-----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, TbF48gqM8l5P2ojs8aolPM+JhxSNeHiQegWB4mspZUXBqtNBH+QKMKFtpfH/eRxp y+5q2fcsb3/tgNelqUbtnA== 0000912057-01-515659.txt : 20010516 0000912057-01-515659.hdr.sgml : 20010516 ACCESSION NUMBER: 0000912057-01-515659 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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-Q SEC ACT: SEC FILE NUMBER: 001-13913 FILM NUMBER: 1635043 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-Q 1 a2048323z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to ____________ Commission file number 001-13913 WADDELL & REED FINANCIAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 51-0261715 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 6300 LAMAR AVENUE OVERLAND PARK, KANSAS 66202 (Address of principal executive offices) (Zip Code) (913) 236-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No ___ Shares outstanding of each of the registrant's classes of common stock as of the latest practicable date:
Class Outstanding as of April 30, 2001* ------------------------------------ --------------------------------- Class A common stock, $.01 par value 79,692,036
*The number of common shares reflects the combination of our two classes of common stock as a result of the conversion of our shares of Class B common stock into shares of Class A common stock on a one-for-one basis at the close of business on April 30, 2001. As of May 1, 2001, all Class A common stock trades on the New York Stock Exchange under the ticker symbol "WDR." WADDELL & REED FINANCIAL, INC. FORM 10-Q QUARTER ENDED MARCH 31, 2001 INDEX
Page No. -------- Part I. Financial Information Item 1. Financial Statements. Consolidated Balance Sheets at March 31, 2001 and December 31, 2000 3 Consolidated Statements of Income for the three months ended March 31, 2001 and March 31, 2000 4 Consolidated Statements of Comprehensive Income for the three months ended March 31, 2001 and March 31, 2000 5 Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2001 6 Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and March 31, 2000 7 Notes to Unaudited Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 18 Part II. Other Information Item 1. Legal Proceedings. 18 Item 2. Changes in Securities and Use of Proceeds. 18 Item 5. Other Information. 19 Item 6. Exhibits and Reports on Form 8-K. 19 Signatures 21
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets (in thousands)
==================================================================================================================================== March 31, December 31, 2001 2000 ASSETS (unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Assets: Cash and cash equivalents $ 83,711 68,082 Investment securities, available-for-sale 55,381 57,639 Receivables: Funds and separate accounts 13,664 13,963 Customers and other 21,955 21,477 Deferred income taxes 48 45 Prepaid expenses and other current assets 5,551 4,868 - ------------------------------------------------------------------------------------------------------------------------------------ Total current assets 180,310 166,074 Property and equipment, net 30,873 55,453 Deferred sales commissions, net 11,122 10,108 Goodwill (net of accumulated amortization of $33,647 and $31,995) 178,685 180,173 Deferred income taxes 2,948 1,026 Other assets 11,285 9,352 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $ 415,223 422,186 ==================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities: Current liabilities: Accounts payable $ 35,686 41,558 Accrued sales force compensation 13,096 18,741 Accrued other compensation 7,172 11,774 Short term notes payable 74,303 -- Income taxes payable 17,503 126 Accrued purchase price liability for acquired subsidiaries -- 13,110 Other current liabilities 4,922 8,429 - ------------------------------------------------------------------------------------------------------------------------------------ Total current liabilities 152,682 93,738 Long-term debt 201,165 175,320 Accrued pensions and post-retirement costs 11,736 11,295 Other 1,938 223 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities 367,521 280,576 - ------------------------------------------------------------------------------------------------------------------------------------ Stockholders' equity : Common stock (See table below) 997 997 Additional paid-in capital 250,745 251,990 Retained earnings 229,808 206,589 Deferred compensation (10,447) (10,950) Treasury stock (See table below) (420,177) (305,008) Accumulated other comprehensive income (3,224) (2,008) - ------------------------------------------------------------------------------------------------------------------------------------ Total stockholders' equity 47,702 141,610 - ------------------------------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 415,223 422,186 ====================================================================================================================================
Common stock ($.01 par value) 2001 2000 ---- ---- Authorized ................................ 250,000,000 250,000,000 Issued .................................... 99,700,761 99,700,761 Outstanding ............................... 79,677,407 83,410,519 Treasury Stock ............................ 20,023,354 16,290,242
See accompanying notes to unaudited consolidated financial statements. 3 WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Income (Unaudited in thousands, except for per share data)
==================================================================================================================================== For the three months ended March 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues: Investment management fees $ 56,203 $ 63,805 Underwriting and distribution fees 48,867 45,481 Shareholder service fees 14,372 11,294 Investment and other income 1,708 4,162 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues 121,150 124,742 - ------------------------------------------------------------------------------------------------------------------------------------ Expenses: Underwriting and distribution 43,720 41,396 Compensation and related costs 14,810 14,001 General and administrative 6,019 6,612 Depreciation 1,240 631 Interest expense 4,398 2,499 Amortization of goodwill 1,652 929 - ------------------------------------------------------------------------------------------------------------------------------------ Total expenses 71,839 66,068 - ------------------------------------------------------------------------------------------------------------------------------------ Income before provision for income taxes 49,311 58,674 Provision for income taxes 18,715 22,548 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 30,596 $ 36,126 ==================================================================================================================================== Net income per share: -- Basic $ 0.37 $ 0.43 -- Diluted $ 0.36 $ 0.41 ==================================================================================================================================== Weighted average shares outstanding: -- Basic 82,219 84,713 -- Diluted 85,538 87,213 ==================================================================================================================================== Dividends declared per common share $ 0.0884 $ 0.0884
See accompanying notes to unaudited consolidated financial statements. 4 WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited in thousands)
==================================================================================================================================== For the three months ended March 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 30,596 $ 36,126 Other comprehensive income: Net unrealized appreciation (depreciation) of investments during the period, net of income taxes of $(740) and $686 (1,207) 1,092 Reclassification adjustment for amounts included in net income, net of income taxes of $(5) and $(818) (9) (1,306) - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive Income $ 29,380 $ 35,912 ====================================================================================================================================
See accompanying notes to unaudited consolidated financial statements. 5 WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity For the Three Months Ended March 31, 2001 (Unaudited in thousands)
==================================================================================================================================== Accumulated Common Stock Additional other Total -------------- paid-in Retained Deferred Treasury comprehensive stockholders' Shares Amount capital earnings Compensation Stock income equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2000 99,701 $997 251,990 206,589 (10,950) (305,008) (2,008) 141,610 Net income -- -- -- 30,596 -- -- -- 30,596 Recognition of deferred compensation -- -- -- -- 503 -- -- 503 Dividends paid -- -- -- (7,377) -- -- -- (7,377) Exercise of stock options -- -- (3,007) -- -- 6,871 -- 3,864 Tax benefit from exercise of options -- -- 1,762 -- -- -- -- 1,762 Treasury stock repurchases -- -- -- -- -- (122,040) -- (122,040) Unrealized loss on investment securities -- -- -- -- -- -- (1,216) (1,216) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at March 31, 2001 99,701 $997 250,745 229,808 (10,447) (420,177) (3,224) 47,702 ====================================================================================================================================
See accompanying notes to unaudited consolidated financial statements. 6 WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited in thousands)
==================================================================================================================================== For the three months ended March 31, 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 30,596 $ 36,126 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,911 1,577 Gain on sale of investments (14) (2,096) Recognition of deferred compensation 503 357 Loss on sale and retirement of fixed assets 3 12 Capital gains and dividends reinvested (24) (43) Deferred income taxes (1,178) 5,352 Changes in assets and liabilities (net of acquisition): Receivables from funds and separate accounts 299 (3,999) Other receivables (478) (9,624) Other assets (3,631) (1,112) Accounts payable (5,872) 17,453 Deferred gain on sale/leaseback transaction (1,753) -- Other liabilities 10,435 19,762 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 31,797 63,765 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Additions to investment securities (1,048) (6,833) Proceeds from sales of investment securities 950 37,761 Proceeds from maturity of investment securities 375 502 Proceeds from the sale of buildings 28,233 -- Additions to property and equipment (3,133) (5,604) Acquisition of subsidiaries, (net of cash acquired) -- (60,005) Additional purchase price payments for subsidiaries (13,110) -- Other 36 -- - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) investing activities 12,303 (34,179) - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net borrowings 97,082 95,000 Cash dividends (7,377) (7,616) Purchase of treasury stock (122,040) (90,997) Exercise of stock options 3,864 2,309 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used in financing activities (28,471) (1,304) - ------------------------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 15,629 28,282 Cash and cash equivalents at beginning of period 68,082 60,977 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 83,711 $ 89,259 ====================================================================================================================================
