-----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, C91dEB3/oJPrNX5avrlR//IZPmkdz7W6clXWFZGxqg7m8YECzv+0hvWNua6auJNf og5oiNLJ1Q2gZOewInQjBg== 0000038777-00-000380.txt : 20001208 0000038777-00-000380.hdr.sgml : 20001208 ACCESSION NUMBER: 0000038777-00-000380 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN RESOURCES INC CENTRAL INDEX KEY: 0000038777 STANDARD INDUSTRIAL CLASSIFICATION: INVESTMENT ADVICE [6282] IRS NUMBER: 132670991 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09318 FILM NUMBER: 785027 BUSINESS ADDRESS: STREET 1: 777 MARINERS ISLAND BLVD STREET 2: 6TH FLOOR CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 6503122000 MAIL ADDRESS: STREET 1: FRANKLIN RESOURCES INC STREET 2: 901 MARINERS ISLAND BLVD 6TH FLOOR CITY: SAN MATEO STATE: CA ZIP: 94404 10-K 1 0001.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-9318 FRANKLIN RESOURCES, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-2670991 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including Area Code (650) 312-2000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered COMMON STOCK,PAR VALUE $.10 PER SHARE NEW YORK STOCK EXCHANGE, PACIFIC EXCHANGE, INC. AND LONDON STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.10 PER SHARE (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) or 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 at least 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 amendment to this Form 10-K. [ ] Aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing price of $36.57 on December 1, 2000 on the New York Stock Exchange was $4,751,245,257. Calculation of holdings by non-affiliates is based upon the assumption, for these purposes only, that executive officers, directors, nominees, Registrant's Profit Sharing Plan and persons holding 5% or more of Registrant's Common Stock are affiliates. Number of shares of the Registrant's common stock outstanding at December 1, 2000: 243,618,404 DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the Registrant's proxy statement for its Annual Meeting of Stockholders to be held on January 25, 2001, which shall be filed under cover of Schedule 14A with the Securities and Exchange Commission (the "SEC") in December, 2000 (the "Proxy Statement"), are incorporated by reference into Part III of this report. INDEX TO ANNUAL REPORT ON FORM 10-K PAGE NUMBER FORM 10-K REFERENCE TO THIS REQUIRED INFORMATION 2000 ANNUAL REPORT - -------------------- ON FORM 10-K -------------------- PART I ITEM 1. BUSINESS General Business Summary Investment Advisory and Related Services Banking/Finance Operations Regulatory Considerations Competition Company History Financial Information About Industry Segments ITEM 2. PROPERTIES ITEM 3. LEGAL PROCEEDINGS ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Proxy: "Proposal 1: Election of Directors"* ITEM 11. EXECUTIVE COMPENSATION Proxy: "Proposal 1: Election of Directors"* ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Proxy: "Principal Holders of Voting Securities" and "Security Ownership of Management"* ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Proxy: "Proposal 1: Election of Directors - Certain Relationships and Related Transactions" * PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Consolidated Financial Statements Reports on Form 8-K List of Exhibits * Incorporated by reference to the Proxy Statement. Franklin Resources, Inc. files reports with the SEC. Copies of any of these filings can be obtained from the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. We also file reports with the SEC electronically via the Internet. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at http://www.sec.gov. Additional information about Franklin Resources, Inc. can also be obtained at our website at http://www.franklintempleton.com. PART I "FORWARD-LOOKING STATEMENTS." When used in this Annual Report on Form 10-K, words or phrases about the future such as "expected to," "could have," "will continue," "anticipates," "estimates," or similar expressions are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Statements in "Business," "Management's Discussion and Analysis" ("MD&A"), and elsewhere in this document that speculate about future events are "forward-looking statements." These types of statements are subject to certain risks and uncertainties as described below, including the risk factors explained in MD&A. These risks and uncertainties could cause our current expectations and predictions in the forward-looking statements to be wrong. Forward-looking statements are our best prediction at the time that they are made, and you should not rely on them. If a circumstance occurs that causes any of our forward-looking statements to be inaccurate, Franklin Resources, Inc. does not have an obligation to publicly announce the change to our expectations, or to make any revision to the forward-looking statements. ITEM 1. BUSINESS GENERAL BUSINESS SUMMARY Franklin Resources, Inc. ("FRI" or the "Company") was organized in Delaware in November 1969. FRI and its predecessors, have been engaged in the financial services business since 1947. The common stock of FRI is traded in the United States ("U.S.") primarily on the New York Stock Exchange and the Pacific Exchange, Inc. under the ticker symbol "BEN" and under the ticker symbol "FKR" in the London Stock Exchange. The term "Franklin(R) Templeton(R) Investments" as used in this document, refers to Franklin Resources, Inc. and its consolidated subsidiaries. The majority of our operating revenues, operating expenses and net income are derived from providing investment advisory and related services to retail mutual funds, institutional and private accounts, and other investment products globally. Related services include transfer agency, fund administration, custodial, trustee and fiduciary services. This is our primary business activity and operating segment. The mutual funds and other products that we advise, collectively called our "sponsored investment products", are sold to the public under three brand names: Franklin, Templeton, and Mutual Series (TM). Our sponsored investment products, include 240 broad range domestic and global/international equity, fixed-income and money market mutual funds, as well as other investment products that meet a wide variety of investment needs of individuals and institutions. From time to time, we also participate in various investment management joint ventures. On a consolidated worldwide basis, Franklin Templeton Investments provides U.S. and international individual and institutional investors with a broad range of investment products and services designed to meet varying investment objectives. This affords our clients the opportunity to allocate their investment resources among various alternative investment products as changing worldwide economic and market conditions warrant. Our secondary business activity and operating segment is banking/finance. Our banking/finance group offers consumer lending and selected retail banking services directly to the public. Franklin Templeton Investments' equity investment products include some that are value-oriented and others that reflect a growth style of investing. Value investing focuses on identifying companies which our research analysts and portfolio managers believe are undervalued based on a number of factors. Growth investing relies on the review of macro-economic, industry and sector trends to identify companies that exhibit superior growth potential relative to industry peers and the broad market. Unlike other management styles that focus on short-term market trends, our growth portfolio investment management team invests in companies demonstrating long-term growth potential, based mainly on proprietary in-house analysis and research. We originated our fund business with the Franklin Funds(R) and added the other fund brand names through acquisitions, which are described in the "Company History" section below. When used in this report, the following terms generally apply unless otherwise noted. Information in this report is given as of September 30, 2000 unless otherwise noted. "Franklin Templeton mutual funds" or "Franklin Templeton funds" means: All of the Franklin, Templeton and Mutual Series mutual funds. "sponsored investment products" means: All of the Franklin, Templeton and Mutual Series mutual funds;closed-end investment companies; foreign-based investment products; and other U.S. and international private and institutional accounts. Our revenues are largely dependent upon the level and relative composition of assets under management. To a lesser degree, our revenues also depend upon the level of mutual fund sales and the number of mutual fund shareholder accounts. These factors are discussed below under "Investment Advisory and Related Services - Assets Under Management." As of September 30, 2000, total assets under management by Franklin Templeton Investments were $229.9 billion. Assets under management included $180.9 billion in the U.S.-registered mutual funds (including insurance dedicated funds), and $49.0 billion in closed-end investment companies, foreign-based investment products and U.S. and foreign private and institutional accounts. At September 30, 2000, we employed approximately 6,500 people in 29 countries, serving customers on six different continents. I. INVESTMENT ADVISORY AND RELATED SERVICES Franklin Templeton Investments' principal line of business is providing investment advisory and management services. In support of our core business, we provide the following support services; fund administration, shareholder processing, distribution and related services for our sponsored investment products. Fund shares are offered to individual investors, qualified groups, trustees, tax-deferred (such as IRA) or money purchase plans, employee benefit and profit sharing plans, trust companies, bank trust departments and institutional investors. In addition, various management and advisory services, commingled and pooled accounts, wrap fee arrangements and various other private investment management services are offered to certain private and institutional investors. As discussed below in "MD&A," our revenues are derived primarily from its investment management operating segment. Our revenues and income are dependent upon many factors, such as the level and composition of our assets under management, the numbers and types of shareholders in our funds and our agreements with the advisers that sell our products to the public. These factors are described below in the following sections: a. Assets Under Management b. Asset Mix c. Investment Management and Related Services d. Types of Shares Offered by Our Funds e. Distribution, Marketing and Related Services f. Shareholder Servicing g. Investment Objectives of Funds h. Product Categorization a. ASSETS UNDER MANAGEMENT ("AUM") Franklin Templeton Investments' revenues depend to a large extent upon the dollar value of assets under management because we earn most of our fees based upon the amount of assets in the accounts that we are advising. As of September 30, 2000, the type of assets under management held by investors on a worldwide basis was: TYPE OF ASSETS VALUE IN BILLIONS % OF TOTAL AUM EQUITY $ 151.5 65.9% Growth potential, income potential or various combinations thereof. FIXED-INCOME $ 63.8 27.8% Both long and short-term. HYBRID FUNDS $ 9.3 4.0% Asset allocation, balanced, flexible and income-mixed funds. MONEY FUNDS $ 5.3 2.3% Short-term liquid assets. b. ASSET MIX As discussed above, our revenues are derived primarily from investment management activities. Broadly speaking, the change in the net assets of the funds depends upon two factors: (1) the level of sales of shares of the funds as compared to redemptions of shares of the funds; and (2) the increase or decrease in the market value of the securities owned by the funds. As our asset mix has shifted since 1992 from predominantly fixed-income securities to a majority of equity assets, we have become subject to an increased risk of asset, and therefore revenue, volatility from changes in the domestic and global equity markets. In addition, because we generally derive higher revenues and income from our equity assets, a shift in assets from equity to fixed-income would have a greater than proportional reduction on total income and revenues. Despite such volatility, management believes that in the long run we are more competitive as a result of the greater diversity of investment products available to our customers. Many factors affect market values, including the general condition of national and world economics and the direction and volume of changes in interest rates and/or inflation rates. Fluctuations in interest rates and in the yield curve affect the value of fixed-income assets under management as well as the flow of monies to and from fixed-income funds. In turn, this affects our revenues from those funds. The multiplicity of factors impacting asset mix make it difficult to predict the net effect of any particular set of conditions. Although our assets under management are subject to political and currency risk due to our international investment activities, our direct exposure to fluctuations in foreign currency markets is more limited, as is discussed in more detail in "MD&A." c. INVESTMENT MANAGEMENT AND RELATED SERVICES Franklin Templeton Investments provides investment advisory, portfolio management, transfer agency, business management agent and other administrative services to our sponsored investment products. Various Franklin Templeton Investments subsidiary companies manage and implement the investment activities of sponsored mutual funds and provide the business management and/or administrative services which are necessary to the operation of each fund's business. Subsidiary companies also conduct research and provide the investment advisory services and determine which securities the funds will purchase, hold or sell as directed by each fund's board of trustees, directors or administrative managers. In addition, the subsidiary companies take all steps necessary to implement such decisions, including selecting brokers and dealers, executing and settling trades in accordance with detailed criteria set forth in the management agreement for each fund, and applicable law and practice. Similar services are rendered with respect to the closed-end investment companies, foreign-based funds and other U.S. and international private and institutional accounts. The investment advisory services provided by Franklin Templeton Investments include fundamental investment research and valuation analyses, including original economic, political, industry and company research, company visits and inspections, and the utilization of such sources as company public records and activities, management interviews, company prepared information, and other publicly available information, as well as analyses of suppliers, customers and competitors. In addition, research services provided by brokerage firms are used to support our findings. In some instances, brokerage firms agree to pay third-party providers for research provided to Franklin Templeton Investments' advisory subsidiaries in recognition of brokerage business which may be (but is not contractually required to be) directed to those brokerage firms by Franklin Templeton Investments' advisory subsidiaries in accordance with regulations adopted by the SEC. In accordance with the provisions of the Securities Exchange Act of 1934 (the " '34 Act") and as permitted by fund prospectuses and contracts with individual accounts, the investment adviser may also direct brokerage to firms for execution services as permitted by the National Association of Securities Dealers (the "NASD"). Subject to receiving best execution, advisory subsidiaries may direct trades to brokers who sell shares of the funds advised by the advisory subsidiaries. Fixed-income research includes economic, credit and value analysis. The economic analysis function monitors and evaluates numerous factors that influence the supply and demand for credit on a worldwide basis. Credit analysis researches the creditworthiness of debt issuers and their individual short-term and long-term debt issues. Value analysis reviews yield spread differential and the relative value of market sectors that represent buying and selling opportunities. Investment management and related services are provided pursuant to agreements in effect with each of our U.S.-registered Franklin Templeton open and closed-end mutual funds. Comparable agreements are in effect with foreign-registered funds and with private accounts. In general, the management agreements for our U.S.-registered Franklin Templeton open and closed-end mutual funds must be renewed each year, and must be specifically approved at least annually by a vote of such funds' board of trustees or directors or by a vote of the holders of a majority of such funds' outstanding voting securities. In either event, renewal must be approved by a majority vote of such funds' trustees or directors who are not parties to such agreement or interested persons of any such party (other than as members of the board) within the meaning of the Investment Company Act of 1940 (the " '40 Act"), cast in person at a meeting called for that purpose. Foreign-registered funds have various termination rights, review and renewal provisions that are not discussed in this report. Each U.S. management or advisory agreement between Franklin Templeton Investments and each fund automatically terminates in the event of its "assignment" (as defined in the '40 Act). "Assignment" is defined in the '40 Act as including any direct or indirect transfer of a controlling block of voting stock of the investment adviser to a fund. "Control" is defined as the power to exercise a controlling influence over the management or policies of a company. Therefore, if there was a change in control of Franklin Templeton Investments, such as through a merger or an acquisition, the majority of the U.S. management and advisory agreements with the sponsored investment products would automatically terminate. In addition, either party may terminate the agreement without penalty after written notice ranging from 30 to 60 days. If management agreements representing a significant portion of our assets under management were terminated, it would have a material adverse impact on our company. To date, no management agreements of Franklin Templeton Investments with any of the Franklin Templeton funds have been involuntarily terminated. The funds themselves have no paid employees. Generally, Franklin Templeton Investments provides and pays the salaries of personnel who serve as officers of the Franklin Templeton funds, including the President and other administrative personnel as necessary to conduct such funds' day-to-day business operations. These personnel provide information, ensure compliance with securities regulations, maintain accounting systems and controls, prepare annual reports and perform other administrative activities. Various subsidiaries have contracts with the funds to provide additional services including maintaining a fund's portfolio records, answering shareholder inquiries, and creating and publishing literature. The funds generally pay their own expenses such as legal, custody and auditing fees, reporting costs, board and shareholder meeting costs, SEC and state registration fees and similar expenses. The funds also pay Franklin Templeton Investments a fee payable monthly in arrears based upon a fund's net assets. Annual fee rates under the various global investment management agreements generally range from 0.15% to a maximum of 2.00% and are often reduced as net assets exceed various threshold levels. Our investment management agreements permit Franklin Templeton Investments to serve as an adviser to more than one fund so long as our ability to render services to each of the funds is not impaired, and so long as purchases and sales appropriate for all of the advised funds are made on a proportionate or other equitable basis. The management personnel of Franklin Templeton Investments and the fund directors or boards of trustees regularly review the fund advisory and other administrative fee structures in light of fund performance, the level and range of services provided, industry conditions and other relevant factors. Advisory and other administrative fees are generally waived or voluntarily reduced when a new fund is established and then increased to contractual levels within an established timeline or as net asset values reach certain levels. Franklin Templeton Investments uses a "master/feeder" fund structure in limited situations. This structure allows an investment adviser to manage a single portfolio of securities at the "master fund" level and have multiple "feeder funds" invest all of their respective assets into the master fund. Individual and institutional shareholders invest in the "feeder funds" which can offer a variety of service and distribution options. An advisory fee is charged at the master fund level, and administrative and shareholder servicing fees are charged at the feeder fund level. d. TYPES OF SHARES OFFERED BY OUR FUNDS Most of the U.S.-registered Franklin Templeton funds have a multi-class share structure. Franklin Templeton Investments adopted this share structure to provide investors with greater sales charge alternatives for their investments. Class A shares represent a traditional fee structure whereby the investor pays a commission at the time of purchase to the broker/dealer. During fiscal 1999 and continuing thereafter in fiscal 2000, we introduced Class B shares for many of our funds, which have no front-end sales charges but instead have a declining schedule of sales charges (called contingent deferred sales charges) if the investor redeems within the first six (6) years. For Class B shares, the commission is advanced by the fund's distributor to pay the broker/dealer. Class C shares have a hybrid, level load pricing structure combining aspects of conventional front-end, back-end and level-load pricing. In the U.S., we also offer Advisor Class shares in Franklin and Templeton funds and Z Class shares in Mutual Series funds on a limited basis, both of which have no sales charges. The Advisor and Z Class shares are sold to officers, directors and current and former employees of Franklin Templeton Investments, and are also offered to institutions and investment advisory clients (both affiliated and unaffiliated), as well as individuals investing $5 million or more. In addition, shareholders who held shares of the Mutual Series funds at the time that Franklin Templeton Investments acquired the assets of the investment advisor to the Mutual Series funds may continue to purchase Z Class shares. Franklin Templeton Investments also sells money market funds to investors without a sales charge. Under the terms and conditions described in the prospectuses or the statements of additional information for some funds, certain investors can purchase shares at net asset value or at reduced sales charges. In addition, investors may generally exchange their shares of a fund at net asset value for shares within the same class of another fund in the Franklin Templeton Investments group without having to pay additional sales charges. The Franklin Templeton insurance product funds generally have a two class share structure, Class 1 and Class 2, which are offered at net asset value without a sales load directly to the insurance company separate accounts (the shareholder). The only difference between the two classes is that Class 2 shares pay a distribution and service ("12b-1") fee (as described below in "Distribution, Marketing and Related Services") to Franklin Templeton Investments, the insurance company or others for the expenses of activities that are primarily intended to sell shares of the class or variable contracts offering shares of the class. These 12b-1 fees are generally assessed quarterly at an annual rate of 0.25% of the average daily net assets of the class. The following table summarizes the U.S. retail fund sales and distribution fee structure for various share classes. The fees below generally apply to our U.S. registered retail funds, however, there are exceptions to this fee schedule for some funds. FEES PAID BY SHAREHOLDERS TO FRANKLIN TEMPLETON INVESTMENTS FOR MOST U.S.-REGISTERED RETAIL FUNDS - --------------------------------------------------------------------------- U.S. RETAIL FUNDS CLASS A SHARES CLASS B SHARES (c) CLASS C SHARES - --------------------------------------------------------------------------- Sales Charge At Time of Sale Equity 5.75% (a) None. 1.00% Fixed-income 4.25% (a) None. 1.00% - --------------------------------------------------------------------------- Contingent None. (b) 4% maximum 1% if Deferred Sales declining to zero shareholder Charge after 6 years of sells shares each investment. within 18 months of investment. - --------------------------------------------------------------------------- Maximum Yearly 12b-1 Plan Fees Equity 0.25% 1.00% 1.00% Fixed-income Taxable 0.25% 0.65% 0.65% Tax-free 0.10% 0.65% 0.65% - --------------------------------------------------------------------------- Types of investors Any. Any. Any. that may purchase this share class - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. RETAIL FUNDS ADVISOR CLASS SHARES Z CLASS SHARES (d) - -------------------------------------------------------------------------------- Sales Charge At Time of Sale None. None. Equity Fixed-income - -------------------------------------------------------------------------------- Contingent None. None. Deferred Sales Charge - -------------------------------------------------------------------------------- Maximum Yearly None. None. 12b-1 Plan Fees - -------------------------------------------------------------------------------- Types of investors Officers, directors Officers, directors and that may purchase and current and former current and former employees this share class employees of Franklin of Franklin Templeton Templeton Investments; Investments; Institutions, Institutions, investment investment advisory clients, advisory clients, individuals investing $5 individuals investing $5 million or more in Mutual million or more in Franklin Series funds and or Templeton funds. shareholders that hold shares of the Mutual Series funds reclassified as Z shares. - -------------------------------------------------------------------------------- (a) Reductions in the maximum sales charges may be available depending upon the amount invested and the type of investor. In some cases noted in each fund's prospectus or statement of additional information, certain investors may invest in Class A shares at net asset value (with no load). In connection with certain of these no-load purchases, Franklin/Templeton Distributors, Inc. may make a payment out of its own resources to a broker/dealer involved with that sale. (b) For NAV purchases over $1 million, a contingent deferred sales charge of 1.0% may apply to shares redeemed within one year of investment. (c) Class B shares convert to Class A shares after eight (8) years of ownership. (d) When the Company entered into management contracts for the Mutual Series funds, the existing shares of Mutual Series funds were reclassified as Z Class shares in exchange for the shares that they held at that time. Shareholders who held shares of the Mutual Series funds at the time that Franklin Templeton Investments began to advise Mutual Series may continue to purchase Z Class shares. e. DISTRIBUTION, MARKETING AND RELATED SERVICES Franklin/Templeton Distributors, Inc. ("Distributors"), a wholly-owned subsidiary of the Company, acts as the principal underwriter and distributor of shares of the U.S.-registered open-end Franklin Templeton funds. Distributors has entered into underwriting agreements with the funds, which generally provide for Distributors to pay the commission expenses for sales of fund shares. Franklin Templeton fund shares are sold primarily through a large network of independent intermediaries, including broker/dealers, banks and other similar investment advisers. We are heavily dependent upon these distribution channels and business relationships. There is increasing competition for access to these channels, which has caused our distribution costs to rise and could cause further increases in the future as competition continues and service expectations increase. In addition, many intermediaries also have mutual funds offered for sale under their own names that compete directly with our products. These intermediaries could decide to limit or restrict the sale of our fund shares, which could lower our future sales, increase redemption rates, and cause our revenues to decline. As of September 30, 2000, approximately 3,900 local, regional and national securities brokerage firms offered shares of the U.S.-registered Franklin Templeton funds for sale to the investing public. In the United States, Franklin Templeton Investments has approximately 64 general wholesalers and six (6) retirement plan wholesalers who interface with the broker/dealer community. Broker/dealers receive various fees from Distributors, including fees from investors and the funds, for services in matching investors with funds whose investment objectives match such investors' goals and risk profiles. Broker/dealers may also receive fees for their assistance in explaining the operations of the funds, in servicing the investor's account, reporting and various other distribution services. Most of the U.S.-registered Franklin Templeton funds, with the exception of certain Franklin Templeton money market funds, have adopted distribution plans (the "Plans") under Rule 12b-1 promulgated under the '40 Act ("Rule 12b-1"). The Plans are established for an initial term of one (1) year and, thereafter, must be approved annually by the particular fund's board and by a majority of disinterested fund directors. All such Plans are subject to termination at any time by a majority vote of the disinterested directors or by the particular fund shareholders. The Plans permit the funds to bear certain expenses relating to the distribution of their shares, such as expenses for marketing, advertising, printing and sales promotion. Fees under the Plans for the different share classes are shown above in the chart under "Types of Shares Offered by Our Funds." The implementation of the Plans provided for a lower fee on Class A shares acquired prior to the adoption of such Plans. Fees from the Plans are paid primarily to third-party dealers who provide service to the shareholder accounts, and engage in distribution activities. Distributors may also receive reimbursement from the funds for various expenses that Distributors incurs involved in distributing the funds, such as marketing, advertising, printing and sales promotion subject to the Plans' limitations on amounts. Each fund has a percentage limit for these type of expenses based on average assets under management. Class B and C shares are generally more costly to us in the year of sale, but they allow us to be competitive by increasing our presence in various distribution channels. Franklin Templeton Investments finances payments of the Class B share broker commissions. The repayment of the financing advances is limited to the cash flows generated by the funds' 12b-1 Plans and by any contingent deferred sales charges collected in connection with early redemptions (within six years after purchase). The fees below generally apply to our U.S.-registered retail funds, however, there are exceptions to this fee schedule for some funds. FEES PAID BY FRANKLIN TEMPLETON INVESTMENTS TO BROKER/DEALERS AND OTHER INTERMEDIARIES FOR MOST U.S.-REGISTERED RETAIL FUNDS - ------------------------------------------------------------------------------- U.S. RETAIL FUNDS CLASS A SHARES CLASS B SHARES CLASS C SHARES - ------------------------------------------------------------------------------- Dealer Commission At Time of Sale Equity 5.00% 4.00% 2.00% Fixed-income 4.00% 3.00% 2.00% - ------------------------------------------------------------------------------- Maximum Yearly 12b-1 Plan Fees Equity 0.25% 1.00% (a) 1.00% (c) Fixed-income Taxable 0.25% 0.65% (b) 0.65% (d) Tax-free 0.10% 0.65% (b) 0.65% (d) - ------------------------------------------------------------------------------- (a) Franklin Templeton Investments retains a fee equal to 0.75% and pays 0.25% to the broker/dealer of the average assets in the account. After 8 years from the date of the investment, Class B shares are converted into Class A shares. (b) Franklin Templeton Investments retains a fee equal to 0.50% and pays 0.15% to the broker/dealer of the average assets in the account. After 8 years from the date of the investment, Class B shares are converted into Class A shares. (c) Franklin Templeton Investments retains a fee equal to 0.75% of the average assets in the account for the first twelve (12) months following the sale, after which it is paid annually to the broker/dealer. (d) Franklin Templeton Investments retains a fee equal to 0.50% of the assets in the account for the first twelve (12) months following the sale, after which it is paid annually to the broker/dealer. f. SHAREHOLDER SERVICING Franklin/Templeton Investor Services, Inc. ("FTISI") is a Franklin Templeton Investments subsidiary which provides shareholder record keeping services and acts as transfer agent and dividend-paying agent for the U.S.-registered Franklin Templeton open-end funds. FTISI is registered with the SEC as a transfer agent under the '34 Act. FTISI is compensated under an agreement with each fund on the basis of an annual fee per account, which varies with the fund and the type of services being provided, and is reimbursed for out-of-pocket expenses. In addition, certain funds reimburse FTISI based on assets under management. Other subsidiaries provide the same services to the open-end funds offered for sale in Canada, Europe and Asia under similar fee arrangements. As of September 30, 2000, there were approximately 9.2 million shareholder accounts in the Franklin Templeton Investments group worldwide. g. INVESTMENT OBJECTIVES OF FUNDS Franklin Templeton Investments' sponsored investment products accommodate a variety of investment goals, including capital appreciation, growth and income, income, tax-free income and preservation of capital. In seeking to achieve such objectives, each portfolio emphasizes different investment securities. Portfolios that seek capital appreciation invest primarily in equity securities in a wide variety of international and U.S. markets; some seek broad national market exposure, while others focus on narrower sectors such as precious metals, health care, emerging technology, large-cap companies, small-cap companies, real estate securities and utilities. Portfolios seeking income generally focus on taxable and tax-exempt money market instruments, tax-exempt municipal bonds, global fixed-income securities, fixed-income debt securities of corporations and of the U.S. government and its agencies and instrumentalities such as the Government National Mortgage Association, the Federal National Mortgage Association, and the Federal Home Loan Mortgage Corporation. Still others focus on investments in particular countries and regions, such as emerging markets. A majority of the assets managed are equity-oriented. Franklin Templeton Investments also provides investment management and related services to a number of closed-end investment companies whose shares are traded on various major U.S. and some international stock exchanges. In addition, Franklin Templeton Investments provides investment management, marketing and distribution services to certain sponsored investment companies organized in the Grand Duchy of Luxembourg (called "SICAV Funds"), which are distributed in marketplaces outside of North America, to certain investment funds and portfolios in Canada as well as to certain other international portfolios in the United Kingdom and elsewhere. In addition to closed-end funds, our sponsored investment products also include portfolios managed for some of the world's largest corporations, endowments, charitable foundations, pension funds, wealthy individuals and other institutions. Franklin Templeton Investments uses various investment techniques to focus on specific client objectives for these specialized portfolios. As of September 30, 2000, the net assets under management of our five (5) largest funds were Franklin Small-Cap Growth - I ($15.8 billion), Templeton Growth Fund ($13.8 billion), Franklin California Tax-Free Income Fund, Inc. ($13.3 billion), Templeton Foreign Fund ($12.3 billion), and the Templeton World Fund ($9.4 billion). These five (5) mutual funds represented, in the aggregate, 28.0% of all Franklin Templeton Investments' assets under management. Prior to May 1, 2000, a total of 35 funds in two trusts were available in the United States to insurance company separate accounts as investment options for variable annuity and variable life insurance. In February 2000, shareholders of one trust approved an agreement and plan of reorganization and as the result of the reorganization, including the merger of certain funds, effective May 1, 2000 the insurance product funds were consolidated into a single trust with 27 funds, thus eliminating some duplicative expenses. Most of the funds related to variable insurance contracts have been fashioned after some of the more popular funds offered to the general public and are managed, in most cases, by the same investment adviser. In November 1999, one of the trusts added a fund which included a third class to be offered exclusively to pension plans. Two other insurance product funds were also added in May 2000, bringing the total to 29 funds with assets of $10.1 billion as of September 30, 2000. h. PRODUCT CATEGORIZATION The Investment Company Institute (the "ICI"), an industry group of which Franklin Templeton Investments is a member, has developed detailed definitions for the investment objectives of U.S.-registered mutual funds and variable annuity and variable life sub-accounts. In addition to the open-end mutual fund assets described in the chart below, Franklin Templeton Investments also manages approximately $54.9 billion, 24% of our assets, in closed-end investment companies, foreign-based funds and other U.S. and international private and institutional accounts. Approximately $22.7 billion of these assets are held in separate accounts. The investment objectives of these accounts vary but are primarily equity-oriented. Approximately $22.2 billion of these assets are held in international-based funds whose investment objectives vary but are primarily international and global equity-oriented. Amounts invested by our institutional clients across product types, including mutual funds, trusts, and private accounts, were $48.2 billion at September 30, 2000. From time to time, as business reasons, market conditions or investor demand warrant, Franklin Templeton Investments introduces new funds, merges existing funds, or liquidates existing funds. The following chart shows the types of our U.S.-registered mutual funds and dedicated insurance product funds as of September 30, 2000. The categories used in this chart are more precise than the broad investment objective categories used in "MD&A" and in our "Consolidated Financial Statements." The following chart is categorized using the ICI definitions.
FRANKLIN TEMPLETON FUNDS - U.S.-REGISTERED OPEN-END - ---------------------------------------------------------------------------------------------------------------------------------- CATEGORY (AND APPROXIMATE ASSETS NO. OF UNDER MANAGEMENT, INVESTMENT OBJECTIVE NO. OF MUTUAL INSURANCE IN BILLIONS AS OF FUNDS PRODUCT FUNDS SEPTEMBER 30, 2000) - ----------------------------------------------------------------------------------------------------------------------------------- I. EQUITY FUNDS ($106.1) - ----------------------------------------------------------------------------------------------------------------------------------- A. Capital Appreciation Funds Seek capital appreciation; dividends are not a ($32.5) primary consideration. - ----------------------------------------------------------------------------------------------------------------------------------- 1. Aggressive Growth Funds Invest primarily in common stocks of small, growth 4 2 companies. - ----------------------------------------------------------------------------------------------------------------------------------- 2. Growth Funds Invest primarily in common stocks of 8 3 well-established companies. - ----------------------------------------------------------------------------------------------------------------------------------- 3. Sector Funds Invest primarily in common stocks of companies in 8 4 related fields. - ----------------------------------------------------------------------------------------------------------------------------------- CATEGORY (AND APPROXIMATE ASSETS NO. OF UNDER MANAGEMENT, INVESTMENT OBJECTIVE NO. OF MUTUAL INSURANCE IN BILLIONS AS OF FUNDS PRODUCT FUNDS SEPTEMBER 30, 2000) - ----------------------------------------------------------------------------------------------------------------------------------- B. World Equity Funds ($55.1) Invest primarily in stocks of foreign companies. - ----------------------------------------------------------------------------------------------------------------------------------- 1. Emerging Market Funds Invest primarily in companies based in developing 2 1 regions of the world. - ----------------------------------------------------------------------------------------------------------------------------------- 2. Global Equity Funds Invest primarily in equity securities traded 8 3 worldwide, including those of U.S. companies. - ----------------------------------------------------------------------------------------------------------------------------------- 3. International Equity Funds Must invest in equity securities of companies 3 2 located outside the U.S. and cannot invest in U.S. company stocks. - ----------------------------------------------------------------------------------------------------------------------------------- 4. Regional Equity Funds Invest in companies based in a specific part of the 4 1 world. - ----------------------------------------------------------------------------------------------------------------------------------- C. Total Return Funds ($18.5) Seek a combination of current income and capital appreciation. - ----------------------------------------------------------------------------------------------------------------------------------- 1. Growth and Income Funds Invest primarily in common stocks of established 7 3 companies with the potential for growth and a consistent record of dividend payments. - ----------------------------------------------------------------------------------------------------------------------------------- CATEGORY (AND APPROXIMATE ASSETS NO. OF UNDER MANAGEMENT, INVESTMENT OBJECTIVE NO. OF MUTUAL INSURANCE IN BILLIONS AS OF FUNDS PRODUCT FUNDS SEPTEMBER 30, 2000) - ----------------------------------------------------------------------------------------------------------------------------------- II. HYBRID FUNDS ($8.6) May invest in a mix of equity, fixed-income securities and derivative instruments. - ----------------------------------------------------------------------------------------------------------------------------------- A. Asset Allocation Funds ($0.7) Invest in various asset classes including, but not 3 1 limited to, equities, fixed-income securities and money market instruments. They seek high total return by maintaining precise weightings in asset classes. - ----------------------------------------------------------------------------------------------------------------------------------- B. Flexible Portfolio Funds ($0.2) Invest in common stocks, bonds and other debt securities, and money market securities to provide 1 0 high total return. These funds may invest up to 100 percent in any one type of security and may easily change weightings depending upon market conditions. - ----------------------------------------------------------------------------------------------------------------------------------- C. Income-mixed Funds ($7.8) Invest in a variety of income-producing securities, including equities and fixed-income securities. 1 1 These funds seek a high level of current income without regard to capital appreciation. - ----------------------------------------------------------------------------------------------------------------------------------- CATEGORY (AND APPROXIMATE ASSETS NO. OF UNDER MANAGEMENT, INVESTMENT OBJECTIVE NO. OF MUTUAL INSURANCE IN BILLIONS AS OF FUNDS PRODUCT FUNDS SEPTEMBER 30, 2000) - ----------------------------------------------------------------------------------------------------------------------------------- III. TAXABLE BOND FUNDS ($12.1) - ----------------------------------------------------------------------------------------------------------------------------------- A. High Yield Funds ($3.1) Invest two-thirds or more of their portfolios in lower rated U.S. corporate bonds (Baa or lower by 1 1 Moody's and BBB or lower by Standard and Poor's rating services). - ----------------------------------------------------------------------------------------------------------------------------------- B. World Bond Funds ($0.3) Invest in debt securities offered by foreign companies and governments. They seek the highest level of current income available worldwide. - ----------------------------------------------------------------------------------------------------------------------------------- CATEGORY (AND APPROXIMATE ASSETS NO. OF UNDER MANAGEMENT, INVESTMENT OBJECTIVE NO. OF MUTUAL INSURANCE IN BILLIONS AS OF FUNDS PRODUCT FUNDS SEPTEMBER 30, 2000) - ----------------------------------------------------------------------------------------------------------------------------------- 1. Global Bonds Funds: General Invest in worldwide debt securities with no stated average maturity or an average maturity of five 2 1 years or more. These funds may invest up to 25% of assets in companies located in the U. S. - ----------------------------------------------------------------------------------------------------------------------------------- 2. Global Bond Funds: Invest in debt securities worldwide with an average 2 0 Short Term maturity of one to five years. These funds may invest up to 25% of assets in companies located in the U.S. - ----------------------------------------------------------------------------------------------------------------------------------- 3. Other World Bonds Funds Such as international bond and emerging market debt 1 0 funds, invest in foreign government and corporate debt instruments. - ----------------------------------------------------------------------------------------------------------------------------------- CATEGORY (AND APPROXIMATE ASSETS NO. OF UNDER MANAGEMENT, INVESTMENT OBJECTIVE NO. OF MUTUAL INSURANCE IN BILLIONS AS OF FUNDS PRODUCT FUNDS SEPTEMBER 30, 2000) - ----------------------------------------------------------------------------------------------------------------------------------- C. Government Bond Funds ($8.1) Invest in U.S. Government bonds of varying maturities. They seek high current income. - ----------------------------------------------------------------------------------------------------------------------------------- 1. Government Bond Funds: Invest two-thirds or more of their portfolios in Intermediate Term U.S. Government securities with an average maturity 0 1 of five to ten years. Securities utilized by investment managers may change with market conditions. - ----------------------------------------------------------------------------------------------------------------------------------- 2. Government Bond Funds: Invest two-thirds or more of their portfolios in Short Term U.S. Government securities with an average maturity 1 0 of one to five years. Securities utilized by investment managers may change with market conditions. - ----------------------------------------------------------------------------------------------------------------------------------- 3. Mortgage-backed Funds Invest two-thirds or more of their portfolios in 3 0 pooled mortgage-backed securities. - ----------------------------------------------------------------------------------------------------------------------------------- D. Strategic Income Funds ($0.5) Invest in a combination of U.S. fixed-income 2 4 securities to provide a high level of current income. - ----------------------------------------------------------------------------------------------------------------------------------- CATEGORY (AND APPROXIMATE ASSETS NO. OF UNDER MANAGEMENT, INVESTMENT OBJECTIVE NO. OF MUTUAL INSURANCE IN BILLIONS AS OF FUNDS PRODUCT FUNDS SEPTEMBER 30, 2000) - ----------------------------------------------------------------------------------------------------------------------------------- IV. TAX-FREE BOND FUNDS ($44.0) - ----------------------------------------------------------------------------------------------------------------------------------- A. State Municipal Bond Funds Invest primarily in municipal bonds issued by a ($30.3) particular state. These funds seek high after-tax income for residents of individual states. - ----------------------------------------------------------------------------------------------------------------------------------- 1. State Municipal Bond Funds: Invest primarily in the single-state municipal bonds general with an average maturity of greater than five years 31 0 or no specific stated maturity. The income from these funds is largely exempt from federal as well as state income tax for residents of the state. - ----------------------------------------------------------------------------------------------------------------------------------- B. National Municipal Bond Funds Invest primarily in the bonds of various municipal ($13.7) issuers in the U.S. These funds seek high current income free from federal tax. - ----------------------------------------------------------------------------------------------------------------------------------- 1. National Municipal Bond Invest primarily in municipal bonds with an average 4 0 Funds: general maturity of more than five years or no specific stated maturity. - ----------------------------------------------------------------------------------------------------------------------------------- CATEGORY (AND APPROXIMATE ASSETS NO. OF UNDER MANAGEMENT, INVESTMENT OBJECTIVE NO. OF MUTUAL INSURANCE IN BILLIONS AS OF FUNDS PRODUCT FUNDS SEPTEMBER 30, 2000) - ----------------------------------------------------------------------------------------------------------------------------------- V. MONEY MARKET FUNDS ($4.2) - ----------------------------------------------------------------------------------------------------------------------------------- A. Taxable Money Market Funds Invest in short-term, high-grade money market ($3.3) securities and must have average maturity of 90 days or less. These funds seek the highest level of income consistent with preservation of capital (i.e. maintaining a stable share price). - ----------------------------------------------------------------------------------------------------------------------------------- 1. Taxable Money Market Invest primarily in U.S. Treasury obligations and 2 0 Funds: government other financial instruments issued or guaranteed by the U.S. Government, its agencies or its instrumentalities. - ----------------------------------------------------------------------------------------------------------------------------------- 2. Taxable Money Market Invest in a variety of money market instruments, 5 1 Funds: non-government including certificates of deposit from large banks, commercial paper and bankers' acceptances. - ----------------------------------------------------------------------------------------------------------------------------------- CATEGORY (AND APPROXIMATE ASSETS NO. OF UNDER MANAGEMENT, INVESTMENT OBJECTIVE NO. OF MUTUAL INSURANCE IN BILLIONS AS OF FUNDS PRODUCT FUNDS SEPTEMBER 30, 2000) - ----------------------------------------------------------------------------------------------------------------------------------- B. Tax Exempt Money Market Invest in short-term municipal securities and must Funds ($0.9) have average maturities of 90 days or less. These funds seek the highest level of income - free from federal and, in some cases, state and local taxes - consistent with preservation of capital. - ----------------------------------------------------------------------------------------------------------------------------------- 1. National Tax-Exempt Money Invest primarily in short-term securities of various 1 0 Market Funds U.S. municipal issuers. - ----------------------------------------------------------------------------------------------------------------------------------- 2. State Tax-Exempt Money Invest primarily in short-term securities of 2 0 Market Funds municipal issuers in a single state to achieve the highest level of tax-free income for residents of that state. - -----------------------------------------------------------------------------------------------------------------------------------
i. RECENT FUND INTRODUCTIONS AND CHANGES During the fiscal year ended September 30, 2000, a number of new funds were introduced, both within the U.S. and internationally. In the U.S., the Franklin Technology Fund and Franklin Small Cap Growth Fund II were added to the Franklin Strategic Series. Additionally, the Company launched the Franklin Large Cap Value Fund within the Franklin Value Investors Trust. The Company launched under the Franklin Templeton Variable Insurance Products Trust the Franklin S&P 500 Index Fund, the Franklin Technology Securities Fund and the Franklin Aggressive Growth Securities Fund. In the U.S., we also added the Templeton Overseas Growth Fund, the Templeton Global Restructuring Fund and the Franklin Floating Rate Trust. Internationally, we launched several new SICAV sub-funds including: FTIF High Yield Euro, FTIF Technology, FTIF Emerging Markets Innovations, FTIF Biotech Discovery, FTIF Aggressive Growth and FTIF Mutual European Fund. Additionally, in the United Kingdom we launched the Franklin Biotechnology Fund, another sub-fund in Franklin Templeton Funds. In Asia, we launched the FTF Franklin Life Sciences Discovery Fund, the TIF Japan Fund and the TIF Global Balanced Fund. In Latin America, we introduced Bradesco Templeton Funds, in which there are currently two sub-funds, the Brazilian High Income Fund and the Brazilian Equity Fund. We have also incorporated Franklin Floating Rate Fund, a feeder fund located in Dublin, Ireland, which invests in the Franklin Floating Rate Master Trust. In Canada, we launched nine funds which are similar versions of Franklin equity growth-style funds, including Franklin U.S. Large Cap Growth Fund, Franklin U.S. Aggressive Growth Fund, Franklin World Health Sciences and Biotech Fund, Franklin World Telecom Fund, Franklin Technology Fund, Franklin U.S. Money Market Fund, Templeton Global Balanced RSP Fund, Franklin U.S. Small Cap Growth RSP Fund and Mutual Beacon RSP Fund. We also introduced some country-specific funds, including four funds that are both managed and distributed in India, including Templeton Monthly Income Plan, Franklin India Growth Fund, Franklin India Index Fund and Franklin India Balanced Fund. During the fiscal year ended September 30, 2000, one (1) Templeton fund was liquidated, seven (7) variable annuity funds merged into other variable annuity funds, three (3) Templeton funds merged into other Templeton funds, and one (1) Franklin Templeton fund merged into another Franklin Templeton fund. Internationally, we liquidated one (1) Templeton fund. II. BANKING/FINANCE OPERATIONS Franklin Templeton Investments' second operating segment is banking/finance, through which we offer banking products and services. A more detailed analysis of the financial effects of loan losses and delinquency rates in Franklin Templeton Investments' consumer lending and dealer auto loan business, as well as the funding of this activity, is contained in Note 3 in the Notes to the Financial Statements. These activities are carried out by the subsidiaries described below. Franklin Templeton Bank & Trust, F.S.B. ("Bank"), a subsidiary of FRI, with total assets of $117.9 million, as of September 30, 2000, provides FDIC insured deposit accounts and general customer loan products such as credit card loans and auto loans. The Bank (formerly known as Franklin Bank) became chartered as a federal savings bank on May 1, 2000 when the Office of Thrift Supervision approved the Bank's application to convert from a California state banking charter to a Federal thrift charter. Immediately following the conversion of the Bank's state charter to a federal thrift charter, Franklin Templeton Trust Company, a California chartered trust company, was merged into the Bank and continues to perform its prior activities as a division of the Bank. The Bank exercises full trust powers and through its Trust Division serves primarily as custodian of Individual Retirement Accounts and business retirement plans whose assets are invested in the Franklin Templeton funds. It also serves as trustee or fiduciary of private trusts and retirement plans. Franklin Capital Corporation ("FCC") is a subsidiary of FRI formed to expand Franklin Templeton Investments' lending activities related primarily to the purchase, securitization and servicing of retail installment sales contracts ("automobile contracts") originated by independent automobile dealerships. FCC, headquartered in Utah, conducts its business primarily in the Western region of the United States and is a finance company organized and licensed under the laws of Utah. As of September 30, 2000, FCC's total assets included $168.7 million of outstanding automobile contracts. During fiscal 2000, FCC securitized approximately $124.9 million of automobile contract receivables for which it maintains servicing rights. FCC continues to service $193 million of receivables that have been securitized to date. See Note 3 in the Notes to the Financial Statements. Our securitized consumer receivables business is subject to marketplace fluctuation and competes with businesses with significantly larger portfolios. Auto loan and credit card portfolio losses can be influenced significantly by trends in the economy and credit markets which reduce borrowers' ability to repay loans. III. REGULATORY CONSIDERATIONS Virtually all aspects of Franklin Templeton Investments' businesses are subject to various foreign, and U.S. federal and state, laws and regulations. As discussed above, Franklin Templeton Investments and a number of our subsidiaries are registered with various foreign, and U.S. federal and state, governmental agencies. These supervisory agencies have broad administrative powers, including the power to limit or restrict Franklin Templeton Investments from carrying on our business if we fail to comply with applicable laws and regulations. In the event of non-compliance, the possible sanctions which may be imposed include disciplinary action against individual employees, limiting Franklin Templeton Investments' (or a subsidiary's) ability to engage in business for specified periods of time, revoking the investment adviser or broker/dealer registrations, or similar foreign registrations, as well as censures and fines. Franklin Templeton Investments' compliance procedures meet the standards outlined in the most recent guidelines of the ICI related to securities transactions by employees, officers and directors of investment companies. Franklin Templeton Investments' officers, directors and employees may from time to time own securities which are also held by the funds. Franklin Templeton Investments' internal policies with respect to individual investments by certain employees, including officers and directors who are employed by Franklin Templeton Investments, require prior clearance and reporting of most transactions and restrict certain transactions to address the possibility of conflicts of interest. To the extent that existing or future regulations cause or contribute to reduced sales of fund shares or investment products or impair the investment performance of the funds or such other investment products, our assets under management and revenues might be adversely affected. Changes in regulations affecting free movement of international currencies might also adversely affect Franklin Templeton Investments. Since 1993, the NASD Conduct Rules have limited the amount of aggregate sales charges which may be paid in connection with the purchase and holding of investment company shares sold through brokers. The effect of the rule might be to limit the amount of fees that could be paid pursuant to a fund's 12b-1 Plan to Distributors, a subsidiary of FRI that earns underwriting commissions on the distribution of fund shares. Such limitations would apply in a situation where a fund has no, or limited, new sales for a prolonged period of time. None of the Franklin Templeton funds are in, or close to, that situation at the present time. IV. COMPETITION The financial services industry is highly competitive and has increasingly become a global industry. There are over 8,000 open-end investment companies of varying sizes, investment policies and objectives whose shares are being offered to the public in the United States. Due to Franklin Templeton Investments' international presence and varied product mix, it is difficult to assess our market position relative to other investment managers on a worldwide basis, but Franklin Templeton Investments believes that we are one of the more widely diversified investment managers in the United States. Franklin Templeton Investments believes that our equity and fixed-income asset mix coupled with our global presence will serve our competitive needs well over the long term. Franklin Templeton Investments continues to focus on service to customers, performance of investment products and extensive marketing activities with our strong broker/dealer and other financial institution distribution network. Franklin Templeton Investments faces strong competition from numerous stock brokerage and investment banking firms, insurance companies, banks, savings and loan associations and other financial institutions which also offer a wide range of financial services. In recent years, there has been a trend of consolidation in the financial services industry, resulting in stronger competitors with greater financial resources than Franklin Templeton Investments. Although we rely on intermediaries to sell and distribute Franklin Templeton fund shares, many of these intermediaries also have mutual funds under their own names that compete directly with our products. The banking industry also continues to expand its sponsorship of proprietary funds. These intermediaries could decide to limit or restrict the sale of our fund shares, which could lower our future sales and cause our revenues to decline. Franklin Templeton Investments has and continues to pursue sales relationships with all types of intermediaries to broaden our distribution network. We are currently expanding our Internet e-business to compete with the rapidly developing and evolving capabilities being offered with this technology. It is not currently possible to predict the effect of the Internet on Franklin Templeton Investments or on the financial services industry overall. As investor interest in the mutual fund industry has increased, competitive pressures have increased on sales charges of broker/dealer distributed funds. Franklin Templeton Investments believes that, although this trend will continue, a significant portion of the investing public still relies on the services of the broker/dealer community, particularly during weaker market conditions. Franklin Templeton Investments has experienced increased demand for payments to its distribution channels and anticipates that this trend will continue. We believe that we are well positioned to deal with changes in marketing trends as a result of our already extensive advertising activities and broad based marketplace recognition. Franklin Templeton Investments does significant advertising and conducts sales promotions through various media sources to promote brand recognition. We advertise in major national financial publications, as well as on radio and television to promote brand name recognition and to assist its distribution network. Such activities included purchasing network and cable programming, sponsorship of sporting events, such as the "Franklin Templeton Investments Shark Shoot-Out", sponsorship of The Nightly Business Report on public television, and extensive newspaper and magazine advertising. Diverse and strong competition affects the banking/finance segment of our business as well, and limits the interest rates that we can charge on consumer loans. We compete with many types of institutions for consumer loans, including the finance subsidiaries of large automobile manufacturers. V. COMPANY HISTORY In October 1992, Franklin Templeton Investments acquired substantially all of the assets and liabilities of the investment adviser to the Templeton, Galbraith & Hansberger Ltd. financial services business. This acquisition added the Templeton family of funds to our company. In November 1996, Franklin Templeton Investments acquired certain assets and liabilities of Heine Securities Corporation, which provided investment management services to various accounts and investment companies, including Mutual Series Fund Inc., now known as Franklin Mutual Series Fund Inc. ("Mutual Series"). Subsequent to the Mutual Series acquisition, Franklin Templeton Investments has managed Mutual Series on a unified basis with its other business operations. The purchase price paid at the closing of the Mutual Series acquisition was funded through a combination of available cash, securities and the sale of commercial paper. The base purchase price consisted of $551 million in cash, including acquisition expenses, and the delivery of 3.3 million shares of FRI common stock. The purchase price included the deposit into escrow of $150 million to be invested in shares of Mutual Series. The escrow money shares are being released over a five-year period from the date of the acquisition, with a minimum $100 million retention for the full five-year period. In addition to the base purchase price, the transaction included a contingent payment ranging from $96.25 million to $192.5 million under certain conditions if certain agreed-upon growth targets are met over the five years following the closing. The first contingent payment of $64.2 million related to these agreed-upon growth targets was made in the third quarter of fiscal 1998 and was accounted for as goodwill related to the additional purchase price of the Mutual Series acquisition. No payments were made in fiscal 1999 or 2000. A final contingent payment may be due in November 2001 if agreed upon growth targets are met. See Note 10 in the Notes to the Financial Statements. On September 11, 1998, Franklin Templeton Investments entered into an agreement with FEP Capital II, L.L.C. to form Lightning Finance Company Limited ("LFL"), a private limited liability company incorporated in Ireland on March 13, 1998. LFL is in the business of financing the up-front sales commissions paid to distributors for the sale of open-end mutual fund shares sold on a deferred sales charge basis globally. Franklin Templeton Investments owns 49% of LFL, and currently finances the payment of commissions on its Class B share sales in Canada, the United States and Europe through LFL. On July 25, 2000, Franklin Templeton Investments purchased all of the remaining outstanding shares of a Korean asset management company in which Franklin Templeton Investments formerly held a 44% interest. The purchase price for the shares was approximately $20.3 million. On August 1, 2000, Franklin Templeton Investments entered into an agreement with Nedcor Investment Bank Holdings, Ltd., a South African company, to form Franklin Templeton NIB Asset Management ("FTNIB"). Franklin Templeton Investments contributed cash and other assets with a value of approximately $27 million to the venture in return for a 50% ownership interest in FTNIB. On October 2, 2000, pursuant to an offer to purchase all of the outstanding shares of Bissett & Associates Investment Management, Ltd. ("Bissett"), FTI Acquisition Inc., a wholly-owned subsidiary of Templeton Management Limited, an indirect, wholly-owned subsidiary of FRI, acquired 6,817,817 common shares, representing 98.1% of the issued and outstanding shares of Bissett, for CDN$20.50 per share (equivalent to approximately $US 13.62). On October 3, 2000, FRI exercised its right to acquire the remaining 1.9% outstanding Bissett shares (subject to any appraisal rights that may be asserted as to the amount to be paid for the remaining shares). The cash transaction was valued at approximately CDN $140 million (equivalent to approximately US $95 million). Bissett provides investment advisory services throughout Canada to a broad range of clients including: institutional clients such as pension and other savings plans of corporations, municipalities, universities, endowments, and charitable foundations; mutual funds and pooled trusts including Bissett's own family of retail mutual funds as well as third party mutual funds; and private clients of both Bissett and other financial institutions. Bissett had approximately $5.5 billion (CND)($US 3.8 billion) under management as of June 30, 2000. On October 25, 2000, after the close of the fiscal year, the Company entered into an Agreement and Plan of Share Acquisition (the "Acquisition Agreement") with Fiduciary Trust Company International, a bank organized under the New York State Banking Law ("Fiduciary"), providing for the acquisition by FRI of all of the outstanding shares of common stock, par value $1.00 per share, of Fiduciary ("Fiduciary Common Stock"). The acquisition will be accomplished by way of the exchange of shares of common stock, par value $.10 per share, of FRI ("FRI Common Stock") for shares of Fiduciary common stock, par value $1.00 per share of pursuant to the procedures set forth in Section 143-a of the New York State Banking Law (the "Share Exchange"). The stock transaction is valued at approximately $825 million. In addition, there is a provision for an $85 million retention pool to cover, among other things, various payments aimed at retaining certain key employees of Fiduciary. The completion of the Share Exchange is subject to the receipt of necessary governmental approvals (including approval of the Board of Governors of the Federal Reserve System), Fiduciary shareholder approval and other customary closing conditions, and costs, and is expected to close in the second quarter of fiscal 2001. VI. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Information on Franklin Templeton Investments' operations in various geographic areas of the world and a breakout of business segment information is contained in Note 6 in the Notes to the Financial Statements. ITEM 2. PROPERTIES GENERAL DESCRIPTION As of September 30, 2000, Franklin Templeton Investments leased its principal executive and administrative offices located at 777 Mariners Island Boulevard, San Mateo, California and offices and facilities in eight (8) additional locations in the immediate vicinity of its headquarters. In addition, Franklin Templeton Investments owns seven (7) buildings near Sacramento, California, as well as seven (7) buildings in St. Petersburg, Florida, two (2) buildings in Nassau, Bahamas as well as space in office buildings in Argentina, China and Singapore. Certain properties of Franklin Templeton Investments were under construction during fiscal 2000 as described below. Since Franklin Templeton Investments is operated on a unified basis, corporate activities, fund related activities, accounting operations, sales, real estate and banking operations, auto loans and credit cards, management information system activities, publishing and printing operations, shareholder service operations and other business activities and operations take place in a variety of such locations. Franklin Templeton Investments or its subsidiaries also lease office space domestically in Florida, New York, and Utah and internationally in Australia, Brazil, Canada, China, England, France, Germany, Holland, Hong Kong, India, Italy, Japan, Korea, Luxembourg, Poland, Russia, Scotland, South Africa, Spain, Switzerland, Taiwan, and Turkey. I. LEASED PROPERTIES As of September 30, 2000, Franklin Templeton Investments leased properties at the locations set forth below: Approximate Approximate Square Current Base Expiration LOCATION FOOTAGE MONTHLY RENTAL DATE 777 Mariners Island Boulevard San Mateo, CA 94404 176,000 $585,000 July 2001 500 East Broward Boulevard Ft. Lauderdale, FL 33394 135,000 $293,000 June 2011 555 Airport Boulevard Burlingame, CA 94010 94,000 $229,000 July 2001 1800 Gateway Drive San Mateo, CA 94404(a) 70,000 $214,000 October 2001 1810 Gateway Drive San Mateo, CA 94404(b) 48,000 $177,000 June 2001 1950 Elkhorn Court San Mateo, CA 94403(c) 37,000 $46,000 July 2001 901 Mariners Island Blvd. San Mateo, CA 94404 16,000 $44,000 August 2001 951 Mariners Island Blvd. Between July 2001 San Mateo, CA 94404 9,000 $30,000 and August 2001 5130 Hacienda Drive 49,000 $111,000 May 2007 Dublin, CA 94568 2000 Alameda de las Pulgas 36,000 $125,000 February 2005 San Mateo, CA 94403 51 JFK Parkway Short Hills, NJ 07028 28,000 $80,000 May 2005 4760 Eastgate Mall San Diego, CA 92121(d) 47,000 $55,000 March 2009 4780 Eastgate Mall 47,000 $55,000 March 2009 San Diego, CA 92121(e) 4810 Eastgate Mall 93,321 $144,647 April 2010 San Diego, CA 92121(f) 4820 Eastgate Mall 63,532 $98,474 May 2010 San Diego, CA 92121(g) 1400 Fashion Island Boulevard San Mateo, CA 94404 13,000 $44,000 June 2001 Other U.S. Locations 64,000 -- -- Foreign Locations 257,000 -- -- (a) Franklin Templeton Investments, at its option, may terminate the lease by providing the lessor with six (6) months notice to terminate. (b) Franklin Templeton Investments subleased 4,000 square feet of the 1810 Gateway Drive property to a third party until July 1, 2001. (c) Franklin Templeton Investments subleased the 1950 Elkhorn Court property to a third party until July 31, 2001. (d) Franklin Templeton Investments subleased the 4760 Eastgate Mall property to a third party until August 31, 2007. (e) Franklin Templeton Investments subleased the 4780 Eastgate Mall property to a third party until March 31, 2009. (f) Franklin Templeton Investments subleased the 4810 Eastgate Mall property to a third party until April 30, 2010. (g) Franklin Templeton Investments subleased the 4820 Eastgate Mall Property to a third party until May 31, 2010. II. OWNED PROPERTIES In Rancho Cordova, California, Franklin Templeton Investments owns five (5) office buildings totaling approximately 424,000 square feet, plus a data center/warehouse facility of approximately 162,000 square feet and a warehouse building of approximately 69,000 square feet. In St. Petersburg, Florida, Franklin Templeton Investments owns seven (7) office buildings totaling approximately 670,000 square feet, as well as an approximate 117,000 square foot facility devoted to a computer data center, training, warehouse and mailing operations in St. Petersburg, Florida. Franklin Templeton Investments owns two (2) office buildings in Nassau, Bahamas, of approximately 14,000 square feet and approximately 25,000 square feet, respectively, as well as a nearby condominium residence. Franklin Templeton Investments also owns three (3) separate office-building floors of approximately 1,200, 8,000 and 10,000 square feet in Shanghai, China, Buenos Aires, Argentina, and Singapore, respectively. III. SALE OF CORPORATE HEADQUARTERS On July 11, 2000, Franklin Templeton Investments finalized the sale of its 60% interest in its current headquarters in San Mateo, California to an independent third party. The total purchase price for the property was $80.0 million of which approximately $22.0 million was applied toward the payment of an outstanding loan secured by the property. Franklin Templeton Investments received proceeds from the sale of approximately $34.0 million, net of closing costs and will record a gain on sale of approximately $32.8 million, net of the write-off of certain leasehold improvements on the property. Franklin Templeton Investments will recognize this gain over a 12-month period ending July 31, 2001, the anticipated period over which Franklin Templeton Investments have agreed to leaseback the property pending completion of construction of its new corporate headquarters in San Mateo, California. IV. NEW CORPORATE HEADQUARTERS In June 1999, Franklin Templeton Investments acquired approximately 32 acres of undeveloped land ("Bay Meadows") located in San Mateo, California for a total purchase price of $21.6 million. In connection with this purchase, Franklin Templeton Investments deposited with the seller and the City of San Mateo $22 million representing an estimate of our share of certain off-site improvements. A final reconciliation of the actual amount due to the seller will be made after the improvements have been completed. In June 2000, Franklin Templeton Investments entered into a five-year operating lease agreement in connection with the construction of the new corporate headquarters to be located on a portion of Bay Meadows, which Franklin Templeton Investments has ground leased to a special purpose lessor trust. The total cost of the corporate headquarters covered by this lease agreement is limited to $170 million. The lease provides for a substantial residual value guarantee (approximately 85% of the total cost) by Franklin Templeton Investments which is due on termination of the lease. The lease includes renewal options that can be exercised at the end of the initial lease period, and purchase options that can be exercised prior to the expiration of the lease term. Upon termination of the lease, Franklin Templeton Investments can either exercise our purchase option, or the property can be sold to a third party. Franklin Templeton Investments' interest in the portion of the Bay Meadows property covered by this lease (including our interest as owner of the fee interest in the land) is collateral for our obligations under the lease agreement, including our obligations to pay the residual value guaranty. FRI has provided a guaranty of the obligations of the subsidiary that signed the lease agreement, in a manner substantially similar to the guaranty for our revolving line of credit agreements. ITEM 3. LEGAL PROCEEDINGS Franklin Templeton Investments previously reported that three individual plaintiffs, James C. Roumell, Michael J. Wetta and Richard Waksman, filed a consolidated complaint in the U.S. District Court for the Southern District of Florida against Templeton Vietnam Opportunities Fund, Inc. (now known as Templeton Vietnam and Southeast Asia Fund, Inc.); Templeton Asset Management, Ltd., an indirect wholly-owned subsidiary of FRI and the investment manager of the closed-end investment company; certain of the fund's officers and directors; FRI; and Templeton Worldwide, Inc., an FRI subsidiary. The plaintiffs in that action, captioned In Re: Templeton Securities Litigation (Civil Action No. 98-6059), moved to certify a class with respect to certain claims raised in the consolidated complaint. The court has not ruled on the motion to certify a class. Other than as stated above, there have been no material developments in this litigation during the past fiscal year. Franklin Templeton Investments is involved from time to time in litigation relating to claims arising in the normal course of business. Management is of the opinion that the ultimate resolution of such claims will not materially affect Franklin Templeton Investments' business or financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of the fiscal year covered by this report, no matter was submitted to a vote of security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS INFORMATION ABOUT FRANKLIN TEMPLETON INVESTMENTS' COMMON STOCK FRI's common stock is traded on the New York Stock Exchange ("NYSE") and the Pacific Exchange, Inc. under the ticker symbol BEN and the London Stock Exchange under the ticker symbol FKR. On September 30, 2000, the closing price of FRI's common stock on the NYSE was $44.43 per share. At December 1, 2000, there were approximately 4,900 shareholders of record. Based on nominee solicitation, we believe that there are approximately 25,000 beneficial shareholders whose shares are held in street name. The following table sets forth the high and low sales prices for FRI's common stock on the NYSE. See Note 16 in the Notes to the Financial Statements. 2000 FISCAL YEAR 1999 FISCAL YEAR ---------------- ---------------- QUARTER HIGH LOW HIGH LOW - -------------------------------------------------------------------------------- October-December 35.00 27.44 45.62 26.50 January-March 39.19 24.63 38.38 27.00 April-June 36.25 28.19 45.00 27.12 July-September 45.63 30.00 43.44 29.75 Franklin Templeton Investments declared dividends of $0.24 per share in fiscal 2000 and $0.22 per share in fiscal 1999. Franklin Templeton Investments expects to continue paying dividends on a quarterly basis to common stockholders depending upon earnings and other relevant factors. ITEM 6. SELECTED FINANCIAL DATA FINANCIAL HIGHLIGHTS in millions, except assets under management and per share amounts AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------- SUMMARY OF OPERATIONS Operating revenues $2,340.1 $2,262.5 $2,577.3 $2,163.3 $1,519.5 Net income 562.1 426.7 500.5 434.1 314.7 FINANCIAL DATA Total assets 4,042.4 3,666.8 3,480.0 3,095.2 2,374.2 Long-term debt 294.1 294.3 494.5 493.2 399.5 Stockholders' equity 2,965.5 2,657.0 2,280.8 1,854.2 1,400.6 Operating cash flow 701.7 584.5 693.7 428.5 359.6 ASSETS UNDER MANAGEMENT in billions Period ending 229.9 218.1 208.6 226.0 151.6 Simple monthly average 227.7 219.8 226.9 192.0 141.1 PER COMMON SHARE Earnings Basic 2.28 1.69 1.98 1.72 1.30 Diluted 2.28 1.69 1.98 1.71 1.25 Cash dividends 0.24 0.22 0.20 0.17 0.15 Book value 12.17 10.59 9.06 7.36 5.82 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS In this section, we discuss our results of operations and our financial condition. We also make some statements relating to the future which are called "forward-looking" statements. Although we do our best to make clear and accurate forward-looking statements, the actual results and outcomes could be significantly different from those that we discuss in this document. For this reason, you should not rely too heavily on these forward-looking statements. We encourage you to read the "Risk Factors" section below, where we discuss these statements in more detail. GENERAL The majority of our operating revenues, operating expenses and net income are derived from providing investment advisory and related services to retail mutual funds, institutional and private accounts, and other investment products. This is our primary business activity and operating segment. The mutual funds and other products that we advise, collectively called our sponsored investment products, are distributed to the public via three main brand names: o Franklin o Templeton o Mutual Series Our sponsored investment products include a broad range of domestic and global/international equity, balanced, fixed-income, sector and money market mutual funds, as well as other investment products that meet a wide variety of specific investment needs of individuals and institutions. In fiscal 2001, we anticipate broadening our product lines with funds currently offered by two companies. In October 2000, the acquisition of Bissett and Associates Investment Management Ltd. ("Bissett"), added 12 funds to our Canadian product line, primarily in the balanced and growth asset classes. It also brought a number of institutional and private clients to the group. In October 2000, we also announced the proposed acquisition of Fiduciary Trust Company International ("Fiduciary"), a bank and trust the deposits of which are insured by the Federal Deposit Insurance Corporation. Fiduciary provides investment management services to institutions and private clients, primarily in the growth style. The acquisition is subject to approval by Fiduciary shareholders and various governmental regulatory authorities, and if approved, the acquisition is expected to be completed in the second quarter of fiscal 2001. The level of our revenues is largely dependent upon the level and relative composition of assets under management. To a lesser degree, our revenues are also dependent on the level of mutual fund sales and the number of mutual fund shareholder accounts. The fees charged for our services are based on contracts between our subsidiary entities and our sponsored investment products or our clients. These arrangements could change in the future. Our secondary business activity and operating segment is banking/finance. Our banking/finance group offers consumer lending and selected retail banking services to individuals. Franklin Templeton Investments operates primarily in the United States, but we also provide services and earn revenues in Canada, the Bahamas, Europe, Asia, South America, Africa and Australia. The majority of these revenues and associated expenses, however, are denominated in U.S. dollars. Therefore, our exposure to foreign currency fluctuations in our revenues and expenses is not material at this time. This situation may change in the future as our business continues to grow outside the United States. At September 30, 2000, we employed approximately 6,500 people in 29 countries, serving customers on six different continents.
Assets Under Management (in billions) 2000 1999 as of September 30, 2000 1999 1998 vs 1999 vs 1998 - ----------------------------------------------------------------------------------------------------------------------- Equity Global/international $97.6 $96.8 $84.8 1% 14% Domestic (U.S.) 53.9 37.6 37.6 43% -- Total equity 151.5 134.4 122.4 13% 10% - ----------------------------------------------------------------------------------------------------------------------- Hybrid Funds 9.3 10.2 11.2 (9)% (9)% Fixed-income Tax-free 44.0 48.2 50.5 (9)% (5)% Taxable Domestic 15.6 15.8 16.0 (1)% (1)% Global/international 4.2 3.9 3.7 8% 5% Total fixed-income 63.8 67.9 70.2 (6)% (3)% - ----------------------------------------------------------------------------------------------------------------------- Money Funds 5.3 5.6 4.8 (5)% 17% - ----------------------------------------------------------------------------------------------------------------------- Total $229.9 $218.1 $208.6 5% 5% - ----------------------------------------------------------------------------------------------------------------------- Simple monthly average for the year/1/ $227.7 $219.8 $226.9 4% (3)%
/1/ Investment management fees from approximately 60% of our assets under management at September 30, 2000 are calculated using a daily average assets under management figure. Our assets under management at the end of fiscal 2000 were $229.9 billion, 5% higher than the prior fiscal year end. The simple monthly average value of these assets during fiscal 2000 was $227.7 billion as compared to $219.8 billion in fiscal 1999, a 4% increase. As was evident in fiscal 1999, the change in the simple monthly average assets under management is generally more indicative of investment management fee revenue trends than the period end change year over year. Equity assets comprised 66% of our ending assets under management at September 30, 2000, as compared to 62% at the same time last year. The change in our assets under management was as follows. Assets Under Management (in billions)
2000 1999 year ended September 30, 2000 1999 1998 vs 1999 vs 1998 - ----------------------------------------------------------------------------------------------------------------------- Beginning assets under management $218.1 $208.6 $226.0 5% (8)% Sales 51.7 41.8 56.5 24% (26)% Reinvested dividends 8.7 3.9 4.7 123% (17)% Redemptions (62.8) (59.5) (45.9) 6% 30% Appreciation (depreciation) 14.2 23.3 (32.7) (39)% -- - ----------------------------------------------------------------------------------------------------------------------- Ending assets under management $229.9 $218.1 $208.6 5% 5%
During fiscal 2000 and fiscal 1999, our sponsored investment products experienced overall net cash outflows in contrast to the net cash inflows experienced in fiscal 1998. Gross sales increased 24% in fiscal 2000 on average across our sponsored investment products, but sales increases were strongest in the equity products, which accounted for 62% of total sales during the fiscal year. In fiscal 2000 and fiscal 1999, net outflows were offset by market appreciation. In fiscal 1998, market depreciation, principally in the fourth quarter, offset net inflows. RESULTS OF OPERATIONS The table below presents the highlights of our operations for the last three fiscal years.
