-----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, T9fa68mNjwB7Oc2dJuD65jmw1DEB4KLNNVHpz5ZNsZ3pLVAEU8rYSdZrOhgYS4oK s8TajYsAxd1wkwT4fdyIFg== 0001047469-99-010562.txt : 19990429 0001047469-99-010562.hdr.sgml : 19990429 ACCESSION NUMBER: 0001047469-99-010562 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 24 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WADDELL & REED FINANCIAL INC CENTRAL INDEX KEY: 0001052100 STANDARD INDUSTRIAL CLASSIFICATION: 6211 IRS NUMBER: 510261715 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13913 FILM NUMBER: 99569270 BUSINESS ADDRESS: STREET 1: P O BOX 29217 STREET 2: 6300 LAMAR AVE CITY: OVERLAND PARK STATE: KS ZIP: 66202-4200 BUSINESS PHONE: 9132362000 MAIL ADDRESS: STREET 1: P O BOX 29217 STREET 2: 6300 LAMAR AVE CITY: OVERLAND PARK STATE: KS ZIP: 66202-4200 10-K 1 10-K - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 Commission file number 001-13913 WADDELL & REED FINANCIAL, INC. (Exact name of registrant as specified in its charter) Delaware 51-0261715 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
6300 Lamar Avenue Overland Park, Kansas 66202 913-236-2000 (Address, including zip code, and telephone number of Registrant's principal executive offices) ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED Class A Common Stock, $.01 par value New York Stock Exchange Class B Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. (__) The aggregate market value of the voting stock held by non-affiliates of the registrant (excludes officers, directors and stockholders holding 5% or greater of the registrant's common stock): $782,134,743 at February 26, 1999. Shares outstanding of each of the registrant's classes of common stock as of February 26, 1999: Class A Common Stock, $.01 par value: 30,694,445 Class B Common Stock, $.01 par value: 30,797,556 DOCUMENTS INCORPORATED BY REFERENCE In Part III of this Form 10-K, the definitive proxy statement for the 1999 annual meeting of stockholders to be held April 28, 1999 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Index of Exhibits (Pages B-1 through B-3) Total Number of Pages Included Are 52 WADDELL & REED FINANCIAL, INC. INDEX TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
PART I PAGE --------- Item 1. Business................................................................... 3 Item 2. Properties................................................................. 15 Item 3. Legal Proceedings.......................................................... 15 Item 4. Submission of Matters to a Vote of Security Holders........................ 15 Risk Factors............................................................... 16 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... 19 Item 6. Selected Financial Data.................................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation................................................................ 21 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................. 27 Item 8. Financial Statements and Supplementary Data................................ 27 Item 9. Changes in Disagreements with Accountants on Accounting and Financial Disclosure............................................................... 27 PART III Item 10. Directors and Executive Officers of the Registrant......................... 27 Item 11. Executive Compensation..................................................... 27 Item 12. Security Ownership of Certain Beneficial Owners and Management............. 27 Item 13. Certain Relationships and Related Transactions............................. 27 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........... 27
SIGNATURES................................................................................................. 28 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. A-1 INDEX TO EXHIBITS.......................................................................................... B-1
2 PART I SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS THIS FORM 10-K INCLUDES STATEMENTS THAT ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS FORM 10-K REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS STRATEGY AND OTHER PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT OR THAT THE COMPANY WILL TAKE ANY ACTIONS THAT MAY PRESENTLY BE PLANNED. CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE DISCLOSED IN THE "RISK FACTORS" SECTION OF THIS FORM 10-K ANNUAL REPORT, WHICH INCLUDE, WITHOUT LIMITATION, THE ADVERSE EFFECT FROM A DECLINE IN SECURITIES MARKETS OR IF THE COMPANY'S PRODUCTS' PERFORMANCE DECLINES, FAILURE TO RENEW INVESTMENT MANAGEMENT AGREEMENTS, COMPETITION, CHANGES IN GOVERNMENT REGULATION, AVAILABILITY AND TERMS OF CAPITAL AND YEAR 2000 UNCERTAINTIES. ALL SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS. ITEM 1. BUSINESS BACKGROUND From 1981 until its initial public offering of Class A Common Stock on March 4, 1998 (the "Offering"), Waddell & Reed Financial, Inc. (the "Company") had been a wholly-owned subsidiary of Torchmark Corporation ("Torchmark"), and was known as United Investors Management Company until it effected a name change in December 1997. The Company is a holding company that conducts its business through its subsidiaries. One subsidiary, Waddell & Reed, Inc. ("W&R"), is a registered broker-dealer and registered investment advisor that acts primarily as the nationwide distributor and underwriter for the shares of mutual funds and distributor of insurance products issued primarily by United Investors Life Insurance Company ("UILIC"), a subsidiary of Torchmark. Another subsidiary, Waddell & Reed Investment Management Company ("WRIMCO"), is a registered investment advisor that provides investment management and advisory services to the Company's mutual funds (the "Funds") and to institutions and other private clients through a subcontract with another subsidiary of Torchmark. Finally, Waddell & Reed Services Company ("WRSCO") provides transfer agency and accounting services to the Funds and their shareholders. Waddell & Reed Financial, Inc., W&R, WRIMCO, and WRSCO are hereafter collectively referred to as the "Company," unless the context requires otherwise. After the consummation of the Offering, the Company continued to be controlled by Torchmark, which owned more than 80% of the combined voting power of the Class A Common Stock and the Class B Common Stock of the Company. The holders of Class A Common Stock and Class B Common Stock have identical rights except that holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to five votes per share on all matters to be voted on by stockholders. On November 6, 1998 Torchmark divested its ownership interest in the Company by means of a special dividend to the stockholders of Torchmark of all of the Class A Common Stock and Class B Common Stock owned by Torchmark after the Offering (the "Spin-Off"). 3 OVERVIEW The Company, founded in 1937, is one of the oldest mutual fund complexes in the United States, having introduced the United family of funds in 1940. The Company sells its investment products primarily to middle income Americans through a virtually exclusive sales force. As of December 31, 1998, the Company had $27.7 billion of assets under management, of which $24.5 billion were mutual fund assets and $3.2 billion were managed institutional accounts. The Company has over 582,000 mutual fund customers having an average investment of $38,000 and 47,000 variable account customers having an average investment of $52,000. The Company is the exclusive underwriter and distributor of 36 mutual fund portfolios (the "Funds"), including 17 comprising the United Funds (the "United Funds"), eight comprising the Waddell & Reed Funds (the "W&R Funds"), and 11 comprising the Target/United Funds (the "Target Funds"). The Company also distributes Torchmark underwritten variable annuities and life insurance products to its customers as part of its financial planning services. The Company sells mutual fund products with a front-end load (sales charges are paid upon purchase of fund shares) and contingent deferred sales charge (sales charges are paid upon redemption within specified periods). The traditional market for the Company has generally been professionals and working families with annual incomes between $40,000 and $100,000 who are saving for retirement. The Company believes that demographic trends and shifts in attitudes toward retirement savings will continue to support increased consumer demand for its products. According to U.S. Census Bureau projections, the number of Americans between the ages of 45 and 64 will grow from 53.7 million in 1996 to 71.1 million in 2005, making this "preretirement" age group the fastest growing segment of the U.S. population. The Company distributes the Funds and other financial products through a financial advisor sales force that represents the Company on a virtually exclusive basis. On December 31, 1998, the Company's sales force consisted of 2,370 financial advisors and 129 division managers operating from 184 sales offices located throughout the United States. For the year ended December 31, 1998, the Company's financial advisor sales force sold over $1.8 billion of mutual fund and variable products. The Company believes, based on industry data, that its financial advisor sales force is currently one of the largest sales forces in the United States selling primarily mutual funds. As of December 31, 1998, 38% of the Company's financial advisors have been with the Company for more than 5 years and 26% for more than 10 years. The financial advisor industry is fragmented, consisting primarily of relatively small companies generally employing fewer than 100 investment professionals. The Company's sales force competes primarily with small broker/dealers and independent financial advisors. The Company's marketing efforts are currently focused on customers residing in smaller metropolitan areas and rural communities. The Company conducts investment seminars throughout the United States to reach a large number of potential clients. The Company also provides financial plans for clients offering one-on-one consultations emphasizing long-term relationships through continuing service, rather than a one-time sale. The Company believes that it is well-positioned to benefit from a developing industry trend toward "assisted sales"--sales of mutual fund products through a sales person--driven by the array of options now available to investors and the need for financial planning advice that has resulted from the recent increase in the average household's financial assets. The Company's investment philosophy and financial planning approach emphasize long-term investments. The Company's portfolio managers seek consistent long-term performance and downside protection in turbulent markets. As a result, the Company has developed a loyal customer base with clients maintaining their accounts for approximately 11 years on average as compared to five years for the mutual fund industry, according to the Investment Company Institute. This loyalty is evidenced by a relatively low fund redemption rate for the five years ended December 31, 1998 of 7.8% for the Funds (other than money market funds), which is less than one-half of the industry average of 18.6% and a relatively high dividend reinvestment rate of 87.2% for the Funds for the same period versus 71.3% for the mutual fund 4 industry. Approximately 47% of the Company's assets under management are in retirement accounts as of December 31, 1998. The historically low redemption and high reinvestment rates have provided a stable source of asset and revenue growth at relatively low cost. The Company has a seasoned team of portfolio managers and an internal equity and fixed income investment research staff that have substantial resources available to them including hundreds of meetings annually with company management both on and off site. In addition, the Company utilizes research provided by brokerage firms and independent outside consultants. Portfolio managers usually were investment research analysts for a substantial length of time prior to acquiring money management assignments. The predominant style of the Company's investments is growth equity. As of December 31, 1998 approximately 81% of the Company's mutual fund assets under management were invested in equity funds and the remainder in fixed income and money market funds. This investment strategy emphasizes investment at attractive valuations in companies that the portfolio managers believe can produce above average growth in earnings. OPERATIONS Revenues from operations for the last three years ended were:
FOR YEARS ENDED DECEMBER 31, -------------------------------- 1998 1997 1996 ---------- --------- --------- Revenues from: Investment management......................................................... $ 137,823 117,784 101,466 Underwriting and distribution................................................. 106,615 89,427 85,837 Shareholder service........................................................... 33,808 30,763 28,378 ---------- --------- --------- Revenue excluding investment income........................................... 278,246 237,974 215,681 Investment income............................................................. 9,043 3,798 5,295 ---------- --------- --------- Total revenue................................................................. $ 287,289 241,772 220,976 ---------- --------- --------- ---------- --------- ---------
MARKETING The Company markets its mutual funds through a sales force that represents the Company on a virtually exclusive basis. As of December 31, 1998, the sales force comprised 2,370 financial advisors. The Company's financial advisors are located primarily in smaller metropolitan areas and rural communities. The sales force is organized into divisions that are supervised, as of December 31, 1998, by 129 division managers who, in turn, report to eight regional vice presidents. The Company has taken several steps to increase the productivity of its sales force. Since 1992, the Company has been developing a more fully-committed sales force through recruiting and retention initiatives. These initiatives have resulted in an increase of financial advisors having annual or annualized production of more than $900,000 of investment product sales from 20% of the sales force at December 31, 1993 to 34% at December 31, 1998. Prior to 1993, division managers were engaged in personal sales production as well as sales management. In order to emphasize the importance of recruiting and developing a sales force, the Company implemented a compensation system that ties compensation of division managers to the development of new financial advisors and to division sales rather than personal sales. The Company provides training and motivational programs for its sales force. Sales training specialists provide a regular program of training for new recruits as well as advanced training for experienced financial advisors. Programs for new recruits focus on prospecting techniques, product knowledge, and sales skills. Field office classes provide guidance in identifying target markets, practical exercises to learn interview skills and data collection, instruction in basic financial planning software, and guidance in 5 matching products with various investment objectives. Sales presentation skills are taught and practiced in the classroom environment as well as on joint sales calls with field sales management. The programs for experienced advisors focus on skills related to dealing with larger investment sums (such as IRA rollovers) and include training in the use of asset allocation and estate planning software. In addition, the Company offers all new financial advisors the opportunity to participate in a week long training program at the home office covering such subjects as product features, financial planning, and the use of illustrative software packages. In 1998, the Company launched its first advertising campaign in selected markets throughout the country which focused on the important aspects of the Company's business and was intended to increase name recognition of the Company in those markets. These efforts are expected to continue in 1999. FUNDS AND ASSET MANAGEMENT The Company serves as underwriter for, and investment advisor to, the United Funds, the W&R Funds, and the Target Funds and distributes variable insurance products related to the Target Funds. The Company offers the Funds' shareholders a broad range of investment products designed to attract and retain clients with varying investment objectives. The predominant style of the Company's investments is growth equity. This investment strategy emphasizes investment at attractive valuations in companies that the portfolio managers believe can produce above average growth in earnings. According to an annual Barron's/Lipper fund-family survey which ranks investment performance of mutual fund complexes, the Company ranked second out of 89 mutual fund complexes for 1998 and fifth out of 55 complexes for the five year period ended December 31, 1998. As of December 31, 1998, 81% of the assets under management in the Funds were invested in equity funds, 16% were invested in fixed income funds, and 3% were invested in money market funds. Lipper, Inc. also ranked 57% of the Company's equity assets in the top quartile and 50% in the top 10% of their respective categories. The Company periodically introduces new mutual funds designed to complement and expand its investment product offerings, respond to competitive developments in the financial marketplace, and meet the changing needs of clients. The Company's base of assets under management consists of a broad range of domestic and international stock, bond, and money market mutual funds that meet the varied needs and objectives of its individual and institutional investors. In addition to performing investment management services for the Funds, the Company acts as an investment advisor and portfolio manager for institutional and other private investors. The Company receives a fee that is generally based on a percentage of assets under management for its services as an investment advisor or portfolio manager. Assets under management for institutional and private accounts totaled approximately $3.2 billion at December 31, 1998. Investment management fees from institutional accounts were approximately $6.3 million, or approximately 5%, of total investment management fees, for the year ended December 31, 1998. 6 Ending and average assets under management for the last three years were:
1998 1997 1996 -------------------- -------------------- -------------------- ENDING AVERAGE ENDING AVERAGE ENDING AVERAGE --------- --------- --------- --------- --------- --------- (IN MILLIONS) United Funds Equity.............................................. $ 16,713 15,320 13,687 12,761 11,200 10,463 Fixed-income........................................ 3,637 3,652 3,632 3,499 3,431 3,408 Money market........................................ 644 572 529 498 499 445 --------- --------- --------- --------- --------- --------- 20,994 19,544 17,848 16,758 15,130 14,316 W&R Funds Equity.............................................. 1,050 906 779 684 586 496 Fixed-income........................................ 85 74 66 58 57 55 --------- --------- --------- --------- --------- --------- 1,135 980 845 742 643 551 Target Funds Equity.............................................. 2,127 1,859 1,627 1,452 1,204 1,038 Fixed-income........................................ 245 235 223 204 193 182 Money market........................................ 54 45 43 38 38 36 --------- --------- --------- --------- --------- --------- 2,426 2,139 1,893 1,694 1,435 1,256 Total Mutual Funds Equity.............................................. 19,890 18,085 16,093 14,897 12,990 11,997 Fixed-income........................................ 3,967 3,961 3,921 3,761 3,681 3,645 Money market........................................ 698 617 572 536 537 481 --------- --------- --------- --------- --------- --------- 24,555 22,663 20,586 19,194 17,208 16,123 Institutional Accounts.............................. 3,189 2,947 2,831 2,103 1,862 2,846 --------- --------- --------- --------- --------- --------- Total Assets Under Management....................... $ 27,744 25,610 23,417 21,297 19,070 18,969 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
INVESTMENT MANAGEMENT AGREEMENTS The Company provides investment advisory and management services pursuant to an investment management agreement with each Fund. While the specific terms of the investment management agreements vary, the basic terms of the investment management agreements are similar. The investment management agreements provide that the Company renders overall management services to each of the Funds, subject to the oversight of each Fund's board of directors and in accordance with each Fund's fundamental investment objectives and policies. The investment management agreements permit the Company to enter into separate agreements for shareholder services or accounting services with the respective Funds. Each Fund's board of directors, including a majority of the directors who are not "interested persons," of the Fund or the Company within the meaning of the Investment Company Act of 1940, as amended, and its shareholders must have approved the investment management agreement between the respective Fund and the Company. These agreements may continue in effect from year to year if specifically approved at least annually by (i) the Fund's board of directors, including a majority vote of the directors who are not parties to the agreements or "interested persons" of any such party, or (ii) the vote of the holders of a majority of the outstanding voting securities of the Fund and the vote of a majority of the Fund's directors who are not parties to the agreement or "interested persons" of any such party, each vote being cast in person at a meeting called for such purpose. Each agreement automatically terminates in the event of its "assignment" as defined in the Investment Company Act or the Investment Advisers Act and may be terminated without penalty by the Fund by giving the Company 60 days' written notice, if the termination 7 has been approved by a majority of the Fund's directors or shareholders. The Company may terminate an investment management agreement without penalty on 120 days' written notice. SERVICE AGREEMENTS The Company provides various services to the Funds and their shareholders pursuant to a shareholder servicing agreement with each Fund (except the Target Funds) and an accounting service agreement with each Fund. Pursuant to the shareholder servicing agreements, the Company performs shareholder servicing functions, including the maintenance of shareholder accounts, the issuance, transfer, and redemption of shares, distribution of dividends and payment of redemptions, furnishing information related to the Fund, and handling shareholder inquiries. The Funds pay a monthly fee to the Company for such services. Pursuant to the accounting service agreements, the Company provides the Funds with bookkeeping and accounting services and assistance, including maintenance of the Fund's records, pricing of the Fund's shares, and preparation of the prospectuses for existing shareholders, proxy statements, and certain reports. The Funds pay the Company a monthly fee for such services. A Fund's shareholder servicing agreement or accounting services agreement may be adopted or amended with the approval of the Fund's directors. Each of the shareholder servicing agreements and accounting services agreements have annually renewable terms of one year expiring on October 1 of each year. UNDERWRITING AND DISTRIBUTION The Company distributes the Funds pursuant to an underwriting agreement with each Fund (except the Target Funds). The Company distributes products relating to the Target Funds under an underwriting agreement between the Company and UILIC. General agency commissions paid to the Company by UILIC for distribution of these products comprised 12%, 12% and 14% of the Company's total revenue for each of the years ended 1998, 1997 and 1996, respectively. Under each underwriting agreement with a Fund, the Company offers and sells the Fund's shares on a continual basis and pays the costs of sales literature and printing of prospectuses furnished to it by the Fund. The Company receives underwriting commissions for such services, a major portion of which is paid to financial advisors and sales managers of the Company. The Company charges a sales charge to clients upon purchase of shares in the United Funds, which are front-end load funds, which ranges from zero to 5.75% of the amount invested. The sales charge for the United Funds typically declines as the net asset value of the account increases. In addition, investors may combine their purchases of these Funds' shares within the respective group of Funds to qualify for the reduced sales charge. Investors in the W&R Funds generally pay contingent deferred sales charges upon redemption of shares in W&R Funds of up to 3% of the net asset value of the redeemed shares declining to zero for shares held for more than four years. The underwriting agreements are subject to approval annually by the directors of the respective Funds, including a majority of the directors who are not "interested persons" of the Funds or the Company within the meaning of the Investment Company Act of 1940, as amended, or "interested persons" of any such party and who have no direct or indirect financial interest in the operation of the distribution and service plan (as described below), as applicable, of the Funds or any agreements relating thereto ("independent directors"), cast in person at a meeting called for the purpose of voting on such approval. Each agreement automatically terminates in the event of its assignment, as defined in the Investment Company Act, and either party may terminate the agreement without penalty upon 60 days' written notice. Under a distribution and service plan for Class A shares of the United Funds (except the money market fund) and under a distribution and service plan for the Class B shares of the money market fund and the W&R Funds, each of which plans are adopted under Rule 12b-1 of the Investment Company Act, the Funds may pay the Company a fee for its costs and expenses in connection with providing personal service to shareholders of the Fund, maintaining shareholder accounts and distributing shares of the funds. 8 Each distribution and service plan is subject to approval annually by the directors, including the independent directors, cast in person at a meeting called for the purpose of voting on such approval. The Fund may terminate the Plan at any time without penalty. The Company's investment product sales are summarized as follows: INVESTMENT PRODUCT SALES
1998 1997 1996 --------- --------- --------- (IN MILLIONS) United Funds...................................................................... $ 1,266.8 1,092.7 1,024.8 Waddell & Reed Funds.............................................................. 252.3 175.7 227.4 Variable Products (Target/United)................................................. 308.4 249.8 252.9 --------- --------- --------- $ 1,827.5 1,518.2 1,505.1 --------- --------- --------- --------- --------- ---------
FUNDS SUMMARY The following table sets forth, for each fund within the Fund group, the year that shares in such Fund were first offered to the public, the net assets of such Fund or portfolio as of December 31, 1998 and a description of its investment objective.
NET ASSETS AT DECEMBER 31, 1998 FIRST (DOLLARS IN FUND NAME OFFERED MILLIONS) INVESTMENT OBJECTIVE - - ------------------------------------------- ----------- --------------- ------------------------------------------ UNITED FUNDS Accumulative Fund........................ 1940 $ 1,868.0 Seeks capital growth, with a secondary objective of current income. Asset Strategy Fund...................... 1995 $ 36.2 Seeks high total return over the long term by allocating its assets among stocks, bonds and short-term instruments. Bond Fund................................ 1964 $ 557.1 Seeks to achieve a reasonable return with more emphasis on preservation of capital. Cash Management.......................... 1979 $ 644.3 Seeks to maximize current income to the extent consistent with stability of principal by investing in money market instruments. Continental Income Fund.................. 1970 $ 602.7 Seeks to provide current income to the extent that market and economic conditions permit with a secondary objective of seeking long-term appreciation of capital.
9
NET ASSETS AT DECEMBER 31, 1998 FIRST (DOLLARS IN FUND NAME OFFERED MILLIONS) INVESTMENT OBJECTIVE - - ------------------------------------------- ----------- --------------- ------------------------------------------ UNITED FUNDS Gold & Government Fund................... 1985 $ 12.8 Seeks high total return through investing in precious metals, mineral-related securities and gold, silver and platinum during periods of actual or expected inflation or when the environment for investments in precious metals appears to be favorable, and U.S. Government securities during periods of actual or expected disinflation or low inflation. Government Securities Fund............... 1982 $ 140.7 Seeks high current income consistent with safety of principal by investing primarily in securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities. High Income Fund......................... 1979 $ 1,018.5 Seeks a high level of current income, with a secondary objective of seeking capital growth when consistent with its primary objective. High Income Fund II...................... 1986 $ 416.2 Seeks a high level of current income, with a secondary objective of seeking capital growth when consistent with its primary objective. Income Fund.............................. 1940 $ 7,767.3 Seeks maintenance of current income, subject to market conditions with a secondary goal of capital growth. International Growth Fund................ 1970 $ 1,224.1 Seeks long-term capital appreciation, with a secondary objective of realization of income, by investing in securities issued by companies or governments of any nation.
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NET ASSETS AT DECEMBER 31, 1998 FIRST (DOLLARS IN FUND NAME OFFERED MILLIONS) INVESTMENT OBJECTIVE - - ------------------------------------------- ----------- --------------- ------------------------------------------ UNITED FUNDS Municipal Bond Fund...................... 1976 $ 977.0 Seeks income that is not subject to Federal income taxation by investing principally in tax-exempt municipal bonds. Municipal High Income Fund............... 1986 $ 526.8 Seeks a high level of income that is not subject to Federal income taxation by investing principally in medium and lower quality tax-exempt municipal bonds. New Concepts Fund........................ 1983 $ 956.3 Seeks capital growth by investing in securities issued by relatively new or unseasoned companies, companies in the early stages of development or smaller companies in new and emerging industries with above average opportunity for growth. Retirement Shares Fund................... 1972 $ 822.2 Seeks the highest long-term total return consistent with reasonable safety of capital. Science and Technology Fund.............. 1950 $ 1,674.5 Seeks long-term capital growth through a portfolio emphasizing science and technology securities. Vanguard Fund............................ 1969 $ 1,749.3 Seeks capital appreciation through diversified holdings of securities issued primarily by companies that have appreciation possibilities. WADDELL & REED FUNDS Asset Strategy Fund...................... 1995 $ 28.3 Seeks high total return over the long term by allocating assets among stocks, bonds and short-term instruments. Growth Fund.............................. 1992 $ 399.5 Seeks capital appreciation by investing primarily in securities issued by companies that offer above-average growth potential, including relatively new or unseasoned companies. High Income Fund......................... 1997 $ 22.6 Seeks a high level of current income, with a secondary objective of seeking capital growth when consistent with its primary objective.
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NET ASSETS AT DECEMBER 31, 1998 FIRST (DOLLARS IN FUND NAME OFFERED MILLIONS) INVESTMENT OBJECTIVE - - ------------------------------------------- ----------- --------------- ------------------------------------------ WADDELL & REED FUNDS International Growth Fund................ 1992 $ 91.1 Seeks long-term appreciation, with a secondary goal of realization of income, by investing in securities issued by companies or governments of any nation. Limited-Term Bond Fund................... 1992 $ 20.9 Seeks a high level of current income consistent with preservation of capital by investing primarily in debt securities of investment grade, including U.S. government securities, and maintaining a dollar-weighted average maturity of the portfolio of two to five years. Municipal Bond Fund...................... 1992 $ 41.8 Seeks income that is not subject to Federal income taxation by investing primarily in municipal bonds. Science and Technology Fund.............. 1997 $ 26.0 Seeks long term capital growth through a portfolio emphasizing science and technology securities. Total Return Fund........................ 1992 $ 504.5 Seeks current income and capital growth by investing primarily in securities issued by companies that have a record of paying regular dividends on common stock or have the potential for capital appreciation. TARGET/UNITED FUNDS Asset Strategy fund...................... 1995 $ 14.1 Seeks high total return over the long term by allocating its assets among stocks, bonds and short-term instruments. Balanced fund............................ 1994 $ 92.2 Seeks current income with a secondary objective of long-term appreciation of capital. Bond fund................................ 1987 $ 114.3 Seeks current income with an emphasis on preservation of capital. Growth fund.............................. 1987 $ 825.1 Seeks capital growth with current income as a secondary objective. High Income fund......................... 1987 $ 126.4 Seeks high current income, with a secondary objective of capital growth. Income fund.............................. 1991 $ 811.3 Seeks maintenance of current income, subject to market conditions with a secondary objective of capital growth.
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NET ASSETS AT DECEMBER 31, 1998 FIRST (DOLLARS IN FUND NAME OFFERED MILLIONS) INVESTMENT OBJECTIVE - - ------------------------------------------- ----------- --------------- ------------------------------------------ TARGET/UNITED FUNDS International fund....................... 1994 $ 169.0 Seeks long-term appreciation of capital, with current income as a secondary objective by investing principally in securities issued by companies or governments of any nation. Limited-Term Bond fund................... 1994 $ 4.5 Seeks a high level of current income consistent with preservation of capital by investing primarily in debt securities of investment grade and maintaining a dollar weighted average maturity of the portfolio of two to five years. Money Market fund........................ 1987 $ 54.0 Seeks maximum current income consistent with stability of principal by investing in money market securities. Science and Technology fund.............. 1997 $ 34.6 Seeks long-term capital growth by investing primarily in science and technology securities. Small Cap fund........................... 1994 $ 180.6 Seeks capital growth by investing primarily in securities issued by relatively new or unseasoned companies, companies in their early stages of development or smaller companies positioned in new and emerging industries with above average opportunity for rapid growth.
REGULATION Virtually all aspects of the Company's businesses are subject to various Federal and state laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients and shareholders of registered investment companies. Under such laws and regulations, agencies that regulate investment advisors and broker-dealers such as the Company have broad administrative powers, including the power to limit, restrict, or prohibit such an advisor or broker-dealer from carrying on its business in the event that it fails to comply with such laws and regulations. In such event, the possible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in certain lines of business for specified periods of time, revocation of investment advisor and other registrations, censures, and fines. The business of the Company is subject to regulation at both the Federal and state level by the Securities and Exchange Commission (the "Commission") and other regulatory bodies. Certain subsidiaries of the Company are registered with the Commission under the Investment Advisers Act of 1940, as amended, (the "Advisers Act") and the Funds are registered with the Commission under the Investment Company Act of 1940, as amended, (the "ICA") and with various states under applicable state laws. A 13 subsidiary of the Company is also registered as a broker-dealer with the Commission and is subject to regulation by the National Association of Securities Dealers, Inc. (the "NASD") and various states. Certain subsidiaries of the Company are registered with the Commission under the Advisers Act and, as such, are regulated by and subject to examination by the Commission. The Advisers Act imposes numerous obligations on registered investment advisors including fiduciary duties, recordkeeping requirements, operational requirements, and disclosure obligations. The Commission is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from censure to termination of an investment advisor's registration. The failure of a registered subsidiary of the Company to comply with the requirements of the Commission could have a material adverse effect on the Company. The Company derives a large portion of its revenues from investment management agreements. Under the Advisers Act, the Company's investment management agreements terminate automatically if assigned without the client's consent. Under the ICA, advisory agreements with registered investment companies such as the Funds terminate automatically upon assignment. The term "assignment" is broadly defined and includes direct assignments as well as assignments that may be deemed to occur, under certain circumstances, upon the transfer, directly or indirectly, of a controlling interest in the Company. A subsidiary of the Company is also a member of the Securities Investor Protection Corporation. In its capacity as a broker-dealer, the Company is required to maintain certain minimum net capital and cash reserves for the benefit of its customers, which may limit its ability to pay dividends. The Company's net capital, as defined, has consistently met or exceeded all minimum requirements. Various regulations cover certain investment strategies that may be used by the Funds for hedging purposes. To the extent that the Funds purchase futures contracts, the Funds are subject to the commodities and futures regulations of the Commodity Futures Trading Commission. Under the rules and regulations of the Commission promulgated pursuant to the Federal securities laws, the Company is subject to periodic examination by the Commission. The Company is also subject to periodic examination by the NASD. A subsidiary of the Company is registered under the Exchange Act as a transfer agent. The most recent examination of the Company by the Commission was in February 1999. The most recent examination of the Company by the NASD was in February 1996. COMPETITION The Company is subject to substantial competition in all aspects of its business. The Company competes with hundreds of other mutual fund management, distribution and service companies that distribute their fund shares through a variety of methods including affiliated and unaffiliated sales forces, broker-dealers, and direct sales to the public of shares offered at a low or no sales charge. Many larger mutual fund complexes have developed relationships with brokerage houses with large distribution networks, which may enable these fund complexes to reach broader client bases. The Company competes with firms offering similar services and products to those of the Company, such as American Express Financial Advisors Inc. and Edward D. Jones & Co. In addition, the Company competes with brokerage and investment banking firms, insurance companies, banks, and other financial institutions and businesses offering other financial products in all aspects of its business. Although no one company or group of companies dominates the mutual fund management and services industry, many are larger than the Company and have greater resources and offer a wider array of financial services and products. Competition is based on the methods of distribution of fund shares, the ability to develop investment products for certain segments of the market, the ability to meet the changing needs of investors, the ability to achieve superior investment management performance, the type and quality of shareholder services, and the success of sales promotion efforts. The Company believes that competition in the mutual fund industry will increase as a result of increased flexibility afforded to banks and other financial institutions to sponsor mutual funds and distribute mutual fund shares, and as a result of consolidation and acquisition activity within the industry. In addition, barriers to entry to the investment management business are relatively few, and the Company thus anticipates that it will face a growing number of competitors. Many of the 14 Company's competitors in the mutual fund industry are larger, better known, have penetrated more markets than the Company, and have more resources than those of the Company. The distribution of mutual fund products has undergone significant developments in recent years, which has increased the competitive environment in which the Company operates. These developments include growth in the number of mutual funds, introduction of service fees payable to broker-dealers that provide continual service to clients in connection with their mutual fund investments, and development of complex distribution systems with multiple classes of shares. The Company's financial advisors compete primarily with small broker/dealers and independent financial advisors. The market for financial advice and planning is extremely fragmented, consisting primarily of relatively small companies with fewer than 100 investment professionals. Competition is based on sales techniques, personal relationships and skills, the quality of financial planning products and services, the quality of the financial and insurance products offered, and the quality of service. Competition in this area is intense and some of the competitors of the Company's financial advisors are larger, better known, and have more resources. EMPLOYEES At December 31, 1998, the Company had 530 full-time employees. Its 2,370 financial advisors are independent contractors. ITEM 2. PROPERTIES The Company, through its subsidiary, W&R, owns or leases buildings that are used in the normal course of business. W&R owns and occupies a 116,000 square foot office building utilized as its corporate headquarters in United Investors Park, an approximately thirty-three acre commercial development at 6300 Lamar Avenue, Overland Park, Kansas. Additional leased space is occupied in the immediate area for headquarters operations. W&R also leases division and district office space for its agency sales personnel in various cities and towns in the United States. During 1998, land and four income-producing office buildings adjacent to the Company's headquarters were acquired from Torchmark Income Properties, L.P. ("TIP") in transactions which ended W&R's financial interests in TIP. These properties had previously been contributed by the Company to TIP in exchange for a limited partnership interest. The four office buildings total 180,000 square feet and are 99% leased. As a result of this acquisition, W&R owns 100% of United Investors Park. The Company began to develop architectural plans for an additional 110,000 square foot office building for United Investors Park in 1998. This new building, when completed, will be used primarily for owner occupancy. ITEM 3. LEGAL PROCEEDINGS Certain of the Company's subsidiaries are involved from time to time in various legal proceedings and claims incident to the normal conduct of their businesses. On the basis of information presently available and advice received from counsel, it is the opinion of management that such legal proceedings and claims, individually and in the aggregate, are not likely to have a material adverse effect on its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 15 RISK FACTORS POTENTIAL ADVERSE EFFECT ON CLASS A COMMON STOCK SHARE VALUE FROM DISPARATE VOTING RIGHTS OF CLASS A COMMON STOCK AND CLASS B COMMON STOCK. The holders of Class A Common Stock and Class B Common Stock have identical rights except that (i) holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to five votes per share on all matters to be voted on by stockholders and (ii) holders of Class A Common Stock are not eligible to vote on any alteration of the powers, preferences, or special rights of the Class B Common Stock that would not adversely affect the Class A Common Stock and vice versa. For example, holders of Class A Common Stock would not be entitled to vote on proposals to decrease the voting power of the Class B Common Stock, to decrease the right of Class B Common Stock to receive dividends, or to diminish the rights of the Class B Common Stock in liquidation, and vice versa. The differential in the voting rights could, however, adversely affect the value of the Class A Common Stock to the extent that investors or any potential future purchaser of the Company views the superior voting rights of the Class B Common Stock to have value. The existence of two separate classes of Common Stock could result in less liquidity for either class of Common Stock than if there was only one class of Common Stock. POTENTIAL ADVERSE EFFECTS ON THE COMPANY'S BUSINESS AND PROSPECTS FROM A DECLINE IN SECURITIES MARKETS. The Company's results of operations are affected by certain economic factors, including the level of the securities markets. Favorable performance by the United States securities markets in recent years has attracted a substantial increase in the investments in these markets and has benefited the Funds and the Company. A decline in the securities markets, failure of the securities markets to sustain their recent levels of growth, or short-term volatility in the securities markets could result in investors withdrawing from the markets or decreasing their rate of investment, either of which could adversely affect the Company. Because the revenues of the Company are, to a large extent, based on the value of assets under management, a decline in the value of these assets would adversely affect revenues of the Company. The Company's growth is dependent to a significant degree upon the ability of the Funds to attract and retain mutual fund assets and in an adverse economic environment, this may prove difficult. The Company's growth rate has varied from year to year and there can be no assurance that the average growth rates sustained in the recent past will continue. POTENTIAL ADVERSE EFFECTS ON THE COMPANY'S BUSINESS AND PROSPECTS IF THE FUNDS' PERFORMANCE DECLINES. Success in the investment management and mutual fund businesses is dependent on the investment performance of client accounts. Good performance stimulates sales of the Funds' shares and tends to keep redemptions low. Sales of the Funds' shares generate higher management fees and distribution revenues (which are based on assets of the Funds). Good performance also attracts private institutional accounts to the Company. Conversely, relatively poor performance tends to result in decreased sales, increased redemptions of the Funds' shares, and the loss of private institutional accounts, with corresponding decreases in revenues to the Company. Failure of the Funds to perform well could, therefore, have a material adverse effect on the Company. ADVERSE EFFECT OF TERMINATION OR FAILURE TO RENEW AGREEMENTS. A substantial majority of the Company's revenues are derived from investment management agreements with the Funds that, as required by law, are terminable on 60 days' notice. In addition, each such investment management agreement must be approved and renewed annually by the disinterested members of each Fund's board or its shareholders, as required by law. Any failure to renew or termination of a significant number of these agreements would have a material adverse effect on the Company. POTENTIAL ADVERSE EFFECT IF KEY PERSONNEL AND SALES FORCE CANNOT BE RECRUITED AND RETAINED. The future success of the Company depends to a substantial degree on its ability to attract and retain qualified personnel to conduct its fund management and investment advisory business. The market for qualified fund managers, investment analysts, and financial advisors is extremely competitive and has grown more so 16 in recent periods as the industry has experienced growth. There can be no assurance that the Company will be successful in its efforts to recruit and retain the required personnel. The Company is currently dependent on its sales force to sell its mutual fund and other investment products. The Company's future growth prospects will be directly affected by the quality and quantity of financial advisors it is able to successfully recruit and retain. COMPETITORS WITH GREATER RESOURCES. The mutual fund distribution and service and investment management industries are intensely competitive and are undergoing substantial consolidations. Many organizations in these industries are attempting to market to and service the same clients as the Company, not only with mutual fund investments and services but with a wide range of other financial products and services. Many of the Company's competitors have more products and product lines, services, and may also have substantially greater assets under management and financial resources. Many larger mutual fund complexes have developed relationships with brokerage houses with large distribution networks, which may enable these fund complexes to reach broader client bases. POTENTIAL MISUSE OF FUNDS AND INFORMATION IN POSSESSION OF ADVISORS. The Company's financial advisors handle a significant amount of funds and financial and personal information for investors in the Funds and purchasers of other investment and insurance products. Although the Company has implemented a system of controls to minimize the risk of fraudulent taking or misuse of such funds and information, there can be no assurance that such controls will be adequate or that such taking or misuse can be prevented. The Company could have liability in the event of such taking or misuse and could also be subject to regulatory sanctions. Although the Company believes that it is adequately insured against such risks, there can be no assurance that such insurance will be maintained or that it will be adequate to meet any future liability. NO ASSURANCE OF DIVIDENDS; HOLDING COMPANY STRUCTURE MAY LIMIT AVAILABLE CASH FOR DISTRIBUTION. The Company's Board of Directors currently intends to declare quarterly dividends on both the Class A Common Stock and the Class B Common Stock. The declaration and payment of dividends by the Company are subject to the discretion of its Board of Directors. Any determination as to the payment of dividends, as well as the level of such dividends, will depend on, among other things, general economic and business conditions, the strategic plans of the Company, the Company's financial results and condition, contractual, legal, and regulatory restrictions on the payment of dividends by the Company or its subsidiaries, and such other factors as the Board of Directors of the Company may consider to be relevant. The Company is a holding company and, as such, its ability to pay dividends is subject to the ability of the subsidiaries of the Company to provide cash to the Company. There can be no assurance that the current quarterly dividend level will be maintained or that any dividends will be paid by the Company in any future period. POTENTIAL COSTS AND ADVERSE EFFECTS ON THE COMPANY'S BUSINESS RESULTING FROM YEAR 2000 RISKS. As the year 2000 approaches, an issue has emerged regarding how existing application software programs and operating systems can accommodate this date value. The Company is in the process of modifying its systems and working with its software vendors to prepare the Company for the year 2000. In addition, the Company and the Funds have relationships with third parties that have computer systems that may not be year 2000 compliant. The Company estimates that its compliance activities will be completed no later than the third quarter of 1999. To the extent the Company's or such third parties' systems are not fully year 2000 compliant, there can be no assurance that potential systems interruptions or the cost necessary to update software would not have a material adverse effect on the Company's business, financial condition, results of operations, or business prospects. CHANGES IN REGULATION COULD ADVERSELY AFFECT THE COMPANY. The Company's investment management business is subject to extensive regulation in the United States, primarily at the Federal level, 17 including regulation by the Commission. Changes in laws or regulations or in governmental policies could materially and adversely affect the business and operations of the Company. CHARTER AND BYLAW PROVISIONS COULD DETER TAKEOVER ATTEMPTS. Under the Company's Certificate of Incorporation, the Board of Directors has the authority, without action by the Company's stockholders, to fix certain terms and issue shares of Preferred Stock, par value $1.00 per share (the "Preferred Stock"). Actions of the Board of Directors pursuant to this authority may have the effect of delaying, deterring, or preventing a change in control of the Company. Other provisions in the Certificate of Incorporation and in the Bylaws of the Company (the "Bylaws") impose procedural and other requirements that could make it more difficult to effect certain corporate actions, including replacing incumbent directors. In addition, the Board of Directors of the Company is divided into three classes, each of which is to serve for a staggered three-year term after the initial classification and election and, incumbent directors may not be removed without cause, all of which may make it more difficult for a third party to gain control of the Board of Directors. With certain exceptions, Section 203 of the Delaware General Corporation Law (the "DGCL") imposes certain restrictions on mergers and other business combinations between the Company and any holder of 15% or more of the voting stock of the Company. POTENTIAL ISSUANCE OF PREFERRED STOCK COULD DETER TAKEOVER ATTEMPTS. The Board of Directors could issue a series of preferred stock that could have powers, rights, or preferences superior to that of the Class A or Class B Common Stock or that could impede the completion of a merger, tender offer, or other takeover attempt. Such issuance of preferred stock could be effected without a vote of the holders of the Class A or Class B Common Stock even though some or a majority of the Company's stockholders might believe that such merger, tender offer or takeover is in their best interests and even if such transactions could result in stockholders receiving a premium for their stock over the then current market price of such stock. TERMS OF CREDIT FACILITY; AVAILABILITY OF CAPITAL. The Company has entered into a loan agreement with revolving line of credit and term loan facilities, which has an aggregate commitment of $200 million which may be increased to $300 million (the "Credit Facility") with The Chase Manhattan Bank (the "Bank") and various other lenders. The terms and conditions of the Credit Facility impose restrictions that affect, among other things, the ability of the Company to incur debt, make capital expenditures, merge, sell assets, make distributions, or create or incur liens. Availability of the Credit Facility is also subject to certain financial covenants. The ability of the Company to comply with such covenants can be affected by events beyond the control of the Company and there can be no assurance that the Company will achieve operating results that comply with such provisions. A breach of any of these covenants could result in a default under the Credit Facility. In the event of a default, the Bank could elect to declare the outstanding principal amount of the Credit Facility, all interest thereon and all other amounts payable under the Credit Facility to be immediately due and payable. The Company's ability to satisfy its debt obligations will depend upon its future operating performance, which will be affected by prevailing economic, financial and business conditions and other factors, some of which are beyond the control of the Company. The Company anticipates that borrowings from the Credit Facility or the refinancing of such Credit Facility, and cash provided by operating activities, will provide sufficient funds to finance anticipated development plans, meet its operating expenses and service its debt requirements as they become due. However, in the event that the Company requires additional capital, there can be no assurance that it will be able to raise such capital when needed or on satisfactory terms, if at all. See "Management's Discussion and Analysis of Financial Condition and Results of Operation--Liquidity and Capital Resources". 18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Class A and Class B Common Stock are traded on the New York Stock Exchange under the symbols "WDR" and "WDR.B", respectively. For the period commencing on March 4, 1998 (the date of the Company's Offering), through February 26, 1999, high and low closing sale prices for the Common Stock as reported by the New York Stock Exchange were $27.125 and $16.625, respectively. The table sets forth, for the periods indicated, the reported high and low close sale prices of the Company's Class A and Class B Common Stock, as reported on the New York Stock Exchange, as well as the cash dividends paid for these time periods: 1998 CLASS A MARKET PRICE
DIVIDENDS QUARTER HIGH LOW PER SHARE - - ------------------- ------------------- ------------------- ------------------- 1.................. $27.1250 $25.3750 $-- 2.................. 26.5000 21.8125 .1325 3.................. 24.5000 16.6250 .1325 4.................. 24.3750 17.0625 .1325
Year-end closing price . . . . . . . . . . $23.6875 1998 CLASS B MARKET PRICE
DIVIDENDS QUARTER HIGH LOW PER SHARE - - ------------------- ------------------- ------------------- ------------------- 4.................. $24.0000 $19.7500 $.1325
Year-end closing price . . . . . . . . . . $23.2500 STOCKHOLDERS According to the records of the Company's transfer agent, the Company had 5,403 holders of record of the Class A Common Stock as of March 8, 1999 and 5,853 holders of record of the Class B Common Stock as of March 8, 1999. The Company believes that a substantially larger number of beneficial owners hold such shares in depository or nominee form. 19 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial data for the Company at the dates and for the periods indicated. Selected financial data should be read in conjunction with, and is qualified in its entirety by, "Management's Discussion and Analysis of Financial Condition and Results of Operation" and the Consolidated Financial Statements of the Company and the Notes thereto appearing herein.