See accompanying notes to unaudited consolidated financial statements. 7 WADDELL & REED FINANCIAL, INC. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES Waddell & Reed Financial, Inc. and subsidiaries (hereinafter referred to as the "Company," "we," "us," or "our") derive revenues from investment management, administration, distribution and related services provided primarily to the Waddell & Reed Advisors Funds ("Advisors Funds"), W&R Funds ("W&R Funds"), W&R Target Funds ("Target Funds") and institutional and separate accounts. BASIS OF PRESENTATION In our opinion, the accompanying unaudited balance sheets and related interim statements of income, stockholders' equity, cash flows, and comprehensive income reflect all adjustments consisting only of normal recurring items necessary for their fair presentation in conformity with accounting principles generally accepted in the United States. Preparing financial statements requires us to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year. The information in this Form 10-Q should be read in conjunction with Management's Discussion and Analysis and our audited financial statements and notes thereto included in our December 31, 2000 Form 10-K included in our Annual Report. EARNINGS PER SHARE Basic earnings per share is computed based on the weighted average number of common shares outstanding for the periods ended March 31, 2001 and 2000, respectively. Diluted earnings per share for these periods are computed based on the weighted average number of common shares outstanding plus the effect of the dilutive impact of stock options. The components of basic and diluted earnings per share were as follows (in thousands except per share data):
THREE MONTHS ENDED MARCH 31, 2001 2000 ------- ------- Net income ....................................... $30,596 $36,126 ======= ======= Weighted average shares outstanding-basic ........ 82,219 84,713 Incremental shares from assumed conversions ...... 3,319 2,500 ------- ------- Weighted average shares outstanding-diluted ...... 85,538 87,213 ======= ======= Earnings per share: Basic ......................................... $ 0.37 0.43 Diluted ....................................... $ 0.36 0.41
8 2. STOCKHOLDERS' EQUITY For the three month period ended March 31, 2001, we repurchased 4.0 million Class B common shares for $30.50 per share at a total cost, including commissions, of $122.0 million. On March 6, 2001, we declared a dividend payable on May 1, 2001 in the amount of $.0884 per share to stockholders of record as of April 17, 2001. The total dividend paid was $7.0 million. On April 25, 2001, our stockholders voted to combine 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. As of the close of business on April 30, 2001, each share of our Class B common stock was reclassified into one share of our Class A common stock. As of May 1, 2001, all Class A common shares trade on the New York Stock Exchange under the ticker symbol "WDR." As a result, all per share and shares outstanding data in the consolidated financial statements and related notes have been restated to reflect the combination for all periods presented. 3. DEBT In January 2001, we issued $200.0 million in principal amount 7.5% senior notes due 2006 for net proceeds of $197.6 million (net of discounts, commissions and expenses) to repay amounts borrowed under the money market loan program and for general corporate purposes. Our 2001 first quarter overall weighted average interest rate was 8.0% compared to 6.7% for the same period in the prior year. During the quarter, we had net borrowings of $97.1 million, an increase of $2.1 million from the same period in the prior year. 4. ACQUISITION OF SUBSIDIARIES On March 31, 2000, we acquired The Legend Group, Inc. ("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 offers strategic asset allocation services using proprietary systems. The results of operations of Legend are included in the accompanying financial statements since the date of acquisition. The total cost of the acquisition, including expenses, was $65.4 million, which exceeded the fair value of the net assets of Legend by $63.6 million. The excess is being amortized on a straight-line basis over 25 years. The purchase agreement provides for additional purchase price payments contingent upon the achievement by Legend of specified earnings levels for 2000, 2001 and 2002. These payments could aggregate as much as $14.0 million. For the year 2000, the specified earnings level was met; accordingly, a $4.0 million payment was accrued and added to goodwill in 2000 and paid in the first quarter of 2001. 9 4. ACQUISITION OF SUBSIDIARIES (CONTINUED) A summary of the net assets acquired is as follows (in thousands): Assets acquired Cash .................................................. $ 1,113 Accounts Receivable ................................... 7,156 Goodwill (including additional purchase 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 (in thousands) for the first quarter of 2000 as if the Legend acquisition were made on January 1, 2000 at the same purchase price, based on estimates and assumptions considered appropriate:
For the three months ended March 31, 2000 Revenues ................................................... $136,425 Net Income ................................................. $ 36,310 Net Income per common share Basic ................................................. $ 0.43 Diluted ............................................... $ 0.42
Austin, Calvert & Flavin, Inc. ("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 this criteria and the full amount of these payments of $9.1 million was accrued and added to goodwill at December 31, 2000 and paid in the first quarter of 2001. No further payments will be made related to this acquisition. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q CONSTITUTE "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 FACT INCLUDED IN THIS FORM 10-Q 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-Q ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE ASSUME NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. 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 AND NEITHER US NOR ANY OTHER PERSON WILL BE RESPONSIBLE FOR THE ACCURACY OR COMPLETENESS OF ANY SUCH FORWARD-LOOKING STATEMENTS. CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM OUR EXPECTATIONS ARE DISCLOSED IN THE "RISK FACTORS" SECTION OF OUR FORM 10-K ANNUAL REPORT, 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, ACQUISITION STRATEGY AND OTHER RISKS AS SET OUT IN THE REPORTS FILED BY US WITH THE SECURITIES AND EXCHANGE COMMISSION. SHOULD ONE OR MORE OF THESE RISKS MATERIALIZE OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE FORECASTED OR EXPECTED. 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 INFORMATION CONTAINED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED IN THIS FORM 10-Q AND THE AUDITED FINANCIAL STATEMENTS AND NOTES THERETO IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000. OVERVIEW We derive our revenues from providing investment management, distribution and administrative services primarily to the Advisors Funds, W&R Funds and Target Funds, as well as to institutional and separate accounts. Investment management fees, our most substantial source of revenues, are based on the amount of average assets under management and the management fee rates charged. Sales levels, financial market conditions, redemptions and the composition of assets affect these fees. Underwriting and distribution revenues consist of sales charges and commissions derived from the sale of investment and insurance products and distribution fees. The products sold have various sales charge structures and the revenues received from product sales vary based on the type and amount sold. Rule 12b-1 distribution and service fees earned for distributing shares of certain mutual fund share classes are based upon a percentage of assets and fluctuate based on financial market conditions, sales, and redemptions. Shareholder service fees include transfer agency fees, custodian fees for retirement plan accounts and mutual fund accounting fees. 11 RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2001 AS COMPARED WITH THREE MONTHS ENDED MARCH 31, 2000 First quarter 2001 net income was $30.6 million, or $0.36 per share on a diluted basis, compared with net income of $36.1 million, or $0.41 per share, for the first quarter of 2000. Quarter over quarter, net income per share decreased 12%. The Legend acquisition, which occurred March 31, 2000, did not have a significant impact on our first quarter 2001 consolidated net income. During the first quarter of 2000, $2.1 million of net pre-tax gains were realized from investment security sales to facilitate the acquisition of Legend. Excluding these net gains, last year's first quarter net income would have been $34.9 million, or $0.40 per share on a diluted basis. Investment management fee revenues declined $7.6 million, or 12%, from 2000's first quarter. Adverse market conditions in late 2000 and the first quarter of 2001 caused total average assets under management to decline by 10% from the first quarter of 2000. Investment management fees from mutual funds decreased $6.6 million, or 12%, driven primarily by a 9% decline in average mutual fund assets. The management fee rate for mutual funds decreased to 66.9 basis points in 2001's first quarter from 68.1 basis points for 2000's period. The decline in equity markets led to equity mutual funds comprising a smaller percentage of total mutual fund assets under management when compared with the prior year. Equity funds typically have higher fee rate structures than fixed income funds. Investment management fee revenues from institutional and separate accounts declined by $1.0 million, or 15%. Average institutional and separate account assets under management declined by 14%. In the first quarter of 2000, we earned $0.6 million in performance fees related to one of our separately-managed accounts. Excluding the 2000 performance fee, the average management fee rate for institutional and separate accounts improved to 48.6 basis points from 44.2 basis points as new business with higher fee rates offset lost business with substantially lower rates. Total net sales, including institutional and separate account business, were $165.8 million for this year's first quarter compared with $261.6 million for the same period last year. Redemption rates on retail mutual funds increased slightly in the first quarter of 2001 to 8.7% compared with 7.7% for the first quarter of 2000. The quarter-to-date redemption rate through February 2001 was 7.4%. Net sales in March fell from January and February's pace as redemptions by shareholders rose to pay income taxes. These retail redemption rates exclude all exchanges, including commissionable variable annuity exchanges. Underwriting and distribution fee revenues are derived primarily from sales commissions from front-load products, and to a lesser extent from asset-based fees earned on deferred-load products. Underwriting and distribution revenues were $48.9 million, 7% higher than last year's first quarter. Legend, acquired on March 31, 2000, contributed $8.4 million to underwriting and distribution revenues for the first quarter of 2001. Excluding Legend's contribution, revenues were down $5.0 million, or 11%, driven primarily by the 7% decline in front-load investment product sales (see table below). The first quarter of 2000 was a record sales quarter, making for a difficult quarter-over-quarter comparison. The strength of last year's quarter, coupled with adverse market volatility this year, led to the decline in sales quarter over quarter. 12 INVESTMENT PRODUCT SALES Investment product sales of proprietary products (excludes Legend sales, money market fund sales and sales at net asset value) are summarized as follows ($ in millions):