(in millions except per share amounts) 2000 1999 2000 1999 1998 vs 1999 vs 1998 - ----------------------------------------------------------------------------------------------------------------------- Net Income $562.1 $426.7 $500.5 32% (15)% Earnings Per Share Basic $2.28 $1.69 $1.98 35% (15)% Diluted $2.28 $1.69 $1.98 35% (15)% Without restructuring charge $2.28 $1.86 $1.98 23% (6)% Operating Margin As reported 28% 24% 25% -- -- Without restructuring charge 28% 26% 25% -- -- EBITDA Margin/1/ As reported 36% 30% 30% -- -- Without restructuring charge 36% 33% 30% -- --
/1/ EBITDA margin is earnings before interest, taxes on income, depreciation and the amortization of intangibles divided by total revenues. Net income and diluted earnings per share for fiscal 2000 increased by 32% and 35%, respectively, principally as a result of increased investment management fees from increased average assets under management and as a result of a restructuring charge taken in fiscal 1999. Net income and diluted earnings per share for fiscal 1999 decreased by 15%, principally as a result of the $58.5 million pretax restructuring charge in fiscal 1999 and decreased investment management fee revenues. The table below presents the percentage change in each category between fiscal 2000 and fiscal 1999 and between fiscal 1999 and fiscal 1998.
Operating Revenues 2000 1999 As a percentage of total revenues vs 1999 vs 1998 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Investment management fees 4% (5)% 60% 59% 55% Underwriting and distribution fees (1)% (27)% 30% 32% 38% Shareholder servicing fees 14% 15% 9% 8% 6% Other, net 12% (13)% 1% 1% 1% - ----------------------------------------------------------------------------------------------------------------------- Total operating revenues 3% (12)% 100% 100% 100% - -----------------------------------------------------------------------------------------------------------------------
SUMMARY In fiscal 2000, total operating revenues increased 3% due primarily to increased simple monthly average assets under management and shareholder servicing fee increases. In fiscal 1999, operating revenues fell 12% from fiscal 1998 levels as investment management and underwriting and distribution fees declined consistent with decreases in the simple monthly average value of our assets under management and sales volumes. INVESTMENT MANAGEMENT FEES Investment management fees, the largest component of our operating revenues, include both investment advisory and business management fees. These fees are generally calculated under contractual arrangements with our sponsored investment products as a percentage of the market value of assets under management. Annual rates vary and generally decline as the average net assets of the portfolios exceed certain threshold levels. In return for these fees, we provide investment advisory, administrative and other management services. Investment management fees increased 4% in fiscal 2000, primarily due to 4% higher simple monthly average assets under management. Our effective investment management fee rate remained relatively constant during the year at 0.61%; however, future changes in the composition of assets under management could affect our effective investment management fee rate. In fiscal 1999, investment management fees decreased 5%, primarily due to 3% lower average simple assets under management and a 2% shift in our asset mix towards lower-fee fixed-income products. UNDERWRITING AND DISTRIBUTION FEES Underwriting commissions are earned from the sale of certain classes of mutual funds that have a sales commission paid at the time of purchase. Distribution fees are paid by our sponsored mutual funds in return for sales and marketing efforts on their behalf. Distribution fees include 12b-1 plan fees that are subject to maximum pay-out levels, based upon a percentage of the assets in each fund. A significant portion of underwriting commissions and distribution fees are paid to the brokers and other intermediaries who sell our sponsored investment products to the investing public on our behalf. See the description of underwriting and distribution expenses below. Overall, underwriting and distribution fees decreased 1% in fiscal 2000, despite a 24% increase in product sales. The decrease resulted from a decline in commissionable sales year over year, which led to a 12% reduction in aggregate sales commission revenues. Sales at reduced or zero commissions are offered on certain classes of shares and for sales to shareholders or intermediaries that exceed specified minimum amounts. Thus, as the mix of sales change, so will our commission revenue. The decline in sales commission revenue was offset by an increase in distribution fees during fiscal 2000. This increase was primarily due to the increased simple monthly average assets under management. Underwriting and distribution fees decreased 27% in fiscal 1999 primarily due to reduced commission revenues from lower mutual fund sales and distribution fees from the 3% decrease in simple average assets under management. SHAREHOLDER SERVICING FEES Shareholder servicing fees are generally fixed charges per shareholder account that vary with the particular type of fund and the service being rendered, although some funds are charged fees based on the level of assets under management. Fees are received as compensation for providing transfer agency services which include providing customer statements, transaction processing, customer service and tax reporting. Current agreements with the sponsored investment products provide that closed accounts in a given calendar year remain billable through the second quarter of the following calendar year at a reduced rate. In fiscal 2000, shareholder servicing fees increased 14% over fiscal 1999. This was due to increased fees from funds whose servicing fees are based on assets under management and increases in the per account charge, partially offset by a decrease in the average number of billable accounts for the fiscal year. In fiscal 1999, shareholder servicing fees increased 15% over fiscal 1998 as a result of a 2.0 million (24%) increase in average billable shareholder accounts, a substantial portion of which were closed accounts, and an increase in the per account charge. OTHER, NET Other, net consists primarily of revenues from our banking/finance operating segment: o operating revenues, consisting primarily of interest on loans outstanding and servicing income o interest expense o provision for loan losses Other, net has remained relatively constant during the three-year period. Securitization of a portion of the auto loan portfolio in March 2000 resulted in a loss that was offset by revenues from the residual portfolio. Another securitization is planned during fiscal 2001. We have considered the potential impact of the effect on the banking/finance segment of a 100 basis point (1%) movement in market interest rates and we do not expect it would have a material impact on our operating revenues or consolidated results of operations.
Operating Expenses 2000 1999 As a percentage of total expenses vs 1999 vs 1998 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Underwriting and distribution -- (26)% 37% 36% 43% Compensation and benefits 4% (7)% 32% 30% 29% Information systems, technology and occupancy 1% 17% 13% 12% 9% Advertising and promotion (4)% (16)% 6% 6% 7% Amortization of deferred sales commissions (13)% (9)% 5% 6% 5% Amortization of intangible assets -- 1% 2% 2% 2% Other 5% (14)% 5% 5% 5% Restructuring charges (100)% 100% n/a 3% n/a - ----------------------------------------------------------------------------------------------------------------------- Total operating expenses (3)% (11)% 100% 100% 100% - -----------------------------------------------------------------------------------------------------------------------
SUMMARY In fiscal 2000, operating expenses decreased 3% primarily due to the restructuring charge of fiscal 1999. In fiscal 1999, operating expenses fell 11% principally due to reduced underwriting and distribution expenses offset by the restructuring charge. UNDERWRITING AND DISTRIBUTION Underwriting and distribution includes sales commissions and distribution fees paid to brokers and other third parties for selling, distributing and providing ongoing services to investors in our sponsored investment products. During fiscal 2000, underwriting and distribution expenses remained at 1999 levels. Total sales increased in fiscal 2000 by 24%, but a significant number of those additional sales were at a low or zero commission rate, resulting in a smaller proportional increase in the commissions paid to intermediaries in fiscal 2000 compared to fiscal 1999. Distribution fees increased consistent with the growth in simple monthly average assets under management which more than offset the reduced commission expense. During fiscal 1999, underwriting and distribution expenses decreased 26%, consistent with the downward trend in underwriting and distribution revenues. COMPENSATION AND BENEFITS Compensation and benefits increased 4% in fiscal 2000, primarily due to annual salary increases awarded in October 1999 and market adjustments awarded throughout fiscal 2000 for certain employees, partially offset by a 14% decrease in the average employee headcount during fiscal 2000 as compared to fiscal 1999. The number of employees at September 30, 2000 was approximately 6,500 as compared to the approximately 6,700 at the same time last year. In order to hire and retain our key employees in the current low unemployment labor market, we are committed to keeping our salaries and benefit packages competitive, which means that the level of compensation and benefits may increase more quickly than our revenues. Compensation and benefits decreased 7% in fiscal 1999, primarily due to a reduction in the overall number of employees following the restructuring plan of fiscal 1999 and decreased temporary labor costs and employee overtime. INFORMATION SYSTEMS, TECHNOLOGY AND OCCUPANCY Information systems, technology and occupancy costs increased 1% in fiscal 2000. This increase is not indicative of the actual increase in technology expenses, as we have significantly increased our expenditure on technology intiatives in fiscal 2000. However, that increase was offset by a decrease in Year 2000 expenses and increased capitalization of technology costs following the adoption of a new accounting rule. During the past year, we embarked on a number of significant system upgrades, successfully transitioned to the Year 2000, and developed e-business strategies to improve our service levels, work environment and productivity. We expect that such major system undertakings will continue to have an impact on our overall expenditures through fiscal 2001 and beyond. In addition, during fiscal 2000, we incurred slightly higher occupancy costs related to our site consolidation efforts, new facilities and the pending relocation to our San Mateo worldwide headquarters. We capitalized information systems and technology costs of $70.5 million, $45.4 million and $101.2 million during fiscal 2000, 1999 and 1998, respectively. Information systems, technology and occupancy costs increased 17% in fiscal 1999 as compared to fiscal 1998, primarily as a result of Year 2000 planning, remediation and testing expenditures. ADVERTISING AND PROMOTION Advertising and promotion expenses decreased 4% in fiscal 2000. We initiated a number of campaigns to increase the visibility of our three major Franklin Templeton Investments brand names: Franklin, Templeton and Mutual Series. This increased expenditure was partially offset by cost efficiencies associated with printing and marketing material production expenditures. In fiscal 1999, we reduced expenditures on media advertising and reduced other promotional activities in line with our general restructuring efforts. AMORTIZATION OF DEFERRED SALES COMMISSIONS Amortization of deferred sales commissions decreased 13% in fiscal 2000 and 9% in fiscal 1999, principally as a result of lower class C sales in the U.S. Certain fund classes, namely classes B and C, are sold without a front-end sales charge to shareholders, while, at the same time, our distribution subsidiaries pay a commission to selling brokers and other intermediaries. Similarly, class A shares are sold without a front-end sales charge to shareholders when certain minimum investment criteria are met, yet our U.S. distribution subsidiaries pay a commission on the sale. We have arranged to sell certain deferred commission assets ("DCA") arising from our U.S. operations to Lightning Finance Company Limited, ("LFL"). DCA that remains on our books, principally class A and C shares, is capitalized and amortized. Our Canadian and European sponsored investment products have arranged for financing of these sales commissions directly with LFL. As a result of these arrangements, Canadian and European DCA are not recorded in our financial statements. During the fiscal year, we sold or financed sales commissions globally totaling $56.0 million to LFL, compared to $69.3 million in fiscal 1999. RESTRUCTURING CHARGE During fiscal 1999, we recognized pretax restructuring charges of $58.4 million. These charges were related to a plan announced and initiated by management in the first quarter of fiscal 1999. We do not expect to incur any incremental charges with respect to this plan. All of the $58.4 million total restructuring charge was utilized at September 30, 2000. The anticipated lost revenues associated with products discontinued in connection with such restructuring are not expected to have a material impact on ongoing results of operations. OTHER INCOME (EXPENSE) Investment and other income is comprised primarily of: o dividends from investments in our sponsored mutual funds o interest income from investments in bonds and government securities o realized gains and losses on investments o foreign currency exchange gains and losses Investment income increased 61% in fiscal 2000, due to higher average available cash balances to invest, higher interest rates, and greater realized gains. Realized gains of $8.2 million were included in other income related to the $32.9 million gain on the sale of our headquarters building in San Mateo, which is being recognized over the 12-month leaseback period. In fiscal 1999, higher interest income was offset by lower dividend income and reduced realized gains from the sale of investments. Interest expense decreased 33% and 7% in fiscal 2000 and fiscal 1999, respectively, following a reduction in our average outstanding debt. TAXES ON INCOME Our effective income tax rate for fiscal 2000 declined to 24% on an annual basis compared to 26% in fiscal 1999 and fiscal 1998. The effective tax rate will continue to be reflective of the relative contributions of foreign earnings that are subject to reduced tax rates and that are not currently included in U.S. taxable income. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2000, we had $746.0 million in cash and cash equivalents, as compared to $819.2 million at September 30, 1999. Liquid assets, which consist of cash and cash equivalents, investments available-for-sale and current receivables increased to $1,677.1 million at September 30, 2000 from $1,490.1 million at September 30, 1999. At September 30, 2000, approximately $643.4 million was available to Franklin Templeton Investments under unused commercial paper and medium-term note programs. Revolving credit facilities at September 30, 2000 totaled $550 million, of which $250 million was available under a 364-day facility. The remaining $300 million facility will expire in May 2003. Cash provided by operating activities increased to $701.7 million in fiscal 2000 from $584.5 million in fiscal 1999. This increase was due mainly to higher net income resulting from lower operating expenses, increased revenues and a reduced effective tax rate. In fiscal 2000, we purchased $254.1 million of investments, net of sales; invested net cash of $77.4 million in the banking/finance segment; and used $108.4 million to purchase property and equipment, using a total of $435.8 million in investing activities. Net cash used in financing activities during the year was $339.1 million, compared to $348.6 million in 1999. We used approximately $250.0 million in cash to purchase 8.4 million shares of common stock and paid approximately $58.0 million in dividends. Outstanding debt declined to $362.9 million at September 30, 2000, compared to $403.2 million at September 30, 1999. Debt primarily consisted of fixed-interest medium-term notes and commercial paper that carried interest at variable rates. As described in Note 7 in Notes to the financial statements, we participate in the financial derivatives markets solely to manage our exposure to variable interest-rate fluctuations on a portion of commercial paper. Our overall weighted average interest rate on outstanding commercial paper and medium-term notes was 6.5% and 6.2%, at September 30, 2000 and September 30, 1999, respectively. Through our current interest-rate swap agreements and medium-term note program we have fixed the rates of interest we pay on 49% of our outstanding debt. Interest-rate swaps of $90 million matured in October 2000. Medium-term notes of $60 million mature in March 2001. Other fixed-rate debt has various maturity dates through October 2003. We have entered into a series of agreements to finance the construction of a new corporate headquarters on a 32-acre site in San Mateo, California. An owner-lessor trust has been set up to finance the construction and lease the completed facility. The construction is substantially on target and we expect to move into our new headquarters in the summer of 2001. The lease agreements are not expected to impact our cash flows or financial condition materially during the initial five-year lease period. We have arranged with LFL for non-recourse financing of sales commissions related to our class B shares globally. We are currently negotiating with LFL to purchase the DCA related to class C shares in fiscal 2001. At September 30, 2000, the cumulative sales commissions advanced by us which we have sold to or financed through LFL approximated $215.6 million. We expect that the principal uses of cash will be to increase assets under management through expansion, make strategic acquisitions, fund property and equipment acquisitions, enhance our technology infrastructure, improve our business processes, pay shareholder dividends and repay and service debt. We expect to finance future increases in investment in our banking/finance activities through operating cash flows, debt, or the securitization of a portion of the receivables from consumer lending activities. We believe that our existing liquid assets, together with the expected continuing cash flow from operations, our borrowing capacity under current credit facilities, our sales commission financing arrangement and our ability to issue stock will be sufficient to meet our present and reasonably foreseeable operating cash needs. RISK FACTORS "FORWARD-LOOKING STATEMENTS." When used in this Annual Report, words or phrases about the future such as "expected to," "will continue," "anticipates," "estimates," or similar expressions are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Statements about key employee compensation; financing construction of our new corporate headquarters; financing up front sales commissions paid; the acquisition of Fiduciary; our future cash needs and the expected sources of future cash inflows are also "forward-looking statements." These types of statements are subject to certain risks and uncertainties, such as the factors described in the risk factors outlined below. These risks and uncertainties could cause our current expectations and predictions in the forward-looking statements to be wrong. Forward-looking statements are our best prediction at the time that they are made, and you should not rely on them. Rather, you should read the forward-looking statements in conjunction with the risk disclosures in this Annual Report. If a circumstance occurs that causes any of our forward-looking statements to be inaccurate, we have no obligation to publicly announce the change in our expectations, or to revise the forward-looking statements. WE FACE STRONG COMPETITION FROM NUMEROUS AND SOMETIMES LARGER COMPANIES. We compete with numerous investment management companies, stock brokerage investment banking firms, insurance companies, banks, online and Internet investment sites, savings and loan associations and other financial institutions. These companies also offer financial services and other investment alternatives. Recent consolidation in the financial services industry has created stronger competitors with greater financial resources and broader distribution channels than our own. In addition, the online services that we may offer may fail to compete effectively with other alternatives available to investors. To the extent that existing or potential customers decide to invest with our competitors, our market share, revenues and net income could decline. COMPETING SECURITIES DEALERS AND BANKS COULD RESTRICT SALES OF OUR FUNDS. Many of the securities dealers on whom we rely to sell and distribute Franklin, Templeton and Mutual Series fund shares also have mutual funds under their own names that compete directly with our products. The banking industry also continues to expand its sponsorship of proprietary funds. These firms or banks could decide to limit or restrict the sale of our fund shares, which could lower our future sales and cause our revenues to decline. CHANGES IN THE DISTRIBUTION CHANNELS ON WHICH WE DEPEND COULD REDUCE OUR REVENUES AND HINDER OUR GROWTH. We derive nearly all of our sales through broker/dealers and other similar investment advisors. Increasing competition in these distribution channels has caused our distribution costs to rise and could cause further increases in the future. Higher distribution costs lower our net revenues and earnings. Additionally, if one of the major financial advisors who distributes our products were to cease operations, even for a few days, it could have a significant adverse impact on our revenues and earnings. Moreover, our failure to maintain strong business relationships with these advisors would impair our ability to distribute and sell our products, which would have a negative effect on our level of assets under management, related revenues and overall business and financial condition. NEW SHARE CLASSES THAT WE HAVE INTRODUCED YIELD LOWER REVENUES AND HAVE REDUCED OPERATING MARGINS. Although we receive reduced or no sales charge at the time of initial investments in our class A shares that are related to tax deferred plans and involve sales of more than $1 million, and in our class B shares and C shares, we must nonetheless pay the related dealer commission. In addition, due to industry competition, the dealer commissions that we pay on these types of shares are now higher than in the past and may increase in the future. This could have a negative effect on our liquidity and operating margins. IF OUR ASSET MIX SHIFTS TO PREDOMINANTLY FIXED-INCOME PRODUCTS, OUR REVENUES COULD DECLINE. We derive higher fee revenues and income from the equity assets that we manage. Changing market conditions may cause a shift in our asset mix towards fixed-income products and a decline in our income and revenue. WE HAVE BECOME SUBJECT TO AN INCREASED RISK OF ASSET VOLATILITY FROM CHANGES IN THE GLOBAL EQUITY MARKETS. As our asset mix has shifted since 1992 from predominantly fixed-income to a majority of equity assets, we have become subject to an increased risk of asset volatility from changes in global equity markets. Declines in these markets have caused in the past, and would cause in the future, a decline in our income and revenue. THE LEVELS OF OUR ASSETS UNDER MANAGEMENT ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. Global economic conditions, interest rates, inflation rates and other factors that are difficult to predict affect the mix, market values, and levels of our assets under management. Fluctuations in interest rates and in the yield curve affect the value of fixed-income assets under management as well as the flow of funds to and from fixed-income funds. In turn, this affects our asset management revenues from those assets. Similarly, changes in the equity marketplace may significantly affect the level of our assets under management. The factors above often have opposite effects on equity funds and fixed-income funds, making it difficult for us to predict the net effect of any particular set of conditions on our business and to devise effective strategies to counteract those conditions. WE FACE RISKS ASSOCIATED WITH CONDUCTING OPERATIONS IN NUMEROUS FOREIGN COUNTRIES. We sell mutual funds and offer investment advisory and related services in many different regulatory jurisdictions around the world, and intend to continue to expand our operations internationally. Regulators in these jurisdictions could change their policies or laws in a manner that might restrict or otherwise impede our ability to distribute or register investment products in their respective markets, which could force us to revise our business strategy. GENERAL ECONOMIC AND SECURITIES MARKETS FLUCTUATIONS MAY REDUCE OUR SALES AND MARKET SHARE. Adverse general securities market conditions, increased market volatility, currency fluctuations, governmental regulations and recessionary global economic conditions could reduce our mutual fund share sales and other financial services products sales. Increased and unusual market volatility and high valuations in the technology sector and many "new economy" stocks could also reduce our mutual fund share sales to the extent that customers decided to shift to predominately fixed-income products. Similarly, our securitized consumer receivables business is subject to marketplace fluctuation. General economic and credit market downturns could reduce the ability of our customers to repay loans, which could cause our consumer loan portfolio losses to increase. OUR INABILITY TO MEET CASH NEEDS COULD HAVE A NEGATIVE EFFECT ON OUR FINANCIAL CONDITION AND BUSINESS OPERATIONS. Our ability to meet anticipated cash needs depends upon factors including our asset value, our creditworthiness as perceived by lenders and the market value of our stock. Similarly, our ability to securitize and hedge future portfolios of auto loan and credit card receivables, and to obtain continued financing for class B shares, is also subject to the market's perception of those assets, finance rates offered by competitors, and the general market for private debt. If we are unable, for any reason, to obtain these funds and financing, we may be forced to incur unanticipated costs or revise our business plan. WE FACE INCREASED COMPETITION IN HIRING AND RETAINING QUALIFIED EMPLOYEES. Our continued success will depend upon our ability to attract and retain qualified personnel. Competition to hire these employees has increased, particularly in certain geographic locations where the majority of our workforce is employed. We may be forced to offer compensation and benefits to these employees at a level that exceeds inflation. With historically low unemployment in the United States, qualified personnel are now moving between firms and starting their own companies with greater frequency. If we are not able to attract and retain qualified employees, our overall business condition and revenues could suffer. OUR EMERGING MARKET PORTFOLIOS AND RELATED REVENUES ARE VULNERABLE TO POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH EMERGING MARKETS. Our emerging market portfolios and revenues derived from managing these portfolios are subject to significant risks of loss from political and diplomatic developments, currency fluctuations, social instability, changes in governmental polices, expropriation, nationalization, asset confiscation and changes in legislation related to foreign ownership. Foreign trading markets, particularly in some emerging market countries are often smaller, less liquid, less regulated and significantly more volatile than the U.S. and other established markets. DIVERSE AND STRONG COMPETITION LIMITS THE INTEREST RATES THAT WE CAN CHARGE ON CONSUMER LOANS. We compete with many types of institutions for consumer loans, including the finance subsidiaries of large automobile manufacturers. Some of these competitors can provide loans at significantly below-market interest rates in connection with automobile sales. Our inability to compete effectively against these companies or to maintain our relationships with the various automobile dealers through which we offer consumer loans could harm the growth of our consumer loan business. RISK FACTORS RELATING TO THE POOLING OF INTERESTS COMBINATION WITH FIDUCIARY THE TRANSACTION IS SUBJECT TO REGULATORY AND SHAREHOLDER APPROVAL. Our Agreement and Plan of Share Acquisition with Fiduciary is subject to the approval of the share exchange by various governmental and regulatory agencies. The share exchange is also subject to the approval of the shareholders of Fiduciary. There is no assurance that all the necessary approvals will be obtained. WE MAY BE SUBJECT TO A SUBSTANTIAL TERMINATION FEE IF WE CANCEL THE TRANSACTION. The Agreement and Plan of Acquisition requires us to pay a termination fee of $25 million if, under certain circumstances, the Agreement and Plan of Acquisition is terminated. THE COMBINED BUSINESSES MAY NOT BE FULLY OR SUCCESSFULLY INTEGRATED. The success of the pooling of interests combination of Franklin Templeton Investments and Fiduciary depends in large part on the ability of the businesses of each company to be integrated fully and successfully. The revenue synergies and cost savings from the transaction may not be fully realized or may take longer to achieve than anticipated. Delays and/or disruptions arising from and during the integration and transition in connection with the business combination could make it more difficult for us and Fiduciary to attract and maintain business relationships with clients, retain employees, expand and compete effectively. FOLLOWING THE TRANSACTION, WE WILL BE SUBJECT TO FEDERAL RESERVE BOARD REGULATION. We expect to become a bank holding company and financial holding company that will be subject to Federal Reserve Board regulation under the Bank Holding Company Act of 1956. Following the transaction, we and our subsidiaries will be subject to certain banking regulations, including minimum capital requirements. Additionally, prior approval of the Federal Reserve Board may be required in order to effect a change in control of us. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, the financial position of Franklin Templeton Investments is subjected to a variety of risks, including market risk associated with interest rate movements. Franklin Templeton Investments is exposed to changes in interest rates primarily in its debt transactions. Through its interest-rate swap agreements and its medium-term note program Franklin Templeton Investments has effectively fixed the rate of interest it pays on 49% of its debt outstanding at September 30, 2000. As a result, Franklin Templeton Investments does not believe that the effect of reasonably possible near-term changes in interest rates on Franklin Templeton Investments' financial position, results of operations or cash flow would be material. We have considered the potential impact of the effect on the banking/finance segment of a 100 basis point (1%) movement in market interest rates and we do not expect it would have a material impact on our operating revenues or results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index of Consolidated Financial Statements for the years ended September 30, 2000, 1999 and 1998. CONTENTS Consolidated Financial Statements of Franklin Resources, Inc.: Page Consolidated Statements of Income for the years ended September 30, 2000, 1999, and 1998 Consolidated Balance Sheets as of September 30, 2000 and 1999 Consolidated Statements of Stockholders' Equity and Comprehensive Income as of and for the years ended September 30, 2000, 1999, and 1998 Consolidated Statements of Cash Flows for the years ended September 30, 2000, 1999, and 1998 Notes to Consolidated Financial Statements Report of Independent Accountants All schedules have been omitted as the information is provided in the financial statements or in related notes thereto or is not required to be filed as the information is not applicable. CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
For the years ended September 30, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------------- Operating Revenues Investment management fees $1,399,121 $1,340,612 $1,413,273 Underwriting and distribution fees 709,285 718,871 982,647 Shareholder servicing fees 211,416 184,948 160,560 Other, net 20,318 18,066 20,792 - ----------------------------------------------------------------------------------------------------------------------------- Total operating revenues 2,340,140 2,262,497 2,577,272 Operating Expenses Underwriting and distribution 623,144 620,047 841,706 Compensation and benefits 535,710 515,137 553,085 Information systems, technology and occupancy 213,670 212,495 181,665 Advertising and promotion 101,196 105,935 125,925 Amortization of deferred sales commissions 83,627 95,948 105,405 Amortization of intangible assets 37,163 37,220 36,857 Other 82,187 78,152 90,533 Restructuring charges -- 58,455 -- - ----------------------------------------------------------------------------------------------------------------------------- Total operating expenses 1,676,697 1,723,389 1,935,176 Operating income 663,443 539,108 642,096 Other Income (Expense) Investment and other income 90,108 55,934 56,723 Interest expense (13,960) (20,958) (22,535) - ----------------------------------------------------------------------------------------------------------------------------- Other income, net 76,148 34,976 34,188 Income before taxes on income 739,591 574,084 676,284 Taxes on income 177,502 147,373 175,834 - ----------------------------------------------------------------------------------------------------------------------------- Net Income $562,089 $426,711 $500,450 - ----------------------------------------------------------------------------------------------------------------------------- Earnings per Share Basic and diluted $2.28 $1.69 $1.98
The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED BALANCE SHEETS (in thousands)
As of September 30, 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $734,071 $811,300 Receivables Sponsored investment products 241,282 225,132 Other 27,105 33,178 Investment securities, available-for-sale 635,819 392,022 Prepaid expenses and other 18,017 24,257 - ----------------------------------------------------------------------------------------------------------------------- Total current assets 1,656,294 1,485,889 Banking/Finance Assets Cash and cash equivalents 11,934 7,944 Loans receivable, net 256,416 186,185 Investment securities, available-for-sale 26,851 20,484 Other 4,361 3,165 - ----------------------------------------------------------------------------------------------------------------------- Total banking/finance assets 299,562 217,778 Other Assets Deferred sales commissions 86,754 103,289 Property and equipment, net 444,694 416,395 Intangible assets, net 1,169,485 1,202,777 Receivable from banking/finance group 168,496 107,148 Other 217,158 133,514 - ----------------------------------------------------------------------------------------------------------------------- Total other assets 2,086,587 1,963,123 - ----------------------------------------------------------------------------------------------------------------------- Total Assets $4,042,443 $3,666,790 - -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)
As of September 30, 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Compensation and benefits $180,743 $162,842 Current maturities of long-term debt 68,776 108,985 Accounts payable and accrued expenses 72,646 80,966 Commissions 76,965 61,971 Income taxes 61,661 57,968 Other 28,768 13,758 - ----------------------------------------------------------------------------------------------------------------------- Total current liabilities 489,559 486,490 Banking/Finance Liabilities Payable to Parent 168,496 107,148 Deposits 54,846 58,216 Other 15,612 11,042 - ----------------------------------------------------------------------------------------------------------------------- Total banking/finance liabilities 238,954 176,406 Other Liabilities Long-term debt 294,090 294,260 Other 54,347 52,640 - ----------------------------------------------------------------------------------------------------------------------- Total other liabilities 348,437 346,900 Total liabilities 1,076,950 1,009,796 - ----------------------------------------------------------------------------------------------------------------------- Commitments and Contingencies (Note 10) Stockholders' Equity Preferred stock, $1.00 par value, 1,000,000 shares authorized; none issued -- -- Common stock, $0.10 par value, 500,000,000 shares authorized; 243,730,140 and 251,006,541 shares issued and outstanding for 2000 and 1999, respectively 24,373 25,101 Capital in excess of par value -- 69,631 Retained earnings 2,932,166 2,566,048 Other (3,422) (3,532) Accumulated other comprehensive income 12,376 (254) - ----------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 2,965,493 2,656,994 - ----------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $4,042,443 $3,666,790 - -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (in thousands)
Shares - --------------------------------------------------------------------------------- Capital in As of and for the years ended Common Treasury Common Treasury Excess of September 30, 2000, 1999 and 1998 Stock Stock Stock Stock Par Value - --------------------------------------------------------------------------------- Balance October 1, 1997 126,231 (200) $12,623 $(11,070) $91,207 Net Income Other Comprehensive Income: Net unrealized losses on investments Currency translation adjustments Market value of interest rate swaps Total comprehensive income Retirement of stock (205) 205 (20) 12,600 (12,580) Issuance of 2-for-1 stock split 126,357 12,636 Purchase of stock (1,279) (31) (129) (2,941) (39,522) Cash dividends on common stock Issuance of restricted shares, net 397 (3) 40 (116) 37,773 Other 241 29 24 1,527 16,155 Balance September 30, 1998 251,742 -- 25,174 -- 93,033 - --------------------------------------------------------------------------------- Net Income Other Comprehensive Income: Net unrealized gains on investments Currency translation adjustments Total comprehensive income Purchase of stock (2,064) (206) (64,128) Cash dividends on common stock Issuance of restricted shares, net1,036 104 30,560 Employee stock plan (ESIP) shares 299 30 9,002 Other (6) (1) 1,164 Balance September 30, 1999 251,007 -- 25,101 -- 69,631 - --------------------------------------------------------------------------------- Net Income Other Comprehensive Income: Net unrealized gains on investments Currency translation adjustments Total comprehensive income Purchase of stock (8,442) (844) (112,046) Cash dividends on common stock Issuance of restricted shares, net 989 99 30,081 Employee stock plan (ESIP) shares 349 34 11,030 Other (173) (17) 1,304 Balance September 30, 2000 243,730 -- $24,373 -- -- - --------------------------------------------------------------------------------- Table continued... - -------------------------------------------------------------------------------------------------------- Accumulated Other Total Total As of and for the years ended Retained Comprehensive Stockholders' Comprehensive September 30, 2000, 1999 and 1998 Earnings Other Income Equity Income - -------------------------------------------------------------------------------------------------------- Balance October 1, 1997 $1,757,536 $(5,895) $9,820 $1,854,221 Net Income 500,450 500,450 $500,450 Other Comprehensive Income: Net unrealized losses on investments (17,647) (17,647) (17,647) Currency translation adjustments (14,580) (14,580) (14,580) Market value of interest rate swaps (5,638) (5,638) (5,638) --------- Total comprehensive income $462,585 Retirement of stock -- Issuance of 2-for-1 stock split (12,636) -- Purchase of stock (42,592) Cash dividends on common stock (50,515) (50,515) Issuance of restricted shares, net 1,665 39,362 Other 17,706 Balance September 30, 1998 2,194,835 (4,230) (28,045) 2,280,767 - -------------------------------------------------------------------------------------------------------- Net Income 426,711 426,711 $426,711 Other Comprehensive Income: Net unrealized gains on investments 24,061 24,061 24,061 Currency translation adjustments 3,730 3,730 3,730 -------- Total comprehensive income $454,502 Purchase of stock (64,334) Cash dividends on common stock (55,498) (55,498) Issuance of restricted shares, net 698 31,362 Employee stock plan (ESIP) shares 9,032 Other 1,163 Balance September 30, 1999 2,566,048 (3,532) (254) 2,656,994 - -------------------------------------------------------------------------------------------------------- Net Income 562,089 562,089 $562,089 Other Comprehensive Income: Net unrealized gains on investments 22,511 22,511 22,511 Currency translation adjustments (9,881) (9,881) (9,881) -------- Total comprehensive income $574,719 Purchase of stock (137,152) (250,042) Cash dividends on common stock (58,819) (58,819) Issuance of restricted shares, net 110 30,290 Employee stock plan (ESIP) shares 11,064 Other 1,287 Balance September 30, 2000 $2,932,166 $(3,422) $12,376 $2,965,493 - --------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the years ended September 30, 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Net Income $562,089 $426,711 $500,450 Adjustments to reconcile net income to net cash provided by operating activities Increase in receivables, prepaid expenses and other (63,098) (55,039) (15,711) Advances of deferred sales commissions (67,091) (75,729) (109,376) Increase in other current liabilities 33,229 25,676 54,031 (Decrease) increase in income taxes payable (2,079) (9,351) 35,411 Increase in commissions payable 14,996 8,797 7,049 Increase in accrued compensation and benefits 44,999 34,822 37,728 Depreciation and amortization 199,639 200,014 191,374 (Decrease) increase in restructuring liabilities (2,564) 28,965 -- Gains on disposition of assets (18,407) (399) (7,293) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 701,713 584,467 693,663 Purchase of investments (628,206) (731,798) (494,495) Liquidation of investments 374,102 909,110 88,310 Purchase of banking/finance investments (32,788) (24,891) (23,863) Liquidation of banking/finance investments 26,449 31,557 26,277 Proceeds from securitization of loans receivable 123,048 106,375 131,362 Net (originations) collections of loans receivable (194,100) (131,979) 5,930 Addition of property and equipment (108,432) (135,168) (162,181) Proceeds from sale of property 4,088 4,083 14,517 Acquisition -- -- (64,333) - --------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by investing activities (435,839) 27,289 (478,476) Decrease in bank deposits (3,372) (29,566) (10,623) Exercise of common stock options 1,142 1,456 2,891 Dividends paid on common stock (57,953) (54,279) (49,274) Purchase of stock (250,042) (64,334) (42,592) Issuance of debt 497,118 64,140 168,927 Payments on debt (526,006) (265,972) (171,214) - --------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (339,113) (348,555) (101,885) (Decrease) increase in cash and cash equivalents (73,239) 263,201 113,302 Cash and cash equivalents, beginning of year 819,244 556,043 442,741 - --------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $746,005 $819,244 $556,043 Supplemental disclosure of cash flow information Cash paid during the year for: Interest, including banking/finance group interest $26,370 $30,361 $40,801 Income taxes $180,098 $163,425 $104,306 Acquisition of Korean asset management company, primarily cash and cash equivalents $20,253 -- -- Supplemental disclosure of non-cash information Value of common stock issued in other transactions, principally restricted stock $30,181 $30,664 $37,697
The accompanying notes are an integral part of these consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Franklin Resources, Inc. and its consolidated subsidiaries ("Franklin Templeton Investments") derive substantially all of their revenues and net income from providing investment management, administration, distribution and related services to the Franklin, Templeton and Mutual Series funds, institutional and private accounts and other investment products (our "Sponsored Investment Products"). Our primary business is in the United States but we also operate in Canada, the Bahamas, Europe, Asia, South America, Africa and Australia under various rules and regulations set forth from time to time by the Securities and Exchange Commission, individual state agencies and foreign governments. Services to our Sponsored Investment Products are provided under contracts that set forth the fees to be charged for these services. The majority of these contracts are subject to periodic review and approval by each Mutual Fund's Board of Directors/Trustees and/or its shareholders. Currently, no one Sponsored Investment Product's revenues represent more than 10% of total revenues. Our revenues are largely dependent on the total value and composition of assets under management, which include domestic and global/international equity and debt portfolios. Accordingly, fluctuations in financial markets and in the composition of assets under management impact our revenues and operating results. BASIS OF PRESENTATION. The consolidated financial statements are prepared in accordance with generally accepted accounting principles that require us to estimate certain amounts. Actual amounts may differ from these estimates. Certain 1998 amounts have been reclassified to conform to current year presentation. The consolidated financial statements include the accounts of Franklin Resources, Inc. and its majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated except the intercompany payable from the banking/finance group to the parent to fund auto and credit card loans. Operating revenues of the banking/finance group are included in Other, net and are presented net of related interest expense and the provision for loan losses. Accordingly, reported interest expense excludes interest expense attributable to the banking/finance group. CASH AND CASH EQUIVALENTS include cash on hand, demand deposits with banks, debt instruments with original maturities of three months or less and other highly liquid investments, including money market funds, which are readily convertible into cash. INVESTMENT SECURITIES, AVAILABLE-FOR-SALE are carried at fair value. Fair values for investments in our sponsored investment products are based on the last reported net asset value. Fair values for other investments are based on the last reported price on the exchange on which they are traded. Realized gains and losses are included in investment income currently based on specific identification. Unrealized gains and losses are recorded net of tax as part of Accumulated other comprehensive income until realized. DERIVATIVES. Franklin Templeton Investments does not hold or issue derivative financial instruments for trading purposes. We enter into interest-rate swap agreements to reduce variable interest-rate exposure with respect to our commercial paper. Under these contracts Franklin Templeton Investments agrees to exchange, at specified intervals, the difference between fixed- and variable-interest amounts calculated by reference to an agreed-upon notional principal amount. The interest-rate differential between the fixed pay-rate and the variable receive-rate is reflected as an adjustment to interest expense over the life of the swaps. Interest-rate swaps are carried at an estimate of their termination costs. Unrealized gains and losses on these instruments are recorded net of tax as a part of Accumulated other comprehensive income. These unrealized gains and losses would be recognized only on early termination of the agreements. We have not, and do not intend to, terminate these agreements prior to their normal expiration. LOANS RECEIVABLE. We accrue interest on auto installment loans principally using the rule of 78s method. If interest had been recorded using the interest method, revenues would not be materially different from those presented. Interest on all other loans is accrued using the simple interest method. An allowance for loan losses is established monthly based on historical experience, including delinquency and loss trends. Securitized loans and the associated allowance for loan losses are excluded from the balance sheet and the associated interest revenues and provision for loan losses are excluded from our results of operations. A loan is charged to the allowance for loan losses when it is deemed to be uncollectible, taking into consideration the value of the collateral, the financial condition of the borrower and other factors. Recoveries on loans previously charged off as uncollectible are credited to the allowance for loan losses. DEFERRED SALES COMMISSIONS. Sales commissions paid to brokers and other investment advisors in connection with the sale of shares of our mutual funds sold without a front-end sales charge are capitalized and amortized over periods not exceeding six years - the periods in which we estimate that they will be recovered from distribution plan payments and from contingent deferred sales charges. PROPERTY AND EQUIPMENT are recorded at cost and are depreciated on the straight-line basis over their estimated useful lives. Expenditures for repairs and maintenance are charged to expense when incurred. Leasehold improvements are amortized on the straight-line basis over their estimated useful lives or the lease term, whichever is shorter. SOFTWARE DEVELOPED FOR INTERNAL USE. Certain internal and external costs incurred in connection with developing or obtaining software for internal use are capitalized in accordance with the American Institute of Certified Public Accountants' Statement of Position No.98-1 "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." These capitalized costs are included in Property and Equipment, net on the Consolidated Balance Sheets and are amortized when the software project is complete, over the estimated useful life of the software that was put into production. INTANGIBLE ASSETS, consisting principally of the estimated value of mutual fund management contracts and goodwill resulting from our acquisition of the assets of Templeton, Galbraith & Hansberger Ltd. and Heine Securities Corporation, are being amortized on a straight-line basis over various lives ranging from five to 40 years. We have evaluated the potential impairment of our intangible assets on the basis of the expected future undiscounted operating cash flows without interest charges to be derived from these assets in relation to the carrying values and determined that there is no impairment. At some future period, if such evaluations indicate that the carrying value of these assets cannot be recovered using this test, the assets will be adjusted to their fair values. RECOGNITION OF REVENUES. Investment management fees, shareholder servicing fees, investment income and distribution fees are all recognized as earned. Underwriting commissions related to the sale of shares of our sponsored investment products are recorded on the trade date. ADVERTISING AND PROMOTION. We expense costs of advertising and promotion as incurred. FOREIGN CURRENCY TRANSLATION. Assets and liabilities of foreign subsidiaries are translated at current exchange rates as of the end of the accounting period, and related revenues and expenses are translated at average exchange rates in effect during the period. Net exchange gains and losses resulting from translation are excluded from income and are recorded as part of Accumulated other comprehensive income. Foreign currency transaction gains and losses are reflected in income currently. STOCK SPLIT. All common shares and per share amounts have been adjusted to give retroactive effect to a two-for-one stock split in January 1998. DIVIDENDS. During the years ended September 30, 2000, 1999 and 1998, we declared dividends to common stockholders of $0.24, $0.22 and $0.20 per share, respectively. STOCK-BASED COMPENSATION. As allowed under the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), we have elected to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for our stock-based plans. Accordingly, no compensation costs are recognized with respect to stock options granted, or with respect to shares issued under the Employee Stock Investment Plan. Compensation expense is recognized for the matching contribution that we may elect to make in connection with the Employee Stock Investment Plan over the 18-month holding period and for the full cost of restricted stock grants in the year that they are earned. COMPREHENSIVE INCOME. Total comprehensive income is reported in the consolidated statements of stockholders equity and includes net income and unrealized gains on investment securities available-for-sale, net of income taxes. The changes in net unrealized gains (losses) on investments include reclassification adjustments relating to the net realized gains on investment sales of $9.9 million, $0.1 million and $6.1 million during fiscal 2000, 1999 and 1998, respectively. The tax effect of the change in unrealized gains (losses) on investments was $7.1 million, $4.8 million and $(8.4) million during fiscal 2000, 1999 and 1998, respectively. EARNINGS PER SHARE. Earnings per share were computed as follows: (in thousands except per share amounts)
2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Net income $562,089 $426,711 $500,450 - ----------------------------------------------------------------------------------------------------------------------- Weighted-average shares outstanding - basic 246,116 252,122 252,723 Incremental shares from assumed conversions 508 635 218 - ----------------------------------------------------------------------------------------------------------------------- Weighted-average shares outstanding - diluted 246,624 252,757 252,941 - ----------------------------------------------------------------------------------------------------------------------- Earnings per share: Basic and diluted $2.28 $1.69 $1.98
NOTE 2 - INVESTMENT SECURITIES Investment securities, available-for-sale at September 30, 2000 and 1999, consisted of the following:
(in thousands) Gross unrealized Amortized ---------------- Fair cost Gains Losses value - ----------------------------------------------------------------------------------------------------------------------- 2000 Sponsored investment products $208,125 $55,685 $(2,763) $261,047 Debt (primarily U.S. Government) 397,611 71 (256) 397,426 Equities 1,552 2,658 (13) 4,197 - ----------------------------------------------------------------------------------------------------------------------- Total $607,288 $58,414 $(3,032) $662,670 - ----------------------------------------------------------------------------------------------------------------------- 1999 Sponsored investment products $160,159 $25,630 $(4,083) $181,706 Debt (primarily U.S. Government) 227,168 2 (496) 226,674 Equities 3,113 1,034 (21) 4,126 - ----------------------------------------------------------------------------------------------------------------------- Total $390,440 $26,666 $(4,600) $412,506 - -----------------------------------------------------------------------------------------------------------------------
At September 30, 2000, substantially all of our debt securities mature within one year. NOTE 3 - Banking/Finance Group Loans and Allowance for Loan Losses The banking/finance segment's loans receivable primarily consist of auto loan and credit card receivables from individuals that are collectively described below as installment loans. Changes in these loans and in the associated allowance for loan losses during 2000 and 1999 are shown in the following tables.
(in thousands) 2000 2000 beginning Charge- Loans ending balance Additions Paydowns offs Recoveries securitized balance - --------------------------------------------------------------------------------------------------------------------------- Installment loans $189,771 $311,725 $(109,685) $(5,622) $1,830 $(126,632) $261,387 Allowance for loan losses (3,586) (6,925) -- 5,622 (1,830) 1,748 (4,971) - --------------------------------------------------------------------------------------------------------------------------- Loans receivable, net $186,185 $304,800 $(109,685) -- -- $(124,884) $256,416 - --------------------------------------------------------------------------------------------------------------------------- (in thousands) 1999 1999 beginning Charge- Loans ending balance Additions Paydowns offs Recoveries securitized balance - --------------------------------------------------------------------------------------------------------------------------- Installment loans $167,455 $194,626 $(58,823) $(4,793) $1,520 $(110,214) $189,771 Allowance for loan losses (2,381) (5,271) -- 4,793 (1,520) 793 (3,586) - --------------------------------------------------------------------------------------------------------------------------- Loans receivable, net $165,074 $189,355 $(58,823) -- -- $(109,421) $186,185 - ---------------------------------------------------------------------------------------------------------------------------
For the fiscal years ended September 30, 2000, 1999 and 1998, the interest expense of the banking/finance segment included in other operating revenues, net was $11.4 million, $9.7 million and $17.8 million, respectively. The following table presents delinquency and loss information for fiscal 2000, 1999 and 1998.
(in thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Charge-offs as a percentage of average loans 1.7% 2.1% 1.7% Installment loans, 90 days or more delinquent $683 $785 $2,188 In March 2000, May 1999 and September 1998, the banking/finance segment sold portions of its auto loans receivable to securitization trusts. The table below shows the assumptions that were used to calculate the gain on sale and the details of the transactions. (in millions) March 2000 May 1999 September 1998 - ----------------------------------------------------------------------------------------------------------------------- Proceeds $123.0 $106.4 $131.4 Book value of loans sold $124.9 $109.4 $134.3 (Loss)/gain on sale $(0.9) $1.2 -- Discount rate 12% 12% 12% Cumulative credit loss rate 3.66% 3.44% 2.02% NOTE 4 - PROPERTY AND EQUIPMENT The following is a summary of property and equipment at September 30, 2000 and 1999: (in thousands) Useful lives in years 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Furniture, software and equipment 3-5 $428,501 $343,798 Premises and leasehold improvements 5-35 202,978 196,440 Land -- 69,625 64,078 - ----------------------------------------------------------------------------------------------------------------------- 701,104 604,316 Less: Accumulated depreciation and amortization (256,410) (187,921) - ----------------------------------------------------------------------------------------------------------------------- Property and equipment, net $444,694 $416,395 - ----------------------------------------------------------------------------------------------------------------------- NOTE 5 - INTANGIBLE ASSETS The following is a summary of intangible assets at September 30, 2000 and 1999: (in thousands) Amortization period in years 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Goodwill 20-40 $846,017 $842,178 Management contracts 40 510,490 510,490 Other intangibles 5-15 31,546 31,546 - ----------------------------------------------------------------------------------------------------------------------- 1,388,053 1,384,214 Less: Accumulated amortization (218,568) (181,437) - ----------------------------------------------------------------------------------------------------------------------- Intangible assets, net $1,169,485 $1,202,777
NOTE 6 - SEGMENT INFORMATION We have two operating segments: investment management and banking/finance. The investment management segment derives substantially all of its revenues and net income from providing investment advisory, fund administration, distribution and related services to our sponsored investment products. The banking/finance segment offers consumer lending and selected retail banking services to individuals. Financial information for our two operating segments for the years ended September 30, 2000, 1999 and 1998 is presented in the table below. Operating revenues of the banking/finance segment are reported net of interest expense. See Note 3.
(in thousands) Operating Interest Income Assets revenues expense before taxes - ----------------------------------------------------------------------------------------------------------------------- 2000 Investment management $3,742,881 $2,320,755 $13,960 $739,030 Banking/finance 299,562 19,385 n/a 561 Company Totals $4,042,443 $2,340,140 $13,960 $739,591 - ----------------------------------------------------------------------------------------------------------------------- 1999 Investment management $3,449,012 $2,246,767 $20,958 $570,120 Banking/finance 217,778 15,730 n/a 3,964 Company Totals $3,666,790 $2,262,497 $20,958 $574,084 - ----------------------------------------------------------------------------------------------------------------------- 1998 Investment management $3,269,282 $2,558,449 $22,535 $671,632 Banking/finance 210,767 18,823 n/a 4,652 Company Totals $3,480,049 $2,577,272 $22,535 $676,284 - ----------------------------------------------------------------------------------------------------------------------- The investment management segment incurs substantially all of our depreciation and amortization costs and expenditures on long-lived assets. We conduct operations in five principal geographic areas of the world: the United States, Canada, the Bahamas, Europe, Asia, South America, Africa and Australia. For segment reporting purposes, we have combined Asia, South America, Africa and Australia into one category - Other. Revenues by geographic area include fees and commissions charged to customers and fees charged to affiliates. Information is summarized below: (in thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Operating revenues: United States $1,596,712 $1,591,093 $1,814,458 Canada 250,778 233,013 228,834 Bahamas 284,518 281,437 305,612 Europe 126,111 122,744 135,026 Other 191,095 144,657 159,391 Eliminations (109,074) (110,447) (66,049) - ----------------------------------------------------------------------------------------------------------------------- Total $2,340,140 $2,262,497 $2,577,272 - -----------------------------------------------------------------------------------------------------------------------
(in thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Property and equipment, net: United States $387,197 $356,050 $288,733 Canada 7,096 5,890 5,216 Bahamas 8,126 8,723 9,070 Europe 6,692 7,478 8,784 Other 35,583 38,254 37,426 - ----------------------------------------------------------------------------------------------------------------------- Total $444,694 $416,395 $349,229 - ----------------------------------------------------------------------------------------------------------------------- NOTE 7 - DEBT Debt at September 30, 2000 and 1999 was as follows: (in thousands) 2000 Weighted average interest rate 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Commercial paper 6.47% $254,381 $186,842 Medium-term notes 6.56% 60,000 160,000 Other -- 48,485 56,403 - ----------------------------------------------------------------------------------------------------------------------- 362,866 403,245 - ----------------------------------------------------------------------------------------------------------------------- Less current maturities 68,776 108,985 Long-term debt $294,090 $294,260 - ----------------------------------------------------------------------------------------------------------------------- As of September 30, 2000, maturities of long-term debt are as follows: 2001 $265,556 2002 10,802 2003 2,967 2004 2,883 2005 3,065 Thereafter 8,817 - ---------------------------------------------------------------------------- Long-term debt $294,090
We have revolving credit agreements with a group of commercial banks that will allow us, at our option, to refinance commercial paper borrowings through May 2003. In accordance with our intention and ability to refinance these obligations on a long-term basis, all of our commercial paper borrowings at September 30, 2000 were classified long-term. The credit agreements include various restrictive covenants, including: a capitalization ratio, interest coverage ratio, minimum working capital and limitation on additional debt. We were in compliance with all covenants as of September 30, 2000. At September 30, 2000, amounts available for issuance under the commercial paper program were $293.4 million. At September 30, 2000, we held interest-rate swap agreements maturing through October 2000, which effectively fixed interest rates on $90 million of commercial paper. Our primary objective of holding these swap agreements is to hedge volatility in interest rates on our commercial paper. These financial instruments are placed with major financial institutions. The creditworthiness of the counterparties is subject to continuous review and full performance is anticipated. Any potential loss from failure of the counterparties to perform is deemed to be immaterial. During 2000, $100 million of medium-term notes at an average interest rate of 6.08% were retired at maturity. The interest rate on all of our outstanding notes at September 30, 2000 was 6.56%. These notes mature in March 2001. At September 30, 2000, the amount available for issuance under our medium-term note program was $350 million. NOTE 8 - INVESTMENT INCOME
(in thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Dividends $12,294 $12,473 $16,540 Interest 57,025 40,845 29,969 Realized gains, net 19,718 2,323 8,271 Foreign exchange losses, net (1,311) (1,924) (978) Other 2,382 2,217 2,921 - ----------------------------------------------------------------------------------------------------------------------- Investment income $90,108 $55,934 $56,723 - ----------------------------------------------------------------------------------------------------------------------- Substantially all of our dividend income was generated by investments in our sponsored investment products. We realized a gain of $32.9 million on the sale of our headquarters building in San Mateo in July 2000. That gain is being amortized over 12 months, the period of our leaseback on the building. Accordingly, $24.7 million of the gain is recorded in deferred income and is included within Other current liabilities and $8.2 million has been recognized within Other income at September 30, 2000. NOTE 9 - TAXES ON INCOME Taxes on income for the years ended September 30, 2000, 1999 and 1998 were as follows: (in thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Current Federal $96,074 $91,141 $87,148 State 18,558 24,797 30,903 Foreign 59,590 45,193 45,797 Deferred expense (benefit) 3,280 (13,758) 11,986 - ----------------------------------------------------------------------------------------------------------------------- Total provision $177,502 $147,373 $175,834 - -----------------------------------------------------------------------------------------------------------------------
Included in income before taxes was $446.0 million, $356.9 million and $387.5 million of foreign income for the years ended September 30, 2000, 1999 and 1998, respectively. The major components of the net deferred tax liability/asset as of September 30, 2000 and 1999 were as follows:
(in thousands) 2000 1999 - ----------------------------------------------------------------------------------------------------------------------- Deferred tax assets State taxes $6,511 $4,400 Loan loss reserves 3,165 1,864 Deferred compensation 6,006 6,926 Restricted stock compensation plan 37,094 40,766 Net operating loss and foreign tax carry-forwards 53,627 45,336 Deferred gain on sale of headquarters 10,511 -- Other 10,874 19,478 - ----------------------------------------------------------------------------------------------------------------------- Total deferred tax assets 127,788 118,770 Valuation allowance for tax carry-forwards (53,627) (45,336) - ----------------------------------------------------------------------------------------------------------------------- Deferred tax assets, net of valuation allowance 74,161 73,434 - ----------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities Investments 12,750 3,768 Depreciation on fixed assets 18,148 13,591 Prepaid expenses 2,068 9,031 Amortization of goodwill 38,085 28,597 Deferred commissions 8,473 8,152 Other 1,662 3,151 - ----------------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 81,186 66,290 - ----------------------------------------------------------------------------------------------------------------------- Net deferred tax (liability) asset $(7,025) $7,144 - -----------------------------------------------------------------------------------------------------------------------
At September 30, 2000, there were approximately $44 million of foreign net operating loss carry-forwards, approximately $36 million of which expire between 2001 and 2008 with the remaining carry-forwards having an indefinite life. In addition, there are approximately $525 million in state net operating loss carry-forwards that expire between 2008 and 2020. A valuation allowance has been recognized to offset the related deferred tax assets due to the uncertainty of realizing the benefit of the loss carry-forwards. We have made no provision for U.S. taxes on $1,431 million of cumulative undistributed earnings of foreign subsidiaries as those earnings are intended to be reinvested for an indefinite period of time. Determination of the potential amount of unrecognized deferred U.S. income tax liability related to such reinvested income is not practicable because of the numerous assumptions associated with this hypothetical calculation; however, foreign tax credits would be available to reduce some portion of this amount. The following is a reconciliation between the amount of tax expense at the federal statutory rate and taxes on income as reflected in operations for the years ended September 30, 2000, 1999 and 1998:
(in thousands) 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- U.S. federal statutory rate 35% 35% 35% Federal taxes at statutory rate $258,857 $200,929 $236,699 State taxes, net of federal tax effect 17,586 15,819 20,973 Foreign earnings subject to reduced tax rates for which no U.S. tax is provided (96,260) (83,954) (78,826) Other (2,681) 14,579 (3,012) - ----------------------------------------------------------------------------------------------------------------------- Actual tax provision $177,502 $147,373 $175,834 Effective tax rate 24% 26% 26%
NOTE 10 - COMMITMENTS AND CONTINGENCIES We lease office space and equipment under long-term operating leases expiring at various dates through fiscal year 2017. Lease expense aggregated $43.1 million, $38.7 million and $37.2 million for the fiscal years ended September 30, 2000, 1999 and 1998, respectively. Future minimum lease payments under non-cancelable operating leases are not material. We have entered into an operating lease for the construction of our new corporate headquarters in San Mateo, California. In connection with this lease, we are contingently liable under residual guarantees, for approximately $145 million, representing approximately 85% of the estimated total construction costs of $170 million. At September 30, 2000, the banking/finance segment had commitments to extend credit aggregating $242.2 million, principally under its credit card lines. We are involved in various claims and legal proceedings that are considered normal in our business. While it is not feasible to predict or determine the final outcome of these proceedings, we do not believe that they should have a material adverse effect on our financial position, results of operations or liquidity. In connection with the acquisition of Heine Securities Corporation in November 1996, we agreed to make contingent payments ranging from $96.25 to $192.5 million if certain agreed-upon growth targets are met. Agreed-upon growth targets range from 12.5% to 17.5% of management fee revenues over a five-year period from the date of the acquisition. We made the first contingent payment of $64.2 million in 1998 and accounted for that payment as goodwill related to additional purchase price of the acquisition. No payments were made in fiscal 1999 or 2000. A final payment is due in November 2001 if growth targets are met. NOTE 11 - EMPLOYEE STOCK AWARD AND OPTION PLANS Franklin Templeton Investments sponsors two universal stock plans and an Annual Incentive Compensation Plan ("AICP"). Under the terms of these plans, eligible employees may receive cash and stock awards. Under the terms of the AICP, restricted stock awards are based on our pretax operating income. The universal stock plans provide for the issuance of up to 16 million shares of the common stock for various stock-related awards, including those related to the AICP. As of September 30, 2000, we had approximately 6.9 million shares remaining available for grant under the universal stock plans, including those related to the AICP. In addition to the annual award of stock under the plans, we may award options and other forms of stock-based compensation to certain employees. Currently, only restricted stock and stock options have been granted. The Compensation Committee of the Board of Directors determines the terms and conditions of awards under the plans. Total compensation cost recognized for stock-based compensation during fiscal 2000, 1999 and 1998 was $28.9 million, $37.9 million and $30.3 million, respectively. Information regarding stock options is as follows:
(shares in thousands) 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price - --------------------------------------------------------------------------------------------------------------------------- Outstanding, beginning of year 1,315 $32.02 193 $29.32 333 $15.21 Granted 1,108 $32.60 1,243 $31.39 73 $47.16 Exercised/cancelled (201) $29.73 (121) $21.24 (213) $13.25 - --------------------------------------------------------------------------------------------------------------------------- Outstanding, end of year 2,222 $32.52 1,315 $32.02 193 $29.32 Exercisable, end of year 437 $34.44 117 $34.44 119 $23.65
The range of exercise prices for these options at September 30, 2000, was from $28.19 to $47.16. Of these, 82% were exercisable at prices ranging from $29.61 to $33.25. The weighted-average remaining contractual life for the options was five years. If we had determined compensation costs for our stock option plans and our Employee Stock Investment Plan (See Note 12) based upon fair values at the grant dates in accordance with the provisions of FAS 123, our net income and earnings per share would have been reduced to the pro forma amounts indicated below. For pro forma purposes, the estimated fair value of options is amortized to expense over the options' vesting period.
For the years ended September 30, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Net income (in millions) As reported $562.1 $426.7 $500.5 Pro forma $553.4 $422.5 $499.1 - ----------------------------------------------------------------------------------------------------------------------- Basic earnings per share As reported $2.28 $1.69 $1.98 Pro forma $2.25 $1.67 $1.97 - ----------------------------------------------------------------------------------------------------------------------- Diluted earnings per share As reported $2.28 $1.69 $1.98 Pro forma $2.24 $1.67 $1.97 - -----------------------------------------------------------------------------------------------------------------------
The weighted-average estimated fair value of options granted on the date of grant using Black-Scholes option-pricing model was as follows:
For the years ended September 30, 2000 1999 1998 - ----------------------------------------------------------------------------------------------------------------------- Weighted-average fair value of options granted $15.31 $11.33 $12.08 Assumptions made: Dividend yield 1% 1% 1% Expected volatility 38% 36% 27% Risk-free interest rate 6% 5% 6% Expected life 6 months- 6 months- 6 months- 8 years 8 years 8 years
NOTE 12 - EMPLOYEE STOCK INVESTMENT PLAN We have a qualified, non-compensatory Employee Stock Investment Plan ("ESIP") which allows participants who meet certain eligibility criteria to purchase shares of our common stock at 90% of their market value on certain defined dates. The ESIP is open to substantially all employees of U.S. subsidiaries and certain employees of non-U.S. subsidiaries. Participants made their first purchase of stock under this plan effective as of July 31, 1998. Our stockholders approved 4 million shares of common stock for issuance under the ESIP. At September 30, 2000, approximately 651,000 shares had been purchased on a cumulated basis under the ESIP at a weighted average price of $31.53. In connection with the ESIP, we may provide matching grants to participants in the ESIP of whole or partial shares of common stock. While reserving the right to change such determination, we have initially indicated that we will provide one half-share for each share held by a participant for a minimum period of 18 months. During 2000, we made our first matching grants and issued approximately 84,000 shares at an average market price of $35.52. NOTE 13 - RESTRUCTURING In December 1998, we adopted a restructuring plan estimated to cost approximately $58.4 million and designed to reduce costs, improve service levels and reprioritize our business activities. All of the total estimated charges were utilized at September 30, 2000. NOTE 14 - FAIR VALUES The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The methods and assumptions used to estimate fair values of our financial instruments are described below. Due to the short-term nature and liquidity of Cash and cash equivalents and Receivables, the carrying amounts of these assets in the consolidated balance sheets approximated fair value. Investment securities, available-for-sale are carried at fair market value as required by generally accepted accounting principles. See Note 1. Loans receivable, net are valued using interest rates that consider the current credit and interest rate risk inherent in the loans and the current economic and lending conditions. The amounts in the consolidated balance sheets approximated fair value. Deposits of the banking/finance segment are valued using interest rates offered by comparable institutions on deposits with similar remaining maturities. The amounts in the consolidated balance sheets approximated fair value. Interest-rate swap agreements that expire in October 2000 are carried at their fair value of approximately zero as of September 30, 2000. Debt is valued using publicly-traded debt with similar maturities, credit risk and interest rates. The amounts in the consolidated balance sheet approximate fair values. NOTE 15 - ACQUISITIONS On July 25, 2000, we purchased all of the remaining outstanding shares of a Korean asset management company in which we formerly held a 44% interest. The purchase price for the shares was approximately $20 million. Goodwill of $3.8 million with an estimated life of 20 years was created as a result of the transaction. On August 1, 2000, we entered into an agreement with Nedcor Investment Bank Holdings, Ltd., a South African company, to form Franklin Templeton NIB Asset Management ("FTNIB"). We contributed cash and other assets with a value of approximately $27 million to the venture in return for a 50% ownership interest in FTNIB. We are accounting for our investment using the equity method. On October 2, 2000, we acquired all of the issued and outstanding shares of Bissett & Associates Investment Management Ltd., a Canadian asset management company. The all-cash transaction was valued at approximately $95 million. Intangible assets of approximately $89 million with lives ranging from 5-20 years were created as a result of the acquisition. On October 25, 2000, we announced a definitive agreement with Fiduciary Trust Company International (OTC: FCNY) ("Fiduciary"), under which Franklin Templeton Investments will acquire Fiduciary in an all-stock transaction valued at approximately $825 million. In addition to the purchase price, there is also provision for an $85 million retention pool to cover various payments aimed at retaining certain key employees of Fiduciary. The transaction, which is subject to Fiduciary shareholder and regulatory approvals and other customary closing conditions and costs, is expected to be completed in the second quarter of fiscal 2001.