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS EXCEPT PER SHARE AND FINANCIAL ADVISORS DATA) Revenues from: Investment management.................... $ 137,823 $ 117,784 $ 101,466 $ 85,289 $ 70,711 Underwriting and distribution............ 106,615 89,427 85,837 70,393 72,150 Shareholder service...................... 33,808 30,763 28,378 23,527 22,297 Revenue excluding investment income...... 278,246 237,974 215,681 179,209 165,158 Total revenue............................ 287,289 241,772 220,976 183,504 169,036 Net income................................. 83,735 70,292 66,700 53,501 47,626 per common share......................... 1.27 1.06 1.00 .80 .72 Net income excluding nonrecurring items (1)................... 88,060 74,696 64,174 50,975 46,381 per common share (1)(2).................. 1.33 1.12 0.97 0.77 0.70 Dividends per common share (3)............. $ 0.40 -- -- -- -- Investment product sales................... $ 1,827,526 $ 1,518,257 $ 1,505,100 $ 1,187,609 $ 1,188,530 Financial advisors (end of period)......... 2,370 2,160 2,010 2,335 2,257 Financial advisors (average)............... 2,175 2,072 2,072 2,251 2,408 Investment product sales per advisor....... $ 840 $ 733 $ 726 $ 528 $ 494
AS OF DECEMBER 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ (IN MILLIONS) Assets under management $ 27,744 $ 23,417 $ 19,070 $ 18,489 $ 14,498 Balance sheet data: Goodwill................................. 95.9 98.8 101.7 104.6 107.5 Total assets (4)......................... 327.2 254.3 244.8 226.1 206.8 Short term debt.......................... 40.1 -- -- -- -- Total liabilities (5).................... 120.0 65.3 70.1 51.5 39.2
- - ------------------------ (1) Excludes impact of nonrecurring interest relating to notes with Torchmark Corporation which were prepaid with proceeds from the Offering and nonrecurring 1997 charges related to information systems outsourcing. (2) The number of shares used to compute earnings per share for 1997 and previous years was the number of shares outstanding at the Offering. (3) Three quarterly dividends were declared in 1998 ($0.1325 per quarter). (4) Excludes amounts due from Torchmark of $0, $192.7, $184.5, $57.2 and $96.3 million for 1998, 1997, 1996, 1995 and 1994, respectively. (5) Excludes amounts due to Torchmark of $0, $611.6, $126.6, $13.6 and $41.7 million for 1998, 1997, 1996, 1995 and 1994, respectively. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION THIS ITEM INCLUDES STATEMENTS THAT ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, INCLUDING STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL STATEMENTS, OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS FORM 10-K REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS STRATEGY AND OTHER PLANS AND OBJECTIVES FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-K ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS AND EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT OR THAT THE COMPANY WILL TAKE ANY ACTIONS THAT MAY PRESENTLY BE PLANNED. CERTAIN IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S EXPECTATIONS ARE DISCLOSED IN THE "RISK FACTORS" SECTION OF THIS FORM 10-K ANNUAL REPORT, WHICH INCLUDE, WITHOUT LIMITATION, THE ADVERSE EFFECT FROM A DECLINE IN SECURITIES MARKETS OR IF THE COMPANY'S PRODUCTS' PERFORMANCE DECLINES, FAILURE TO RENEW INVESTMENT MANAGEMENT AGREEMENTS, COMPETITION, CHANGES IN GOVERNMENT REGULATION, AVAILABILITY AND TERMS OF CAPITAL AND YEAR 2000 UNCERTAINTIES. ALL SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY SUCH FACTORS. The following should be read in conjunction with the Selected Financial Data and the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. RESULTS OF OPERATIONS OVERVIEW The Company derives its revenues primarily from providing investment management, distribution and administrative services to the United, W&R and Target funds and institutional accounts. Investment management fees, the Company's most substantial source of revenue, are based on the amount of assets under management and are affected by sales levels, financial market conditions, redemptions and the composition of assets. Underwriting and distribution revenues consist of sales charges and commissions derived from sales of investment and insurance products and distribution fees. The products sold have various sales charge structures and the revenues received from sales of products vary based on the type and amount sold. Rule 12b-1 distribution fees earned for distributing shares of certain mutual funds are based upon a percentage of assets and fluctuate based on sales, redemptions, and financial market conditions. Service fees include transfer agency fees, custodian fees for retirement plan accounts and portfolio accounting fees. 21 SUMMARY OF OPERATING RESULTS
1998 1997 1996 --------------------- --------------------- --------------------- % OF % OF % OF AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE ---------- --------- ---------- --------- ---------- --------- (IN THOUSANDS) OPERATING REVENUES: Investment management fees.................... $ 137,823 48.0% 117,784 48.7 101,466 45.9 Underwriting and distribution fees............ 106,615 37.1 89,427 37.0 85,837 38.9 Shareholder service fees...................... 33,808 11.8 30,763 12.7 28,378 12.8 ---------- --------- ---------- --------- ---------- --------- Total operating revenues...................... 278,246 96.9 237,974 98.4 215,681 97.6 Investment and other income................... 9,043 3.1 3,798 1.6 5,295 2.4 ---------- --------- ---------- --------- ---------- --------- Total revenue................................. 287,289 100.0 241,772 100.0 220,976 100.0 OPERATING EXPENSES: Underwriting and distribution................. 99,575 34.6 79,995 33.1 78,915 35.7 Compensation and related costs................ 31,512 11.0 26,618 11.0 21,913 9.9 General and administrative.................... 8,551 3.0 15,826 6.5 10,180 4.6 Depreciation.................................. 1,892 0.7 1,307 0.6 1,758 0.8 ---------- --------- ---------- --------- ---------- --------- Total operating expense....................... 141,530 49.3 123,746 51.2 112,766 51.0 OTHER ITEMS: Interest expense.............................. 704 0.2 0 0.0 0 0.0 Amortization of goodwill...................... 2,903 1.0 2,903 1.2 2,903 1.3 ---------- --------- ---------- --------- ---------- --------- Total expense................................. 145,137 50.5 126,649 52.4 115,669 52.3 ---------- --------- ---------- --------- ---------- --------- Income before affiliated items and income taxes....................................... $ 142,152 49.5% 115,123 47.6 105,307 47.7 ---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------
Total operating revenues increased $40.3 million or 17% to $278.2 million in 1998 compared to 1997. This growth follows a $22.3 million or 10% increase from 1996 to 1997. Total revenues, which include investment and other income, were $287.3 million in 1998, a 19% increase from 1997. Total revenues in 1997 were 9% higher than in 1996. Income before affiliated items and income taxes increased 23% to $142.2 million in 1998 following a 9% increase from 1996 to 1997. Income before affiliated items and income taxes as a percentage of revenue was 49.5%, 47.6% and 47.7% in 1998, 1997, and 1996, respectively. In 1997, nonrecurring charges, as explained in "general and administrative expense" herein, reduced net income by $4.4 million. INVESTMENT MANAGEMENT FEES Investment management fees are earned for providing investment advisory services to the Funds and institutional accounts. Investment management fees in 1998 were $137.8 million, a 17% increase over 1997. The increase in management fees was due to growth in assets related to market performance. Average assets under management were $25.6 million for 1998, an increase of 20% compared with 1997. The asset growth rate exceeded the rate of increase in management fees due primarily to two factors. First, certain mutual funds have breakpoints in their fee schedules which provide for reduced fee rates as assets grow resulting in a slower rate of growth in revenues than growth in assets. Secondly, institutional assets, which generally have a lower management fee rate than mutual funds, constituted a higher percentage of total assets for 1998. Management fee revenues in 1997 were 16% higher than in 1996, while average assets were up 12%. The percentage of institutional assets to total assets was lower in 1997 than in 1996 resulting in revenue growth exceeding asset growth in 1997. 22 UNDERWRITING AND DISTRIBUTION FEES Underwriting and distribution fees are comprised of commissions charged on sales of front-load mutual funds, variable products and insurance products and Rule 12b-1 distribution fees and contingent deferred sales charges from back-end load funds. Underwriting and distribution fees in 1998 increased 19% to $106.6 million. The higher fees are primarily due to increases in sales of front-load investment products and Rule 12b-1 distribution fees. Sales of front-load investment products were up 17% from 1997 to $1.6 billion. Distribution revenue, which consists primarily of Rule 12b-1 distribution fees from the W&R Funds, increased 36% from $6.5 million in 1997 to $8.8 million in 1998 due to growth in assets of these funds. Underwriting and distribution fee revenue was $89.4 million for 1997, up $3.6 million or 4% compared with that of 1996. Commission revenues from front-load investment products increased $1.4 million from $67.0 million in 1996 to $68.4 million in 1997 primarily as a result of higher sales volumes. Distribution revenue, which consists primarily of Rule 12b-1 distribution fees from the W&R Funds, increased from $4.7 million in 1996 to $6.5 million in 1997 due to growth in assets of these funds. SHAREHOLDER SERVICE FEES Shareholder service fees include transfer agency fees, custodian fees from retirement plan accounts and portfolio accounting fees. The transfer agency fees and custodian fees, which comprised 94% of the service fee revenues in 1998, are primarily based on annual charges per account and fluctuate based on the number of accounts. In 1998, shareholder service fees increased 10% to $33.8 million due primarily to an 8% increase in the average number of accounts. A fee increase in the fourth quarter of 1998, coinciding with the outsourcing of the data processing component of transfer agency activities, caused the increase in revenues to exceed the increase in number of accounts serviced. In 1997, shareholder service fees increased 8% from 1996 to $30.8 million. The average number of accounts serviced increased 6% during this period. The growth in revenues exceeded the growth in the number of accounts due to the impact of a full twelve months of a fee increase implemented in the second quarter of 1996. UNDERWRITING AND DISTRIBUTION EXPENSE Underwriting and distribution expense includes costs associated with the marketing, promotion, and distribution of the Company's products. The primary costs are compensation paid to financial advisors, sales management and other marketing personnel plus expenses relating to field offices, sales programs and advertising. Underwriting and distribution expense for 1998 was $99.6 million, an increase of $19.6 million or 24% compared with 1997. These costs were higher than 1997 due primarily to growth in sales volume, an additional $1.5 million of costs related to an advertising campaign that was implemented during the fourth quarter of 1998, and an increase of approximately $2.0 million related to enhancements to field compensation that were effective July 1, 1998. In 1997, underwriting and distribution expenses increased to $80.0 million, a 1% increase from 1996. Most of the increase in underwriting and distribution costs was attributable to selling commissions and other costs associated with higher sales levels. COMPENSATION AND RELATED COSTS Compensation and related costs were up 18% to $31.5 million in 1998 due to normal increases in compensation and staff additions, primarily in investment management and shareholder services operations. Management plans to hire additional staff in 1999, particularly in the investment management and shareholder services operations, as part of a continuing effort to enhance investment performance and improve shareholder services. Compensation and related costs in 1997 of $26.6 million were up $4.7 million or 21% compared with those of 1996. The increase was attributable to additional expenses of $1.5 million related to staff additions and normal salary and fringe benefit changes, $1.3 million for incentive compensation and adjustments of $1.9 million to make total compensation more competitive with the industry generally. 23 GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense, which reflects operating costs other than compensation and marketing was down 46% to $8.6 million for 1998 due primarily to non-recurring charges of $6.8 million in 1997 related to the outsourcing of the data processing component of transfer agency activities and the discontinuation of internally developed systems. General and administrative expense was $15.8 million in 1997, a $5.6 million or 55% increase from that of 1996 due to the $6.8 million non-recurring charges. This increase was partially offset by lower expenses of $2.2 million in 1997 for year 2000 compliance as compared to 1996. INVESTMENT AND OTHER INCOME Investment and other income increased $5.2 million to $9.0 million in 1998 due to the investment of operating cash flows. Average invested cash and marketable securities were $144.8 million in 1998 and $82.4 million in 1997. Investment and other income declined in 1997 from 1996 by $1.5 million due to the timing of dividend and note payments to Torchmark. DEPRECIATION Depreciation of property and equipment increased by $.6 million from 1997 due to additions totaling $7.6 million in late 1998. Depreciation expense declined $.5 million in 1997 from 1996 due to certain fixed assets becoming fully depreciated during the year. INTEREST EXPENSE Until the third quarter of 1998, the Company had not used debt financing as a source of capital, and therefore did not incur interest expense. In the third quarter of 1998, the Company obtained a $200 million credit facility, expandable to $300 million. During the fourth quarter, $40 million was borrowed against the facility to fund share repurchases. Interest expense associated with these borrowings was $.3 million. Costs to establish the facility of $.4 million were incurred in the third quarter of 1998. AFFILIATED INTEREST INCOME AND EXPENSE Prior to the Offering, the Company had various notes payable and notes receivable with Torchmark and certain subsidiaries of Torchmark. The affiliated interest income and expense as reported in the consolidated statement of operations pertain to these notes and were prepaid with proceeds from the Offering. INCOME TAXES The Company's effective income tax rate was 38.2%, 39.0%, and 38.9% in 1998, 1997, and 1996, respectively. The rate declined in 1998 due primarily to investments in tax-exempt municipal securities. FINANCIAL CONDITION At December 31, 1998, the Company's total assets were $327.2 million, down $119.8 million from December 31, 1997. The decrease in total assets was primarily related to the prepayment of notes receivable from Torchmark Corporation that coincided with the closing of the Company's Offering in March 1998. Net proceeds from the sale of 23.9 million shares were $516 million of which the Company retained approximately $35 million. The remainder of the proceeds were used to prepay notes to Torchmark. During the third and fourth quarters, the Company repurchased 3.6 million shares of its common stock at a total cost of $74.8 million. A $200 million credit facility, expandable to $300 million, was utilized to fund $40.0 million of the repurchases. At December 31, 1998, the Company's outstanding debt, including principal and accrued interest was $40.1 million. The average interest rate on the amount 24 outstanding at December 31, 1998 was 5.94%. Interest and related costs related to the facility were $.7 million during 1998. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities increased $16.4 million to $78.7 million for 1998. Net cash used for investments in 1998 was $97.7 million. Prior to 1998, cash from operations was paid to Torchmark as dividends. At December 31, 1998, the Company had $133.3 million in cash and marketable investment securities, of which $10.8 million was restricted for the benefit of customers in compliance with securities industry regulations. Cash and marketable securities at December 31, 1997 were $92.8 million, of which $14.9 million was restricted. A $200 million revolving credit facility, expandable to $300 million, was available to the Company at December 31, 1998, with an amount borrowed and outstanding of $40.0 million. During 1998, the Company repurchased 1.2 million shares of Class A and 2.4 million shares of Class B Common Stock, the combined cost of which was $74.8 million. The Company has decided on a plan to expand existing home office facilities at an estimated cost of $12 million. This expansion is expected to commence in 1999 and be completed in late 2000. The costs of this expansion will be financed by invested cash, operating cash flow and/or the use of the Credit Facility. Management believes its available cash, marketable securities, and expected cash flow from operations will be sufficient to fund dividends, operations, advance sales commissions, obligations, and other reasonably foreseeable cash needs. The Company may also continue to repurchase shares of its common stock from time to time as management deems appropriate. The share repurchases could be financed by the Company's available cash and investments and/or the use of the Credit Facility. SUBSEQUENT EVENTS From January 1, 1999 to March 8, 1999, the Company repurchased an additional .3 million shares of Class A Common Stock and 1.2 million shares of Class B Common Stock under its stock repurchase program. The average price per share was $19.82. The total cost of these repurchases was $28.9 million. The repurchases were partially funded by borrowing $20 million against the Credit Facility. During 1999, the Company intends to submit a proposal to restructure the management fee arrangements of the Funds to the shareholders of the United, W&R and Target Funds. This proposal, if approved by the Funds' shareholders, will replace the "group" fee structure and "specific fund" add-on fee with a specific fee schedule for each Fund. The Funds' fee schedules under the proposal would include breakpoints at which fee rates will decline as assets increase. If approved by the Funds' shareholders, the Funds' fee schedules generally would more closely conform with others in the mutual fund industry. Under the proposal, the overall management fee rates for some Funds would increase, some would decrease and some would be waived until the net assets in a Fund reached certain levels. The overall impact to the Company would be an increase in management fee rates of approximately .06%. There can be no assurance that the Funds' shareholders will approve the restructuring of the management fee arrangements with respect to any one or more of the Funds. RECENT ACCOUNTING DEVELOPMENTS On January 1, 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 established standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and unrealized gains (losses) on available-for-sale securities and is presented in a separate statement of comprehensive income. SFAS No. 130 requires only additional disclosures in the financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been presented to conform to the requirements of SFAS No. 130. 25 The Company adopted SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, on January 1, 1998. SFAS No. 132 requires only additional disclosures in the footnotes to the financial statements regarding pension and other postretirement benefits. It does not affect the Company's financial position or results of operations. Prior year disclosures have been presented to conform to the requirements of SFAS No. 132. INFORMATION SYSTEMS AND YEAR 2000 READINESS Some computers, software, and other equipment include computer code in which the calendar year data is abbreviated to only two digits. As a result, some of these systems will not operate correctly after 1999 because they may interpret "00" to mean 1900, rather than 2000. These problems are widely expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "Year 2000 Problem". The Company believes that is has identified all significant data, computer hardware, software applications and related equipment, as well as office and facilities equipment such as telephone switches and security systems used in connection with its internal operations that must be modified, upgraded or replaced to minimize the possibility of a material disruption to its business. The Company is currently in the process of modifying, upgrading and replacing major systems that have been assessed as adversely affected, and expects to complete this process before the occurrence of any material disruption of its business. However, there can be no assurance in this regard. Internal and external resources are being used to make the required modifications and test Year 2000 compliance. The Company estimates that its compliance activities will be completed no later than the first quarter of 1999 for all mission critical items and no later than the third quarter of 1999 for all medium and low risk items and estimates that the total costs of this effort will be $4.4 million for the five year period ending June 30, 2000. Total costs incurred through year end are approximately $3.4 million. The Year 2000 Problem also affects some of the Company's vendors and suppliers of data, computers, software and other equipment. The Company has been actively contacting all vendors and suppliers to inquire about their Year 2000 readiness. However, the Company has limited or no control over the actions of these vendors and suppliers. Accordingly, the Company cannot guarantee that these vendors and suppliers will resolve any or all Year 2000 Problems. If the Company's vendors and suppliers fail to resolve Year 2000 Problems, the Company's business could be materially disrupted. The Company expects to identify and resolve all Year 2000 Problems that could materially adversely affect its business operations. However, due to the number of interactions with internal and external systems, equipment and data, management believes that it is not possible to determine with complete certainty that all Year 2000 Problems affecting the Company or its clients have been identified or corrected. In addition, no one can accurately predict how many Year 2000 Problem-related failures will occur or the severity, duration or financial consequences of these potential failures. As a result, management expects that the Company could suffer a small number of operational inconveniences and inefficiencies for the Company and its clients that will divert some of management's time and attention and financial and human resources from its ordinary business activities. The Company is developing contingency plans to minimize the impact of potential Year 2000 Problems on its mission critical systems. The Company expects to complete its contingency plans by the end of third quarter 1999. The discussion of the Company's efforts, and management's expectations, relating to Year 2000 compliance constitutes forward-looking statements. The Company's ability to achieve Year 2000 compliance and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendor ability to modify proprietary software and unanticipated problems identified in the ongoing compliance review. 26 SEASONABILITY AND INFLATION The Company does not believe its operations are subject to significant seasonal fluctuations. The Company does not believe that inflation has had a significant impact on operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable to the Company for this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Consolidated Financial Statements referred to in the Index on page A-1 setting forth the consolidated financial statements of the Company, together with the report of KPMG LLP dated March 1, 1999. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure have been reported on a Form 8-K within the twenty-four months prior to the date of the most recent financial statements. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information required by this Item 10 appears in the definitive proxy statement for the Company's 1999 Annual Meeting of Stockholders and is incorporated by reference in this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION Information required by this Item 11 appears in the definitive proxy statement for the Company's 1999 Annual Meeting of Stockholders and is incorporated by reference in this Form 10-K. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by this Item 12 appears in the definitive proxy statement for the Company's 1999 Annual Meeting of Stockholders and is incorporated by reference in this Form 10-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this Item 13 appears in the definitive proxy statement for the Company's 1999 Annual Meeting of Stockholders and is incorporated by reference in this Form 10-K. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements. Reference is made to the Index to Consolidated Financial Statements on page A-1 for a list of all financial statements filed as part of this Report. (a)(2) Financial Statement Schedules. None. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company during the fourth quarter of 1998. (c) Exhibits. Reference is made to the Index to Exhibits on page B-1 for a list of all exhibits filed as part of this Report. 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Overland Park, State of Kansas, on March 19, 1999. WADDELL & REED FINANCIAL, INC. By: /s/ KEITH A. TUCKER ----------------------------------------- Keith A. Tucker CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed by the following persons on behalf of the Company and in the capacities and on the dates indicated.
NAME TITLE DATE - - ------------------------------ -------------------------- ------------------- Chairman of the Board, /s/ KEITH A. TUCKER Chief Executive Officer - - ------------------------------ and Director (Principal March 19, 1999 Keith A. Tucker Executive and Financial Officer) /s/ HENRY J. HERRMANN President, Chief - - ------------------------------ Investment Officer, March 19, 1999 Henry J. Herrmann Treasurer and Director /s/ ROBERT L. HECHLER Chief Operating Officer, - - ------------------------------ Executive Vice President March 19, 1999 Robert L. Hechler and Director /s/ MICHAEL D. STROHM Senior Vice President - - ------------------------------ (Principal Accounting March 19, 1999 Michael D. Strohm Officer) /s/ HAROLD T. MCCORMICK* - - ------------------------------ Director March 19, 1999 Harold T. McCormick /s/ LOUIS T. HAGOPIAN* - - ------------------------------ Director March 19, 1999 Louis T. Hagopian
28
NAME TITLE DATE - - ------------------------------ -------------------------- ------------------- /s/ R.K. RICHEY* - - ------------------------------ Director March 19, 1999 R.K. Richey /s/ JOSEPH L. LANIER, JR.* - - ------------------------------ Director March 19, 1999 Joseph L. Lanier, Jr. /s/ WILLIAM L. ROGERS* - - ------------------------------ Director March 19, 1999 William L. Rogers /s/ JAMES M. RAINES* - - ------------------------------ Director March 19, 1999 James M. Raines /s/ GEORGE J. RECORDS, SR.* - - ------------------------------ Director March 19, 1999 George J. Records, Sr. /s/ DAVID L. BOREN* - - ------------------------------ Director March 19, 1999 David L. Boren /s/ JOSEPH M. FARLEY* - - ------------------------------ Director March 19, 1999 Joseph M. Farley
*By: /s/ DANIEL C. SCHULTE ------------------------- Daniel C. Schulte March 19, 1999 ATTORNEY-IN-FACT
29 WADDELL & REED FINANCIAL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- Waddell & Reed Financial, Inc.: Independent Auditors' Report............................................................................. A-2 Consolidated Balance Sheets at December 31, 1998 and December 31, 1997................................... A-3 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1998................................................................................................... A-5 Consolidated Statements of Changes in Stockholders' Equity for each of the years in the three-year period ended December 31, 1998................................................................................ A-6 Consolidated Statements of Comprehensive Income for each of the years in the three-year period ended December 31, 1998...................................................................................... A-7 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1998................................................................................................... A-8 Notes to Consolidated Financial Statements............................................................... A-9
A-1 INDEPENDENT AUDITORS' REPORT The Board of Directors Waddell & Reed Financial, Inc.: We have audited the accompanying consolidated balance sheets of Waddell & Reed Financial, Inc. and subsidiaries, as of December 31, 1998 and 1997 and the related statements of operations, changes in stockholders' equity, comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Waddell & Reed Financial, Inc. and subsidiaries as of December 31, 1998 and 1997 and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Kansas City, Missouri March 1, 1999 A-2 WADDELL & REED FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997 ASSETS
1998 1997 ---------- ---------- (IN THOUSANDS) Assets: Cash and cash equivalents............................................................... $ 30,180 73,820 Investment securities, available-for-sale............................................... 103,153 18,977 Receivables: United Funds and W&R Funds............................................................ 5,740 4,031 Customers and other................................................................... 28,865 11,840 Due from affiliates..................................................................... -- 17,232 Deferred income taxes................................................................... 1,309 1,241 Prepaid expenses and other current assets............................................... 3,222 2,991 ---------- ---------- Total current assets.................................................................. 172,469 130,132 Due from affiliates..................................................................... -- 175,450 Property and equipment, net............................................................. 17,685 12,058 Investment in real estate............................................................... 24,718 17,544 Deferred sales commissions, net......................................................... 15,710 12,316 Goodwill (net of accumulated amortization of $20,382 and $17,479)....................... 95,928 98,831 Other assets............................................................................ 669 633 ---------- ---------- Total assets.......................................................................... $ 327,179 446,964 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. A-3 WADDELL & REED FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) DECEMBER 31, 1998 AND 1997 LIABILITIES AND STOCKHOLDERS' EQUITY
1998 1997 ---------- ---------- (IN THOUSANDS) Liabilities: Current liabilities: Accounts payable........................................................................ $ 28,304 22,929 Due to affiliates....................................................................... -- 102,459 Accrued salesforce compensation......................................................... 11,916 8,666 Short term notes payable................................................................ 40,076 -- Income taxes payable.................................................................... 13,464 3,314 Other current liabilities............................................................... 16,034 18,525 ---------- ---------- Total current liabilities............................................................. 109,794 155,893 ---------- ---------- Due to affiliates....................................................................... -- 509,186 Deferred income taxes................................................................... 208 2,246 Accrued pensions and post-retirement costs.............................................. 10,041 9,530 ---------- ---------- Total liabilities..................................................................... 120,043 676,855 ---------- ---------- Stockholders' equity: Common stock ($.01 par value; 150,000,000 class A shares authorized, 32,142,174 issued and 30,906,445 outstanding and 100,000,000 class B shares authorized, 34,325,000 issued and 31,911,956 outstanding December 31, 1998; 7,975,000 class A shares authorized, issued and outstanding 34,325,000 class B shares authorized, issued and outstanding December 31, 1997)........................................................ 665 423 Additional paid-in capital.............................................................. 246,271 -- Retained earnings....................................................................... 47,325 -- Dividends in excess of retained earnings and additional paid-in capital................. -- (230,658) Deferred compensation................................................................... (12,494) -- Treasury stock (1,235,729 class A shares and 2,413,044 class B shares).................. (74,833) -- Accumulated other comprehensive income, net of deferred taxes of $122 and $212....................................................... 202 344 ---------- ---------- Total stockholders' equity............................................................ 207,136 (229,891) ---------- ---------- Commitments, contingencies and subsequent events Total liabilities and stockholders' equity................................................ $ 327,179 446,964 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. A-4 WADDELL & REED FINANCIAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ---------- --------- --------- (IN THOUSANDS, EXCEPT FOR PER SHARE DATA) Revenue: Investment management fees............................................... $ 137,823 117,784 101,466 Underwriting and distribution fees....................................... 106,615 89,427 85,837 Shareholder service fees................................................. 33,808 30,763 28,378 Investment and other revenue............................................. 9,043 3,798 5,295 ---------- --------- --------- Total revenue.......................................................... 287,289 241,772 220,976 ---------- --------- --------- Expenses: Underwriting and distribution............................................ 99,575 79,995 78,915 Compensation and related costs........................................... 31,512 26,618 21,913 General and administrative............................................... 8,551 15,826 10,180 Depreciation............................................................. 1,892 1,307 1,758 Amortization of goodwill................................................. 2,903 2,903 2,903 Interest expense......................................................... 704 -- -- ---------- --------- --------- Total expenses......................................................... 145,137 126,649 115,669 ---------- --------- --------- Income before affiliated items and provision for income taxes.......... 142,152 115,123 105,307 Affiliated items: Interest income.......................................................... 1,950 11,323 4,072 Interest expense......................................................... (8,604) (11,299) (186) ---------- --------- --------- Income before provision for income taxes............................... 135,498 115,147 109,193 Provision for income taxes................................................. 51,763 44,855 42,493 ---------- --------- --------- Net income............................................................. 83,735 70,292 66,700 ---------- --------- --------- ---------- --------- --------- Net income per share: Basic and diluted........................................................ $ 1.27 $ 1.06 $ 1.00 ---------- --------- --------- ---------- --------- --------- Weighted average shares outstanding--basic and diluted..................... 66,179 66,467 66,467 Dividends declared per common share........................................ $ 0.40 -- --
See accompanying notes to consolidated financial statements. A-5 WADDELL & REED FINANCIAL, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
DIVIDENDS IN EXCESS OF RETAINED EARNINGS AND COMMON STOCK ADDITIONAL ADDITIONAL ---------------------- PAID-IN RETAINED PAID-IN DEFERRED TREASURY SHARES AMOUNT CAPITAL EARNINGS CAPITAL COMPENSATION STOCK --------- ----------- ----------- ----------- ----------- ------------- ----------- (IN THOUSANDS) Balance at December 31, 1995......... 42,300 $ 423 203,958 13,561 -- -- -- Net income........................... -- -- -- 66,700 -- -- -- Contributions from parent............ -- -- 121,358 -- -- -- -- Other distributions.................. -- -- (93,348) (70,261) -- -- -- Cash dividends to parent............. -- -- -- (10,000) -- -- -- Unrealized loss on investment securities......................... -- -- -- -- -- -- -- --------- ----- ----------- ----------- ----------- ------------- ----------- Balance at December 31, 1996......... 42,300 423 231,968 -- -- -- -- Net income........................... -- -- -- 70,292 -- -- -- Contributions from parent............ -- -- 47,980 -- -- -- -- Other distributions.................. -- -- (279,948) (18,627) (230,658) -- -- Cash dividends to parent............. -- -- -- (51,665) -- -- -- Unrealized gain on investment securities......................... -- -- -- -- -- -- -- --------- ----- ----------- ----------- ----------- ------------- ----------- Balance at December 31, 1997......... 42,300 423 -- -- (230,658) -- -- Net income........................... -- -- -- 73,712 10,023 -- -- Issuance of restricted shares........ 297 3 5,260 -- -- (12,494) -- IPO proceeds......................... 23,870 239 295,140 -- 220,635 -- -- Dividends paid....................... -- -- -- (26,387) -- -- -- Other distributions.................. -- -- (54,129) -- -- -- -- Treasury stock repurchases........... (3,649) -- -- -- -- -- (74,833) Unrealized loss on investment securities......................... -- -- -- -- -- -- -- --------- ----- ----------- ----------- ----------- ------------- ----------- Balance at December 31, 1998 62,818 $ 665 246,271 47,325 -- (12,494) (74,833) --------- ----- ----------- ----------- ----------- ------------- ----------- --------- ----- ----------- ----------- ----------- ------------- ----------- ACCUMULATED TOTAL OTHER STOCKHOLDER'S COMPREHENSIVE EQUITY INCOME (DEFICIT) --------------- ------------ Balance at December 31, 1995......... 264 218,206 Net income........................... -- 66,700 Contributions from parent............ -- 121,358 Other distributions.................. -- (163,609) Cash dividends to parent............. -- (10,000) Unrealized loss on investment securities......................... (100) (100) ----- ------------ Balance at December 31, 1996......... 164 232,555 Net income........................... -- 70,292 Contributions from parent............ -- 47,980 Other distributions.................. -- (529,233) Cash dividends to parent............. -- (51,665) Unrealized gain on investment securities......................... 180 180 ----- ------------ Balance at December 31, 1997......... 344 (229,891) Net income........................... -- 83,735 Issuance of restricted shares........ -- (7,231) IPO proceeds......................... -- 516,014 Dividends paid....................... -- (26,387) Other distributions.................. -- (54,129) Treasury stock repurchases........... -- (74,833) Unrealized loss on investment securities......................... (142) (142) ----- ------------ Balance at December 31, 1998 202 207,136 ----- ------------ ----- ------------
See accompanying notes to consolidated financial statements. A-6 WADDELL & REED FINANCIAL, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 --------- --------- --------- (IN THOUSANDS) Net income.......................................................................... $ 83,735 70,292 66,700 Other comprehensive income: Net unrealized appreciation (depreciation) of investments during the period, net of income taxes of $(150), $110 and $(35)....................................... (249) 180 (100) Reclassification adjustment for amounts included in net income, net of income taxes of $64, $0 and $0......................................................... 107 -- -- --------- --------- --------- Comprehensive income.............................................................. $ 83,593 70,472 66,600 --------- --------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. A-7 WADDELL & REED FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ----------- --------- ---------- (IN THOUSANDS) Cash flows from operating activities: Net income.................................................................. $ 83,735 70,292 66,700 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................. 4,795 4,210 4,661 Recognition of deferred compensation...................................... 1,333 -- -- Loss on sale of investments............................................... 171 -- -- Loss on sale and retirement of fixed assets............................... 75 65 311 Capital gains and dividends reinvested.................................... (399) (78) (60) Deferred income taxes..................................................... (1,988) 27 827 Changes in assets and liabilities: Receivables from funds.................................................. (1,709) (452) 1,172 Other receivables....................................................... (23,818) (1,195) 2,725 Due to/from affiliates--operating....................................... 4,509 (4,217) 1,703 Other assets............................................................ (3,661) (5,383) (9,913) Accounts payable........................................................ 5,375 (1,883) (252) Other liabilities....................................................... 10,237 898 18,369 ----------- --------- ---------- Net cash provided by operating activities..................................... 78,655 62,284 86,243 ----------- --------- ---------- Cash flows from investing activities: Additions to investment securities.......................................... (110,652) (40) (116) Proceeds from sales of investment securities................................ 24,020 1 -- Proceeds from maturity of investment securities............................. 2,424 1,260 1,355 Purchase of property and equipment.......................................... (7,602) (3,218) (1,689) Investment in real estate................................................... (5,913) -- (298) Other....................................................................... 7 50 18 ----------- --------- ---------- Net cash used in investing activities......................................... (97,716) (1,947) (730) ----------- --------- ---------- Cash flows from financing activities: Cash dividends to parent.................................................... -- (51,665) (10,000) Proceeds from IPO........................................................... 516,014 -- Notes payable............................................................... 40,000 -- -- Cash dividends.............................................................. (26,387) -- -- Change in due to/from affiliates--nonoperating.............................. (479,373) (37,888) (170,016) Purchase of treasury stock.................................................. (74,833) -- -- Cash contributions from parent.............................................. -- 44,033 111,718 ----------- --------- ---------- Net cash used in financing activities......................................... (24,579) (45,520) (68,298) ----------- --------- ---------- Net increase (decrease) in cash and cash equivalents.......................... (43,640) 14,817 17,215 Cash and cash equivalents at beginning of year................................ 73,820 59,003 41,788 ----------- --------- ---------- Cash and cash equivalents at end of year...................................... $ 30,180 73,820 59,003 ----------- --------- ---------- ----------- --------- ---------- Cash paid for: Income taxes................................................................ $ 48,830 65,754 43,667 Interest.................................................................... 628 -- --
See accompanying notes to consolidated financial statements A-8 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997, AND 1996 1. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION BUSINESS Waddell & Reed Financial, Inc. and subsidiaries (the "Company") derive their revenues primarily from investment management, investment product distribution, and shareholder services administration provided to the United mutual funds, Waddell & Reed mutual funds, Target/United mutual funds collectively ("the Funds") and managed institutional accounts. The Funds and institutional accounts operate under various rules and regulations set forth by the Securities and Exchange Commission (the "Commission"). Services to the Funds are provided under contracts that set forth the fees to be charged for these services. The majority of these contracts are subject to annual review and approval by each Fund's Board of Directors and shareholders. Company revenues are largely dependent on the total value and composition of assets under management, which include domestic and international equity and debt securities, accordingly, fluctuations in financial markets and composition of assets under management impact revenues and results of operations. For 1998, management fees from the United Income fund were $39.8 million or 14% of total revenues. The United Income Fund had a market value of $7.8 billion at December 31, 1998. Prior to December 1997, the Company was known as United Investors Management Company. In the first quarter of 1998, the insurance operations of the Company, United Investors Life Insurance Company, were distributed to Torchmark Corporation and a subsidiary of Torchmark (together, "Torchmark"). The Company was wholly owned by Torchmark until March 4, 1998, when the Company completed the initial public offering ("Offering") of its Class A common stock, with the Company realizing net proceeds of approximately $516 million. Approximately $481 million of the proceeds were used to prepay notes payable to Torchmark. After giving effect to the Offering and prior to November 6, 1998, Torchmark controlled in excess of 60% of the outstanding Class A and Class B common stock, and in excess of 80% of the voting power of the outstanding Class A and Class B common stock of the Company. On November 6, 1998 Torchmark distributed its remaining ownership interest in the Company by means of a tax-free spin-off to the stockholders of Torchmark of all common stock of the Company held by Torchmark. BASIS OF PRESENTATION The accompanying financial statements include the accounts of the Company and its subsidiaries for all periods presented. All significant intercompany accounts and transactions are eliminated in consolidation. Amounts in the accompanying financial statements and notes are rounded to the nearest thousand. Certain amounts in the prior year financial statements have been reclassified to conform to the 1998 presentation. USE OF ESTIMATES The management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. A-9 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION (CONTINUED) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Given the nature of the Company's assets and liabilities, the Company believes the amounts in the financial statements approximate fair value. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand and short-term investments. The Company considers all highly liquid debt instruments with original maturities of ninety days or less to be cash equivalents. INVESTMENT SECURITIES AND INVESTMENT IN AFFILIATED MUTUAL FUNDS All investments in debt securities and mutual funds are classified as available-for-sale. As a result, these investments are recorded at fair value. Unrealized holding gains and losses, net of related tax effects, are excluded from earnings until realized and are reported as a separate component of comprehensive income. Realized gains and losses are computed using the specific identification method for investment securities other than mutual funds. For mutual funds, realized gains and losses are computed using the average cost method. CONCENTRATION OF CREDIT RISK Financial instruments which potentially expose the Company to concentrations of credit risk, as defined by SFAS No. 105, DISCLOSURE OF INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK, consist primarily of investments in U.S. government and agency securities, municipal securities, corporate securities, and affiliated money market and fixed income mutual funds and accounts receivable. Credit risk is believed to be minimal in that the U.S. government and agency securities are backed by the full faith and credit of the U.S. government, municipal securities are backed by the full taxing power of the issuing municipality or revenues from a specific project, corporate bonds are backed by the assets of the corporations, and the affiliated mutual funds have substantial net assets. COMPREHENSIVE INCOME On January 1, 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 established standards for reporting and presentation of comprehensive income and its components in a full set of financial statements. Comprehensive income consists of net income and unrealized gains (losses) on available-for-sale securities and is presented in a separate statement of comprehensive income. SFAS No. 130 requires only additional disclosures in the financial statements; it does not affect the Company's financial position or results of operations. Prior year financial statements have been presented to conform to the requirements of SFAS No. 130. PROPERTY AND EQUIPMENT AND INVESTMENT IN REAL ESTATE Property and equipment and investment real estate are carried at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. A-10 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. WADDELL & REED FINANCIAL, INC. AND SUBSIDIARIES AND BASIS OF PRESENTATION (CONTINUED) GOODWILL Goodwill, which represents the excess of purchase price over fair value of net assets acquired, arose in connection with the acquisition of the Company by Torchmark. Amortization is on a straight-line basis over forty years. The Company assesses the recoverability of goodwill by determining whether the unamortized balance can be recovered through undiscounted future operating cash flows over its remaining life. Impairment, if any, is measured by the excess of the unamortized balance over discounted future operating cash flows. DEFERRED SALES COMMISSIONS The Company defers certain costs, principally selling commissions, which are paid to financial advisors in connection with the sale of the Class B shares of the Waddell & Reed funds, which do not charge a commission at the time of the sale. These costs are amortized on a straight-line basis over the estimated life of shareholder investments not to exceed ten years. The Company recovers such costs through 12b-1 distribution fees, which are paid by the Waddell & Reed funds and a contingent deferred sales charge paid by shareholders who redeem their shares prior to completion of the required holding periods. RETIREMENT PLAN AND POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company adopted SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, on January 1, 1998. SFAS No. 132 requires only additional disclosures in the footnotes to the financial statements regarding pension and other postretirement benefits. It does not affect the Company's financial position or results of operations. Prior year disclosures have been presented to conform to the requirements of SFAS No. 132. REVENUE RECOGNITION Investment advisory and administrative service fees are recognized when earned. Commission revenues and expenses (and related receivables and payables) resulting from securities transactions are recorded on the date on which the order to buy or sell securities is executed. ADVERTISING Advertising costs are expensed as incurred. Amounts incurred were $2,845,000, $1,046,000 and $841,000 for 1998, 1997 and 1996, respectively. EARNINGS PER SHARE Earnings per share are calculated in accordance with SFAS No. 128 "Earnings Per Share", which requires that both basic and diluted earnings per share be presented. Diluted amounts are computed to reflect the potential impact of stock options and restricted stock awards. The weighted average number of shares outstanding was 65,787,000, 66,467,000 and 66,467,000 for 1998, 1997 and 1996 respectively. The weighted average number of shares used in computing diluted earnings per share was 66,179,000, 66,467,000 and 66,467,000 for 1998, 1997 and 1996, respectively. The average number of shares used for 1997 and 1996 is the actual shares outstanding at the Offering. A-11 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. CASH AND CASH EQUIVALENTS Cash and cash equivalents at December 31, 1998 and 1997 include reserves of $10,810,000 and $14,943,000, respectively, for the benefit of customers in compliance with securities industry regulations. Substantially all such reserves are in excess of federal deposit insurance limits. 3. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE Investments at December 31, 1998 and 1997 are as follows:
AMORTIZED UNREALIZED UNREALIZED FAIR 1998 COST GAINS LOSSES VALUE - - ---------------------------------------------- ---------- ----------- ----------- --------- (IN THOUSANDS) United States government-backed mortgage securities.................................. $ 2,944 50 -- 2,994 Municipal bonds............................... 47,030 1,300 (56) 48,274 Corporate bonds............................... 41,012 120 (1,125) 40,007 Preferred stock............................... 8,292 119 -- 8,411 Affiliated mutual funds....................... 3,547 25 (105) 3,467 ---------- ----- ----------- --------- $ 102,825 1,614 (1,286) 103,153 ---------- ----- ----------- --------- ---------- ----- ----------- ---------
(IN THOUSANDS) ----------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR 1997 COST GAINS LOSSES VALUE - - ---------------------------------------------- ---------- ----------- ----------- --------- United States government-backed mortgage securities.................................. $ 4,749 86 -- 4,835 Municipal bonds............................... 12,723 422 (2) 13,143 Affiliated mutual funds....................... 949 50 -- 999 ---------- ----- ----------- --------- $ 18,421 558 (2) 18,977 ---------- ----- ----------- --------- ---------- ----- ----------- ---------
An investment maturity schedule for municipal and corporate bonds held as of December 31, 1998 is as follows:
AMORTIZED FAIR COST VALUE ----------- --------- (IN THOUSANDS) Within one year.......................................................... $ -- $ -- One to five years........................................................ 17,276 17,581 After five years but within ten years.................................... 36,382 36,378 After ten years.......................................................... 34,384 34,322 ----------- --------- $ 88,042 88,281 ----------- --------- ----------- ---------
In 1998, investment securities with fair value of $6,983,000 were sold, which resulted in realized losses of $171,000. There were no sales of securities in 1997 or 1996. A-12 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENT IN REAL ESTATE A summary of investment in real estate at December 31, 1998 and 1997 is as follows:
ESTIMATED USEFUL 1998 1997 LIVES --------- --------- ----------- (IN THOUSANDS) Land...................................................... $ 3,809 -- -- Buildings................................................. 20,909 -- 40 years --------- --------- Investment in real estate, at cost........................ 24,718 -- Less accumulated depreciation............................. -- -- --------- --------- Investment real estate, net............................... $ 24,718 -- --------- --------- --------- --------- Investment in real estate limited partnership............. $ -- 17,544 --------- --------- --------- ---------
Effective January 1, 1997, the Company contributed its investment in real estate, which consisted of commercial properties located adjacent to its offices in Overland Park, Kansas to TMK Income Properties, LP ("TIP") in exchange for a limited partnership interest in TIP. TIP is a limited partnership with Torchmark affiliates that was formed for the purpose of acquiring, developing, and managing real estate property. The property was transferred at its net book value. Effective July 1, 1997, the Company contributed additional land and improvements with a net book value of $5,113,000 for an additional 5% interest in TIP. In late 1998, the Company ceased its participation in TIP. In exchange for its partnership interest, the Company received the property which it had originally contributed. Additionally, the Company paid TIP $5,913,000 for improvements made to that property while it was in the partnership. Real estate partnership income of $465,000 and $199,000 for the years ended December 31, 1998 and 1997 and rental income of $1,682,000 for the year ended December 31, 1996 is included in investment and other revenue. Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was $0, $18,000 and $383,000, respectively. 5. PROPERTY AND EQUIPMENT A summary of property and equipment at December 31, 1998 and 1997 is as follows:
ESTIMATED USEFUL 1998 1997 LIVES --------- --------- ----------- (IN THOUSANDS) Land...................................................... $ 1,717 1,717 -- Building.................................................. 6,257 6,257 40 years Furniture and fixtures.................................... 6,992 5,862 3-10 years Equipment and machinery................................... 13,903 7,859 3-10 years --------- --------- Property and equipment, at cost........................... 28,869 21,695 Less accumulated depreciation............................. 11,184 9,637 --------- --------- Property and equipment, net............................... $ 17,685 12,058 --------- --------- --------- ---------
A-13 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. REVOLVING CREDIT AGREEMENT The Company entered into a $200 million revolving credit facility, expandable to $300 million, on October 15, 1998 with a syndicate of nine banks. The credit facility is a 364-day revolving facility at an interest rate of LIBOR plus .35%. The facility is in place to provide an additional source of capital to finance share repurchases, acquisitions and other general corporate needs. As of December 31, 1998, the Company had borrowed $40 million on this facility, which was used to repurchase the Company's stock that is held in treasury. The credit agreement stipulates two financial condition covenants. The consolidated leverage ratio cannot exceed 3.0 to 1.0 for four consecutive quarters. The consolidated leverage ratio is defined as consolidated total debt to consolidated earnings before interest costs, income taxes, depreciation and amortization ("EBITDA"). The consolidated interest coverage ratio cannot be less than 4.0 to 1.0 for four consecutive quarters. Consolidated interest coverage ratio is defined as consolidated EBITDA to consolidated interest expense. The Company was in compliance with the covenant provisions for 1998. 7. TRANSACTIONS WITH RELATED PARTIES The Company serves as investment advisor to Torchmark and its affiliates and receives advisory fees for this service. Advisory fees, which are based on assets under management, amounted to $2,401,000, $1,241,000 and $1,037,000 for the years ended December 31, 1998, 1997 and 1996, respectively. These commissions were earned under contracts, which have been renewed for 1999 with substantially the same terms. The Company earns commissions from Torchmark for marketing life and health insurance products and variable annuities. For the years ended December 31, 1998, 1997 and 1996, the commissions amounted to $36,724,000, $30,612,000 and $30,778,000, respectively. These commissions were earned under contracts, which have been renewed for 1999 with substantially the same terms. Prior to the Offering, Torchmark performed certain administrative services for the Company. Charges for such services, which were allocated based on a defined formula that allocated Torchmark's total costs for services provided based on each affiliate's assets and compensation expense as a percentage of the total affiliates assets and compensation expense. These charges were $2,008,000 and $2,189,000 for the years ended December 31, 1997 and 1996, respectively. During 1998 no charges were made pertaining to these administrative services and no future charges are expected since the Company is no longer an affiliate of Torchmark. Effective September 1997, Waddell & Reed Asset Management Company ("WRAMCO"), a subsidiary of the Company, was distributed to Torchmark at its net book value of $2,977,000. WRAMCO provides investment management services to institutional investors and privately managed accounts. Subsequent to the distribution date, the Company provides investment advisory services to WRAMCO and receives a fee based on assets under management. At December 31, 1998, there were no amounts due from Torchmark other than normal non-interest bearing amounts for current operating expenses and commissions due from the sale of Torchmark products. At December 31, 1997, current amounts due from affiliates included $11,672,000 of 5.5% demand notes plus accrued interest. At December 31, 1997 the noncurrent amounts due from affiliates included a $123,947,000 note receivable with an interest rate of 6% from Torchmark, plus $1,239,000 of accrued interest. Also included in the noncurrent portion at December 31, 1997 is a $40,000,000 note receivable with an interest rate of 8.1% from Torchmark. During 1998, the proceeds from the offering were used to prepay these notes. In 1997, amounts due from Torchmark aggregating $38,124,000 were forgiven and charged against stockholders' equity. The current amounts due to affiliates at December 31, 1997 include amounts due for administrative services. Included in the 1997 noncurrent amounts due to affiliates was a $123,947,000 note payable to A-14 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. TRANSACTIONS WITH RELATED PARTIES (CONTINUED) Torchmark, plus $1,239,000 of accrued interest. This 6% note was prepaid with the proceeds from the Offering. On November 25, 1997, the Company declared a $480,000,000 dividend evidenced by two 8% promissory notes to Torchmark and a subsidiary of Torchmark. Notes aggregating $96,000,000 were due in 1998 and, accordingly, were classified in the current portion of due to affiliates. The remaining $384,000,000 of these notes were included in the long-term portion of due to affiliates. These notes were prepaid with the proceeds from the Offering. 8. INCOME TAXES The components of total income tax expense are as follows:
1998 1997 1996 --------- --------- --------- (IN THOUSANDS) Currently payable: Federal.................................................... $ 46,845 38,939 36,197 State...................................................... 6,934 5,889 5,469 --------- --------- --------- 53,779 44,828 41,666 Deferred taxes............................................... (2,016) 27 827 --------- --------- --------- Income tax expense from operations........................... $ 51,763 44,855 42,493 --------- --------- --------- Stockholders' equity--unrealized gain (loss) on investment securities available-for-sale............................... (86) 110 (36) --------- --------- --------- Total income taxes........................................... $ 51,677 44,965 42,457 --------- --------- --------- --------- --------- ---------
The tax effect of temporary differences that give rise to significant portions of deferred tax liabilities and deferred tax assets at December 31, 1998 and 1997 are as follows:
1998 1997 --------- --------- (IN THOUSANDS) Deferred tax liabilities: Deferred acquisition costs............................................ $ (5,732) (4,680) Fixed assets.......................................................... -- (824) Other................................................................. (648) (500) --------- --------- Total gross deferred liabilities........................................ (6,380) (6,004) --------- --------- Deferred tax assets: Benefit plans......................................................... 3,824 3,557 Accrued expenses...................................................... 2,674 1,442 Fixed assets.......................................................... 983 -- --------- --------- Total gross deferred assets............................................. 7,481 4,999 --------- --------- Net deferred tax asset (liability)...................................... $ 1,101 (1,005) --------- --------- --------- ---------
A-15 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) A valuation allowance for deferred tax assets was not necessary at December 31, 1998 and 1997. The following table reconciles the statutory federal income tax rate to the Company's effective income tax rate:
1998 1997 1996 --------- --------- --------- Statutory federal income tax rate....................................... 35.0% 35.0 35.0 State income taxes, net of federal tax benefits......................... 3.3 3.3 3.1 Other items............................................................. (0.1) 0.7 0.8 --- --- --- Effective income tax rate............................................... 38.2% 39.0 38.9 --- --- --- --- --- ---
9. RETIREMENT PLAN The Company participates in a noncontributory retirement plan which covers substantially all employees of the Company and certain vested former employees of Torchmark. Benefits payable under the plan are based on employees' years of service and compensation during the final ten years of employment.
1998 1997 --------- --------- (IN THOUSANDS) Change in benefit obligation Benefit obligation at beginning of year............................... $ 28,979 24,786 Service cost.......................................................... 1,612 1,511 Interest cost......................................................... 2,294 2,148 Actuarial loss........................................................ 2,733 2,431 Benefits paid......................................................... (4,364) (1,897) --------- --------- Benefit obligation at end of year..................................... $ 31,254 28,979 --------- --------- --------- --------- Change in plan assets: Fair value of plan assets at beginning of year........................ $ 25,689 23,483 Actual return on plan assets.......................................... 5,249 4,103 Company contribution.................................................. 1,492 -- Benefits paid......................................................... (4,364) (1,897) --------- --------- Fair value of plan assets at end of year.............................. $ 28,066 25,689 --------- --------- --------- --------- Funded status of plan................................................... $ (3,188) (3,290) Unrecognized actuarial gain............................................. (3,097) (2,989) Unrecognized prior service cost......................................... 673 717 Unrecognized net transition obligation.................................. 103 108 --------- --------- Net amount recognized................................................... $ (5,509) (5,454) --------- --------- --------- ---------
A-16 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. RETIREMENT PLAN (CONTINUED)
1998 1997 --------- --------- Weighted average assumptions as of December 31: Discount rate......................................................... 6.75% 7.50% Expected return on plan assets........................................ 9.25% 9.25% Rate of compensation increase......................................... 3.75% 4.50% Components of net periodic benefit cost: Service cost.......................................................... $ 1,612 1,511 Interest cost......................................................... 2,294 2,148 Expected return on assets............................................. (2,407) (2,164) Prior service cost amortization....................................... 44 44 Transition obligation amortization.................................... 5 5 --------- --------- Net periodic benefit cost....................................... $ 1,548 1,544 --------- --------- --------- ---------
10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company sponsors an unfunded defined benefit postretirement medical plan that covers substantially all employees. The plan is contributory with retiree contributions adjusted annually.
1998 1997 --------- --------- (IN THOUSANDS) Change in benefit obligation Benefit obligation at beginning of year............................... $ 1,142 872 Service cost.......................................................... 64 48 Interest cost......................................................... 92 68 Actuarial (gain) loss................................................. (85) 314 Retiree contributions................................................. 75 56 Benefits and expenses paid............................................ (137) (216) --------- --------- Benefit obligation at end of year..................................... $ 1,151 1,142 --------- --------- --------- --------- Change in plan assets: Fair values of plan assets at beginning of year....................... -- -- Company contribution.................................................. 77 160 Retiree contributions................................................. 75 56 Benefits and expenses paid............................................ (152) (216) --------- --------- Fair value of plan assets at end of year.............................. $ -- -- --------- --------- --------- --------- Funded status........................................................... $ (1,151) (1,142) Unrecognized loss....................................................... 62 102 Unrecognized prior service cost......................................... (175) (191) --------- --------- Accrued benefit cost at December 31................................... $ (1,264) (1,231) --------- --------- --------- ---------
A-17 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) Weighted average assumptions as of December 31: Discount rate......................................................... 7.50% 7.50% Components of net periodic benefit cost: Service cost.......................................................... 64 48 Interest cost......................................................... 92 67 Unrecognized amortization of prior service cost....................... (15) (16) Unrecognized net actuarial gain....................................... -- (2) --------- --------- Net periodic benefit cost............................................. $ 141 97 --------- --------- --------- ---------
For measurement purposes, the health care cost trend rate was 8% and 9% in 1998 and 1997, respectively. The effect of a 1% annual increase in assumed cost trend rates would increase the December 31, 1998 accumulated postretirement benefit obligation by approximately $1,375,000, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1998 by approximately $210,000. The effect of a 1% annual decrease in assumed cost trend rates would decrease the December 31, 1998 accumulated postretirement benefit obligation by approximately $956,000, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1998 by approximately $130,000. 11. SAVINGS AND INVESTMENT PLANS The company has a savings and investment plan covering substantially all employees. The plan provides for a matching corporate contribution of 50% of the employee's investment in mutual fund shares and/or stock, not to exceed 3% of the employee's salary. The Company's contribution to the savings and investment plan for the years ended December 31, 1998, 1997 and 1996 was $858,000, $716,000 and $641,000, respectively. 12. EMPLOYEE STOCK OPTIONS The Company has a fixed employee stock-based compensation plan ("Option plan"), whereby the Company may grant options on its common stock. The exercise price of each option is equal to the market price of the stock on the date of grant. The maximum term of the options is ten years and generally vests one-third in each of the three years starting one year after grant date. In October 1995, the FASB issued Statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), which was effective for the Company beginning January 1, 1996. SFAS No. 123 defines the "fair value method" of accounting for employee stock options. It also allows accounting for such options under the "intrinsic value method" in accordance with Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB No. 25) and related interpretations. If a company elects to use the intrinsic value method, pro forma disclosures of earnings and earnings per share are required as if the fair value method of accounting was applied. A-18 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. EMPLOYEE STOCK OPTIONS (CONTINUED) Pursuant to SFAS No 123, the fair value of each option has been estimated using a Black-Scholes option-pricing model with the following assumptions: Dividend yield...................................................... 2.34% Risk-free interest rate............................................. 5.20 Expected volatility................................................. 29.70 Expected life (in years)............................................ 4.70
After the spin off from Torchmark, holders of Torchmark stock options granted prior to 1998 were given a choice to retain their Torchmark options or convert their options into options of the Company ("Conversion Options"). Employees and directors of the Company who held Torchmark options could elect to convert all of their Torchmark options into Conversion Options. In total 3,694,100 Conversion Options were converted from Torchmark options. The Conversion Options retained the same terms as the previous Torchmark options except that the exercise price and the number of shares were adjusted so that the aggregate intrinsic value of the options remained the same. Prior to 1998, there were no Company stock options outstanding. A summary of stock option activity and related information for the year ended December 31, 1998 follows:
WEIGHTED AVERAGE OPTIONS EXERCISE PRICE ---------- ----------------- Outstanding, beginning of year................................. -- -- Granted........................................................ 4,389,088 $ 22.63 Converted...................................................... 3,694,100 13.96 Exercised...................................................... -- -- Expired........................................................ -- -- ---------- ------ Outstanding, end of year....................................... 8,083,188 $ 18.67 ---------- ------ Exercisable, end of year....................................... 2,957,826 $ 14.42 ---------- ------ ---------- ------
The range of fair values of options granted during the year was $4.78 to $7.43, with a weighted average fair value of $5.75. Had compensation cost for the options granted in 1998 been determined on the basis of fair value pursuant to SFAS No. 123, net income and earnings per share would have been reduced as follows: Net income As reported...................................................... $ 83,735 Pro forma........................................................ $ 79,744 Basic and diluted earnings per share............................... As reported...................................................... $ 1.27 Pro forma........................................................ $ 1.21
A-19 WADDELL & REED FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. UNIFORM CAPITAL RULE REQUIREMENTS Waddell & Reed, Inc. ("W&R") a subsidiary of the Company, is a registered broker-dealer and a member of the National Association of Securities Dealers, Inc. and is therefore subject to a requirement of the Commission's Uniform Net Capital Rule, requiring the maintenance of certain minimal capital levels. At December 31, 1998, W&R had net capital, as defined by the Uniform Capital Rule, of $11,582,000 which is $8,247,000 in excess of the required net capital. 14. COMMITMENTS AND CONTINGENCIES RENTAL EXPENSE AND LEASE COMMITMENTS The Company rents certain sales and other office space under long-term operating leases. Rent expense was $4,937,000, $4,397,000 and $3,824,000 for the years ended, December 31, 1998, 1997 and 1996, respectively. Future minimum rental commitments under noncancelable operating leases are as follows: Minimum remaining rental commitment years ended December 31 in thousands: 1999................................................................ $ 3,564 2000................................................................ 1,603 2001................................................................ 805 2002................................................................ 427 2003................................................................ 186 Thereafter.......................................................... -- --------- $ 6,585 --------- ---------
New leases are expected to be executed as existing leases expire. Thus, future minimum lease commitments are not expected to be less than those in 1999. CONTINGENCIES From time to time, the Company is a party to various claims arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, it is unlikely that any adverse determination in one or more pending claims would have a material adverse effect on the Company's financial position or results of operations. 15. SUBSEQUENT EVENTS As of January 1, 1999, the Company enacted a 401(k) plan for employees. This plan provides for a matching of 100% corporate contribution on the first 3% of income and 50% on the next 2% of income, not to exceed 5% of the employee's salary. From January 1, 1999 through February 28, 1999 the Company repurchased an additional .2 million shares of its class A common stock and 1.1 million shares of its class B common stock at an average price of $19.91. Total costs of $26.5 million for the repurchase was funded partially by an additional borrowing of $20.0 million on the credit facility. A-20 WADDELL & REED FINANCIAL, INC. INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT DESCRIPTION - - ----------- --------------------------------------------------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the Company's Form S-1 Registration Statement Number 333-43687 (the "Registration Statement") and incorporated herein by reference. 3.2 Amended and Restated Bylaws of the Company. Filed as Exhibit 3.2 to the Company's Registration Statement and incorporated herein by reference. 4.1 Specimen of Class A Common Stock Certificate. Filed as Exhibit 4.1 to the Company's Registration Statement and incorporated herein by reference. 4.2 Specimen of Class B Common Stock Certificate. Filed as Exhibit 4.1 to the Company's Form 8-A Registration Statement, Accession Number 0000930661-98-002062, dated October 1, 1998 and incorporated herein by reference. 10.1 Public Offering and Separation Agreement, dated as of March 3, 1998, by and between the Company and Torchmark Corporation. Filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.2 Tax Disaffiliation Agreement, dated as of March 3, 1998, by and between the Company and Torchmark Corporation. Filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.3 Investment Services Agreement, dated as of March 3, 1998, by and between Waddell & Reed Investment Management Company and Waddell & Reed Asset Management Company. Filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.4 General Agent Contract, dated January 1, 1985, by and between United Investors Life Insurance Company and W & R Insurance Agency, Inc. Filed as Exhibit 10.4 to the Company's Registration Statement and incorporated herein by reference. 10.5 Amendment Extending General Agent Contract, dated as of March 31, 1998, by and between United Investors Life Insurance Company and W & R Insurance Agency, Inc. Filed as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.6 Second Amendment of General Agent Contract, dated as of December 21, 1998, by and between United Investors Life Insurance Company and W & R Insurance Agency, Inc. 10.7 Independent Agent Contract, dated June 25, 1997, by and among United American Insurance Company, W & R Insurance Agency, Inc., and affiliates identified therein. Filed as Exhibit 10.6 to the Company's Registration Statement and incorporated herein by reference. 10.8 Amendment Extending Independent Agent Contract, dated as of March 3, 1998 by and among United American Insurance Company, W & R Insurance Agency, Inc., and affiliates identified therein. Filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference.
B-1 WADDELL & REED FINANCIAL, INC. INDEX TO EXHIBITS 10.9 Second Amendment of Independent Agent Contract, dated as of December 31, 1998, by and among United American Insurance Company, W & R Insurance Agency, Inc. and affiliates identified herein. 10.10 Distribution Contract, dated April 4, 1997, by and between United Investors Life Insurance Company and Target/United Funds, Inc. Filed as Exhibit 10.16 to the Company's Registration Statement and incorporated herein by reference. 10.11 Agreement Amending Distribution Contract, dated as of March 3, 1998, by and between United Investors Life Insurance Company and Target/United Funds, Inc. Filed as Exhibit 10.15 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.12 Second Amendment of Distribution Contract, dated as of December 31, 1998, by and between United Investors Life Insurance Company and Target/United Funds, Inc. 10.13 Principal Underwriting Agreement, dated May 1, 1990, by and between United Investors Life Insurance Company and Waddell & Reed, Inc. Filed as Exhibit 10.18 to the Company's Registration Statement and incorporated herein by reference. 10.14 Agreement Amending Principal Underwriting Agreement, dated as of March 3, 1998, by and between United Investors Life Insurance Company and Waddell & Reed, Inc. Filed as Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.15 Second Amendment of Principal Underwriting Agreement, dated as of December 31, 1998, by and between United Investors Life Insurance Company and Waddell & Reed, Inc. 10.16 Services Agreement, dated as of March 3, 1998, by and between Waddell & Reed Investment Management Company and Waddell & Reed Asset Management Company. Filed as Exhibit 10.19 to the Company's Quarterly Report on a Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.17 Addendum to Services Agreement, dated as of December 31, 1998, by and between Waddell & Reed Investment Management Company and Waddell & Reed Asset Management Company. 10.18 Reciprocity Agreement, dated as of March 3, 1998, by and between the Company and Torchmark Corporation. Filed as Exhibit 10.20 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.19 Administrative Services Agreement, dated as of March 3, 1998, by and between the Company and Torchmark Corporation. Filed as Exhibit 10.21 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.20 The Company 1998 Stock Incentive Plan. 10.21 The Company 1998 Non-Employee Director Stock Option Plan. Filed as Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.22 The Company 1998 Executive Deferred Compensation Stock Option Plan. Filed as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.23 First Amendment to 1998 Executive Deferred Compensation Stock Option Plan.