1Q01 1Q00 % change ---------- ---------- ---------- Front-load (Class A) $ 394.0 $ 456.3 (13.7)% W&R Target funds (variable products)* 173.0 155.4 11.3% ---------- ---------- Front load product total 567.0 611.7 (7.3)% ---------- ---------- Back-load (Class B) 72.0 111.2 (35.3)% Level-load (Class C) 31.6 97.9 (67.7)% ---------- ---------- Deferred load product total 103.6 209.1 (50.5)% ---------- ---------- Total retail product sales 670.6 820.8 (18.3)% Institutional and separate accounts 355.2 317.5 11.9% ---------- ---------- Total investment product sales $ 1,025.8 $ 1,138.3 (9.9)% ========== ==========
* First quarter 2001 includes $34.5 million of commissionable variable annuity exchanges. Underwriting and distribution expenses were $43.7 million for this year's first quarter, an increase of 6% over the same period last year. Legend contributed $6.9 million to the increase in underwriting and distribution expense. Excluding Legend's contribution, these expenses were down $4.6 million, or 11%, in correlation with the decline in related revenues. Indirect distribution costs declined as advertising and marketing programs were significantly reduced, more overhead expenses were reimbursed from mutual funds, and sales-related legal costs declined. Distribution margin, excluding Legend's contribution, was 9.0% in both 2000 and 2001's first quarter. Including Legend's contribution, distribution margin was 10.5% for this year's first quarter. With the overall 18% decrease in retail investment product sales came a decrease in sales force productivity, as measured by retail investment sales per advisor. Sales force productivity decreased 26% to $239 thousand in the first quarter of 2001 from $323 thousand in the first quarter of 2000. The total number of financial advisors increased 12% to 2,835, up 313 from last year's first quarter. Shareholder service fee revenues from transfer agency, custodian and accounting services were $14.4 million for the first quarter of 2000, up 27% over the same period last year. Legend's custodial services fee revenue, which is based on a percentage of the applicable assets, contributed $1.4 million to service fee revenue during the first quarter of 2001. Non-Legend shareholder service fee revenue was $12.9 million, an increase of 15% over last year's first quarter. Over 80% of this revenue is comprised of transfer agency fees charged for shareholder accounts, while the remainder comes from retirement plan fees and mutual fund accounting service fees. The number of shareholder accounts increased 12% to 2.04 million at March 31, 2001, compared with 1.82 million at March 31, 2000. Investment and other income, which consists primarily of interest income from investment securities, included realized gains from the sales of securities of $2.1 million in the first quarter of 2000. Excluding this gain, investment and other income decreased $0.4 million due primarily to lower balances in commercial paper and fixed income securities. 13 Compensation and related costs increased $0.8 million, or 6%, from last year's first quarter. Base salaries increased $1.8 million due largely to last year's increase in personnel and annual raises; however, this was somewhat offset by a reduction in amounts accrued for incentive-based compensation and bonuses. General and administrative expenses were $6.0 million, a 9% decrease over the first quarter of 2000. Legend contributed $0.8 million to general and administrative costs in the current year's first quarter. Excluding Legend's contribution, these costs were down $1.4 million or 22%. A greater portion of information systems support was dedicated to underwriting and distribution efforts during the year, the costs of which are included in underwriting and distribution expense. In addition, costs incurred in 2000 associated with restructuring and renaming our fund families and adding additional share classes were not incurred in 2001, resulting in a favorable comparison. Costs also were lower for professional services and consulting, and client service costs. Interest expense increased $1.9 million, or 76%, over last year's first quarter. Total average outstanding debt for the first quarter of 2001 was $221.7 million compared with $150.2 million for the first quarter of 2000. The increase was due to the issuance of long-term debt in the first quarter of 2001 of $200.0 million in principal amount 7.5% senior notes on January 18, 2001. Our 2001 first quarter overall weighted average interest rate was 8.0% compared to 6.7% for the same period in the prior year. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and liquid marketable securities were $139.1 million at March 31, 2001, an increase of $13.4 million from December 31, 2000. Cash and cash equivalents included reserves of $16.9 million and $21.9 million for the benefit of customers in compliance with securities regulations at March 31, 2001 and December 31, 2000, respectively. Liquid assets, which consist of cash and cash equivalents, investments available-for-sale and current receivables increased to $174.7 million at March 31, 2001 from $161.2 million at December 31, 2000. Cash flow provided from operations was $31.8 million and $63.8 million for the first quarters of 2001 and 2000, respectively. A greater reduction in accounts payable and other liabilities when compared with the same period last year contributed to less cash flow provided by operations. In the first quarter of 2000, larger changes in accounts payable and other receivables were realized due to the timing of customer receipts and payments for mutual fund transactions. Cash flow provided from investing activities was $12.3 million compared with net cash used of $34.2 million for the same period in the prior year. Cash flow from investing activities in the first quarter of 2001 included net proceeds of $28.2 million related to the sale of our two home office buildings, which were subsequently leased back for a period of fifteen years. A gain on this transaction of $1.8 million will be amortized over the operating lease term. Proceeds from this sale were used to pay down short-term borrowings and for general corporate purposes. In the first quarter of 2000, we acquired Legend for $61.1 million, which was facilitated somewhat by the sale of investment securities of $37.8 million during the period. In the first quarter of 2001, additional purchase price payments of $13.1 million were made to previous owners of acquired companies for attaining specified earnings levels as stipulated in the purchase agreements. Cash flow used in financing activities during the first quarter of 2001 was $28.5 million, an increase of $27.2 million from the same period last year. The increase was principally attributable to larger repurchases of our common stock in the current year's quarter. 14 We have a $220 million 364-Day revolving credit facility available to us at an interest rate of LIBOR plus 0.425%. This facility is expandable to $330 million with a syndicate of eight banks, whereby syndicates could, at their option upon our request, increase the loan by $110 million. We also utilize a money market loan program, which is similar to commercial paper. As of March 31, 2001, there was no outstanding balance on the credit facility and the outstanding balance related to the money market loan program was $74.0 million, excluding accrued interest. In January 2001, we also issued $200.0 million in principal amount 7.5% senior notes due 2006 for net proceeds of $197.6 million (net of discounts, commissions and expenses) to repay amounts borrowed under the money market loan program and for general corporate purposes. During the quarter, we had net borrowings of $97.1 million, an increase of $2.1 million from the same period in the prior year. The ratio of total debt to total capitalization was 0.85 and 0.55 at March 31, 2001 and December 31, 2000, respectively. The primary use of the borrowed funds in the current period was to repurchase stock under our stock repurchase program. We believe our available cash, marketable securities and expected cash flow from operations will be sufficient to fund dividends, obligations and operations as well as advance sales commissions and to meet any other reasonably foreseeable cash needs. ADDITIONAL PRODUCT OFFERINGS THROUGH NATIONWIDE The steps taken last year to provide broader depth to our insurance product offerings are continuing to progress. Nationwide Financial Services, Inc. ("Nationwide") now underwrites substantially all of the variable annuity and variable universal life products sold by our sales force. Nationwide's reputation for quality products and superior service enhances the attractiveness of these products to our advisors and clients. Nationwide also has developed a survivorship life product, a qualified group retirement plan and term insurance for distribution by our financial advisors. TERMINATION OF AGREEMENTS BY UNITED INVESTORS LIFE INSURANCE COMPANY On February 28, 2001, United Investors Life Insurance Company ("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 products underwritten by UILIC by our financial advisors. As a result, beginning May 1, 2001, Nationwide is the sole provider of variable products invested in our mutual funds for distribution by our financial advisors. In addition, on February 28, 2001, UILIC terminated the General Agent Contract 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, we recently have entered into an agreement with BISYS Insurance Services, Inc. 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. 15 OTHER INFORMATION ASSETS UNDER MANAGEMENT (amounts in millions) ENDING
1Q 01 1Q 00 % change ---------- ---------- ---------- Mutual Fund Equity $ 23,229 $ 31,186 (25.5)% Fixed Income 3,184 3,289 (3.2)% Money Market 1,191 873 36.4% ---------- ---------- Total $ 27,604 $ 35,348 (21.9)% Institutional and separate accounts 4,645 6,132 (24.2)% ---------- ---------- Total $ 32,249 $ 41,480 (22.3)% ========== ==========
AVERAGE*
1Q 01 1Q 00 % change ---------- ---------- ---------- Mutual Funds Equity $ 26,125 $ 29,270 (10.7)% Fixed Income 3,171 3,403 (6.8)% Money Market 1,072 825 29.9% ---------- ---------- Total $ 30,368 $ 33,498 (9.3)% Institutional and separate accounts 4,934 5,722 (13.8)% ---------- ---------- Total $ 35,302 $ 39,220 (10.0)% ========== ==========
* Average calculated using daily ending balances for mutual funds and monthly ending balances for institutional and private accounts.
