be the chief operating officer of the Corporation, unless the Board elects a separate Chief Operating Officer, and shall perform such duties as may be assigned to him from time to time by these Bylaws, by the Board of Directors, and by the President. Section 6. VICE PRESIDENTS: The Vice Presidents shall perform such duties as may be assigned to them from time to time by these Bylaws, the Board of Directors, the Chairman of the Board, or the President. Section 7. TREASURER: The Treasurer shall have custody of all funds of the Corporation. The Treasurer shall have and perform such duties as are incident to the office of Treasurer and such other duties as may from time to time be assigned to him by the Board of Directors, the Chairman, or the President. Section 8. SECRETARY: The Secretary shall keep minutes of all meetings of the stockholders and the Board of Directors unless otherwise directed by those bodies. The Secretary shall have custody of the corporate seal, and the Secretary or any Assistant Secretary shall affix the same to all instruments or papers requiring the seal of the Corporation. The Secretary, or in his absence, any Assistant Secretary, shall attend to the giving and serving of all notices of the Corporation. The Secretary shall perform all the duties incident to the office of Secretary, subject to the control of the Board of Directors, and shall do and perform such other duties as may from time to time be assigned by the Board of Directors, the Chairman, or the President. Section 9. OTHER OFFICERS AND AGENTS: The Board of Directors may appoint such other officers and agents as it may deem advisable, who shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Section 10. CHIEF EXECUTIVE OFFICER: The Chairman of the Board shall serve as the chief executive officer of the Corporation. Subject to the control of the Board of Directors, the Chairman of the Board shall be vested with authority to act for the Corporation, and shall have general and active management of the business of the Corporation and such other general powers and duties of supervision and management as usually devolve upon such office and as may be prescribed from time to time by the Board of Directors. Section 11. ELECTION AND TERM: The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting held after each annual meeting of stockholders. Each officer shall hold office at the pleasure of the Board of Directors until his death, resignation, retirement, or removal. Any officer may be elected by the Board of Directors at other than annual meetings to serve until the first meeting of the Board of Directors held after the annual meeting of stockholders next following his election. ARTICLE VI. MISCELLANEOUS Section 1. CERTIFICATES OF STOCK: A certificate of stock or certificates of stock, signed by the Chairman or Vice Chairman of the Board, the President or Vice-President, the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant B-7 Secretary, shall be adopted by the Board of Directors and shall be issued to each stockholder certifying the number of shares owned by such stockholder in the Corporation. Any or all of the signatures may be facsimiles. Section 2. LOST CERTIFICATES: The Board of Directors may order a new certificate or certificates of stock to be issued in the place of any certificate or certificates of the Corporation alleged to have been lost or destroyed, but in every such case the owner of the lost certificate or certificates shall first cause to be given to the Corporation or its authorized agent a bond in such sum as said Board may direct, as indemnity against any loss that the Corporation may incur by reason of such replacement of the lost certificate or certificates; but the Board of Directors may, at their discretion refuse to replace any lost certificate of stock save upon the order of some court having jurisdiction in such matter and may cause such legend to be inscribed on the new certificate or certificates as in the Board's discretion may be necessary to prevent loss to the Corporation. Section 3. TRANSFER OF SHARES: The shares of stock of the Corporation shall be transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the Corporation by the delivery thereof to the person in charge of the stock and transfer books, and ledgers, or to the authorized agent of the Corporation, by whom they shall be canceled, and new certificates shall thereupon be issued. A record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the stock and transfer books. The Corporation may decline to register on its stock books transfers of stock standing in the name of infants, unless (a) the law of the state of which the infant is a resident relieves the Corporation of all liability therefore in case the infant or anyone acting for him thereafter elects to rescind such transfer, or (b) a court having jurisdiction of the infant and the subject matter enters a valid decree authorizing such transfer. Section 4. FRACTIONAL SHARES: No fractional part of a share of stock shall ever be issued by this Corporation. Section 5. STOCKHOLDERS RECORD DATE: In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 6. DIVIDENDS: Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefore at any regular or special meeting, declare dividends upon the capital stock of the Corporation as and when they deem expedient. Before declaring any dividend there may be set apart out of any fund of the Corporation available for dividends, such sum or sums as the directors from time to time in their discretion deem proper for working capital or to serve as a fund to meet contingencies or for equalizing dividends or for such other purposes as the directors shall deem conducive to the interests of B-8 the Corporation. The Corporation may decline to pay cash dividends to infant stockholders except where full and valid release may be granted by the infant or under a decree of court of competent jurisdiction. Section 7. SEAL: The corporate seal shall consist of two concentric circles between which shall be "WADDELL & REED FINANCIAL, INC." with a representation of the Corporate Logogram in the center. Section 8. FISCAL YEAR: The fiscal year of the corporation shall be the calendar year or such other period as shall be determined by resolution of the Board of Directors. Section 9. CHECKS: All checks, drafts or other orders for the payment off money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, agent or agents of the Corporation, and in such manner as shall be determined from time to time by resolution of the Board of Directors. Section 10. FORM OF RECORDS: Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on or by means of, or be in the form of, diskettes or any other information storage device or method, provided that the records so kept can be converted into clearly legible paper form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect such records pursuant to any provision of the Delaware General Corporation Law. Section 11. NOTICE: (a) Except as otherwise specifically provided in these Bylaws (including, without limitation, the provisions of Article VI, Section 11(b) below) or required by law, all notices required to be given pursuant to these Bylaws shall be in writing and may in every instance be effectively given by hand delivery (including use of a delivery service), by depositing such notice in the United States mail, postage prepaid, or by sending such notice by prepaid telegram, telex, overnight express courier, mailgram or facsimile. Any such notice shall be addressed to the person to whom notice is to be given at such person's address as it appears on the records of the Corporation. The notice shall be deemed given (i) in the case of hand delivery, when received by the person to whom notice is to be given or by any person accepting such notice on behalf of such person, (ii) in the case of delivery by mail, upon deposit in the mail, (iii) in the case of delivery by overnight express courier, when dispatched, and (iv) in the case of delivery via telegram, telex, mailgram or facsimile, when dispatched. (b) Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under any provision of the Delaware General Corporation Law, the Certificate of Incorporation, or these Bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if (i) the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent and (ii) such inability becomes known to the Secretary or an Assistant Secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice; provided, however, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Notice given pursuant to this Article VI, Section 11(b) shall be deemed given: (i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (iv) if by any other form of electronic transmission, when directed to the stockholder. B-9 (c) An affidavit of the Secretary or an Assistant Secretary or of the transfer agent or other agent of the Corporation that the notice has been given in writing or by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein. Section 12. WAIVER OF NOTICE: Whenever notice is required to be given under any provision of these Bylaws, a written waiver of notice, signed by the person entitled to notice, or waiver by electronic transmission by such person, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any waiver of notice. ARTICLE VII. AMENDMENTS Except as otherwise provided in Article III of these Bylaws, these Bylaws may be altered or repealed and Bylaws may be adopted at any annual meeting of the stockholders, or at any special meeting thereof if notice of the proposed alteration or repeal or Bylaw or Bylaws to be adopted is contained in the notice of such special meeting, by the affirmative vote of a majority of the stock issued and outstanding and entitled to vote thereat, or without any stockholder action by the affirmative vote of a majority of the Board of Directors, at any annual meeting of the Board of Directors, or at a special meeting of the Board of Directors, if notice of the proposed alteration or repeal, or Bylaw or Bylaws to be adopted, is contained in the notice of such special meeting. B-10 EX-3.2 3 a2041359zex-3_2.txt AMENDED & RESTATED BYLAWS Exhibit 3.2 AMENDED AND RESTATED BYLAWS of WADDELL & REED FINANCIAL, INC. ------------------- ARTICLE I. OFFICES Section 1. REGISTERED OFFICE: The registered office shall be established and maintained at the office of the Corporation Trust Company, in the City of Wilmington, in the County of New Castle, in the State of Delaware, and said corporation shall be the registered agent of this corporation in charge thereof. Section 2. OTHER OFFICES: The Corporation may have other offices, either within or without the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the Corporation may require. The principal place of business of the Corporation shall be in Overland Park, Kansas. ARTICLE II. MEETINGS OF STOCKHOLDERS Section 1. STOCKHOLDER ACTION: Effective as of the Trigger Date (defined below) and subject to the rights of any holders of Preferred Stock to elect directors as provided in the Certificate of Incorporation of the Corporation, as amended (the "Certificate of Incorporation"), any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the corporation and may not be effected by any consent in writing by such stockholders. Subject to rights of holders of Preferred Stock to elect additional directors as provided in the Certificate of Incorporation, special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors or the Chairman of the Board, upon not less than ten nor more than sixty days' written notice, provided that prior to the Trigger Date, special meetings can also be called at the request of the holders of a majority of the voting power of the then outstanding shares of stock. For purposes of these Bylaws, "TRIGGER DATE" shall mean the date Torchmark Corporation owns a beneficial interest of less than a majority of the voting power of the then outstanding shares of stock entitled to vote generally in the election of directors. Section 2. ANNUAL MEETINGS: Annual meetings of stockholders for the election of directors and for such other business as may be stated in the notice of the meeting given by the Corporation, shall be held at such place, either within or without the State of Delaware, and at such time and date as the Board of Directors, by resolution, shall determine and as set forth in the notice of the meeting. In the event the Board of Directors fails to so determine the time, date and place of meeting, the annual meeting of stockholders shall be held at the principal executive offices of the Corporation in Kansas on the last Wednesday of April. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. At each annual meeting, the stockholders entitled to vote shall elect members of a class of the Board of Directors, and they may transact such other corporate business as may properly come before the meeting. Section 3. VOTING AND PROXIES: In accordance with the terms of the Certificate of Incorporation and in accordance with the provisions of these Bylaws each holder of Class A Common Stock shall be entitled to one vote, in person or by proxy, per share and each holder of Class B Common Stock shall be entitled to five votes, in person or by proxy, per share. Holders of Class A Common Stock shall not be 2 eligible to vote on any alteration or change in the powers, preferences, or special rights of the Class B Common Stock that would not adversely affect the rights of Class A Common Stock and holders of Class B Common Stock shall not be eligible to vote on any alteration or change in the powers, preferences or special rights of Class A Common Stock that would not adversely affect the rights of Class B Common Stock. No proxy shall be voted after eleven (11) months from its date unless such proxy provides for a longer period. Such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. Upon the demand of any stockholder, the vote for directors and the vote upon any question before the meeting shall be by ballot. All elections for directors shall be decided by a plurality vote; all other questions shall be decided by a majority vote except as otherwise provided by these Bylaws, the Certificate of Incorporation or the laws of the State of Delaware. A complete list of the stockholders entitled to vote at the ensuing election, arranged in alphabetical order, with the address of each, and the number of shares held by each, shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 4. QUORUM: A majority of the voting power of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at meetings of stockholders. In determining whether a quorum is present treasury shares shall not be counted. If less than a 3 majority of the voting power of the outstanding shares are represented, a majority of the voting power of the shares so represented may adjourn the meeting from time to time without further notice, but until a quorum is secured no other business may be transacted. The stockholders present at a duly organized meeting may continue to transact business until an adjournment notwithstanding the withdrawal of enough stockholders to leave less than a quorum. At any duly organized meeting, except as otherwise provided by these Bylaws or in the Certificate of Incorporation, a vote of a majority of the voting power of the stock represented thereat shall decide any question brought before the meeting. Section 5. NOTICE OF MEETINGS: Written notice, stating the place, date and time of the meeting, and the general nature of the business to be considered, shall be given to each stockholder entitled to vote thereat at such stockholder's address as it appears on the records of the Corporation, not less than ten nor more than sixty days before the date of the meeting. No business other than that stated in the notice shall be transacted at any special meeting or any annual meeting; provided, business not stated in the notice of an annual meeting may be transacted at such annual meeting with the unanimous consent of all the stockholders entitled to vote thereat. Section 6. ORDER OF BUSINESS: The order of business at the annual meeting and, as far as practicable, at all other meetings of the stockholders shall be as follows: 1. Calling of roll. 2. Proof of due notice of meeting. 3. Reading and disposal of any unapproved minutes. 4. Reports of officers and committees. 4 5. Election of directors. 6. Unfinished business. 7. New business. 8. Adjournment. ARTICLE III. DIRECTORS Section 1. NUMBER, ELECTION AND TERMS: The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than seven nor more than 15 persons. Subject to any rights of holders of Preferred Stock to elect directors as provided in the Certificate of Incorporation, the exact number of directors within the minimum and maximum limitations specified in the preceding sentence shall be fixed from time to time by the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors. The Board of Directors shall be divided into three classes, designated as Class I, Class II and Class III. Each class shall consist initially of four Class I directors, four Class II directors and two Class III directors. Class I directors shall be elected initially for a one-year term, Class II directors initially for a two-year term and Class III directors initially for a three-year term. At each succeeding annual meeting of stockholders beginning in 1999, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to apportion the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case shall a 5 decrease in the number of directors shorten the term of any incumbent director. Directors need not be stockholders. Section 2. RESIGNATIONS: Any director, member of a committee or other officer may resign at any time. Such resignation shall be made in writing, and shall take effect at the time of its receipt by the Chief Executive Officer or Secretary or at such other time as may be specified therein. The acceptance of a resignation shall not be necessary to make it effective. Section 3. NEWLY CREATED DIRECTORSHIPS AND VACANCIES: Subject to the rights of the holders of any series of Preferred Stock then outstanding to elect directors as provided in the Certificate of Incorporation, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall, unless the Board of Directors otherwise determine, be filled by a majority vote of the directors then in office even if less than a quorum remain on the Board of Directors, or if all of the directors shall have been removed, by stockholders with a majority of the voting power of the outstanding shares of stock, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which they have been elected expires. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. If the office of any member of a committee or other officer becomes vacant, the directors in office, by a majority vote, may appoint any qualified person to fill such vacancy, who shall hold office for the unexpired term and until his successor shall be duly chosen. 6 Subject to the rights of holders of Preferred Stock to elect directors under specified circumstances, effective as of the Trigger Date, directors may be removed only for cause and only upon the affirmative vote of holders of at least 80% of the voting power of all the then outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class; provided, however, that prior to such date, directors may be removed, without cause, with the affirmative vote of the holders of at least a majority of the voting power of the then outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class. If the holders of any series of Preferred Stock then outstanding are entitled to elect one or more directors, these provisions shall not apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that series and the rights of the holders of such shares shall be as set out in the Certificate of Designations, Preferences and Rights for such shares. Section 4. POWERS: The Board of Directors shall exercise all the powers of the Corporation except such as are by law, or by the Certificate of Incorporation of the Corporation or by these Bylaws conferred upon or reserved to the stockholders. Section 5. ELECTION OF COMMITTEE MEMBERS: At each regular annual meeting of the Board of Directors, the directors may, by resolution or resolutions passed by a majority of the whole Board, designate directors to serve as members of the executive committee, the compensation committee, the finance committee, the nominating committee, and the audit committee until the next regular meeting of the Board of Directors and until their successors are duly designated. At any regular or special meeting of the Board of 7 Directors, the directors may elect additional advisors for these committees. Such advisors may or may not be members of the Board of Directors and shall serve until the next annual meeting of the Board of Directors or for the period of time designated by the Board. The Board of Directors may from time to time provide for such other committees as may be deemed necessary and assign to such committees such authority and duties as are appropriate and allowed by Delaware law. Section 6. MEETINGS: The directors may hold their annual meeting for the purpose of organization and the transaction of business, if a quorum be present, immediately after the annual meeting of the stockholders; or the time and place of such meeting may be fixed by resolution of the directors. Regular meetings of the directors may be held without notice at such places and times as shall be determined from time to time by resolution of the directors. Special meetings of the Board of Directors may be called by the Chief Executive Officer at any time or by the Secretary on the written request of any two directors upon at least twelve hours personal notice to each director. For purposes of this paragraph, personal notice shall be deemed given if telephonic notice is given to the business office of a director during normal business hours (8:00 a.m. to 5:00 p.m. in the respective time zone in which the director's office is located). Such special meetings shall be held at such place or places as may be determined by the Chief Executive Officer or the directors calling the meeting, and shall be stated in the notice of the call of the meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in 8 the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 7. QUORUM: A majority of the directors shall constitute a quorum for the transaction of business. If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum is obtained, and no further notice thereof need be given other than by announcement at the meeting which shall be so adjourned. Section 8. COMPENSATION: Directors shall not receive any stated salary for their services as directors or as members of committees, except that by resolution of the Board of Directors, retainer fees, meeting fees, expenses of attendance at meetings and other benefits and payments may be authorized. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefor. Section 9. ACTION WITHOUT MEETING: Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof, may be taken without a meeting, if prior to such action a written consent thereto is signed by all members of the Board of Directors, or of such committee as the case may be, and such written consent is filed with the minutes of proceedings of the Board of Directors or committee. Section 10. AMENDMENT, REPEAL AND ADOPTION: Notwithstanding anything contained in these Bylaws to the contrary the shareholders may only amend or repeal, or adopt any provision inconsistent with this Article III, with the 9 affirmative vote of the holders of at least 80% of the voting power of all of the shares of the Corporation entitled to vote generally in the election of directors. ARTICLE IV. STANDING COMMITTEES Section 1. EXECUTIVE COMMITTEE: The executive committee of the Board of Directors shall consist of the chairman of the board, the president, and not less than three nor more than eight members elected by the directors from their own number. The chairman of this committee shall be selected by the Board of Directors. The executive committee in the interim between meetings of the Board of Directors shall exercise all of the powers of the Board of Directors. Section 2. COMPENSATION COMMITTEE: The compensation committee shall consist of not less than two nor more than eight members. The chairman of this committee shall be selected by the Chairman of the Board. The compensation committee shall prescribe the compensation of all officers having an annual compensation of one hundred fifty thousand dollars ($150,000) or more and administer all of the Corporation's benefit and stock option plans. The compensation of all other officers shall be determined by the Chief Executive Officer. Section 3. AUDIT COMMITTEE: The audit committee shall consist of not less than three nor more than eight members elected by the directors from among their own number; provided, however, that a majority of the members of the committee shall be outside directors. The chairman of the committee shall also be selected by the Board of Directors. The audit committee shall recommend to the Board the firm to be employed by the Corporation as its external auditor; shall consult with the persons chosen to be the external auditors with regard to the plan of audit; shall review the fees of the 10 external auditors for audit and non-audit services; shall review, in consultation with the external auditors, their report of audit, or proposed report of audit, and the accompanying management letter, if any; shall review with management and the external auditor before publication or issuance, the annual financial statement, and any annual reports to be filed with the Securities and Exchange Commission; shall consult with the external auditors (periodically, as appropriate, out of the presence of management) with regard to the adequacy of the internal auditing and general accounting functions of the Corporation; shall consult with the internal auditors (periodically, as appropriate, out of the presence of management) with regard to cooperation of corporate divisions with the internal auditing and accounting departments and the adequacy of corporate systems of accounting and controls; shall serve as a communications liaison between the Board of Directors, the external auditors, and the internal auditors; and shall perform such other duties not inconsistent with the spirit and purpose of the committee as are delegated to it by the Board of Directors. Section 4. FINANCE COMMITTEE: The Board of Directors may elect from its membership a finance committee of not less than three nor more than eight members elected by the directors from among their own number. The Chairman of the committee shall also be selected by the Board of Directors. The finance committee shall have special charge and control of all financial affairs of the Company. The principal functions and responsibilities of the finance committee are to: review and approve investment and loan policies; review and approve asset-liability management policies; monitor corporate financial results; recommend corporate financial actions, including dividends and capital financing. The finance committee shall make recommendations to the Board of Directors with respect to the terms and provisions of any issue of securities of the Company, including 11 equity and debt securities, and shall serve as the pricing committee in connection with any such financing and shall authorize the execution of such underwriting agreements as may be necessary or desirable to effectuate such issue. Section 5. NOMINATING COMMITTEE: The nominating committee shall consist of all non-employee (outside) directors of the Company, with its chairman to be named by the Board of Directors. The nominating committee shall meet periodically to review the qualifications of potential Board candidates from whatever source received; shall report its findings to the Board and propose nominations for Board membership for approval by the Board and for submission to stockholders for approval; and shall review and make recommendations to the Board, where appropriate, concerning the size of the Board and the frequency of meetings. The nominating committee shall have and exercise all such power as it shall deem necessary for the performance of its duties. Section 6. MEETINGS: Meetings of the executive committee, the finance committee, the nominating committee, the compensation committee, and the audit committee shall be held on call of the chairman of the board or any committee member. Meetings may be held informally, by telephone, or by mail, and it is not necessary that members of the committee be physically present together in order for a meeting to be held. The greater of two or one-third of the members of a committee shall constitute a quorum. ARTICLE V. OFFICERS Section 1. OFFICERS: The officers of the Corporation shall be a President, such Vice-Presidents as shall from time to time be deemed necessary, a Secretary, a Treasurer, and such other officers as may be 12 deemed appropriate. A Chairman of the Board and a Vice Chairman of the Board may also be elected. All such officers shall be elected by the Board of Directors and shall hold office until their successors are elected and qualified. None of the officers of the Corporation need be directors. More than one office may be held by the same person. Section 2. CHAIRMAN OF THE BOARD: In the event that there is a Chairman of the Board, he shall preside at all meetings of the Board of Directors and stockholders. He shall have and perform such duties as usually devolve upon his office and such other duties as are prescribed by the Bylaws and by the Board of Directors. Section 3. VICE CHAIRMAN OF THE BOARD: The Vice Chairman of the Board shall in the absence or inability to act of the Chairman of the Board preside at all meetings of the Board of Directors and stockholders, and exercise and discharge the responsibilities and duties of the Chairman of the Board. He shall have and perform such other duties as may be prescribed or assigned by the Board of Directors or the Chairman of the Board. Section 4. PRESIDENT: The President shall perform such duties as usually devolve upon his office and such other duties as are prescribed by these Bylaws, by the Board of Directors, and by the Chairman. In the absence or inability to act of the Chairman of the Board and the Vice Chairman of the Board or if the offices of Chairman of the Board and Vice Chairman of the Board shall be vacant, the President shall have and exercise all the powers and duties of such office. If the Chairman of the Board, Vice Chairman of the Board or the President is absent from any meeting of the Board of 13 Directors or stockholders where either was to have presided, the other directors shall elect one of their number to preside at the meeting. Section 5. VICE PRESIDENTS: The Vice Presidents shall perform such duties as may be assigned to them from time to time by these Bylaws, the Board of Directors, the Chairman of the Board, or the President. Section 6. Executive Vice President: The Executive Vice President shall be the chief operating officer of the Corporation, unless the Board elects a separate Chief Operating Officer, and shall perform such duties as may be assigned to him from time to time by these Bylaws, by the Board of Directors, and by the President. Section 7. TREASURER: The Treasurer shall have custody of all funds of the Corporation. The Treasurer shall have and perform such duties as are incident to the office of Treasurer and such other duties as may from time to time be assigned to him by the Board of Directors, the Chairman, or the President. Section 8. SECRETARY: The Secretary shall keep minutes of all meetings of the stockholders and the Board of Directors unless otherwise directed by those bodies. The Secretary shall have custody of the corporate seal, and the Secretary or any Assistant Secretary shall affix the same to all instruments or papers requiring the seal of the Corporation. The Secretary, or in his absence, any Assistant Secretary, shall attend to the giving and serving of all notices of the Corporation. The Secretary shall perform all the duties incident to the office of Secretary, subject to the control of the Board 14 of Directors, and shall do and perform such other duties as may from time to time be assigned by the Board of Directors, the Chairman, or the President. Section 9. OTHER OFFICERS AND AGENTS: The Board of Directors may appoint such other officers and agents as it may deem advisable, including, without limitation, a Chief Operating Officer, who shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. Section 10. CHIEF EXECUTIVE OFFICER: The Chairman of the Board shall serve as the chief executive officer of the Corporation. Subject to the control of the Board of Directors, the Chairman of the Board shall be vested with authority to act for the Corporation, and shall have general and active management of the business of the Corporation and such other general powers and duties of supervision and management as usually devolve upon such office and as may be prescribed from time to time by the Board of Directors. Section 11. ELECTION AND TERM: The officers of the Corporation shall be elected annually by the Board of Directors at the first meeting held after each annual meeting of stockholders. Each officer shall hold office at the pleasure of the Board of Directors until his death, resignation, retirement, or removal. Any officer may be elected by the Board of Directors at other than annual meetings to serve at the pleasure of the Board of Directors until the first meeting of the Board of Directors held after the annual meeting of stockholders next following his election. 15 ARTICLE VI. MISCELLANEOUS Section 1. CERTIFICATES OF STOCK: A certificate of stock or certificates of stock, signed by the Chairman or Vice Chairman of the Board, or the President or Vice-President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, shall be adopted by the Board of Directors and shall be issued to each stockholder certifying the number of shares owned by such stockholder in the Corporation. Any or all of the signatures may be facsimiles. Section 2. LOST CERTIFICATES: The Board of Directors may order a new certificate or certificates of stock to be issued in the place of any certificate or certificates of the Corporation alleged to have been lost or destroyed, but in every such case the owner of the lost certificate or certificates shall first cause to be given to the Corporation or its authorized agent a bond in such sum as said Board may direct, as indemnity against any loss that the Corporation may incur by reason of such replacement of the lost certificate or certificates; but the Board of Directors may, at their discretion refuse to replace any lost certificate of stock save upon the order of some court having jurisdiction in such matter and may cause such legend to be inscribed on the new certificate or certificates as in the Board's discretion may be necessary to prevent loss to the Corporation. Section 3. TRANSFER OF SHARES: The shares of stock of the Corporation shall be transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered to the Corporation by the delivery thereof to the person in charge of the stock and transfer books, and ledgers, or to the authorized agent of the Corporation, by whom they shall be canceled, and new certificates shall thereupon be issued. A 16 record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the stock and transfer books. The Corporation may decline to register on its stock books transfers of stock standing in the name of infants, unless (a) the law of the state of which the infant is a resident relieves the Corporation of all liability therefor in case the infant or anyone acting for him thereafter elects to rescind such transfer, or (b) a court having jurisdiction of the infant and the subject matter enters a valid decree authorizing such transfer. Section 4. FRACTIONAL SHARES: No fractional part of a share of stock shall ever be issued by this Corporation. Section 5. STOCKHOLDERS RECORD DATE: In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 6. DIVIDENDS: Subject to the provisions of the Certificate of Incorporation, the Board of Directors may, out of funds legally available therefore at any regular or special meeting, declare dividends upon the capital stock of the Corporation as and when they deem expedient. Before declaring any 17 dividend there may be set apart out of any fund of the Corporation available for dividends, such sum or sums as the directors from time to time in their discretion deem proper for working capital or to serve as a fund to meet contingencies or for equalizing dividends or for such other purposes as the directors shall deem conducive to the interests of the Corporation. The Corporation may decline to pay cash dividends to infant stockholders except where full and valid release may be granted by the infant or under a decree of court of competent jurisdiction. Section 7. SEAL: The corporate seal shall consist of two concentric circles between which shall be "WADDELL & REED FINANCIAL, INC." with a representation of the Corporate Logogram in the center. Section 8. FISCAL YEAR: The fiscal year of the corporation shall be the calendar year or such other period as shall be determined by resolution of the Board of Directors. Section 9. CHECKS: All checks, drafts or other orders for the payment off money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or officers, agent or agents of the Corporation, and in such manner as shall be determined from time to time by resolution of the Board of Directors. Section 10. NOTICE AND WAIVER OF NOTICE: Whenever any notice is required by these Bylaws to be given, personal notice is not meant unless expressly so stated, and any notice so required shall be deemed to be sufficient if given by depositing the same in the United States mail, postage prepaid, addressed to the person entitled thereto at such person's address as it appears on the records of the Corporation, and such 18 notice shall be deemed to have been given on the date of such mailing. Stockholders not entitled to vote shall not be entitled to receive notice of any meetings except as otherwise provided by statute. Whenever any notice whatever is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation of the Corporation or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE VII. AMENDMENTS Except as otherwise provided in Article III of these Bylaws, these Bylaws may be altered or repealed and Bylaws may be adopted at any annual meeting of the stockholders, or at any special meeting thereof if notice of the proposed alteration or repeal or Bylaw or Bylaws to be adopted is contained in the notice of such special meeting, by the affirmative vote of a majority of the voting power of the stock issued and outstanding and entitled to vote thereat, or without any stockholder action by the affirmative vote of a majority of the Board of Directors, at any regular meeting of the Board of Directors, or at a special meeting of the Board of Directors, if notice of the proposed alteration or repeal, or Bylaw or Bylaws to be adopted, is contained in the notice of such special meeting. 19 EX-4.4 4 a2041359zex-4_4.txt FIRST AMEND TO RIGHTS AGMT EXHIBIT A RE: SERIES A Exhibit 4.4 FIRST AMENDMENT TO RIGHTS AGREEMENT THIS FIRST AMENDMENT TO RIGHTS AGREEMENT (this "Amendment"), dated to be effective as of February 14, 2001, is between WADDELL & REED FINANCIAL, INC., a Delaware corporation (the "Company"), and FIRST CHICAGO TRUST COMPANY OF NEW YORK, a New York trust company (the "Rights Agent"), at the direction of the Company. Capitalized terms not defined herein have the same meaning as defined in the Rights Agreement (as defined below). WHEREAS, the Company and the Rights Agent entered into a Rights Agreement dated as of April 28, 1999 (the "Rights Agreement"); WHEREAS, SECTION 27 of the Rights Agreement permits the amendment of the Rights Agreement at the direction of the Company; WHEREAS, the Company has entered into that certain merger agreement, dated to be effective as of February 14, 2001, by and between the Company and WDR Sub, Inc., a Delaware corporation wholly-owned by the Company (the "Merger Agreement"), pursuant to which all the issued shares of the Company's Class B Common Stock, $.01 par value per share, will be converted into shares of the Company's Class A Common Stock, $.01 par value per share, (the "Converted Shares"); WHEREAS, the Rights Agreement does not explicitly address the effects a conversion of the shares of Class B Common Stock into shares of Class A Common Stock will have upon the Rights attached to the shares of Class B Common Stock or the Converted Shares; WHEREAS, pursuant to a resolution duly adopted on January 18, 2001, the Board of Directors of the Company adopted and authorized an amendment to the Rights Agreement to clarify how the transactions contemplated by the Merger Agreement will effect the Rights granted under the Rights Agreement; WHEREAS, the Board of Directors of the Company has resolved and determined that such amendment is desirable and consistent with, and for the purpose of fulfilling, the objectives of the Board of Directors in connection with the original adoption of the Rights Agreement; NOW, THEREFORE, the Rights Agreement is hereby amended as follows: A. The Rights Agreement shall be amended by inserting the following text immediately following the text of Section 34: "Section 35. CONVERSION OF SHARES OF COMMON STOCK. If the Company consummates the merger (the "Merger") contemplated by that certain merger agreement, dated as of February 14, 2001, by and between the Company and WDR Sub, Inc., a Delaware corporation wholly-owned by the Company, each issued share of Class B Common Stock, shall, by virtue of the Merger, and without any action on the part of the holder thereof, become and be converted into one fully paid and validly issued, non-assessable share of Class A Common Stock (a "Converted Share"). For purposes of this Agreement, simultaneously upon the conversion of each share of Class B Common Stock into a share of Class A Common Stock, the Right attached to such share of Class B Common Stock shall be cancelled, and a Right shall be issued for each Converted Share in accordance with Section 3(c) hereof except that the legend referred to therein shall only be required to be borne by new certificates issued for Converted Shares." B. Upon the Effective Time, as defined in the Merger Agreement, the Rights Agreement shall be amended as follows: 1. AMENDMENT TO THE PREAMBLE. ------------------------- The preamble of the Rights Agreement is amended by deleting the phrase "form of Certificate of" and inserting the phrase "Section 4.3.4 of the Company's Amended and Restated Certificate of Incorporation (the "Designation of the Rights and Preferences of the Series A Junior Participating Preferred Stock") 2. AMENDMENT OF SECTION 1. ---------------------- a. SECTION 1(g) of the Rights Agreement is hereby amended in its entirety to read as follows: "(g) [intentionally left blank]" b. SECTION 1(i) of the Rights Agreement is hereby amended in its entirety to read as follows: (i) "Common Stock" shall mean the Class A Common Stock, except that "Common Stock" when used with reference to any Person other than the Company shall mean the capital stock of such Person with the greatest voting power, or the equity securities or other equity interest having power to control or direct the management, of such Person. 3. AMENDMENT TO THE TABLE OF CONTENTS. ---------------------------------- The Table of Contents of the Rights Agreement is hereby amended by substituting the phrase "Designation of the Rights and Preferences of the Series A Junior Participating Preferred Stock" for the phrase "Certificate of Designation, Preferences and Rights" in the reference to EXHIBIT A in the Table of Contents. 2 4. AMENDMENT OF EXHIBIT A. ---------------------- EXHIBIT A to the Rights Agreement is hereby replaced with EXHIBIT A to this Amendment. 5. AMENDMENT OF EXHIBIT C. The first full paragraph of EXHIBIT C to the Rights Agreement is hereby amended in its entirety to read as follows: On April 28, 1999, the Board of Directors of Waddell & Reed Financial, Inc. (the "Company") declared a dividend distribution of one Right for each outstanding share of Class A Common Stock and Class B Common Stock of the Company to stockholders of record at the close of business on May 12, 1999 (the "Record Date"). Subsequently, the Company converted all issued shares of Class B Common Stock into shares of Class A Common Stock, and therefore, the Rights attached to the shares of Class B Common Stock were cancelled and new Rights were issued with the shares of Class A Common Stock into which the shares of Class B Common Stock were converted. In this summary, the Class A Common Stock is referred to as "Common Stock". Each Right entitles the registered holder to purchase from the Company a unit consisting of one one-hundredth of a share (a "Unit") of Series A Junior Participating Preferred Stock, par value $1.00 per share (the "Series A Preferred Stock") at a Purchase Price of $85.00 per Unit, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and First Chicago Trust Company of New York, as Rights Agent. 4. EFFECTIVENESS. Subject to the condition in Section B of this Amendment, this Amendment shall be effective as of the date above first written, and all references to the Rights Agreement shall, from and after such time, be deemed to be references to the Rights Agreement as amended hereby. 5. CERTIFICATION. The undersigned officer of the Company certifies by execution hereof that this Amendment is in compliance with the terms of SECTION 27 of the Rights Agreement. 6. MISCELLANEOUS. This Amendment may be executed in any number of counterparts, each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. If any term, provision, covenant or 3 restriction of this Amendment is held by a court of competent jurisdiction or other authority to be invalid, illegal, or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Amendment shall remain in full force and effect and shall in no way be affected, impaired or invalidated. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date and year first above written. WADDELL & REED FINANCIAL, INC. By: /s/ Keith A. Tucker ------------------- Name: Keith A. Tucker Title: Chairman and CEO FIRST CHICAGO TRUST COMPANY OF NEW YORK, as Rights Agent By: /s/ Laurence A. Woods --------------------- Name: Laurence A. Woods Title: Vice President 5 EXHIBIT A RIGHTS, POWERS AND PREFERENCES OF THE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK 4.3.4 DESIGNATION OF THE RIGHTS AND PREFERENCES OF THE SERIES A JUNIOR PARTICIPATING PREFERRED STOCK. 750,000 shares of the authorized Preferred Stock are hereby designated Series A Junior Participating Preferred Stock ("Series A Junior Participating Preferred Stock"). The rights and preferences of the Series A Junior Participating Preferred Stock are as follows: (a) DIVIDENDS. (1) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of February, May, August and November in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after April 28, 1999 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of 1 which is the number of shares of Common Stock that were outstanding immediately prior to such event. (2) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in Paragraph 4.3.4(a)(1) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A Junior Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (3) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. (b) VOTING RIGHTS. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights: (1) Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on 2 the Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (2) Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (4) If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock (including holders of the Series A Junior Participating Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) directors. (5) During any default period, the voting right described in section 4.3.4(b)(4) of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to section 4.3.4(b)(6) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of directors shall be exercised unless the holders of ten percent (10%) in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Stock shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) directors or, if such right is exercised at an annual meeting, to elect two (2) directors. 3 If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect directors in any default period and during the continuance of such period, the number of directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or PARI PASSU with the Series A Junior Participating Preferred Stock. (6) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect directors, the Board of Directors may order, or any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this section 4.3.4(b)(6) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any stockholder or stockholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding. Notwithstanding the provisions of this section 4.3.4(b)(6), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the stockholders. (7) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of directors until the holders of Preferred Stock shall have exercised their right to elect two (2) directors voting as a class, after the exercise of which right (x) the directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in Section 4.3.4(b)(5)) be filled by vote of a majority of the remaining directors theretofore elected by the holders of the class of stock which elected the director whose office shall have become vacant. References in this Section 4 4.3.4(b) to directors elected by the holders of a particular class of stock shall include directors elected by such directors to fill vacancies as provided in clause (y) of the foregoing sentence. (8) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect directors shall cease, (y) the term of any directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of directors shall be such number as may be provided for in the certificate of incorporation or by-laws irrespective of any increase made pursuant to the provisions of section 4.3.4(b)(5) (such number being subject, however, to change thereafter in any manner provided by law or in the certificate of incorporation or by-laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining directors. (9) Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. (c) CERTAIN RESTRICTIONS. (1) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 4.3.4(a) are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; 5 (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (2) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Section (1) of this 4.3.4(c), purchase or otherwise acquire such shares at such time and in such manner. (d) REACQUIRED SHARES. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. (e) LIQUIDATION, DISSOLUTION OR WINDING UP. (1) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received an amount equal to $100 per share of Series A Junior 6 Participating Preferred Stock, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series A Liquidation Preference"). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph (3) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Stock, respectively, holders of Series A Junior Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (2) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of the Series A Junior Participating Preferred Stock and such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (3) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7 (f) CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (g) NO REDEMPTION. The shares of Series A Junior Participating Preferred Stock shall not be redeemable. (h) RANKING. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. (i) AMENDMENT. At any time when any shares of Series A Junior Participating Preferred Stock are outstanding, the Amended and Restated Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class. (j) FRACTIONAL SHARES. Series A Junior Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock. 8 EX-10.5 5 a2041359zex-10_5.txt GENERAL AGENT AGREEMENT Exhibit 10.5 GENERAL AGENT AGREEMENT THIS AGREEMENT, effective this 20th day of October, 2000, is made by and among Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, (collectively, "Nationwide") WADDELL & REED, INC. on its own behalf and on behalf of its affiliated Corporate Insurance Agencies (Collectively referred to as "Agency") and ("Broker/Dealer"). Nationwide hereby appoints Broker/Dealer and Agency (collectively, "General Agent") as General Agent with the rights, powers, duties and liabilities set forth herein. General Agent hereby accepts the appointment. General Agent acknowledges, understands and agrees that although Nationwide Life Insurance Company ("NWL") and Nationwide Life and Annuity Insurance Company ("NWLAIC") are collectively referred to herein as "Nationwide", NWL and NWLAIC are separate corporate entities, and that the rights and obligations of each under this Agreement are to be exclusively determined on the basis of which of the two entities (NWL or NWLAIC) is the issuing company of the product(s) specified in Exhibit A, and being sold pursuant to this Agreement. Nationwide acknowledges, understands and agrees that although Broker/Dealer and its affiliated Corporate insurance agencies are collectively, referred to herein as "General Agent", Broker/Dealer and each of the Corporate insurance agencies are separate corporate entities, and that the rights and obligations of each under this Agreement are to be exclusively determined on the basis of which of the entities is acting as agent with respect to the product(s) specified in Exhibit A and being sold pursuant to this Agreement. IN CONSIDERATION OF THE MUTUAL PROMISES HEREIN MADE, THE PARTIES AGREE AS FOLLOWS: 1. SCOPE. This Agreement shall supersede the General Agent Agreement by and between Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, and Waddell & Reed, Inc. dated December 6, 1999, and all other prior agreements between the parties, with respect to the matters addressed herein. All of the insurance or annuity products sold under this Agreement shall be referred to as "Contract(s)" except when particular provisions relate solely to variable contracts required to be registered under the Securities Act of 1933 ("1933 Act") and/or the Investment Company Act of 1940 ("1940 Act") and such contracts shall be referred to as "Variable Contracts". The Contracts which may be sold under this Agreement are listed in the Compensation Schedules which are included in Exhibit A. These Compensation Schedules may be amended upon written agreement of Nationwide and General Agent. In consideration of the services to be performed hereunder, Nationwide agrees to pay General Agent compensation, in accordance with the Exhibits to this Agreement, as may be amended from time to time by mutual written agreement of the parties, based on purchase payments due and received by Nationwide on Contracts issued upon applications submitted either directly or through registered representatives and agents, on or after the date of this Agreement. 2. EXCLUSIVITY. Except as otherwise provided herein, Nationwide will be the exclusive provider to General Agent of the products specified in Exhibit B for a period of five- (5) years. During this five- (5) year period, General Agent will not offer any other competitor's products to their clients, except as otherwise provided herein. Notwithstanding the foregoing, this exclusivity provision will not apply to (a) clients transferring similar investment products from one investment advisor and/or broker- 1 dealer to General Agent, but only to the extent of the transfer itself, (b) products offered by General Agent's former affiliate, United Investors Life Insurance Company, (c) additions made by General Agent clients to products owned prior to the commencement of distribution of like Nationwide products by General Agent pursuant to this agreement, (d) sales made in New York prior to the development by Nationwide of replacement products for sale in New York, and (e) sales made by new General Agent financial advisors to prospects to which non-Nationwide products were offered prior to their engagement by General Agent. General Agent will make a good faith effort to monitor and report these exceptions to ensure that the principle of overall exclusivity is maintained. Nationwide will provide sufficient resources to fulfill mutually agreed upon product feature, support and service level standards. It is understood and agreed that such exclusivity shall terminate at General Agent's option if (a) Nationwide fails to meet the agreed upon product feature, support and service standards and (b) Nationwide experiences a change of control involving an unaffiliated organization. Nationwide may also terminate its exclusive relationship with General Agent if General Agent fails to meet its obligations as set forth herein. Notwithstanding the foregoing, if General Agent experiences a change of control involving an unaffiliated organization and such organization desires for General Agent to sell its products or the products of one or more of its affiliates ("Acquirer Products"), this exclusivity provision will not apply to the Acquirer Products. It is understood and agreed that if such a change of control should occur, and General Agent commences offering Acquirer Products, General Agent shall use its best efforts to insure that Nationwide's products receive and maintain an equitable competitive position in General Agent's distribution system throughout the exclusive period. For purposes of this provision, an "equitable competitive position" shall mean, the opportunity for Nationwide to provide products with substantially similar costs, features commissions, fund diversification and positioning as the Acquirer Products. In the event such a change of control occurs and General Agent commences offering Acquirer Products, the exception from this exclusivity provision identified in section (b) of the previous paragraph, regarding a change of control at Nationwide involving an unaffiliated organization, shall cease to apply. 3. AUTHORITY. Agency and Broker/Dealer are hereby authorized, through their individual agents ("Agents"), representatives or duly licensed affiliated agencies who are duly licensed and registered as required by law, to solicit and procure applications for the Contracts in accordance with the terms and conditions of this Agreement, and are authorized in connection therewith: a. to collect purchase payments on Contracts for which applications are submitted; b. when requested and as directed by Nationwide to deliver Contracts after the terms and conditions governing such delivery are completed, provided that no such delivery of a Contract shall be deemed to constitute a warranty by General Agent that such terms and conditions have been complied with; c. to perform any other act related to the Contracts that is authorized in writing by Nationwide and is permissible under the law; and d. General Agent will pay all fees required to obtain and/or maintain any licenses or registrations required by state or federal law for General Agent and agents of General Agent. Nationwide will pay the fees in connection with the initial appointment with Nationwide of agents of General Agent. Any subsequent appointment fees will be the responsibility of the General Agent or as mutually agreed upon with Nationwide. 