B-2 WADDELL & REED FINANCIAL, INC. INDEX TO EXHIBITS 10.24 The Company 401(k) and Thrift Plan. Filed as Exhibit 4(a) to the Company's Form S-8 Registration Statement Number 333-69897 and incorporated herein by reference. 10.25 The Company Retirement Income Plan. Filed as Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.26 Waddell & Reed, Inc. Career Field Retirement Plan. Filed as Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference. 10.27 Credit Agreement dated October 15, 1998, by and among the Company, Lenders and The Chase Manhattan Bank. 10.28 The Company Supplemental Executive Retirement Plan. 10.29 The Company Management Incentive Plan of 1999. 10.30 Form of Accounting Services Agreement by and between each of the Funds and Waddell & Reed Services Company. 10.31 Form of Investment Management Agreement by and between each of the United Funds and Waddell & Reed, Inc. 10.32 Form of Investment Management Agreement by and between the Waddell & Reed Funds and Waddell & Reed Investment Management Company. 10.33 Form of Investment Management Agreement by and between the Target/United Funds and Waddell & Reed, Inc. 10.34 Form of Shareholder Servicing Agreement by and between the Funds and Waddell & Reed Services Company. 10.35 Form of Underwriting Agreement by and between each of the United Funds and Waddell & Reed, Inc. 10.36 Form of Underwriting Agreement by and between each of the Waddell & Reed Funds and Waddell & Reed, Inc. 10.37 Form of Amended and Restated Custodian Agreement by and between each of the Funds and UMB Bank, n.a. 11 Statement regarding computation of per share earnings. 21 Subsidiaries of the Company. 23 Consent of KPMG LLP. 24 Powers of Attorney. 27 Financial Data Schedule.
B-3 EX-10.6 2 EXHIBIT 10.6 EXHIBIT 10.6 SECOND AMENDMENT OF GENERAL AGENT CONTRACT This is an amendment ("Second Amendment") to the General Agent Contract effective January 1, 1985 ("General Agent Contract") between UNITED INVESTORS LIFE INSURANCE COMPANY ("United" or "Company") and W & R INSURANCE AGENCY, INC. et al., ("General Agent") (a copy of which is attached hereto as Exhibit "A"), as amended by the AMENDMENT EXTENDING GENERAL AGENT CONTRACT ("First Amendment"), executed on the 3rd day of March, 1998, (a copy of which is attached hereto as Exhibit "B".) 1. The parties hereunto agree as follows: Subparagraph A of Paragraph 13 of the General Agent contract, as amended by the First Amendment thereto, is amended to read as follows: A. Except as provided in subparagraph B or C of this Paragraph 13, this contract shall be effective from its Effective Date for a term of one year, and shall be automatically renewed each year for successive one-year terms, unless and until either party gives written notice of termination to the other party not less than 180 days prior to the expiration date of the initial term or any renewal term. 2. In all other respects, the General Agent Contract is unchanged, and the parties ratify and confirm the General Agent Contract, as amended by this Second Amendment. IN WITNESS WHEREOF, the parties have executed this Second Amendment by their duly authorized representatives on this 21st day of December, 1998. United Investors Life Insurance Company ("Company") By: /s/ Anthony L. McWhorter ------------------------ Its: President --------- W&R Insurance Agency, Inc., Waddell & Reed Inc., et al., ("General Agent") By: /s/ Robert L. Hechler --------------------- Its: President --------- EX-10.9 3 EXHIBIT 10.9 EXHIBIT 10.9 SECOND AMENDMENT OF INDEPENDENT AGENT CONTRACT This amendment ("Second Amendment") to the Independent Agent Contract, dated June 25, 1997 ("Independent Agent Contract"), by and between United American Insurance Company ("United") and W & R Insurance Agency, Inc. ("Independent Agent")(a copy of which is attached hereto as Exhibit "A"), as amended by the Amendment Extending Independent Agent Contract ("First Amendment"), dated the March 3, 1998 (a copy of which is attached hereto as Exhibit "B") is made effective as of the 31st day of December, 1998, except as otherwise provided herein. 1. The parties hereby agree to rescind the provision for termination of the Independent Agent Contract contained in the First Amendment and extend the Independent Agent Contract for the term provided in the "TERMINATION" section thereof. 2. In all other respects, the Independent Agent Contract is unchanged, and the parties ratify and confirm the Independent Agent Contract, as amended by this Second Amendment. IN WITNESS WHEREOF, the parties have executed this Second Amendment by their duly authorized representatives to become effective as provided herein. UNITED AMERICAN INSURANCE COMPANY By: /s/ Larry M. Hutchinson Its: Vice President and Secretary W & R INSURANCE AGENCY, INC. By: /s/ Robert L. Hechler Its: Vice President EX-10.12 4 EXHIBIT 10.12 EXHIBIT 10.12 SECOND AMENDMENT OF DISTRIBUTION CONTRACT This amendment ("Second Amendment") to the Distribution Contract, dated April 4, 1997 ("Distribution Contract"), by and between United Investors Life Insurance Company ("UILIC") and Target/United Funds, Inc. f/k/a TMK/United Funds, Inc. (the "Fund")(a copy of which is attached hereto as Exhibit "A"), as amended by the Agreement Amending Distribution Contract ("First Amendment"), dated the March 3, 1998 (a copy of which is attached hereto as Exhibit "B") is made effective as of the 31st day of December, 1998, except as otherwise provided herein. 1. The parties hereby agree as follows: a. To rescind the provision for termination of the Distribution Contract contained in the First Amendment and extend the Distribution Contract for the term provided in Section 8 thereof. b. The second full paragraph of the Distribution Contract shall be amended, retroactively to April 18, 1997, by deleting the word "two" in the first sentence and replacing it with the word "three" and by inserting ", United Investors Universal Life Variable Account" after the phrase "United Investors Life Variable Account" in the first sentence. c. Section 1 of the Distribution Contract shall be amended, retroactively to April 18, 1997, by deleting the word "two" and replacing it with the word "three" in the third line. 2. In all other respects, the Distribution Contract is unchanged, and the parties ratify and confirm the Distribution Contract, as amended by this Second Amendment. IN WITNESS WHEREOF, the parties have executed this Second Amendment by their duly authorized representatives to become effective as provided herein. UNITED INVESTORS LIFE INSURANCE COMPANY By: /s/ Anthony L. McWhorter Its: President TARGET/UNITED FUNDS, INC. By: /s/ Robert L. Hechler Its: President EX-10.15 5 EXHIBIT 10.15 EXHIBIT 10.15 SECOND AMENDMENT OF PRINCIPAL UNDERWRITING AGREEMENT This amendment ("Second Amendment") to the Principal Underwriting Agreement, dated May 1, 1990 ("Principal Underwriting Agreement") by and between United Investors Life Insurance Company ("United Investors"), on its own behalf and on behalf of United Investors Life Variable Account ("Variable Account"), and Waddell & Reed, Inc. ("W&R")(a copy of which is attached hereto as Exhibit "A"), as amended by the Agreement Amending Principal Underwriting Agreement ("First Amendment"), dated the March 3, 1998 (a copy of which is attached hereto as Exhibit "B") is made effective as of the 31st day of December, 1998, except as otherwise provided herein. 1. The parties hereunto agree as follows: a. To rescind the provision for termination of the Principal Underwriting Agreement contained in the First Amendment and extend the Principal Underwriting Agreement for the term provided in Section 16 thereof. b. The preamble of the Principal Underwriting Agreement shall be amended by inserting ", United Investors Annuity Variable Account and United Investors Universal Life Variable Account" after the phrase "United Investors Life Variable Account" in line four. c. The preamble of the Principal Underwriting Agreement shall be further amended by inserting "collectively referred to herein as the" before the phrase "Variable Account" in line four. d. The first recital shall be amended by inserting ", deferred variable annuity policies and flexible premium variable life insurance policies" after the phrase "flexible premium variable life insurance policies" in line four. 2. The amendments to the Principal Underwriting Agreement adding "United Investors Annuity Variable Account" and ", deferred variable annuity policies" shall be effective retroactively to May 1, 1990. The amendments to the Principal Underwriting Agreement adding "United Investors Universal Life Variable Account" and "and flexible premium variable life insurance policies" shall be effective retroactively to April 18, 1997. 3. In all other respects, the Principal Underwriting Agreement is unchanged, and the parties ratify and confirm the Principal Underwriting Agreement, as amended by this Second Amendment. IN WITNESS WHEREOF, the parties have executed this Second Amendment by their duly authorized representatives to become effective as provided herein. UNITED INVESTORS LIFE INSURANCE COMPANY By: /s/ Anthony L. McWhorter Its: President WADDELL & REED, INC. By: /s/ Robert L. Hechler Its: President EX-10.17 6 EXHIBIT 10.17 EXHIBIT 10.17 ADDENDUM TO SERVICES AGREEMENT THIS ADDENDUM to that certain Services Agreement (the "Agreement"), dated March 3, 1998, by and between WADDELL & REED INVESTMENT MANAGEMENT COMPANY ("WRIMCO") and WADDELL & REED ASSET MANAGEMENT COMPANY ("WRAMCO"), is made effective as provided herein. WHEREAS, WRIMCO and WRAMCO desire to supplement the terms and conditions of the Agreement as herein provided; and NOW, THEREFORE, in consideration of the premises, the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency is hereby acknowledged, WRIMCO and WRAMCO hereby agree to amend, modify and supplement the Agreement as follows: 1. ADDENDUM TO SECTION 2. Section 2. of the Agreement is hereby amended by adding the following to the end of such subsection b.: Pursuant to 42 U.S.C. 1395x(v)(1)(I), WRIMCO agrees that, until the expiration of four years after the furnishing of services by WRAMCO to any client subject to such provision, WRIMCO shall make available, upon written request, to the Secretary of the United States Department of Health and Human Services or to the Comptroller General of the United States, or any of their duly authorized representatives, any books, documents and records of WRIMCO that are necessary to certify the nature and extent of the cost of services provided to any such client. 2. REMAINING PROVISIONS. Any provision of the Agreement not amended, modified and/or supplemented by this Addendum shall remain in full force and effect. In the event of any inconsistency between the Agreement and this Addendum, this Addendum shall control. 3. MISCELLANEOUS. The Agreement and this Addendum, together with all exhibits attached to the Agreement and this Addendum, if any, contain the full and complete agreement and understanding between Buyer and Seller. IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed by their duly authorized representatives to be effective as of the 31st day of December, 1998. WADDELL & REED INVESTMENT WADDELL & REED ASSET MANAGEMENT COMPANY MANAGEMENT COMPANY By: /s/ Henry J. Herrmann By: /s/ Michael Klyce Title: President and Chief Title: Vice President and Treasurer Investment Officer EX-10.20 7 EXHIBIT 10.20 EXHIBIT 10.20 WADDELL & REED FINANCIAL, INC. 1998 STOCK INCENTIVE PLAN SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS. The name of this plan is the Waddell & Reed Financial, Inc. 1998 Stock Incentive Plan (the "Plan"). The purpose of the Plan is to enable Waddell & Reed Financial, Inc. (the "Company") and its Subsidiaries to attract and retain employees, directors and consultants who contribute to the Company's success by their ability, ingenuity and industry, and to enable such employees and directors to participate in the long-term success and growth of the Company through an equity interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: a. "Affiliate" means (i) any corporation (other than a Subsidiary), partnership, joint venture or any other entity in which the Company owns, directly or indirectly, at least a 10 percent beneficial ownership interest, and (ii) the Company's parent company or former parent company. b. "Board" means the Board of Directors of the Company. c. "Cause" means a participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company or any Subsidiary or Affiliate. d. "Code" means the Internal Revenue Code of 1986, as amended, or any successor thereto. e. "Committee" means the Compensation Committee of the Board. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board. f. "Commission" means the Securities and Exchange Commission. g. "Company" means Waddell & Reed Financial, Inc., a corporation organized under the laws of the State of Delaware (or any successor corporation). h. "Deferred Stock" means an award made pursuant to Section 9 below of the right to receive Stock at the end of a specified deferral period. i. "Director Stock Option" means any option to purchase shares of Stock granted pursuant to Section 6. 1 j. "Disability" means total and permanent disability as determined under the Company's long term disability program. With respect to Director Stock Options, "Disability" shall be determined as if the Director was covered under the Company's long term disability program. k. "Early Retirement" means retirement from active employment with the Company, any Subsidiary, and any Affiliate pursuant to the early retirement provisions of the applicable tax-qualified Company pension plan. l. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and any successor thereto. m. "Fair Market Value" means, as of the date of the initial public offering, the initial public offering price for the stock, and thereafter the closing price of the Stock on the New York Stock Exchange Composite Tape on the date in question. n. "Incentive Stock Option" means any Stock Option intended to be and designated as an "incentive stock option" within the meaning of Section 422 of the Code. o. "Immediate Family" means the children, grandchildren or spouse of any optionee. p. "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option. q. "Normal Retirement" means retirement from active employment with the Company, any Subsidiary, and any Affiliate on or after the normal retirement date specified in the applicable tax-qualified Company pension plan. r. "Plan" means this 1998 Stock Incentive Plan. s. "Restricted Stock" means an award of shares of Stock that are subject to restrictions under Section 8. t. "Retirement" means Normal or Early Retirement. u. "Stock" means the Class A Common Stock of the Company, par value $.01. v. "Stock Appreciation Right" means a right granted under Section 7 below to surrender to the Company all or a portion of a Stock Option in exchange for an amount equal to the difference between (i) the Fair Market Value, as of the date such Stock Option or such portion thereof is surrendered, of the shares of Stock covered by such Stock Option or such portion thereof, and (ii) the aggregate exercise price of such Stock Option or such portion thereof. 2 w. "Stock Option" means any option to purchase shares of Stock granted to employees pursuant to Section 5. x. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. ADMINISTRATION. The Plan shall be administered by the Committee which shall at all times comply with any applicable requirements of Rule 16b-3 of the Exchange Act. All members of the Committee shall also be "outside directors" within the meaning of Section 162(m) of the Code. The Committee shall have the power and authority to grant to eligible employees, pursuant to the terms of the Plan: (i) Stock Options; (ii) Stock Appreciation Rights; (iii) Restricted Stock or (iv) Deferred Stock. In particular, the Committee shall have the authority: (i) to select the consultants, officers and other key employees of the Company, its Subsidiaries, and its Affiliates to whom Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock awards or a combination of the foregoing from time to time will be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock or Deferred Stock, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares of Stock to be covered by each such award granted hereunder; (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (other than Director Stock Options), including, but not limited to, any restriction on any Stock Option or other award and/or the shares of Stock relating thereto based on performance and/or such other factors as the Committee may determine, in its sole discretion, and any vesting acceleration features based on performance and/or such other factors as the Committee may determine, in its sole discretion; (v) to determine whether, to what extent and under what circumstances Stock 3 and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of a participant, including providing for and determining the amount (if any) of deemed earnings on any deferred amount during any deferral period. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any award issued under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. STOCK SUBJECT TO PLAN. The total number of shares of Stock reserved and available for distribution under the Plan shall be 13,000,000. If any shares of Stock that have been optioned cease to be subject to option, or if any shares subject to any Restricted Stock or Deferred Stock award granted hereunder are forfeited or such award otherwise terminates, such shares shall again be available for distribution in connection with future awards under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, Stock dividend, or other change in corporate structure affecting the Stock, an equitable substitution or adjustment shall be made in (i) the aggregate number of shares reserved for issuance under the Plan, (ii) the number and option price of shares subject to outstanding Stock Options and Director Stock Options granted under the Plan, (iii) the number of shares subject to Restricted Stock or Deferred Stock awards granted under the Plan, (iv) the aggregate number of shares available for issuance to any employee pursuant to Section 4(a), and (v) the number of Director Stock Options to be granted each year pursuant to Section 6, as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any award shall always be a whole number. Such adjusted option price shall also be used to determine the amount payable by the Company upon the exercise of any Stock Appreciation Right associated with any Stock Option. SECTION 4. ELIGIBILITY. (a) Consultants, officers and other key employees of the Company, its Subsidiaries or its Affiliates (but excluding members of the Committee and any person who serves only as a director, except as provided in Section 6 below) who are responsible for or contribute to the management, growth and/or profitability of the business of the Company, its Subsidiaries, or its Affiliates are eligible to be granted Stock Options, Stock 4 Appreciation Rights, Restricted Stock or Deferred Stock awards. Only employees of the Company and its Subsidiaries are eligible to be granted Incentive Stock Options. Except as provided in Section 6, the optionees and participants under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each award or grant; provided, however, that no employee shall be granted Stock Options on more than 2,500,000 shares in any calendar year. (b) Directors of the Company (other than directors who are also officers or employees of the Company, its Subsidiaries or its Affiliates) are eligible to receive Director Stock Options pursuant to Section 6 of the Plan. SECTION 5. STOCK OPTIONS FOR EMPLOYEES. Stock Options may be granted either alone or in addition to other awards granted under the Plan. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve, and the provisions of Stock Option awards need not be the same with respect to each optionee. The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. The Committee shall have the authority to grant any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights) except that Incentive Stock Options shall not be granted to employees of an Affiliate. To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Except as provided in Section 5(1), no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. Notwithstanding the foregoing, in the event an optionee voluntarily disqualifies an option as an Incentive Stock Option within the meaning of Section 422 of the Code, the Committee may, but shall not be obligated to, make such additional grants, awards or bonuses as the Committee shall deem appropriate, to reflect the tax savings to the Company which results from such disqualification. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable: (a) OPTION PRICE. The option price per share of Stock purchasable under 5 a Stock Option shall be determined by the Committee at the time of grant but shall be not less than 100% of the Fair Market Value of the Stock on the date of the grant of the Stock Option. (b) OPTION TERM. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date such Incentive Stock Option is granted. (c) EXERCISABILITY. Subject to paragraph (l) of this Section 5 with respect to Incentive Stock Options, Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee, provided, however, that, except as provided in Section 5(f), 5(g), 5(h) or 13, no Stock Option shall be exercisable prior to six months from the date of the granting of the option. Notwithstanding the limitations set forth in the preceding sentence, the Committee may accelerate the exercisability of any Stock Option, at any time in whole or in part, based on performance and/or such other factors as the Committee may determine in its sole discretion. (d) METHOD OF EXERCISE. Stock Options may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Committee (including instruments providing for "cashless exercise"). As determined by the Committee, in its sole discretion, at or after grant, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee or, in the case of the exercise of a Non-Qualified Stock Option, Restricted Stock or Deferred Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the option is exercised, as determined by the Committee). If payment of the option exercise price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock or Deferred Stock, the shares received upon the exercise of such Stock Option shall be restricted or deferred, as the case may be, in accordance with the original term of the Restricted Stock award or Deferred Stock award in question, except that the Committee may direct that such restrictions or deferral provisions shall apply to only the number of such shares equal to the number of shares of Restricted Stock or Deferred Stock surrendered upon the exercise of such option. No shares of unrestricted Stock shall be issued until full payment therefor has been made. An optionee shall have the rights to dividends or other rights of a stockholder with respect to shares subject to the option when the optionee has given written notice of exercise and has paid in full for such shares. (e) TRANSFERABILITY OF OPTIONS. A Stock Option agreement may permit an optionee to transfer the Stock Option to members of his or her Immediate Family, to one or more trusts for the benefit of such Immediate Family members, or to one or more partnerships where such Immediate Family members are the only partners if (i) the agreement setting forth such Stock Option expressly provides that the Stock Option may 6 be transferred only with the express written consent of the Committee, and (ii) the optionee does not receive any consideration in any form whatsoever for said transfer. Any Stock Option so transferred shall continue to be subject to the same terms and conditions in the hands of the transferee as were applicable to said Stock Option immediately prior to the transfer thereof. Any Stock Option not (i) granted pursuant to any agreement expressly allowing the transfer of said Stock Option or (ii) amended expressly to permit its transfer shall not be transferable by the optionee otherwise than by will or by the laws of descent and distribution and such Stock Option thus shall be exercisable during the optionee's lifetime only by the optionee. (f) TERMINATION BY DEATH. Unless otherwise determined by the Committee, if an optionee's employment with the Company, any Subsidiary, and any Affiliate terminates by reason of death (or if an optionee dies following termination of employment by reason of disability or Normal Retirement), any Stock Option shall become immediately exercisable and may thereafter be exercised by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, during the period ending on the expiration of the stated term of such Stock Option or the first anniversary of the optionee's death, whichever is later. (g) TERMINATION BY REASON OF DISABILITY. Unless otherwise determined by the Committee, if an optionee's employment with the Company, any Subsidiary and any Affiliate terminates by reason of Disability, any Stock Option held by such optionee shall be immediately exercisable and may thereafter be exercised during the period ending on the expiration of the stated term of such Stock Option. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (h) TERMINATION BY REASON OF RETIREMENT. Unless otherwise determined by the Committee, if an optionee's employment with the Company, any Subsidiary and any Affiliate terminates by reason of Normal Retirement, any Stock Option held by such optionee shall become immediately exercisable. A Stock Option held by an optionee whose employment has terminated by reason of Normal Retirement shall expire at the end of the stated term of such Stock Option, unless otherwise determined by the Committee. If an optionee's employment with the Company, any Subsidiary and any Affiliate terminates by reason of Early Retirement, any Stock Option shall terminate three years from the date of such Early Retirement or upon the expiration of the stated term of the Stock Option, whichever is shorter, unless otherwise determined by the Committee. In the event of Early Retirement, there shall be no acceleration of vesting of the Stock Option unless otherwise determined by the Committee at or after grant, and said Stock Option may only be exercised to the extent it is or has become exercisable prior to 7 termination of the Stock Option. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the exercise periods that apply for purposes of Section 422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified Stock Option. (i) TERMINATION FOR CAUSE. If the optionee's employment with the Company, any Subsidiary and any Affiliate is terminated for Cause, the Stock Option shall immediately be forfeited to the Company upon the giving of notice of termination of employment. (j) OTHER TERMINATION. If the optionee's employment with the Company, any Subsidiary and any Affiliate is involuntarily terminated by the optionee's employer without Cause, the Stock Option shall terminate three months from the date of termination of employment or upon the expiration of the stated term of the Stock Option, whichever is shorter, unless otherwise determined by the Committee. If an optionee's employment with the Company, any Subsidiary and any Affiliate is voluntarily terminated for any reason, the Stock Option shall terminate one month from the date of termination of employment or upon the expiration of the stated term of the Stock Option, whichever is shorter. In the event of involuntary termination without Cause or voluntary termination for any reason, there shall be no acceleration of vesting of the Stock Option unless otherwise determined by the Committee and said Stock Option may only be exercised to the extent it is or has become exercisable prior to termination of the Stock Option. (k) TERMINATION UPON CHANGE OF CONTROL. Notwithstanding the provisions of Section 5(j) or the stated term of the Stock Option, if the optionee's employment with the Company, any Subsidiary and any Affiliate is involuntarily terminated by the optionee's employer without Cause by reason of or within three months after a merger or other business combination resulting in a "Change of Control" as defined in Section 13 of this Plan, the Stock Option shall terminate upon the later of six months and one day after such merger or business combination or ten business days following the expiration of the period during which publication of financial results covering at least thirty days of post-merger combined operations has occurred. (l) LIMIT ON VALUE OF INCENTIVE STOCK OPTION FIRST EXERCISABLE ANNUALLY. The aggregate Fair Market Value (determined at the time of grant) of the Stock for which "incentive stock options" within the meaning of Section 422 of the Code are exercisable for the first time by an optionee during any calendar year under the Plan (and/or any other stock option plans of the Company, any Subsidiary and any Affiliate) shall not exceed $100,000. Notwithstanding the preceding sentence, the exercisability of such Stock Options may be accelerated by the Committee and shall be accelerated as provided in Sections 5(f), 5(g), 5(h), and 13, in which case Stock Options which exceed such $100,000 limit shall be treated as Non-Qualified Stock Options. For this purpose, options 8 granted earliest shall be applied first to the $100,000 limit. In the event that only a portion of the options granted at the same time can be applied to the $100,000 limit, the Company shall issue separate share certificates for such number of shares as does not exceed the $100,000 limit, and shall designate such shares as ISO stock in its share transfer records. SECTION 6. DIRECTOR STOCK OPTIONS. Director Stock Options granted under the Plan shall be Non-Qualified Stock Options. Such Director Stock Options may be granted pursuant to a pre-established formula contained in the Plan or may, in the sole discretion of the entire Board of Directors, be granted as to such number of shares and upon such terms and conditions as shall be determined by said Board of Directors. Director Stock Options granted under the Plan shall be evidenced by a written agreement in such form as the Committee shall from time to time approve, which agreements shall comply with and be subject to the following terms and conditions: (a) FORMULA-BASED DIRECTOR STOCK OPTIONS. For 1998, 6,000 Director Stock Options shall be granted automatically to each member of the Board who is not an employee of the Company, its Subsidiaries or Affiliates ("Outside Director"). For each calendar year thereafter, 3,000 Director Stock Options shall be granted automatically on the first day of each calendar year on which Stock is publicly traded on the New York Stock Exchange to each Outside Director. The option price per share of Stock purchasable under such Director Stock Option shall be 100% of the Fair Market Value of the Stock on the date of the grant of the Director Stock Option. Except as provided in Section 13, said Director Stock Options shall become exercisable in full six months from the date of the grant of the option and shall remain exercisable for a term of ten years and two days from the date such Director Stock Option is granted. (b) NON-FORMULA BASED DIRECTOR STOCK OPTIONS. Within its sole discretion, the entire Board may award Director Stock Options on a non-formula basis to all or such individual Outside Directors as it shall select. Such Director Stock Options may be awarded at such times and for such number of shares as the Board in its discretion determines. The price of such Director Stock Options may be fixed by the Board at a discount not to exceed 25% of the fair market value of the Stock on the date of grant or may be the fair market value of the Stock on the grant date. Such Director Stock Options shall become first exercisable and have an option term as determined by the Board in its discretion, provided however, that except as described in Section 13 and in paragraph (e) of this section, no such Director Stock Option shall be first exercisable until six months from the date of grant. All other terms and conditions of such Director Stock Options shall be as established by the Board in its sole discretion. 9 (c) METHOD OF EXERCISE. Any Director Stock Option granted pursuant to the Plan may be exercised in whole or in part at any time during the option period, by giving written notice of exercise to the Company specifying the number of shares to be purchased, accompanied by payment in full of the purchase price, in cash, by check or such other instrument as may be acceptable to the Committee (including instruments providing for "cashless exercise"). Payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee (based on the Fair Market Value of the Stock on the date the option is exercised). No shares of unrestricted Stock shall be issued until full payment therefor has been made. An optionee shall have the rights to dividends or other rights of a stockholder with respect to shares subject to the option when the optionee has given written notice of exercise and has paid in full for such shares. (d) TRANSFERABILITY OF OPTIONS. No Director Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all Director Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee; provided, however, that the Committee may (but need not) permit other transfers where the Committee concludes that such transferability (i) does not result in accelerated taxation, and (ii) is otherwise appropriate and desirable, taking into account any state or federal securities laws applicable to transferable options. (e) TERMINATION OF SERVICE. Upon an optionee's termination of status as an Outside Director with the Company for any reason, any Director Stock Options held by such optionee shall become immediately exercisable and may thereafter be exercised during the period ending on the expiration of the stated term of such Director Stock Options or the first anniversary of the optionee's death, whichever is later. Notwithstanding the foregoing sentence, if the optionee's status as an Outside Director terminates by reason of or within three months after a merger or other business combination resulting in a "Change of Control" as defined in Section 13 of this Plan, the Director Stock Option shall terminate upon the latest of (i) six months and one day after the merger or business combination, (ii) ten business days following the expiration of the period during which publication of financial results covering at least thirty days of post-merger combined operations has occurred, and (iii) the expiration of the stated term of such Director Stock Option. SECTION 7. STOCK APPRECIATION RIGHTS. (a) GRANT AND EXERCISE. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option granted under the Plan. In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Non-Qualified Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Incentive Stock Option. A Stock Appreciation Right or applicable portion thereof granted with respect to a given Stock Option shall terminate and no longer be exercisable upon the termination or 10 exercise of the related Stock Option, except that, unless otherwise provided by the Committee at the time of grant, a Stock Appreciation Right granted with respect to less than the full number of shares covered by a related Stock Option shall only be reduced if and to the extent that the number of shares covered by the exercise or termination of the related Stock Option exceeds the number of shares not covered by the Stock Appreciation Right. A Stock Appreciation Right may be exercised by an optionee, in accordance with paragraph (b) of this Section 7, by surrendering the applicable portion of the related Stock Option. Upon such exercise and surrender, the optionee shall be entitled to receive an amount determined in the manner prescribed in paragraph (b) of this Section 7. Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Stock Appreciation Rights have been exercised. (b) TERMS AND CONDITIONS. Stock Appreciation Rights shall be subject to such terms and conditions, not inconsistent with the provisions of the Plan, as shall be determined from time to time by the Committee, including the following: (i) Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 5 and this Section 7 of the Plan; provided, however, that any Stock Appreciation Right granted subsequent to the grant of the related Stock Option shall not be exercisable during the first six months of the term of the Stock Appreciation Right, except that this additional limitation shall not apply in the event of death or Disability of the optionee prior to the expiration of the six-month period. (ii) Upon the exercise of a Stock Appreciation Right, an optionee shall be entitled to receive up to, but not more than, an amount in cash or shares of Stock equal in value to the excess of the Fair Market Value of one share of Stock over the option price per share specified in the related Stock Option multiplied by the number of shares in respect of which the Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment. (iii) Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under paragraph (e) of Section 5 of the Plan. (iv) Upon the exercise of a Stock Appreciation Right, the Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of shares of Stock to be issued under the Plan. (v) A Stock Appreciation Right granted in connection with an Incentive Stock Option may be exercised only if and when the market price of the Stock subject to the Incentive Stock Option exceeds the exercise price of such Stock Option. 11 (vi) In its sole discretion, the Committee may provide, at the time of grant of a Stock Appreciation Right under this Section 7, that such Stock Appreciation Right can be exercised only in the event of a "Change of Control" and/or a "Potential Change of Control" (as defined in Section 13 below). (vii) The Committee, in its sole discretion, may also provide that in the event of a "Change of Control" and/or a "Potential Change of Control" (as defined in Section 13 below) the amount to be paid upon the exercise of a Stock Appreciation Right shall be based on the "Change of Control Price" (as defined in Section 13 below). SECTION 8. RESTRICTED STOCK. (a) ADMINISTRATION. Shares of Restricted Stock may be issued either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company and its Subsidiaries and Affiliates to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price, if any, to be paid by the recipient of Restricted Stock (subject to Section 8(b) hereof), the time or times within which such awards may be subject to forfeiture, and all other conditions of the awards. The Committee may also condition the grant and/or vesting of Restricted Stock upon the attainment of specified performance goals, or such other criteria as the Committee may determine, in its sole discretion. The provisions of Restricted Stock awards need not be the same with respect to each recipient. (b) AWARDS AND CERTIFICATES. The prospective recipient of an award of shares of Restricted Stock shall not have any rights with respect to such award, unless and until such recipient has executed an agreement evidencing the award (a "Restricted Stock Award Agreement"), has delivered a fully executed copy thereof to the Company, and has otherwise complied with the then applicable terms and conditions. Awards of Restricted Stock must be accepted within a period of 60 days (or such shorter period as the Committee may specify) after the award date by executing a Restricted Stock Award Agreement and paying the price specified in the Restricted Stock Award Agreement. Each participant who is awarded Restricted Stock shall be issued a stock certificate registered in the name of the participant in respect of such shares of Restricted Stock. The Committee shall specify that the certificate shall bear a legend, as provided in clause (i) below, and/or be held in custody by the Company, as provided in clause (ii) below. (i) The certificate shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such award, substantially in the following form: "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Waddell & Reed Financial, Inc. 1998 12 Stock Incentive Plan and a Restricted Stock Award Agreement entered into between the registered owner and Waddell & Reed Financial, Inc. Copies of such Plan and Agreement are on file in the offices of Waddell & Reed Financial, Inc., 6300 Lamar Avenue, Overland Park, Kansas 66202." (ii) The Committee shall require that the stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the participant shall have delivered a stock power, endorsed in blank, relating to the Stock covered by such award. (c) RESTRICTIONS AND CONDITIONS. The shares of Restricted Stock awarded pursuant to this Section 8 shall be subject to the following restrictions and conditions: (i) Subject to the provisions of this Plan and the Restricted Stock Award Agreements, during such period as may be set by the Committee commencing on the grant date (the "Restriction Period"), the participant shall not be permitted to sell, transfer, pledge or assign shares of Restricted Stock awarded under the Plan. The Committee may, in its sole discretion, provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part, before or after the participant's termination of employment, based on performance and/or such other factors as the Committee may determine, in its sole discretion. (ii) Except as provided in paragraph (c)(i) of this Section 8, the participant shall have, with respect to the shares of Restricted Stock, all of the rights of a stockholder of the Company, including the right to receive any dividends. Dividends paid in stock of the Company or stock received in connection with a stock split with respect to Restricted Stock shall be subject to the same restrictions as on such Restricted Stock. Certificates for shares of unrestricted Stock shall be delivered to the participant promptly after, and only after, the period of forfeiture shall expire without forfeiture in respect of such shares of Restricted Stock. (iii) Subject to the provisions of the Restricted Stock Award Agreement and this Section 8, upon termination of employment for any reason other than Normal Retirement or death during the Restriction Period, all shares still subject to restriction shall be forfeited by the participant, and the participant shall only receive the amount, if any, paid by the participant for such forfeited Restricted Stock. SECTION 9. DEFERRED STOCK AWARDS. (a) ADMINISTRATION. Deferred Stock may be awarded either alone or in addition to other awards granted under the Plan. The Committee shall determine the officers and key employees of the Company, its Subsidiaries and Affiliates to whom, and 13 the time or times at which, Deferred Stock shall be awarded, the number of shares of Deferred Stock to be awarded to any participant, the duration of the period (the "Deferral Period") during which, and the conditions under which, receipt of the Stock will be deferred, and the terms and conditions of the award in addition to those set forth in paragraph (b) of this Section 9. The Committee may also condition the grant and/or vesting of Deferred Stock upon the attainment of specified performance goals, or such other criteria as the Committee shall determine, in its sole discretion. The provisions of Deferred Stock awards need not be the same with respect to each recipient. (b) TERMS AND CONDITIONS. The shares of Deferred Stock awarded pursuant to this Section 9 shall be subject to the following terms and conditions: (i) Subject to the provisions of this Plan and the award agreement, Deferred Stock awards may not be sold, assigned, transferred, pledged or otherwise encumbered during the Deferral Period. At the expiration of the Deferral Period (or Elective Deferral Period, (as defined below) where applicable), share certificates shall be delivered to the participant, or his legal representative, in a number equal to the shares covered by the Deferred Stock award. (ii) At the time of the award, the Committee may, in its sole discretion, determine that amounts equal to any dividends declared during the Deferral Period (or Elective Deferral Period) with respect to the number of shares covered by a Deferred Stock award will be: (a) paid to the participant currently; (b) deferred and deemed to be reinvested; or (c) that such participant has no rights with respect thereto. (iii) Subject to the provisions of the award agreement and this Section 9, upon termination of employment for any reason during the Deferral Period for a given award, the Deferred Stock in question shall be forfeited by the participant. (iv) Based on performance and/or such other criteria as the Committee may determine, the Committee may, at or after grant (including after the participant's termination of employment), accelerate the vesting of all or any part of any Deferred Stock award and/or waive the deferral limitations for all or any part of such award. (v) A participant may elect to defer further receipt of the award for a specified period or until a specified event (the "Elective Deferral Period"), subject in each case to the Committee's approval and to such terms as are determined by the Committee, all in its sole discretion. Subject to any exceptions adopted by the Committee, such election must generally be made at least six months prior to completion of the Deferral Period for a Deferred Stock award (or for an installment of such an award). (vi) Each award shall be confirmed by, and subject to the terms of, a Deferred Stock award agreement executed by the Company and the participant. SECTION 10. LOAN PROVISIONS. 14 With the consent of the Committee, the Company may make, or arrange for, a loan or loans to an employee with respect to the exercise of any Stock Option granted under the Plan and/or with respect to the payment of the purchase price, if any, of any Restricted Stock awarded hereunder. The Committee shall have full authority to decide whether to make a loan or loans hereunder and to determine the amount, term and provisions of any such loan or loans, including the interest rate to be charged in respect of any such loan or loans, whether the loan or loans are to be with or without recourse against the borrower, the terms on which the loan is to be repaid and the conditions, if any, under which the loan or loans may be forgiven. SECTION 11. AMENDMENTS AND TERMINATION. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made which would impair the right of an optionee or participant under a Stock Option, Director Stock Option, Stock Appreciation Right, Restricted Stock or Deferred Stock award theretofore granted, without the optionee's or participant's consent. Amendments may be made without stockholder approval except as required to satisfy Rule 16b-3 under the Exchange Act, Section 162(m) of the Code, stock exchange listing requirements, or other regulatory requirements. The Committee may amend the terms of any award or option (other than Director Stock Options) theretofore granted, prospectively or retroactively, but no such amendment shall impair the rights of any holder without his consent. The Committee may also substitute new Stock Options for previously granted Stock Options including options granted under other plans applicable to the participant and previously granted Stock Options having higher option prices. SECTION 12. UNFUNDED STATUS OF PLAN. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a participant or optionee by the Company, nothing set forth herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock or payments in lieu of or with respect to awards hereunder, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 13. CHANGE OF CONTROL. The following acceleration and valuation provisions shall apply in the event of a "Change of Control" or "Potential Change of Control," as defined in this Section 13, that 15 occurs more than twelve months after the date of the Company's initial public offering: (a) In the event of a "Change of Control" as defined in paragraph (b) of this Section 13, unless otherwise determined by the Committee in writing at or after grant, but prior to the occurrence of such Change of Control, or, if and to the extent so determined by the Committee in writing at or after grant (subject to any right of approval expressly reserved by the Committee at the time of such determination) in the event of a "Potential Change of Control," as defined in paragraph (c) of this Section 13: (i) any Stock Appreciation Rights and any Stock Options awarded under the Plan not previously exercisable and vested shall become fully exercisable and vested; (ii) the restrictions and deferral limitations applicable to any Restricted Stock and Deferred Stock awards under the Plan shall lapse and such shares and awards shall be deemed fully vested; and (iii) the value of all outstanding Stock Options, Director Stock Options, Stock Appreciation Rights, Restricted Stock and Deferred Stock Awards, shall, to the extent determined by the Committee at or after grant, be settled on the basis of the "Change of Control Price" (as defined in paragraph (d) of this Section 13) as of the date the Change of Control occurs or Potential Change of Control is determined to have occurred, or such other date as the Committee may determine prior to the Change of Control or Potential Change of Control. In the sole discretion of the Committee, such settlements may be made in cash or in stock, as shall be necessary to effect the desired accounting treatment for the transaction resulting in the Change of Control. In addition, any Stock Option, Director Stock Option, and Stock Appreciation Right which has been outstanding for less than six months shall be settled solely in stock. (b) For purposes of paragraph (a) of this Section 13, a "Change of Control" means the happening of any of the following: (i) when any "person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the Company or a Subsidiary or any Company employee benefit plan), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly of securities of the Company representing 20 percent or more of the combined voting power of the Company's then outstanding securities; (ii) the occurrence of any transaction or event relating to the Company required to be described pursuant to the requirements of 6(e) of Schedule 14A of Regulation 14A of the Commission under the Exchange Act; (iii) when, during any period of two consecutive years during the existence of the Plan, the individuals who, at the beginning of such period, constitute the 16 Board cease, for any reason other than death, to constitute at least a majority thereof, unless each director who was not a director at the beginning of such period was elected by, or on the recommendation of, at least two-thirds of the directors at the beginning of such period; or (iv) the occurrence of a transaction requiring stockholder approval for the acquisition of the Company by an entity other than the Company or a Subsidiary through purchase of assets, or by merger, or otherwise. (c) For purposes of paragraph (a) of this Section 13, a "Potential Change of Control" means the happening of any of the following: (i) the entering into an agreement by the Company, the consummation of which would result in a Change of Control of the Company as defined in paragraph (b) of this Section 13; or (ii) the acquisition of beneficial ownership, directly or indirectly, by any entity, person or group (other than the Company or a Subsidiary or any Company employee benefit plan) of securities of the Company representing 5 percent or more of the combined voting power of the Company's outstanding securities and the adoption by the Board of Directors of a resolution to the effect that a Potential Change of Control of the Company has occurred for purposes of this Plan. (d) For purposes of this Section 13, "Change of Control Price" means the highest price per share paid in any transaction reported on the New York Stock Exchange Composite Tape, or paid or offered in any transaction related to a potential or actual Change of Control of the Company at any time during the preceding sixty day period as determined by the Committee, except that (i) in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, such price shall be based only on transactions reported for the date on which the Committee decides to cashout such options, and (ii) in the case of Director Stock Options, the sixty day period shall be the period immediately prior to the Change of Control. SECTION 14. LIMITATIONS ON PAYMENTS. (a) Notwithstanding Section 13 above or any other provision of this Plan or any other agreement, arrangement or plan, in no event shall the Company pay or be obligated to pay any Plan participant an amount which would be an Excess Parachute Payment except as provided in Section 14(f) below and except as the Committee specifically provides otherwise in the participant's grant agreement. For purposes of this Agreement, the term "Excess Parachute Payment" shall mean any payment or any portion thereof which would be an "excess parachute payment" within the meaning of Section 280G(b)(1) of the Code, and would result in the imposition of an excise tax under Section 4999 of the Code, in the opinion of tax counsel selected by the Company, ("Tax 17 Counsel"). In the event it is determined that an Excess Parachute Payment would result if the full acceleration of vesting and exercisability provided in Section 13 above were made (when added to any other payments or benefits contingent on a change of control under any other agreement, arrangement or plan), the payments due under Section 13(a) shall be reduced to the minimum extent necessary to prevent an Excess Parachute Payment; then, if necessary to prevent an Excess Parachute Payment, benefits or payments under any other plan, agreement or arrangement shall be reduced. If it is established pursuant to a final determination of a court or an Internal Revenue Service administrative appeals proceeding that, notwithstanding the good faith of the participant and the Company in applying the terms of this Section 14(a), a payment (or portion thereof) made is an Excess Parachute Payment, then, the Company shall pay to the participant an additional amount in cash (a "Gross-Up Payment") equal to the amount necessary to cause the amount of the aggregate after-tax compensation and benefits received by the participant hereunder (after payment of the excise tax under Section 4999 of the Code with respect to any Excess Parachute Payment, and any state and federal income taxes with respect to the Gross-Up Payment) to be equal to the aggregate after-tax compensation and benefits he would have received as if Sections 280G and 4999 of the Code had not been enacted. (b) Subject to the provisions of Section 14(c), the amount of any Gross-Up Payment and the assumptions to be utilized in arriving at such amount, shall be determined by a nationally recognized certified public accounting firm designated by the Company (the "Accounting Firm"). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to Section 14(a), shall be paid by the Company to the participant within five (5) days after the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and participant. (c) Participant shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by Company of a Gross-Up Payment. Such notification shall be given no later than ten (10) business days after participant is informed in writing of such claim and shall apprise the Company of the nature of the claim and the date of requested payment. Participant shall not pay the claim prior to the expiration of the thirty (30) day period following the date on which it gives notice to the Company. If the Company notifies participant in writing prior to the expiration of the period that it desires to contest such claim, participant shall: (i) give the Company any information reasonably requested by the Company relating to such claim; (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, 18 including, without limitation, accepting legal representation with respect to such claim by an attorney selected by the Company and reasonably acceptable to participant; (iii) cooperate with the Company in good faith in order to effectively contest such claim; and (iv) permit the Company to participate in any proceedings relating to such claim. Without limitation on the foregoing provisions of this Section 14(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct participant to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and participant agrees to prosecute such contest to a determination before any administration tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; PROVIDED, HOWEVER, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold participant harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of the contest; PROVIDED, FURTHER, that if the Company directs participant to pay any claim and sue for a refund, the Company shall advance the amount of the payment to participant, on an interest-free basis, and shall indemnify and hold participant harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to the advance or with respect to any imputed income with respect to the advance. (d) In the event that the Company exhausts its remedies pursuant to Section 14(c) and participant thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Gross-Up Payment required and such payment shall be promptly paid by the Company to or for the benefit of participant. (e) If, after the receipt of participant of an amount advanced by the Company pursuant to Section 14(c), participant becomes entitled to receive any refund with respect to such claim, participant shall promptly after receiving such refund pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by participant of an amount advanced by the Company pursuant to Section 14(c), a determination is made that participant shall not be entitled to any refund with respect to such claim and the Company does not notify participant in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days 19 after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. (f) Notwithstanding the foregoing, the limitation set forth in Section 14(a) shall not apply to a participant if in the opinion of Tax Counsel or the Accounting Firm (i) the total amounts payable to the participant hereunder and under any other agreement, arrangement or plan as a result of a change of control (calculated without regard to the limitation of Section 14(a)), reduced by the amount of excise tax imposed on the participant under Code Section 4999 with respect to all such amounts and reduced by the state and federal income taxes on amounts paid in excess of the limitation set forth in Section 14(a), would exceed (ii) such total amounts payable after application of the limitation of Section 14(a). No Gross-Up Payment shall be made in such case. SECTION 15. GENERAL PROVISIONS. (a) All certificates for shares of Stock delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Commission, any stock exchange upon which the Stock is then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing set forth in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee or director of the Company, any Subsidiary or any Affiliate, any right to continued employment (or, in the case of a director, continued retention as a director) with the Company, a Subsidiary or an Affiliate, as the case may be, nor shall it interfere in any way with the right of the Company, a Subsidiary or an Affiliate to terminate the employment of any of its employees at any time. (c) Each participant shall, no later than the date as of which the value of an award first becomes includible in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee, in its sole discretion, regarding payment of, any Federal, FICA, state, or local taxes of any kind required by law to be withheld with respect to the award. The obligations of the Company under the Plan shall be conditional on such payment or arrangements. The Committee may permit or require, in its sole discretion, participants to elect to satisfy their Federal, and where applicable, FICA, state and local tax withholding obligations with respect to all awards other than Stock Options which have related Stock Appreciation Rights by the reduction, in an amount necessary to pay all said withholding 20 tax obligations, of the number of shares of Stock or amount of cash otherwise issuable or payable to said participants in respect of an award. The Company and, where applicable, its Subsidiaries and Affiliates shall, to the extent permitted by law, have the right to deduct any such taxes owed hereunder by a participant from any payment of any kind otherwise due to said participant. (d) At the time of grant or purchase, the Committee may provide in connection with any grant or purchase made under this Plan that the shares of Stock received as a result of such grant or purchase shall be subject to a right of first refusal, pursuant to which the participant shall be required to offer to the Company any shares that the participant wishes to sell, with the price being the then Fair Market Value of the Stock, subject to the provisions of Section 13 hereof and to such other terms and conditions as the Committee may specify at the time of grant. (e) No member of the Board or the Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation. SECTION 16. EFFECTIVE DATE OF PLAN. The Plan shall be effective on the date it is approved by a majority vote of the Company's stockholders. SECTION 17. TERM OF PLAN. No Stock Option, Director Stock Option, Stock Appreciation Right, Restricted Stock award or Deferred Stock award shall be granted pursuant to the Plan on or after March 2, 2008, but awards theretofore granted may extend beyond that date. 21 EX-10.23 8 EXHIBIT 10.23 EXHIBIT 10.23 FIRST AMENDMENT TO WADDELL & REED FINANCIAL, INC. 1998 EXECUTIVE DEFERRED COMPENSATION STOCK OPTION PLAN WHEREAS, the Company adopted and implemented the Waddell & Reed Financial, Inc. Executive Deferred Compensation Stock Option Plan as of March 3, 1998 (the "Executive Plan"); WHEREAS, the Company desires to amend certain provisions of the Executive Plan; WHEREAS, on October 21, 1998, the Compensation Committee of the Board of Directors of the Company adopted a resolution authorizing the amendment of the Executive Plan in accordance with the authority granted to them pursuant to the Executive Plan. NOW, THEREFORE, the Executive Plan is hereby amended as follows: Section 6.1.(a) of the Executive Plan is hereby modified, altered, amended and replaced in the following respect: 1. SECTION 6.1.(a) "OPTIONS CONVERTED FROM DEFERRED SALARY". During the same calendar quarter with respect to which a Participant deferred Salary into the Plan, the Participant shall have the right to convert some or all of his or her Interest Account for Salary for such quarter or the previous quarter(s) of that same calendar year into Options pursuant to this Article 6. To make such election, the Participant must file with the plan administrator a written irrevocable Secondary Election Form for Salary to receive Options as of the date of the filing of such Secondary Election Form (the "Option Grant Date"). 2. EXHIBIT C "SECONDARY ELECTION FORM FOR SALARY". Exhibit C of the Executive Plan is hereby replaced and superceded by the revised Exhibit C attached hereto as Attachment "1". 3. OTHER PROVISIONS AND TERMS. Except as expressly provided for herein, all other terms, conditions, rights, powers and responsibilities contained in the Executive Plan shall remain in full force and effect as the same are prescribed for and provided by the terms and conditions of said Executive Plan. Capitalized terms used but not defined herein shall have the meaning given them in the Executive Plan. EX-10.27 9 EXHIBIT 10.27 EXHIBIT 10.27 CREDIT AGREEMENT dated as of October 15, 1998 among WADDELL & REED FINANCIAL, INC. The Lenders Party hereto, and THE CHASE MANHATTAN BANK, as Administrative Agent $200,000,000 REVOLVING CREDIT AND COMPETITIVE ADVANCE FACILITY CHASE SECURITIES INC., as Advisor, Arranger and Book Manager ARTICLE DEFINITIONS SECTION 1.01 DEFINED TERMS. As used in this Agreement, the following terms have the meanings specified below: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "ADJUSTED LIBO RATE" means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "ADMINISTRATIVE AGENT" means The Chase Manhattan Bank, in its capacity as administrative agent for the Lenders hereunder. "ADMINISTRATIVE QUESTIONNAIRE" means an Administrative Questionnaire in a form supplied by the Administrative Agent. "AFFILIATE" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "AGGREGATE REVENUE BASE" means the sum of Revenue Bases for all W&R Funds and for all other assets managed by the Borrower or any Subsidiary of the Borrower for other entities. "AGREEMENT" means this Credit Agreement, as amended, supplemented or otherwise modified from time to time. "ALTERNATE BASE RATE" means, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "APPLICABLE PERCENTAGE" means, with respect to any Lender, the percentage of the total Commitments represented by such Lender's Commitment. If the Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. "APPLICABLE RATE" means, for any day, with respect to any ABR Loan or Eurodollar Loan, or with respect to the facility fees payable hereunder, as the case may be, the applicable rate per annum set forth below under the caption "ABR Spread", "Eurodollar Spread" or "Facility Fee Rate", as the case may be:
- - --------------------------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------------------- CONSOLIDATED LEVERAGE ABR EURODOLLAR FACILITY FEE RATIO SPREAD SPREAD RATE - - --------------------------------------------------------------------------------------------------------- LESS THAN 2.0:1 0% 0.35% 0.10% - - --------------------------------------------------------------------------------------------------------- AE2.0:1 0% 0.50% 0.10% - - --------------------------------------------------------------------------------------------------------- - - ---------------------------------------------------------------------------------------------------------
"ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A or any other form approved by the Administrative Agent. "AVAILABILITY PERIOD" means the period from and including the Effective Date to but excluding the earlier of the Revolving Credit Termination Date and the date of termination of the Commitments. "BOARD" means the Board of Governors of the Federal Reserve System of the United States of America. "BORROWER" means Waddell & Reed Financial, Inc., a Delaware corporation. "BORROWING" means (a) Revolving Loans or Term Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect, or (b) a Competitive Loan or group of Competitive Loans of the same Type made on the same date and as to which a single Interest Period is in effect. "BUSINESS DAY" means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed; PROVIDED that, when used in connection with a Eurodollar Loan, the term "BUSINESS DAY" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "CAPITAL EXPENDITURES" means, for any period, with respect to any Person, the aggregate of all expenditures by such Person and its Subsidiaries for the acquisition or leasing (pursuant to a capital lease) of fixed or capital assets or additions to equipment (including replacements, capitalized repairs and improvements during such period) that should be capitalized under GAAP on a consolidated balance sheet of such Person and its Subsidiaries. "CAPITAL LEASE OBLIGATIONS" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "CAPITAL STOCK" means any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other than a corporation) and any and all warrants, rights or options to purchase any of the foregoing. "CHANGE IN CONTROL" means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof) other than the Borrower, of shares representing more than 25% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower; (b) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were neither (i) nominated by the board of directors of the Borrower nor (ii) appointed by directors so nominated; or (c) the acquisition of direct or indirect Control of the Borrower by any Person or group. "CHANGE IN LAW" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "CLASS", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans, Term Loans or Competitive Loans. "CLOSING DATE" means the date on which the conditions precedent set forth in Section 4.01 shall have been satisfied, which date is October 15, 1998. "CODE" means the Internal Revenue Code of 1986, as amended from time to time. "COMMITMENT" means, with respect to each Lender, the commitment of such Lender to make Revolving Loans and Term Loans hereunder, expressed as an amount representing the maximum aggregate outstanding principal amount of such Lender's Revolving Loans and Term Loans hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.09, (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04 and (c) increased from time to time pursuant to Section 2.20. The initial amount of each Lender's Commitment is set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Commitment, as applicable, and the initial aggregate amount of the Commitments of the Lenders (as set forth on Schedule 2.01) is $150,000,000. "COMPETITIVE BID" means an offer by a Lender to make a Competitive Loan in accordance with Section 2.06. "COMPETITIVE BID RATE" means, with respect to any Competitive Bid, the Margin or the Fixed Rate, as applicable, offered by the Lender making such Competitive Bid. "COMPETITIVE BID REQUEST" means a request by the Borrower for Competitive Bids in accordance with Section 2.06. "COMPETITIVE LOAN" means a Loan made pursuant to Section 2.06. "CONFIDENTIAL INFORMATION MEMORANDUM" means the Confidential Information Memorandum dated September 1998 and furnished to the Lenders. "CONSOLIDATED EBITDA" means, for any period, Consolidated Net Income for such period PLUS, without duplication and to the extent reflected as a charge in the statement of such Consolidated Net Income for such period, the sum of (a) income tax expense, (b) interest expense, amortization or writeoff of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans), (c) depreciation and amortization expense, (d) amortization of intangibles (including, but not limited to, goodwill) and organization costs, (e) any extraordinary, unusual or non-recurring non-cash expenses or losses (including, whether or not otherwise includable as a separate item in the statement of such Consolidated Net Income for such period, non-cash losses on sales of assets outside of the ordinary course of business), PROVIDED, that the amounts referred to in this clause (e) shall not, in the aggregate, exceed $1,000,000 for any fiscal year of the Borrower, and (f) any other non-cash charges. For the purposes of calculating Consolidated EBITDA for any period of four consecutive fiscal quarters (each, a "Reference Period") pursuant to any determination of the Consolidated Leverage Ratio, (i) if at any time during such Reference Period the Borrower or any Subsidiary shall have made any Material Disposition, the Consolidated EBITDA for such Reference Period shall be reduced by an amount equal to the Consolidated EBITDA (if positive) attributable to the property that is the subject of such Material Disposition for such Reference Period or increased by an amount equal to the Consolidated EBITDA (if negative) attributable thereto for such Reference Period and (ii) if during such Reference Period the Borrower or any Subsidiary shall have made a Material Acquisition, Consolidated EBITDA for such Reference Period shall be calculated after giving PRO FORMA effect thereto as if such Material Acquisition occurred on the first day of such Reference Period. As used in this definition, "Material Acquisition" means any acquisition of property or series of related acquisitions of property that (a) constitutes assets comprising all or substantially all of an operating unit of a business or constitutes all or substantially all of the common stock of a Person and (b) involves the payment of consideration by the Borrower and its Subsidiaries in excess of $1,000,000; and "Material Disposition" means any Disposition of property or series of related Dispositions of property that yields gross proceeds to the Borrower or any of its Subsidiaries in excess of $1,000,000. "CONSOLIDATED INTEREST COVERAGE RATIO" means, for any period, the ratio of (a) Consolidated EBITDA for such period to (b) Consolidated Interest Expense for such period. "CONSOLIDATED INTEREST EXPENSE" means, for any period, interest expense (including that attributable to Capital Lease Obligations) of the Borrower and its Subsidiaries for such period with respect to all outstanding Indebtedness of the Borrower and its Subsidiaries (including all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and net costs under Hedging Agreements in respect of interest rates to the extent such net costs are allocable to such period in accordance with GAAP). "CONSOLIDATED LEVERAGE RATIO" means, as at the last day of any period, the ratio of (a) Consolidated Total Debt on such day to (b) Consolidated EBITDA for such period. "CONSOLIDATED NET INCOME" means, for any period, the consolidated net income (or loss) of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP; PROVIDED that there shall be excluded (a) the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary of the Borrower or is merged into or consolidated with the Borrower or any of its Subsidiaries, (b) the income (or deficit) of any Person (other than a Subsidiary of the Borrower) in which the Borrower or any of its Subsidiaries has an ownership interest, except to the extent that any such income is actually received by the Borrower or such Subsidiary in the form of dividends or similar distributions and (c) the undistributed earnings of any Subsidiary of the Borrower to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of any Contractual Obligation or Requirement of Law applicable to such Subsidiary. "CONSOLIDATED TOTAL DEBT" means, at any date, the aggregate principal amount of all Indebtedness of the Borrower and its Subsidiaries at such date, determined on a consolidated basis in accordance with GAAP. "CONTRACTUAL OBLIGATION" means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "CONTROL" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "CONTROLLING" and "CONTROLLED" have meanings correlative thereto. "DEFAULT" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "DISCLOSED MATTERS" means the actions, suits and proceedings and the environmental matters disclosed in Schedule 3.06. "DISTRIBUTION FEES" means all fees payable pursuant to a plan contemplated by Rule 12b-1 under the Investment Company Act of 1940, as amended, in connection with the distribution of shares of W&R Funds that are open-end funds. "DOLLARS" or "$" refers to lawful money of the United States of America. "EFFECTIVE DATE" means the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 9.02). "ENVIRONMENTAL LAWS" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to health and safety matters. "ENVIRONMENTAL LIABILITY" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA EVENT" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "EURODOLLAR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate (or, in the case of a Competitive Loan, the LIBO Rate). "EVENT OF DEFAULT" has the meaning assigned to such term in Article VII. "EXCLUDED TAXES" means, with respect to the Administrative Agent, any Lender, or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.19(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement or is attributable to such Foreign Lender's failure or inability to comply with Section 2.17(e), except to the extent that such Foreign Lender's assignor (if any) was entitled, at the time of assignment, to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.17(a). "FEDERAL FUNDS EFFECTIVE RATE" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. "FINANCIAL OFFICER" means the chief financial officer, principal accounting officer, treasurer or controller of the Borrower. "FIXED RATE" means, with respect to any Competitive Loan (other than a Eurodollar Competitive Loan), the fixed rate of interest per annum specified by the Lender making such Competitive Loan in its related Competitive Bid. "FIXED RATE LOAN" means a Competitive Loan bearing interest at a Fixed Rate. "FOREIGN LENDER" means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "GAAP" means generally accepted accounting principles in the United States of America. "GOVERNMENTAL AUTHORITY" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body (including self-regulatory body), court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government, including, in any event, the Securities and Exchange Commission and any applicable state securities commission or similar body. "GUARANTEE" of or by any Person (the "GUARANTOR") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "PRIMARY OBLIGOR") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; PROVIDED, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "HAZARDOUS MATERIALS" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "HEDGING AGREEMENT" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "INDEBTEDNESS" of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty, (j) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances and (k) net liabilities of such Person under Hedging Agreements. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. "INDEMNIFIED TAXES" means Taxes other than Excluded Taxes. "INTEREST ELECTION REQUEST" means a request by the Borrower to convert or continue a Revolving Borrowing in accordance with Section 2.08. "INTEREST PAYMENT DATE" means (a) with respect to any ABR Loan, the last day of each March, June, September and December, (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day prior to the last day of such Interest Period that occurs at intervals of three months' duration, after the first day of such Interest Period, and (c) with respect to any Fixed Rate Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Fixed Rate Borrowing with an Interest Period of more than 90 days' duration (unless otherwise specified in the applicable Competitive Bid Request), each day prior to the last day of such Interest Period that occurs at intervals of 90 days' duration after the first day of such Interest Period, and any other dates that are specified in the applicable Competitive Bid Request as Interest Payment Dates with respect to such Borrowing. "INTEREST PERIOD" means (a) with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter, as the Borrower may elect, and (b) with respect to any Fixed Rate Borrowing, the period (which shall not be less than seven days or more than 364 days) commencing on the date of such Borrowing and ending on the date specified in the applicable Competitive Bid Request; PROVIDED, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of a Eurodollar Borrowing only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, (ii) any Interest Period pertaining to a Eurodollar Borrowing that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period, and (iii) any Interest Period that would otherwise extend beyond the Revolving Credit Termination Date or beyond the date final payment is due on the Term Loans shall end on the Revolving Credit Termination Date or such date of final payment, as the case may be. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and, in the case of a Revolving Borrowing, thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "LENDERS" means the Persons listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to an Assignment and Acceptance, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance. "LIBO RATE" means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Dow Jones Markets Screen (or on any successor or substitute page of such Screen, or any successor to or substitute for such Screen, providing rate quotations comparable to those currently provided on such page of such Screen, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO RATE" with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "LIEN" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "LOANS" means the loans made by the Lenders to the Borrower pursuant to this Agreement. "MANAGEMENT CONTRACT" means an agreement, written or oral, pursuant to which the Borrower or any Subsidiary of the Borrower provides (i) investment advisory, management or administrative services to a W&R Fund or (ii)investment advisory or management services to any Person, including, without limitation, unregistered investment companies and personal or corporate investment accounts. "MARGIN" means, with respect to any Competitive Loan bearing interest at a rate based on the LIBO Rate, the marginal rate of interest, if any, to be added to or subtracted from the LIBO Rate to determine the rate of interest applicable to such Loan, as specified by the Lender making such Loan in its related Competitive Bid. "MATERIAL ADVERSE EFFECT" means a material adverse effect on (a) the business, assets, property, prospects or condition, financial or otherwise, of the Borrower and its Subsidiaries taken as a whole, or (b) the validity or enforceability of this Agreement or the rights or remedies of the Administrative Agent or the Lenders hereunder. "MATERIAL INDEBTEDNESS" means Indebtedness (other than the Loans), or obligations in respect of one or more Hedging Agreements, of any one or more of the Borrower and its Subsidiaries in an aggregate principal amount exceeding $5,000,000. For purposes of determining Material Indebtedness, the "principal amount" of the obligations of the Borrower or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Borrower or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time. "MOODY'S" means Moody's Investors Service, Inc. "MULTIEMPLOYER PLAN" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "NET ASSET VALUE" means, at any date of determination and with respect to any investment company or account manager, the "current net asset" value (as defined in Rule 2a-4 under the Investment Company Act of 1940), in the aggregate, of all outstanding redeemable securities issued by such investment company at such date. "OTHER TAXES" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "PERMITTED ACQUISITION" means an acquisition of a Person, or the assets of a Person or a line of business of a Person, in the same or a related line of business as the Borrower, PROVIDED that after giving effect to such acquisition (a) no Default or Event of Default shall have occurred and be continuing, (b) the Borrower shall be in compliance, on a PRO FORMA basis, as of the end of the most recent fiscal quarter of the Borrower with the provisions of Section 6.01, and (c) in the case of an acquisition involving aggregate consideration valued at $20,000,000 or more, at least three Business Days prior to the date of such acquisition, the Borrower shall have furnished to the Administrative Agent and the Lenders a compliance certificate to the effect of clauses (a) and (b) showing in reasonable detail the calculations supporting the determination of compliance, on such a PRO FORMA basis, with such provisions. "PERMITTED ENCUMBRANCES" means: (a) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 5.04; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.04; (c) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary; and (f) judgment Liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII, so long as such judgment Liens are not in effect for more than 45 days; PROVIDED that the term "Permitted Encumbrances" shall not include any Lien securing Indebtedness. "PERMITTED INVESTMENTS" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof which has a combined capital and surplus and undivided profits of not less than $500,000,000; (d) investments in newly created funds or investments intended for sale to newly created funds advised or managed by the Borrower and its Subsidiaries, in an aggregate amount (based upon book value on the books of the Borrower and its Subsidiaries) of not more than $25,000,000 at any time; (e) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; and (f) other than those contained in (a), (b), (c) and (e) above, United States dollar denominated fixed income securities and syndicated bank loans not to exceed $7,500,000 per issuer, with the exception of United States government securities, and not to exceed $7,500,000 per country, with the exception of the United States of America. "PERSON" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "PLAN" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "PRIME RATE" means the rate of interest per annum publicly announced from time to time by The Chase Manhattan Bank as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "PUBLIC OFFERING AND SEPARATION AGREEMENT" means the Public Offering and Separation Agreement made and entered into the 3rd day of March, 1998, between Torchmark Corporation and the Borrower. "REGISTER" has the meaning set forth in Section 9.04. "RELATED PARTIES" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "REQUIRED LENDERS" means, (a) prior to any conversion of Revolving Loans to Term Loans in accordance with Sections 2.04 and 2.05, Lenders having Revolving Credit Exposures and unused Commitments representing at least 51% of the sum of the total Revolving Credit Exposures and unused Commitments at such time; PROVIDED that, for purposes of declaring the Loans to be due and payable pursuant to Article VII, and for all purposes after the Loans become due and payable pursuant to Article VII or the Commitments expire or terminate, the outstanding Competitive Loans of the Lenders shall be included in their respective Revolving Credit Exposures in determining the Required Lenders, and (b) thereafter, Lenders having Term Loans with a total outstanding principal amount representing at least 51% of the sum of the total outstanding principal amount of Term Loans at such time. "REQUIREMENT OF LAW" means, as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "RESTRICTED PAYMENT" means any dividend or other distribution (whether in cash, securities or other property) with respect to any shares of any class of capital stock of the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such shares of capital stock of the Borrower or any option, warrant or other right to acquire any such shares of capital stock of the Borrower. "REVENUE BASE" means the sum of (A) the product of (i) with respect to each W&R Fund, the Net Asset Value of the W&R Fund on the date of calculation and with respect to assets managed for other entities, the market value or Net Asset Value of such assets on the date of calculation and (ii) the rate provided for in the applicable Management Contract for determining the annual fee required for such advisory, management or administrative services on such date and (B) Distribution Fees for such W&R Fund. "REVOLVING BORROWING REQUEST" means a request by the Borrower for a Revolving Borrowing in accordance with Section 2.03. "REVOLVING CREDIT EXPOSURE" means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender's Revolving Loans at such time. "REVOLVING CREDIT TERMINATION DATE" means October 14, 1999 or such earlier date as the Commitments shall terminate pursuant to the terms hereof (or, if such day is not a Business Day, the next preceding Business Day). "REVOLVING LOAN" means a Loan made pursuant to Section 2.03. "S&P" means Standard & Poor's. "SPIN-OFF" means the distribution to shareholders by Torchmark Corporation of its remaining equity interests in the Borrower. "STATUTORY RESERVE RATE" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board or other Governmental Authority to which the Administrative Agent is subject with respect to the Adjusted LIBO Rate. Such reserve percentages shall include those imposed pursuant to Regulation D of the Board. Eurodollar Loans shall be deemed to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "SUBSIDIARY" means, with respect to any Person (the "PARENT") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "SUBSIDIARY" means any subsidiary of the Borrower. "TAX DISAFFILIATION AGREEMENT" means the Tax Disaffiliation Agreement dated as of March 3, 1998 by and between Torchmark Corporation and the Borrower. "TAXES" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "TERM BORROWING REQUEST" means a request by the Borrower for a Revolving Borrowing in accordance with Section 2.05. "TERMINATION DATE" means the date that is six (6) months after the Revolving Credit Termination Date. "TERM LOAN" means a Loan made pursuant to Section 2.04. "TRANSACTIONS" means the execution, delivery and performance by the Borrower of this Agreement, the borrowing of Loans and the use of the proceeds thereof. "TYPE", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate, the Alternate Base Rate or, in the case of a Competitive Loan or Borrowing, the LIBO Rate or a Fixed Rate. "W&R FUND" MEANS all closed-end funds and open-end mutual funds sponsored by the Borrower or any of its Subsidiaries or for which the Borrower or any of its Subsidiaries provides investment advisory, management, administrative, supervisory, consulting, underwriting or similar services. "WITHDRAWAL LIABILITY" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. SECTION 1.02 CLASSIFICATION OF LOANS AND BORROWINGS. For purposes of this Agreement, Loans may be classified and referred to by Class (E.G., a "Revolving Loan" or "Term Loan") or by Type (E.G., a "Eurodollar Loan") or by Class and Type (E.G., a "Eurodollar Revolving Loan" or "Eurodollar Term Loan"). Borrowings also may be classified and referred to by Class (E.G., a "Revolving Borrowing" or "Term Borrowing") or by Type (E.G., a "Eurodollar Borrowing") or by Class and Type (E.G., a "Eurodollar Revolving Borrowing" of "Eurodollar Term Borrowing"). SECTION 1.03 TERMS GENERALLY. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. SECTION 1.04 ACCOUNTING TERMS; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; PROVIDED that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. ARTICLE II THE CREDITS SECTION 2.01 COMMITMENTS. Subject to the terms and conditions set forth herein, each Lender agrees to make Revolving Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in (a) such Lender's Revolving Credit Exposure exceeding such Lender's Commitment or (b) the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans exceeding the total Commitments. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans. SECTION 2.02 LOANS AND BORROWINGS. (a) Each Revolving Loan shall be made as part of a Borrowing consisting of Revolving Loans made by the Lenders ratably in accordance with their respective Commitments. Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.06. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; PROVIDED that the Commitments and Competitive Bids of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b) Subject to Section 2.14, (i) each Revolving Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith, and (ii) each Competitive Borrowing shall be comprised entirely of Eurodollar Loans or Fixed Rate Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; PROVIDED that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. (c) At the commencement of each Interest Period for any Eurodollar Revolving Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000; PROVIDED that an ABR Revolving Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Commitments. Each Competitive Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $5,000,000. Borrowings of more than one Type and Class may be outstanding at the same time; PROVIDED that there shall not at any time be more than a total of ten (10) Eurodollar Revolving Borrowings outstanding. (d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Revolving Credit Termination Date. SECTION 2.03 REQUESTS FOR REVOLVING BORROWINGS. To request a Revolving Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone prior to 10:00 a.m., New York City time (a) three Business Days before the date of the proposed Borrowing in the case of a Eurodollar Borrowing or (b) one Business Day before the date of the proposed Borrowing in the case of an ABR Borrowing. Each such telephonic Revolving Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Revolving Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Revolving Borrowing Request shall specify the following information in compliance with Section 2.02: (i) the aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.07. If no election as to the Type of Revolving Borrowing is specified, then the requested Revolving Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Revolving Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. SECTION 2.04 TERM LOANS. The Revolving Loans outstanding at the close of business on the Revolving Credit Termination Date shall, at the option of the Borrower by notice given to the Administrative Agent as provided in Section 2.05, convert on such date into term loans (the "TERM LOANS") to the Borrower. The Term Loans may from time to time be (a) Eurodollar Loans, (b) ABR Loans or (c) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.05 and 2.08. SECTION 2.05 PROCEDURE FOR TERM BORROWING. To request the conversion of the Revolving Credit Loans to Term Loans as contemplated in Section 2.04, the Borrower shall notify the Administrative Agent of such request by telephone prior to 10:00 A.M., New York City time, (a) three Business Days prior to the Revolving Credit Termination Date, if all or any part of the Term Loans are to be initially Eurodollar Borrowing or (b) one Business Day prior to the Revolving Credit Termination Date, otherwise. Such telephonic Term Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Term Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Term Borrowing Request shall specify the following information in compliance with Section 2.02: (i) the aggregate amount of the requested conversion; (ii) the date of such conversion, which shall be a Business Day; (iii) whether after giving effect to such conversion, the outstanding Term Loans are to consist of an ABR Borrowing or a Eurodollar Borrowing, or a combination thereof; and (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period". If no election as to the Type of Term Loans is specified, then the requested Term Loans shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Term Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Term Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan converted as part of the requested Borrowing. The aggregate principal amount of the Term Loans shall be equal to the aggregate principal amount of the Revolving Loans then outstanding and the Term Loans shall be made by conversion of such Revolving Loans, without any payments being made by the Lenders. SECTION 2.06 COMPETITIVE BID PROCEDURE. (a) Subject to the terms and conditions set forth herein, from time to time during the Availability Period the Borrower may request Competitive Bids and may (but shall not have any obligation to) accept Competitive Bids and borrow Competitive Loans; PROVIDED that the sum of the total Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans at any time shall not exceed the total Commitments. To request Competitive Bids, the Borrower shall notify the Administrative Agent of such request by telephone, in the case of a Eurodollar Borrowing, not later than 10:00 a.m., New York City time, four Business Days before the date of the proposed Borrowing and, in the case of a Fixed Rate Borrowing, not later than 10:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing; PROVIDED that the Borrower may submit up to (but not more than) two Competitive Bid Requests on the same day, but a Competitive Bid Request shall not be made within five Business Days after the date of any previous Competitive Bid Request, unless any and all such previous Competitive Bid Requests shall have been withdrawn or all Competitive Bids received in response thereto rejected. Each such telephonic Competitive Bid Request shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Competitive Bid Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Competitive Bid Request shall specify the following information in compliance with Section 2.02: (i) the aggregate amount of the requested Borrowing; (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be a Eurodollar Borrowing or a Fixed Rate Borrowing; (iv) the Interest Period to be applicable to such Borrowing, which shall be a period contemplated by the definition of the term "Interest Period"; (v) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.07; and (vi) the maturity date of such Borrowing, which shall not be less than seven or more than 364 days from the date of such Borrowing and shall not be later than the Revolving Credit Termination Date. Promptly following receipt of a Competitive Bid Request in accordance with this Section, the Administrative Agent shall notify the Lenders of the details thereof by telecopy, inviting the Lenders to submit Competitive Bids. (b) Each Lender may (but shall not have any obligation to) make one or more Competitive Bids to the Borrower in response to a Competitive Bid Request. Each Competitive Bid by a Lender must be substantially in the form of Exhibit D and must be received by the Administrative Agent by telecopy, in the case of a Eurodollar Competitive Borrowing, not later than 9:30 a.m., New York City time, three Business Days before the proposed date of such Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the proposed date of such Competitive Borrowing. Competitive Bids that do not conform substantially to the form of Exhibit D may be rejected by the Administrative Agent, and the Administrative Agent shall notify the applicable Lender as promptly as practicable. Each Competitive Bid shall specify (i) the principal amount (which shall be a minimum of $5,000,000 and an integral multiple of $1,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested by the Borrower) of the Competitive Loan or Loans that the Lender is willing to make, (ii) the Competitive Bid Rate or Rates at which the Lender is prepared to make such Loan or Loans (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) and (iii) the Interest Period applicable to each such Loan and the last day thereof. (c) The Administrative Agent shall promptly notify the Borrower by telecopy of the Competitive Bid Rate and the principal amount specified in each Competitive Bid and the identity of the Lender that shall have made such Competitive Bid. (d) Subject only to the provisions of this paragraph, the Borrower may accept or reject any Competitive Bid. The Borrower shall notify the Administrative Agent by telephone, confirmed by telecopy in a form approved by the Administrative Agent, whether and to what extent it has decided to accept or reject each Competitive Bid, in the case of a Eurodollar Competitive Borrowing, not later than 10:30 a.m., New York City time, three Business Days before the date of the proposed Competitive Borrowing, and in the case of a Fixed Rate Borrowing, not later than 10:30 a.m., New York City time, on the proposed date of the Competitive Borrowing; PROVIDED that (i) the failure of the Borrower to give such notice shall be deemed to be a rejection of each Competitive Bid, (ii) the Borrower shall not accept a Competitive Bid made at a particular Competitive Bid Rate if the Borrower rejects a Competitive Bid made at a lower Competitive Bid Rate, (iii) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the aggregate amount of the requested Competitive Borrowing specified in the related Competitive Bid Request, (iv) to the extent necessary to comply with clause (iii) above, the Borrower may accept Competitive Bids at the same Competitive Bid Rate in part, which acceptance, in the case of multiple Competitive Bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such Competitive Bid, and (v) except pursuant to clause (iv) above, no Competitive Bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $5,000,000 and an integral multiple of $1,000,000; PROVIDED FURTHER that if a Competitive Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) above, such Competitive Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple Competitive Bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in a manner determined by the Borrower. A notice given by the Borrower pursuant to this paragraph shall be irrevocable. (e) The Administrative Agent shall promptly notify each bidding Lender by telecopy whether or not its Competitive Bid has been accepted (and, if so, the amount and Competitive Bid Rate so accepted), and each successful bidder will thereupon become bound, subject to the terms and conditions hereof, to make the Competitive Loan in respect of which its Competitive Bid has been accepted. (f) If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such Competitive Bid directly to the Borrower at least one quarter of an hour earlier than the time by which the other Lenders are required to submit their Competitive Bids to the Administrative Agent pursuant to paragraph (b) of this Section. SECTION 2.07 FUNDING OF BORROWINGS. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Administrative Agent in New York City and designated by the Borrower in the applicable Revolving Borrowing Request, Term Borrowing Request or Competitive Bid Request. (b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, the Federal Funds Effective Rate or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. SECTION 2.08 INTEREST ELECTIONS. (a) Each Revolving Borrowing initially shall be of the Type specified in the applicable Revolving Borrowing Request and, in the case of a Eurodollar Revolving Borrowing, shall have an initial Interest Period as specified in such Revolving Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Revolving Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section shall not apply to Competitive Borrowings, which may not be converted or continued. (b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Revolving Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Revolving Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be continued as a Eurodollar Revolving Borrowing with an Interest Period of one month. Notwithstanding any contrary provision hereof, (a) if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Revolving Borrowing may be converted to or continued as a Eurodollar Borrowing, (ii) no outstanding Term Borrowing may be converted to a Eurodollar Borrowing and (iii) unless repaid, each Eurodollar Revolving Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto, and (b) no Revolving Loan or Term Loan may be converted into or continued as a Eurodollar Borrowing after the date that is one month or 30 days, respectively, prior to the Revolving Credit Termination Date or the Termination Date, as the case may be. SECTION 2.09 TERMINATION AND REDUCTION OF COMMITMENTS. (a) Unless previously terminated, the Commitments shall terminate on the Revolving Credit Termination Date. (b) The Borrower may at any time terminate, or from time to time reduce, the Commitments; PROVIDED that (i) each reduction of the Commitments shall be in an amount that is an integral multiple of $1,000,000 and not less than $10,000,000 and (ii) the Borrower shall not terminate or reduce the Commitments if, after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.11, the sum of the Revolving Credit Exposures plus the aggregate principal amount of outstanding Competitive Loans would exceed the total Commitments. (c) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; PROVIDED that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments shall be permanent. Termination of the Commitments shall also terminate the obligation of the Lenders to make the Term Loans. Each reduction of the Commitments shall be made ratably among the Lenders in accordance with their respective Commitments. SECTION 2.10 REPAYMENT OF LOANS; EVIDENCE OF DEBT. (a) The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender (i) the then unpaid principal amount of each Revolving Loan on the Revolving Credit Termination Date (or such earlier date on which the Revolving Loans become due and payable pursuant to Article VII), (ii) the principal amount of the Term Loan of such Lender on the Termination Date (or the then unpaid principal amount of such Term Loan, on the date that the Term Loans become due and payable pursuant to Article VII), and (iii) the then unpaid principal amount of each Competitive Loan on the last day of the Interest Period applicable to such Loan (or such earlier date on which the Competitive Loans become due and payable pursuant to Article VII). (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be PRIMA FACIE evidence of the existence and amounts of the obligations recorded therein; PROVIDED that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (e) Any Lender may request that Loans made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). SECTION 2.11 PREPAYMENT OF LOANS. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to prior notice in accordance with paragraph (b) of this Section; PROVIDED that the Borrower shall not have the right to prepay any Competitive Loan without the prior consent of the Lender thereof. (b) The Borrower shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Revolving Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment, or (ii) in the case of prepayment of an ABR Revolving Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Borrowing or portion thereof to be prepaid; PROVIDED that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.09, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.09. Promptly following receipt of any such notice relating to a Revolving Borrowing, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Revolving Borrowing shall be in an amount that would be permitted in the case of an advance of a Revolving Borrowing of the same Type as provided in Section 2.02. Each prepayment of a Revolving Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.13. Amounts prepaid on account of Term Loans may not be reborrowed. SECTION 2.12 FEES. (a) The Borrower agrees to pay to the Administrative Agent for the account of each Lender a facility fee, which shall accrue at the Applicable Rate on the daily amount of the Commitment of such Lender (whether used or unused) or the outstanding amount of the Term Loans of such Lender, during the period from and including the Closing Date to but excluding the date on which such Commitment terminates; PROVIDED that, if such Lender continues to have any outstanding Loans after its Commitment terminates, then such facility fee shall continue to accrue on the daily amount of such Lender's outstanding Loans from and including the date on which its Commitment terminates to but excluding the date on which such Lender ceases to have any outstanding Loans. Accrued facility fees shall be payable in arrears on the last day of March, June, September and December of each year and on the date on which the Commitments terminate, commencing on the first such date to occur after the date hereof; PROVIDED that any facility fees accruing after the date on which the Commitments terminate shall be payable on demand. All facility fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent. (c) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, in the case of facility fees, to the Lenders. Fees paid shall not be refundable under any circumstances. SECTION 2.13 INTEREST. (a) The Loans comprising each ABR Borrowing shall bear interest at a rate per annum equal to the Alternate Base Rate plus the Applicable Rate. (b) The Loans comprising each Eurodollar Borrowing shall bear interest at a rate per annum equal to (i) in the case of a Eurodollar Loan, the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate, or (ii) in the case of a Eurodollar Competitive Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus (or minus, as applicable) the Margin applicable to such Loan. (c) Each Fixed Rate Loan shall bear interest at a rate per annum equal to the Fixed Rate applicable to such Loan. (d) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided above or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Loans as provided above. (e) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan; PROVIDED that (i) interest accrued pursuant to paragraph (d) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan prior to the end of the Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment, (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion and (iv) all accrued interest shall be payable upon termination of the Commitments. (f) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.14 ALTERNATE RATE OF INTEREST. If prior to the commencement of any Interest Period for a Eurodollar Borrowing: (a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period; or (b) the Administrative Agent is advised by the Required Lenders (or, in the case of a Eurodollar Competitive Loan, the Lender that is required to make such Loan) that the Adjusted LIBO Rate or the LIBO Rate, as applicable, for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Revolving Borrowing to, or continuation of any Revolving Borrowing as, a Eurodollar Borrowing shall be ineffective, (ii) if any Revolving Borrowing Request requests a Eurodollar Revolving Borrowing, such Borrowing shall be made as an ABR Borrowing and (iii) any request by the Borrower for a Eurodollar Competitive Borrowing shall be ineffective; PROVIDED that (A) if the circumstances giving rise to such notice do not affect all the Lenders, then requests by the Borrower for Eurodollar Competitive Borrowings may be made to Lenders that are not affected thereby and (B) if the circumstances giving rise to such notice affect only one Type of Borrowings, then the other Type of Borrowings shall be permitted. SECTION 2.15 INCREASED COSTS. (a) If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate); or (ii) impose on any Lender or the London interbank market any other condition affecting this Agreement or Eurodollar Loans or Fixed Rate Loans made by such Lender; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or Fixed Rate Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. (b) If any Lender determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement or the Loans made hereunder, to a level below that which such Lender or such Lender's holding company could have achieved but for such Change in Law (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company for any such reduction suffered. (c) A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's right to demand such compensation; PROVIDED that the Borrower shall not be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than six months prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender's intention to claim compensation therefor; PROVIDED FURTHER that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the six-month period referred to above shall be extended to include the period of retroactive effect thereof. (e) Notwithstanding the foregoing provisions of this Section, a Lender shall not be entitled to compensation pursuant to this Section in respect of any Competitive Loan if the Change in Law that would otherwise entitle it to such compensation shall have been publicly announced prior to submission of the Competitive Bid pursuant to which such Loan was made. SECTION 2.16 BREAK FUNDING PAYMENTS. In the event of (a) the payment of any principal of any Eurodollar Loan or Fixed Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Revolving Loan or Term Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice is permitted to be revocable under Section 2.11(b) and is revoked in accordance herewith), (d) the failure to borrow any Competitive Loan after accepting the Competitive Bid to make such Loan, or (e) the assignment of any Eurodollar Loan or Fixed Rate Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.19, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, the loss to any Lender attributable to any such event shall be deemed to include an amount determined by such Lender to be equal to the excess, if any, of (i) the amount of interest that such Lender would pay for a deposit equal to the principal amount of such Loan for the period from the date of such payment, conversion, failure or assignment to the last day of the then current Interest Period for such Loan (or, in the case of a failure to borrow, convert or continue, the duration of the Interest Period that would have resulted from such borrowing, conversion or continuation) if the interest rate payable on such deposit were equal to the Adjusted LIBO Rate (in the case of a Eurodollar Loan) for such Interest Period, over (ii) the amount of interest that such Lender would earn on such principal amount for such period if such Lender were to invest such principal amount for such period at the interest rate that would be bid by such Lender (or an affiliate of such Lender) for dollar deposits from other banks in the eurodollar market at the commencement of such period. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.17 TAXES. (a) Any and all payments by or an account of any obligation of the Borrower hereunder shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; PROVIDED that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Administrative Agent and each Lender within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) paid by the Administrative Agent or such Lender, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or by the Administrative Agent on its own behalf or on behalf of a Lender, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent. (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Administrative Agent), at the time or times prescribed by applicable law or reasonably requested by the Borrower, such properly completed and executed documentation prescribed by applicable law as will permit such payments to be made without withholding or at a reduced rate. SECTION 2.18 PAYMENTS GENERALLY; PRO RATA TREATMENT; SHARING OF SET-OFFS. (a) The Borrower shall make each payment required to be made by it hereunder (whether of principal, interest, fees, or under Section 2.15, 2.16 or 2.17, or otherwise) prior to 12:00 noon, New York City time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent, c/o The Loan and Agency Services Group at the address set forth in Section 9.01, except that payments pursuant to Sections 2.15, 2.16, 2.17 and 9.03 shall be made directly to the Persons entitled thereto. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in dollars. (b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied (i) first, to pay interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, to pay principal then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then due to such parties. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Revolving Loans or Term Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans or Term Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans or Term Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans or Term Loans; PROVIDED that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation. (d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the Federal Funds Effective Rate. (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.07(b) or 2.18(d), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. SECTION 2.19 MITIGATION OBLIGATIONS; REPLACEMENT OF LENDERS. (a) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.15 or 2.17, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement (other than any outstanding Competitive Loans held by it) to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); PROVIDED that (i) the Borrower shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans (other than Competitive Loans), accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.15 or payments required to be made pursuant to Section 2.17, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply. SECTION 2.20 NEW LENDERS; COMMITMENT INCREASES. (a) With the consent of the Borrower and the Administrative Agent (which, in the case of the Administrative Agent, shall not be unreasonably withheld), (i) one or more additional banks or other financial institutions may become a party to this Agreement by executing a supplement hereto, in form and substance satisfactory to such bank or other financial institution, the Borrower and the Administrative Agent, whereupon such bank or other financial institution (a "New Lender") shall become a Lender for all purposes hereof and to the same extent as if originally a party hereto and shall be bound by and entitled to the benefits of this Agreement, and Schedule 2.01 hereto shall be deemed to be amended to add the name, address and Commitment of such New Lender and (ii) any Lender may increase the amount of its Commitment by executing a supplement hereto, in form and substance satisfactory to such Lender, the Borrower and the Administrative Agent, whereupon such Lender shall be bound by and entitled to the benefits of this Agreement with respect to the full amount of its Commitment as so increased, and Schedule 2.01 hereto shall be deemed to be amended to reflect such increase in the Commitment of such Lender. In no event may the aggregate Commitments be increased above $300,000,000 pursuant to any supplement described in this Section 2.20(a). (b) If on the date upon which a bank or other financial institution becomes a New Lender or upon which a Lender's Commitment is changed pursuant to Section 2.20(a), any Revolving Loans are then outstanding, the Borrower shall borrow Revolving Loans from such Lender in such amount and with such Interest Period such that, after giving effect thereto, the quotient of (x) the Revolving Loan of such Lender of each Type and, in the case of Eurodollar Loans, with each Interest Period and (y) such Lender's Commitment is equal to the corresponding comparable quotient of each other Lender. Any Eurodollar Borrowing borrowed pursuant to the preceding sentence shall bear interest at a rate equal to the respective interest rates then applicable to the Eurodollar Revolving Loans of the other Lenders or such other rate as may be agreed upon by the Borrower and such Lender. ARTICLE III REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lenders that: SECTION 3.01 ORGANIZATION; POWERS. Each of the Borrower and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. SECTION 3.02 AUTHORIZATION; ENFORCEABILITY. The Transactions are within the Borrower's corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. This Agreement has been duly executed and delivered by the Borrower and constitutes a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. SECTION 3.03 GOVERNMENTAL APPROVALS; NO CONFLICTS. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or any of its Subsidiaries or its assets, or give rise to a right thereunder to require any payment to be made by the Borrower or any of its Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. SECTION 3.04 FINANCIAL CONDITION; NO MATERIAL ADVERSE EFFECT. (a) The Borrower has heretofore furnished to the Lenders its consolidated balance sheet and statements of income, stockholders equity and cash flows (i) as of and for the fiscal years ended 1996 and 1997, reported on by KPMG Peat Marwick LLP, independent public accountants, and (ii) as of and for the fiscal quarters and the portion of the fiscal year ended March 31, 1998 and June 30, 1998, certified by its principal accounting officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Borrower and its consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (ii) above. The Borrower and its Subsidiaries do not have any material Guarantees, contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term commitments, including any interest rate or foreign currency swap or exchange transaction or other obligation in respect of derivatives, that are not reflected in the most recent financial statements referred to in this paragraph. (b) Since December 31, 1997, there has been no event, development or circumstance that has had or could reasonably be expected to have a Material Adverse Effect. SECTION 3.05 PROPERTIES. (a) Each of the Borrower and its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, and none of such property is subject to any Lien except as permitted by Section 6.03. (b) Each of the Borrower and its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Borrower and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.06 LITIGATION AND ENVIRONMENTAL MATTERS. (a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve this Agreement or the Transactions. (b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither the Borrower nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. (c) Since the date of this Agreement, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect. SECTION 3.07 COMPLIANCE WITH LAWS AND AGREEMENTS. Each of the Borrower and its Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments (including any material investment advisory or management agreements) binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.08 INVESTMENT AND HOLDING COMPANY STATUS. (a) Neither the Borrower nor any of its Subsidiaries is (i) an "investment company", or a company "controlled" by an "investment company", each as defined in, or subject to regulation under, the Investment Company Act of 1940, or (ii) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. Except for net capital and other requirements imposed on registered broker-dealers, neither the Borrower nor any of its Subsidiaries is subject to any regulation under any Requirement of Law (other than Regulation X of the Board) that limits its ability to incur Indebtedness. (b) The Borrower and each Subsidiary of the Borrower which is engaged in investment advisory or investment management activities is, and at all times will be, duly registered as an investment adviser as and to the extent required under the Investment Advisers Act of 1940, as amended; and each Subsidiary of the Borrower which is engaged in broker-dealer business is, and at all times will be, duly registered as a broker-dealer as and to the extent required under the Securities Exchange Act of 1934, as amended, and, as and to the extent required, is, and at all times will be, a member in good standing of the National Association of Securities Dealers, Inc. SECTION 3.09 TAXES. Each of the Borrower and its Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary, as applicable, has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. SECTION 3.10 ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $5,000,000 the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $10,000,000 the fair market value of the assets of all such underfunded Plans. SECTION 3.11 DISCLOSURE. The Borrower has disclosed to the Lenders all agreements, instruments and corporate or other restrictions to which it or any of its Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Borrower to the Administrative Agent or any Lender in connection with the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. SECTION 3.12 NO DEFAULT. Neither the Borrower nor any of its Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect that could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. SECTION 3.13 SUBSIDIARIES. Except as disclosed to the Administrative Agent by the Borrower in writing from time to time after the Closing Date, () Schedule 3.13 sets forth the name and jurisdiction of incorporation of each Subsidiary and, as to each such Subsidiary, the percentage of each class of Capital Stock owned by the Borrower and () there are no outstanding subscriptions, options, warrants, calls, rights or other agreements or commitments (other than stock options or restricted stock granted to employees or directors and directors' qualifying shares) of any nature relating to any Capital Stock of the Borrower or any Subsidiary. SECTION 3.14 FEDERAL REGULATIONS. No part of the proceeds of any Loans will be used for "buying" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U as now and from time to time hereafter in effect in any manner that violates the provisions of the Regulations of the Board or for any other purpose that violates the provisions of the Regulations of the Board. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1, as applicable, referred to in Regulation U. No more than 25% of the consolidated assets of the Borrower and its Subsidiaries (excluding treasury shares) consists of "margin stock" under Regulation U as now and from time to time hereafter in effect. SECTION 3.15 YEAR 2000 MATTERS. Any reprogramming required to permit the proper functioning (but only to the extent that such proper functioning would otherwise be impaired by the occurrence of the year 2000) in and following the year 2000 of computer systems and other equipment containing embedded microchips, in either case owned or operated by the Borrower or any of its Subsidiaries or used or relied upon in the conduct of their business (including any such systems and other equipment supplied by others or with which the computer systems of the Borrower or any of its Subsidiaries interface), and the testing of all such systems and other equipment as so reprogrammed, is scheduled to be completed by March 31, 1999. The costs to the Borrower and its Subsidiaries that have not been incurred as of the date hereof for such reprogramming and testing and for the other reasonably foreseeable consequences to them of any improper functioning of other computer systems and equipment containing embedded microchips due to the occurrence of the year 2000 could not reasonably be expected to result in a Default or Event of Default or to have a Material Adverse Effect. Except for any reprogramming referred to above, the computer systems of the Borrower and its Subsidiaries are and, with ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient for the conduct of their business as currently conducted. SECTION 3.16 SPIN-OFF. The Borrower has heretofore furnished to each Lender copies of the then-current draft of the material definitive documentation with respect to the Spin-Off (including any registration statement with respect to its common stock included in the Spin-Off documentation) and the intercompany arrangements between the Borrower and Torchmark Corporation (including the Public Offering and Separation Agreement and the Tax Disaffiliation Agreement). The consummation of the Spin-Off could not reasonably be expected to result in a Material Adverse Effect on (i) the Borrower, (ii) the Borrower's ability to perform its obligations under this Agreement or (iii) the rights and remedies of the Lenders. SECTION 3.17 NO BURDENSOME RESTRICTIONS. No Requirement of Law or Contractual Obligation of the Borrower could reasonably be expected to have a Material Adverse Effect. ARTICLE IV CONDITIONS SECTION 4.01 EFFECTIVE DATE. The obligations of the Lenders to make Loans hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02): (a) The Administrative Agent (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement. (b) The Administrative Agent shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of the General Counsel of the Borrower, substantially in the form of Exhibit B, and covering such other matters relating to the Borrower, this Agreement or the Transactions as the Required Lenders shall reasonably request. The Borrower hereby requests such counsel to deliver such opinion. (c) The Administrative Agent shall have received such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower, the authorization of the Transactions and any other legal matters relating to the Borrower, this Agreement or the Transactions, all in form and substance satisfactory to the Administrative Agent and its counsel. (d) The Administrative Agent shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer of the Borrower, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.02 without giving effect to the parenthetical set forth in paragraph (a) of Section 4.02. (e) The Administrative Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all reasonable out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder. (f) All governmental and third party approvals necessary in connection with the continuing operations of the Borrower and its Subsidiaries and the transactions contemplated hereby shall have been obtained and be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority that would restrain, prevent or otherwise impose adverse conditions on the financing contemplated hereby. (g) The Lenders shall have received (i) audited consolidated financial statements of the Borrower for the 1996 and 1997 fiscal years and (ii) unaudited interim consolidated financial statements of the Borrower for each quarterly period ended subsequent to the date of the latest applicable financial statements delivered pursuant to clause (i) of this paragraph as to which such financial statements are available, and such financial statements shall not, in the reasonable judgment of the Lenders, reflect any material adverse change in the consolidated financial condition of the Borrower, as reflected in the financial statements or projections contained in the Confidential Information Memorandum. (h) The Administrative Agent shall have received from the Borrower documentation reasonably satisfactory to the Administrative Agent, in form and substance, with respect to the Spin-Off and the intercompany arrangements between the Borrower and Torchmark Corporation (including the allocation of tax and other liabilities between the Borrower and Torchmark Corporation). The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) at or prior to 5:00 p.m., New York City time, on October 15, 1998 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time). SECTION 4.02 EACH CREDIT EVENT. The obligation of each Lender to make a Loan on the occasion of any Borrowing (including, without limitation, its initial Loan) is subject to the satisfaction of the following conditions: (a) The representations and warranties of the Borrower set forth in this Agreement (with the exception of the representation and warranty contained in Section 3.04(b)) shall be true and correct on and as of the date of such Borrowing. (b) At the time of and immediately after giving effect to such Borrowing, no Default shall have occurred and be continuing. Each Borrowing, the conversion of the Revolving Loans into Term Loans pursuant to Sections 2.04 and 2.05, and the increase of the aggregate Commitments pursuant to Section 2.20, shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section, PROVIDED that (i) such conversion of the Revolving Loans into Term Loans and (ii) such increase of the aggregate Commitments shall also be deemed to constitute a representation and warranty by the Borrower that the matters specified in Section 3.04(b) are true and correct on and as of the date thereof. ARTICLE V AFFIRMATIVE COVENANTS Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full, the Borrower covenants and agrees with the Lenders that: SECTION 5.01 FINANCIAL STATEMENTS AND OTHER INFORMATION. The Borrower will furnish to the Administrative Agent and each Lender: (a) within 90 days after the end of each fiscal year of the Borrower, the annual report of the Borrower on Form 10-K filed by the Borrower with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission; (b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, the quarterly report of the Borrower on Form 10-Q filed by the Borrower with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission; (c) concurrently with any delivery of financial statements under clause (a) or (b) above, a certificate of a Financial Officer of the Borrower (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Section 6.01 and (iii) stating whether any change in GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 3.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (d) promptly after the same become publicly available, copies of all annual reports on Form 10-K, quarterly reports on Form 10-Q and all reports on Form 8-K, and all proxy statements, filed by the Borrower or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed by the Borrower to its shareholders generally, as the case may be; (e) after the end of each calendar month, (A) a schedule of the Net Asset Value of the investment companies and accounts managed by the Borrower and its Subsidiaries on the last day of such calendar month and certain other information, substantially in the form of Exhibit C and (B) a schedule showing the calculation of the Aggregate Revenue Base as of the end of such calendar month, and an analysis of changes from the preceding calendar month, substantially in the form of Exhibit C-2, or in such other form as may be reasonably satisfactory to the Administrative Agent; and (f) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Borrower or any Subsidiary, or compliance with the terms of this Agreement, as the Administrative Agent or any Lender may reasonably request. SECTION 5.02 NOTICES OF MATERIAL EVENTS. The Borrower will furnish to the Administrative Agent and each Lender prompt written notice of the following: (a) the occurrence of any Default; (b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Borrower or any Affiliate thereof that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; (c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and its Subsidiaries in an aggregate amount exceeding $5,000,000; (d) any suspension or termination of the registration of the Borrower or any of its Subsidiaries as an investment adviser under the Investment Advisers Act of 1940, as amended, or any cancellation or expiration without renewal of any material investment advisory agreement or similar contract to which the Borrower or any of its Subsidiaries is a party; and (e) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. SECTION 5.03 EXISTENCE; CONDUCT OF BUSINESS. The Borrower will, and will cause each of its Subsidiaries to, (a) do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business; PROVIDED that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.04, and (b) comply with all Contractual Obligations and Requirements of Law except to the extent that failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. SECTION 5.04 PAYMENT OF OBLIGATIONS. The Borrower will, and will cause each of its Subsidiaries to, pay its obligations, including Tax liabilities, that, if not paid, could result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.05 MAINTENANCE OF PROPERTIES; INSURANCE. The Borrower will, and will cause each of its Subsidiaries to, (a) keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted, and (b) maintain, with financially sound and reputable insurance companies, insurance in such amounts and against such risks as are customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations. SECTION 5.06 BOOKS AND RECORDS; INSPECTION RIGHTS. The Borrower will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of its Subsidiaries to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested. SECTION 5.07 COMPLIANCE WITH LAWS. The Borrower will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property and maintain all registrations and memberships with any Governmental Authority, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.08 USE OF PROCEEDS. The proceeds of the Loans will be used only for general corporate purposes, including but not limited (i) to repurchase shares of the Borrower's Class A Common Stock and, after the Spin-Off, the Borrower's Class A and Class B Common Stock and (ii) to consummate Permitted Acquisitions. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations U and X. SECTION 5.09 ENVIRONMENTAL LAWS. The Borrower will, and will cause each of its Subsidiaries to, (a) comply in all material respects with all applicable Environmental Laws, and obtain and comply in all material respects with and maintain any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws, and (b) conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws, except in each case to the extent that non-compliance therewith could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.10. SPIN-OFF. In the event that the Spin-Off occurs, the Borrower will ensure that the Spin-Off is consummated in a manner that does not have a Material Adverse Effect on (i) the Borrower, (ii) the Borrower's ability to perform its obligations under this Agreement or (iii) the rights and remedies of the Lenders, and, in concert with Torchmark Corporation, shall procure one or more rulings from the Internal Revenue Service to the effect that the Spin-Off will not subject Torchmark Corporation or the Borrower to any federal income taxes. ARTICLE VI NEGATIVE COVENANTS Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full, the Borrower covenants and agrees with the Lenders that: SECTION 6.01 FINANCIAL CONDITION COVENANTS. (a) CONSOLIDATED LEVERAGE RATIO. The Borrower shall not permit the Consolidated Leverage Ratio as at the last day of any period of four consecutive fiscal quarters of the Borrower ending with any fiscal quarter to equal or exceed the ratio of 3.0 to 1.0. (b) CONSOLIDATED INTEREST COVERAGE RATIO. The Borrower shall not permit the Consolidated Interest Coverage Ratio for any period of four consecutive fiscal quarters of the Borrower ending with any fiscal quarter to be less than or equal to the ratio of 4.0 to 1.0. SECTION 6.02 INDEBTEDNESS. The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Indebtedness, except: (a) Indebtedness created hereunder; (b) Indebtedness existing on the date hereof and set forth in Schedule 6.02, but not any extensions, renewals or replacements of any such Indebtedness and without increasing, or shortening the maturity of, the principal amount thereof; (c) Indebtedness of the Borrower to any Subsidiary and of any Subsidiary to the Borrower or any other Subsidiary; (d) Guarantees by the Borrower of Indebtedness of any Subsidiary and by any Subsidiary of Indebtedness of the Borrower or any other Subsidiary; (e) Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition, construction or improvement of any fixed or capital assets, including Capital Lease Obligations and any Indebtedness assumed in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof, and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof; PROVIDED that (i) such Indebtedness is incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement and (ii) the aggregate principal amount of Indebtedness permitted by this clause (e) shall not exceed $10,000,000 at any time outstanding; (f) Indebtedness of any Person that becomes a Subsidiary after the date hereof; PROVIDED that such Indebtedness exists at the time such Person becomes a Subsidiary and is not created in contemplation of or in connection with such Person becoming a Subsidiary; (g) Indebtedness of the Borrower or any Subsidiary as an account party in respect of trade letters of credit; (h) Indebtedness of the Borrower incurred to finance a Permitted Acquisition; and (i) other unsecured Indebtedness in an aggregate principal amount not exceeding $25,000,000 at any time outstanding. SECTION 6.03 LIENS. The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except: (a) Permitted Encumbrances; (b) any Lien on any property or asset of the Borrower or any Subsidiary existing on the date hereof and set forth in Schedule 6.02; PROVIDED that (i) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary and (ii) such Lien shall secure only those obligations which it secures on the date hereof; (c) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary or existing on any property or asset of any Person that becomes a Subsidiary after the date hereof prior to the time such Person becomes a Subsidiary; PROVIDED that (i) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary, as the case may be, (ii) such Lien shall not apply to any other property or assets of the Borrower or any Subsidiary and (iii) such Lien shall secure only those obligations which it secures on the date of such acquisition or the date such Person becomes a Subsidiary, as the case may be; and (d) Liens on property, plant and equipment acquired, constructed or improved by the Borrower or any Subsidiary; PROVIDED that (i) such security interests secure Indebtedness permitted by clause (e) of Section 6.02, (ii) such security interests and the Indebtedness secured thereby are incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement, (iii) the Indebtedness secured thereby does not exceed 70% of the cost of acquiring, constructing or improving such property, plant and equipment and (iv) such security interests shall not apply to any other property or assets of the Borrower or any Subsidiary. SECTION 6.04 FUNDAMENTAL CHANGES. (a) The Borrower will not, and will not permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all of its assets, or all or substantially all of the stock of any of its Subsidiaries (in each case, whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) any other Person, including a Subsidiary, may merge into the Borrower in a transaction in which the Borrower is the surviving corporation, (ii) any Subsidiary may merge into any Subsidiary in a transaction in which the surviving entity is a Subsidiary, (iii) any Subsidiary may sell, transfer, lease or otherwise dispose of its assets to the Borrower or to another Subsidiary, (iv) any Subsidiary may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower and is not materially disadvantageous to the Lenders, and (v) the Borrower may merge into or consolidate with another Person in a transaction in which such other Person is the surviving entity if such other Person is organized and validly existing under the laws of the United States or any State thereof and by operation of law or otherwise assumes all obligations of the Borrower hereunder and such assumption is evidenced by an opinion of counsel to such other Person satisfactory in form and substance to the Administrative Agent; PROVIDED that any such merger involving a Person that is not a wholly owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Section 6.05. (b) The Borrower will not, and will not permit any of its Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Borrower and its Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto. SECTION 6.05 INVESTMENTS, LOANS, ADVANCES, GUARANTEES AND ACQUISITIONS; HEDGING AGREEMENTS. (a) The Borrower will not, and will not permit any of its Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly owned Subsidiary prior to such merger) any capital stock, evidences of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, except: (i) Permitted Investments; (ii) investments by the Borrower existing on the date hereof in the capital stock of its Subsidiaries; (iii) loans or advances made by the Borrower to any Subsidiary and made by any Subsidiary to the Borrower or any other Subsidiary; (iv) Guarantees constituting Indebtedness permitted by Section 6.02; (v) Permitted Acquisitions; and (vi) other investments in an aggregate principal amount not exceeding $20,000,000 at any time outstanding. (b) The Borrower will not, and will not permit any of its Subsidiaries to, enter into any Hedging Agreement, other than Hedging Agreements entered into in the ordinary course of business to hedge or mitigate risks to which the Borrower or any Subsidiary is exposed in the conduct of its business or the management of its liabilities. SECTION 6.06 RESTRICTED PAYMENTS. The Borrower will not, and will not permit any of its Subsidiaries to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except (a) the Borrower or any of its Subsidiaries may declare and pay dividends with respect to its capital stock provided that, in the case of any such declaration or payment by the Borrower, no Default or Event of Default has occurred or is continuing or would result therefrom, (b) the Borrower may make Restricted Payments pursuant to and in accordance with stock option plans or other benefit plans for management or employees of the Borrower and its Subsidiaries and (c) prior to the Spin-Off, the Borrower may repurchase shares of the Borrower's Class A Common Stock and, after the Spin-Off, the Borrower may, in addition to the foregoing, repurchase shares of the Borrower's Class B Common Stock, PROVIDED that such repurchases are not made with the proceeds of debt financings other than under this Agreement. SECTION 6.07 TRANSACTIONS WITH AFFILIATES. The Borrower will not, and will not permit any of its Subsidiaries to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (a) in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, (b) transactions between or among the Borrower and its wholly owned Subsidiaries not involving any other Affiliate and (c) any Restricted Payment permitted by Section 6.06. SECTION 6.08 RESTRICTIVE AGREEMENTS. The Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets, or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness of the Borrower or any other Subsidiary; PROVIDED that (i) the foregoing shall not apply to restrictions and conditions imposed by law or by this Agreement, (ii) the foregoing shall not apply to restrictions and conditions existing on the date hereof identified on Schedule 6.08 (but shall apply to any extension or renewal of, or any amendment or modification expanding the scope of, any such restriction or condition), (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (iv) clause (a) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (v) clause (a) of the foregoing shall not apply to customary provisions in leases restricting the assignment thereof. SECTION 6.09 CAPITAL EXPENDITURES. The Borrower will not, and will not permit any of its Subsidiaries to, make or commit to make any Capital Expenditure, except Capital Expenditures of the Borrower and its Subsidiaries in the ordinary course of business not exceeding $25,000,000 in the aggregate from the date hereof. SECTION 6.10. SALES AND LEASEBACKS. The Borrower will not, and will not permit any of its Subsidiaries to, enter into any arrangement with any Person providing for the leasing by the Borrower or any Subsidiary of real or personal property that has been or is to be sold or transferred by the Borrower or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Borrower or such Subsidiary. SECTION 6.11. CHANGES IN FISCAL PERIODS. The Borrower will not permit the fiscal year of the Borrower to end on a day other than December 31 or change the Borrower's method of determining fiscal quarters. SECTION 6.12. NEGATIVE PLEDGE CLAUSES. The Borrower will not, and will not permit any of its Subsidiaries to, enter into or suffer to exist or become effective any agreement that prohibits or limits the ability of the Borrower or any of its Subsidiaries to create, incur, assume or suffer to exist any Lien upon any of its property or revenues, whether now owned or hereafter acquired, to secure its obligations under this Agreement other than (a) this Agreement and (b) any agreements governing any purchase money Liens or Capital Lease Obligations otherwise permitted hereby (in which case, any prohibition or limitation shall only be effective against the assets financed thereby). SECTION 6.13. OPTIONAL PAYMENTS AND MODIFICATIONS OF CERTAIN DEBT INSTRUMENTS. The Borrower will not, and will not permit any of its Subsidiaries to, make or offer to make any optional or voluntary payment, prepayment, repurchase or redemption of or otherwise optionally or voluntarily defease any Indebtedness (other than Indebtedness under this Agreement), or amend, modify, waive or otherwise change, or consent or agree to any amendment, modification, waiver or other change to, any of the terms relating to the payment or prepayment of principal of or interest on, any such Indebtedness (other than any such amendment, modification, waiver or other change that would extend the maturity or reduce the amount of any payment of principal thereof or reduce the rate or extend any date for payment of interest thereon). ARTICLE VII EVENTS OF DEFAULT If any of the following events ("EVENTS OF DEFAULT") shall occur: (a) the Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; (b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of five days; (c) any representation or warranty made or deemed made by or on behalf of the Borrower or any Subsidiary in or in connection with this Agreement or any amendment or modification hereof, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with this Agreement or any amendment or modification hereof, shall prove to have been materially incorrect when made or deemed made; (d) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5.02, 5.03 (with respect to the Borrower's existence) or 5.08 or in Article VI; (e) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in this Agreement (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent (given at the request of any Lender) to the Borrower; (f) the Borrower or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable; (g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; PROVIDED that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower or any Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) the Borrower or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (j) the Borrower or any Subsidiary shall become unable, admit in writing or fail generally to pay its debts as they become due; (k) one or more judgments for the payment of money in an aggregate amount in excess of $5,000,000 shall be rendered against the Borrower, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Borrower or any Subsidiary to enforce any such judgment; (l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect; or (m) a Change in Control shall occur; then, and in every such event (other than an event with respect to the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. ARTICLE VIII THE ADMINISTRATIVE AGENT Except as provided below, each of the Lenders hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof, together with such actions and powers as are reasonably incidental thereto. The bank serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder. The Administrative Agent shall not have any duties or obligations except those expressly set forth herein. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise in writing by the Required Lenders, and (c) except as expressly set forth herein, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Subsidiaries that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders or in the absence of its own gross negligence or wilful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made by any other Person in or in connection with this Agreement, (ii) the contents of any certificate, report or other document delivered by any other Person hereunder or in connection herewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein, (iv) the validity, enforceability, effectiveness (other than its own due execution) or genuineness of this Agreement or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing reasonably believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. The Administrative Agent may perform any and all its duties and exercise its rights and powers through Related Parties of the Administrative Agent. The exculpatory provisions of the preceding paragraphs shall apply to the Related Parties of the Administrative Agent, and shall apply to their activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time by notifying the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any related agreement or any document furnished hereunder or thereunder. ARTICLE IX MISCELLANEOUS SECTION 9.01 NOTICES. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to the Borrower, to it at 6300 Lamar Avenue, Shawnee Mission, Kansas 66202, Attention of John Sundeen (Telecopy No. (913) 236-2252); (b) if to the Administrative Agent, to The Chase Manhattan Bank, c/o The Loan and Agency Services Group, 1 Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Laura Rebecca (Telecopy No. (212) 552-7490), with a copy to Chase Securities Inc., 270 Park Avenue, New York, New York 10017, Attention of David Stawik (Telecopy No. (212) 270-1789); and (c) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. SECTION 9.02 WAIVERS; AMENDMENTS. (a) No failure or delay by the Administrative Agent or any Lender in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of this Agreement or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent or any Lender may have had notice or knowledge of such Default at the time. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or by the Borrower and the Administrative Agent with the consent of the Required Lenders; PROVIDED that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled date of payment of the principal amount of any Loan, or any interest thereon, or any fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.18(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, (v) increase the aggregate Commitments above $300,000,000, without the written consent of each Lender, or (vi) change any of the provisions of this Section or the definition of "Required Lenders" or any other provision hereof specifying the number or percentage of Lenders required to waive, amend or modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender; PROVIDED FURTHER that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent. SECTION 9.03 EXPENSES; INDEMNITY; DAMAGE WAIVER. (a) The Borrower shall pay (i) all reasonable, documented out-of-pocket expenses incurred by the Administrative Agent and its Affiliates in amounts previously agreed to in writing and the reasonable fees, charges and disbursements of counsel for the Administrative Agent, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions hereof (whether or not the transactions contemplated hereby or thereby shall be consummated) and (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights in connection with this Agreement, including its rights under this Section, or in connection with the Loans made, including in connection with any workout, restructuring or negotiations in respect thereof. (b) The Borrower shall indemnify the Administrative Agent and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "INDEMNITEE") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities, costs and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement or any agreement or instrument contemplated hereby, the performance by the parties hereto of their respective obligations hereunder or the consummation of the Transactions or any other transactions contemplated hereby, (ii) any Loan or the use of the proceeds therefrom, (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; PROVIDED that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities, costs or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee. (c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent such Lender's Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; PROVIDED that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent in its capacity as such. (d) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Transactions, any Loan or the use of the proceeds thereof. (e) All amounts due under this Section shall be payable not later than 5 days after written demand therefor. SECTION 9.04 SUCCESSORS AND ASSIGNS. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); PROVIDED that (i) except in the case of an assignment to a Lender or an Affiliate of a Lender, each of the Borrower and the Administrative Agent must give their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender's Commitment, the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 unless each of the Borrower and the Administrative Agent otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement, except that this clause (iii) shall not apply to rights in respect of outstanding Competitive Loans, (iv) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500 (the obligation to pay such fee to be shared equally by the assignor and assignee), and (v) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; PROVIDED FURTHER that any consent of the Borrower otherwise required under this paragraph shall not be required if an Event of Default under clause (h) or (i) of Article VII has occurred and is continuing. Upon acceptance and recording pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance, the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.15, 2.16, 2.17 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (e) of this Section. (c) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "REGISTER"). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Lender may, without the consent of the Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a "PARTICIPANT") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); PROVIDED that (i) such Lender's obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; PROVIDED that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. (f) A Participant shall not be entitled to receive any greater payment under Section 2.15 or 2.17 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.17 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.17(e) as though it were a Lender. (g) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any such pledge or assignment to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; PROVIDED that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such assignee for such Lender as a party hereto. SECTION 9.05 SURVIVAL. All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of this Agreement and the making of any Loans, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Commitments have not expired or terminated. The provisions of Sections 2.15, 2.16, 2.17 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof. SECTION 9.06 COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and any separate letter agreements with respect to fees payable to the Administrative Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 9.07 SEVERABILITY. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 9.08 RIGHT OF SETOFF. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.09 GOVERNING LAW; JURISDICTION; CONSENT TO SERVICE OF PROCESS. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to this Agreement against the Borrower or its properties in the courts of any jurisdiction. (c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 9.11. HEADINGS. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. SECTION 9.12. CONFIDENTIALITY. Each of the Administrative Agent and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than the Borrower. For the purposes of this Section, "INFORMATION" means all information received from the Borrower relating to the Borrower or its business, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by the Borrower; PROVIDED that, in the case of information received from the Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information. SECTION 9.13. INTEREST RATE LIMITATION. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the "CHARGES"), shall exceed the maximum lawful rate (the "MAXIMUM RATE") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. WADDELL & REED FINANCIAL, INC., by /s/Keith A. Tucker ------------------ Name: Keith A. Tucker Title: Chairman, Chief Executive Officer THE CHASE MANHATTAN BANK, individually and as Administrative Agent, by /s/Lawrence Palumbo, Jr. ------------------------ Name: Lawrence Palumbo, Jr. Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION by /s/ Name: Title: BANK OF MONTREAL by /s/K. Daniel Strieff -------------------- Name: K. Daniel Strieff Title: Managing Director THE BANK OF NEW YORK by /s/Scott M. Buitekant --------------------- Name: Scott M. Buitekant Title: Assistant Vice President BANQUE NATIONALE DE PARIS by /s/Marguerite L. Lebon ---------------------- Name: Marguerite L. Lebon Title: Assistant Vice President by /s/Laurent Vanderzyppe ---------------------- Name: Laurent Vanderzyppe Title: Vice President DEUTSCHE BANK AG NEW YORK BRANCH by /s/Peter J. Bassler ------------------- Name: Peter J. Bassler Title: Vice President by /s/Eckhard Osenberg ------------------- Name: Eckhard Osenberg Title: Vice President FLEET NATIONAL BANK by /s/David A. Bosselait --------------------- Name: David A. Bosselait Title:Vice President STATE STREET BANK AND TRUST COMPANY by /s/F. Omar Hazoury ------------------ Name: F. Omar Hazoury Title: Vice President UMB BANK, N.A. by /s/David A. Proffitt -------------------- Name: David A. Proffitt Title: Senior Vice President EX-10.28 10 EXHIBIT 10.28 EXHIBIT 10.28 WADDELL & REED FINANCIAL, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN PURPOSE The purpose of the Waddell & Reed Financial, Inc. Supplemental Executive Retirement Plan (the "PLAN") is to provide deferred compensation that otherwise would be paid currently to select employees of Waddell & Reed Financial, Inc., a Delaware corporation (the "COMPANY"), and any subsidiaries or affiliates of the Company that may adopt this Plan with the consent of the Board of Directors of the Company. This Plan is designed to constitute a nonqualified deferred compensation arrangement. ARTICLE I DEFINITION OF TERMS Certain words and phrases are defined when first used in later paragraphs of this Plan. In addition, the following words and phrases when used herein, unless the context clearly requires otherwise, will have the following respective meanings: 1.1 "AGGREGATE CONTRIBUTION AMOUNT" means the amount determined by the Compensation Committee to be allocated among Participants' Deferred Compensation Accounts for a Plan Year. 1.2 "BASE PAY" means a Participant's base rate of compensation for a Plan Year as designated by the Compensation Committee. 1.3 "CODE" means the Internal Revenue Code of 1986, as amended. 1.4 "DEFERRED COMPENSATION ACCOUNT" is defined in Section 4.1. 1.5 "EFFECTIVE DATE" means December 10, 1998. 1.6 "EMPLOYEE" means a common-law employee of the Company or a Participating Employer. 1.7 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.8 "401(k) PLAN" means the Waddell & Reed Financial, Inc. 401(k) and Thrift Plan, as such plan may be amended from time to time, or any similar plan in which a Participating Employer participates. 1.9 "PARTICIPANT" means an Employee who has satisfied the requirements for eligibility under Article III and is participating in the Plan. 1.10 "PARTICIPATING EMPLOYER" means a subsidiary or affiliate of the Company that adopts this Plan by a properly executed document evidencing such intent with the consent of the Board of Directors of the Company. 1.11 "PLAN YEAR" means the period commencing January 1 and ending December 31. 1.12 "TOTAL DISABILITY" means a Participant has satisfied the requirements to receive long-term disability benefits under the Company's (or his or her Participating Employer's) long-term disability insurance plan. 1.13 "VALUATION DATE" means December 31 and such other or additional dates as provided herein or otherwise designated by the Administrator as Valuation Dates for the purpose of making valuation adjustments to the Deferred Compensation Accounts in accordance with Section 4.2. ARTICLE II ADMINISTRATION This Plan will be administered by the Company's Compensation Committee, which will be the "ADMINISTRATOR" of the Plan. The decision of a majority of the members of the Compensation Committee will control; provided, however, that a member will not be entitled to participate in discretionary decisions directly related to such person's own participation in the Plan. The Administrator will have full power and authority to adopt rules, regulations, and practices governing the administration of the Plan, to interpret and apply the provisions of this Plan in its sole discretion, to alter, amend, or revoke any rules and regulations so adopted, to enter into contracts on behalf of the Company with respect to the Plan, and to make discretionary decisions under the Plan, except where that authority is retained by the Company under this Plan. The Administrator will administer the Plan and render decisions in a uniform and consistent manner so that all Participants in similar circumstances are generally treated similarly. The Administrator's decision as to all aspects of Plan operations, including but not limited to, the eligibility of persons to participate in the Plan, the benefits payable under the Plan, and the interpretation of the Plan, cannot be overturned unless it is arbitrary and capricious. The term "ARBITRARY AND CAPRICIOUS" will mean having no foundation. ARTICLE III ELIGIBILITY An Employee who has been designated by the Administrator as eligible for participation in the Plan, will be eligible for participation beginning in the Plan Year with respect to which the designation is made. A Participant will continue to participate in the Plan until he or she ceases to be a member of a select group of management or highly compensated employees, or until the Administrator in its sole discretion determines otherwise. ARTICLE IV DEFERRED COMPENSATION ACCOUNTS 4.1 ESTABLISHMENT OF DEFERRED COMPENSATION ACCOUNTS. At the time an Employee becomes a Participant in the Plan, the Company will establish a memorandum account (a "DEFERRED COMPENSATION ACCOUNT") for the Participant on its books. 4.2 ADDITIONS TO DEFERRED COMPENSATION ACCOUNTS. (a) 401(k) PLAN BENEFIT RESTORATION -- For each Plan Year, the Administrator will credit the Deferred Compensation Account of each Participant with an amount equal to four percent (4%) of his or her Base Pay, less the amount of any employer matching contribution made or to be made on the Participant's behalf under the 401(k) Plan with respect to the Plan Year. (b) SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFIT -- For each Plan Year, the Compensation Committee will allocate the Aggregate Contribution Amount among the Deferred Compensation Accounts of Participants in proportion to their Base Pay for the Plan Year. (c) SPECIAL DEFERRAL ELECTION -- With prior approval of the Administrator, a Participant who receives a distribution from a nonqualified deferred compensation plan sponsored by Torchmark Corporation may make a one-time special deferral election to have an amount deferred from his future compensation from the Company (or his or her Participating Employer), such amount not to exceed the amount of any such distribution from a nonqualified deferred compensation plan sponsored by Torchmark Corporation. The amount of any such special deferral election will be credited to the Participant's Deferred Compensation Account. (d) VALUATION ADJUSTMENTS -- As of each Valuation Date, the Administrator will also credit (or charge) the Participant's Deferred Compensation Account with valuation adjustments determined in accordance with this Section 4.2(d). The valuation adjustment to be credited (or charged) to the Participant's Deferred Compensation Account as of any Valuation Date (the "CURRENT VALUATION DATE") will be an amount equal to the performance of certain hypothetical investments or investment vehicles since the last preceding Valuation Date (the "PRECEDING VALUATION DATE") as described below. The value of the Participant's Deferred Compensation Account as of the current Valuation Date will be determined as if the balance of the Deferred Compensation Account as of the preceding Valuation Date, together with any amounts subsequently credited to such Deferred Compensation Account, had been invested since the preceding Valuation Date or the date credited to the Deferred Compensation Account, as the case may be, in the investments or investment vehicles specified by the Administrator or its designee. For purposes of this Section 4.2(d), "PERFORMANCE" will include, but not be limited to, in the sole discretion of the Administrator, interest, expenses, and realized and unrealized gains and losses. The crediting (or charging) of amounts under this Section 4.2(d) will occur so long as there is a balance in the Participant's Deferred Compensation Account; provided, however, the crediting (or charging) of amounts under this Section 4.2(d) will cease at a reasonable time (as determined by the Administrator in its sole discretion) prior to the date a complete distribution of a Participant's benefit under this Plan is made. 4.3 FORFEITURE. (a) All amounts credited to, and not withdrawn from, a Participant's Deferred Compensation Account will be nonforfeitable, except as provided below. (b) Notwithstanding any other provision of this Plan, a Participant's Deferred Compensation Account will be forfeited in its entirety if the Administrator determines that the Participant has engaged in any activity that is (1) illegal and involves fraud, dishonesty, or theft; or (2) intentionally detrimental to the Company, a Participating Employer, or any subsidiary or affiliate thereof. ARTICLE V DISTRIBUTION OF BENEFITS 5.1 DISTRIBUTION ON TERMINATION OF EMPLOYMENT. Unless otherwise elected pursuant to Section 5.4, amounts credited to, and not withdrawn from, a Participant's Deferred Compensation Account (less applicable tax and other withholdings) will be paid in a single lump sum payment, in cash or other property at the Administrator's election, within 90 days after the Participant's termination of employment with the Company or, if applicable, Participating Employer. 5.2 DISTRIBUTION ON TOTAL DISABILITY. Unless otherwise elected pursuant to Section 5.4, amounts credited to, and not withdrawn from, a Participant's Deferred Compensation Account (less applicable tax and other withholdings) as of the date the Administrator determines that the Participant has sustained a Total Disability will be paid in a single lump sum payment, in cash or other property at the Administrator's election, within 90 days after such determination. 5.3 DISTRIBUTION ON DEATH. Unless otherwise elected pursuant to Section 5.4, payment of the amounts credited to, and not withdrawn from, his or her Deferred Compensation Account (less applicable tax and other withholdings) as of the date of the Participant's death will be made in a single lump sum payment, in cash or other property at the Administrator's election, within 90 days after the Participant's death, to the Participant's designated beneficiary in accordance with the last such designation received by the Administrator, or if none, to the Participant's surviving spouse, or if there is no surviving spouse, to the personal representative of the Participant's estate. A Participant will have the right, at any time, to submit, on a form prescribed by the Administrator, a written designation of primary and secondary beneficiaries to whom payment under this Plan will be made in the event of his or her death prior to complete distribution of the benefits due and payable to the Participant under this Plan. Each beneficiary designation will become effective only when receipt thereof is acknowledged in writing by the Administrator. 5.4 FORM OF BENEFIT DISTRIBUTION. A Participant or Beneficiary may elect the form and timing, subject to the Administrator's approval, of distribution of his or her benefits and may revoke that election (with or without a new election) at any time at least 30 days before his or her payments begin or are scheduled to begin, by notifying the Administrator in writing of his or her election. A Participant or Beneficiary may elect distributions of benefits in one of the following forms: (a) LUMP SUM -- a single payment of the entire balance in the Participant's Deferred Compensation Account, payable as of a date specified in the election, which date may not be later than the date the Participant attains (or would have attained) age 65. (b) INSTALLMENTS -- Period payments over a specified period of time, beginning as of a date specified in the election, which date may not be later than the date the Participant attains (or would have attained) age 65, and which time period may not extend beyond the life expectancy of the Participant or Beneficiary. 5.5 INCAPACITY. In the event of the Participant's incapacity (as determined by the Administrator), payment pursuant to Sections 5.1 through 5.3, above, will be made to the Participant or to the legal guardian or conservator of the Participant or to an adult with whom the Participant maintains his or her residence, as the Administrator in its sole and absolute discretion will determine. Such a payment to a legal guardian, conservator, or adult will fully discharge the Administrator, the Company, each Participating Employer, and the Plan from further liability on account thereof. ARTICLE VI GENERAL PROVISIONS 6.1 NON-TRANSFERABILITY OF INTERESTS. Notwithstanding any other provision of this Plan, all Deferred Compensation Accounts maintained by the Company will be general assets of the Company and will be subject to the claims of such Employer's general creditors. Except as provided in Section 6.2 below, benefits payable to Participants and their beneficiaries under this Plan may not in any manner be anticipated, assigned (either at law or in equity), alienated, sold, transferred, pledged, encumbered or subjected to attachment, garnishment, levy, execution, or other legal or equitable process by creditors of the Participant or the Participant's beneficiaries. 6.2 DOMESTIC RELATIONS ORDERS (a) To the extent required under a final judgment, decree, or order (including approval of a property settlement agreement) made pursuant to a state domestic relations law (a "DOMESTIC RELATIONS ORDER"), any portion of a Participant's Deferred Compensation Account may be paid or set aside for payment to a spouse, former spouse, or child of the Participant. The Administrator shall establish written procedures for determining whether a Domestic Relations Order directed to the Program is a "PLAN-APPROVED DOMESTIC RELATIONS ORDER" in compliance with Code Section 414(p)(1)(A)(i) and such procedures. (b) Where necessary to carry out the terms of a Domestic Relations Order, a separate account shall be established with respect to the spouse, former spouse, or child. Any amount so set aside for a spouse, former spouse, or child shall be paid out in a lump sum at the earliest date that benefits may be paid to the Participant, unless the judgment, decree, or order directs a different form of payment. Nothing in this Section shall be construed to authorize any amount to be distributed under the Plan at a time or in a form that is not permitted under ERISA or the Code. (c) A Participant's right to receive benefits under the Plan will be reduced to the extent that any portion of a Participant's Deferred Compensation Account has been paid or set side for payment to a spouse, former spouse, or child pursuant to a Plan-Approved Domestic Relations Order or to the extent that the Company, a Participating Employer, or the Plan is otherwise subject to a binding judgment, decree, or order for the attachment, garnishment, or execution or any portion of the Participant's Deferred Compensation Account or of any distributions therefrom. The Participant shall be deemed to have released the Company, each Participating Employer, and the Program from any claim with respect to such amounts in any case in which -- (1) the Company, a Participating Employer, the Plan, or any Plan representative has been served with legal process or otherwise joined in a proceeding relating to such amounts, (2) the Participant has been notified of the pendency of such proceeding in the manner prescribed by the law of the jurisdiction in which the proceeding is pending for service of process or by mail from the Company, a Participating Employer, or a Plan representative to the Participant's last known mailing address, and (3) the Participant fails to obtain an order of the court in the proceeding relieving the Company, Participating Employer, and the Plan from the obligation to comply with the judgment, decree, or order. (d) Neither the Company, any Participating Employer, nor any Plan representative will be obligated to incur any cost to defend against or set aside any judgment, decree, or order relating to the division, attachment, garnishment, or execution of the Participant's Deferred Compensation Account or of any distribution therefrom. Notwithstanding the foregoing, if the Company, a Participating Employer, the Plan, or a Plan representative is joined in any such proceeding, a Plan representative will take such steps as it deems necessary and appropriate to protect the terms of the Plan. 6.3 AMENDMENT, SUSPENSION, AND TERMINATION. The Company, in its sole and absolute discretion, at any time may amend, suspend, or terminate the Plan or any portion thereof in any manner and to any extent. Such amendment, suspension, or termination of the Plan will be final and binding on each Participating Employer unless objected to in writing by such Participating Employer within 30 days after written notice is received of such amendment, suspension, or termination. No amendment, suspension, or termination will alter or impair any then existing Deferred Compensation Accounts. Upon termination of the Plan, amounts credited to each Participant's Deferred Compensation Account will be paid at the Administrator's election (provided such election applies uniformly to all such Participants) in a single lump sum benefit (in cash or other property at the Administrator's election) either (a) at any time after 30 days following the termination of the Plan; or (b) at such time and in such event as are otherwise provided under this Plan. 6.4 UNFUNDED OBLIGATION. The Plan is intended to be, and will be operated and administered so as to be, a plan that is unfunded and maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. Neither the Company nor any Participating Employer will make any provision for funding or insuring the Deferred Compensation Accounts that would cause the Plan to be (a) a "funded" plan for purposes of Section 404(a)(5) of the Code or Title I of ERISA, or (b) other than an "unfunded and unsecured promise to pay money or property in the future" under Treasury Regulations Section 1.83-3(e). A Participant and his or her beneficiary will be treated as general, unsecured creditors of the Company and, if applicable, his or her Participating Employer at all times under the Plan. The Plan constitutes a mere promise by the Company to make the benefit payments as provided in the future. It is the intention of the Company that the Deferred Compensation Accounts be unfunded for tax purposes and for purposes of Title I of ERISA. The foregoing notwithstanding, the Company may establish a grantor trust described in Treasury Regulation Section 1.677(a)-(d) to accumulate funds to pay the Deferred Compensation Accounts, provided that the trust assets will be subject to the claims of the Company's general creditors and will be required to be used to satisfy the claims of the Company's general creditors in the event the Company or a Participating Employer is "insolvent" under the terms of such trust. 6.5 NO RIGHT TO EMPLOYMENT OR OTHER BENEFITS. Nothing contained herein will be construed as conferring upon any Participant the right to continue in the employ of the Company or any Participating Employer. Any compensation deferred and any benefits paid under this Plan will be disregarded in computing benefits under any employee benefit plan of the Company or any Participating Employer. 6.6 CLAIMS PROCEDURES. (a) (1) In the event benefits provided under this Plan are not timely paid, any Participant or, if the Participant is deceased, the Participant's designated beneficiary (the "CLAIMANT," which term will include the duly authorized representative of claimant) may file a claim requesting benefits under the Plan by submitting to the Administrator (or such officer or agent of the Company as the Administrator may designate for such purpose) a written statement setting out the general nature of the claim. (2) If a duly submitted claim is wholly or partly denied, notice of the denial will be furnished to the claimant within 60 days after receipt of the claim by the Administrator. Such notice will be given as provided in subparagraph 6.6(a)(3) hereunder, and if the claim has not been granted within 60 days of the submission of the claim, the claim will be deemed denied for the purposes hereof. (3) The Administrator will provide to every claimant whose duly submitted claim for benefits is denied, written notice setting forth in a manner calculated to be understood by the claimant: (A) The specific reason or reasons for the denial; (B) Specific reference to pertinent Plan provisions on which the denial is based; (C) A description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; (D) An explanation of the Plan's claim review procedure. Such notice will be sent by certified mail, return receipt requested, to the claimant's last known address. (b) (1) The Administrator will appoint a Claims Review Committee which will consist of any number of officers of the Company (other than the claimant), as the Administrator in its discretion will determine, to review and make decisions on claim denials. All decisions of the Claims Review Committee will be by majority vote. (2) Within 60 days after denial of a claim as herein provided, the claimant may request review of the denied claim by submitting a written request therefor to the Claims Review Committee, in the care of the Administrator. (3) After the request for a review of the claim denial has been submitted, and before issuance of the decision on review, the claimant may upon reasonable advance written notice review pertinent Plan documents during regular business hours at the Company's office; provided, however, that such Plan documents will not be considered to include any documents such as correspondence or memoranda between any agents or employees of the Company and any other persons or government agencies. At the option of the Claims Review Committee, the claimant may be given photocopies of pertinent Plan documents in lieu of a review of such documents at the Company's offices. (4) Within 30 days after the request for a review of the claim denial has been submitted, the claimant may submit issues and comments in writing to the Compensation Committee. (5) Upon request of the Claimant, or upon its own motion, the Compensation Committee may, but will not be required to, provide the claimant an opportunity for a hearing before the Compensation Committee. (6) Within 60 days after receipt of a request for review, the Compensation Committee will render its decision unless special circumstances (such as the need to hold a hearing) require an extension of time for processing the request for review, in which case a decision will be rendered as soon as possible, but in no event later than 120 days after receipt of the request for review. (7) The decision on review will be in writing and will include specific reasons for the decision, written in a manner calculated to be understood by the claimant, and specifically referencing pertinent Plan provisions on which the decision is based. 6.7 INUREMENT. This Plan will be binding upon and inure to the benefit of the Company, each Participating Employer, their successors and assigns, the Participant, and his or her successors, heirs, executors, personal representatives, administrators and beneficiaries. 6.8 NOTICE. Any notice, consent or demand required or permitted to be given under the provisions of this Plan will be in writing, and will be signed by the party giving or making the same. If such notice, consent or demand is mailed to a party hereto, it will be sent by United States certified mail, postage prepaid, addressed to such party's last known address as shown on the records of the Company. The date of such mailing will be deemed the date of notice, consent or demand. Either party may change the address to which notice is to be sent by giving notice of change of address in the manner aforesaid. 6.9 GOVERNING LAW. This Plan, and the rights of the parties hereunder, will be governed by and construed in accordance with the laws of the State of Kansas, without reference to the principles of conflict of laws. IN WITNESS WHEREOF, WADDELL & REED FINANCIAL, INC. has caused this Plan to be executed by its duly authorized officer, on the 31st day of December, 1998. WADDELL & REED FINANCIAL, INC. By: /s/ Keith A. Tucker ------------------------------ Keith A. Tucker, Chairman of the Board and Chief Executive Officer EX-10.29 11 EXHIBIT 10.29 EXHIBIT 10.29 WADDELL & REED FINANCIAL, INC. 1999 MANAGEMENT INCENTIVE PLAN (EFFECTIVE AS OF JANUARY 1, 1999) 1. PURPOSE The purposes of the Plan are to advance the interests of stockholders of the Company by providing performance-based incentives to eligible Participants and to enable the Company and its Subsidiaries to attract, retain, motivate and reward the best qualified executive officers and key employees by providing them with the opportunity to earn competitive compensation directly linked to the Company's performance. The Plan is designed to assure that amounts paid to certain executive officers of the Company will not fail to be deductible by the Company for Federal income tax purposes because of the limitations imposed by Section 162(m). With respect to individuals who are Covered Employees, the Plan is intended to provide "qualified performance-based compensation", as such term is defined in Treas. Reg. 1.162-27(e), to the extent deemed appropriate by the Committee at the time Performance Goals are established for a Fiscal Year. Nothing herein shall be construed as preventing the Plan from providing both "qualified performance-based compensation" and nonqualified compensation for the same Fiscal Year in the manner permitted under Code Section 162(m). The Plan shall be administered and construed in a manner consistent with Code Section 162(m) and regulations thereunder for any Fiscal Year in which the Plan is intended to provide "qualified performance-based compensation". 2. DEFINITIONS Unless the context requires otherwise, the following words as used in the Plan shall have the meanings ascribed to each below, it being understood that masculine, feminine, and neuter pronouns are interchangeable and that each comprehends the others. (a) "Board" shall mean the Board of Directors of the Company. (b) "Committee" shall mean the Compensation Committee of the Board (or such other committee of the Board that the Board shall designate from time to time) or any subcommittee thereof comprised of two or more directors each of whom is an "outside director" within the meaning of Section 162(m). (c) "Company" shall mean Waddell & Reed Financial, Inc. (d) "Covered Employee" shall have the meaning set forth in Section 162(m)(3). (e) "Fiscal Year" means the twelve month period beginning on each January 1 and ending on the following December 31. (f) "Incentive Percentage" means the pre-established award formula established by the Committee for each Fiscal Year which specifies a percentage of a Participant's rate of salary in effect for the last full payroll period of the Fiscal Year to be paid as an Incentive Plan Award. The Committee may establish different Incentive Percentages for individual Participants or different classes of Participants, and/or the achievement levels of the Performance Goals. Solely with respect to Covered Employees, for any Fiscal Year for which the Plan is intended to provide "qualified performance-based compensation", the Incentive Percentages applicable to the Covered Employees must be established by the Committee no later than 90 days after the beginning of the Fiscal Year for which the Incentive Plan Award pertains. (g) "Incentive Plan Award" means the annual incentive compensation award granted under the Plan which is contingent and based upon the attainment of the Performance Goals with respect to a Fiscal Year. (h) "Participant" shall mean (i) each executive officer of the Company and (ii) each other key employee of the Company or a Subsidiary who the Committee designates as a participant under the Plan. For each Fiscal Year, the Committee shall determine which of such executive officers and other key employees shall participate in the Plan. For any Fiscal Year for which "qualified performance-based compensation" is to be provided, the Committee shall designate the individual or classes of Covered Employees for such compensation no later than the 90th day of such Fiscal Year. (i) "Performance Goals" means the pre-established objective performance goals established by the Committee for each Fiscal Year. Solely with respect to Covered Employees, for any Fiscal Year for which the Plan is intended to provide "qualified performance-based compensation", Performance Goals applicable to the Covered Employees must be established by the Committee no later than 90 days after the beginning of the Fiscal Year to which the Performance Goals pertain. The Performance Goals may be based upon the performance of the Company or any Subsidiary, or division thereof, using one or more of the following operating performance measures selected by the Committee: (a) earnings; (b) revenue; (c) operating or net cash flows; (d) financial return ratios; (e) total stockholder return; (f) market share; (g) pre-tax profits; (h) earnings per share; or (i) net income. Separate Performance Goals may be established by the Committee for the Company or a Subsidiary, or division thereof. With respect to Participants who are not Covered Employees, the Committee may establish such other subjective or objective goals, including individual Performance Goals, which it deems appropriate. The preceding sentence shall also apply to Covered Employees with respect to any Incentive Plan Award not intended at time of grant to be "qualified performance-based compensation". Performance Goals may be set at a specific level, or may be expressed as a relative percentage to the comparable measure at comparison companies or a defined index. (j) "Plan" shall mean the Waddell & Reed Financial, Inc. 1999 Management Incentive Plan, as set forth herein and as may be amended from time to time. 2 (k) "Section 162(m)" shall mean Section 162(m) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (including any proposed regulations). (l) "Subsidiary" shall mean any corporation in which the Company owns, directly or indirectly, stock representing more than 50% of the voting power of all classes of stock entitled to vote. 3. ADMINISTRATION The Committee shall administer and interpret the Plan, PROVIDED THAT, in no event, shall the Plan be interpreted in a manner which would cause any amount payable under the Plan to any Covered Employee to fail to qualify as performance-based compensation under Section 162(m). The Committee shall establish the performance objectives for any calendar year in accordance with Section 4 and certify whether such performance objectives have been obtained. Any determination made by the Committee under the Plan shall be final and conclusive on all parties, but shall be based on such objective information or financial data as is relevant to the Performance Goal. Subject to the provisions of the Plan, the Committee shall have full discretionary authority to administer and interpret the Plan, to exercise all powers either specifically granted to it under the Plan or as are necessary or advisable in the administration of the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, and to make all other determinations necessary or advisable for the administration of the Plan, all of which shall be binding on all persons, including the Company, the Participants (or any person claiming any rights under the Plan from or through any Participant), and any stockholder of the Company. A majority of the Committee shall constitute a quorum, and the Committee shall act pursuant to a majority vote or by unanimous written consent. The Committee may employ such legal counsel, consultants, and agents (including counsel or agents who are employees of the Company or a Subsidiary) as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel or consultant or agent and any computation received from such consultant or agent. All expenses incurred in the administration of the Plan, including, without limitation, for the engagement of any counsel, consultant, or agent, shall be paid by the Company. No member or former member of the Board or the Committee shall be liable for any act, omission, interpretation, construction, or determination made in connection with the Plan other than as a result of such individual's willful misconduct. The Committee may delegate its responsibilities for administering the Plan to one or more persons as the Committee deems necessary. However, the Committee may not delegate its responsibilities under the Plan relating to any Covered Employee where such delegation is prohibited under Code Section 162(m) pertaining to "qualified performance-based compensation". 4. INCENTIVE PLAN AWARDS (a) PERFORMANCE GOALS. On or before April 1 of each year (or such other date as may be required or permitted under Section 162(m)), the Committee shall establish the Performance Goals that must be satisfied in order for a Participant to receive an Incentive Plan Award for such year. (b) CERTIFICATION AND MAXIMUM AMOUNT PAYABLE. The Committee shall, promptly 3 after the date on which the necessary financial, individual or other information for a particular Fiscal Year becomes available, certify: (i) the degree to which each of the Performance Goals have been attained; and (ii) with respect to each qualifying Participant who is a Covered Employee, the amount of the Incentive Plan Award, if any, payable to such Participant. The Committee or its designee shall likewise certify the amount of the Incentive Plan Award, if any, payable with respect to a qualifying Participant who is not a Covered Employee. If the Committee certifies in writing that any of the performance objectives established for the relevant year under Section 4(a) have been satisfied, each Participant who is employed by the Company or one of its Subsidiaries on the last day of the calendar year for which the Incentive Plan Award is payable shall receive the Incentive Plan Award. The Incentive Plan Award shall be determined by multiplying the Incentive Percentage applicable to the Participant by the Participant's rate of base salary in effect for the last full payroll period of the Fiscal Year to which the Incentive Plan Award pertains. In no event, however, will an Incentive Plan Award for a Covered Employee exceed $5,000,000. To be eligible for payment of any Incentive Plan Award, the Participant must: (i) have performed the Participant's duties to the satisfaction of the Committee; (ii) have not engaged in any act deemed by the Committee to be contrary to the best interests of the Company; and (iii) otherwise complied with Company policies at all times prior to the date the Incentive Plan Award is actually paid. No Incentive Plan Award shall be paid to any Participant who does not satisfy each of the above. If a Participant's employment terminates for any reason (including, without limitation, his death, disability, or retirement under the terms of any retirement plan maintained by the Company or a Subsidiary) prior to the last day of the Fiscal Year for which the Incentive Plan Award is payable, such Participant shall receive an Incentive Plan Award equal to the maximum Incentive Plan Award payable to such Participant under the preceding sentence multiplied by a fraction, the numerator of which is the number of days that have elapsed during the calendar year in which the termination occurs prior to and including the date of the Participant's termination of employment and the denominator of which is 365. (c) NEGATIVE DISCRETION. Notwithstanding anything else contained in Section 4(b) to the contrary, the Committee shall have the right, in its absolute discretion, (i) to reduce or eliminate the amount otherwise payable to any Participant under Section 4(b) based on individual performance or any other factors that the Committee, in its discretion, shall deem appropriate and (ii) to establish rules or procedures that have the effect of limiting the amount payable to each Participant to an amount that is less than the maximum amount otherwise authorized under Section 4(b). (d) AFFIRMATIVE DISCRETION. Notwithstanding any other provision in the Plan to the contrary, (i) the Committee shall have the right, in its discretion, to pay to any Participant who is not a Covered Employee an annual Incentive Plan Award for such year in an amount up to the maximum bonus payable under Section 4(b), based on individual performance or any other criteria that the Committee deems appropriate and (ii) in connection with the hiring any person who is or becomes Covered Employee, the Committee may provide for a minimum Incentive Plan 4 Award amount in any calendar year, regardless of whether performance objectives are attained. 5. PAYMENT Except as otherwise provided hereunder, payment of any bonus amount determined under Section 4 shall be made to each Participant as soon as practicable after the Committee certifies that one or more of the applicable Performance Goals have been attained (or, in the case of any Incentive Plan Award payable under the provisions of Section 4(d), after the Committee determines the amount of any such Incentive Plan Award). The Incentive Plan Award may be paid in whole or in part, in the discretion of the Committee, in Company stock options, with the remainder, if any, to be paid in cash. 6. GENERAL PROVISIONS (a) EFFECTIVENESS OF THE PLAN. The Plan shall be effective with respect to calendar years beginning on or after January 1, 1999, subject to the approval of the Company's stockholders, and ending on or before December 31, 2003, unless the term hereof is extended by action of the Board. (b) AMENDMENT AND TERMINATION. Notwithstanding Section 6(a), the Board or the Committee may at any time amend, suspend, discontinue, or terminate the Plan; provided, however, that no such amendment, suspension, discontinuance, or termination shall adversely affect the rights of any Participant in respect of any Fiscal Year which has already commenced and no such action shall be effective without approval by the stockholders of the Company to the extent necessary to continue to qualify the amounts payable hereunder to Covered Employees as "qualified performance-based compensation" under Section 162(m). (c) DESIGNATION OF BENEFICIARY. Each Participant may designate a beneficiary or beneficiaries (which beneficiary may be an entity other than a natural person) to receive any payments which may be made following the Participant's death. Such designation may be changed or canceled at any time without the consent of any such beneficiary. Any such designation, change or cancellation must be made in a form approved by the Committee and shall not be effective until received by the Committee. If no beneficiary has been named, or the designated beneficiary or beneficiaries shall have predeceased the Participant, the beneficiary shall be the Participant's spouse or, if no spouse survives the Participant, the Participant's estate. If a Participant designates more than one beneficiary, the rights of such beneficiaries shall be payable in equal shares, unless the Participant has designated otherwise. (d) NO RIGHT OF CONTINUED EMPLOYMENT. Nothing in this Plan shall be construed as conferring upon any Participant any right to continue in the employment of the Company or any of its Subsidiaries. (e) NO LIMITATION ON CORPORATE ACTIONS. Nothing contained in the Plan shall be construed to prevent the Company or any Subsidiary from taking any corporate 5 action which is deemed by it to be appropriate or in its best interest, whether or not such action would have an adverse effect on any awards made under the Plan. No employee, beneficiary or other person shall have any claim against the Company or any Subsidiary as a result of any such action. (f) NONALIENATION OF BENEFITS. Except as expressly provided herein, no Participant or beneficiary shall have the power or right to transfer, anticipate, or otherwise encumber the Participant's interest under the Plan. The Company's obligations under this Plan are not assignable or transferable except to (i) a corporation which acquires all or substantially all of the Company's assets, or (ii) any corporation into which the Company may be merged or consolidated. The provisions of the Plan shall inure to the benefit of each Participant and the Participant's beneficiaries, heirs, executors, administrators, or successors in interest. (g) WITHHOLDING. Any amount payable to a Participant or a beneficiary under this Plan shall be subject to any applicable Federal, state, and local income and employment taxes and any other amounts that the Company or a Subsidiary is required at law to deduct and withhold from such payment. (h) SEVERABILITY. If any provision of this Plan is held unenforceable, the remainder of the Plan shall continue in full force and effect without regard to such unenforceable provision and shall be applied as though the unenforceable provision were not contained in the Plan. (i) GOVERNING LAW. The Plan shall be construed in accordance with and governed by the laws of the State of Kansas, without reference to the principles of conflict of laws except that any matters relating to the internal governance of the Company shall be governed by the general corporate laws of the state of Delaware. (j) HEADINGS. Headings are inserted in this Plan for convenience of reference only and are to be ignored in a construction of the provisions of the Plan. (k) PLAN NOT FUNDED. Plan awards shall be made solely from the general assets of the Company. To the extent any person acquires a right to receive payments from the Company under the Plan, the right is no greater than the right of any other unsecured general creditor. (l) NO GUARANTEE. While a discretionary Incentive Plan Award may have been paid in the past, whether such payments will be made in the future will depend upon various factors, such as the Company's financial condition and performance. There is no guarantee that the Company will pay any such incentive. The Committee may, in its sole discretion, reduce, eliminate or increase, any Incentive Plan Award, except that the amount of any Incentive Plan Award intended to be "qualified performance-based compensation" may not be increased above the amount established for the Performance Goal and Incentive Percentage. The Company may withhold an Incentive Plan Award, or portions thereof, for any reason including gross misconduct (e.g., theft, dishonesty/compromised integrity, fraud, harassment, etc.) or any actions deemed to be contrary to the best interests of the Company by the Committee. 6 (m) RIGHTS TO PAYMENTS. No absolute right to any Incentive Plan Award shall be considered as having accrued to any Participant prior to the close of the Fiscal Year with respect to which the award is made. No Participant shall have any enforceable right to receive any Incentive Plan Award made with respect to a Fiscal Year or to retain any payment made with respect thereto if for any reason the requirements of Section 4 are not satisfied. 7 EX-10.30 12 EXHIBIT 10.30 EXHIBIT 10.30 ACCOUNTING SERVICES AGREEMENT THIS AGREEMENT, made as of the ___ day of ______, 199_, by and between _________________________________ (the "Fund"), a __________ corporation and Waddell & Reed Services Company ("Agent"), a Missouri corporation, WITNESSETH: WHEREAS, the Fund wishes to appoint the Agent to be its Accounting Services Agent upon and subject to the terms and provisions of this Agreement; NOW THEREFORE, in consideration of the mutual covenants contained in this Agreement, the parties agree as follows: A. Appointment of the Agent as Accounting Services Agent for the Fund; Acceptance. (1) The Fund hereby appoints the Agent to act as Accounting Services Agent for the Fund upon and subject to the terms and provisions of this Agreement. (2) Agent hereby accepts the appointment as Accounting Services Agent for the Fund and agrees to act as such upon and subject to the terms and provisions of this Agreement. B. Duties of the Agent. The Agent shall perform such duties as set forth in this Paragraph B as agent for and on behalf of the Fund. (1) Agent shall provide bookkeeping and accounting services and assistance by providing to the Fund the necessary personnel and facilities to maintain the Fund's portfolio records and general accounting records, to price daily the value of shares of the Fund, and with the assistance and advice of the Fund's attorneys and independent accountants, to prepare or assist the Fund's attorneys and independent accountants to prepare, as may be applicable, reports required to be filed by the Fund with regulatory agencies including the preparation of proxy statements, prospectuses, shareholder reports and other reports as required by law. (2) Agent shall maintain and keep current the accounts, books, records, and other documents relating to the Fund's financial and portfolio transactions as may be required by rules and regulations of the Securities and Exchange Commission adopted under Section 31(a) of the Investment Company Act of 1940 as amended (the "Act"). (3) Agent shall cause the subject records of the Fund to be maintained and preserved pursuant to the requirements under the Act. (4) In pricing daily the value of shares of the Fund, Agent may make arrangements to and obtain the value of portfolio securities from pricing services or quotation services that are compensated by the Fund directly or indirectly through the placement of portfolio transactions with broker-dealers who provide such valuation or quotation services to the Agent. (5) The Agent shall maintain duplicate copies of, or information from which copies of, the records necessary to the preparation of the Fund's financial statements and valuations of its assets may be reconstructed. Such duplicate copies or information shall be maintained at a location other than where the Agent performs its normal duties hereunder so that in the event the records established and maintained pursuant to the foregoing provisions of this Section B are damaged or destroyed, the Agent shall be able to provide the bookkeeping and accounting services and assistance specified in this Section B. (6) In the event any of the Agent's facilities or equipment necessary for the performance of its duties hereunder is damaged, destroyed or rendered inoperable by reason of fire, vandalism, riot, natural disaster or otherwise, Agent will use its best efforts to restore all services hereunder to the Fund and will not seek from the Fund additional compensation to repair or replace damaged or destroyed facilities or equipment. The Agent shall also make and maintain arrangements for emergency use of alternative facilities for use in the event of the aforesaid destruction of or damage to its facilities. C. Compensation of the Agent. The Fund agrees to pay to the Agent for its services under this Agreement, an amount payable on the first day of the month as shown on the following table pertinent to the average daily net assets of the Fund during the prior month:
Fund's Average Daily Net Asset for Monthly Fee the Month $ 0 - $ 10 million $ 0 $ 10 - $ 25 million $ 833 $ 25 - $ 50 million $ 1,667 $ 50 - $ 100 million $ 2,500 $100 - $ 200 million $ 3,333 $200 - $ 350 million $ 4,167 $350 - $ 550 million $ 5,000 $550 - $ 750 million $ 5,833 $750 - $ 1.0 billion $ 7,083 $1.0 billion and over $ 8,333