1Q 01 1Q 00 % change ---------- ---------- ---------- Retail Redemption Rate [1] 8.7% 7.7% Sales per advisor (000s) [2] - ---------------------------- Total 239 323 (26.0)% 2+ Years [3] 328 460 (28.7)% 0 to 2 Years [4] 55 95 (42.1)% Other 119 164 (27.4)% Number of financial advisors [2] 2,835 2,522 12.4% Average number of financial advisors [2] 2,809 2,544 10.4% Number of shareholder accounts 2,035,449 1,820,771 11.8%
[1] Excludes all exchanges including commissionable variable annuity exchanges of $34.5 million in the first quarter of 2001. [2] Excludes Legend Retirement Advisors [3] Advisors licensed with the Company for two or more years. [4] Advisors licensed with the Company for less than two years. 16 FORWARD LOOKING INFORMATION From time-to-time, information or statements provided by or on behalf of the Company, including those within this quarterly report on Form 10-Q may contain certain "forward-looking information," including information relating to anticipated growth in our revenues or earnings, anticipated changes in the amount and composition of assets under management, our anticipated expense levels, and our expectations regarding financial markets and other conditions. Readers are cautioned that any forward-looking information provided by or on behalf of the Company is not a guarantee of future performance. Actual results may differ materially from those contained in these forward-looking statements as a result of various factors, including but not limited to those discussed below. Further, such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, whether as a result of new information, future developments or otherwise. Our future revenues will fluctuate due to many factors, such as the total value and composition of assets under our management and related cash inflows or outflows in the Advisors, W&R and W&R Target mutual funds (the "Funds") and other investment portfolios; fluctuations in national and worldwide financial markets resulting in appreciation or depreciation of assets under our management; the relative investment performance of the Funds and other investment portfolios as compared to competing offerings; the expense ratios of the Funds; investor sentiment and investor confidence; the ability to maintain our investment management and administrative fees at appropriate levels; competitive conditions in the mutual fund, asset management, and broader financial services sectors; our introduction of new mutual funds and investment portfolios; our ability to contract with the Funds for payment for investment advisory-related administrative services provided to the Funds and their shareholders; the continuation of trends in the retirement plan marketplace favoring defined contribution plans and participant-directed investments; potential misuse of client funds and information in the possession of our financial advisors; and the risk that the restructuring of our mutual fund products and development of additional distribution channels may not be successful. Our revenues are substantially dependent on fees earned under contracts with the Funds and could be adversely affected if the independent directors of one or more of the Funds determined to terminate or significantly alter the terms of the investment management or related administrative services agreements. Our future operating results are also dependent upon the level of our operating expenses, which are subject to fluctuation for the following or other reasons: variations in the level of compensation expense due to, among other things, performance-based bonuses, changes in our employee count and mix, and competitive factors; unanticipated costs that may be incurred to protect investor accounts and the goodwill of our clients; and disruptions of services, including those provided by third parties such as communications, power, and the mutual fund transfer agent system. In addition, our future operating results may also be impacted by our ability to incur additional debt and by adverse litigation. The Company's business is also subject to substantial governmental regulation, and changes in legal, regulatory, accounting, tax, and compliance requirements may have a substantial effect on our operations and results, including but not limited to effects on costs we incur and effects on investor interest in mutual funds and investing in general or in particular classes of mutual funds or other investments. 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Since December 31, 2000, there has been no material change in the information provided in Item 7A of the 2000 Form 10-K Annual Report. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. UNITED INVESTORS LIFE INSURANCE COMPANY LITIGATION As previously disclosed, we are in litigation with 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 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 ("post-1999 assets"), and annual compensation of 0.20% on variable annuity policies' assets under management issued before that date ("pre-2000 assets"). 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. We have subsequently named Torchmark Corporation as a third-party defendant in a tortious interference claim. On April 9, 2001, the Circuit Court of Jefferson County, Alabama, issued two orders. In the first order on the issue of the contract being valid, our motion for summary judgment was denied. This issue is currently set for trial in September 2001. In the second order on the issue of whether annual compensation of 0.20% on pre-2000 assets terminates with the Principal Underwriting Agreement, UILIC's motion for summary judgment was granted. The annual compensation of 0.25% on post-1999 assets was not addressed by these orders. These completely incongruous orders prevent us from collecting fees on pre-2000 assets after May 2001 unless our efforts for immediate legal relief are successful or we prevail at and after the September 2001 proceedings. While management believes that the Company will ultimately prevail on this issue, if it does not, the revenue impact at current market levels is estimated to be $2.4 million over the remaining three quarters of 2001. In the future, this impact should be mitigated by a pre-2000 asset balance that is expected to decline as clients migrate their variable policies to other products with superior features and service. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On April 25, 2001, our stockholders approved an Agreement and Plan of Merger by and between the Company and WDR Sub, Inc., one of the Company's wholly-owned subsidiaries, with the Company to remain as the surviving corporation. The merger effected a combination of our Class A and Class B common stock on a one-for-one basis. Prior to the merger, our Class A and Class B common stock had the same rights, powers and preferences, except that the Class A common stock was entitled to one vote per share and the Class B common stock was entitled to five votes per share. Effective as of the end of business on April 30, 2001, each share of our Class B common stock was converted into one share of Class A common stock and the number of Class A authorized shares increased from 150,000,000 to 250,000,000 to account for the elimination of the 18 100,000,000 authorized Class B shares. We terminated the Class B common stock registration under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and it is no longer listed or traded on the New York Stock Exchange (the "NYSE"). Our Class A common stock will continue to be registered under the Exchange Act and will continue to be listed and traded on the NYSE under the symbol "WDR." ITEM 5. OTHER INFORMATION. Forward-Looking Statements We desire to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). The 1995 Act provides a "safe harbor" for forward-looking statements to encourage companies to provide information without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected. Although we do not anticipate that we will make forward-looking statements as a general policy, we will make forward-looking statements as required by law or regulation, and from time to time may make such statements with respect to management's estimation of our future operating results and business. We hereby incorporate into this report by reference to our Form 10-K for the year ended December 31, 2000, the cautionary statements found on pages 29-32 of such Form 10-K. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS: 2.1 Agreement and Plan of Merger, dated as of February 14, 2001, by and between Waddell & Reed Financial, Inc. and WDR Sub, Inc. Filed as Exhibit 2.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. 3.1 Amended and Restated Certificate of Incorporation. 3.2 Amended and Restated Bylaws of the Company. 4.1 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. Filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. 4.2 Indenture, dated as of January 18, 2001, by and between Waddell & Reed Financial, Inc. and Chase Manhattan Trust Company, National Association. Filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. 4.3 First Supplemental Indenture, dated as of January 18, 2001 by and between Waddell & Reed Financial, Inc. and Chase Manhattan Trust Company, National Association, 19 including the form of the 7.5% notes due January 2006 as Exhibit A. Filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. 10.1 Administrative Agreement, dated as of March 9, 2001 by and among W&R Insurance Agency, Inc., Waddell & Reed, Inc., and BISYS Insurance Services, Inc. (b) REPORTS ON FORM 8-K: A Form 8-K dated February 5, 2001 was filed to announce that on January 18, 2001, we completed our sale of $200.0 million aggregate principal amount of our 7.50% senior notes due January 18, 2006 under an effective registration statement filed with the Securities and Exchange Commission. No financial statements were required to be filed. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, this 15th day of May, 2001. WADDELL & REED FINANCIAL, INC. By: /s/ John E. Sundeen, Jr. ---------------------------------------- Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) By: /s/ D. Tyler Towery ---------------------------------------- Vice President and Controller (Principal Accounting Officer) 21 EX-3.1 2 a2048323zex-3_1.txt EX 3.1 AMENDED & RESTATED CERTIFICATE OF INC. EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF WADDELL & REED FINANCIAL, INC. 