2 4. Right to Sell; Regulatory Approvals. a. General Agent is authorized to sell the Contracts set forth in the Compensation Schedule (Exhibit A) as now and hereafter attached to this Agreement. The Compensation Schedule is hereby incorporated by reference. b. Except as disclosed to General Agent in writing, Nationwide represents and warrants that it has the authority to issue Contracts in the states where the General Agent is authorized to conduct business. Nationwide agrees to notify General Agent promptly of any change in such authority. General Agent agrees that it will solicit applications for Nationwide only in those states in which such Contracts are approved. c. General Agent will not solicit applications in any state unless the Agent signing the application has been properly licensed by the appropriate regulatory agency in that state, which may include registrations as a registered representative of Broker/Dealer if Variable Contracts are being sold. As a licensed appointee of Nationwide, General Agent will comply with the statutory and regulatory obligations related to the solicitation and procurement of applications for Contracts. d. If General Agent engages in sales of the Contracts on the premises of or in cooperation with financial institutions (including banks, savings and loan institutions, or credit unions), General Agent shall, as required by applicable law, maintain separation of its business from the business of such financial institution, including separation of records. General Agent shall also conduct its business at all times so as not to lead to confusion between the business conducted by General Agent and the business conducted by the financial institution. The parties to the Agreement hereby agree to abide by, observe, and otherwise conduct the business contemplated under the Agreement in a manner consistent with the Guidelines set forth in the Interagency Statement on Retail Sales of Non-Deposit Investment Products, issued jointly by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision on February 15, 1994, or any modifications or interpretations thereof. 5. AGENT SUPERVISION a. Before an Agent is permitted to solicit and procure applications for the Contracts, General Agent and Agent shall have entered into an agreement pursuant to which such Agent will be appointed as an agent of General Agent and in which Agent will agree that Agent's selling activities relating to the Contracts will be under the supervision and control of General Agent. The Agent's right to continue to sell the Contracts is subject to Agent's continued compliance with such agreement. b. If an Agent fails to meet the rules and standards imposed by General Agent, General Agent shall take such disciplinary action as it deems appropriate. If an Agent fails or refuses to submit to supervision of General Agent in accordance with this Agreement, General Agent shall immediately notify such Agent that such Agent is no longer authorized to sell the Contracts and shall take whatever additional action may be necessary to terminate the sales activities of such Agent relating to the Contracts including immediate notification to Nationwide of such termination. 3 c. In the event that General Agent regards itself as exempt from the licensing requirements of a state insurance authority, then General Agent hereby warrants and guarantees that it shall exercise supervisory control over the training and conduct of its Agents in a manner consistent with state insurance requirements with respect to fair, accurate and good faith representations of product information in the solicitation process, with due regard to the financial status of individual consumers and the appropriateness of the Contract as an investment for such individual consumers. Any intentional or negligent failure in this regard, by any Agent of General Agent, shall require General Agent to immediately terminate such Agent's ability to sell the Contracts and to notify Nationwide of such termination. In addition, General Agent will ensure that its Agents comply with all applicable state insurance requirements and have obtained and maintain any security licenses required by the state insurance authorities. 6. SALE OF VARIABLE CONTRACTS. a. General Agent agrees that each Agent who sells Variable Contracts will be a registered representative of Broker/Dealer (for purposes of this section, "Registered Representative") with the National Association of Securities Dealers Inc. (the "NDAS") before the Agent engages into the offer and sale of Variable Contracts. Broker/Dealer shall certify the status of each Registered Representative's qualifications to Nationwide's satisfaction and shall notify Nationwide if any such person ceases to be a Registered Representative of Broker/Dealer. b. Broker/Dealer shall have full responsibility for the training and supervision of the Registered Representatives that offer and sell the Variable Contracts. This training shall include training in the sale of variable contracts. All Registered Representatives shall be subject to the control of Broker/Dealer in connection with the offer and sale of such Variable Contracts. c. Broker/Dealer will fully comply with the requirements of the NASD, the Securities Exchange Act of 1934, and all other applicable federal or state laws and will establish such rules and procedures as may be necessary to cause diligent supervision of the securities activities of the Registered Representatives. Broker/Dealer shall furnish records necessary to document such supervision at Nationwide's reasonable request. d. Before a Registered Representative is permitted to solicit and procure applications for the Variable Contracts, Broker/Dealer and the Registered Representative shall have entered into an agreement pursuant to which the Registered Representative will become a Registered Representative of Broker/Dealer and will agree that their selling activities relating to the Variable Contracts will be under the supervision and control of Broker/Dealer. The right to continue to sell such Variable Contracts is subject to continued compliance with such agreement. e. If a Registered Representative fails to meet the rules and standards imposed by Broker/Dealer, Broker/Dealer shall take such disciplinary action as it deems appropriate. If a Registered Representative fails or refuses to submit to supervision of Broker/Dealer in accordance with this Agreement, Broker/Dealer shall immediately notify such Registered Representative that he is no longer authorized to sell the Variable Contracts, and Broker/Dealer shall take whatever additional action may be necessary to terminate the sales activities of such Registered Representative relating to the Variable Contracts including immediate notification to Nationwide of such termination. 4 f. Nationwide represents that (a) the Variable Contracts are properly registered under the 1933 Act and/or 1940 Act and the registration statements and the Variable Contracts will remain in full force and effect for the duration of this Agreement, and (b) the Variable Contracts are exempted or excepted from registration under state securities laws. If any state should amend its current securities laws to require registration of insurance contracts, then Nationwide will comply with the amended state law. g. In connection with the conduct of its business, Broker/Dealer shall be provided with prospectuses relating to the Variable Contracts and such other material as Nationwide determines to be necessary. Nationwide represents and warrants to Broker/Dealer that all prospectuses and other material, which Nationwide makes available to Broker/Dealer will comply in all respects with any and all applicable federal and state securities laws. 7. INDEPENDENT CONTRACTOR. General Agent is free to exercise its own judgment as to the persons from whom it will solicit applications for Contracts as well as the time, manner and place of solicitation, and Nationwide will not unreasonably interfere with its activity or manner of performance under this Agreement as an independent contractor. Nothing contained in this Agreement shall create, or shall be construed to create, the relationship of an employer and employee between Nationwide and General Agent. 8. COLLECTION OF PURCHASE PAYMENTS. All Contract purchase payments on applications procured by or through General Agent, which General Agent may collect, are collected on behalf of Nationwide. All purchase payments shall be in check or wire transfer. All such monies received by General Agent shall be collected and transmitted promptly to Nationwide in a manner agreed to by both General Agent and Nationwide. 9. LIMITATIONS ON AUTHORITY. Unless otherwise authorized by Nationwide in writing pursuant to Section 3(c), General Agent shall have no authority on behalf of Nationwide to: a. make, alter or discharge any Contract, b. incur any indebtedness or liability, expend or contract for the expenditure of funds of Nationwide, c. extend the time for payment of any purchase payment, bind Nationwide to the reinstatement of any terminated Contract, or accept notes for payment of purchase payments, d. waive or modify any terms, conditions or limitations of any Contract, adjust or settle any claim or commit Nationwide with respect thereto except as provided in Section 13 c., e. enter into legal proceedings in connection with any matter pertaining to Nationwide's business without the prior written consent of Nationwide unless General Agent is named in such proceedings or General Agent could be subject to paying all or a part of any judgment. General Agent must immediately give Nationwide written notification of the legal proceeding. Where General Agent is either named or may be subject to paying all or a portion of any judgment, General Agent may retain counsel of its choice, f. use the registered marks of Nationwide without receiving prior written approval of Nationwide, 5 g. represent products of Nationwide except as referenced in the prospectus, h. advertise or publish any matter or thing concerning Nationwide or the Contracts without the prior written permission of Nationwide, except as provided in Section 14.a., i. open any bank account or trust account on behalf of, for the benefit of, or containing the name of Nationwide. j. directly or indirectly cause or endeavor to cause any General Agent or their Agents to terminate or alter their association with Nationwide, or will not advise or encourage any Nationwide Contract Owner to relinquish, surrender, replace or lapse their Nationwide contract unless such action is in the best interest of the Contract Owner as reasonably determined by the General Agent. k. do or perform any acts or things other than expressly authorized herein. 10. AGENTS. a. General Agent shall select Agents subject to the provisions of this Agreement and Nationwide shall appoint the selected Agents or provide to General Agent in writing a reasonable basis for not making such appointment. General Agent shall notify Nationwide promptly, in writing, upon the giving or receipt of any notice of termination of an Agent. General Agent will provide Nationwide with any documentation necessary for the appointment of the Agents. Nationwide reserves the right to terminate the appointment of any Agent in its reasonable discretion. Nationwide will promptly notify the General Agent of the termination of the appointment of any Agent and the basis therefor. b. At all times during which an Agent is appointed by Nationwide to sell Contracts, General Agent shall ensure that each Agent has obtained and maintains all applicable licenses in accordance with applicable state and federal laws and regulations. General Agent shall provide Nationwide on request evidence of applicable insurance licenses of General Agent's Agents. c. General Agent maintains the responsibility to ensure its Agents comply with the terms of the Agreement. 11. COMPENSATION. a. Nationwide agrees to pay General Agent compensation, in accordance with the Compensation Schedules to this Agreement as may be amended from time to time by mutual written agreement of the parties. b. Nationwide will pay all compensation due General Agent or any Agents, either directly to General Agent or, as necessary to meet legal requirements, to the licensed General Agent affiliate or other affiliated entity which is permitted to receive such compensation under applicable state law. In states where corporate licenses are not granted, General Agent represents and warrants that it or its affiliated entity has the necessary relationship with the Agents based upon which such affiliated entity is permitted to receive compensation under applicable state insurance law except as otherwise approved by Nationwide. General Agent hereby warrants that all necessary contractual arrangements are in place to enable Nationwide to pay General Agent, or any of its affiliates, for business produced by Agents in the jurisdiction in which they hold licenses. General Agent shall pay all compensation due to Agents or any other person with respect to the Contracts, and no such Agent or other person shall have any claim against Nationwide on account of the sale or service of any Contract. Nationwide shall have no obligation to make compensation payments except as 6 provided above. If Nationwide permits the General Agent to retain compensation before remitting purchase payments, then the Net Compensation Addendum shall specify that authority. Should Nationwide pay General Agent for premiums later returned or credited to the customer or any other overpayment to General Agent, Nationwide shall have, in addition to all other creditor rights, the right to deduct such overpayment from any current or future compensation due General Agent. c. All trail commissions, if any, shall be paid by Nationwide to General Agent with respect to all Contracts sold by Agents on or before the date of termination of this Agreement. In the event Nationwide receives written authorization from an appointed officer of the General Agent to transfer a Contract paying trail commissions to a new General Agent, all subsequent trail commissions as of the effective date of the transfer will be paid to the new General Agent of record. In the event Nationwide receives a written request from a contract owner to transfer a contract to a new General Agent, all subsequent trail commissions as of the effective date of the transfer will be paid to the new General Agent of record. This paragraph shall not be in derogation of any right of offset or other remedy Nationwide may have on monies owed by General Agent or by the new General Agent of record. General Agent agrees to maintain any or all federal or state license and appointment including any applicable renewal fees required, except to the extend Nationwide is responsible therefor pursuant to this Agreement, in order to receive trail commissions from Nationwide. d. Notwithstanding any other provisions of this Agreement Nationwide shall not be obligated to pay any compensation which would be in violation of the applicable laws, rules or regulations of any jurisdiction, subject to Section 13 of this Agreement. 12. SEGREGATED BANK ACCOUNT. All purchase payments received by General Agent on behalf of Nationwide, including purchase payments received by General Agent from Agents, shall be held in a segregated bank account and shall be forwarded to Nationwide in accordance with mutually agreed upon instructions. 13. INDEMNIFICATION. a. Nationwide agrees to indemnify and hold General Agent harmless from any and all losses, claims, damages, liabilities or expenses to which General Agent may become subject under any statute, regulation, common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses relate directly to the sale of the Contracts and arise as a direct consequence of: 1) any material misrepresentation or omission, or alleged misrepresentation or omission, contained in the registration statement, prospectuses, the Contracts, this Agreement or any other document prepared or distributed by Nationwide including, but not limited to, advertising or sales literature; 2) any failure by Nationwide or its employees, whether negligent or intentional, to perform the duties and discharge the obligations contemplated in this Agreement; and 3) any fraudulent, unauthorized or wrongful act or omission by Nationwide or its employees or agents. 7 b. General Agent agrees to indemnify and hold Nationwide harmless from any and all losses, claims, damages, liabilities or expenses to which Nationwide may become subject under any statute, regulation, common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses related directly to the sale of the Contracts and arise as a direct consequence of: 1) any material misrepresentation or omission, or alleged misrepresentation or omission involving the sales contained within this Agreement provided that such misrepresentations or omissions are not attributable to any failure by Nationwide; 2) any failure by General Agent or its employees or Agents, whether negligent or intentional, to perform the duties and discharge the obligations contemplated in this agreement; and 3) any fraudulent, unauthorized or wrongful act or omission by General Agent or its employees or Agents. c. In the event that Nationwide is compelled or agrees to pay any amount in the settlement of any claim, judgment, arbitration or similar action and, in conjunction therewith, General Agent voluntarily agrees to reimburse Nationwide, either partially or totally, Nationwide may deduct the amount of the reimbursement from any sales compensation subsequently payable to General Agent. Nothing herein shall obligate General Agent to provide any such voluntary reimbursement. d. Neither Nationwide or General Agent shall be liable, as the indemnifying party pursuant to Sections 13a and 13b, if the losses, claims, damages, liabilities or legal expenses incurred by the indemnified party arise out of the indemnified party's willful misfeasance, bad faith, or gross negligence in the performance of its duties, or through the reckless disregard of the indemnified party's duties under this Agreement. e. Nationwide and General Agent will promptly notify each other of the commencement of any litigation or proceedings, or the assertion of any claim or any material inquiries related to the duties set forth in the Agreement. f. This indemnification shall be in addition to any other course of action Nationwide or General Agent may have. 14. AGREEMENTS. a. All advertising material and sales promotional material published by General Agent or its Agents that specifically name Nationwide or reference the Contracts shall be and remain the sole and exclusive property of General Agent and shall be used solely and exclusively by General Agent and its Agents. Such material shall be submitted to Nationwide for its approval prior to its use by General Agent or Agents. Nationwide shall provide its approval in writing. Such material shall not be used by Nationwide or its other agents without prior written consent of General Agent. b. Nationwide and General Agent shall keep thorough and correct records, books, and accounts on all transactions arising out of this Agreement, and shall preserve and hold all documents, correspondence and records relating to Contracts which come into its possession or under its control. All such books or accounts, documents, correspondence and records of each party pertaining to or used by it in connection with its operations hereunder shall belong to it, and 8 at all times shall be open to inspection by any officer or duly authorized representative of the other party. c. In the course of normal customer servicing of existing Contracts or if required by law, Nationwide may contact by mail or otherwise any client, agent, account executive, or employee of General Agent or other individual acting in a similar capacity if deemed appropriate by Nationwide. d. Each party agrees to promptly notify the others in writing of any written customer complaint or notice of regulatory investigation it receives which may involve the others. e. Each party represents and warrants that the entering into and performance of this Agreement does not and will not conflict with or cause a breach of any other agreement to which any of them is a party. f. Each party represents and warrants that it has full power and authority to enter into this Agreement and to carry out its duties and obligations hereunder. g. Agency represents and warrants that it has the authority to execute this Agreement on its own behalf and on behalf of any of its affiliated agencies providing the services set forth in this Agreement in order for General Agent to meet all applicable legal requirements. All the necessary arrangements are in place to bind Agency's affiliated agencies to the terms and conditions of this Agreement. 15. TERMINATION. a. Each party may terminate this Agreement for cause at any time, without prior written notice, if another party (1) fails to comply with the laws or regulations of any state or other governmental agency or body having jurisdiction over the sale of insurance or securities, (2) misappropriates any money or property belonging to another party, (3) subjects an other party to any actual or potential liability due to misfeasance, malfeasance, or nonfeasance, (4) commits any fraud upon another party, (5) has an assignment for the benefit of creditors, (6) incurs bankruptcy, or (7) commits a material breach of this Agreement. b. Nationwide may terminate the relationship and any obligations set forth herein if Waddell & Reed experiences a change of control, if said change of control materially alters General Agent's ability to perform its obligations under this agreement. c. This Agreement may be terminated by a party upon six months written notice to the other parties. 16. MISCELLANEOUS PROVISIONS. a. General Agent may assign or pledge any rights under this Agreement with Nationwide's prior written consent. b. The forbearance or neglect of Nationwide, Broker/Dealer or Agency to insist upon strict compliance by a party, with any of the provisions of this Agreement, whether continuing or not, or to declare a forfeiture of termination against that party, shall not be construed as a waiver of any of the rights or privileges of the parties. No waiver of any right or privilege of Nationwide, Broker/Dealer or Agency arising from any default or failure of performance by a party shall affect 9 the rights or privileges of the other parties in the event of a further default or failure of performance. c. Communications sent pursuant to provisions of this item shall be in writing and shall be delivered personally or sent by U.S. mail or commercial courier: If to Nationwide: Nationwide Life Insurance Company and/or Nationwide Life and Annuity Insurance Company One Nationwide Plaza Columbus, OH 43215 Attn: Vice President, Individual Annuity Operations If to General Agent: Waddell & Reed, Inc. Attn: Legal Department 6300 Lamar Avenue Overland Park, KS 66202 Any party may change its address by so notifying the other parties in writing. Any notice shall be deemed given only upon receipt by the party to be notified. d. Except as otherwise provided in this Agreement, this Agreement may not be amended or modified except by a written Agreement executed by the parties. e. This Agreement (including Amendments and Compensation Schedules) constitutes the entire agreement between the parties and supersedes all prior agreements, understandings and arrangements, oral and written, between the parties with respect to the subject matter hereof. f. This Agreement shall be binding upon the parties and their respective successors and assigns. g. This Agreement shall be governed and construed in accordance with the laws of the State of Ohio. h. In case any provision in this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not be affected or impaired. i. The paragraph headings are for reference purposes only and shall not be deemed to be a part of this Agreement or to affect the meaning or interpretation of the Agreement. j. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original instrument and all of which together shall be deemed to be one and the same instrument. 10 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. WADDELL & REED, INC. NATIONWIDE LIFE INSURANCE COMPANY on it's own behalf and on the behalf of its affiliated Corporate Agencies NATIONWIDE LIFE AND ANNUITY (General Agent) INSURANCE COMPANY By: /s/ Thomas W. Butch By: /s/ Rhodes B. Baker -------------------------------- --------------------------------- Title: Executive Vice President Title: VP -------------------------------- --------------------------------- 11 EXHIBIT A COMPENSATION SCHEDULE Effective Date: October 20, 2000 This is the Compensation Schedule for the General Agent Agreement between Nationwide and General Agent. 1. Nationwide shall pay General Agent compensation computed on the premiums or purchase payments paid to, received and accepted by Nationwide on contract applications procured by General Agent in accordance with this Agreement, and at the rates set forth in this schedule and all amendments attached hereto. 2. Unless otherwise provided in an applicable Net Compensation Addendum, nothing herein shall be construed as giving General Agent the right to withhold or net such compensation from premium or purchase payments it shall receive. 3. Except as otherwise provided in this Agreement, Nationwide will prepare a compensation statement for periods ending on the 7th, 15th, 22nd and the last business day of each month and shall deliver the statement, and any compensation due there under, to General Agent within 15 business days of the end of such period for the following products: Waddell & Reed Advisors Select Life, Waddell & Reed Advisors Survivorship Life, Waddell & Reed Advisors Term One/Ten/Twenty and Waddell & Reed Advisors Term Ten/Twenty-NY. The billing cycle for compensation associated with the Waddell & Reed Advisors Retirement Plan product, is the 1st day of the month through the 15th day and the 16th day through the last business day of the month. The compensation cycle for the following products will be daily: Waddell & Reed Advisor Select Annuity Waddell & Reed Advisors Select Plus Annuity Waddell & Reed Advisors Select Plus Annuity NY 4. The compensation rates which shall apply to business produced by General Agent pursuant to this Agreement are attached to this Exhibit as one or more Compensation Schedules, which may be amended from time to time as provided for in this Agreement. The Compensation Schedules also apply to all state specific versions of the contract form numbers listed on the Compensation Schedules. Some of the Contracts listed in the Compensation Schedules may not be available for sale in all states. General Agent is responsible for ascertaining whether it has the authority, pursuant to state and federal law, to sell the Contracts in the jurisdictions in which the Contracts have been approved and in which General Agent is appointed by Nationwide. 5. No compensation shall be payable, and Nationwide may chargeback any compensation that may have been paid in any of the following situations: (i) Nationwide, in its good faith discretion, determines not to issue the Contract applied for; (ii) Nationwide refunds the premiums or purchase payments upon the applicant's surrender or withdrawal pursuant to any "free-look" privilege; (iii) Nationwide refunds the premiums paid as a result of a complaint by the Contract holder or applicant; or (iv) Nationwide determines that any person soliciting an application was required to be licensed and was not or that any other person or entity receiving compensation for soliciting application or premiums for the Contracts is not or was not duly licensed as an insurance agent and appointed (v) if Nationwide determines at any time that the applicant did not meet applicable underwriting standards, including but not limited to, the maximum issue age. 6. Compensations or replacements or conversions shall be allowed in accordance with the Company rules in force at the time such replacement or conversion is effected. 7. Nationwide will not pay compensation on an internal exchange unless otherwise provided in this Agreement. THIS EXHIBIT ESTABLISHES THE COMPENSATION RATES FOR PURCHASE PAYMENTS SPECIFIED HEREIN AND IN NO WAY SUPERSEDES OR REVOKES ANY OTHER TERMS IN THE AGREEMENT. ALL OTHER PROVISIONS OF THE AGREEMENT ARE UNAFFECTED BY THIS EXHIBIT. 12 EXHIBIT B EXCLUSIVITY Nationwide will be the exclusive provider to Waddell & Reed for the following products: 1. Waddell & Reed Advisor Select Annuity 2. Waddell & Reed Advisors Select Plus Annuity 3. Waddell & Reed Advisors Select Plus Annuity NY 4. Waddell & Reed Advisors Select Life 5. Waddell & Reed Advisors Retirement Plan There will be no Exclusivity Arrangement regarding the following products: 1. Waddell & Reed Advisors Survivorship Life 2. Waddell & Reed Advisors Term Ten/Twenty 3. Waddell & Reed Advisors Term Ten/Twenty NY Upon the mutual agreement of both parties, this EXHIBIT may be amended from time to time with the addition of certain other annuity or insurance products. *Actual form numbers to be used in certain states may have different identifying suffixes, which reflect certain unique characteristics of the contract mandated by the particular state insurance authority. EX-10.6 6 a2041359zex-10_6.txt FUND PARTICIPATION AGREEMENT Exhibit 10.6 FUND PARTICIPATION AGREEMENT This Fund Participation Agreement ("Agreement"), dated as of the 1st day of December, 2000 is made by and between Nationwide Life Insurance Company and/or Nationwide Life and Annuity Insurance Company (separately or collectively "Nationwide") on behalf of the Nationwide separate accounts identified on Exhibit A which is attached hereto and may be amended from time to time ("Variable Accounts"), and WADDELL & REED SERVICES COMPANY ("WRSCO") and WADDELL & REED, INC. ("W&R, INC.") which serve respectively as the accounting services/shareholder servicing agent and the distributor to the W&R TARGET FUNDS, INC. (the "Funds") listed on Exhibit A. WRSCO and W&R, INC. are collectively referred to throughout this Agreement as "W&R." WHEREAS, the Contracts allow for the allocation of net amounts received by Nationwide to separate sub-accounts of the Variable Accounts for investment in shares of the Funds and other similar funds as agreed by W&R and Nationwide; and WHEREAS, selection of a particular sub-account (corresponding to a particular Fund) is made by the Contract owner; or, in the case of certain group Contracts, by participants in various types of retirement plans which have purchased such group Contracts, and such Contract owners and/or participants may reallocate their investment options among the sub-accounts of the Variable Accounts in accordance with the terms of the Variable Accounts in accordance with the terms of the Contracts; and WHEREAS, Nationwide and W&R mutually desire the inclusion of the Funds as underlying investment media for variable life insurance policies and/or variable annuity contracts as agreed by W&R and Nationwide (collectively, the "Contracts") issued by Nationwide; NOW THEREFORE, Nationwide and W&R, in consideration of the promises and undertakings described herein, agree as follows: 1. (a) Nationwide represents and warrants that the Variable Accounts have been established and are in good standing under Ohio Law; and the Variable Accounts have been registered as unit investment trusts under the Investment Company Act of 1940, as amended (the "1940 Act") and will remain so registered, or are exempt from registration pursuant to section 3(c)(11) of the 1940 Act; (b) Nationwide represents and warrants that it is an insurance company duly organized and in good standing under the laws of its state of incorporation and that it has legally and validly established each Variable Account and Contract; (c) Nationwide represents and warrants that the Contracts will be registered under the Securities Act of 1933, as amended ("1933 Act") unless an exemption from registration is available prior to any issuance or sale of the Contracts and that the Contracts will be issued in compliance in all material respects with applicable federal and state laws. 2. Each party recognizes that the Funds shall be the exclusive underlying investments for the Contracts developed for exclusive distribution by W&R. The Funds may be available in other Contracts upon mutual agreement of Nationwide and W&R. 3. Subject to the terms and conditions of this Agreement, Nationwide shall be appointed to, and agrees, to act as a limited agent of W&R, for the sole purpose of receiving instructions for the purchase and redemption of Fund shares (from Contract owners or participants making investment allocation decisions under the Contracts) prior to the close of regular trading each Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which the Funds calculate their net asset value as set forth in the Funds' most recent Prospectuses and Statements of Additional Information. Except as particularly stated in this paragraph, Nationwide shall have no authority to act on behalf of W&R or to incur any cost or liability on its behalf. W&R will use its reasonable best efforts to provide closing net asset value, change in net asset value, dividend or daily accrual rate information and capital gain information by 6:00 p.m. Eastern Time each 1 Business Day to Nationwide. Nationwide shall use this data to calculate unit values. Unit values shall be used to process that same Business Day's Variable Account transactions. Orders for purchases or redemptions shall be placed with W&R or its specified agent no later than 10:00 a.m. of the following Business Day. Orders for shares of Funds shall be accepted and executed at the time they are received by W&R and at the net asset value price determined as of the close of trading on the previous Business Day. The Funds may refuse to sell shares to any person or may suspend or terminate the offering of its shares if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the directors of the Funds, necessary in the best interest of the shareholders of the Funds. W&R will not accept any order made on a conditional basis or subject to any delay or contingency. Nationwide shall only place purchase orders for shares of Funds on behalf of its customers whose addresses recorded on Nationwide's books are in a state or other jurisdiction in which the Funds are registered or qualified for sale, or are exempt from registration or qualification as confirmed in writing by W&R. Payment for net purchases shall be wired to a custodial account designated by W&R and payment for net redemptions will be wired to an account designated by Nationwide. Dividends and capital gain distributions shall be reinvested in additional Fund shares at net asset value. Notwithstanding the above, W&R shall not be held responsible for providing Nationwide with ex-date net asset value, change in net asset value, dividend or capital gain information when the New York Stock Exchange is closed, when an emergency exists making the valuation of net assets not reasonably practicable, or during any period when the Securities and Exchange Commission ("SEC") has by order permitted the suspension of pricing shares for the protection of shareholders. Issuance and transfer of Fund shares will be by book entry only. Share certificates will not be issued to Nationwide for any Variable Account. Fund shares will be recorded in the appropriate title for each Variable Account. Nationwide agrees to provide W&R, upon request, written reports indicating the number of shareholders that hold interests in the Funds and such other information (including books and records) that W&R may reasonably request or as may be necessary or advisable to enable it to comply with any law, regulation or order. 4. All expenses incident to the performance by W&R and the Funds under this Agreement shall be paid by W&R and the Funds. W&R shall promptly provide Nationwide (or its designee), or cause Nationwide (or its designee) to be provided with, a reasonable quantity of the Funds' Statements of Additional Information and any supplements, and a camera-ready copy of the Funds' Prospectus and any Supplements for use by Nationwide in producing a combined prospectus for each Contract incorporating both the Contract Prospectus and the Funds' Prospectus. Costs for production of such documents shall be allocated as set forth in the Administrative Services Agreement, dated September 1, 2000 by and between Nationwide and Waddell & Reed, Inc. 5. Nationwide and its agents shall make no representations concerning the Funds or Fund shares except those contained in the Funds' then current Prospectuses, Statements of Additional Information or other documents produced by W&R (or an entity on its behalf) which contain information about the Funds. Nationwide agrees to allow a reasonable period of time for W&R to review any advertising and sales literature drafted by Nationwide (or agents on its behalf) with respect to the Funds prior to submitting such material to any regulator. 2 6. W&R represents that the Funds are currently qualified as regulated investment companies under Subchapter M of the Internal Revenue Code of 1986 (the "Code"), as amended, and that the Funds shall make every effort to maintain such qualification. W&R shall promptly notify Nationwide upon having a reasonable basis for believing that the Funds have ceased to so qualify, or that they may not qualify as such in the future. W&R represents that the Funds currently comply with the diversification requirements pursuant to Section 817(h) of the Code and Section 1.817-5(b) of the Federal Tax Regulations and that the Funds will make every effort to maintain the Funds' compliance with such diversification requirements, unless the Funds are otherwise exempt from section 817(h) and/or except as otherwise disclosed in the Funds' prospectus. W&R will notify Nationwide promptly upon having a reasonable basis for believing that the Funds have ceased to so qualify, or that the Funds might not so qualify in the future. Unless otherwise exempt, W&R shall provide to Nationwide a statement indicating compliance with Section 817(h) and a schedule of investment holdings, to be received by Nationwide no later than twenty-five (25) days following the end of each calendar quarter. Nationwide represents that the Contracts are currently, and at the time of issuance will be, treated as annuity contracts or life insurance policies, whichever is appropriate under applicable provisions of the Code, and that it shall make every effort to maintain such treatment. Nationwide will promptly notify W&R upon having a reasonable basis for believing that the Contracts have ceased to be treated as annuity contracts or life insurance polices, or that the Contracts may not be so treated in the future. Unless the Funds are exempt from the requirements of section 817(h), Nationwide represents that each Variable Account is a "segregated asset account" and that interests in each Variable Account are offered exclusively through the purchase of a "variable contract", within the meaning of such terms pursuant to section 1.817-5(f)(2) of the Federal Tax Regulations, that it shall make every effort to continue to meet such definitional requirements, and that it shall notify W&R immediately upon having a reasonable basis for believing that such requirements have ceased to be met or that they may not be met in the future. 7. Within five (5) Business Days after the end of each calendar month, W&R shall provide Nationwide a monthly statement of account, which shall confirm all transactions made during that particular month in the Variable Accounts. 8. (a) The directors of the Funds will monitor the operations of the Funds for the existence of any material irreconcilable conflict among the interest of all Contract owners of all separate accounts investing in the Funds. W&R shall notify Nationwide of the potential for, or the determination of, such irreconcilable material conflict. An irreconcilable conflict may arise, among other things, from (i) an action by any state insurance regulatory authority; (ii) a change in applicable insurance laws or regulations; (iii) a tax ruling or provision of the Code or the regulations thereunder; (iv) any other development relating to the tax treatment of insurers, contract holders or policy owners or beneficiaries of variable annuity or variable life insurance products; (v) the manner in which the investments of the Funds are managed; (vi) a difference in voting instructions given by variable annuity contract owners, on the one hand, and variable life insurance policy owners on the other hand, or by the contract holders or policy owners of different participating insurance companies; or (vii) a decision by an insurer to override the voting instructions of participating contract owners. (b) Nationwide is responsible for reporting any potential or existing conflicts to W&R and the Funds. Nationwide will be responsible for assisting the directors in carrying out their responsibilities under this provision by providing the directors with all information reasonably necessary for them to consider the issues raised. The Funds will also require Waddell & Reed Investment Management Company ("WRIMCO") (the Funds' investment adviser) to report to the directors any such conflict that comes to the attention of WRIMCO. (c) If a majority of the directors of the Funds or a majority of the disinterested directors determine that a material irreconcilable conflict exists involving Nationwide, Nationwide shall, at its expense and 3 to the extent reasonably practicable (as determined by a majority of the disinterested directors), take whatever steps are necessary to eliminate the irreconcilable material conflict, including, but not limited to, withdrawing the assets allocable to some or all of the Variable Accounts from the Funds and reinvesting such assets in a different investment medium, including another Fund, offering to the affected Contract owners the option of making such a change or offering a new funding medium, including a registered investment company. For purposes of this provision, the directors or the disinterested directors shall determine whether any proposed action adequately remedies any irreconcilable material conflict. In the event of a determination of an irreconcilable material conflict, the directors shall cause the Funds to take such action, such as establishment of one or more additional Funds, as they reasonably determine to be in the interest of all shareholders and Contract owners in view of all the applicable factors such as the cost, feasibility, tax, regulatory and other considerations. In no event will the Funds be required by this provision to establish a new funding medium for any Contract. Nationwide shall not be required by this provision to establish a new funding medium for any Contract if an offer to do so has been declined by a vote of a majority of the Contract owners materially adversely affected by the material irreconcilable conflict. Nationwide will decline an offer to establish a new funding medium only if Nationwide believes it is in the best interest of its Contract owners. 9. This Agreement shall terminate as to the sale and issuance of new Contracts: (a) at the option of Nationwide or W&R upon at least 60 days advance written notice to the other; (b) in the event of termination of the General Agency Agreement between Waddell & Reed, Inc. and Nationwide; (c) at any time, upon W&R's election, if the Funds determine that liquidation of the Funds is in the best interest of the Funds and their beneficial owners. Reasonable advance notice of election to liquidate shall be furnished by W&R to permit the substitution of Fund shares with the shares of another investment company pursuant to SEC regulation; (d) if the Contracts are not treated as annuity contracts or life insurance policies by the applicable regulators or under applicable rules or regulations; (e) if the Variable Accounts are not deemed "segregated asset accounts" by the applicable regulators or under applicable rules or regulations; (f) at the option of Nationwide, if Fund shares are not available for any reason to meet the requirements of Contracts as determined by Nationwide. Reasonable advance notice of election to terminate (and time to cure) shall be furnished by Nationwide; (g) at the option of Nationwide or W&R, upon institution of relevant formal proceedings against the broker-dealer(s) marketing the Contracts, the Variable Accounts, Nationwide or the Funds by the NASD, IRS, the Department of Labor, the SEC, state insurance departments or any other regulatory body, the expected or anticipated outcome of which would, in the reasonable judgment of the terminating party, materially impair the other party's ability to meet and perform its obligations under this Agreement. Prompt notice of an election to terminate under this provision shall be furnished by the terminating party and shall be effective upon receipt; (h) upon a decision by Nationwide, in accordance with regulations of the SEC, to substitute such Fund shares with the shares of another investment company for Contracts for which the Fund shares have been selected to serve as the underlying investment medium, provided, however, that Nationwide shall not take any action to remove the Funds as the underlying investment medium for the Contracts developed for exclusive distribution by W&R. Nationwide shall give at least 60 days written notice to the Funds and W&R of any proposal to substitute Fund shares; (i) upon assignment of this Agreement unless such assignment is made with the written consent of each other party; and (j) in the event Fund shares are not registered, issued or sold pursuant to Federal law, or such law precludes the use of Fund shares as an underlying investment medium of Contracts issued or to be issued by Nationwide. Prompt written notice shall be given by either party to the other in the event the conditions of this provision occur. 4 10. Each notice required by this Agreement shall be given orally and confirmed in writing to: Nationwide Life Insurance Company Nationwide Life and Annuity Insurance Company One Nationwide Plaza 1-09-V3 Columbus, Ohio 43215 Attention: Compliance Officer Waddell & Reed, Inc. Waddell & Reed Services Company 6300 Lamar Avenue Overland Park, KS 66202 Attention: Legal Department W&R Target Funds, Inc. 6300 Lamar Avenue Overland Park, KS 66202 Attention: Treasurer With a copy to: Nationwide Life Insurance Company Nationwide Life and Annuity Insurance Company One Nationwide Plaza 1-09-V3 Columbus, Ohio 43215 Attention: Director - Securities W&R Target Funds, Inc. 6300 Lamar Avenue Overland Park, KS 66202 Attention: Secretary Any party may change its address by notifying the other party(ies) in writing. 11. So long as and to the extent that the SEC continues to interpret the 1940 Act to require pass-through voting privileges for variable contract owners, Nationwide shall distribute all proxy material furnished by W&R (provided that such material is received by Nationwide at least 10 business days prior to the date scheduled for mailing to Contract owners) and shall vote Fund shares in accordance with instructions received from the Contract owners who have such interests in such Fund shares. Nationwide shall vote the Fund shares for which no instructions have been received in the same proportion as Fund shares for which said instructions have been received from Contract owners, provided that such proportional voting is not prohibited by the Contract owner's related plan or trust document. Nationwide and its agents will in no way recommend action in connection with or oppose or interfere with the solicitation of proxies for the Fund shares held for the benefit of such Contract owners. 5 12. (a) Nationwide agrees to reimburse and/or indemnify and hold harmless W&R, the Funds, and each of their directors, officers, employees, agents and each person, if any, who controls or is controlled by W&R within the meaning of the Securities Act of 1933 (the "1933 Act") (collectively, "Affiliated Party") against any losses, claims, damages or liabilities ("Losses") to which W&R or any such Affiliated Party may become subject, under the 1933 Act or otherwise, insofar as such Losses (or actions in respect thereof) arise out of or are based upon, but not limited to: (i) any untrue statement or alleged untrue statement of any material fact contained in information furnished by Nationwide; (ii) the omission or the alleged omission to state in the Registration Statements or Prospectuses of the Variable Accounts, or Contract, or in any sales literature generated or approved by Nationwide on behalf of the Variable Accounts or Contracts, a material fact required to be stated therein or necessary to make the statements therein not misleading; (iii) conduct, statements or representations of Nationwide or its agents, with respect to the sale and distribution of Contracts for which Fund shares are an underlying investment; (iv) the failure of Nationwide to provide the services and furnish the materials under the terms of this Agreement; (v) a breach of this Agreement or of any of the representations contained herein; or (vi) any failure to register the Contracts or the Variable Accounts under federal or state securities laws, state insurance laws or to otherwise comply with such laws, rules, regulations or orders. Provided however, that Nationwide shall not be liable in any such case to the extent any such statement, omission or representation or such alleged statement, alleged omission or alleged representation was made in reliance upon and in conformity with written information furnished to Nationwide by or on behalf of W&R specifically for use therein. Nationwide shall reimburse any legal or other expenses reasonably incurred by W&R, the Funds, or any Affiliated Party in connection with investigating or defending any such Losses, provided, however, that Nationwide shall have prior approval of the use of said counsel or the expenditure of said fees. This indemnity agreement shall be in addition to any liability which Nationwide may otherwise have. (b) W&R and the Funds agree to indemnify and hold harmless Nationwide and each of its directors, officers, employees, agents and each person, (collectively, "Nationwide Affiliated Party"), who controls Nationwide within the meaning of the 1933 Act against any Losses to which Nationwide or any such Nationwide Affiliated Party may become subject, under the 1933 Act or otherwise, insofar as such Losses (or actions in respect thereof) arise out of or are based upon; but not limited to: (i) any untrue statement or alleged untrue statement of any material fact contained in any information furnished by W&R or the Funds, including but not limited to, the Registration Statements, Prospectuses or sales literature of the Funds; (ii) the omission or the alleged omission to state in the Registration Statements or Prospectuses of the Funds a material fact required to be stated therein or necessary to make the statements therein not misleading; (iii) W&R's failure to keep the Funds fully diversified and qualified as regulated investment companies as required by the applicable provisions of the Code, the 1940 Act, and the applicable regulations promulgated thereunder; (iv) the failure of W&R to provide the services and furnish the materials under the terms of this Agreement; (v) a breach of this Agreement or of any of the representations contained herein; or (vi) any failure to register the Funds under federal or state securities laws or to otherwise comply with such laws, rules, regulations or orders. 6 Provided however, that W&R and the Funds shall not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an act or omission of Nationwide or untrue statement or omission or alleged omission made in conformity with written information furnished to W&R or the Funds by Nationwide specifically for use therein. W&R and the Funds shall reimburse any reasonable legal or other expenses reasonably incurred by Nationwide or any Nationwide Affiliated Party in connection with investigating or defending any such Losses, provided, however, that W&R and the Funds shall have prior approval of the use of said counsel or the expenditure of said fees. This indemnity agreement will be in addition to any liability which W&R and the Funds may otherwise have. (c) Each party shall promptly notify the other party(ies) in writing of any situation which presents or appears to involve a claim which may be the subject of indemnification under this Agreement and the indemnifying party shall have the option to defend against any such claim. In the event the indemnifying party so elects, it shall notify the indemnified party and shall assume the defense of such claim, and the indemnified party shall cooperate fully with the indemnifying party, at the indemnifying party's expense, in the defense of such claim. Notwithstanding the foregoing, the indemnified party shall be entitled to participate in the defense of such claim at its own expense through counsel of its own choosing. Neither party shall admit to wrong-doing nor make any compromise in any action or proceeding which may result in a finding of wrongdoing by the other party without the other party's prior written consent. Any notice given by the indemnifying party to an indemnified party or participation in or control of the litigation of any such claim by the indemnifying party shall in no event be deemed to be an admission by the indemnifying party of culpability, and the indemnifying party shall be free to contest liability among the parties with respect to the claim. 13. Subject to Section 9(h) of this Agreement, W&R may request or Nationwide may initiate the filing of a substitution application pursuant to Section 26(c) of the 1940 Act to substitute shares of a Fund held by a Nationwide Variable Account for another investment media ("Substitution Application"). The costs associated with a Substitution Application shall be allocated as follows: (a) In the event W&R requests Nationwide to submit a Substitution Application, W&R shall reimburse Nationwide for all reasonable costs incurred by Nationwide with respect to such Substitution Application. W&R shall be obligated to reimburse Nationwide under this provision irrespective of whether the Substitution Application requested by W&R is effectuated. (b) In the event Nationwide initiates a Substitution Application and the Fund being substituted is offered by separate accounts of companies other than Nationwide, Nationwide shall bear all costs associated with the Substitution Application irrespective of whether the Substitution Application is effectuated. (c) In the event Nationwide initiates a Substitution Application in accordance with Section 9(h), Nationwide shall bear the costs incurred in the transfer. 14. The forbearance or neglect of any party to insist upon strict compliance by another party with any of the provisions of this Agreement, whether continuing or not, or to declare a forfeiture of termination against the other parties, shall not be construed as a waiver of any of the rights or privileges of any party hereunder. No waiver of any right or privilege of any party arising from any default or failure of performance by any party shall affect the rights or privileges of the other parties in the event of a further default or failure of performance. 15. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of Ohio, without respect to its choice of law provisions and in accordance with the 1940 Act. In the case of any conflict, the 1940 Act shall control. 7 16. Each party hereby represents and warrants to the other that the persons executing this Agreement on its behalf are duly authorized and empowered to execute and deliver the Agreement and that the Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms. Except as particularly set forth herein, neither party assumes any responsibility hereunder, and will not be liable to the other for any damage, loss of data, delay or any other loss whatsoever caused by events beyond its reasonable control. 17. Nationwide acknowledges that the identity of W&R's (and its affiliates' and/or subsidiaries') customers and all information maintained about those customers constitute the valuable property of W&R. Nationwide agrees that, should it come into contact or possession of any such information (including, but not limited to, lists or compilations of the identity of such customers), Nationwide shall hold such information or property in confidence and shall not use, disclose or distribute any such information or property except with W&R's prior written consent or as required by law or judicial process. W&R acknowledges that the identity of Nationwide's (and its affiliates' and/or subsidiaries') customers and all information maintained about those customers constitute the valuable property of Nationwide. W&R agrees that, should it come into contact or possession of any such information (including, but not limited to, lists or compilations of the identity of such customers), W&R shall hold such information or property in confidence and shall not use, disclose or distribute any such information or property except with Nationwide's prior written consent or as required by law or judicial process. This section shall survive the expiration or termination of this Agreement. 18. Nothing in this Agreement shall be deemed to create a partnership or joint venture by and among the parties hereto. 19. This Agreement supersedes any and all prior Fund Participation Agreements made by and between the parties. 20. Except to amend Exhibit A, or as otherwise provided in this Agreement, this Agreement may not be amended or modified except by a written amendment executed by each of the parties. 8 21. This Agreement may be executed by facsimile signature and it may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. NATIONWIDE LIFE INSURANCE COMPANY AND NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY /s/ William G. Goslee ---------------------------------------------- By: William G. Goslee Title: Vice President Investment Management Relationships WADDELL & REED, INC. /s/ Thomas W. Butch ---------------------------------------------- By: Thomas W. Butch Title: Executive Vice President WADDELL & REED SERVICES COMPANY /s/ Michael D. Strohm ---------------------------------------------- By: Michael D. Strohm Title: President W&R Target Funds, Inc. /s/ Robert L. Hechler ---------------------------------------------- By: Robert L. Hechler Title: President 9 EXHIBIT A This Exhibit corresponds to the Fund Participation Agreement dated December 1, 2000.