D. Right of Fund to Inspect, and Ownership of Records. The Fund will have the right under this Agreement to perform on-site inspection of records and accounts, and audits directly pertaining to the Fund's accounting and portfolio records maintained by the Agent hereunder at the Agent's facilities. The Agent will cooperate with the Fund's independent accountants or representatives of appropriate regulatory agencies and furnish all reasonably requested records and data. Agent acknowledges that these records are the property of the Fund, and that it will surrender to the Fund all such records promptly on request. E. Standard of Care; Indemnification. The Agent will at all times exercise due diligence and good faith in performing its duties hereunder. The Agent will make every reasonable effort and take all reasonably available measures to assure the adequacy of its personnel, facilities and equipment as well as the accurate performance of all services to be performed by it hereunder within, at a minimum, the time requirements of any applicable statutes, rules or regulations and in conformity with the Fund's Articles of Incorporation, Bylaws and representations made in the Fund's current registration statement as filed with the Securities and Exchange Commission. The Agent shall not be responsible for, and the Fund agrees to indemnify the Agent for, any losses, damages or expenses (including reasonable counsel fees and expenses) (i) resulting from any claim, demand, action or suit not resulting from the Agent's failure to exercise good faith or due diligence and arising out of or in connection with the Agent's duties on behalf of the Fund hereunder; (ii) for any delay, error or omission by reason of circumstances beyond its control, including acts of civil or military authority, national emergencies, labor difficulties (except with respect to the Agent's employees), fire, mechanical breakdown beyond its control, flood catastrophe, acts of God, insurrection, war, riots or failure beyond its control of transportation, communication or power supply; or (iii) for any action taken or omitted to be taken by the Agent in good faith in reliance on the accuracy of any information provided to it by the Fund or its directors or in reliance on any advice of counsel who may be internally employed counsel or outside counsel for the Fund or advice of any independent accountant or expert employed by the Fund with respect to the preparation and filing of any document with a governmental agency or authority. In order for the rights to indemnification to apply, it is understood that if in any case the Fund may be asked to indemnify or hold the Agent harmless, the Fund shall be advised of all pertinent facts concerning the situation in question, and it is further understood that the Agent will use reasonable care to identify and notify the Fund promptly concerning any situation which presents or appears likely to present a claim for indemnification against the Fund. The Fund shall have the option to defend the Agent against any claim which may be the subject of this indemnification and, in the event that the Fund so elects, it will so notify the Agent, and thereupon the Fund shall take over complete defense of the claim, and the Agent shall sustain no further legal or other expenses in such situation for which the Agent shall seek indemnification under this paragraph. The Agent will in no case confess any claim or make any compromise in any case in which the Fund will be asked to indemnify the Agent except with the Fund's prior written consent. F. Term of the Agreement; Taking Effect; Amendments. This Agreement shall become effective at the start of business on the date hereof and shall continue, unless terminated as hereinafter provided, for a period of one (1) year and from year-to-year thereafter, provided that such continuance shall be specifically approved as provided below. This Agreement shall go into effect, or may be continued, or may be amended, or a new agreement covering the same topics between the Fund and the Agent may be entered into only if the terms of this Agreement, such continuance, the terms of such amendment or the terms of such new agreement have been approved by the Board of Directors of the Fund, including the vote of a majority of the directors who are not "interested persons," as defined in the Act, of either party to this Agreement, the agreement to be continued, amendment or new agreement, cast in person at a meeting called for the purpose of voting on such approval. Such a vote is hereinafter referred to as a "disinterested director vote." Any disinterested director's vote shall, in favor of continuance, amendment or execution of a new agreement, include a determination that (i) the Agreement, amendment, new agreement or continuance in question is in the best interests of the Fund and its shareholders; (ii) the services to be performed under the Agreement, the Agreement as amended, new agreement or agreement to be continued, are services required for the operation of the Fund; (iii) the Agent can provide services, the nature and quality of which are at least equal to those provided by others offering the same or similar services; and (iv) the fees for such services are fair and reasonable in the light of the usual and customary charges made by others for services of the same nature and quality. Nothing herein contained shall prevent any disinterested director vote from being conditioned on the favorable vote of the holders of a majority (as defined in or under the Act) of the outstanding shares of the Fund. G. Termination. (1) This Agreement may be terminated by the Agent at any time without penalty upon giving the Fund at least one hundred twenty (120) days' written notice (which notice may be waived by the Fund) and may be terminated by the Fund at any time without penalty upon giving the Agent at least sixty (60) days' written notice (which notice may be waived by the Agent), provided that such termination by the Fund shall be directed or approved by the vote of a majority of the Board of Directors of the Fund in office at the time or by the vote of the holders of a majority (as defined in or under the Act) of the outstanding shares of the Fund. (2) On termination, the Agent will deliver to the Fund or its designee all files, documents and records of the Fund used, kept or maintained by the Agent in the performance of its services hereunder, including such of the Fund's records in machine readable form as may be maintained by the Agent, as well as such summary and/or control data relating thereto used by or available to the Agent. (3) In addition, on such termination or in preparation therefore at the request of the Fund and at the Fund's expense, the Agent shall provide, to the extent that its capabilities then permit, such documentation, personnel and equipment as may be reasonably necessary in order for a new agent or the Fund to fully assume and commence to perform the agency functions described in this Agreement with a minimum disruption to the Fund's activities. (4) This Agreement shall automatically terminate in the event of its assignment, the term "assignment" for this purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act of 1940 and the rules and regulations thereunder of the Securities and Exchange Commission. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the date and year first above written. ------------------------------ By: ---------------------- ---------------------- WADDELL & REED SERVICES COMPANY By: ---------------------- ---------------------- EX-10.31 13 EXHIBIT 10.31 EXHIBIT 10.31 INVESTMENT MANAGEMENT AGREEMENT AGREEMENT made this 1st day of August, 1990, by and between____________________ ______________ (hereinafter called "United"), and WADDELL & REED, INC. WITNESSETH: In consideration of the mutual promises and agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is hereby agreed by and between the parties hereto as follows: I. In General Waddell & Reed, Inc., agrees to act as investment adviser to United with respect to the investment of its assets and in general to supervise the investments of United, subject at all times to the direction and control of the Board of Directors of United, all as more fully set forth herein. II. Duties of Waddell & Reed, Inc., with respect to investment of assets of United A. Waddell & Reed Inc., shall regularly provide investment advice to United and shall, subject to the succeeding provisions of this section, continuously supervise the investment and reinvestment of cash, securities or other property comprising the assets of the investment portfolios of United; and in furtherance thereof, Waddell & Reed, Inc., shall: 1. obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or one or more of the portfolios of United, and whether concerning the individual companies whose securities are included in United's portfolios or the industries in which they engage, or with respect to securities which Waddell & Reed, Inc., considers desirable for inclusion in United's portfolios; 2. furnish continuously an investment program for each of the portfolios of United; 3. determine what securities shall be purchased or sold by United; 4. take, on behalf of United, all actions which appear to Waddell & Reed, Inc., necessary to carry into effect such investment programs and supervisory functions as aforesaid, including the placing of purchase and sale orders. B. Waddell & Reed, Inc., shall make appropriate and regular reports to the Board of Directors of United on the actions it takes pursuant to Section II.A. above. Any investment programs furnished by Waddell & Reed, Inc., under this section, or any supervisory function taken hereunder by Waddell & Reed, Inc., shall at all times conform to and be in accordance with any requirements imposed by: 1. the provisions of the Investment Company Act of 1940 and any rules or regulations in force thereunder; 2. any other applicable provision of law; 3. the provisions of the Articles of Incorporation of United as amended from time to time; 4. the provisions of the Bylaws of United as amended from time to time; 5. the terms of the registration statements of United, as amended from time to time, under the Securities Act of 1933 and the Investment Company Act of 1940. C. Any investment programs furnished by Waddell & Reed, Inc., under this section or any supervisory functions taken hereunder by Waddell & Reed, Inc., shall at all times be subject to any directions of the Board of Directors of United, its Executive Committee, or any committee or officer of United acting pursuant to authority given by the Board of Directors. III. Allocation of Expenses The expenses of United and the expenses of Waddell & Reed, Inc., in performing its functions under this Agreement shall be divided into two classes, to wit: (i) those expenses which will be paid in full by Waddell & Reed, Inc., as set forth in subparagraph "A" hereof, and (ii) those expenses which will be paid in full by United, as set forth in subparagraph "B" hereof. A. With respect to the duties of Waddell & Reed, Inc., under Section II above, it shall pay in full, except as to the brokerage and research services acquired through the allocation of commissions as provided in Section IV hereinafter, for (a) the salaries and employment benefits of all employees of Waddell & Reed, Inc. who are engaged in providing these advisory services; (b) adequate office space and suitable office equipment for such employees; and (c) all telephone and communications costs relating to such functions. In addition, Waddell & Reed, Inc., shall pay the fees and expenses of all directors of United who are affiliated with Waddell & Reed, Inc., or an affiliated corporation and the salaries and employment benefits of all officers of United who are affiliated persons of Waddell & Reed, Inc. B. United shall pay in full for all of its expenses which are not listed above (other than those assumed by Waddell & Reed, Inc., or its affiliates in its capacity as Accounting Services Agent for United), including (a) the costs of preparing and printing prospectuses and reports to shareholders of United including mailing costs; (b) the costs of printing all proxy statements and all other costs and expenses of meetings of shareholders of United; (c) interest, taxes, brokerage commission and premiums on fidelity and other insurance; (d) audit fees and expenses of independent accountants and legal fees and expenses of attorneys, but not of attorneys who are employees of Waddell & Reed, Inc.; (e) fees and expenses of its directors not affiliated with Waddell & Reed, Inc.; (f) custodian fees and expenses; (g) fees payable by United under the Securities Act of 1933, the Investment Company Act of 1940, and the securities or "Blue-Sky" laws of any jurisdiction; (h) fees and assessments of the Investment Company Institute or any successor organization; (i) such non recurring or extraordinary expenses as may arise, including litigation affecting United and any indemnification by United of its officers, directors, employees and agents with respect thereto; (j) the costs and expenses provided for in any Shareholder Servicing Agreement or Accounting Services Agreement, including amendments thereto, contemplated by subsection C of this section III. In the event that any of the foregoing shall, in the first instance, be paid by Waddell & Reed, Inc., United shall pay the same to Waddell & Reed, Inc., on presentation of a statement with respect thereto. C. Waddell & Reed, Inc., or an affiliate of Waddell & Reed, Inc., may also act as (i) transfer agent or shareholder servicing agent of United and/or as (ii) accounting services agent of United if at the time in question there is a separate agreement, "Shareholder Servicing Agreement" and/or "Accounting Services Agreement," covering such functions between United and Waddell & Reed, Inc., or such affiliate. The corporation, whether Waddell & Reed, Inc., or its affiliate, which is the party to such Agreement with United is referred to as the "Agent." Each such Agreement shall provide in substance that it shall not go into effect, or may be amended, or a new agreement covering the same topics between United and the Agent may be entered into only if the terms of such Agreement, such amendment or such new agreement have been approved by the Board of Directors of United, including the vote of a majority of the directors who are not "interested persons" as defined in the Investment Company Act of 1940, of either party to the Agreement, such amendment or such new agreement (considering Waddell & Reed, Inc., to be such a party even if at the time in question the Agent is an affiliate of Waddell & Reed, Inc.), cast in person at a meeting called for the purpose of voting on such approval. Such a vote is referred to as a "disinterested director" vote. Each such Agreement shall also provide in substance for its continuance, unless terminated, for a specified period which shall not exceed two years from the date of its execution and from year to year thereafter only if such continuance is specifically approved at least annually by a disinterested director vote, and that any disinterested director vote shall include a determination that (i) the Agreement, amendment, new agreement or continuance in question is in the best interests of United and its shareholders; (ii) the services to be performed under the Agreement, the Agreement as amended, new agreement or agreement to be continued are services required for the operation of United; (iii) the Agent can provide services the nature and quality of which are at least equal to those provided by others offering the same or similar services; and (iv) the fees for such services are fair and reasonable in light of the usual and customary charges made by others for services of the same nature and quality. Any such Agreement may also provide in substance that any disinterested director vote may be conditioned on the favorable vote of the holders of a majority (as defined in or under the Investment Company Act of 1940) of the outstanding shares of each class of United. Any such Agreement shall also provide in substance that it may be terminated by the Agent at any time without penalty upon giving United one hundred twenty (120) days' written notice (which notice may be waived by United) and may be terminated by United at any time without penalty upon giving the Agent sixty (60) days' written notice (which notice may be waived by the Agent), provided that such termination by United shall be directed or approved by the vote of a majority of the Board of Directors of United in office at the time or by the vote of the holders of a majority (as defined in or under the Investment Company Act of 1940) of the outstanding shares of each class of United. IV. Brokerage (a) Waddell & Reed, Inc., may select brokers to effect the portfolio transactions of United on the basis of its estimate of their ability to obtain, for reasonable and competitive commissions, the best execution of particular and related portfolio transactions. For this purpose, "best execution" means prompt and reliable execution at the most favorable price obtainable. Such brokers may be selected on the basis of all relevant factors including the execution capabilities required by the transaction or transactions, the importance of speed, efficiency, or confidentiality, and the willingness of the broker to provide useful or desirable investment research and/or special execution services. Waddell & Reed, Inc., shall have no duty to seek advance competitive commission bids and may select brokers based solely on its current knowledge of prevailing commission rates. (b) Subject to the foregoing, Waddell & Reed, Inc., shall have discretion, in the interest of United, to direct the execution of its portfolio transactions to brokers who provide brokerage and/or research services (as such services are defined in Section 28(e) of the Securities Exchange Act of 1934) for United and/or other accounts for which Waddell & Reed, Inc., and its affiliates exercise "investment discretion" (as that term is defined in Section 3(a)(35) of the Securities Act of 1934); and in connection with such transactions, to pay commission in excess of the amount another adequately qualified broker would have charged if Waddell & Reed, Inc., determines, in good faith, that such commission is reasonable in relation to the value of the brokerage and/or research services provided by such broker, viewed in terms of either that particular transaction or the overall responsibilities of Waddell & Reed, Inc., and its investment advisory affiliates with respect to the accounts for which they exercise investment discretion. In reaching such determination, Waddell & Reed, Inc., will not be required to attempt to place a specified dollar amount on the brokerage and/or research services provided by such broker; provided that Waddell & Reed, Inc., shall be prepared to demonstrate that such determinations were made in good faith, and that all commissions paid by United over a representative period selected by its Board of Directors were reasonable in relation to the benefits to United. (c) Subject to the foregoing provisions of this Paragraph "IV," Waddell & Reed, Inc., may also consider sales of insurance policies funded by United's shares and sales of shares of investment companies distributed by Waddell & Reed, Inc., or its affiliates, and portfolio valuation or pricing services as a factor in the selection of brokers to execute brokerage and principal portfolio transactions. V. Compensation of Waddell & Reed, Inc. As compensation in full for services rendered and for the facilities and personnel furnished under sections I, II, and IV of this Agreement, United will pay to Waddell & Reed, Inc., for each day the fees specified in Exhibit A hereto. The amounts payable to Waddell & Reed, Inc., shall be determined as of the close of business each day; shall, except as set forth below, be based upon the value of net assets computed in accordance with the Articles of Incorporation of United; and shall be paid in arrears whenever requested by Waddell & Reed, Inc. Notwithstanding the foregoing, if the laws, regulations or policies of any state in which shares of United are qualified for sale limit the operation and management expenses of United, Waddell & Reed, Inc., will refund to United the amount by which such expenses exceed the lowest of such state limitations. VI. Undertakings of Waddell & Reed, Inc.; Liabilities Waddell & Reed, Inc., shall give to United the benefit of its best judgment, efforts and facilities in rendering advisory services hereunder. Waddell & Reed, Inc., shall at all times be guided by and be subject to United's investment policies, the provisions of its Articles of Incorporation and Bylaws as each shall from time to time be amended, and to the decision and determination of United's Board of Directors. This Agreement shall be performed in accordance with the requirements of the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934, to the extent that the subject matter of this Agreement is within the purview of such Acts. Insofar as applicable to Waddell & Reed, Inc., as an investment adviser and affiliated person of United, Waddell & Reed, Inc., shall comply with the provisions of the Investment Company Act of 1940, the Investment Advisers Act of 1940 and the respective rules and regulations of the Securities and Exchange Commission thereunder. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of Waddell & Reed, Inc., it shall not be subject to liability to United or to any stockholder of United (direct or beneficial) for any act or omission in the course of or connected with rendering services thereunder or for any losses that may be sustained in the purchase, holding or sale of any security. VII. Duration of this Agreement This Agreement shall become effective at the start of business on the date hereof and shall continue in effect, unless terminated as hereinafter provided, for a period of one year and from year-to-year thereafter only if such continuance is specifically approved at least annually by the Board of Directors, including the vote of a majority of the directors who are not parties to this Agreement or "interested persons" (as defined in the Investment Company Act of 1940) of any such party, cast in person at a meeting called for the purpose of voting on such approval, or by the vote of the holders of a majority (as so defined) of the outstanding voting securities of each class of United and by the vote of a majority of the directors who are not parties to this Agreement or "interested persons" (as so defined) of any such party, cast in person at a meeting called for the purpose of voting on such approval. VIII. Termination This Agreement may be terminated by Waddell & Reed, Inc., at any time without penalty upon giving United one hundred twenty (120) days' written notice (which notice may be waived by United) and may be terminated by United at any time without penalty upon giving Waddell & Reed, Inc. sixty (60) days' written notice (which notice may be waived by Waddell & Reed, Inc.), provided that such termination by United shall be directed or approved by the vote of a majority of the Board of Directors of United in office at the time or by the vote of a majority (as defined in the Investment Company Act of 1940) of the outstanding voting securities of United. This Agreement shall automatically terminate in the event of its assignment, the term "assignment" for this purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act of 1940 and the rules and regulations thereunder. IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers and their corporate seal to be hereunto affixed, all as of the day and year first above written. ______________________________________ By:____________________________ ____________________________ WADDELL & REED, INC. By:____________________________ ____________________________ EXHIBIT A TO INVESTMENT MANAGEMENT AGREEMENT ___________________________________________ FEE SCHEDULE A cash fee consisting of two elements: 1. A "specific" fee computed each day on net asset value at the annual rate of .15 of 1% of net assets; and 2. A pro rata participation based on the relative net asset size of United in a "Group" fee computed each day on the combined net asset values of all the Funds in the United Group listed hereafter at the annual rates shown in the following table:
Group Fee Rate Group Net Asset Level Annual Group Fee (all dollars in millions) Rate For Each Level ------------------------- ------------------- From $ 0 to $ 750 From $ 750 to $ 1,500 From $ 1,500 to $ 2,250 From $ 2,250 to $ 3,000 From $ 3,000 to $ 3,750 From $ 3,750 to $ 7,500 From $ 7,500 to $12,000 Over $12,000
Determined as of the close of business that day or, if not a business day, as of the close of business the first business day preceding. The Funds in the United Group are: United Funds, Inc. United High Income Fund United Income Fund United Accumulative Fund United Science & Technology Fund United Vanguard Fund, Inc. United Retirement Shares, Inc. United Continental Income Fund, Inc. United International Growth Fund, Inc. United Municipal High Income Fund, Inc. United Municipal High Income Fund, Inc. United Cash Management, Inc. United Government Securities Fund, Inc. United High Income Fund, Inc. United High Income Fund II, Inc. United New Concepts Fund, Inc., United Gold & Government Fund, Inc. United Asset Strategy Fund, Inc. and such other funds for which Waddell & Reed, Inc., may now or hereafter act as investment adviser, provided that the parties to this Agreement expressly agree in writing that such fund shall be included in the present United Group for the purpose of determining the group fee rate. EX-10.32 14 EXHIBIT 10.32 EXHIBIT 10.32 INVESTMENT MANAGEMENT AGREEMENT THIS AGREEMENT, made this ___ day of ____________, 199_, by and between WADDELL & REED FUNDS, INC. (hereinafter called "Fund"), and WADDELL & REED INVESTMENT MANAGEMENT COMPANY, WITNESSETH: In consideration of the mutual promises and agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is hereby agreed by and between the parties hereto as follows: I. IN GENERAL Waddell & Reed Investment Management Company agrees to act as investment adviser to Fund with respect to the investment of its assets and in general to supervise the investments of Fund, subject at all times to the direction and control of the Board of Directors of Fund, all as more fully set forth herein. II. DUTIES OF WADDELL & REED INVESTMENT MANAGEMENT COMPANY WITH RESPECT TO INVESTMENT OF ASSETS OF FUND A. Waddell & Reed Investment Management Company shall regularly provide investment advice to Fund and shall, subject to the succeeding provisions of this section, continuously supervise the investment and reinvestment of cash, securities or other property comprising the assets of the investment portfolios of Fund; and in furtherance thereof, Waddell & Reed Investment Management Company shall: 1. obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or one or more of the portfolios of Fund, and whether concerning the individual companies whose securities are included in one or more of Fund's portfolios or the industries in which they engage, or with respect to securities which Waddell & Reed Investment Management Company considers desirable for inclusion in one or more of Fund's portfolios; 2. furnish continuously an investment program for each of the portfolios of Fund; 3. determine what securities shall be purchased or sold by Fund; 4. take, on behalf of Fund, all actions which appear to Waddell & Reed Investment Management Company necessary to carry into effect such investment programs and supervisory functions as aforesaid, including the placing of purchase and sale orders. B. Waddell & Reed Investment Management Company shall make appropriate and regular reports to the Board of Directors of Fund on the actions it takes pursuant to Section II.A. above. Any investment programs furnished by Waddell & Reed Investment Management Company under this section, or any supervisory function taken hereunder by Waddell & Reed Investment Management Company shall at all times conform to and be in accordance with any requirements imposed by: 1. the provisions of the Investment Company Act of 1940 and any rules or regulations in force thereunder; 2. any other applicable provision of law; 3. the provisions of the Articles of Incorporation of Fund as amended from time to time; 4. the provisions of the Bylaws of Fund as amended from time to time; 5. the terms of the registration statement of Fund, as amended from time to time, under the Securities Act of 1933 and the Investment Company Act of 1940. C. Any investment programs furnished by Waddell & Reed Investment Management Company under this section or any supervisory functions taken hereunder by Waddell & Reed Investment Management Company shall at all times be subject to any directions of the Board of Directors of Fund, its Executive Committee, or any committee or officer of Fund acting pursuant to authority given by the Board of Directors. III. ALLOCATION OF EXPENSES The expenses of Fund and the expenses of Waddell & Reed Investment Management Company in performing its functions under this Agreement shall be divided into two classes, to wit: (i) those expenses which will be paid in full by Waddell & Reed Investment Management Company as set forth in subparagraph "A" hereof, and (ii) those expenses which will be paid in full by Fund, as set forth in subparagraph "B" hereof. A. With respect to the duties of Waddell & Reed Investment Management Company under Section II above, it shall pay in full, except as to the brokerage and research services acquired through the allocation of commissions as provided in Section IV hereinafter, for (a) the salaries and employment benefits of all employees of Waddell & Reed Investment Management Company who are engaged in providing these advisory services; (b) adequate office space and suitable office equipment for such employees; and (c) all telephone and communications costs relating to such functions. In addition, Waddell & Reed Investment Management Company shall pay the fees and expenses of all directors of Fund who are employees of Waddell & Reed Investment Management Company or an affiliated corporation and the salaries and employment benefits of all officers of Fund who are affiliated persons of Waddell & Reed Investment Management Company. B. Fund shall pay in full for all of its expenses which are not listed above (other than those assumed by Waddell & Reed Investment Management Company or one of its affiliates in its capacity as principal underwriter of the shares of Fund, as Shareholder Servicing Agent or as Accounting Services Agent for Fund), including (a) the costs of preparing and printing prospectuses and reports to shareholders of Fund, including mailing costs; (b) the costs of printing all proxy statements and all other costs and expenses of meetings of shareholders of Fund (unless Fund and Waddell & Reed Investment Management Company shall otherwise agree); (c) interest, taxes, brokerage commissions and premiums on fidelity and other insurance; (d) audit fees and expenses of independent accountants and legal fees and expenses of attorneys, but not of attorneys who are employees of Waddell & Reed Investment Management Company or an affiliated company; (e) fees and expenses of its directors not affiliated with Waddell & Reed, Inc.; (f) custodian fees and expenses; (g) fees payable by Fund under the Securities Act of 1933, the Investment Company Act of 1940, and the securities or "Blue-Sky" laws of any jurisdiction; (h) fees and assessments of the Investment Company Institute or any successor organization; (i) such nonrecurring or extraordinary expenses as may arise, including litigation affecting Fund, and any indemnification by Fund of its officers, directors, employees and agents with respect thereto; (j) the costs and expenses provided for in any Shareholder Servicing Agreement or Accounting Services Agreement, including amendments thereto, contemplated by subsection C of this Section III. In the event that any of the foregoing shall, in the first instance, be paid by Waddell & Reed Investment Management Company, Fund shall pay the same to Waddell & Reed Investment Management Company on presentation of a statement with respect thereto. C. Waddell & Reed Investment Management Company or an affiliate of Waddell & Reed Investment Management Company, may also act as (i) transfer agent or shareholder servicing agent of Fund and/or as (ii) accounting services agent of Fund if at the time in question there is a separate agreement, "Shareholder Servicing Agreement" and/or "Accounting Services Agreement," covering such functions between Fund and Waddell & Reed Investment Management Company, or such affiliate. The corporation, whether Waddell & Reed 2 Investment Management Company, or its affiliate, which is the party to either such Agreement with Fund is referred to as the "Agent." Each such Agreement shall provide in substance that it shall go into effect, or be amended, or a new agreement covering the same topics between Fund and the Agent may be entered into, only if the terms of such Agreement, such amendment or such new agreement have been approved by the Board of Directors of Fund, including the vote of a majority of the directors who are not "interested persons" as defined in the Investment Company Act of 1940, of either party to the Agreement, such amendment or such new agreement (considering Waddell & Reed Investment Management Company to be such a party even if at the time in question the Agent is an affiliate of Waddell & Reed Investment Management Company), cast in person at a meeting called for the purpose of voting on such approval. Such a vote is referred to as a "disinterested director" vote. Each such Agreement shall also provide in substance for its continuance, unless terminated, for a specified period which shall not exceed two years from the date of its execution and from year to year thereafter only if such continuance is specifically approved at least annually by a disinterested director vote, and that any disinterested director vote shall include a determination that (i) the Agreement, amendment, new agreement or continuance in question is in the best interests of Fund and its shareholders; (ii) the services to be performed under the Agreement, the Agreement as amended, new agreement or agreement to be continued are services required for the operation of Fund; (iii) the Agent can provide services the nature and quality of which are at least equal to those provided by others offering the same or similar services; and (iv) the fees for such services are fair and reasonable in light of the usual and customary charges made by others for services of the same nature and quality. Any such Agreement may also provide in substance that any disinterested director vote may be conditioned on the favorable vote of the holders of a majority (as defined in or under the Investment Company Act of 1940) of the outstanding shares of each class or series of Fund. Any such Agreement shall also provide in substance that it may be terminated by the Agent at any time without penalty upon giving Fund one hundred twenty (120) days' written notice (which notice may be waived by Fund) and may be terminated by Fund at any time without penalty upon giving the Agent sixty (60) days' written notice (which notice may be waived by the Agent), provided that such termination by Fund shall be directed or approved by the vote of a majority of the Board of Directors of Fund in office at the time or by the vote of the holders of a majority (as defined in or under the Investment Company Act of 1940) of the outstanding shares of each class or series of Fund. IV. BROKERAGE (a) Waddell & Reed Investment Management Company may select brokers to effect the portfolio transactions of Fund on the basis of its estimate of their ability to obtain, for reasonable and competitive commissions, the best execution of particular and related portfolio transactions. For this purpose, "best execution" means prompt and reliable execution at the most favorable price obtainable. Such brokers may be selected on the basis of all relevant factors including the execution capabilities required by the transaction or transactions, the importance of speed, efficiency, or confidentiality, and the willingness of the broker to provide useful or desirable investment research and/or special execution services. Waddell & Reed Investment Management Company shall have no duty to seek advance competitive commission bids and may select brokers based solely on its current knowledge of prevailing commission rates. (b) Subject to the foregoing, Waddell & Reed Investment Management Company shall have discretion, in the interest of Fund, to direct the execution of its portfolio transactions to brokers who provide brokerage and/or research services (as such services are defined in Section 28(e) of the Securities Exchange Act of 1934) for Fund and/or other accounts for which Waddell & Reed Investment Management Company or one or more of its affiliates exercise "investment discretion" (as that term is defined in Section 3(a)(35) of the Securities Exchange Act of 1934); and in connection with such transactions, to pay commission in excess of the amount another adequately qualified broker would have charged if Waddell & Reed Investment Management Company determines, in good faith, that such commission is reasonable in relation to the value of the brokerage and/or research services provided by such broker, viewed in terms of either that particular transaction or the overall responsibilities of Waddell & Reed Investment Management Company and its investment advisory affiliates with respect to the accounts for which they exercise investment discretion. In reaching such determination, Waddell & Reed Investment Management Company will not be required to attempt to place a specified dollar amount on the brokerage and/or research services provided by such broker; provided that Waddell & Reed Investment Management Company shall be prepared to demonstrate that such determinations were made in good faith, and that all commissions paid by 3 Fund over a representative period selected by its Board of Directors were reasonable in relation to the benefits to Fund. (c) Subject to the foregoing provisions of this Paragraph "IV," Waddell & Reed Investment Management Company may also consider sales of Fund's shares and shares of investment companies distributed by Waddell & Reed, Inc. or one of its affiliates, and portfolio valuation or pricing services as a factor in the selection of brokers to execute brokerage and principal portfolio transactions. V. COMPENSATION OF WADDELL & REED INVESTMENT MANAGEMENT COMPANY As compensation in full for services rendered and for the facilities and personnel furnished under sections I, II, and IV of this Agreement, Fund will pay to Waddell & Reed Investment Management Company for each day the fees specified in Exhibit A hereto. The amounts payable to Waddell & Reed Investment Management Company shall be determined as of the close of business each day; shall, except as set forth below, be based upon the value of net assets computed in accordance with the Articles of Incorporation of Fund; and shall be paid in arrears whenever requested by Waddell & Reed Investment Management Company. In computing the value of the net assets of Fund, there shall be excluded the amount owed to Fund with respect to shares which have been sold but not yet paid to Fund by Waddell & Reed, Inc. Notwithstanding the foregoing, if the laws, regulations or policies of any state in which shares of Fund are qualified for sale limit the operation and management expenses of Fund, Waddell & Reed Investment Management Company will refund to Fund the amount by which such expenses exceed the lowest of such state limitations. VI. UNDERTAKINGS OF WADDELL & REED INVESTMENT MANAGEMENT COMPANY; LIABILITIES Waddell & Reed Investment Management Company shall give to Fund the benefit of its best judgment, efforts and facilities in rendering advisory services hereunder. Waddell & Reed Investment Management Company shall at all times be guided by and be subject to Fund's investment policies, the provisions of its Articles of Incorporation and Bylaws as each shall from time to time be amended, and to the decision and determination of Fund's Board of Directors. This Agreement shall be performed in accordance with the requirements of the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934, to the extent that the subject matter of this Agreement is within the purview of such Acts. Insofar as applicable to Waddell & Reed Investment Management Company, as an investment adviser and affiliated person of Fund, Waddell & Reed Investment Management Company shall comply with the provisions of the Investment Company Act of 1940, the Investment Advisers Act of 1940 and the respective rules and regulations of the Securities and Exchange Commission thereunder. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of Waddell & Reed Investment Management Company, it shall not be subject to liability to Fund or to any stockholder of Fund for any act or omission in the course of or connected with rendering services thereunder or for any losses that may be sustained in the purchase, holding or sale of any security. VII. DURATION OF THIS AGREEMENT This Agreement shall become effective at the start of business on the date hereof and shall continue in effect, unless terminated as hereinafter provided, for a period of one year and from year-to-year thereafter only if such continuance is specifically approved at least annually by the Board of Directors, including the vote of a majority of the directors who are not parties to this Agreement or "interested persons" (as defined in the Investment 4 Company Act of 1940) of any such party, cast in person at a meeting called for the purpose of voting on such approval, or by the vote of the holders of a majority (as so defined) of the outstanding voting securities of each class or series of Fund and by the vote of a majority of the directors who are not parties to this Agreement or "interested persons" (as so defined) of any such party, cast in person at a meeting called for the purpose of voting on such approval. VIII. TERMINATION This Agreement may be terminated by Waddell & Reed Investment Management Company at any time without penalty upon giving Fund one hundred twenty (120) days' written notice (which notice may be waived by Fund) and may be terminated by Fund at any time without penalty upon giving Waddell & Reed Investment Management Company sixty (60) days' written notice (which notice may be waived by Waddell & Reed Investment Management Company), provided that such termination by Fund shall be directed or approved by the vote of a majority of the Board of Directors of Fund in office at the time or by the vote of a majority (as defined in the Investment Company Act of 1940) of the outstanding voting securities of Fund. This Agreement shall automatically terminate in the event of its assignment, the term "assignment" for this purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act of 1940 and the rules and regulations thereunder. IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers and their corporate seal to be hereunto affixed, all as of the day and year first above written. WADDELL & REED FUNDS, INC. By: ----------------------------- ----------------------------- WADDELL & REED INVESTMENT MANAGEMENT COMPANY By: --------------------------- --------------------------- EX-10.33 15 EXHIBIT 10.33 EXHIBIT 10.33 INVESTMENT MANAGEMENT AGREEMENT AGREEMENT made this ___ day of ______________, 199_ by and between TARGET/UNITED FUNDS, INC. (hereinafter called "United", and WADDELL & REED, INC. WITNESSETH: In consideration of the mutual promises and agreements herein contained and other good and valuable consideration, the receipt of which is hereby acknowledged, it is hereby agreed by and between the parties hereto as follows: I. IN GENERAL. Waddell & Reed, Inc., agrees to act as investment adviser to United with respect to the investment of its assets and in general to supervise the investments of United, subject at all times to the direction and control of the Board of Directors of United, all as more fully set forth herein. II. DUTIES OF WADDELL & REED, INC., WITH RESPECT TO INVESTMENT OF ASSETS OF UNITED. A. Waddell & Reed Inc., shall regularly provide investment advice to United and shall, subject to the succeeding provisions of this section, continuously supervise the investment and reinvestment of cash, securities or other property comprising the assets of the investment portfolios of United; and in furtherance thereof, Waddell & Reed, Inc., shall: 1. obtain and evaluate pertinent information about significant developments and economic, statistical and financial data, domestic, foreign or otherwise, whether affecting the economy generally or one or more of the portfolios of United, and whether concerning the individual companies whose securities are included in United's portfolios or the industries in which they engage, or with respect to securities which Waddell & Reed, Inc., considers desirable for inclusion in United's portfolios; 2. furnish continuously an investment program for each of the portfolios of United; 3. determine what securities shall be purchased or sold by United; 4. take, on behalf of United, all actions which appear to Waddell & Reed, Inc., necessary to carry into effect such investment programs and supervisory functions as aforesaid, including the placing of purchase and sale orders. B. Waddell & Reed, Inc., shall make appropriate and regular reports to the Board of Directors of United on the actions it takes pursuant to Section II.A. above. Any investment programs furnished by Waddell & Reed, Inc., under this section, or any supervisory function taken hereunder by Waddell & Reed, Inc., shall at all times conform to and be in accordance with any requirements imposed by: 1. the provisions of the Investment Company Act of 1940 and any rules or regulations in force thereunder; 2. any other applicable provision of law; 3. the provisions of the Articles of Incorporation of United as amended from time to time; 4. the provisions of the Bylaws of United as amended from time to time; 5. the terms of the registration statements of United, as amended from time to time, under the Securities Act of 1933 and the Investment Company Act of 1940. C. Any investment programs furnished by Waddell & Reed, Inc., under this section or any supervisory functions taken hereunder by Waddell & Reed, Inc., shall at all times be subject to any directions of the Board of Directors of United, its Executive Committee, or any committee or officer of United acting pursuant to authority given by the Board of Directors. III. ALLOCATION OF EXPENSES. The expenses of United and the expenses of Waddell & Reed, Inc., in performing its functions under this Agreement shall be divided into two classes, to wit: (i) those expenses which will be paid in full by Waddell & Reed, Inc., as set forth in subparagraph "A" hereof, and (ii) those expenses which will be paid in full by United, as set forth in subparagraph "B" hereof. A. With respect to the duties of Waddell & Reed, Inc., under Section II above, it shall pay in full, except as to the brokerage and research services acquired through the allocation of commissions as provided in Section IV hereinafter, for (a) the salaries and employment benefits of all employees of Waddell & Reed, Inc. who are engaged in providing these advisory services; (b) adequate office space and suitable office equipment for such employees; and (c) all telephone and communications costs relating to such functions. In addition, Waddell & Reed, Inc., shall pay the fees and expenses of all directors of United who are employees of Waddell & Reed, Inc., or an affiliated corporation and the salaries and employment benefits of all officers of United who are affiliated persons of Waddell & Reed, Inc. B. United shall pay in full for all of its expenses which are not listed above (other than those assumed by Waddell & Reed, Inc., or its affiliates in its capacity as Accounting Services Agent for United), including (a) the costs of preparing and printing prospectuses and reports to shareholders of United including mailing costs; (b) the costs of printing all proxy statements and all other costs and expenses of meetings of shareholders of United; (c) interest, taxes, brokerage commission and premiums on fidelity and other insurance; (d) audit fees and expenses of independent accountants and legal fees and expenses of attorneys, but not of attorneys who are employees of Waddell & Reed, Inc.; (e) fees and expenses of its directors; (f) custodian fees and expenses; (g) fees payable by United under the Securities Act of 1933, the Investment Company Act of 1940, and the securities or "Blue-Sky" laws of any jurisdiction; (h) fees and assessments of the Investment Company Institute or any successor organization; (i) such nonrecurring or extraordinary expenses as may arise, including litigation affecting United and any indemnification by United of its officers, directors, employees and agents with respect thereto; (j) the costs and expenses of maintaining shareholder records and processing transactions for the issuance and redemption of its shares; and (k) the costs and expenses provided for in any Accounting Services Agreement, including amendments thereto, contemplated by subsection C of this section III. C. Waddell & Reed, Inc., or an affiliate of Waddell & Reed, Inc., may also act as accounting services agent of United if at the time in question there is a separate agreement, "Accounting Services Agreement," covering such functions between United and Waddell & Reed, Inc., or such affiliate. The corporation, whether Waddell & Reed, Inc., or its affiliate, which is the party to such Agreement with United is referred to as the "Agent." Any such Agreement shall provide in substance that it shall not go into effect, or may be amended, or a new agreement covering the same topics between United and the Agent may be entered into only if the terms of such Agreement, such amendment or such new agreement have been approved by the Board of Directors of United, including the vote of a majority of the directors who are not "interested persons" as defined in the Investment Company Act of 1940, of either party to the Agreement, such amendment or such new agreement (considering Waddell & Reed, Inc., to be such a party even if at the time in question the Agent is an affiliate of Waddell & Reed, Inc.), cast in person at a meeting called for the purpose of voting on such approval. Such a vote is referrer to as a "disinterested director" vote. Any such Agreement shall also provide in substance for its continuance, unless terminated, for a specified period which shall not exceed two years from the date of its execution and from year to year thereafter only if such continuance is specifically approved at least annually by a disinterested director vote, and that any disinterested director vote shall include a determination that (i) the Agreement, amendment, new agreement or continuance in question is in the best interests of United and its shareholders; (ii) the services to be performed under the Agreement, the Agreement as amended, new agreement or agreement to be continued are services required for the operation of United; (iii) the Agent can provide services the nature and quality of which are at least equal to those provided by others offering the same or similar services; and (iv) the fees for such services are fair and reasonable in light of the usual and customary charges made by others for services of the same nature and quality. Any such Agreement may also provide in substance that any disinterested director vote may be conditioned on the favorable vote of the holders of a majority (as defined in or under the Investment Company Act of 1940) of the outstanding shares of each class of United. Any such Agreement shall also provide in substance that it may be terminated by the Agent at any time without penalty upon giving United one hundred twenty (120) days' written notice (which notice may be waived by United) and may be terminated by United at any time without penalty upon giving the Agent sixty (60) days' written notice (which notice may be waived by the Agent), provided that such termination by United shall be directed or approved by the vote of a majority of the Board of Directors of United in office at the time or by the vote of the holders of a majority (as defined in or under the Investment Company Act of 1940) of the outstanding shares of each class of United. IV. BROKERAGE. (a) Waddell & Reed, Inc., may select brokers to effect the portfolio transactions of United on the basis of its estimate of their ability to obtain, for reasonable and competitive commissions, the best execution of particular and related portfolio transactions. For this purpose, "best execution" means prompt and reliable execution at the most favorable price obtainable. Such brokers may be selected on the basis of all relevant factors including the execution capabilities required by the transaction or transactions, the importance of speed, efficiency, or confidentiality, and the willingness of the broker to provide useful or desirable investment research and/or special execution services. Waddell & Reed, Inc., shall have no duty to seek advance competitive commission bids and may select brokers based solely on its current knowledge of prevailing commission rates. (b) Subject to the foregoing, Waddell & Reed, Inc., shall have discretion, in the interest of United, to direct the execution of its portfolio transactions to brokers who provide brokerage and/or research services (as such services are defined in Section 28(e) of the Securities Exchange Act of 1934) for United and/or other accounts for which Waddell & Reed, Inc., and its affiliates exercise "investment discretion" (as that term is defined in Section 3(a)(35) of the Securities Act of 1934); and in connection with such transactions, to pay commission in excess of the amount another adequately qualified broker would have charged if Waddell & Reed, Inc., determines, in good faith, that such commission is reasonable in relation to the value of the brokerage and/or research services provided by such broker, viewed in terms of either that particular transaction or the overall responsibilities of Waddell & Reed, Inc., and its investment advisory affiliates with respect to the accounts for which they exercise investment discretion. In reaching such determination, Waddell & Reed, Inc., will not be required to attempt to place a specified dollar amount on the brokerage and/or research services provided by such broker; provided that Waddell & Reed, Inc., shall be prepared to demonstrate that such determinations were made in good faith, and that all commissions paid by United over a representative period selected by its Board of Directors were reasonable in relation to the benefits to United. (c) Subject to the foregoing provisions of this Paragraph "IV," Waddell & Reed, Inc., may also consider sales of insurance policies funded by United's shares and sales of shares of investment companies distributed by Waddell & Reed, Inc., or its affiliates, and portfolio valuation or pricing services as a factor in the selection of brokers to execute brokerage and principal portfolio transactions. V. COMPENSATION OF WADDELL & REED, INC. As compensation in full for services rendered and for the facilities and personnel furnished under sections I, II, and IV of this Agreement, United will pay to Waddell & Reed, Inc., for each day the fees specified in Exhibit A hereto. The amounts payable to Waddell & Reed, Inc., shall be determined as of the close of business each day; shall, except as set forth below, be based upon the value of net assets computed in accordance with the Articles of Incorporation of United; and shall be paid in arrears whenever requested by Waddell & Reed, Inc. Notwithstanding the foregoing, if the laws, regulations or policies of any state in which shares of United are qualified for sale limit the operation and management expenses of United, Waddell & Reed, Inc., will refund to United the amount by which such expenses exceed the lowest of such state limitations. VI. UNDERTAKINGS OF WADDELL & REED, INC.; LIABILITIES. Waddell & Reed, Inc., shall give to United the benefit of its best judgment, efforts and facilities in rendering advisory services hereunder. Waddell & Reed, Inc., shall at all times be guided by and be subject to United's investment policies, the provisions of its Articles of Incorporation and Bylaws as each shall from time to time be amended, and to the decision and determination of United's Board of Directors. This Agreement shall be performed in accordance with the requirements of the Investment Company Act of 1940, the Investment Advisors Act of 1940, the Securities Act of 1933, and the Securities Exchange Act of 1934, to the extent that the subject matter of this Agreement is within the purview of such Acts. Insofar as applicable to Waddell & Reed, Inc., as an investment adviser and affiliated person of United, Waddell & Reed, Inc., shall comply with the provisions of the Investment Company Act of 1940, the Investment Advisers Act of 1940 and the respective rules and regulations of the Securities and Exchange Commission thereunder. In the absence of willful misfeasance, bad faith, gross negligence or reckless disregard of obligations or duties hereunder on the part of Waddell & Reed, Inc., it shall not be subject to liability to United or to any stockholder of United (direct of beneficial) for any act or omission in the course of or connected with rendering services thereunder or for any losses that may be sustained in the purchase, holding or sale of any security. VII. DURATION OF THIS AGREEMENT. This Agreement shall become effective at the start of business on the date hereof and shall continue in effect, unless terminated as hereinafter provided, for a period of one year and from year-to-year thereafter only if such continuance is specifically approved at least annually by the Board of Directors, including the vote of a majority of the directors who are not parties to this Agreement or "interested persons" (as defined in the Investment Company Act of 1940) of any such party, cast in person at a meeting called for the purpose of voting on such approval, or by the vote of the holders of a majority (as so defined) of the outstanding voting securities of each class of United and by the vote of a majority of the directors who are not parties to this Agreement or "interested persons" (as so defined) of any such party, cast in person at a meeting called for the purpose of voting on such approval. VIII. TERMINATION. This Agreement may be terminated by Waddell & Reed, Inc., at any time without penalty upon giving United one hundred twenty (120) days' written notice (which notice may be waived by United) and may be terminated by United at any time without penalty upon giving Waddell & Reed, Inc. sixty (60) days' written notice (which notice may be waived by Waddell & Reed, Inc.), provided that such termination by United shall be directed or approved by the vote of a majority of the Board of Directors of United in office at the time or by the vote of a majority (as defined in the Investment Company Act of 1940) of the outstanding voting securities of United. This Agreement shall automatically terminate in the event of its assignment, the term "assignment" for this purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act of 1940 and the rules and regulations thereunder. IN WITNESS WHEREROF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers and their corporate seal to be hereunto affixed, all as of the day and year first above written. TMK/UNITED FUNDS, INC. By:_______________________ ----------------------- WADDELL & REED, INC. By:_______________________ ----------------------- EXHIBIT A TO INVESTMENT MANAGEMENT AGREEMENT TARGET/UNITED FUNDS, INC. FEE SCHEDULE 1. A "specific" fee computed each day on net asset value at the annual rates listed below: CLASS OF SHARES --------------- Money Market Portfolio Bond Portfolio High Income Portfolio Growth Portfolio Income Portfolio International Portfolio Small Cap Portfolio Balanced Portfolio Limited-Term Bond Portfolio Asset Strategy Portfolio Science and Technology Portfolio 2. A "base" fee computed each day on the combined net asset values of all the portfolios of TMK/United Funds, Inc. and allocated among the eleven classes of shares based on their relative net asset size at the annual rates shown in the following table:
Base Fee Rate Combined Net Asset Level Annual Base (all dollars in millions) Fee Rate for Each Level -------------------------- ----------------------- From $ 0 to $ 750 From $ 750 to $1,500 From $1,500 to $2,250 Over $2,250
EX-10.34 16 EXHIBIT 10.34 EXHIBIT 10.34 SHAREHOLDER SERVICING AGREEMENT THIS AGREEMENT, made as of the ___ day of ________, 199_, by and between ______________________, and Waddell & Reed Services Company (the "Agent"), as amended and restated as of April 1, 1996, W I T N E S S E T H : WHEREAS, The Company wishes, as applicable, to appoint the Agent or to continue the appointment of the Agent to be its shareholder servicing agent upon, and subject to, the terms and provisions of this Agreement; NOW THEREFORE, in consideration of the mutual covenants contained in this Agreement, the parties agree as follows: 1. Appointment of Agent as Shareholder Servicing Agent for the Company; Acceptance. (1) The Company hereby appoints the Agent to act as Shareholder Servicing Agent for the Company upon, and subject to, the terms and provisions of this Agreement. (2) The Agent hereby accepts the appointment as Shareholder Servicing Agent for the Company and agrees to act as such upon, and subject to, the terms and provisions of this Agreement. (3) The Agent may appoint an entity or entities approved by the Company in writing to perform any portion of Agent's duties hereunder (the "Subagent"). 2. Definitions. (1) In this Agreement - (a) The term the "Act" means the Investment Company Act of 1940 as amended from time to time; (b) The term "account" means the shares of the Company registered on the books of the Company in the name of a shareholder under a particular account registration number and includes shares subject to instructions by the shareholder with respect to periodic redemptions and/or reinvestment in additional shares of any dividends payable on said shares; (c) The term "affiliate" of a person shall mean a person controlling, controlled by, or under common control with that person; (d) The term "Class" shall mean each separate sub-class of a class of shares of the Company, as may now or in the future exist; (e) The term "Fund" shall mean each separate class of shares of the Company, as may now or in the future exist; (f) The term "officers' instruction" means an instruction given on behalf of the Company to the Agent and signed on behalf of the Company by any one or more persons authorized to do so by the Company's Board of Directors; (g) The term "prospectus" means the prospectus and Statement of Additional Information of the applicable Fund or Class from time to time in effect; (h) The term "shares" means shares including fractional shares of capital stock of the Company, whether or not such shares are evidenced by an outstanding stock certificate issued by the Company; (i) The term "shareholder" shall mean the owner of record of shares of the Company; (j) The term "stock certificate" means a certificate representing shares in the form then currently in use by the Company. 3. Duties of the Agent. The Agent shall perform such duties as shall be set forth in this paragraph 3 and in accordance with the practice stated in Exhibit A of this Agreement or any amendment thereof, any or all of which duties may be delegated to or performed by one or more Subagents pursuant to Paragraph (3) above. (1) Transfers. Subject to the provisions of this Agreement the Agent hereby agrees to perform the following functions as transfer agent for the Company: (a) Recording the ownership, transfer, exchange and cancellation of ownership of shares of the Company on the books of the Company; (b) Causing the issuance, transfer, exchange and cancellation of stock certificates; (c) Establishing and maintaining records of accounts; (d) Computing and causing to be prepared and mailed or otherwise delivered to shareholders payment checks and notices of reinvestment in additional shares of dividends, stock dividends or stock splits declared by the Company on shares and of redemption proceeds due by the Company on redemption of shares; (e) Furnishing to shareholders such information as may be reasonably required by the Company, including appropriate income tax information; (f) Addressing and mailing to shareholders prospectuses, annual and semi-annual reports and proxy materials for shareholder meetings prepared by or on behalf of the Company; (g) Replacing allegedly lost, stolen or destroyed stock certificates in accordance with and subject to procedures and conditions agreed upon and set out in officers' instructions; (h) Maintaining such books and records relating to transactions effected by the Agent pursuant to this Agreement as are required by the Act, or by rules or regulations thereunder, or by any other applicable provisions of law, to be maintained by the Company or its transfer agent with respect to such transactions; preserving, or causing to be preserved, any such books and records for such periods as may be required by any such law, rule or regulation; furnishing the Company such information as to such transactions and at such time as may be reasonably required by it to comply with applicable laws and regulations; (i) Providing such services and carrying out such responsibilities on behalf of the Company, or imposed on the Agent as the Company's transfer agent, not otherwise expressly provided for in this Paragraph 3, as may be required by or be reasonably necessary to comply with any statute, act, governmental rule, regulation or directive or court order, including, without limitation, the requirements imposed by the Tax Equity and Fiscal Responsibility Act of 1982 and the Income and Dividend Tax Compliance Act of 1983 relating to the withholding of tax from distributions to shareholders. (2) Correspondence. The Agent agrees to deal with and answer all correspondence from or on behalf of shareholders relating to its functions under this Agreement. 4. Compensation of the Agent. The Company agrees to pay the Agent for its services under this Agreement in accordance with the schedule as then in effect set forth in Exhibit B of this Agreement or any amendment thereof. In addition, the Company agrees to reimburse the Agent for the following "out-of-pocket" expenses of the Agent within five days after receipt of an itemized statement of such expenses, to the extent that payment of such expenses has not been or is not to be made directly by the Company: (i) costs of stationery, appropriate forms, envelopes, checks, postage, printing (except cost of printing prospectuses, annual and semi-annual reports and proxy materials) and mailing charges, including returned mail and proxies, incurred by the Agent with respect to materials and communications sent to shareholders in carrying out its duties to the Company under this Agreement; (ii) long distance telephone costs incurred by the Agent for telephone communications and microfilm and storage costs for transfer agency records and documents; (iii) costs of all ancillary and supporting services and related expenses (other than insurance premiums) reasonably required by and provided to the Agent, other than by its employees or employees of an affiliate, with respect to functions of the Company being performed by it in its capacity as Agent hereunder, including legal advice and representation in litigation to the extent that such payments are permitted under Paragraph 7 of this Agreement and charges to Agent made by any Subagent; (iv) costs for special reports or information furnished on request pursuant to this Agreement and not specifically required by the Agent by Paragraph 3 of this Agreement; and (v) reasonable costs and expenses incurred by the Agent in connection with the duties of the Agent described in Paragraph (3)(1)(i). In addition, the Company agrees to promptly pay over to the Agent any fees or payment of charges it may receive from a shareholder for services furnished to the shareholder by the Agent. Services and operations incident to the sale and distribution of the Company's shares, including sales communications, confirmations of investments (not including reinvestment of dividends) and the clearing or collection of payments will not be for the account or at the expense of the Company under this Agreement. 5. Right of Company to Inspect Records, etc. The Company will have the right under this Agreement to perform on site inspection of records and accounts and to perform audits directly pertaining to the Company shareholder accounts serviced by the Agent hereunder at the Agent's or any Subagent's facilities in accordance with reasonable procedures at the frequency necessary to assure proper administration of the Agreement. The Agent will cooperate with the Company's auditors or representatives of appropriate regulatory agencies and furnish all reasonably requested records and data. 6. Insurance. The Agent now has the insurance coverage described in Exhibit C, attached hereto, and the Agent will not take any action to eliminate or decrease such coverage during the term of this Agreement without receiving the approval of the Fund in advance of any change, except the Agent, after giving reasonable notice to the Company, may eliminate or decrease any coverage if the premiums for such coverage are substantially increased. 7. Standard of Care; Indemnification. The Agent will at all times exercise due diligence and good faith in performing its duties hereunder. The Agent will make every reasonable effort and take all reasonably available measures to assure the adequacy of its personnel and facilities as well as the accurate performance of all services to be performed by it hereunder within, at a minimum, the time requirements of any applicable statutes, rules or regulations or as set forth in the prospectus. The Agent shall not be responsible for, and the Company agrees to indemnify the Agent for any losses, damages or expenses (including reasonable counsel fees and expenses) (i) resulting from any claim, demand, action or suit not resulting from the Agent's failure to exercise good faith or due diligence and arising out of or in connection with the Agent's duties on behalf of the Company hereunder; (ii) for any delay, error or omission by reason of circumstances beyond its control, including acts of civil or military authority, national emergencies, labor difficulties (except with respect to the Agent's employees), fire, mechanical breakdown beyond its control, flood or catastrophe, acts of God, insurrection, war, riots, or failure beyond its control of transportation, communication or power supply; or (iii) for any action taken or omitted to be taken by the Agent in good faith in reliance on (a) the authenticity of any instrument or communication reasonably believed by it to be genuine and to have been properly made and signed or endorsed by an appropriate person, (b) the accuracy of any records or information provided to it by the Company, (c) any authorization or instruction contained in any officers' instruction, or (d) with respect to the functions performed for the Company listed under Paragraph 3(1) of this Agreement, any advice of counsel approved by the Company who may be internally employed counsel or outside counsel, in either case for the Company and/or the Agent. In order for the rights to indemnification to apply, it is understood that if in any case the Company may be asked to indemnify or hold the Agent harmless, the Company shall be advised of all pertinent facts concerning the situation in question, and it is further understood that the Agent will use reasonable care to identify and notify the Company promptly concerning any situation which presents or appears likely to present a claim for indemnification against the Company. The Company shall have the option to defend the Agent against any claim which may be the subject of this indemnification and, in the event that the Company so elects, it will so notify the Agent and thereupon the Company shall take over complete defense of the claim and the Agent shall sustain no further legal or other expenses in such situation for which the Agent shall seek indemnification under this paragraph. The Agent will in no case confess any claim or make any compromise in any case in which the Company will be asked to indemnify the Agent except with the Company's prior written consent. 8. Term of the Agreement; Taking Effect; Amendments. This Agreement shall become effective at the start of business on the date hereof and shall continue, unless terminated as hereinafter provided, for a period of one year and from year to year thereafter, provided that such continuance shall be specifically approved as provided below. This Agreement shall go into effect, or may be continued, or may be amended or a new agreement between the Company and the Agent covering the substance of this Agreement may be entered into only if the terms of this Agreement, such continuance, the terms of such amendment or the terms of such new agreement have been approved by the Board of Directors of the Company, including the vote of a majority of the directors who are not "interested persons," as defined in the Act, of either party to this Agreement or of Waddell & Reed Investment Management Company, cast in person at a meeting called for the purpose of voting on such approval. Such a vote is hereinafter referred to as a "disinterested director vote." Any disinterested director vote shall include a determination that (i) the Agreement, amendment, new agreement or continuance in question is in the best interests of the Company and its shareholders; (ii) the services to be performed under the Agreement, the Agreement as amended, new agreement or agreement to be continued, are services required for the operation of the Company; (iii) the Agent can provide services the nature and quality of which are at least equal to those provided by others offering the same or similar services; and (iv) the fees for such services are fair and reasonable in the light of the usual and customary charges made by others for services of the same nature and quality. 9. Termination. (1) This Agreement may be terminated by the Agent at any time without penalty upon giving the Company 120 days' written notice (which notice may be waived by the Company) and may be terminated by the Company at any time without penalty upon giving the Agent sixty (60) days' written notice (which notice may be waived by the Agent), provided that such termination by the Company shall be directed or approved by the vote of a majority of the Board of Directors of the Company in office at the time or by the vote of the holders of a majority (as defined in or under the Act) of the outstanding shares of the Company. (2) On termination, the Agent will deliver to the Company or its designee all files, documents and records of the Company used, kept or maintained by the Agent in the performance of its services hereunder, including such of the Company's records in machine readable form as may be maintained by the Agent, as well as such summary and/or control data relating thereto used by or available to the Agent. (3) In the event of any termination which involves the appointment of a new shareholder servicing agent, including the Company's acting as such on its own behalf, the Company shall have the non-exclusive right to the use of the data processing programs used by the Agent in connection with the performance of its duties under this Agreement without charge. (4) In addition, on such termination or in preparation therefore, at the request of the Company and at the Company's expense the Agent shall provide to the extent that its capabilities then permit such documentation, personnel and equipment as may be reasonably necessary in order for a new agent or the Company to fully assume and commence to perform the agency functions described in this Agreement with a minimum disruption to the Company's activities. 10. Construction; Governing Law. The headings used in this Agreement are for convenience only and shall not be deemed to constitute a part hereof. Whenever the context requires, words denoting singular shall be read to include the plural. This Agreement and the rights and obligations of the parties hereunder, shall be construed and interpreted in accordance with the laws of the State of Kansas, except to the extent that the laws of the State of Maryland apply with respect to share transactions. 11. Representations and Warranties of Agent. Agent represents and warrants that it is a corporation duly organized and existing and in good standing under the laws of the State of Missouri, that it is duly qualified to carry on its business in the State of Kansas and wherever its duties require, that it has the power and authority under laws and by its Articles of Incorporation and Bylaws to enter into this Shareholder Servicing Agreement and to perform the services contemplated by this Agreement. 12. Entire Agreement. This Agreement and the Exhibits annexed hereto constitutes the entire and complete agreement between the parties hereto relating to the subject matter hereof, supersedes and merges all prior discussions between the parties hereto, and may not be modified or amended orally. IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be duly executed on the day and year first above written. UNITED MUNICIPAL HIGH INCOME FUND, INC. By: ----------------------------------- ----------------------------------- WADDELL & REED SERVICES COMPANY By: ----------------------------------- ----------------------------------- EXHIBIT A A. DUTIES IN SHARE TRANSFERS AND REGISTRATION 1. The Agent in carrying out its duties shall follow general commercial practices and the Rules of the Stock Transfer Association, Inc. except as they may conflict or be inconsistent with the specific provisions of the Company's Articles of Incorporation and Bylaws, prospectus, applicable Federal and state laws and regulations and this Agreement. 2. The Agent shall not require that the signature of the appropriate person be guaranteed, witnessed or verified in order to effect a redemption, transfer, exchange or change of address except as may from time to time be directed by the Company as set forth in an officers' instruction. In the event a signature guarantee is required by the Company, the Agent shall not inquire as to the genuineness of the guarantee. 