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; 2 (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 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. 3 (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 4 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 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. 5 (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 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 6 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 (i) 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 (ii) 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 (ii) of the foregoing sentence. (7) Immediately upon the expiration of a default period, (i) the right of the holders of Preferred Stock as a class to elect directors shall cease, (ii) the term of any directors elected by the holders of Preferred Stock as a class shall terminate, and (iii) the number of directors shall be 7 such number as may be provided for in the certificate of incorporation or bylaws 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 (ii) and (iii) 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 8 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 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 9 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. (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 10 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, 11 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. 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 12 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 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 (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for paying a dividend or approving a stock repurchase in violation of Section 174 of the Delaware General Corporation Law, or (iv) 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 13 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 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 14 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. 15 EX-3.2 3 a2048323zex-3_2.txt EX 3.2 AMENDED & RESTATED BYLAWS Exhibit 3.2 AMENDED AND RESTATED BYLAWS OF WADDELL & REED FINANCIAL, INC. EFFECTIVE AS OF APRIL 25, 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 2 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 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. 3 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. 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 4 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 direct9ors 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. 5 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 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 6 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 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 7 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 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. 8 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. 9 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 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 10 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 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 11 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. (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 12 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. 13 EX-10.1 4 a2048323zex-10_1.txt EXHIBIT 10.1 Exhibit 10.1 ADMINISTRATIVE AGREEMENT THIS ADMINISTRATIVE AGREEMENT ("Agreement") is entered into as of the 9th day of March, 2001, by and between, W & R Insurance Agency, Inc., a licensed insurance agency, on its own behalf and on behalf of its affiliated corporate insurance agencies ("INSURANCE AGENCY") and Waddell & Reed, Inc., a registered Broker-Dealer, ("W & R") (INSURANCE AGENCY and W & R sometimes referred to herein as "AGENCY") with offices at 6300 Lamar Avenue, Shawnee Mission, Kansas 66201 and BISYS Insurance Services, Inc. and its registered wholesale Broker-Dealer, Underwriters Equity Corp. (collectively "BISYS"), with offices at 4200 Crums Mill Road, Harrisburg, Pennsylvania 17112. WHEREAS, INSURANCE AGENCY is an insurance agency that markets certain products and services to CUSTOMERS through AGENTS; and WHEREAS, BISYS is in the business of making available insurance products and providing administrative services to organizations that market such insurance products and services; and WHEREAS, BISYS is a general agent for the CARRIERS under various contracts now in existence and has the authority to appoint AGENTS to sell the insurance products of such CARRIERS; and WHEREAS, AGENCY wishes BISYS to make available PRODUCTS, and provide SERVICES to support the sales of such PRODUCTS by AGENTS; and WHEREAS, BISYS will earn compensation from sales of PRODUCTS through this Agreement and is willing to pay a stipulated portion of such compensation to AGENCY on business sold by AGENTS. NOW THEREFORE, in consideration of the foregoing and the mutual provisions set forth below, for good and valuable consideration, and intending to be legally bound hereby, the parties hereto agree as follows: SECTION 1. DEFINITIONS. 1.1 AGENTS mean insurance agent duly licensed by INSURANCE AGENCY or affiliates of AGENCY and/or registered representatives of W & R who are registered and qualified as necessary with the NASD and any appropriate state authority and that are authorized to conduct the securities brokerage activities contemplated by this Agreement. 1.2 AGENCY INDEMNIFIED PERSON shall have the meaning specified in Section 6.1. 1.3 BISYS INDEMNIFIED PERSON shall have the meaning specified in Section 6.2. 1.4 CARRIER means the insurance companies with which BISYS has a general agency, marketing agreement or selling agreement in effect as listed in EXHIBIT A. Any changes, additions or deletions to PRODUCTS unilaterally made by CARRIERS shall automatically modify Attachment 1 to EXHIBIT A. 1.5 CUSTOMERS mean individuals or businesses that procure services or products from AGENCY or affiliates of AGENCY. 1.6 PRODUCTS mean the disability insurance, life insurance, and, subject to the last two sentences of this Section 1.6, the variable life insurance products listed in Attachment 1 to EXHIBIT A, as selected by AGENCY, as such Exhibit is amended from time to time. Any changes, additions or deletions to PRODUCTS unilaterally made by CARRIERS shall automatically modify attachment 1 to EXHIBIT A. BISYS acknowledges that AGENCY is a party to certain agreements with 1 Nationwide Financial and its affiliates ("Nationwide"), pursuant to which AGENCY has granted Nationwide an exclusive right to sell certain variable life insurance products. BISYS further acknowledges and agrees that the term PRODUCTS in this Agreement, when referring to variable life insurance products, shall be limited to: a. variable life insurance policies that are being sold due to an impaired risk; provided that such policies may only be sold through BISYS after Nationwide has been given the opportunity to sell such variable life insurance policies and has refused or declined to do so, or b. variable life insurance policies that are being sold as a result of a contractually guaranteed right of conversion without evidence of insurability from a term life insurance policy. 1.7 SERVICES shall mean those administrative services set forth in Section 2.3. SECTION 2. COVENANTS OF BISYS. 2.1 BISYS shall make available to AGENCY the PRODUCTS listed in EXHIBIT A. 2.2 BISYS will compensate AGENCY for PRODUCTS sold (i.e., insurance coverage placed) to CUSTOMERS in accordance with the provisions set forth in EXHIBIT B. a. AGENCY shall be vested in and entitled to their portion of renewal commissions for insurance coverage issued by CARRIERS and paid to BISYS. b. All commissions due to AGENCY are to be paid to either Insurance Agency or W & R, whichever is applicable. In the event that a carrier pays a commission directly to the AGENTS, all commissions payable to AGENCY will be reduced by the amount of commissions paid directly to the AGENCY by such CARRIER. c. In the event that the CARRIER contracts or any applicable laws prohibit the compensation splits in this Agreement, this Agreement shall be immediately amended, without further action. d. In the event that CARRIERS unilaterally modify the commissions payable to BISYS, the commissions in EXHIBIT B shall be immediately amended without further action. e. EXHIBIT B may be reviewed annually. BISYS reserves the right to modify the compensation. If AGENCY does not agree to the compensation modification, AGENCY may terminate the Agreement with ninety (90) days notice to BISYS. 2.3 BISYS will provide the following administrative services to AGENCY during the term of this Agreement at no charge to Agency: a. preparation of standard management information systems (MIS) reports relating to the sales of PRODUCTS by AGENTS; b. all services required to process applications, including for example but not limited to: (1) all contracting and appointment functions for AGENTS, (2) initial contracting and appointment functions for AGENCY, (3) all new business functions, 2 (4) all underwriting functions, (5) all policy issue functions, (6) all compensation distribution functions, and (7) all policy holder service functions; c. role as liaison between AGENCY and CARRIERS; d. full and free access to download illustration software from the BISYS web site by AGENCY or by AGENTS via secured pass code; e. sales supplies (i.e., marketing and promotional material and application forms provided by CARRIERS) for use by AGENCY and AGENTS; f. secure electronic access to case status via the BISYS web site; g. initial product training of AGENCY and AGENTS as AGENCY shall approve; h. impaired risk guidelines for informal inquiries, which are: (1) For cases less than $500,000 of face amount, BISYS will accept phone calls, emails, or faxed inquiries only and will not accept trial applications, set up files, or order APSs. After BISYS reviews the details of the client's medical factors and background, BISYS will advise AGENT which company is likely to deliver the best results based on the particular impairment(s). AGENT can then proceed by submitting a formal application for a specific carrier. If AGENT does not have sufficient information for BISYS to suggest a course of action, BISYS will indicate what additional information AGENT will need to obtain. If, in BISYS' judgment, an APS is needed to properly evaluate the case, BISYS will accept AGENT-obtained APS information. (2) For cases of $500,000 to $1,000,000 in face amount, BISYS will accept phone calls, emails or faxed inquiries only and will not accept trial applications. To assist the AGENT in developing this business, internet-based questionnaires, in addition to other comprehensive impaired risk information found at www.bisd.com, will guide the AGENT in the collection of data sufficient for BISYS to advise on the case. BISYS will try in all cases to make decisions based on the data that the AGENT has collected. If APS information is needed, BISYS will ask the AGENT to supply this information. (3) For cases greater than $1,000,000 in face amount, BISYS will accept the submission of informal applications. BISYS will request APSs in those cases where it is necessary in its judgment to render a viable offer, making every effort to evaluate a case without the need for an APS. BISYS encourages the AGENT to print and complete the online INFORMAL INQUIRY found at www.bisd.com to expedite the review of cases, and will reimburse the AGENT for APS costs if the case is formalized and placed through BISYS. 