- ------------------------------------------------------------------------------------------------------------------------- VARIABLE ACCOUNTS OF NATIONWIDE CORRESPONDING NATIONWIDE CONTRACTS CORRESPONDING FUNDS - ------------------------------------------------------------------------------------------------------------------------- Nationwide VA Separate Account-D o Waddell & Reed Advisors W&R Target Funds, Inc. Select Annuity o Asset Strategy Portfolio o Balanced Portfolio o Bond Portfolio o Core Equity Portfolio (formerly, Income Portfolio) o Growth Portfolio o High Income Portfolio o International Portfolio o Limited-Term Bond Portfolio o Money Market Portfolio o Science and Technology Portfolio o Small Cap Portfolio - ------------------------------------------------------------------------------------------------------------------------- Nationwide VLI Separate Account-5 o Waddell & Reed Advisors W&R Target Funds, Inc. Select Life o Asset Strategy Portfolio o Waddell & Reed Advisors o Balanced Portfolio Select Survivorship Life o Bond Portfolio o Core Equity Portfolio (formerly, Income Portfolio) o Growth Portfolio o High Income Portfolio o International Portfolio o Limited-Term Bond Portfolio o Money Market Portfolio o Science and Technology Portfolio o Small Cap Portfolio - ------------------------------------------------------------------------------------------------------------------------- Nationwide Variable Account-9 o Waddell & Reed Advisors W&R Target Funds, Inc. Select Plus Annuity o Asset Strategy Portfolio (proprietary version of o Balanced Portfolio Future (1933 Act o Bond Portfolio No.333-28995)) o Core Equity Portfolio (formerly, Income Portfolio) o Growth Portfolio o High Income Portfolio o International Portfolio o Limited-Term Bond Portfolio o Money Market Portfolio o Science and Technology Portfolio o Small Cap Portfolio
10 EX-10.9 7 a2041359zex-10_9.txt LETTER AGREEMENT Exhibit 10.9 [LOGO] Anthony L. McWhorter FSA, MAAA PRESIDENT 205-325-2758 FAX 205-325-2520 UNITED INVESTORS LIFE 2001 THIRD AVENUE SOUTH (35233) POST OFFICE BOX 10207, BIRMINGHAM, ALABAMA 35202-0207 July 8, 1999 Mr. Robert Hechler President Waddell & Reed, Inc. 6300 Lamar Shawnee Mission, KS 66202 Dear Bob: As you requested, this letter will set forth some details of the agreement that we reached over the telephone on Wednesday, July 7. COMPENSATION PAYABLE TO WADDELL & REED BEGINNING 1/1/2000 For variable annuity contracts issued beginning 1/1/2000: 7.75% of premiums received, plus .25% annually of variable assets, paid monthly beginning the FIRST month For the in force block of variable annuity business (i.e., issues of 1999 and earlier): .20% annually of variable assets, paid monthly CERTAIN VARIABLE ANNUITY PRODUCT FEATURES In addition to product features previously proposed, we agree to the following: - 1.25% mortality & expense charge - .15% admin. charge - 7 year surrender charge period, with surrender charge pattern of 7%, 6, 5, 4, 3, 2, 1, 0% - $25 contract maintenance fee, waived for accounts GREATER THAN $25,000 By agreeing to the foregoing arrangements, we acknowledge that Waddell & Reed has withdrawn its consideration of possible relationships on attractive terms with other third party insurance companies in order to establish a long-term relationship with us. In doing so, Waddell & Reed has relied on our representations with respect to our commitment to provide, jointly with Waddell & Reed, a first-class, competitive product that is fully supported and serviced by sufficient resources, Page 2 July 8, 1999 including personnel, systems and technology. We acknowledge that Waddell & Reed will commit substantial resources to market and provide a first-class, competitive product to its customers, and we agree that we will work cooperatively with Waddell & Reed towards this end. Among other things, we will cooperate with Waddell & Reed and commit the reasonable resources necessary (a) to design, create, implement and introduce products and product features that will be first-class and competitive and (b) to enhance and improve such products and product features as the market for insurance products and variable insurance products evolves. In addition, we acknowledge that the breadth and quality of client service is an integral component of providing a first-class, competitive product. Accordingly, we also agree to commit the reasonable resources necessary, including, but not limited to, personnel, systems and technology, to develop and/or acquire and implement the services necessary to support and service clients who purchase the products jointly offered by Waddell & Reed and us, and to enhance and improve such services in order to remain fully competitive. Bob, I believe this fully describes the items that we discussed regarding compensation and product features. If you are in agreement with the foregoing terms and conditions, please sign this letter below and return a copy to me as soon as possible. Sincerely, /s/ Tony McWhorter Anthony L. McWhorter Accepted and agreed to this 12th day of July, 1999. Waddell & Reed, Inc. By: /s/ Robert L. Hechler ---------------------------- Its: President ----------------------- EX-10.14 8 a2041359zex-10_14.txt CREDIT AGREEMENT Exhibit 10.14 ================================================================================ CREDIT AGREEMENT dated as of October 13, 2000 among WADDELL & REED FINANCIAL, INC., The Lenders Party Hereto, and THE CHASE MANHATTAN BANK, as Administrative Agent. BANK OF AMERICA, N.A., as Documentation Agent DEUTSCHE BANK AG, as Syndication Agent $220,000,000 REVOLVING CREDIT AND COMPETITIVE ADVANCE FACILITY ================================================================================ CHASE SECURITIES INC., as Advisor, Lead Arranger and Book Manager TABLE OF CONTENTS Page TABLE OF CONTENTS
Page ---- ARTICLE I Definitions.............................................................................................1 SECTION 1.01. Defined Terms..............................................................................1 SECTION 1.02. Classification of Loans and Borrowings....................................................16 SECTION 1.03. Terms Generally...........................................................................16 SECTION 1.04. Accounting Terms; GAAP....................................................................16 ARTICLE II The Credits...........................................................................................16 SECTION 2.01. Commitments...............................................................................16 SECTION 2.02. Loans and Borrowings......................................................................17 SECTION 2.03. Requests for Revolving Borrowings.........................................................17 SECTION 2.04. Term Loans................................................................................18 SECTION 2.05. Procedure for Term Borrowing..............................................................18 SECTION 2.06. Competitive Bid Procedure.................................................................19 SECTION 2.07. Funding of Borrowings.....................................................................21 SECTION 2.08. Interest Elections........................................................................22 SECTION 2.09. Termination and Reduction of Commitments..................................................23 SECTION 2.10. Repayment of Loans; Evidence of Debt......................................................24 SECTION 2.11. Prepayment of Loans.......................................................................24 SECTION 2.12. Fees......................................................................................25 SECTION 2.13. Interest..................................................................................26 SECTION 2.14. Alternate Rate of Interest................................................................26 SECTION 2.15. Increased Costs...........................................................................27 SECTION 2.16. Break Funding Payments....................................................................28 SECTION 2.17. Taxes.....................................................................................29 SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of Set-offs...............................29 SECTION 2.19. Mitigation Obligations; Replacement of Lenders............................................31 SECTION 2.20. New Lenders; Commitment Increases.........................................................31 ARTICLE III Representations and Warranties.......................................................................32 SECTION 3.01. Organization; Powers......................................................................32 SECTION 3.02. Authorization; Enforceability.............................................................32 SECTION 3.03. Governmental Approvals; No Conflicts......................................................32 SECTION 3.04. Financial Condition; No Material Adverse Effect...........................................33 SECTION 3.05. Properties................................................................................33 SECTION 3.06. Litigation and Environmental Matters......................................................33 SECTION 3.07. Compliance with Laws and Agreements.......................................................34 SECTION 3.08. Investment and Holding Company Status.....................................................34 SECTION 3.09. Taxes.....................................................................................34
Page ---- SECTION 3.10. ERISA.....................................................................................34 SECTION 3.11. Disclosure................................................................................35 SECTION 3.12. No Default................................................................................35 SECTION 3.13. Subsidiaries..............................................................................35 SECTION 3.14. Federal Regulations.......................................................................35 SECTION 3.15. No Burdensome Restrictions................................................................35 ARTICLE IV Conditions............................................................................................36 SECTION 4.01. Effective Date............................................................................36 SECTION 4.02. Each Credit Event.........................................................................37 ARTICLE V Affirmative Covenants..................................................................................38 SECTION 5.01. Financial Statements and Other Information................................................38 SECTION 5.02. Notices of Material Events................................................................39 SECTION 5.03. Existence; Conduct of Business............................................................39 SECTION 5.04. Payment of Obligations....................................................................40 SECTION 5.05. Maintenance of Properties; Insurance......................................................40 SECTION 5.06. Books and Records; Inspection Rights......................................................40 SECTION 5.07. Compliance with Laws......................................................................40 SECTION 5.08. Use of Proceeds...........................................................................40 SECTION 5.09. Environmental Laws........................................................................41 ARTICLE VI Negative Covenants....................................................................................41 SECTION 6.01. Financial Condition Covenants.............................................................41 SECTION 6.02. Indebtedness..............................................................................41 SECTION 6.03. Liens.....................................................................................42 SECTION 6.04. Fundamental Changes.......................................................................42 SECTION 6.05. Investments, Loans, Advances, Guarantees and Acquisitions; Hedging Agreements.............43 SECTION 6.06. Restricted Payments.......................................................................44 SECTION 6.07. Transactions with Affiliates..............................................................44 SECTION 6.08. Restrictive Agreements....................................................................44 SECTION 6.09. Capital Expenditures......................................................................44 SECTION 6.10. Sales and Leasebacks......................................................................45 SECTION 6.11. Changes in Fiscal Periods.................................................................45 SECTION 6.12. Negative Pledge Clauses...................................................................45 SECTION 6.13. Optional Payments and Modifications of Certain Debt Instruments...........................45 ARTICLE VII Events of Default....................................................................................45 ARTICLE VIII The Administrative Agent............................................................................47 ARTICLE IX Miscellaneous.........................................................................................49 SECTION 9.01. Notices...................................................................................49 SECTION 9.02. Waivers; Amendments.......................................................................50 SECTION 9.03. Expenses; Indemnity; Damage Waiver........................................................50 SECTION 9.04. Successors and Assigns....................................................................52
Page ---- SECTION 9.05. Survival..................................................................................54 SECTION 9.06. Counterparts; Integration; Effectiveness..................................................54 SECTION 9.07. Severability..............................................................................54 SECTION 9.08. Right of Setoff...........................................................................54 SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process................................55 SECTION 9.10. WAIVER OF JURY TRIAL......................................................................55 SECTION 9.11. Headings..................................................................................56 SECTION 9.12. Confidentiality...........................................................................56 SECTION 9.13. Interest Rate Limitation..................................................................56 ANNEXES Annex A Pricing Grid SCHEDULES: Schedule 2.01 -- Commitments Schedule 3.06 -- Disclosed Matters Schedule 3.13 -- Subsidiaries Schedule 6.02 -- Existing Indebtedness Schedule 6.03 -- Existing Liens Schedule 6.08 -- Existing Restrictions Schedule 6.10 -- Sale/Leaseback Properties EXHIBITS: Exhibit A -- Form of Assignment and Acceptance Exhibit B -- Form of Opinion of Borrower's General Counsel Exhibit C-1 -- Form of Report Under Section 5.01(e)(A) Exhibit C-2 -- Form of Report Under Section 5.01(e)(B) Exhibit D -- Form of Competitive Bid
CREDIT AGREEMENT dated as of October 13, 2000, among WADDELL & REED FINANCIAL, INC. (the "BORROWER"), the LENDERS party hereto, and THE CHASE MANHATTAN BANK, as Administrative Agent. W I T N E S S E T H: - - - - - - - - - - 1. The Borrower is party to the Credit Agreement dated as of October 14, 1999 (the "EXISTING CREDIT AGREEMENT") among the Borrower, the lenders party thereto, and The Chase Manhattan Bank, as administrative agent. 2. The Borrower, the Lenders and the Administrative Agent desire to replace the Existing Credit Agreement with this Agreement upon and subject to the terms and conditions hereinafter set forth. The parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01 DEFINED TERMS. As used in this Agreement, the following terms have the meanings specified below: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "ADJUSTED LIBO RATE" means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "ADMINISTRATIVE AGENT" means The Chase Manhattan Bank, in its capacity as administrative agent for the Lenders hereunder. "ADMINISTRATIVE QUESTIONNAIRE" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "AFFILIATE" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "AGGREGATE REVENUE BASE" means the sum of Revenue Bases for all W&R Funds and for all other assets managed by the Borrower or any Subsidiary of the Borrower for other entities. "AGREEMENT" means this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "ALTERNATE BASE RATE" means, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "APPLICABLE PERCENTAGE" means, with respect to any Lender, the percentage of the total Commitments represented by such Lender's Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. "APPLICABLE RATE" means, for any day, with respect to any ABR Loan or Eurodollar Loan, or with respect to the facility fees payable hereunder, as the case may be, the applicable rate per annum determined pursuant to the Pricing Grid attached hereto as Annex A. "APPROVED FUND" means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity that administers or manages a Lender. "ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. "AVAILABILITY PERIOD" means the period from and including the Effective Date to but excluding the earlier of the Revolving Credit Termination Date and the date of termination of the Commitments. "BOARD" means the Board of Governors of the Federal Reserve System of the United States of America. "BORROWER" means Waddell & Reed Financial, Inc., a Delaware corporation. "BORROWING" means (a) Revolving Loans or Term Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect, or (b) a Competitive Loan or group of Competitive Loans of the same Type made on the same date and as to which a single Interest Period is in effect. "BUSINESS DAY" means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed; PROVIDED that, when used in connection with a Eurodollar Loan, the term "BUSINESS DAY" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "CAPITAL EXPENDITURES" means, for any period, with respect to any Person, the aggregate of all expenditures by such Person and its Subsidiaries for the acquisition or leasing 2 (pursuant to a capital lease) of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) that should be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries. "CAPITAL LEASE OBLIGATIONS" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "CAPITAL STOCK" means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing. "CHANGE IN CONTROL" means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof) other than the Borrower, of shares representing more than 25% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower; (b) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were neither (i) nominated by the board of directors of the Borrower nor (ii) appointed by directors so nominated; or (c) the acquisition of direct or indirect Control of the Borrower by any Person or group. "CHANGE IN LAW" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "CLASS", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans, Term Loans or Competitive Loans. "CLOSING DATE" means the date on which the conditions precedent set forth in Section 4.01 shall have been satisfied, which date is October 13, 2000. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COMMITMENT" means, with respect to each Lender, the commitment of such Lender to make Revolving Loans and Term Loans hereunder, expressed as an amount representing the maximum aggregate outstanding principal amount of such Lender's Revolving Loans and Term Loans hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.09, (b) reduced or increased from time to time pursuant to assignments by 3 or to such Lender pursuant to Section 9.04 and (c) increased from time to time pursuant to Section 2.20. The initial amount of each Lender's Commitment is set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable, and the initial aggregate amount of the Commitments of the Lenders (as set forth on Schedule 2.01) is $220,000,000. "COMMITMENT UTILIZATION PERCENTAGE" means on any day the percentage equivalent of a fraction (a) the numerator of which is the sum of the aggregate outstanding principal amount of Loans and (b) the denominator of which is the aggregate amount of the Commitments (or, on any day after termination of the Commitments, the aggregate amount of the Commitments in effect immediately preceding such termination). "COMPETITIVE BID" means an offer by a Lender to make a Competitive Loan in accordance with Section 2.06. "COMPETITIVE BID RATE" means, with respect to any Competitive Bid, the Margin or the Fixed Rate, as applicable, offered by the Lender making such Competitive Bid. "COMPETITIVE BID REQUEST" means a request by the Borrower for Competitive Bids in accordance with Section 2.06. "COMPETITIVE LOAN" means a Loan made pursuant to Section 2.06. "CONFIDENTIAL INFORMATION MEMORANDUM" means the Confidential Information Memorandum dated September 2000 and furnished to the Lenders. "CONSOLIDATED EBITDA" means, for any period, Consolidated Net Income for such period PLUS, without duplication and to the extent reflected as a charge in the statement of such Consolidated Net Income for such period, the sum of (a) income tax expense, (b) interest expense, amortization or writeoff of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans), (c) depreciation and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (e) any extraordinary, unusual or non-recurring non-cash expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, non-cash losses on sales of assets outside of the ordinary course of business), PROVIDED, that the amounts referred to in this clause (e) shall not, in the aggregate, exceed $1,000,000 for any fiscal year of the Borrower, and (f) any other non-cash charges. For the purposes of calculating Consolidated EBITDA for any period of four consecutive fiscal quarters (each, a "Reference Period") pursuant to any determination of the Consolidated Leverage Ratio, (i) if at any time during such Reference Period the Borrower or any Subsidiary shall have made any Material Disposition, the Consolidated EBITDA for such Reference Period shall be reduced by an amount equal to the Consolidated EBITDA (if positive) attributable to the property that is the subject of such Material Disposition for such Reference Period or increased by an amount equal to the Consolidated EBITDA (if negative) attributable thereto for such Reference Period and (ii) if during such Reference Period the Borrower or any Subsidiary shall have made a Material Acquisition, Consolidated EBITDA for such Reference Period shall be calculated after giving PRO FORMA effect thereto as if such Material Acquisition 4 occurred on the first day of such Reference Period. As used in this definition, "Material Acquisition" means any acquisition of property or series of related acquisitions of property that (a) constitutes assets comprising all or substantially all of an operating unit of a business or constitutes all or substantially all of the common stock of a Person and (b) involves the payment of consideration by the Borrower and its Subsidiaries in excess of $1,000,000; and "Material Disposition" means any Disposition of property or series of related Dispositions of property that yields gross proceeds to the Borrower or any of its Subsidiaries in excess of $1,000,000. "CONSOLIDATED INTEREST COVERAGE RATIO" means, for any period, the ratio of (a) Consolidated EBITDA for such period to (b) Consolidated Interest Expense for such period. "CONSOLIDATED INTEREST EXPENSE" means, for any period, interest expense (including that attributable to Capital Lease Obligations) of the Borrower and its Subsidiaries for such period with respect to all outstanding Indebtedness of the Borrower and its Subsidiaries (including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Hedging Agreements in respect of interest rates to the extent such net costs are allocable to such period in accordance with GAAP). "CONSOLIDATED LEVERAGE RATIO" means, as at the last day of any period, the ratio of (a) Consolidated Total Debt on such day to (b) Consolidated EBITDA for such period. "CONSOLIDATED NET INCOME" means, for any period, the consolidated net income (or loss) of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP; PROVIDED that there shall be excluded (a) the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary of the Borrower or is merged into or consolidated with the Borrower or any of its Subsidiaries, (b) the income (or deficit) of any Person (other than a Subsidiary of the Borrower) in which the Borrower or any of its Subsidiaries has an ownership interest, except to the extent that any such income is actually received by the Borrower or such Subsidiary in the form of dividends or similar distributions and (c) the undistributed earnings of any Subsidiary of the Borrower to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of any Contractual Obligation or Requirement of Law applicable to such Subsidiary. "CONSOLIDATED TOTAL DEBT" means, at any date, the aggregate principal amount of all Indebtedness of the Borrower and its Subsidiaries at such date, determined on a consolidated basis in accordance with GAAP. "CONTRACTUAL OBLIGATION" means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. 5 "DEFAULT" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "DISCLOSED MATTERS" means the actions, suits and proceedings and the environmental matters disclosed in Schedule 3.06. "DISTRIBUTION FEES" means all fees payable pursuant to a plan contemplated by Rule 12b-1 under the Investment Company Act of 1940, as amended, in connection with the distribution of shares of W&R Funds that are open-end funds. "DOLLARS" or "$" refers to lawful money of the United States of America. "EFFECTIVE DATE" means the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 9.02). "ENVIRONMENTAL LAWS" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to health and safety matters. "ENVIRONMENTAL LIABILITY" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA EVENT" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention 6 to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "EURODOLLAR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate (or, in the case of a Competitive Loan, the LIBO Rate). "EVENT OF DEFAULT" has the meaning assigned to such term in Article VII. "EXCESS UTILIZATION DAY" means each day on which the Commitment Utilization Percentage exceeds the applicable percentage set forth in Section 2.12(b)(i) and Section 2.12(b)(ii). "EXCLUDED TAXES" means, with respect to the Administrative Agent, any Lender, or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.19(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement or is attributable to such Foreign Lender's failure or inability to comply with Section 2.17(e), except to the extent that such Foreign Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.17(a). "EXISTING CREDIT AGREEMENT" has the meaning set forth in the recitals hereto. "FEDERAL FUNDS EFFECTIVE RATE" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "FINANCIAL OFFICER" means the chief financial officer, principal accounting officer, treasurer or controller of the Borrower. 7 "FIXED RATE" means, with respect to any Competitive Loan (other than a Eurodollar Competitive Loan), the fixed rate of interest per annum specified by the Lender making such Competitive Loan in its related Competitive Bid. "FIXED RATE LOAN" means a Competitive Loan bearing interest at a Fixed Rate. "FOREIGN LENDER" means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "FUND" means any Person that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business. "GAAP" means generally accepted accounting principles in the United States of America. "GOVERNMENTAL AUTHORITY" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body (including self-regulatory body), court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government, including, in any event, the Securities and Exchange Commission and any applicable state securities commission or similar body. "GUARANTEE" of or by any Person (the "GUARANTOR") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; PROVIDED, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "HAZARDOUS MATERIALS" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. 8 "HEDGING AGREEMENT" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "INDEBTEDNESS" of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty, (j) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances and (k) net liabilities of such Person under Hedging Agreements. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. "INDEMNIFIED TAXES" means Taxes other than Excluded Taxes. "INTEREST ELECTION REQUEST" means a request by the Borrower to convert or continue a Revolving Borrowing in accordance with Section 2.08. "INTEREST PAYMENT DATE" means (a) with respect to any ABR Loan, the last day of each March, June, September and December, (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day prior to the last day of such Interest Period that occurs at intervals of three months' duration, after the first day of such Interest Period, and (c) with respect to any Fixed Rate Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Fixed Rate Borrowing with an Interest Period of more than 90 days' duration (unless otherwise specified in the applicable Competitive Bid Request), each day prior to the last day of such Interest Period that occurs at intervals of 90 days' duration after the first day of such Interest Period, and any other dates that are specified in the applicable Competitive Bid Request as Interest Payment Dates with respect to such Borrowing. "INTEREST PERIOD" means (a) with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect, and (b) with respect to any Fixed Rate Borrowing, the period (which shall not be less than seven days or more than 364 days) commencing on the date of such Borrowing and ending on the date 9 specified in the applicable Competitive Bid Request; PROVIDED, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, (ii) any Interest Period pertaining to a Eurodollar Borrowing that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period, and (iii) any Interest Period that would otherwise extend beyond the Revolving Credit Termination Date or beyond the date final payment is due on the Term Loans shall end on the Revolving Credit Termination Date or such date of final payment, as the case may be. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and, in the case of a Revolving Borrowing, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "LENDERS" means the Persons listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to an Assignment and Acceptance, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance. "LIBO RATE" means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Dow Jones Markets Screen (or on any successor or substitute page of such Screen, or any successor to or substitute for such Screen, providing rate quotations comparable to those currently provided on such page of such Screen, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO RATE" with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "LIEN" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "LOANS" means the loans made by the Lenders to the Borrower pursuant to this Agreement. "MANAGEMENT CONTRACT" means an agreement, written or oral, pursuant to which the Borrower or any Subsidiary of the Borrower provides (i) investment advisory, management or administrative services to a W&R Fund or (ii) investment advisory or management services to 10 any Person, including, without limitation, unregistered investment companies and personal or corporate investment accounts. "MARGIN" means, with respect to any Competitive Loan bearing interest at a rate based on the LIBO Rate, the marginal rate of interest, if any, to be added to or subtracted from the LIBO Rate to determine the rate of interest applicable to such Loan, as specified by the Lender making such Loan in its related Competitive Bid. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, assets, property, prospects or condition, financial or otherwise, of the Borrower and its Subsidiaries taken as a whole, or (b) the validity or enforceability of this Agreement or the rights or remedies of the Administrative Agent or the Lenders hereunder. "MATERIAL INDEBTEDNESS" means Indebtedness (other than the Loans), or obligations in respect of one or more Hedging Agreements, of any one or more of the Borrower and its Subsidiaries in an aggregate principal amount exceeding $5,000,000. For purposes of determining Material Indebtedness, the "principal amount" of the obligations of the Borrower or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Borrower or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time. "MOODY'S" means Moody's Investors Service, Inc. "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NET ASSET VALUE" means, at any date of determination and with respect to any investment company or account manager, the "current net asset" value (as defined in Rule 2a-4 under the Investment Company Act of 1940), in the aggregate, of all outstanding redeemable securities issued by such investment company at such date. "OTHER TAXES" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "PERMITTED ACQUISITION" means an acquisition of a Person, or the assets of a Person or a line of business of a Person, in the same or a related line of business as the Borrower, PROVIDED that after giving effect to such acquisition (a) no Default or Event of Default shall have occurred and be continuing, (b) the Borrower shall be in compliance, on a PRO FORMA basis, as of the end of the most recent fiscal quarter of the Borrower with the provisions of Section 6.01, and (c) in the case of an acquisition involving aggregate consideration valued at $20,000,000 or more, at least three Business Days prior to the date of such acquisition, the Borrower shall have furnished to the Administrative Agent and the Lenders a compliance certificate to the effect of 11 clauses (a) and (b) showing in reasonable detail the calculations supporting the determination of compliance, on such a PRO FORMA basis, with such provisions. "PERMITTED ENCUMBRANCES" means: (a) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 5.04; (b) Carriers', warehousemen's, mechanics', materialmen's, repairmen's and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.04; (c) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary; and (f) judgment Liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII, so long as such judgment Liens are not in effect for more than 45 days; PROVIDED that the term "Permitted Encumbrances" shall not include any Lien securing Indebtedness. "PERMITTED INVESTMENTS" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, an investment-grade credit rating from S&P or from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic 12 office of any commercial bank organized under the laws of the United States of America or any State thereof which has a combined capital and surplus and undivided profits of not less than $500,000,000; (d) investments in newly created funds or investments intended for sale to newly created funds advised or managed by the Borrower and its Subsidiaries, in an aggregate amount (based upon book value on the books of the Borrower and its Subsidiaries) of not more than $25,000,000 at any time; (e) investments in funds advised or managed by the Borrower and its Subsidiaries for the benefit of the Borrower's and its Subsidiaries' senior executives and portfolio management personnel in conjunction with various nonqualified deferral compensation arrangements adopted by the Borrower and its Subsidiaries, in an aggregate amount (based on book value on the books of the Borrower and its Subsidiaries) of not more than $25,000,000 at any time; (f) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; and (g) other than those contained in (a), (b), (c) and (e) above, United States dollar denominated fixed income securities and syndicated bank loans not to exceed $7,500,000 per issuer, with the exception of United States government securities, and not to exceed $7,500,000 per country, with the exception of the United States of America. "PERSON" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "PLAN" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "PRIME RATE" means the rate of interest per annum publicly announced from time to time by The Chase Manhattan Bank as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "REGISTER" has the meaning set forth in Section 9.04. "RELATED PARTIES" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "REQUIRED LENDERS" means, (a) prior to any conversion of Revolving Loans to Term Loans in accordance with Sections 2.04 and 2.05, Lenders having Revolving Credit Exposures and unused Commitments representing at least 51% of the sum of the total Revolving 13 Credit Exposures and unused Commitments at such time; PROVIDED that, for purposes of declaring the Loans to be due and payable pursuant to Article VII, and for all purposes after the Loans become due and payable pursuant to Article VII or the Commitments expire or terminate, the outstanding Competitive Loans of the Lenders shall be included in their respective Revolving Credit Exposures in determining the Required Lenders, and (b) thereafter, Lenders having Term Loans with a total outstanding principal amount representing at least 51% of the sum of the total outstanding principal amount of Term Loans at such time. "REQUIREMENT OF LAW" means, as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "RESTRICTED PAYMENT" means any dividend or other distribution (whether in cash, securities or other property) with respect to any shares of any class of capital stock of the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such shares of capital stock of the Borrower or any option, warrant or other right to acquire any such shares of capital stock of the Borrower. "REVENUE BASE" means the sum of (A) the product of (i) with respect to each W&R Fund, the Net Asset Value of the W&R Fund on the date of calculation and with respect to assets managed for other entities, the market value or Net Asset Value of such assets on the date of calculation and (ii) the rate provided for in the applicable Management Contract for determining the annual fee required for such advisory, management or administrative services on such date and (B) Distribution Fees for such W&R Fund. "REVOLVING BORROWING REQUEST" means a request by the Borrower for a Revolving Borrowing in accordance with Section 2.03. "REVOLVING CREDIT EXPOSURE" means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender's Revolving Loans at such time. "REVOLVING CREDIT TERMINATION DATE" means October 12, 2001 or such earlier date as the Commitments shall terminate pursuant to the terms hereof (or, if such day is not a Business Day, the next preceding Business Day). "REVOLVING LOAN" means a Loan made pursuant to Section 2.03. "S&P" means Standard & Poor's. "STATUTORY RESERVE RATE" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board or other Governmental Authority to which the Administrative Agent is subject with respect to the 14 Adjusted LIBO Rate. Such reserve percentages shall include those imposed pursuant to Regulation D of the Board. Eurodollar Loans shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "SUBSIDIARY" means, with respect to any Person (the "PARENT") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "SUBSIDIARY" means any subsidiary of the Borrower. "TAXES" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "TERM BORROWING REQUEST" means a request by the Borrower for a Revolving Borrowing in accordance with Section 2.05. "TERMINATION DATE" means the date that is six (6) months after the Revolving Credit Termination Date. "TERM LOAN" means a Loan made pursuant to Section 2.04. "TRANSACTIONS" means the execution, delivery and performance by the Borrower of this Agreement, the borrowing of Loans and the use of the proceeds thereof. "TYPE", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate, the Alternate Base Rate or, in the case of a Competitive Loan or Borrowing, the LIBO Rate or a Fixed Rate. "W&R FUND" means all closed-end funds and open-end mutual funds sponsored by the Borrower or any of its Subsidiaries or for which the Borrower or any of its Subsidiaries provides investment advisory, management, administrative, supervisory, consulting, underwriting or similar services. "WITHDRAWAL LIABILITY" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. 15 SECTION 1.02. CLASSIFICATION OF LOANS AND BORROWINGS. For purposes of this Agreement, Loans may be classified and referred to by Class (E.G., a "Revolving Loan" or "Term Loan") or by Type (E.G., a "Eurodollar Loan") or by Class and Type (E.G., a "Eurodollar Revolving Loan" or "Eurodollar Term Loan"). Borrowings also may be classified and referred to by Class (E.G., a "Revolving Borrowing" or "Term Borrowing") or by Type (E.G., a "Eurodollar Borrowing") or by Class and Type (E.G., a "Eurodollar Revolving Borrowing" of "Eurodollar Term Borrowing"). SECTION 1.03. TERMS GENERALLY. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 1.04. ACCOUNTING TERMS; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; PROVIDED that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. ARTICLE II THE CREDITS SECTION 2.01. COMMITMENTS. Subject to the terms and conditions set forth herein, each Lender agrees to make Revolving Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in (a) such Lender's Revolving Credit Exposure exceeding such Lender's Commitment or (b) the sum of the total 16 Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans exceeding the total Commitments. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans. SECTION 2.02. LOANS AND BORROWINGS. (a) Each Revolving Loan shall be made as part of a Borrowing consisting of Revolving Loans made by the Lenders ratably in accordance with their respective Commitments. Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.06. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments and Competitive Bids of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Subject to Section 2.14, (i) each Revolving Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith, and (ii) each Competitive Borrowing shall be comprised entirely of Eurodollar Loans or Fixed Rate Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; PROVIDED that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. (c) At the commencement of each Interest Period for any Eurodollar Revolving Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000; PROVIDED that an ABR Revolving Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Commitments. Each Competitive Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. Borrowings of more than one Type and Class may be outstanding at the same time; PROVIDED that there shall not at any time be more than a total of ten (10) Eurodollar Revolving Borrowings outstanding. (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Revolving Credit Termination Date. SECTION 2.03. REQUESTS FOR REVOLVING BORROWINGS. To request a Revolving Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone prior to 10:00 a.m., New York City time (a) three Business Days before the date of the proposed Borrowing in the case of a Eurodollar Borrowing or (b) one Business Day before the date of the proposed Borrowing in the case of an ABR Borrowing. Each such telephonic Revolving Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Revolving Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Revolving Borrowing Request shall specify the following information in compliance with Section 2.02: 17 (i) the aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.07. If no election as to the Type of Revolving Borrowing is specified, then the requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Revolving Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. SECTION 2.04. TERM LOANS. The Revolving Loans outstanding at the close of business on the Revolving Credit Termination Date shall, at the option of the Borrower by notice given to the Administrative Agent as provided in Section 2.05, convert on such date into term loans (the "TERM LOANS") to the Borrower. The Term Loans may from time to time be (a) Eurodollar Loans, (b) ABR Loans or (c) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.05 and 2.08. SECTION 2.05. PROCEDURE FOR TERM BORROWING. To request the conversion of the Revolving Credit Loans to Term Loans as contemplated in Section 2.04, the Borrower shall notify the Administrative Agent of such request by telephone prior to 10:00 A.M., New York City time, (a) three Business Days prior to the Revolving Credit Termination Date, if all or any part of the Term Loans are to be initially Eurodollar Borrowing or (b) one Business Day prior to the Revolving Credit Termination Date, otherwise. Such telephonic Term Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Term Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Term Borrowing Request shall specify the following information in compliance with Section 2.02: (i) the aggregate amount of the requested conversion; (ii) the date of such conversion, which shall be a Business Day; (iii) whether after giving effect to such conversion, the outstanding Term Loans are to consist of an ABR Borrowing or a Eurodollar Borrowing, or a combination thereof; and 18 (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period". If no election as to the Type of Term Loans is specified, then the requested Term Loans shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Term Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Term Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan converted as part of the requested Borrowing. The aggregate principal amount of the Term Loans shall be equal to the aggregate principal amount of the Revolving Loans then outstanding and the Term Loans shall be made by conversion of such Revolving Loans, without any payments being made by the Lenders. SECTION 2.06. COMPETITIVE BID PROCEDURE. (a) Subject to the terms and conditions set forth herein, from time to time during the Availability Period the Borrower may request Competitive Bids and may (but shall not have any obligation to) accept Competitive Bids and borrow Competitive Loans; PROVIDED that the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans at any time shall not exceed the total Commitments. To request Competitive Bids, the Borrower shall notify the Administrative Agent of such request by telephone, in the case of a Eurodollar Borrowing, not later than 10:00 a.m., New York City time, four Business Days before the date of the proposed Borrowing and, in the case of a Fixed Rate Borrowing, not later than 10:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing; PROVIDED that the Borrower may submit up to (but not more than) two Competitive Bid Requests on the same day, but a Competitive Bid Request shall not be made within five Business Days after the date of any previous Competitive Bid Request, unless any and all such previous Competitive Bid Requests shall have been withdrawn or all Competitive Bids received in response thereto rejected. Each such telephonic Competitive Bid Request shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Competitive Bid Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Competitive Bid Request shall specify the following information in compliance with Section 2.02: (i) the aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be a Eurodollar Borrowing or a Fixed Rate Borrowing; (iv) the Interest Period to be applicable to such Borrowing, which shall be a period contemplated by the definition of the term "Interest Period"; (v) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.07; and 19 (vi) the maturity date of such Borrowing, which shall not be less than seven or more than 364 days from the date of such Borrowing and shall not be later than the Revolving Credit Termination Date. Promptly following receipt of a Competitive Bid Request in accordance with this Section, the Administrative Agent shall notify the Lenders of the details thereof by telecopy, inviting the Lenders to submit Competitive Bids. (b) Each Lender may (but shall not have any obligation to) make one or more Competitive Bids to the Borrower in response to a Competitive Bid Request. Each Competitive Bid by a Lender must be substantially in the form of Exhibit D and must be received by the Administrative Agent by telecopy, in the case of a Eurodollar Competitive Borrowing, not later than 9:30 a.m., New York City time, three Business Days before the proposed date of such Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the proposed date of such Competitive Borrowing. Competitive Bids that do not conform substantially to the form of Exhibit D may be rejected by the Administrative Agent, and the Administrative Agent shall notify the applicable Lender as promptly as practicable. Each Competitive Bid shall specify (i) the principal amount (which shall be a minimum of $5,000,000 and an integral multiple of $1,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested by the Borrower) of the Competitive Loan or Loans that the Lender is willing to make, (ii) the Competitive Bid Rate or Rates at which the Lender is prepared to make such Loan or Loans (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) and (iii) the Interest Period applicable to each such Loan and the last day thereof. (c) The Administrative Agent shall promptly notify the Borrower by telecopy of the Competitive Bid Rate and the principal amount specified in each Competitive Bid and the identity of the Lender that shall have made such Competitive Bid. (d) Subject only to the provisions of this paragraph, the Borrower may accept or reject any Competitive Bid. The Borrower shall notify the Administrative Agent by telephone, confirmed by telecopy in a form approved by the Administrative Agent, whether and to what extent it has decided to accept or reject each Competitive Bid, in the case of a Eurodollar Competitive Borrowing, not later than 10:30 a.m., New York City time, three Business Days before the date of the proposed Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 10:30 a.m., New York City time, on the proposed date of the Competitive Borrowing; PROVIDED that (i) the failure of the Borrower to give such notice shall be deemed to be a rejection of each Competitive Bid, (ii) the Borrower shall not accept a Competitive Bid made at a particular Competitive Bid Rate if the Borrower rejects a Competitive Bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the aggregate amount of the requested Competitive Borrowing specified in the related Competitive Bid Request, (iv) to the extent necessary to comply with clause (iii) above, the Borrower may accept Competitive Bids at the same Competitive Bid Rate in part, which acceptance, in the case of multiple Competitive Bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such Competitive Bid, and (v) except pursuant to clause (iv) above, no Competitive Bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal 20 amount of $5,000,000 and an integral multiple of $1,000,000; PROVIDED FURTHER that if a Competitive Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) above, such Competitive Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple Competitive Bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in a manner determined by the Borrower. A notice given by the Borrower pursuant to this paragraph shall be irrevocable. (e) The Administrative Agent shall promptly notify each bidding Lender by telecopy whether or not its Competitive Bid has been accepted (and, if so, the amount and Competitive Bid Rate so accepted), and each successful bidder will thereupon become bound, subject to the terms and conditions hereof, to make the Competitive Loan in respect of which its Competitive Bid has been accepted. (f) If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such Competitive Bid directly to the Borrower at least one quarter of an hour earlier than the time by which the other Lenders are required to submit their Competitive Bids to the Administrative Agent pursuant to paragraph (b) of this Section. SECTION 2.07. FUNDING OF BORROWINGS. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent in New York City and designated by the Borrower in the applicable Revolving Borrowing Request, Term Borrowing Request or Competitive Bid Request. (b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the Federal Funds Effective Rate or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. 21 SECTION 2.08. INTEREST ELECTIONS. (a) Each Revolving Borrowing initially shall be of the Type specified in the applicable Revolving Borrowing Request and, in the case of a Eurodollar Revolving Borrowing, shall have an initial Interest Period as specified in such Revolving Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Revolving Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section shall not apply to Competitive Borrowings, which may not be converted or continued. (b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Revolving Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. 22 (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Revolving Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be continued as a Eurodollar Revolving Borrowing with an Interest Period of one month. Notwithstanding any contrary provision hereof, (a) if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Revolving Borrowing may be converted to or continued as a Eurodollar Borrowing, (ii) no outstanding Term Borrowing may be converted to a Eurodollar Borrowing and (iii) unless repaid, each Eurodollar Revolving Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto, and (b) no Revolving Loan or Term Loan may be converted into or continued as a Eurodollar Borrowing after the date that is one month or 30 days, respectively, prior to the Revolving Credit Termination Date or the Termination Date, as the case may be. SECTION 2.09. TERMINATION AND REDUCTION OF COMMITMENTS. (a) Unless previously terminated, the Commitments shall terminate on the Revolving Credit Termination Date. (b) The Borrower may at any time terminate, or from time to time reduce, the Commitments; PROVIDED that (i) each reduction of the Commitments shall be in an amount that is an integral multiple of $1,000,000 and not less than $10,000,000 and (ii) the Borrower shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.11, the sum of the Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans would exceed the total Commitments. (c) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; PROVIDED that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments shall be permanent. Termination of the Commitments shall also terminate the obligation of the Lenders to make the Term Loans. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their respective Commitments. SECTION 2.10. REPAYMENT OF LOANS; EVIDENCE OF DEBT. (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender (i) the then unpaid principal amount of each Revolving Loan on the Revolving Credit Termination Date (or such earlier date on which the Revolving Loans become due and payable pursuant to Article VII), (ii) the principal amount of the 23 Term Loan of such Lender on the Termination Date (or the then unpaid principal amount of such Term Loan, on the date that the Term Loans become due and payable pursuant to Article VII), and (iii) the then unpaid principal amount of each Competitive Loan on the last day of the Interest Period applicable to such Loan (or such earlier date on which the Competitive Loans become due and payable pursuant to Article VII). (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be PRIMA FACIE evidence of the existence and amounts of the obligations recorded therein; PROVIDED that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (e) Any Lender may request that Loans made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). SECTION 2.11. PREPAYMENT OF LOANS. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to prior notice in accordance with paragraph (b) of this Section; PROVIDED that the Borrower shall not have the right to prepay any Competitive Loan without the prior consent of the Lender thereof. (b) The Borrower shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Revolving Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment, or (ii) in the case of prepayment of an ABR Revolving Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; PROVIDED that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.09, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.09. Promptly following receipt of any 24 such notice relating to a Revolving Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Revolving Borrowing shall be in an amount that would be permitted in the case of an advance of a Revolving Borrowing of the same Type as provided in Section 2.02. Each prepayment of a Revolving Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.13. Amounts prepaid on account of Term Loans may not be reborrowed. SECTION 2.12. FEES. (a) Prior to conversion of Revolving Loans into Term Loans pursuant to Section 2.04, the Borrower agrees to pay to the Administrative Agent for the account of each Lender a facility fee, which shall accrue at the Applicable Rate on the daily amount of the Commitment of such Lender (whether used or unused), during the period from and including the Closing Date to but excluding the date on which such Commitment terminates; PROVIDED that, if such Lender continues to have any outstanding Loans after its Commitment terminates and such Loans are not Term Loans that have been converted from Revolving Loans pursuant to Section 2.04, then such facility fee shall continue to accrue on the daily amount of such Lender's outstanding Loans from and including the date on which its Commitment terminates to but excluding the date on which such Lender ceases to have any outstanding Loans. Accrued facility fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the date hereof; PROVIDED that any facility fees accruing after the date on which the Commitments terminate shall be payable on demand. All facility fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) Prior to conversion of Revolving Loans into Term Loans pursuant to Section 2.04, the Borrower agrees to pay to the Administrative Agent for the account of each Lender a utilization fee equal to (i) 0.10% per annum for each day on which the Commitment Utilization Percentage exceeds 25%, which fee shall accrue on the daily amount of such Lender's outstanding Loans for each Excess Utilization Day during the period from and including the day on which the Commitment Utilization Percentage exceeds 25% to but excluding the day on which the Commitment Utilization Percentage no longer exceeds 25% and (ii) 0.20% per annum for each day on which the Commitment Utilization Percentage exceeds 50%, which fee shall accrue on the daily amount of such Lender's outstanding Loans for each Excess Utilization Day during the period from and including the day on which the Commitment Utilization Percentage exceeds 50% to but excluding the day on which the Commitment Utilization Percentage no longer exceeds 50%. Accrued utilization fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the date hereof; PROVIDED that any utilization fees accruing after the date on which the Commitments terminate shall be payable on demand. All utilization fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent. 25 (d) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, in the case of facility fees, to the Lenders. Fees paid shall not be refundable under any circumstances. SECTION 2.13. INTEREST. (a) The Loans comprising each ABR Borrowing shall bear interest at a rate per annum equal to the Alternate Base Rate plus the Applicable Rate. (b) The Loans comprising each Eurodollar Borrowing shall bear interest at a rate per annum equal to (i) in the case of a Eurodollar Loan, the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate, or (ii) in the case of a Eurodollar Competitive Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus (or minus, as applicable) the Margin applicable to such Loan. (c) Each Fixed Rate Loan shall bear interest at a rate per annum equal to the Fixed Rate applicable to such Loan. (d) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided above or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided above. (e) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan; PROVIDED that (i) interest accrued pursuant to paragraph (d) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment, (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion and (iv) all accrued interest shall be payable upon termination of the Commitments. (f) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.14. ALTERNATE RATE OF INTEREST. If prior to the commencement of any Interest Period for a Eurodollar Borrowing: (a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period; or 26 (b) the Administrative Agent is advised by the Required Lenders (or, in the case of a Eurodollar Competitive Loan, the Lender that is required to make such Loan) that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Revolving Borrowing to, or continuation of any Revolving Borrowing as, a Eurodollar Borrowing shall be ineffective, (ii) if any Revolving Borrowing Request requests a Eurodollar Revolving Borrowing, such Borrowing shall be made as an ABR Borrowing and (iii) any request by the Borrower for a Eurodollar Competitive Borrowing shall be ineffective; PROVIDED that (A) if the circumstances giving rise to such notice do not affect all the Lenders, then requests by the Borrower for Eurodollar Competitive Borrowings may be made to Lenders that are not affected thereby and (B) if the circumstances giving rise to such notice affect only one Type of Borrowings, then the other Type of Borrowings shall be permitted. SECTION 2.15. INCREASED COSTS. (a) If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate); or (ii) impose on any Lender or the London interbank market any other condition affecting this Agreement or Eurodollar Loans or Fixed Rate Loans made by such Lender; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or Fixed Rate Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. (b) If any Lender determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement or the Loans made hereunder, to a level below that which such Lender or such Lender's holding company could have achieved but for such Change in Law (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. 27 (c) A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's right to demand such compensation; PROVIDED that the Borrower shall not be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than six months prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender's intention to claim compensation therefor; PROVIDED FURTHER that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the six-month period referred to above shall be extended to include the period of retroactive effect thereof. (e) Notwithstanding the foregoing provisions of this Section, a Lender shall not be entitled to compensation pursuant to this Section in respect of any Competitive Loan if the Change in Law that would otherwise entitle it to such compensation shall have been publicly announced prior to submission of the Competitive Bid pursuant to which such Loan was made. SECTION 2.16. BREAK FUNDING PAYMENTS. In the event of (a) the payment of any principal of any Eurodollar Loan or Fixed Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Revolving Loan or Term Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice is permitted to be revocable under Section 2.11(b) and is revoked in accordance herewith), (d) the failure to borrow any Competitive Loan after accepting the Competitive Bid to make such Loan, or (e) the assignment of any Eurodollar Loan or Fixed Rate Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.19, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, the loss to any Lender attributable to any such event shall be deemed to include an amount determined by such Lender to be equal to the excess, if any, of (i) the amount of interest that such Lender would pay for a deposit equal to the principal amount of such Loan for the period from the date of such payment, conversion, failure or assignment to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, convert or continue, the duration of the Interest Period that would have resulted from such borrowing, conversion or continuation) if the interest rate payable on such deposit were equal to the Adjusted LIBO Rate (in the case of a Eurodollar Loan) for such Interest Period, over (ii) the amount of interest that such Lender would earn on such principal amount for such period if such Lender were to invest such principal amount for such period at the interest rate that would be bid by such Lender (or an affiliate of such Lender) for dollar deposits from other banks in the eurodollar market at the commencement of such period. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent 28 manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.17. TAXES. (a) Any and all payments by or an account of any obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; PROVIDED that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Administrative Agent and each Lender within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. SECTION 2.18. PAYMENTS GENERALLY; PRO RATA TREATMENT; SHARING OF SET-OFFS. (a) The Borrower shall make each payment required to be made by it hereunder (whether of principal, interest, fees, or under Section 2.15, 2.16 or 2.17, or otherwise) prior to 12:00 noon, New York City time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for 29 purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent, c/o The Loan and Agency Services Group at the address set forth in Section 9.01, except that payments pursuant to Sections 2.15, 2.16, 2.17 and 9.03 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in dollars. (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, to pay interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, to pay principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Revolving Loans or Term Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans or Term Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans or Term Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans or Term Loans; PROVIDED that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation. (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such 30 amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the Federal Funds Effective Rate. (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.07(b) or 2.18(d), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. SECTION 2.19. MITIGATION OBLIGATIONS; REPLACEMENT OF LENDERS. (a) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.15 or 2.17, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement (other than any outstanding Competitive Loans held by it) to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); PROVIDED that (i) the Borrower shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans (other than Competitive Loans), accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.15 or payments required to be made pursuant to Section 2.17, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply. SECTION 2.20. NEW LENDERS; COMMITMENT INCREASES. (a) With the consent of the Borrower and the Administrative Agent (which, in the case of the Administrative Agent, shall not be unreasonably withheld), (i) one or more additional banks or other financial institutions may become a party to this Agreement by executing a supplement hereto, in form and substance satisfactory to such bank or other financial institution, the Borrower and the 31 Administrative Agent, whereupon such bank or other financial institution (a "New Lender") shall become a Lender for all purposes hereof and to the same extent as if originally a party hereto and shall be bound by and entitled to the benefits of this Agreement, and Schedule 2.01 hereto shall be deemed to be amended to add the name, address and Commitment of such New Lender and (ii) any Lender may increase the amount of its Commitment by executing a supplement hereto, in form and substance satisfactory to such Lender, the Borrower and the Administrative Agent, whereupon such Lender shall be bound by and entitled to the benefits of this Agreement with respect to the full amount of its Commitment as so increased, and Schedule 2.01 hereto shall be deemed to be amended to reflect such increase in the Commitment of such Lender. In no event may the aggregate Commitments be increased above $330,000,000 pursuant to any supplement described in this Section 2.20(a). (b) If on the date upon which a bank or other financial institution becomes a New Lender or upon which a Lender's Commitment is changed pursuant to Section 2.20(a), any Revolving Loans are then outstanding, the Borrower shall borrow Revolving Loans from such Lender in such amount and with such Interest Period such that, after giving effect thereto, the quotient of (x) the Revolving Loan of such Lender of each Type and, in the case of Eurodollar Loans, with each Interest Period and (y) such Lender's Commitment is equal to the corresponding comparable quotient of each other Lender. Any Eurodollar Borrowing borrowed pursuant to the preceding sentence shall bear interest at a rate equal to the respective interest rates then applicable to the Eurodollar Revolving Loans of the other Lenders or such other rate as may be agreed upon by the Borrower and such Lender. ARTICLE III REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lenders that: SECTION 3.01. ORGANIZATION; POWERS. Each of the Borrower and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. SECTION 3.02. AUTHORIZATION; ENFORCEABILITY. The Transactions are within the Borrower's corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. This Agreement has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. SECTION 3.03. GOVERNMENTAL APPROVALS; NO CONFLICTS. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any 32 Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or any of its Subsidiaries or its assets, or give rise to a right thereunder to require any payment to be made by the Borrower or any of its Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. SECTION 3.04. FINANCIAL CONDITION; NO MATERIAL ADVERSE EFFECT. (a) The Borrower has heretofore furnished to the Lenders its consolidated balance sheet and statements of income, stockholders equity and cash flows (i) as of and for the fiscal years ended 1998 and 1999, reported on by KPMG LLP, independent public accountants, and (ii) as of and for the fiscal quarters and the portion of the fiscal year ended March 31, 2000 and June 30, 2000, certified by its principal accounting officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Borrower and its consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above. The Borrower and its Subsidiaries do not have any material Guarantees, contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including any interest rate or foreign currency swap or exchange transaction or other obligation in respect of derivatives, that are not reflected in the most recent financial statements referred to in this paragraph. (b) Since December 31, 1999, there has been no event, development or circumstance that has had or could reasonably be expected to have a Material Adverse Effect. SECTION 3.05. PROPERTIES. (a) Each of the Borrower and its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, and none of such property is subject to any Lien except as permitted by Section 6.03. (b) Each of the Borrower and its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Borrower and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.06. LITIGATION AND ENVIRONMENTAL MATTERS. (a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve this Agreement or the Transactions. (b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material 33 Adverse Effect, neither the Borrower nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. (c) Since the date of this Agreement, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect. SECTION 3.07. COMPLIANCE WITH LAWS AND AGREEMENTS. Each of the Borrower and its Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments (including any material investment advisory or management agreements) binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.08. INVESTMENT AND HOLDING COMPANY STATUS. (a) Neither the Borrower nor any of its Subsidiaries is (i) an "investment company", or a company "controlled" by an "investment company", each as defined in, or subject to regulation under, the Investment Company Act of 1940, or (ii) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. Except for net capital and other requirements imposed on registered broker-dealers, neither the Borrower nor any of its Subsidiaries is subject to any regulation under any Requirement of Law (other than Regulation X of the Board) that limits its ability to incur Indebtedness. (b) The Borrower and each Subsidiary of the Borrower which is engaged in investment advisory or investment management activities is, and at all times will be, duly registered as an investment adviser as and to the extent required under the Investment Advisers Act of 1940, as amended; and each Subsidiary of the Borrower which is engaged in broker-dealer business is, and at all times will be, duly registered as a broker-dealer as and to the extent required under the Securities Exchange Act of 1934, as amended, and, as and to the extent required, is, and at all times will be, a member in good standing of the National Association of Securities Dealers, Inc. SECTION 3.09. TAXES. Each of the Borrower and its Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary, as applicable, has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, 34 as of the date of the most recent financial statements reflecting such amounts, exceed by more than $5,000,000 the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $10,000,000 the fair market value of the assets of all such underfunded Plans. SECTION 3.11. DISCLOSURE. The Borrower has disclosed to the Lenders all agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Borrower to the Administrative Agent or any Lender in connection with the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. SECTION 3.12. NO DEFAULT. Neither the Borrower nor any of its Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect that could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. SECTION 3.13. SUBSIDIARIES. Except as disclosed to the Administrative Agent by the Borrower in writing from time to time after the Closing Date, (a) Schedule 3.13 sets forth the name and jurisdiction of incorporation of each Subsidiary and, as to each such Subsidiary, the percentage of each class of Capital Stock owned by the Borrower and (b) there are no outstanding subscriptions, options, warrants, calls, rights or other agreements or commitments (other than stock options or restricted stock granted to employees or directors and directors' qualifying shares) of any nature relating to any Capital Stock of the Borrower or any Subsidiary. SECTION 3.14. FEDERAL REGULATIONS. No part of the proceeds of any Loans will be used for "buying" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U as now and from time to time hereafter in effect in any manner that violates the provisions of the Regulations of the Board or for any other purpose that violates the provisions of the Regulations of the Board. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1, as applicable, referred to in Regulation U. No more than 25% of the consolidated assets of the Borrower and its Subsidiaries (excluding treasury shares) consist of "margin stock" under Regulation U as now and from time to time hereafter in effect. SECTION 3.15. NO BURDENSOME RESTRICTIONS. No Requirement of Law or Contractual Obligation of the Borrower could reasonably be expected to have a Material Adverse Effect. 35 ARTICLE IV CONDITIONS SECTION 4.01. EFFECTIVE DATE. The obligations of the Lenders to make Loans hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02): (a) The Administrative Agent (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement. (b) The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of the General Counsel of the Borrower, substantially in the form of Exhibit B, and covering such other matters relating to the Borrower, this Agreement or the Transactions as the Required Lenders shall reasonably request. The Borrower hereby requests such counsel to deliver such opinion. (c) The Administrative Agent shall have received such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower, the authorization of the Transactions and any other legal matters relating to the Borrower, this Agreement or the Transactions, all in form and substance satisfactory to the Administrative Agent and its counsel. (d) The Administrative Agent shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer of the Borrower, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.02 without giving effect to the parenthetical set forth in paragraph (a) of Section 4.02. (e) The Administrative Agent shall have received evidence satisfactory to it that simultaneously with the making of the initial Loans on the Closing Date, the Borrower will have repaid in full all amounts outstanding under the Existing Credit Agreement and the commitments of the lenders under the Existing Credit Agreement will have been terminated, and the Administrative Agent shall have received the promissory notes issued under the Existing Credit Agreement marked "cancelled". (f) The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all reasonable out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder. (g) All governmental and third party approvals necessary in connection with the continuing operations of the Borrower and its Subsidiaries and the transactions 36 contemplated hereby shall have been obtained and be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority that would restrain, prevent or otherwise impose adverse conditions on the financing contemplated hereby. (h) The Lenders shall have received (i) audited consolidated financial statements of the Borrower for the 1998 and 1999 fiscal years and (ii) unaudited interim consolidated financial statements of the Borrower for each quarterly period ended subsequent to the date of the latest applicable financial statements delivered pursuant to clause (i) of this paragraph as to which such financial statements are available, and such financial statements shall not, in the reasonable judgment of the Lenders, reflect any material adverse change in the consolidated financial condition of the Borrower, as reflected in the financial statements or projections contained in the Confidential Information Memorandum. The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) at or prior to 5:00 p.m., New York City time, on October 13, 2000 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time). SECTION 4.02. EACH CREDIT EVENT. The obligation of each Lender to make a Loan on the occasion of any Borrowing (including, without limitation, its initial Loan) is subject to the satisfaction of the following conditions: (a) The representations and warranties of the Borrower set forth in this Agreement (with the exception of the representation and warranty contained in Section 3.04(b)) shall be true and correct on and as of the date of such Borrowing. (b) At the time of and immediately after giving effect to such Borrowing, no Default shall have occurred and be continuing. Each Borrowing, the conversion of the Revolving Loans into Term Loans pursuant to Sections 2.04 and 2.05, and the increase of the aggregate Commitments pursuant to Section 2.20, shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section, PROVIDED that (i) such conversion of the Revolving Loans into Term Loans and (ii) such increase of the aggregate Commitments shall also be deemed to constitute a representation and warranty by the Borrower that the matters specified in Section 3.04(b) are true and correct on and as of the date thereof. 37 ARTICLE V AFFIRMATIVE COVENANTS Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full, the Borrower covenants and agrees with the Lenders that: SECTION 5.01. FINANCIAL STATEMENTS AND OTHER INFORMATION. The Borrower will furnish to the Administrative Agent and each Lender: (a) within 90 days after the end of each fiscal year of the Borrower, the annual report of the Borrower on Form 10-K filed by the Borrower with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission; (b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, the quarterly report of the Borrower on Form 10- Q filed by the Borrower with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission; (c) concurrently with any delivery of financial statements under clause (a) or (b) above, a certificate of a Financial Officer of the Borrower (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Section 6.01 and (iii) stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 3.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (d) promptly after the same become publicly available, copies of all annual reports on Form 10-K, quarterly reports on Form 10-Q and all reports on Form 8-K, and all proxy statements, filed by the Borrower or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed by the Borrower to its shareholders generally, as the case may be; (e) after the end of each calendar month, (A) a schedule of the Net Asset Value of the investment companies and accounts managed by the Borrower and its Subsidiaries on the last day of such calendar month and certain other information, substantially in the form of Exhibit C-1 and (B) a schedule showing the calculation of the Aggregate Revenue Base as of the end of such calendar month, and an analysis of changes from the preceding calendar month, substantially in the form of Exhibit C-2, or in such other form as may be reasonably satisfactory to the Administrative Agent; and (f) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Borrower or any Subsidiary, or 38 compliance with the terms of this Agreement, as the Administrative Agent or any Lender may reasonably request. SECTION 5.02. NOTICES OF MATERIAL EVENTS. The Borrower will furnish to the Administrative Agent and each Lender prompt written notice of the following: (a) the occurrence of any Default; (b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Borrower or any Affiliate thereof that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; (c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and its Subsidiaries in an aggregate amount exceeding $5,000,000; (d) any suspension or termination of the registration of the Borrower or any of its Subsidiaries as an investment adviser under the Investment Advisers Act of 1940, as amended, or any cancellation or expiration without renewal of any material investment advisory agreement or similar contract to which the Borrower or any of its Subsidiaries is a party; and (e) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. SECTION 5.03. EXISTENCE; CONDUCT OF BUSINESS. The Borrower will, and will cause each of its Subsidiaries to, (a) do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business; PROVIDED that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.04, and (b) comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. 39 SECTION 5.04. PAYMENT OF OBLIGATIONS. The Borrower will, and will cause each of its Subsidiaries to, pay its obligations, including Tax liabilities, that, if not paid, could result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.05. MAINTENANCE OF PROPERTIES; INSURANCE. The Borrower will, and will cause each of its Subsidiaries to, (a) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations. SECTION 5.06. BOOKS AND RECORDS; INSPECTION RIGHTS. The Borrower will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of its Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested. SECTION 5.07. COMPLIANCE WITH LAWS. The Borrower will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property and maintain all registrations and memberships with any Governmental Authority, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.08. USE OF PROCEEDS. The proceeds of the Loans will be used to finance the payment by the Borrower of outstanding Indebtedness under the Existing Credit Agreement, to pay related fees and expenses and for general corporate purposes, including but not limited (i) to repurchase shares of the Borrower's Class A and Class B Common Stock and (ii) to consummate Permitted Acquisitions. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations U and X. 40 SECTION 5.09. ENVIRONMENTAL LAWS. The Borrower will, and will cause each of its Subsidiaries to, (a) comply in all material respects with all applicable Environmental Laws, and obtain and comply in all material respects with and maintain any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws, and (b) conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws, except in each case to the extent that non-compliance therewith could not reasonably be expected to result in a Material Adverse Effect. ARTICLE VI NEGATIVE COVENANTS Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full, the Borrower covenants and agrees with the Lenders that: SECTION 6.01. FINANCIAL CONDITION COVENANTS. (a) CONSOLIDATED LEVERAGE RATIO. The Borrower shall not permit the Consolidated Leverage Ratio as at the last day of any period of four consecutive fiscal quarters of the Borrower ending with any fiscal quarter to equal or exceed the ratio of 3.0 to 1.0. (b) CONSOLIDATED INTEREST COVERAGE RATIO. The Borrower shall not permit the Consolidated Interest Coverage Ratio for any period of four consecutive fiscal quarters of the Borrower ending with any fiscal quarter to be less than or equal to the ratio of 4.0 to 1.0. SECTION 6.02. INDEBTEDNESS. The Borrower will not permit any Subsidiary to create, incur, assume or permit to exist any Indebtedness, except: (a) Indebtedness existing on the date hereof and set forth in Schedule 6.02, but not any extensions, renewals or replacements of any such Indebtedness and without increasing, or shortening the maturity of, the principal amount thereof; (b) Indebtedness of any Subsidiary to the Borrower or any other Subsidiary; (c) Guarantees by any Subsidiary of Indebtedness of the Borrower or any other Subsidiary; (d) Indebtedness of any Subsidiary incurred to finance the acquisition, construction or improvement of any fixed or capital assets, including Capital Lease Obligations and any Indebtedness assumed in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof, and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof; PROVIDED that (i) such Indebtedness is incurred prior to or within 90 days after such acquisition or the completion of such construction or 41 improvement and (ii) the aggregate principal amount of Indebtedness permitted by this clause (d) shall not exceed $10,000,000 at any time outstanding; (e) Indebtedness of any Person that becomes a Subsidiary after the date hereof; PROVIDED that such Indebtedness exists at the time such Person becomes a Subsidiary and is not created in contemplation of or in connection with such Person becoming a Subsidiary; (f) Indebtedness of any Subsidiary as an account party in respect of trade letters of credit; and (g) other unsecured Indebtedness in an aggregate principal amount not exceeding $25,000,000 at any time outstanding. SECTION 6.03. LIENS. The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except: (a) Permitted Encumbrances; (b) any Lien on any property or asset of the Borrower or any Subsidiary existing on the date hereof and set forth in Schedule 6.03; PROVIDED that (i) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary and (ii) such Lien shall secure only those obligations which it secures on the date hereof; (c) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary or existing on any property or asset of any Person that becomes a Subsidiary after the date hereof prior to the time such Person becomes a Subsidiary; PROVIDED that (i) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary, as the case may be, (ii) such Lien shall not apply to any other property or assets of the Borrower or any Subsidiary and (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such Person becomes a Subsidiary, as the case may be; and (d) Liens on property, plant and equipment acquired, constructed or improved by the Borrower or any Subsidiary; PROVIDED that (i) such security interests secure Indebtedness permitted by clause (d) of Section 6.02, (ii) such security interests and the Indebtedness secured thereby are incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement, (iii) the Indebtedness secured thereby does not exceed 70% of the cost of acquiring, constructing or improving such property, plant and equipment and (iv) such security interests shall not apply to any other property or assets of the Borrower or any Subsidiary. SECTION 6.04. FUNDAMENTAL CHANGES. (a) The Borrower will not, and will not permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially 42 all of its assets, or all or substantially all of the stock of any of its Subsidiaries (in each case, whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) any other Person, including a Subsidiary, may merge into the Borrower in a transaction in which the Borrower is the surviving corporation, (ii) any Subsidiary may merge into any Subsidiary in a transaction in which the surviving entity is a Subsidiary, (iii) any Subsidiary may sell, transfer, lease or otherwise dispose of its assets to the Borrower or to another Subsidiary, (iv) any Subsidiary may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower and is not materially disadvantageous to the Lenders, and (v) the Borrower may merge into or consolidate with another Person in a transaction in which such other Person is the surviving entity if such other Person is organized and validly existing under the laws of the United States or any State thereof and by operation of law or otherwise assumes all obligations of the Borrower hereunder and such assumption is evidenced by an opinion of counsel to such other Person satisfactory in form and substance to the Administrative Agent; PROVIDED that any such merger involving a Person that is not a wholly owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Section 6.05. (b) The Borrower will not, and will not permit any of its Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Borrower and its Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto. SECTION 6.05. INVESTMENTS, LOANS, ADVANCES, GUARANTEES AND ACQUISITIONS; HEDGING AGREEMENTS. (a) The Borrower will not, and will not permit any of its Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly owned Subsidiary prior to such merger) any capital stock, evidences of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, except: (i) Permitted Investments; (ii) investments by the Borrower existing on the date hereof in the capital stock of its Subsidiaries; (iii) loans or advances made by the Borrower to any Subsidiary and made by any Subsidiary to the Borrower or any other Subsidiary; (iv) Guarantees constituting Indebtedness permitted by Section 6.02; (v) Permitted Acquisitions; and (vi) other investments, loans, advances, guarantees or acquisitions in an aggregate principal amount not exceeding $20,000,000 at any time outstanding. 43 (b) The Borrower will not, and will not permit any of its Subsidiaries to, enter into any Hedging Agreement, other than Hedging Agreements entered into in the ordinary course of business to hedge or mitigate risks to which the Borrower or any Subsidiary is exposed in the conduct of its business or the management of its liabilities. SECTION 6.06. RESTRICTED PAYMENTS. The Borrower will not, and will not permit any of its Subsidiaries to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except (a) the Borrower or any of its Subsidiaries may declare and pay dividends with respect to its capital stock provided that, in the case of any such declaration or payment by the Borrower, no Default or Event of Default has occurred or is continuing or would result therefrom, (b) the Borrower may make Restricted Payments pursuant to and in accordance with stock option plans or other benefit plans for management or employees of the Borrower and its Subsidiaries and (c) the Borrower may, in addition to the foregoing, repurchase shares of the Borrower's Class A and Class B Common Stock. SECTION 6.07. TRANSACTIONS WITH AFFILIATES. The Borrower will not, and will not permit any of its Subsidiaries to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (a) in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, (b) transactions between or among the Borrower and its wholly owned Subsidiaries not involving any other Affiliate and (c) any Restricted Payment permitted by Section 6.06. SECTION 6.08. RESTRICTIVE AGREEMENTS. The Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets, or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness of the Borrower or any other Subsidiary; PROVIDED that (i) the foregoing shall not apply to restrictions and conditions imposed by law or by this Agreement, (ii) the foregoing shall not apply to restrictions and conditions existing on the date hereof identified on Schedule 6.08 (but shall apply to any extension or renewal of, or any amendment or modification expanding the scope of, any such restriction or condition), (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (iv) clause (a) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (v) clause (a) of the foregoing shall not apply to customary provisions in leases restricting the assignment thereof. SECTION 6.09. CAPITAL EXPENDITURES. The Borrower will not, and will not permit any of its Subsidiaries to, make or commit to make any Capital Expenditure, except 44 Capital Expenditures of the Borrower and its Subsidiaries in the ordinary course of business not exceeding $25,000,000 in the aggregate from the date hereof. SECTION 6.10. SALES AND LEASEBACKS. The Borrower will not, and will not permit any of its Subsidiaries to, enter into any arrangement with any Person providing for the leasing by the Borrower or any Subsidiary of real or personal property that has been or is to be sold or transferred by the Borrower or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Borrower or such Subsidiary (a "SALE/LEASEBACK TRANSACTION"), except Sale/Leaseback Transactions entered into with respect to the real property listed on Schedule 6.10. SECTION 6.11. CHANGES IN FISCAL PERIODS. The Borrower will not permit the fiscal year of the Borrower to end on a day other than December 31 or change the Borrower's method of determining fiscal quarters. SECTION 6.12. NEGATIVE PLEDGE CLAUSES. The Borrower will not, and will not permit any of its Subsidiaries to, enter into or suffer to exist or become effective any agreement that prohibits or limits the ability of the Borrower or any of its Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of its property or revenues, whether now owned or hereafter acquired, to secure its obligations under this Agreement other than (a) this Agreement and (b) any agreements governing any purchase money Liens or Capital Lease Obligations otherwise permitted hereby (in which case, any prohibition or limitation shall only be effective against the assets financed thereby). SECTION 6.13. OPTIONAL PAYMENTS AND MODIFICATIONS OF CERTAIN DEBT INSTRUMENTS. The Borrower will not permit any of its Subsidiaries to make or offer to make any optional or voluntary payment, prepayment, repurchase or redemption of or otherwise optionally or voluntarily defease any Indebtedness, or amend, modify, waive or otherwise change, or consent or agree to any amendment, modification, waiver or other change to, any of the terms relating to the payment or prepayment of principal of or interest on, any such Indebtedness (other than any such amendment, modification, waiver or other change that would extend the maturity or reduce the amount of any payment of principal thereof or reduce the rate or extend any date for payment of interest thereon). ARTICLE VII EVENTS OF DEFAULT If any of the following events ("Events of Default") shall occur: (a) the Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; (b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this 45 Agreement, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of five days; (c) any representation or warranty made or deemed made by or on behalf of the Borrower or any Subsidiary in or in connection with this Agreement or any amendment or modification hereof, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any amendment or modification hereof, shall prove to have been materially incorrect when made or deemed made; (d) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5.02, 5.03 (with respect to the Borrower's existence) or 5.08 or in Article VI; (e) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in this Agreement (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent (given at the request of any Lender) to the Borrower; (f) the Borrower or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable; (g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; PROVIDED that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower or any Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) the Borrower or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate 46 manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (j) the Borrower or any Subsidiary shall become unable, admit in writing or fail generally to pay its debts as they become due; (k) one or more judgments for the payment of money in an aggregate amount in excess of $5,000,000 shall be rendered against the Borrower, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Borrower or any Subsidiary to enforce any such judgment; (l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect; or (m) a Change in Control shall occur; then, and in every such event (other than an event with respect to the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. ARTICLE VIII THE ADMINISTRATIVE AGENT Except as provided below, each of the Lenders hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions 47 on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto. The bank serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder. The Administrative Agent shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise in writing by the Required Lenders, and (c) except as expressly set forth herein, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders or in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made by any other Person in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered by any other Person hereunder or in connection herewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (iv) the validity, enforceability, effectiveness (other than its own due execution) or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing reasonably believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. The Administrative Agent may perform any and all its duties and exercise its rights and powers through Related Parties of the Administrative Agent. The exculpatory provisions of the preceding paragraphs shall apply to the Related Parties of the Administrative 48 Agent, and shall apply to their activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder. ARTICLE IX MISCELLANEOUS SECTION 9.01. NOTICES. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to the Borrower, to it at 6300 Lamar Avenue, Overland Park, Kansas 66202, Attention of John Sundeen (Telecopy No. (913) 236-1799); (b) if to the Administrative Agent, to The Chase Manhattan Bank, c/o The Loan and Agency Services Group, 1 Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Laura Rebecca (Telecopy No. (212) 552-7490), with a copy to Chase 49 Securities Inc., 270 Park Avenue, New York, New York 10017, Attention of David Stawik (Telecopy No. (212) 270-1789); and (c) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. SECTION 9.02. WAIVERS; AMENDMENTS. (a) No failure or delay by the Administrative Agent or any Lender in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent or any Lender may have had notice or knowledge of such Default at the time. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or by the Borrower and the Administrative Agent with the consent of the Required Lenders; PROVIDED that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.18(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, (v) increase the aggregate Commitments above $330,000,000, without the written consent of each Lender, or (vi) change any of the provisions of this Section or the definition of "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; PROVIDED FURTHER that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent. SECTION 9.03. EXPENSES; INDEMNITY; DAMAGE WAIVER. (a) The Borrower shall pay (i) all reasonable, documented out-of-pocket expenses incurred by the Administrative Agent 50 and its Affiliates in amounts previously agreed to in writing and the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated) and (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made, including in connection with any workout, restructuring or negotiations in respect thereof. (b) The Borrower shall indemnify the Administrative Agent and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "INDEMNITEE") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities, costs and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Loan or the use of the proceeds therefrom, (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; PROVIDED that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities, costs or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. (c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; PROVIDED that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent in its capacity as such. (d) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof. (e) All amounts due under this Section shall be payable not later than 5 days after written demand therefor. 51 SECTION 9.04. SUCCESSORS AND ASSIGNS. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); PROVIDED that (i) except in the case of an assignment to a Lender or an Affiliate of a Lender, each of the Borrower and the Administrative Agent must give their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender's Commitment, and the Loans at the time owing to it or in the case of an assignment to a Lender or an Affiliate of a Lender or an Approved Fund with respect to a Lender, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) or principal outstanding balance of the Term Loan of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 or, in the case of any assignment of a Term Loan, $1,000,000, unless each of the Borrower and the Administrative Agent otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement with respect to the Loan or the Commitment assigned, except that this clause (iii) shall not apply to rights in respect of outstanding Competitive Loans, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500 (the obligation to pay such fee to be shared equally by the assignor and assignee), and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; PROVIDED FURTHER that any consent of the Borrower otherwise required under this paragraph shall not be required if an Event of Default under clause (h) or (i) of Article VII has occurred and is continuing. Upon acceptance and recording pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.15, 2.16, 2.17 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (e) of this Section. 52 (c) The Administrative Agent, acting solely for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Lender may, without the consent of the Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a "PARTICIPANT") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); PROVIDED that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; PROVIDED that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. (f) A Participant shall not be entitled to receive any greater payment under Section 2.15 or 2.17 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.17 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.17(e) as though it were a Lender. (g) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including without limitation (i) any such pledge or assignment to a Federal Reserve Bank, and (ii) in the case of 53 any Lender that is a Fund, any pledge or assignment of all or any portion of such Lender's rights under this Agreement to any holders of obligations owed, or securities issued, by such Lender as security for such obligations or securities, or to any trustee for, or any other representative of such holders and this Section shall not apply to any such pledge or assignment of a security interest; PROVIDED that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto. SECTION 9.05. SURVIVAL. All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Commitments have not expired or terminated. The provisions of Sections 2.15, 2.16, 2.17 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof. SECTION 9.06. COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 9.07. SEVERABILITY. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 9.08. RIGHT OF SETOFF. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such 54 Lender to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.09. GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction. (c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. 55 SECTION 9.11. HEADINGS. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. SECTION 9.12. CONFIDENTIALITY. Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section, (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than the Borrower or (iii) to the National Association of Insurance Commissioners or any other similar organization or nationally recognized rating agency that requires access to information about a Lender's investment portfolio in connection with rating issued with respect to such Lender. For the purposes of this Section, "INFORMATION" means all information received from the Borrower relating to the Borrower or its business, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by the Borrower; PROVIDED that, in the case of information received from the Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. SECTION 9.13. INTEREST RATE LIMITATION. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the "CHARGES"), shall exceed the maximum lawful rate (the "MAXIMUM RATE") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. 56 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. WADDELL & REED FINANCIAL, INC., By /s/ Keith A. Tucker --------------------------------------- Name: Keith A. Tucker Title: Chairman and Chief Executive Officer THE CHASE MANHATTAN BANK, individually and as Administrative Agent, By /s/ Elisabeth H. Schwabe --------------------------------------- Name: Elisabeth H. Schwabe Title: Managing Director DEUTSCHE BANK AG, NEW YORK BRANCH By /s/ Alan Krouk --------------------------------------- Name: Alan Krouk Title: Vice President By /s/ John S. Mcgill --------------------------------------- Name: John S. McGill Title: Director BANK OF AMERICA, N.A. By /s/ Joan L. D'Amico --------------------------------------- Name: Joan L. D'Amico Title: Managing Director THE BANK OF NEW YORK By /s/ Joseph P. Blanchard -------------------------------------- Name: Joseph P. Blanchard Title: Vice President BNP PARIBAS By /s/ Joseph P. Blanchard -------------------------------------- Name: Joseph P. Blanchard By /s/ Marguerite L. Lelo --------------------------------------- Name: Marguerite L. Lelo FLEET NATIONAL BANK By /s/ David A. Bosselait --------------------------------------- Name: David A. Bosselait Title: Director STATE STREET BANK AND TRUST COMPANY By /s/ Karen Gallagher --------------------------------------- Name: Karen Gallagher Title: Vice President UMB BANK, N.A. By /s/ David A. Proffitt --------------------------------------- Name: David A. Proffitt Title: Senior Vice President Annex A PRICING GRID
LEVEL 1 LEVEL 2 LEVEL 3 LEVEL 4 LEVEL 5 ------- ------- ------- ------- ------- S&P Rating: A- or BBB+ BBB BBB- Less than better BBB- Moody's Rating: A3 or Baa1 Baa2 Baa3 Less than better Baa3 ABR Loans' 0% 0% 0% 0% 0% Applicable Margin Eurodollar Loans' 0.270% 0.350% 0.425% 0.600% 0.825% Applicable Margin Facility Fee Rate 0.080% 0.100% 0.125% 0.150% 0.175%
For purposes of determining the Applicable Margins or the Facility Fee Rates, (i) in the event of a "split rating" (I.E., if the Moody's Rating applicable to the Borrower at any time appears in the chart above in a different column from that in which the S&P Rating then applicable to the Borrower appears), the Applicable Margins and the Facility Fee Rates will be based on the column which includes the higher rating (unless the higher rating is more than one rating level higher than the lower rating, in which case the pricing shall be that applicable to the rating level which is one rating level lower than the higher rating level), (ii) if Moody's or S&P shall not have in effect a rating (other than because such rating agency shall no longer be in the business of rating corporate debt obligations), then such rating agency will be deemed to have established a rating one rating level lower than the rating of either Moody's or S&P, as the case may be, that remains in effect and (iii) the Applicable Margins and the Facility Fee Rates shall be subject to adjustment (upwards or downwards, as appropriate), effective as of the date on which S&P or Moody's announces a rating change which results in a change in the Applicable Margins and the Facility Fee Rates. SCHEDULE 2.01 COMMITMENTS ================================================================================ Lender Commitment - -------------------------------------------------------------------------------- The Chase Manhattan Bank $35,000,000 - -------------------------------------------------------------------------------- Deutsche Bank AG - New York Branch $35,000,000 - -------------------------------------------------------------------------------- Bank of America, N.A. $35,000,000 - -------------------------------------------------------------------------------- Fleet National Bank $35,000,000 - -------------------------------------------------------------------------------- The Bank of New York $25,000,000 - -------------------------------------------------------------------------------- UMB Bank, N.A. $25,000,000 - -------------------------------------------------------------------------------- BNP Paribas $15,000,000 - -------------------------------------------------------------------------------- State Street Bank and Trust Company $15,000,000 - -------------------------------------------------------------------------------- Total $220,000,000 ================================================================================ SCHEDULE 3.06 DISCLOSED MATTERS None SCHEDULE 3.13 SUBSIDIARIES
Jurisdiction of Incorporation % of Capital Stock NAME or Formation Owned by Borrower(1) ---- ------------ -------------------- Waddell & Reed Financial Services, Inc. Missouri 100% Waddell & Reed Development, Inc. Delaware 100% Waddell & Reed, Inc. Delaware 100% Waddell & Reed Investment Kansas 100% Management Company Waddell & Reed Services Company Missouri 100% Waddell & Reed Leasing, Inc. Missouri 100% Waddell & Reed Distributors, Inc. Missouri 100% W&R Insurance Agency, Inc. Missouri 100% W&R Insurance Agency of Alabama, Inc. Alabama 100% W&R Insurance Agency of Arkansas, Inc. Arkansas 100% W&R Insurance Agency of Montana, Inc. Montana 100% W&R Insurance Agency of Nevada, Inc. Nevada 100% W&R Insurance Agency of Utah, Inc. Utah 100% W&R Insurance Agency of Wyoming, Inc. Wyoming 100% Unicon Agency, Inc. New York 100% Unicon Insurance Agency of Massachusetts 100% Massachusetts, Inc. Fiduciary Trust Company of New Hampshire New Hampshire 100% Austin, Calvert & Flavin, Inc. Texas 100% Encino Partners, L.P. Texas General Partner Legend Group Holdings, LLC Delaware 100% Legend Advisory Corporation New York 100% Legend Equities Corporation Delaware 100% - ------------- (1) Owned directly or indirectly through one or more wholly-owned subsidiaries.