NOTE 16 - QUARTERLY INFORMATION (UNAUDITED) (in thousands) Quarter First Second Third Fourth - --------------------------------------------------------------------------------------------------------------------------- 2000 Revenues $565,667 $612,526 $568,897 $593,050 Operating income $167,635 $172,077 $168,832 $154,899 Net income $137,522 $143,374 $140,370 $140,823 Earnings per share: Basic $0.55 $0.58 $0.58 $0.58 Diluted $0.55 $0.58 $0.58 $0.58 Dividend per share $0.06 $0.06 $0.06 $0.06 Common stock price per share: High $35.00 $39.19 $36.25 $45.63 Low $27.44 $24.63 $28.19 $30.00 - --------------------------------------------------------------------------------------------------------------------------- 1999 Revenues $567,679 $554,071 $566,775 $573,972 Operating income $90,765 $131,120 $156,506 $160,717 Net income $68,492 $102,471 $123,307 $132,441 Earnings per share: Basic $0.27 $0.41 $0.49 $0.53 Diluted $0.27 $0.41 $0.49 $0.52 Dividend per share $0.055 $0.055 $0.055 $0.055 Common stock price per share: High $45.62 $38.38 $45.00 $43.44 Low $26.50 $27.00 $27.12 $29.75 - --------------------------------------------------------------------------------------------------------------------------- 1998 Revenues $632,399 $673,691 $672,596 $598,586 Operating income $167,442 $163,424 $168,219 $143,011 Net income $130,515 $126,669 $131,013 $112,253 Earnings per share: Basic $0.52 $0.50 $0.52 $0.44 Diluted $0.52 $0.50 $0.52 $0.44 Dividend per share $0.05 $0.05 $0.05 $0.05 Common stock price per share: High $51.88 $57.25 $57.88 $54.88 Low $39.75 $38.00 $47.56 $25.75 - ---------------------------------------------------------------------------------------------------------------------------
Our common stock is traded on the New York Stock Exchange ("NYSE") and the Pacific Exchange, Inc. under the ticker symbol BEN and the London Stock Exchange under the ticker symbol FKR. On September 30, 2000, the closing price of our common stock on the NYSE was $44.43 per share. At November 1, 2000, there were approximately 4,800 stockholders of record. REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Franklin Resources, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity and comprehensive income and cash flows present fairly, in all material respects, the consolidated financial position of Franklin Resources, Inc. and its subsidiaries at September 30, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 of these financial statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California October 25, 2000 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS OF REGISTRANT The following information on the executive officers of Franklin Templeton Investments, including their principal occupations for the past five (5) years, is given as of December 1, 2000. JENNIFER J. BOLT AGE 36 Vice President of FRI since June 1994; officer and/or director of other Company subsidiaries; employed by FRI or subsidiaries in various other capacities for more than the past six (6) years. HARMON E. BURNS AGE 55 DIRECTOR SINCE 1991 Vice Chairman and Director of FRI, formerly Executive Vice President and director of the Company for more than the past six (6) years; officer and/or director of many other Company subsidiaries; officer and/or director or trustee of 52 of the investment companies in the Franklin Templeton group of funds. MARTIN L. FLANAGAN AGE 40 President, Member - Office of the President, Chief Financial Officer and Chief Operating Officer of FRI; formerly Senior Vice President; Chief Financial Officer of FRI since December 1995; officer and/or director of many other Company subsidiaries; officer, director and/or trustee of 52 of the investment companies in the Franklin Templeton group of funds. BARBARA GREEN AGE 53 Vice President and Deputy General Counsel of FRI since January 2000; Vice President, Franklin Templeton Companies, Inc. since March 2000; Senior Vice President, Templeton Worldwide, Inc.; officer of 53 of the investment companies in the Franklin Templeton group of funds. ALLEN J. GULA, JR. AGE 46 President, Member - Office of the President, formerly Senior Vice President and Chief Information Officer of FRI since September 1999; officer of two other Company subsidiaries since August 1999. Previously, Executive Vice President and Chief Technology Officer of KeyCorp, a bank holding company, from October 1998 to August 1999. Chairman and Chief Executive Officer of Key Services, a subsidiary of KeyCorp, and Executive Vice President of KeyCorp from February 1994 to October 1998. DONNA S. IKEDA AGE 44 Vice President of FRI since October 1993. Previously employed by FRI from 1982 to 1990 as Director of Human Resources. CHARLES B. JOHNSON AGE 67 DIRECTOR SINCE 1969 Chairman of the Board, Chief Executive Officer and director of the Company; officer and/or director of many other Company subsidiaries; officer and/or director or trustee of 49 of the investment companies in the Franklin Templeton group of funds. CHARLES E. JOHNSON AGE 44 DIRECTOR SINCE 1993 President, Member - Office of the President, and director of the Company; formerly Senior Vice President and director of the Company for more than the past five (5) years; officer and/or director of many other Company subsidiaries; officer and/or director or trustee of 33 of the investment companies in the Franklin Templeton group of funds. GREGORY E. JOHNSON AGE 39 President, Member - Office of the President; formerly Vice President of FRI for more than the past five (5) years; officer of many other Company subsidiaries and of one investment company in the Franklin Templeton group of funds. RUPERT H. JOHNSON, JR. AGE 60 DIRECTOR SINCE 1969 Vice Chairman, formerly Executive Vice President and director of the Company for more than the past five (5) years; officer and/or director of many other Company subsidiaries; officer and/or director or trustee of 52 of the investment companies in the Franklin Templeton group of funds. LESLIE M. KRATTER AGE 55 Senior Vice President of FRI since January 2000 and Secretary since March 1998; formerly Vice President of FRI since March 1993; officer of many other Company subsidiaries. KENNETH A. LEWIS AGE 39 Vice President of FRI since September 1996; formerly Corporate Controller of FRI; officer of many other Company subsidiaries. Prior to the Templeton acquisition, employed by various Templeton entities since 1989. WILLIAM J. LIPPMAN AGE 75 Senior Vice President of FRI since March 1990; officer and/or director or trustee of other Company subsidiaries and of six of the investment companies in the Franklin Templeton group of funds. Until June 1988, President, Chief Executive Officer and director of L.F. Rothschild Fund Management, Inc., Director of L.F. Rothschild Asset Management, Inc., Administrative Managing Director and director of L.F. Rothschild & Co., Incorporated. CHARLES R. SIMS AGE 39 Vice President of Finance, Chief Accounting Officer and Treasurer of FRI since June 2000; and Treasurer of FRI and various subsidiaries since September 1997; and assistant treasurer of 53 of the investment companies in the Franklin Templeton group of funds. Prior to September 1997, employed as Vice President and Chief Financial Officer of Franklin Templeton Investments Corp. formerly know as Templeton Management Limited. Employed by Franklin Templeton Investments since 1989. MURRAY L. SIMPSON AGE 63 Executive Vice President and General Counsel of FRI since January 2000; Officer of 53 of the investment companies of the Franklin Templeton group of funds. Previously Managing Director and Chief Executive Officer Templeton Franklin Investment Services (Asia), Limited from 1994-2000. Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. Peter M. Sacerdote, a director of FRI, is a brother-in-law of Charles B. Johnson and Rupert H. Johnson, Jr. Charles E. Johnson is the son of Charles B. Johnson, the nephew of Rupert H. Johnson, Jr. and Peter Sacerdote and the brother of Gregory E. Johnson and Jennifer Bolt. Gregory E. Johnson is the son of Charles B. Johnson, the nephew of Rupert H. Johnson, Jr. and Peter Sacerdote and the brother of Jennifer Bolt and Charles E. Johnson. Jennifer Bolt is the daughter of Charles B. Johnson, the niece of Rupert H. Johnson, Jr. and Peter Sacerdote and the sister of Charles E. Johnson and Gregory E. Johnson. Information regarding the biographies of the directors of FRI and compliance with Section 16(a) of the Exchange Act is incorporated by reference to the Proxy Statement section entitled "Proposal 1: Election of Directors." ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to the Proxy Statement section entitled "Proposal 1: Election of Directors." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference to the Proxy Statement section entitled "Principal Holders of Voting Securities" and "Security Ownership of Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference to the Proxy Statement section entitled "Proposal 1: Election of Directors - Certain Relationships and Related Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Please see the index in Item 8 for a list of the financial statements filed as part of this report (2) Please see the index in Item 8 for a list of the financial statement schedules filed as part of this report (3) The following exhibits are filed as part of this report: (3)(i)(a) Registrant's Certificate of Incorporation, as filed November 28, 1969, incorporated by reference to Exhibit (3)(i) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (the "1994 Annual Report") (3)(i)(b) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed March 1, 1985, incorporated by reference to Exhibit (3)(ii) to the 1994 Annual Report (3)(i)(c) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed April 1, 1987, incorporated by reference to Exhibit (3)(iii) to the 1994 Annual Report (3)(i)(d) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed February 2, 1994, incorporated by reference to Exhibit (3)(iv) to the 1994 Annual Report (3)(ii) Registrant's Amended and Restated By-laws adopted December 10, 1999 (4) Indenture between the Registrant and The Chase Manhattan Bank (formerly Chemical Bank), as trustee, dated as of May 19, 1994, incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-3, filed on April 14, 1994 10.1 Representative Distribution Plan between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc. incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 (the "1993 Annual Report") 10.2 Representative Transfer Agent Agreement between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc. incorporated by reference to Exhibit 10.3 to the 1993 Annual Report 10.3 Representative Investment Management Agreement between Templeton Growth Fund, Inc. and Templeton, Galbraith & Hansberger Ltd. incorporated by reference to Exhibit 10.5 to the 1993 Annual Report 10.4 Representative Management Agreement between Advisers and the Franklin Group of Funds incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992 (the "1992 Annual Report") 10.5 Representative Distribution 12b-1 Plan between Distributors and the Franklin Group of Funds incorporated by reference to Exhibit 10.3 to the 1992 Annual Report 10.6 Amended Annual Incentive Compensation Plan approved January 24, 1995 incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 28, 1994 in connection with its Annual Meeting of Stockholders held on January 24, 1995 * 10.7 Universal Stock Plan approved January 19, 1994 incorporated by reference to the Company's 1995 Proxy Statement filed under cover of Schedule 14A on December 29, 1993 in connection with its Annual Meeting of Stockholders held on January 19, 1994 * 10.8 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 (the "June 1995 Quarterly Report") 10.9 Distribution 12b-1 Plan for Class II shares between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to Exhibit 10.2 to the June 1995 Quarterly Report 10.10 Representative Investment Management Agreement between Templeton Global Strategy SICAV and Templeton Investment Management Limited, incorporated by reference to Exhibit 10.3 to the June 1995 Quarterly Report 10.11 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and BAC Corp. Securities, incorporated by reference to Exhibit 10.4 to the June 1995 Quarterly Report 10.12 Representative Dealer Agreement between Franklin/Templeton Distributors, Inc. and Dealer, incorporated by reference to Exhibit 10.5 to the June 1995 Quarterly Report 10.13 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (ERISA), incorporated by reference to Exhibit 10.6 to the June 1995 Quarterly Report 10.14 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (NON-ERISA), incorporated by reference to Exhibit 10.7 to the June 1995 Quarterly Report 10.15 Representative Amended and Restated Transfer Agent and Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Franklin Custodian Funds, Inc., dated July 1, 1995, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (the "1995 Annual Report") 10.16 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc., incorporated by reference to Exhibit 10.17 to the 1995 Annual Report 10.17 Representative Class II Distribution Plan between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc., on behalf of its Growth Series, incorporated by reference to Exhibit 10.18 to the 1995 Annual Report 10.18 Representative Dealer Agreement between Franklin/Templeton Distributors, Inc. and Dealer, incorporated by reference to Exhibit 10.19 to the 1995 Annual Report 10.19 Representative Mutual Fund Purchase and Sales Agreement for Accounts of Bank and Trust Company Customers, effective July 1, 1995, incorporated by reference to Exhibit 10.20 to the 1995 Annual Report 10.20 Representative Management Agreement between Franklin Value Investors Trust, on behalf of Franklin MicroCap Value Fund, and Franklin Advisers, Inc., incorporated by reference to Exhibit 10.21 to the 1995 Annual Report 10.21 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and Sub-Distributor, incorporated by reference to Exhibit 10.22 to the 1995 Annual Report 10.22 Representative Non-Exclusive Underwriting Agreement between Templeton Growth Fund, Inc. and Templeton Franklin Investment Services (Asia) Limited, dated September 18, 1995, incorporated by reference to Exhibit 10.23 to the 1995 Annual Report 10.23 Representative Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Templeton Franklin Investment Services (Asia) Limited, dated September 18, 1995, incorporated by reference to Exhibit 10.24 to the 1995 Annual Report 10.24 Agreement to Merge the Businesses of Heine Securities Corporation, Elmore Securities Corporation and Franklin Resources, Inc., dated June 25, 1996, incorporated by reference to Exhibit 2 to Registrant's Report on Form 8-K dated June 25, 1996 10.25 Subcontract for Transfer Agency and Shareholder Services dated November 1, 1996 by and between Franklin Investor Services, Inc. and PFPC Inc., incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996 (the "1996 Annual Report") 10.26 Representative Sample of Franklin/Templeton Investor Services, Inc. Transfer Agent and Shareholder Services Agreement, incorporated by reference to Exhibit 10.26 to the 1996 Annual Report 10.27 Representative Administration Agreement between Templeton Growth Fund, Inc. and Franklin Templeton Services, Inc., incorporated by reference to Exhibit 10.27 to the 1996 Annual Report 10.28 Representative Sample of Fund Administration Agreement with Franklin Templeton Services, Inc., incorporated by reference to Exhibit 10.28 to the 1996 Annual Report 10.29 Representative Subcontract for Fund Administrative Services between Franklin Advisers, Inc. and Franklin Templeton Services, Inc., incorporated by reference to Exhibit 10.29 to the 1996 Annual Report 10.30 Representative Investment Advisory Agreement between Franklin Mutual Series Fund Inc. and Franklin Mutual Advisers, Inc., incorporated by reference to Exhibit 10.30 to the 1996 Annual Report 10.31 Representative Management Agreement between Franklin Valuemark Funds and Franklin Mutual Advisers, Inc., incorporated by reference to Exhibit 10.31 to the 1996 Annual Report 10.32 Representative Investment Advisory and Asset Allocation Agreement between Franklin Templeton Fund Allocator Series and Franklin Advisers, Inc., incorporated by reference to Exhibit 10.32 to the 1996 Annual Report 10.33 Representative Management Agreement between Franklin New York Tax-Free Income Fund, Inc. and Franklin Investment Advisory Services, Inc., incorporated by reference to Exhibit 10.33 to the 1996 Annual Report 10.34 1998 Employee Stock Investment Plan approved January 20, 1998, incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 17, 1997 in connection with its Annual Meeting of Stockholders held on January 20, 1998 10.35 System Development and Services Agreement dated as of August 29, 1997 by and between Franklin/Templeton Investor Services, Inc. and Sungard Shareholder Systems, Inc., incorporated by reference to Exhibit 10.35 to the 1997 Annual Report 10.36 1998 Universal Stock Incentive Plan approved October 16, 1998 by the Board of Directors, incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 23, 1998 in connection with its Annual Meeting of Stockholders to be held on January 28, 1999 * 10.37 Amendment No. 3 to the Agreement to Merge the Businesses of Heine Securities Corporation, Elmore Securities Corporation and Franklin Resources, Inc., dated December 17, 1997, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1997 10.38 Representative Agreement for the Supply of Investment Management and Administration Services, dated February 16, 1998, by and between Templeton Funds and Templeton Investment Management Limited, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 10.39 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (ERISA), as amended, incorporated by reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K/A for the fiscal year ended September 30, 1998 (the "1998 Annual Report") 10.40 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (NON-ERISA), as amended, incorporated by reference to Exhibit 10.40 to the 1998 Annual Report 10.41 Representative Variable Insurance Fund Participation Agreement among Templeton Variable Products Series Fund or Franklin Valuemark Fund, Franklin/Templeton Distributors, Inc. and an insurance company incorporated by reference from Exhibit 10.1 to the form 10-Q for the quarter ended December 31, 1998 10.42 Purchase Agreement between Mariners Island Co-Tenancy and Keynote Systems, Inc. dated April 25, 2000 incorporated by reference to Exhibit 10 to the Company's Report on Form 10-Q for the quarterly period ended June 30, 2000 10.43 Acquisition Agreement dated July 26, 2000 among Franklin Resources, Inc., FTI Acquisition and Bissett & Associates Investment Management, Ltd., incorporated by reference to Registrant's Report on Form 8-K dated August 1, 2000 10.44 Agreement and Plan of Share Acquisition between Franklin Resources, Inc. and Fiduciary Trust Company International dated October 25, 2000, incorporated by reference to Registrant's Report on Form 8-K/A (Amendment No. 1) dated October 25, 2000 and filed on October 26, 2000 10.45 Representative Amended and Restated Distribution Agreement among Templeton Emerging Markets Fund, Templeton Canadian Bond Fund, Templeton International Stock Fund, Templeton Canadian Stock Fund, Templeton Global Smaller Companies Fund, Templeton Global Bond Fund, Templeton Treasury Bill Fund, Templeton Global Balanced Fund, Templeton International Balanced Fund, Templeton Canadian Asset Allocation Fund, Mutual Beacon Fund, Franklin U.S. Small Cap Growth Fund, Templeton Balanced Fund, Templeton Growth Fund, Ltd., Templeton Management Limited and FEP Capital, L.P. dated December 31, 1998 10.46 Representative Purchase and Sales Agreement by and among Franklin/Templeton Distributors, Inc., Franklin Resources, Inc. and Lightning Finance Company Limited dated August 1, 1999 10.47 Representative Advisory Agreement between Templeton Global Advisers Limited and Templeton Asset Management Limited dated December 21, 1999 10.48 Representative Amended and Restated Commission Paying Agreement between Templeton Global Strategy Funds, Templeton Global Advisors Limited, Templeton Global Strategic Services S.A., and Lightning Finance Company Limited dated January 31, 2000 10.49 Representative Variable Insurance Fund Participation Agreement among Franklin Templeton Variable Insurance Products Trust (formerly Franklin Valuemark Funds), Franklin/Templeton Distributors, Inc. and CUNA Mutual Life Insurance Company dated May 1, 2000 10.50 Stock Purchase Agreement between Good Morning Securities Co., Ltd. and Templeton Investment Counsel, Inc. dated June 29, 2000 10.51 Agreement entered into between NEDCOR Investment Bank Holdings limited, NEDCOR Investment Bank Limited, Templeton International, inc., Franklin Templeton Asset Management (Proprietary) Limited and Templeton Global Advisors Limited dated August 1, 2000 10.52 Representative Amended and Restated Distribution Agreement between Franklin-Templeton Distributors, Inc. and Franklin Growth and Income Fund dated August 10, 2000 12 Computation of Ratios of Earnings to Fixed Charges 21 List of Subsidiaries 23 Consent of Independent Accountants 27 Financial Data Schedule * Compensatory Plan (b)(1) Report on Form 8-K dated July 11, 2000 was filed on July 13, 2000 under Items 5 and 7 (b)(2) Report on Form 8-K dated July 26, 2000 was filed on August 1, 2000 under Items 5 and 7 (b)(3) Report on Form 8-K dated July 27, 2000 was filed on August 2, 2000 attaching Registrant's press release dated July 27, 2000 under Items 5 and 7 (b)(4) Report on Form 8-K dated and filed on October 25, 2000 under Items 5 and 7 (b)(5) Report on Form 8-K/A (Amendment No. 1) dated October 25, 2000 was filed on October 26, 2000 under Items 5 and 7 (c) See Item 14(a)(3) above (d) No separate financial statements are required; schedules are included in Item 8 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FRANKLIN RESOURCES, INC. Date: December 7, 2000 By: /S/ CHARLES B. JOHNSON ---------------------- Charles B. Johnson, Chairman, Chief Executive Officer, and Member-Office of the Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Date: December 7, 2000 By: /S/ CHARLES B. JOHNSON ---------------------- Charles B. Johnson, Chairman, Chief Executive Officer, Member-Office of the Chairman, and Director Date: December 7, 2000 By: /S/ HARMON E. BURNS ------------------- Harmon E. Burns, Vice Chairman, Member - Office of the Chairman, and Director Date: December 7, 2000 By: /S/ MARTIN L. FLANAGAN ---------------------- Martin L. Flanagan, President, Member-Office of the President, and Chief Financial Officer Date: December 7, 2000 By: /S/ ALLEN J. GULA, JR. ---------------------- Allen J. Gula, Jr., President, and Member-Office of the President Date: December 7, 2000 By: /S/ CHARLES E. JOHNSON ---------------------- Charles E. Johnson, President, Member-Office of the President, and Director Date: December 7, 2000 By: /S/ GREGORY E. JOHNSON ---------------------- Gregory E. Johnson, President, and Member-Office of the President Date: December 7, 2000 By: /S/ RUPERT H. JOHNSON, JR. -------------------------- Rupert H. Johnson, Jr., Vice Chairman, Member - Office of the Chairman, and Director Date: December 7, 2000 By: /S/ HARRY O. KLINE ------------------ Harry O. Kline, Director Date: December 7, 2000 By: /S/ JAMES A. MCCARTHY --------------------- James A. McCarthy, Director Date: December 7, 2000 By: /S/ PETER M. SACERDOTE ---------------------- Peter M. Sacerdote, Director Date: December 7, 2000 By: /S/ CHARLES R. SIMS ------------------- Charles R. Sims, Vice President - Finance, Chief Accounting Officer, and Treasurer Date: December 7, 2000 By: /S/ LOUIS E. WOODWORTH ---------------------- Louis E. Woodworth, Director Exhibits (other than 12, 21 and 23) deleted, but filed with the Securities and Exchange Commission. EXHIBIT INDEX EXHIBIT NO. (3)(i)(a) Registrant's Certificate of Incorporation, as filed November 28, 1969, incorporated by reference to Exhibit (3)(i) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994 (the "1994 Annual Report") (3)(i)(b) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed March 1, 1985, incorporated by reference to Exhibit (3)(ii) to the 1994 Annual Report (3)(i)(c) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed April 1, 1987, incorporated by reference to Exhibit (3)(iii) to the 1994 Annual Report (3)(i)(d) Registrant's Certificate of Amendment of Certificate of Incorporation, as filed February 2, 1994, incorporated by reference to Exhibit (3)(iv) to the 1994 Annual Report (3)(ii) Registrant's Amended and Restated By-laws adopted December 10, 1999 (4) Indenture between the Registrant and The Chase Manhattan Bank (formerly Chemical Bank), as trustee, dated as of May 19, 1994, incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-3, filed on April 14, 1994 10.1 Representative Distribution Plan between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc. incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 (the "1993 Annual Report") 10.2 Representative Transfer Agent Agreement between Templeton Growth Fund, Inc. and Franklin/Templeton Investor Services, Inc. incorporated by reference to Exhibit 10.3 to the 1993 Annual Report 10.3 Representative Investment Management Agreement between Templeton Growth Fund, Inc. and Templeton, Galbraith & Hansberger Ltd. incorporated by reference to Exhibit 10.5 to the 1993 Annual Report 10.4 Representative Management Agreement between Advisers and the Franklin Group of Funds incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1992 (the "1992 Annual Report") 10.5 Representative Distribution 12b-1 Plan between Distributors and the Franklin Group of Funds incorporated by reference to Exhibit 10.3 to the 1992 Annual Report 10.6 Amended Annual Incentive Compensation Plan approved January 24, 1995 incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 28, 1994 in connection with its Annual Meeting of Stockholders held on January 24, 1995 * 10.7 Universal Stock Plan approved January 19, 1994 incorporated by reference to the Company's 1995 Proxy Statement filed under cover of Schedule 14A on December 29, 1993 in connection with its Annual Meeting of Stockholders held on January 19, 1994 * 10.8 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995 (the "June 1995 Quarterly Report") 10.9 Distribution 12b-1 Plan for Class II shares between Franklin/Templeton Distributors, Inc. and Franklin Federal Tax-Free Income Fund, incorporated by reference to Exhibit 10.2 to the June 1995 Quarterly Report 10.10 Representative Investment Management Agreement between Templeton Global Strategy SICAV and Templeton Investment Management Limited, incorporated by reference to Exhibit 10.3 to the June 1995 Quarterly Report 10.11 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and BAC Corp. Securities, incorporated by reference to Exhibit 10.4 to the June 1995 Quarterly Report 10.12 Representative Dealer Agreement between Franklin/Templeton Distributors, Inc. and Dealer, incorporated by reference to Exhibit 10.5 to the June 1995 Quarterly Report 10.13 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (ERISA), incorporated by reference to Exhibit 10.6 to the June 1995 Quarterly Report 10.14 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (NON-ERISA), incorporated by reference to Exhibit 10.7 to the June 1995 Quarterly Report 10.15 Representative Amended and Restated Transfer Agent and Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Franklin Custodian Funds, Inc., dated July 1, 1995, incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995 (the "1995 Annual Report") 10.16 Representative Amended and Restated Distribution Agreement between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc., incorporated by reference to Exhibit 10.17 to the 1995 Annual Report 10.17 Representative Class II Distribution Plan between Franklin/Templeton Distributors, Inc. and Franklin Custodian Funds, Inc., on behalf of its Growth Series, incorporated by reference to Exhibit 10.18 to the 1995 Annual Report 10.18 Representative Dealer Agreement between Franklin/Templeton Distributors, Inc. and Dealer, incorporated by reference to Exhibit 10.19 to the 1995 Annual Report 10.19 Representative Mutual Fund Purchase and Sales Agreement for Accounts of Bank and Trust Company Customers, effective July 1, 1995, incorporated by reference to Exhibit 10.20 to the 1995 Annual Report 10.20 Representative Management Agreement between Franklin Value Investors Trust, on behalf of Franklin MicroCap Value Fund, and Franklin Advisers, Inc., incorporated by reference to Exhibit 10.21 to the 1995 Annual Report 10.21 Representative Sub-Distribution Agreement between Templeton, Galbraith & Hansberger Ltd. and Sub-Distributor, incorporated by reference to Exhibit 10.22 to the 1995 Annual Report 10.22 Representative Non-Exclusive Underwriting Agreement between Templeton Growth Fund, Inc. and Templeton Franklin Investment Services (Asia) Limited, dated September 18, 1995, incorporated by reference to Exhibit 10.23 to the 1995 Annual Report 10.23 Representative Shareholder Services Agreement between Franklin/Templeton Investor Services, Inc. and Templeton Franklin Investment Services (Asia) Limited, dated September 18, 1995, incorporated by reference to Exhibit 10.24 to the 1995 Annual Report 10.24 Agreement to Merge the Businesses of Heine Securities Corporation, Elmore Securities Corporation and Franklin Resources, Inc., dated June 25, 1996, incorporated by reference to Exhibit 2 to Registrant's Report on Form 8-K dated June 25, 1996 10.25 Subcontract for Transfer Agency and Shareholder Services dated November 1, 1996 by and between Franklin Investor Services, Inc. and PFPC Inc., incorporated by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1996 (the "1996 Annual Report") 10.26 Representative Sample of Franklin/Templeton Investor Services, Inc. Transfer Agent and Shareholder Services Agreement, incorporated by reference to Exhibit 10.26 to the 1996 Annual Report 10.27 Representative Administration Agreement between Templeton Growth Fund, Inc. and Franklin Templeton Services, Inc., incorporated by reference to Exhibit 10.27 to the 1996 Annual Report 10.28 Representative Sample of Fund Administration Agreement with Franklin Templeton Services, Inc., incorporated by reference to Exhibit 10.28 to the 1996 Annual Report 10.29 Representative Subcontract for Fund Administrative Services between Franklin Advisers, Inc. and Franklin Templeton Services, Inc., incorporated by reference to Exhibit 10.29 to the 1996 Annual Report 10.30 Representative Investment Advisory Agreement between Franklin Mutual Series Fund Inc. and Franklin Mutual Advisers, Inc., incorporated by reference to Exhibit 10.30 to the 1996 Annual Report 10.31 Representative Management Agreement between Franklin Valuemark Funds and Franklin Mutual Advisers, Inc., incorporated by reference to Exhibit 10.31 to the 1996 Annual Report 10.32 Representative Investment Advisory and Asset Allocation Agreement between Franklin Templeton Fund Allocator Series and Franklin Advisers, Inc., incorporated by reference to Exhibit 10.32 to the 1996 Annual Report 10.33 Representative Management Agreement between Franklin New York Tax-Free Income Fund, Inc. and Franklin Investment Advisory Services, Inc., incorporated by reference to Exhibit 10.33 to the 1996 Annual Report 10.34 1998 Employee Stock Investment Plan approved January 20, 1998, incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 17, 1997 in connection with its Annual Meeting of Stockholders held on January 20, 1998 10.35 System Development and Services Agreement dated as of August 29, 1997 by and between Franklin/Templeton Investor Services, Inc. and Sungard Shareholder Systems, Inc., incorporated by reference to Exhibit 10.35 to the 1997 Annual Report 10.36 1998 Universal Stock Incentive Plan approved October 16, 1998 by the Board of Directors, incorporated by reference to the Company's Proxy Statement filed under cover of Schedule 14A on December 23, 1998 in connection with its Annual Meeting of Stockholders to be held on January 28, 1999 * 10.37 Amendment No. 3 to the Agreement to Merge the Businesses of Heine Securities Corporation, Elmore Securities Corporation and Franklin Resources, Inc., dated December 17, 1997, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 1997 10.38 Representative Agreement for the Supply of Investment Management and Administration Services, dated February 16, 1998, by and between Templeton Funds and Templeton Investment Management Limited, incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 10.39 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (ERISA), as amended, incorporated by reference to Exhibit 10.39 to the Company's Annual Report on Form 10-K/A for the fiscal year ended September 30, 1998 (the "1998 Annual Report") 10.40 Representative Investment Management Agreement between Templeton Investment Counsel, Inc. and Client (NON-ERISA), as amended, incorporated by reference to Exhibit 10.40 to the 1998 Annual Report 10.41 Representative Variable Insurance Fund Participation Agreement among Templeton Variable Products Series Fund or Franklin Valuemark Fund, Franklin/Templeton Distributors, Inc. and an insurance company incorporated by reference from Exhibit 10.1 to the form 10-Q for the quarter ended December 31, 1998 10.42 Purchase Agreement between Mariners Island Co-Tenancy and Keynote Systems, Inc. dated April 25, 2000 incorporated by reference to Exhibit 10 to the Company's Report on Form 10-Q for the quarterly period ended June 30, 2000 10.43 Acquisition Agreement dated July 26, 2000 among Franklin Resources, Inc., FTI Acquisition and Bissett & Associates Investment Management, Ltd., incorporated by reference to Registrant's Report on Form 8-K dated August 1, 2000 10.44 Agreement and Plan of Share Acquisition between Franklin Resources, Inc. and Fiduciary Trust Company International dated October 25, 2000, incorporated by reference to Registrant's Report on Form 8-K/A (Amendment No. 1) dated October 25, 2000 and filed on October 26, 2000 10.45 Representative Amended and Restated Distribution Agreement among Templeton Emerging Markets Fund, Templeton Canadian Bond Fund, Templeton International Stock Fund, Templeton Canadian Stock Fund, Templeton Global Smaller Companies Fund, Templeton Global Bond Fund, Templeton Treasury Bill Fund, Templeton Global Balanced Fund, Templeton International Balanced Fund, Templeton Canadian Asset Allocation Fund, Mutual Beacon Fund, Franklin U.S. Small Cap Growth Fund, Templeton Balanced Fund, Templeton Growth Fund, Ltd., Templeton Management Limited and FEP Capital, L.P. dated December 31, 1998 10.46 Representative Purchase and Sales Agreement by and among Franklin/Templeton Distributors, Inc., Franklin Resources, Inc. and Lightning Finance Company Limited dated August 1, 1999 10.47 Representative Advisory Agreement between Templeton Global Advisers Limited and Templeton Asset Management Limited dated December 21, 1999 10.48 Representative Amended and Restated Commission Paying Agreement between Templeton Global Strategy Funds, Templeton Global Advisors Limited, Templeton Global Strategic Services S.A., and Lightning Finance Company Limited dated January 31, 2000 10.49 Representative Variable Insurance Fund Participation Agreement among Franklin Templeton Variable Insurance Products Trust (formerly Franklin Valuemark Funds), Franklin/Templeton Distributors, Inc. and CUNA Mutual Life Insurance Company dated May 1, 2000 10.50 Stock Purchase Agreement between Good Morning Securities Co., Ltd. and Templeton Investment Counsel, Inc. dated June 29, 2000 10.51 Agreement entered into between NEDCOR Investment Bank Holdings limited, NEDCOR Investment Bank Limited, Templeton International, inc., Franklin Templeton Asset Management (Proprietary) Limited and Templeton Global Advisors Limited dated August 1, 2000 10.52 Representative Amended and Restated Distribution Agreement between Franklin-Templeton Distributors, Inc. and Franklin Growth and Income Fund dated August 10, 2000 12 Computation of Ratios of Earnings to Fixed Charges 21 List of Subsidiaries 23 Consent of Independent Accountants 27 Financial Data Schedule * Compensatory Plan (b)(1) Report on Form 8-K dated July 11, 2000 was filed on July 13, 2000 under Items 5 and 7 (b)(2) Report on Form 8-K dated July 26, 2000 was filed on August 1, 2000 under Items 5 and 7 (b)(3) Report on Form 8-K dated July 27, 2000 was filed on August 2, 2000 attaching Registrant's press release dated July 27, 2000 under Items 5 and 7 (b)(4) Report on Form 8-K dated and filed on October 25, 2000 under Items 5 and 7 (b)(5) Report on Form 8-K/A (Amendment No. 1) dated October 25, 2000 was filed on October 26, 2000 under Items 5 and 7 (c) See Item 14(a)(3) above (d) No separate financial statements are required; schedules are included in Item 8 EX-10.45 2 0002.txt AMENDED AND RESTATED DISTRIBUTION AGREEMENT AMENDED AND RESTATED DISTRIBUTION AGREEMENT THIS AGREEMENT made as of the 31st day of December, 1998. A M O N G: TEMPLETON EMERGING MARKETS FUND ("TEMF"), TEMPLETON CANADIAN BOND FUND ("TCBF"), TEMPLETON INTERNATIONAL STOCK FUND ("TISF"), TEMPLETON CANADIAN STOCK FUND ("TCSF"), TEMPLETON GLOBAL SMALLER COMPANIES FUND ("TGSCF"), TEMPLETON GLOBAL BOND FUND ("TGBF"), TEMPLETON TREASURY BILL FUND ("TTBF"), TEMPLETON GLOBAL BALANCED FUND ("TGBAF"), TEMPLETON INTERNATIONAL BALANCED FUND ("TIBF"), TEMPLETON CANADIAN ASSET ALLOCATION FUND ("TCAAF"), MUTUAL BEACON FUND ("MBF"), FRANKLIN U.S. SMALL CAP GROWTH FUND ("FSCF") AND TEMPLETON BALANCED FUND ("TBF"), by their manager/trustee Templeton Management Limited, a corporation incorporated under the laws of the Province of Ontario with its registered office at Suite 2101, 1 Adelaide Street East, Toronto, Ontario (hereinafter referred to as the "Trustee") OF THE FIRST PART; -and- TEMPLETON GROWTH FUND, LTD., a corporation incorporated under the laws of Canada with its registered office at Suite 2101, 1 Adelaide Street East, Toronto, Ontario (hereinafter referred to as the "TGF" or the "Corporate Fund") OF THE SECOND PART; -and- TEMPLETON MANAGEMENT LIMITED, a corporation incorporated under the laws of the Province of Ontario with its registered office at Suite 2101, 1 Adelaide Street West, Toronto, Ontario (hereinafter referred to as the "Manager"), OF THE THIRD PART; -and- FEP CAPITAL, L.P., a limited partnership formed under the laws of the State of Texas, and having an office at 201 Main Street, Fort Worth, Texas 76102 (hereinafter referred to as "FEP"), OF THE FOURTH PART. RECITALS: (1) Each of the Trust Funds (as hereinafter defined) are open-end mutual fund trusts established under the laws of Ontario by the Declarations (as hereinafter defined). (2) Pursuant to the Declarations and the Management Agreements, the Manager is the manager-trustee and principal distribution agent of each of the Trust Funds and, accordingly, may from time to time in its discretion appoint or remove distribution agents for each of the Trust Funds. (3) The Corporate Fund is an open-end mutual fund corporation incorporated by letters patent under the laws of Canada. TML acts as the principal distributor of the shares of the Corporate Fund pursuant to the TGF Distribution Agreement (as hereinafter defined) and may from time to time in its discretion delegate its functions to other distribution agents. (4) The Trustee, on behalf of each of the Trust Funds (as hereinafter defined), the Corporate Fund, the Manager and FEP entered into a distribution agreement dated as of the 31st day of December, 1997 whereby the Manager, as principal distributor for the Trust Funds and the Corporate Fund, retained FEP to arrange for the distribution of the Deferred Charge Securities (as hereinafter defined) on the terms and conditions set out therein. 3 (5) The parties wish to amend and restate the Distribution Agreement dated December 31, 1997 to reflect certain agreed amendments to the terms and conditions thereof. AGREEMENT: NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1 DEFINITIONS. Whenever used in this Agreement and the schedules, unless there is something inconsistent in the subject matter or context, the following words and terms shall have the following meaning: "Account Rate" means the lesser of: (i) the senior debt rate of FEP; and (ii) LIBOR plus 1.50%. "Additional Fund" means any other open-end mutual fund created or reorganized by, or the management and distribution rights of which are acquired by the Manager, from time to time, which distributes its Securities generally on the same basis (including fee structure) as the Funds and the Securities of which the Manager, at its option, permits investors to purchase immediately with the proceeds of redemption of Deferred Charge Securities without payment of a redemption fee in respect of such redemptions added to this Agreement, or any closed-end fund added to this Agreement, in accordance with the provisions of section 10.1 hereof. "Adjustment Account" in respect of a Quarterly Pool, means the amount of the Monthly Fees paid or payable to FEP in respect of the period beginning on the first day of the Quarterly Pool and ending on the Sales Cutoff Date accrued daily at the Account Rate from the Sales Cutoff Date to the Anniversary of the Sales Cutoff. "Adverse Effect" when used alone or in conjunction with other terms means the occurrence or existence of any act, circumstance, condition, event, fact, or combination of the foregoing which, in the reasonable judgement of FEP, creates a significant probability of any material adverse effect upon (i) the timing or amount of any payment of any Fees; or (ii) the timely receipt by FEP of any Fees; or (iii) the Manager or any of the 4 Funds' ability to pay or perform their obligations under this Agreement in a timely manner; or (iv) the remedies and other rights of FEP under this Agreement. "Advisory Agreements" means the investment management agreements between each of the Funds and the applicable portfolio manager as described in Schedule "A" hereto as supplemented or amended from time to time. "Affiliate" has the meaning provided to that term under the Securities Act (Ontario). "Agreement" means this Agreement, as the same may from time to time be amended, supplemented, waived or modified. "Anniversary of the Sale Cutoff Date" means, in respect of any particular Quarterly Pool, the date which is 7 years following the Sale Cutoff Date in respect of that Quarterly Pool or, in respect of any particular Quarterly Pool which is subject to a DCA Takeout Transaction, the date determined by FEP which is 7 years or less following the Sale Cutoff Date in respect of that Quarterly Pool. "Base Amount" means, on an annualized basis, in respect of each Quarterly Pool, .96% for each month in each of the first six years and .92% for each month in the remaining seventh year, except in respect of securities of TTBF forming part of such Quarterly Pool for which the base amount shall be .50% for each month in each of the seven years. "Business Day" means any day, other than a Saturday, Sunday or any statutory holiday in the province of Ontario, on which banks are generally open for business in Toronto, Ontario. "Calculated Percentage" means in respect of any Quarterly Pool in any month, the Base Amount plus, in the case of all Funds other than TTBF, the Free Redemption Adjustment provided that the maximum Calculated Percentage shall be 1.10%. "Closing" means the completion of the transactions contemplated by this Agreement, the assignment of the Fees to FEP and the delivery of additional documentation required by this Agreement. "Closing Date" means such date as the parties agree is the date upon which Closing shall take place. "Closing Time" means 10:00 a.m. on the Closing Date or such other time on the Closing Date as the parties may agree as the time at which the Closing shall take place. 5 "Collection Account" means a bank account of FEP maintained at Toronto-Dominion Bank, with respect to which the Manager shall have no access or control. "Collections" means (a) all amounts paid or payable under the Program Documents in respect of the Fees including, without limitation, amounts payable in respect of Purchase Events, and (b) all proceeds of the foregoing, except that "Collections" shall not include amounts paid or payable pursuant to sections 9.1 and 11.9. "Constating Documents" means collectively the Declarations and/or the letters patent of the Corporate Fund and the Management Agreements. "Conversion Feature" means, with respect to a Security, a mandatory or elective provision (including, without limitation, a provision which permits or requires such Security to be converted into a Security of a different class, but excluding the free redemption amount or privilege offered by a Fund) which may result in a reduction or termination of any amount owing from any Fund or any securityholder in respect of the Fees relating to such Security at some time in the future prior to the redemption thereof. "Corporate Fund" or "TGF" means Templeton Growth Fund, Ltd. "DCA Takeout Transaction" shall mean any transaction whereby the economic value, or any portion thereof, of all fees payable to FEP hereunder shall be transferred, assigned, sold or removed from the balance sheet of FEP, to another entity as consideration for payment thereof. "Declarations" means collectively the declarations of trust for each of the Trust Funds as supplemented, amended or restated from time to time and "Declaration" means any one of them. "Deferred Charge" means, with respect to any Fund, the deferred charge payable, either directly or by withholding from the proceeds of the redemption of the Securities of such Fund, by the securityholders of such Fund on any redemption of Securities of such Fund in accordance with the applicable Constating Documents and the Prospectus Documents relating to such Fund. "Deferred Charge Security" means each Security in respect of which Fund investors do not pay a sales charge at the time of purchase, but rather are required to pay a Deferred Charge in certain circumstances. "Distributed Securities" has the meaning given to that term in section 4.1. 6 "Eligible Fee" means a Fee which (a) constitutes an "account" as such term is defined in the personal property security legislation of all jurisdictions the laws of which are applicable for determining whether the interests created by the Program Documents are perfected; (b) (i) constitutes a legal, valid and binding obligation of the obligor thereof which is not subject to any dispute, offset, counterclaim or defence whatsoever (it being understood that the mere fact that a Purchase Event may occur in the future with respect to any such Fee shall not in itself cause such Fee to not constitute an Eligible Fee prior to the time such Purchase Event occurs), and (ii) which is not subject to any adverse claim; and (c) does not contravene any applicable law. "Factor" shall mean the number corresponding to the current Quarterly Pool as set out in Schedule D. "Fees" means all fees payable to FEP under any Program Document. "FEP Balance Sheet Carrying Value" means, with respect to a Quarterly Pool as of any date, the value of all Fees receivable by FEP in respect of such Quarterly Pool as reflected on the balance sheet of FEP determined in accordance with GAAP. "FEP Event of Termination" means each of the following events: (a) any Fund shall fail to make or cause to be made in the manner and when due any payment to be made or to be caused to be made by it under any Program Document and the failure of such payment has an Adverse Effect; (b) the Manager or any Fund shall fail to perform or observe any other material term, covenant or agreement on its part to be performed or observed under any Program Document; (c) any representation or warranty made or deemed made by the Manager or a Fund or any of their respective officers or directors under or in connection with any Program Document shall have been false, incorrect or misleading in any material respect when made or deemed made and which gives rise to an Adverse Effect; (d) any provision of any Program Document to which the Manager or any Fund is a party shall cease to be a legal, valid and binding obligation of any such Person enforceable in accordance with its terms or any such Person shall so assert in writing; (e) there shall have occurred an Insolvency Event; 7 (f) FRI shall cease to own, directly or indirectly, at least 80% of the issued and outstanding equity securities of the Manager; (g) there shall have occurred any change in accounting, governmental or other legislation, regulation or policy which will have an Adverse Effect; and (h) the occurrence of a Purchase Event; (i) the termination of the joint venture agreement respecting Lightning among FEP Capital II LLC and TGH Holdings Limited and Lightning pursuant to section 14 of that agreement. "Free Redemption Adjustment" means, in respect of all Quarterly Pools in any particular quarter, the amount calculated by: (a) multiplying the total dollar value of redemptions, other than redemptions of TTBF, made without the payment of a Deferred Charge (other than a redemption where the redemption proceeds are invested immediately in Distributed Securities of one or more other Funds) in the previous quarter in respect of the first Quarterly Pool by 4 and then by the Factor; (b) adding to the amount determined in (a) above, the additional separate amounts determined by applying the formula in (a) above to each of the successive Quarterly Pools in respect of that previous quarter; and (c) dividing the sum determined in (b) above by the average daily net asset value of all Quarterly Pools for that previous quarter. "free redemption entitlement" has the meaning given to that term in section 4.4. "FRI" means Franklin Resources, Inc., the indirect parent company of the Manager. "Funds" means collectively the Trust Funds, the Corporate Fund and any Additional Fund which becomes a party to this Agreement and "Fund" means any one of them. "GAAP" means generally accepted accounting principles in Canada (in the case of the Funds and the Manager) or the United States of America (in the case of FEP), as in effect from time to time, consistently applied. "Insolvency Event" means any of the following occurrences: 8 (a) the Manager or a Fund shall generally not pay its obligations as such obligations become due or shall admit in writing its inability to pay its obligations generally or shall make a general assignment for the benefit of creditors; or (b) any proceeding shall be instituted by or against the Manager or a Fund seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding-up, reorganization, arrangement, adjustment, protection, relief or composition of it or its obligations or proposal to its creditors under any laws relating to bankruptcy, insolvency or reorganization or relief of debtors or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceedings instituted against it (but not instituted by it), such proceedings shall remain undismissed or unstayed for a period of 60 days; or (c) a court or other governmental authority or agency having jurisdiction in the premises shall enter a decree or order (i) for the appointment of a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of the Manager or a Fund of any material part of its property or for the winding up or liquidation of its affairs and such decree shall remain in force undischarged and unstayed for a period of 60 days; or (ii) for the sequestration or attachment of any material part of the property of the Manager or a Fund without its unconditional return to the possession of the Manager or a Fund or its unconditional release from such sequestration or attachment within 60 days thereafter; or (d) the Manager or a Fund shall take any action to authorize any of the actions set forth above. "Joint Venture" means the joint venture between FEP and FRI and/or their respective Affiliates or associates which may be created for the purposes of funding the payment of sales commissions in respect of deferred charge securities sold globally. "Joint Venture Assumption Date" means, the date that the Joint Venture assumes the obligations of FEP under this Agreement; "LIBOR" means, at any date, a rate per annum equal to the rate of interest per annum at which deposits in Canadian dollars for a period of 30 days are offered to leading banks in the London interbank market at 11:00 a.m. (London time) and determined on the basis of the provisions set forth below: (a) On the applicable date, FEP will determine the interest rate for deposits in Canadian dollars for a 30 day period on the British Bankers' Association Official BBA LIBOR Fixings page on Bloomberg 9 ("BBAM") as of 11:00 a.m. (London time) on such date or if such page on such service ceases to display such information, such other page as may replace it on that service for the purpose of display of such information. If such rate does not appear on the BBAM page, then the rate will be determined in accordance with clause (b) below. (b) If the BBAM page shall be unavailable, LIBOR shall be determined on the basis of the rate of interest per annum at which deposits in Canadian dollars are offered by The Chase Manhattan Bank to leading banks in London. "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien or security interest (statutory or other) or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever or other charge or encumbrance, including the retained security title of a conditional vendor or lessor. "Management Agreements" means the management and distribution agreements between each of MBF and FSCF and the Manager, as supplemented or amended from time to time. "Manager Event of Termination" means each of the following events: (a) any change in accounting, governmental or other legislation, regulation or policy which will materially and adversely affect the accounting or tax treatment of the distribution arrangement under the Program Documents to the Manager; and (b) any failure by FEP to pay the Selling Commissions when due under this Agreement. "Manager Report" has the meaning given to that term in section 3.7. "Master Trust" means any trust or other special purpose entity or Person to which any interest in any of the Fees relating to any Fund or the right to receive any Collections with respect thereto has been transferred in connection with a Takeout Transaction. "Master Trust Transfer Agreement" means any agreement pursuant to which any interest in the Fees is transferred to a Master Trust. "Material Contracts" has the meaning given to that term in section 5.1(p). "Monthly Fee" has the meaning given to that term in section 4.1. 10 "Multiple Material Errors" means errors in the calculation of amounts due to and adverse to FEP in excess of 5% of any amounts payable, which errors occur in excess of three times during the term of this Agreement excluding any and all errors (other than those caused by bad faith or fraud on the part of the Manager) occurring prior to the first year anniversary date of this Agreement. "Net Asset Value" means, with respect to any Fund or any Security, as of the date any determination thereof is made, the meaning given that term in the Constating Documents or Program Documents of such Fund. "Original Charge Securities" has the meaning given that term in the definition of "Quarterly Pool". "Person" means any individual, partnership, limited partnership, joint venture, syndicate, sole proprietorship, company or corporation, with or without share capital, unincorporated association, trust, trustee, executor, administrator or other legal personal representative, regulatory body or governmental agency, authority or entity, however designated or constituted. "Permitted Designee" means (a) any Person designated by FEP or any Master Trust, as the case may be, which may be The Chase Manhattan Bank or Constellation Financial Management Company, L.L.C. or any Affiliate of the foregoing, and (b) any other Person designated by FEP or any Master Trust, as the case may be, (i) which is not actively engaged in the sponsorship or management of any other mutual fund in Canada, and (ii) which has agreed to be bound by confidentiality undertakings in substance comparable to those contained in this Agreement. "Program Documents" means this Agreement, the Constating Documents, the TGF Distribution Agreement, the Advisory Agreements, the Prospectus Documents, the Material Contracts, any Master Trust Transfer Agreement and the other agreements, documents, certificates and instruments entered into or delivered in connection herewith and therewith, as the same may from time to time be amended, supplemented, waived or modified. "Prospectus Documents" means, with respect to a Fund, the most recent simplified prospectus and annual information form for such Fund as more particularly described in Schedule A hereto as amended or supplemented from time to time. "Purchase Event" means any of the following events: 11 (a) any Fund shall fail to make or cause to be made in the manner and when due any payment to FEP or deposit required to be made or to be caused to be made by it under any Program Document and such failure shall have an Adverse Effect; (b) the Manager or any Fund shall fail to perform or observe in any respect any other covenant on its part required to be performed or observed under any Program Document and such failure shall have an Adverse Effect; (c) any representation or warranty made by the Manager or a Fund under or in connection with any Program Document shall have been false, incorrect or misleading in any respect when made and such inaccuracy shall have an Adverse Effect; (d) there shall have occurred an change in the financial condition of the Manager which would prevent the Manager from performing its obligations under this Agreement which has an Adverse Effect; or (e) if, as a result of any action or inaction by the Manager or a Fund, any provision of this Agreement ceases to be a legal, valid and binding obligation of the Manager or a Fund and causes an Adverse Effect. "Quarterly Pool" means, in respect of any calendar quarter, (i) each Deferred Charge Security issued in that quarter for which FEP has arranged distribution and has paid the Selling Commission ("Original Charge Security"), (ii) each Deferred Charge Security of a Fund issued upon the immediate investment of proceeds realized on the redemption of an Original Charge Security or Transfer Security (as hereinafter defined) or Reinvested Security (as hereinafter defined) in a Deferred Charge Security of another Fund ("Transfer Security"), and (iii) each Deferred Charge Security issued upon the automatic reinvestment of income and capital gains distributions upon an Original Charge Security, Transfer Security or another Reinvested Security (as hereinafter defined) or any Security of a Fund issued upon the immediate reinvestment of proceeds realized on the redemption of a Reinvested Security in a Security of another Fund (a "Reinvested Security"). "Reinvested Security" has the meaning given to that term in the definition of "Quarterly Pool" as modified by section 4.1. "Sale Cutoff Date" means, with respect to any particular Quarterly Pool, the last Business Day of the calendar quarter during which FEP arranged for the distribution of Original Charge Securities forming part of the Quarterly Pool and paid the Selling Commissions in respect of such Quarterly Pool. 12 "Securities" means collectively the units of the Trust Funds and the shares of the Corporate Fund and "Security" means any one of them. "Selling Commission" has the meaning given to that term in section 3.6(b). "Subscription Price" means with respect to any Deferred Charge Security at any particular time, the gross purchase price of such Deferred Charge Security established by the Constating Documents or Program Documents of the applicable Fund. "Takeout Transaction" means any transaction including a DCA Takeout Transaction (excluding any transaction transferring the parties interest under this Agreement to the Joint Venture) pursuant to which FEP, or any Master Trust which obtains such interest directly or indirectly from FEP, sells or otherwise transfers, participates or causes to be sold, transferred or participated interests in the Fees relating to any Fund (including, without limitation, the right to receive any portion of any Collections) to any Person, including a Master Trust which publicly or privately sells debt instruments and/or certificates or other instruments representing ownership interests in such Master Trust or interest in any Fees relating to any Fund (including, without limitation, any right to receive any portion of any Collections). "Termination Date" means December 31, 2001, subject to suspension or termination as set forth in section 3.1, or such later date as shall be agreed to in writing by the parties hereto, except that the Termination Date may be deemed to have occurred on an earlier date pursuant to section 8. "TGF Distribution Agreement" means the distribution agreement between TGF and the Manager, as supplemented, amended or restated from time to time. "Transfer Securities" has the meaning given to that term in the definition of "Quarterly Pool". "Trust Funds" means, collectively TEMF, TCBF, TISF, TCSF, TGSCF, TGBF, TTBF, TGBAF, TIBF, TCAAF, MBF, FSCF and TBF, and "Trust Fund" means any one of them. "TTBF Account" in respect of a Quarterly Pool, means an amount equal to the Monthly Fee paid or payable to FEP in respect of Distributed Securities and Reinvested Securities of TTBF that form part of such Quarterly Pool accrued daily at the Account Rate from the Sales Cutoff Date to the Anniversary of the Sales Cutoff Date. 13 ARTICLE 2 CLOSING ARRANGEMENTS 2.1 THE CLOSING. The transactions contemplated by this Agreement shall be completed at the Closing Time at the offices of the counsel to FEP or at such other location as may be agreed to by the parties. ARTICLE 3 DISTRIBUTION RIGHTS 3.1 APPOINTMENT OF FEP. Upon and subject to the terms and conditions hereof the Manager, with the knowledge and consent of each of the Funds as evidenced by their signatures hereto, hereby grants FEP the right to arrange for the distribution of Deferred Charge Securities in each of the provinces and territories of Canada in return for the compensation described in this Agreement, and FEP hereby accepts such grant. The right of FEP to arrange for the distribution of Deferred Charge Securities shall commence on trade date January 12, 1998, or such other date as is mutually agreeable to the parties, and shall continue until December 31, 2000, subject to suspension and termination at any time in the circumstances described in this Agreement. Until terminated in accordance with the terms of this Agreement, FEP's distribution right is exclusive during the distribution period described above, other than during a suspension period, during which the Manager may arrange for the distribution of Deferred Charge Securities through any other Person, including the Manager. It is acknowledged and agreed by the parties hereto that FEP's distribution right does not extend to sales of Securities which are not Deferred Charge Securities and that FEP shall not receive any remuneration of any kind in respect of such Securities. 3.2 DISTRIBUTION THROUGH REGISTERED DEALERS. FEP will arrange for the distribution of Deferred Charge Securities only through registered dealers approved by the Manager, and FEP will not itself directly or indirectly sell any Securities of the Funds. All Deferred Charge Securities will be sold at a price equal to the Net Asset Value per Security at the time of purchase, without a sales charge to investors. The Manager will advise FEP upon the execution hereof and regularly as required thereafter so long as FEP is entitled hereunder to arrange for the distribution of Deferred Charge Securities, of the names of all registered dealers approved by the Manager as dealers through whom the Deferred Charge Securities may be sold. The Manager, as transfer agent for the Funds, agrees not to knowingly accept purchase orders from Persons with respect to the sale of Deferred Charge Securities in any jurisdiction in which the Deferred Charge Securities are not registered, qualified for sale or otherwise exempt from the need to qualify for sale under applicable securities legislation. In respect of these Deferred 14 Charge Securities which are unknowingly accepted by the Manager, as transfer agent for the Funds, such Deferred Charge Securities will be subject to this Agreement unless the trade in such Securities is subsequently reversed, in which case such Deferred Charge Securities shall not be subject to this Agreement and the Manager, as transfer agent for the Funds, will forthwith, following the trade reversal and out of the proceeds of the trade reversal, refund to FEP the amount of the Selling Commissions paid by it in respect of such Securities. 3.3 REJECTION OF PURCHASE ORDERS. The Manager may reject purchase orders for Deferred Charge Securities received from a registered dealer during the term of this Agreement only in accordance with the terms stated in the Constating Documents of the Funds and/or the TGF Distribution Agreement. 3.4 REGISTRATION OF PURCHASES. After receipt and acceptance of a purchase order together with an amount equal to the purchase price for each Deferred Charge Security purchased, the Manager will promptly forward the purchase order to the registrar of the appropriate Fund (if the Manager is not itself the registrar of the Fund) for registration of the purchaser as a holder of a Security or Securities of that Fund and shall deposit the purchase price to the credit of that Fund. 3.5 AUTHORITY OF THE MANAGER. The Manager shall have the exclusive right to approve or disapprove of the registered dealers through which the Deferred Charge Securities will be distributed, to determine the Funds' distribution and marketing policies and procedures and, pursuant to section 10.2 of this Agreement, to suspend or terminate the offering of Securities of one or more of the Funds at any time. 3.6 SERVICES OF FEP. The primary purpose of this Agreement is to ensure that satisfactory arrangements exist for the distribution of the Deferred Charge Securities and to provide a mechanism for the payment of Selling Commissions to registered dealers who distribute Deferred Charge Securities. Subject to its rights of termination as provided herein, FEP will provide the following services to the Manager and the Funds during the period in which FEP has the right to arrange for distribution of Deferred Charge Securities: (a) making all necessary arrangements for the distribution of the Deferred Charge Securities through registered dealers approved by the Manager; (b) paying the selling commission (equal to 5% of the Subscription Price of the Deferred Charge Securities and if any non-Canadian jurisdiction imposes a withholding on the payment of the selling commission, the amount of the payment shall be increased by the amount necessary so that the payment net of withholding tax equals 5% of the Subscription Price of the Deferred Charge Security) (the "Selling Commission") due to registered dealers upon receipt of notice from the Manager of accepted purchase orders for Original Charge Securities. The parties agree that FEP's 15 obligation to pay the Selling Commission in respect of a Deferred Charge Security shall arise on the trade date, notwithstanding that FEP is only required to make actual payment of the Selling Commission in respect of such purchase on the settlement date; (c) maintaining proper and adequate business records of its operations in order to properly monitor the Deferred Charge Securities for which it arranged distribution and the amount of the Selling Commissions paid; (d) providing confirmation to the Manager and the Funds when requested as to the due and timely payment of Selling Commissions; and (e) providing an annual review of the Funds' operations which shall include annual redemption analysis, portfolio risk analysis, income and balance sheet risk analysis together with annual meetings of FEP clients to exchange distribution, product development and other related information. FEP, the Manager and the Funds acknowledge that the Manager shall continue to arrange for the distribution of Deferred Charge Securities pursuant to the Constating Documents and the TGF Distribution Agreement, in the case of the Corporate Fund, and that, except as expressly provided by this Agreement, FEP shall have no obligation to perform any duties or functions or make any payments, carried out or made by the Manager under the Constating Documents or the TGF Distribution Agreement. 3.7 MANAGER REPORT. On or before 10 Business Days after the end of each month, the Manager shall provide FEP or a Permitted Designee with a report (a "Manager Report") as of the last day of such month which shall set forth, among other things, the Manager's determination of (a) the Selling Commissions paid or payable by FEP in respect of Deferred Charge Securities distributed during such month, (b) the amount of Fees paid or payable in respect of such month and the Deferred Charge Securities attributable to such Fees, (c) the computation of the amount of such Fees in reasonable detail, and (d) the amount of the Adjustment Accounts and the TTBF Accounts in reasonable detail. The parties agree to use their commercially reasonable best efforts to finalize as soon as possible and in any event not later than March 31, 1998 the form of the Manager Report which is acceptable to both parties. 3.8 MATERIAL ERRORS. If Multiple Material Errors occur, FEP shall provide the Manager with written notice of such occurrence, following which the Manager shall have 15 days to cure such errors. In the event all such errors are not cured within such period, FEP may terminate its obligations to pay Selling Commissions at any time thereafter upon 60 days prior written notice to the Manager. 16 ARTICLE 4 PAYMENT AND ASSIGNMENT OF FEES 4.1 MONTHLY FEE. For its services in arranging for the distribution of Deferred Charge Securities which form a Quarterly Pool, FEP shall receive a monthly fee (the "Monthly Fee") in each calendar month in respect of each Quarterly Pool equal to the Calculated Percentage in respect of that Quarterly Pool for that quarter multiplied by the daily average Net Asset Value of all Distributed and Reinvested Securities forming part of such Quarterly Pool multiplied by 30 and divided by 360. The Monthly Fee will be accrued daily on each Valuation Date (as defined in the Constating Document of each Fund) of each Fund. The Monthly Fee will be paid to FEP net of any taxes required to be withheld, at the same time as the Manager is paid a management fee by a Fund and, in any event, within ten days after the end of each calendar month. The Monthly Fee shall continue to be payable to FEP in respect of each Deferred Charge Security forming part of a Quarterly Pool for the lesser of: (i) the period that such Deferred Charge Security remains outstanding, and (ii) the Anniversary of the Sale Cutoff Date, subject to extension pursuant to section 4.8, notwithstanding that FEP's appointment as exclusive distributor has expired or has been suspended or terminated. Each Fund and the Manager hereby agrees with FEP that they will not, at any time while FEP is entitled to receive payment of any fee under this Article, consent to or agree to a reduction in the management fee payable by any Fund to the Manager or any alteration in the manner or as to the time of calculation of such management fee or effect any action, amendment or change of any nature whatsoever if such reduction, alteration, action, amendment or change could have the effect of preventing FEP from receiving the full amount of the Monthly Fee to which it is entitled under this section, or materially adversely affect the timing of the receipt of such payment. All Original Charge Securities and Transfer Securities are collectively referred to in this Agreement as "Distributed Securities". Distributed Securities and Reinvested Securities shall include any Securities that are issued upon the consolidation or subdivision of any Distributed Securities or Reinvested Securities, respectively. For greater certainty, Transfer Securities and Reinvested Securities shall be deemed to be issued on the same date as the Original Charge Securities to which they relate. In the case of the TTBF, Distributed Securities and Reinvested Securities will be deemed to include any net income (including any net realized capital gains) which has accrued in respect of such Securities for the purpose of calculating the Monthly Fee payable pursuant to this section. Distributed Securities of the TTBF Fund will be deemed to include such accrued amounts for the purpose of calculating any Deferred Charges as described in this Article 4. 17 4.2 ASSIGNMENT OF MANAGEMENT FEES. (a) To provide for the payment to FEP of the Monthly Fee payable pursuant to section 4.1, the Manager hereby: (i) irrevocably and unconditionally and absolutely assigns to FEP its right to receive payment from, and all moneys paid or payable by, each Fund of that portion of the management fee payable by such Fund to the Manager under the Fund's Constating Document and the TGF Distribution Agreement (in the case of TGF) which shall be equal to the Monthly Fee, for the lesser of: (i) the period that such Distributed Securities and Reinvested Securities remain outstanding, and (ii) the Anniversary of the Sale Cutoff Date and, if such period is extended pursuant to section 4.8, during such period of extension; and (ii) irrevocably and unconditionally authorizes and directs each Fund to pay to FEP that portion of the management fee payable under that Constating Document and the TGF Distribution Agreement (in the case of TGF) which has been assigned to FEP pursuant to subparagraph (i) above (net of any taxes required to be withheld) at the same time as the Manager is paid the balance of the management fee by such Fund pursuant to the applicable Constating Document for the Fund and the TGF Distribution Agreement (in the case of TGF) and in any event within ten days after the end of each calendar month. (b) Each of the Funds hereby: (i) consents to and accepts notice of the assignment and direction pursuant to paragraph (a) above and irrevocably agrees to make payments to FEP in accordance with the foregoing assignment and direction without regard to any equities which may exist or any claims or rights which a Fund may assert against the Manager or any other Person from time to time, provided however that any goods and services tax payable by the Funds in respect of that portion of the management fee which is paid to FEP shall be paid to the Manager or remitted directly to Revenue Canada, as applicable; and (ii) waives any right of set-off, counterclaim or deduction of any kind which it may have against the Manager in respect of that portion of the applicable management fee assigned to FEP pursuant to paragraph (a) above provided that this waiver shall not constitute a release of any claim which a Fund may have against the Manager from time to time. 18 (c) FEP agrees and acknowledges that its only recourse in the event of non-payment by a Fund of the Monthly Fee shall be against such Fund and the assets of such Fund and FEP further agrees and acknowledges that FEP shall have no recourse against the assets of the Manager for such non-payment of the Monthly Fee. 4.3 [intentionally deleted] 4.4 DEFERRED CHARGES. The Manager and each Fund represents and warrants to FEP that a Deferred Charge applies to all Distributed Securities of the Fund which are redeemed within six years of their date of issue, or deemed date of issue, except (i) on redemptions where the redemption proceeds realized are immediately invested in Distributed Securities of one or more of the other Funds (excluding any Distributed Securities redeemed to pay to the investor's dealer a transfer fee in respect of such transaction); and (ii) on redemptions pursuant to the free redemption amount privilege described below. The Manager and each Fund further represents that the Deferred Charge, expressed as a percentage of the Subscription Price per Distributed Security of the Fund being redeemed, declines over time from the date of issue, or deemed date of issue, of the Distributed Security as follows: If Redeemed During the Following Deferred Periods After the Date of Charge ISSUE OR DEEMED DATE OF ISSUE PERCENTAGE During the 1st year 6.0% During the 2nd year 5.5% During the 3rd year 5.0% During the 4th year 4.5% During the 5th year 4.0% During the 6th year 3.0% Thereafter Nil An investor in a Fund will be permitted to redeem in each calendar year without the redemption charge described above, Deferred Charge Securities of a Fund having a Net Asset Value of up to the aggregate of (i) 10% of the Net Asset Value as at December 31 of the prior calendar year of Deferred Charge Securities purchased by such investor in such Fund after February 28, 1993 and before the current calendar year, plus (ii) 10% of the cost of Deferred Charge Securities purchased by the investor in such Fund in the then current calendar year (the "free redemption entitlement"). The free redemption entitlement is not cumulative and any unexercised entitlement cannot be carried forward to future years. An investor in a Fund may request that distributions of a Fund's net income or capital gains be paid to the investor in cash rather than the receipt of Reinvested Units of that Fund. The amount of any distributions paid in cash and the value of Reinvested Units of a Fund redeemed by the investor in the 19 calendar year shall be deducted from the investor's free redemption amount. If an investor transfers all or part of his investment in a Fund to another Fund, any unexercised free redemption amount attributable to the Deferred Charge Securities redeemed to effect the transfer will also be transferred on a proportionate basis. The Funds and the Manager represent and warrant to FEP that, for the purpose of calculating the Deferred Charge payable to FEP, Deferred Charge Securities will be redeemed in the following order: (a) Reinvested Securities will be redeemed first; (b) Distributed Securities redeemed pursuant to the free redemption amount will be redeemed second; (c) Deferred Charge Securities of a Fund issued first, or deemed to be issued first, will be redeemed third; and (d) Where an investor holds both Deferred Charge Securities and securities of the Funds acquired on a front-load basis, the investor is required to elect which category of security the investor is redeeming upon redemption. Each Fund and the Manager hereby agrees with FEP that they will not, at any time while FEP is entitled to receive payment of any amount under this Agreement, consent to or agree to a reduction in the Deferred Charge for Distributed Securities or any alteration in the manner or as to the time of calculation of the Deferred Charge or effect any action, amendment or change of any nature whatsoever if the effect of such reduction, alteration, action, amendment or change would be to reduce the amounts payable to FEP or materially adversely affect the timing of the receipt of such amounts payable pursuant to this Article 4. In the event of the termination of a Fund, FEP shall be entitled to receive any applicable Deferred Charges in respect of the outstanding Distributed Securities of that Fund. 4.5 DEFERRED CHARGE PAYMENTS. In addition to the Monthly Fee payable to FEP pursuant to section 4.1 and in consideration for its services hereunder, FEP shall also be entitled to receive any Deferred Charge paid by securityholders on the redemption of their Distributed Securities (net of any taxes required to be withheld). The Deferred Charges will be calculated and collected by the Manager, in its capacity as transfer agent for the Funds, on each Valuation Date and will be payable to FEP monthly within ten days after the end of the calendar month or in the event of termination of a Fund, immediately prior to the termination of the Fund. Such amount shall continue to be payable to FEP on the redemption of each Distributed Security notwithstanding that FEP's appointment as exclusive distributor been suspended, has expired or has been terminated. 20 4.6 ASSIGNMENT OF DEFERRED CHARGES. (a) To provide for the payment to FEP of the Deferred Charges payable pursuant to section 4.5, the Manager hereby: (i) irrevocably and unconditionally and absolutely assigns to FEP its right to receive payment from, and all moneys paid or payable by, each securityholder of Distributed Securities and Reinvested Securities of that portion of the redemption proceeds payable to the Manager in respect of the redemption of such Securities under the Funds' Constating Documents and TGF Distribution Agreement; and (ii) irrevocably and unconditionally authorizes and directs each Fund to pay to FEP that portion of the redemption proceeds payable under the applicable Constating Document or TGF Distribution Agreement which has been assigned to FEP pursuant to subparagraph (i) above (net of any taxes required to be withheld) at the same time as the Manager is paid the management fee pursuant to the applicable Constating Document or TGF Distribution Agreement for the Fund and in any event within ten days after the calendar month. (b) Each of the Funds hereby: (i) consents to and accepts notice of the assignment and direction pursuant to paragraph (a) above and irrevocably agrees to make payments to FEP in accordance with the foregoing assignment and direction without regard to any equities which may exist or any claims or rights which a Fund may assert against the Manager or any other Person from time to time; and (ii) waives any right of set-off, counterclaim or deduction of any kind which it may have against the Manager or any other Person in respect of the applicable redemption proceeds assigned to FEP pursuant to paragraph (a) above provided that this waiver shall not constitute a release of any claim which a Fund may have against the Manager or any other Person from time to time. (c) FEP agrees and acknowledges that its only recourse in the event of non-payment of the Deferred Charges shall be against the applicable Fund and the assets of such Fund and FEP further agrees and acknowledges that FEP shall have no recourse against the assets of the Manager for such non-payment of the Deferred Charges. 21 4.7 COLLECTION ACCOUNT. The Manager shall cause all Collections payable by each Fund to be deposited directly by each Fund into the Collection Account without any intermediate commingling of such amounts with the assets of the Manager or any Affiliate. No amounts other than the Collections shall be deposited to the Collection Account. 4.8 CONTINUATION OF MONTHLY FEES. On the Anniversary of the Sale Cutoff Date in respect of each Quarterly Pool, if the TTBF Account in respect of such Quarterly Pool is greater than the Adjustment Account in respect of such Quarterly Pool, then the Monthly Fee payable in respect of such Quarterly Pool shall continue to be payable to FEP until such date as such Monthly Fees paid to FEP during such extension period equal the difference in such TTBF Account and such Adjustment Account as at such Anniversary of the Sale Cutoff Date. ARTICLE 5 REPRESENTATIONS AND WARRANTIES 5.1 MANAGER'S AND FUNDS' REPRESENTATIONS AND WARRANTIES. The Manager and each of the Funds represent and warrant (but only as to itself) to FEP: (a) ORGANIZATION AND GOOD STANDING - The Manager and each of the Funds have been duly incorporated or created, as the case may be, are organized, validly existing and up-to-date in all material filings and registrations required under the laws of Canada and each province and territory thereof where such filings or registrations are necessary for the conduct of its business, and have all necessary power, authority and capacity to own their respective properties and assets and to carry on the business in which they are now engaged. (b) DISTRIBUTION OF FUND SECURITIES - The Securities of each of the Funds are offered for sale to the public on a continuous basis in each of the provinces and territories of Canada pursuant to the Prospectus Documents. All material information and statements contained in the Prospectus Documents of each of the Funds are true and correct and contain no misrepresentation (as defined in the Securities Act (Ontario)). (c) COMPLIANCE WITH LAWS - The Manager and each of the Funds are in compliance in all material respects with all applicable laws, including but not limited to, applicable securities laws. (d) LICENSES AND REGISTRATIONS - The Manager and each of the Funds have received all approvals, licences, registrations and authorizations necessary for the conduct of their respective businesses as they are now conducted, all of which are in full force and effect; no 22 violations thereof have been recorded; and no proceeding is pending or threatened which could result in the revocation or limitation thereof and neither the Funds nor the Manager is aware of any basis upon which the same may be revoked. (e) COMPLIANCE WITH CONSTATING DOCUMENTS - The Manager and, to the best of the Manager's knowledge after due inquiry, each of the portfolio managers appointed by the Manager in respect of the portfolios of each of the Funds have complied with the investment objectives, policies and restrictions of each of the Funds as provided in their respective Constating Documents, the Advisory Agreements and the Prospectus Documents. (f) CONSENTS AND APPROVALS - There are no consents, approvals, orders or authorizations of any Person or registrations, declarations, notices, filings or recordings with any Person required to be obtained or made by the Manager or any of the Funds in connection with the transactions contemplated by this Agreement, the execution and delivery of this Agreement or the performance of any of the terms and conditions of this Agreement other than the consent of the board of directors of the Corporate Fund and the Manager, in its own capacity and in its capacity as the manager of each of the Funds and the trustee of each of the Trust Funds. (g) RIGHT TO ASSIGN - The Manager has good and marketable title to the Fees assigned and transferred to FEP under this Agreement free and clear of any Lien (other than the rights of FEP under this Agreement) and has the right to assign such Fees to FEP. Each of the Fees is an Eligible Fee. (h) FINANCIAL STATEMENTS - (i) The financial statements of each of the Funds and the balance sheet of the Manager have been prepared in accordance with GAAP; and (ii) the financial statements of the Funds present fairly the financial position and investment portfolios of each of the Funds as of the respective dates thereof and the changes in each Fund's net assets for the period covered by those statements and the treatment of management fees, legal, audit, custodian, safekeeping fees, interest, operating and administrative costs payable by each of the Funds. (i) ABSENCE OF UNDISCLOSED LIABILITIES - Except to the extent reflected or reserved against in the financial statements of the Funds or otherwise disclosed herein or except as incurred in the ordinary and normal course of the business of each of the Funds, none of the Funds has any outstanding indebtedness or any liabilities or obligations (whether direct or indirect, current or long-term, accrued, absolute, contingent or otherwise). 