2.4 BISYS will provide to AGENCY an estimate of costs associated with performing administrative services beyond the scope of Section 2.3. 3 2.5 BISYS shall maintain professional liability insurance against claims for damages based on alleged or actual errors or omissions, with an initial combined single limit of not less than one million dollars ($1,000,000). 2.6 BISYS shall not use AGENCY's name or logo for any marketing or promotional purposes without the prior written approval of AGENCY. 2.7 BISYS shall not assign, pledge, alienate, or otherwise encumber any amounts payable by BISYS to AGENCY under this Agreement, unless, under the CARRIER's contract BISYS is charged back a percentage of AGENCY's or AGENT's compensation, in which event BISYS will net the charge-back against AGENCY's compensation. The charge-back invoice shall include the amount due, the policy number, and the CARRIER identification. SECTION 3. REPRESENTATION AND WARRANTIES OF BISYS. BISYS represents and warrants to AGENCY that: 3.1 BISYS is corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and qualified to do business in each jurisdiction in which it conducts business. BISYS is required to be so qualified because the failure to be so qualified would have a material adverse effect on the financial condition, operating results, or business of BISYS. BISYS has all corporate powers, licenses, and regulatory approvals necessary to engage in the business which relates to the subject matter of this Agreement except where the failure to have any such powers, licenses or regulatory approvals would not have a material effect on the financial condition, operating results or business of BISYS, or its ability to perform under this Agreement. 3.2 The execution and delivery of this Agreement by BISYS has been duly authorized by all necessary corporate action. Neither the execution of this Agreement nor the fulfillment of its obligations by BISYS hereunder will cause BISYS, to its knowledge, to violate any federal or state statute, any rule or regulation of any state or federal regulatory agency to which BISYS may be subject, resulting in a material adverse effect on the financial condition, operating results or business of BISYS, or its ability to perform under this Agreement. 3.3 There is no judicial, administrative or regulatory proceeding, investigation or administrative charge or complaint pending or, within the knowledge or belief of BISYS, threatened, which could result in any material adverse change in the financial condition, operating results or business of BISYS or which would have a material adverse effect on the ability of BISYS to perform its obligations under this Agreement. SECTION 4. COVENANTS OF INSURANCE AGENCY AND W & R. 4.1 AGENCY and affiliates of AGENCY shall have the right to continue in effect any existing agreement with insurance carriers entered into prior to the effective date of this Agreement to obtain any disability insurance, life insurance, and/or variable life insurance products for the remaining term of such agreements, including renewals or extensions of such agreements. 4.2 After the effective date of this Agreement, and at all times during its term, AGENCY agrees to provide BISYS with an exclusive right to obtain access for the AGENCY to: a. the disability insurance and life insurance products made available to AGENCY pursuant to such pre-existing agreements upon their expiration or termination; and 4 b. any new disability insurance and life insurance products the AGENCY is considering or intends to offer to CUSTOMERS. If BISYS cannot provide access to such disability insurance and life insurance products, AGENCY shall have the right to proceed to access such products directly from the carrier but not through another general agency that is unaffiliated with a carrier. 4.3 AGENCY at all times shall cause each AGENT to conduct its activities pursuant to this Agreement in accordance with all applicable state and federal laws and regulations including without limitation, applicable state and federal insurance laws, regulations and interpretive positions (collectively, "INSURANCE REGULATIONS") governing the sale of PRODUCTS by AGENTS and all aspects of the business of insurance. Without limiting the generality of Section 4.3, AGENCY shall take appropriate measures and establish and implement procedures, as follows: a. AGENCY at all times shall cause each AGENT to hold the appropriate insurance license(s) in the state of solicitation and the state where the application is signed prior to submitting an application for insurance to BISYS. Neither BISYS nor CARRIERS provide first-time licensing services to AGENTS in states of sale, whether resident or non-resident. b. AGENCY at all times shall cause each AGENT to obtain pre-contracting/appointment with the CARRIER prior to soliciting the sale of a PRODUCT to the consumer if required by the CARRIER and by the insurance laws of the applicable state. c. AGENCY at all times shall use its best efforts to cause each AGENT to refrain from altering, modifying, waiving, or amending any terms, rates or conditions of any advertisement, brochures, applications, policies, contracts or other materials provided to the AGENT by BISYS or any CARRIER. d. AGENCY at all times shall use its best efforts to cause each AGENT to refrain from issuing or circulating any advertising material, circular or pamphlet relating to any insurance product unless the same shall have been authorized and approved in writing by BISYS or the CARRIER. 4.4 AGENCY shall maintain professional liability insurance against claims for damages based on alleged or actual errors or omissions, with an initial combined single limit of not less than one million dollars ($1,000,000). 4.5 AGENCY shall require AGENT to maintain professional liability insurance against claims for damages based on alleged or actual errors or omissions, with an initial combined single limit of not less than one million dollars ($1,000,000). 4.6 AGENCY shall prohibit AGENTS with a felony conviction for a crime of dishonesty or breach of trust to work in the insurance industry, unless their state insurance commissioner grants written permission. AGENCY certifies that, to the best of its knowledge, none of its AGENTS have ever been convicted of a state or federal felony involving dishonesty or breach of trust; or, if so, that the AGENTS have received written authorization from their state insurance commissioner specifically referencing Section 1033 of the Violent Crime Control and Law Enforcement Act of 1994, subsection (e)(2) granting permission to work in the insurance industry. 4.7 AGENCY shall not use BISYS' name or logo for any marketing or promotional purposes without the prior written approval of BISYS, which shall not be unreasonably withheld or delayed. 5 4.8 AGENCY shall not use the CARRIER's name or logo for any marketing or promotional purposes without the prior written approval of BISYS and CARRIER, which BISYS shall not unreasonably withhold or delay. 4.9 Intentionally omitted. 4.10 AGENCY shall be responsible for costs associated with performance of administrative services beyond the scope of Section 2.3. 4.11 W & R at all times shall maintain its Broker-Dealer license under the 1934 Act, be a member in good standing of the NASD and be duly licensed in all states and jurisdictions where required to perform pursuant to this Agreement. 4.12 W & R shall fully comply with the requirements of the 1934 Act and all other applicable federal or state laws and with the rules of the NASD. 4.13 W & R shall establish such rules and procedures as may be necessary to cause diligent supervision of the securities activities of the registered representatives including ensuring compliance with the prospectus delivery requirements of the 1933 Act. 4.14 W & R shall train and supervise its registered representatives to ensure that purchase of a PRODUCT is not recommended to a CUSTOMER in the absence of reasonable grounds to believe the purchase of the PRODUCT is suitable for that CUSTOMER. While not limited to the following, a determination of suitability shall be based on information furnished to a registered representative after reasonable inquiry of such CUSTOMER, concerning the CUSTOMER's other security holdings, financial situation, financial objectives and needs. 4.15 W & R shall ensure that any offer of a PRODUCT, which constitutes a sale of a security made by a registered representative will be made by means of a currently effective prospectus. 4.16 W & R shall not permit an offer of a PRODUCT, which constitutes a sale of a security to be made by any person that is not a registered representative. 