Jurisdiction of Incorporation % of Capital Stock NAME or Formation Owned by Borrower(1) ---- ------------ -------------------- Advisory Services Corporation Nevada 100% The Legend Group, Inc. Delaware 100% LEC Insurance Agency, Inc. Texas 100%
SCHEDULE 6.02 EXISTING INDEBTEDNESS None SCHEDULE 6.03 EXISTING LIENS None SCHEDULE 6.08 EXISTING RESTRICTIONS None SCHEDULE 6.10 SALE/LEASEBACK PROPERTIES 1. 6300 Lamar Avenue, Overland Park, Kansas 2. 6301 Glenwood, Overland Park, Kansas EXHIBIT A FORM OF ASSIGNMENT AND ACCEPTANCE Reference is made to the Credit Agreement, dated as of October 13, 2000 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among Waddell & Reed Financial, Inc. (the "BORROWER"), the Lenders party thereto and The Chase Manhattan Bank, as administrative agent for the Lenders (in such capacity, the "ADMINISTRATIVE AGENT"). Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. The Assignor identified on Schedule l hereto (the "ASSIGNOR") and the Assignee identified on Schedule l hereto (the "ASSIGNEE") agree as follows: i. The Assignor hereby irrevocably sells and assigns to the Assignee without recourse to the Assignor, and the Assignee hereby irrevocably purchases and assumes from the Assignor without recourse to the Assignor, as of the Effective Date (as defined below), the interest described in Schedule 1 hereto (the "ASSIGNED INTEREST") in and to the Assignor's rights and obligations under the Credit Agreement with respect to those credit facilities contained in the Credit Agreement as are set forth on Schedule 1 hereto (individually, an "ASSIGNED FACILITY"; collectively, the "ASSIGNED FACILITIES"), in a principal amount for each Assigned Facility as set forth on Schedule 1 hereto. ii. The Assignor (a) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or with respect to the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto, other than that the Assignor has not created any adverse claim upon the interest being assigned by it hereunder and that such interest is free and clear of any such adverse claim; (b) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower, any of its Subsidiaries or any other obligor or the performance or observance by the Borrower, any of its Subsidiaries or any other obligor of any of their respective obligations under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto; and (c) attaches any promissory notes held by it evidencing the Assigned Facilities and (i) requests that the Administrative Agent, upon request by the Assignee, exchange the attached promissory notes for a new promissory note or notes payable to the Assignee and (ii) if the Assignor has retained any interest in the Assigned Facility, requests that the Administrative Agent exchange the attached promissory notes for a new promissory note or notes payable to the Assignor, in each case in amounts which reflect the assignment being made hereby (and after giving effect to any other assignments which have become effective on the Effective Date). iii. The Assignee (a) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance; (b) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements delivered pursuant to subsection 3.04 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (c) agrees that it will, independently and without reliance upon the Assignor, the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto; (d) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement or any other instrument or document furnished pursuant hereto or thereto as are delegated to the Administrative Agent by the terms thereof, together with such powers as are incidental thereto; and (e) agrees that it will be bound by the provisions of the Credit Agreement and will perform in accordance with its terms all the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender including, if it is organized under the laws of a jurisdiction outside the United States, its obligation pursuant to subsection 2.17(e) of the Credit Agreement. iv. The effective date of this Assignment and Acceptance shall be the Effective Date of Assignment described in Schedule 1 hereto (the "EFFECTIVE DATE"). Following the execution of this Assignment and Acceptance, it will be delivered to the Administrative Agent for acceptance by it and recording by the Administrative Agent pursuant to the Credit Agreement, effective as of the Effective Date (which shall not, unless otherwise agreed to by the Administrative Agent, be earlier than five Business Days after the date of such acceptance and recording by the Administrative Agent). v. Upon such acceptance and recording, from and after the Effective Date, the Administrative Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignor for amounts which have accrued to the Effective Date and to the Assignee for amounts which have accrued subsequent to the Effective Date. The Assignor and the Assignee shall make all appropriate adjustments in payments by the Administrative Agent for periods prior to the Effective Date or with respect to the making of this assignment directly between themselves. vi. From and after the Effective Date, (a) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and shall be bound by the provisions thereof and (b) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. vii. This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed as of the date first above written by their respective duly authorized officers on Schedule 1 hereto. Schedule 1 to Assignment and Acceptance Name of Assignor: ________________________ Name of Assignee: ________________________ Effective Date of Assignment: ________________________
Credit Principal Facility Assigned Amount Assigned Commitment Percentage Assigned(1) - ----------------- --------------- --------------------------------- $ --------- --.----------% [Name of Assignee] [Name of Assignor] By: _______________________ By: _______________________ Title: Title Accepted: Consented To: THE CHASE MANHATTAN BANK, WADDELL & REED FINANCIAL, INC.2 as Administrative Agent By: _______________________ By: _______________________ Title: Title:
EXHIBIT B WADDELL & REED FINANCIAL, INC. 6300 LAMAR AVENUE OVERLAND PARK, KANSAS 66202 October 13, 2000 The Chase Manhattan Bank, as Administrative Agent under the Credit Agreement, as hereinafter defined (the "AGENT") and The Lenders listed on Schedule I hereto which are parties to the Credit Agreement on the date hereof Re: Credit Agreement dated as of October 13, 2000 (the "CREDIT AGREEMENT") among Waddell & Reed Financial, Inc. (the "COMPANY"), the lending institutions identified in the Credit Agreement (the "LENDERS") and the Agent Ladies and Gentlemen: I am General Counsel of Waddell & Reed Financial, Inc. (the "COMPANY"). As General Counsel, I have been requested to provide you my opinion as to certain matters in connection with the preparation, execution and delivery of the Credit Agreement and the promissory notes (the "NOTES") delivered to the Lenders thereunder on the date hereof. Unless otherwise indicated, capitalized terms used but not defined herein shall have the respective meanings set forth in the Credit Agreement. This opinion is furnished to you pursuant to Section 4.01(b) of the Credit Agreement. In connection with this opinion, I have examined the Credit Agreement, signed by the Company and by the Agent and certain of the Lenders. I also have examined the originals, or duplicates or certified or conformed copies, of such records, agreements, instruments and other documents and have made such other investigations as I have deemed relevant and necessary in connection with the opinions expressed herein. As to questions of fact material to this opinion, I have relied upon certificates of public officials and of officers and representatives of the Company. In addition, I have examined, and have relied as to matters of fact upon, the representations made in the Credit Agreement. In rendering the opinions set forth below, I have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to me as originals, the conformity to original documents of all documents submitted to me as duplicates or certified or conformed copies, and the authenticity of the originals of such latter documents. Based upon and subject to the foregoing, and subject to the qualifications and limitations set forth herein, I am of the opinion that: 1. The Company (a) has been duly incorporated and is validly existing and in good standing as a corporation under the laws of the State of Delaware, (b) has the corporate power and authority to execute and deliver the Credit Agreement and the Notes and to borrow, and perform its obligations thereunder and (c) has duly authorized, executed and delivered the Credit Agreement and the Notes. 2. The execution and delivery by the Company of the Credit Agreement and the Notes, its borrowings in accordance with the terms of the Credit Agreement, and performance of its payment obligations thereunder (a) will not result in any violation of (1) the Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws of the Company, (2) assuming that proceeds of borrowings will be used in accordance with the terms of the Credit Agreement, any Federal or Kansas statute or the Delaware General Corporation Law or any rule or regulation issued pursuant to any Kansas or Federal statute or the Delaware General Corporation Law or any order known to us issued by any court or governmental agency or body and (b) will not breach or result in a default under or result in the creation of any lien upon, or security interest in, the Company's properties pursuant to the terms of any agreement or instrument. 3. No consent, approval, authorization, order, filing, registration or qualification of or with any Federal or Kansas governmental agency or body or any Delaware governmental agency or body acting pursuant to the Delaware General Corporation Law is required for the execution and delivery by the Company of the Credit Agreement and the Notes, the borrowings by the Company in accordance with the terms of the Credit Agreement or the performance by the Company of its payment obligations under the Credit Agreement and the Notes. 4. Assuming that the Credit Agreement is a valid and legally binding obligation of each of the Lenders parties thereto, the Credit Agreement and the Notes constitutes the valid and legally binding obligation of the Company, enforceable against the Company in accordance with their respective terms. 5. To our knowledge there is no action, suit or proceeding before or by any court, arbitrator or governmental agency, body or official, now pending, to which the Company is a party or to which the business, assets or property of the Company is subject and no such action, suit or proceeding is threatened to which the Company or the business, assets or property of the Company would be subject that in either case questions the validity of the Credit Agreement. My opinion in paragraph 4 above is subject to (i) the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, (ii) general equitable principles (whether considered in a proceeding in equity or at law) and (iii) an implied covenant of good faith and fair dealing. My opinion is limited to applicable laws of the United States of America and the applicable laws of the states thereof, as appropriate, and is based on the facts in existence and the laws in effect on the date hereof. In rendering this opinion, note that I am a member of the bar of the States of Kansas and Missouri only. My opinion with respect to the law of the State of Delaware is limited to the Delaware General Corporation Law. This opinion letter is being delivered to you and your successors and assigns solely for your use in connection with the Credit Agreement and is not to be relied on, quoted or used, in whole or in part, by any other party or for any other purpose or transaction except with my prior written consent. The opinions contained herein are as of the date of this letter, and no obligation or responsibility is undertaken to update or supplement this opinion in response to or to make you aware of any subsequent changes in events or information affecting opinions contained herein. Very truly yours, /S/ Daniel C. Schulte Daniel C. Schulte General Counsel SCHEDULE I The Chase Manhattan Bank Deutsche Bank AG - New York Branch Bank of America, N.A. The Bank of New York Fleet National Bank BNP Paribas State Street Bank and Trust Company UMB Bank, n.a. WADDELL & REED FINANCIAL, INC. EXHIBIT C-1 W A D D E L L & R E E D I N V E S T M E N T M A N A G E M E N T C O M P A N Y 2000 ACTUAL ($000)
MANAGEMENT FEES JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC - -------------------------------- -------------------------------------------------------------------------------------- - -------------------------------- W&R ADVISORS FUNDS - -------------------------------- Income $4,066 3,743 4,198 4,141 4,249 4,197 4,351 4,381 Con't Income 349 320 351 338 341 339 348 348 Retirement Shares 705 676 780 742 768 801 836 851 Gold & Government 0 0 0 0 0 0 0 0 Small Cap 84 121 177 183 210 230 252 257 Asset Strategy 33 33 39 40 44 45 49 53 -------------------------------------------------------------------------------------- Balanced Income Funds $5,237 $4,893 $5,545 $5,444 $5,612 $5,612 $5,836 $5,890 Accumulative 1,277 1,184 1,374 1,303 1,349 1,313 1,334 1,386 Science & Technology 2,665 2,779 3,418 2,658 2,507 2,580 2,719 2,750 Int'l Growth 1,283 1,346 1,481 1,249 1,221 1,248 1,268 1,218 Vanguard 1,420 1,421 1,680 1,561 1,579 1,620 1,689 1,683 New Concepts 1,296 1,371 1,571 1,194 1,181 1,251 1,351 1,331 -------------------------------------------------------------------------------------- Equity Funds $7,941 $8,101 $9,524 $7,965 $7,837 $8,012 $8,361 $8,368 Bond 224 208 220 212 214 209 218 218 Municipal Bond 347 321 344 328 324 320 332 334 High Income 473 434 454 415 420 407 421 414 High Income II 190 174 181 168 169 162 166 164 Gov't Securities 53 49 51 49 49 48 50 50 Municipal High Income 203 185 196 187 188 184 189 188 Bond Funds $1,490 $1,371 $1,446 $1,359 $1,364 $1,330 $1,376 $1,368 TOTAL LONG-TERM FUNDS $14,668 $14,365 $16,515 $14,768 $14,813 $14,954 $15,573 $15,626 Cash Management 268 237 254 273 283 268 271 268 -------------------------------------------------------------------------------------- TOTAL W&R ADVISORS FUNDS $14,936 $14,602 $16,769 $15,041 $15,096 $15,222 $15,844 $15,894 - -------------------------------- W&R FUNDS - -------------------------------- Total Return 331 301 336 329 337 333 343 346 Growth 534 550 648 503 501 513 525 495 Municipal Bond 14 13 13 12 12 11 12 12 Limited-Term Bond 0 0 0 0 0 0 0 0 Int'l Growth 143 162 187 151 144 144 147 143 Asset Strategy 27 25 30 30 32 31 33 33 Science & Technology 165 184 236 154 141 151 161 159 High Income 13 0 0 0 0 0 0 0 Large Cap Growth 0 0 0 0 0 0 0 0 Mid Cap Growth 0 0 0 0 0 0 0 0 Tax Managed Equity 0 0 0 0 0 0 0 0 Money Market 0 0 0 0 0 0 0 0 ------------------------------------------------------------------------------------- TOTAL W&R FUNDS $1,227 $1,235 $1,450 $1,179 $1,167 $1,183 $1,221 $1,188 - -------------------------------- TMK/UNITED FUNDS - -------------------------------- Income 561 518 586 584 607 603 629 640 Growth 681 648 759 737 752 756 791 809 Bond 49 45 48 47 47 47 49 49 High Income 63 59 62 57 58 56 58 58 Money Market 22 20 22 21 19 18 18 18 International 211 228 256 218 213 215 222 216 Small Cap 231 242 294 240 247 256 268 259 Balanced 69 66 73 72 75 76 81 83 Limited Term 0 0 0 0 0 0 0 0 Asset Strategy 0 0 10 16 18 18 20 22 Science & Technology 187 212 272 189 183 201 218 220 ------------------------------------------------------------------------------------- TOTAL TMK/UNITED $2,074 $2,038 $2,382 $2,181 $2,219 $2,246 $2,354 $2,374 GRAND TOTAL MGMT. FEES $18,237 $17,875 $20,601 $18,401 $18,482 $18,651 $19,419 $19,456 DAILY AVERAGE 588.3 616.4 664.5 613.4 596.2 621.7 626.4 627.6
%INC (DEC) TOTAL % OF VARIANCE 1999 YEAR MANAGEMENT FEES Y-T-D TOTAL FROM L-Y ACTUAL 1999 - -------------------------------- ----------- --------- ---------- ---------- --------- - -------------------------------- W&R ADVISORS FUNDS - -------------------------------- Income Con't Income $33,326 22.1% $4,351 15.0% $44,404 Retirement Shares 2,734 1.8 448 19.6 3,650 Gold & Government 6,159 4.1 2,841 85.6 5,675 Small Cap 0 0.0 -38 -100.0 38 Asset Strategy 1,514 1.0 1,514 82 336 0.2 154 84.6 301 Balanced Income Funds ----------- --------- ---------- ---------- --------- $44,069 29.2 9,270 26.6 $54,150 Accumulative Science & Technology 10,520 7.0 3,080 41.4 11,969 Int'l Growth 22,076 14.6 13,571 159.6 16,104 Vanguard 10,314 6.8 4,250 70.1 10,206 New Concepts 12,653 8.4 4,114 48.2 13,327 10,546 7.0 5,208 97.6 9,200 Equity Funds ----------- --------- ---------- ---------- --------- $66,109 43.7 30,223 84.2 $60,806 Bond Municipal Bond 1,723 1.1 110 6.8 2,526 High Income 2,650 1.8 -130 -4.7 4,249 High Income II 3,438 2.3 -255 -6.9 5,598 Gov't Securities 1,374 0.9 -126 -8.4 2,275 Municipal High Income 399 0.3 17 4.5 601 Bond Funds 1,520 1.0 -237 -13.5 2,626 $11,104 7.3 -621 -5.3 $17,875 TOTAL LONG-TERM FUNDS $121,282 80.3 38,872 47.2 $132,831 Cash Management 2,122 1.4 371 21.2 $2,739 TOTAL W&R ADVISORS FUNDS ----------- --------- ---------- ---------- --------- $123,404 81.7% 39,243 46.6% $135,570 - -------------------------------- W&R FUNDS - -------------------------------- Total Return Growth 2,656 1.8 202 8.2 3,732 Municipal Bond 4,269 2.8 1,814 73.9 4,092 Limited-Term Bond 99 0.1 -57 -36.5 221 Int'l Growth 0 0.0 -59 -100.0 59 Asset Strategy 1,221 0.8 653 115.0 978 Science & Technology 241 0.2 71 41.8 266 High Income 1,351 0.9 1,080 398.5 683 Large Cap Growth 13 0.0 -97 -88.2 164 Mid Cap Growth 0 0.0 0 0 Tax Managed Equity 0 0.0 0 0 Money Market 0 0.0 0 0 0 0.0 0 0 TOTAL W&R FUNDS ----------- --------- ---------- ---------- --------- $9,850 6.5% $3,607 57.8% $10,195 - -------------------------------- TMK/UNITED FUNDS - -------------------------------- Income Growth 4,728 3.1 831 21.3 5,983 Bond 5,933 3.9 1,846 45.2 6,470 High Income 381 0.3 -13 -3.3 592 Money Market 471 0.3 -57 -10.8 779 International 158 0.1 -18 -10.2 256 Small Cap 1,779 1.2 817 84.9 1,608 Balanced 2,037 1.3 951 87.6 1,771 Limited Term 595 0.4 187 45.8 664 Asset Strategy 0 0.0 -14 -100.0 14 Science & Technology 104 0.1 45 76.3 59 1,682 1.1 1,383 462.5 738 TOTAL TMK/UNITED ----------- --------- ---------- ---------- --------- $17,868 11.8% $5,958 50.0% $18,934 GRAND TOTAL MGMT. FEES $151,122 100.0% $48,808 47.7% $164,699 DAILY AVERAGE 619.4 198.3 47.1% 451.2
EXHIBIT C-1 WADDELL AND REED AUGUST 2000 CHANGE IN MUTUAL FUND ASSETS UNDER MANAGEMENT (MILLIONS)
-------------------------------------------------------------------------------- NET ASSETS SHAREHOLDER TRANSACTIONS --------------------------------------------------------------- AT 7-31-00 SALES REDEMPT. NET EXCH. DIV. REINV. TOTAL -------------------------------------------------------------------------------- Income 8,760.1 42.9 -53.3 20.1 0.0 9.7 Cont Income 571.4 2.9 -3.7 -2.4 0.0 -3.2 Retire Shares 1,396.4 18.2 -7.3 3.7 0.0 14.6 Gold & Gov't 0.0 0.0 0.0 0.0 0.0 0.0 Asset Strategy 83.8 5.1 -0.4 2.3 0.0 7.0 Accumulative 2,342.5 8.4 -13.1 -0.7 0.0 -5.4 Science & Technology 3,801.3 21.2 -17.1 50.3 0.0 54.4 International Growth 1,673.0 10.6 -7.8 20.4 0.0 23.2 Vanguard 2,951.2 28.9 -14.3 0.9 0.0 15.5 New Concepts 1,789.1 15.9 -8.2 17.9 0.0 25.6 Small Cap 341.8 24.7 -1.2 5.4 0.0 28.9 Tax-Managed Equity 19.9 3.0 0.0 0.9 0.0 3.9 Bond 498.4 3.8 -3.7 -13.5 2.2 -11.2 Municipal Bond 759.8 2.7 -8.7 -11.2 2.6 -14.6 High Income 796.6 3.4 -8.4 -18.9 5.1 -18.8 High Income II 309.9 1.1 -2.9 -1.7 2.1 -1.4 Government Securities 117.5 1.2 -1.7 -0.2 0.5 -0.2 Municipal High Income 422.6 2.4 -4.5 -1.9 1.7 -2.3 -------------------------------------------------------------------------------- ADVISORS FUNDS TOTAL 26,635.3 196.4 -156.3 71.4 14.2 125.7 Total Return 560.8 2.1 -5.0 0.0 0.0 -2.9 Small Cap Growth 685.4 2.7 -5.4 -2.4 0.0 -5.1 Mid Cap Growth 4.6 1.0 0.0 1.5 0.0 2.5 Large Cap Growth 5.6 2.4 0.0 4.2 0.0 6.6 Tax-Managed Equity 3.1 0.1 0.0 0.0 0.0 0.1 Municipal Bond 26.3 0.0 -0.5 -0.1 0.1 -0.5 Limited-Term Bond 18.9 0.1 -0.2 0.0 0.1 0.0 Int'l Growth 196.1 1.5 -1.5 -1.3 0.0 -1.3 Asset Strategy 54.4 0.3 -0.2 0.6 0.0 0.7 Science & Technology 213.3 1.7 -1.6 -1.5 0.0 -1.4 High Income 20.8 0.2 -0.3 -0.1 0.1 -0.1 -------------------------------------------------------------------------------- W & R FUNDS TOTAL 1,789.3 12.1 -14.7 0.9 0.3 -1.4 -------------------------------------------------------------------------------- ADVISORS & W&R FUNDS TOTAL 28,424.6 208.5 -171.0 72.3 14.5 124.3 Asset Strategy 34.9 4.2 -0.5 0.0 3.7 Money Mkt 51.9 18.0 -18.7 0.3 -0.4 Bond 109.3 1.8 -1.6 0.0 0.2 High Inc 109.3 1.2 -1.2 0.0 0.0 Growth 1,323.0 16.5 -10.4 0.0 6.1 Income 1,037.7 14.9 -8.0 0.0 6.9 International Port 297.1 4.7 -2.0 0.0 2.7 Small Cap Port 355.4 7.4 -3.1 0.0 4.3 Balanced Port 134.4 4.5 -1.4 0.0 3.1 Ltd-Term Bond Port 5.8 0.2 -0.1 0.0 0.1 Science & Technology 293.1 8.9 -4.2 0.0 4.7 -------------------------------------------------------------------------------- TARGET/UTD FUNDS TOTAL 3,751.9 82.3 -51.2 0.0 0.3 31.4 -------------------------------------------------------------------------------- FUNDS TOTAL W/O CASH MANAGEMENT 32,176.5 290.8 -222.2 72.3 14.8 155.7 CASH MANAGEMENT 883.4 65.8 -84.9 -72.6 3.8 -87.9 -------------------------------------------------------------------------------- ALL FUNDS 33,059.9 356.6 -307.1 -0.3 18.6 67.8
AUGUST 2000 MONTH TO DATE --------------------------------------------------- NET INVEST DIVIDENDS VALUATION NET ASSETS INCOME PAID CHANGE AT 8-31-00 --------------------------------------------------- Income 4.7 0.0 472.0 9,246.5 Cont Income 1.3 0.0 21.0 590.5 Retire Shares 1.7 0.0 111.1 1,523.8 Gold & Gov't 0.0 0.0 0.0 0.0 Asset Strategy 0.2 0.0 2.5 93.5 Accumulative 2.9 0.0 185.7 2,525.7 Science & Technology 2.3 0.0 332.1 4,190.1 International Growth 1.0 0.0 10.5 1,707.7 Vanguard -1.3 0.0 208.5 3,173.9 New Concepts -1.2 0.0 193.4 2,006.9 Small Cap 0.2 0.0 11.6 382.5 Tax-Managed Equity 0.0 0.0 0.5 24.3 Bond 2.5 -2.6 2.8 489.9 Municipal Bond 3.2 -3.3 8.9 754.0 High Income 5.8 -5.9 -0.7 777.0 High Income II 2.2 -2.2 -0.8 307.7 Government Securities 0.6 -0.6 1.3 118.6 Municipal High Income 2.1 -2.1 3.8 424.1 --------------------------------------------------- ADVISORS FUNDS TOTAL 28.2 -16.7 1,564.2 28,336.7 Total Return -0.2 0.0 30.6 588.3 Small Cap Growth -0.3 0.0 23.0 703.0 Mid Cap Growth 0.0 0.0 1.1 8.2 Large Cap Growth 0.0 0.0 0.8 13.0 Tax-Managed Equity 0.0 0.0 0.2 3.4 Municipal Bond 0.1 -0.1 0.4 26.2 Limited-Term Bond 0.1 -0.1 0.1 19.0 Int'l Growth -0.1 0.0 6.5 201.2 Asset Strategy 0.0 0.0 1.8 56.9 Science & Technology 0.0 0.0 18.9 230.8 High Income 0.1 -0.1 -0.1 20.6 --------------------------------------------------- W & R FUNDS TOTAL -0.3 -0.3 83.3 1,870.6 --------------------------------------------------- ADVISORS & W&R FUNDS TOTAL 27.9 -17.0 1,647.5 30,207.3 Asset Strategy 0.1 0.0 1.1 39.8 Money Mkt 0.3 -0.3 0.1 51.6 Bond 0.6 0.0 0.8 110.9 High Inc 1.0 0.0 0.4 110.7 Growth 0.4 0.0 102.2 1,431.7 Income 0.7 0.0 54.3 1,099.6 International Port 0.2 0.0 0.2 300.2 Small Cap Port 0.3 0.0 11.3 371.3 Balanced Port 0.4 0.0 4.3 142.2 Ltd-Term Bond Port 0.0 0.0 0.0 5.9 Science & Technology 0.3 0.0 24.6 322.7 --------------------------------------------------- TARGET/UTD FUNDS TOTAL 4.3 -0.3 199.3 3,986.6 --------------------------------------------------- FUNDS TOTAL W/O CASH MANAGEMENT 32.2 -17.3 1,846.8 34,193.9 CASH MANAGEMENT 4.0 -4.0 0.0 795.5 --------------------------------------------------- ALL FUNDS 36.2 -21.3 1,846.8 34,989.4
Note: For the Target/UTD Funds, sales include exchanges in and redemptions include exchanges out. EXHIBIT C-1 CONT. WADDELL AND REED AUGUST 2000 CHANGE IN MUTUAL FUND ASSETS UNDER MANAGEMENT (MILLIONS)
-------------------------------------------------------------------------------- SHAREHOLDER TRANSACTIONS NET ASSETS --------------------------------------------------------------- AT 12-31-99 SALES REDEMPT. NET. EXCH. DIV. REINV. TOTAL -------------------------------------------------------------------------------- Income 8,399.1 313.7 -460.7 -250.1 6.8 -390.3 Cont Income 600.0 16.6 -31.1 -29.7 5.6 -38.6 Retire Shares 1,199.9 125.0 -48.9 41.8 2.2 120.1 Gold & Gov't 0.0 0.0 0.0 0 0 0.0 Asset Strategy 56.7 18.8 -2.6 10.1 0 26.3 Accumulative 2,254.5 65.4 -94.3 -22.9 2.5 -49.3 Science & Technology 3,795.5 267.4 -135.4 139.8 0.0 271.8 International Growth 1,885.6 118.0 -60.1 12.6 0.0 70.5 Vanguard 2,568.1 190.7 -102.4 -4.4 0.0 83.9 New Concepts 1,769.0 181.6 -56.3 69.9 0.0 195.2 Small Cap 97.7 153.4 -12.6 118.4 0.0 259.2 Tax-Managed Equity 0.0 17.8 0.0 5.7 0.0 23.5 Bond 505.5 24.9 -33.6 -28.4 17.4 -19.7 Municipal Bond 805.4 11.9 -67.5 -43.9 21.3 -78.2 High Income 921.5 24.7 -67.4 -82.8 42.0 -83.5 High Income II 364.3 8.3 -26.1 -29.0 17.2 -29.6 Government Securities 127.6 8.1 -12.7 -10.5 4.1 -11.0 Municipal High Income 465.3 12.2 -36.3 -31.0 13.4 -41.7 -------------------------------------------------------------------------------- ADVISORS FUNDS TOTAL 25,815.7 1,558.5 -1,248.0 -134.4 132.5 308.6 Total Return 563.5 14.2 -44.4 -22.7 0.0 -52.9 Small Cap Growth 743.7 34.8 -44.6 -9.9 0.0 -19.7 Mid Cap Growth 0.0 4.6 0.0 2.4 0.0 7.0 Large Cap Growth 0.0 6.2 0.0 5.4 0.0 11.6 Tax-Managed Equity 0.0 3.2 0.0 0 0 3.2 Municipal Bond 33.3 -0.1 -4.3 -4.2 0.7 -7.9 Limited-Term Bond 23.0 0.2 -2.1 -2.7 0.7 -3.9 Int'l Growth 205.5 24.9 -11.4 1.9 0.0 15.4 Asset Strategy 45.1 3.2 -2.7 3.5 0.0 4.0 Science & Technology 226.8 41.1 -11.0 7.8 0.0 37.9 High Income 25.9 0.4 -2.7 -2.3 1.1 -3.5 -------------------------------------------------------------------------------- W & R FUNDS TOTAL 1,866.8 132.7 -123.2 -20.8 2.5 -8.8 -------------------------------------------------------------------------------- ADVISORS & W&R FUNDS TOTAL 27,682.5 1,691.2 -1,371.2 -155.2 135.0 299.8 Asset Strategy 21.6 17.7 -3.7 0.0 14.0 Money Mkt 64.4 229.9 -244.9 2.2 -12.8 Bond 110.5 10.2 -16.0 0.0 -5.8 High Inc 120.7 10.6 -17.6 0.0 -7.0 Growth 1,162.7 132.1 -81.4 0.0 50.7 Income 940.5 104.7 -85.6 0.0 19.1 International Port 300.1 57.7 -18.0 0.0 39.7 Small Cap Port 318.0 77.1 -21.7 0.0 55.4 Balanced Port 117.2 28.0 -12.2 0.0 15.8 Ltd-Term Bond Port 6.0 0.9 -1.2 0.0 -0.3 Science & Technology 252.7 127.7 -33.2 0.0 94.5 -------------------------------------------------------------------------------- TARGET/UTD FUNDS TOTAL 3,414.4 796.6 -535.5 0.0 2.2 263.3 -------------------------------------------------------------------------------- FUNDS TOTAL W/O CASH MANAGEMENT 31,096.9 2,487.8 -1,906.7 -155.2 137.2 563.1 CASH MANAGEMENT 812.1 594.3 -789.8 152.1 26.8 -16.6 -------------------------------------------------------------------------------- ALL FUNDS 31,909.0 3,082.1 -2,696.5 -3.1 164.0 546.5
AUGUST 2000 YEAR TO DATE --------------------------------------------------- NET INVEST DIVIDENDS VALUATION NET ASSETS INCOME PAID CHANGE AT 8-31-00 --------------------------------------------------- Income 7.2 -7.2 1,237.7 9,246.5 Cont Income 8.0 -5.8 26.9 590.5 Retire Shares 5.9 -2.3 200.2 1,523.8 Gold & Gov't 0.0 0.0 0.0 0.0 Asset Strategy 0.4 0.0 10.1 93.5 Accumulative 9.4 -2.7 313.8 2,525.7 Science & Technology -5.4 0.0 128.2 4,190.1 International Growth 1.1 0.0 -249.5 1,707.7 Vanguard -9.1 0.0 531.0 3,173.9 New Concepts -8.5 0.0 51.2 2,006.9 Small Cap 1.6 0.0 24.0 382.5 Tax-Managed Equity 0.0 0.0 0.8 24.3 Bond 19.7 -19.5 3.9 489.9 Municipal Bond 26.8 -26.8 26.8 754.0 High Income 49.3 -49.3 -61.0 777.0 High Income II 19.2 -19.2 -27.0 307.7 Government Securities 4.8 -4.8 2.0 118.6 Municipal High Income 17.8 -17.6 0.3 424.1 --------------------------------------------------- ADVISORS FUNDS TOTAL 148.2 -155.2 2,219.4 28,336.7 Total Return -3.4 0.0 81.1 588.3 Small Cap Growth -3.7 0.0 -17.3 703.0 Mid Cap Growth 0.0 0.0 1.2 8.2 Large Cap Growth 0.0 0.0 1.4 13.0 Tax-Managed Equity 0.0 0.0 0.2 3.4 Municipal Bond 0.8 -0.8 0.8 26.2 Limited-Term Bond 0.8 -0.8 -0.1 19.0 Int'l Growth -2.1 0.0 -17.6 201.2 Asset Strategy 0.0 0.0 7.8 56.9 Science & Technology -1.7 0.0 -32.2 230.8 High Income 1.5 -1.5 -1.8 20.6 --------------------------------------------------- W & R FUNDS TOTAL -7.8 -3.1 23.5 1,870.6 --------------------------------------------------- ADVISORS & W&R FUNDS TOTAL 140.4 -158.3 2,242.9 30,207.3 Asset Strategy 0.2 0.0 4.0 39.8 Money Mkt 2.3 -2.4 0.1 51.6 Bond 4.5 0.0 1.7 110.9 High Inc 7.5 0.0 -10.5 110.7 Growth 0.3 0.0 218.0 1,431.7 Income 2.2 0.0 137.8 1,099.6 International Port 0.1 0.0 -39.7 300.2 Small Cap Port 1.5 0.0 -3.6 371.3 Balanced Port 2.2 0.0 7.0 142.2 Ltd-Term Bond Port 0.1 0.0 0.1 5.9 Science & Technology 0.6 0.0 -25.1 322.7 --------------------------------------------------- TARGET/UTD FUNDS TOTAL 21.5 -2.4 289.8 3,986.6 --------------------------------------------------- FUNDS TOTAL W/O CASH MANAGEMENT 161.9 -160.7 2,532.7 34,193.9 CASH MANAGEMENT 29.3 -29.3 0.0 795.5 --------------------------------------------------- ALL FUNDS 191.2 -190.0 2,532.7 34,989.4
Note: For the Target/UTD Funds, sales include exchanges in and redemptions include exchanges out. EXHIBIT C-2 W&R GROUP OF COMPANIES TOTAL REVENUES For the period indicated in each column heading, amounts in thousands except per share amounts.