23 (j) TAX MATTERS - None of the Funds is in default in filing any tax returns or reports required to be filed as of the date of this Agreement covering any Canadian federal, provincial, municipal or local taxes, assessments or other imposts in respect of its respective capital, income, business or property. Each of the Trust Funds has qualified and continues to qualify as a mutual fund trust under the Income Tax Act (Canada). The Corporate Fund has qualified and continues to qualify as a mutual fund corporation under the Income Tax Act (Canada). (k) LITIGATION - There is no suit, action, litigation, inquiry, investigation, arbitration or proceeding, including appeals and applications to review, in progress or, to the knowledge of the Manager, threatened or pending against or relating to the Funds or the Manager or affecting their respective properties or businesses which might materially adversely affect properties, businesses, future prospects or financial condition of the Funds or the Manager or which might prevent or restrict the distribution to the public of the Securities in each jurisdiction in which the Securities are qualified for distribution or which may seek to prevent the consummation of the transactions contemplated by this Agreement or seek any determination or ruling which may materially and adversely affect the performance of the Manager or any of the Funds under the Agreement or could give rise to an Adverse Effect. There is not presently outstanding against any of the Funds any judgement, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator. (l) ACCURACY OF BOOKS AND RECORDS - The books and records, financial and otherwise, of each of the Funds and the balance sheet and books and records of the Manager (only in respect of the Fees) fairly and correctly set out and disclose in all material respects the financial position of each of the Funds and the Manager as of the date of this Agreement and all material transactions (subject to the qualifications as to the Manager's books and records) have been accurately recorded in those books and records. (m) ACCURACY OF INFORMATION PROVIDED - All information provided by or on behalf of the Manager and the Funds on or prior to the date hereof to FEP or any agent thereof for purposes of or in connection with this Agreement or the transactions contemplated by this Agreement are true, correct and complete in all material respects and no such information contains any material misrepresentation or material omission to state therein matters necessary to make the statements made therein not misleading in any material respect in light of the circumstances in which were made. 24 (n) DUE AUTHORIZATION, EXECUTION AND DELIVERY - This Agreement has been duly authorized, executed and delivered by the Manager and each of the Funds and is a valid and binding obligation of the Manager and each of the Funds enforceable in accordance with its terms, subject, however, to limitations with respect to enforcement imposed by law in connection with bankruptcy or similar proceedings and to the extent that equitable remedies, such as specific performance and injunction, are in the discretion of the court from which they are sought. (o) ABSENCE OF CONFLICTING AGREEMENTS - Neither the Manager nor any of the Funds is a party to, bound or affected by or subject to any indenture, mortgage, lease, agreement, instrument, charter or by-law provision, statute, regulation order, judgement, decree or law which would be violated, contravened or breached by or under which any default would occur as a result of the execution and delivery of this Agreement or the performance of any of the terms of this Agreement or which could have an Adverse Effect. (p) MATERIAL CONTRACTS - Except for the contracts and agreements (the "Material Contracts") listed in Schedule A, none of the Funds nor the Manager is a party to or bound by any presently existing oral or written contracts or a commitment which is material in respect of this Agreement and the transactions contemplated herein. The Material Contracts are in compliance in all material respects with applicable law, are in full force and effect, unamended, and no material default exists in respect of any of them on the part of any of the parties and there exists no set of facts which, after notice or lapse of time or both, would constitute such material default. Each of the Funds and the Manager has the capacity to perform all their respective obligations in the Material Contracts. Each of the Material Contracts has been duly executed by the signatories thereto and constitutes a valid and binding obligation of each of such signatories enforceable against them in accordance with its respective terms, free and clear of any mortgage, pledge, lien, charge, security interest or encumbrance or rights of others. (q) NO SECURITY AGREEMENT - No security agreement, equivalent security or lien instrument or, to the Manager's or any of the Funds' knowledge, any financing statement, other than the financing statements covering all or any part of the fees payable by the Funds to the Manager or the Fees payable to FEP under this Agreement, has been entered into or is on file or on record in any jurisdiction, except such as may be filed, recorded or made or contemplated by this Agreement or as provided in Schedule B hereto. (r) PRINCIPAL PLACE OF BUSINESS, NAME - The Manager and the Funds' principal place of business and chief executive office and the place where its records are kept is at the address first written above or 25 such other address of which FEP has received notice pursuant to section 11.7. The full legal name of the Manager and of each Fund (including any French form, any combined English/French form and any other form) is set forth on Schedule C. (s) SECURITY ATTRIBUTES - The Securities of each of the Funds have the attributes described in the Prospectus Documents and, other than the ability to transfer and redeem Securities free of any Deferred Charge as described in the Prospectus Documents, no Security of any Fund has the benefit of any Conversion Feature. (t) INSOLVENCY - Since December 31, 1996, there has not occurred a Insolvency Event with respect to the Manager or any of the Funds. (u) DEFERRED CHARGES PAYABLE UPON TERMINATION - In the event of a termination of a Fund, a Deferred Charge as provided in this Agreement shall be payable in respect of each Distributed Security of such Fund outstanding for a period of 6 years or less from its date of issue or deemed date of issue. (v) INFORMATION CORRECT - All information in respect of the payment of Selling Commissions relating to each Fund to be set forth in each Manager Report will be true and correct in all material respects. 5.2 FEP'S REPRESENTATIONS AND WARRANTIES. FEP hereby represents and warrants to the Manager and each of the Funds that: (a) ORGANIZATION AND GOOD STANDING - FEP has been duly formed and organized as a limited partnership under the laws of the State of Texas and is validly existing, is up-to-date in all material filings and registrations required under the laws of the United States and has all necessary power, authority and capacity to own its property and assets and to carry on the business in which it is now engaged. (b) RESIDENCE - FEP and all of the partners of FEP are resident in the United States for purposes of the Internal Revenue Code of 1986 and the Canada-United States Income Tax Convention, 1980 and are non-residents of Canada for the purposes of the Income Tax Act (Canada). (c) G.S.T. - FEP is not a registrant under the Excise Tax Act (Canada) for the purposes of the goods and services tax. (d) DUE AUTHORIZATION, EXECUTION AND DELIVERY - This Agreement has been duly authorized, executed and delivered by FEP and is a valid and binding obligation of FEP enforceable in accordance with its terms, 26 subject, however, to limitations with respect to enforcement imposed by law in connection with bankruptcy or similar proceedings and, to the extent that equitable remedies such as specific performance and injunction are in the discretion of the court from which they are sought. (e) ABSENCE OF CONFLICTING AGREEMENTS - FEP is not a party to, bound or affected by or subject to any indenture, mortgage, lease, agreement, instrument, charter or by-law, provision, statute, regulation, order, judgement, decree or law which would be violated, contravened or breached by, or under which any default would occur as a result of, the execution and delivery by it of this Agreement or the performance by it of any of the terms of this Agreement. (f) LITIGATION - There is no suit, action, litigation, inquiry, investigation, arbitration or proceeding, including appeals and applications to review in progress, pending or threatened against or relating to FEP or affecting its property or business which may materially adversely affect its property, business, future prospects or financial condition or which could materially adversely affect the performance or obligations of FEP under, or the validity or enforceability of this Agreement or which could give rise to any adverse effect on FEP's ability to pay or perform any of its material obligations under this Agreement. (g) FINANCIAL CAPACITY - FEP has the financial capability and resources to perform its obligations under this Agreement, including the payment of all Selling Commissions due to registered dealers pursuant to Article 4 of this Agreement. 5.3 NON-WAIVER. No investigation made by or on behalf of any party at any time shall have the effect of waiving, diminishing the scope of or otherwise affecting any representation or warranty made by any other party in or pursuant to this Agreement. No waiver by any party of any condition, in whole or in part, shall operate as a waiver of any other condition. 5.4 NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements contained in any certificate or other document delivered by or on behalf of a party pursuant to or in connection with the transactions contemplated by this Agreement shall be deemed to be made by that party under this Agreement. All representations and warranties, covenants and agreements on the part of each of the parties contained in this Agreement or in any certificate or other document delivered pursuant to this Agreement shall survive the Closing and shall survive for the duration of this Agreement. 27 ARTICLE 6 CONDITIONS PRECEDENT 6.1 FEP'S CONDITIONS TO CLOSING. The obligation of FEP to complete the transactions contemplated by this Agreement shall be subject to the satisfaction of, or compliance with, at or before the Closing Time, each of the following conditions precedent (each of which is acknowledged to be inserted for the exclusive benefit of FEP and may be waived by it in whole or in part by notice in writing to the Manager): (a) TRUTH AND ACCURACY OF REPRESENTATIONS AND WARRANTIES OF THE MANAGER AND THE FUNDS AT CLOSING TIME - All the representations and warranties of the Manager and the Funds made in or pursuant to this Agreement shall be true and correct in all material respects as at the Closing Time and with the same effect as if made at and as at the Closing Time. FEP shall receive a certificate from the Manager and each of the Funds confirming the truth and correctness in all material respects of the representations and warranties of the Manager and the Funds. (b) RECEIPT OF CLOSING DOCUMENTATION - All documentation relating to the assignment of Fees payable to FEP and the transactions contemplated by this Agreement, including a legal opinion from counsel to the Manager and the Funds, shall be satisfactory to FEP and its counsel. FEP shall receive copies of all documentation or other evidences it may reasonably request in order to establish the consummation of the transactions contemplated by this Agreement and the taking of all corporate proceedings in connection with this Agreement in compliance with these conditions in form (as to certification and otherwise) and substance satisfactory to FEP and its counsel. (c) MATERIAL ADVERSE CHANGE - No material adverse change in the condition or operations of the business, assets or financial condition of the Funds or the Manager shall have occurred including any change in the fundamental investment objective of a Fund, and no Adverse Effect shall have occurred. (d) PERFORMANCE OF OBLIGATIONS - The Manager and each of the Funds shall have performed or complied with, in all respects, all obligations, covenants and agreements in this Agreement to be performed or complied with by the Closing Time. (e) CONSENTS, AUTHORIZATIONS AND REGISTRATIONS - All consents, approvals, orders and authorizations of any Person in Canada or elsewhere including, without limitation, the approval of the board of directors of the Corporate Fund and the Manager, in its own capacity and in its capacity as the manager, of each of the 28 Funds and trustee of each of the Trust Funds, required in connection with the completion of any of the transactions contemplated by this Agreement, the execution of this Agreement, the Closing or the performance of any of the terms and conditions of this Agreement shall have been obtained at or before the Closing Time. (f) MANAGER AND TRUSTEE OF THE FUNDS - The Manager shall, at the date of this Agreement and at the Closing Time, be the manager of each of the Funds and the trustee of each of the Trust Funds. (g) PPSA SEARCH REPORTS - FEP shall have received certified copies of search reports under applicable personal property security legislation dated reasonably near the Closing Date listing all effective financing statements which name the Manager (under its respective present name or any previous names) or any Fund as debtor and which are filed in the jurisdictions in which filings are required to be made pursuant to section 6.1(i) together with copies of such financing statements, none of which (other than those in favour of FEP) will cover any of the Fees due to FEP under this Agreement. (h) RELEASE OF EXISTING SECURITY INTERESTS - The Manager shall have caused FEP to receive duly executed copies of proper discharge statements, if any, necessary to release all security interests and other rights of any Person in the Fees due to FEP under this Agreement. (i) DULY REGISTERED FINANCING STATEMENTS - FEP shall have received confirmation of the registration of financing statements under the personal property security legislation of all jurisdictions FEP may deem reasonably necessary or desirable in order to perfect its interest in the Fees payable to it as contemplated by this Agreement, each of which shall be in form, scope and substance satisfactory to FEP. (j) FINANCIAL STATEMENTS - FEP or its Permitted Designee shall have received copies of the Manager's audited balance sheet as at September 30, 1997 together with the auditors' report thereon. (k) EVENT OF TERMINATION - The Manager and the Funds are in compliance with section 6.2(c). 6.2 FEP'S CONDITIONS TO PAYMENT OF SELLING COMMISSIONS FROM TIME TO TIME. The obligation of FEP to arrange for the distribution of Deferred Charge Securities and to pay Selling Commissions under this Agreement from time to time shall be subject to the satisfaction of, or compliance with, each of the following conditions precedent (each of which is acknowledged to be inserted for the 29 exclusive benefit of FEP and may be waived by it in whole or in part by notice in writing to the Manager) at each such time: (a) TRUTH AND ACCURACY OF REPRESENTATIONS AND WARRANTIES OF THE MANAGER AND THE FUNDS - The representations and warranties of the Manager and the Funds made in or pursuant to sections 5.1 (a), (b), (c), (d), (e), (g), (h), (i), (j), (k), (l), (m), (o), (p), (q), (t) and (v) shall be true and correct in all material respects as of the time of arranging for the distribution of Deferred Charge Securities and payment of such Selling Commissions and with the same effect as if made at the time of payment of Selling Commissions. (b) MANAGER AND TRUSTEE OF THE FUNDS - The Manager or an Affiliate of the Manager shall, at the time of payment of such Selling Commissions, be the manager of each of the Funds and trustee of each of the Trust Funds. (c) EVENT OF TERMINATION - Both immediately before and immediately after giving effect to the payment of a Selling Commission on such date by FEP, no FEP Event of Termination (or event which, with the passage of time or the giving of notice, or both, would constitute an Event of Termination) in respect of the Manager or any of the Funds shall have occurred and be continuing provided that, for purposes of this section, FEP Event of Termination (g) shall not be deemed to have occurred until the 60 day notice period provided for in section 8.1 has expired. (d) DISTRIBUTION RIGHTS - The Manager shall have delivered all Manager's Reports required to be delivered on or prior to such date pursuant to this Agreement, which shall be in form and substance reasonably satisfactory to FEP or its Permitted Designee. (e) PERFORMANCE OF OBLIGATIONS - The Manager and each of the Funds shall have performed or complied with, in all material respects, all obligations, covenants and agreements in this Agreement to be performed or complied with. The delivery of the Manager Report from time to time shall constitute a representation and warranty by the Manager that, on the date of such delivery, the conditions set forth in section 6.2 have been fulfilled, except as specifically agreed to in writing by FEP. 6.3 MANAGER AND FUNDS' CONDITIONS. The obligations of the Manager and each of the Funds to complete the transactions contemplated by this Agreement shall be subject to the satisfaction of, or compliance with, at or before the Closing Time, each of the following conditions precedent (each of which is acknowledged to be inserted for the exclusive benefit of the Manager and the Funds and may be waived by them in whole or in part by notice in writing to FEP): 30 (a) TRUTH AND ACCURACY OF REPRESENTATIONS OF FEP AT CLOSING TIME - All the representations and warranties of FEP made in or pursuant to this Agreement shall be true and correct in all material respects as at the Closing Time with the same effect as if made at and as at the Closing Time. (b) PERFORMANCE OF OBLIGATIONS - FEP shall have performed or complied with, in all material respects, all obligations, covenants and agreements in this Agreement to be performed or complied with by the Closing Date. (c) MATERIAL ADVERSE EFFECT - No material adverse change in the condition or operation of the business, assets or financial condition of FEP shall have occurred which would adversely affect its ability to pay or to perform its obligations under this Agreement. (d) CONSENTS, AUTHORIZATIONS AND REGISTRATIONS - All consents, approvals, orders and authorizations of any Person or government authority in Canada or elsewhere including, without limitation, the approval of the board of directors of FEP, required in connection with the contemplation of any of the transactions contemplated by this Agreement, the execution of this Agreement, the closing or performance of any of the terms and conditions of this Agreement shall have been obtained on or before the Closing Time. ARTICLE 7 COVENANTS 7.1 COVENANTS OF THE MANAGER AND THE FUNDS. Each of the Manager and the Funds covenant and agree (but only as to itself) with FEP to the extent applicable that prior to the termination of this Agreement: (a) COMPLIANCE WITH MATERIAL CONTRACTS - Each of the Manager and the Funds, and the Manager shall use commercially reasonable efforts to cause each portfolio manager of each of the Funds to, duly comply with all applicable laws in the conduct of their respective businesses, to maintain and keep in full force and effect all licences, registrations and authorizations necessary to conduct their respective businesses and to fulfil all obligations on its part to be performed under or in connection with this Agreement, the Advisory Agreements and the Material Contracts to which it is a party unless the failure to do so would not have an Adverse Effect. 31 (b) TERMINATION OF THE FUNDS - The Manager and each of the Funds shall, subject to the discharge of their respective fiduciary duties, not take any action, omit to take any action or initiate any proceeding which may, indirectly or directly, trigger the termination or wind-up of a Fund pursuant to any of the Material Contracts if such termination or wind-up has an Adverse Effect upon FEP. (c) MAINTENANCE OF BOOKS AND RECORDS - Each of the Manager and the Funds shall keep proper books and records in accordance with normal business practice in which full and appropriate entries shall be made of all transactions in relation to its business activity which relate in any manner to the transactions contemplated by this Agreement. The Manager shall cause its auditors to review the Manager's books and records relating to the payment of the Selling Commissions and the calculation of Fees and the Manager shall provide and shall cause its auditors to provide written affirmation as to the accuracy of those books and records in respect of the matters relating to the payment of Selling Commissions and the Fees no later than June 30, 1998 and thereafter within 90 days following the end of the Manager's fiscal year. The standards relating to the review of such books and records must be acceptable to the Manager's and FEP's auditors as complying with Canadian and U.S. generally accepted accounting standards. The Manager shall pay all reasonable expenses incurred by FEP in reviewing the Manager's books and records and such written affirmation. (d) DISCLOSURE OF MATERIAL CHANGES - Each of the Manager and the Funds shall promptly give written notice to FEP (i) of any FEP Event of Termination or event which, with the passage of time or the giving of notice or both, would constitute an FEP Event of Termination; (ii) any material litigation or proceedings with respect to the Manager, any portfolio manager of any of the Funds or the Funds or any of their respective assets or properties which, if adversely determined, could give rise to an Adverse Effect; (iii) the failure of any representation or warranty of the Manager or any of the Funds contained in this Agreement to be true and correct in all material respects as of the date given; or (iv) the failure of any of the Manager or the Funds to perform any obligation which is required to be performed by it under this Agreement in any material respect on a timely basis; (v) any material change in the management or structure of the Funds. (e) FURTHER INSTRUMENTS AND DOCUMENTS - Each of the Manager and the Funds shall promptly at its expense execute and deliver to FEP such further instruments and documents and take such further action as FEP may from time to time reasonably request in order to further carry out the intent and purpose of this Agreement and 32 to establish and protect the rights, interests and remedies created or intended to be created hereby and thereby including, without limitation, the execution and delivery, recording and filing of financing statements under the personal property securities legislation of any applicable jurisdiction, provided however, that the Manager and the Funds shall not be obligated to execute and deliver such further instruments and documents if they would thereby incur any material obligations or liabilities not contemplated by this Agreement. (f) RIGHTS OF INSPECTION - Each of the Manager and the Fund shall permit FEP or any Permitted Designee reasonably acceptable to the Manager and the Funds to visit and inspect the properties, files, books and records of the Manager relating to the Fees, this Agreement, the transactions contemplated hereby and the financial condition, results of operations, cash flows of the Funds and to discuss the foregoing with the officers, partners, employees and accountants of the Manager, all at such reasonable times during reasonable business hours and as often as FEP may reasonably request. (g) MAINTENANCE OF PROSPECTUS - Each of the Funds and the Manager shall maintain the Prospectus Documents in order to qualify the Securities of the Funds for sale to the public in full force and effect so that the Deferred Charge Securities may be offered for sale to the public in all of the provinces and territories of Canada during the period in which FEP has the right to arrange for the distribution of Deferred Charge Securities hereunder. (h) PRESERVATION OF RELATIONSHIPS - The Manager shall, and shall use commercially reasonable efforts to, and use commercially reasonable efforts to cause the portfolio managers for the Funds to, in each case, consistent with past practice, preserve their relationships with each Fund, including without limitation, those arrangements relating to distribution, management, investment management and administration of the Funds; and not to terminate or take any action or omit to take any action which would, indirectly or directly, trigger the termination of a Material Contract. For greater certainty, the foregoing sentence shall not prevent the Manager from (i) terminating a Material Contract when the Manager, acting reasonably, considers such action to be in the best interests of a Fund or the Funds; or (ii) assigning a Material Contract to an Affiliate, provided that such assignment does not result in an Adverse Effect. (i) DELIVERY OF LENDER NOTICES - The Manager and the Funds shall deliver to FEP a copy of all notices or waivers of default, delivered by any lenders to the Funds and of all agreements and amendments entered into with such lenders. 33 (j) CHANGE TO INVESTMENT OBJECTIVE OF A FUND - In the event, the investment objective of a Fund is amended and such amendment has a material impact upon the Fees received by FEP, then the Manager and such Fund agree to amend the Monthly Fee payable to FEP under this Agreement in light of such material impact. (k) PAYMENT OF FUNDS - If the Manager or any designee or agent thereof shall receive any of the Fees from a Fund, the Manager or such designee or agent shall hold such Fees in trust for FEP (acknowledging that such Fees do not constitute property of the Manager) and immediately following receipt of any such Fees, the Manager shall, or shall cause such Person to, remit the same to FEP in the form received and ensure that such amounts are not commingled with other funds. (l) PROVISION OF INFORMATION - All information provided by or on behalf of the Manager or the Funds after the date hereof to FEP or any Permitted Designee for purposes of or in connection with this Agreement, or the transactions contemplated hereby, will be true, correct and complete in all respects material to the Fees and the transactions contemplated by this Agreement and no such information will contain any material misrepresentation or material omission to state therein matters necessary to make statements therein not misleading in any respect material to the Fees and the transactions contemplated by this Agreement in light of the circumstances in which they are made, provided that this covenant shall apply only to such misrepresentations or omissions as would give rise to an Adverse Effect. (m) STATUS OF FEES - Except to the extent expressly permitted by this Agreement, neither the Manager or the Funds shall permit to exist any Lien on or attempt to transfer or grant a security interest in any interest in any Fees. (n) NOTICE RESPECTING PRINCIPAL OFFICE, NAME - The Manager shall not move its chief executive office, principal place of business or the place where it keeps its records concerning the Fees from the office specified in section 5.1(r) or change its name (including any French form, any combined English/French form and any other form) or the name under or by which it conducts its business unless the Manager shall have given to FEP not less than 15 Business Days' prior written notice of its intention to do so, and of any new location or new name. The Manager and the Funds shall not take any action or omit to take any action that will have an Adverse Effect upon FEP's interest in the Fees under personal property security legislation and each of such parties agrees that it will do all such things as are reasonably necessary to permit FEP to maintain the priority registration of its financing statements respecting its interest in the Fees under the personal property security legislation. 34 (o) PROVISION OF BALANCE SHEET - The Manager shall furnish to FEP: (i) its balance sheet as soon as available and no later than 90 days after the end of its fiscal year. An opinion of the independent auditors of the Manager will accompany its balance sheet confirming that such balance sheet has been prepared in accordance with GAAP and fairly presents the financial condition; (ii) as soon as available, and in no event later than 90 days after the end of each semi-annual period of its fiscal year, the balance sheet referred to in clause (i) above for the semi-annual period which shall be prepared in accordance with GAAP but need not be audited; (iii)together with each delivery of the balance sheet pursuant to clause (i) above a certificate signed by any of its senior financial officers certifying in their official capacity only and not personally as to the absence of an FEP Event of Termination as of the date thereof; and (iv) promptly such other information as FEP may from time to time reasonably request. (p) FEE PAYMENT BY A FUND - If at any time after the date of this Agreement an Insolvency Event occurs, the Manager or an Affiliate of the Manager is no longer the manager of a Fund or is no longer the trustee of a Trust Fund, such Fund agrees that from and after such date such Fund shall continue to be responsible for and shall continue to pay to FEP the amounts required to be paid to FEP under this Agreement and such Fund, and the Manager shall use its best efforts to cause any successor manager, trustee, receiver-manager or such other Person, as the case may be, to enter into any necessary agreement to provide for the continuing provision of the service of FEP and the uninterrupted payment of the Fees to FEP as provided for in this Agreement. (q) MAINTENANCE OF FEES - Each Fund and the Manager hereby agrees with FEP that they will not, at any time while FEP is entitled to receive payment of any amount hereunder, consent to or agree to a reduction in the Deferred Charge for Distributed Securities or any alteration in the manner or as to the time of calculation of the Deferred Charge or effect any action, amendment or change of any nature whatsoever if the effect of such reduction, alteration, action, amendment or change would be to reduce the amounts payable to FEP or materially adversely affect the timing of the receipt of such amounts payable pursuant to Article 4. 35 (r) MANAGER AND TRUSTEE OF THE FUNDS - The Manager shall, at the date of this Agreement and at the Closing Time, be the manager of each of the Funds and the trustee of each of the Trust Funds. (s) PAYMENT OF TAXES - Each of the Manager and the Funds shall cause to be paid and discharged all taxes, assessments and other charges or levies of any authority imposed upon it or upon any of its income or assets, prior to the day on which penalties are attached thereto, if the failure to pay and discharge such tax assessment or other charges or levies could give rise to an Adverse Effect. (t) PROTECTION OF FEP'S RIGHTS - Each of the Manager and the Funds shall use commercially reasonable efforts consistent with past practice to protect the interests of FEP under this Agreement for so long as FEP is entitled to any Fees under this Agreement. (u) CORPORATE RESTRUCTURING - Neither the Manager or any of the Funds shall (i) sell or otherwise dispose of all or substantially all of its assets; (ii) consolidate or merge with or enter into any agreement to do so with another Person; (iii) acquire all or substantially all the assets of another Person; or (iv) permit a majority of the interest in the capital distribution or profits of it to be acquired by any Person; unless, in all cases, the Manager provides to FEP reasonable written notice consistent with the disclosure obligations it would have if it were a public company and provided that (i) immediately after giving effect to such consolidation, merger, sale, disposition or other transaction, the corporation or other entity formed by or surviving any such consolidation, merger or other transaction or to which such sale or disposition shall have been made, whether the Manager or the Funds, as the case may be, or such other entity (the "Surviving Entity") shall not be in default in performance or observation of any of the terms, covenants and conditions of any Program Document to be kept or performed by it or any indebtedness or financing transaction for itself that would have an Adverse Effect; (ii) the Surviving Entity shall expressly assume the due and punctual performance and observation of all covenants and conditions of the Program Documents to be performed or observed by the predecessor entity, if any, by agreement reasonably satisfactory in form and substance to FEP; and (iii) FEP shall have satisfied itself as to the continued perfection and priority of its security interest in the Fees. (v) BOARD OF DIRECTORS FOR THE FUNDS - The Manager and each of the Funds shall provide 60 days' prior written notice to FEP of any proposed introduction of a board of directors for any of the Funds. 36 (w) CLIENT AND PORTFOLIO REPORTING - The Manager shall provide client and portfolio reporting to FEP. Client reporting will consist of the administration package of reports on monthly securityholder activity derived from the Funds' transfer agent's system. Portfolio reporting will consist of a monthly balance sheet (statement of condition) inclusive of price and securities (with CUSIP numbers) reported to FEP in respect of each Fund separately. The portfolio reports shall be in substantially the same form as those currently generated by the Manager's accountants daily. 7.2 COVENANTS OF FEP. FEP covenants and agrees with each of the Manager and the Funds to the extent applicable that prior to the termination of this Agreement: (a) SERVICES RENDERED OUTSIDE CANADA - FEP shall not and shall not permit any of its employees to render in Canada the services of arranging for the distribution of Deferred Charge Securities or any other service for which it receives a fee under the Program Documents. (b) PROVISION OF FEP BALANCE SHEET - FEP shall furnish to the Manager: (i) its balance sheet as soon as available and no later than 90 days after the end of its fiscal year. An opinion of the independent auditors of FEP will accompany its balance sheet confirming that such balance sheet has been prepared in accordance with GAAP and fairly presents the financial condition; (ii) as soon as available, and in no event later than 90 days after the end of each semi-annual period of its fiscal year prior to the Termination Date, the balance sheet referred to in clause (i) above for the semi-annual period which shall be prepared in accordance with GAAP but need not be audited; (iii)together with each delivery of the balance sheet pursuant to clause (i) above, a certificate signed by any of its senior financial officers certifying in their official capacity only and not personally as to the absence of a Manager's Event of Termination as of the date thereof. 37 ARTICLE 8 TERMINATION EVENTS AND PURCHASE EVENTS 8.1 FEP TERMINATION EVENTS. The obligation of FEP to arrange for the distribution of Deferred Charge Securities and to pay the Selling Commissions pursuant to Article 3.6 may be terminated by FEP if a FEP Event of Termination shall occur and be continuing. Such termination shall be effected by the giving of written notice to the Manager giving the Manager 15 Business Days (60 days in the case of FEP Event of Termination (g)) to cure such breach during which period FEP shall not have the right to suspend its obligation to arrange for the distribution of Deferred Charge Securities and to pay Selling Commissions. If such breach continues uncured, at the expiration of such notice period, FEP may give a second written notice to the Manager declaring that the Termination Date has occurred (in which case the Termination Date shall be deemed to have occurred on the date such second notice is given). The parties agree that in respect of FEP Event of Termination (g), the parties shall use their respective commercially reasonable efforts during such 60 day notice period to restructure the distribution arrangement contemplated by the Program Documents to attempt to accommodate and facilitate the continued arrangement notwithstanding such change. 8.2 PURCHASE EVENTS. (a) If any Purchase Event shall occur and be continuing, FEP may, without prejudice to any other rights and remedies which FEP may have under or in connection with this Agreement or any other Program Document or under applicable law, waive the Purchase Event. (b) FEP may by written notice to the Manager require that the Manager or the Funds use their respective commercially reasonable efforts to cure the Purchase Event within 15 Business Days after receipt of such notice, and, if the Manager or the Funds do not so cure such Purchase Event within such cure period, FEP may elect any one of the following courses of action: (i) waive the breach; (ii) sue the Manager or the Funds for damages; or (iii)grant the Manager or a Person acceptable to the Manager and FEP, acting reasonably, the option to purchase FEP's right to Fees for an amount equal to 110% of the FEP Balance Sheet Carrying Value as of the expiration of the cure period set forth above. (c) Upon receipt of any payment under section 8.2(b) (iii), FEP shall execute and deliver to the replacement party(s) such instruments relating to the Fees as the replacement party(s) or its counsel may reasonably request to convey to the replacement party(s), without representation or warranty of any kind (other than a 38 warranty that FEP is conveying such interest in the Fees as was conveyed to it by the Manager free and clear of any Liens), such interest, if any, as FEP shall then have in the Fees, except that FEP shall not be obligated to execute and deliver any instrument if it would, as a result, incur any material obligation or liability not contemplated by this Agreement. Upon receipt of such payment, FEP shall not be entitled to indemnification under section 9.1 other than with respect to Liabilities alleged by a Person other than the Funds and the Manager. (d) If the Manager elects not to purchase the Fees and FEP pursues such remedies as it may have related to the circumstances that gave rise to such Purchase Event, the parties hereto acknowledge that, due to the difficulty that FEP may have proving the amount of monetary damage that it will have suffered or may in the future suffer as a result of such circumstances, an equitable remedy for such injury may be appropriate. 8.3 MANAGER SUSPENSION AND TERMINATION RIGHTS. (a) MANAGER'S TERMINATION RIGHT. Provided that a FEP Event of Termination has not occurred and is continuing, the right of FEP to arrange for the distribution of Deferred Charge Securities of the Funds under this Agreement may be terminated by the Manager if FEP fails to pay Selling Commissions pursuant to Article 3 and such failure is continuing. Such termination shall be effective by the giving of written notice to FEP by the Manager giving FEP 15 Business Days to cure such breach during which period the Manager shall not have any right to terminate FEP's distribution right. If such breach continues uncured, at the expiration of such notice period, the Manager may give a second written notice to FEP declaring that the Termination Date has occurred (in which case a Termination Date shall be deemed to have occurred on the date such second notice is given). (b) MANAGER'S PURCHASE EVENT. If a Manager Event of Termination shall occur and be continuing, the Manager or its designee may, with or without the consent of FEP, upon 60 days' notice, purchase all of FEP's right, title and interest in and to all the Fees for a price equal to the FEP Balance Sheet Carrying Value in respect of each Quarterly Pool. Upon receipt of any such payment, FEP shall execute and deliver to the Manager or its designee such instruments relating to the Fees as the Manager or its counsel may reasonably request to convey to the Manager without representation or warranty of any kind (other than a warranty that it owns such interest in the Fees as was conveyed to it by the Manager free and clear of all Liens), such interest, if any, as FEP shall then have in the Fees, except that FEP shall not be obligated to execute and deliver any instrument if it would, as a result, incur any material obligation or liability not contemplated by the Program Documents to which it is a party. The 39 parties agree that, in respect of the Manager Event of Termination (a), the parties shall use their respective commercially reasonable efforts during such 60 day notice period to restructure the distribution arrangement contemplated by the Program Documents to attempt to accommodate and facilitate the continued arrangement notwithstanding such change. (c) MANAGER'S SUSPENSION RIGHTS. The Manager may at any time and from time to time suspend FEP's right to arrange for the distribution of Deferred Charge Securities, for a maximum period of 12 calendar months per suspension, provided that, in respect of each suspension: (i) it provides to FEP not less than 60 days prior written notice of the suspension; and (ii) the suspension period may only commence on the first business day of a calendar month following the expiry of the notice period; and provided that in respect of the termination of an existing suspension period and the recommencement of FEP's distribution right under the Agreement: (i) not less than 60 days written notice is provided by the Manager to FEP prior to the expiry of the applicable suspension period; and (ii) following the termination of an existing suspension period, FEP's distribution right shall be for a minimum of three months. The parties acknowledge and agree that FEP shall be entitled to terminate this Agreement at any time following the end of a 12 calendar month suspension period if the Manager has not provided written notice to FEP of the Manager's intent to recommence FEP's distribution right 60 days prior to the end of the suspension period. In addition to its rights of suspension as provided above, the Manager, may, at any time, terminate FEP's right to arrange for the distribution of Deferred Charge Securities in respect of any future Quarterly Pool by providing 90 days prior written notice to FEP. 8.4 COSTS AND EXPENSES OF FEP. All costs and expenses incurred by FEP in connection with the enforcement of this Agreement against the Manager or the Funds resulting from an FEP Event of Termination or a Purchase Event shall be paid by the Manager or the Funds forthwith on demand therefor by FEP. The 40 payment obligations of the Manager and the Funds under this section shall be several. 8.5 COSTS AND EXPENSES OF MANAGER. All costs and expenses incurred by the Manager in connection with the enforcement of this Agreement against FEP resulting from a Manager Event of Termination shall be paid by FEP forthwith on demand therefor by the Manager. ARTICLE 9 INDEMNIFICATION 9.1 INDEMNIFICATION OF FEP. The Manager and each of the Funds severally agree to indemnify and hold harmless FEP, each of its partners and each of their respective Affiliates and their respective officers, directors, employees, agents and advisers (an "Indemnified Party") from and against any and all claims, damages, losses, liabilities, expenses, obligations, penalties, actions, suits, judgements and disbursements or any kind or nature whatsoever (including without limitation the reasonable fees and disbursements of counsel and expert witnesses (collectively but without duplication the "Liabilities")) that may be incurred by, asserted or awarded against any Indemnified Party, in each case arising out of or relating to or by reason of any one or more of the following: (a) preparation for, or defence of, any investigation, litigation or proceeding arising out of or relating to any of the Prospectus Documents, this Agreement or the transactions contemplated hereby; (b) any failure or alleged failure by the Manager or a Fund to perform any of its obligations contained in this Agreement promptly and fully; (c) any failure or alleged failure of any representation or warranty made or deemed made by the Manager or a Fund contained in this Agreement which has an Adverse Effect; (d) any failure or alleged failure to provide to FEP good and marketable title under applicable personal property securities legislation to the Fees; (e) the failure of this Agreement or the Program Documents to comply with law; and (f) any non-fulfilment of any condition precedent or covenant on the part of the Manager or any of the Funds under this Agreement whether before or after the Closing, 41 provided that the Manager and the Funds shall not be required to indemnify any Indemnified Party in respect of any Liability if and to the extent that such Liability results from one or more of the following: (g) the negligence or wilful misconduct of an Indemnified Party or any other Person for whom an Indemnified Party acts; or (h) the failure of the Indemnified Party to perform any of its covenants set forth in this Agreement or any failure of any of the representations and warranties of the Indemnified Party to be true and correct. The parties acknowledge and agree the Manager shall only be responsible pursuant to this section to the extent of its obligations under the Agreement and its sole liability under this section shall be limited to any liability resulting from the Manager's failure to perform its obligations under this Agreement. 9.2 INDEMNIFICATION OF MANAGER AND THE FUNDS. FEP agrees to indemnify and hold harmless the Manager and the Funds, each of its partners and each of their respective affiliates and their respective officers, directors, employees, agents, advisers of any Person controlling any of the foregoing (an "Indemnified Party") from and against any and all claims, damages, losses, liabilities, expenses, obligations, penalties, actions, judgements and disbursements of any kind or nature whatsoever (including without limitation the reasonable fees and disbursements of counsel and expert witnesses (collectively but without duplication the "Liabilities")) that may be incurred by, asserted or awarded against any Indemnified Party, in each case arising out of or relating to or by reason of any one or more of the following: (a) failure or alleged failure by FEP to perform any of its obligations contained in this Agreement promptly and fully; (b) the imposition of withholding tax under Canadian tax laws on the payment of Fees to FEP or under U.S. tax laws on the payment of Selling Commissions or any other payment made by FEP under the Program Documents; provided that FEP shall not be required to indemnify any Indemnified Party in respect of any Liability if and to the extent that such Liability resulted from one of the following: (c) the negligence or wilful misconduct of an Indemnified Party or any other Person for whom an Indemnified Party acts other than any negligence or wilful misconduct relating to the failure to withhold or remit tax under Canadian tax laws; or 42 (d) the failure of the Indemnified Party to perform any of its covenants set forth in this Agreement or any failure of any of the representations and warranties of the Indemnified Party to be true and correct. ARTICLE 10 ADDITIONAL FUNDS 10.1 ADDITIONAL FUNDS. (a) The Manager shall add Additional Funds to the Funds in respect of which FEP's distribution right extends. The Manager shall cause each Additional Fund to become a party to this Agreement as fully and effectually as if it had been an original signatory hereto. Each of the remaining parties hereto shall execute and deliver such amendments to this Agreement as shall be necessary to give effect to this section. Subject to compliance with the foregoing, each such Additional Fund shall be deemed to be a "Fund" within the meaning hereof and the mutual fund securities of such Additional Funds which are sold on a deferred-charge basis shall be deemed to be "Deferred Charge Securities" within the meaning hereof and the terms and conditions of this Agreement shall be applicable to such Additional Funds. The Manager agrees not to permit any Distributed Security to become a Transfer Security of an Additional Fund, until such Additional Fund becomes a party to this Agreement. (b) The Manager may add to the Funds in respect of which FEP's distribution right extends, any open-end mutual fund, the management and distribution rights of which are acquired from a third party from time to time. The Manager shall add such open-end fund to FEP's distribution right if the Manager provides for an exchange privilege to investors allowing the transfer from such open-end funds to the Funds. If the Manager elects or is required to add such open-end fund to FEP's distribution right, such Fund shall be considered an Additional Fund and shall be treated and subject to the conditions noted above in paragraph (a). (c) The Manager may add to the Funds in respect of which FEP's distribution right extends, any closed-end fund created or reorganized by the Manager if FEP and the Manager agree as to an appropriate fee structure in respect of such Fund. If an agreement as to an appropriate fee structure is reached, such Fund shall be 43 considered an "Additional Fund" and shall be treated and subject to the conditions noted above in paragraph (a). (d) The Manager shall provide notice to FEP of any Additional Fund on or about the time when the Manager files the preliminary prospectus for the Additional Fund. 10.2 CHANGE IN MARKET CONDITIONS. During any period or periods when, in the reasonable opinion of the Manager, the state of the financial markets becomes such that it would be impracticable or unprofitable to offer or to continue to offer the Deferred Charge Securities for sale to the public, or if any event has occurred or situation developed which renders it inexpedient or unprofitable to offer or to continue to offer the Deferred Charge Securities for sale to the public, the Funds and the Manager shall be under no obligation to offer or to continue to offer the Deferred Charge Securities for sale to the public. Any such discontinuation in the offering of Deferred Charge Securities will not have any effect on the obligation of the Manager and the Funds to pay FEP the remuneration to which it is entitled under Article 4 or to continue to qualify outstanding Distributed Securities under applicable securities legislation, to the extent necessary to give effect to the provisions of this Agreement. ARTICLE 11 GENERAL 11.1 AMENDMENT OF AGREEMENT. This Agreement may be amended from time to time only by written consent of the Funds, the Manager and FEP. 11.2 TERMINATION OF FEP AS EXCLUSIVE DISTRIBUTOR. If FEP is unable to carry out its obligations hereunder (which may occur if FEP is unable to pay Selling Commissions for all of the Original Charge Securities sold during the period of its appointment as distributor under this Agreement), the Manager may terminate FEP's exclusive right to arrange for distribution of Deferred Charge Securities and may: (i) pay Selling Commissions directly; (ii) enter into agreements with other parties to pay Selling Commissions; or (iii) limit, by allotment or otherwise, sales of Deferred Charge Securities. 11.3 RESIGNATION BY FEP. FEP may resign as distributor on not less than 365 days' prior notice to the Funds and the Manager provided such notice may not be provided prior to the date which is six months from the date of this Agreement. In such event, FEP shall thereafter have no entitlement to arrange for the distribution of Deferred Charge Securities but shall be entitled to continue to receive payment of the Fees payable pursuant to Article 4. 44 11.4 ASSIGNMENT (a) This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective permitted successors and permitted assigns; provided, however, that, except as permitted under paragraph 11.4(c), section 7.1(u) or to an Affiliate of the Manager, the Manager may not assign its rights or obligations hereunder or in connection herewith or any interest herein or under any other Program Document or with respect to any Fees or the proceeds thereof without FEP's prior written consent, such consent not to be unreasonably withheld; and provided further that, except as provided in sections 11.4(b) and 11.4(c), FEP shall not assign its rights or obligations hereunder or under any other Program Document or in respect of any Fees or the proceeds thereof, without the prior written consent of the Manager, such consent not to be unreasonably withheld. (b) The rights and obligations of FEP under this Agreement shall be assignable in connection with any merger, consolidation or sale or disposition of all or substantially all of the assets of or the general and limited partnership or corporate interests in FEP with or to another entity, provided that the surviving entity shall (i) be a corporation or other entity organized under the laws of any country in Europe, the United States of America or any State thereof or of Canada or any province thereof, (ii) expressly assume the due and punctual performance and observance of all covenants and conditions of this Agreement and all other Program Documents to be performed or observed by FEP, by agreement reasonably satisfactory in form and substance to the Manager and (iii) prior to the Termination Date, have a net worth prior to the Termination Date at least equal to that of FEP, and access to funding sources for purposes of making payments of Selling Commissions hereunder equivalent in an amount to those to which FEP had access, immediately prior to such merger, consolidation or sale or disposition of assets or interests. FEP shall have the right, subject to section 11.4(d) and (e), to assign to any Person, as a part of and in connection with a Takeout Transaction, its right, title and interest in the Fees and the proceeds thereof; provided that FEP shall not assign to any Person any other right, title or interest of FEP hereunder or under any other Program Document (including, without limitation, the benefit of the representations and warranties of, or indemnification agreed to, by the Manager contained in this Agreement or any other Program Document). Notwithstanding the foregoing, FEP may (i) pledge all of its rights under this Agreement or any other Program Document to a major financial institution as security for money borrowed, or (ii) make representations or warranties and grant indemnities to another Person, as a part of and in connection with a Takeout Transaction, which are similar to the representations, warranties and indemnities agreed to by the Manager in this Agreement or any other Program Document. 45 (c) The parties agree and consent to the assignment of their respective rights and obligations under this Agreement to the Joint Venture. (d) In the event that a Takeout Transaction is proposed which would involve the offering by prospectus of securities in Canada then: (i) FEP shall give the Manager notice of such proposed Takeout Transaction; (ii) the Manager shall then have 30 days from the receipt of such notice to give FEP notice of the intent of the Manager or one of its Affiliates to file a preliminary prospectus within 30 days of the date of the Manager's notice with respect to an offering relating to the funding of the payment of Selling Commissions in respect of Deferred Charge Securities; (iii)if the Manager does not give notice within the 30 day period described in (ii) above, or if the Manager or its Affiliate does not file a preliminary prospectus within 30 days of giving its notice, then the proposed Takeout Transaction may proceed; (iv) in any other case, the proposed Takeout Transaction will not proceed until the earlier of: (A) the first closing of the offering described in (ii) above, and (B) 12 months from the date of the Manager's notice. (e) FEP shall not have the right to assign any of its rights under this Agreement to any of the top five mutual fund management companies in Canada and the U.S., as measured by the net asset value of funds under management published as at the end of each calendar year by the Investment Funds Institute of Canada and the Investment Companies Institute, as applicable. This exclusion shall not apply to Affiliates or associates of such fund companies that are not involved in the management and distribution of retail investment funds. 11.5 LIABILITY. FEP shall not be liable for any error of judgment or for any loss suffered by any Fund or the Manager in connection with the matters to which this Agreement relates, except a loss resulting from misfeasance, bad faith or negligence on its part in the performance of, or reckless disregard by it of, its obligations hereunder. 11.6 CONFIDENTIALITY. Unless otherwise required by applicable law, the Manager, the Funds and FEP agree to maintain the confidentiality of this Agreement (and all drafts thereof), the transactions contemplated hereby and all confidential, material, non-public information concerning the other parties to this Agreement, which information has been provided by such party by another party and was not also available to such party through other means (collectively, "Confidential 46 Information"); provided that nothing in this section shall prohibit disclosure of Confidential Information by any such Person as follows: (a) pursuant to an order under applicable law or pursuant to a subpoena or other legal process; (b) to the officers, directors, partners, employees, legal counsel or auditors of, or lenders to, such Person, who shall also be instructed to maintain it as confidential; (c) in the case of any Fund, to any then current directors or trustees of such Fund, Fund counsel, independent accountants or officers, who shall also be instructed to maintain it as confidential; (d) to any permitted assignee or permitted pledgee of all or any portion of such Person's right, title or interest in this Agreement or the Fees, provided that such permitted assignee or pledgee agrees in writing delivered to and for the benefit of all parties to this Agreement to be bound by the terms of this section; or (e) to any proposed permitted assignee or permitted pledgee of all or any portion of such Person's right, title and interest in this Agreement or the Fees, provided that such Person advises such proposed permitted assignee or pledgee in writing that such Confidential Information is confidential, non-public information and requests that such proposed permitted assignee or pledgee keep it confidential and use it only for purposes of evaluating the proposed assignment or pledge and such proposed permitted assignee or pledgee agrees in a writing delivered to and for the benefit of all parties to this Agreement to be bound by the provisions of this section and provided, further that FEP shall not disclose such Confidential Information to any assignee or pledgee pursuant to clause (d) above or this clause (e) which is or is an affiliate of an investment adviser, principal underwriter, administrator or subadvisor to any registered, open-end management investment company. Notwithstanding anything to the contrary contained herein, FEP shall keep, and shall use its commercially reasonable efforts to cause its officers, directors, partners, employees, advisers, legal counsel, auditors, lenders and affiliates to keep, confidential all Confidential Information concerning the Funds delivered or made available by the Manager or the Funds to FEP or such other Persons, including without limitation the Fund Documents (to the extent not publicly available), shareholder records, shareholder transaction records and information concerning the composition of their respective portfolios, and information concerning the financial condition of the Manager of its parent (and FEP shall not, and shall cause each of the foregoing other Persons not to, use such information to sell securities to or purchase securities from any such Fund 47 or other investment company or recommend such trading to any other Person on the basis of such information). 11.7 NOTICE. Any notice which is required or permitted to be given under this Agreement may be given in writing by delivery in person or by ordinary prepaid mail by addressing the same to the party to whom it is to be given at the address first written above or at such other address as such party may designate by notice in the foregoing manner. Any notice so given shall be deemed to have been given on the day it is personally delivered or on the day which is five days after it is mailed, as the case may be. 11.8 DISPUTE RESOLUTION. Any dispute relating to the Program Documents, including the method or the calculation of the payments, shall be negotiated in good faith by the parties. If any dispute cannot be resolved, any party may give written notice to the other parties that the arbitration proceedings described below shall apply to all or a specified part of the issues in dispute. Upon receipt of the notice referred to in the preceding paragraph, the parties shall attempt to agree on an arbitrator and, if they are unable to agree within 10 Business Days, FEP shall name an arbitrator who is a partner of PricewaterhouseCoopers or such other accounting firm retained by the Manager, or who is a partner of any nationally recognized accounting firm in Canada agreed to by the Manager. The arbitrator shall be given access to all materials and information reasonably requested by him for such purpose. The rules and procedures to be followed in the arbitration proceedings shall be determined by the arbitrator in his discretion. To the extent not inconsistent with this Agreement, the arbitration shall be governed by the International Commercial Arbitrations Act (Ontario). The arbitrator's determination of all matters in dispute shall be final and binding on all parties and shall not be subject to appeal by any party. The fees and expenses of the arbitrator shall be determined by the arbitrator. Any amount determined to be payable by one party to another shall be payable with interest calculated at an annual rate on interest reported by Chase Bank Canada as its "prime rate", for the period commencing from the date such payment was originally due to the date payment actually is made. 11.9 TAXES. The Manager or the Funds, as applicable, shall pay any present or future sales or excise taxes, excluding FEP's income taxes, imposed under Canadian legislation upon the supply of services by FEP under this Agreement (hereinafter referred to as "Sales Taxes"). In addition, the Manager or the Funds, as applicable, shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise under Canadian legislation from any payment made by or on behalf of the Funds, hereunder or from the execution or delivery of, or otherwise with respect to, this Agreement or any other Program Document to which the Manager, the Funds or any of their respective Affiliates is a party (hereinafter referred to as "Other Taxes"). FEP shall be entitled to indemnification under section 9.1 for the full 48 amount of Sales Taxes or Other Taxes (including, without limitation, any Sales Taxes or Other Taxes imposed by any Canadian jurisdiction on amounts payable under this section 11.9) paid by the Manager or the Funds and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Sales Taxes or Other Taxes were correctly or legally asserted. 11.10 SEPARATE LIABILITY OF FUNDS. The liability and obligations of each Fund to the Manager and FEP hereunder shall be separate and distinct from the liability and obligations of each of the other Funds with the result that no Fund shall be liable or responsible for the action or inaction of any other Fund. Notwithstanding the foregoing and notwithstanding that the Manager may cease to be the manager of any Fund, each of the Funds agrees that it shall provide to FEP and the Manager such information as may be required from time to time to determine the amount of the Fees payable pursuant to Article 4. 11.11 HEADINGS. In this Agreement, the headings are for convenience of reference only, do not form a part of this Agreement and are not to be considered in the interpretation of this Agreement. References to Articles, sections, paragraphs, subparagraphs and clauses are to Articles, sections, paragraphs, subparagraphs and clauses of this Agreement. 11.12 GENDER AND NUMBER. In this Agreement, words importing the masculine gender include the feminine and neuter genders, words importing persons include all Persons, and words in the singular include the plural, and vice versa, wherever the context requires. 11.13 SEVERABILITY. Every provision of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality shall not affect the validity of the remainder of this Agreement. 11.14 FURTHER ACTS. The parties hereto agree to execute and deliver any such further and other documents and perform and cause to be performed such further and other acts and things as may be necessary or desirable in order to give full effect to this Agreement and every part thereof. Without limiting the generality of the foregoing, each of the Funds agrees that it will provide to the other Funds, the Manager and FEP such information as to date of issue and issue price of its Deferred Charge Securities and such other information as shall be required to facilitate the calculating of any amounts which are payable hereunder. 11.15 CURRENCY. All dollar amounts referred to in this Agreement or required to be paid hereunder, are in Canadian funds. 11.16 INTEREST RATE EQUIVALENCE. For the purposes of the Interest Act (Canada), where in this Agreement a rate of interest is to be calculated on the basis of a year of 360 or 365 days, the yearly rate of interest to which the said rate is equivalent is the said rate multiplied by the number of days in the calendar 49 year commencing on the first day of the period for which such calculation is made and divided by 360 or 365 (as applicable). 11.17 COUNTERPARTS, FACSIMILE EXECUTION. This Agreement may be executed in several counterparts, each of which when so executed shall be deemed to be an original and such counterparts together shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart. This Agreement may be executed and delivered by facsimile and will be considered duly executed and delivered by the parties so executing delivery on the day of its transmission by facsimile in executed form to the other parties. A party so executing by way of facsimile shall promptly deliver to each other party an originally signed counterpart. 11.18 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and the parties. 11.19 APPLICABLE LAW. This Agreement shall be governed by and interpreted in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein and the courts of the Province of Ontario shall have exclusive jurisdiction with respect to this Agreement. 11.20 ENUREMENT. This Agreement is binding upon and enures to the benefit of the parties hereto and their respective successors and permitted assigns. The remainder of this page has been left blank intentionally. IN WITNESS WHEREOF the parties have duly executed this Agreement. TEMPLETON EMERGING MARKETS FUND, TEMPLETON CANADIAN BOND FUND, TEMPLETON INTERNATIONAL STOCK FUND, TEMPLETON CANADIAN STOCK FUND, TEMPLETON GLOBAL SMALLER COMPANIES FUND, TEMPLETON GLOBAL BOND FUND, TEMPLETON TREASURY BILL FUND, TEMPLETON GLOBAL BALANCED FUND, TEMPLETON INTERNATIONAL BALANCED FUND, TEMPLETON CANADIAN ASSET ALLOCATION FUND, MUTUAL BEACON FUND, FRANKLIN U.S. SMALL CAP GROWTH FUND AND TEMPLETON BALANCED FUND, by its manager and trustee, Templeton Management Limited Per: /s/ Michael Mezei ----------------- Vice-President and General Counsel /s/ James Cook Vice President and Chief Financial Officer TEMPLETON GROWTH FUND, LTD. Per: /s/ Michael Mezei ----------------- Assistant Secretary /s/ James Cook Treasurer TEMPLETON MANAGEMENT LIMITED Per: /s/ Michael Mezei ----------------- Vice-President and General Counsel /s/ James Cook Vice President and Chief Financial Officer FEP Capital, L.P. By: FEP Holdings, L.P., its General Partner By: FEP Genpar, L.P., General Partner of FEP Holdings, L.P. By: FW Group Genpar, Inc. General Partner of FEP Genpar, L.P. By: /s/ David G. Brown ------------------ David G. Brown President of FW Group Genpar, Inc. EX-10.46 3 0003.txt PURCHASE AND SALES AGREEMENT PURCHASE AND SALE AGREEMENT by and among Franklin/Templeton Distributors, Inc. as Seller and Franklin Resources, Inc. as Seller Parent and Lightning Finance Company Limited as Purchaser Dated as of August 1, 1999 TABLE OF CONTENTS ARTICLE I - DEFINITIONS AND RULES OF CONTRUCTION.............................3 SECTION 1.1. DEFINITIONS...................................................3 SECTION 1.2 RULES OF CONSTRUCTION........................................23 ARTICLE II - PURCHASE AND SALE OF PURCHASED RECEIVABLES; ADDITIONAL FUNDS AND COLLECTIONS............................................23 SECTION 2.1 PURCHASE AND SALE............................................23 SECTION 2.2 ADDITIONAL FUNDS.............................................24 SECTION 2.3 COLLECTIONS AND SELLER COLLECTIONS...........................25 SECTION 2.4 TRANSFER OF RECORDS TO PURCHASER.............................26 SECTION 2.5 DISTRIBUTION PLAN TERMINATION................................26 SECTION 2.6 INTERIM AGREEMENT............................................26 ARTICLE III - CONDITIONS PRECEDENT..........................................26 SECTION 3.1 CONDITIONS PRECEDENT TO INITIAL PURCHASE OF PURCHASED RECEIVABLES...................................................26 SECTION 3.2 CONDITIONS PRECEDENT TO INITIAL SALE OF PURCHASED RECEIVABLES.28 SECTION 3.3 CONDITIONS PRECEDENT TO THE PURCHASER'S CONTINUING OBLIGATION TO PURCHASE PURCHASED RECEIVABLES.............................28 ARTICLE IV - REPRESENTATIONS AND WARRANTIES.................................29 SECTION 4.1 REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE SELLER PARENT.......................................................29 SECTION 4.1A. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE SELLER.....33 SECTION 4.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER..............34 ARTICLE V - COVENANTS.......................................................36 SECTION 5.1 AFFIRMATIVE COVENANTS OF THE SELLER AND THE SELLER PARENT....36 SECTION 5.2 NEGATIVE COVENANTS OF THE SELLER AND THE SELLER PARENT.......42 SECTION 5.4 AFFIRMATIVE COVENANTS OF THE PURCHASER.......................44 SECTION 5.5. NEGATIVE COVENANTS OF THE PURCHASER..........................46 ARTICLE VI - EVENTS OF TERMNATION...........................................46 SECTION 6.1 EVENTS OF TERMINATION........................................46 SECTION 6.2 TERMINATION OF SELLER'S OBLIGATIONS TO SELL PURCHASED RECEIVABLES..................................................47 ARTICLE VII - MISCELLANEOUS.................................................47 SECTION 7.1 NO WAIVER; MODIFICATIONS IN WRITING..........................47 SECTION 7.2 PAYMENT......................................................47 SECTION 7.3 NOTICES, ETC.................................................48 SECTION 7.4 TAXES, COSTS, AND EXPENSES...................................49 SECTION 7.6 EXECUTION IN COUNTERPARTS....................................51 SECTION 7.7 BINDING EFFECT; ASSIGNMENT...................................51 SECTION 7.8 GOVERNING LAW; SUBMISSION TO JURISDICTION....................52 SECTION 7.9 SEVERABILITY OF PROVISIONS...................................53 SECTION 7.10 CONFIDENTIALITY..............................................53 SECTION 7.11 INTENT OF AGREEMENT..........................................54 SECTION 7.12 LIABILITIES TO ANY FUND......................................55 SECTION 7.13 MERGER.......................................................55 SECTION 7.14 FURTHER ACTS.................................................55 SECTION 7.15 OTHER RIGHTS.................................................55 SECTION 7.16 REORGANIZATION...............................................55 SECTION 7.17 [INTENTIONALLY LEFT BLANK]...................................56 SECTION 7.18 FREE REDEMPTIONS.............................................56 SECTION 7.19 [INTENTIONALLY LEFT BLANK]...................................56 SECTION 7.20 REORGANIZATION...............................................56 SCHEDULES SCHEDULE I Applicable Percentages SCHEDULE II Contingent Deferred Sales Charges SCHEDULE III List of Funds, Shares and Purchase Price Percentages SCHEDULE IV List of Conversion Features SCHEDULE V Form of Purchaser Report EXHIBITS EXHIBIT A Form of Additional Eligible Fund Addendum EXHIBIT B Form of Assignment EXHIBIT C Form of Distribution Plan(s) EXHIBIT D Form of Irrevocable Payment Instruction EXHIBIT E Form of Servicing Agreement EXHIBIT F Forms of Underwriting Agreement(s) EXHIBIT G Prospectus for Each Fund EXHIBIT H Form of Opinion of Fund Counsel EXHIBIT I Form of Opinion of Counsel to Seller EXHIBIT J Form of Opinion of Counsel to Seller Parent EXHIBIT K Form of Officers Certificate for Seller, Seller Parent, and Servicer EXHIBIT L Form of Opinion of Counsel to Servicer EXHIBIT M Form of Opinion of Counsel to Purchaser EXHIBIT N Forms of Investment Management Agreement(s) EXHIBIT O Form of Opinion of Counsel to Seller re: Takeout Transaction EXHIBIT P Form of Letter Agreement THIS PURCHASE AND SALE AGREEMENT is entered into as of August 1, 1999, by and among Lightning Finance Company Limited, an Irish private limited liability company (the "Purchaser"), Franklin/Templeton Distributors, Inc., a New York corporation (the "Seller") and Franklin Resources, Inc., a Delaware corporation (the "Seller Parent"). BACKGROUND The Seller, a registered broker/dealer under the Exchange Act and regulations of the SEC and a member of the NASD, provides distribution, marketing and other services to the Franklin/Templeton family of open-end management investment companies, commonly called mutual funds. Some members of this Franklin/Templeton family of mutual funds have decided to offer to the investment community, effective January 4, 1999, a new class of shares, named Class B shares, which are referred to as the "Shares" in this Agreement. The mutual funds which have made this decision are referred to as the "Funds," and each of the Funds is referred to as a "Fund," in this Agreement. The Seller is compensated in two ways for certain of its costs and expenses associated with the distribution and sale of the Shares of a Fund. First, pursuant to the Fund's distribution plan adopted under Rule 12b-1 under the Investment Company Act, the Seller anticipates that it shall be paid amounts drawn on a regular and periodic basis from the general assets of the Fund at an annual percentage rate of the average daily net assets of the Fund. Second, the Seller anticipates that it shall be paid a percentage of the proceeds payable to the shareholder when certain of the shareholder's Shares are redeemed by the Fund within a certain period after their purchase. The property rights and assets which constitute the Seller's anticipation to be paid these monies are referred to in this Agreement as the "Receivables." The Funds have agreed with the Seller that, in exchange for the performance by the Seller of certain duties that will benefit the Funds and their shareholders, the Seller will own the Receivables and have the right to receive and keep the cash payments that are collected from the Receivables. The Seller contemplates that it will expend very considerable sums on a monthly basis in connection with the distribution, marketing and other services that the Seller is contractually obligated to provide in connection with the sale and redemption of the Shares. Since the timing of the cash flow from the Receivables will not be sufficient to permit the Seller to pay these expenses on a timely basis, the Seller has elected to sell certain of the Receivables to the Purchaser and the Purchaser has agreed to purchase certain of the Receivables from the Seller. The portion of the Receivables that is sold by the Seller to the Purchaser is referred to in this Agreement as the "Purchased Receivables." The Purchaser desires to buy and acquire the Purchased Receivables from the Seller and the Purchaser is willing to pay to the Seller an agreed-upon price for the Purchased Receivables. This price is referred to in this Agreement as the "Purchase Price." The Purchaser has arranged for a credit facility to be established by certain banks in the Purchaser's favor to permit the Purchaser to have the funds necessary to periodically pay amounts of the Purchase Price to the Seller; this credit facility is referred to in this Agreement as the "Credit Agreement." The Purchaser may elect to retain the Purchased Receivables or to engage in subsequent transactions, involving the Purchased Receivables, including the resale of Purchased Receivables to third parties. The Seller Parent owns all of the issued and outstanding stock of the Seller. The Seller and the Purchaser both desire that the Seller Parent join this Agreement for the specific and limited purposes expressly set forth in this Agreement. The Seller Parent is willing to join this Agreement in connection with, and only in connection with, the specific and limited purposes expressly set forth in this Agreement. The Seller considered, as an alternative to the transactions contemplated by this Agreement, obtaining the cash necessary to continue to fund its operations pertaining to the Shares by contracting with banks or other sources of finance for a loan secured by a pledge by the Seller of its interest in some or all of the Receivables. The Seller has rejected such a financing alternative and expressly desires to sell and irrevocably transfer the Purchased Receivables to the Purchaser. The Seller, the Seller Parent, and the Purchaser all expressly intend that the sale, transfer, conveyance and assignment of the Purchased Receivables by the Seller to the Purchaser pursuant to this Agreement shall constitute an outright and irrevocable sale to the Purchaser of all of the Seller's right, title and interest in the Purchased Receivables. This intention of the parties as to the legal characterization of this transaction is referred to in this Agreement as a "True Sale." The Seller, the Seller Parent and the Purchaser also intend that all sales, transfers, conveyances and assignments of Purchased Receivables by the Seller to the Purchaser pursuant to an Interim Agreement dated as of January 4, 1999, as amended, previously in place by and among the Seller, the Seller Parent and the Purchaser shall be governed by all the terms and conditions of this Agreement. Sometime after the date of this Agreement, the Seller and the Seller Parent may seek to reorganize each of the Funds not currently organized in Delaware into Delaware business trusts to take advantage of certain aspects of Delaware business trust law favoring investment companies. The reorganization of each such Fund will typically be accomplished by creating a new Delaware business trust or new series of shares of an existing Delaware business trust (the "New Fund"). The Fund that is reorganizing (the "Prior Fund") will then transfer all or substantially all of its assets and liabilities to the New Fund in exchange for all the shares of beneficial interest of the New Fund. These shares of the New Fund will then be distributed to the shareholders of the Prior Fund in exchange for their shares of the Prior Fund, and the latter shares will be cancelled. All of the service provider agreements and other material contracts of the Prior Fund are typically assigned to the New Fund as part of the reorganization. This Agreement is intended to cover the transfer of Purchased Receivables to the Purchaser by both Prior Funds and New Funds. The Seller, the Seller Parent and the Purchaser intend that all of the foregoing business understandings and various related matters be reflected in a detailed negotiated contract. This Agreement is that detailed negotiated contract. 2 ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION SECTION 1.1 DEFINITIONS. As used in this Agreement, the following terms shall have the meanings indicated: "ADDITIONAL EFFECTIVE DATE" shall mean with respect to any Additional Eligible Fund, the first date on which all of the following conditions shall have been satisfied: a. the Purchaser shall have received a fully executed Additional Eligible Fund Addendum, together with such signed opinions of counsel to such Additional Eligible Fund, the Seller and the Seller Parent, each in the form of Exhibits H, I and J, and each dated a date reasonably near the Additional Effective Date, as the Purchaser shall have reasonably requested; b. the Purchaser shall have received such instruments, certificates and documents regarding the addition of such Additional Eligible Fund from the Seller, the Seller Parent and such Additional Eligible Fund as the Purchaser shall have reasonably requested; c. the Purchaser and the Seller shall have agreed in writing to the Purchase Price Percentage applicable to such Additional Eligible Fund; and d. the Purchaser shall have received evidence satisfactory to it that (i) the conditions set forth in Sections 3.1 and 3.3 of this Agreement shall be satisfied in respect of such Additional Eligible Fund immediately after the Additional Effective Date and (ii) that on such Additional Effective Date the Receivables relating to such Additional Eligible Fund shall constitute Eligible Receivables. "ADDITIONAL ELIGIBLE FUND" shall mean any additional investment company or series or portfolio thereof (each, in the context of this definition, a "fund") for which the Seller is the principal underwriter and an Adviser is the investment adviser where: a. such fund shall have in full force and effect a distribution plan, investment management agreement and underwriting agreement, which either shall be substantially identical to the Distribution Plan, Investment Management Agreement and Underwriting Agreement in effect in respect of the Funds on the date hereof or shall have been approved in writing by the Purchaser; b. the Seller shall act as the principal underwriter to such fund and an Adviser shall act as investment adviser to such fund on such terms as are either substantially identical to those pursuant to which the Seller acts as the principal underwriter and an Adviser acts as investment adviser for the Funds on the date hereof or otherwise on terms reasonably satisfactory to the Purchaser; 3 c. the fundamental investment objectives and policies of such fund shall either be substantially identical to those of any of the Funds on the date hereof or be reasonably satisfactory to the Purchaser; d. the Seller shall be entitled to receive Contingent Deferred Sales Charges from the shareholders of the Class B shares or other class of shares, as identified in a notice to Purchaser pursuant to Section 5.1(s), of such fund on such terms as are either substantially identical to those in respect of Shares of any of the Funds on the date hereof or otherwise on terms reasonably satisfactory to the Purchaser; e. there shall be in full force and effect an Irrevocable Payment Instruction of such fund which has been acknowledged and agreed to by the investment company and the fund as is contemplated thereby; and f. the Seller shall have certified in writing to the Purchaser that each of the foregoing statements is true and correct and shall have furnished therewith: (i) a true and complete copy of the prospectus for such fund; (ii) a true and complete copy of the distribution plan in respect of such fund; (iii) a true and complete copy of the underwriting agreement in respect of such fund; and (iv) to the extent not reflected in clause (i) above, a statement of the fundamental investment objectives and policies of such fund. "ADDITIONAL ELIGIBLE FUND ADDENDUM" shall mean the addendum substantially in the form of Exhibit A attached hereto, executed by the Seller and the Purchaser. "ADVERSE" when used alone or in conjunction with other terms (including without limitation "Affect", "Change" and "Effect", but specifically excluding "Claim") shall mean the occurrence or existence of any act, circumstance, condition, event, fact or set or combination of the foregoing which, in the reasonable judgment of the Purchaser, creates a significant possibility of (a) any adverse effect upon (i) the timing or amount of any payment of any Collections or (ii) the timely receipt by the Purchaser of any Collections; or (b) any material adverse effect upon (i) the ability of the Seller, the Seller Parent, any Adviser or any Fund to pay or perform any of its respective obligations under any Program Document in a timely manner, (ii) the status of the Purchased Receivables as Eligible Receivables, (iii) the remedies and the other rights of the Purchaser under any Program Document, or (iv) the then existing or projected financial condition of the Seller. "ADVERSE CLAIM" shall mean any Lien of any Person (other than any such right or claim of the Purchaser or any Master Trust created by or pursuant to this Agreement, any other Program Document, or any Master Trust Transfer Agreement). "ADVISER" shall mean, as of any date, any Person that on such date (a) is "controlled" by the Seller Parent (as defined in the definition of "Affiliate"), (b) of which the Seller Parent owns, directly or indirectly, twenty-five percent (25%) or more of (i) the outstanding equity security or (ii) the interests in the capital, distributions and profits, (c) is registered as an investment adviser in the United States, and (d) directly or indirectly, provides investment advisory services or subadvisory services to any of the Funds. 