4.17 W & R shall have full responsibility for the training and supervision of all persons associated with it who are engaged directly or indirectly in the offer or sale of PRODUCTS. All such persons shall be registered representatives of and shall be subject to its control with respect to their securities activities. SECTION 5. REPRESENTATION AND WARRANTIES OF AGENCY. AGENCY represents and warrants to BISYS that: 5.1 AGENCY is duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and is qualified to do business in each jurisdiction in which it conducts business and is required to be so qualified where failure to be so qualified would have a material adverse effect on the financial condition, operating results or business of each AGENCY. AGENCY has all corporate powers, licenses, and regulatory approvals necessary to engage in the business which relates to the subject matter of this Agreement except where the failure to have any such powers, licenses or regulatory approvals would not have a material adverse effect on the financial condition, operating results or business of AGENCY, or its ability to perform under this Agreement. 5.2 The execution and delivery of this Agreement by AGENCY has been duly authorized by all necessary corporate action. Neither the execution of this Agreement nor the performance by AGENCY of its obligations hereunder will cause AGENCY, to the best of its knowledge, to 6 violate any federal or state statute, any rule or regulation of any state or federal regulatory agency pursuant to which AGENCY may be subject which would result in a material adverse effect on the financial condition, operating results or business of AGENCY, or its ability to perform under this Agreement. 5.3 There is no judicial, administrative or regulatory proceeding, investigation or administrative charge or complaint pending or, within the knowledge or belief of AGENCY, threatened, which could result in any material adverse change in the financial condition, operating results or business of AGENCY or which would have a material adverse effect on the ability of AGENCY to perform its obligations under this Agreement. SECTION 6. INDEMNIFICATION. 6.1 BISYS agrees to indemnify AGENCY, its affiliates and their shareholders, directors, officers, employees and agents (collectively "AGENCY INDEMNIFIED PERSONS") and to hold each of them harmless against any and all losses, liabilities, claims, demands, actions, judgments, damages, costs and expenses, including, but not limited to, reasonable attorneys' fees, disbursements and other expenses incurred in connection with investigating any claim and defending any action and any amounts paid in settlement or compromise (provided that BISYS shall have given its prior written approval of any settlement or compromise, not to be unreasonably withheld) of an action to which such AGENCY INDEMNIFIED PERSON is a party based upon, arising out of, relating to, or in connection with: a. any breach of the representations, warranties or covenants contained in Sections 2 or 3, or b. the negligent performance by BISYS of its responsibilities under this Agreement, except to the extent that such losses, liabilities, claims, demands, actions, judgments, damages, costs and expenses are incurred by the reason of: (1) the willful misconduct or gross negligence of any AGENCY INDEMNIFIED PERSON whose duties are directly related to this Agreement; or (2) a regulatory or other challenge to the legality of the contractual relationship between BISYS and AGENCY or the activities contemplated in this Agreement. If any event occurs for which indemnification to any AGENCY INDEMNIFIED PERSON is sought pursuant to this Section 6, such AGENCY INDEMNIFIED PERSON must provide BISYS with written notice of such event as soon as possible, but in no event later than thirty (30) days after the earlier of: c. such time as it has actual knowledge of the occurrence of such event; or d. such time as it receives notice that an action has been filed in a court, or action has been taken by any administrative agency, alleging the occurrence of an event that may entitle an AGENCY INDEMNIFIED PERSON to indemnification by BISYS hereunder. BISYS shall be entitled to participate in such action or proceeding and, after written notice from BISYS to such AGENCY INDEMNIFIED PERSON, to assume the defense of such action or proceeding with mutually acceptable counsel and, with such AGENCY INDEMNIFIED PERSON's consent which shall not be unreasonably withheld, to compromise or settle such action or proceeding. Notwithstanding BISYS' election to assume the defense of such action or proceeding, such AGENCY INDEMNIFIED PERSON shall have the right to employ separate counsel and to participate in the defense of such action or proceeding at its own expense. 7 6.2 AGENCY agrees to indemnify BISYS, its affiliates and their directors, officers, employees and agents (collectively "BISYS INDEMNIFIED PERSONS") and to hold each of them harmless against any and all losses, liabilities, claims, demands, actions, judgments, damages, costs and expenses, including, but not limited to, reasonable attorneys' fees, disbursements and other expenses incurred in connection with investigating any claim and defending any action and any amounts paid in settlement or compromise (provided that AGENCY shall have given its prior written approval of any settlement or compromise, which shall not be unreasonably withheld) of an action to which such BISYS INDEMNIFIED PERSON is a party arising out of, relating to, or in connection with: a. any breach of the representations, warranties or covenants contained in Sections 4 or 5, or b. the negligent performance by AGENCY of its responsibilities under this Agreement, except to the extent that losses, liabilities, claims, demands, actions, judgments, damages, costs and expenses are incurred by reason of: (1) the willful misconduct or gross negligence of any BISYS INDEMNIFIED PERSON whose duties are directly related to this Agreement; or (2) a regulatory or other challenge to the legality of the contractual relationship between BISYS and AGENCY or the activities contemplated in this Agreement. If any event occurs for which indemnification to any BISYS INDEMNIFIED PERSON is sought pursuant to this Section 6, such BISYS INDEMNIFIED PERSON must provide AGENCY with written notice of such event as soon as possible, but in no event later than thirty (30) days after the earlier of: c. such time as it has actual knowledge of the occurrence of such event; or d. such time as it receives notice that an action has been filed in a court, or action has been taken by any administrative agency, alleging the occurrence of an event that may entitle a BISYS INDEMNIFIED PERSON to indemnification by AGENCY hereunder. AGENCY shall be entitled to participate in such action or proceeding and, after written notice from AGENCY to such BISYS INDEMNIFIED PERSON, to assume the defense of such action or proceeding with mutually acceptable counsel and, with such BISYS INDEMNIFIED PERSON's consent which shall not be unreasonably withheld, to compromise or settle such action or proceeding. Notwithstanding AGENCY's election to assume the defense of such action or proceeding, such BISYS INDEMNIFIED PERSON shall have the right to employ separate counsel and to participate in the defense of such action or proceeding at its own expense. 6.3 The obligations of the parties under this Section 6 shall survive the termination of this Agreement. SECTION 7. CONFIDENTIALITY. 7.1 In performing its obligations pursuant to this Agreement, each party may have access to and receive certain information about the other party, including, but not limited to, marketing philosophy and objectives, competitive advantages and disadvantages, financial results, technological developments, names, addresses and telephone numbers of customers (all on a variety of media including computer tapes and disks) and a variety of other information and materials that such other party considers confidential and/or proprietary (collectively "CONFIDENTIAL INFORMATION"). All CONFIDENTIAL INFORMATION obtained pursuant to this Agreement by either party, its directors, officers or other employees is, and shall be considered, confidential and proprietary of the other party. Each of the parties hereto shall: 8 a. protect and preserve the confidential and proprietary nature of all CONFIDENTIAL INFORMATION; b. not, without the prior written consent of either party, disclose, give, sell or otherwise transfer or make available, directly or indirectly, any CONFIDENTIAL INFORMATION to any third party; c. not make any records or copies of the CONFIDENTIAL INFORMATION, except as required by this Agreement, and shall return or destroy all CONFIDENTIAL INFORMATION and any copies thereof (in whatever form) immediately upon request; and d. limit the dissemination of the CONFIDENTIAL INFORMATION within its own organization to such persons that need to know the CONFIDENTIAL INFORMATION and restrict its use solely to the purposes set forth herein. 7.2 For purposes of Section 7.1(b), each party hereby consents to the disclosure of CONFIDENTIAL INFORMATION to CARRIERS to the extent: a. necessary or advisable in connection with the processing of applications for insurance coverage, or b. upon the request of insurance regulatory authorities which have jurisdiction over the parties in connection with this Agreement. 7.3 The provisions of this Section 7 shall survive the termination of this Agreement. 7.4 The restrictions shall not apply to any part of the CONFIDENTIAL INFORMATION which: a. was at the time of disclosure or thereafter becomes generally available to the public other than as a result of a breach of the receiving party's obligations hereunder; or b. was at the time of disclosure, as shown by the receiving party's records, already in the receiving party's possession on a lawful basis; or c. is lawfully acquired by the receiving party after the time of the disclosure through a third party under no obligation of confidence to the disclosing party; or d. is required to be disclosed pursuant to legal or regulatory authority, provided that immediate notice of such requirement is given to the other party. SECTION 8. TERM OF AGREEMENT. Unless terminated earlier pursuant to the terms of this Agreement, the initial term of this Agreement shall be three (3) years from the date of this Agreement (the "INITIAL TERM"). This Agreement shall automatically renew thereafter for successive one-year periods (each a "RENEWAL TERM") unless notice is received by either party within 60 days of expiration of the INITIAL TERM or any RENEWAL TERM. SECTION 9. TERMINATION. 