- --------------------------------------------------------------------------------------------------------------------------------- Aug-99 Sep-99 Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 ----------------------------------------------------------------------------------------- REVENUES: Investment management fees 15,462 16,009 16,989 17,362 20,148 20,230 20,011 23,565 Underwriting & distribution fees 10,425 9,671 9,511 10,112 12,639 13,397 14,780 17,304 Shareholder service fees 3,490 3,689 3,480 3,535 3,795 3,691 3,662 3,941 Investment & other revenue 690 566 751 739 1,150 794 221 3,147 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUE 30,067 29,935 30,731 31,748 37,732 38,112 38,674 47,957 - --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- QTD QTD Variance Variance QTD QTD Variance Variance Aug-00 May-00 Dollars Percent Aug-00 Aug-99 Dollars Percent ----------------------------------------------------------------------------------------- REVENUES: Investment management fees 43,473 41,330 2,143 5.2% 43,473 31,081 12,391 39.9% Underwriting & distribution fees 33,584 38,106 -4,522 -11.9% 33,584 20,796 12,788 61.5% Shareholder service fees 8,943 8,641 302 3.5% 8,943 6,932 2,011 29.0% Investment & other revenue 1,261 1,278 -17 -1.3% 1,261 1,523 -262 -17.2% - --------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUE 87,261 89,355 -2,094 -4.5% 87,261 60,332 26,928 113.2% - ---------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------ Apr-00 May-00 Jun-00 Jul-00 Aug-00 ------------------------------------------------------ REVENUES: Investment management fees 20,647 20,683 20,971 21,756 21,717 Underwriting & distribution fees 20,622 17,484 17,785 15,902 17,681 Shareholder service fees 4,346 4,295 4,963 4,322 4,622 Investment & other revenue 528 750 701 583 678 - ---------------------------------------------------------------------------------------------- TOTAL REVENUE 46,143 43,212 44,420 42,563 44,698 - ---------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------- YTD YTD Variance Variance Aug-00 Aug-99 Dollars Percent ------------------------------------------- REVENUES: Investment management fees 169,579 108,105 61,474 56.9% Underwriting & distribution fees 134,956 84,385 50,571 59.9% Shareholder service fees 33,841 27,027 6,815 25.2% Investment & other revenue 7,403 6,995 408 5.8% - ----------------------------------------------------------------------------------- TOTAL REVENUE 345,779 226,512 119,268 147.8% - -----------------------------------------------------------------------------------
EXHIBIT D [FORM OF COMPETITIVE BID] The Chase Manhattan Bank, as Administrative Agent 270 Park Avenue New York, New York 10017 ----- ---, ------ Ladies and Gentlemen: Pursuant to subsection 2.06(b) of the Credit Agreement dated as of October 13, 2000 (the "CREDIT AGREEMENT"), among Waddell & Reed Financial, Inc. (the "COMPANY"), the Lenders party thereto and The Chase Manhattan Bank, as Administrative Agent, the undersigned hereby makes a Competitive Bid in response to the Competitive Bid Request made by the Company on [Date], and in that connection sets forth below the terms on which such Competitive Bid is made: (A) Principal Amount (3) __________________ (B) Competitive Bid Rate (4) __________________ (C) Interest Period and last day thereof __________________ The undersigned hereby confirms that it is prepared, subject to the conditions set forth in the Credit Agreement, to extend credit to the Company upon acceptance by the Company of this bid in accordance with subsection 2.06(d) of the Credit Agreement. Terms defined in the Credit Agreement are used in this bid with their defined meanings. Very truly yours, [NAME OF BANK], By: _________________ Name: Title: - ------------------ (3) Not less than $5,000,000 or greater than the requested Competitive Borrowing and in integral multiples of $1,000,000. Multiple bids will be accepted by the Administrative Agent. (4) LIBO Rate + or - [ ]%, in the case of Eurodollar Loans, or [ ]%, in the case of Fixed Rate Loans, in either case such percentage rate to be expressed to no more than four decimal places. EX-10.15 9 a2041359zex-10_15.txt FIXED RATE PROMISSORY NOTE Exhibit 10.15 [CHASE LOGO] FIXED RATE PROMISSORY NOTE (MULTIPLE LOANS) NEW YORK, NEW YORK August 15, 2000 For value received, the undersigned (the "Borrower") unconditionally promises to pay to the order of THE CHASE MANHATTAN BANK (the "Bank"), at its principal office located at 270 Park Avenue, New York, New York 10017, the principal amount of each loan made by the Bank to the Borrower and outstanding under this Note on the maturity date(s) as evidenced by the Bank's records as provided in the fifth paragraph hereof. The Borrower promises to pay interest on the unpaid balance of the principal balance of each such loan for each day outstanding at a fixed rate per annum equal to the rate as evidenced in the Bank's records as provided in the fifth paragraph hereof; provided that principal and (to the extent permitted by law) interest not paid when due (whether at stated maturity, by acceleration or otherwise) shall bear interest for each day overdue at a variable rate per annum equal to: (a) the higher of: (i) the Federal Funds Rate plus 1/2 of 1% and (ii) the Prime Rate; plus (b) 2%. "Federal Funds Rate" means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions as published by the Federal Reserve Bank of New York for such day (or for any day that is not a banking day in New York City, for the immediately preceding banking day). "Prime Rate" means, for any day, that rate of interest from time to time announced by the Bank at its principal office as its prime rate, as in effect for such day in accordance with announcements by the Bank of changes in such rate. Interest shall be calculated on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). Interest on each loan shall be due and payable at the maturity thereof (and quarterly, if requested by the Bank); provided, however, that interest accruing on any amount not paid when due shall be payable upon demand. In no case shall the interest on this Note exceed the maximum amount which the Bank may charge or collect under applicable law. Each loan hereunder may be prepaid in whole but not in part, provided that accrued and unpaid interest is paid on the date of such prepayment, together with any compensation payable in accordance with the following. If there is any payment (whether by voluntary prepayment, acceleration or otherwise) of a loan under this Note on a date other than the scheduled maturity date set forth in the first paragraph hereof, then the Borrower will pay the Bank on demand such amount as will be sufficient in the reasonable opinion of the Bank to compensate it for any loss, cost or expense which the Bank determines is attributable thereto. Without limiting the foregoing, such compensation shall include an amount equal to the excess, if any, of: (a) the aggregate amount of interest which otherwise would have accrued on the principal amount so paid for the period from and including the date of payment to but excluding such maturity date at the rate of interest provided herein over (b) the amount of interest the Bank would pay (as determined by the Bank in good faith, such determination to be conclusive) on a deposit placed with the Bank on the date of such payment in an amount comparable to such principal amount and with a maturity comparable to such period. All payments under this Note shall be made in lawful money of the United States of America and in immediately available funds at the Bank's principal office specified above. If any loan evidenced by this Note becomes due and payable on a day which is not a banking day in New York City, the maturity of such loan shall be extended to the next succeeding banking day, and interest shall be payable for such extension on such loan at the rate of interest specified in this Note. The Bank may (but shall not be obligated to) debit the amount of any payment which is not made when due to any deposit account of the Borrower with the Bank. The date, amount, rate of interest and maturity date of each loan under this Note and each payment of principal, loan(s) to which such principal is applied (which shall be at the discretion of the Bank) and the outstanding principal balance of loans shall be recorded by the Bank on its books and prior to any transfer and delivery of this Note, endorsed by the Bank on the schedule attached or any continuation of such schedule. Any such endorsement shall be conclusive in the absence of manifest error. If any of the following events of default shall occur: (a) the Borrower fails to pay any liability to the Bank under this Note when due and payable; (b) the Borrower or any third party supporting or liable with respect to this Note (a "Third Party") shall breach any representation, warranty or covenant in this Note or in any certificate, opinion or financial or other statement delivered in connection with this Note; (c) the Borrower shall fail to pay any other indebtedness for borrowed money (other than the loans hereunder) in a principal amount in excess of $10,000,000 in the aggregate, or any interest or premium thereon, when due and payable or if there shall be any default by the Borrower or such Third Party thereunder; (d) the Borrower or any Third Party shall become insolvent (however evidenced) or shall seek any relief under any bankruptcy or similar law of any jurisdiction (or any person shall seek such relief against the Borrower or such Third Party); (e) This Note shall at any time cease to be in full force and effect or its validity or enforceability shall be disputed or contested; or (f) any lien or security interest securing this Note shall cease to create a valid and perfected first priority lien or security interest in the property purported to be subject thereto; THEN, if the Bank shall elect by notice to the Borrower, the unpaid principal amount of this Note together with interest and any other amounts due hereunder shall become forthwith due and payable; provided that in the case of an event of default under (d) above, such amounts shall automatically become due and payable without any notice or other action by the Bank. The Borrower waives presentment, notice of dishonor, protest and any other formality with respect to this Note. The Borrower shall reimburse the Bank or demand for all costs, expenses and charges (including, without limitation, fees and charges of external legal counsel for the Bank and costs allocated by its internal legal department) in connection with the preparation, performance or enforcement of this Note. This Note shall be binding on the Borrower and its successors and assigns and shall inure to the benefit of the Bank and its successors and assigns; provided that the Borrower may not delegate any obligations hereunder without the prior written consent of the Bank. Without limiting any provision of this Note, the obligations under this Note shall continue in full force and effect and shall be binding on: (a) the estate of the Borrower if the Borrower is an individual; and (b) any successor partnership and on previous partners and their respective estates if the Borrower is a partnership, regardless of any change in the partnership as a result of death, retirement or otherwise. THIS NOTE SHALL BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK. THE BORROWER CONSENTS TO THE NONEXCLUSIVE JURISDICTION AND VENUE OF THE STATE OR FEDERAL COURTS LOCATED IN THE CITY OF NEW YORK. SERVICE OF PROCESS BY THE BANK IN CONNECTION WITH ANY SUCH DISPUTE SHALL BE BINDING ON THE BORROWER IF SENT TO THE BORROWER BY REGISTERED MAIL AT THE ADDRESS SPECIFIED BELOW. THE BORROWER WAIVES ANY RIGHT THE BORROWER MAY HAVE TO JURY TRIAL. Address: 6300 Lamar Ave. Waddell & Reed Financial, Inc. Overland Park, KS 66202-4247 By /s/ John E. Sundeen, Jr. -------------------------------- Name: John E. Sundeen, Jr. Title: Senior Vice President, Chief Financial Officer, and Treasurer By /s/ -------------------------------- Name: Title: EX-10.18 10 a2041359zex-10_18.txt ACCOUNTING SERVICES AGREEMENT Exhibit 10.18 ACCOUNTING SERVICES AGREEMENT THIS AGREEMENT, made as of the ____ day of ______________, 2000, by and between _______________________ (the "Fund"), a Maryland corporation and Waddell & Reed Services Company ("Agent"), a Missouri corporation, WITNESSETH: WHEREAS, the Fund wishes to appoint the Agent to be its Accounting Services Agent upon and subject to the terms and provisions of this Agreement; NOW THEREFORE, in consideration of the mutual covenants contained in this Agreement, the parties agree as follows: A. APPOINTMENT OF THE AGENT AS ACCOUNTING SERVICES AGENT FOR THE FUND; ACCEPTANCE. (1) The Fund hereby appoints the Agent to act as Accounting Services Agent for the Fund upon and subject to the terms and provisions of this Agreement. (2) Agent hereby accepts the appointment as Accounting Services Agent for the Fund and agrees to act as such upon and subject to the terms and provisions of this Agreement. B. DUTIES OF THE AGENT. The Agent shall perform such duties as set forth in this Paragraph B as agent for and on behalf of the Fund. (1) Agent shall provide bookkeeping and accounting services and assistance by providing to the Fund the necessary personnel and facilities to maintain the Fund's portfolio records and general accounting records, to price daily the value of shares of the Fund, and with the assistance and advice of the Fund's attorneys and independent accountants, to prepare or assist the Fund's attorneys and independent accountants to prepare, as may be applicable, reports required to be filed by the Fund with regulatory agencies including the preparation of proxy statements, prospectuses, shareholder reports and other reports as required by law. (2) Agent shall maintain and keep current the accounts, books, records, and other documents relating to the Fund's financial and portfolio transactions as may be required by rules and regulations of the Securities and Exchange Commission adopted under Section 31(a) of the Investment Company Act of 1940, as amended (the "Act"). (3) Agent shall cause the subject records of the Fund to be maintained and preserved pursuant to the requirements under the Act. (4) In pricing daily the value of shares of the Fund, Agent may make arrangements to and obtain the value of portfolio securities from pricing services or quotation services that are compensated by the Fund directly or indirectly through the placement of portfolio transactions with broker-dealers who provide such valuation or quotation services to the Agent. (5) The Agent shall maintain duplicate copies of, or information from which copies of, the records necessary to the preparation of the Fund's financial statements and valuations of its assets may be reconstructed. Such duplicate copies or information shall be maintained at a location other than where the Agent performs its normal duties hereunder so that in the event the records established and maintained pursuant to the foregoing provisions of this Section B are damaged or destroyed, the Agent shall be able to provide the bookkeeping and accounting services and assistance specified in this Section B. (6) In the event any of the Agent's facilities or equipment necessary for the performance of its duties hereunder is damaged, destroyed or rendered inoperable by reason of fire, vandalism, riot, natural disaster or otherwise, Agent will use its best efforts to restore all services hereunder to the Fund and will not seek from the Fund additional compensation to repair or replace damaged or destroyed facilities or equipment. The Agent shall also make and maintain arrangements for emergency use of alternative facilities for use in the event of the aforesaid destruction of or damage to its facilities. C. COMPENSATION OF THE AGENT. The Fund agrees to pay to the Agent for its services under this Agreement, an amount payable on the first day of the month as shown in the following table pertinent to the average daily net assets of the Fund during the prior month:
Fund's Average Daily Net Assets for Monthly the Month Fee $ 0 - $ 10 million $ 0 $ 10 - $ 25 million $ 917 $ 25 - $ 50 million $ 1,833 $ 50 - $ 100 million $ 2,750 $100 - $ 200 million $ 3,666 $200 - $ 350 million $ 4,583 $350 - $ 550 million $ 5,500 $550 - $ 750 million $ 6,417 $750 - $ 1.0 billion $ 7,792 $1.0 billion and over $ 9,167
In addition, for each class of shares in excess of one, the Fund pays the Agent a monthly per-class fee equal to 2.5% of the monthly base fee. 2 D. RIGHT OF FUND TO INSPECT; OWNERSHIP OF RECORDS. The Fund will have the right under this Agreement to perform on-site inspection of records and accounts, and audits directly pertaining to the Fund's accounting and portfolio records maintained by the Agent hereunder at the Agent's facilities. The Agent will cooperate with the Fund's independent accountants or representatives of appropriate regulatory agencies and furnish all reasonably requested records and data. Agent acknowledges that these records are the property of the Fund, and that it will surrender to the Fund all such records promptly on request. E. STANDARD OF CARE; INDEMNIFICATION. The Agent will at all times exercise due diligence and good faith in performing its duties hereunder. The Agent will make every reasonable effort and take all reasonably available measures to assure the adequacy of its personnel, facilities and equipment as well as the accurate performance of all services to be performed by it hereunder within, at a minimum, the time requirements of any applicable statutes, rules or regulations and in conformity with the Fund's Articles of Incorporation, Bylaws and representations made in the Fund's current registration statement as filed with the Securities and Exchange Commission, including any supplements to the prospectus(es) and statement of additional information contained in such registration statement. The Agent shall not be responsible for, and the Fund agrees to indemnify the Agent for, any losses, damages or expenses (including reasonable counsel fees and expenses): (i) resulting from any claim, demand, action or suit not resulting from the Agent's failure to exercise good faith or due diligence and arising out of or in connection with the Agent's duties on behalf of the Fund hereunder; (ii) for any delay, error or omission by reason of circumstances beyond its control, including acts of civil or military authority, national emergencies, labor difficulties (except with respect to the Agent's employees), fire, mechanical breakdown beyond its control, flood or catastrophe, acts of God, insurrection, war, riots or failure beyond its control of transportation, communication or power supply; or (iii) for any action taken or omitted to be taken by the Agent in good faith in reliance on the accuracy of any information provided to it by the Fund or its directors or in reliance on any advice of counsel who may be internally employed counsel or outside counsel for the Fund or advice of any independent accountant or expert employed by the Fund with respect to the preparation and filing of any document with a governmental agency or authority. In order for the rights to indemnification to apply, it is understood that if in any case the Fund may be asked to indemnify or hold the Agent harmless, the Fund shall be advised of all pertinent facts concerning the situation in question, and it is further understood that the Agent will use reasonable care to identify and notify the Fund promptly concerning any situation which presents or appears likely to present a claim for indemnification against the Fund. The Fund shall have the option to defend the Agent against any claim which may be the subject of this indemnification and, in the event that the Fund so elects, it will so notify the Agent, and thereupon the Fund shall take over complete defense of the claim, and the Agent shall sustain no further legal or other expenses in such situation for which the Agent shall seek indemnification under this 3 paragraph. The Agent will in no case confess any claim or make any compromise in any case in which the Fund will be asked to indemnify the Agent except with the Fund's prior written consent. F. TERM OF THE AGREEMENT; TAKING EFFECT; AMENDMENTS. This Agreement shall become effective at the start of business on the date hereof and shall continue, unless terminated as hereinafter provided, for a period of one (1) year and from year-to-year thereafter, provided that such continuance shall be specifically approved as provided below. This Agreement shall go into effect, or may be continued, or may be amended, or a new agreement covering the same topics between the Fund and the Agent may be entered into only if the terms of this Agreement, such continuance, the terms of such amendment or the terms of such new agreement have been approved by the Board of Directors of the Fund, including the vote of a majority of the directors who are not "interested persons," as defined in the Act, of either party to this Agreement, the agreement to be continued, amendment or new agreement, cast in person at a meeting called for the purpose of voting on such approval. Such a vote is hereinafter referred to as a "disinterested director vote." Any disinterested director's vote shall, in favor of continuance, amendment or execution of a new agreement, include a determination that: (i) the Agreement, amendment, new agreement or continuance in question is in the best interests of the Fund and its shareholders; (ii) the services to be performed under the Agreement, the Agreement as amended, new agreement or agreement to be continued, are services required for the operation of the Fund; (iii) the Agent can provide services, the nature and quality of which are at least equal to those provided by others offering the same or similar services; and (iv) the fees for such services are fair and reasonable in the light of the usual and customary charges made by others for services of the same nature and quality. Nothing herein contained shall prevent any disinterested director vote from being conditioned on the favorable vote of the holders of a majority (as defined in or under the Act) of the outstanding voting securities of the Fund. G. TERMINATION. (1) This Agreement may be terminated by the Agent at any time without penalty upon giving the Fund at least one hundred twenty (120) days' written notice (which notice may be waived by the Fund) and may be terminated by the Fund at any time without penalty upon giving the Agent at least sixty (60) days' written notice (which notice may be waived by the Agent), provided that such termination by the Fund shall be directed or approved by the vote of a majority of the Board of Directors of the Fund in office at the time or by the vote of the holders of a majority (as defined in or under the Act) of the outstanding voting securities of the Fund. (2) On termination, the Agent will deliver to the Fund or its designee all files, documents and records of the Fund used, kept or maintained by the Agent in the 4 performance of its services hereunder, including such of the Fund's records in machine readable form as may be maintained by the Agent, as well as such summary and/or control data relating thereto used by or available to the Agent. (3) In addition, on such termination or in preparation therefore at the request of the Fund and at the Fund's expense, the Agent shall provide, to the extent that its capabilities then permit, such documentation, personnel and equipment as may be reasonably necessary in order for a new agent or the Fund to fully assume and commence to perform the agency functions described in this Agreement with a minimum disruption to the Fund's activities. (4) This Agreement shall automatically terminate in the event of its assignment, the term "assignment" for this purpose having the meaning defined in Section 2(a)(4) of the Act and the rules and regulations thereunder of the Securities and Exchange Commission. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date and year first above written. -------------------------------- (name of Fund) ------------------------- Name, Title ATTEST: - -------------------------------- Name, Title WADDELL & REED SERVICES COMPANY ------------------------------- Name, Title ATTEST: - ------------------------- Name, Title 5 EX-10.19 11 a2041359zex-10_19.txt INVESTMENT MANAGEMENT AGREEMENT Exhibit 10.19 INVESTMENT MANAGEMENT AGREEMENT THIS AGREEMENT, made this ____ day of ___________, 2000, by and between ___________________________________ (hereinafter called "Fund"), and WADDELL & REED INVESTMENT MANAGEMENT COMPANY (hereinafter called "WRIMCO"), WITNESSETH: In consideration of the mutual promises and agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is hereby agreed by and between the parties hereto as follows: I. IN GENERAL WRIMCO agrees to act as investment adviser to Fund with respect to the investment of its assets and in general to supervise the investments of Fund, subject at all times to the direction and control of the Board of Directors of Fund, all as more fully set forth herein. II. DUTIES OF WRIMCO WITH RESPECT TO INVESTMENT OF ASSETS OF FUND A. WRIMCO shall regularly provide investment advice to Fund and shall, subject to the succeeding provisions of this section, continuously supervise the investment and reinvestment of cash, securities or other property comprising the assets of the investment portfolios of Fund; and in furtherance thereof, WRIMCO shall: 1. obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or one or more of the portfolios of Fund, and whether concerning the individual companies whose securities are included in one or more of Fund's portfolios or the industries in which they engage, or with respect to securities which WRIMCO considers desirable for inclusion in one or more of Fund's portfolios; 2. furnish continuously an investment program for each of the portfolios of Fund; 3. determine what securities shall be purchased or sold by Fund; 4. take, on behalf of Fund, all actions which appear to WRIMCO necessary to carry into effect such investment programs and supervisory functions as aforesaid, including the placing of purchase and sale orders. B. WRIMCO shall make appropriate and regular reports to the Board of Directors of Fund on the actions it takes pursuant to Section II.A. above. Any investment programs furnished by WRIMCO under this section, or any supervisory function taken hereunder by WRIMCO shall at all times conform to and be in accordance with any requirements imposed by: 1. the provisions of the Investment Company Act of 1940 and any rules or regulations in force thereunder; 2. any other applicable provision of law; 3. the provisions of the Articles of Incorporation of Fund as amended from time to time; 4. the provisions of the Bylaws of Fund as amended from time to time; 5. the terms of the registration statement of Fund, as amended from time to time, under the Securities Act of 1933 and the Investment Company Act of 1940, including any supplements to the prospectus(es) and statement of additional information contained in such registration statement. C. Any investment programs furnished by WRIMCO under this section or any supervisory functions taken hereunder by WRIMCO shall at all times be subject to any directions of the Board of Directors of Fund, its Executive Committee, or any committee or officer of Fund acting pursuant to authority given by the Board of Directors. III. ALLOCATION OF EXPENSES The expenses of Fund and the expenses of WRIMCO in performing its functions under this Agreement shall be divided into two classes, to wit: (i) those expenses which will be paid in full by WRIMCO as set forth in subparagraph "A" hereof, and (ii) those expenses which will be paid in full by Fund, as set forth in subparagraph "B" hereof. A. With respect to the duties of WRIMCO under Section II above, it shall pay in full, except as to the brokerage and research services acquired through the allocation of commissions as provided in Section IV hereinafter, for (a) the salaries and employment benefits of all employees of WRIMCO who are engaged in providing these advisory services; (b) adequate office space and suitable office equipment for such employees; and (c) all telephone and communications costs relating to such functions. In addition, WRIMCO shall pay the fees and expenses of all directors of Fund who are affiliated with WRIMCO or an affiliated corporation and the salaries and employment benefits of all officers of Fund who are affiliated persons of WRIMCO. B. Fund shall pay in full for all of its expenses which are not listed above (other than those assumed by WRIMCO or one of its affiliates in its capacity as principal underwriter of the shares of Fund, as Shareholder Servicing Agent or as Accounting Services Agent for Fund), including (a) the costs of preparing and printing prospectuses and reports to shareholders of Fund, including mailing costs; (b) the costs of printing all proxy statements and all other costs and expenses of meetings of shareholders of Fund (unless Fund and WRIMCO shall otherwise agree); (c) interest, taxes, brokerage commissions and premiums on fidelity and other insurance; (d) audit fees and expenses of independent accountants and legal fees and expenses of attorneys, but not of attorneys who are employees of WRIMCO or an affiliated company; (e) fees and expenses of its directors not affiliated with Waddell & 2 Reed, Inc.; (f) custodian fees and expenses; (g) fees payable by Fund under the Securities Act of 1933, the Investment Company Act of 1940, and the securities or "Blue-Sky" laws of any jurisdiction; (h) fees and assessments of the Investment Company Institute or any successor organization; (i) such nonrecurring or extraordinary expenses as may arise, including litigation affecting Fund, and any indemnification by Fund of its officers, directors, employees and agents with respect thereto; (j) the costs and expenses provided for in any Shareholder Servicing Agreement or Accounting Services Agreement, including amendments thereto, contemplated by subsection C of this Section III. In the event that any of the foregoing shall, in the first instance, be paid by WRIMCO, Fund shall pay the same to WRIMCO on presentation of a statement with respect thereto. C. WRIMCO, or an affiliate of WRIMCO, may also act as (i) transfer agent or shareholder servicing agent of Fund and/or as (ii) accounting services agent of Fund if at the time in question there is a separate agreement, "Shareholder Servicing Agreement" and/or "Accounting Services Agreement," covering such functions between Fund and WRIMCO, or such affiliate. The entity, whether WRIMCO, or its affiliate, which is the party to either such Agreement with Fund is referred to as the "Agent." Each such Agreement shall provide in substance that it shall go into effect, or be amended, or a new agreement covering the same topics between Fund and the Agent may be entered into, only if the terms of such Agreement, such amendment or such new agreement have been approved by the Board of Directors of Fund, including the vote of a majority of the directors who are not "interested persons" as defined in the Investment Company Act of 1940, of either party to the Agreement, such amendment or such new agreement (considering WRIMCO to be such a party even if at the time in question the Agent is an affiliate of WRIMCO), cast in person at a meeting called for the purpose of voting on such approval. Such a vote is referred to as a "disinterested director" vote. Each such Agreement shall also provide in substance for its continuance, unless terminated, for a specified period which shall not exceed two years from the date of its execution and from year to year thereafter only if such continuance is specifically approved at least annually by a disinterested director vote, and that any disinterested director vote shall include a determination that (i) the Agreement, amendment, new agreement or continuance in question is in the best interests of Fund and its shareholders; (ii) the services to be performed under the Agreement, the Agreement as amended, new agreement or agreement to be continued are services required for the operation of Fund; (iii) the Agent can provide services the nature and quality of which are at least equal to those provided by others offering the same or similar services; and (iv) the fees for such services are fair and reasonable in light of the usual and customary charges made by others for services of the same nature and quality. Any such Agreement may also provide in substance that any disinterested director vote may be conditioned on the favorable vote of the holders of a majority (as defined in or under the Investment Company Act of 1940) of the outstanding shares of each class or series of Fund. Any such Agreement shall also provide in substance that it may be terminated by the Agent at any time without penalty upon giving Fund one hundred twenty (120) days' written notice (which notice may be waived by Fund) and may be terminated by Fund at any time without penalty upon giving the Agent sixty (60) days' written notice (which notice may be waived by the Agent), provided that such termination by Fund shall be directed or approved by the vote of a majority of the Board of Directors of Fund in office at the time or by the vote of the holders of a majority (as defined in or under the Investment Company Act of 1940) of the outstanding shares of each class or series of Fund. 3 IV. BROKERAGE A. WRIMCO may select brokers to effect the portfolio transactions of Fund on the basis of its estimate of their ability to obtain, for reasonable and competitive commissions, the best execution of particular and related portfolio transactions. For this purpose, "best execution" means prompt and reliable execution at the most favorable price obtainable. Such brokers may be selected on the basis of all relevant factors including the execution capabilities required by the transaction or transactions, the importance of speed, efficiency, or confidentiality, and the willingness of the broker to provide useful or desirable investment research and/or special execution services. WRIMCO shall have no duty to seek advance competitive commission bids and may select brokers based solely on its current knowledge of prevailing commission rates. B. Subject to the foregoing, WRIMCO shall have discretion, in the interest of Fund, to direct the execution of its portfolio transactions to brokers who provide brokerage and/or research services (as such services are defined in Section 28(e) of the Securities Exchange Act of 1934) for Fund and/or other accounts for which WRIMCO exercises "investment discretion" (as that term is defined in Section 3(a)(35) of the Securities Exchange Act of 1934); and in connection with such transactions, to pay commission in excess of the amount another adequately qualified broker would have charged if WRIMCO determines, in good faith, that such commission is reasonable in relation to the value of the brokerage and/or research services provided by such broker, viewed in terms of either that particular transaction or the overall responsibilities of WRIMCO with respect to the accounts for which it exercises investment discretion. In reaching such determination, WRIMCO will not be required to attempt to place a specified dollar amount on the brokerage and/or research services provided by such broker; provided that WRIMCO shall be prepared to demonstrate that such determinations were made in good faith, and that all commissions paid by Fund over a representative period selected by its Board of Directors were reasonable in relation to the benefits to Fund. C. Subject to the foregoing provisions of this Paragraph "IV," WRIMCO may also consider sales of Fund's shares and shares of investment companies distributed by Waddell & Reed, Inc. or one of its affiliates, and portfolio valuation or pricing services as a factor in the selection of brokers to execute brokerage and principal portfolio transactions. V. COMPENSATION OF WRIMCO A. As compensation in full for services rendered and for the facilities and personnel furnished under sections I, II, and IV of this Agreement, Fund will pay to WRIMCO for each day the fee specified in Exhibit A hereto. B. The amounts payable to WRIMCO shall be determined as of the close of business each day; shall, except as set forth below, be based upon the value of net assets computed in accordance with the Articles of Incorporation of Fund; and shall be paid in arrears whenever requested by WRIMCO. In computing the value of the net assets of Fund, there shall be excluded the amount owed to Fund with respect to shares which have been sold but not yet paid to Fund by Waddell & Reed, Inc. 4 VI. UNDERTAKINGS OF WRIMCO; LIABILITIES A. WRIMCO shall give to Fund the benefit of its best judgment, efforts and facilities in rendering advisory services hereunder. B. WRIMCO shall at all times be guided by and be subject to Fund's investment policies, the provisions of its Articles of Incorporation and Bylaws as each shall from time to time be amended, and to the decision and determination of Fund's Board of Directors. C. This Agreement shall be performed in accordance with the requirements of the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934, to the extent that the subject matter of this Agreement is within the purview of such Acts. Insofar as applicable to WRIMCO, as an investment adviser and affiliated person of Fund, WRIMCO shall comply with the provisions of the Investment Company Act of 1940, the Investment Advisers Act of 1940 and the respective rules and regulations of the Securities and Exchange Commission thereunder. D. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of WRIMCO, it shall not be subject to liability to Fund or to any stockholder of Fund for any act or omission in the course of or connected with rendering services thereunder or for any losses that may be sustained in the purchase, holding or sale of any security. VII. DURATION OF THIS AGREEMENT This Agreement shall become effective at the start of business on the date hereof and shall continue in effect, unless terminated as hereinafter provided, for a period of one year and from year-to-year thereafter only if such continuance is specifically approved at least annually by the Board of Directors, including the vote of a majority of the directors who are not parties to this Agreement or "interested persons" (as defined in the Investment Company Act of 1940) of any such party, cast in person at a meeting called for the purpose of voting on such approval, or by the vote of the holders of a majority (as so defined) of the outstanding voting securities of a series of Fund with respect to that series and by the vote of a majority of the directors who are not parties to this Agreement or "interested persons" (as so defined) of any such party, cast in person at a meeting called for the purpose of voting on such approval. VIII. TERMINATION This Agreement may be terminated by WRIMCO at any time without penalty upon giving Fund one hundred twenty (120) days written notice (which notice may be waived by Fund) and may be terminated by Fund at any time without penalty upon giving WRIMCO sixty (60) days written notice (which notice may be waived by WRIMCO), provided that such termination by Fund shall be directed or approved by the vote of a majority of the Board of Directors of Fund in office at the time or by the vote of a majority (as defined in the Investment Company Act of 1940) of the outstanding voting securities of Fund. This Agreement shall automatically terminate in the event of its assignment, the term "assignment" for this purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act of 1940 and the rules and regulations thereunder. 5 IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers and their corporate seal to be hereunto affixed, all as of the day and year first above written. (Seal) ------------------------------ (name of Fund) By: -------------------------- Name, Title ATTEST: By: ---------------------------------- Name, Title (Seal) WADDELL & REED INVESTMENT MANAGEMENT COMPANY By: -------------------------- Name, Title ATTEST: By: ---------------------------------- Name, Title 6 EXHIBIT A TO INVESTMENT MANAGEMENT AGREEMENT FEE SCHEDULES* FOR EACH OF THE FUNDS IN THE FUND COMPLEX WADDELL & REED ADVISORS ASSET STRATEGY FUND, INC. A cash fee computed each day on net asset value for the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $1 billion 0.70% of net assets Over $1 billion and up to $2 billion 0.65% of net assets Over $2 billion and up to $3 billion 0.60% of net assets Over $3 billion 0.55% of net assets
As Amended and Effective June 30, 1999. WADDELL & REED ADVISORS CASH MANAGEMENT, INC. A cash fee computed each day on net asset value for the Fund at the annual rate of 0.40% of net assets. As Amended and Effective June 30, 1999. WADDELL & REED ADVISORS CONTINENTAL INCOME FUND, INC. A cash fee computed each day on net asset value for the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $1 billion 0.70% of net assets Over $1 billion and up to $2 billion 0.65% of net assets Over $2 billion and up to $3 billion 0.60% of net assets Over $3 billion 0.55% of net assets
As Amended and Effective June 30, 1999. WADDELL & REED ADVISORS FUNDS, INC. 7 A cash fee computed each day on net asset value for each Fund at the annual rates listed below: ACCUMULATIVE FUND
Net Assets Fee - ---------- --- Up to $1 billion 0.70% of net assets Over $1 billion and up to $2 billion 0.65% of net assets Over $2 billion and up to $3 billion 0.60% of net assets Over $3 billion 0.55% of net assets
CORE INVESTMENT FUND
Net Assets Fee - ---------- --- Up to $1 billion 0.70% of net assets Over $1 billion and up to $2 billion 0.65% of net assets Over $2 billion and up to $3 billion 0.60% of net assets Over $3 billion up to $6 billion 0.55% of net assets Over $6 billion 0.50%
BOND FUND
Net Assets Fee - ---------- --- Up to $500 million 0.525% of net assets Over $500 million and up to $1 billion 0.50% of net assets Over $1 billion and up to $1.5 billion 0.45% of net assets Over $1.5 billion 0.40% of net assets
8 SCIENCE AND TECHNOLOGY FUND
Net Assets Fee - ---------- --- Up to $1 billion 0.85% of net assets Over $1 billion and up to $2 billion 0.83% of net assets Over $2 billion and up to $3 billion 0.80% of net assets Over $3 billion 0.76% of net assets
As Amended and Effective June 30, 1999. WADDELL & REED ADVISORS GLOBAL BOND FUND, INC. A cash fee computed each day on net asset value for the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $500 million 0.625% of net assets Over $500 million and up to $1 billion 0.60% of net assets Over $1 billion and up to $1.5 billion 0.55% of net assets Over $1.5 billion 0.50% of net assets
As Amended and Effective June 30, 1999. WADDELL & REED ADVISORS GOVERNMENT SECURITIES FUND, INC. A cash fee computed each day on net asset value for the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $500 million 0.50% of net assets Over $500 million and up to $1 billion 0.45% of net assets Over $1 billion and up to $1.5 billion 0.40% of net assets Over $1.5 billion 0.35% of net assets
As Amended and Effective June 30, 1999. 9 WADDELL & REED ADVISORS HIGH INCOME FUND, INC. A cash fee computed each day on net asset value for the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $500 million 0.625% of net assets Over $500 million and up to $1 billion 0.60% of net assets Over $1 billion and up to $1.5 billion 0.55% of net assets Over $1.5 billion 0.50% of net assets
As Amended and Effective June 30, 1999. WADDELL & REED ADVISORS INTERNATIONAL GROWTH FUND, INC. A cash fee computed each day on net asset value for the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $1 billion 0.85% of net assets Over $1 billion and up to $2 billion 0.83% of net assets Over $2 billion and up to $3 billion 0.80% of net assets Over $3 billion 0.76% of net assets
As Amended and Effective June 30, 1999. WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC. A cash fee computed each day on net asset value for the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $500 million 0.525% of net assets Over $500 million and up to $1 billion 0.50% of net assets Over $1 billion and up to $1.5 billion 0.45% of net assets Over $1.5 billion 0.40% of net assets
10 As Amended and Effective June 30, 1999. WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC. A cash fee computed each day on net asset value for the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $500 million 0.525% of net assets Over $500 million and up to $1 billion 0.50% of net assets Over $1 billion and up to $1.5 billion 0.45% of net assets Over $1.5 billion 0.40% of net assets
As Amended and Effective June 30, 1999. WADDELL & REED ADVISORS MUNICIPAL MONEY MARKET FUND, INC. A cash fee computed each day on net asset value for the Fund at the annual rate of 0.40% of net assets. Effective November 15, 2000. WADDELL & REED ADVISORS NEW CONCEPTS FUND, INC. A cash fee computed each day on net asset value for the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $1 billion 0.85% of net assets Over $1 billion and up to $2 billion 0.83% of net assets Over $2 billion and up to $3 billion 0.80% of net assets Over $3 billion 0.76% of net assets
As Amended and Effective June 30, 1999. WADDELL & REED ADVISORS RETIREMENT SHARES, INC. 11 A cash fee computed each day on net asset value for the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $1 billion 0.70% of net assets Over $1 billion and up to $2 billion 0.65% of net assets Over $2 billion and up to $3 billion 0.60% of net assets Over $3 billion 0.55% of net assets
As Amended and Effective June 30, 1999. WADDELL & REED ADVISORS SMALL CAP FUND, INC. A cash fee computed each day on the net assets of the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $1 billion 0.85% of net assets Over $1 billion and up to $2 billion 0.83% of net assets Over $2 billion and up to $3 billion 0.80% of net assets Over $3 billion 0.76% of net assets
Effective August 18, 1999. WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC. A cash fee computed each day on the net assets of the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $1 billion 0.65% of net assets Over $1 billion and up to $2 billion 0.60% of net assets Over $2 billion and up to $3 billion 0.55% of net assets Over $3 billion 0.50% of net assets
Effective February 25, 2000. 12 WADDELL & REED ADVISORS VALUE FUND, INC. A cash fee computed each day on the net assets of the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $1 billion 0.70% of net assets Over $1 billion and up to $2 billion 0.65% of net assets Over $2 billion and up to $3 billion 0.60% of net assets Over $3 billion 0.55% of net assets
Effective November 15, 2000. WADDELL & REED ADVISORS VANGUARD FUND, INC. A cash fee computed each day on net asset value for the Fund at the annual rates listed below:
Net Assets Fee - ---------- --- Up to $1 billion 0.70% of net assets Over $1 billion and up to $2 billion 0.65% of net assets Over $2 billion and up to $3 billion 0.60% of net assets Over $3 billion 0.55% of net assets