4 "AFFILIATE" of a referenced Person shall mean (a) another Person controlling, controlled by or under common control with such referenced Person, (b) any other Person of whom such referenced Person beneficially owns or controls twenty-five percent (25%) or more (i) of the outstanding voting securities or voting rights of the referenced Person or (ii) of the interest in the capital, distributions or profits of the referenced Person, (c) any other Person beneficially owning or controlling twenty-five percent (25%) or more (i) of the outstanding voting securities or voting rights of the referenced Person or (ii) of the interest in the capital, distributions or profits of the referenced Person or (d) any officer (exclusive of a "ministerial officer" with no authority to bind the referenced Person) or director of or partner in the referenced Person; PROVIDED, HOWEVER, that the term "Affiliate" shall not be deemed to include any Fund. For purposes of this Agreement, except where expressly stated otherwise, the terms "control", "controlling", "controlled" and the like shall mean the direct or indirect possession of the power to direct or cause the direction of the management or policies of a Person or the disposition of its assets or properties, whether through ownership, by contract, arrangement or understanding, or otherwise. "AGREEMENT" shall mean this Purchase and Sale Agreement by and among the Purchaser, the Seller, and the Seller Parent, dated as of August 1, 1999, including the Schedules and Exhibits attached hereto and referenced herein, as the same may from time to time be amended, supplemented, waived or modified. "APPLICABLE LAW" shall mean any Law of any Authority, whether domestic or foreign, including, without limitation, all federal and state banking or securities laws, to which the Person in question is subject or by which it or any of its property is bound. "APPLICABLE PERCENTAGE" shall mean, with respect to any Fund, the applicable percentage set forth on Schedule I attached hereto. "ASSIGNMENT" shall mean an assignment substantially in the form of Exhibit B, attached hereto. "AUTHORITY" shall mean any governmental or quasi-governmental authority, whether executive, legislative, judicial, administrative or other, or any combination thereof, including, without limitation, any federal, state or local government or governmental or quasi-governmental agency, board, body, branch, bureau, commission, corporation, court, department, instrumentality or other political unit or subdivision or other entity of any of the foregoing, whether domestic or foreign, including, without limitation, the NASD or any other self-regulatory organization. "BANKRUPTCY CODE" shall mean the United States Bankruptcy Code of 1978, as amended from time to time or any similar legislation of the United States enacted in substitution or replacement thereof. "BANKRUPTCY EVENT" shall mean any one of the following occurrences: a. the Seller, the Seller Parent or an Adviser shall generally fail to pay its obligations as such obligations become due, or shall admit in writing its inability to pay its obligations generally, or shall make a general assignment of all or substantially all of its assets for the benefit of creditors; or 5 b. any proceeding shall be instituted by or against the Seller, the Seller Parent or an Adviser seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its obligations under any Law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), such proceeding shall remain undismissed or unstayed for a period of sixty (60) days; or c. a court or other governmental authority or agency having jurisdiction in the premises shall enter a decree or order (i) for the appointment of a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of the Seller, the Seller Parent or an Adviser or of any material part of its property, or for the winding-up or liquidation of its affairs, and such decree or order shall remain in force undischarged and unstayed for a period of more than sixty (60) days, or (ii) for the sequestration or attachment of any material part of the property of the Seller, the Seller Parent or an Adviser without its unconditional return to the possession of the Seller, the Seller Parent or an Adviser or its unconditional release from such sequestration or attachment, within sixty (60) days thereafter; or a court having jurisdiction in the premises shall enter an order for relief in any involuntary case commenced against the Seller, the Seller Parent or an Adviser, under the Bankruptcy Code, and such order shall remain in force undischarged and unstayed for a period of more than sixty (60) days; or d. the Seller, the Seller Parent or an Adviser shall take any action to authorize any of the actions set forth above in this definition. "BENEFICIARY" shall mean each Person which has a beneficial interest in any Master Trust, together with its permitted respective successors and assigns. "BUSINESS DAY" shall mean any day (other than a Saturday or a Sunday) on which (a) the New York Stock Exchange is open and (b) banks are not authorized or required to close in New York City. "CDSC COLLECTION ACCOUNT" shall mean the account of the Purchaser (Account No. 323-114-814) maintained with The Chase Bank of Texas or such other account as the Purchaser shall designate in writing to the Seller with respect to which the Seller shall have no access or control. "CODE" shall mean the Internal Revenue Code of 1986, as amended from time to time and the regulations promulgated and the rulings issued thereunder or any similar legislation of the United States enacted in substitution or replacement thereof. "COLLECTION ACCOUNT" shall mean the account of the Purchaser (Account No. 22967504) maintained with The Chase Manhattan Bank (Ireland) PLC or such other account as the Purchaser shall designate in writing to the Seller, with respect to which the Seller shall have no access or control. "COLLECTIONS" shall mean (a) all amounts paid or payable by each Fund or each shareholder of each Fund in respect of the Purchased Receivables relating to each such Fund and all amounts payable by the Seller or the Seller Parent 6 under the Program Documents in respect of the Purchased Receivables relating to each such Fund, and (b) all Proceeds of the foregoing; it being understood that the term Collections shall not include amounts paid or payable pursuant to Section 7.4 or 7.5 of this Agreement. Without limiting the generality of the foregoing definition, the term Collections shall include, without limitation, all amounts deposited in the Collection Account or the CDSC Collection Account pursuant to Sections 2.3(a) or 2.3(b), respectively. "CONDUCT RULES" shall mean the Conduct Rules of the NASD, including without limitation, Section 2830 thereof, as amended, and the rules, regulations and interpretations of the NASD in respect thereto. "CONFIDENTIAL INFORMATION" shall mean the Program Documents (and all drafts thereof) (other than the Underwriting Agreements, the Investment Management Agreements, the Distribution Plans and the Prospectuses), the transactions contemplated hereby and thereby, and all confidential, non-public information provided to a Party, concerning another Party or any of its Affiliates, which information has been provided to such Party by another Party and was not also available to such Party through other means. "CONTINGENT DEFERRED SALES CHARGES" shall mean, with respect to any Fund, the contingent deferred sales charges as set forth in Schedule II hereto, or as identified in a notice to Purchaser pursuant to Section 5.1(s), payable, either directly or through withholding a portion of the proceeds of the redemption of Shares of such Fund, by the shareholders of such Fund on any redemption of Shares of such Fund in accordance with the Underwriting Agreement and the Prospectus relating to such Fund and pursuant to the Conduct Rules. "CONVERSION FEATURE" shall mean, with respect to any Share of any Fund, a mandatory or elective provision (including, without limitation, a provision which permits or requires such Share to be converted into a share of a different class, but excluding the scheduled reductions in Contingent Deferred Sales Charges as set forth in Schedule II hereto and Free Redemptions) that may result in a reduction or termination of any amount owing from any Fund or the shareholder in respect of the Receivable relating to such Share (or the share obtained by virtue of a conversion of such Share) at some point in the future prior to the redemption of such Share. "CREDIT AGREEMENT" shall mean that certain Credit Agreement dated as of December 30, 1998 by and among the Purchaser, the several banks and other financial institutions from time to time parties thereto, The Bank of New York as syndication agent, Deutche Bank, N.A. as documentation agent and The Chase Manhattan Bank as administrative agent, as amended from time to time. "DEBT" of any Person shall mean at any date, without duplication, (a) all obligations of such Person for borrowed money; (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (c) all non-current liabilities of such Person to pay the deferred purchase price of property or services; (d) all obligations of such Person as lessee under leases or other agreements which have been or should be capitalized in accordance with GAAP; (e) all liabilities in respect of unfunded benefits under any Plan; and (f) all Secured or Guaranteed Debt. 7 "DISTRIBUTION PLAN" shall mean, with respect to any Fund, the Distribution Plan of the Investment Company adopted pursuant to Rule 12b-1 under the Investment Company Act and in the form of Exhibit C attached hereto, as it applies to such Fund pursuant to which Shares of such Fund are distributed by the Seller, together with any successor or replacement distribution plan, as the same may be amended, supplemented, waived or modified from time to time. "DOLLARS" and "$" shall mean lawful money of the United States of America. "ELIGIBLE RECEIVABLE" shall mean a Receivable which: (a) represents an obligation of a United States obligor which obligor is not an Authority; (b) constitutes an "account" or "general intangible" as such terms are defined in the UCC of all applicable jurisdictions; (c) is denominated and payable in Dollars; (d) constitutes a legal, valid and binding contractual obligation of the obligor thereof which is not subject to any dispute, offset, counterclaim or defense whatsoever; (e) is not subject to any Adverse Claim; (f) does not contravene any Applicable Law applicable to any Investment Company, any Fund or any other Person; and (g) constitutes an asset in accordance with GAAP. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "EVENT OF TERMINATION" shall mean any one of the following events: a. the Seller, the Seller Parent, any Investment Company or any Fund shall fail to make or fail to cause to be made in the manner and when due any payment or deposit to be made or to be caused to be made by it to the Purchaser, or any Investment Company or Fund shall voluntarily fail to make or fail to cause to be made in the manner and when due any payment or deposit to be made or caused to be made by it to any Adviser, under this Agreement, any Distribution Plan, any Underwriting Agreement, the Servicing Agreement or any other Program Document and such failure shall continue unremedied for ten (10) Business Days following notice thereof from the Purchaser or the Seller, as the case may be, to the entity obligated to make such payment; PROVIDED, HOWEVER, if (i) such event affects only Funds which are not Substantial Funds, (ii) the Seller is able to segregate Receivables related to Shares of the Fund(s) affected by such event (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) from Purchased Receivables related to Shares of such Fund and any unaffected Funds (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges), and (iii) the Seller's ability to segregate Receivables, as described above, is certified to the Purchaser by an independent accounting firm of national standing, reasonably acceptable to the Purchaser, such Event of Termination will only relate to the Purchaser's obligation to purchase Receivables related to the affected Fund(s), and such Event of Termination will not affect the Purchaser's obligation to continue to purchase Purchased Receivables related to Shares of unaffected Funds on subsequent Purchase Dates; b. the Seller or the Seller Parent shall have failed to provide 90 days' advance notice of any change in the fundamental investment objectives or policies of any Fund from those set forth in the Prospectus for such Fund as of the date of this Agreement; PROVIDED, HOWEVER, if (i) such event affects only Funds which are not Substantial Funds, (ii) the Seller is able to segregate Receivables related to Shares of the Fund(s) affected by such event (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) 8 from Purchased Receivables related to Shares of such Fund and any unaffected Funds (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges), and (iii) the Seller's ability to segregate Receivables, as described above, is certified to the Purchaser by an independent accounting firm of national standing, reasonably acceptable to the Purchaser, such Event of Termination will only relate to the Purchaser's obligation to purchase Receivables related to the affected Fund(s), and such Event of Termination will not affect the Purchaser's obligation to continue to purchase Purchased Receivables related to Shares of unaffected Funds on subsequent Purchase Dates; c. (i) any representation or warranty made or deemed made by the Seller, the Seller Parent, the Servicer, or any Adviser (or any of their respective officers) under or in connection with this Agreement, the Servicing Agreement or any other Program Document to which it is a party shall have been false, incorrect or misleading in any material respect when made or deemed made or (ii) any Purchaser Report or any other statement, certificate or report delivered by or on behalf of the Seller or the Seller Parent or any Adviser in connection with this Agreement, the Servicing Agreement, or any other Program Document, shall have been false, incorrect or misleading in any material respect when delivered; d. it shall be alleged in any proceeding of the type referred to in paragraph (h) or paragraph (r) of this definition of Event of Termination that any purchase of Purchased Receivables in respect of any Fund by the Purchaser pursuant to this Agreement does not for any reason constitute a True Sale thereof, free and clear of any Adverse Claim or any other claim and there has been an Adverse Effect or it shall have been finally determined by a court or other tribunal that any purchase of Purchased Receivables in respect of any Fund by the Purchaser pursuant to this Agreement does not for any reason constitute a True Sale thereof, free and clear of any Adverse Claim or any other claim; e. any material adverse change shall occur in (i) the then existing or projected financial condition of the Seller or (ii) the then existing or projected financial condition of either the Seller Parent or any Adviser which in the case of (ii) could reasonably be expected to have an Adverse Effect; f. the Seller Parent shall cease to own, directly or indirectly, all of the issued and outstanding stock (or membership interest or partnership interest) of each class and series of the Seller; g. any material provision of any Program Document to which the Seller, the Seller Parent, the Servicer, any Adviser, any Fund or any Investment Company is a party shall without the written consent of Purchaser cease to be a legal, valid and binding obligation of any such Person, enforceable in accordance with its terms; PROVIDED, HOWEVER, if (i) such event affects only Funds which are not Substantial Funds, (ii) the Seller is able to segregate Receivables related to Shares of the Fund(s) affected by such event (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) from Purchased Receivables related to Shares of such Fund and any unaffected Funds (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges), and (iii) the Seller's ability to segregate Receivables, as described above, is certified to the Purchaser by an independent accounting firm of national standing, reasonably 9 acceptable to the Purchaser, such Event of Termination will only relate to the Purchaser's obligation to purchase Receivables related to the affected Fund(s), and such Event of Termination will not affect the Purchaser's obligation to continue to purchase Purchased Receivables related to Shares of unaffected Funds on subsequent Purchase Dates; h. the Securities Investor Protection Corporation, established under SIPA, shall apply for a protective decree against the Seller, and the Seller shall have failed to obtain a dismissal of such application within thirty (30) days after such application; i. the Seller has knowingly failed in a material manner to meet, or the NASD or the SEC has determined that the Seller has failed to meet, the minimum net capital requirements prescribed from time to time by Rule 15c3-1 under the Exchange Act and such failure is not cured within fifteen (15) Business Days after Seller obtained such knowledge or such determination is made, as applicable; j. the SEC, the NASD or any other Authority with authority to interpret or initiate proposed changes in the Investment Company Act, the Conduct Rules, the rules and regulations under either thereof or the interpretations of any of the foregoing, shall modify or propose to modify any of the foregoing, in a manner that might, in the reasonable judgment of the Purchaser, give rise to an Adverse Effect, or terminate Rule 12b-1, or the interpretation of any of the foregoing; k. any of the Governmental Authorizations or Private Authorizations required in connection with the Program Documents or the transactions contemplated thereby shall cease to be in full force and effect or shall be revoked and such revocation shall not be waived within thirty (30) days, or there shall occur any breach or violation of or default under any such Governmental Authorizations or Private Authorizations which shall not have been cured or waived within thirty (30) days of the occurrence thereof, or any action or proceeding under any Applicable Law shall in any way be brought to challenge (and shall continue unstayed for a period of fifteen (15) Business Days) the validity or enforceability of any such Governmental Authorizations or Private Authorizations; l. (i) the Seller shall cease to be registered as a broker/dealer under the Exchange Act or shall cease to be a member of the NASD and no Affiliate of the Seller has been substituted as the Seller hereunder, or (ii) any Adviser shall cease to be either (A) exempt form registration as an investment adviser under Section 202(a)(11) of the Investment Adviser Act or (B) registered as an investment adviser under such act; PROVIDED, HOWEVER, in the case of (ii), if (X) such event affects only Funds which are not Substantial Funds, (Y) the Seller is able to segregate Receivables related to Shares of the Fund(s) affected by such event (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) from Purchased Receivables related to Shares of such Fund and any unaffected Funds (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges), and (Z) the Seller's ability to segregate Receivables, as described above, is certified to the Purchaser by an independent accounting firm of national standing, reasonably acceptable to the Purchaser, such Event of Termination will only relate to the Purchaser's obligation to purchase Receivables related to the affected Fund(s), and such Event of Termination will not affect the Purchaser's obligation to continue to 10 purchase Purchased Receivables related to Shares of unaffected Funds on subsequent Purchase Dates; m. any Fund or Investment Company shall have been prevented for a period in excess of ten (10) Business Days by any Authority or by any Applicable Law from paying Collections or amounts owed with respect to any Purchased Receivables to the Purchaser in accordance with this Agreement and the applicable Irrevocable Payment Instruction or any Fund shall so assert in writing; PROVIDED, HOWEVER, if (i) such event affects only Funds which are not Substantial Funds, (ii) the Seller is able to segregate Receivables related to Shares of the Fund(s) affected by such event (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) from Purchased Receivables related to Shares of such Fund and any unaffected Funds (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges), and (iii) the Seller's ability to segregate Receivables, as described above, is certified to the Purchaser by an independent accounting firm of national standing, reasonably acceptable to the Purchaser, such Event of Termination will only relate to the Purchaser's obligation to purchase Receivables related to the affected Fund(s), and such Event of Termination will not affect the Purchaser's obligation to continue to purchase Purchased Receivables related to Shares of unaffected Funds on subsequent Purchase Dates; n. any one or more of the Funds or Investment Companies shall cease (voluntarily or by the requirement of any Authority or any Applicable Law) to regularly offer Shares to new investors (except to the extent waived in writing by the Purchaser); PROVIDED, HOWEVER, that the foregoing shall not include the failure of a Fund to regularly offer Shares to new investors after achieving aggregate net assets above which the Prospectus for such Fund on the date hereof (or on the Additional Effective Date in the case of an Additional Eligible Fund) expressly states that sales to new investors may be suspended if a new Fund which provides investors with a reasonable investment alternative to such closed Fund is made available to investors within 120 days of such suspension; and PROVIDED FURTHER, that such event affects only Funds which are not Substantial Funds, (ii) the Seller is able to segregate Receivables related to Shares of the Fund(s) affected by such event (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) from Purchased Receivables related to Shares of such Fund and any unaffected Funds (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) and (iii) the Seller's ability to segregate Receivables, as described above, is certified to the Purchaser by an independent accounting firm of national standing, reasonably acceptable to the Purchaser, such Event of Termination will only relate to the Purchaser's obligation to purchase Receivables related to the affected Fund(s), and such Event of Termination will not effect the Purchaser's obligation to continue to purchase Purchased Receivables related to Shares of unaffected Funds on subsequent Purchase Dates; o. any Fund or any Investment Company shall adopt a plan of dissolution or liquidation; PROVIDED, HOWEVER, if (i) such event affects only Funds which are not Substantial Funds, (ii) the Seller is able to segregate Receivables related to Shares of the Fund(s) affected by such event (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) from Purchased Receivables related to Shares of such Fund and any unaffected Funds (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges), and (iii) the Seller's ability to segregate Receivables, as described above, is certified to the Purchaser by an independent accounting firm of national standing, reasonably acceptable to the Purchaser, such Event of 11 Termination will only relate to the Purchaser's obligation to purchase Receivables related to the affected Fund(s), and such Event of Termination will not affect the Purchaser's obligation to continue to purchase Purchased Receivables related to Shares of unaffected Funds on subsequent Purchase Dates; p. any Fund or any Investment Company shall propose to its shareholders or effect a merger or other combination with another mutual fund which gives rise to an Adverse Effect; PROVIDED, HOWEVER, if (i) such event affects only Funds which are not Substantial Funds, (ii) the Seller is able to segregate Receivables related to Shares of the Fund(s) affected by such event (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) from Purchased Receivables related to Shares of such Fund and any unaffected Funds (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges), and (iii) the Seller's ability to segregate Receivables, as described above, is certified to the Purchaser by an independent accounting firm of national standing, reasonably acceptable to the Purchaser, such Event of Termination will only relate to the Purchaser's obligation to purchase Receivables related to the affected Fund(s), and such Event of Termination will not affect the Purchaser's obligation to continue to purchase Purchased Receivables related to Shares of unaffected Funds on subsequent Purchase Dates; q. the Seller Parent shall fail to pay any amount in respect of any of its Debt, the outstanding principal amount of which is in excess of One Hundred Million Dollars ($100,000,000) in the aggregate, when the same has been due and payable for a period of five (5) Business Days; r. there shall occur a Bankruptcy Event with respect to the Seller, the Seller Parent or any Adviser; s. the Underwriting Agreement, the Investment Management Agreement, the Distribution Plan or the Prospectus in respect of any Fund, the terms of any Conversion Feature of any Share issued by such Fund, Rule 12b-1 under the Investment Company Act or the Conduct Rules, or the interpretation of any of the foregoing, each as in effect on the date of this Agreement, shall have been amended or modified in a manner which, in the reasonable judgment of the Purchaser, gives rise to an Adverse Effect; PROVIDED, HOWEVER, if (i) such event affects only Funds which are not Substantial Funds, (ii) the Seller is able to segregate Receivables related to Shares of the Fund(s) affected by such event (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) from Purchased Receivables related to Shares of such Fund and any unaffected Funds (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges), and (iii) the Seller's ability to segregate Receivables, as described above, is certified to the Purchaser by an independent accounting firm of national standing, reasonably acceptable to the Purchaser, such Event of Termination will only relate to the Purchaser's obligation to purchase Receivables related to the affected Fund(s), and such Event of Termination will not affect the Purchaser's obligation to continue to purchase Purchased Receivables related to Shares of unaffected Funds on subsequent Purchase Dates; t. the Underwriting Agreement, the Distribution Plan, the Investment Management Agreement or the Prospectus in respect of any Fund or Rule 12b-1 under the Investment Company Act, each as in effect on the date of this Agreement (or on the Additional Effective Date in the case of an Additional 12 Eligible Fund), shall have been terminated or shall otherwise no longer be effective, whether voluntarily or involuntarily, by such Fund, the Seller, the Seller Parent, an Adviser or any other Person, including without limitation by any Authority or as a result of any Applicable Law unless in respect of such Fund a replacement Underwriting Agreement, Distribution Plan, Investment Management Agreement, Prospectus or the Conduct Rules, as the case may be, has become effective and which has terms which would not result in an Adverse Effect; PROVIDED, HOWEVER, if (i) such event affects only Funds which are not Substantial Funds, (ii) the Seller is able to segregate Receivables related to Shares of the Fund(s) affected by such event (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) from Purchased Receivables related to Shares of such Fund and any unaffected Funds (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges), and (iii) the Seller's ability to segregate Receivables, as described above, is certified to the Purchaser by an independent accounting firm of national standing, reasonably acceptable to the Purchaser, such Event of Termination will only relate to the Purchaser's obligation to purchase Receivables related to the affected Fund(s), and such Event of Termination will not affect the Purchaser's obligation to continue to purchase Purchased Receivables related to Shares of unaffected Funds on subsequent Purchase Dates; u. the Purchaser is unable to pay Purchase Price on any Purchase Date for any Purchased Receivables due to a lack of Funds, as validated by a unanimous resolution of the Purchaser's Board of Directors or by a majority resolution of the Purchaser's shareholders to this effect; v. the Seller, the Seller Parent or any Adviser shall fail to perform or observe any other term, covenant or agreement on its part to be performed or observed under this Agreement, the Servicing Agreement or any other Program Document to which it is a party and such failure could reasonably be expected to have an Adverse Effect and shall continue unremedied for a period of fifteen (15) Business Days after the earlier of discovery by the Seller or the Seller Parent or after written notice thereof by the Purchaser to the Seller; and w. any investment adviser to any Fund shall not be an Adviser; PROVIDED, HOWEVER, if (i) such event affects only Funds which are not Substantial Funds, (ii) the Seller is able to segregate Receivables related to Shares of the Fund(s) affected by such event (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) from Purchased Receivables related to Shares of such Fund and any unaffected Funds (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges), and (iii) the Seller's ability to segregate Receivables, as described above, is certified to the Purchaser by an independent accounting firm of national standing, reasonably acceptable to the Purchaser, such Event of Termination will only relate to the Purchaser's obligation to purchase Receivables related to the affected Fund(s), and such Event of Termination will not affect the Purchaser's obligation to continue to purchase Purchased Receivables related to Shares of unaffected Funds on subsequent Purchase Dates. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, and the rules and regulations of the SEC thereunder, all as from time to time in effect, or any successor law, rules or regulations, and any reference to any statutory or regulatory provision shall be deemed to be a reference to any successor statutory or regulatory provision. 13 "EXISTING INVESTMENT COMPANY" shall mean each of the investment companies set forth on Schedule III to this Agreement, as the same may be modified pursuant to Section 7.20 hereof, each an open-end management investment company which is described in a Prospectus, together with its permitted successors and assigns. "FINAL TERMINATION DATE" shall mean the fifteenth day of the Purchaser's fiscal quarter immediately following the fiscal quarter during which occurs the eighth anniversary of the Sale Cutoff Date with respect to the last Monthly Pool of Purchased Receivables purchased by the Purchaser. "FRANKLIN SERVICES" shall mean Franklin Templeton Services, Inc., a Delaware corporation. "FRANKLIN SPONSORED FUND" shall mean any investment company or series or portfolio thereof (each, in the context of this definition, a "fund") where (a) such fund is not yet a Fund; (b) such fund has a class of shares that is subject to a Contingent Deferred Sales Charge in excess of 1%; (c) the Seller, the Seller Parent, or any Affiliate of the Seller or the Seller Parent is an investment adviser for such fund; (d) none of the Seller or the Seller Parent or any Affiliate of the Seller or Seller Parent is a principal underwriter for such fund; and (e) such fund is directly or indirectly sponsored by Seller, Seller Parent, or any Affiliate of either, without regard to the form of such sponsorship (which shall include, without limitation, directly or indirectly directing the marketing and/or promotion of the fund and licensing of trademarks, logos or other intellectual property rights which would cause a reasonable investor to conclude that such fund is in fact so sponsored). "FREE EXCHANGE" shall mean the exchange of Shares of one Fund (the "Redeeming Fund") for Shares of another Fund (the "Issuing Fund"), where, pursuant to the applicable constituent documents of the Issuing Fund: (a) Shares of the Issuing Fund are deemed for all purposes (related to the computation of the amount of, and timing of payment of, Receivables) to have been acquired at the time when the exchanged Shares of the Redeeming Fund were acquired (or deemed to be acquired) by the holder thereof; (b) the exchanging shareholder becomes obligated to pay to the Issuing Fund the same Contingent Deferred Sales Charge in respect of the Shares of the Issuing Fund and on the same terms as such shareholder was obligated to pay to the Redeeming Fund; (c) the date upon which such Shares of the Issuing Fund are converted pursuant to the Permitted Conversion Feature is the date the exchanged Shares of the Redeeming Fund were to be converted pursuant to the Permitted Conversion Feature of the exchanged Shares; (d) both the redemption of the Shares of the Redeeming Fund so exchanged and the issuance of the Shares of the Issuing Fund are effected at the Net Asset Value of such Shares at the date of the exchange without any reduction for fees or expenses attributable to such exchange; and (e) at the time of such exchange all of the conditions set forth in Section 3.3(d) of this Agreement would be met for a purchase of Receivables relating to Shares of the Issuing Fund. "FREE REDEMPTIONS" shall mean a redemption of Shares of any Fund obtained by (a) a shareholder through reinvestment of dividends (whether ordinary, capital gain or exempt-interest dividends) paid by such Fund or (b) a shareholder of such Fund under any arrangement (including, without limitation, (i) any arrangements pursuant to which a certain Person is entitled to acquire 14 such Shares of such Fund under circumstances in which no Contingent Deferred Sales Charges will be payable by such Person and (ii) arrangements pursuant to which Contingent Deferred Sales Charges are deferred in connection with the redemption of Shares of such Fund because the redeeming shareholder is reinvesting all or a portion of the proceeds of such redemption in Shares of another Fund) which relieves or defers, in whole or in part, such shareholder's obligation to pay the maximum Contingent Deferred Sales Charge that would have been payable in the absence of such arrangement or reinvestment if such shareholders were any other shareholder of such Fund redeeming Shares of such Fund that had been held by such other shareholder for the same period the Shares of such Fund in question had been held by the shareholder in question, but such term shall not include any Free Exchange. "FUND" shall mean each series or portfolio of an Investment Company, or the Investment Company itself where the Investment Company does not have series or more than one portfolio, as specified on Schedule III hereto, as the same may be deemed amended, modified or supplemented pursuant to Sections 2.2 or 7.20 of this Agreement. "GAAP" shall mean generally accepted accounting principles in the United States, as in effect from time to time, consistently applied; PROVIDED, HOWEVER, that, where expressly noted, GAAP shall mean generally accepted accounting principles in the United States, as in effect on the date hereof. "GOVERNMENTAL AUTHORIZATIONS" shall mean all franchises, permits, licenses, approvals, consents and other authorizations of all Authorities. "GOVERNMENTAL FILINGS" shall mean all filings, including franchise and similar tax filings, and the payment of all fees, assessments, interests and penalties associated with such filings with all Authorities. "GUARANTEE" by any Person shall mean any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (b) entered into for the purpose of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. "INVESTMENT ADVISERS ACT" shall mean the Investment Advisers Act of 1940, as amended, and the rules and regulations of the SEC thereunder, all as from time to time in effect, or any successor law, rules or regulations, and any reference to any statutory or regulatory provision shall be deemed to be a reference to any successor statutory or regulatory provision. 15 "INVESTMENT COMPANY" shall mean each Existing Investment Company and each New Investment Company, each as described on Schedule III hereto, as amended from time to time, and its permitted successors and assigns. "INVESTMENT COMPANY ACT" shall mean the Investment Company Act of 1940, as amended, and the rules and regulations of the SEC thereunder, all as from time to time in effect, or any successor law, rules or regulations, and any reference to any statutory or regulatory provision shall be deemed to be a reference to any successor statutory or regulatory provision. "INVESTMENT MANAGEMENT AGREEMENT" shall mean, with respect to any Fund, each agreement between an Adviser and such Fund or an Investment Company on behalf of such Fund and any replacement agreement that may be adopted in the future, pursuant to which an Adviser (or Seller Parent or any other Affiliate of the Seller Parent) may receive advisory or other similar fees relating to such Fund, as the same may be amended, supplemented, waived or modified from time to time. "IRREVOCABLE PAYMENT INSTRUCTION" shall mean the Seller's irrevocable payment instruction to each Fund, in the form of Exhibit D attached hereto. "ISSUE PRICE" shall mean, with respect to any Fund, the gross purchase price of the Shares of such Fund as reported by the transfer agent for such Fund. "LAW" shall mean any (a) judicial, executive, legislative, administrative or other action, code, consent decree, constitution, decree, enactment, finding, guideline, law, injunction, interpretation, judgment, order, ordinance, policy statement, proclamation, promulgation, regulation, requirement, rule, rule of law, rule of public policy, settlement agreement, statute, treaty or writ, of any Authority, whether domestic or foreign, or any particular section, part or provision thereof, (b) common law or other legal or quasi-legal precedent, or (c) arbitrator's, mediator's or referee's decision, finding, award or recommendation, or, in any case, any particular section, part or provision thereof. "LETTER AGREEMENT" shall mean that Letter Agreement dated as of September 22, 1999 by and between Franklin Services and the Purchaser, in the form of Exhibit P attached hereto, as the same may from time to time be amended, supplemented, waived or modified. "LIABILITIES" shall mean claims, damages, losses, liabilities, expenses, obligations, penalties, actions, suits, judgments and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel). "LIEN" shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien or security interest (statutory or other), or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the UCC or comparable law of any jurisdiction), or other charge or encumbrance, including the retained security title of a conditional vendor or lessor. 16 "LIGHTNING BALANCE SHEET CARRYING VALUE" shall mean, with respect to any Purchased Receivables as of any date, the value of such Purchased Receivables determined in accordance with GAAP, including FAS 125, as in effect on the date hereof. "MASTER TRUST" shall mean any trust or other special purpose entity to which any interest in any of the Purchased Receivables relating to any Fund or the right to receive any Collections with respect thereto has been transferred in connection with a Takeout Transaction. "MASTER TRUST TRANSFER AGREEMENT" shall mean any agreement pursuant to which any interest in the Purchased Receivables is transferred to a Master Trust. "MAXIMUM AGGREGATE SALES CHARGE ALLOWABLE" shall mean as of any date, with respect to the Shares of any Fund, the maximum Sales Charge that may be paid by the Investment Company with respect to such Shares pursuant to Section 2830 of the Conduct Rules, assuming the Investment Company pays a separate Service Fee in respect of such Fund, unreduced by payments theretofore made in respect thereof by the Investment Company in respect of such Fund. "MONTHLY POOL" shall mean with respect to the Purchased Receivables relating to any Fund purchased during any calendar month, the Receivables relating to (a) the Shares of such Fund whose Issue Price is included in the calculation of the Purchase Price of Purchased Receivables relating to such Fund purchased during such calendar month; (b) the Shares of such Fund issued in a Free Exchange in exchange for (i) Shares of another Fund whose Issue Price was included in the calculation of the Purchase Price of Purchased Receivables relating to such other Fund purchased during such calendar month and (ii) Shares of such other Fund issued in connection with the reinvestment of dividends (whether ordinary, capital gain or exempt-interest dividends) paid in respect of the Shares of such other Fund described in clause (b)(i) above or this clause (b)(ii); and (c) the Shares of such Fund issued in connection with the reinvestment of dividends (whether ordinary, capital gain or exempt-interest dividends) paid in respect of the Shares of such Fund described in clause (a) or (b) above or this clause (c). "NASD" shall mean the National Association of Securities Dealers, Inc. or any successor entity. "NET ASSET VALUE" shall mean, with respect to any Fund, as of the date any determination thereof is made, the net asset value applicable to Shares of such Fund computed in the manner such value is required to be computed by such Fund in its reports to its shareholders, and shall mean with respect to any Share of such Fund as of any date, the quotient obtained by dividing the Net Asset Value of such Fund as of such date by the number of Shares of such Fund outstanding on such date. "NEW INVESTMENT COMPANY" shall mean any open-end management investment company which is an Additional Eligible Fund, together with its permitted successors and assigns. "OTHER TAXES" shall mean any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies (but shall not include any charges, levies or taxes excluded from the definition of "Taxes" herein) which arise from any payment made by or on behalf of the Seller 17 hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Program Document to which the Seller is a party. "PARTIES" shall mean, collectively, the Seller, the Seller Parent and the Purchaser. "PERMITTED CONVERSION FEATURE" shall mean with respect to any Share of any Fund, a Conversion Feature described in Schedule IV, attached hereto, in respect of such Fund which, by its terms, may not become effective prior to the date on which the eighth (8th) anniversary of the date of the issuance of such Share occurs. "PERMITTED DESIGNEE" shall mean (a) any Person designated by the Purchaser or any Master Trust, as the case may be, which may be The Chase Manhattan Bank, Constellation Financial Management Company LLC, FEP Holdings, L.P. or any Affiliate of the foregoing, and (b) any other Person designated by the Purchaser or any Master Trust, as the case may be, (i) which is not (nor is any Affiliate of such Person) actively engaged in the sponsorship or management of any management investment company registered under the Investment Company Act and (ii) which has agreed to be bound by confidentiality undertakings in substance comparable to Section 7.10. "PERSON" shall mean an individual or a corporation (including a business trust), partnership, trust, incorporated or unincorporated association, joint stock company, government (or an agency or political subdivision thereof) or other entity of any kind. "PLAN" shall mean, in respect of any Person, any plan defined in Section 402(a) of ERISA in respect of which such Person is an "employer" or a "substantial employer" as defined in Section 3(5) and 4001(a)(2) of ERISA, respectively. "POST-DEFAULT RATE" shall mean in respect of any amount payable by a Party hereunder not paid when due, a rate per annum during the period commencing on the due date thereof until such amount is paid in full equal to the Prime Rate as in effect from time to time plus two percent (2%). "PRIME RATE" shall mean the rate of interest from time to time announced by The Chase Manhattan Bank at its principal office as its prime commercial lending rate. The Prime Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. "PRIVATE AUTHORIZATIONS" shall mean all franchises, permits, licenses, approvals, consents and other authorizations of all Persons (other than Authorities) including, without limitation, those with respect to trademarks, service marks, trade names, copyrights, computer software programs and other intellectual property. "PROCEEDS" shall have, with reference to any property or asset, the meaning ascribed to such term under the UCC and, in any event, shall include, but not be limited to, any and all amounts from time to time paid or payable under or in respect of such property or asset. "PROGRAM DOCUMENTS" shall mean this Agreement, each Assignment, the Servicing Agreement, the Underwriting Agreements, the Prospectuses, the 18 Investment Management Agreements, the Distribution Plans, the Irrevocable Payment Instruction, the Letter Agreement and the other agreements, documents, certificates and instruments entered into or delivered in connection herewith and therewith, including any and all Exhibits and Schedules referenced herein or therein, and attached hereto or thereto, as the same may from time to time be amended, supplemented, waived or modified. "PROSPECTUS" shall mean, with respect to any Fund, the prospectus with respect to Shares of such Fund filed with the SEC as a part of the Investment Company's Registration Statement on Form N-1A, as amended or supplemented from time to time, and shall include, without limitation, the related Statement of Additional Information included in such Registration Statement. "PURCHASE DATE" shall mean each Business Day after January 6, 1999 and prior to and including the Termination Date, on which the Seller provides to the Purchaser a Purchaser Report which shall set forth, among other things, the Seller's determination of the Purchase Price for the Purchased Receivables to be purchased on such Purchase Date. "PURCHASE PRICE" shall mean with respect to the Purchased Receivables relating to any Share of any Fund to be purchased on any Purchase Date, an amount equal to the product of (a) the Purchase Price Percentage relating to the Shares of such Fund and (b) the total Issue Price of such Shares of such Fund, the sales of which settle (other than in connection with the reinvestment of dividends (whether ordinary, capital gain or tax-exempt dividends or return of capital) or Free Exchanges) during the period from (but not including) the Sale Cutoff Date relating to the immediately preceding Purchase Date to (and including) the Sale Cutoff Date relating to such Purchase Date. Notwithstanding the provisions of the preceding sentence, the Purchase Price otherwise payable by the Purchaser for such Purchased Receivables shall be reduced by the sum of all amounts paid as Sales Charges (or in respect of Shares issued prior to such date as a result of the Free Exchange of such Shares or the reinvestment of dividends (whether ordinary, capital gain or tax-exempt dividends or return of capital on any of the foregoing)) to the extent that the Purchaser does not otherwise receive and retain the economic benefits of such payments pursuant to this Agreement. "PURCHASE PRICE PERCENTAGE" shall mean, with respect to any Fund, the percentage set forth opposite the name of such Fund under the heading "Purchase Price Percentage" on Schedule III attached hereto, as the same may be deemed amended, modified or supplemented pursuant to Sections 2.2 or 7.20 of this Agreement. "PURCHASED RECEIVABLES" shall mean with respect to the Shares of any Fund: a. the Receivables, other than Seller Receivables, relating to (i) Shares, the sales of which settled during the period from and including January 7, 1999 (or, if later, the Additional Effective Date for such Fund) through the Business Day to and including the most recent Sale Cutoff Date preceding or coinciding with such date, and (ii) the Shares issued in connection with the reinvestment of dividends (whether ordinary, capital gain or tax-exempt dividends, or return of capital) paid in respect of the Shares described in clause (i) of this paragraph (a); and 19 b. the Receivables, other than Seller Receivables, due from any other Fund relating to (i) Shares of such other Fund which were acquired by the holder of the Shares referred to in paragraph (a) above or this paragraph (b) in a Free Exchange and (ii) Shares of such other Fund issued after such Free Exchange in connection with the reinvestment of dividends (whether ordinary, capital gain or tax-exempt dividends, or return of capital) paid in respect of the Shares described in clause (i) of this paragraph (b). "PURCHASER REPORT" shall mean the report in substantially the form of Schedule V attached hereto, with such changes therein (and in such form) as the Purchaser may from time to time reasonably request. "PURCHASER'S KNOWLEDGE" shall mean the actual knowledge of any shareholder or officer of Purchaser who is not an Affiliate of Seller, Seller Parent or their respective Affiliates. "PURCHASER'S REMITTANCE ACCOUNT" shall mean the account of the Purchaser (Account No. 22967504) maintained with The Chase Manhattan Bank (Ireland) PLC or such other account as the Purchaser shall designate in writing to the Seller. "RECEIVABLES" shall mean, with respect to each Fund, all of the Seller's rights under the related Underwriting Agreement, the related Distribution Plan, the related Prospectus and the Conduct Rules to receive amounts paid or payable in respect of Sales Charges, including the Contingent Deferred Sales Charges, as listed on Schedule II attached hereto, in each case in respect of the issuance (whether prior to or on or after the date hereof and including issuance in a Free Exchange) by such Fund of Shares, including, without limitation, any similar amounts paid or payable under any replacement Underwriting Agreement, Distribution Plan or Conduct Rules and any continuation payments, in respect of such Sales Charges in respect of the issuance by such Funds of Shares, that are paid or payable in the event of a termination of the related Distribution Plan or the related Underwriting Agreement; it being understood that such term does not include the Service Fee payable pursuant to the related Underwriting Agreement, the related Distribution Plan, the Prospectus and the Conduct Rules. "RULE 12B-1" shall mean Rule 12b-1 adopted under the Investment Company Act. "SALE CUTOFF DATE" relating to any Purchase Date shall mean the third Business Day preceding such Purchase Date. "SALES CHARGE" shall have the meaning set forth in Section 2830(b)(8) of the Conduct Rules, it being understood that such term does not include any Service Fee. "SEC" shall mean the United States Securities and Exchange Commission or any other governmental authority of the United States of America at the time primarily responsible for administering the Securities Act, the Investment Company Act, the Investment Advisers Act or the Exchange Act. "SECURED OR GUARANTEED DEBT" of any Person shall mean, at any date, (a) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is assumed by such Person, and (b) all Debt of others in respect of which such Person has issued a Guarantee. 20 "SECURITIES ACT" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as from time to time in effect, or any successor law, rules or regulations, and any reference to any statutory or regulatory provisions shall be deemed to be a reference to any successor statutory or regulatory provision. "SELLER COLLECTIONS" shall mean all amounts that become payable by a Fund or a shareholder of a Fund, including without limitation Sales Charges, and are paid, with respect to Shares to which Purchased Receivables relate, in an amount which could not be paid pursuant to the Conduct Rules, calculated (a) as though the Shares of such Fund to which Purchased Receivables relate constituted all of the outstanding Shares of a Fund and (b) assuming such Fund pays a separate Service Fee in respect of such Shares. "SELLER RECEIVABLES" shall mean, as of any date of determination, the right of the Seller to receive the Seller Collections. "SELLER TERMINATION EVENT" shall mean each of the following events: a. any proceeding shall be instituted by or against the Purchaser seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its obligations under any Law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order of relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it, such proceeding shall remain undismissed or unstayed for a period of sixty (60) days; b. the failure of the Purchaser to pay when due and payable, after expiration of any applicable grace period, any amount with respect to its Debt outstanding from time to time under the Credit Agreement, as amended or restated from time to time; c. the failure of the Purchaser to make in the manner and when due any payment to be made by it under this Agreement, including, without limitation, the Purchase Price with respect to any Purchased Receivables, and such failure shall continue unremedied for ten (10) Business Days following written notice thereof from the Seller to the Purchaser; or d. (i) any representation or warranty made or deemed made by the Purchaser (or any of its officers) under or in connection with this Agreement, the Servicing Agreement or any other Program Document shall have been false, incorrect or misleading in any material respect when made or deemed made or (ii) any other statement, certificate or report delivered by or on behalf of the Purchaser in connection with this Agreement, the Servicing Agreement, or any other Program Document, shall have been false, incorrect or misleading in any material respect when delivered. "SELLER'S ACCOUNT" shall mean the account of the Seller (Account No. 7313201334) maintained with Bank of America, or such other account as the Seller shall designate in writing to the Purchaser. "SERVICE FEE" shall have the meaning set forth in Section 2830(b)(9) of the Conduct Rules. 21 "SERVICER" shall mean Franklin/Templeton Investor Services, Inc., a California corporation. "SERVICING AGREEMENT" shall mean the Servicing Agreement dated the date hereof by and between the Purchaser and the Servicer, in the form of Exhibit E attached hereto, as the same may from time to time be amended, supplemented, waived or modified. "SETTLEMENT DATE" shall mean the eighth Business Day of each calendar month that occurs prior to the end of the calendar month following the Termination Date; PROVIDED, HOWEVER, that, in respect of the Settlement Date occurring in any calendar month, the Purchaser and the Seller may agree that the Settlement Date in such calendar month shall be on a different Business Day of such month. "SHARES" shall mean, in respect of any Fund any Class B shares or other classes of shares of the Fund that are sold or issued pursuant to a Distribution Plan adopted under Rule 12b-1 which have a Contingent Deferred Sales Charge, and which are specified on Schedule III hereof, as the same may be deemed amended, modified, or supplemented pursuant to Sections 2.2 or 7.20. "SIPA" shall mean the Securities Investor Protection Act of 1970, as amended from time to time and the regulations promulgated and the rulings issued thereunder. "SUBSTANTIAL FUNDS" shall mean, as of any date, any Fund or group of Funds the Shares of which together on such date have a Net Asset Value equal to thirty percent (30%) or more of the total Net Asset Value related to Shares of all Funds taken together, as of such date; "TAKEOUT TRANSACTION" shall mean any transaction pursuant to which the Purchaser sells or otherwise transfers, or causes to be sold or transferred, interests in the Purchased Receivables relating to any Fund (including, without limitation, the right to receive any portion of any Collections) to any Person, including a Master Trust which publicly or privately sells debt instruments and/or certificates or other instruments representing ownership interests in such Master Trust or interests in any Purchased Receivables relating to any Fund (including, without limitation, any right to receive any portion of any Collections). "TAXES" shall mean any present or future taxes, levies, imposts, deductions, charges and all liabilities with respect thereto, EXCLUDING (i) taxes imposed on the Purchaser's income, and franchise taxes imposed on the Purchaser, by (a) the jurisdiction under the laws of which the Purchaser is organized or any political subdivision thereof, (b) the jurisdiction of the Purchaser's principal executive office or any political subdivision thereof or (c) any other jurisdiction regardless of where located; (ii) taxes required to be withheld or subject to advance payment through withholding or otherwise; and (iii) transfer, sales, use or value added taxes, all as required under Applicable Law. "TERMINATION DATE" shall mean January 15, 2002 or such subsequent date as shall be agreed to in writing by the Parties, except that the Termination Date may be deemed to have occurred on an earlier date pursuant to Sections 6.1 or 6.2. 22 "TRUE SALE" shall mean, with respect to any asset or property, the sale of an absolute and complete ownership interest in such asset or property (and not the granting of a security interest therein), within the meaning of all Applicable Law, including, without limitation, the UCC, the Code and the Bankruptcy Code. "UCC" shall mean the Uniform Commercial Code, as from time to time in effect in the applicable jurisdictions. "UNDERWRITING AGREEMENT" shall mean, with respect to each Fund, the agreement between the Seller and the Investment Company as it applies to such Fund in the form attached hereto as Exhibit F, and any replacement agreement as may be adopted in the future, pursuant to which the Seller has been appointed the principal underwriter or distributor for such Fund, subject to the terms of the Distribution Plan relating to such Fund, as the same may be amended, supplemented, waived or modified from time to time. SECTION 1.2 RULES OF CONSTRUCTION. For all purposes of this Agreement, except as otherwise expressly provided herein or unless the context requires otherwise (a) each use in this Agreement of a singular version of a pronoun shall be deemed to include references to the plural, and vice versa, (b) Article and Section headings are for convenience of reference only and shall not affect the construction of this Agreement, and (c) the definitions of terms defined in this Agreement shall be equally applicable to the singular and plural forms of such terms. Except where the context requires otherwise, references to "this section" or words of similar import shall be deemed to refer to the entire section and not to a particular subsection, references to a Section, subsection or Article shall be deemed to refer to the specific referenced Section, subsection or Article of this Agreement and references to "hereunder", "herein", "hereto" or words of similar import shall be deemed to refer to this entire Agreement and not to any particular section or subsection. Terms defined in the Preamble of this Agreement which are more fully defined in this Article 1 are used herein as defined in this Article 1. ARTICLE II PURCHASE AND SALE OF PURCHASED RECEIVABLES; ADDITIONAL FUNDS AND COLLECTIONS SECTION 2.1 PURCHASE AND SALE. a. On each Purchase Date that occurs on or prior to the Termination Date, the Purchaser shall, subject to and upon the terms and conditions set forth in this Agreement, purchase, and the Seller shall, subject to and upon the terms and conditions set forth in this Agreement, sell, transfer, convey and assign to the Purchaser, on and as of such Purchase Date, all of the Seller's right, title and interest in, to and under the Purchased Receivables (and the Collections in respect thereof) relating to the sales of Shares of each Fund for the period from (but not including) the Sale Cutoff Date relating to the immediately preceding Purchase Date (which for the initial purchase of Purchased Receivables shall be deemed to mean January 4, 1999 and for an initial purchase of such Purchased Receivables relating to an Additional Eligible Fund shall mean the related Additional Effective Date) to (and including) the Sale Cutoff Date relating to such Purchase Date, and the Purchaser shall purchase from the Seller 23 such Purchased Receivables for an amount equal to the aggregate Purchase Price payable in respect of such Purchased Receivables. The aggregate Purchase Price to be paid by the Purchaser to the Seller or its designee on each Purchase Date shall be paid on the respective Purchase Date by wire transfer of immediately available funds. Notwithstanding the foregoing, the Purchaser shall have no obligation to purchase Receivables relating to any Fund after any change in such Fund's fundamental investment objective or fundamental investment policies unless such Fund is reapproved by the Purchaser as an Additional Eligible Fund pursuant to Section 2.2 below. b. Monthly on or before the day which is four (4) Business Days prior to each Settlement Date, the Seller shall provide the Purchaser with a Purchaser Report which shall set forth, among other things, the Seller's determination of (i) the Purchase Price for the Purchased Receivables purchased during the preceding calendar month and (ii) the computation of such Purchase Price in reasonable detail. On each Settlement Date, the Purchaser shall pay to the Seller or the Seller shall reimburse the Purchaser, as the case may be, for any difference between the aggregate amount of Purchase Price previously paid to the Seller during the preceding calendar month for Purchased Receivables sold during such month and the actual aggregate Purchase Price of the Purchased Receivables purchased during such month, as set forth on the Purchaser Report delivered for such month. c. Each purchase and sale of Purchased Receivables pursuant to Section 2.1(a) shall be evidenced by an Assignment to be delivered by the Seller to the Purchaser on the Purchase Date related to such purchase of Purchased Receivables. d. It is the intention of the Parties that each purchase and sale of Purchased Receivables to be made hereunder shall constitute a True Sale. SECTION 2.2 ADDITIONAL FUNDS. Unless an Event of Termination (or an event which, with the passage of time or notice, or both, would constitute an Event of Termination) shall have occurred and be continuing, the Seller and the Seller Parent may request that an Additional Eligible Fund become a "Fund" under this Agreement on the Additional Effective Date for such Additional Eligible Fund. On and as of such Additional Effective Date, (a) each Additional Eligible Fund shall become a Fund hereunder, (b) Schedule III and Exhibits C, D, F, G and N hereof shall be deemed to be supplemented to reflect such addition, and (c) any reference in this Agreement to any change or modification since the date of this Agreement to the Underwriting Agreement, Distribution Plan, Investment Management Agreement, Prospectus or Contingent Deferred Sales Charge arrangement of such Additional Eligible Fund shall be deemed with respect to such Additional Eligible Fund to refer to any change or modification thereof since such Additional Effective Date. The Seller and the Seller Parent shall provide the Purchaser with written notice thirty (30) days prior to the anticipated Additional Effective Date of any investment company or series or portfolio thereof that is to become an Additional Eligible Fund, it being agreed that without such timely prior written notice the Purchaser shall not be obligated to purchase Purchased Receivables of such Additional Eligible Fund from the Seller as of the Additional Effective Date. Notwithstanding anything herein to the contrary, it is also understood that the Purchaser has the right in its reasonable discretion (x) to reject any request that any Additional Eligible Fund be included as a Fund hereunder or (y) as a condition to agreeing to any such request, to require such modifications to the Program Documents as the Purchaser may reasonably request. 24 SECTION 2.3 COLLECTIONS AND SELLER COLLECTIONS. a. The Seller shall cause all Collections and Seller Collections, other than Collections or Seller Collections related to Contingent Deferred Sales Charges, in respect of Purchased Receivables relating to each Fund payable by such Fund to be deposited directly into the Collection Account by such Fund (or its transfer agent, if applicable) without any intermediary commingling of such amounts with the other assets of the Seller or any of its Affiliates (other than such transfer agent). b. The Seller shall cause all Collections and Seller Collections related to Contingent Deferred Sales Charges in respect of Purchased Receivables relating to each Fund payable by the shareholders of each Fund to be deposited, one (1) Business Days after each applicable settled trade, directly into the CDSC Collection Account by such Fund (or its transfer agent, if applicable) without any intermediary commingling of such amounts with the other assets of the Seller or any of its Affiliates (other than such transfer agent). c. If any check or other instrument in payment of Collections shall require the endorsement of the Seller, the Seller hereby irrevocably authorizes and empowers the Purchaser to endorse (without recourse) the same as attorney-in-fact. d. On the fifteenth calendar day after the last day of each of the Purchaser's fiscal quarters, the Purchaser shall pay to Seller, in immediately available funds by wire transfer, the amount, if any, equal to any Seller Collections deposited in the Collection Account or the CDSC Collection Account pursuant to the Program Documents on or prior to the last day of such preceding fiscal quarter which have not been previously disbursed to Seller pursuant to this Section 2.3. e. In the event of any disagreement between the Purchaser and the Seller as to the accuracy or completeness of the information and data provided to the Purchaser by the Seller in the reports described on Exhibit A to the Servicing Agreement, as such information and data relate to any calculation of, or the method of calculating, Collections, the Purchaser and the Seller shall negotiate in good faith to resolve the disagreement. If the disagreement is not so resolved within thirty (30) days, either the Purchaser or the Seller, by written notice to the other, may require that the disagreement be submitted to an accounting firm of recognized national standing for a resolution which shall be final and binding upon the Parties. In connection with all such disagreements submitted for resolution pursuant to the preceding sentence, the accounting firm shall be selected jointly by the Seller and the Purchaser and the fees of the accounting firm shall be borne equally by the Seller and the Purchaser. Upon resolution of any dispute, any error shall be corrected by payment to the appropriate Party in the amount of the error plus interest calculated at the Prime Rate for the period from the date the payment was originally due to the date payment is actually made. f. In the event that the sale of any Shares of any class of any Fund to which Purchased Receivables relate shall be rescinded for any reason whatsoever, the Seller shall promptly refund to the Purchaser an amount equal to the product of (i) the Purchase Price Percentage relating to such Fund and (ii) the Issue Price of such Shares of such Fund, minus the sum of all amounts theretofore paid to the Purchaser as Sales Charges to the extent that Seller does not otherwise 25 receive and retain the economic benefits of such payments pursuant to this Agreement, plus interest calculated at the Prime Rate on the amount of the foregoing outstanding from time to time. SECTION 2.4 TRANSFER OF RECORDS TO PURCHASER. a. Each purchase of Purchased Receivables hereunder shall include the transfer to the Purchaser of all of the Seller's right, title and interest in, to and under the records relating to such Purchased Receivables and the Collections, and the Seller hereby agrees that such transfer shall be effected automatically with each such purchase, without any further documentation. b. The Seller shall take all such actions requested by the Purchaser, from time to time hereafter, that may be necessary or appropriate, in the reasonable opinion of Purchaser, to ensure that the Purchaser has (i) an enforceable ownership interest in the records relating to the Purchased Receivables and Collections purchased from the Seller hereunder and (ii) an enforceable right (whether by license, sublicense or otherwise) to use all of the computer software used to account for the Purchased Receivables and Collections and/or to recreate such records. SECTION 2.5 DISTRIBUTION PLAN OR UNDERWRITING AGREEMENT TERMINATION. The Seller and the Purchaser recognize that any Fund has the right to terminate a Distribution Plan or Underwriting Agreement pertaining to such Fund. The Purchaser, consistent with its status as a buyer of the Purchased Receivables in a True Sale transaction, accepts, subject to all the other terms and conditions of this Agreement (including the Seller's and the Seller's Parent's responsibilities hereunder), the risks associated with any such termination by a Fund of a Distribution Plan or an Underwriting Agreement. SECTION 2.6 INTERIM AGREEMENT. The Parties recognize that prior to the execution of this Agreement, the parties were engaging in a series of transactions pursuant to the terms of an Interim Agreement dated as of January 4, 1999, as amended as of February 28, 1999, March 31, 1999, April 30, 1999, May 28, 1999, June 7, 1999, June 30, 1999, and July 30, 1999 which transactions were similar to the transactions contemplated by this Agreement pertaining to the Purchased Receivables. The Parties intend that all of the transactions consummated under and governed by the Interim Agreement shall be deemed transactions governed by, and subject to all of the terms and conditions of, this Agreement. ARTICLE III CONDITIONS PRECEDENT SECTION 3.1 CONDITIONS PRECEDENT TO INITIAL PURCHASE OF PURCHASED RECEIVABLES. The obligation of the Purchaser to make the initial purchase of Purchased Receivables pursuant to this Agreement shall be subject to the prior or concurrent fulfillment (or waiver by the Purchaser) of each of the following conditions precedent: a. the Servicing Agreement shall have been duly executed by the parties thereto and shall be in full force and effect, and the Purchaser shall have received a fully executed copy thereof; 26 b. the Purchaser shall have received the signed opinions of counsel to each of the Funds, the Seller, the Seller Parent and the Servicer which shall each be substantially in the form attached hereto as Exhibits H, I, J and L, respectively, and be dated contemporaneously with the execution of this Agreement; c. the Purchaser shall have received (i) a subsistence certificate, dated on or after July 15, 1999 from the Secretary of State of the State of New York with respect to the Seller; (ii) a good standing certificate, dated on or after July 15, 1999 from the Secretary of State of the State of Delaware with respect to the Seller Parent; (iii) a certificate of status, dated on or after July 15, 1999 from the Secretary of State of the State of California with respect to the Servicer; (iv) copies of the certificates of incorporation, with all amendments thereto, for the Seller, the Seller Parent and the Servicer, certified by the Secretary of State of the State of New York, the State of Delaware, or the State of California, as applicable; and (v) a signed certificate of the President or a Vice President and a Secretary or Assistant Secretary of each of the Seller, the Seller Parent and the Servicer, in the form of Exhibit K attached hereto; d. the Purchaser shall have received a copy of each Governmental Authorization and each Private Authorization which may be required to be obtained by the Seller, the Seller Parent, each Investment Company and each Fund in connection with this Agreement and the other Program Documents and the transactions contemplated hereby and thereby, each of which shall be in form, scope and substance satisfactory to the Purchaser; e. the Seller shall have caused the Purchaser to receive duly executed financing statements which have been filed, before the execution of this Agreement, under the UCC of all jurisdictions that the Purchaser may deem necessary or desirable in order to perfect the interests of the Purchaser in the Purchased Receivables as contemplated by this Agreement, each of which shall be in form, scope and substance satisfactory to the Purchaser; f. the Seller shall have caused the Purchaser to receive time stamped receipt copies of proper UCC termination statements, if any, necessary to release all security interests and other rights of any Person in the Purchased Receivables; g. the Seller shall have caused the Purchaser to receive certified copies of requests for information (Form UCC-11) (or a similar search report certified by a party acceptable to the Purchaser), dated, before the execution of this Agreement (but after April 1, 1999), listing all effective financing statements which name the Seller (under its present name or any previous name), as debtor and which are filed in the jurisdictions in which filings are required to be made pursuant to Section 3.1(e), together with copies of such financing statements (none of which shall cover any of the Purchased Receivables); h. the Seller shall have caused the Purchaser to receive a duplicate original of each Irrevocable Payment Instruction, in the form attached hereto as Exhibit D, executed and delivered by the Seller to each Investment Company on behalf of each Fund which has been acknowledged and agreed to by each Investment Company on behalf of each Fund as contemplated by the terms thereof; i. the initial Purchase Date shall have occurred prior to September 30, 1999; 27 j. the Purchaser shall have received evidence that the items attached hereto as Exhibits C and F were filed with the SEC and have been approved by the directors or trustees of each Fund or each Investment Company by a vote in person of a majority of its directors (including a majority of its directors or trustees who are not parties to such Fund's Distribution Plans(s) or Underwriting Agreement(s) or interested persons of any such party within the meaning of the Investment Company Act), by resolution(s) acceptable to the Purchaser; k. the Seller shall have caused the Purchaser to receive copies of the relevant portions of the minutes of the meeting(s) of the Board of Directors or Trustees of each Fund or each Investment Company at which a majority of such directors or trustees (including a majority of such directors or trustees who are not parties to such Fund's Distribution Plans(s) or Underwriting Agreement(s) or interested persons of any such party within the meaning of the Investment Company Act) approved the transactions contemplated by the Program Documents; l. each of the investment advisers to each Fund shall be an Adviser; and m. the conditions set forth in Section 3.3 shall have been fulfilled. SECTION 3.2 CONDITIONS PRECEDENT TO INITIAL SALE OF PURCHASED RECEIVABLES. The obligation of the Seller to sell any Purchased Receivables pursuant to this Agreement shall be subject to the prior or concurrent fulfillment (or waiver by the Seller) of each of the following conditions precedent: a. receipt by the Seller of the signed opinion of counsel to the Purchaser which shall be in the form attached hereto as Exhibit M and be dated contemporaneously with the execution of this Agreement; and b. the Purchaser shall have paid to the Seller and the Seller Parent the costs and expenses required to be paid by it under Section 7.4(c). SECTION 3.3 CONDITIONS PRECEDENT TO THE PURCHASER'S CONTINUING OBLIGATION TO PURCHASE PURCHASED RECEIVABLES. The continuing obligation of the Purchaser to purchase Purchased Receivables relating to any Fund on any Purchase Date shall be subject to the prior or concurrent fulfillment (or waiver by the Purchaser), at or prior to the time of such Purchase Date, of each of the following conditions precedent: a. both immediately before and immediately after giving effect to the purchase of Purchased Receivables on such Purchase Date (i) no Event of Termination (or event which, with the passage of time or notice, or both, would constitute an Event of Termination) shall have occurred and be continuing and (ii) the representations and warranties of each of the Seller, each Adviser and the Seller Parent set forth in the Program Documents to which it is a party shall be true and correct in all material respects with the same effect as if then made (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct in all material respects as of such earlier date); b. the Assignment to be delivered by the Seller on each Settlement Date shall have been duly executed and delivered; 28 c. the Seller shall have delivered all Purchaser Reports as and when required to be delivered prior to or on such Purchase Date pursuant to this Agreement and the Servicing Agreement, which shall be in form and substance reasonably satisfactory to the Purchaser; d. the Purchased Receivables relating to Shares of each Fund shall constitute Eligible Receivables on such Purchase Date; e. there shall have occurred no change in the fundamental investment objective or fundamental investment policies of such Fund from those set forth in the Prospectus for such Fund attached hereto as part of Exhibit G; f. the Purchaser shall have received from the Seller and the Seller Parent such instruments and documents as the Purchaser may have reasonably requested in connection with the Purchased Receivables relating to any Fund and any Purchase Price payable on any such Purchase Date; g. the purchase of Purchased Receivables hereunder shall constitute a True Sale thereof, free and clear of any Adverse Claim or any other claim; h. each of the investment advisers for each of the Funds continues to be an Adviser; and i. the conditions specified in Section 3.1 shall, as to the applicable Fund, be fully satisfied or waived on or prior to the initial Purchase Date. The acceptance by the Seller of the proceeds of a purchase of Purchased Receivables shall constitute a representation and warranty by the Seller that, on the date of such purchase, the conditions precedent set forth in this Section 3.3 have been fulfilled. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.1 REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE SELLER PARENT. The Seller, with respect to the Seller and any Person other than the Seller Parent, represents and warrants to the Purchaser as set forth in Sections 4.1(a) through 4.1(w) and the Seller Parent, only with respect to the Seller Parent, separately and not jointly with the Seller or any other Person, represents and warrants to the Purchaser as set forth in Sections 4.1(a) through 4.1(w) (it being agreed by the Parties that the words "separately, and not jointly" mean that only the Seller and not the Seller Parent is responsible to the Purchaser for the representations and warranties pertaining to any Person other than the Seller Parent, and that only the Seller Parent (and not the Seller) is responsible to the Purchaser for the representations and warranties pertaining to the Seller Parent): a. each of the Seller, the Seller Parent and each Adviser is duly organized and is validly existing and in good standing under the laws of the jurisdiction of its incorporation, with (i) full corporate power and authority 29 and all Governmental Authorizations and Private Authorizations necessary to execute and deliver and to perform its obligations under the Program Documents to which it is a party, with such exceptions, if any, as could not and will not give rise to an Adverse Effect and (ii) all Governmental Authorizations and Private Authorizations necessary to conduct the business in which it is now engaged with such exceptions, if any, as could not and will not give rise to an Adverse Effect; b. each of the Seller, the Seller Parent and each Adviser is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the nature of its business or the performance of its obligations under this Agreement and the other Program Documents to which it is a party requires such qualification except where the failure to be so qualified will not give rise to an Adverse Effect; c. the execution, delivery and performance by each of the Seller, the Seller Parent and each Adviser, as applicable, of this Agreement, the other Program Documents to which it is a party and the other instruments and agreements contemplated hereby or thereby have been duly authorized by all requisite corporate action and have been duly executed and delivered by it and constitute the legal, valid and binding obligations enforceable against it in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy laws and any other similar laws affecting the rights and remedies of creditors generally and by equitable principles; d. the Seller has the requisite corporate power and authority and legal right to from time to time sell Purchased Receivables relating to each Fund and any other property to be sold or assigned hereunder to the Purchaser in accordance with the terms of this Agreement and the Seller has duly authorized each such sale to the Purchaser by all necessary corporate action; e. neither the execution nor delivery of this Agreement, the other Program Documents to which either of the Seller, the Seller Parent or any Adviser is a party, or any instrument or agreement referred to herein or therein or contemplated hereby or thereby to which any of the Seller, the Seller Parent or any Adviser is a party, nor the consummation of the transactions herein or therein contemplated, nor compliance with the terms, conditions and provisions hereof or thereof (i) will conflict with, or result in a breach or violation of, or constitute a default under, such Person's certificate of incorporation or by-laws or any Applicable Law (applicable to the Seller, the Seller Parent, any Adviser or any Fund); (ii) will conflict with, or result in a breach or violation of, or constitute a default under, or permit the acceleration of any obligation or liability in, or, but for any requirement of the giving of notice or the passage of time (or both), would constitute such a conflict with, breach, or violation of, or default under, or permit any such acceleration in (A) any Prospectus, any Underwriting Agreement, any Distribution Plan or any Investment Management Agreement or (B) with such exceptions, if any, as could not and will not give rise to an Adverse Effect, any other contractual obligation or any agreement or document to which it is a party or by which it or any of its properties is bound; (iii) will result in or permit the creation or imposition of any Adverse Claim upon any Purchased Receivables relating to any Fund; or (iv) will result in the termination of any Underwriting Agreement or any Distribution Plan or any Investment Management Agreement in any such case with respect to the Sales Charges applicable to the Shares of the related class unless a replacement of such terminated document has become effective which in 30 any such case with respect to the Sales Charges applicable to the Shares of the related class (A) is identical to the terminated document in all material respects or (B) in the reasonable opinion of the Purchaser, is at least as favorable to the Purchaser as the terminated document including, without limitation, in respect of timing and amount payable in respect of any Purchased Receivables and the Purchaser's rights in respect thereof; f. this Agreement and the actions of the Seller required to be taken pursuant to the terms hereof are, and at all times shall be, effective to transfer to the Purchaser all of the Seller's right, title and interest in the Purchased Receivables free and clear of any claim other than the rights and claims of the Purchaser hereunder; g. neither the Seller nor the Seller Parent is incorporated under the laws of any state within any district in the jurisdiction of the United States Court of Appeals for the Tenth Circuit; h. immediately prior to each purchase of Purchased Receivables relating to each Fund by the Purchaser, (i) no party other than the Seller will have any right, title or interest in such Purchased Receivables, including any payments or proceeds in respect thereto, (ii) the Seller will own and have good and marketable title to such Purchased Receivables free and clear of all Liens or other restrictions on transfer and (iii) such Purchased Receivables and payments made in respect thereto will not have been sold, transferred or assigned to any other Person; i. each of the Seller, the Seller Parent and each Adviser has obtained all necessary Governmental Authorizations and Private Authorizations, and made all Governmental Filings required under Applicable Law for the execution, delivery and performance by the Seller, the Seller Parent and each Adviser of the Program Documents to which it is a party, and the agreements and instruments contemplated thereby, and no consents which have not been obtained or waivers under any instruments to which the Seller, the Seller Parent or any Adviser is a party or by which it or any of its properties is bound are required by the Seller or the Seller Parent to be obtained in connection with the execution, delivery or performance of the Program Documents; j. the Purchased Receivables conveyed by the Seller to the Purchaser pursuant to this Agreement will at all times constitute Eligible Receivables (it being understood that this representation and warranty shall not be deemed to have been breached with respect to any Purchased Receivables which, when sold, were Eligible Receivables and thereafter ceased to satisfy the provisions of clause (f) of the definition of such term because of a change in law or in the interpretation thereof); k. with such exceptions, if any, as could not reasonably be expected to and will not have an Adverse Effect, none of the Seller, the Seller Parent nor any Adviser, is in violation of any Applicable Law; l. no Fund is prohibited by any Applicable Law from making the payments contemplated by this Agreement in respect of the Purchased Receivables; m. the Seller's principal place of business and principal executive office, and the place where its records concerning the Purchased Receivables relating to each Fund are kept is at the address first set forth for the Seller 31 in Section 7.3 or such other address of which the Purchaser has received notice pursuant to Section 5.2(b); n. since December 31, 1998 there has been (i) no material adverse change in the financial condition or the results of operations of the Seller and (ii) no material adverse change in the financial condition or results of operations of the Seller Parent or any Adviser, which, in the case of clause (ii) could reasonably be expected to cause an Adverse Effect; o. none of the Seller, the Seller Parent or any Adviser is in default on any of its obligations under any Program Document to which it is a party which could reasonably be expected to, or will, have an Adverse Effect; p. there are no proceedings or, to the best knowledge of the Seller and the Seller Parent, investigations pending or, threatened before any Authority (i) asserting the invalidity of this Agreement or any other Program Document, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any other Program Document, (iii) seeking any determination or ruling which could adversely affect the performance by the Seller, the Seller Parent or any Adviser of its obligations under, or the validity or enforceability of, this Agreement, if any, any other Program Document to which it is a party, or any agreement, certificate or document executed by the Seller, the Seller Parent or any Adviser in connection herewith or therewith, or (iv) which otherwise could reasonably be expected to give rise to an Adverse Effect; q. the Seller is a registered broker/dealer under the regulations of the SEC and a member of the NASD and not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act; r. the Seller is not engaged principally in the business of extending, or arranging for the extension of, credit, for the purpose of purchasing or carrying (i) any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System or (ii) any margin security within the meaning of Regulation G of the Board of Governors of the Federal Reserve System and no part of the proceeds of the Purchase Price paid to the Seller will be used to purchase or carry any margin stock or any margin securities, respectively, within the meaning of said regulations or to extend credit to others for such purpose; s. all information provided by or on behalf of the Seller, the Seller Parent, Franklin Services, the Servicer or any Adviser, to the Purchaser or any other Person for purposes of or in connection with this Agreement, the other Program Documents, or the transactions contemplated hereby or thereby is, and all such information hereafter provided by or on behalf of the Seller, the Seller Parent, Franklin Services, the Servicer or any Adviser to the Purchaser or any other Person pursuant to or in connection with any Program Document or the transactions contemplated thereby will be, true, correct and complete in all material respects on the date such information is stated or certified and no such information contains, or will contain, any material misrepresentation or any omission to state therein matters necessary to make the statements made therein not misleading in any material respect, in light of the circumstances under which they were made; 32 t. the Seller and the Seller Parent have furnished to the Purchaser their balance sheets as of December 31, 1998 and the related consolidated statements of income and cash flows for the year then ended; such statements and any financial statements delivered pursuant to Section 5.1(r) present fairly, in conformity with GAAP, the financial position of the Seller and the Seller Parent at the dates indicated and the results of their operations and cash flows for the period then ended; u. there has been no action by the Board of Directors of the Seller, the Board of Directors of the Seller Parent, the Board of Directors of any Adviser, or the Board of Directors or Trustees of any Investment Company or of any Fund, to make any modification or amendment to, or any waiver of any provisions of, or any termination of, any Distribution Plan, any Investment Management Agreement, any Contingent Deferred Sales Charge arrangement, any Underwriting Agreement, any Prospectus or the interpretation of any thereof, each as in effect on the date of this Agreement, or any modification in the amounts payable or actually being paid thereunder, except, in each case, as has been previously disclosed in writing by the Seller to the Purchaser; v. each Fund has complied with the fundamental investment objectives and policies of such Fund as set forth in the Prospectus for such Fund and the Seller or the Seller Parent have provided 90 days' advance notice of any change in the fundamental investment objectives or policies of any Fund from those set forth in the Prospectus for such Fund as of the date of this Agreement; and w. the Seller Parent owns, directly or indirectly, all of the issued and outstanding stock of each class or series of the Seller and each investment adviser to each Fund is an Adviser. SECTION 4.1A. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller, in addition to the representations and warranties of the Seller provided in Section 4.1, represents and warrants to the Purchaser as follows: a. attached hereto as Exhibits G, C, F and N are true, correct and complete copies of the Prospectus and forms of the Distribution Plan, the Underwriting Agreement and the Investment Management Agreement, respectively, relating to each Fund which are each in full force and effect, and such Prospectuses, Distribution Plans, Underwriting Agreements, and Investment Management Agreements have not been amended in any manner from the forms attached hereto in the referenced exhibits, except as consented to in writing by the Purchaser or for any such amendments of which the Seller has provided to the Purchaser copies prior to execution of this Agreement; b. the Distribution Plans, Underwriting Agreements, Prospectuses and Investment Management Agreements are in compliance, in all material respects, with Applicable Law, including, without limitation, Rule 12b-1 and the Conduct Rules; c. no Share to which a Purchased Receivable relates has the benefit of any Conversion Feature other than a Permitted Conversion Feature; d. the Sales Charge, including the Contingent Deferred Sales Charge, arrangement relating to each Fund and the payments provided for in, and actually being made pursuant to, the Underwriting Agreement or Distribution Plan and the 33 Prospectus for each such Fund are fairly and accurately described in the Underwriting Agreement or Distribution Plan and the Prospectus relating to such Fund; e. on each date on which Purchased Receivables are purchased under this Agreement, (i) the Maximum Aggregate Sales Charge Allowable in respect of the sales of Shares of such Fund, subject to the effect of any future Permitted Conversion Feature and any Free Redemption, will be not less than the sum of (A) 6.25% of the total Issue Price of the Shares of such Fund, plus (B) interest on the amount in clause (A) above at the prime rate in effect plus one percent (1%) per annum, and (ii) the amount of the asset-based Sales Charge in clause (i) will accrue daily and be payable monthly in an amount (on the average) not less than (on the average) the daily equivalent of 0.75% per annum of the average daily Net Asset Value of such Fund (provided, however, that the foregoing provisions of this Section 4.1(A)(e) shall be subject to the maximum sales charges permitted from time to time by the Conduct Rules); f. (i) the aggregate Sales Charges paid and payable by each Investment Company with respect to the Shares, subject in each case to the effect of any Permitted Conversion Feature and any Free Redemption, will equal the lesser of (A) the maximum Sales Charges payable in respect of the sales of such Shares under the terms of the related Underwriting Agreement, Distribution Plan and Prospectus on the date such Sales Charges were purchased by the Purchaser, and (B) the Maximum Aggregate Sales Charge Allowable in respect of such sales, calculated as though the Shares of such Fund to which Purchased Receivables relate constituted all of the outstanding Shares of such Fund and (ii) the amount of the asset-based Sales Charge in clause (i) above will accrue daily and be payable monthly in an amount, subject to clause (i) above, not less than (on the average) the daily equivalent of the Applicable Percentage of the average daily Net Asset Value for each Fund; and g. all information in respect of the Purchased Receivables set forth in each Purchaser Report will be true and correct. SECTION 4.2 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser represents and warrants to the Seller and the Seller Parent as follows: a. the Purchaser is duly organized and is validly existing and in good standing as a private limited liability company under the laws of Ireland, with full company power and authority and all Governmental Authorizations and Private Authorizations necessary to own and operate its property, to conduct the business in which it is now engaged and to execute and deliver and to perform its obligations under this Agreement and the other Program Documents to which the Purchaser is a party; b. the Purchaser is duly qualified to do business as a foreign entity and is in good standing in each jurisdiction in which the nature of its business or the performance of its obligations under this Agreement and the other Program Documents to which the Purchaser is a party requires such qualification except where the failure to be so qualified will not give rise to an adverse effect on the Purchaser's ability to pay or to perform any of its material obligations under this Agreement or any such other Program Document in a timely manner; 34 c. the execution, delivery and performance by the Purchaser of this Agreement, the other Program Documents to which the Purchaser is a party, and the other instruments and agreements contemplated hereby or thereby, have been duly authorized by all requisite company action by the Purchaser and have been duly executed and delivered by the Purchaser and constitute the legal, valid and binding obligations of the Purchaser, enforceable against the Purchaser in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy laws and any other similar laws affecting the rights and remedies of creditors generally and by equitable principles; d. the Purchaser has the requisite company power and authority and legal right to (i) execute and deliver this Agreement and the other Program Documents to which the Purchaser is a party and to perform its obligations hereunder and thereunder and (ii) from time to time, purchase Purchased Receivables relating to each Fund and any other property to be sold or assigned hereunder to the Purchaser in accordance with the terms of this Agreement and the Purchaser has duly authorized each such purchase from the Seller by all necessary action; e. neither the execution nor delivery of this Agreement, the other Program Documents to which the Purchaser is a party, or any instrument or agreement referred to herein or therein, or contemplated hereby or thereby, to which the Purchaser is a party, nor the consummation by the Purchaser of the transactions herein or therein contemplated nor compliance with the terms, conditions and provisions hereof or thereof, (i) will conflict with, or result in a breach or violation of, or constitute a default under, the Memorandum and Articles of Association or other charter documents or by-laws of the Purchaser or any Applicable Law applicable to the Purchaser, (ii) will conflict with, or result in a breach or violation of, or constitute a default under, the Credit Agreement or (iii) will conflict with, or result in a breach or violation of, or constitute a default under, or permit the acceleration of any obligation or liability in, or but for any requirement of the giving of notice or the passage of time (or both) would constitute such a conflict with, breach or violation of, or default under, or permit any such acceleration in, any contractual obligation or any agreement or document to which it is a party or by which it or any of its properties is bound; f. there are no proceedings to which the Purchaser is a party and, to the Purchaser's Knowledge there are no investigations pending or threatened before any Authority (i) asserting the invalidity of this Agreement or any other Program Document, (ii) seeking to prevent the consummation of any of the transactions contemplated by this Agreement or any other Program Document or (iii) seeking any determination or ruling which could materially adversely affect the performance or obligations of the Purchaser under, or the validity or enforceability of, this Agreement or any other Program Document to which the Purchaser is a party, in each case, which would give rise to any material adverse effect upon the Purchaser's ability to pay or to perform any of its material obligations under this Agreement or any such other Program Document in a timely manner; g. the Purchaser has obtained all necessary Governmental Authorizations and Private Authorizations, and made all Governmental Filings required under Applicable Law applicable to the Purchaser for the execution, delivery and performance by the Purchaser of the Program Documents to which it is a party, and the agreements and instruments contemplated thereby, and no consents which have not been obtained or waivers under any instruments to which the Purchaser 35 is a party or by which it or any of its properties is bound are required by the Purchaser to be obtained in connection with the execution, delivery or performance of the Program Documents; h. all information provided by or on behalf of the Purchaser to the Seller, the Seller Parent or any other Person for purposes of or in connection with this Agreement, the other Program Documents, or the transactions contemplated hereby or thereby is, and all such information hereafter provided by or on behalf of the Purchaser to the Seller, the Seller Parent or any other Person pursuant to or in connection with any Program Document or the transactions contemplated thereby will be, true, correct and complete in all material respects on the date such information is stated or certified and no such information contains, or will contain, any material misrepresentation or any omission to state therein matters necessary to make the statements made therein not misleading in any material respect, in light of the circumstances under which they are made, except no warranty is made with respect to information that the Purchaser has obtained from an Affiliate of the Seller or the Seller Parent; and i. the Purchaser is not in material violation of any Applicable Law. ARTICLE V COVENANTS SECTION 5.1 AFFIRMATIVE COVENANTS OF THE SELLER AND THE SELLER PARENT. The Seller and the Seller Parent each separately, and not jointly, covenant and agree as follows (it being agreed by the Parties that the words "separately, and not jointly" mean that only the Seller (and not the Seller Parent) is responsible to the Purchaser for the covenants and agreements pertaining to any Person other than the Seller Parent, and that only the Seller Parent (and not the Seller) is responsible to the Purchaser for the covenants and agreements pertaining to the Seller Parent): a. the Seller and the Seller Parent shall each (i) obtain, maintain and keep in full force and effect all Governmental Authorizations and Private Authorizations which are necessary or appropriate to properly carry out the transactions contemplated to be performed by it under this Agreement and the other Program Documents and (ii) with such exceptions, if any, as could not and will not have an Adverse Effect, (A) obtain, maintain and keep in full force and effect all other Governmental Authorizations and Private Authorizations, (B) duly observe and conform to all requirements of Applicable Law relative to the conduct of its business or to its properties or assets and (C) preserve and keep in full force and effect its existence, rights, privileges and franchises; b. each of the Seller and the Seller Parent shall duly fulfill all obligations on its part to be performed under or in connection with, this Agreement, the Underwriting Agreements, the Distribution Plans, the Investment Management Agreements and the other Program Documents to which it is a party and the agreements and instruments entered into in connection herewith or therewith; 36 c. the Seller shall keep proper books of record and account in accordance with normal business practice in which full and appropriate entries shall be made of all dealings or transactions in relation to the Purchased Receivables relating to each Fund and to its business and activities in connection with this Agreement and the other Program Documents, and the transactions contemplated hereby and thereby, and shall mark any data processing or other records it maintains so as to clearly indicate that the Purchased Receivables relating to each Fund have been sold to the Purchaser; d. the Seller and the Seller Parent shall promptly deliver to the Purchaser copies of any amendments or modifications to their respective certificates of incorporation or by-laws certified, with respect to the certificate of incorporation, by the Secretary of State of its state of incorporation, and, with respect to the by-laws, by an authorized officer; e. the Seller and the Seller Parent shall (i) promptly give written notice to the Purchaser of (A) any known Event of Termination or event which, with the passage of time or notice or both, would constitute an Event of Termination, (B) any litigation or proceedings with respect to the Seller or the Seller Parent or any of their assets or properties, which, if adversely determined, could give rise to an Adverse Effect, (C) the failure of any representation or warranty of the Seller or the Seller Parent contained in any Program Document to at all times be true and correct in all material respects, or (D) the failure to satisfy any of its condition precedents set forth in Article III and (ii) upon obtaining actual knowledge thereof, promptly give written notice of any litigation or proceedings not required to be disclosed pursuant to the preceding clause (i)(B) which, if adversely determined, could give rise to an Adverse Effect; f. upon written request by the Purchaser, the Seller and the Seller Parent shall furnish or cause to be furnished to the Purchaser a copy of any Private Authorizations or Governmental Authorizations obtained or required to be obtained by it or any of its subsidiaries in connection with the transactions contemplated by this Agreement or any other Program Document; g. the Seller and the Seller Parent shall cause to be paid and discharged all taxes, assessments and other charges or levies of any Authority imposed upon it, or upon any of its income or assets, prior to the day on which penalties are attached thereto, if the failure to pay and discharge such tax, assessment or other charges or levies could reasonably be expected to give rise to an Adverse Effect, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided for on the books of the Seller or the Seller Parent; h. the Seller and the Seller Parent shall promptly deliver to the Purchaser a copy of all (i) notices of or waivers of material payment or covenant defaults delivered to or received from any lenders of the Seller or the Seller Parent and (ii) material agreements or amendments entered into with such lenders which could have an Adverse Effect (A) on the ability of the Seller or the Seller Parent to perform any of its obligations under any Program Document or (B) on the Purchaser or the Purchaser's collection of Eligible Receivables; i. if at any time the Servicer is no longer the servicer under the Servicing Agreement, the Seller shall cooperate with the successor servicer thereunder in order for such successor servicer to fully perform its duties and 37 obligations under the Servicing Agreement and shall permit the inspections provided by clause (a) of Section 8.4 of the Servicing Agreement, shall cause the audits provided by clause (b) of Section 8.4 of the Servicing Agreement, and shall perform the covenants and duties set forth in Section 7.2 and clause (vi) of Section 2.1 of the Servicing Agreement, all as if the Servicer were still servicer thereunder; it being understood that the Seller shall not be obligated to compel a replacement servicer to perform the obligations of the Servicer under the Servicing Agreement or be liable for any breach by a replacement servicer of any such obligations; j. the Seller and the Seller Parent shall permit the Purchaser or any Permitted Designee to visit its properties and inspect its properties, files, books and records relating to the Receivables, the Program Documents and the transactions contemplated thereby, and its financial condition, results of operations and cash flows and to discuss the foregoing with the officers, partners, employees and accountants of each of the Seller and the Seller Parent all at such reasonable times during normal business hours upon giving the Seller or the Seller Parent, as applicable, two (2) Business Days' prior written notice; k. each of the Seller and the Seller Parent shall promptly, at its expense, execute and deliver to the Purchaser such further instruments and documents, and take such further action, as the Purchaser may from time to time reasonably request, in order to further carry out the intent and purpose of this Agreement and the other Program Documents to which it is a party and to establish and protect the rights, interests and remedies created, or intended to be created, hereby and thereby, including, without limitation, the execution, delivery, recordation and filing of financing statements and continuation statements under the UCC of any applicable jurisdiction; l. the Seller and the Seller Parent shall promptly deliver to the Purchaser copies of all notices, requests, agreements, amendments, supplements, waivers and other documents received or delivered by it under or with respect to any of the Program Documents; m. in the event that, notwithstanding the Irrevocable Payment Instruction, the Seller shall receive any Collections from a Fund, immediately upon its receipt of any such Collections, the Seller shall remit the same to the Purchaser in the form received and ensure that such amounts are not commingled with any other funds of the Seller; n. the Seller and the Seller Parent (to the extent applicable) shall provide to the directors or trustees of each Fund in connection with (i) the annual reapproval of or any amendment to such Fund's Distribution Plan or Underwriting Agreement, or (ii) a meeting of the directors or trustees of such Fund at which there exists a scheduled agenda item relating to the conversion period of the Shares of such Fund or the Contingent Deferred Sales Charge arrangement of such Fund, the following to permit the directors or trustees of such Fund to determine that the continuation of such Fund's Distribution Plan or Underwriting Agreement is likely to benefit such Fund and its shareholders: (a) a description of sales and redemption figures on an aggregate and net basis for the Class B shares of such Fund for the previous fiscal year of such Fund; (b) a description of all payments made under such Fund's Distribution Plan including the amount and purpose for such payments and the recipients of such payments; (c) comparative Rule 12b-1 fee and other expense materials for such Fund prepared by an independent third party; (d) a written recommendation that such Fund continue its Distribution Plan, Underwriting Agreement, Contingent Deferred 38 Sales Charge arrangement and conversion period of the Shares of such Fund as presently constituted, to the extent applicable; and (e) such other information as is reasonably requested by the directors or trustees of such Fund from time to time. If the Seller and/or the Seller Parent has actual knowledge that the directors or trustees of a Fund propose to vote in favor of an amendment or termination of any of the items described in clause (d) above, the Seller and/or the Seller Parent, as applicable, shall recommend to the directors or trustees of such Fund that the Purchaser be permitted to make a presentation to the directors or trustees of such Fund prior to the taking of such vote; o. each of the Seller and the Seller Parent shall provide prompt written notice to the Purchaser of any modification or amendment to, or any waiver of any provisions of, or any termination of any Distribution Plan, any Investment Management Agreement, any Contingent Deferred Sales Charge arrangement, any Underwriting Agreement or any Prospectus, each as in effect on the date of this Agreement, or any modification in the amounts payable or actually being paid thereunder, provided that such modification, amendment, waiver, or termination results or may result in an Adverse Effect, or, if a new distribution plan, management agreement, contingent deferred sales charge arrangement, prospectus or underwriting agreement is approved and entered into, the Seller shall provide the Purchaser with copies of any such modification or such newly adopted plan or agreement, as adopted, promptly after such modification or adoption has been made; p. each of the Seller and the Seller Parent shall promptly notify the Purchaser of any change in any Fund's sales commission structure or arrangements, distribution fees or Contingent Deferred Sales Charges, and any change with respect to the business, properties, conditions (financial or otherwise), results of operations or prospects of the Seller or the Seller Parent since December 31, 1998 which could reasonably be expected to have an Adverse Effect; q. the Seller shall keep each Irrevocable Payment Instruction in full force and effect; r. the Seller Parent shall furnish to the Purchaser: i. annually within 90 days after the end of each fiscal year, audited consolidated financial statements of the Seller Parent and its consolidated subsidiaries (including the Seller) prepared in accordance with GAAP for such fiscal year; ii. quarterly within 45 days after the end of each fiscal quarter, unaudited consolidated financial statements of the Seller Parent and its consolidated subsidiaries (including the Seller) prepared in accordance with GAAP for such quarter, subject to ordinary year-end adjustments; iii. promptly, (A) information from the results of examinations of the Seller Parent or the Seller by the SEC or the NASD that are material for purposes of this Agreement or the NASD, including such material information in any written deficiency letters and management's written responses thereto, if applicable; (B) information on a daily basis with respect to the number of outstanding Shares, the number and kind of other outstanding shares, sales, redemptions and exchanges; and (C) (not less 39 frequently than monthly) calculations of commissions and compliance with NASD sales charge rules, including the NASD maximum sales charge limits, with respect to the Funds; and iv. promptly, such other information as the Purchaser may from time to time reasonably request; it being understood that the reasonableness of any Purchaser request shall be determined in view of the extent of the relationships established by the Program Documents; s. if the Seller is the principal underwriter and an Adviser is the investment adviser for a mutual fund or an Additional Eligible Fund that has a class of shares that is subject to a contingent deferred sales charge in excess of 1%, the Seller shall promptly notify the Purchaser; if, within 30 days after receipt of this notice from the Seller, the Purchaser consents to make such class of shares of such mutual fund into Shares or to make the additional Additional Eligible Fund a Fund, the Seller and the Seller Parent shall promptly treat such shares of such class of such mutual fund as Shares or treat the Additional Eligible Fund as a Fund, as the case may be; if, at the time the Purchaser gives its consent, another means of financing the distribution expenses of such class of such mutual fund or the Additional Eligible Fund that is more economically advantageous to the class (a "Competing Bid") is available and the Puchaser does not, within thirty (30) days of notice of such Competing Bid offer a financing package which is at least as economically advantageous to the Shares as the Competing Bid, the Seller and the Seller Parent do not have to treat such shares of such class of such mutual fund as Shares or treat the Additional Eligible Fund as a Fund; t. if any Adviser or any Affiliate of the Seller Parent shall be the principal investment adviser for any mutual fund for which the Seller is not the principal underwriter and which is a Franklin Sponsored Fund, the Seller Parent shall use its best efforts to cause the principal underwriter for such mutual fund to make sales of receivables relating to such mutual fund available to the Purchaser, if the Purchaser agrees to purchase such receivables, on terms and conditions substantially similar to those of this Agreement and the other Program Documents or on such other terms and conditions as may be agreed upon by such principal underwriter and the Purchaser; u. in addition to complying with the provisions of paragraphs (s) and (t) above, the Seller Parent shall not, and shall cause its Affiliates not to, register with the SEC any Franklin Sponsored Fund which is not then a Fund unless such Franklin Sponsored Fund does not engage in Free Exchanges with any Fund; PROVIDED, HOWEVER, such Franklin Sponsored Fund which is not then a Fund may engage in Free Exchanges with any Fund if (i) the Seller is able to segregate Receivables related to Shares of the Franklin Sponsored Funds (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) from Purchased Receivables related to Shares of Funds (and any Shares of other Funds or Franklin Sponsored Funds into which such Shares may be exchanged in Free Exchanges), (ii) the Seller's ability to segregate Receivables, as described above, is certified to the Purchaser by an independent accounting firm of national standing, reasonably acceptable to the Purchaser, and (iii) the Seller preserves the Purchaser's continuing right to the Purchased Receivables as if such Free Exchanges had not occurred; 40 v. the Seller shall, within a reasonable period of time (not in excess of 30 days) after being requested to do so, cause to be delivered to the Purchaser in connection with a Takeout Transaction an opinion of counsel to the Seller, such counsel to be reasonably satisfactory to the Purchaser, substantially in the form of Exhibit O attached hereto, provided however, if there has been a change in Applicable Law such that the Seller's counsel is unable to deliver an opinion in such form, the Seller shall cause such counsel to deliver an opinion in form, scope and substance reasonably satisfactory to the Purchaser, taking into account any such change in Applicable Law; w. all information provided by or on behalf of the Seller, the Seller Parent, the Servicer or Franklin Services after the date hereof to the Purchaser or any of its agents for purposes of or in connection with this Agreement, the other Program Documents or the transactions contemplated hereby or thereby will be true, correct and complete in all respects material to the Purchased Receivables and the transactions contemplated by this Agreement and the other Program Documents (taken as a whole) and no such information will contain any material misrepresentation or material omission to state therein matters necessary to make statements made therein not misleading in any respect material to the Purchased Receivables and the transactions contemplated by this Agreement and the other Program Documents, in light of the circumstances under which they are made; PROVIDED, HOWEVER, that this covenant shall apply only to such misrepresentations or omissions as would give rise to an Adverse Effect; x. the Seller and the Seller Parent shall provide ninety (90) days' prior written notice (or in any event no later than the time of filing of such change with the SEC) to the Purchaser if any Fund intends to initiate a change in the fundamental investment objective and policies of such Fund; y. the Seller and the Seller Parent shall provide prompt written notice to the Purchaser of any proposed action which if taken by the board of directors of any Investment Company will, or could reasonably be expected to, have an Adverse Effect or, upon such Person obtaining actual knowledge, of any action of the board of directors of any Investment Company to make any modification or amendment to, or any waiver of any provisions of, or any termination of, any Distribution Plan, any Investment Management Agreement (other than in respect of any waiver of any management fee payable to it under any Investment Management Agreement), any Contingent Deferred Sales Charge arrangement, any Underwriting Agreement, any Prospectus or any interpretation of any thereof, each as in effect on the date hereof, or any modification in the amounts payable or actually being paid thereunder, which action may result in an Adverse Effect, or, if a new distribution plan, investment management agreement, contingent deferred sales charge arrangement, prospectus or underwriting agreement is proposed to be approved and entered into with respect to any Fund, the Seller and the Seller Parent shall provide the Purchaser with copies of any such proposed modification, as adopted, and a newly adopted distribution plan, contingent deferred sales charges arrangement, investment management agreement, prospectus or underwriting agreement promptly after such proposal, modification or adoption has been made; z. the Seller Parent shall from time to time, as necessary, transfer and convey to the Seller funds in such amounts as to enable the Seller to at all times have and maintain net capital in an amount equal to or greater than the amount of net capital required by Rule 15c3-1 under the Exchange Act, whether or not the Seller is subject to Rule 15c3-1; 41 aa. in the event of a change in "control" (as such term is defined in Section 2(a)(9) of the Investment Company Act) in the operations of the Seller or the Seller Parent which results in the termination of the Underwriting Agreement, Investment Management Agreement or Distribution Plan with respect to any Fund, or any "assignment" (as such term is defined in Section 2(a)(4) of the Investment Company Act or Section 202(a) of the Investment Advisers Act) of the Underwriting Agreement or the Investment Management Agreement with respect to any Fund which would result in a termination of such Underwriting Agreement or Investment Management Agreement with respect to such Fund, the Seller and the Seller Parent shall use their best efforts to cause a replacement underwriting agreement, investment management agreement, and/or distribution plan, as applicable, to become effective which provides for the continued payment to Purchaser of Collections in respect of the Purchased Receivables related to such Fund as though such termination had not occurred and without an Adverse Effect; and bb. for any Fund which has terminated or amended its Distribution Plan or Underwriting Agreement in a manner which adversely affects the amount or rate of payment of any Purchased Receivables related to the Shares of such Fund, the Seller shall pay to the Purchaser an amount equal to any such Service Fee which is paid by such Fund (but such payments shall not exceed the difference between the Collections actually paid with respect to such Purchased Receivables, if any, and the amount that would have been payable with respect to such Purchased Receivables had such termination or amendment not occurred). SECTION 5.2 NEGATIVE COVENANTS OF THE SELLER AND THE SELLER PARENT. The Seller and the Seller Parent each separately, and not jointly, covenant and agree as follows (it being agreed by the Parties that the words "separately and not jointly" mean that only the Seller (and not the Seller Parent) is responsible to the Purchaser for the covenants and agreements pertaining to any Person other than the Seller Parent, and that only the Seller Parent (and not the Seller) is responsible to the Purchaser for the covenants and agreements pertaining to the Seller Parent): a. the Seller shall not permit to exist (as a result of any act or omission of the Seller) any Adverse Claim on, or (except pursuant to this Agreement) attempt to transfer any interest in, any Purchased Receivables or the Proceeds to be derived therefrom; b. the Seller shall not move its chief executive office, principal place of business, or the principal place where it keeps its records concerning the Receivables from the addresses specified in Section 4.1(m) or change its name or the name under or by which it conducts its business, unless (i) it shall have given to the Purchaser not less than fifteen (15) Business Days' prior written notice of its intention to do so and of any new location, (ii) it shall have taken such action, satisfactory to the Purchaser, as may be necessary or desirable to maintain the title or ownership of the Purchaser in the Purchased Receivables relating to each Fund at all times fully perfected and in full force and effect, and (iii) any new location is in the contiguous continental United States and is not in the States of Louisiana or Tennessee; c. the Seller shall not amend, waive, terminate or otherwise modify the terms of any Irrevocable Payment Instruction or take any action inconsistent with any Irrevocable Payment Instruction; 42 d. to the extent that the Seller or the Seller Parent is a party to a Program Document, the Seller and the Seller Parent shall not cancel, terminate, amend, modify or waive any term or condition of any Program Document (to the extent the same gives rise to an Adverse Effect), each as in effect as of the date hereof; e. [INTENTIONALLY LEFT BLANK] f. to the extent that the Seller or the Seller Parent is a party to a Program Document, the Seller and the Seller Parent shall not (i) cancel, terminate, amend, modify or waive any term or condition of the Contingent Deferred Sales Charge obligations of any shareholders of any Fund, each as in effect on the date hereof, or (ii) propose that, or take any action that causes, any reduction or termination of the Contingent Deferred Sales Charges; g. neither the Seller nor the Seller Parent shall change its state of incorporation to a jurisdiction which would result in the representation in Section 4.1(g) no longer being correct; h. the Seller Parent shall not permit any of its Affiliates other than the Seller to become the principal distributor for any Fund unless such Affiliate shall, to the reasonable satisfaction of the Purchaser, specifically assume the responsibilities of the Seller under this Agreement; i. neither the Seller nor the Seller Parent shall serve as an investment adviser, or perform, directly or indirectly, the functions of an investment adviser, for any class of Shares of any mutual fund or investment company that engages a distributor for such fund or investment company which is not an Affiliate of the Seller or the Seller Parent unless such relationship (i) does not involve a mutual fund offering shares with a contingent deferred sales charge greater than one (1%) percent, (ii) does not involve a Franklin Sponsored Fund or (iii) is consented to by the Purchaser, which consent shall not be unreasonably withheld; j. the Seller and the Seller Parent shall not (except as required by applicable accounting standards and Applicable Laws pertaining to Taxes) on its books, records, tax returns or financial statements reflect the Purchased Receivables as being owned by the Seller, any Affiliate of the Seller, or other Person other than the Purchaser; k. the Seller shall not file a voluntary petition, or consent to the filing of an involuntary petition, in any proceeding with respect to itself under the Bankruptcy Code in a Bankruptcy Court sitting in the jurisdiction of the United States Court of Appeals for the Tenth Circuit; l. unless required by a change, if any, in Applicable Law after the date hereof under the Investment Company Act or other Applicable Law, the Seller and the Seller Parent shall not take any action designed to encourage any Fund to cancel, terminate, amend, modify or waive any term or condition of any Program Document to which the Seller or the Seller Parent is a party in regard to any matter related to the transactions contemplated herein (other than to permit Free Redemptions or Free Exchanges as contemplated by the Prospectus of such Fund), in each case to the extent such cancellation, termination, amendment, modification, or waiver would, or could reasonably be expected to, give rise to an Adverse Effect; 43 m. unless required by a change, if any, in Applicable Law after the date hereof, under the Investment Company Act or other Applicable Law, and without limiting the generality of paragraph (l) above, neither the Seller nor the Seller Parent shall take any action that could result in either (i) the aggregate Sales Charge paid or payable by any Fund in respect of the sales of Shares of such Fund pursuant to the related Underwriting Agreement, Distribution Plan and Prospectus and pursuant to the Conduct Rules being less than the lesser of (A) the maximum Sales Charges payable in respect of the sales of such Shares under the related Underwriting Agreement, Distribution Plan and Prospectus on the date such Sales Charges were purchased by the Purchaser and (B) the Maximum Aggregate Sales Charge Allowable in respect of such Shares, plus interest thereon at the prime rate in effect, plus one percent (1%) per annum) or (ii) the amount in clause (i) above being payable in installments less frequently than monthly or in amounts that are less on the average than the daily equivalent of the Applicable Percentage of the average daily Net Asset Value for each Fund; PROVIDED THAT each of the Seller and Seller Parent shall not be required, pursuant to this Section 5.2(m), to take any action inconsistent with Sections 5.1(n) and 5.1(s); and n. With respect to any Fund for which the Purchaser has terminated its purchase obligation pursuant to either Section 6.1 or Section 2.1(a) (a "Non-Purchased Fund"), the Seller and the Seller Parent shall not take any actions designed to permit any Fund to continue to permit its shareholders to engage in Free Exchanges with such Non-Purchased Fund; PROVIDED THAT if the board of directors or trustees of the Fund determines that the shareholders of the Fund shall continue to be permitted to engage in Free Exchanges with such Non-Purchased Fund, then the shareholders of the Fund shall be permitted to engage in Free Exchanges with such Non-Purchased Fund and either (x) the following three conditions are met: (i) the Seller is able to segregate Purchased Receivables related to Shares of the Fund(s) (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges) from Receivables related to Shares of such Non-Purchased Funds (and any Shares of other Funds into which such Shares may be exchanged in Free Exchanges), (ii) the Seller's ability to segregate Purchased Receivables, as described above, is certified to the Purchaser by an independent accounting firm of national standing, reasonably acceptable to the Purchaser, and (iii) the Seller preserves the Purchaser's continuing right to the Purchased Receivables as if such Free Exchanges had not occurred; or (y) the Seller shall have the same obligations under this Agreement with respect to Shares that are exchanged from a Fund to a Non-Purchased Fund in a Free Exchange as Shares that are sold in a Free Redemption under Section 7.18. SECTION 5.3 [INTENTIONALLY LEFT BLANK] SECTION 5.4 AFFIRMATIVE COVENANTS OF THE PURCHASER. The Purchaser hereby covenants and agrees as follows: a. prior to the Final Termination Date, the Purchaser shall furnish to the Seller (i) quarterly within sixty (60) days after the end of each fiscal quarter unaudited financial statements of the Purchaser prepared in accordance with GAAP for such quarter and (ii) annually within ninety (90) days after the end of each fiscal year, audited financial statements of the Purchaser prepared in accordance with GAAP for such fiscal quarter or year; 44 b. the Purchaser shall provide notice to the Seller of any material adverse change in its financial condition or of any other event which would, in either instance, materially and adversely affect the Purchaser's ability to purchase Purchased Receivables; c. the Purchaser shall (i) obtain, maintain and keep in full force and effect all Governmental Authorizations and Private Authorizations required by Applicable Law which are necessary or appropriate for it to properly carry out the transactions contemplated to be performed by it under this Agreement and the other Program Documents; (ii) duly observe and conform to all requirements of Applicable Law relative to the conduct of its business or to its properties or assets, where the failure to so conform could reasonably be expected to have a material adverse effect on the Purchaser's ability to perform hereunder; and (iii) preserve and keep in full force and effect its existence, rights, privileges and franchises; d. the Purchaser shall duly fulfill all obligations on its part to be performed under or in connection with this Agreement and the other Program Documents to which it is a party, and any agreements and instruments entered into in connection herewith or therewith; e. the Purchaser shall keep proper books of record and account in accordance with normal business practice in which full and appropriate entries shall be made of all dealings or transactions in relation to the Purchased Receivables relating to each Fund, and to its business and activities in connection with this Agreement and the other Program Documents, and the transactions contemplated hereby and thereby, and shall mark any data processing or other records it maintains so as to clearly indicate that the Purchased Receivables relating to each Fund have been sold to the Purchaser and are, prior to any relevant Takeout Transaction, owned by the Purchaser; f. the Purchaser shall (i) promptly give written notice to the Seller of (A) any Seller Termination Event or event which, with the passage of time or notice or both, would constitute a Seller Termination Event, (B) any litigation or proceedings with respect to the Purchaser or any of its assets or properties, which, if adversely determined, could reasonably be expected to give rise to any material adverse effect upon the Purchaser's ability to purchase the Purchased Receivables hereunder or perform any of its obligations under any Program Document or (C) the failure of any representation or warranty of the Purchaser contained in any Program Document to be true and correct in all material respects; and (ii) upon obtaining Purchaser's Knowledge thereof, promptly give written notice of any litigation or proceedings not required to be disclosed pursuant to the preceding clause (i)(B) which, if adversely determined, could give rise to any material adverse effect upon the Purchaser's ability to purchase the Purchased Receivables hereunder or perform any of its obligations under any Program Document; g. upon written request by the Seller, the Purchaser (excluding information provided by or on behalf of any Affiliate of the Seller or the Seller Parent) shall furnish or cause to be furnished to the Seller a copy of any Private Authorizations or Governmental Authorizations obtained or required to be obtained by it under Applicable Law applicable to the Purchaser in connection with the transactions contemplated by this Agreement or any other Program Document; 45 h. all information provided by or on behalf of the Purchaser (excluding information provided by or on behalf of any Affiliate of the Seller or the Seller Parent or their respective Affiliates) after the date hereof to the Seller or the Seller Parent or any of their agents for purposes of or in connection with this Agreement, the other Program Documents, or the transactions contemplated hereby or thereby will be true, correct and complete in all respects material to the transactions contemplated by this Agreement and the other Program Documents (taken as a whole) and no such information will contain any material misrepresentation or material omission to state therein matters necessary to make statements made therein not misleading in any respect material to the transactions contemplated by this Agreement and the other Program Documents, in light of the circumstances under which they are made; PROVIDED, HOWEVER, that this covenant shall apply only to such misrepresentations or omissions as would give rise to a material adverse effect upon the Purchaser's ability to purchase the Purchased Receivables or perform any of its obligations under any Program Document; i. the Purchaser shall promptly deliver to the Seller a copy of all (i) notices of or waivers of material payment or covenant defaults delivered to or received from any lenders of the Purchaser, including without limitation any lenders under the Credit Agreement and (ii) material agreements or amendments entered into with such lenders which would have a material adverse effect upon the Purchaser's ability to purchase the Purchased Receivables hereunder or perform any of its obligations under any Program Document; and j. upon the consummation of any Free Exchange, the Purchaser shall cause (i) the Lightning Balance Sheet Carrying Value in respect of the applicable Monthly Pool of Purchased Receivables of the issuing Fund to be increased on the effective date of the exchange by the portion of the Lightning Balance Sheet Carrying Value on such date in respect of the applicable Monthly Pool of Purchased Receivables of the redeeming Fund attributable to the Shares of the redeeming Fund so exchanged and (ii) the Lightning Balance Sheet Carrying Value in respect of the applicable Monthly Pool of Purchased Receivables of the redeeming Fund to be reduced on the effective date of the exchange by the Lightning Balance Sheet Carrying Value on such date in respect of the applicable Monthly Pool of Purchased Receivables attributable to the Shares of the redeeming Fund so exchanged. SECTION 5.5. NEGATIVE COVENANTS OF THE PURCHASER. The Purchaser shall not on its books and records, tax returns or financial statements reflect the Purchased Receivables relating to any Fund as being owned by the Seller, any Affiliate of the Seller, or, prior to a related Takeout Transaction, by any other Person other than the Purchaser. ARTICLE VI EVENTS OF TERMINATION SECTION 6.1 EVENTS OF TERMINATION. If any Event of Termination shall occur and be continuing then the Purchaser may, by notice to the Seller and the Seller Parent, declare the Termination Date to have occurred (in which case the Termination Date shall be deemed to have occurred as of the date such notice is effective pursuant to the provisions of Section 7.3); PROVIDED, HOWEVER, that 46 upon the occurrence of any event (without any requirement for the passage of time or the giving of notice, or both) described in subsection (r) of the definition of Event of Termination, the Termination Date shall be deemed to have automatically occurred; and PROVIDED FURTHER, that upon the occurrence of any event described in subsections (a), (b), (g), (l)(ii), (m), (n), (o), (p), (s), (t) and (w) of Event of Termination, the Termination Date shall be deemed to have occurred as of the date which is six (6) months from the date such notice is effective pursuant to the provisions of Section 7.3; and PROVIDED, FURTHER, that, with respect to an Event of Termination which affects only certain Funds, the Purchaser may, by notice to the Seller and the Seller Parent, terminate only its obligation to purchase Receivables related to such Funds. SECTION 6.2 TERMINATION OF SELLER'S OBLIGATIONS TO SELL PURCHASED RECEIVABLES. If any Seller Termination Event shall occur and be continuing then the Seller may, by notice to the Purchaser, declare the Termination Date to have occurred (in which case the Termination Date shall be deemed to have occurred as of the date such notice is effective pursuant to the provisions of Section 7.3); PROVIDED, HOWEVER, that upon the occurrence of any event (without any requirement for the passage of time or the giving of notice or both) described in subsection (a) of the definition of Seller Termination Event, the Termination Date shall be deemed to have automatically occurred. ARTICLE VII MISCELLANEOUS SECTION 7.1 NO WAIVER; MODIFICATIONS IN WRITING. No failure or delay on the part of a Party in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or future exercise thereof or the exercise of any other right, power or remedy. No amendment, modification, supplement, termination or waiver of this Agreement shall be effective unless the same shall be in writing and signed by all of the Parties. Any waiver of any provision of this Agreement, and any consent to any departure by any Party from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which given. SECTION 7.2 PAYMENT. Unless otherwise provided herein, whenever any payment to be made hereunder shall be due on a non-Business Day, such payment shall be made on the next succeeding Business Day. All amounts owing and payable to a Party under this Agreement shall be paid in immediately available funds without counterclaim, setoff, deduction, defense, abatement, suspension or deferment. All amounts payable by the Seller, the Seller Parent or the Purchaser pursuant to Section 7.4 or Section 7.5, as applicable, shall be paid to the Purchaser's Remittance Account or the Seller's Account, respectively. The Seller, the Seller Parent and the Purchaser hereby agree to pay interest at the Post-Default Rate on any amounts payable by the Seller, the Seller Parent or the Purchaser, respectively, under this Agreement, which shall not be paid in full when due, for the period commencing on the due date thereof until, but not including, the date the same is paid in full; PROVIDED, HOWEVER, that for such period not in excess of thirty (30) days during which the Parties are attempting to resolve a disagreement as to the amount owed, interest shall be payable at the Prime Rate. For purposes of calculating interest, any amount received by or 47 on behalf of the Seller, the Seller Parent, or the Purchaser, as applicable, after 3:00 p.m. (New York City time) shall be deemed to have been received on the next succeeding Business Day. SECTION 7.3 NOTICES, ETC. Except where telephonic instructions are authorized herein to be given, all notices, demands, instructions and other communications required or permitted to be given to or made upon any Party hereto shall be in writing and shall be personally delivered or sent by registered, certified or express mail, postage prepaid, or by prepaid telegram (with messenger delivery specified in the case of a telegram), or by telecopier, or by prepaid courier service, and shall be deemed to be given for purposes of this Agreement on the day that such writing is received by the intended recipient thereof in accordance with the provisions of this Section 7.3. Unless otherwise specified in a notice sent or delivered in accordance with the foregoing provisions of this Section 7.3, notices, demands, instructions and other communications in writing shall be given to or made upon the Parties at their respective addresses (or to their respective telecopier numbers) indicated below, and, in the case of telephonic instructions or notices, by calling the telephone number or numbers indicated for such Party below: If to the Purchaser: Lightning Finance Company Limited Chase Manhattan House International Financial Services Center Dublin, Ireland Attention: Global Trust Services / Thomas Caffrey Telephone No.: 353-1-612-3117 Facsimile No.: 00-353-1-612-5777 With a copy to: Christopher Quinn, Esquire Matheson Ormsby Prentice 30 Herbert Street Dublin 3, Ireland Telephone No.: Facsimile No.: Constellation Financial Management Company LLC 52 Vanderbilt - 13th Floor New York, New York 10017 Attention: David Steinmetz Telephone No.: 212-557-5504 Facsimile No.: 212-557-5510 Alfred O. Rose, Esquire Ropes & Gray One International Place Boston, Massachusetts 02110 Telephone No.: 617-951-7372 Facsimile No.: 617-951-7050 48 If to the Seller: Franklin/Templeton Distributors, Inc. 777 Mariners Island Boulevard San Mateo, CA 94404 Attention: Deborah Gatzek Telephone No.: 650-312-3051 Facsimile No.: 650-525-7259 With a copy to: Mark H. Plafker, Esquire Stradley, Ronon, Stevens & Young, LLP 2600 One Commerce Square Philadelphia, PA 19103 Telephone No.: (215) 564-8024 Facsimile No.: (215) 564-8120 If to the Seller Parent:Franklin Resources, Inc. 777 Mariners Island Boulevard San Mateo, CA 94404 Attention: Deborah Gatzek Telephone No.: (650) 312-3051 Facsimile No.: (650) 525-7259 With a copy to: Mark H. Plafker, Esquire Stradley, Ronon, Stevens & Young LLP 2600 One Commerce Square Philadelphia, PA 19103 Telephone No.: (215) 564-8024 Facsimile No.: (215) 564-8120 SECTION 7.4 TAXES, COSTS, AND EXPENSES. a. Any and all payments by the Seller under this Agreement or any other Program Document shall be made free and clear of and without deduction for any and all Taxes. If the Seller shall be required by Law to deduct any Taxes from or in respect of any sum payable hereunder or under any other Program Document, (i) the sum payable hereunder or thereunder shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 7.4(a)) the Purchaser receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Seller shall make such deductions and (iii) the Seller shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with Applicable Law. In addition, the Seller agrees to pay any Other Taxes. Notwithstanding any other provisions of this Agreement, in the event that the Seller is required to withhold any taxes from any payments or transfers of receivables to be paid to, or transferred to, the Purchaser pursuant to this Agreement, the Seller shall do so without any recourse by, or claim against, the Seller by the Purchaser. In the event that the Seller is assessed a deficiency by any taxing authority under Applicable Law for the failure of the Seller to withhold any taxes or other amounts with respect to any payments to be made by, or transfers to be accomplished to the Purchaser by the Seller under this Agreement, the Seller shall be permitted to withhold any such deficiency from any current or future payments or transfers to 49 be made by the Seller to the Purchaser under this Agreement until such deficiency, (but not including any interest and penalties thereon), is paid by the Purchaser; the Purchaser shall have no recourse or claim against the Seller with respect to any such payments or withholdings. b. The Seller agrees to pay all UCC filing fees in connection with the transactions contemplated by this Agreement, the Servicing Agreement and the other Program Documents. c. Subject to subsection (b) above, regardless of whether any of the transactions contemplated hereby are actually consummated, the Purchaser agrees to promptly pay to the Seller and the Seller Parent, as applicable, on written demand (i) all reasonable costs and expenses incurred by the Seller or the Seller Parent in connection with the preparation, review, negotiation, reproduction, execution or delivery of this Agreement and (ii) all reasonable fees and disbursements of counsel to the Seller and the Seller Parent in connection with any of the foregoing. Any costs or expenses reasonably incurred by a Party in good faith for the purpose of enforcing such Party's rights under this Agreement, and all reasonable fees and disbursements of counsel to such Party in connection with the enforcement of such rights, shall be promptly paid to such party, upon written demand, by the Party or Parties against whom enforcement is granted, unless otherwise ordered in a judgment in a court of competent jurisdiction or as mutually agreed upon by the Parties. d. The Purchaser shall pay any additional Taxes which may be imposed due to the non-existence of any present or former connection between such Purchaser (or through any of its Affiliates) and the country in which the Purchaser is (i) organized, (ii) being or having been a citizen or resident of the country or treated as a resident thereof, (iii) being or having been engaged in a trade or business or present therein, (iv) being or having had a permanent establishment therein or (v) making or having made an election the effect of which is subject such Purchaser such tax, assessment or other governmental charge. SECTION 7.5 INDEMNIFICATION. a. Each of the Seller and the Seller Parent, separately and not jointly, agrees to indemnify and hold harmless the Purchaser and each of its Affiliates and their respective officers, directors, employees, agents, advisors of, and any Person controlling any of, the foregoing (each an "Indemnified Party") from and against (collectively, but without duplication) any and all Liabilities that may be incurred by or asserted or awarded against an Indemnified Party, in each case arising out of, relating to or by reason of, any claim brought by any Person not a party to this Agreement in connection with the transactions contemplated hereby; PROVIDED, HOWEVER, the Seller and the Seller Parent shall not be required to indemnify any Indemnified Party in respect of any Liability if and to the extent such Liability resulted primarily from (i) such Indemnified Party's gross negligence or willful misconduct, or (ii) in the case of an Indemnified Party which is the Purchaser, any failure of the Purchaser to perform its covenants, if any, set forth herein or in the other Program Documents to which it is a party, or any failure of any of the Purchaser's representations and warranties, if any, set forth herein or in the other Program Documents to which it is a party, to be true and correct as of the time such representation or warranty spoke. Furthermore, the Seller and the Seller Parent shall not be required to indemnify any Indemnified Party in respect of (A) any 50 liability under applicable securities laws arising out of a Takeout Transaction, except to the extent such liability is attributable to or would not have occurred but for (i) the violation at the time of, or prior to, such Takeout Transaction of any covenant, representation or warranty made by the Seller, the Seller Parent, the Servicer or any Adviser contained in this Agreement or any other Program Document, or (ii) any information furnished by or on behalf of the Seller, the Seller Parent or the Servicer being false or misleading in any material respect, or (B) any Liabilities arising as a result of a claim by an Indemnified Party against the Seller or the Seller Parent or as a result of a claim by the Seller or the Seller Parent against an Indemnified Party where it is determined that the position of the Seller or the Seller Parent in respect of such claim is correct in all material respects. b. The Seller's obligation, if any, to indemnify and hold harmless an Indemnified Party under this Section 7.5 shall not extend to Liabilities arising out of or relating to the actions of the Seller Parent in connection with any of the events described in the first sentence of subsection (a) above, and the Seller Parent's obligation, if any, to indemnify and hold harmless an Indemnified Party under this Section 7.5 shall extend only to Liabilities arising out of or relating to the actions of the Seller Parent (and not the actions of the Seller or any other Person) in connection with any of the events described in the first sentence of subsection (a) above. In the event a Liability arises out of or relates to actions of both the Seller Parent and another Person in connection with any of the events described in the first sentence of subsection (a) above, each of the Seller and the Seller Parent shall indemnify and hold harmless the Indemnified Party to the extent such Person's actions are attributable to the occurrence of such event. c. The Purchaser agrees to indemnify and hold harmless the Seller, the Seller Parent, each of their Affiliates and their respective officers, directors, employees, agents, advisors of, and any Person controlling any of, the foregoing (collectively, the "Seller Indemnities") from and against (collectively, but without duplication) any and all Liabilities that may be incurred by or asserted or awarded against a Seller Indemnitee, in each case arising out of, relating to or by reason of, any claim brought by any Person not a party to this Agreement in connection with the transactions contemplated hereby; provided, HOWEVER, the Purchaser shall not be required to indemnify a Seller Indemnitee in respect of any Liability to the extent such Liability resulted from (i) such Seller Indemnitee's gross negligence or willful misconduct, or (ii) in the case of a Seller Indemnitee that is a party to any Program Document, any failure of such Seller Indemnitee to perform its covenants set forth in the Program Documents to which it is a party or any failure of any of its representations and warranties set forth in the Program Documents to which it is a party to be true and correct in all material respects at the time such representation or warranty spoke. SECTION 7.6 EXECUTION IN COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which, when so executed and delivered, shall be deemed to be an original and all of which taken together, shall constitute one and the same document. SECTION 7.7 BINDING EFFECT; ASSIGNMENT. a. This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective permitted successors and permitted assigns. 51 b. The Seller may not assign its rights or obligations hereunder or in connection herewith or any interest herein or under any other Program Document or with respect to any Purchased Receivables or the Proceeds thereof without the Purchaser's prior written consent. c. The Purchaser may not (except as is appropriate in connection with a Takeout Transaction) assign its rights or obligations hereunder or in connection herewith or any interest herein or under any other Program Documents without the Seller's prior written consent. d. The Purchaser, as the owner of the Purchased Receivables, shall have the right to sell, transfer, convey and assign to any Person, as a part of and in connection with a Takeout Transaction, all or a portion of the Purchaser's right, title and interest in the Purchased Receivables and the Proceeds thereof; PROVIDED, HOWEVER, that the Purchaser shall not assign to any Person the benefit of the representations and warranties of the Seller, the Seller Parent or any Adviser contained in this Agreement or any other Program Document. The Purchaser shall give the Seller thirty (30) days' advance notice of any sale, transfer, conveyance or assignment of the Purchased Receivables or the Proceeds thereof. Notwithstanding the foregoing, the Purchaser may (i) pledge all of its rights under this Agreement or any other Program Document and all of its rights with respect to the Purchased Receivables to a major financial institution as security for money borrowed by the Purchaser or (ii) make representations and warranties to another Person, as a part of and in connection with a Takeout Transaction, which are similar to the representations and warranties agreed to by the Seller in this Agreement or any other Program Document. e. In the event of any sale, transfer, conveyance or assignment of the Purchased Receivables or the Proceeds thereof pursuant to Section 7.7(d) above, the Seller shall execute and deliver such instruments and documents and shall take all such actions as the Purchaser or any Master Trust shall reasonably deem necessary in order to confer upon any such Person ownership of the Purchased Receivables, including, without limitation, using its commercially reasonable efforts to cause the reapproval of each Underwriting Agreement (in the manner required by the Investment Company Act) by the Board of Directors of the related Fund at its next regularly scheduled meeting if such transferee shall deem such action necessary to avoid the termination of such agreements. SECTION 7.8 GOVERNING LAW; SUBMISSION TO JURISDICTION. a. THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF CALIFORNIA AND FOR ALL PURPOSES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF SAID JURISDICTION WITHOUT REGARD TO ITS CONFLICTS OF LAWS PROVISIONS. b. THE SELLER, THE SELLER PARENT AND THE PURCHASER EACH HEREBY IRREVOCABLY SUBMITS ITSELF TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF CALIFORNIA AND TO THE NON-EXCLUSIVE JURISDICTION OF ANY FEDERAL COURT OF THE UNITED STATES LOCATED IN SUCH JURISDICTION, FOR THE PURPOSES OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF THIS AGREEMENT OR THE OTHER PROGRAM DOCUMENTS 52 OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. c. THE SELLER, THE SELLER PARENT AND THE PURCHASER EACH HEREBY AGREE TO FILE SUCH NOTICES NECESSARY TO APPOINT CT CORPORATION SYSTEM, 818 WEST SEVENTH STREET, LOS ANGELES, CA 90017, AND THE SUCCESSORS IN SUCH OFFICE, ITS REGISTERED AGENT IN THE STATE OF CALIFORNIA UPON WHOM MAY BE SERVED ANY NOTICE, PROCESS OR PLEADING IN ANY SUIT, ACTION OR PROCEEDING AGAINST EACH OF THE SELLER, THE SELLER PARENT OR THE PURCHASER, RESPECTIVELY, ARISING OUT OF THIS AGREEMENT OR THE OTHER PROGRAM DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, AND EACH OF THE SELLER, THE SELLER PARENT AND THE PURCHASER DOES HEREBY CONSENT THAT SUCH SUIT, ACTION OR PROCEEDING AGAINST IT MAY BE COMMENCED IN ANY COURT OF COMPETENT JURISDICTION AND PROPER VENUE WITHIN SUCH STATE BY SERVICE OF PROCESS UPON SAID OFFICER WITH THE SAME EFFECT AS IF SUCH PARTY WAS ORGANIZED OR CREATED UNDER THE LAWS OF SAID STATE AND HAD BEEN LAWFULLY SERVED WITH PROCESS IN SAID STATE. SECTION 7.9 SEVERABILITY OF PROVISIONS. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 7.10 CONFIDENTIALITY. Unless otherwise required by Applicable Law, the Seller and the Purchaser agree to maintain the confidentiality of the Confidential Information; provided that nothing in this Section 7.10 shall prohibit disclosure of such Confidential Information by the Seller or the Purchaser, as the case may be, a. pursuant to an order under Applicable Law or pursuant to a subpoena or other legal process; b. (i) to the officers, directors, partners, employees, legal counsel, or auditors of, or lenders to, such Person or (ii) to an insurance company or its agents, solely with respect to errors and omissions insurance coverage; c. in the case of the Purchaser, to a Master Trust, any then directors, trustees or officers of such Master Trust, counsel for the Master Trust, or independent accountants for the Master Trust; d. in the case of the Seller, to any Fund, any then current directors, trustees or officers of such Fund, Fund counsel, counsel for the Seller or independent accountants for the Fund or the Seller; e. to any permitted assignee or permitted pledgee of all or any portion of such Person's right, title or interest in this Agreement and the Servicing Agreement, the Purchased Receivables or the Collections, provided that such permitted assignee or pledgee agrees in a writing delivered to and for the 53 benefit of all Parties and the parties to the Servicing Agreement to be bound by the terms of this Section 7.10; or f. to any proposed permitted assignee or permitted pledgee of all or any portion of such Person's right, title and interest in this Agreement and the Servicing Agreement, the Purchased Receivables or the Collections, provided that such Person advises such proposed permitted assignee or pledgee in writing that such Confidential Information is confidential, non-public information and requests that such proposed permitted assignee or pledgee keep it confidential and use it only for purposes of evaluating the proposed assignment or pledge and such proposed permitted assignee or pledgee agrees in a writing delivered to and for the benefit of all Parties and the parties to the Servicing Agreement to be bound by the provisions of this Section 7.10, and provided, further that the Purchaser shall not disclose such Confidential Information pursuant to subsection (e) above or this subsection (f) to any assignee or pledgee which is an affiliate of an investment adviser, principal underwriter, administrator or subadvisor to any registered, open-end management investment company (as defined under the Investment Company Act). Notwithstanding anything to the contrary contained herein, the Purchaser shall keep, and shall use its best efforts to cause its officers, directors, partners, employees, advisers, legal counsel, auditors, lenders and Affiliates to keep, confidential all Confidential Information concerning the Seller, the Seller Parent, the Funds and the Investment Companies, delivered or made available by the Seller or any of its Affiliates to the Purchaser or such other Persons, including without limitation the Program Documents (to the extent not publicly available), shareholder records, shareholder transaction records, information concerning the composition of the Funds' and the Investment Companies' respective portfolios, information concerning the identity of any Person acting as a broker or dealer for the sale of any Fund shares, and information concerning the financial condition of the Seller (and the Purchaser shall not, and shall cause each of the foregoing other Persons not to, use such information to sell securities to or purchase securities from any such Fund or other Investment Company or to trade for its own account or recommend such trading to any other Person on the basis of such information). SECTION 7.11 INTENT OF AGREEMENT. It is the intention of this Agreement that each purchase of Purchased Receivables hereunder shall absolutely and irrevocably convey to the Purchaser an ownership interest in such Purchased Receivables on the Purchase Date therefor and that such transactions shall constitute a True Sale and not a secured loan. If, notwithstanding such intention, any conveyance of Purchased Receivables from the Seller to the Purchaser shall ever be recharacterized as a secured loan and not a sale, it is the intention of this Agreement that this Agreement shall constitute a security agreement under Applicable Law, and that the Seller shall be deemed as of the date of this Agreement to have granted, and does hereby grant, to the Purchaser a duly perfected first priority security interest in all of the Seller's right, title and interest in, to and under such Purchased Receivables including without limitation all payments on or with respect to such Purchased Receivables, all other rights relating to and payments made in respect of such Purchased Receivables and all Proceeds thereof free and clear of any Adverse Claim, as security for its obligations to the Purchaser under or in connection with this Agreement and the other Program Documents. 54 SECTION 7.12 LIABILITIES TO ANY FUND. No obligation or liability to any Fund, any shareholder of any Fund or any Person contracting with or related to any Fund is intended to be assumed by the Purchaser under or as a result of this Agreement or the other Program Documents and the transactions contemplated hereby and thereby and, to the maximum extent permitted under provisions of Law, the Purchaser expressly disclaims any such assumption. SECTION 7.13 MERGER. The Program Documents taken as a whole incorporate the entire agreement among the parties thereto concerning the subject matter thereof. The Program Documents supersede any prior agreements among the parties relating to the subject matter thereof. SECTION 7.14 FURTHER ACTS. Each Party agrees that at any time, and from time to time, it will do all such things and execute and deliver all such instruments, assignments, releases, other documents and assurances, as any other Party or its counsel reasonably deems necessary or desirable in order to carry out the intent, purpose and conditions of this Agreement and the other Program Documents, and the transactions contemplated hereby and thereby, to facilitate the enjoyment of any of the rights created or contemplated hereby or thereby or to facilitate compliance with any changes in Applicable Law. Without limiting the generality of the foregoing, to the extent permitted by Applicable Law, upon the Purchaser's written request from time to time, the Seller shall make, execute, acknowledge and deliver and file and record in the proper filing and recording places all such instruments, and take all such actions, as the Purchaser may reasonably deem necessary or advisable for assuring or confirming to the Purchaser its rights and interest in and to, and remedies in respect of, the Purchased Receivables relating to each Fund. In addition, the Seller agrees to consent to any Amendment or supplements to this Agreement and any other Program Document which is, in the opinion of the Purchaser, necessary or appropriate in order to effect any Takeout Transaction; PROVIDED, HOWEVER, that the Seller shall not be obligated to give any such consent if it would thereby incur any material obligations or liabilities not contemplated by the Program Documents to which the Seller, the Seller Parent or the Servicer is a party; and provided further, that the Seller shall not be required by this Section 7.14 to consent to any change in any Underwriting Agreement, any Distribution Plan or any Prospectus. SECTION 7.15 OTHER RIGHTS. The rights and remedies of the Parties hereunder are cumulative and are not in lieu of, but are in addition to, any other rights and remedies which the Parties may have under or by virtue of any Applicable Law, or in equity, or any other agreement or obligations to which the Parties are a party. The rights and remedies of the Parties and the parties to the other Program Documents may be exercised from time to time and as often as such exercise is deemed expedient. The Parties agree that it is expected that the Purchaser will (a) enter into hedging transactions in order to hedge the risks associated with the Purchased Receivables, and (b) rely on the representations, warranties and covenants provided herein in making representations and warranties in Takeout Transactions, and that losses related to the foregoing are, with the exception of losses in hedging transactions which are not attributable to a breach of the representations, warranties and covenants herein, a reasonably foreseeable result of any breach by the Seller, the Seller Parent, or the Servicer of this Agreement or other Program Document to which it is a party. SECTION 7.16 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. Each 55 of the representations, warranties, covenants and other agreements of the Parties contained or reaffirmed in this Agreement (a) shall survive the execution and delivery of this Agreement and the purchase of and payment for the Purchased Receivables relating to each Fund and (b) shall remain and continue in full force and effect without regard to any waiver, modification, extension, renewal, consolidation, amendment or restatement of any term or provision, except as specifically provided in such waiver, modification, extension, renewal, consolidation, amendment or restatement. SECTION 7.17 [INTENTIONALLY LEFT BLANK] SECTION 7.18 FREE REDEMPTIONS. In addition to all other amounts payable to the Purchaser pursuant to this Agreement and the other Program Documents, promptly following each Free Redemption which is not provided for in the applicable Fund's Prospectus on the date hereof, or on the Additional Effective Date in the case of an Additional Eligible Fund, the Seller shall pay to the Purchaser an amount equal to the maximum Contingent Deferred Sales Charge that would have been payable in connection with such redemption if such redemption had not been a Free Redemption. SECTION 7.19 [INTENTIONALLY LEFT BLANK] SECTION 7.20 REORGANIZATION. Notwithstanding anything to the contrary contained herein, the shareholders of any Fund shall have the right, upon thirty (30) days' notice to the Purchaser, to cause any Existing Investment Company to transfer all or substantially all of its assets, including without limitation all of its rights and obligations in or pursuant to any Underwriting Agreement, Investment Management Agreement or Distribution Plan to which it is a party, to a New Investment Company, or merge with or otherwise combine with a new Investment Company, for the main purpose of changing such Existing Investment Company's state of incorporation or organization. Upon such transfer, merger or combination (a) each such Existing Investment Company shall cease to be an Investment Company hereunder; (b) each such New Investment Company shall be deemed to be an Investment Company hereunder; and (c) Schedule III and Exhibits C, D, E, and F shall be deemed to be amended to reflect the changes described in subsections (a) and (b) of this Section 7.20; PROVIDED, HOWEVER, that such merger or combination shall not have an Adverse Effect. 56 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed by their respective officers, or other authorized signatories, thereunto duly authorized, on the date indicted below effective as of the date first above written. Lightning Finance Company Limited as Purchaser Date: August 1, 1999 By: /s/ David Brown Name: DAVID BROWN Title: Director Franklin/Templeton Distributors, Inc. as Seller Date: August 1, 1999 By: /s/ Deborah Gatzek Name: DEBORAH GATZEK Title: Senior Vice President Franklin Resources, Inc. as Seller Parent Date: August 1, 1999 By: /s/ Martin L. Flanagan Name: MARTIN L. FLANAGAN Title: Senior Vice President EX-10.47 4 0004.txt ADVISORY AGREEMENT ADVISORY AGREEMENT Templeton Funds, Inc. (on behalf of Templeton World Fund) THIS ADVISORY AGREEMENT made as of December 21, 1999 by and between TEMPLETON GLOBAL ADVISERS LIMITED ("TGAL"), a corporation existing under the laws of Bahamas, and TEMPLETON ASSET MANAGEMENT LIMITED ("TAML"), a corporation existing under the laws of Singapore. WITNESSETH WHEREAS, TGAL and TAML are each registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the "Advisers Act"), and engaged in the business of supplying investment management services, as an independent contractor; WHEREAS, TGAL, pursuant to an investment management agreement, has been retained to render investment advisory services to Templeton World Fund (the "Fund"), a series of Templeton Funds, Inc. (the "Company"), an investment management company registered with the U.S. Securities and Exchange Commission (the "SEC") pursuant to the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, Jeffrey A. Everett, Executive Vice President of TGAL and lead portfolio manager for the Fund, will temporarily be residing in Hong Kong during which time he will be employed by TAML and TGAL wishes to enter into this agreement with TAML to enable Mr. Everett to continue to perform his responsibilities as lead portfolio manager of the Fund during his employment with TAML. NOW, THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties hereto, intending to be legally bound hereby, mutually agree as follows: 1. TGAL hereby retains TAML and TAML hereby accepts such engagement, to furnish certain investment advisory services with respect to the assets of the Fund, as more fully set forth herein. (a) Subject to the overall policies, control, direction and review of the Company's Board of Directors (the "Board") and to the instructions and supervision of TGAL, TAML agrees to provide certain investment advisory services with respect to securities and investments and cash equivalents in the Fund. TGAL will continue to have full responsibility for all investment advisory services provided to the Fund. TGAL acknowledges that the only services that TAML will provide under this agreement are the portfolio management services of Jeffrey Everett while he remains employed by TAML. Nothing in this agreement grants to TGAL any right to receive any research undertaken by TAML's Emerging Markets Group. (b) Both TAML and TGAL may place all purchase and sale orders on behalf of the Fund. The placement of these orders will take place exclusively in Nassau, Bahamas, Singapore or Hong Kong. (c) Unless otherwise instructed by TGAL or the Board, and subject to the provisions of this Agreement and to any guidelines or limitations specified from time to time by TGAL or by the Board, TAML shall report daily all transactions effected by TAML on behalf of the Fund to TGAL and to other entities as reasonably directed by TGAL or the Board. (d) For the term of this Agreement, TGAL shall provide the Board at least quarterly, in advance of the regular meetings of the Board, a report of its activities hereunder on behalf of the Fund and its proposed strategy for the next quarter, all in such form and detail as requested by the Board. Jeffrey Everett shall also be available to attend such meetings of the Board as the Board may reasonably request. (e) In performing its services under this Agreement, TAML shall adhere to the Fund's investment objective, policies and restrictions as contained in the Fund's Prospectus and Statement of Additional Information, and in the Company's Articles of Incorporation, and to the investment guidelines most recently established by TGAL and shall comply with the provisions of the 1940 Act and the rules and regulations of the SEC thereunder in all material respects and with the provisions of the United States Internal Revenue Code of 1986, as amended, which are applicable to regulated investment companies. (f) In carrying out its duties hereunder, TAML shall comply with all reasonable instructions of the Fund or TGAL in connection therewith. Such instructions may be given by letter, telex, telefax or telephone confirmed by telex, by the Board or by any other person authorized by a resolution of the Board, provided a certified copy of such resolutions has been supplied to TAML. 2. In performing the services described above, TAML shall use its best efforts to obtain for the Fund the most favorable price and execution available. Subject to prior authorization of appropriate policies and procedures by the Board, TAML may, to the extent authorized by law and in accordance with the terms of the Fund's Prospectus and Statement of Additional Information, cause the Fund to pay a broker who provides brokerage and research services an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction, in recognition of the brokerage and research services provided by the broker. To the extent authorized by applicable law, TAML shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of such action. 3. (a) TGAL shall pay to TAML a fee equal to 60% of the advisory fee paid to TGAL by the Fund, which fee shall be payable in the U.S. dollar equivalent of such Hong Kong currency dollar amount on the first business day of each month as compensation for the services to be rendered and obligations assumed by TAML during the preceding month. The advisory fee under this Agreement shall be payable on the first business day of the first month following the effective day of this Agreement and shall be reduced by the amount of any advance payments made by TGAL relating to the previous month. (b) If this Agreement is terminated prior to the end of any month, the monthly fee shall be prorated for the portion of any month in which this Agreement is in effect which is not a complete month according to the proportion which the number of calendar days in the month during which the Agreement is in effect bears to the total number of calendar days in the month, and shall be payable within 10 days after the date of termination. 4. It is understood that the services provided by TAML are not to be deemed exclusive. TGAL acknowledges that TAML may have investment responsibilities, render investment advice to, or perform other investment advisory services to other Investment companies and clients, which may invest in the same type of securities as the Fund (collectively, "Clients"). TGAL agrees that TAML may give advice or exercise investment responsibility and take such other action with respect to such Clients which may differ from advice given or the timing or nature of action taken with respect to the Fund. In providing services, TAML may use information furnished by others to TGAL and TAML in providing services to other such Clients. 2 5. TGAL agrees to use its best efforts in performing the services to be provided by it pursuant to this Agreement. 6. During the term of this Agreement, TAML will pay all expenses incurred by it in connection with the services to be provided by it under this Agreement other than the cost of securities (including brokerage commissions, if any) purchased for the Fund. The Fund and TGAL will be responsible for all of their respective expenses and liabilities. 7. TAML shall, unless otherwise expressly provided and authorized, have no authority to act for or represent TGAL or the Fund in any way, or in any way be deemed an agent for TGAL or the Fund. 8. TAML will treat confidentially and as proprietary information of the Fund all records and other information relative to the Fund and prior, present or potential shareholders, and will not use such records and information for any purpose other than performance of its responsibilities and duties hereunder, except after prior notification to and approval in writing by the Fund, which approval shall not be unreasonably withheld and may not be withheld where TAML may be exposed to civil or criminal contempt proceedings for failure to comply when requested to divulge such information by duly constituted authorities, or when so requested by the Fund. 9. This Agreement shall become effective on the date that Jeffrey Everett becomes employed by TAML and shall continue in effect until Jeffrey Everett ceases to be employed by TAML for whatever reason. The term of Mr. Everett's temporary employment with TAML and the term of this agreement is not expected to exceed six months beginning January 25, 2000 (but may be extended by TAML if necessary). 