3. The Agent shall not replace a lost, stolen or misplaced stock certificate without requiring and being furnished with an open penalty surety bond protecting the Company and the Agent against loss. B. The practices, procedures and requirements specified in A above may be modified, altered, varied or supplemented as from time to time may be mutually agreed upon by the Company and the Agent and evidenced on behalf of the Company by an officers' instruction. Any such change shall not be deemed to be an amendment to the Agreement within the meaning of Paragraph 8 of the Agreement. EX-10.35 17 EXHIBIT 10.35 EXHIBIT 10.35 UNDERWRITING AGREEMENT THIS AGREEMENT, made this ___ day of ______, 199_, by and between ______________________ (hereinafter the "Company"), a Maryland corporation, and Waddell & Reed, Inc. (hereinafter "W&R"), a Delaware corporation; I. REPRESENTATIONS A. The Company represents that 1) it is a registered open-end management investment company (mutual fund), and 2) the shares of each of its classes of shares ("Fund") and of each sub-class thereof ("Class"), if any, are, as of the date of the effectiveness of this Agreement as to each such Fund or Class, registered with the Securities and Exchange Commission ("SEC") and qualified or otherwise authorized for sale in all states of the United States as may be agreed upon. (As to any Fund or Class not registered with the SEC and qualified or otherwise authorized for sale in all states of the United States as may be agreed upon, this Agreement shall become effective as to such Fund or Class upon such registration and qualification or authorization.) B. W&R represents that 1) it is a broker-dealer registered with the SEC and is duly qualified to offer shares of the Company in all states in which the shares are currently qualified or otherwise authorized for offer for sale; 2) it is a member of the National Association of Securities Dealers, Inc. ("NASD"); 3) it maintains a retail securities and insurance sales organization consisting in part of a number of representatives authorized under Federal and state securities laws to solicit as representatives of W&R orders for Company shares and other securities; 4) it maintains and enforces procedures to enable it to supervise its representatives and associated persons in accordance with applicable securities laws, rules and regulations including the Rules of the NASD; and 5) it maintains and enforces procedures to review for compliance with applicable securities laws, rules and regulations all sales literature and promotional materials used by it and authorized to be used by its representatives in solicitation of orders to buy Company shares, and it files, when applicable, such literature and materials with the NASD. II. APPOINTMENT OF UNDERWRITER and OBLIGATIONS The Company hereby, as applicable, appoints W&R or continues the appointment of W&R, and W&R, as applicable, agrees to act or continues to act, as the Company's principal underwriter under the terms and provisions of this Agreement. A. Company agrees 1) to use its best efforts to register from time to time under the Securities Act of 1933 (the "Securities Act") adequate amounts of its shares for sale by W&R to the public and to qualify or to permit W&R to qualify such shares for offering to the public in such states as may from time to time be agreed upon; 2) to immediately advise W&R (i) when any post-effective amendment to its registration statement or any further amendment or supplement thereto or any further registration statement or amendment or supplement thereto becomes effective, (ii) of any request by the SEC for amendments to the registration statement(s) or any then effective prospectus or for additional information, (iii) of the issuance by the SEC of any stop-order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose, and (iv) of the happening of any event which makes untrue any material statement made in the registration statement or any then effective prospectus or which, in the opinion of counsel for the Company, requires the making of a change in the registration statement or any then effective prospectus in order to make the statements therein not misleading; in case of the happening at any time of any event which materially affects the Company or its securities and which should be set forth in a supplement to or an amendment of any then effective prospectus in order to make the statements therein not misleading, to prepare and furnish to W&R such amendment or amendments to that prospectus as will correct the prospectus so that as corrected it will not contain, or such supplement or supplements to that prospectus which when read in conjunction with that prospectus will make the combined information not contain any untrue statement of a material fact or any omission to state any material fact necessary in order to make the statements in that prospectus not misleading; if any time the SEC shall issue any stop-order suspending the effectiveness of the registration statement, to make every reasonable effort to obtain the prompt lifting of such order; and, before filing any amendment to the registration statement or to any then effective prospectus, to furnish W&R with a copy of the proposed amendment; 3) to advise W&R of the net asset value of the shares of each of its Funds and Classes, as applicable, as often as computed and to furnish to W&R as soon as practical such information as may be reasonably requested by W&R in order that it may know all of the facts necessary to sell shares of the Company; 4) to make delivery of its shares subject to the provisions of its Articles of Incorporation and Bylaws to W&R as ordered by W&R as soon as reasonably possible after receipt of the orders and against payment of the consideration to be received by the Company therefor from W&R; 5) to pay or cause to be paid all expenses incident to the issuance, transfer, registration and delivery of its shares, all taxes in connection therewith, costs and expenses incident to preparing and filing any registration statements and prospectuses and any amendments or supplements to a registration statement or a prospectus, statutory fees incidental to the registration of additional shares with the SEC, statutory fees and expenses incurred in connection with any Blue Sky law qualifications undertaken by or at the request of W&R, and the fees and expenses of the Company's counsel, accountants or any other experts used in connection with the foregoing; and 6) not without the consent of W&R to offer any of its shares for sale directly or to any persons or corporations other than W&R, except only a) the reinvestment of dividends and/or distributions or their declaration in shares of the Company, in optional form or otherwise; b) the issuance of additional shares to stock splits or stock dividends; c) sale of shares to another investment or securities holding company in the process of purchasing all or a portion of its assets; d) in connection with an exchange of shares of the Company for shares in another investment or securities holding company; e) the sale of shares to registered unit investment trusts; or f) in connection with the exchange of one Fund's shares for shares of another Fund of the Company. B. W&R agrees 1) to offer Company shares in such states as may be agreed upon through its retail account representatives and, at its sole discretion, through broker-dealers which are members of the NASD on such terms as are not inconsistent with this Agreement; 2) to order shares from the Company only after it has received a purchase order therefor; 3) to pay to the Company the net asset value of shares sold within two business days after the day payment is received by W&R at its principal place of business from the investor or broker-dealer, or pay the Company at such other time as may be agreed upon hereafter by the Company and W&R, or as may be prescribed by law or the Rules of the NASD; 4) in offering shares to comply with the provisions of the Articles of Incorporation and Bylaws of the Company and with the provisions stated in its applicable then current prospectus(es); 5) timely to inform the Company of any action or proceeding to terminate, revoke or suspend W&R's registration as a broker-dealer with the SEC, membership in the NASD, or authority with any state securities commission to offer Company shares; and 6) to pay the cost of all sales literature, advertising and other materials which it may at its discretion use in connection with the sale of Company shares, including the cost of reports to the shareholders of the Company in excess of the cost of reports to existing shareholders and the cost of printing the prospectus(es) furnished to it by the Company. III. TERMS FOR SALE OF SHARES A. It is mutually agreed that 1) W&R shall act as principal in all matters relating to promotion and sale of Company shares, including the preparation and use of all advertising, sales literature and other promotional materials, and shall make and enter into all other arrangements, agreements and contracts as principal on its own account and not as agent for the Company. Title to shares issued and sold by the Company through W&R shall pass directly from the Company to the dealer or investor, or shall first pass to W&R as it may from time to time be determined by W&R and the Company; except provided, however, that W&R may, if so agreed by W&R and the Company, act as agent of the Company without commission on repurchase of shares of the Company; 2) certificates for shares shall not be created or delivered by the Company in any case in which the purchase is pursuant to any provisions of the Company described in its applicable then current prospectus(es) under the terms of which certificates are not to be issued to the shareholder. Shares sold by W&R shall be registered in such name or names and amounts as W&R may request from time to time, and all shares when so paid for and issued shall be fully paid and non-assessable; 3) the offering price at which shares of the Company may be sold by W&R shall include such selling commission as may be applicable to that Class and as may be fixed from time to time by W&R but shall not be in excess of 8.5 percent of the offering price. W&R shall retain any such sales commission and may re-allow all or any part of the sales commission to its account representatives and to selected brokers and dealers who sell shares of the Company; and 4) W&R may designate, reduce or eliminate its selling commissions in certain sales or exchanges to the extent described in the applicable then current prospectus(es) of the Company and in accordance with Section 22(d) of the Investment Company Act of 1940 and any rules, regulations or orders of the SEC thereunder. IV. THE PLAN A. It is mutually acknowledged that the Company has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (a "Plan"), which Plan is applicable to certain shares and that the Company may in the future adopt Plans applicable to certain Funds and Classes, respectively. B. With respect to any Fund or Class as to which the Company has adopted a Plan, pursuant to that Plan, each day the Company shall pay to W&R a distribution fee and/or a service fee at the maximum rates and under the terms and conditions set forth in the applicable Plan, as amended from time to time, or such lesser amount as the Company and W&R may agree. C. The Company shall, after excluding from the redemption proceeds that portion represented by the reinvestment of dividends and distributions and the appreciation of the value of Fund shares being redeemed, promptly pay W&R an amount, if any, equal to the percent of the amount invested as determined by W&R and as is then stated in the Company's current prospectus applicable to the shares redeemed (the "contingent deferred sales charge"). For purposes of determining the applicable contingent deferred sales charge, if any: the redemptions shall be deemed in order of investment made when more than one investment has been made; and when the shares being redeemed were acquired by exchange of shares of another Fund or Class of the Company, or corresponding class of another registered investment company for which W&R or its affiliate serves as principal underwriter, the investment shall be deemed as if it had been made when the Company's shares were first purchased, and the applicable contingent deferred sales charges, if any, shall be with respect to the amount originally invested in Company shares; and provided that any contingent deferred sales charge shall be determined in accordance with and in the manner set forth in the applicable then current prospectus and any applicable Order or Rule issued by the SEC. D. It is contemplated that W&R may pay commissions to its field sales force at the time of sale of the Company's shares and may incur other expenses substantially in advance of receiving the distribution fee, if any, that may be applicable to the payment of such commissions and expenses. W&R recognizes that such payments are at its risk and that this Agreement may be terminated or not continued as hereinafter provided without the payment to it of any further distribution fees or service fees whatsoever and without the payment of any penalty. The contingent deferred sales charges, if any, shall, however, be payable to W&R with respect to all subject sales made prior to the termination of this Agreement. E. W&R shall at least quarterly provide to the Company's board of directors a written report with respect to each Fund or Class, as applicable, of the amounts of the distribution and/or service fees expended and the purposes for which these expenditures were made. W&R shall in addition furnish to the board of directors of the Company such information as may be requested or as may be necessary to an informed determination by the directors of whether or not the directors should continue the Company's Plan(s) and continue this Agreement and to determine whether there is reasonable likelihood that the Plan(s) and this Agreement will benefit the Company and its shareholders affected by such Plan(s). V. INDEMNIFICATION A. The Company agrees with W&R for the benefit of W&R and each person, if any, who controls W&R within the meaning of Section 15 of the Securities Act and each and all and any of them, to indemnify and hold harmless W&R and any such controlling person from and against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, under any other statute, at common law or otherwise, and to reimburse the underwriter and such controlling persons, if any, for any legal or other expenses (including the cost of any investigation and preparation) reasonably incurred by them or any of them in connection with any litigation whether or not resulting in any liability, insofar as such losses, claims, damages, liabilities or litigation arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement or any prospectus or any amendment thereof or supplement thereto or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this indemnity agreement shall not apply to amounts paid in settlement of any such litigation if such settlement is effected without the consent of the Company or to any such losses, claims, damages, liabilities or litigation arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus or any amendment thereof or supplement thereto, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, which statement or omission was made in reliance upon information furnished in writing to the Company by W&R for inclusion in any registration statement or any prospectus or any amendment thereof or supplement thereto. W&R and each such controlling person shall promptly, after the complaint shall have been served upon W&R or such controlling person in any litigation against W&R or such controlling person in respect of which indemnity may be sought from the Company on account of its agreement contained in this paragraph, notify the Company in writing of the commencement thereof. The omission of W&R or such controlling person so to notify the Company of any such litigation shall relieve the Company from any liability which it may have to W&R or such controlling person on account of the indemnity agreement contained in this paragraph but shall not relieve the Company from any liability which it may have to W&R or controlling person otherwise than on account of the indemnity agreement contained in this paragraph. In case any such litigation shall be brought against W&R or any such controlling person and the underwriter or such controlling person shall notify the Company of the commencement thereof, the Company shall be entitled to participate in (and, to the extent that it shall wish, to direct) the defense thereof at its own expense but such defense shall be conducted by counsel of good standing and satisfactory to W&R or such controlling person or persons, defendant or defendants in the litigation. The indemnity agreement of the Company contained in this paragraph shall remain operative and in full force and effect regardless of any investigation made by or on behalf of W&R or any such controlling person and shall survive any delivery of shares of the Company. The Company agrees to notify W&R promptly of the commencement of any litigation or proceeding against it or any of its officers or directors of which it may be advised in connection with the issue and sale of its shares. B. Anything herein to the contrary notwithstanding, the agreement in Section A of this article, insofar as it constitutes a basis for reimbursement by the Company for liabilities (other than payment by the Company of expenses incurred or paid in the successful defense of any action, suit or proceeding) arising under the Securities Act, shall not extend to the extent of any interest therein of any person who is an underwriter or a partner or controlling person of an underwriter within the meaning of Section 15 of the Securities Act or who, at the date of this Agreement, is a director of the Company, except to the extent that an interest of such character shall have been determined by a court of appropriate jurisdiction the question of whether or not such interest is against public policy as expressed in the Securities Act. C. W&R agrees to indemnify and hold harmless the Company and its directors and such officers as shall have signed any registration statement from and against any and all losses, claims, damages or liabilities, joint or several, to which the Company or such directors or officers may become subject under the Securities Act, under any other statute, at common law or otherwise, and will reimburse the Company or such directors or officers for any legal or other expenses (including the cost of any investigation and preparation) reasonably incurred by it or them or any of them in connection with any litigation, whether or not resulting in any liability insofar as such losses, claims, damages, liabilities or litigation arise out of, or are based upon, any untrue statement or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, which statement or omission was made in reliance upon information furnished in writing to the Company by W&R for inclusion in any registration statement or any prospectus, or any amendment thereof or supplement thereto, or which statement was made in, or the alleged omission was from, any advertising or sales literature (including any reports to shareholders used as such) which relate to the Company. W&R shall not be liable for amounts paid in settlement of any such litigation if such settlement was effected without its consent. The Company and its directors and such officers, defendant or defendants, in any such litigation shall, promptly after the complaint shall have been served upon the Company or any such director or officer in any litigation against the Company or any such director or officer in respect of which indemnity may be sought from W&R on account of its agreement contained in this paragraph, notify W&R in writing of the commencement thereof. The omission of the Company or such director or officer so to notify the underwriter of any such litigation shall relieve W&R from any liability which it may have to the Company or such director or officer on account of the indemnity agreement contained in this paragraph, but shall not relieve W&R from any liability which it may have to the Company or such director or officer otherwise than on account of the indemnity agreement contained in this paragraph. In case any such litigation shall be brought against the Company or any such officer or director and notice of the commencement thereof shall have been so given to W&R, W&R shall be entitled to participate in (and, to the extent that it shall wish, to direct) the defense thereof at its own expense, but such defense shall be conducted by counsel of good standing and satisfactory to the Company. The indemnity agreement of W&R contained in this paragraph shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Company and shall survive any delivery of shares of the Company. W&R agrees to notify the Company promptly of the commencement of any litigation or proceeding against it or any of its officers or directors or against any such controlling person of which it may be advised, in connection with the issue and sale of the Company's shares. D. Notwithstanding any provision contained in this Agreement, no party hereto and no person or persons in control of any party hereto shall be protected against any liability to the Company or its security holders to which they would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of their duties or by reason of their reckless disregard of their obligations and duties under this Agreement. VI. OTHER TERMS A. This Agreement shall not be deemed to limit W&R from acting as underwriter and/or dealer for any other mutual fund, from engaging in any other aspects of the securities business, whether or not such may be deemed in competition with the sale of shares of the Company, and to carry on any other lawful business whatsoever. B. Except as expressly provided in Article V and hereinabove, the agreements herein set forth have been made and are made solely for the benefit of the Company and W&R, and the persons expressly provided for in Article V, their respective heirs and successors, personal representatives and assigns, and except as so provided, nothing expressed or mentioned herein is intended or shall be construed to give any person, firm or corporation other than the Company, W&R and the persons expressly provided for in Article V any legal or equitable right, remedy or claim under or in respect of this Agreement or any representation, warranty or agreement herein contained. Except as so provided, the term "heirs, successors, personal representatives and assigns" shall not include any purchaser of shares merely because of such purchase. C. This Agreement shall continue in effect, unless terminated as hereinafter provided, for a period of one (1) year and thereafter only if such continuance is specifically approved at least annually by the Board of Directors, including the vote of a majority of the directors who are not parties to the Agreement or "interested persons" (as defined in the Investment Company Act of 1940) or any such party and who have no direct or indirect financial interest in the operation of any Plan or any agreement relating to that Plan (hereafter the "Plan directors"), cast in person at a meeting called for the purpose of voting on such approval. This Agreement may be terminated by W&R at any time without penalty upon giving the Company sixty (60) days' written notice (which notice may be waived by the Company) and may be terminated by the Company at any time without penalty upon giving W&R sixty (60) days' written notice (which notice may be waived by W&R), provided that such termination by the Company shall be directed or approved by the vote of a majority of the Plan directors, or by the vote of a majority (as defined in the Investment Company Act of 1940) of the outstanding voting securities of a Fund with respect to that Fund. This Agreement shall automatically terminate in the event of its assignment, the term "assignment" for this purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act of 1940. D. This Agreement shall be governed and construed in accordance with the laws of Kansas. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized officers and their corporate seals to be affixed as of the day and year first above written. -------------------------------- By:_____________________________ ----------------------------- WADDELL & REED, INC. By:____________________________ ---------------------------- EX-10.36 18 EXHIBIT 10.36 EXHIBIT 10.36 UNDERWRITING AGREEMENT THIS AGREEMENT, made this ___ day of ________, 199_, by and between ____________________ (hereinafter the "Company"), a Maryland corporation, and Waddell & Reed, Inc. (hereinafter "W&R"), a Delaware corporation; I. REPRESENTATIONS A. The Company represents that 1) it is a registered open-end management investment company (mutual fund), and 2) the shares of each of its classes of shares ("Fund") and of each sub-class thereof ("Class"), if any, are, as of the date of the effectiveness of this Agreement as to each such Fund or Class, registered with the Securities and Exchange Commission ("SEC") and qualified or otherwise authorized for sale in all states of the United States as may be agreed upon. (As to any Fund or Class not registered with the SEC and qualified or otherwise authorized for sale in all states of the United States as may be agreed upon, this Agreement shall become effective as to such Fund or Class upon such registration and qualification or authorization.) B. W&R represents that 1) it is a broker-dealer registered with the SEC and is duly qualified to offer shares of the Company in all states in which the shares are currently qualified or otherwise authorized for offer for sale; 2) it is a member of the National Association of Securities Dealers, Inc. ("NASD"); 3) it maintains a retail securities and insurance sales organization consisting in part of a number of representatives authorized under Federal and state securities laws to solicit as representatives of W&R orders for Company shares and other securities; 4) it maintains and enforces procedures to enable it to supervise its representatives and associated persons in accordance with applicable securities laws, rules and regulations including the Rules of the NASD; and 5) it maintains and enforces procedures to review for compliance with applicable securities laws, rules and regulations all sales literature and promotional materials used by it and authorized to be used by its representatives in solicitation of orders to buy Company shares, and it files, when applicable, such literature and materials with the NASD. II. APPOINTMENT OF UNDERWRITER and OBLIGATIONS The Company hereby, as applicable, appoints W&R or continues the appointment of W&R, and W&R, as applicable, agrees to act or continues to act, as the Company's principal underwriter under the terms and provisions of this Agreement. A. Company agrees 1) to use its best efforts to register from time to time under the Securities Act of 1933 (the "Securities Act") adequate amounts of its shares for sale by W&R to the public and to qualify or to permit W&R to qualify such shares for offering to the public in such states as may from time to time be agreed upon; 2) to immediately advise W&R (i) when any post-effective amendment to its registration statement or any further amendment or supplement thereto or any further registration statement or amendment or supplement thereto becomes effective, (ii) of any request by the SEC for amendments to the registration statement(s) or any then effective prospectus or for additional information, (iii) of the issuance by the SEC of any stop-order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose, and (iv) of the happening of any event which makes untrue any material statement made in the registration statement or any then effective prospectus or which, in the opinion of counsel for the Company, requires the making of a change in the registration statement or any then effective prospectus in order to make the statements therein not misleading; in case of the happening at any time of any event which materially affects the Company or its securities and which should be set forth in a supplement to or an amendment of any then effective prospectus in order to make the statements therein not misleading, to prepare and furnish to W&R such amendment or amendments to that prospectus as will correct the prospectus so that as corrected it will not contain, or such supplement or supplements to that prospectus which when read in conjunction with that prospectus will make the combined information not contain any untrue statement of a material fact or any omission to state any material fact necessary in order to make the statements in that prospectus not misleading; if any time the SEC shall issue any stop-order suspending the effectiveness of the registration statement, to make every reasonable effort to obtain the prompt lifting of such order; and, before filing any amendment to the registration statement or to any then effective prospectus, to furnish W&R with a copy of the proposed amendment; 3) to advise W&R of the net asset value of the shares of each of its Funds and Classes, as applicable, as often as computed and to furnish to W&R as soon as practical such information as may be reasonably requested by W&R in order that it may know all of the facts necessary to sell shares of the Company; 4) to make delivery of its shares subject to the provisions of its Articles of Incorporation and Bylaws to W&R as ordered by W&R as soon as reasonably possible after receipt of the orders and against payment of the consideration to be received by the Company therefor from W&R; 5) to pay or cause to be paid all expenses incident to the issuance, transfer, registration and delivery of its shares, all taxes in connection therewith, costs and expenses incident to preparing and filing any registration statements and prospectuses and any amendments or supplements to a registration statement or a prospectus, statutory fees incidental to the registration of additional shares with the SEC, statutory fees and expenses incurred in connection with any Blue Sky law qualifications undertaken by or at the request of W&R, and the fees and expenses of the Company's counsel, accountants or any other experts used in connection with the foregoing; and 6) not without the consent of W&R to offer any of its shares for sale directly or to any persons or corporations other than W&R, except only a) the reinvestment of dividends and/or distributions or their declaration in shares of the Company, in optional form or otherwise; b) the issuance of additional shares to stock splits or stock dividends; c) sale of shares to another investment or securities holding company in the process of purchasing all or a portion of its assets; d) in connection with an exchange of shares of the Company for shares in another investment or securities holding company; e) the sale of shares to registered unit investment trusts; or f) in connection with the exchange of one Fund's shares for shares of another Fund of the Company. 2 B. W&R agrees 1) to offer Company shares in such states as may be agreed upon through its retail account representatives and, at its sole discretion, through broker-dealers which are members of the NASD on such terms as are not inconsistent with this Agreement; 2) to order shares from the Company only after it has received a purchase order therefor; 3) to pay to the Company the net asset value of shares sold within two business days after the day payment is received by W&R at its principal place of business from the investor or broker-dealer, or pay the Company at such other time as may be agreed upon hereafter by the Company and W&R, or as may be prescribed by law or the Rules of the NASD; 4) in offering shares to comply with the provisions of the Articles of Incorporation and Bylaws of the Company and with the provisions stated in its applicable then current prospectus(es); 5) timely to inform the Company of any action or proceeding to terminate, revoke or suspend W&R's registration as a broker-dealer with the SEC, membership in the NASD, or authority with any state securities commission to offer Company shares; and 6) to pay the cost of all sales literature, advertising and other materials which it may at its discretion use in connection with the sale of Company shares, including the cost of reports to the shareholders of the Company in excess of the cost of reports to existing shareholders and the cost of printing the prospectus(es) furnished to it by the Company. III. TERMS FOR SALE OF SHARES A. It is mutually agreed that 1) W&R shall act as principal in all matters relating to promotion and sale of Company shares, including the preparation and use of all advertising, sales literature and other promotional materials, and shall make and enter into all other arrangements, agreements and contracts as principal on its own account and not as agent for the Company. Title to shares issued and sold by the Company through W&R shall pass directly from the Company to the dealer or investor, or shall first pass to W&R as it may from time to time be determined by W&R and the Company; except provided, however, that W&R may, if so agreed by W&R and the Company, act as agent of the Company without commission on repurchase of shares of the Company; 2) certificates for shares shall not be created or delivered by the Company in any case in which the purchase is pursuant to any provisions of the Company described in its applicable then current prospectus(es) under the terms of which certificates are not to be issued to the shareholder. Shares sold by W&R shall be registered in such name or names and amounts as W&R may request from time to time, and all shares when so paid for and issued shall be fully paid and non-assessable; and 3) the offering price at which shares of the Company may be sold by W&R shall include such selling commission as may be applicable to that Class and as may be fixed from time to time by W&R but shall not be in excess of 8.5 percent of the offering price. W&R shall retain any such sales commission and may re-allow all or any part of the sales commission to its account representatives and to selected brokers and dealers who sell shares of the Company. W&R may designate, reduce or eliminate its selling commissions in certain sales or exchanges to the extent described in the applicable then current prospectus(es) of the Company and in accordance with Section 22(d) of the Investment Company Act of 1940 and any rules, regulations or orders of the SEC thereunder. 3 IV. THE PLAN A. It is mutually acknowledged that the Company has adopted a plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (a "Plan"), which Plan is applicable to certain shares and that the Company may in the future adopt Plans applicable to certain Funds and Classes, respectively. B. With respect to any Fund or Class as to which the Company has adopted a Plan, pursuant to that Plan, each day the Company shall pay to W&R a distribution fee and/or a service fee at the maximum rates and under the terms and conditions set forth in the applicable Plan, as amended from time to time, or such lesser amount as the Company and W&R may agree. C. The Company shall, after excluding from the redemption proceeds that portion represented by the reinvestment of dividends and distributions and the appreciation of the value of Fund shares being redeemed, promptly pay W&R an amount, if any, equal to the percent of the amount invested as determined by W&R and as is then stated in the Company's current prospectus applicable to the shares redeemed (the "contingent deferred sales charge"). For purposes of determining the applicable contingent deferred sales charge, if any: the redemptions shall be deemed in order of investment made when more than one investment has been made; and when the shares being redeemed were acquired by exchange of shares of another Fund or Class of the Company, or corresponding class of another registered investment company for which W&R or its affiliate serves as principal underwriter, the investment shall be deemed as if it had been made when the Company's shares were first purchased, and the applicable contingent deferred sales charges, if any, shall be with respect to the amount originally invested in Company shares; and provided that any contingent deferred sales charge shall be determined in accordance with and in the manner set forth in the applicable then current prospectus and any applicable Order or Rule issued by the SEC. D. It is contemplated that W&R may pay commissions to its field sales force at the time of sale of the Company's shares and may incur other expenses substantially in advance of receiving the distribution fee, if any, that may be applicable to the payment of such commissions and expenses. W&R recognizes that such payments are at its risk and that this Agreement may be terminated or not continued as hereinafter provided without the payment to it of any further distribution fees or service fees whatsoever and without the payment of any penalty. The contingent deferred sales charges, if any, shall, however, be payable to W&R with respect to all subject sales made prior to the termination of this Agreement. E. W&R shall at least quarterly provide to the Company's board of directors a written report with respect to each Fund or Class, as applicable, of the amounts of the distribution and/or service fees expended and the purposes for which these expenditures were made. W&R shall in addition furnish to the board of directors of the Company such information as may be requested or as may be necessary to an informed determination by the directors of whether or not the directors should continue the Company's Plan(s) and continue this Agreement and to determine whether there is reasonable likelihood that the Plan(s) and this Agreement will benefit the Company and its shareholders affected by such Plan(s). V. INDEMNIFICATION A. The Company agrees with W&R for the benefit of W&R and each person, if any, who controls W&R within the meaning of Section 15 of the Securities Act and each and all and any of them, to indemnify and hold harmless W&R and any such controlling person from and against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, under any other statute, at common law or otherwise, and to reimburse the underwriter and such controlling persons, if any, for any legal or other expenses (including the cost of any investigation and preparation) reasonably incurred by them or any of them in connection with any litigation whether or not resulting in any liability, insofar as such losses, claims, damages, liabilities or litigation arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement or any prospectus or any amendment thereof or supplement thereto or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the 4 statements therein not misleading; provided, however, that this indemnity agreement shall not apply to amounts paid in settlement of any such litigation if such settlement is effected without the consent of the Company or to any such losses, claims, damages, liabilities or litigation arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any registration statement or prospectus or any amendment thereof or supplement thereto, or arising out of or based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, which statement or omission was made in reliance upon information furnished in writing to the Company by W&R for inclusion in any registration statement or any prospectus or any amendment thereof or supplement thereto. W&R and each such controlling person shall promptly, after the complaint shall have been served upon W&R or such controlling person in any litigation against W&R or such controlling person in respect of which indemnity may be sought from the Company on account of its agreement contained in this paragraph, notify the Company in writing of the commencement thereof. The omission of W&R or such controlling person so to notify the Company of any such litigation shall relieve the Company from any liability which it may have to W&R or such controlling person on account of the indemnity agreement contained in this paragraph but shall not relieve the Company from any liability which it may have to W&R or controlling person otherwise than on account of the indemnity agreement contained in this paragraph. In case any such litigation shall be brought against W&R or any such controlling person and the underwriter or such controlling person shall notify the Company of the commencement thereof, the Company shall be entitled to participate in (and, to the extent that it shall wish, to direct) the defense thereof at its own expense but such defense shall be conducted by counsel of good standing and satisfactory to W&R or such controlling person or persons, defendant or defendants in the litigation. The indemnity agreement of the Company contained in this paragraph shall remain operative and in full force and effect regardless of any investigation made by or on behalf of W&R or any such controlling person and shall survive any delivery of shares of the Company. The Company agrees to notify W&R promptly of the commencement of any litigation or proceeding against it or any of its officers or directors of which it may be advised in connection with the issue and sale of its shares. B. Anything herein to the contrary notwithstanding, the agreement in Section A of this article, insofar as it constitutes a basis for reimbursement by the Company for liabilities (other than payment by the Company of expenses incurred or paid in the successful defense of any action, suit or proceeding) arising under the Securities Act, shall not extend to the extent of any interest therein of any person who is an underwriter or a partner or controlling person of an underwriter within the meaning of Section 15 of the Securities Act or who, at the date of this Agreement, is a director of the Company, except to the extent that an interest of such character shall have been determined by a court of appropriate jurisdiction the question of whether or not such interest is against public policy as expressed in the Securities Act. C. W&R agrees to indemnify and hold harmless the Company and its directors and such officers as shall have signed any registration statement from and against any and all losses, claims, damages or liabilities, joint or several, to which the Company or such directors or officers may become subject under the Securities Act, under any other statute, at common law or otherwise, and will reimburse the Company or such directors or officers for any legal or other expenses (including the cost of any investigation and preparation) reasonably incurred by it or them or any of them in connection with any litigation, whether or not resulting in any liability insofar as such losses, claims, damages, liabilities or litigation arise out of, or are based upon, any untrue statement or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, which statement or omission was made in reliance upon information furnished in writing to the Company by W&R for inclusion in any registration statement or any prospectus, or any amendment thereof or supplement thereto, or which statement was made in, or the alleged omission was from, any advertising or sales literature (including any reports to shareholders used as such) which relate to the Company. W&R shall not be liable for amounts paid in settlement of any such litigation if such settlement was effected without its consent. The Company and its directors and such officers, defendant or defendants, in any such litigation shall, promptly after the complaint shall have been served upon the Company or any such director or officer in any litigation against the Company or any such director or officer in respect of which indemnity may be sought from W&R on account of its agreement contained in this paragraph, notify W&R in writing of the commencement thereof. The omission of the Company or such director or officer so to notify the underwriter of any such litigation shall relieve W&R from any liability which it may have to the Company or such director or officer on account of the indemnity agreement contained in this paragraph, but shall not relieve W&R from any liability which it may have to the Company or 5 such director or officer otherwise than on account of the indemnity agreement contained in this paragraph. In case any such litigation shall be brought against the Company or any such officer or director and notice of the commencement thereof shall have been so given to W&R, W&R shall be entitled to participate in (and, to the extent that it shall wish, to direct) the defense thereof at its own expense, but such defense shall be conducted by counsel of good standing and satisfactory to the Company. The indemnity agreement of W&R contained in this paragraph shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the Company and shall survive any delivery of shares of the Company. W&R agrees to notify the Company promptly of the commencement of any litigation or proceeding against it or any of its officers or directors or against any such controlling person of which it may be advised, in connection with the issue and sale of the Company's shares. D. Notwithstanding any provision contained in this Agreement, no party hereto and no person or persons in control of any party hereto shall be protected against any liability to the Company or its security holders to which they would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of their duties or by reason of their reckless disregard of their obligations and duties under this Agreement. VI. OTHER TERMS A. This Agreement shall not be deemed to limit W&R from acting as underwriter and/or dealer for any other mutual fund, from engaging in any other aspects of the securities business, whether or not such may be deemed in competition with the sale of shares of the Company, and to carry on any other lawful business whatsoever. B. Except as expressly provided in Article V and hereinabove, the agreements herein set forth have been made and are made solely for the benefit of the Company and W&R, and the persons expressly provided for in Article V, their respective heirs and successors, personal representatives and assigns, and except as so provided, nothing expressed or mentioned herein is intended or shall be construed to give any person, firm or corporation other than the Company, W&R and the persons expressly provided for in Article V any legal or equitable right, remedy or claim under or in respect of this Agreement or any representation, warranty or agreement herein contained. Except as so provided, the term "heirs, successors, personal representatives and assigns" shall not include any purchaser of shares merely because of such purchase. C. This Agreement shall continue in effect, unless terminated as hereinafter provided, for a period of one (1) year and thereafter only if such continuance is specifically approved at least annually by the Board of Directors, including the vote of a majority of the directors who are not parties to the Agreement or "interested persons" (as defined in the Investment Company Act of 1940) or any such party and who have no direct or indirect financial interest in the operation of any Plan or any agreement relating to that Plan (hereafter the "Plan directors"), cast in person at a meeting called for the purpose of voting on such approval. This Agreement may be terminated by W&R at any time without penalty upon giving the Company sixty (60) days' written notice (which notice may be waived by the Company) and may be terminated by the Company at any time without penalty upon giving W&R sixty (60) days' written notice (which notice may be waived by W&R), provided that such termination by the Company shall be directed or approved by the vote of a majority of the Plan directors, or by the vote of a majority (as defined in the Investment Company Act of 1940) of the outstanding voting securities of a Fund with respect to that Fund. This Agreement shall automatically terminate in the event of its assignment, the term "assignment" for this purpose having the meaning defined in Section 2(a)(4) of the Investment Company Act of 1940 and applicable Rules thereunder. D. This Agreement shall be governed and construed in accordance with the laws of Kansas. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized officers and their corporate seals to be affixed as of the day and year first above written. 6 Waddell & Reed Funds, Inc. By: -------------------------- -------------------------- WADDELL & REED, INC. By: -------------------------- -------------------------- 7 EX-10.37 19 EXHIBIT 10.37 EXHIBIT 10.37 CUSTODIAN AGREEMENT DATED AS OF FEBRUARY 22, 1995 AMENDED AND RESTATED AS OF MAY 13, 1998 BETWEEN UMB BANK, N.A. AND _________ _________ _________ FUND, INC. TABLE OF CONTENTS ARTICLE I. Appointment of Custodian II. Powers and Duties of Custodian 2.01 Safekeeping 2.02 Manner of Holding Securities 2.03 Purchase of Assets 2.04 Exchanges of Securities 2.05 Sales of Securities 2.06 Depositary Receipts 2.07 Exercise of Rights, Tender Offers, Etc. 2.08 Stock Dividends, Rights, Etc. 2.09 Options 2.10 Futures Contracts 2.11 Borrowing 2.12 Interest Bearing Deposits 2.13 Foreign Exchange Transactions 2.14 Securities Loans 2.15 Collections 2.16 Dividends, Distributions and Redemptions 2.17 Proceeds from Shares Sold 2.18 Proxies, Notices, Etc. 2.19 Bills and Other Disbursements 2.20 Nondiscretionary Functions 2.21 Bank Accounts 2.22 Deposit of Fund Assets in Securities System 2.23 Other Transfers 2.24 Establishment of Segregated Account 2.25 Custodian's Books and Records 2.26 Opinion of Fund's Independent Certified Public Accountants 2.27 Reports by Independent Certified Public Accountants 2.28 Overdraft Facility III. Proper Instructions, Special Instructions and Related Matters 3.01 Proper Instruction and Special Instructions 3.02 Authorized Persons 3.03 Persons Having Access to Assets of the Portfolios 3.04 Actions of Custodian Based on Proper Instructions and Special Instructions 2 IV. Subcustodians 4.01 Domestic Subcustodians 4.02 Foreign Sub-Subcustodians and Interim Sub-Subcustodians 4.03 Special Subcustodians 4.04 Termination of a Subcustodian 4.05 Certification Regarding Foreign Sub-Subcustodians V. Standard of Care, Indemnification 5.01 Standard of Care 5.02 Liability of the Custodian for Actions of Other Person 5.03 Indemnification by Fund 5.04 Investment Limitations 5.05 Fund's Right to Proceed 5.06 Indemnification by Custodian 5.07 Custodian's Right to Proceed VI. Compensation VII. Termination VIII. Defined Terms IX. Miscellaneous 9.01 Execution of Documents, Etc. 9.02 Representations and Warranties 9.03 Entire Agreement 9.04 Waivers and Amendments 9.05 Interpretation 9.06 Captions 9.07 Governing Law 9.08 Notices 9.09 Assignment 9.10 Counterparts 9.11 Confidentiality; Survival of Obligations Appendix "B" 3 CUSTODIAN AGREEMENT AGREEMENT made as of the 22nd day of February, 1995 between __________ ________ _______ Fund, Inc. (the "Fund") and UMB Bank, n.a. (the "Custodian") and as amended and restated as of May 13, 1998. WITNESSETH WHEREAS, the Fund desires to appoint the Custodian as custodian on behalf of the Fund in accordance with the provisions of the Investment Company Act of 1940, as amended (the "1940 Act") and the rules and regulations thereunder, under the terms and conditions set forth in this Agreement, and the Custodian has agreed so to act as custodian. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto agree as follows: ARTICLE I APPOINTMENT OF CUSTODIAN Subject to the terms and provisions of this Agreement, the Fund hereby employs and appoints the Custodian as a custodian of the cash, securities and other assets owned by the Fund and deposited from time to time with the Custodian ("Assets"). The Fund shall deliver to the Custodian, or shall cause to be delivered to the Custodian, Assets during the term of this Agreement. The Custodian is authorized to act under the terms and conditions of this Agreement as the Fund's agent and shall be representing the Fund when acting within the scope of this Agreement. The Custodian hereby accepts such appointment as custodian and shall perform the duties and responsibilities set forth herein on the terms and conditions set forth herein. ARTICLE II POWERS AND DUTIES OF CUSTODIAN As custodian, the Custodian shall have and perform the powers and duties set forth in this Article II. Pursuant to and in accordance with Article IV hereof, the Custodian may appoint one or more Subcustodians (as hereinafter defined) to exercise the powers and perform the duties of the Custodian set forth in this Article II and references to the Custodian in this Article II shall include any Subcustodian so appointed. SECTION 2.01. SAFEKEEPING. The Custodian shall accept delivery of and keep safely the Assets in accordance with the terms and conditions hereof on behalf of the Fund. SECTION 2.02. MANNER OF HOLDING SECURITIES. (a) The Custodian shall at all times hold securities of the Fund either: (i) by physical possession of the share certificates or other instruments representing such securities in registered or bearer form; or (ii) in book-entry form by a Securities System (as hereinafter defined) in accordance with the provisions of Section 2.22 below. (b) The Custodian may at all times hold registered securities of the Fund in the name of the Fund or the Fund's nominee, or in the nominee name of the Custodian unless specifically directed by Proper Instructions (as hereinafter defined) to hold such registered securities in so-called street name; provided that, in any event, all 4 Assets shall be held in an account of the Custodian containing only assets of the Fund. Notwithstanding the foregoing, unless it receives Proper Instructions to the contrary, the Custodian shall register all securities in the name of the Custodian's nominee as authorized by the Fund. All securities held directly or indirectly by the Custodian hereunder shall at all times be identifiable on the records of the Custodian. Except as otherwise provided herein, the Custodian shall keep the Assets physically segregated from those of other persons or entities. The Custodian shall execute and deliver all certificates and documents in connection with registration of securities as may be required by the applicable provisions of the Internal Revenue Code, the laws of any State or territory of the United States and the laws of any jurisdiction in which the securities are held. SECTION 2.03. PURCHASE OF ASSETS. (a) SECURITY PURCHASES. Upon receipt of Proper Instructions, the Custodian shall pay for and receive securities purchased for the account of the Fund, provided that payment shall be made by Custodian only upon receipt of the securities: (a) by the Custodian; (b) by a clearing corporation of a national securities exchange of which the Custodian is a member; or (c) by a Securities System. Notwithstanding the foregoing, upon receipt of Proper Instructions: (i) in the case of a repurchase agreement, the Custodian may release funds to a Securities System prior to the receipt of advice from the Securities System that the securities underlying such repurchase agreement have been transferred by book-entry into the Account (as hereinafter defined) maintained with such Securities System by the Custodian, provided that the Custodian's instructions to the Securities System require that the Securities System may make payment of such funds to the other party to the repurchase agreement only upon transfer by book-entry of the securities underlying the repurchase agreement into the Account; (ii) in the case of time deposits, call account deposits, currency deposits and other deposits, foreign exchange transactions, futures contracts or options, pursuant to Sections 2.09, 2.10, 2.12 and 2.13 hereof, the Custodian may make payment therefor before receipt of an advice or transaction; and (iii) in the case of the purchase of securities, the settlement of which occurs outside of the United States of America, the Custodian may make payment therefor and receive delivery of such securities in accordance with local custom and practice generally accepted by Institutional Clients (as hereinafter defined) in the country in which the settlement occurs, but in all events subject to the standard of care set forth in Article V hereof. For purposes of this Agreement, an "Institutional Client" shall mean a major commercial bank, corporation, insurance company, or substantially similar institution, which, as a substantial part of its business operations, purchases or sells securities and makes use of custodial services. (b) OTHER ASSET PURCHASES. Upon receipt of Proper Instructions and except as otherwise provided herein, the Custodian shall pay for and receive other Assets for the account of the Fund as provided in Proper Instructions. SECTION 2.04. EXCHANGES OF SECURITIES. Upon receipt of Proper Instructions, the Custodian shall exchange securities held by it for the account of the Fund for other securities in connection with any reorganization, recapitalization, split-up of shares, change of par value, conversion or other event relating to the securities or the issuer of such securities, and shall deposit any such securities in accordance with the terms of any reorganization or protective plan. The Custodian shall, without receiving Proper Instructions: surrender securities for transfer into the name of the Fund, the Fund's nominee or the nominee name of the Custodian as permitted by Section 2.02(b); and surrender securities for a different number of certificates or instruments representing the same number of shares or same principal amount of indebtedness, provided that the securities to be issued will be delivered to the Custodian. SECTION 2.05. SALES OF SECURITIES. Upon receipt of Proper Instructions, the Custodian shall make delivery of securities which have been sold for the account of the Fund, but only against payment therefor in the form of: (a) cash, certified check, bank cashier's check, bank credit, or bank wire transfer; (b) credit to the 5 account of the Custodian with a clearing corporation of a national securities exchange of which the Custodian is a member; or (c) credit to the Account of the Custodian with a Securities System, in accordance with the provisions of Section 2.22 hereof. Notwithstanding the foregoing: (i) in the case of the sale of securities, the settlement of which occurs outside of the United States of America, such securities shall be delivered and paid for in accordance with local custom and practice generally accepted by Institutional Clients in the country in which the settlement occurs, but in all events subject to the standard of care set forth in Article V hereof; and (ii) in the case of securities held in physical form, such securities shall be delivered and paid for in accordance with "street delivery custom" to a broker or its clearing agent, against delivery to the Custodian of a receipt for such securities, provided that the Custodian shall have taken reasonable steps to ensure prompt collection of the payment for, or return of, such securities by the broker or its clearing agent, and provided further that, subject to the standard of care set forth in Article V hereof, the Custodian shall not be responsible for the selection of or the failure or inability to perform of such broker or its clearing agent. SECTION 2.06. DEPOSITARY RECEIPTS. Upon receipt of Proper Instructions, the Custodian shall surrender securities to the depositary used for such securities by an issuer of American Depositary Receipts or International Depositary Receipts (hereinafter referred to, collectively , as "ADRs"), against a written receipt therefor adequately describing such securities and written evidence satisfactory to the Custodian that the depositary has acknowledged receipt of instructions to issue ADRs with respect to such securities in the name of the Custodian or a nominee of the Custodian, for delivery to the Custodian at such place as the Custodian may from time to time designate. Upon receipt of Proper Instructions, the Custodian shall surrender ADRs to the issuer thereof, against a written receipt therefor adequately describing the ADRs surrendered and written evidence satisfactory to the Custodian that the issuer of the ADRs has acknowledged receipt of instructions to cause its depository to deliver the securities underlying such ADRs to the Custodian. SECTION 2.07. EXERCISE OF RIGHTS, TENDER OFFERS, ETC. Upon receipt of Proper Instructions, the Custodian shall: (a) deliver warrants, puts, calls, rights or similar securities to the issuer or trustee thereof (or to the agent of such issuer or trustee) for the purpose of exercise or sale, provided that the new securities, cash or other Assets, if any, acquired as a result of such actions are to be delivered to the Custodian; and (b) deposit securities upon invitations for tenders thereof, provided that the consideration for such securities is to be paid or delivered to the Custodian, or the tendered securities are to be returned to the Custodian. Notwithstanding any provision of this Agreement to the contrary, the Custodian shall promptly notify the Fund in writing of (i) any default in payment of funds on securities; (ii) any securities that have matured, been called or redeemed; and (iii) to the extent the Custodian has notice which is contained in services to which it normally subscribes for such purposes, or actual knowledge if not contained in such services, any other default involving securities; and all announcements of defaults, bankruptcies, reorganizations, mergers, consolidations, recapitalizations or rights or privileges to subscribe, convert, exchange, put, redeem or tender securities held subject to this Agreement. The Custodian shall, following receipt or knowledge, convey such information to the Fund in a timely manner based upon the circumstances of each particular case. Whenever any such rights or privileges exist, the Fund will, in a timely manner based upon the circumstances of each particular case, provide the Custodian with Proper Instructions. Absent the Custodian's timely receipt of Proper Instructions, the Custodian shall not be liable for not taking any action or not exercising such rights prior to their expiration unless such failure is due to Custodian's failure to give timely notice to the Fund in accordance with this Section 2.07. SECTION 2.08. STOCK DIVIDENDS, RIGHTS, ETC. The Custodian shall receive and collect all stock dividends, rights and other items of like nature and, upon receipt of Proper Instructions, take action with respect to the same as directed in such Proper Instructions. SECTION 2.09. OPTIONS. Upon receipt of Proper Instructions and in accordance with the provisions of any agreement between the Custodian, any registered broker-dealer and, if necessary, the Fund relating to 6 compliance with the rules of the Options Clearing Corporation (the "OCC") or of any registered national securities exchange or similar organization(s), the Custodian shall: (a) receive and retain confirmations or other documents, if any, evidencing the purchase or writing of an option by the Fund; (b) deposit and maintain in a segregated account, securities (either physically or by book-entry in a Securities System), cash or other Assets; and (c) pay, release and/or transfer such securities, cash or other Assets in accordance with any such agreement and with notices or other communications evidencing the expiration, termination or exercise of such options furnished by the OCC, the securities or options exchange on which such options are traded or such other organization as may be responsible for handling such option transactions. The Fund and the broker-dealer shall be responsible for determining the sufficiency of assets held in any segregated account established in compliance with applicable margin maintenance requirements and the performance of other terms of any option contract; provided, however, that the Custodian shall be liable for performance of its duties under this Agreement and in accordance with Proper Instructions, and shall be liable for performance of its duties under any other agreement between the Custodian, any registered broker-dealer and, if necessary, the Fund. Notwithstanding anything herein to the contrary, if the Fund issues Proper Instructions to sell a naked option (including stock index options), then as part of the transaction, the Custodian, the Fund and the broker-dealer shall have entered into a tri-party agreement, as described above. SECTION 2.10. FUTURES CONTRACTS. Upon receipt of Proper Instructions, or pursuant to the provisions of any futures margin procedural agreement among the Fund, the Custodian and any futures commission merchant (a "Procedural Agreement"), the Custodian shall: (a) receive and retain confirmations, if any evidencing the purchase of or sale of a futures contract or an option on a futures contract by the Fund; (b) deposit and maintain in a segregated account cash, securities and other Assets designated as initial, maintenance or variation "margin" deposits intended to secure the Fund's performance of its obligations under any futures contracts purchased or sold or any options on futures contracts written by the Fund, in accordance with the provisions of the Commodity Futures Trading Commission and/or any commodity exchange or contract market (such as the Chicago Board of Trade), or any similar organization(s), regarding such margin deposits; and (c) release assets from and/or transfer assets into such margin accounts only in accordance with any such Procedural Agreements. The Fund and such futures commission merchant shall be responsible for determining the sufficiency of assets held in the segregated account in compliance with applicable margin maintenance requirements and the performance of any futures contract or option on a futures contract in accordance with its terms; provided, however, that the Custodian shall be liable for performance of its duties under this Agreement and in accordance with Proper Instructions, and shall be liable for performance of its duties under any Procedural Agreement. SECTION 2.11. BORROWING. Upon receipt of Proper Instructions, the Custodian shall deliver securities of the Fund to lenders or their agents, or otherwise establish a segregated account as agreed to by the Fund and the Custodian, as collateral for borrowings effected by the Fund, provided that such borrowed money is payable by the lender (a) to or upon the Custodian's order, as Custodian for the Fund, and (b) concurrently with delivery of such securities. SECTION 2.12. INTEREST BEARING DEPOSITS. Upon receipt of Proper Instructions directing the Custodian to purchase interest bearing fixed term and call deposits (hereinafter referred to collectively, as "Interest Bearing Deposits") for the account of the Fund, the Custodian shall purchase such Interest Bearing Deposits in the name of the Fund with such banks or trust companies (including the Custodian, any Subcustodian or any subsidiary or affiliate of the Custodian) (hereinafter referred to as "Banking Institutions") and in such amounts as the Fund may direct pursuant to Proper Instructions. Such Interest Bearing Deposits may be denominated in U.S. Dollars or other currencies, as the Fund may determine and direct pursuant to Proper Instructions. The Custodian shall include in its records with respect to the Assets of the Fund appropriate notation as to the amount and currency of each such Interest Bearing Deposit, the accepting Banking Institution and all other appropriate details, and shall retain such forms of advice or receipt evidencing such account, if any, as may be forwarded to the 7 Custodian by the Banking Institution. The responsibilities of the Custodian to the Fund for Interest Bearing Deposits accepted on the Custodian's books in the United States shall be that of a U.S. bank for a similar deposit. With respect to Interest Bearing Deposits other than those accepted on the Custodian's books, (a) the Custodian shall be responsible for the collection of income as set forth in Section 2.15 and the transmission of cash and instructions to and from such accounts; and (b) the Custodian shall have no duty with respect to the selection of the Banking Institution or, so long as the Custodian acts in accordance with Proper Instructions and the terms and conditions of this Agreement, for the failure of such Banking Institution to pay upon demand. Upon receipt of Proper Instructions, the Custodian shall take such reasonable actions as the Fund deems necessary or appropriate to cause each such Interest Bearing Deposit account to be insured to the maximum extent possible by all applicable deposit insurers including, without limitation, the Federal Deposit Insurance Corporation. SECTION 2.13. FOREIGN EXCHANGE TRANSACTIONS. (a) FOREIGN EXCHANGE TRANSACTIONS OTHER THAN AS PRINCIPAL. Upon receipt of Proper Instructions, the Custodian shall settle foreign exchange contracts or options to purchase and sell foreign currencies for spot and future delivery on behalf of and for the account of the Fund with such currency brokers or Banking Institutions as the Fund may determine and direct pursuant to Proper Instructions. The Fund accepts full responsibility for its use of third party foreign exchange brokers (any dealer other than the Foreign Subcustodian) (as hereinafter defined) and for execution of said foreign exchange contracts and understands that the Fund shall be responsible for any and all costs and interest charges which may be incurred as a result of the failure or delay of its third party broker to deliver foreign exchange unless such loss, damage, or expense is caused by, or results from the negligence, misfeasance or misconduct of the Custodian. Notwithstanding the foregoing, the Custodian shall be responsible for the transmission of cash and instructions to and from the currency broker or Banking Institution with which the contract or option is made, the safekeeping of all certificates and other documents and agreements evidencing or relating to such foreign exchange transactions and the maintenance of proper records as set forth in Section 2.25. The Custodian shall have no duty with respect to the selection of the currency brokers or Banking Institutions with which the Fund deals or, so long as the Custodian acts in accordance with Proper Instructions, for the failure of such brokers or Banking Institutions to comply with the terms of any contract or option. (b) FOREIGN EXCHANGE CONTRACTS AS PRINCIPAL. The Custodian shall not be obligated to enter into foreign exchange transactions as principal. However, if the Custodian has made available to the Fund its services as a principal in foreign exchange transactions, upon receipt of Proper Instructions, the Custodian shall enter into foreign currencies for spot and future delivery on behalf of and for the account of the Fund with the Custodian as principal. The Custodian shall be responsible for the selection of the currency brokers or Banking Institutions and the failure of such currency brokers or Banking Institutions to comply with the terms of any contract or option. (c) PAYMENTS. Notwithstanding anything to the contrary contained herein, upon receipt of Proper Instructions the Custodian may, in connection with a foreign exchange contract, make free outgoing payments of cash in the