As Amended and Effective June 30, 1999. *If the Fund's net assets are less than $25 million, Waddell & Reed Investment Management Company has agreed to waive the management fee, subject to its right to change or modify this waiver. 13 EX-10.20 12 a2041359zex-10_20.txt INV. MGMT. AGREEMENT (W&R) Exhibit 10.20 INVESTMENT MANAGEMENT AGREEMENT THIS AGREEMENT, made this 31st day of August, 1992, by and between WADDELL & REED FUNDS, INC. (hereinafter called "Fund"), and WADDELL & REED INVESTMENT MANAGEMENT COMPANY, WITNESSETH: In consideration of the mutual promises and agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is hereby agreed by and between the parties hereto as follows: I. IN GENERAL Waddell & Reed Investment Management Company agrees to act as investment adviser to Fund with respect to the investment of its assets and in general to supervise the investments of Fund, subject at all times to the direction and control of the Board of Directors of Fund, all as more fully set forth herein. II. DUTIES OF WADDELL & REED INVESTMENT MANAGEMENT COMPANY WITH RESPECT TO INVESTMENT OF ASSETS OF FUND A. Waddell & Reed Investment Management Company shall regularly provide investment advice to Fund and shall, subject to the succeeding provisions of this section, continuously supervise the investment and reinvestment of cash, securities or other property comprising the assets of the investment portfolios of Fund; and in furtherance thereof, Waddell & Reed Investment Management Company shall: 1. obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or one or more of the portfolios of Fund, and whether concerning the individual companies whose securities are included in one or more of Fund's portfolios or the industries in which they engage, or with respect to securities which Waddell & Reed Investment Management Company considers desirable for inclusion in one or more of Fund's portfolios; 2. furnish continuously an investment program for each of the portfolios of Fund; 3. determine what securities shall be purchased or sold by Fund; 4. take, on behalf of Fund, all actions which appear to Waddell & Reed Investment Management Company necessary to carry into effect such investment programs and supervisory functions as aforesaid, including the placing of purchase and sale orders. B. Waddell & Reed Investment Management Company shall make appropriate and regular reports to the Board of Directors of Fund on the actions it takes pursuant to Section II.A. above. Any investment programs furnished by Waddell & Reed Investment Management Company under this section, or any supervisory function taken hereunder by Waddell & Reed Investment Management Company shall at all times conform to and be in accordance with any requirements imposed by: 1. the provisions of the Investment Company Act of 1940 and any rules or regulations in force thereunder; 2. any other applicable provision of law; 3. the provisions of the Articles of Incorporation of Fund as amended from time to time; 4. the provisions of the Bylaws of Fund as amended from time to time; 5. the terms of the registration statement of Fund, as amended from time to time, under the Securities Act of 1933 and the Investment Company Act of 1940. C. Any investment programs furnished by Waddell & Reed Investment Management Company under this section or any supervisory functions taken hereunder by Waddell & Reed Investment Management Company shall at all times be subject to any directions of the Board of Directors of Fund, its Executive Committee, or any committee or officer of Fund acting pursuant to authority given by the Board of Directors. III. ALLOCATION OF EXPENSES The expenses of Fund and the expenses of Waddell & Reed Investment Management Company in performing its functions under this Agreement shall be divided into two classes, to wit: (i) those expenses which will be paid in full by Waddell & Reed Investment Management Company as set forth in subparagraph "A" hereof, and (ii) those expenses which will be paid in full by Fund, as set forth in subparagraph "B" hereof. A. With respect to the duties of Waddell & Reed Investment Management Company under Section II above, it shall pay in full, except as to the brokerage and research services acquired through the allocation of commissions as provided in Section IV hereinafter, for (a) the salaries and employment benefits of all employees of Waddell & Reed Investment Management Company who are engaged in providing these advisory services; (b) adequate office space and suitable office equipment for such employees; and (c) all telephone and communications costs relating to such functions. In addition, Waddell & Reed Investment Management Company shall pay the fees and expenses of all directors of Fund who are employees of Waddell & Reed Investment Management Company or an affiliated corporation and the salaries and employment benefits of all officers of Fund who are affiliated persons of Waddell & Reed Investment Management Company. 2 B. Fund shall pay in full for all of its expenses which are not listed above (other than those assumed by Waddell & Reed Investment Management Company or one of its affiliates in its capacity as principal underwriter of the shares of Fund, as Shareholder Servicing Agent or as Accounting Services Agent for Fund), including (a) the costs of preparing and printing prospectuses and reports to shareholders of Fund, including mailing costs; (b) the costs of printing all proxy statements and all other costs and expenses of meetings of shareholders of Fund (unless Fund and Waddell & Reed Investment Management Company shall otherwise agree); (c) interest, taxes, brokerage commissions and premiums on fidelity and other insurance; (d) audit fees and expenses of independent accountants and legal fees and expenses of attorneys, but not of attorneys who are employees of Waddell & Reed Investment Management Company or an affiliated company; (e) fees and expenses of its directors not affiliated with Waddell & Reed, Inc.; (f) custodian fees and expenses; (g) fees payable by Fund under the Securities Act of 1933, the Investment Company Act of 1940, and the securities or "Blue-Sky" laws of any jurisdiction; (h) fees and assessments of the Investment Company Institute or any successor organization; (i) such nonrecurring or extraordinary expenses as may arise, including litigation affecting Fund, and any indemnification by Fund of its officers, directors, employees and agents with respect thereto; (j) the costs and expenses provided for in any Shareholder Servicing Agreement or Accounting Services Agreement, including amendments thereto, contemplated by subsection C of this Section III. In the event that any of the foregoing shall, in the first instance, be paid by Waddell & Reed Investment Management Company, Fund shall pay the same to Waddell & Reed Investment Management Company on presentation of a statement with respect thereto. C. Waddell & Reed Investment Management Company or an affiliate of Waddell & Reed Investment Management Company, may also act as (i) transfer agent or shareholder servicing agent of Fund and/or as (ii) accounting services agent of Fund if at the time in question there is a separate agreement, "Shareholder Servicing Agreement" and/or "Accounting Services Agreement," covering such functions between Fund and Waddell & Reed Investment Management Company, or such affiliate. The corporation, whether Waddell & Reed Investment Management Company, or its affiliate, which is the party to either such Agreement with Fund is referred to as the "Agent." Each such Agreement shall provide in substance that it shall go into effect, or be amended, or a new agreement covering the same topics between Fund and the Agent may be entered into, only if the terms of such Agreement, such amendment or such new agreement have been approved by the Board of Directors of Fund, including the vote of a majority of the directors who are not "interested persons" as defined in the Investment Company Act of 1940, of either party to the Agreement, such amendment or such new agreement (considering Waddell & Reed Investment Management Company to be such a party even if at the time in question the Agent is an affiliate of Waddell & Reed Investment Management Company), cast in person at a meeting called for the purpose of voting on such approval. Such a vote is referred to as a "disinterested director" vote. Each such Agreement shall also provide in substance for its continuance, unless terminated, for a specified period which shall not exceed two years from the date of its execution and from year to year thereafter only if such continuance is specifically approved at least annually by a disinterested director vote, and that any disinterested director vote shall include a determination that (i) the Agreement, amendment, new agreement or continuance in question is in the best interests of Fund and its shareholders; (ii) the services to be performed under the Agreement, the Agreement as amended, new agreement or agreement to be continued are services required for the operation of Fund; (iii) the Agent can provide services the nature and quality of which are at least equal to those provided by others offering the same or similar services; and (iv) the fees for such services are fair and reasonable in 3 light of the usual and customary charges made by others for services of the same nature and quality. Any such Agreement may also provide in substance that any disinterested director vote may be conditioned on the favorable vote of the holders of a majority (as defined in or under the Investment Company Act of 1940) of the outstanding shares of each class or series of Fund. Any such Agreement shall also provide in substance that it may be terminated by the Agent at any time without penalty upon giving Fund one hundred twenty (120) days' written notice (which notice may be waived by Fund) and may be terminated by Fund at any time without penalty upon giving the Agent sixty (60) days' written notice (which notice may be waived by the Agent), provided that such termination by Fund shall be directed or approved by the vote of a majority of the Board of Directors of Fund in office at the time or by the vote of the holders of a majority (as defined in or under the Investment Company Act of 1940) of the outstanding shares of each class or series of Fund. IV. BROKERAGE (a) Waddell & Reed Investment Management Company may select brokers to effect the portfolio transactions of Fund on the basis of its estimate of their ability to obtain, for reasonable and competitive commissions, the best execution of particular and related portfolio transactions. For this purpose, "best execution" means prompt and reliable execution at the most favorable price obtainable. Such brokers may be selected on the basis of all relevant factors including the execution capabilities required by the transaction or transactions, the importance of speed, efficiency, or confidentiality, and the willingness of the broker to provide useful or desirable investment research and/or special execution services. Waddell & Reed Investment Management Company shall have no duty to seek advance competitive commission bids and may select brokers based solely on its current knowledge of prevailing commission rates. (b) Subject to the foregoing, Waddell & Reed Investment Management Company shall have discretion, in the interest of Fund, to direct the execution of its portfolio transactions to brokers who provide brokerage and/or research services (as such services are defined in Section 28(e) of the Securities Exchange Act of 1934) for Fund and/or other accounts for which Waddell & Reed Investment Management Company or one or more of its affiliates exercise "investment discretion" (as that term is defined in Section 3(a)(35) of the Securities Exchange Act of 1934); and in connection with such transactions, to pay commission in excess of the amount another adequately qualified broker would have charged if Waddell & Reed Investment Management Company determines, in good faith, that such commission is reasonable in relation to the value of the brokerage and/or research services provided by such broker, viewed in terms of either that particular transaction or the overall responsibilities of Waddell & Reed Investment Management Company and its investment advisory affiliates with respect to the accounts for which they exercise investment discretion. In reaching such determination, Waddell & Reed Investment Management Company will not be required to attempt to place a specified dollar amount on the brokerage and/or research services provided by such broker; provided that Waddell & Reed Investment Management Company shall be prepared to demonstrate that such determinations were made in good faith, and that all commissions paid by Fund over a representative period selected by its Board of Directors were reasonable in relation to the benefits to Fund. (c) Subject to the foregoing provisions of this Paragraph "IV," Waddell & Reed Investment Management Company may also consider sales of Fund's shares and 4 shares of investment companies distributed by Waddell & Reed, Inc. or one of its affiliates, and portfolio valuation or pricing services as a factor in the selection of brokers to execute brokerage and principal portfolio transactions. V. COMPENSATION OF WADDELL & REED INVESTMENT MANAGEMENT COMPANY As compensation in full for services rendered and for the facilities and personnel furnished under sections I, II, and IV of this Agreement, Fund will pay to Waddell & Reed Investment Management Company for each day the fees specified in Exhibit A hereto. The amounts payable to Waddell & Reed Investment Management Company shall be determined as of the close of business each day; shall, except as set forth below, be based upon the value of net assets computed in accordance with the Articles of Incorporation of Fund; and shall be paid in arrears whenever requested by Waddell & Reed Investment Management Company. In computing the value of the net assets of Fund, there shall be excluded the amount owed to Fund with respect to shares which have been sold but not yet paid to Fund by Waddell & Reed, Inc. Notwithstanding the foregoing, if the laws, regulations or policies of any state in which shares of Fund are qualified for sale limit the operation and management expenses of Fund, Waddell & Reed Investment Management Company will refund to Fund the amount by which such expenses exceed the lowest of such state limitations. VI. UNDERTAKINGS OF WADDELL & REED INVESTMENT MANAGEMENT COMPANY; LIABILITIES Waddell & Reed Investment Management Company shall give to Fund the benefit of its best judgment, efforts and facilities in rendering advisory services hereunder. Waddell & Reed Investment Management Company shall at all times be guided by and be subject to Fund's investment policies, the provisions of its Articles of Incorporation and Bylaws as each shall from time to time be amended, and to the decision and determination of Fund's Board of Directors. This Agreement shall be performed in accordance with the requirements of the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934, to the extent that the subject matter of this Agreement is within the purview of such Acts. Insofar as applicable to Waddell & Reed Investment Management Company, as an investment adviser and affiliated person of Fund, Waddell & Reed Investment Management Company shall comply with the provisions of the Investment Company Act of 1940, the Investment Advisers Act of 1940 and the respective rules and regulations of the Securities and Exchange Commission thereunder. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of Waddell & Reed Investment Management Company, it shall not be subject to liability to Fund or to any 5 stockholder of Fund for any act or omission in the course of or connected with rendering services thereunder or for any losses that may be sustained in the purchase, holding or sale of any security. VII. DURATION OF THIS AGREEMENT This Agreement shall become effective at the start of business on the date hereof and shall continue in effect, unless terminated as hereinafter provided, for a period of one year and from year-to-year thereafter only if such continuance is specifically approved at least annually by the Board of Directors, including the vote of a majority of the directors who are not parties to this Agreement or "interested persons" (as defined in the Investment Company Act of 1940) of any such party, cast in person at a meeting called for the purpose of voting on such approval, or by the vote of the holders of a majority (as so defined) of the outstanding voting securities of each class or series of Fund and by the vote of a majority of the directors who are not parties to this Agreement or "interested persons" (as so defined) of any such party, cast in person at a meeting called for the purpose of voting on such approval. VIII. TERMINATION This Agreement may be terminated by Waddell & Reed Investment Management Company at any time without penalty upon giving Fund one hundred twenty (120) days' written notice (which notice may be waived by Fund) and may be terminated by Fund at any time without penalty upon giving Waddell & Reed Investment Management Company sixty (60) days' written notice (which notice may be waived by Waddell & Reed Investment Management Company), provided that such termination by Fund shall be directed or approved by the vote of a majority of the Board of Directors of Fund in office at the time or by the vote of a majority (as defined in the Investment Company Act of 1940) of the outstanding voting securities of Fund. This Agreement shall automatically terminate in the event of its assignment, the term "assignment" for this purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act of 1940 and the rules and regulations thereunder. IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers and their corporate seal to be hereunto affixed, all as of the day and year first above written. (Seal) WADDELL & REED FUNDS, INC. By: /s/Rodney O. McWhinney ----------------------- Rodney O. McWhinney Vice President ATTEST: By: /s/Sharon K. Pappas ------------------- Sharon K. Pappas Secretary 6 (Seal) WADDELL & REED INVESTMENT MANAGEMENT COMPANY By: /s/Robert L. Hechler ------------------------ Robert L. Hechler Executive Vice President ATTEST: By: /s/Rodney O. McWhinney ---------------------- Rodney O. McWhinney Secretary 7 EXHIBIT A TO INVESTMENT MANAGEMENT AGREEMENT W&R FUNDS, INC. FEE SCHEDULES A cash fee computed each day on net asset value for each Fund at the annual rates listed below*: ASSET STRATEGY FUND
Net Assets Fee - ---------- --- Up to $1 billion 0.70% of net assets Over $1 billion and up to $2 billion 0.65% of net assets Over $2 billion and up to $3 billion 0.60% of net assets Over $3 billion 0.55% of net assets
CORE EQUITY FUND
Net Assets Fee - ---------- --- Up to $1 billion 0.70% of net assets Over $1 billion and up to $2 billion 0.65% of net assets Over $2 billion and up to $3 billion 0.60% of net assets Over $3 billion 0.55% of net assets
HIGH INCOME FUND
Net Assets Fee - ---------- --- Up to $500 million 0.625% of net assets Over $500 million and up to $1 billion 0.60% of net assets Over $1 billion and up to $1.5 billion 0.55% of net assets Over $1.5 billion 0.50% of net assets
8 INTERNATIONAL GROWTH FUND
Net Assets Fee - ---------- --- Up to $1 billion 0.85% of net assets Over $1 billion and up to $2 billion 0.83% of net assets Over $2 billion and up to $3 billion 0.80% of net assets Over $3 billion 0.76% of net assets
LARGE CAP GROWTH FUND
Net Assets Fee - ---------- --- Up to $1 billion 0.70% of net assets Over $1 billion and up to $2 billion 0.65% of net assets Over $2 billion and up to $3 billion 0.60% of net assets Over $3 billion 0.55% of net assets
LIMITED-TERM BOND FUND
Net Assets Fee - ---------- --- Up to $500 million 0.50% of net assets Over $500 million and up to $1 billion 0.45% of net assets Over $1 billion and up to $1.5 billion 0.40% of net assets Over $1.5 billion 0.35% of net assets
MID CAP GROWTH FUND
Net Assets Fee - ---------- --- Up to $1 billion 0.85% of net assets Over $1 billion and up to $2 billion 0.83% of net assets Over $2 billion and up to $3 billion 0.80% of net assets Over $3 billion 0.76% of net assets
9 MONEY MARKET FUND A cash fee computed each day on net asset value for the Fund at the annual rate of 0.40% of net assets. MUNICIPAL BOND FUND
Net Assets Fee - ---------- --- Up to $500 million 0.525% of net assets Over $500 million and up to $1 billion 0.50% of net assets Over $1 billion and up to $1.5 billion 0.45% of net assets Over $1.5 billion 0.40% of net assets
SCIENCE AND TECHNOLOGY FUND
Net Assets Fee - ---------- --- Up to $1 billion 0.85% of net assets Over $1 billion and up to $2 billion 0.83% of net assets Over $2 billion and up to $3 billion 0.80% of net assets Over $3 billion 0.76% of net assets
SMALL CAP GROWTH FUND
Net Assets Fee - ---------- --- Up to $1 billion 0.85% of net assets Over $1 billion and up to $2 billion 0.83% of net assets Over $2 billion and up to $3 billion 0.80% of net assets Over $3 billion 0.76% of net assets
10 TAX-MANAGED EQUITY FUND
Net Assets Fee - ---------- --- Up to $1 billion 0.65% of net assets Over $1 billion and up to $2 billion 0.60% of net assets Over $2 billion and up to $3 billion 0.55% of net assets Over $3 billion 0.50% of net assets
*If a Fund's net assets are less than $25 million, Waddell & Reed Investment Management Company has agreed to voluntarily waive the management fee, subject to its right to change or modify this waiver. As Amended and Effective June 30, 2000. 11 EX-10.21 13 a2041359zex-10_21.txt INV. MGMT. AGREEMENT (TMK) Exhibit 10.21 INVESTMENT MANAGEMENT AGREEMENT AGREEMENT made this 1st day of July, 1990, by and between TMK/UNITED FUNDS, INC. (hereinafter called "United", and WADDELL & REED, INC. WITNESSETH: In consideration of the mutual promises and agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is hereby agreed by and between the parties hereto as follows: I. IN GENERAL. Waddell & Reed, Inc., agrees to act as investment adviser to United with respect to the investment of its assets and in general to supervise the investments of United, subject at all times to the direction and control of the Board of Directors of United, all as more fully set forth herein. II. DUTIES OF WADDELL & REED, INC., WITH RESPECT TO INVESTMENT OF ASSETS OF UNITED. A. Waddell & Reed Inc., shall regularly provide investment advice to United and shall, subject to the succeeding provisions of this section, continuously supervise the investment and reinvestment of cash, securities or other property comprising the assets of the investment portfolios of United; and in furtherance thereof, Waddell & Reed, Inc., shall: 1. obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or one or more of the portfolios of United, and whether concerning the individual companies whose securities are included in United's portfolios or the industries in which they engage, or with respect to securities which Waddell & Reed, Inc., considers desirable for inclusion in United's portfolios; 2. furnish continuously an investment program for each of the portfolios of United; 3. determine what securities shall be purchased or sold by United; 4. take, on behalf of United, all actions which appear to Waddell & Reed, Inc., necessary to carry into effect such investment programs and supervisory functions as aforesaid, including the placing of purchase and sale orders. B. Waddell & Reed, Inc., shall make appropriate and regular reports to the Board of Directors of United on the actions it takes pursuant to Section II.A. above. Any investment programs furnished by Waddell & Reed, Inc., under this section, or any supervisory function taken hereunder by Waddell & Reed, Inc., shall at all times conform to and be in accordance with any requirements imposed by: 1. the provisions of the Investment Company Act of 1940 and any rules or regulations in force thereunder; 2. any other applicable provision of law; 3. the provisions of the Articles of Incorporation of United as amended from time to time; 4. the provisions of the Bylaws of United as amended from time to time; 5. the terms of the registration statements of United, as amended from time to time, under the Securities Act of 1933 and the Investment Company Act of 1940. C. Any investment programs furnished by Waddell & Reed, Inc., under this section or any supervisory functions taken hereunder by Waddell & Reed, Inc., shall at all times be subject to any directions of the Board of Directors of United, its Executive Committee, or any committee or officer of United acting pursuant to authority given by the Board of Directors. III. ALLOCATION OF EXPENSES. The expenses of United and the expenses of Waddell & Reed, Inc., in performing its functions under this Agreement shall be divided into two classes, to wit: (i) those expenses which will be paid in full by Waddell & Reed, Inc., as set forth in subparagraph "A" hereof, and (ii) those expenses which will be paid in full by United, as set forth in subparagraph "B" hereof. A. With respect to the duties of Waddell & Reed, Inc., under Section II above, it shall pay in full, except as to the brokerage and research services acquired through the allocation of commissions as provided in Section IV hereinafter, for (a) the salaries and employment benefits of all employees of Waddell & Reed, Inc. who are engaged in providing these advisory services; (b) adequate office space and suitable office equipment for such employees; and (c) all telephone and communications costs relating to such functions. In addition, Waddell & Reed, Inc., shall pay the fees and expenses of all directors of United who are employees of Waddell & Reed, Inc., or an affiliated corporation and the salaries and employment benefits of all officers of United who are affiliated persons of Waddell & Reed, Inc. B. United shall pay in full for all of its expenses which are not listed above (other than those assumed by Waddell & Reed, Inc., or its affiliates in its capacity as Accounting Services Agent for United), including (a) the costs of preparing and printing prospectuses and reports to shareholders of United including mailing costs; (b) the costs of printing all proxy statements and all other costs and expenses of meetings of shareholders of United; (c) interest, taxes, brokerage commission and premiums on fidelity and other insurance; (d) audit fees and expenses of independent accountants and legal fees and expenses of attorneys, but not of attorneys who are employees of Waddell & Reed, Inc.; (e) fees and expenses of its directors; (f) custodian fees and expenses; (g) fees payable by United under the Securities Act of 1933, the Investment Company Act of 1940, and the securities or "Blue-Sky" laws of any jurisdiction; (h) fees and assessments of the Investment Company Institute or any successor organization; (i) such nonrecurring or extraordinary expenses as may arise, including litigation affecting United and any indemnification by United of its officers, directors, employees and agents with respect thereto; (j) the costs and expenses of maintaining shareholder records and processing transactions for the issuance and redemption of its shares; and (k) the costs and expenses provided for in any Accounting Services Agreement, including amendments thereto, contemplated by subsection C of this section III. C. Waddell & Reed, Inc., or an affiliate of Waddell & Reed, Inc., may also act as accounting services agent of United if at the time in question there is a separate agreement, "Accounting Services Agreement," covering such functions between United and Waddell & Reed, Inc., or such affiliate. The corporation, whether Waddell & Reed, Inc., or its affiliate, which is the party to such Agreement with United is referred to as the "Agent." Any such Agreement shall provide in substance that it shall not go into effect, or may be amended, or a new agreement covering the same topics between United and the Agent may be entered into only if the terms of such Agreement, such amendment or such new agreement have been approved by the Board of Directors of United, including the vote of a majority of the directors who are not "interested persons" as defined in the Investment Company Act of 1940, of either party to the Agreement, such amendment or such new agreement (considering Waddell & Reed, Inc., to be such a party even if at the time in question the Agent is an affiliate of Waddell & Reed, Inc.), cast in person at a meeting called for the purpose of voting on such approval. Such a vote is referrer to as a "disinterested director" vote. Any such Agreement shall also provide in substance for its continuance, unless terminated, for a specified period which shall not exceed two years from the date of its execution and from year to year thereafter only if such continuance is specifically approved at least annually by a disinterested director vote, and that any disinterested director vote shall include a determination that (i) the Agreement, amendment, new agreement or continuance in question is in the best interests of United and its shareholders; (ii) the services to be performed under the Agreement, the Agreement as amended, new agreement or agreement to be continued are services required for the operation of United; (iii) the Agent can provide services the nature and quality of which are at least equal to those provided by others offering the same or similar services; and (iv) the fees for such services are fair and reasonable in light of the usual and customary charges made by others for services of the same nature and quality. Any such Agreement may also provide in substance that any disinterested director vote may be conditioned on the favorable vote of the holders of a majority (as defined in or under the Investment Company Act of 1940) of the outstanding shares of each class of United. Any such Agreement shall also provide in substance that it may be terminated by the Agent at any time without penalty upon giving United one hundred twenty (120) days' written notice (which notice may be waived by United) and may be terminated by United at any time without penalty upon giving the Agent sixty (60) days' written notice (which notice may be waived by the Agent), provided that such termination by United shall be directed or approved by the vote of a majority of the Board of Directors of United in office at the time or by the vote of the holders of a majority (as defined in or under the Investment Company Act of 1940) of the outstanding shares of each class of United. IV. BROKERAGE. (a) Waddell & Reed, Inc., may select brokers to effect the portfolio transactions of United on the basis of its estimate of their ability to obtain, for reasonable and competitive commissions, the best execution of particular and related portfolio transactions. For this purpose, "best execution" means prompt and reliable execution at the most favorable price obtainable. Such brokers may be selected on the basis of all relevant factors including the execution capabilities required by the transaction or transactions, the importance of speed, efficiency, or confidentiality, and the willingness of the broker to provide useful or desirable investment research and/or special execution services. Waddell & Reed, Inc., shall have no duty to seek advance competitive commission bids and may select brokers based solely on its current knowledge of prevailing commission rates. (b) Subject to the foregoing, Waddell & Reed, Inc., shall have discretion, in the interest of United, to direct the execution of its portfolio transactions to brokers who provide brokerage and/or research services (as such services are defined in Section 28(e) of the Securities Exchange Act of 1934) for United and/or other accounts for which Waddell & Reed, Inc., and its affiliates exercise "investment discretion" (as that term is defined in Section 3(a)(35) of the Securities Act of 1934); and in connection with such transactions, to pay commission in excess of the amount another adequately qualified broker would have charged if Waddell & Reed, Inc., determines, in good faith, that such commission is reasonable in relation to the value of the brokerage and/or research services provided by such broker, viewed in terms of either that particular transaction or the overall responsibilities of Waddell & Reed, Inc., and its investment advisory affiliates with respect to the accounts for which they exercise investment discretion. In reaching such determination, Waddell & Reed, Inc., will not be required to attempt to place a specified dollar amount on the brokerage and/or research services provided by such broker; provided that Waddell & Reed, Inc., shall be prepared to demonstrate that such determinations were made in good faith, and that all commissions paid by United over a representative period selected by its Board of Directors were reasonable in relation to the benefits to United. (c) Subject to the foregoing provisions of this Paragraph "IV," Waddell & Reed, Inc., may also consider sales of insurance policies funded by United's shares and sales of shares of investment companies distributed by Waddell & Reed, Inc., or its affiliates, and portfolio valuation or pricing services as a factor in the selection of brokers to execute brokerage and principal portfolio transactions. V. COMPENSATION OF WADDELL & REED, INC. As compensation in full for services rendered and for the facilities and personnel furnished under sections I, II, and IV of this Agreement, United will pay to Waddell & Reed, Inc., for each day the fees specified in Exhibit A hereto. The amounts payable to Waddell & Reed, Inc., shall be determined as of the close of business each day; shall, except as set forth below, be based upon the value of net assets computed in accordance with the Articles of Incorporation of United; and shall be paid in arrears whenever requested by Waddell & Reed, Inc. Notwithstanding the foregoing, if the laws, regulations or policies of any state in which shares of United are qualified for sale limit the operation and management expenses of United, Waddell & Reed, Inc., will refund to United the amount by which such expenses exceed the lowest of such state limitations. VI. UNDERTAKINGS OF WADDELL & REED, INC.; LIABILITIES. Waddell & Reed, Inc., shall give to United the benefit of its best judgment, efforts and facilities in rendering advisory services hereunder. Waddell & Reed, Inc., shall at all times be guided by and be subject to United's investment policies, the provisions of its Articles of Incorporation and Bylaws as each shall from time to time be amended, and to the decision and determination of United's Board of Directors. This Agreement shall be performed in accordance with the requirements of the Investment Company Act of 1940, the Investment Advisors Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934, to the extent that the subject matter of this Agreement is within the purview of such Acts. Insofar as applicable to Waddell & Reed, Inc., as an investment adviser and affiliated person of United, Waddell & Reed, Inc., shall comply with the provisions of the Investment Company Act of 1940, the Investment Advisers Act of 1940 and the respective rules and regulations of the Securities and Exchange Commission thereunder. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of Waddell & Reed, Inc., it shall not be subject to liability to United or to any stockholder of United (direct of beneficial) for any act or omission in the course of or connected with rendering services thereunder or for any losses that may be sustained in the purchase, holding or sale of any security. VII. DURATION OF THIS AGREEMENT. This Agreement shall become effective at the start of business on the date hereof and shall continue in effect, unless terminated as hereinafter provided, for a period of one year and from year-to-year thereafter only if such continuance is specifically approved at least annually by the Board of Directors, including the vote of a majority of the directors who are not parties to this Agreement or "interested persons" (as defined in the Investment Company Act of 1940) of any such party, cast in person at a meeting called for the purpose of voting on such approval, or by the vote of the holders of a majority (as so defined) of the outstanding voting securities of each class of United and by the vote of a majority of the directors who are not parties to this Agreement or "interested persons" (as so defined) of any such party, cast in person at a meeting called for the purpose of voting on such approval. VIII. TERMINATION. This Agreement may be terminated by Waddell & Reed, Inc., at any time without penalty upon giving United one hundred twenty (120) days' written notice (which notice may be waived by United) and may be terminated by United at any time without penalty upon giving Waddell & Reed, Inc. sixty (60) days' written notice (which notice may be waived by Waddell & Reed, Inc.), provided that such termination by United shall be directed or approved by the vote of a majority of the Board of Directors of United in office at the time or by the vote of a majority (as defined in the Investment Company Act of 1940) of the outstanding voting securities of United. This Agreement shall automatically terminate in the event of its assignment, the term "assignment" for this purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act of 1940 and the rules and regulations thereunder. IN WITNESS WHEREROF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers and their corporate seal to be hereunto affixed, all as of the day and year first above written. (Seal) TMK/UNITED FUNDS, INC. By: /s/Rodney O. McWhinney ---------------------- Rodney O. McWhinney Vice President ATTEST: /s/Sharon K. Pappas - ------------------- Sharon K. Pappas Secretary (Seal) WADDELL & REED, INC. By: /s/Robert L. Hechler -------------------- Robert L. Hechler Executive Vice President ATTEST: /s/Rodney O. McWhinney - ---------------------- Rodney O. McWhinney Secretary EXHIBIT A TO INVESTMENT MANAGEMENT AGREEMENT TARGET/UNITED FUNDS, INC. FEE SCHEDULE A cash fee computed each day on net asset value for each Portfolio at the annual rates listed below*: ASSET STRATEGY PORTFOLIO
Net Assets Fee - ---------- --- Up to $1 billion 0.70% Over $1 billion and up to $2 billion 0.65% Over $2 billion and up to $3 billion 0.60% Over $3 billion 0.55%
BALANCED PORTFOLIO
Net Assets Fee - ---------- --- Up to $1 billion 0.70% Over $1 billion and up to $2 billion 0.65% Over $2 billion and up to $3 billion 0.60% Over $3 billion 0.55%
BOND PORTFOLIO
Net Assets Fee - ---------- --- Up to $500 million 0.525% Over $500 million and up to $1 billion 0.50% Over $1 billion and up to $1.5 billion 0.45% Over $1.5 billion 0.40%
CORE EQUITY PORTFOLIO
Net Assets Fee - ---------- --- Up to $1 billion 0.70% Over $1 billion and up to $2 billion 0.65% Over $2 billion and up to $3 billion 0.60% Over $3 billion 0.55%
GROWTH PORTFOLIO
Net Assets Fee - ---------- --- Up to $1 billion 0.70% Over $1 billion and up to $2 billion 0.65% Over $2 billion and up to $3 billion 0.60% Over $3 billion 0.55%
HIGH INCOME PORTFOLIO
Net Assets Fee - ---------- --- Up to $500 million 0.625% Over $500 million and up to $1 billion 0.60% Over $1 billion and up to $1.5 billion 0.55% Over $1.5 billion 0.50%
INTERNATIONAL PORTFOLIO
Net Assets Fee - ---------- --- Up to $1 billion 0.85% Over $1 billion and up to $2 billion 0.83% Over $2 billion and up to $3 billion 0.80% Over $3 billion 0.76%
LIMITED-TERM BOND PORTFOLIO
Net Assets Fee - ---------- --- Up to $500 million 0.50% Over $500 million and up to $1 billion 0.45% Over $1 billion and up to $1.5 billion 0.40% Over $1.5 billion 0.35%
MONEY MARKET PORTFOLIO A cash fee computed each day on net asset values for the Portfolio at the annual rate of 0.40% of net assets. SCIENCE & TECHNOLOGY PORTFOLIO
Net Assets Fee - ---------- --- Up to $1 billion 0.85% Over $1 billion and up to $2 billion 0.83% Over $2 billion and up to $3 billion 0.80% Over $3 billion 0.76%
SMALL CAP PORTFOLIO
Net Assets Fee - ---------- --- Up to $1 billion 0.85% Over $1 billion and up to $2 billion 0.83% Over $2 billion and up to $3 billion 0.80% Over $3 billion 0.76%
VALUE PORTFOLIO
Net Assets Fee - ---------- --- Up to $1 billion 0.70% Over $1 billion and up to $2 billion 0.65% Over $2 billion and up to $3 billion 0.60% Over $3 billion 0.55%
*If a Portfolio's net assets are less than $25 million, Waddell & Reed Investment Management Company has agreed to voluntarily waive the management fee, subject to its right to change or modify this waiver. As Amended and Effective February 14, 2001. EX-10.22 14 a2041359zex-10_22.txt SHAREHOLDER SERVICING AGREEMENT Exhibit 10.22 SHAREHOLDER SERVICING AGREEMENT THIS AGREEMENT, made as of the ____ day of _____________, 2000, by and between ________________________________________ (the "Company"), and Waddell & Reed Services Company (the "Agent"), W I T N E S S E T H : WHEREAS, The Company wishes, as applicable, to appoint the Agent or to continue the appointment of the Agent to be its shareholder servicing agent upon, and subject to, the terms and provisions of this Agreement; NOW THEREFORE, in consideration of the mutual covenants contained in this Agreement, the parties agree as follows: 1. Appointment of Agent as Shareholder Servicing Agent for the Company; Acceptance. (1) The Company hereby appoints the Agent to act as Shareholder Servicing Agent for the Company upon, and subject to, the terms and provisions of this Agreement. (2) The Agent hereby accepts the appointment as Shareholder Servicing Agent for the Company and agrees to act as such upon, and subject to, the terms and provisions of this Agreement. (3) The Agent may appoint an entity or entities approved by the Company in writing to perform any portion of Agent's duties hereunder (the "Subagent"). 2. Definitions. (1) In this Agreement - (a) The term the "Act" means the Investment Company Act of 1940 as amended from time to time; (b) The term "account" means the shares of the Company registered on the books of the Company in the name of a shareholder under a particular account registration number and includes shares subject to instructions by the shareholder with respect to periodic redemptions and/or reinvestment in additional shares of any dividends payable on said shares; (c) The term "affiliate" of a person shall mean a person controlling, controlled by, or under common control with that person; (d) The term "Class" shall mean each separate sub-class of a class of shares of the Company, as may now or in the future exist; (e) The term "Fund" shall mean each separate class of shares of the Company, as may now or in the future exist; (f) The term "officers' instruction" means an instruction given on behalf of the Company to the Agent and signed on behalf of the Company by any one or more persons authorized to do so by the Company's Board of Directors; (g) The term "prospectus" means the prospectus and Statement of Additional Information of the applicable Fund or Class from time to time in effect; (h) The term "shares" means shares including fractional shares of capital stock of the Company, whether or not such shares are evidenced by an outstanding stock certificate issued by the Company; (i) The term "shareholder" shall mean the owner of record of shares of the Company; (j) The term "stock certificate" means a certificate representing shares in the form then currently in use by the Company. 3. Duties of the Agent. The Agent shall perform such duties as shall be set forth in this paragraph 3 and in accordance with the practice stated in Exhibit A of this Agreement or any amendment thereof, any or all of which duties may be delegated to or performed by one or more Subagents pursuant to Paragraph (3) above. (1) Transfers. Subject to the provisions of this Agreement the Agent hereby agrees to perform the following functions as transfer agent for the Company: (a) Recording the ownership, transfer, exchange and cancellation of ownership of shares of the Company on the books of the Company; (b) Causing the issuance, transfer, exchange and cancellation of stock certificates; (c) Establishing and maintaining records of accounts; (d) Computing and causing to be prepared and mailed or otherwise delivered to shareholders payment checks and notices of reinvestment in additional shares of dividends, stock dividends or stock splits declared by the Company on shares and of redemption proceeds due by the Company on redemption of shares; (e) Furnishing to shareholders such information as may be reasonably required by the Company, including appropriate income tax information; 2 (f) Addressing and mailing to shareholders prospectuses, annual and semi-annual reports and proxy materials for shareholder meetings prepared by or on behalf of the Company; (g) Replacing allegedly lost, stolen or destroyed stock certificates in accordance with and subject to procedures and conditions agreed upon and set out in officers' instructions; (h) Maintaining such books and records relating to transactions effected by the Agent pursuant to this Agreement as are required by the Act, or by rules or regulations thereunder, or by any other applicable provisions of law, to be maintained by the Company or its transfer agent with respect to such transactions; preserving, or causing to be preserved, any such books and records for such periods as may be required by any such law, rule or regulation; furnishing the Company such information as to such transactions and at such time as may be reasonably required by it to comply with applicable laws and regulations; (i) Providing such services and carrying out such responsibilities on behalf of the Company, or imposed on the Agent as the Company's transfer agent, not otherwise expressly provided for in this Paragraph 3, as may be required by or be reasonably necessary to comply with any statute, act, governmental rule, regulation or directive or court order, including, without limitation, the requirements imposed by the Tax Equity and Fiscal Responsibility Act of 1982 and the Income and Dividend Tax Compliance Act of 1983 relating to the withholding of tax from distributions to shareholders. (2) Correspondence. The Agent agrees to deal with and answer all correspondence from or on behalf of shareholders relating to its functions under this Agreement. 4. Compensation of the Agent. The Company agrees to pay the Agent for its services under this Agreement in accordance with the schedule as then in effect set forth in Exhibit B of this Agreement or any amendment thereof. In addition, the Company agrees to reimburse the Agent for the following "out-of-pocket" expenses of the Agent within five days after receipt of an itemized statement of such expenses, to the extent that payment of such expenses has not been or is not to be made directly by the Company: (i) costs of stationery, appropriate forms, envelopes, checks, postage, printing (except cost of printing prospectuses, annual and semi-annual reports and proxy materials) and mailing charges, including returned mail and proxies, incurred by the Agent with respect to materials and communications sent to shareholders in carrying out its duties to the Company under this Agreement; (ii) long distance telephone costs incurred by the Agent for telephone communications and microfilm and storage costs for transfer agency records and documents; (iii) costs of all ancillary and supporting services and related expenses (other than insurance premiums) reasonably required by and provided to the Agent, other than by its employees or employees of an affiliate, with respect to functions of the Company being performed by it in its capacity as Agent hereunder, including legal advice and representation in litigation to the extent that such payments are permitted under Paragraph 7 of this Agreement 3 and charges to Agent made by any Subagent; (iv) costs for special reports or information furnished on request pursuant to this Agreement and not specifically required by the Agent by Paragraph 3 of this Agreement; and (v) reasonable costs and expenses incurred by the Agent in connection with the duties of the Agent described in Paragraph (3)(1)(i). In addition, the Company agrees to promptly pay over to the Agent any fees or payment of charges it may receive from a shareholder for services furnished to the shareholder by the Agent. Services and operations incident to the sale and distribution of the Company's shares, including sales communications, confirmations of investments (not including reinvestment of dividends) and the clearing or collection of payments will not be for the account or at the expense of the Company under this Agreement. 5. Right of Company to Inspect Records, etc. The Company will have the right under this Agreement to perform on site inspection of records and accounts and to perform audits directly pertaining to the Company shareholder accounts serviced by the Agent hereunder at the Agent's or any Subagent's facilities in accordance with reasonable procedures at the frequency necessary to assure proper administration of the Agreement. The Agent will cooperate with the Company's auditors or representatives of appropriate regulatory agencies and furnish all reasonably requested records and data. 6. Insurance. The Agent now has the insurance coverage described in Exhibit C, attached hereto, and the Agent will not take any action to eliminate or decrease such coverage during the term of this Agreement without receiving the approval of the Fund in advance of any change, except the Agent, after giving reasonable notice to the Company, may eliminate or decrease any coverage if the premiums for such coverage are substantially increased. 7. Standard of Care; Indemnification. The Agent will at all times exercise due diligence and good faith in performing its duties hereunder. The Agent will make every reasonable effort and take all reasonably available measures to assure the adequacy of its personnel and facilities as well as the accurate performance of all services to be performed by it hereunder within, at a minimum, the time requirements of any applicable statutes, rules or regulations or as set forth in the prospectus. The Agent shall not be responsible for, and the Company agrees to indemnify the Agent for any losses, damages or expenses (including reasonable counsel fees and expenses) (i) resulting from any claim, demand, action or suit not resulting from the Agent's failure to exercise good faith or due diligence and arising out of or in connection with the Agent's duties on behalf of the Company hereunder; (ii) for any delay, error or omission by reason of circumstances beyond its control, including acts of civil or military authority, national emergencies, labor difficulties (except with respect to the Agent's employees), fire, mechanical breakdown beyond its control, flood or catastrophe, acts of God, insurrection, war, riots, or failure beyond its control of transportation, communication or power supply; or (iii) for any action taken or omitted to be taken by the Agent in good faith in reliance on (a) the 4 authenticity of any instrument or communication reasonably believed by it to be genuine and to have been properly made and signed or endorsed by an appropriate person, (b) the accuracy of any records or information provided to it by the Company, (c) any authorization or instruction contained in any officers' instruction, or (d) with respect to the functions performed for the Company listed under Paragraph 3(1) of this Agreement, any advice of counsel approved by the Company who may be internally employed counsel or outside counsel, in either case for the Company and/or the Agent. In order for the rights to indemnification to apply, it is understood that if in any case the Company may be asked to indemnify or hold the Agent harmless, the Company shall be advised of all pertinent facts concerning the situation in question, and it is further understood that the Agent will use reasonable care to identify and notify the Company promptly concerning any situation which presents or appears likely to present a claim for indemnification against the Company. The Company shall have the option to defend the Agent against any claim which may be the subject of this indemnification and, in the event that the Company so elects, it will so notify the Agent and thereupon the Company shall take over complete defense of the claim and the Agent shall sustain no further legal or other expenses in such situation for which the Agent shall seek indemnification under this paragraph. The Agent will in no case confess any claim or make any compromise in any case in which the Company will be asked to indemnify the Agent except with the Company's prior written consent. 8. Term of the Agreement; Taking Effect; Amendments. This Agreement shall become effective at the start of business on the date hereof and shall continue, unless terminated as hereinafter provided, for a period of one year and from year to year thereafter, provided that such continuance shall be specifically approved as provided below. This Agreement shall go into effect, or may be continued, or may be amended or a new agreement between the Company and the Agent covering the substance of this Agreement may be entered into only if the terms of this Agreement, such continuance, the terms of such amendment or the terms of such new agreement have been approved by the Board of Directors of the Company, including the vote of a majority of the directors who are not "interested persons," as defined in the Act, of either party to this Agreement or of Waddell & Reed Investment Management Company, cast in person at a meeting called for the purpose of voting on such approval. Such a vote is hereinafter referred to as a "disinterested director vote." Any disinterested director vote shall include a determination that: (i) the Agreement, amendment, new agreement or continuance in question is in the best interests of the Company and its shareholders; (ii) the services to be performed under the Agreement, the Agreement as amended, new agreement or agreement to be continued, are services required for the operation of the Company; (iii) the Agent can provide services the nature and quality of which are at least equal to those provided by others offering the same or similar services; and (iv) the fees for such services are fair and reasonable in the light of the usual and customary charges made by others for services of the same nature and quality. 5 9. Termination. (1) This Agreement may be terminated by the Agent at any time without penalty upon giving the Company 120 days' written notice (which notice may be waived by the Company) and may be terminated by the Company at any time without penalty upon giving the Agent sixty (60) days' written notice (which notice may be waived by the Agent), provided that such termination by the Company shall be directed or approved by the vote of a majority of the Board of Directors of the Company in office at the time or by the vote of the holders of a majority (as defined in or under the Act) of the outstanding voting securities of the Company. (2) On termination, the Agent will deliver to the Company or its designee all files, documents and records of the Company used, kept or maintained by the Agent in the performance of its services hereunder, including such of the Company's records in machine readable form as may be maintained by the Agent, as well as such summary and/or control data relating thereto used by or available to the Agent. (3) In the event of any termination which involves the appointment of a new shareholder servicing agent, including the Company's acting as such on its own behalf, the Company shall have the non-exclusive right to the use of the data processing programs used by the Agent in connection with the performance of its duties under this Agreement without charge. (4) In addition, on such termination or in preparation therefore, at the request of the Company and at the Company's expense the Agent shall provide to the extent that its capabilities then permit such documentation, personnel and equipment as may be reasonably necessary in order for a new agent or the Company to fully assume and commence to perform the agency functions described in this Agreement with a minimum disruption to the Company's activities. 