10. (a) Notwithstanding the foregoing, this Agreement may be terminated at any time, without the payment of any penalty, by the Board upon not less than sixty (60) days' written notice to TGAL and TAML, and by TGAL or TAML upon not less than sixty (60) days' written notice to the other party (b) This Agreement shall terminate automatically in the event of any transfer or assignment thereof, as defined in the 1940 Act, and in the event of any act or event that terminates the Investment Advisory Agreement between TGAL and the Fund. 11. (a) In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of its obligations or duties hereunder on the part of TAML, neither TAML nor any of its directors, officers, employees or affiliates shall be subject to liability to TGAL or the Fund or to any shareholder of the Fund for any error of judgement or mistake of law or any other act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Fund. (b) Notwithstanding paragraph 11(a), to the extent that TGAL is found by a court of competent jurisdiction, or the SEC or any other regulatory agency to be liable to the Fund or any shareholder (a "liability"), for any acts undertaken by TAML pursuant to authority delegated as described in Paragraph 1(a), TAML shall indemnify TGAL and each of its affiliates, officers, directors and employees (each a "Franklin Indemnified Party") harmless from, against, for and in respect of all losses, damages, costs and expenses incurred by a Franklin Indemnified Party with respect to such liability, together with all legal and other expenses reasonably incurred by any such Franklin Indemnified Party, in connection with such liability. 3 (c) No provision of this Agreement shall be construed to protect any director or officer of TGAL or TAML from liability in violation of Sections l 7(h) or (i), respectively, of the 1940 Act. 12. In compliance with the requirements of Rule 31a-3 under the 1940 Act, TAML hereby agrees that all records which it maintains for the Fund are the property of the Fund and further agrees to surrender promptly to the Fund, or to any third party at the Fund's direction, any of such records upon the Fund's request. TAML further agrees to preserve for periods prescribed by Rule 31 a-2 under the 1940 Act the records required to be maintained by Rule 31a-1 under the 1940 Act. 13. Upon termination of TAML's engagement under this Agreement or at the Fund's direction, TAML shall forthwith deliver to the Fund, or to any third party at the Fund's direction, all records, documents and books of accounts which are in the possession or control of TAML and relate directly and exclusively to the performance by TAML of its obligations under this Agreement; provided, however, that TAML shall be permitted to keep such records or copies thereof for such periods of time as are necessary 10 comply with applicable laws, in which case TAML shall provide the Fund or a designated third party with copies of such retained documents unless providing such copies would contravene such rules, regulations and laws. Termination of this Agreement or TAML's engagement hereunder shall be without prejudice to the rights and liabilities created hereunder prior to such termination. 14. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, in whole or in part, the other provisions hereof shall remain in full force and effect. Invalid provisions shall, in accordance with the intent and purpose of this Agreement, be replaced by such valid provisions which in their economic effect come as closely as legally possible to such invalid provisions. 15. TGAL will furnish to TAML properly certified or authenticated copies of the resolutions of the board authorizing the appointment of TAML and approving this Agreement as soon as such copies are available. 16. Any notice or other communication required to be given pursuant to this Agreement shall be in writing and given by personal delivery or by facsimile transmission and shall be effective upon receipt. Notices and communications shall be given: (iii) to TAML: 7 Temasek Boulevard #38-03 Suntec Tower One Singapore 038987 Facsimile: 011-65-338-7677 (iv) to TGAL: Box N-7759 Lyford Cay Nassau, Bahamas Facsimile: 242-362-4308 4 17. This Agreement shall be interpreted in accordance with the laws of the State of Florida. 18. TAML acknowledges that is has received notice of and accepts the limitations of the Company's liability as set forth in its Articles of Incorporation. TAML agrees that the Company's obligations hereunder shall be limited to the assets of the Fund, and that TAML shall not seek satisfaction of any such obligation from any shareholders of the Fund nor from any trustee, officer, employee or agent of the Company. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers and their respective corporate seals to be hereunto duly affixed and attested. TEMPLETON ASSET MANAGEMENT LIMITED By:/s/ Gregory E. McGowen -------------------------------- Gregory E. McGowan, Director TEMPLETON GLOBAL ADVISERS LIMITED By: /s/ Mark G. Holowesko -------------------------------- Mark G. Holowesko, President EX-10.48 5 0005.txt AMENDED AND RESTATED COMMISSION PAYING AGMT DATED 31 JANUARY 2000 (1) TEMPLETON GLOBAL STRATEGY FUNDS (2) TEMPLETON GLOBAL ADVISORS LIMITED (3) TEMPLETON GLOBAL STRATEGIC SERVICES SA (4) LIGHTNING FINANCE COMPANY LIMITED -------------------------------------------------------------- AMENDED AND RESTATED COMMISSION PAYING AGREEMENT --------------------------------------------------------------- MATHESON ORMSBY PRENTICE 30 HERBERT STREET DUBLIN 2 IRELAND J:\WP\PMY\LUXAMENDAGR3.DOC INDEX ARTICLE 1..................................................2 Definitions..............................................2 ARTICLE 2.................................................10 Closing Arrangements....................................10 ARTICLE 3.................................................10 Commission Payment......................................10 ARTICLE 4.................................................12 Payment of Fees.........................................12 ARTICLE 5.................................................14 Representations and Warranties..........................14 ARTICLE 6.................................................18 Conditions Precedent....................................18 ARTICLE 7.................................................21 Covenants...............................................21 ARTICLE 8.................................................24 Termination Events......................................24 ARTICLE 9.................................................26 Indemnification.........................................26 ARTICLE 10................................................27 Additional Sub-Funds....................................27 ARTICLE 11................................................27 General.................................................27 SCHEDULE A................................................35 SCHEDULE B................................................36 SCHEDULE C................................................37 SCHEDULE D................................................38 SCHEDULE E................................................45 THIS AGREEMENT made on 31 January 2000 BETWEEN: TEMPLETON GLOBAL STRATEGY FUNDS a societe d'investissement a capital variable, incorporated under the laws of the Grand-Duchy of Luxembourg, having its registered office at 26 boulevard Royale, L-2449, Luxembourg, (the "Fund"); TEMPLETON GLOBAL ADVISORS LIMITED (formerly known as Templeton, Galbraith & Hansberger Limited), a company incorporated under the laws of the Commonwealth of the Bahamas and having its registered office at Nassau, Bahamas, ("TGAL" or the "Principal Distributor"); TEMPLETON GLOBAL STRATEGIC SERVICES SA, a Societe Anonyme, incorporated under the laws of the Grand-Duchy of Luxembourg and having its registered office at 26 boulevard Royale, L-2449, Luxembourg ("TGSS" ); AND LIGHTNING FINANCE COMPANY LIMITED, a limited liability company incorporated in Ireland and having its registered office at Chase Manhattan House, IFSC, Dublin 1, Ireland ("LFL"). WHEREAS: A The Fund has been incorporated as an investment fund for the investment and reinvestment of its assets in certain types of securities, as more fully described in its Articles of Incorporation. B The Fund, pursuant to a distribution agreement dated as of 6 November 1990 made between the Fund and Templeton, Galbraith and Hansberger Ltd, a company incorporated under the laws of the Cayman Islands ("TGH Cayman"), appointed TGH Cayman as principal distributor of the shares issued from time to time in the capital of the Fund (the "Shares") for all countries outside of the United States of America (the "Distribution Agreement"). C TGH Cayman, pursuant to an assignment dated 30 October 1992 made between the Fund, TGH Cayman and the Principal Distributor, assigned its title and interest in the Distribution Agreement to the Principal Distributor and the Principal Distributor thereby assumed the obligations of TGH Cayman under the Distribution Agreement as if the Principal Distributor were named in the Distribution Agreement as a party thereto in lieu of TGH Cayman. D Pursuant to the Addendum to the Distribution Agreement (the "Distribution Agreement Addendum") dated 1 July 1999 between the Fund and the Principal Distributor (which has taken effect as and from the 1 July 1999), the Principal Distributor has been granted the right to receive all conditional deferred sales charges and servicing charges in respect of the Shares. E Pursuant to a distribution controller agreement made as of 1 October 1995 between the Principal Distributor and TGSS (the "Distribution Controller Agreement"), the Principal Distributor appointed TGSS as distribution controller of the Fund (in such capacity, the "Distribution Controller"). It was agreed in the Distribution Controller Agreement that TGSS would receive certain fees in return for co-ordinating the distribution of the Shares and providing certain other associated services. F Pursuant to a letter (the "Fees Side-Letter") from the Principal Distributor to TGSS (which is stated to take effect as of 29 July 1994) the Principal Distributor granted to TGSS the right to receive certain conditional deferred sales charges and other charges in connection with the class of Shares which, up until 1 July 1999, were known as the Class B Shares and which are now known as the Class Bx Shares (the "Class Bx Shares"). G With effect from 1 July 1999 and as more particularly described in the addendum dated June 1999 to the prospectus of the Fund dated September 1997 (as amended, varied or supplemented from time to time by various instruments including the addendum) (the "Prospectus"), a new class of Shares named Class B Shares (the "New B Shares") will be introduced for certain Sub-Funds. H On the terms and subject to the conditions set out in a Commission Paying Agreement and letter agreement in relation thereto each dated 1 July 1999 and each among the parties hereto (together the "Commission Paying Agreement"), pursuant to which the Fund with the knowledge and consent of TGAL and TGSS requested LFL to perform, in respect of the New B Shares, certain services in connection with the distribution of the New B Shares (including the payment of Selling Commissions (as defined in Article 1.1)). In return, the Fund, pursuant to the terms of the Commission Paying Agreement, agreed to pay certain fees (as more particularly described in the Commission Paying Agreement) to LFL (and TGAL and TGSS agreed to waive any entitlement they may have to such fees) for each New B Share in respect of which LFL has become obligated to pay a Selling Commission and any related Transfer and Reinvested Shares. The Fund's obligation to pay the appropriate fees in respect of a New B Share and any related Transfer and Reinvested Shares commenced on the Trade Date for which LFL is obligated to pay a Selling Commission in respect of that New B Share. I The parties hereto wish to amend and restate the Commission Paying Agreement upon the terms and subject to the conditions set out in this Agreement and, with effect from the date hereof, this Agreement will supersede the Commission Paying Agreement which shall automatically and without further act or document terminate upon the execution by the parties hereto of this Agreement. NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE 1 DEFINITIONS 1.1. DEFINITIONS. Whenever used in this Agreement and the schedules, unless there is something inconsistent in the subject matter or context, words and terms shall have the meanings given to them in this Article 1.1 and in the recitals hereto: "Additional Sub-Fund" means any new or existing Sub-Fund which commences to issue New B Shares. "Adverse Effect" when used alone or in conjunction with other terms means the occurrence or existence of any act, circumstance, condition, event, fact, or combination of the foregoing which, in the reasonable judgement of LFL, creates a significant probability of any (a) adverse effect (or material adverse effect, where such occurrence is caused by a computer or operations error) upon (i) the timing or amount of any payment of any Fee; or (ii) the timely receipt by LFL of any Fees; or (b) a material adverse effect upon (i) the Funds's, TGAL's or TGSS's ability to pay or perform its obligations under this Agreement in a timely manner or (ii) the remedies and other rights of LFL under this Agreement. "Advisory Agreements" means the investment management agreements in respect of each of the Sub-Funds between the Fund and the applicable investment advisor as described in Schedule A as supplemented or amended from time to time. "Affiliate" has the meaning provided to that term under the Securities and Exchange Act of 1933 of the United States of America. "Agreement" means this Agreement, as the same may from time to time be amended, supplemented, waived or modified. "Anniversary of the Sale Cutoff Date" means, in respect of any particular Monthly Pool, the date which is 6 years following the Sale Cutoff Date in respect of that Monthly Pool. "Approved Dealers" means dealers in respect of the Shares as approved by TGAL or its duly appointed agents. "Articles of Incorporation" means the articles of incorporation of the Fund. "Business Day" means a day on which the Fund is valued in accordance with the Prospectus Documents. "Closing" means the completion of the transactions contemplated by this Agreement and the delivery of additional documentation required by this Agreement. "Closing Date" means such date as the parties agree is the date upon which Closing shall take place. "Closing Time" means 12:00 p.m. on the Closing Date or such other time on the Closing Date as the parties may agree as the time at which the Closing shall take place. "Collection Account" means a bank account of LFL maintained at The Chase Manhattan Bank at account number 323-13-43-35, with respect to which the Fund, TGSS and TGAL shall have no access or control. "Collections" means (a) all amounts paid or payable under the Program Documents in respect of the Fees and (b) all proceeds of the foregoing, except that "Collections" shall not include amounts paid or payable pursuant to Article 9.1. "Commission Payer" means LFL acting in its capacity as commission payer hereunder. "Deferred Sales Charge" means, with respect to any Sub-Fund, the deferred sales charge payable, either directly or by withholding from the proceeds of the redemption of Shares of such Sub-Fund, by the shareholders of such Sub-Fund on any redemption of Shares of such Sub-Fund in accordance with the Prospectus Documents relating to such Sub-Fund. "Deferred Sales Charge Share" means each New B Share issued after July 1, 1999 by a New B Share Sub-Fund in respect of which a Deferred Sales Charge is payable. "Distributed Shares" means collectively, the Original Charge Shares and the Transfer Shares. "Distribution Agreements" means the distribution services agreements between each of the Fund, TGAL, TGSS and TGH Cayman (including without limitation, the Distribution Agreement, the Distribution Agreement Addendum, the Distribution Controller Agreement and the Fees Side-Letter) as supplemented or amended from time to time. "Distributor Report" means a monthly report to be prepared by TGSS which shall set forth, among other things TGSS's determination, as of the last Business Day of such month, of (a) the Selling Commissions paid or payable by LFL in respect of Deferred Sales Charges Shares distributed during such month, (b) the amount of Fees paid or payable in respect of such month and the Deferred Sales Charge Shares attributable to such Fees and (c) the computation of the amount of such Fees in reasonable detail. "Distributors" means TGAL and TGSS and "Distributor" means any one of them. "Eligible Fee" means a Fee which (a) (i) constitutes a legal, valid and binding obligation of the obligor thereof which is not subject to any dispute, offset, counterclaim or defence whatsoever and (ii) which is not subject to any adverse claim; and (b) does not contravene any applicable law. "External Reinvested Share" is a Reinvested Share which is a share of a Sub-Fund which is not a New B Share Sub-Fund. "External Share" means a Share issued by a Sub-Fund, which is not a New B Share Sub-Fund, upon the immediate investment of proceeds realised on the redemption of a Distributed Share or another External Share (and any other Share issued upon the consolidation or subdivision of an External Share). "Fees" means all amounts payable to LFL under this Agreement and any other Program Document. "Free Exchange" shall mean the exchange of Shares of one Sub-Fund for a Transfer Share or an External Share of another Sub-Fund. "Free Redemption" means a redemption of Distributed Shares or External Shares where the obligation of the shareholder of such Distributed Shares or External Shares to pay the applicable Deferred Sales Charge is relieved or deferred in whole or in part. "FRI" means Franklin Resources, Inc., the indirect parent company of each of the Distributors. "Fund Event of Termination" means: (a) any change (or proposed change as agreed between the parties hereto) in accounting, governmental or other legislation, regulation or policy (i) which will materially and adversely affect the accounting or tax treatment of the arrangements under the Program Documents to any of the Fund, TGSS or TGAL or (ii) as a result of which TGAL, TGSS or the Fund will become liable, under Article 11.8, to pay any amount or amounts which, but for such change, it would not have been liable to pay; (b) the occurrence of an LFL Insolvency Event; or (c) a suit, litigation or regulatory proceeding which has a material adverse effect on the ability of LFL to perform or comply with its obligations hereunder. "GAAP" means generally accepted accounting principles in Luxembourg (in the case of the Fund), or the United States of America (in the case of LFL), as in effect from time to time and consistently applied (except where specified otherwise). "Insolvency Event" means any of the following occurrences: (a) TGSS, TGAL or the Fund shall generally not pay its obligations as such obligations become due or shall admit in writing its inability to pay its obligations generally or shall make a general assignment for the benefit of creditors; or (b) any proceeding shall be instituted by or against TGSS, TGAL or the Fund seeking to adjudicate it in whole or in part bankrupt or insolvent, or seeking liquidation, winding-up, reorganisation, arrangement, adjustment, protection, relief or composition of it or its obligations or proposal to its creditors under any laws relating to bankruptcy, insolvency or reorganisation or relief of debtors or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceedings instituted against it (but not instituted by it), such proceedings shall remain undismissed or unstayed for a period of 60 days; or (c) a court or other governmental authority or agency having jurisdiction in the premises shall enter a decree or order (i) for the appointment of a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of TGAL, TGSS or the Fund of any material part of its property or for the winding up or liquidation of its affairs and such decree shall remain in force undischarged and unstayed for a period of 60 days; or (ii) for the sequestration or attachment of any material part of the property of TGSS, TGAL or the Fund without its unconditional return to the possession of TGSS, TGAL or the Fund or its unconditional release from such sequestration or attachment within 60 days thereafter; or (d) TGAL, TGSS or the Fund shall take any action to authorise any of the actions set forth above. "Liabilities" means claims, damages, losses, liabilities, expenses, obligations, penalties, actions, suits, judgments and disbursements of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel). "LFL Event of Termination" means each of the following events: (a) the Fund, TGAL or TGSS shall fail to make or cause to be made in the manner and when due any payment to be made or to be caused to be made by it under any Program Document and the failure of such payment shall continue unremedied for 10 Business Days following notice thereof from LFL to the entity obligated to make such payment and the failure of such payment has an Adverse Effect; (b) TGSS, TGAL or the Fund shall fail to perform or observe any other material term, covenant or agreement on its part to be performed or observed under any Program Document following TGSS, TGAL or the Fund's (as the case may be) actual knowledge thereof or receipt of notice from LFL, whichever is the earlier; (c) any representation or warranty made or deemed made by TGSS, TGAL or the Fund or any of their respective officers or directors under or in connection with any Program Document shall have been false, incorrect or misleading in any material respect when made or deemed made and which gives rise to an Adverse Effect; (d) any material provision of any Program Document to which TGSS, TGAL or the Fund is a party shall cease to be a legal, valid and binding obligation of any such Person enforceable in accordance with its terms or any such Person shall so assert in writing; (e) there shall have occurred an Insolvency Event; (f) FRI shall cease to own, directly or indirectly, at least 80% of the issued and outstanding equity securities of each of TGSS and TGAL; (g) there shall have occurred any change (or proposed change as agreed by the parties hereto) in accounting, governmental or other legislation, regulation or policy which would have an Adverse Effect; (h) the termination of the Joint Venture Agreement dated September 11, 1998 as amended respecting LFL among FEP Capital II LLC and TGH Holdings Limited and LFL pursuant to Article 14 of that agreement; and (i) a suit, litigation or regulatory proceeding which has a material adverse effect on the ability of any of the Fund, TGAL or TGSS to perform or comply with its obligations hereunder. "LFL Insolvency Event" means any of the following occurrences: (a) LFL shall generally not pay its obligations as such obligations become due or shall admit in writing its inability to pay its obligations generally or shall make a general assignment for the benefit of creditors; or (b) any proceeding shall be instituted by or against LFL seeking to adjudicate it in whole or in part bankrupt or insolvent, or seeking liquidation, winding-up, court protection, reorganisation, arrangement, adjustment, protection, relief or composition of it or its obligations or proposal to its creditors under any laws relating to bankruptcy, insolvency or reorganisation or relief of debtors or seeking the entry of an order for relief or the appointment of a receiver, trustee, examiner, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceedings instituted against it (but not instituted by it), such proceedings shall remain undismissed or unstayed for a period of 60 days; or (c) a court or other governmental authority or agency having jurisdiction in the premises shall enter a decree or order (i) for the appointment of a receiver, liquidator, examiner, assignee, trustee or sequestrator (or other similar official) of LFL of any material part of its property or for the winding up or liquidation of its affairs and such decree shall remain in force undischarged and unstayed for a period of 60 days; or (ii) for the sequestration or attachment of any material part of the property of LFL without its unconditional return to the possession of LFL or its unconditional release from such sequestration or attachment within 60 days thereafter; or (d) LFL shall take any action to authorise any of the actions set forth above. "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien or security interest (statutory or other) or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever or other charge or encumbrance, including the retained security title of a conditional vendor or lessor. "Master Trust" means any trust or other special purpose entity or Person to which any interest in any of the Fees or the right to receive any Collections with respect thereto has been transferred in connection with a Takeout Transaction. "Master Trust Transfer Agreement" means any agreement pursuant to which any interest in the Fees is transferred to a Master Trust. "Monthly Fee" means, in respect of each Monthly Pool, a monthly fee equal to 0.975% (on an annual basis) of the average daily Net Asset Value for that month of all Distributed and Reinvested Shares and External Shares forming part of such Monthly Pool divided by twelve. "Monthly Pool" means, with respect to any Sub-Fund and any calendar month: (i) each Original Charge Share issued by such Sub-Fund during such calendar month; (ii) Transfer Shares of such Sub-Fund issued upon the immediate reinvestment of proceeds realised on the redemption of (a) an Original Charge Share of another Sub-Fund issued by such Sub-Fund during the calendar month described in clause (i) above; (b) a Reinvested Share (that is not an External Reinvested Share) of another Sub-Fund issued in respect of Deferred Sales Charge Shares described in clause (ii)(a) above or this clause (ii)(b); or (c) a Transfer Share of another Sub-Fund which relates to a Deferred Sales Charge Share described in clause (ii)(a) or (ii)(b) above or this clause (ii)(c); (iii)Deferred Sales Charge Shares of such Sub-Fund issued upon the automatic reinvestment of income and capital gains distributions with respect to Deferred Sales Charge Shares of such Sub-Fund described in clauses (i) or (ii) above, or this clause (iii); and (iv) External Shares or External Reinvested Shares of such Sub-Fund which are derived (directly or indirectly) from a Deferred Sales Charge Share formerly included in the Monthly Pool of a New B Share Sub-Fund whose Sale Cutoff Date occurred in such calendar month, provided always that each Deferred Sales Charge Share of such Sub-Fund will be allocated to a Monthly Pool in accordance with the allocation procedures in Schedule D. "Multiple Material Errors" means errors in the calculation of amounts due to and adverse to LFL in excess of 10% of any amounts payable, which errors occur in excess of three times during the term of this Agreement excluding any and all errors (other than those caused by bad faith or fraud on the part of TGSS or TGAL) occurring prior to the first year anniversary date of this Agreement. "Net Asset Value" means, with respect to any Sub-Fund or any Share, as of the date any determination thereof is made, the meaning given to that term in the Prospectus Documents. "New B Share Sub-Funds" means, at any time, the Sub-Funds listed in Schedule C together with any Sub-Funds that have become New B Share Sub-Funds in accordance with Article 10. "Original Charge Share" means, in respect of any calendar month, a Deferred Sales Charge Share issued in that month for which LFL is obligated to pay the Selling Commission (and the term "Original Charge Share" includes any Shares issued upon the consolidation or subdivision of an Original Charge Share). "Person" means any individual, partnership, limited partnership, joint venture, syndicate, sole proprietorship, company or corporation, with or without share capital, unincorporated association, trust, trustee, executor, administrator or other legal personal representative, regulatory body or governmental agency, authority or entity, however designated or constituted. "Permitted Designee" means (a) any Person designated by LFL or any Master Trust, as the case may be, which may be The Chase Manhattan Bank, Deutsche Bank, Bank of New York or Constellation Financial Management Company, L.L.C. or any Affiliate of the foregoing, or (b) any other Person designated by LFL or any Master Trust, as the case may be, (i) which is not actively engaged in the sponsorship or management of any other mutual fund in the United States, Canada or Europe in the reasonable judgment of TGSS (such judgment not to be unreasonably withheld or delayed), and (ii) which has agreed to be bound by confidentiality undertakings in substance comparable to those contained in this Agreement. "Program Documents" means this Agreement, the Articles of Incorporation, the Advisory Agreements, the Prospectus Documents, the Distribution Agreements, the Material Contracts, any Master Trust Transfer Agreement and the other agreements, documents, certificates and instruments entered into or delivered in connection herewith and therewith, as the same may from time to time be amended, supplemented, waived or modified. "Prospectus Documents" means, with respect to the Fund and each Sub-Fund, the most recent prospectus and addenda thereto filed in connection with registration in Luxembourg as more particularly described in Schedule A hereto as amended or supplemented from time to time. "Reinvested Share" means a Deferred Sales Charge Share or any Share issued upon the automatic reinvestment of income and/or capital gains distributions upon an Original Charge Share, a Transfer Share or any Share which has derived directly or indirectly (through reinvestment of income and/or capital gains) from an Original Charge Share or a Transfer Share (and the term "Reinvested Share" also includes any Shares issued upon the consolidation or subdivision of a Reinvested Share) or any Share issued upon the immediate investment of proceeds realised on the redemption of a Reinvested Share of a New B Share Fund. "Sale Cutoff Date" means, with respect to any particular Monthly Pool, the last Business Day of the calendar month during which LFL arranged for the payment of commissions of Original Charge Shares forming part of the Monthly Pool and became obligated to pay the Selling Commissions in respect of such Monthly Pool. "Selling Commission" means, in respect of a Deferred Sales Charge Share, 4% of the Subscription Price of such Deferred Sales Charge Share. "Sub-Funds" means the sub-funds of the Fund (including, without limitation, those sub-funds in Schedule C). "Subscription Price" means with respect to any Deferred Sales Charge Share at any particular time, the gross purchase price of such Deferred Sales Charge Share in the applicable currency of the relevant New B Share Sub-Fund established by the Prospectus Documents. "Substantial Funds" means, at any time, any New B Share Sub-Fund or group of New B Share Sub-Funds which, at such time, have an aggregate Net Asset Value equal to thirty per cent (30%) or more of the total Net Asset Value of all the New B Share Sub-Funds taken together at such time. "Takeout Transaction" means any transaction pursuant to which LFL, or any Master Trust which obtains such interest directly or indirectly from LFL, sells or otherwise transfers, participates or causes to be sold, transferred or participated interests in the Fees relating to any New B Share Sub-Fund (including, without limitation, the right to receive any portion of any Collections) to any Person, including a Master Trust or a subsidiary or Affiliate of LFL which publicly or privately sells debt instruments and/or certificates or other instruments representing ownership interests in such Master Trust or interest in any Fees (including, without limitation, any right to receive any portion of any Collections). "Termination Date" means 30 June 2002, subject to termination or suspension as set forth in Article 3.1, or such later date as shall be agreed to in writing by the parties hereto, except that the Termination Date may be deemed to have occurred on an earlier date pursuant to Article 8. "Trade Date" means, in respect of the purchase of Deferred Sales Charge Shares, the relevant Valuation Day of such Shares. "Transfer Share" means a Deferred Sales Charge Share issued upon the immediate investment of proceeds realised on the redemption of an Original Charge Share, or another Transfer Share in a Deferred Sales Charge Share of another New B Share Sub-Fund provided that the term "Transfer Share" includes any Deferred Sales Charge Share issued upon the consolidation or subdivision of a Transfer Share. "Valuation Day" means a day on which the Fund is accepting subscriptions for Deferred Sales Charge Shares. ARTICLE 2 CLOSING ARRANGEMENTS 2.1 THE CLOSING. The transactions contemplated by this Agreement shall be completed at the Closing Time at the offices of the counsel to LFL or at such other location as may be agreed to by the parties. ARTICLE 3 COMMISSION PAYMENT 3.1 APPOINTMENT OF LFL. Upon and subject to the terms and conditions hereof, the Fund, with the knowledge and consent of TGAL and TGSS as evidenced by their signatures hereto, hereby appoints LFL as Commission Payer in respect of the Deferred Sales Charge Shares in any country where it is legal to distribute the Fund and LFL will pay or procure the payment of Selling Commissions to Approved Dealers as and from 1 July 1999 up to and including 30 June 2002, subject to suspension and termination at any time in the circumstances described in this Agreement. Until terminated in accordance with the terms of this Agreement, LFL will be the exclusive Commission Payer with respect to such Deferred Sales Charge Shares during the period described above. It is acknowledged and agreed by the parties hereto that LFL's obligations do not extend to sales of Shares which are not Deferred Sales Charge Shares and that LFL shall not receive any remuneration of any kind in respect of such Shares. 3.2 DISTRIBUTION THROUGH APPROVED DEALERS. LFL will pay the Selling Commissions based on sales of Deferred Sales Charge Shares only through Approved Dealers, and LFL will not itself directly or indirectly promote, market or sell any Shares or accept orders for the purchase of Shares. All Deferred Sales Charge Shares will be sold at a price equal to the Net Asset Value per Share at the time of purchase, without a sales charge payable by investors. TGSS will advise LFL upon the execution hereof and regularly as required thereafter so long as LFL is entitled hereunder to act as Commission Payer and receive fees hereunder of the names of all Approved Dealers through whom the Deferred Sales Charge Shares may be sold. The Distributors agree not to knowingly accept purchase orders from Persons with respect to the sale of Deferred Sales Charge Shares in any jurisdiction in which the Deferred Sales Charge Shares are not registered, qualified for sale or otherwise exempt from the need to qualify for sale under applicable securities legislation. In respect of any such purchase orders which are unknowingly accepted by the Distributors, the Deferred Sales Charge Shares sold pursuant to such orders will be subject to this Agreement unless the trade in such Shares is subsequently reversed, in which case such Deferred Sales Charge Shares shall not be subject to this Agreement and the Distributors, will forthwith, following the trade reversal and out of the proceeds of the trade reversal, refund to LFL the amount of the Selling Commissions paid by it, if any, in respect of such Shares. 3.3 REJECTION OF PURCHASE ORDERS. Each of the Fund and TGAL may reject purchase orders for Deferred Sales Charge Shares received from an Approved Dealer during the term of this Agreement only in accordance with the terms stated in the Prospectus Documents. 3.4 REGISTRATION OF PURCHASES. After receipt and acceptance of a purchase order together with an amount equal to the purchase price for each Deferred Sales Charge Share purchased, TGSS will promptly register the purchaser as a holder of the purchased Share or Shares and shall deposit the purchase price to the credit of the Fund. 3.5 SERVICES OF LFL. The primary purpose of this Agreement is to ensure that satisfactory arrangements exist for the distribution of the Deferred Sales Charge Shares and to provide a mechanism for the payment of Selling Commissions to Approved Dealers who distribute Deferred Sales Charge Shares. Subject to its rights of termination as provided herein, LFL will provide the following services to the Distributors and the Fund during the period in which LFL acts as Commission Payer in accordance with Article 3.1: (a) paying the Selling Commissions in respect of the Deferred Sales Charge Shares; the parties agree that LFL's obligation to pay the Selling Commission in respect of a Deferred Sales Charge Share shall arise on the Trade Date for such Deferred Sales Charge Share, notwithstanding that LFL is only required to make actual payment of the Selling Commission in respect of such purchase on the settlement date for such Deferred Sales Charge Share; (b) maintaining proper and adequate business records of its operations in order to properly monitor the Deferred Sales Charge Shares for which it pays Selling Commissions and the amount of the Selling Commissions paid; and (c) providing confirmation to the Distributors and the Fund when requested as to the due and timely payment of Selling Commissions. LFL, the Distributors and the Fund acknowledge that the Distributors shall continue to arrange for the distribution of Deferred Sales Charge Shares pursuant to the Program Documents and that, except as expressly provided by this Agreement, LFL shall have no obligation to perform any duties or functions or make any payments carried out or made by the Distributors. 3.6 DISTRIBUTOR REPORT. On or before 10 Business Days after the end of each month, TGSS shall provide LFL or a Permitted Designee with a Distributor Report. The parties agree to finalise as soon as possible and in any event not later than August 31, 1999 the form of the Distributor Report which is acceptable to both parties. ARTICLE 4 PAYMENT OF FEES 4.1 MONTHLY FEE. For its services in paying Selling Commissions on sales of Original Charge Shares included in a Monthly Pool, the Fund shall pay to LFL the Monthly Fee in respect of each Monthly Pool and TGAL and TGSS hereby waive any entitlement they may have, whether under the Program Documents or otherwise, to each such Monthly Fee payable hereunder. The Monthly Fee will be accrued daily on each Valuation Day and will be paid to LFL within ten days after the end of each calendar month. The Monthly Fee shall continue to be payable to LFL in respect of each Deferred Sales Charge Share, External Share or External Reinvested Share forming part of a Monthly Pool for the lesser of (i) the period that such Deferred Sales Charge Share, External Share or External Reinvested Share remains in issue; and (ii) the Anniversary of the Sale Cutoff Date, notwithstanding that LFL's appointment as exclusive Commission Payer has expired or has been suspended or terminated. 4.2 DEFERRED SALES CHARGES. Each of TGAL, TGSS and the Fund represents and warrants to LFL that a Deferred Sales Charge applies to all Distributed Shares of a New B Share Sub-Fund and all External Shares which are redeemed within five years of their date of issue, or deemed date of issue, except on redemptions where the redemption proceeds realised are immediately invested in Distributed Shares of one or more of the other New B Share Sub-Funds or in External Shares). Each of TGAL, TGSS and the Fund further represents and warrants to LFL that the Deferred Sales Charge, expressed as a percentage of the lower of the current Net Asset Value or the issue price when purchased per Distributed Share or External Share being redeemed, declines over time from the date of issue, or deemed date of issue, of the Distributed Share or External Share as follows: If Redeemed During the Following Deferred Sales Periods After the Date of Charge ISSUE OR DEEMED DATE OF ISSUE PERCENTAGE During the 1st year 4.0% During the 2nd year 3.0% During the 3rd year 2.0% During the 4th year 1.0% During the 5th year 1.0% Thereafter Nil Each of TGAL, TGSS and the Fund represents and warrants to LFL that, for the purpose of calculating the Deferred Sales Charge payable to LFL, Deferred Sales Charge Shares will be redeemed in the following order: (a) Reinvested Shares will be redeemed first; and (b) Distributed Shares (or External Shares derived therefrom) of a Sub-Fund issued first, or deemed to be issued first, will be redeemed second. In the event of the termination of any Sub-Fund, LFL shall be entitled to receive any applicable Deferred Sales Charges in respect of the outstanding Distributed Shares or External Shares of that Sub-Fund unless such Shares become Transfer Shares or External Shares of another Sub-Fund. Notwithstanding the foregoing provisions, LFL agrees and accepts that, if at any time, the Luxembourg supervisory authority compels the Fund not to levy any Deferred Sales Charge as a result of, inter alia, material changes to or liquidation or merger of Sub-Funds or for whatsoever other reason, the Fund will not be liable for the payment of any Deferred Sales Charge which would otherwise normally be payable. 4.3 DEFERRED SALES CHARGE PAYMENTS. In addition to the Monthly Fee payable to LFL pursuant to Article 4.1 and in consideration for its services hereunder, LFL shall also be entitled to receive any Deferred Sales Charge paid by shareholders on the redemption of their Distributed Shares or External Shares. The Deferred Sales Charges will be calculated and collected by TGSS, its successors or assigns in its capacity as Distribution Controller for the Fund on each Valuation Day and will be payable by the Fund to LFL monthly within ten days after the end of the calendar month or in the event of termination of a Sub-Fund, immediately prior to the termination of the Sub-Fund. Such amount shall continue to be payable to LFL on the redemption of each Distributed Share and each External Share notwithstanding that (a) LFL's appointment hereunder as exclusive Commission Payer has been suspended, has expired or has been terminated or b) TGAL or TGSS has been terminated as the Fund's Principal Distributor or Distribution Controller, respectively. 4.4 FREE REDEMPTIONS In addition to all other amounts payable to LFL pursuant to this Agreement, promptly following each Free Redemption the Fund or the Distributors or both of them shall pay to LFL an amount equal to the maximum Deferred Sales Charge that would have been payable in connection with such redemption if such redemption had not been a Free Redemption. 4.5 RIGHT OF ACTION (a) The Fund hereby irrevocably and unconditionally authorises and instructs TGAL and TGSS to take all necessary steps to recover (whether by legal proceedings or otherwise) any amounts which may become due and owing by a shareholder to the Fund in respect of Deferred Sales Charges (including by withholding or deducting such amounts from any amounts payable by the Fund to such a shareholder). TGAL and TGSS hereby undertake to keep the Fund advised of any actions they may take pursuant to this provision. (b) Each of TGSS and TGAL hereby covenants, in favour of LFL and the Fund, that it will diligently take all steps reasonably necessary to recover and pay to LFL any such amounts as referred to in (a) above which are payable to LFL. (c) LFL agrees and acknowledges that its only right of action in the event of non-payment of the Fees shall be against the Fund and the assets of the Fund attributable to the relevant Sub-Fund in relation to which the relevant Fees are due and LFL further agrees and acknowledges that LFL shall have no recourse against the assets of the Distributors or other Sub-Funds for such non-payment of the Fees. 4.6 COLLECTION ACCOUNT. All Collections payable by the Fund are to be deposited directly by or on behalf of the Fund into the Collection Account without any intermediate commingling of such amounts with the assets of the Distributors or any Affiliate of either of them. No amounts other than the Collections shall be deposited to the Collection Account. 4.7 ACCRUAL OF LFL'S ENTITLEMENT TO FEES Notwithstanding any other provision of this Agreement, the parties hereto acknowledge and agree that LFL's entitlement to receive Monthly Fees in respect of a Deferred Sales Charge Share shall accrue at the same time as the obligation of LFL to pay, the Selling Commission in respect of that Deferred Sales Charge Share. LFL's entitlement to receive the Deferred Sales Charge payable by a shareholder on the redemption of a Distributed Share shall accrue at the same time as the obligation of LFL to pay, in respect of that Deferred Sales Charge Share, the Selling Commission in respect of (i) (where such Distributed Share is an Original Charge Share) that Distributed Share or (ii) (where such Distributed Share is a Transfer Share) the Original Charge Share to which such Distributed Share relates. 4.8 MATERIAL ERRORS If Multiple Material Errors occur, LFL shall provide TGSS with written notice of such occurrence, following which TGSS shall have 60 days to cure such errors during which period LFL shall have the right to suspend its obligation to pay Selling Commissions. If such breach continues uncured, at the expiration of such notice period, LFL may give a second written notice to the Fund declaring that the Termination Date has occurred (in which case the Termination Date shall be deemed to have occurred on the date such second notice is given), provided that if such Multiple Material Errors occur only in respect of a New B Share Sub-Fund or New B Share Sub-Funds which are not Substantial Funds (in either case), LFL may only terminate its obligations in respect of such Sub-Fund or Sub-Funds (as the case may be). Where LFL terminates its obligations in respect of a New B Share Sub-Fund or New B Share Sub-Funds which are not Substantial Funds (in either case) then the Fund, TGAL, or TGSS shall either (i) take such actions as LFL may reasonably request so as to preserve the economic return to LFL in respect of such terminated Sub-Fund or Sub-Funds (so that LFL receives a return equal to the return it would have received had such Multiple Material Errors not occurred); or (ii) demonstrate to LFL that it can accurately track the relevant New B Shares of such terminated Sub-Fund. In the event that such errors are cured within the 60 day period, then LFL shall promptly pay all Selling Commissions in respect of the sales of Deferred Sales Charge Shares which occurred during such period. ARTICLE 5 REPRESENTATIONS AND WARRANTIES 5.1 DISTRIBUTORS AND FUND'S REPRESENTATIONS AND WARRANTIES. Except where otherwise indicated, each of TGSS, TGAL and the Fund represents and warrants to LFL: (a) ORGANISATION - It has been duly incorporated or created, as the case may be, and is organised, validly existing and up-to-date in all material filings and registrations required under the laws of Luxembourg, the Commonwealth of the Bahamas (in the case of TGAL) and each country where such filings or registrations are necessary for the conduct of its business, and it has all necessary power, authority and capacity to own its properties and assets and to carry on the business in which it is now engaged. (b) DISTRIBUTION OF NEW B SHARES - The New B Shares are offered for sale to the public on a continuous basis pursuant to the Prospectus Documents. All material information and statements contained in the Prospectus Documents with respect to the New B Shares are true and correct in all material respects and contain no material misrepresentation. (c) COMPLIANCE WITH LAWS - It is in compliance in all material respects with all applicable laws, including but not limited to, applicable securities laws. (d) LICENSES AND REGISTRATIONS - It has received all approvals, licences, registrations and authorisations necessary for the conduct of its businesses as they are now conducted, all of which are in full force and effect; no violations thereof have been recorded; and no proceeding is pending or threatened which could result in the revocation or limitation thereof. (e) INVESTMENT ADVISER COMPLIANCE - To the best of the Distributors' knowledge, after due inquiry, each of the investment advisers appointed in respect of the New B Share Sub-Funds has complied with the investment objectives, policies and restrictions of such New B Share Sub-Funds as provided in the Articles of Incorporation, the Advisory Agreements and the Prospectus Documents. (f) CONSENTS AND APPROVALS - There are no consents, approvals, orders or authorisations of any Person or registrations, declarations, notices, filings or recordings with any Person required to be obtained or made by it (and which have not been so obtained or made) in connection with the transactions contemplated by this Agreement, the execution and delivery of this Agreement or the performance by the Fund, TGSS or TGAL of any of the terms and conditions of this Agreement. (g) FINANCIAL STATEMENTS - The financial statements of the Fund have been prepared in accordance with GAAP and present fairly the financial position of the Fund as of the respective dates thereof and the changes in the Fund's net assets for the period covered by those statements and the treatment of management fees, legal, audit, custodian, safekeeping fees, interest, operating and administrative costs payable by the Fund. (h) ABSENCE OF UNDISCLOSED LIABILITIES - Except to the extent reflected or reserved against in the financial statements of the Fund or otherwise disclosed herein or except as incurred in the ordinary course of the business of the Fund, the Fund has no outstanding indebtedness or any liabilities or obligations (whether direct or indirect, current or long-term, accrued, absolute, contingent or otherwise). (i) TAX MATTERS - The Fund is not in default in filing any tax returns or reports required to be filed as of the date of this Agreement covering any relevant national, provincial, municipal or local taxes, assessments or other imposts in respect of its capital, income, business or property (where such default could have an Adverse Effect). (j) LITIGATION - There is no suit, action, litigation, inquiry, investigation, arbitration or proceeding, including appeals and applications to review, in progress or, to its knowledge, threatened or pending against or relating to it or affecting its properties or businesses which could have an Adverse Effect. There is not presently outstanding against it any judgement, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or arbitrator which could have an Adverse Effect. (k) ACCURACY OF BOOKS AND RECORDS - The books and records, financial and otherwise, of the Fund fairly and correctly set out and disclose in all material respects the financial position of the Fund as of the date of this Agreement and all material transactions have been accurately recorded in those books and records. (l) ACCURACY OF INFORMATION PROVIDED - To the best of its knowledge, all information provided by or on behalf of the Distributors, the Fund, FRI or its Affiliates to LFL or any agent thereof for purposes of or in connection with this Agreement or the transactions contemplated by this Agreement is true, correct and complete in all material respects. (m) DUE AUTHORISATION, EXECUTION AND DELIVERY - This Agreement has been duly authorised, executed and delivered by it and the obligations expressed to be assumed by it in this Agreement are legal and valid obligations binding on it and enforceable against it in accordance with the terms hereof, subject, however, to limitations with respect to enforcement imposed by law in connection with bankruptcy or similar proceedings and to the extent that equitable remedies, such as specific performance and injunction, are in the discretion of the court from which they are sought. (n) ABSENCE OF CONFLICTING AGREEMENTS - It is not a party to, bound or affected by or subject to any indenture, mortgage, lease, agreement, instrument, charter or by-law provision, statute, regulation order, judgement, decree or law which would be violated, contravened or breached by or under which any default would occur as a result of the execution and delivery of this Agreement or the performance of any of the terms of this Agreement or which could have an Adverse Effect. (o) MATERIAL CONTRACTS - Except for the Material Contracts it is not a party to or bound by any presently existing oral or written contracts or a commitment which is material in respect of this Agreement and the transactions contemplated herein. The Material Contracts are in compliance in all material respects with applicable law, are in full force and effect, unamended, and no material default exists in respect of any of them on the part of any of the parties and there exists no set of facts which, after notice or lapse of time or both, would constitute such material default. It has the capacity to perform all its respective obligations in the Material Contracts. Each of the Material Contracts has been duly executed by it and constitutes a valid and binding obligation of it enforceable against it in accordance with the terms thereof, free and clear of any mortgage, pledge, lien, charge, security interest or encumbrance or rights of others. (p) NO SECURITY AGREEMENT - To the best of the knowledge of the Distributors, no security agreement, equivalent security or lien instrument or any financing statement, has been entered into or is on file or on record in respect of the Deferred Sales Charges (or any part thereof) in any jurisdiction. (q) PRINCIPAL PLACE OF BUSINESS, NAME - Its principal place of business and the place where its records are kept is at the address first written above or such other address of which LFL has received notice pursuant to Article 11.6. (r) INSOLVENCY - Since 1 July, 1999, there has not occurred an Insolvency Event with respect to the Fund, TGSS or TGAL. (s) INFORMATION CORRECT - All information in respect of the payment of Selling Commissions to be set forth in each Distributor Report will be true and correct in all material respects (this warranty shall be given by TGSS and its successors or assigns only). (t) REGISTRATION OF FUND - The Fund continues to be registered as (and qualify as) a societe d'investissement a capital variable, incorporated under the laws of the Grand-Duchy of Luxembourg. (u) ROLE OF TGAL AND TGSS - TGAL shall be the Principal Distributor in accordance with the Distribution Agreement and TGSS shall be the Distribution Controller in accordance with the Distribution Controller Agreement. Each of the representations and warranties contained in this Article 5.1 are made severally by TGSS, TGAL and the Fund (each a "Representing Party") and accordingly, a Representing Party shall not be responsible to LFL for any misrepresentation on the part of another Representing Party. 5.2 LFL'S REPRESENTATIONS AND WARRANTIES. LFL hereby represents and warrants to TGSS, TGAL and the Fund that: (a) ORGANISATION AND GOOD STANDING - LFL has been duly formed and organised as a limited liability company incorporated in Ireland and has all necessary power, authority and capacity to own its property and assets and to carry on the business in which it is now engaged. (b) AUTHORISATION, EXECUTION AND DELIVERY - This Agreement has been duly authorised, executed and delivered by LFL and is a valid and binding obligation of LFL enforceable in accordance with its terms, subject, however, to limitations with respect to enforcement imposed by law in connection with bankruptcy or similar proceedings and, to the extent that equitable remedies such as specific performance and injunction are in the discretion of the court from which they are sought. (c) ABSENCE OF CONFLICTING AGREEMENTS - LFL is not a party to, bound or affected by or subject to any indenture, mortgage, lease, agreement, instrument, charter or by-law, provision, statute, regulation, order, judgement, decree or law which would be violated, contravened or breached by, or under which any default would occur as a result of, the execution and delivery by it of this Agreement or the performance by it of any of the terms of this Agreement. (d) LITIGATION - There is no suit, action, litigation, inquiry, investigation, arbitration or proceeding, including appeals and applications to review in progress, pending or threatened against or relating to LFL or affecting its property or business which may materially adversely affect its property, business, future prospects or financial condition or which could materially adversely affect the performance or obligations of LFL under, or the validity or enforceability of this Agreement or which could give rise to any adverse effect on LFL's ability to pay or perform any of its material obligations under this Agreement. (e) COMPLIANCE WITH LAWS - It is in compliance in all material respects with all laws that are applicable to it. (f) LICENSES AND REGISTRATIONS - It has received all approvals, licences, registrations and authorisations necessary for the conduct of its businesses as they are now conducted, all of which are in full force and effect; no violations thereof have been recorded; and no proceeding is pending or threatened which could result in the revocation or limitation thereof. (g) CONSENTS AND APPROVALS - There are no consents, approvals, orders or authorisations of any Person required under laws applicable to it or registrations, declarations, notices, filings or recordings with any Person required to be obtained or made by it pursuant to laws applicable to it (and which have not been so obtained or made) in connection with the transactions contemplated by this Agreement, the execution and delivery of this Agreement or the performance of any of the terms and conditions of this Agreement. (h) INSOLVENCY - Since July 1, 1999, there has not occurred an LFL Insolvency Event. 5.3 NON-WAIVER. No investigation made by or on behalf of any party at any time shall have the effect of waiving, diminishing the scope of or otherwise affecting any representation or warranty made by any other party in or pursuant to this Agreement. No waiver by any party of any condition, in whole or in part, shall operate as a waiver of any other condition. 5.4 NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All statements contained in any certificate or other document delivered by or on behalf of a party pursuant to or in connection with the transactions contemplated by this Agreement shall be deemed to be made by that party under this Agreement. All representations and warranties, covenants and agreements on the part of each of the parties contained in this Agreement or in any certificate or other document delivered pursuant to this Agreement shall survive the Closing and shall survive for the duration of this Agreement. ARTICLE 6 CONDITIONS PRECEDENT 6.1 LFL'S CONDITIONS TO CLOSING. The obligation of LFL to complete the transactions contemplated by this Agreement shall be subject to the satisfaction of, or compliance with, at or before the Closing Time, each of the following conditions precedent (each of which is acknowledged to be inserted for the exclusive benefit of LFL and may be waived by it in whole or in part by notice in writing to TGSS, TGAL and the Fund): (a) TRUTH AND ACCURACY OF REPRESENTATIONS AND WARRANTIES OF THE DISTRIBUTORS AND THE FUND AT CLOSING TIME - All the representations and warranties of the Distributors and the Fund made in or pursuant to this Agreement shall be true and correct in all material respects as at the Closing Time and with the same effect as if made at and as at the Closing Time. LFL shall receive a certificate from TGSS, TGAL and the Fund confirming the truth and correctness in all material respects of the representations and warranties of the each of them. (b) RECEIPT OF CLOSING DOCUMENTATION - All documentation relating to the transactions contemplated by this Agreement, including legal opinions from counsel to the Distributors and the Fund, shall be satisfactory to LFL and its counsel, both acting reasonably. LFL shall receive copies of all documentation or other evidence it may reasonably request in order to establish the consummation of the transactions contemplated by this Agreement and the taking of all corporate proceedings and action in connection with this Agreement in compliance with these conditions in form (as to certification and otherwise) and substance satisfactory to LFL and its counsel. (c) MATERIAL ADVERSE CHANGE - Since September 30, 1998, no material adverse change in the condition or operations of the business, assets or financial condition of the Fund shall have occurred including any change in the fundamental investment objective of a Sub-Fund, and no Adverse Effect shall have occurred. (d) PERFORMANCE OF OBLIGATIONS - The Distributors and the Fund shall have performed or complied with, in all respects, all obligations, covenants and agreements in this Agreement to be performed or complied with by the Closing Time. (e) CONSENTS, AUTHORISATIONS AND REGISTRATIONS - All consents, approvals, orders and authorisations of any Person required in connection with the completion of any of the transactions contemplated by this Agreement, the execution of this Agreement, the Closing or the performance of any of the terms and conditions of this Agreement shall have been obtained at or before the Closing Time. (f) ROLE OF TGAL AND TGSS - At the date of this Agreement and at the Closing Time, TGAL shall be the Principal Distributor in accordance with the terms of the Distribution Agreement and TGSS shall be the Distribution Controller in accordance with the terms of the Distribution Controller Agreement. (g) EVENT OF TERMINATION - The condition set out in Article 6.2(c) shall be satisfied. 6.2 LFL'S CONDITIONS TO PAYMENT OF SELLING COMMISSIONS FROM TIME TO TIME. The obligation of LFL to pay Selling Commissions under this Agreement from time to time shall be subject to the satisfaction of, or compliance with, each of the following conditions precedent (each of which is acknowledged to be inserted for the exclusive benefit of LFL and may be waived by it in whole or in part by notice in writing to TGAL, TGSS and the Fund) at each such time: (a) TRUTH AND ACCURACY OF REPRESENTATIONS AND WARRANTIES OF THE DISTRIBUTORS AND THE FUND - The representations and warranties of the Distributors and the Fund made in or pursuant to this Agreement shall be true and correct in all material respects as of the time of payment of such Selling Commissions and with the same effect as if made at the time of payment of such Selling Commissions. (b) ROLE OF TGAL AND TGSS - TGAL shall be the Principal Distributor in accordance with the terms of the Distribution Agreement and TGSS shall be the Distribution Controller in accordance with the terms of the Distribution Controller Agreement. (c) EVENT OF TERMINATION - Both immediately before and immediately after giving effect to the payment of a Selling Commission on such date by LFL, no LFL Event of Termination (or event which, with the passage of time or the giving of notice, or both, would constitute an LFL Event of Termination) in respect of TGAL, TGSS or the Fund shall have occurred and be continuing. (d) DISTRIBUTOR REPORTS - TGSS shall have delivered all Distributor Reports required to be delivered on or prior to such date pursuant to this Agreement, which shall be in form and substance reasonably satisfactory to LFL or its Permitted Designee. (e) PERFORMANCE OF OBLIGATIONS - The Distributors and the Fund shall have performed or complied with, in all material respects, all obligations, covenants and agreements in this Agreement to be performed or complied with by each of them. The delivery of a Distributor Report from time to time shall constitute a representation and warranty by TGSS that, on the date of such delivery, the conditions set forth in Article 6.2 have been fulfilled, except as specifically agreed to in writing by LFL. 6.3 DISTRIBUTOR AND FUND CONDITIONS. The obligations of the Distributors and the Fund to complete the transactions contemplated by this Agreement shall be subject to the satisfaction of, or compliance with, at or before the Closing Time, each of the following conditions precedent (each of which is acknowledged to be inserted for the exclusive benefit of the Distributors and the Fund and may be waived by all of them in whole or in part by notice in writing to LFL): (a) TRUTH AND ACCURACY OF REPRESENTATIONS OF LFL AT CLOSING TIME - All the representations and warranties of LFL made in or pursuant to this Agreement shall be true and correct in all material respects as at the Closing Time with the same effect as if made at and as at the Closing Time. (b) PERFORMANCE OF OBLIGATIONS - LFL shall have performed or complied with, in all material respects, all obligations, covenants and agreements in this Agreement to be performed or complied with by the Closing Date. (c) MATERIAL ADVERSE EFFECT - As of December 31, 1998 no material adverse change in the condition or operation of the business, assets or financial condition of LFL shall have occurred which would adversely affect its ability to pay or to perform its obligations under this Agreement. (d) CONSENTS, AUTHORISATIONS AND REGISTRATIONS - All consents, approvals, orders and authorisations of any Person or government authority required in connection with the contemplation of any of the transactions contemplated by this Agreement, the execution of this Agreement, the closing or performance of any of the terms and conditions of this Agreement shall have been obtained on or before the Closing Time. (e) FINANCIAL CAPABILITY - LFL shall have the financial capability and resources to perform its obligations under this Agreement, including the payment of all Selling Commissions due to Approved Dealers pursuant to Article 4 hereof provided always that in the event that this condition (e) is not satisfied because LFL is in the process of being wound-up or has otherwise ceased to carry on its businesses (or where the LFL Event of Termination set out in paragraph (g) of that definition occurs) then in any such case, the Fund and each Distributor acknowledges and agrees that it shall not be entitled to take any action (whether by way of court proceedings or otherwise) against LFL arising out of the failure to satisfy this condition (e). 6.4 DOCUMENTS TO BE DELIVERED TO LFL. TGSS shall procure that the documents listed in Schedule E (which shall be in form and substance satisfactory to TGSS and LFL) are delivered to LFL within 30 days of the date hereof. ARTICLE 7 COVENANTS 7.1 COVENANTS OF THE DISTRIBUTORS AND THE FUND. Each of the Distributors and the Fund covenants and agrees (but only as to itself) with LFL to the extent applicable that prior to the termination of this Agreement: (a) COMPLIANCE WITH ADVISORY AGREEMENTS - Each of the Distributors shall conduct annual reviews with each investment advisor under the Advisory Agreements in order to ensure that such investment advisor has kept in full force and effect and intends to keep in full force and effect, all licences, registrations and authorisations necessary to conduct its respective business under the applicable terms in the relevant Advisory Agreement. (b) TERMINATION OF A NEW B SHARE SUB-FUND - Each of the Distributors and the Fund shall not, unless compelled to do so (i) by any competent regulatory authority; or (ii) pursuant to any applicable law, at any time while LFL is entitled to receive payment of any amount hereunder, take any action, omit to take any action or initiate any proceeding which may, indirectly or directly, trigger the termination, reorganisation or winding-up of a New B Share Sub-Fund if such termination, reorganisation or winding-up has an Adverse Effect without the prior consent of LFL, such consent not to be unreasonably withheld. (c) MAINTENANCE OF BOOKS AND RECORDS - Each of the Distributors and the Fund shall keep proper books and records in accordance with normal business practice in which full and appropriate entries shall be made of all transactions in relation to its business activity which relate in any manner to the transactions contemplated by this Agreement. (d) DISCLOSURE OF MATERIAL CHANGES - Each of the Distributors and the Fund (upon becoming aware thereof) shall promptly give written notice to LFL of (i) any LFL Event of Termination or event which, with the passage of time or the giving of notice or both, would constitute an LFL Event of Termination; (ii) any material litigation or proceedings with respect to TGSS, TGAL, any investment adviser of any of the Sub-Funds or the Fund or any of their respective assets or properties which, if adversely determined, could give rise to an Adverse Effect; (iii) the failure of any representation or warranty of any of the Distributors or the Fund contained in this Agreement to be true and correct in all material respects as of the date given; or (iv) the failure of any of the Distributors or the Fund to perform any obligation which is required to be performed by it under this Agreement in any material respect on a timely basis; and (v) any material change in the management or structure of the Fund. (e) FURTHER INSTRUMENTS AND DOCUMENTS - Each of the TGSS, TGAL and the Fund shall promptly at its expense execute and deliver to LFL such further instruments and documents and take such further action as LFL may from time to time reasonably request in order to further carry out the intent and purpose of this Agreement and to establish and protect the rights, interests and remedies created or intended to be created hereby and thereby, provided however, that TGSS, TGAL and the Fund shall not be obligated to execute and deliver such further instruments and documents if they would thereby incur any material obligations or liabilities not contemplated by this Agreement. (f) RIGHTS OF INSPECTION - Each of TGSS, TGAL and the Fund shall permit LFL or any Permitted Designee reasonably acceptable to it to visit and inspect the properties, files, books and records of the Fund (other than those subject to confidentiality rules under Luxembourg laws), TGAL and TGSS relating to the Fees, this Agreement, the transactions contemplated hereby and the financial condition, results of operations and cash flows of the Fund and to discuss the foregoing with the officers, partners, employees, legal advisers and accountants of the Fund, TGAL and TGSS, all at such reasonable times during reasonable business hours and as often as LFL may reasonably request. (g) MAINTENANCE OF PROSPECTUS - Insofar as reasonably within their respective control and except with the consent of LFL, such consent not to be unreasonably withheld or delayed, each of the Fund and the Distributors shall maintain the Prospectus Documents in full force and effect so that the Deferred Sales Charge Shares may be offered for sale to the public in the relevant jurisdictions where such Shares are being sold during the period in which LFL has the obligation to pay Selling Commissions in respect of the distribution of Deferred Sales Charge Shares hereunder. (h) DELIVERY OF LENDER NOTICES - The Distributors and the Fund shall deliver to LFL a copy of all notices or waivers of default, delivered by any lenders to the Fund and of all agreements and amendments entered into with such lenders. (i) CHANGE TO INVESTMENT OBJECTIVE OF A NEW B SHARE SUB-FUND - In the event that the investment objective of a New B Share Sub-Fund is amended (or will be amended) and such amendment will have a material adverse effect upon (a) the timing or amount of any payment of any Fee, (b) the timely receipt by LFL of any Fees, (c) the ability of the Fund, TGAL or TGSS to pay or perform its obligations hereunder in a timely manner or (d) the remedies and other rights of LFL under this Agreement, then each of TGSS, TGAL and the Fund agree (subject to approval by the Luxembourg supervisory authority) to consult in good faith with LFL for a period of 60 days from the time that LFL is notified of such amendment or potential amendment with a view to reaching agreement on a method of amending the Monthly Fee payable to LFL under this Agreement (or otherwise amending or varying the terms of the agreements between them and LFL) in order to preserve the economic return to LFL as if such amendment had not occurred (or were not to occur, in the case of a potential amendment). (j) PAYMENT OF FUNDS - If either TGAL or TGSS or any designee or agent thereof shall receive any of the Fees from the Fund, it shall hold (or procure that such designee or agent holds) such Fees in trust for LFL (acknowledging that such Fees do not constitute its property) and immediately following receipt of any such Fees, it shall, or shall cause such designee or agent to, remit the same to LFL in the form received and ensure that such amounts are not commingled with other funds. (k) PROVISION OF INFORMATION - All information provided by or on behalf of TGSS, TGAL or the Fund including information provided by FRI or one of its Affiliates after the date hereof to LFL or any Permitted Designee for purposes of or in connection with this Agreement, or the transactions contemplated hereby, will be true, correct and complete in all respects material to the Fees and the transactions contemplated by this Agreement, provided that this covenant shall apply only to such misrepresentations or omissions as would give rise to an Adverse Effect. (l) STATUS OF FEES - Except to the extent expressly permitted by this Agreement, none of TGSS, TGAL or the Fund shall permit to exist any Lien on or attempt to transfer or grant a security interest in any interest in any Fees. (m) FEE PAYMENT BY THE FUND - If at any time after the date of this Agreement an Insolvency Event occurs or TGAL (or its Affiliate) ceases to be the Principal Distributor or TGSS (or its Affiliate) ceases to be the Distribution Controller, the Fund agrees that as and from such date the Fund shall continue to be responsible for and shall continue to pay to LFL the amounts required to be paid by the Fund to LFL under this Agreement and the Fund shall cause the successor Distribution Controller or Principal Distributor, as appropriate, to become a party to this Agreement and (if requested by LFL) to agree to become responsible for the payment of amounts payable to LFL hereunder. (n) MAINTENANCE OF FEES - Other than to permit Free Redemptions or Free Exchanges as contemplated by the Prospectus Documents of the relevant Sub-Fund on the date hereof, each of the Fund, TGSS and TGAL hereby agrees with LFL that it will not, without the prior written consent of LFL, unless compelled to do so (i) by any competent regulatory authority or (ii) pursuant to any applicable law, at any time while LFL is entitled to receive payment of any amount hereunder, consent to or agree to a reduction in the Deferred Sales Charge for Distributed Shares or any alteration in the manner or as to the time of calculation of the Deferred Sales Charge or effect any action, amendment or change of any nature whatsoever if the effect of such reduction, alteration, action, amendment or change would be to reduce the amounts payable to LFL or adversely affect the timing of the receipt of such amounts payable pursuant to Article 4. For the avoidance of doubt, the provisions of this Article 7.1(n) restrict the ability of Fund, TGSS and TGAL to make retroactive changes (including changes in respect of New B Shares which have already been issued) but will not prevent any of them from making prospective changes in respect of the offering of New B Shares which are not Transfer Shares, Reinvested Shares and with respect to which LFL has no obligation to pay Selling Commissions. (o) PAYMENT OF TAXES - Each of the Distributors and the Fund shall cause to be paid and discharged all taxes, assessments and other charges or levies of any authority imposed upon it or upon any of its income or assets, prior to the day on which penalties are attached thereto, if the failure to pay and discharge such tax assessment or other charges or levies could give rise to an Adverse Effect. (p) CLIENT AND NEW B SHARE SUB-FUND REPORTING - TGSS shall provide shareholder and portfolio reporting to LFL. Shareholder reporting will consist of the administration package of reports on monthly shareholder activity derived from the Fund's transfer agent's system. Portfolio reporting will consist of a monthly balance sheet (statement of condition) inclusive of price and shares (with CUSIP and/or SIDOL numbers) reported to LFL in respect of each New B Share Sub-Fund separately. The portfolio reports shall be in substantially the same form as those currently generated by TGSS's accountants daily, provided always that TGSS shall not be required to provide any information to LFL under this Article where such provision would, in the reasonable opinion of TGSS, be in breach of any applicable laws of Luxembourg relating to data protection. 7.2 COVENANT OF LFL. LFL covenants and agrees with each of TGSS, TGAL and the Fund to the extent applicable that prior to the termination of this Agreement it will provide such information as each of them may reasonably request from time to time. 7.3 COMPLIANCE WITH LUXEMBOURG LAW. Nothing contained in Article 7.1 shall prevent the Fund from acting (a) in accordance with the terms of future instructions from the Luxembourg supervisory authorities or (b) where compelled to do so pursuant to the Articles of Incorporation or any applicable law or (c) in accordance with the terms of any resolution of the shareholders of the Fund (where such resolution has been proposed by a shareholder or shareholders in either case not affiliated with any of the parties hereto). ARTICLE 8 TERMINATION EVENTS 8.1 LFL TERMINATION EVENTS. The obligation of LFL to pay the Selling Commissions pursuant to Article 3 may be terminated by LFL if an LFL Event of Termination shall occur and be continuing. Such termination shall be effected by the giving of written notice to the Fund and each of the Distributors, declaring an LFL Event of Termination to have occurred (in which case the Termination Date shall be deemed to have occurred as of the date such notice is given pursuant to the provisions of Article 11.6) provided that upon the occurrence of any event (without the requirement for the passage of time or the giving of notice, or both) described in Articles (e) and (h) of the definition of LFL Event of Termination, the Termination Date shall be deemed to have automatically occurred; and provided further that, in the case of the occurrence of an event described in Articles (a), (b), (c), (d) and (i) if (1) such event affects only New B Share Sub-Funds which are not Substantial Funds, and (2) EITHER the Fund and/or the Distributors or either of them is able to segregate the Deferred Sales Charges related to Shares affected by such event (including any Shares of other Sub-Funds into which such Shares may have been exchanged in Free Exchanges) in respect of which LFL has not paid Selling Commissions from the Deferred Sales Charges related to Shares of the affected New B Share Sub-Funds and any unaffected New B Share Sub-Funds in respect of which LFL has paid Selling Commissions (and any Shares of any other Sub-Funds into which such New B Shares may be exchanged in Free Exchanges) and the Fund's ability to segregate the Deferred Sales Charges as described in above is certified to LFL by an independent accounting firm of international standing, reasonably acceptable to LFL, OR the Fund, the Distributors and LFL reach agreement upon an allocation procedure which will preserve the economic return to LFL (as if such event had not occurred), THEN such Event of Termination will only relate to LFL's obligations hereunder related to the affected New B Shares Fund(s), and such Event of Termination will not affect LFL's obligations hereunder with respect to the unaffected New B Share Sub-Funds; and provided further that upon the occurrence of any event described in Articles (d) and (i) of the definition of LFL Event of Termination, the Termination Date shall be deemed to have occurred as of the date which is six (6) months from the date such notice is effective pursuant to the provisions of Article 11.6; and The parties agree that upon the occurrence of any event described in Articles (d), and (i) of the definition of an LFL Event of Termination, the parties shall use their respective commercially reasonable efforts during such six (6) month period to restructure the distribution arrangements contemplated by the Program Documents in order to attempt to accommodate and facilitate the continuance of such arrangements notwithstanding such change. 8.2 FUND TERMINATION RIGHTS. (a) Provided that a LFL Event of Termination has not occurred and is continuing, LFL's role as exclusive Commission Payer with respect to the Deferred Sales Charge Shares under this Agreement may be terminated by the Fund if LFL fails to pay Selling Commissions pursuant to Article 3 and such failure is continuing. Such termination shall be effective by the giving of written notice to LFL by the Fund giving LFL 15 Business Days to cure such breach during which period the Fund shall not have any right to terminate LFL's role as exclusive Commission Payer. If such breach continues uncured, at the expiration of such notice period, the Fund may give a second written notice to LFL declaring that the Termination Date has occurred (in which case a Termination Date shall be deemed to have occurred on the date such second notice is given). (b) If a Fund Event of Termination shall occur and be continuing, TGSS shall promptly notify LFL in writing (and the other parties hereto) thereof and the parties hereto shall, during the period of 60 Business Days after such notification (the "Discussion Period"), consult in order to mitigate the effect of such circumstances. If, at the end of that period, the parties have not reached agreement on a method of mitigation, the Fund may terminate LFL's role as exclusive Commission Payer and the Termination Date shall be deemed to occur on the date such notice is given. On the date of receipt of such notification by LFL, LFL shall be entitled to suspend its obligations to pay Selling Commissions hereunder as and from such date. In the event that the parties hereto subsequently agree on a method of mitigation during the applicable Discussion Period, then LFL shall promptly pay all Selling Commissions in respect of the sales of Deferred Sales Charge Shares which occurred during such period. 8.3 COSTS AND EXPENSES OF LFL. All costs and expenses incurred by LFL in connection with the enforcement of this Agreement against the Distributors or the Fund shall be paid by the Distributors or the Fund forthwith on demand therefor by LFL. The obligations of the Distributors and the Fund under this Article 8.3 shall be several. 8.4 COSTS AND EXPENSES OF TGSS AND THE FUND. All costs and expenses incurred by TGSS in connection with the enforcement of this Agreement against LFL as set out in Article 8.2(a) shall be paid by LFL forthwith on demand therefor by TGSS. 8.5 TRANSACTION EXPENSES. LFL shall reimburse each of TGSS, TGAL and the Fund for all reasonable costs and expenses (including legal fees) together with any VAT thereon incurred by each of them in connection with the negotiation, preparation and execution of this Agreement, any other document referred to in this Agreement and the completion of the transactions herein contemplated. ARTICLE 9 INDEMNIFICATION 9.1 Each of the Distributors on their own behalf and on behalf of the Fund, separately and not jointly, agrees to indemnify and hold harmless LFL and each of its Affiliates and their respective officers, directors, employees, agents, advisors of, and any Person controlling any of the foregoing (each an "Indemnified Party") from and against (collectively, but without duplication) any and all Liabilities that may be incurred by or asserted or awarded against an Indemnified Party, in each case arising out of, relating to or by reason of, any claim brought by any Person not a party to this Agreement in connection with the transactions contemplated hereby (including, without limitation, any act or omission of or breach of this Agreement by the Fund); PROVIDED, HOWEVER, the Distributors shall not be required to indemnify any Indemnified Party in respect of any Liability if and to the extent such Liability resulted primarily from (i) such Indemnified Party's gross negligence or willful misconduct, or (ii) in the case of an Indemnified Party which is LFL, any failure of LFL to perform its covenants if any, set forth herein or in the other Program Documents to which it is a party, or any failure of any of LFL's representations and warranties, if any, set forth herein or in the other Program Documents to which it is a party, to be true and correct as of the time such representation or warranty spoke. Furthermore, the Distributors shall not be required to indemnify any Indemnified Party in respect of (a) any liability under applicable securities laws arising out of a Takeout Transaction, except to the extent such liability is attributable to or would not have occurred but for (i) the violation at the time of, or prior to, such Takeout Transaction of any covenant, representation or warranty made by the Distributors or the Funds contained in this Agreement or any other Program Document, or (ii) any information furnished by or on behalf of the Distributors or the Fund being false or misleading in any material respect, or (b) any Liabilities arising as a result of a claim by an Indemnified Party against the Distributors or as a result of a claim by the Distributors against an Indemnified Party where it is determined that the position of the Distributors in respect of such claim is correct in all material respects. 9.2 LFL agrees to indemnify and hold harmless TGAL,TGSS and the Fund, each of their Affiliates and their respective officers, directors, employees, agents, advisors of, and any Person controlling any of, the foregoing (collectively, the "Templeton Indemnitees") from and against (collectively, but without duplication) any and all Liabilities that may be incurred by or asserted or awarded against a Templeton Indemnitee, in each case arising out of, relating to or by reason of, any claim brought by any person not a party to this Agreement in connection with the transactions contemplated hereby; PROVIDED, however, LFL shall not be required to indemnify a Templeton Indemnitee in respect of any Liability to the extent such Liability resulted from (i) such Templeton Indemnitee's gross negligence or willful misconduct, or (ii) in the case of a Templeton Indemnitee that is a party to any Program Document, any failure of such Templeton Indemnitee to perform its covenants set forth in the Program Documents to which it is a party or any failure of any of its representations and warranties set forth in the Program Documents to which it is a party to be true and correct in all material respects at the time such representation or warranty spoke. 