form of U.S. Dollars or foreign currency prior to receipt of confirmation of such foreign exchange contract or confirmation that the countervalue currency completing such contract has been delivered or received. SECTION 2.14. SECURITIES LOANS. Upon receipt of Proper Instructions, the Custodian shall, in connection with loans of securities by the Fund, deliver securities of the Fund to the borrower thereof and may, except as otherwise provided below, deliver such securities prior to receipt of the collateral, if any, for such borrowing; provided that, in cases of loans of securities secured by cash collateral, the Custodian's instructions to the Securities System shall require that the Securities System deliver the securities of the Fund to the 8 borrower thereof only upon receipt of the collateral for such borrowing. The Custodian shall retain on the Fund's behalf the right to any dividends, interest or distribution on such loaned securities and any other rights specified in Proper Instructions. Upon receipt of Proper Instructions and the loaned securities, the Custodian will release the collateral to the borrower. SECTION 2.15. COLLECTIONS. The Custodian shall: (a) collect amounts due and payable to the Fund with respect to portfolio securities and other Assets; (b) promptly credit to the account of the Fund all income and other payments relating to portfolio securities and other Assets held by the Custodian hereunder upon Custodian's receipt of such income or payments or as otherwise agreed in writing by the Custodian and the Fund; (c) promptly endorse and deliver any instruments required to effect such collection; and (d) promptly execute ownership and other certificates and affidavits for all federal, state, local and foreign tax purposes in connection with receipt of income or other payments with respect to portfolio securities and other Assets, or in connection with the transfer of such securities or other Assets; provided, however, that with respect to portfolio securities registered in so-called street name, or physical securities with variable interest rates, the Custodian shall use its best efforts to collect amounts due and payable to the Fund. The Custodian shall promptly notify the Fund in writing by facsimile transmission or in such other manner as the Fund and Custodian may agree in writing if any amount payable with respect to portfolio securities or other Assets is not received by the Custodian when due. The Custodian shall not be responsible for the collection of amounts due and payable with respect to portfolio securities or other Assets that are in default. SECTION 2.16. DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. To enable the Fund to pay dividends or other distributions to shareholders of the Fund and to make payment to shareholders who have requested repurchase or redemption of their shares of the Fund (collectively, the "Shares"), the Custodian shall promptly release cash or securities (a) in the case of cash, upon receipt of Proper Instructions, to one or more Distribution Accounts (as hereinafter defined) designated by the Fund in such Proper Instructions; or (b) in the case of securities, upon the receipt of Special Instructions (as hereinafter defined) to such entity or account designated by the Fund in such Special Instructions. For purposes of this Agreement, a "Distribution Account" shall mean an account established at a Banking Institution designated by the Fund in Special Instructions. SECTION 2.17. PROCEEDS FROM SHARES SOLD. The Custodian shall receive funds representing cash payments received for Shares issued or sold from time to time by the Fund, and shall promptly credit such funds to the account of the Fund. The Custodian shall promptly notify the Fund of Custodian's receipt of cash in payment for Shares issued by the Fund by facsimile transmission or in such other manner as the Fund and Custodian may agree in writing. Upon receipt of Proper Instructions, the Custodian shall: (a) deliver all federal funds received by the Custodian in payment for Shares in payment for such investments as may be set forth in such Proper Instructions and at a time agreed upon between the Custodian and the Fund; and (b) make federal funds available to the Fund as of specified times agreed upon from time to time by the Fund and the Custodian, in the amount of checks received in payment for Shares which are deposited to the accounts of the Fund. SECTION 2.18. PROXIES, NOTICES, ETC. The Custodian shall deliver or cause to be delivered to the Fund, in the most expeditious manner practicable, all forms of proxies, all notices of meetings, and any other notices or announcements affecting or relating to securities owned by the Fund that are received by the Custodian, any Subcustodian, or any nominee of either of them, and, upon receipt of Proper Instructions, the Custodian shall execute and deliver, or cause such Subcustodian or nominee to execute and deliver, such proxies or other authorizations as may be required. Except as directed pursuant to Proper Instructions, neither the Custodian nor any Subcustodian or nominee shall vote upon any such securities, or execute any proxy to vote thereon, or give any consent or take any other action with respect thereto. The Custodian will not release the identity of the Fund to an issuer which requests such information pursuant to the Shareholder Communications Act of 1985, 9 for the specific purpose of direct communications between such issuer and the Fund unless the Fund directs the Custodian otherwise in writing. SECTION 2.19. BILLS AND OTHER DISBURSEMENTS. Upon receipt of Proper Instructions, the Custodian shall pay or cause to be paid, all bills, statements, or other obligations of the Fund. SECTION 2.20. NONDISCRETIONARY FUNCTIONS. The Custodian shall attend to all nondiscretionary details not specifically covered by this Agreement in accordance with industry standards in connection with the sale, exchange, substitution, purchase, transfer or other dealings with securities or other Assets held by the Custodian, except as otherwise directed from time to time pursuant to Proper Instructions. SECTION 2.21. BANK ACCOUNTS. (a) ACCOUNTS WITH THE CUSTODIAN. The Custodian shall open and operate a bank account or accounts (hereinafter referred to collectively, as "Bank Accounts") on the books of the Custodian; provided that such Bank Account(s) shall be in the name of the Custodian or a nominee thereof, for the account of the Fund, and shall be subject only to draft or order of the Custodian. The responsibilities of the Custodian to the Fund for deposits accepted on the Custodian's books shall be that of a U.S. bank for a similar deposit. (b) DEPOSIT INSURANCE. Upon receipt of Proper Instructions, the Custodian shall take such action as the Fund deems necessary or appropriate to cause each deposit account established by the Custodian pursuant to this Section 2.21 to be insured to the maximum extent possible by all applicable deposit insurers, including, without limitation, the Federal Deposit Insurance Corporation. SECTION 2.22. DEPOSIT OF FUND ASSETS IN SECURITIES SYSTEMS. The Custodian may deposit and/or maintain domestic securities owned by the Fund in: (a) The Depository Trust Company; (b) the Participants Trust Company; (c) any book-entry system as provided in (i) Subpart O of Treasury Circular No. 300, 31 CFR 306.115 (ii) Subpart B of Treasury Circular Public Debt Series No. 27-76, 31 CFR 350.2, or (iii) the book-entry regulations of federal agencies substantially in the form of 31 CFR 306.115; or (d) any other domestic clearing agency registered with the Securities and Exchange Commission ("SEC") under Section 17A of the Securities Exchange Act of 1934 (or as may otherwise be authorized by the Securities and Exchange Commission to serve in the capacity of depository or clearing agent for the securities or other assets of investment companies) which acts as a securities depository; provided, however, that no such deposit or maintenance of securities may be made except with respect to those agencies and entities the use of which the Fund has previously approved by Special Instructions (each of the foregoing being referred to in this Agreement as a "Securities System"). Use of a Securities System shall be in accordance with applicable Federal Reserve Board and SEC rules and regulations, if any, and subject to the following provisions: (A) The Custodian or any Subcustodian may deposit and/or maintain securities held hereunder in a Securities System, provided that such securities are represented in an account ("Account") of the Custodian in the Securities System which Account shall not contain any assets of the Custodian other than assets held as fiduciary, custodian or otherwise for customers. (B) The books and records of the Custodian shall at all times identify those securities belonging to the Fund which are maintained in a Securities System. (C) The Custodian shall pay for securities purchased for the account of the Fund only upon (i) receipt of advice from the Securities System that such securities have been transferred to the Account of the Custodian, and (ii) the making of an entry on the records of the Custodian to reflect such payment and transfer for the 10 account of the Fund. The Custodian shall transfer securities sold for the account of the Fund only upon (iii) receipt of advice from the Securities System that payment for such securities has been transferred to the Account of the Custodian, and (iv) the making of an entry on the records of the Custodian to reflect such transfer and payment for the account of the Fund. Copies of all advices from the Securities System relating to transfers of securities for the account of the Fund shall identify the Fund, and shall be maintained for the Fund by the Custodian. The Custodian shall deliver to the Fund on the next succeeding business day daily transaction reports which shall include each day's transactions in the Securities System for the account of the Fund. Such transaction reports shall be delivered to the Fund or any agent designated by the Fund pursuant to Proper Instructions, by computer or in such other manner as the Fund and Custodian may agree in writing. (D) The Custodian shall, if requested by the Fund pursuant to Proper Instructions, provide the Fund with all reports obtained by the Custodian or any Subcustodian with respect to a Securities System's accounting system, internal accounting control and procedures for safeguarding securities deposited in the Securities System. (E) Upon receipt of Special Instructions, the Custodian shall terminate the use of any Securities System (except the federal book-entry system) on behalf of the Fund as promptly as practicable and shall take all actions reasonably practicable to safeguard the securities of the Fund maintained with such Securities System. SECTION 2.23. OTHER TRANSFERS. Upon receipt of Special Instructions, the Custodian shall make such other dispositions of securities, funds, or other Assets of the Fund in a manner or for purposes other than as expressly set forth in this Agreement, provided that the Special Instructions relating to such disposition shall include a statement of the purposes for which the delivery is to be made, the amount of funds, Assets and/or securities to be delivered and the name of the person or persons to whom delivery is to be made, and shall otherwise comply with the provisions of Sections 3.01 and 3.03 hereof. SECTION 2.24. ESTABLISHMENT OF SEGREGATED ACCOUNT. Upon receipt of Proper Instructions, the Custodian shall establish and maintain on its books a segregated account or accounts for and on behalf of the Fund, into which account or accounts may be transferred cash and/or securities or other Assets of the Fund, including securities maintained by the Custodian in a Securities System pursuant to Section 2.22 hereof, said account or accounts to be maintained: (a) for the purposes set forth in Section 2.09, 2.10 and 2.11 hereof; (b) for the purposes of compliance by the Fund with the procedures required by Investment Company Act Release No. 10666, or any subsequent release or releases of the SEC relating to the maintenance of segregated accounts by registered investment companies; or (c) for such other purposes as may be set forth, from time to time, in Special Instructions. The Custodian shall not be responsible for the determination of the type or amount of Assets to be held in any segregated account referred to in this Section 2.24. SECTION 2.25. CUSTODIAN'S BOOKS AND RECORDS. The Custodian shall provide any assistance reasonably requested by the Fund in the preparation of reports to Fund shareholders and others, audits of accounts, and other ministerial matters of like nature. The Custodian shall maintain complete and accurate records with respect to securities and other Assets held for the accounts of the Fund as required by the rules and regulations of the SEC applicable to investment companies registered under the 1940 Act, including, but not limited to: (a) journals or other records of original entry containing a detailed and itemized daily record of all receipts and deliveries of securities (including certificate and transaction identification numbers, if any), and all receipts and disbursements of cash; (b) ledgers or other records reflecting (i) securities in transfer, (ii) securities in physical possession, (iii) securities borrowed, loaned or collateralizing obligations of the Fund, (iv) monies borrowed and monies loaned (together with a record of the collateral therefor and substitutions of such collateral), and (v) dividends and interest received; and (c) cancelled checks and bank records relating thereto. The Custodian shall keep such other books and records of the Fund as the Fund shall reasonably request. All such books and records 11 maintained by the Custodian shall be maintained in a form acceptable to the Fund and in compliance with the rules and regulations of the SEC, including, but not limited to, books and records required to be maintained by Section 31(a) of the 1940 Act and the rules and regulations from time to time adopted thereunder. All books and records maintained by the Custodian pursuant to this Agreement shall at all times be the property of the Fund and shall be available during normal business hours for inspection and use by the Fund and its agents, including without limitation, its independent certified public accountants. Notwithstanding the preceding sentence, the Funds shall not take any actions or cause the Custodian to take any actions which would knowingly cause, either directly or indirectly, the Custodian to violate any applicable laws, regulations or orders. Notwithstanding the provisions of this Section 2.25, in the event the Fund purchases cash, securities and other Assets requiring the use of a Domestic Subcustodian or Foreign Sub-Subcustodian, the Custodian shall be entitled to rely upon and use the books, records and accountings of the Domestic Subcustodian as its means of accounting to the Fund for all cash, securities and other Assets deposited with such entities; provided however, that such books, records and accountings on which the Bank may rely must be maintained in the United States by such Domestic Subcustodian and, provided further, that any agreement between the Custodian and such Domestic Subcustodian must state that the Domestic Subcustodian agrees to make any records available upon request and preserve, for the periods described in Rule 31a-2 of the 1940 Act, the records required to be maintained by Rule 31a-1 of the 1940 Act. In no event shall the Custodian be entitled to rely upon and use books, records and accountings which are maintained outside of the United States. SECTION 2.26. OPINION OF FUND'S INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS. The Custodian shall take all reasonable action as the Fund may request to obtain from year to year favorable opinions from the Fund's independent certified public accountants with respect to the Custodian's activities hereunder in connection with the preparation of the Fund's Form N-1A and the Fund's Form N-SAR or other periodic reports to the SEC and with respect to any other requirements of the SEC. SECTION 2.27. REPORTS BY INDEPENDENT CERTIFIED PUBLIC Accountants. At the request of the Fund, the Custodian shall deliver to the Fund a written report prepared by the Custodian's independent certified public accountants with respect to the services provided by the Custodian under this Agreement, including, without limitation, the Custodian's accounting system, internal accounting control and procedures for safeguarding cash, securities and other assets, including cash, securities and other assets deposited and/or maintained in a Securities System or with a Subcustodian. Such report shall be of sufficient scope and in sufficient detail as may reasonably be required by the Fund and as may reasonably be obtained by the Custodian. SECTION 2.28. OVERDRAFT FACILITY. In the event that the Custodian is directed by Proper Instructions to make any payment or transfer of funds on behalf of the Fund for which there would be, at the close of business on the date of such payment or transfer, insufficient funds held by the Custodian on behalf of the Fund, the Custodian may, in its sole discretion, provide an overdraft (an "Overdraft") to the Fund in an amount sufficient to allow the completion of such payment. Any Overdraft provided hereunder: (a) shall be payable on the next business day, unless otherwise agreed by the Fund and the Custodian; and (b) shall accrue interest from the date of the Overdraft to the date of payment in full by the Fund at a rate agreed upon in writing, from time to time, by the Custodian and the Fund. The purpose of such Overdrafts is to temporarily finance extraordinary or emergency expenses not reasonably foreseeable by the Fund. The Custodian shall promptly notify the Fund in writing ("Overdraft Notice") of any Overdraft by facsimile transmission or in such other manner as the Fund and the Custodian may agree in writing. The Custodian shall have a right of set-off against all Assets (except for Assets held in a segregated margin account or otherwise pledged in connection with options or futures contracts held for the benefit of the Fund and for Assets allocated to any other Overdraft or loan made hereunder); provided, however, the Custodian shall promptly notify the Fund in writing of any intent to exercise a right of set-off against Assets hereunder and shall not exercise any such right of set-off against Assets hereunder unless and until the Fund has failed to pay (within ten (10) days after the Fund's receipt of such notice 12 of intent to exercise a right of set-off), any Overdraft, together with all accrued interest thereon. Notwithstanding the provisions of any applicable law, including, without limitation, the Uniform Commercial Code, the only rights or remedies which the Custodian is entitled to with respect to Overdrafts is the right of set-off granted herein. ARTICLE III PROPER INSTRUCTIONS, SPECIAL INSTRUCTIONS AND RELATED MATTERS SECTION 3.01. PROPER INSTRUCTIONS AND SPECIAL INSTRUCTIONS. (a) PROPER INSTRUCTIONS. As used herein, the term "Proper Instructions" shall mean: (i) a tested telex, a written (including, without limitation, facsimile transmission) request, direction, instruction or certification signed or initialed by or on behalf of the Fund by two or more Authorized Persons (as hereinafter defined); (ii) a telephonic or other oral communication by one or more Authorized Persons; or (iii) a communication effected directly between an electro-mechanical or electronic device or system (including, without limitation, computers) by or on behalf of the Fund by one or more Authorized Persons; PROVIDED, HOWEVER, that communications of the types described in clauses (ii) and (iii) above purporting to be given by an Authorized Person shall be considered Proper Instructions only if the Custodian reasonably believes such communications to have been given by an Authorized Person with respect to the transaction involved. Proper Instructions in the form of oral communications shall be confirmed by the Fund by tested telex or in writing in the manner set forth in clause (i) above, but the lack of such confirmation shall in no way affect any action taken by the Custodian in reliance upon such oral instructions prior to the Custodian's receipt of such confirmation. The Fund and the Custodian are hereby authorized to record any and all telephonic or other oral instructions communicated to the Custodian. Proper Instructions may relate to specific transactions or to types or classes of transactions, and may be in the form of standing instructions. (b) SPECIAL INSTRUCTIONS. As used herein, the term "Special Instructions" shall mean Proper Instructions countersigned or confirmed in writing by the Treasurer or any Assistant Treasurer of the Fund or any other person designated by the Treasurer of the Fund in writing, which countersignature or confirmation shall be (i) included on the same instrument containing the Proper Instructions or on a separate instrument relating thereto, and (ii) delivered by hand, by facsimile transmission or in such other manner as the Fund and the Custodian agree in writing. (c) ADDRESS FOR PROPER INSTRUCTIONS AND SPECIAL INSTRUCTIONS. Proper Instructions and Special Instructions shall be delivered to the Custodian at the address and/or telephone, telecopy or telex number agreed upon from time to time by the Custodian and the Fund. SECTION 3.02. AUTHORIZED PERSONS. Concurrently with the execution of this Agreement and from time to time thereafter, as appropriate, the Fund shall deliver to the Custodian, duly certified as appropriate by a Treasurer or Assistant Treasurer of the Fund, a certificate setting forth: (a) the names, titles, signatures, and scope of authority of all persons authorized to give Proper Instructions or any other notice, request, direction, instruction, certificate or instrument on behalf of the Fund (collectively, the "Authorized Persons" and individually, an "Authorized Person"); and (b) the names, titles and signatures of those persons authorized to issue Special Instructions. Such certificate may be accepted and relied upon by the Custodian as conclusive evidence of the facts set forth therein and shall be considered to be in full force and effect until delivery to the Custodian of a similar certificate to the contrary. Upon delivery of a certificate which deletes or does not include the name(s) of a person previously authorized to give Proper Instructions or to issue Special 13 Instructions, such persons shall no longer be considered an Authorized Person or authorized to issue Special Instructions. SECTION 3.03. PERSONS HAVING ACCESS TO ASSETS OF THE PORTFOLIOS. Notwithstanding anything to the contrary contained in this Agreement, no Authorized Person, Director, officer, employee or agent of the Fund shall have physical access to the Assets of the Fund held by the Custodian nor shall the Custodian deliver any Assets of the Fund to an account of such person; provided, however, that nothing in this Section 3.03 shall prohibit (a) any Authorized Person from giving Proper Instructions, or any person authorized to issue Special Instructions from issuing Special Instructions, so long as such action does not result in delivery of or access to Assets of the Fund prohibited by this Section 3.03; or (b) the Fund's independent certified public accountants from examining or reviewing the Assets of the Fund held by the Custodian. The Fund will deliver from time to time a written certificate executed by two Authorized Persons identifying such Authorized Persons, Directors, officers, employees and agents of the Fund. Notwithstanding the foregoing, to the extent that the person acting on behalf of the Custodian in making such delivery has actual knowledge that any person is an Authorized Person, Director, officer, employee or agent of the Fund, the Custodian will comply with this Section 3.03 as if the name of such Authorized Person, Director, officer, employee or agent had been contained in a written certificate provided pursuant to this Section 3.03. SECTION 3.04. ACTIONS OF CUSTODIAN BASED ON PROPER INSTRUCTIONS AND SPECIAL INSTRUCTIONS. So long as and to the extent that the Custodian acts in accordance with (a) Proper Instructions or Special Instructions, as the case may be, and (b) the terms of this Agreement, the Custodian shall not be responsible for the title, validity or genuineness of any property, or evidence of title thereof, received by it or delivered by it pursuant to this Agreement. ARTICLE IV SUBCUSTODIANS From time to time, in accordance with the relevant provisions of this Agreement, (i) the Custodian may appoint one or more Domestic Subcustodians and Special Subcustodians (each, as hereinafter defined) to act on behalf of the Fund; and (ii) any Domestic Subcustodian so appointed and which has been designated as a Foreign Custody Manager (as such term is defined in Rule 17f-5 of the 1940 Act) by the Custodian and approved by the Fund's board ("Approved Foreign Custody Manager") may appoint a Foreign Sub-Subcustodian or Interim Sub-Subcustodian (as each are hereinafter defined) in accordance with this Article IV; provided that the Fund's board also has approved the agreement between the Custodian and the Foreign Custody Manager specifying the Foreign Custody Manager's duties ("Delegation Agreement"). For purposes of this Agreement, all Domestic Subcustodians, Special Subcustodians, Foreign Sub-Subcustodians and Interim Sub-Subcustodians shall be referred to collectively as "Subcustodians". SECTION 4.01. DOMESTIC SUBCUSTODIANS. The Custodian may, at any time and from time to time, appoint any bank as defined in Section 2(a)(5) of the 1940 Act or any trust company or other entity any of which meet requirements of a custodian under Section 17(f) of the 1940 Act and the rules and regulations thereunder, to act as agent for the Custodian on behalf of the Fund as a subcustodian for purposes of holding cash, securities and other Assets of the Fund and performing other functions of the Custodian within the United States (a "Domestic Subcustodian"); PROVIDED, THAT, the Custodian shall notify the Fund in writing of the identity and qualifications of any proposed Domestic Subcustodian at least sixty (60) days prior to the desired appointment of such Domestic Subcustodian, and the Fund will notify the Custodian, in writing signed by two or more Authorized Persons, of approval or disapproval of the appointment of the proposed Domestic Subcustodian; and PROVIDED, FURTHER, that the Custodian may not appoint any such Domestic Subcustodian without such prior written approval of the Fund by such Authorized Persons. Each such duly approved 14 Domestic Subcustodian and the countries where, Foreign Sub-Subcustodians and the securities depositories and clearing agencies through which they may hold securities and other Assets of the Fund shall be as agreed upon by the parties hereto in writing, from time to time, in accordance with the provisions of Section 9.04 hereof (the "Subcustodian List"). SECTION 4.02. FOREIGN SUB-SUBCUSTODIANS AND INTERIM SUB-SUBCUSTODIANS. (a) FOREIGN SUB-SUBCUSTODIANS. Provided that the Custodian of a Domestic Subcustodian is an Approved Foreign Custody Manager, the Custodian or any such Domestic Subcustodian, as applicable, may appoint any (1)(a) "Qualified Foreign Bank" (as such term is defined in Rule 17f-5) meeting the requirements of an "Eligible Foreign Custodian" (as such term is defined in Rule 17f-5) or by SEC order exempt therefrom; (b) majority-owned direct or indirect subsidiary of a "U.S. bank" (as such term is defined in Rule 17f-5) or bank holding company meeting the requirements of an Eligible Foreign Custodian or exempt by SEC order therefrom; or (c) any bank (as such term is defined in Section 2(a)(5) of the 1940 Act) meeting the requirements of a custodian under Section 17(f) of the 1940 Act and the rules and regulations thereunder (each a "Foreign Sub-Subcustodian") or (2) any "Securities Depository" (as such term is defined in Rule 17f-5) or clearing agency meeting the requirements of an Eligible Foreign Custodian or exempt by SEC order therefrom ("Securities Depositories and Clearing Agencies"), provided that the Foreign Custody Manager's appointments of such Eligible Foreign Custodians shall at all times be governed by the Delegation Agreement. (b) INTERIM SUB-SUBCUSTODIANS. Notwithstanding the foregoing, in the event that the Fund shall invest in a security or other Asset to be held in a country in which the Foreign Custody Manager has not appointed an Eligible Foreign Custodian, the Custodian shall, or shall cause the Domestic Subcustodian to, promptly notify the Fund in writing by facsimile transmission or in such other manner as the Fund and Custodian shall agree in writing of the unavailability of an approved Foreign Sub-Subcustodian in such country; and upon the receipt of Special Instructions, the Custodian shall, or shall cause the Domestic Subcustodian to, appoint or approve any Person (as hereinafter defined) designated by the Fund in such Special Instructions, to hold such security or other Asset. (Any Person appointed or approved as a sub-subcustodian pursuant to this Section 4.02(b) is hereinafter referred to as an "Interim Sub-Subcustodian.") SECTION 4.03. SPECIAL SUBCUSTODIANS. Upon receipt of Special Instructions, the Custodian shall, on behalf of the Fund, appoint one or more banks, trust companies or other entities designated in such Special Instructions to act as a subcustodian for the purpose of (i) effecting third-party repurchase transactions with banks, brokers, dealers or other entities, (ii) providing depository and clearing agency services with respect to certain variable rate demand note securities; and (iii) effecting any other transactions designated by the Fund in Special Instructions. (Each such designated subcustodian is hereinafter referred to as a "Special Subcustodian.") Each such duly appointed Special Subcustodian shall be listed on the Subcustodian List. In connection with the appointment of any Special Subcustodian, the Custodian shall enter into a subcustodian agreement with the Special Subcustodian in form and substance approved by the Fund, provided that such agreement shall in all events comply with the provisions of the 1940 Act and the rules and regulations thereunder and the terms and provisions of this Agreement. The Custodian shall not amend any subcustodian agreement entered into with a Special Subcustodian, or agree to change or permit any changes thereunder, or waive any rights under such agreement, except upon prior approval pursuant to Special Instructions. SECTION 4.04. TERMINATION OF A SUBCUSTODIAN. The Custodian shall (i) cause each Domestic Subcustodian to, and (ii) use its best efforts to cause each Interim Sub-Subcustodian and Special Subcustodian to, perform all of its obligations in accordance with the terms and conditions of the subcustodian agreement between the Custodian and such Domestic Subcustodian and Special Subcustodian or between the Domestic Subcustodian and a Foreign Sub-Subcustodian or Interim Sub-Subcustodian. In the event that the Custodian is 15 unable to cause such subcustodian or sub-subcustodian to fully perform its obligations thereunder, the Custodian shall promptly notify the Fund in writing and forthwith, upon the receipt of Special Instructions, terminate or cause the termination of such Subcustodian or Sub-Subcustodian with respect to the Fund and, if necessary or desirable, appoint or cause the appointment of a replacement Subcustodian or Sub-Subcustodian in accordance with the provisions of this Article IV. In addition to the foregoing, the Custodian (A) may, at any time in its discretion, upon written notification to the Fund, terminate any Domestic Subcustodian which is not an approved Foreign Custody Manager, and (B) shall, upon receipt of Special Instructions, terminate any Special Subcustodian or Domestic Subcustodian which is an Approved Foreign Custody Manager with respect to the Fund, in accordance with the termination provisions under the applicable subcustodian agreement, and (C) shall, upon receipt of Special Instructions, cause the Domestic Subcustodian to terminate any Foreign Sub-Subcustodian or Interim Sub-Subcustodian as to its use of such entities with respect to the Fund, in accordance with the termination provisions under the applicable sub-subcustodian agreement. SECTION 4.05. CERTIFICATION REGARDING FOREIGN SUB-SUBCUSTODIANS. Upon request of the Fund, the Custodian shall deliver to the Fund a certificate stating: (i) the identity of each Foreign Sub-Subcustodian then acting on behalf of the Custodian; (ii) the countries in which and the Securities Depositories and Clearing Agents through which each such Foreign Sub-Subcustodian is then holding cash, securities and other Assets of the Fund; and (iii) such other information as may be requested by the Fund to ensure compliance with rules and regulations under the 1940 Act. ARTICLE V STANDARD OF CARE: INDEMNIFICATION SECTION 5.01. STANDARD OF CARE. (a) GENERAL STANDARD OF CARE. The Custodian shall exercise reasonable care and diligence in carrying out all of its duties and obligations under this Agreement, and shall be liable to the Fund for all loss, damage and expense suffered or incurred by the Fund resulting from the failure of the Custodian to exercise such reasonable care and diligence. (b) ACTIONS PROHIBITED BY APPLICABLE LAW, ETC. In no event shall the Custodian incur liability hereunder if the Custodian or any Subcustodian or Securities System, or any subcustodian, Securities Depository or Clearing Agency utilized by any such Subcustodian, or any nominee of the Custodian or any Subcustodian (individually, a "Person") is prevented, forbidden or delayed from performing, or omits to perform, any act or thing which this Agreement provides shall be performed or omitted to be performed, by reason of: (i) any provision of any present or future law or regulation or order of the United States of America, or any state thereof, or of any foreign country, or political subdivision thereof or of any court of competent jurisdiction (and the Custodian nor any other Person shall not be obligated to take any action contrary thereto); or (ii) any act of God or war or other similar circumstance beyond the control of the Custodian unless in each case, such delay or nonperformance is caused by the negligence, misfeasance or misconduct of the Custodian. (c) MITIGATION BY CUSTODIAN. Upon the occurrence of any event which causes or may cause any loss, damage or expense to the Fund, (i) the Custodian shall, (ii) the Custodian shall cause any applicable Domestic Subcustodian or Foreign Sub-Subcustodian to, and (iii) the Custodian shall use its best efforts to cause any applicable Interim Sub-Subcustodian or Special Subcustodian to, use all commercially reasonable efforts and take all reasonable steps under the circumstances to mitigate the effects of such event and to avoid continuing harm to the Fund. 16 (d) ADVICE OF COUNSEL. The Custodian shall be without liability for any action reasonably taken or omitted in good faith pursuant to the written advise of (i) counsel for the Fund, or (ii) at the expense of the Custodian, such other counsel as the Fund and the Custodian may agree upon in writing; provided, however, with respect to the performance of any action or omission of any action upon such advice, the Custodian shall be required to conform to the standard of care set forth in Section 5.01 (a). (e) EXPENSES OF THE FUND. In addition to the liability of the Custodian under this Article V, the Custodian shall be liable to the Fund for all reasonable costs and expenses incurred by the Fund in connection with any claim by the Fund against the Custodian arising from the obligations of the Custodian hereunder including, without limitation, all reasonable attorneys' fees and expenses incurred by the Fund in asserting any such claim, and all expenses incurred by the Fund in connection with any investigations, lawsuits or proceedings relating to such claim; provided however, that the Fund has recovered from the Custodian for such claim. (f) LIABILITY FOR PAST RECORDS. The Custodian shall have no liability in respect of any loss, damage or expense suffered by the Fund, insofar as such loss, damage or expense arises from the performance of the Custodian in reliance upon records that were maintained for the Fund by entities other than the Custodian prior to the Custodian's employment hereunder which the Custodian has no reason to believe are inaccurate or incomplete after reasonable inquiry. SECTION 5.02. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHER PERSONS. (a) DOMESTIC SUBCUSTODIAN AND FOREIGN SUB-SUBCUSTODIAN. The Custodian shall be liable for the actions or omissions of any Domestic Subcustodian or Foreign Sub-Subcustodian (excluding any Securities Depository or Clearing Agency appointed by them) to the same extent as if such actions or omissions were performed by the Custodian itself. In the event of any loss, damage or expense suffered or incurred by the Fund caused by or resulting from the actions or omissions of any Domestic Subcustodian or Foreign Sub-Subcustodian for which the Custodian would otherwise be liable, the Custodian shall promptly reimburse the Fund in the amount of any such loss, damage or expense. (b) SPECIAL SUBCUSTODIANS, INTERIM SUB-SUBCUSTODIANS, SECURITY SYSTEMS, SECURITIES DEPOSITORIES AND CLEARING AGENCIES. The Custodian shall not be liable to the Fund for any loss, damage or expense suffered or incurred by the Fund resulting from the actions or omissions of a Special Subcustodian, Interim Sub-Subcustodian, Securities System, Securities Depository or Clearing Agency unless such loss, damage or expense is caused by, or results from, the negligence, misfeasance or misconduct of the Custodian; provided, however, in the event of any such loss, damage or expense, the Custodian shall take all reasonable steps to enforce such rights as it may have against such Special Subcustodian, Interim Sub-Subcustodian, Security System, Securities Depository or Clearing Agency to protect the interest of the Fund. (c) REIMBURSEMENT OF EXPENSES. The Fund agrees to reimburse the Custodian for all reasonable out-of-pocket expenses incurred by the Custodian in connection with the fulfillment of its obligations under Section 5.01(c) as it relates to Interim Sub-Subcustodians and Special Subcustodians and 5.02(b); provided however, that such reimbursement shall not apply to expenses occasioned by or resulting from the negligence, misfeasance or misconduct of the Custodian. SECTION 5.03. INDEMNIFICATION BY FUND. (a) INDEMNIFICATION OBLIGATIONS OF FUND. Subject to the limitations set forth in this Agreement, the Fund agrees to indemnify and hold harmless the Custodian and its nominees from all loss, damage and expense 17 (including reasonable attorneys' fees) suffered or incurred by the Custodian or its nominee caused by or arising from actions taken by the Custodian, its employees or agents in the performance of its duties and obligations under this Agreement; PROVIDED, HOWEVER, that such indemnity shall not apply to loss, damage and expense occasioned by or resulting from the negligence, misfeasance or misconduct of the Custodian or its nominee. In addition, the Fund agrees to indemnify any Person against liability incurred by reason of taxes assessed to such Person resulting from the fact that securities and other property of the Fund are registered in the name of such Person in accordance with the provisions of this Agreement; provided, however, that in no event shall such indemnification be applicable to income, franchise or similar taxes which may be imposed or assessed against any Person. It is also understood that the Fund agrees to indemnify and hold harmless the Custodian and its nominee for any loss arising from a foreign currency transaction or contract, where the loss results from a Sovereign Risk (as hereinafter defined) or where any Person maintaining securities, currencies, deposits or other Assets of the Fund in connection with any such transactions has exercised reasonable care maintaining such property or in connection with any such transaction involving such Assets. A "Sovereign Risk" shall mean nationalization, expropriation, devaluation, revaluation, confiscation, seizure, cancellation, destruction or similar action by any governmental authority, de facto or de jure; or enactment, promulgation, imposition or enforcement by any such governmental authority of currency restrictions, exchange controls, taxes, levies or other charges affecting the Fund's property; or acts of war, terrorism, insurrection or revolution. (b) NOTICE OF LITIGATION. RIGHT TO PROSECUTE, ETC. The Fund shall not be liable for indemnification under this Section 5.03 unless a Person shall have promptly notified the Fund in writing of the commencement of any litigation or proceeding brought against the Custodian or other Person in respect of which indemnity may be sought under this Section 5.03. With respect to claims in such litigation or proceedings for which indemnity by the Fund may be sought and subject to applicable law and the ruling of any court of competent jurisdiction, the Fund shall be entitled to participate in any such litigation or proceeding with counsel of its choice at its own expense in respect of that portion of the litigation for which the Fund may be subject to an indemnification obligation; provided, however, a Person shall be entitled to participate in (but not control) at its own cost and expense, the defense of any such litigation or proceeding if the Fund has not acknowledged in writing it obligation to indemnify the Person with respect to such litigation or proceeding. If the Fund is not permitted to participate or control such litigation or proceeding under applicable law or by a ruling of a court of competent jurisdiction, or if the Fund chooses not to so participate, the Custodian or other Person shall not consent to the entry of any judgment or enter into any settlement in any such litigation or proceeding without providing the Fund with adequate notice of any such settlement or judgment, and without the Fund's prior written consent which consent shall not be unreasonably withheld or delayed. All Persons shall submit written evidence to the Fund with respect to any cost or expense for which they are seeking indemnification in such form and detail as the Fund may reasonably request. SECTION 5.04. INVESTMENT LIMITATIONS. If the Custodian has otherwise complied with the terms and conditions of this Agreement in performing its duty generally, and more particularly in connection with the purchase, sale or exchange of securities made by or for the Fund, the Custodian shall not be liable to the Fund and the Fund agrees to indemnify the Custodian and its nominees, for any loss, damage or expense suffered or incurred by the Custodian and its nominees arising out of any violation of any investment or other limitation to which the Fund is subject except for violations of which the Custodian has actual knowledge. For purposes of this Section 5.04 the term "actual knowledge" shall mean knowledge gained by the Custodian by means other than from any prospectus published by the Fund or contained in any filing by the Fund with the SEC. SECTION 5.05. FUND'S RIGHT TO PROCEED. Notwithstanding anything to the contrary contained herein, the Fund shall have, at its election upon reasonable notice to the Custodian, the right to enforce, to the extent permitted by any applicable agreement and applicable law, the Custodian's rights against any Subcustodian, Securities System or other Person for loss, damage or expense caused the Fund by such Subcustodian, Securities 18 System or other Person, which the Custodian may have as a consequence of any such loss, damage or expense, if and to the extent that the Fund has not been made whole for any such loss, expense or damage. If the Custodian makes the Fund whole for any such loss, expense or damage, the Custodian shall retain the ability to enforce its rights directly against such Subcustodian, Securities System or other Person. Upon the Fund's election to enforce any rights of the Custodian under this Section 5.05, the Fund shall reasonably prosecute all actions and proceedings directly relating to the rights of the Custodian in respect of the loss, damage or expense incurred by the Fund; provided that, so long as the Fund has acknowledged in writing its obligation to indemnify the Custodian under Section 5.03 hereof with respect to such claim, the Fund shall retain the right to settle, compromise and/or terminate any action or proceeding in respect of the loss, damage or expense incurred by the Fund without the Custodian's consent and provided further, that if the Fund has not made an acknowledgement of its obligation to indemnify, the Fund shall not settle, compromise or terminate any such action or proceeding without the written consent of the Custodian, which consent shall not be unreasonably withheld or delayed. The Custodian agrees to cooperate with the Fund and take all actions reasonably requested by the Fund in connection with the Fund's enforcement of any rights of the Custodian. Nothing contained in this Section 5.05 shall be construed as an obligation of the Fund to enforce the Custodian's rights. The Fund agrees to reimburse the Custodian for out-of-pocket expenses incurred by it in connection with the fulfillment of its obligations under this Section 5.05; provided, however, that such reimbursement shall not apply to expenses occasioned by or resulting from the negligence, misfeasance or misconduct of the Custodian. SECTION 5.06. INDEMNIFICATION BY CUSTODIAN. (a) INDEMNIFICATION OBLIGATIONS OF CUSTODIAN. Subject to the limitations set forth in this Agreement and in addition to the reimbursement obligations provided in Section 5.02(a), the Custodian agrees to indemnify and hold harmless the Fund and its nominees from all loss, damage and expense (including reasonable attorneys' fees) suffered or incurred by the Fund or its nominee caused by or arising from the failure of the Custodian, its nominee, employees or agents to comply with the terms or conditions of this Agreement or arising out of the negligence, misfeasance or misconduct of the Custodian or its nominee. (b) NOTICE OF LITIGATION, RIGHT TO PROSECUTE, ETC. The Custodian shall not be liable for indemnification under this Section 5.06 unless the Fund shall have promptly notified the Custodian in writing of the commencement of any litigation or proceeding brought against the Fund in respect of which indemnity may be sought under this Section 5.06. With respect to claims in such litigation or proceedings for which indemnity by the Custodian may be sought and subject to applicable law and the ruling of any court of competent jurisdiction, the Custodian shall be entitled to participate in any such litigation or proceeding with counsel of its choice at its own expense in respect of that portion of the litigation for which the Custodian may be subject to an indemnification obligation; provided, however, the Fund shall be entitled to participate in (but not control) at its own cost and expense, the defense of any such litigation or proceeding if the Custodian has not acknowledged in writing its obligation to indemnify the Fund with respect to such litigation or proceeding. If the Custodian is not permitted to participate or control such litigation or proceeding under applicable law or by a ruling of a court of competent jurisdiction, or if the Custodian chooses not to so participate, the Fund shall not consent to the entry of any judgement or enter into any settlement in any such litigation or proceeding without providing the Custodian with adequate notice of any such settlement or judgement, and without the Custodian's prior written consent which consent shall not be unreasonably withheld or delayed. The Fund shall submit written evidence to the Custodian with respect to any cost or expense for which it is seeking indemnification in such form and detail as the Custodian may reasonably request. SECTION 5.07. CUSTODIAN'S RIGHT TO PROCEED. Notwithstanding anything to the contrary contained herein, the Custodian shall have, at its election upon reasonable notice to the Fund, the right to enforce, to the extent permitted by any applicable agreement and applicable law, the Fund's rights against any Subcustodian, 19 Securities System or other Person for loss, damage or expense caused the Custodian by such Subcustodian, Securities System or other Person, which the Fund may have as a consequence of any such loss, damage or expense, if and to the extent that the Custodian has not been made whole for any such loss, expense or damage. If the Fund makes the Custodian whole for any such loss, expense or damage, the Fund shall retain the ability to enforce its rights directly against such Subcustodian, Securities System or other Person. Upon the Custodian's election to enforce any rights of the Fund under this Section 5.07, the Custodian shall reasonably prosecute all actions and proceedings directly relating to the rights of the Fund in respect of the loss, damage and expense incurred by the Custodian; provided that, so long as the Custodian has acknowledged in writing its obligation to indemnify the Fund under Section 5.06 hereof with respect to such claim, the Custodian shall retain the right to settle, compromise and/or terminate any action or proceeding in respect of the loss, damage or expense incurred by the Custodian without the Fund's consent and provided further, that if the Custodian has not made an acknowledgement of its obligation to indemnify, the Custodian shall not settle, compromise or terminate any such action or proceeding without the written consent of the Fund, which consent shall not be unreasonably withheld or delayed. The Fund agrees to cooperate with the Custodian and take all actions reasonably requested by the Custodian in connection with the Custodian's enforcement of any rights of the Fund. Nothing contained in this Section 5.07 shall be construed as an obligation of the Custodian to enforce the Fund's rights. The Custodian agrees to reimburse the Fund for out-of-pocket expenses incurred by it in connection with the fulfillment of its obligations under this Section 5.07; provided, however, that such reimbursement shall not apply to expenses occasioned by or resulting from the negligence, misfeasance or misconduct of the Fund. ARTICLE VI COMPENSATION For the initial three year period beginning on the effective date of this Agreement, the Fund shall compensate the Custodian in the amount and at the times specified in Appendix "B" attached hereto. Thereafter, the Fund shall compensate the Custodian in the amount, and at times, as may be agreed upon in writing, from time to time, by the Custodian and the Fund. ARTICLE VII TERMINATION This Agreement shall continue in full force and effect until the first to occur of: (a) termination by the Custodian by an instrument in writing delivered or mailed (certified mail, return receipt requested) to the Fund, such termination to take effect not sooner than ninety (90) days after the date of such delivery or receipt; (b) termination by the Fund by an instrument in writing delivered or mailed (certified mail, return receipt requested) to the Custodian, such termination to take effect not sooner than ninety (90) days after the date of such delivery or receipt; or (c) termination by the Fund by an instrument in writing delivered to the Custodian, based upon the Fund's determination that there is reasonable basis to conclude that the Custodian is insolvent or that the financial condition of the Custodian is deteriorating in any material respect, in which case termination shall take effect upon the Custodian's receipt of such notice or at such later time as the Fund shall designate. In the event of termination pursuant to this Article VII, the Fund shall make payment of all accrued fees and unreimbursed expenses within a reasonable time following termination and delivery of a statement to the Fund setting forth such fees and expenses. The Fund shall identify in any notice of termination a successor custodian to which the cash, securities and other Assets of the Fund shall, upon termination of this Agreement, be delivered. In the event that securities and other Assets remain in the possession of the Custodian after the date of termination hereof owing to failure of the Fund to appoint a successor custodian, the Custodian shall be entitled to compensation for its services in accordance with the fee schedule most recently in effect, for such period as the Custodian retains possession of such securities and other Assets, and the provisions of this Agreement relating to the duties and obligations of the Custodian and the Fund shall remain in full force and effect for such period. 20 In the event of the appointment of a successor custodian, the cash, securities and other Assets owned by the Fund and held by the Custodian, any Subcustodian or nominee shall be delivered, at the terminating party's expense, to the successor custodian; and the Custodian agrees to cooperate with the Fund in the execution of documents and performance of other actions necessary or desirable in order to substitute the successor custodian for the Custodian under this Agreement. ARTICLE VIII DEFINED TERMS The following terms are defined in the following sections:
TERM SECTION - - ---- ------- Account 2.22(A) ADRs 2.06 Approved Foreign Custody Manager Article IV Assets Article I Authorized Person 3.02 Banking Institution 2.12 Bank Accounts 2.21 Clearing Agency 4.02(a) Delegation Agreement Article IV Distribution Account 2.16 Domestic Subcustodian 4.01 Eligible Foreign Custodian 4.02(a) Foreign Sub-Subcustodian 4.02(a) Institutional Client 2.03 Interest Bearing Deposit 2.12 Interim Sub-Subcustodian 4.02(b) OCC 2.09 Overdraft 2.28 Overdraft Notice 2.28 Person 5.01(b) Procedural Agreement 2.10 Proper Instruction 3.01(a) SEC 2.22 Securities Depositories 4.02(a) Securities System 2.22 Shares 2.16 Sovereign Risk 5.03(a) Special Instruction 3.01(b) Special Subcustodian 4.03 Subcustodian Article IV 1940 Act Preamble
ARTICLE IX MISCELLANEOUS SECTION 9.01. EXECUTION OF DOCUMENTS, ETC. 21 (a) ACTIONS BY THE FUND. Upon request, the Fund shall execute and deliver to the Custodian such proxies, powers of attorney or other instruments as may be reasonable and necessary or desirable in connection with the performance by the Custodian or any Subcustodian of their respective obligations under this Agreement or any applicable subcustodian agreement, provided that the exercise by the Custodian or any Subcustodian of any such rights shall in all events be in compliance with the terms of this Agreement. (b) ACTIONS BY CUSTODIAN. Upon receipt of Proper Instructions, the Custodian shall execute and deliver to the Fund or to such other parties as the Fund may designate in such Proper Instructions, all such documents, instruments or agreements as may be reasonable and necessary or desirable in order to effectuate any of the transactions contemplated hereby and designated therein. SECTION 9.02. REPRESENTATIONS AND WARRANTIES. (a) REPRESENTATIONS AND WARRANTIES OF THE FUND. The Fund hereby represents and warrants that each of the following shall be true, correct and complete as of the date of execution of this Agreement and, unless notice to the contrary is provided by the Fund to the Custodian, at all times during the term of this Agreement: (i) the Fund is duly organized under the laws of its jurisdiction of organization and is registered as an open-end management investment company under the 1940 Act or is a series of portfolio of such entity; and (ii) the execution, delivery and performance by the Fund of this Agreement are (w) within its power, (x) have been duly authorized by all necessary action, and (y) will not (A) contribute to or result in a breach of or default under or conflict with any existing law, order, regulation or ruling of any governmental or regulatory agency or authority, or (B) violate any provision of the Fund's corporate charter or other organizational document, or bylaws, or any amendment thereof or any provision of its most recent Prospectus or Statement of Additional Information. (b) REPRESENTATIONS AND WARRANTIES OF THE CUSTODIAN. The Custodian hereby represents and warrants that each of the following shall be true, correct and complete as of the date of execution of this Agreement and, unless notice to the contrary is provided by the Custodian to the Fund, at all times during the term of this Agreement: (i) the Custodian is duly organized under the laws of its jurisdiction of organization and qualifies to serve as a custodian to open-end management investment companies under the provisions of the 1940 Act; and (ii) the execution, delivery and performance by the Custodian of this Agreement are (w) within its power (x) have been duly authorized by all necessary action, and (y) will not (A) contribute to or result in a breach of or default under or conflict with any existing law, order, regulation or ruling of any governmental or regulatory agency or authority, or (B) violate any provision of the Custodian's corporate charter, or other organizational document, or bylaws, or any amendment thereof. The Custodian acknowledges receipt of a copy of the Fund's most recent Prospectus and Statement of Additional Information. SECTION 9.03. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding and agreement of the parties hereto with respect to the subject matter hereof and accordingly, supersedes as of the effective date of this Agreement any custodian agreement heretofore in effect between the Fund and the Custodian. SECTION 9.04. WAIVERS AND AMENDMENTS. No provisions of this Agreement may be waived, amended or deleted except by a statement in writing signed by the party against which enforcement of such waiver, amendment or deletion is sought. SECTION 9.05. INTERPRETATION. In connection with the operation of this Agreement, the Custodian and the Fund may agree in writing from time to time on such provisions interpretative of or in addition to the provisions of this Agreement as may in their joint opinion be consistent with the general tenor of this Agreement. No interpretative or additional provisions made as provided in the preceding sentence shall be deemed to be an amendment of this Agreement. 22 SECTION 9.06. CAPTIONS. Headings contained in this Agreement, which are included as convenient references only, shall have no bearing upon the interpretation of the terms of the Agreement or the obligations of the parties hereto. SECTION 9.07. GOVERNING LAW. This Agreement shall be construed in accordance with and governed by the laws of the State of Missouri, in each case without giving effect to principles of conflicts of law. SECTION 9.08. NOTICES. Except in the case of Proper Instructions or Special Instructions, and as otherwise provided in this Agreement, notices and other writings contemplated by this Agreement shall be delivered by hand or by facsimile transmission or as otherwise agreed to by the Fund and the Custodian in writing (provided that in the case of delivery by facsimile transmission, notice shall also be mailed postage prepaid) to the parties at the following addresses: (a) If to the Fund: ________ _________ ________ Fund, Inc. 6300 Lamar Avenue Overland Park, Kansas 66202 Attn: Fund Treasurer Telephone: 913-236-2000 Telefax: 913-236-1595 (b) If to the Custodian: UMB Bank, n.a. 928 Grand Avenue, 10th Floor Kansas City, Missouri 64106 Attn: Securities Administration Telephone: 816-860-7764 Telefax: 816-860-4869 or such other address as either party may have designated in writing to the other party hereto. SECTION 9.09. ASSIGNMENT. This Agreement shall be binding on and shall inure to the benefit of the Fund and the Custodian and their respective successors and assigns, provided that, subject to the provisions of Section 7.01 hereof, neither party hereto may assign this Agreement or any of its rights or obligations hereunder without the prior written consent of the other party. SECTION 9.10. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. This Agreement shall become effective when one or more counterparts have been signed and delivered by each of the parties. SECTION 9.11. CONFIDENTIALITY; SURVIVAL OF OBLIGATIONS. The parties hereto agree that each shall treat confidentially the terms and conditions of this Agreement and all information provided by each party to the other regarding its business and operations. All confidential information provided by a party hereto shall be used by any other party hereto solely for the purpose of rendering services pursuant to this Agreement and, except as may be required in carrying out this Agreement, shall not be disclosed to any third party without the prior consent of such providing party. The foregoing shall not be applicable to any information that is publicly 23 available when provided or thereafter becomes publicly available other than through a breach of this Agreement, or that is required to be disclosed by any bank examiner of the Custodian or any Subcustodians, any auditor or examiner of the parties hereto, by judicial or administrative process or otherwise by applicable law or regulation. The provisions of this Section 9.11 and Section 9.01, 9.07, Section 2.28, Section 3.04, Section 4.05, Section 7.01, Article V and Article VI hereof and any other rights or obligations incurred or accrued by any party hereto prior to termination of this Agreement shall survive any termination of this Agreement. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed in its name and behalf on the day and year first above written. __________ ________ _______ FUND, INC. UMB BANK, n.a. By: /s/ By: /s/ Ralph Santoro ---------------------------- ------------------------- Name: Name: Ralph Santoro Title: Vice President Title: Senior Vice President 24 SUBCUSTODIAN LIST PURSUANT TO CUSTODIAN AGREEMENT BETWEEN UNITED ASSET STRATEGY FUND, INC. AND UMB BANK, n.a. Dated as of August 31, 1998 This Subcustodian List relates to the Custodian Agreements between UMB Bank, n.a. and each of the following funds dated the date specified by the fund's name, as subsequently amended and restated:
FUND DATE ---- ---- United Asset Strategy Fund, Inc. February 22, 1995 United Cash Management, Inc. November 26, 1991 United Continental Income Fund, Inc. November 26, 1991 United Gold & Government Fund, Inc. November 26, 1991 United Government Securities Fund, Inc. November 26, 1991 United High Income Fund, Inc. November 26, 1991 United High Income Fund II, Inc. November 26, 1991 United International Growth Fund, Inc. November 26, 1991 United Municipal Bond Fund, Inc. November 26, 1991 United Municipal High Income Fund, Inc. November 26, 1991 United New Concepts Fund, Inc. November 26, 1991 United Retirement Shares, Inc. November 26, 1991 United Vanguard Fund, Inc. November 26, 1991 United Funds, Inc. United Bond Fund November 26, 1991 United Income Fund November 26, 1991 United Accumulative Fund November 26, 1991 United Science and Technology Fund November 26, 1991 Target/United Funds, Inc.* High Income Portfolio November 26, 1991 Money Market Portfolio November 26, 1991 Bond Portfolio November 26, 1991 Income Portfolio November 26, 1991 Growth Portfolio November 26, 1991 Balanced Portfolio April 29, 1994 International Portfolio April 29, 1994 Limited-Term Bond Portfolio April 29, 1994 Small Cap Portfolio April 29, 1994 Asset Strategy Portfolio May 1, 1995 Science and Technology Portfolio April 4, 1997 Waddell & Reed Funds, Inc. Total Return Fund April 24, 1992 Municipal Bond Fund April 24, 1992 Limited-Term Bond Fund April 24, 1992 International Growth Fund April 24, 1992 Growth Fund April 24, 1992 Asset Strategy Fund April 20, 1995 High Income Fund July 31, 1997 Science and Technology Fund July 31, 1997
*Formerly, TMK/United Funds, Inc. The following is a list of Domestic Subcustodians, Foreign Subcustodian and Special Subcustodians under the Custodian Agreement as amended: A. DOMESTIC CUSTODIANS: Brown Brothers Harriman & Co. United Missouri Trust Company of New York B. FOREIGN SUB-CUSTODIANS Country Sub-Custodian Depository Argentina Citibank, n.a. CDV; CRYL Australia National Australia Bank Ltd. AUSTRACLEAR, RITs Austria Creditanstalt Bankverein KONTROLLBANK (OEKB) Belgium Banque Bruxelles Lambert CIK, BNB Brazil First National Bank of Boston, BOVESPA, CLC Brazil Canada Canadian Imperial Bank of Commerce CDS; The Bank of Canada Chile Citibank, n.a. None China Standard Chartered Bank SSCCRC; SSCC Czech Republic Ceskoslovenska Obchodni CNB; SCP Banka A.S. Denmark Den Danske Bank VP Finland Merita Securities Association; Finnish Central Securities Depository Ltd. France Banque Indosuez SICOVAM; Banque de France Germany Deutsche Bank KASSENVEREIN Hungary Citibank, N.A. KELER Ltd. Hong Kong HongKong & Shanghai Banking Corp. HongKong Securities Clearing Company India Citibank, N.A., Mumbai National Securities Depository Limited Indonesia Citibank, n.a. None Ireland Allied Irish Banks PLC Gilt Settlement Office Israel Bank Hapoalim B.M. TASE Clearinghouse Ltd. Italy Banca Commerciale Italiana MONTE TITOLI, Banca D'Italia Japan The Bank of Tokyo, Ltd. JASDEC, Bank of Japan Korea Citibank, n.a. Korean Securities Depository Corporation (KSD) Malaysia Hong Kong Bank Malaysia Berhad MCD; Bank Negara Malaysia Mexico Citibank Mexico, s.a. INDEVAL; Banco De Mexico Netherlands ABN - Amro Bank NECIGER; De Nederlandsche Bank Norway Christiana Bank VPS Peru Citibank, n.a. Caja De Valores (CAVAL) Philippines Citibank, n.a. Phillipines Central Depository, Inc. Poland Bank Polska Kasa Opieki S.A. NPB Portugal Banco Espirito Santo E Comercial Interbolsa De Lisboa Singapore HongKong & Shanghai Banking Corp. CDP Spain Banco Santander SCLV; Banco De Espana Sweden Skandinaviska Enskilda Banken VPC Switzerland Union Bank of Switzerland SEGA Taiwan Standard Chartered Bank, Taipei TSCD Thailand HongKong & Shanghai Banking Corp. Share Depository Center (SDC) Turkey Citibank, n.a. TvS, Central Bank of Turkey United Kingdom Midland Securities PLC CMO; CGO; CrestCo C. SPECIAL SUBCUSTODIANS: Wilmington Trust Co. The Bank of New York, n.a. Euroclear
EX-11 20 EXHIBIT 11 Exhibit 11 WADDELL & REED FINANCIAL, INC. COMPUTATION OF EARNINGS PER SHARE
(in thousands except for per share data) 1998 1997 1996 ------- ------- ------- Net income $83,735 $70,292 $66,700 Basic weighted average shares outstanding 65,787 66,467 66,467 ======= ======= ======= Diluted weighted average shares outstanding 66,179 66,467 66,467 ======= ======= ======= Basic net income per share $ 1.27 $ 1.06 $ 1.00 Diluted net income per share $ 1.27 $ 1.06 $ 1.00
Note: For comparison purposes, weighted average shares outstanding for 1997 and 1996 are the actual shares outstanding immediately after the initial public offering. EX-21 21 EXHIBIT 21 EXHIBIT 21 Company Subsidiaries
STATE OF NAME INCORPORATION - - ---- ------------- Waddell & Reed Financial Services, Inc. Missouri Waddell & Reed Development, Inc. Delaware Waddell & Reed, Inc. Delaware Waddell & Reed Investment Management Company Kansas Waddell & Reed Services Company Missouri Waddell & Reed Leasing, Inc. Missouri Waddell & Reed Distributors, Inc. Missouri W & R Insurance Agency, Inc. Missouri W & R Insurance Agency of Alabama, Inc. Alabama W & R Insurance Agency of Arkansas, Inc. Arkansas W & R Insurance Agency of Massachusetts, Inc. Massachusetts W & R Insurance Agency of Montana, Inc. Montana W & R Insurance Agency of Nevada, Inc. Nevada W & R Insurance Agency of Utah, Inc. Utah W & R Insurance Agency of Wyoming, Inc. Wyoming Unicon Agency, Inc. New York Unicon Insurance Agency of Massachusetts, Inc. Massachusetts Fiduciary Trust Company of New Hampshire New Hampshire
EX-23 22 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Waddell & Reed Financial, Inc. We consent to the inclusion of our report dated March 1, 1999 in the Annual Report on Form 10-K of Waddell & Reed Financial, Inc. KPMG LLP Kansas City, Missouri March 19, 1999 EX-24 23 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Helge K. Lee, Michael D. Strohm and Daniel C. Schulte, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ David L. Boren David L. Boren, Director Date: February 11, 1999 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Helge K. Lee, Michael D. Strohm and Daniel C. Schulte, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ Joseph M. Farley Joseph M. Farley, Director Date: February 5, 1999 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Helge K. Lee, Michael D. Strohm and Daniel C. Schulte, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ Louis T. Hagopian Louis T. Hagopian, Director Date: February 5, 1999 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Helge K. Lee, Michael D. Strohm and Daniel C. Schulte, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ Joseph L. Lanier, Jr. Joseph L. Lanier, Jr. Date: February 8, 1999 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Helge K. Lee, Michael D. Strohm and Daniel C. Schulte, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ Harold T. McCormick Harold T. McCormick, Director Date: February 5, 1999 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Helge K. Lee, Michael D. Strohm and Daniel C. Schulte, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ James M. Raines James M. Raines, Director Date: February 5, 1999 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Helge K. Lee, Michael D. Strohm and Daniel C. Schulte, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ George J. Records, Sr. George J. Records, Sr., Director Date: February 9, 1999 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Helge K. Lee, Michael D. Strohm and Daniel C. Schulte, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ R.K. Richey R. K. Richey, Director Date: March 10, 1999 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That the undersigned Director of Waddell & Reed Financial, Inc. does hereby constitute and appoint Helge K. Lee, Michael D. Strohm and Daniel C. Schulte, and each of them severally, his lawful attorneys and agents, for him and in his name and in the capacity indicated below, with full power and authority to do any and all acts and things and to execute any and all instruments which said attorneys and agents determine may be necessary, advisable, or required to enable the said Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations, or requirements of the Securities and Exchange Commission in connection with the Form 10-K for the fiscal year foregoing, the powers granted include the power and authority to execute and file the Form 10-K, any and all amendments to the part of or in conjunction with the Form 10-K and any and all instruments or documents submitted as a part of or in conjunction with the Form 10-K. The undersigned hereby ratifies and confirms his signature as it may be signed by said attorneys and all that said attorneys and agents shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as of the date indicated below in his name. /s/ William L. Rogers William L. Rogers, Director Date: February 6, 1999 EX-27 24 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON PAGES A-3 THROUGH A-5 OF THE COMPANY'S FORM 10-K FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 30,180 103,153 34,605 0 0 172,469 17,685 11,183 327,179 109,794 0 0 0 665 207,136 327,179 278,246 289,239 0 142,234 2,903 0 8,604 142,152 51,763 83,735 0 0 0 83,735 1.27 1.27
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