10. Construction; Governing Law. The headings used in this Agreement are for convenience only and shall not be deemed to constitute a part hereof. Whenever the context requires, words denoting singular shall be read to include the plural. This Agreement and the rights and obligations of the parties hereunder, shall be construed and interpreted in accordance with the laws of the State of Kansas, except to the extent that the laws of the State of Maryland apply with respect to share transactions. 11. Representations and Warranties of Agent. Agent represents and warrants that it is a corporation duly organized and existing and in good standing under the laws of the State of Missouri, that it is duly qualified to carry on its business in the State of Kansas and wherever its duties require, that it has the power and authority under laws and by its Articles of Incorporation and Bylaws to enter into this Shareholder Servicing Agreement and to perform the services contemplated by this Agreement. 6 12. Entire Agreement. This Agreement and the Exhibits annexed hereto constitutes the entire and complete agreement between the parties hereto relating to the subject matter hereof, supersedes and merges all prior discussions between the parties hereto, and may not be modified or amended orally. IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be duly executed on the day and year first above written. ------------------------------ (name of Fund) By: -------------------------- Name, Title ATTEST: By: ---------------------------------- Name, Title WADDELL & REED SERVICES COMPANY By: -------------------------------- Name, Title ATTEST: By: --------------------------- Name, Title 7 EXHIBIT A A. DUTIES IN SHARE TRANSFERS AND REGISTRATION 1. The Agent in carrying out its duties shall follow general commercial practices and the Rules of the Stock Transfer Association, Inc. except as they may conflict or be inconsistent with the specific provisions of the Company's Articles of Incorporation and Bylaws, prospectus, applicable Federal and state laws and regulations and this Agreement. 2. The Agent shall not require that the signature of the appropriate person be guaranteed, witnessed or verified in order to effect a redemption, transfer, exchange or change of address except as may from time to time be directed by the Company as set forth in an officers' instruction. In the event a signature guarantee is required by the Company, the Agent shall not inquire as to the genuineness of the guarantee. 3. The Agent shall not replace a lost, stolen or misplaced stock certificate without requiring and being furnished with an open penalty surety bond protecting the Company and the Agent against loss. B. The practices, procedures and requirements specified in A above may be modified, altered, varied or supplemented as from time to time may be mutually agreed upon by the Company and the Agent and evidenced on behalf of the Company by an officers' instruction. Any such change shall not be deemed to be an amendment to the Agreement within the meaning of Paragraph 8 of the Agreement. 8 SHAREHOLDER SERVICING AGREEMENTS EXHIBIT B COMPENSATION FOR EACH OF THE FUNDS IN THE FUND COMPLEX WADDELL & REED ADVISORS ASSET STRATEGY FUND, INC. Class A Shares An amount payable on the first day of each month of $1.4125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class B Shares An amount payable on the first day of each month of $1.4125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.4125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 WADDELL & REED ADVISORS CASH MANAGEMENT, INC. Class A Shares An amount payable on the first day of each month of $1.75 for each account of the Company which was in existence during any portion of the immediately preceding month and, in addition, the Company also pays the Agent a monthly fee of $.75 for each shareholder check it processes. Class B Shares An amount payable on the first day of each month of $1.75 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.75 for each account of the Company which was in existence during any portion of the immediately preceding month. Waddell & Reed Money Market C Shares An amount payable on the first day of each month of $1.75 for each account of the Company which was in existence during any portion of the immediately preceding month. Effective August 18, 1999 9 WADDELL & REED ADVISORS CONTINENTAL INCOME FUND, INC. Class A Shares An amount payable on the first day of each month of $1.4125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class B Shares An amount payable on the first day of each month of $1.4125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.4125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 WADDELL & REED ADVISORS FUNDS, INC. CLASS A SHARES-ACCUMULATIVE FUND AND SCIENCE AND TECHNOLOGY FUND (each a "Fund") An amount payable on the first day of each month of $1.3625 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS A SHARES-BOND FUND ("Fund") An amount payable on the first day of each month of $1.6125 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS A SHARES-CORE INVESTMENT FUND ("Fund") An amount payable on the first day of each month of $1.4125 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS B SHARES-ACCUMULATIVE FUND AND SCIENCE AND TECHNOLOGY FUND (each a "Fund") An amount payable on the first day of each month of $1.3625 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS B SHARES-BOND FUND ("Fund") An amount payable on the first day of each month of $1.6125 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS B SHARES-CORE INVESTMENT FUND ("Fund") An amount payable on the first day of each month of $1.4125 for each account of the Fund which was in existence during any portion of the immediately preceding month. 10 CLASS C SHARES-ACCUMULATIVE FUND AND SCIENCE AND TECHNOLOGY FUND (each a "Fund") An amount payable on the first day of each month of $1.3625 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS C SHARES-BOND FUND ("Fund") An amount payable on the first day of each month of $1.6125 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS C SHARES-CORE INVESTMENT FUND ("Fund") An amount payable on the first day of each month of $1.4125 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS Y SHARES-ALL FUNDS An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 WADDELL & REED ADVISORS GLOBAL BOND FUND, INC. Class A Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class B Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 WADDELL & REED ADVISORS GOVERNMENT SECURITIES FUND, INC. Class A Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month and, in addition, to pay to the Agent the sum of $.75 for each check drawn on the checking account of the Company maintained for its shareholders presented to the Agent for review during the immediately preceding month. 11 Class B Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 WADDELL & REED ADVISORS HIGH INCOME FUND, INC. Class A Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class B Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 WADDELL & REED ADVISORS INTERNATIONAL GROWTH FUND, INC. Class A Shares An amount payable on the first day of each month of $1.3625 for each account of the Company which was in existence during any portion of the immediately preceding month. Class B Shares An amount payable on the first day of each month of $1.3625 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.3625 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 12 WADDELL & REED ADVISORS MUNICIPAL BOND FUND, INC. Class A Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class B Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 WADDELL & REED ADVISORS MUNICIPAL HIGH INCOME FUND, INC. Class A Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class B Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.6125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 WADDELL & REED ADVISORS MUNICIPAL MONEY MARKET FUND, INC. Class A Shares An amount payable on the first day of each month of $1.75 for each account of the Company which was in existence during any portion of the immediately preceding month and, in addition, the Company also pays the Agent a monthly fee of $.75 for each shareholder check it processes. Class B Shares An amount payable on the first day of each month of $1.75 for each account of the Company which was in existence during any portion of the immediately preceding month. 13 Class C Shares An amount payable on the first day of each month of $1.75 for each account of the Company which was in existence during any portion of the immediately preceding month. Effective November 15, 2000 WADDELL & REED ADVISORS NEW CONCEPTS FUND, INC. Class A Shares An amount payable on the first day of each month of $1.3375 for each account of the Company which was in existence during any portion of the immediately preceding month. Class B Shares An amount payable on the first day of each month of $1.3375 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.3375 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 WADDELL & REED ADVISORS RETIREMENT SHARES, INC. Class A Shares An amount payable on the first day of each month of $1.4125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class B Shares An amount payable on the first day of each month of $1.4125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.4125 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 WADDELL & REED ADVISORS SMALL CAP FUND, INC. Class A Shares An amount payable on the first day of each month of $1.3375 for each account of the Company which was in existence during any portion of the immediately preceding month. 14 Class B Shares An amount payable on the first day of each month of $1.3375 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.3375 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 WADDELL & REED ADVISORS TAX-MANAGED EQUITY FUND, INC. Class A Shares An amount payable on the first day of each month of $1.3375 for each account of the Company which was in existence during any portion of the immediately preceding month. Class B Shares An amount payable on the first day of each month of $1.3375 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.3375 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 WADDELL & REED ADVISORS VALUE FUND, INC. Class A Shares An amount payable on the first day of each month of $1.3375 for each account of the Company which was in existence during any portion of the immediately preceding month. Class B Shares An amount payable on the first day of each month of $1.3375 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.3375 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. 15 Effective November 15, 2000 WADDELL & REED ADVISORS VANGUARD FUND, INC. Class A Shares An amount payable on the first day of each month of $1.3625 for each account of the Company which was in existence during any portion of the immediately preceding month. Class B Shares An amount payable on the first day of each month of $1.3625 for each account of the Company which was in existence during any portion of the immediately preceding month. Class C Shares An amount payable on the first day of each month of $1.3625 for each account of the Company which was in existence during any portion of the immediately preceding month. Class Y Shares An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 W&R FUNDS, INC. CLASS A SHARES-ASSET STRATEGY FUND ("Fund") An amount payable on the first day of each month of $1.4125 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS A SHARES-HIGH INCOME FUND, LIMITED-TERM BOND FUND AND MUNICIPAL BOND FUND (each a "Fund") An amount payable on the first day of each month of $1.6125 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS A SHARES-INTERNATIONAL GROWTH FUND, LARGE CAP GROWTH FUND, MID CAP GROWTH FUND, SCIENCE AND TECHNOLOGY FUND, SMALL CAP GROWTH FUND, TAX-MANAGED EQUITY FUND AND CORE EQUITY FUND (each a "Fund") An amount payable on the first day of each month of $1.3375 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS A SHARES-MONEY MARKET FUND ("Fund") An amount payable on the first day of each month of $1.75 for each account of the Fund which was in existence during any portion of the immediately preceding month and, in addition, the Fund also pays the Agent a monthly fee of $0.75 for each shareholder check it processes. CLASS B SHARES-ASSET STRATEGY FUND ("Fund") An amount payable on the first day of each month of $1.4125 for each account of the Fund which was in existence during any portion of the immediately preceding month. 16 CLASS B SHARES-HIGH INCOME FUND, LIMITED-TERM BOND FUND AND MUNICIPAL BOND FUND (each a "Fund") An amount payable on the first day of each month of $1.6125 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS B SHARES-INTERNATIONAL GROWTH FUND, LARGE CAP FUND, MID CAP FUND, SCIENCE AND TECHNOLOGY FUND, SMALL CAP GROWTH FUND, TAX-MANAGED EQUITY FUND AND CORE EQUITY FUND (each a "Fund") An amount payable on the first day of each month of $1.3375 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS B SHARES-MONEY MARKET FUND ("Fund") An amount payable on the first day of each month of $1.75 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS C-ASSET STRATEGY FUND ("Fund") An amount payable on the first day of each month of $1.4125 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS C SHARES-HIGH INCOME FUND, LIMITED-TERM BOND FUND AND MUNICIPAL BOND FUND (each a "Fund") An amount payable on the first day of each month of $1.6125 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS C SHARES-INTERNATIONAL GROWTH FUND, LARGE CAP GROWTH FUND, MID CAP GROWTH FUND, SCIENCE AND TECHNOLOGY, SMALL CAP GROWTH FUND, TAX-MANAGED EQUITY FUND AND CORE EQUITY FUND (each a "Fund") An amount payable on the first day of each month of $1.3375 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS C SHARES-MONEY MARKET FUND ("Fund") An amount payable on the first day of each month of $1.75 for each account of the Fund which was in existence during any portion of the immediately preceding month. CLASS Y SHARES-ALL FUNDS An amount payable on the first day of each month equal to 1/12 of .15 of 1% of the average daily net assets of the Class for the preceding month. Effective September 1, 2000 17 EXHIBIT C*
Bond or Name of Bond Policy No. Insurer Investment Company 87015100B ICI Blanket Bond Form Mutual Insurance Company Fidelity $23,500,000 Audit Expense 50,000 On Premises 23,500,000 In Transit 23,500,000 Forgery or Alteration 23,500,000 Securities 23,500,000 Counterfeit Currency 23,500,000 Uncollectible Items of Deposit 25,000 Phone-Initiated Transactions 23,500,000 Directors and Officers/ 87015100D ICI Errors and Omissions Liability Mutual Insurance Form Insurance Total Limit $15,000,000 Company Blanket Lost Instrument Bond (Mail Loss) 30S100639551 Travelers Blanket Undertaking Lost Instrument Waiver of Probate 42SUN339806 Hartford Casualty Insurance
- -------------------- *The above coverages to become effective upon SEC effectiveness. 18 EX-10.25 15 a2041359zex-10_25.txt DISTRIBUTION AND SERVICE PLAN FOR CLASS A SHARES Exhibit 10.25 DISTRIBUTION AND SERVICE PLAN FOR CLASS A SHARES (Adopted on October 1, 1993, Restated on February 8, 1995 and amended on July 29, 1997) This Plan is adopted by _____________________ (the "Fund"), pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act") to provide for payment by the Fund of certain expenses in connection with the distribution of the Fund's Class A shares, provision of personal services to the Fund's Class A shareholders and/or maintenance of its Class A shareholder accounts. Payments under the Plan are to be made to Waddell & Reed, Inc. ("W&R") which serves as the principal underwriter for the Fund under the terms of the Underwriting Agreement pursuant to which W&R offers and sells the shares of the Fund. DISTRIBUTION FEE AND SERVICE FEE The Fund is authorized to pay to W&R an amount not to exceed on an annual basis .25 of 1% of the Fund's average net assets of the Class A shares as either (1) a "distribution fee" to finance the distribution of the Fund's Class A shares, or (2) a "service fee" to finance shareholder servicing by W&R, its affiliated companies, broker-dealers who may sell Class A shares and other third-parties to encourage and foster the maintenance of Class A shareholder accounts, or as a combination of the two fees. The amounts shall be payable to W&R monthly or at such other intervals as the board of directors may determine to reimburse W&R for costs and expenses incurred. NASD DEFINITION For purposes of this Plan, the "distribution fee" may be considered as a sales charge that is deducted from the Class A net assets of the Fund and does not include the service fee. The "service fee" shall be considered a payment made by the Fund for personal service and/or maintenance of Class A shareholder accounts, as such is now defined by the National Association of Securities Dealers, Inc. ("NASD"), provided, however, if the NASD adopts a definition of "service fee" for purposes of Rule 2830 of the NASD Conduct Rules that differs from the definition of "service fee" as presently used, or if the NASD adopts a related definition intended to define the same concept, the definition of "service fee" as used herein shall be automatically amended to conform to the NASD definition. QUARTERLY REPORTS W&R shall provide to the board of directors of the Fund and the board of directors shall review at least quarterly a written report of the amounts so expended of the distribution fee and/or service fee paid or payable to it under this Plan and the purposes for which such expenditures were made. APPROVAL OF PLAN This Plan shall become effective when it has been approved by a vote of at least a majority of the outstanding Class A voting securities of the Fund (as defined in the Act) and by a vote of the board of directors of the Fund and of the directors who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Plan or any agreement related to this Plan (other than as directors or shareholders of the Fund) ("independent directors") cast in person at a meeting called for the purposes of voting on such Plan. CONTINUANCE This Plan shall continue in effect for a period of one (1) year and thereafter from year to year only so long as such continuance is approved by the directors, including the independent directors, as specified hereinabove for the adoption of the Plan by the directors and independent directors. DIRECTOR CONTINUATION In considering whether to adopt, continue or implement this Plan, the directors shall have a duty to request and evaluate, and W&R shall have a duty to furnish, such information as may be reasonably necessary to an informed determination of whether this Plan should be adopted, implemented or continued. TERMINATION This Plan may be terminated at any time by a vote of a majority of the independent directors of the Fund or by a vote of the majority of the outstanding Class A voting securities of the Fund without penalty. On termination, the payment of all distribution fees and service fees shall cease, and the Fund shall have no obligation to W&R to reimburse it for any cost or expenditure it has made or may make to distribute the Class A shares or service Class A shareholder accounts. AMENDMENTS This Plan may not be amended to increase materially the amount to be spent for distribution of Class A shares, personal service and/or maintenance of shareholder accounts without approval of the Class A shareholders, and all material amendments of this Plan must be approved in the manner prescribed for the adoption of the Plan as provided hereinabove. DIRECTORS While this Plan is in effect, the selection and nomination of the directors who are not interested persons of the Fund shall be committed to the discretion of the directors who are not interested persons of the Fund. RECORDS Copies of this Plan, the Underwriting Agreement and reports made pursuant to this Plan shall be preserved as provided in Rule 12b-1(f) under the Act. EX-10.26 16 a2041359zex-10_26.txt W&R FUNDS, INC. DIST. & SERV. PLAN FOR CLASS A Exhibit 10.26 W&R FUNDS, INC. DISTRIBUTION AND SERVICE PLAN FOR CLASS A SHARES (Adopted on May 17, 2000) This Plan is adopted by W&R Funds, Inc. (the "Company"), pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act") to provide for payment by the Fund of certain expenses in connection with the distribution of the Fund's Class A shares, provision of personal services to the Company's Class A shareholders and the service and maintenance of Class A shareholder accounts. Payments under the Plan are to be made to Waddell & Reed, Inc. ("W&R") which serves as the principal underwriter for the Company under the terms of the Underwriting Agreement (the "Agreement") pursuant to which it shall offer and sell the Class A shares of each series (each a "Fund") of the Company at net asset value. DISTRIBUTION FEE AND SERVICE FEE With respect to each Fund, the Company is authorized to pay to W&R an amount not to exceed on an annual basis .25 of 1% of a Fund's average net assets of the Class A shares as either (1) a "distribution fee" to finance the distribution of the Fund's Class A shares, or (2) a "service fee" to finance shareholder servicing by W&R, its affiliated companies, broker-dealers who may sell Class A shares and other third-parties to encourage and foster the maintenance of Class A shareholder accounts, or as a combination of the two fees. The amounts shall be payable to W&R monthly or at such other intervals as the board of directors may determine to reimburse W&R for costs and expenses incurred. NASD DEFINITION For purposes of this Plan, the "distribution fee" may be considered as a sales charge that is deducted from the net assets of the Class A shares of each Fund and does not include the service fee. The "service fee" may be considered a payment made by the Company for personal service and/or maintenance of Class A shareholder accounts, provided, however, if the National Association of Securities Dealers, Inc. ("NASD"), adopts a definition of "service fee" for purposes of Rule 2830 that differs from the definition of "service fee" as used herein, or if the NASD adopts a related definition intended to define the same concept, the definition of "service fee" as used herein shall be automatically amended to conform to the NASD definition. QUARTERLY REPORTS W&R shall provide to the board of directors of the Company and the board of directors shall review at least quarterly a written report of the amounts so expended of the distribution fee and the service fee paid to it under this Plan with respect to the Class A shares of each Fund and the purposes for which such expenditures were made with respect to Class A shares of each Fund. APPROVAL OF PLAN This Plan shall not become effective as to a Fund until it has been approved by a vote of at least a majority of the outstanding shares of that Fund (as defined in the Act) affected by this Plan and by a vote of the board of directors of the Company and by the directors who are not interested persons of the Company and have no direct or indirect financial interest in the operation of the Plan or any agreement related to this Plan (other than as directors or shareholders of a Fund) ("independent directors") cast in person at a meeting called for the purposes of voting on such Plan. CONTINUANCE This Plan shall continue in effect as to each Fund for a period of one (1) year and thereafter from year to year only so long as such continuance is approved by the directors, including the independent directors, as specified hereinabove for the adoption of the Plan by the directors and independent directors. DIRECTOR CONTINUATION In considering whether to adopt, continue or implement this Plan, the directors shall have a duty to request and evaluate, and W&R shall have a duty to furnish, such information as may be reasonably necessary to an informed determination of whether this Plan should be adopted, implemented or continued. TERMINATION This Plan may be terminated at any time by a vote of a majority of the independent directors as to the Company or by a vote of the majority of the outstanding Class A shares 2 of a Fund without penalty. On termination, the payment of all distribution and service fees shall cease, and the Company shall have no obligation to W&R to reimburse it for any expenditure it has made or may make to distribute Fund Class A shares or service Class A shareholder accounts. AMENDMENTS This Plan may not be amended to increase materially the amount to be spent for distribution or services without approval by the Class A shareholders of the affected Fund, and all material amendments of this Plan must be approved in the manner prescribed for the adoption of the Plan as provided hereinabove. The distribution and service fees may be reduced by action of the board of directors without shareholder approval. DIRECTORS While this Plan is in effect, the selection and nomination of the directors who are not interested persons of the Company shall be committed to the discretion of the directors who are not interested persons of the Company. RECORDS Copies of this Plan, agreements and reports made pursuant to this Plan shall be preserved as provided in Rule 12b-1(f) under the Act. 3 EX-10.27 17 a2041359zex-10_27.txt DIST. AND SERVICE PLAN FOR CLASS B SHARES Exhibit 10.27 DISTRIBUTION AND SERVICE PLAN FOR CLASS B SHARES (Adopted on February 10, 1999) This Plan is adopted by ____________________ (the "Fund"), pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act") to provide for payment by the Fund of certain expenses in connection with the distribution of the Fund's Class B shares, provision of personal services to the Fund's Class B shareholders and/or maintenance of its Class B shareholder accounts. Payments under the Plan are to be made to Waddell & Reed, Inc. ("W&R") which serves as the principal underwriter for the Fund under the terms of the Underwriting Agreement pursuant to which W&R offers and sells the shares of the Fund. DISTRIBUTION FEE The Fund is authorized to pay to W&R an amount not to exceed on an annual basis .75 of 1% of the Fund's average net assets of its Class B shares as a "distribution fee" to finance the distribution of the Fund's Class B shares payable to W&R daily or at such other intervals as the board of directors may determine. SERVICE FEE The Fund is authorized to pay to W&R an amount not to exceed on an annual basis .25 of 1% of the Fund's average net assets of its Class B shares as a "service fee" to finance shareholder servicing by W&R or its affiliated companies to encourage and foster the maintenance of shareholder accounts of the Fund's Class B shares. The amounts shall be payable to W&R daily or at such other intervals as the board of directors may determine. NASD DEFINITION For purposes of this Plan, the "distribution fee" may be considered as a sales charge that is deducted from the Class B net assets of the Fund and does not include the service fee. The "service fee" shall be considered a payment made by the Fund for personal service and/or maintenance of Class B shareholder accounts, as such is now defined by the National Association of Securities Dealers, Inc. ("NASD"), provided, however, if the NASD adopts a definition of "service fee" for purposes of Rule 2830 of the NASD Conduct Rules that differs from the definition of "service fee" as presently used, or if the NASD adopts a related definition intended to define the same concept, the definition of "service fee" as used herein shall be automatically amended to conform to the NASD definition. QUARTERLY REPORTS W&R shall provide to the board of directors of the Fund and the board of directors shall review at least quarterly a written report of the amounts so expended of the distribution fee and/or service fee paid or payable to it under this Plan and the purposes for which such expenditures were made. APPROVAL OF PLAN This Plan shall become effective when it has been approved by a vote of the board of directors of the Fund and of the directors who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Plan or any agreement related to this Plan (other than as directors or shareholders of the Fund) ("independent directors") cast in person at a meeting called for the purposes of voting on such Plan. CONTINUANCE This Plan shall continue in effect for a period of one (1) year and thereafter from year to year only so long as such continuance is approved by the directors, including the independent directors, as specified hereinabove for the adoption of the Plan by the directors and independent directors. DIRECTOR CONTINUATION In considering whether to adopt, continue or implement this Plan, the directors shall have a duty to request and evaluate, and W&R shall have a duty to furnish, such information as may be reasonably necessary to an informed determination of whether this Plan should be adopted, implemented or continued. TERMINATION This Plan may be terminated at any time by a vote of a majority of the independent directors of the Fund or by a vote of the majority of the outstanding Class B voting securities of the Fund without penalty. On termination, the payment of all distribution fees and service fees shall cease, and the Fund shall have no obligation to W&R to reimburse it for any cost or expenditure it has made or may make to distribute the Class B shares or service Class B shareholder accounts. AMENDMENTS This Plan may not be amended to increase materially the amount to be spent for distribution of Class B shares, personal service and/or maintenance of shareholder accounts without approval of the Class B shareholders, and all material amendments of this Plan must be approved in the manner prescribed for the adoption of the Plan as provided hereinabove. The distribution and service fees may be 2 reduced by action of the board of directors without shareholder approval. DIRECTORS While this Plan is in effect, the selection and nomination of the directors who are not interested persons of the Fund shall be committed to the discretion of the directors who are not interested persons of the Fund. RECORDS Copies of this Plan, the Underwriting Agreement and reports made pursuant to this Plan shall be preserved as provided in Rule 12b-1(f) under the Act. 3 EX-10.28 18 a2041359zex-10_28.txt DIST. AND SERVICE PLAN FOR CLASS C SHARES Exhibit 10.28 DISTRIBUTION AND SERVICE PLAN FOR CLASS C SHARES (Adopted on February 10, 1999) This Plan is adopted by ____________________ (the "Fund"), pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act") to provide for payment by the Fund of certain expenses in connection with the distribution of the Fund's Class C shares, provision of personal services to the Fund's Class C shareholders and/or maintenance of its Class C shareholder accounts. Payments under the Plan are to be made to Waddell & Reed, Inc. ("W&R") which serves as the principal underwriter for the Fund under the terms of the Underwriting Agreement pursuant to which W&R offers and sells the shares of the Fund. DISTRIBUTION FEE The Fund is authorized to pay to W&R an amount not to exceed on an annual basis .75 of 1% of the Fund's average net assets of its Class C shares as a "distribution fee" to finance the distribution of the Fund's Class C shares payable to W&R daily or at such other intervals as the board of directors may determine. SERVICE FEE The Fund is authorized to pay to W&R an amount not to exceed on an annual basis .25 of 1% of the Fund's average net assets of its Class C shares as a "service fee" to finance shareholder servicing by W&R or its affiliated companies to encourage and foster the maintenance of shareholder accounts of the Fund's Class C shares. The amounts shall be payable to W&R daily or at such other intervals as the board of directors may determine. NASD DEFINITION For purposes of this Plan, the "distribution fee" may be considered as a sales charge that is deducted from the Class C net assets of the Fund and does not include the service fee. The "service fee" shall be considered a payment made by the Fund for personal service and/or maintenance of Class C shareholder accounts, as such is now defined by the National Association of Securities Dealers, Inc. ("NASD"), provided, however, if the NASD adopts a definition of "service fee" for purposes of Rule 2830 of the NASD Conduct Rules that differs from the definition of "service fee" as presently used, or if the NASD adopts a related definition intended to define the same concept, the definition of "service fee" as used herein shall be automatically amended to conform to the NASD definition. QUARTERLY REPORTS W&R shall provide to the board of directors of the Fund and the board of directors shall review at least quarterly a written report of the amounts so expended of the distribution fee and/or service fee paid or payable to it under this Plan and the purposes for which such expenditures were made. APPROVAL OF PLAN This Plan shall become effective when it has been approved by a vote of the board of directors of the Fund and of the directors who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Plan or any agreement related to this Plan (other than as directors or shareholders of the Fund) ("independent directors") cast in person at a meeting called for the purposes of voting on such Plan. CONTINUANCE This Plan shall continue in effect for a period of one (1) year and thereafter from year to year only so long as such continuance is approved by the directors, including the independent directors, as specified hereinabove for the adoption of the Plan by the directors and independent directors. DIRECTOR CONTINUATION In considering whether to adopt, continue or implement this Plan, the directors shall have a duty to request and evaluate, and W&R shall have a duty to furnish, such information as may be reasonably necessary to an informed determination of whether this Plan should be adopted, implemented or continued. TERMINATION This Plan may be terminated at any time by a vote of a majority of the independent directors of the Fund or by a vote of the majority of the outstanding Class C voting securities of the Fund without penalty. On termination, the payment of all distribution fees and service fees shall cease, and the Fund shall have no obligation to W&R to reimburse it for any cost or expenditure it has made or may make to distribute the Class C shares or service Class C shareholder accounts. AMENDMENTS This Plan may not be amended to increase materially the amount to be spent for distribution of Class C shares, personal service and/or maintenance of shareholder accounts without approval of the Class C shareholders, and all material amendments of this Plan must be approved in the manner prescribed for the adoption of the Plan as provided hereinabove. The distribution and service fees may be 2 reduced by action of the board of directors without shareholder approval. DIRECTORS While this Plan is in effect, the selection and nomination of the directors who are not interested persons of the Fund shall be committed to the discretion of the directors who are not interested persons of the Fund. RECORDS Copies of this Plan, the Underwriting Agreement and reports made pursuant to this Plan shall be preserved as provided in Rule 12b-1(f) under the Act. 3 EX-10.29 19 a2041359zex-10_29.txt DIST. AND SERVICE PLAN FOR CLASS Y SHARES Exhibit 10.29 WADDELL & REED FUNDS, INC. DISTRIBUTION AND SERVICE PLAN FOR CLASS Y SHARES (Adopted on December 27, 1995) This Plan is adopted by Waddell & Reed Funds, Inc. (the "Company") pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act") to provide for payment by the Company of certain expenses in connection with the distribution of the Company's Class Y shares and the service and maintenance of Class Y shareholder accounts. Payments under the Plan are to be made to Waddell & Reed, Inc. ("W&R") which serves as the principal underwriter for the Company under the terms of an under writing agreement pursuant to which it shall offer and sell the Class Y shares of each series (each a "Fund") of the Company at net asset value. DISTRIBUTION FEE With respect to each Fund, subject to the limitation on total plan fees set forth below, the Company is authorized to pay to W&R an amount not to exceed on an annual basis .25 of 1% of each Fund's average net assets of its Class Y shares as a "distribution fee" to finance the distribution of that Fund's Class Y shares payable to W&R daily or at such other intervals as the board of directors may determine. SERVICE FEE With respect to each Fund, subject to the limitation on total plan fees set forth below, the Company is authorized to pay to W&R an amount not to exceed on an annual basis .25 of 1% of each Fund's average net assets of its Class Y shares as a "service fee" to finance shareholder servicing by W&R or its affiliated companies to encourage and foster the maintenance of shareholder accounts of the particular Fund's Class Y shares. The amounts shall be payable to W&R daily or at such other intervals as the board of directors may determine. LIMITATION ON TOTAL PLAN FEES With respect to each Fund, the Company is authorized to pay both a distribution fee and a service fee to W&R provided that the total amount of fees paid to W&R pursuant to this Plan shall not exceed on an annual basis .25 of 1% of the average net assets of that Fund's Class Y shares. NASD DEFINITION For purposes of this Plan, the distribution fee may be considered as a sales charge that is deducted from the net assets of the Class Y shares of each Fund and does not include the service fee. The service fee may be considered a payment made by the Company with respect to each Fund for personal service and/or maintenance of Class Y shareholder accounts, provided, however, that if the National Association of Securities Dealers, Inc. ("NASD") adopts a definition of "service fee" for purposes of Article III, Section 26(b) of its Rules of Fair Practice that differs from the definition of "service fee" as used herein, or if the NASD adopts a related definition intended to define the same concept, the definition of "service fee" as used herein shall be automatically amended to conform to the NASD definition. QUARTERLY REPORTS W&R shall provide to the board of directors of the Company and the board of directors shall review at least quarterly a written report of the amounts so expended of the distribution fee and the service fee paid to it under this Plan with respect to the Class Y shares of each Fund and the purposes for which such expenditures were made with respect to the Class Y shares of each Fund. APPROVAL OF PLAN This Plan shall not become effective as to a Fund until it has been approved by a vote of at least a majority of the outstanding Class Y shares of that Fund (as defined in the Act) and by a vote of the board of directors of the Company and by the directors who are not interested persons of the Company and have no direct or indirect financial interest in the operation of the Plan or any agreement related to this Plan (other than as directors or shareholders of the Company) ("independent directors") cast in person at a meeting called for the purpose of voting on such Plan. CONTINUANCE This Plan shall continue in effect as to each Fund for a period of one (1) year and thereafter from year-to-year only so long as such continuance is approved by the directors, including the independent directors, as specified hereinabove for the adoption of a Plan by the directors and independent directors. TERMINATION This Plan may be terminated at any time by a vote of a majority of the independent directors as to any Fund or by a vote of the majority of the outstanding Class Y shares of that Fund without penalty. On termination, the payment of all distribution and service fees shall cease, and the Company shall have no obligation to W&R to reimburse it for any expenditure it has made or may make to distribute Fund Class Y shares or service Class Y shareholder accounts. AMENDMENTS This Plan may not be amended to increase materially the amount to be spent for distribution or services without approval by the Class Y shareholders of the affected Fund, and all material amendments of this Plan must be approved in the manner prescribed for the adoption of the Plan as provided hereinabove. The distribution and service fees may, however, be reduced by action of the board of directors without shareholder approval. DIRECTORS While this Plan is in effect, the selection and nomination of the directors who are not interested persons of the Company shall be committed to the discretion of the directors who are not interested persons of the Company. RECORDS Copies of the Plan, agreements and reports made pursuant to this Plan shall be preserved as provided in Rule 12b-1(f) under the Act. EX-10.30 20 a2041359zex-10_30.txt TARGET/UNITED FUNDS, INC. SERVICE PLAN Exhibit 10.30 TARGET/UNITED FUNDS, INC. SERVICE PLAN Adopted August 21, 1998 This Plan is adopted by Target/United Funds, Inc. (the "Fund"), pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act"), to provide for payment by each series ("Portfolio") of the Fund of certain expenses in connection with the provision of personal services to the owners of variable life insurance policies or variable annuity contracts funded by Portfolio shares ("Policies") and/or maintenance of the accounts of such Policies ("Policyowners"). Payments under the Plan are to be made to Waddell & Reed, Inc. ("W&R"). SERVICE FEE Each Portfolio is authorized to pay to W&R an amount not to exceed on an annual basis .25 of 1% of the Portfolio's average net assets as a "service fee" to finance Policyowner servicing by W&R, its affiliated companies, broker-dealers who may sell the Portfolio's shares and other third parties and to encourage and foster the maintenance of Policyowner accounts. The amounts shall be payable to W&R monthly or at such other intervals as the board of directors may determine. NASD DEFINITION The "service fee" shall be considered a payment made by the Portfolio for personal service and/or maintenance of Policyowner accounts, as such is now defined by the National Association of Securities Dealers, Inc. ("NASD"), provided, however, if the NASD adopts a definition of "service fee" for purposes of Rule 2830 and the NASD Conduct Rules that differs from the definition of "service fee" as presently used, or if the NASD adopts a related definition intended to define the same concept, the definition of "service fee" as used herein shall be automatically amended to conform to the NASD definition. QUARTERLY REPORTS W&R shall provide to the board of directors of the Fund, and the board of directors shall review, at least quarterly a written report of the amounts so expended of the service fee paid or payable to it under this Plan and the purposes for which such expenditures were made. APPROVAL OF PLAN This Plan shall become effective as to a Portfolio when it has been approved by a vote of at least a majority of that Portfolio's outstanding voting securities (as defined in the Act) and by a vote of the board of directors of the Fund and of the directors who are not interested persons of the Fund and have no direct or indirect financial interest in the operation of the Plan or any agreement related to this Plan (other than as directors of the Fund or as Policyowners) ("independent directors") cast in person at a meeting called for the purposes of voting on such Plan. CONTINUANCE This Plan shall continue in effect for a period of one (1) year and thereafter from year to year only so long as such continuance is approved by the directors, including the independent directors, as specified hereinabove for the adoption of the Plan by the directors and independent directors. DIRECTOR CONTINUATION In considering whether to adopt, continue or implement this Plan, the directors shall have a duty to request and evaluate, and W&R shall have a duty to furnish, such information as may be reasonably necessary to an informed determination of whether this Plan should be adopted, implemented or continued. TERMINATION This Plan may be terminated at any time by a vote of a majority of the independent directors of the Fund or, as to a Portfolio, by a vote of the majority of the outstanding voting securities of that Portfolio without penalty. On termination, the payment of all service fees shall cease, and the Fund shall have no obligation to W&R to reimburse it for any cost or expenditure it has made or may make to service Policyowner accounts. AMENDMENTS This Plan may not be amended to increase materially the amount to be spent by a Portfolio for personal service and/or maintenance of Policyowner accounts without approval of the shareholders of that Portfolio, and all material amendments of this Plan must be approved in the manner prescribed for the adoption of the Plan as provided hereinabove. DIRECTORS While this Plan is in effect, the selection and nomination of the directors who are not interested persons of the Fund shall be committed to the discretion of the directors who are not interested persons of the Fund. RECORDS Copies of this Plan and reports made pursuant to this Plan shall be preserved as provided in Rule 12b-1(f) under the Act. 2 EX-11 21 a2041359zex-11.txt STATEMENT RE COMPUTATION Exhibit 11 WADDELL & REED FINANCIAL, INC. COMPUTATION OF EARNINGS PER SHARE
(in thousands except for per share data) 2000 1999 1998 ------------ ------------- ---------- Net income $139,005 $81,767 $83,735 Basic weighted average shares outstanding 83,362 89,456 98,681 ========= ========= ========= Diluted weighted average shares outstanding 86,895 91,548 99,269 ========= ========= ========= Basic net income per share $1.67 $0.91 $0.85 Diluted net income per share $1.67 $0.89 $0.84
Note: Data for all periods presented is stated or has been restated to reflect the three-for-two stock split declared on February 23, 2000, payable on April 7, 2000 to shareholders of record as of March 17, 2000. EX-21 22 a2041359zex-21.txt SUBSIDIARIES Exhibit 21 SUBSIDIARIES ------------
JURISDICTION OF NAME INCORPORATION OR FORMATION ---- -------------------------- Waddell & Reed Financial Services, Inc. Missouri Waddell & Reed Development, Inc. Delaware Waddell & Reed, Inc. Delaware Waddell & Reed Investment Management Company Kansas Waddell & Reed Services Company Missouri Waddell & Reed Leasing, Inc. Missouri Waddell & Reed Distributors, Inc. Missouri W & R Insurance Agency, Inc. Missouri W & R Insurance Agency of Alabama, Inc. Alabama W & R Insurance Agency of Arkansas, Inc. Arkansas W & R Insurance Agency of Montana, Inc. Montana W & R Insurance Agency of Nevada, Inc. Nevada W & R Insurance Agency of Texas, Inc. Texas W & R Insurance Agency of Utah, Inc. Utah W & R Insurance Agency of Wyoming, Inc. Wyoming Unicon Agency, Inc. New York Unicon Insurance Agency of Massachusetts, Inc. Massachusetts Fiduciary Trust Company of New Hampshire New Hampshire Austin, Calvert & Flavin, Inc. Texas Encino GP Investment Partners, LLC Delaware Legend Group Holdings, LLC Delaware Legend Advisory Corporation New York Legend Equities Corporation Delaware Advisory Services Corporation Nevada The Legend Group, Inc. Delaware LEC Insurance Agency, Inc. Texas Waddell & Reed Capital Trust I Delaware
EX-23 23 a2041359zex-23.txt KPMG CONSENT EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBIC ACCOUNTANTS The Board of Directors Waddell & Reed Financial, Inc. We consent to incorporation by reference in the Registration Statements No. 333-65827 and 333-44528 on Forms S-8 of our report dated January 24, 2001, relating to the consolidated balance sheets of Waddell & Reed Financial, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows and the related schedules for each of the years in the three-year period ended December 31, 2000, which report appears in the December 31, 2000 Annual Report on Form 10-K of Waddell & Reed Financial, Inc. /s/ KPMG LLP Kansas City, Missouri March 14, 2001 EX-24 24 a2041359zex-24.txt POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint John E. Sundeen, Jr., D. Tyler Towery and Daniel C. Schulte, and each of them severally, his true and lawful attorneys-in-fact and agents, for him and in his name and in the capacity indicated below, with full power of substitution and resubstitution and authority to do any and all acts and things and to execute any and all instruments which said attorneys-in-fact and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2000, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys-in-fact and all that said attorneys-in-fact and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ Robert L. Hechler Robert L. Hechler, Director Date: January 24, 2001 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint John E. Sundeen, Jr., D. Tyler Towery and Daniel C. Schulte, and each of them severally, his true and lawful attorneys-in-fact and agents, for him and in his name and in the capacity indicated below, with full power of substitution and resubstitution and authority to do any and all acts and things and to execute any and all instruments which said attorneys-in-fact and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2000, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys-in-fact and all that said attorneys-in-fact and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ James M. Raines James M. Raines, Director Date: January 29, 2001 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint John E. Sundeen, Jr., D. Tyler Towery and Daniel C. Schulte, and each of them severally, his true and lawful attorneys-in-fact and agents, for him and in his name and in the capacity indicated below, with full power of substitution and resubstitution and authority to do any and all acts and things and to execute any and all instruments which said attorneys-in-fact and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2000, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys-in-fact and all that said attorneys-in-fact and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ Ronald C. Reimer Ronald C. Reimer, Director Date: March 6, 2001 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint John E. Sundeen, Jr., D. Tyler Towery and Daniel C. Schulte, and each of them severally, his true and lawful attorneys-in-fact and agents, for him and in his name and in the capacity indicated below, with full power of substitution and resubstitution and authority to do any and all acts and things and to execute any and all instruments which said attorneys-in-fact and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2000, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys-in-fact and all that said attorneys-in-fact and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ William L. Rogers William L. Rogers, Director Date: January 25, 2001 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint John E. Sundeen, Jr., D. Tyler Towery and Daniel C. Schulte, and each of them severally, his true and lawful attorneys-in-fact and agents, for him and in his name and in the capacity indicated below, with full power of substitution and resubstitution and authority to do any and all acts and things and to execute any and all instruments which said attorneys-in-fact and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year ended December 31, 2000, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys-in-fact and all that said attorneys-in-fact and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ Jerry W. Walton Jerry W. Walton, Director Date: January 22, 2001 -----END PRIVACY-ENHANCED MESSAGE-----