9.1 This Agreement may be terminated without penalty by mutual agreement of the parties, or for "cause" as defined below. 9 9.2 For purposes of this Agreement, "cause" shall mean: a. willful misfeasance, bad faith, gross negligence or reckless disregard on the part of the party to be terminated with respect to its obligations and duties set forth herein; b. a breach of any material term or obligation under this Agreement which is not cured within 30 days of written notice to the breaching party by the non-breaching party; c. the insolvency or bankruptcy of either party or the inability of either party generally to pay its debts when due; or d. the failure of AGENCY or BISYS to maintain adequate licenses to substantially perform their responsibilities under this Agreement. 9.3 This Agreement may also be terminated without penalty by AGENCY in the event that that certain Limited Agency Agreement For Qualified Plan Accounts, by and among W & R, BISYS Brokerage Services, Inc., and BISYS Plan Services, L.P., has not been executed within thirty (30) days of the date hereof. SECTION 10. RESPONSIBILITIES UPON TERMINATION. 10.1 Except as otherwise expressly provided herein, the termination of this Agreement shall not terminate, affect or impair any rights, obligations or liabilities of any party hereto that may accrue prior to such termination or that, under the terms of this Agreement, continue after such termination. Upon the termination of this Agreement, each party shall return, or cause to be returned, all property, including but not limited to CONFIDENTIAL INFORMATION, belonging to the other party immediately upon request. Copies or reproductions of all jointly owned property shall be distributed to both parties. 10.2 BISYS shall make its best efforts to facilitate the assignment within sixty (60) days of the termination date of all commissions that may become due and owing to AGENCY on insurance coverage placed on CUSTOMERS pursuant hereto prior to the termination of this Agreement. 10.3 All commissions payable after termination, if not assignable, will be administered by BISYS and paid to AGENCY pursuant to EXHIBIT A upon a negotiated service fee for such administration. SECTION 11. ASSIGNMENT AND TRANSFER; SUBCONTRACTING. 11.1 No party hereto shall assign or otherwise transfer any of its rights or obligations hereunder, or contract with any third party to perform any of its responsibilities or obligations relating to this Agreement, without the prior written consent of the other party, which shall not be unreasonably withheld or delayed, except that AGENCY and BISYS may assign any of their respective rights or obligations hereunder to a parent corporation or a wholly-owned direct or indirect subsidiary of such parent upon prior notice to the other party and as contemplated under Section 11.2. 11.2 Prior to any approval of a third party subcontractor, the parties reserve the right to require such third party subcontractor to execute a confidentiality agreement in a form acceptable to the party protected. SECTION 12. REMEDIES; WAIVER. All remedies of the parties hereto shall be cumulative. No party hereto shall be deemed to have waived any of its rights, powers or remedies hereunder unless such waiver is made in writing signed by such party. 10 SECTION 13. ACCOUNTING AND AUDIT. During the term of this Agreement and for a period of one hundred and eighty (180) days following the termination of this Agreement, AGENCY or BISYS may, during normal business hours at its own expense and upon reasonable notice, inspect and conduct audits of all records of the other party relating to all transactions contemplated hereunder. SECTION 14. COMPLIANCE WITH REGULATORY AUTHORITIES. The parties mutually agree to cooperate fully in any regulatory examination or investigation by, or proceeding of any governmental or judicial authority arising in connection with this Agreement or the offering sale, and/or servicing of insurance thereunder, and to cooperate fully in any regulatory examination or investigation by, or proceeding of any governmental or judicial authority with respect to AGENCY or BISYS, and their respective affiliates, agents, representatives or employees to the extent that such investigation or proceeding is in connection to this Agreement or any conduct relating thereto. SECTION 15. FORCE MAJEURE. To the extent permitted by law, in the event that any party should fail in whole or in part to fulfill its obligations under this Agreement as a consequence of acts of God, fire, explosion, strikes, floods, earthquakes, embargoes, war, or riot, such failure to perform shall not be considered a breach of this Agreement during the period of such disability and for a reasonable time thereafter. In the event of any force majeure occurrence as set forth in this Section 15, the disabled party shall use its best efforts to meet its obligations as set forth in this Agreement. The disabled party shall promptly and in writing advise the other party if it is unable to perform due to a force majeure event, of the expected duration of such inability to perform, and of any developments (or changes therein) that appear likely to affect the ability of that party to perform any of its obligations hereunder in whole or in part. SECTION 16. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and shall be binding upon the parties hereto. SECTION 17. ENTIRE AGREEMENT. This Agreement and the Exhibits attached hereto embody the entire agreement and understanding between the parties hereto with respect to the subject hereof and supersedes any and all prior agreements and understandings relating to the subject matter hereof. SECTION 18. CONSTRUCTION OF AGREEMENT. The headings contained herein are for the convenience of reference only and are not intended to define, limit, expand or describe the scope or intent of any provision of this Agreement. SECTION 19. DISCLAIMER. Nothing contained herein shall be deemed to guarantee or warrant, nor does AGENCY represent, that any or all CUSTOMERS will use the services of BISYS or that any such CUSTOMER that avails itself of BISYS' services is credit worthy. AGENCY shall not be liable to BISYS for any costs or damages sustained by BISYS as a result of the failure of any such CUSTOMER to use BISYS' services or to purchase any PRODUCT recommended by BISYS. SECTION 20. NO PARTNERSHIP, ETC. 11 It is expressly understood and agreed that neither party hereto has, or shall have, authority to make any representation, warranty or any binding commitment in the name or on behalf of the other party. Neither the execution and delivery nor the performance of this Agreement shall constitute the parties hereto as partners, joint venturers or participants in any other association between them or any other person, nor create any relationship of principal and agent or franchiser and franchisee. Neither of the parties shall be responsible for, or incur any liability with respect to, the debts or the acts or omissions to act of the other party. SECTION 21. WAIVER, MODIFICATION. There can be no waiver of any term, provision or condition of this Agreement except in a writing signed by the party against whom the waiver is to be asserted. No change, modification or amendment to or of any provision of this Agreement shall be deemed to have been made or shall be effective unless expressed in a writing and signed by both AGENCY and BISYS. SECTION 22. FURTHER ASSURANCES. AGENCY and BISYS shall each take all such actions as may be reasonably requested by the other (including, without limitation, the execution of any further instruments and documents) in order to carry out the provisions and purposes of this Agreement. SECTION 23. COMMUNICATIONS. All notices or other communications given under this Agreement shall be made by guaranteed overnight delivery, or certified mail, or by telephone or telecopy only if immediately followed by one of the written notices as stated herein. Notice is effective when first received. Notices will be given to the parties at the following addresses: If to BISYS: BISYS Insurance Services, Inc. Attn: Executive Vice President 4200 Crums Mill Road Harrisburg, Pennsylvania 17112 With a copy to: BISYS Insurance Services, Inc. Attn: Counsel 4200 Crums Mill Road Harrisburg, PA 17112 If to AGENCY: Waddell and Reed, Inc. Attn: Assistant Vice President, Insurance Marketing 6300 Lamar Avenue Shawnee Mission, KS 66201 With a copy to: Waddell & Reed, Inc. Attention: Legal Department 6300 Lamar Avenue Shawnee Mission, KS 66201 SECTION 24. SEVERABILITY. If any provision of this Agreement shall be held or determined to be illegal, void or unenforceable, then the remaining provisions shall continue in full force and effect and unaffected by such holding or determination. 12 SECTION 25. GOVERNING LAW. This Agreement and all questions relating to its validity, interpretation, performance and enforcement shall be governed by and construed in accordance with the laws of Pennsylvania including its statutes of limitations but without regard to its conflict of laws provisions. 13 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the date first above written. BISYS INSURANCE SERVICES, INC. W & R INSURANCE AGENCY, INC. By: /s/ J. Randall Grespin By: /s/ Tony Craddock -------------------------- ------------------------ Name: J. Randall Grespin Name: Tony Craddock, ChFC Title: Executive Vice President Title: Assistant Vice President, Insurance Marketing Underwriters Equity Corp. WADDELL & REED, Inc. By: /s/ Steven S. Wevodau By: /s/ Robert J. Williams, Jr. --------------------------- ---------------------------- Name: Steven S. Wevodau Name: Robert J. Williams, Jr. Title: Vice President, Finance Title: Executive Vice President, National Sales Manager 14 EXHIBIT A Approved Carrier List: American General Banner Life Continental Assurance First Colony First Penn Pacific GE Capital Jefferson Pilot Lincoln Benefit Lincoln Life Manulife Mass Mutual Prudential Reliastar of NY Security-Connecticut Sun Life of Canada United of Omaha USG Annuity and Life Valley Forge Zurich Kemper -----END PRIVACY-ENHANCED MESSAGE-----