9.3 ACTUAL LOSSES. For the purposes of this Article 9, each party's indemnification obligations hereunder shall be in respect of only such Liabilities that are reasonably forseeable as likely to arise by reason of the occurrence of the relevant event in respect of which indemnification is sought and, for the avoidance of doubt, such indemnification obligations do not extend to cover indirect or consequential losses of any party. The parties agree that it is expected that LFL will (a) enter into hedging transactions in order to hedge the risks associated with the Deferred Sales Charges, the Selling Commissions and the other transactions contemplated by this Agreement, and (b) rely on the representations, warranties and covenants provided herein in making representations and warranties in Takeout Transactions, and that losses related to the foregoing are, with the exception of losses in hedging transactions which are not attributable to a breach of the representations, warranties and covenants given herein, a reasonably foreseeable result of any breach by the Fund or the Distributors of this Agreement or other Program Document to which is a party. ARTICLE 10 ADDITIONAL SUB-FUNDS 10.1 ADDITIONAL SUB-FUNDS. (a) In the event that the Fund adds an Additional Sub-Fund LFL shall be given the opportunity to serve as the exclusive Commission Payer to such Additional Sub-Fund. If LFL agrees to act as the exclusive Commission Payer to such Additional Sub-Fund, then the parties hereto agree that such Additional Sub-Fund shall be deemed to be a "New B Share Sub-Fund" within the meaning hereof and the New B Shares of such Additional Sub-Fund which are sold on a deferred sales charge basis shall be deemed to be "Deferred Sales Charge Shares" and "New B Shares" within the meaning hereof and the terms and conditions of this Agreement shall be applicable to such Additional Sub-Fund. Each of the parties hereto shall execute and deliver such amendments to this Agreement as shall be necessary to give effect to this Article 10.1. If an Additional Sub-Fund is added but does not become a New B Share Sub-Fund, then the allocation procedures at Schedule D shall be amended so as to allocate External Shares and External Reinvested Shares and the charges relating thereto to Monthly Pools. (b) The Fund shall provide notice to LFL on or about the time when the Fund files a prospectus supplement or prospectus addendum (as appropriate) for a New B Share Sub-Fund. ARTICLE 11 GENERAL 11.1 AMENDMENT OF AGREEMENT. This Agreement may be amended from time to time only by written consent of the Fund, TGSS, TGAL and LFL. 11.2 TERMINATION OF LFL AS EXCLUSIVE COMMISSION PAYER. If LFL is unable to carry out its obligations hereunder (which may occur if LFL is unable to pay Selling Commissions for all of the Original Charge Shares sold during the period of its appointment as Commission Payer under this Agreement), TGSS may terminate LFL's exclusive right to pay Selling Commissions and may: (i) pay Selling Commissions directly; (ii) enter into agreements with other parties to pay Selling Commissions; or (iii) limit, by allotment or otherwise, sales of Deferred Sales Charge Shares. 11.3 ASSIGNMENT (a) This Agreement shall be binding upon, and inure to the benefit of, the parties hereto and their respective permitted successors and assigns; provided however that except in the case of TGSS or TGAL, where such assignment is to an Affiliate of TGSS or TGAL (as the case may be) and where such Affiliate assignee is of equal financial standing to the assignor, each of the Fund, TGAL and TGSS may not assign its rights or obligations hereunder or in connection herewith or any interest herein or under any other Program Document or with respect to any Fees or the proceeds thereof without LFL's prior written consent, such consent not to be unreasonably withheld; and provided further that, except as provided in Articles 11.3(b) and 11.3(c), LFL shall be entitled to assign its rights or obligations hereunder or under any other Program Document or in respect of any Fees or the proceeds thereof, provided it gives TGSS, TGAL and the Fund 30 days notice (the "Notice Period") If LFL does not, within the Notice Period, receive a notice stating that consent is withheld, it shall be deemed to have the authority to effect such an assignment. It shall be reasonable for the Fund, TGAL and TGSS to refuse to give its consent under this Article 11.3(a) where, in its reasonable opinion, its obligations or liabilities will be increased or otherwise adversely affected. (b) The rights and obligations of LFL under this Agreement shall be assignable in connection with any merger, consolidation or sale or disposition of all or substantially all of the assets of or the general and limited partnership or corporate interests in LFL with or to another entity, provided that the surviving entity shall (i) be a corporation or other entity organised under the laws of any country in Europe, the United States of America or any State thereof or of Canada or any province thereof; (ii) expressly assume the due and punctual performance and observance of all covenants and conditions of this Agreement and all other Program Documents to be performed or observed by LFL, by agreement reasonably satisfactory in form and substance to TGSS and the Fund; and (iii) prior to the Termination Date, have a net worth prior to the Termination Date at least equal to that of LFL, and access to funding sources for purposes of making payments of Selling Commissions hereunder equivalent in an amount to those to which LFL had access, immediately prior to such merger, consolidation or sale or disposition of assets or interests. Notwithstanding any other provision of this agreement (apart from Article 11.3(c) below), LFL may, at any time (provided that it has given 30 Business Days' notice to the Fund, TGAL and TGSS), assign (whether absolutely or by way of security) all or any of its rights and benefits under this Agreement or any other Program Document to any Person (and the Fund, TGAL and TGSS will, as appropriate, acknowledge receipt of any such notice and comply with the directions as to payment set out in such notice) and, without prejudice to the generality of the foregoing, LFL may (i) pledge or otherwise grant security over all of its rights or benefits under this Agreement or any other Program Document to a major financial institution as security for money borrowed; (ii) make representations or warranties and grant indemnities to another Person, as a part of and in connection with a Takeout Transaction, which are similar to the representations, warranties and indemnities agreed to by the Fund, TGSS and TGAL in this Agreement or any other Program Document; or (iii) assign the right to receive the proceeds of any indemnification provided hereunder. (c) LFL shall not have the right to assign any of its rights under this Agreement to any of the top five mutual fund management companies in each of Europe, Canada and the U.S. (and TGSS shall, acting reasonably, determine the identities of such companies from time to time). This exclusion shall not apply to Affiliates or associates of such fund companies that are not involved in the management and distribution of retail investment funds. 11.4 LIABILITY. LFL shall not be liable for any error of judgment or for any loss suffered by the Fund or the Distributors in connection with the matters to which this Agreement relates, except a loss resulting from misfeasance, bad faith or negligence on its part in the performance of, or reckless disregard by it of, its obligations hereunder. 11.5 CONFIDENTIALITY. Unless otherwise required by applicable law, TGSS, TGAL, the Fund and LFL agree to maintain the confidentiality of this Agreement (and all drafts thereof), the transactions contemplated hereby and all confidential, material, non-public information concerning the other parties to this Agreement, which information has been provided by such party by another party and was not also available to such party through other means (collectively, "Confidential Information"); provided that nothing in this Article 11.5 shall prohibit disclosure of Confidential Information by any such Person as follows: (a) pursuant to an order under applicable law or pursuant to a subpoena or other legal process; (b) to the officers, directors, partners, employees, legal counsel or auditors of, or lenders to, such Person, who shall also be instructed to maintain it as confidential; (c) in the case of the Fund, to any then current directors of the Fund, Fund counsel, independent accountants or officers, who shall also be instructed to maintain it as confidential; (d) to any permitted assignee or permitted pledgee of all or any portion of such Person's right, title or interest in this Agreement or the Fees, provided that such permitted assignee or pledgee agrees in writing delivered to and for the benefit of all parties to this Agreement to be bound by the terms of this Article 11.5; or (e) to any proposed permitted assignee or permitted pledgee of all or any portion of such Person's right, title and interest in this Agreement or the Fees, provided that such Person advises such proposed permitted assignee or pledgee in writing that such Confidential Information is confidential, non-public information and requests that such proposed permitted assignee or pledgee keep it confidential and use it only for purposes of evaluating the proposed assignment or pledge and such proposed permitted assignee or pledgee agrees in a writing delivered to and for the benefit of all parties to this Agreement to be bound by the provisions of this Article 11.5. Notwithstanding anything to the contrary contained herein, LFL shall keep, and shall use its commercially reasonable efforts to cause its officers, directors, partners, employees, advisers, legal counsel, auditors, lenders and affiliates to keep, confidential all Confidential Information concerning the Fund delivered or made available by the TGSS, TGAL or the Fund to LFL or such other Persons, including without limitation the Program Documents (to the extent not publicly available), shareholder records, shareholder transaction records and information concerning the composition of their respective portfolios, and information concerning the financial condition of the TGSS, TGAL or their parents (and LFL shall not, and shall cause each of the foregoing other Persons not to, use such information to sell shares to or purchase shares from the Fund or other investment company or recommend such trading to any other Person on the basis of such information). 11.6 NOTICE. Any notice which is required or permitted to be given under this Agreement may be given in writing by delivery in person or by ordinary prepaid mail by addressing the same to the party to whom it is to be given at the address set out below or at such other address as such party may designate by notice in the foregoing manner: (a) in the case of LFL: c/o Chase Manhattan (Ireland) plc, Georges Dock, 1 IFSC, Dublin 1, Ireland Fax No: 00 353 1 6125777 (b) in the case of the Fund: 26, boulevard Royal, L-2449, Luxembourg Attn: General Manager Fax No: 00 352 4666 6711 (c) in the case of TGAL: PO Box N-7759, Nassau, Bahamas Attn: Corporate Secretary Fax No: 001 242 3624 308 (d) in the case of TGSS: 26, boulevard Royal, L-2449, Luxembourg Attn: General Manager Fax No: 00 352 4666 6711 Any notice so given shall be deemed to have been given on the day it is personally delivered or on the day which is five days after it is mailed, as the case may be. All such notices shall be copied to: Franklin Resources Inc 777 Mariners Island Boulevard San Mateo CA 94404 USA Attn: General Counsel Fax No: 001 650 5257279 and to Constellation Financial Management Company, LLC 52 Vanderbilt Avenue, 13th Floor New York, NY 10017 USA Attn: David Steinmetz and to Templeton Global Investors Limited Saltire Court 20 Castle Terrace Edinburgh EH1 2EH Attn: Company Secretary 11.7 OVERDUE AMOUNTS. Any amount determined to be payable by one party to another shall be payable with interEst calculated at an annual rate on interest reported by Chase Manhattan Bank as its "prime rate", for the period commencing from the date such payment was originally due to the date payment actually is made. 11.8 TAXES. (a) The Distributors or the Fund, as applicable, shall pay any present or future sales, value added or excise taxes, excluding LFL's income taxes, imposed upon the supply of services by LFL under this Agreement (hereinafter referred to as "Sales Taxes"). In addition, the Distributors or the Fund, as applicable, shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise under Luxembourg legislation from any payment made by or on behalf of the Fund hereunder or from the execution or delivery of, or otherwise with respect to this Agreement or any other Program Document to which the Distributors, the Fund or any of their respective Affiliates is a party (hereinafter referred to as "Other Taxes"). LFL shall be entitled to indemnification for the full amount of Sales Taxes or Other Taxes (including without limitation, any Sales Taxes or Other Taxes imposed on amounts payable under this section 11.8(a)) paid by the Fund or either Distributor (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Sales Taxes or Other Taxes were correctly or legally asserted. (b) LFL shall pay (and indemnifies TGSS, TGAL and the Fund (each an "Indemnitee") in respect of) any present or future sales, value-added or excise taxes, excluding each Indemnitee's income taxes, imposed upon the payments to be made by LFL under Article 3.1. In addition LFL shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payments to be made by it hereunder. (c) LFL shall pay (and indemnifies TGSS, TGAL and the Fund in respect of) any withholding taxes that may become payable in connection with the payments to be made by LFL of Selling Commissions to Approved Dealers pursuant to Article 3.1 hereof and LFL shall gross up any such payment so as to ensure that, after making all required deductions, the Approved Dealers receive the full amount of the Selling Commissions due to such Approved Dealers. Furthermore, the Fund shall pay the full amounts deducted to the relevant taxation authority or other authority (d) The Fund shall pay any withholding taxes that may become payable in connection with any and all payments to be made by the Fund under this Agreement and the Fund shall gross up any such payment so as to ensure that, after making all required deductions, LFL receives an amount equal to the amounts it would have received had no deductions been made and the Fund shall pay the full amounts deducted to the relevant taxation authority or other authority. Notwithstanding any other provisions of this Agreement, in the event that the Fund is required to withhold any such taxes, it shall do so without any recourse by, or claim against, the Fund by LFL. In the event that the Fund is assessed a deficiency by any taxing authority in respect of its failure to withhold any such taxes, then the Fund shall be permitted to withhold any such deficiency from any current or future payments or transfers to be made by it to LFL under this Agreement until such deficiency (but not including any interest and penalties thereon) is paid by LFL and LFL shall have no recourse or claim against Fund with respect to any such payments or withholdings. 11.9 SEPARATE LIABILITY OF FUND. Save where otherwise provided in this Agreement, the liability and obligations of the Fund to TGAL, TGSS and LFL hereunder shall be separate and distinct from the liability and obligations of TGAL and TGSS, and the Fund shall be not be liable or responsible for the action or inaction of TGAL and TGSS. Notwithstanding the foregoing regardless of whether TGSS ceases to be the Distribution Controller or not, the Fund agrees that it shall provide to LFL, TGSS and TGAL such information as may be required from time to time to determine the amount of the Fees payable pursuant to Article 4. 11.10 HEADINGS. In this Agreement, the headings are for convenience of reference only, do not form a part of this Agreement and are not to be considered in the interpretation of this Agreement. References to Articles, sections, paragraphs, subparagraphs and clauses are to Articles, sections, paragraphs, subparagraphs and clauses of this Agreement. 11.11 GENDER AND NUMBER. In this Agreement, words importing the masculine gender include the feminine and neuter genders, words importing persons include all Persons, and words in the singular include the plural, and vice versa, wherever the context requires. 11.12 SEVERABILITY. Every provision of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality shall not affect the validity of the remainder of this Agreement. 11.13 FURTHER ACTS. The parties hereto agree to execute and deliver any such further and other documents and perform and cause to be performed such further and other acts and things as may be necessary or desirable in order to give full effect to this Agreement and every part thereof. Without limiting the generality of the foregoing, the Fund agrees that it will provide to TGSS, TGAL and LFL such information as to date of issue and issue price of its Deferred Sales Charge Shares and such other information as shall be required to facilitate the calculating of any amounts which are payable hereunder. 11.14 CURRENCY. All amounts referred to in this Agreement or required to be paid hereunder shall be paid in the base currency of the applicable Sub-Fund. 11.15 COUNTERPARTS, FACSIMILE EXECUTION. This Agreement may be executed in several counterparts, each of which when so executed shall be deemed to be an original and such counterparts together shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart. This Agreement may be executed and delivered by facsimile and will be considered duly executed and delivered by the parties so executing delivery on the day of its transmission by facsimile in executed form to the other parties. A party so executing by way of facsimile shall promptly deliver to each other party an originally signed counterpart. 11.16 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties pertaining to the subject matter hereof and supersedes, with effect from the date of this Agreement, all prior agreements, understandings and negotiations between the parties including, without limitation, the Commission Paying Agreement and those provisions only of the Fees Side-Letter, the Distribution Agreement and the Distribution Agreement Addendum which expressly conflict with the provisions of this Agreement. For the avoidance of doubt, the remaining provisions of each of the Fees Side-Letter, the Distribution Agreement and the Distribution Agreement Addendum which do not expressly conflict with the provisions of this Agreement shall remain in full force and uuvaried effect. 11.17 ENUREMENT. This Agreement is binding upon and enures to the benefit of the parties hereto and their respective successors and permitted assigns. 11.18 INSTRUCTIONS. Any instructions to be given by LFL in the performance of its duties hereunder in respect of any of the matters referred to in or contemplated by this Agreement ("Proper Instructions") shall be written, cabled, telecopied or telexed instructions and signed or purported to be signed by such person or persons as LFL shall from time to time have authorised in writing to give the particular class of instructions in question. Different persons may be authorised to give instructions for different purposes and such persons may also include officers of corporations other than LFL so authorised by LFL. For the purposes of this Agreement, LFL shall furnish the other parties hereto with a schedule of the names of the persons authorised from time to time (either alone or with others as specified) to give instructions together with specimens of their signatures. LFL shall also furnish the other parties hereto with a certified copy of a resolution of the Directors of LFL as conclusive evidence of the authority of any such person to act and the other parties hereto shall be entitled to rely on such resolution and authority as being in full force and effect until receipt of written notice to the contrary. 11.19 LAW AND JURISDICTION. (a) This Agreement shall be governed by and construed in accordance with the laws of Ireland. (b) Each of the parties hereto irrevocably agree that the courts of Ireland shall have non-exclusive jurisdiction to hear and determine any suit, action or proceeding and to settle any disputes which may arise out of or in connection with this Agreement and for such purposes hereby irrevocably submit to the jurisdiction of such courts. (c) Each party irrevocably waives any objection which it may have now or in the future to the courts of Ireland being nominated for the purpose of Article 11.19(b) and agrees not to claim that any such court is not a convenient or appropriate forum. (d) Each of the Fund, TGAL and TGSS hereby irrevocably authorises and appoints Matsack Trust Limited as its process agent to accept service of all legal process arising out of or connected with this Agreement and service on Matsack Trust Limited (or any substitute process agent appointed in accordance with this Article) shall be deemed to be service on the Fund, TGAL or TGSS (as the case may be). If for any reason Matsack Trust Limited (or any substitute process agent appointed in accordance with this Article 11.19 (d)) ceases to be able to act as process agent or no longer has an address in Ireland, each of the Fund, TGAL or TGSS irrevocably undertakes to appoint a substitute process agent resident in Ireland and advise LFL thereof. Failing such appointment each of the Fund, TGAL or TGSS hereby authorises the Agent to appoint an Agent on its behalf. Nothing in this Article 11.19 (d) shall affect the right to serve legal process in any other manner permitted by law. ACKNOWLEDGEMENT BY THE FUND AND TGSS Without prejudice to the execution of the Agreement by the parties hereto, each of the Fund and TGSS expressly and specifically confirm their agreement with the provisions of clause 11.19(b) of this Agreement for the purpose of article 1 of the Protocol annexed to the Convention on jurisdiction and the enforcement of judgements in civil and commercial matters signed at Brussels on 27 September, 1968 as amended by the Convention of Lugano and San-Sebastian. - -------------------------------- ------------------------------ TEMPLETON GLOBAL STRATEGY TEMPLETON GLOBAL STRATEGIC SERVICES SA FUNDS SERVICES SA FUNDS AS WITNESS WHEREOF the duly authorised representatives of the parties hereto have caused this Agreement to be duly executed the day and year first herein written. SCHEDULE A ADVISORY AGREEMENTS 1. Investment Management Agreement dated February 2, 1995 between the Fund and Templeton Investment Management Limited. 2. Investment Management Agreement dated July 7, 1997 between the Fund and Franklin Mutual Advisers Inc. 3. Investment Management Agreement dated February 15, 1996 between the Fund and Franklin Advisers Inc (as amended by an amendment between those parties dated March 1, 1996). 4. Investment Management Agreement dated February 2, 1995 between the Fund and Templeton Investment Management (Singapore) Pte. Ltd. 5. Investment Management Agreement between the Fund and Templeton Galbraith & Hansberger Ltd (now TGSS). PROSPECTUS DOCUMENTS 1. The prospectus in relation to the Fund dated September 1997. 2. The addenda thereto dated January 1, 1999 and January 8 1999 respectively. SCHEDULE B Intentionally left blank SCHEDULE C Templeton Global Growth Fund Franklin Mutual Beacon Fund Franklin U.S. Equity Fund Templeton Emerging Markets Fund Franklin Templeton High Yield Fund Franklin Templeton U.S. Government Fund Templeton Emerging Markets Fixed Income Fund Templeton U.S. Dollar Liquid Reserve Fund SCHEDULE D ALLOCATION PROCEDURES Deferred Sales Charge Shares shall be allocated among Monthly Pools in accordance with the procedures set forth in these Allocation Procedures. The parties agree that if (i) the Sub-Funds or the Sub-Funds' transfer agent becomes able to supply records which accurately track Free Shares and Transfer Shares to the Commission Shares from which they were derived and the Fund, TGSS or TGAL develops an alternative allocation methodology which uses such tracking information (the "Alternate Methodology") and (ii) LFL reasonably determines that such methodology is at least as reliable and accurate as the methodology described below, then the parties agree that such Alternate Methodology will be substituted for the foregoing and this Schedule D will be amended to reflect a mutually agreeable description of such Alternate Methodology. Defined terms used in this Schedule D and not otherwise defined in this Schedule D shall have the meanings assigned to such terms. As used herein the following terms shall have the meanings indicated: "COMMISSION SHARE" shall mean, in respect of any New B Share Sub-Fund, each New B Share of such Sub-Fund which is issued under circumstances which would normally give rise to an obligation of the holder of such Share to pay a Deferred Sales Charge upon redemption of such Share, including, without limitation, any Share of such Sub-Fund issued in connection with a Free Exchange, and any such Share shall not cease to be a Commission Share prior to the redemption (including a redemption in connection with a Free Exchange) or conversion of such Share even though the obligation to pay the Deferred Sales Charge shall have expired or conditions for waivers thereof shall exist. "DEFERRED SALES CHARGE" or "DSC" shall mean any deferred sales charge payable by the holder of a Share of any Sub-Fund upon redemption of such Share, either directly or by withholding from the proceeds of such redemption. "FREE EXCHANGE" shall mean the issuance of a Transfer Share upon the immediate investment of proceeds realized on the redemption of a Commission Share of another New B Share Sub-Fund. "FREE SHARE" shall mean, in respect of any New B Share Sub-Fund, each Reinvested Share of such Sub-Fund. "MONTHLY POOL" shall mean, with respect to any Sub-Fund and any calendar month: (i) each Original Charge Share issued by such Sub-Fund during such calendar month; (ii) Transfer Shares of such Sub-Fund issued upon the immediate reinvestment of proceeds realized on the redemption of (a) an Original Charge Share of another Sub-Fund issued by such Sub-Fund during the calendar month described in clause (i) above; (b) a Reinvested Share of another Sub-Fund issued in respect of Deferred Sales Charge Shares described in clause (ii) (a) above or this clause (ii)(b); or (c) a Transfer Share of another Sub-Fund which relates to a Deferred Sales Charge Share described in clause (ii)(a) or (ii)(b) above or this clause (ii)(c); and (iii) Free Shares of such Sub-Fund issued upon the automatic reinvestment of income and capital gains distributions with respect to Deferred Sales Charge Shares of such Sub-Fund described in clauses (i) or (ii) above, or this clause (iii). "NET ASSET VALUE" shall mean, with respect to any Share of a Sub-Fund and any date of determination, the net asset value of such Share on such date computed in the manner such value is required to be computed by such Sub-Fund in its reports to its shareholders. "NON-OMNIBUS COMMISSION SHARE" shall mean a Commission Share that is a Non-Omnibus Share. "NON-OMNIBUS FREE SHARE" shall mean a Free Share that is a Non-Omnibus Share. "NON-OMNIBUS SHARE" shall mean a Share that is not an Omnibus Share. "OMNIBUS COMMISSION SHARE" shall mean a Commission Share that is an Omnibus Share. "OMNIBUS FREE SHARE" shall mean a Free Share that is an Omnibus Share. "OMNIBUS SHARE" shall mean, with respect to any Sub-Fund, a Share of such Sub-Fund held in the name of a broker dealer street account on the records maintained by the Sub-Fund's Transfer Agent. "SHARE" shall mean any Deferred Charge Share of any New B Share Sub-Fund. ATTRIBUTION OF SHARES: Shares of each Sub-Fund outstanding from time to time shall be attributed to Monthly Pools in accordance with the following procedures: 1 NON-OMNIBUS SHARES (a) COMMISSION SHARES Each Sub-Fund's Transfer Agent maintains records with which it is able to determine the original issuance date of each outstanding Non-Omnibus Commission Share, or in the case of a Transfer Share, of the Original Charge Share from which such Transfer Share is derived through one or more Free Exchanges. Using such data, LFL will attribute the following Commission Shares outstanding from time to time to the Monthly Pool having its Sale Cutoff Date in a specified month: (i) Original Charge Shares sold (whether or not settled) during such month, and (ii) Transfer Shares which were derived through one or more Free Exchanges from Original Charge Shares sold (whether or not settled) during such month, in each case determined in accordance with the records maintained by the Transfer Agent. (b) FREE SHARES Non-Omnibus Free Shares of a Sub-Fund to be attributed among Monthly Pools pursuant to this Section 1(b) will be attributed by LFL using records maintained by LFL in accordance with this Section 1. information supplied by such Sub-Fund's Transfer Agent and the following methodology: (1) NON-OMNIBUS FREE SHARE ISSUANCES. Non-Omnibus Free Shares -------------------------------- issued on any day during any calendar month by such Sub-Fund shall be attributed: (i) To Monthly Pools originated prior to the month in question using the following formula: FS * CSFS -------------------------- TCSFS + [NMCS * DD/DM] (ii) To the Monthly Pool originated during the month in question using the following formula: FS * NMCS DD -------------------------- * ---- TCSFS + [NMCS * DD/DM] DM (iii) For this purpose: FS = The number of Non-Omnibus Free Shares issued on such day during such month based on information provided by the Fund's Transfer Agent. CSFS = The number of Non-Omnibus Commission Shares and Non-Omnibus Free Shares attributed to such Monthly Pool in question and outstanding as of the close of business on the last business day of the month preceding the month in question. TCSFS = The total number of Non-Omnibus Commission Shares and Non-Omnibus Free Shares outstanding as of the close of business on the last day of the month preceding the month in question. NMCS = The number of Non-Omnibus Commission Shares attributed to the Monthly Pool originated during the month in question and outstanding as of the close of business on the last business day of such month. DD = The number of days in the month in question prior to and including the ex-dividend date for the payment of the dividend or other distribution giving rise to the issuance of Free Shares in question. DM = The number of days in the month in question. (2) NON-OMNIBUS FREE SHARE CONVERSIONS. The number of Non-Omnibus Free Shares of a Sub-Fund deemed converted during any calendar month will equal the sum of (i) the number of Non-Omnibus Free Shares of such Sub-Fund attributed as of the close of business on the last business day preceding the month in question to the Monthly Pool the Anniversary of the Sale Cutoff Date of which occurs during such month, plus (ii) the number of Non-Omnibus Free Shares of such Sub-Fund attributed to such Monthly Pool with respect to the month in question pursuant to clause 1(b)(1) above. (3) NON-OMNIBUS FREE SHARE REDEMPTIONS AND EXCHANGES. Net changes during any calendar month in the number of Non-Omnibus Free Shares of a Sub-Fund that have not been allocated pursuant to clause 1(b)(1) or 1(b)(2) above (which changes will primarily result from redemptions or exchanges of such Shares) shall be attributed to Monthly Pools as of the end of such month using the following methodology: (i) The aggregate amount of such changes during such month will be computed as follows: FSRE = FSO - FSI + FSC where: FSRE = The change during such calendar month in the number of outstanding Non-Omnibus Free Shares of the Sub-Fund in question that has not been allocated pursuant to clause 1(b)(1) or 1(b)(2) above. FSO = The number of Non-Omnibus Free Shares outstanding on the last business day of the calendar month in question minus the number of Non-Omnibus Free Shares outstanding on the last business day of the preceding calendar month. FSI = The number of Non-Omnibus Free Shares issued during the month in question and attributed to Monthly Pools pursuant to clause 1(b)(1) above. FSC = The number of Non-Omnibus Free Shares deemed converted during the month in question and attributed to Monthly Pools pursuant to clause 1(b)(2) above. (ii) The aggregate amount of FSRE during such month will be attributed to Monthly Pools as follows: FSRE X FS ---- TFS where: FSRE = The amount of FSRE determined as provided in clause (i) above. FS = The number of Non-Omnibus Free Shares attributed to such Monthly Pool as of the last business day of the calendar month preceding the month in question. TFS = The total number of Non-Omnibus Free Shares as of the last business day of the calendar month preceding the month in question. 2 Omnibus Shares. (a) Alternative Methodologies. If the conditions to broker dealer attribution of Omnibus Shares of a Sub-Fund have been satisfied, then the Omnibus Shares of such Sub-Fund will be attributed pursuant to Section 2(b). If the conditions to broker dealer attribution of Omnibus Shares of a Sub-Fund have not been satisfied, then the Omnibus Shares of such Sub-Fund will be attributed pursuant to Section 2(c). The conditions to broker dealer attribution of Omnibus Shares of a Sub-Fund will have been satisfied if certain broker dealer(s) (the "Specified Broker Dealer(s)") can provide reliable data with which LFL can attribute Omnibus Shares held by the Specified Broker Dealer(s) to specific Monthly Pools using the methodology described in Section 1 as though all references in Section 1 to the Transfer Agent, Non-Omnibus Shares, Non-Omnibus Commission Shares and Non-Omnibus Free Shares were references to the Specified Broker Dealer(s), Omnibus Shares, Omnibus Commission Shares and Omnibus Free Shares, respectively. (b) IF BROKER DEALER DATA IS AVAILABLE. If the conditions to broker dealer attribution of Omnibus Shares of a Sub-Fund have been satisfied, then the aggregate number of Omnibus Shares attributed to each Monthly Pool as of the last business day of a calendar month shall equal: OSSBD X TOS ------- TOSSBD where: OSSBD = The number of Omnibus Shares of such Sub-Fund held by the Specified Broker Dealer(s) as of the last business day of the calendar month in question and attributed to such Monthly Pool using the methodology described in Section 1 with respect to such Sub-Fund and the data supplied by such Specified Broker Dealer(s) but without using data supplied by the Sub-Fund's Transfer Agent. TOS = The total number of Omnibus Shares as of the last business day of the calendar month in question according to the Sub-Fund's Transfer Agent's records. TOSSBD = The total number of Omnibus Shares as of the last business day of the calendar month in question held by the Specified Broker Dealer(s) according to the Specified Broker Dealer(s)'s records. (c) IF BROKER DEALER DATA IS NOT AVAILABLE. If the conditions to broker dealer attribution of Omnibus Shares of a Sub-Fund have not been satisfied, then the aggregate number of Omnibus Shares attributed to each Monthly Pool as of the last business day of a calendar month shall equal: TOS X NOS ------ TNOS where: TOS = The total number of Omnibus Shares as of the last business day of the calendar month in question according to the Sub-Fund's Transfer Agent's records. NOS = The number of Non-Omnibus Shares as of the last business day of the calendar month in question attributed to the Monthly Pool in question. TNOS = The total number of Non-Omnibus Shares as of the last business day of the calendar month in question. SCHEDULE E 1. An opinion of Luxembourg counsel. 2. Certified copies of the Articles of Incorporation of the Fund and a resolution of the board of directors of the Fund wherein, inter alia, they authorise the execution of this Agreement by the Fund and the performance of its obligations hereunder. 3. Certified copies of the Prospectus Documents, the Advisory Agreements, the Distribution Agreement, the Distribution Agreement Addendum, the Distribution Controller Agreement and the Fees Side-Letter. SIGNED for and on behalf of LIGHTNING FINANCE COMPANY LIMITED by Signature: ____________________________ Print Name: ____________________________ Title: ____________________________ DULY AUTHORISED OFFICER in the presence of: Signature: _____________________________ Witness Name:_____________________________ Address: _____________________________ SIGNED for and on behalf of TEMPLETON GLOBAL STRATEGY FUNDS by Signature: ____________________________ Print Name: ____________________________ Title: ____________________________ DULY AUTHORISED OFFICER in the presence of: Signature: _____________________________ Witness Name:_____________________________ Address: _____________________________ SIGNED for and on behalf of TEMPLETON GLOBAL ADVISORS LIMITED by Signature: ____________________________ Print Name: ____________________________ Title: ____________________________ DULY AUTHORISED OFFICER in the presence of: Signature: _____________________________ Witness Name:_____________________________ Address: _____________________________ SIGNED for and on behalf of TEMPLETON GLOBAL STRATEGIC SERVICES S.A. by Signature: ____________________________ Print Name: ____________________________ Title: ____________________________ DULY AUTHORISED OFFICER in the presence of: Signature: _____________________________ Witness Name:_____________________________ Address: _____________________________ EX-10.49 6 0006.txt PARTICIPATION AGREEMENT PARTICIPATION AGREEMENT as of May 1, 2000 Franklin Templeton Variable Insurance Products Trust Franklin Templeton Distributors, Inc. CUNA Mutual Life Insurance Company CONTENTS SECTION SUBJECT MATTER 1. Parties and Purpose 2. Representations and Warranties 3. Purchase and Redemption of Trust Portfolio Shares 4. Fees, Expenses, Prospectuses, Proxy Materials and Reports 5. Voting 6. Sales Material, Information and Trademarks 7. Indemnification 8. Notices 9. Termination 10. Miscellaneous SCHEDULES TO THIS AGREEMENT A. The Company B. Accounts of the Company C. Available Portfolios and Classes of Shares of the Trust; Investment Advisers D. Contracts of the Company E. Other Portfolios Available under the Contracts F. Rule 12b-1 Plans of the Trust G. Addresses for Notices H. Shared Funding Order 1. PARTIES AND PURPOSE This agreement (the "Agreement") is between certain portfolios, specified below and in Schedule C, of Franklin Templeton Variable Insurance Products Trust, an open-end management investment company organized as a business trust under Massachusetts law (the "Trust"), Franklin Templeton Distributors, Inc., a California corporation which is the principal underwriter for the Trust (the "Underwriter," and together with the Trust, "we" or "us") and the insurance company identified on Schedule A ("you"), on your own behalf and on behalf of each segregated asset account maintained by you that is listed on Schedule B, as that schedule may be amended from time to time ("Account" or "Accounts"). The purpose of this Agreement is to entitle you, on behalf of the Accounts, to purchase the shares, and classes of shares, of portfolios of the Trust ("Portfolios") that are identified on Schedule C, solely for the purpose of funding benefits of your variable life insurance policies or variable annuity contracts ("Contracts") that are identified on Schedule D. This Agreement does not authorize any other purchases or redemptions of shares of the Trust. 2. REPRESENTATIONS AND WARRANTIES 2.1 REPRESENTATIONS AND WARRANTIES BY YOU You represent and warrant that: 2.1.1 You are an insurance company duly organized and in good standing under the laws of your state of incorporation. 2.1.2 All of your directors, officers, employees, and other individuals or entities dealing with the money and/or securities of the Trust are and shall be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Trust, in an amount not less than $5 million. Such bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. You agree to make all reasonable efforts to see that this bond or another bond containing such provisions is always in effect, and you agree to notify us in the event that such coverage no longer applies. 2.1.3 Each Account is a duly organized, validly existing segregated asset account under applicable insurance law and interests in each Account are offered exclusively through the purchase of or transfer into a "variable contract" within the meaning of such terms under Section 817 of the Internal Revenue Code of 1986, as amended ("Code") and the regulations thereunder. You will use your best efforts to continue to meet such definitional requirements, and will notify us immediately upon having a reasonable basis for believing that such requirements have ceased to be met or that they might not be met in the future. 2.1.4 Each Account either: (i) has been registered or, prior to any issuance or sale of the Contracts, will be registered as a unit investment trust under the Investment Company Act of 1940 ("1940 Act"); or (ii) has not been so registered in proper reliance upon an exemption from registration under Section 3(c) of the 1940 Act; if the Account is exempt from registration as an investment company under Section 3(c) of the 1940 Act, you will use your best efforts to maintain such exemption and will notify us immediately upon having a reasonable basis for believing that such exemption no longer applies or might not apply in the future. 2.1.5 The Contracts or interests in the Accounts: (i) are or, prior to any issuance or sale will be, registered as securities under the Securities Act of 1933, as amended (the "1933 Act"); or (ii) are not registered because they are properly exempt from registration under Section 3(a)(2) of the 1933 Act or will be offered exclusively in transactions that are properly exempt from 2 registration under Section 4(2) or Regulation D of the 1933 Act, in which case you will make every effort to maintain such exemption and will notify us immediately upon having a reasonable basis for believing that such exemption no longer applies or might not apply in the future. 2.1.6 The Contracts: (i) will be sold by broker-dealers, or their registered representatives, who are registered with the Securities and Exchange Commission ("SEC") under the Securities and Exchange Act of 1934, as amended (the "1934 Act") and who are members in good standing of the National Association of Securities Dealers, Inc. (the "NASD"); (ii) will be issued and sold in compliance in all material respects with all applicable federal and state laws; and (iii) will be sold in compliance in all material respects with state insurance suitability requirements and NASD suitability guidelines. 2.1.7 The Contracts currently are and will be treated as annuity contracts or life insurance contracts under applicable provisions of the Code and you will use your best efforts to maintain such treatment; you will notify us immediately upon having a reasonable basis for believing that any of the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.1.8 The fees and charges deducted under each Contract, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by you. 2.1.9 You will use shares of the Trust only for the purpose of funding benefits of the Contracts through the Accounts. 2.1.10 Contracts will not be sold outside of the United States. 2.1.11 With respect to any Accounts which are exempt from registration under the 1940 Act in reliance on 3(c)(1) or Section 3(c)(7) thereof: 2.1.11.1 the principal underwriter for each such Account and any subaccounts thereof is a registered broker-dealer with the SEC under the 1934 Act; 2.1.11.2 the shares of the Portfolios of the Trust are and will continue to be the only investment securities held by the corresponding subaccounts; and 2.1.11.3 with regard to each Portfolio, you, on behalf of the corresponding subaccount, will: (a) vote such shares held by it in the same proportion as the vote of all other holders of such shares; and (b) refrain from substituting shares of another security for such shares unless the SEC has 3 approved such substitution in the manner provided in Section 26 of the 1940 Act. 2.2 REPRESENTATIONS AND WARRANTIES BY THE TRUST The Trust represents and warrants that: 2.2.1 It is duly organized and in good standing under the laws of the State of Massachusetts. 2.2.2 All of its directors, officers, employees and others dealing with the money and/or securities of a Portfolio are and shall be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Trust in an amount not less that the minimum coverage required by Rule 17g-1 or other regulations under the 1940 Act. Such bond shall include coverage for larceny and embezzlement and be issued by a reputable bonding company. 2.2.3 It is registered as an open-end management investment company under the 1940 Act. 2.2.4 Each class of shares of the Portfolios of the Trust is registered under the 1933 Act. 2.2.5 It will amend its registration statement under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares. 2.2.6 It will comply, in all material respects, with the 1933 and 1940 Acts and the rules and regulations thereunder. 2.2.7 It is currently qualified as a "regulated investment company" under Subchapter M of the Code, it will make every effort to maintain such qualification, and will notify you immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 2.2.8 The Trust will use its best efforts to comply with the diversification requirements for variable annuity, endowment or life insurance contracts set forth in Section 817(h) of the Code, and the rules and regulations thereunder, including without limitation Treasury Regulation 1.817-5. Upon having a reasonable basis for believing any Portfolio has ceased to comply and will not be able to comply within the grace period afforded by Regulation 1.817-5, the Trust will notify you immediately and will take all reasonable steps to adequately diversify the Portfolio to achieve compliance. 4 2.2.9 It currently intends for one or more classes of shares (each, a "Class") to make payments to finance its distribution expenses, including service fees, pursuant to a plan ("Plan") adopted under rule 12b-1 under the 1940 Act ("Rule 12b-1"), although it may determine to discontinue such practice in the future. To the extent that any Class of the Trust finances its distribution expenses pursuant to a Plan adopted under rule 12b-1, the Trust undertakes to comply with any then current SEC interpretations concerning rule 12b-1 or any successor provisions. 2.3 REPRESENTATIONS AND WARRANTIES BY THE UNDERWRITER The Underwriter represents and warrants that: 2.3.1 It is registered as a broker dealer with the SEC under the 1934 Act, and is a member in good standing of the NASD. 2.3.2 Each investment adviser listed on Schedule C (each, an "Adviser") is duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and any applicable state securities law. 2.4 WARRANTY AND AGREEMENT BY BOTH YOU AND US We received an order from the SEC dated November 16, 1993 (file no. 812-8546), which was amended by a notice and an order we received on September 17, 1999 and October 13, 1999, respectively (file no. 812-11698) (collectively, the "Shared Funding Order," attached to this Agreement as Schedule H). The Shared Funding Order grants exemptions from certain provisions of the 1940 Act and the regulations thereunder to the extent necessary to permit shares of the Trust to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies and qualified pension and retirement plans outside the separate account context. You and we both warrant and agree that both you and we will comply with the "Applicants' Conditions" prescribed in the Shared Funding Order as though such conditions were set forth verbatim in this Agreement, including, without limitation, the provisions regarding potential conflicts of interest between the separate accounts which invest in the Trust and regarding contract owner voting privileges. In order for the Trust's Board of Trustees to perform its duty to monitor for conflicts of interest, you agree to inform us of the occurrence of any of the events specified in condition 2 of the Shared Funding Order to the extent that such event may or does result in a material conflict of interest as defined in that order. 3. PURCHASE AND REDEMPTION OF TRUST PORTFOLIO SHARES 3.1 We will make shares of the Portfolios available to the Accounts for the benefit of the Contracts. The shares will be available for purchase at the net asset value per share next computed after we (or our agent) receive a purchase order, as established in accordance with the provisions of the then current prospectus of the Trust. Notwithstanding the foregoing, the Trust's Board of Trustees ("Trustees") may refuse to sell shares of any Portfolio to any person, or may suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or if, in the sole discretion of the Trustees, they deem such action to be in the best interests of the shareholders of such Portfolio. Without limiting the 5 foregoing, the Trustees have determined that there is a significant risk that the Trust and its shareholders may be adversely affected by investors whose purchase and redemption activity follows a market timing pattern, and have authorized the Trust, the Underwriter and the Trust's transfer agent to adopt procedures and take other action (including, without limitation, rejecting specific purchase orders) as they deem necessary to reduce, discourage or eliminate market timing activity. You agree to cooperate with us to assist us in implementing the Trust's restrictions on purchase and redemption activity that follows a market timing pattern. 3.2 We agree that shares of the Trust will be sold only to life insurance companies which have entered into fund participation agreements with the Trust ("Participating Insurance Companies") and their separate accounts or to qualified pension and retirement plans in accordance with the terms of the Shared Funding Order. No shares of any Portfolio will be sold to the general public. 3.3 You agree that all net amounts available under the Contracts shall be invested in the Trust or in your general account. Net amounts available under the Contracts may also be invested in an investment company other than the Trust if: (i) such other investment company, or series thereof, has investment objectives or policies that are substantially different from the investment objectives and policies of the Portfolios; or (ii) you give us forty-five (45) days written notice of your intention to make such other investment company available as a funding vehicle for the Contracts; or (iii) such other investment company is available as a funding vehicle for the Contracts at the date of this Agreement and you so inform us prior to our signing this Agreement (a list of such investment companies appears on Schedule E to this Agreement); or (iv) we consent in writing to the use of such other investment company. 3.4 You shall be the designee for us for receipt of purchase orders and requests for redemption resulting from investment in and payments under the Contracts ("Instructions"). The Business Day on which such Instructions are received in proper form by you and time stamped by the close of trading will be the date as of which Portfolio shares shall be deemed purchased, exchanged, or redeemed as a result of such Instructions. Instructions received in proper form by you and time stamped after the close of trading on any given Business Day shall be treated as if received on the next following Business Day. You warrant that all orders, Instructions and confirmations received by you which will be transmitted to us for processing on a Business Day will have been received and time stamped prior to the Close of Trading on that Business Day. Instructions we receive after 9 a.m. Eastern Time shall be processed on the next Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which the Trust calculates its net asset value pursuant to the rules of the SEC and its current prospectus. 3.5 We shall calculate the net asset value per share of each Portfolio on each Business Day, and shall communicate these net asset values to you or your designated agent on a daily basis as soon as reasonably practical after the calculation is completed (normally by 6:30 p.m. Eastern time). 6 3.6 You shall submit payment for the purchase of shares of a Portfolio on behalf of an Account no later than the close of business on the next Business Day after we receive the purchase order. Payment shall be made in federal funds transmitted by wire to the Trust or to its designated custodian. 3.7 We will redeem any full or fractional shares of any Portfolio, when requested by you on behalf of an Account, at the net asset value next computed after receipt by us (or our agent) of the request for redemption, as established in accordance with the provisions of the then current prospectus of the Trust. We shall make payment for such shares in the manner we establish from time to time, but in no event shall payment be delayed for a greater period than is permitted by the 1940 Act. Payments for the purchase or redemption of shares by you may be netted against one another on any Business Day for the purpose of determining the amount of any wire transfer on that Business Day. 3.8 Issuance and transfer of the Portfolio shares will be by book entry only. Stock certificates will not be issued to you or the Accounts. Portfolio shares purchased from the Trust will be recorded in the appropriate title for each Account or the appropriate subaccount of each Account. 3.9 We shall furnish, on or before the ex-dividend date, notice to you of any income dividends or capital gain distributions payable on the shares of any Portfolio. You hereby elect to receive all such income dividends and capital gain distributions as are payable on shares of a Portfolio in additional shares of that Portfolio, and you reserve the right to change this election in the future. We will notify you of the number of shares so issued as payment of such dividends and distributions. 4. FEES, EXPENSES, PROSPECTUSES, PROXY MATERIALS AND REPORTS 4.1 We shall pay no fee or other compensation to you under this Agreement except as provided on Schedule F, if attached. 4.2 We shall prepare and be responsible for filing with the SEC, and any state regulators requiring such filing, all shareholder reports, notices, proxy materials (or similar materials such as voting instruction solicitation materials), prospectuses and statements of additional information of the Trust. We shall bear the costs of preparation and filing of the documents listed in the preceding sentence, registration and qualification of the Trust's shares of the Portfolios. 4.3 We shall use reasonable efforts to provide you, on a timely basis, with such information about the Trust, the Portfolios and each Adviser, in such form as you may reasonably require, as you shall reasonably request in connection with the preparation of disclosure documents and annual and semi-annual reports pertaining to the Contracts. 4.4 At your request, we shall provide you with camera ready copy, in a form suitable for printing, of a copy of portions of the Trust's current prospectus, annual report, semi-annual report and other shareholder communications, including any amendments or supplements to any of the foregoing, pertaining specifically to the Portfolios. We shall delete information relating to series of the Trust other than the Portfolios to the extent practicable. We shall provide you with a copy of the Trust's current statement of additional 7 information, including any amendments or supplements, in a form suitable for you to duplicate. You shall bear the costs of furnishing these documents (including printing and mailing) to Contract owners or others. 4.5 We shall provide you, at our expense, with copies of any Trust-sponsored proxy materials in such quantity as you shall reasonably require for distribution to Contract owners who are invested in a designated subaccount. You shall bear the costs of distributing proxy materials (or similar materials such as voting solicitation instructions) to Contract owners. 4.6 You assume sole responsibility for ensuring that the Trust's prospectuses, shareholder reports and communications, and proxy materials are delivered to Contract owners in accordance with applicable federal and state securities laws. 5. VOTING 5.1 All Participating Insurance Companies shall have the obligations and responsibilities regarding pass-through voting and conflicts of interest corresponding to those contained in the Shared Funding Order. 5.2 If and to the extent required by law, you shall: (i) solicit voting instructions from Contract owners; (ii) vote the Trust shares in accordance with the instructions received from Contract owners; and (iii) vote Trust shares for which no instructions have been received in the same proportion as Trust shares of such Portfolio for which instructions have been received; so long as and to the extent that the SEC continues to interpret the 1940 Act to require pass-through voting privileges for variable contract owners. You reserve the right to vote Trust shares held in any Account in your own right, to the extent permitted by law. 5.3 So long as, and to the extent that, the SEC interprets the 1940 Act to require pass-through voting privileges for Contract owners, you shall provide pass-through voting privileges to Contract owners whose Contract values are invested, through the Accounts, in shares of one or more Portfolios of the Trust. We shall require all Participating Insurance Companies to calculate voting privileges in the same manner and you shall be responsible for assuring that the Accounts calculate voting privileges in the manner established by us. With respect to each Account, you will vote shares of each Portfolio of the Trust held by an Account and for which no timely voting instructions from Contract owners are received in the same proportion as those shares held by that Account for which voting instructions are received. You and your agents will in no way recommend or oppose or interfere with the solicitation of proxies for Portfolio shares held to fund the Contracts without our prior written consent, which consent may be withheld in our sole discretion. 6. SALES MATERIAL, INFORMATION AND TRADEMARKS 6.1 For purposes of this Section 6, "Sales literature or other Promotional material" includes, but is not limited to, portions of the following that use any logo or other trademark related to the Trust, or Underwriter or its affiliates, or refer to the Trust: advertisements (such as material published or designed for use in a newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, electronic communication or other public media), sales 8 literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts or any other advertisement, sales literature or published article or electronic communication), educational or training materials or other communications distributed or made generally available to some or all agents or employees in any media, and disclosure documents, shareholder reports and proxy materials. 6.2 You shall furnish, or cause to be furnished to us or our designee, at least one complete copy of each registration statement, prospectus, statement of additional information, private placement memorandum, retirement plan disclosure information or other disclosure documents or similar information, as applicable (collectively "Disclosure Documents"), as well as any report, solicitation for voting instructions, Sales literature or other Promotional materials, and all amendments to any of the above that relate to the Contracts or the Accounts prior to its first use. You shall furnish, or shall cause to be furnished, to us or our designee each piece of Sales literature or other Promotional material in which the Trust or an Adviser is named, at least fifteen (15) Business Days prior to its proposed use. No such material shall be used unless we or our designee approve such material and its proposed use. 6.3 You and your agents shall not give any information or make any representations or statements on behalf of the Trust or concerning the Trust, the Underwriter or an Adviser, other than information or representations contained in and accurately derived from the registration statement or prospectus for the Trust shares (as such registration statement and prospectus may be amended or supplemented from time to time), annual and semi-annual reports of the Trust, Trust-sponsored proxy statements, or in Sales literature or other Promotional material approved by the Trust or its designee, except as required by legal process or regulatory authorities or with the written permission of the Trust or its designee. 6.4 We shall not give any information or make any representations or statements on behalf of you or concerning you, the Accounts or the Contracts other than information or representations contained in and accurately derived from Disclosure Documents for the Contracts (as such Disclosure Documents may be amended or supplemented from time to time), or in materials approved by you for distribution, including Sales literature or other Promotional materials, except as required by legal process or regulatory authorities or with your written permission. 6.5 Except as provided in Section 6.2, you shall not use any designation comprised in whole or part of the names or marks "Franklin" or "Templeton" or any logo or other trademark relating to the Trust or the Underwriter without prior written consent, and upon termination of this Agreement for any reason, you shall cease all use of any such name or mark as soon as reasonably practicable. 7. INDEMNIFICATION 7.1 INDEMNIFICATION BY YOU 9 7.1.1 You agree to indemnify and hold harmless the Underwriter, the Trust and each of its Trustees, officers, employees and agents and each person, if any, who controls the Trust within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" and individually the "Indemnified Party" for purposes of this Section 7) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with your written consent, which consent shall not be unreasonably withheld) or expenses (including the reasonable costs of investigating or defending any alleged loss, claim, damage, liability or expense and reasonable legal counsel fees incurred in connection therewith) (collectively, "Losses"), to which the Indemnified Parties may become subject under any statute or regulation, or at common law or otherwise, insofar as such Losses are related to the sale or acquisition of shares of the Trust or the Contracts and 7.1.1.1 arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in a Disclosure Document for the Contracts or in the Contracts themselves or in sales literature generated or approved by you on behalf of the Contracts or Accounts (or any amendment or supplement to any of the foregoing) (collectively, "Company Documents" for the purposes of this Section 7), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this indemnity shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and was accurately derived from written information furnished to you by or on behalf of the Trust for use in Company Documents or otherwise for use in connection with the sale of the Contracts or Trust shares; or 7.1.1.2 arise out of or result from statements or representations (other than statements or representations contained in and accurately derived from Trust Documents as defined below in Section 7.2) or wrongful conduct of you or persons under your control, with respect to the sale or acquisition of the Contracts or Trust shares; or 7.1.1.3 arise out of or result from any untrue statement or alleged untrue statement of a material fact contained in Trust Documents as defined below in Section 7.2 or 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 if such statement or omission was made in reliance upon and accurately derived from written information furnished to the Trust by or on behalf of you; or 7.1.1.4 arise out of or result from any failure by you to provide the services or furnish the materials required under the terms of this Agreement; 7.1.1.5 arise out of or result from any material breach of any representation and/or warranty made by you in this Agreement or arise out of or result from any other material breach of this Agreement by you; or 7.1.1.6 arise out of or result from a Contract failing to be considered a life insurance policy or an annuity Contract, whichever is 10 appropriate, under applicable provisions of the Code thereby depriving the Trust of its compliance with Section 817(h) of the Code. 7.1.2 You shall not be liable under this indemnification provision with respect to any Losses to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to the Trust or Underwriter, whichever is applicable. You shall also not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified you in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify you of any such claim shall not relieve you from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, you shall be entitled to participate, at your own expense, in the defense of such action. Unless the Indemnified Party releases you from any further obligations under this Section 7.1, you also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from you to such party of the your election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and you will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 7.1.3 The Indemnified Parties will promptly notify you of the commencement of any litigation or proceedings against them in connection with the issuance or sale of the Trust shares or the Contracts or the operation of the Trust. 7.2 INDEMNIFICATION BY THE UNDERWRITER 7.2.1 The Underwriter agrees to indemnify and hold harmless you, and each of your directors and officers and each person, if any, who controls you within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" and individually an "Indemnified Party" for purposes of this Section 7.2) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Underwriter, which consent shall not be unreasonably withheld) or expenses (including the reasonable costs of investigating or defending any alleged loss, claim, damage, liability or expense and reasonable legal counsel fees incurred in connection therewith) (collectively, "Losses") to which the Indemnified Parties may become subject under any statute, at common law or otherwise, insofar as such Losses are related to the sale or acquisition of the shares of the Trust or the Contracts and: 7.2.1.1 arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the Registration Statement, prospectus or sales literature of the Trust (or any amendment or supplement to any of the foregoing) (collectively, the "Trust Documents") or arise out of or are based upon the omission or the 11 alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission of such alleged statement or omission was made in reliance upon and in conformity with information furnished to us by or on behalf of you for use in the Registration Statement or prospectus for the Trust or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Trust shares; or 7.2.1.2 arise out of or as a result of statements or representations (other than statements or representations contained in the Disclosure Documents or sales literature for the Contracts not supplied by the Underwriter or persons under its control) or wrongful conduct of the Trust, Adviser or Underwriter or persons under their control, with respect to the sale or distribution of the Contracts or Trust shares; or 7.2.1.3 arise out of any untrue statement or alleged untrue statement of a material fact contained in a Disclosure Document or sales literature covering the Contracts, or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement or statements therein not misleading, if such statement or omission was made in reliance upon information furnished to you by or on behalf of the Trust; or 7.2.1.4 arise as a result of any failure by us to provide the services and furnish the materials under the terms of this Agreement (including a failure, whether unintentional or in good faith or otherwise, to comply with the qualification representation specified above in Section 2.2.7 and the diversification requirements specified above in Section 2.2.8; or 7.2.1.5 arise out of or result from any material breach of any representation and/or warranty made by the Underwriter in this Agreement or arise out of or result from any other material breach of this Agreement by the Underwriter; as limited by and in accordance with the provisions of Sections 7.2.2 and 7.2.3 hereof. 7.2.2 The Underwriter shall not be liable under this indemnification provision with respect to any Losses to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to you or the Accounts, whichever is applicable. 7.2.3 The Underwriter shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Underwriter in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Underwriter of any such claim shall not relieve the Underwriter from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Underwriter will be entitled to participate, at its own expense, in the defense thereof. Unless the Indemnified 12 Party releases the Underwriter from any further obligations under this Section 7.2, the Underwriter also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Underwriter to such party of the Underwriter's election to assume the defense thereof, the Indemnified Party shall bear the expenses of any additional counsel retained by it, and the Underwriter will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 7.2.4 You agree promptly to notify the Underwriter of the commencement of any litigation or proceedings against you or the Indemnified Parties in connection with the issuance or sale of the Contracts or the operation of each Account. 7.3 INDEMNIFICATION BY THE TRUST 7.3.1 The Trust agrees to indemnify and hold harmless you, and each of your directors and officers and each person, if any, who controls you within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 7.3) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Trust, which consent shall not be unreasonably withheld) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements result from the gross negligence, bad faith or willful misconduct of the Board or any member thereof, are related to the operations of the Trust, and arise out of or result from any material breach of any representation and/or warranty made by the Trust in this Agreement or arise out of or result from any other material breach of this Agreement by the Trust; as limited by and in accordance with the provisions of Sections 7.3.2 and 7.3.3 hereof. It is understood and expressly stipulated that neither the holders of shares of the Trust nor any Trustee, officer, agent or employee of the Trust shall be personally liable hereunder, nor shall any resort be had to other private property for the satisfaction of any claim or obligation hereunder, but the Trust only shall be liable. 7.3.2 The Trust shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against any Indemnified Party as such may arise from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to you, the Trust, the Underwriter or each Account, whichever is applicable. 7.3.3 The Trust shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Trust in writing within a reasonable time after the summons or other first legal process giving 13 information of the nature of the claims shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Trust of any such claim shall not relieve the Trust from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Trust will be entitled to participate, at its own expense, in the defense thereof. Unless the Indemnified Party releases the Trust from any further obligations under this Section 7.3, the Trust also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Trust to such party of the Trust's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Trust will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 7.3.4 You agree promptly to notify the Trust of the commencement of any litigation or proceedings against you or the Indemnified Parties in connection with this Agreement, the issuance or sale of the Contracts, with respect to the operation of the Account, or the sale or acquisition of shares of the Trust. 8. NOTICES Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth in Schedule G below or at such other address as such party may from time to time specify in writing to the other party. 9. TERMINATION 9.1 This Agreement may be terminated by any party in its entirety or with respect to one, some or all Portfolios for any reason by sixty (60) days advance written notice delivered to the other parties. This Agreement shall terminate immediately in the event of its assignment by any party without the prior written approval of the other parties, or as otherwise required by law. 9.2 This Agreement may be terminated immediately by us upon written notice to you if: 9.2.1 you notify the Trust or the Underwriter that the exemption from registration under Section 3(c) of the 1940 Act no longer applies, or might not apply in the future, to the unregistered Accounts, or that the exemption from registration under Section 4(2) or Regulation D promulgated under the 1933 Act no longer applies or might not apply in the future, to interests under the unregistered Contracts; or 9.2.2 either one or both of the Trust or the Underwriter respectively, shall determine, in their sole judgment exercised in good faith, that you have suffered a material adverse change in your business, operations, financial condition or prospects since the date of this Agreement or are the subject of material adverse publicity; or 14 9.2.3 you give us the written notice specified above in Section 3.3 and at the same time you give us such notice there was no notice of termination outstanding under any other provision of this Agreement; provided, however, that any termination under this Section 9.2.3 shall be effective forty-five (45) days after the notice specified in Section 3.3 was given. 9.3 If this Agreement is terminated for any reason, except as required by the Shared Funding Order or pursuant to Section 9.2.1, above, we shall, at your option, continue to make available additional shares of any Portfolio and redeem shares of any Portfolio pursuant to all of the terms and conditions of this Agreement for all Contracts in effect on the effective date of termination of this Agreement. If this Agreement is terminated as required by the Shared Funding Order, its provisions shall govern. 9.4 The provisions of Sections 2 (Representations and Warranties) and 7 (Indemnification) shall survive the termination of this Agreement. All other applicable provisions of this Agreement shall survive the termination of this Agreement, as long as shares of the Trust are held on behalf of Contract owners in accordance with Section 9.3, except that we shall have no further obligation to sell Trust shares with respect to Contracts issued after termination. 9.5 You shall not redeem Trust shares attributable to the Contracts (as opposed to Trust shares attributable to your assets held in the Account) except: (i) as necessary to implement Contract owner initiated or approved transactions; (ii) as required by state and/or federal laws or regulations or judicial or other legal precedent of general application (hereinafter referred to as a "Legally Required Redemption"); or (iii) as permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon request, you shall promptly furnish to us the opinion of your counsel (which counsel shall be reasonably satisfactory to us) to the effect that any redemption pursuant to clause (ii) above is a Legally Required Redemption. Furthermore, except in cases where permitted under the terms of the Contracts, you shall not prevent Contract owners from allocating payments to a Portfolio that was otherwise available under the Contracts without first giving us ninety (90) days notice of your intention to do so. 10. MISCELLANEOUS 10.1 The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions of this Agreement or otherwise affect their construction or effect. 10.2 This Agreement may be executed simultaneously in two or more counterparts, all of which taken together shall constitute one and the same instrument. 10.3 If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 10.4 This Agreement shall be construed and its provisions interpreted under and in accordance with the laws of the State of California. It shall also be subject to the provisions of the federal securities laws and the rules and 15 regulations thereunder, to any orders of the SEC on behalf of the Trust granting it exemptive relief, and to the conditions of such orders. We shall promptly forward copies of any such orders to you. 10.5 The parties to this Agreement acknowledge and agree that all liabilities of the Trust arising, directly or indirectly, under this Agreement, of any and every nature whatsoever, shall be satisfied solely out of the assets of the Trust and that no Trustee, officer, agent or holder of shares of beneficial interest of the Trust shall be personally liable for any such liabilities. 10.6 The parties to this Agreement agree that the assets and liabilities of each Portfolio of the Trust are separate and distinct from the assets and liabilities of each other Portfolio. No Portfolio shall be liable or shall be charged for any debt, obligation or liability of any other Portfolio. 10.7 Each party to this Agreement shall cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD, and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 10.8 Each party to this Agreement shall treat as confidential all information reasonably identified as confidential in writing by any other party to this Agreement, and, except as permitted by this Agreement or as required by legal process or regulatory authorities, shall not disclose, disseminate, or use such names and addresses and other confidential information until such time as they may come into the public domain, without the express written consent of the affected party to this Agreement. Without limiting the foregoing, no party to this Agreement shall disclose any information that such party has been advised is proprietary, except such information that such party is required to disclose by any appropriate governmental authority (including, without limitation, the SEC, the NASD, and state securities and insurance regulators). 10.9 The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties to this Agreement are entitled to under state and federal laws. 10.10 The parties to this Agreement acknowledge and agree that this Agreement shall not be exclusive in any respect, except as provided above in Section 3.3. 10.11 Neither this Agreement nor any rights or obligations created by it may be assigned by any party without the prior written approval of the other parties. 10.12 No provisions of this Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by both parties. 16 IN WITNESS WHEREOF, each of the parties have caused their duly authorized officers to execute this Agreement. The Company: CUNA MUTUAL LIFE INSURANCE COMPANY By: /s/ Michael S. Daubs --------------------- Name: Michael S. Daubs Title: Senior Vice President, Chief Investment Officer The Trust: FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST Only on behalf of each Portfolio listed on Schedule C hereof By: /s/ Karen L. Skidmore --------------------- Name: Karen L. Skidmore Title: Assistant Vice President The Underwriter: FRANKLIN TEMPLETON DISTRIBUTORS, INC. By: /s/ Philip J. Kearns --------------------- Name: Philip J. Kearns Title: Vice President 17 SCHEDULE A THE COMPANY CUNA Mutual Life Insurance Company 5910 Mineral Point Road Madison, WI 53701-0391 A life insurance company organized under Iowa law. 18 SCHEDULE B ACCOUNTS OF THE COMPANY 1. Name: CUNA Mutual Life Variable Annuity Account Date Established: 12-14-1993 SEC Registration Number: 811- 08260 2. Name: CUNA Mutual Life Group Variable Annuity Account Date Established: 08-16-1983 SEC Registration Number: N/A 3. Name: CUNA Mutual Life Variable Account Date Established: 08-16-1983 SEC Registration Number: 811- 03915 19 SCHEDULE C AVAILABLE PORTFOLIOS AND CLASSES OF SHARES OF THE TRUST; INVESTMENT ADVISERS FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST INVESTMENT ADVISER - ------------------------------ ------------------ Templeton Developing Markets Templeton Asset Management Ltd. Securities Fund 20
SCHEDULE D CONTRACTS OF THE COMPANY - ------------------------------------------------------------------------------------- CONTRACT 1 CONTRACT 2 CONTRACT 3 - ------------------------------------------------------------------------------------- CONTRACT/PRODUCT Members Variable CU Pension Saver MEMBERS Variable NAME Annuity Group Annuity Universal Life UltraSaver Group Annuity CU UltraSaver Group Annuity - ------------------------------------------------------------------------------------- REGISTERED (Y/N) Yes No Yes - ------------------------------------------------------------------------------------- SEC REGISTRATION 033-73738 N/A 033-19718 NUMBER - ------------------------------------------------------------------------------------- REPRESENTATIVE 1676 01-GA-2-0390 190D FORM NUMBERS - ------------------------------------------------------------------------------------- SEPARATE ACCOUNT CUNA Mutual Life CUNA Mutual Life CUNA Mutual Life NAME/DATE Variable Annuity Group Variable Variable Account ESTABLISHED Account (December Annuity Account (August 16, 1983) 14, 1993) (August 16, 1983) - ------------------------------------------------------------------------------------- SEC REGISTRATION 811-08260 N/A 811-03915 NUMBER - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- PORTFOLIOS AND Templeton Developing Templeton Developing Templeton Developing CLASSES Markets Securities Markets Securities Markets Securities Fund Class 2 Fund Class 2 Fund Class 2 - -------------------------------------------------------------------------------------
21
SCHEDULE D CONT. CONTRACTS OF THE COMPANY - ------------------------------------------------------------------------------------- CONTRACT 4 CONTRACT 5 CONTRACT 6 - ------------------------------------------------------------------------------------- CONTRACT/PRODUCT MEMBERS Variable NAME Universal Life - ------------------------------------------------------------------------------------- REGISTERED (Y/N) Yes - ------------------------------------------------------------------------------------- SEC REGISTRATION 033-81499 NUMBER - ------------------------------------------------------------------------------------- REPRESENTATIVE 99-VUL FORM NUMBERS - ------------------------------------------------------------------------------------- SEPARATE ACCOUNT CUNA Mutual Life NAME/DATE Variable Account ESTABLISHED (August 16, 1983) - ------------------------------------------------------------------------------------- SEC REGISTRATION 811-03915 NUMBER - ------------------------------------------------------------------------------------- PORTFOLIOS AND Templeton Developing CLASSES Markets Securities Fund Class 2 - -------------------------------------------------------------------------------------
22 SCHEDULE E OTHER PORTFOLIOS AVAILABLE UNDER THE CONTRACTS 1. Investment Company: CIMCO Ultra Series Fund Portfolios: Money Market Fund Bond Fund Balanced Fund Growth & Income Stock Fund Capital Appreciation Stock Fund 2. Investment Company: MFS Variable Insurance Trust Portfolios: World Governments Fund Emerging Growth Fund 3. Investment Company: T. Rowe Price International Series, Inc. Portfolio: International Stock Fund 4. Investment Company: Oppenheimer Variable Account Funds Portfolio: High Income Fund 23 SCHEDULE F 24 SCHEDULE G ADDRESSES FOR NOTICES To the Company: CUNA Mutual Life Insurance Company 5910 Mineral Point Road Madison, WI 53701-0391 Attention: Associate General Counsel To the Trust: Franklin Templeton Variable Insurance Products Trust 777 Mariners Island Boulevard San Mateo, California 94404 Attention: Karen L. Skidmore, Assistant Vice President To the Underwriter: Franklin Templeton Distributors, Inc. 777 Mariners Island Boulevard San Mateo, California 94404 Attention: Philip J. Kearns, Vice President 25 SCHEDULE H SHARED FUNDING ORDER Templeton Variable Products Series Fund, et al. File No. 812-11698 SECURITIES AND EXCHANGE COMMISSION Release No. IC-24018 1999 SEC LEXIS 1887 September 17, 1999 ACTION: Notice of application for an amended order of exemption pursuant to Section 6(c) of the Investment Company Act of 1940 (the "1940 Act") from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder. TEXT: Summary of Application: Templeton Variable Products Series Fund (the "Templeton Trust"), Franklin Templeton Variable Insurance Products Trust (formerly Franklin Valuemark Funds) (the "VIP Trust," and together with the Templeton Trust, the "Funds"), Templeton Funds Annuity Company ("TFAC") or any successor to TFAC, and any future open-end investment company for which TFAC or any affiliate is the administrator, sub-administrator, investment manager, adviser, principal underwriter, or sponsor ("Future Funds") seek an amended order of the Commission to (1) add as parties to that order the VIP Trust and any Future Funds and (2) permit shares of the Funds and Future Funds to be issued to and held by qualified pension and retirement plans outside the separate account context. Applicants: Templeton Variable Products Series Fund, Franklin Templeton Variable Insurance Products Trust, Templeton Funds Annuity Company or any successor to TFAC, and any future open-end investment company for which TFAC or any affiliate is the administrator, sub-administrator, investment manager, adviser, principal underwriter, or sponsor (collectively, the "Applicants"). Filing Date: The application was filed on July 14, 1999, and amended and restated on September 17, 1999. Hearing or Notification of Hearing: An order granting the application will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Secretary of the Commission and serving Applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m., on October 12, 1999, and should be accompanied by proof of service on the Applicants in the form of an affidavit 26 or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Secretary of the Commission. Addresses: Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, D.C. 20549-0609. Applicants: Templeton Variable Products Series Fund and Franklin Templeton Variable Insurance Products Trust, 777 Mariners Island Boulevard, San Mateo, California 94404, Attn: Karen L. Skidmore, Esq. For Further Information Contact: Kevin P. McEnery, Senior Counsel, or Susan M. Olson, Branch Chief, Office of Insurance Products, Division of Investment Management, at (202) 942-0670. Supplementary Information: The following is a summary of the application. The complete application is available for a fee from the SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington, D.C. 20549-0102 (tel.(202)942-8090). Applicants' Representations: 1. Each of the Funds is registered under the 1940 Act as an open-end management investment company and was organized as a Massachusetts business trust. The Templeton Trust currently consists of eight separate series, and the VIP Trust consists of twenty-five separate series. Each Fund's Declaration of Trust permits the Trustees to create additional series of shares at any time. The Funds currently serve as the underlying investment medium for variable annuity contracts and variable life insurance policies issued by various insurance companies. The Funds have entered into investment management agreements with certain investment managers ("Investment Managers") directly or indirectly owned by Franklin Resources, Inc. ("Resources"), a publicly owned company engaged in the financial services industry through its subsidiaries. 2. TFAC is an indirect, wholly owned subsidiary of Resources. TFAC is the sole insurance company in the Franklin Templeton organization, and specializes in the writing of variable annuity contracts. The Templeton Trust has entered into a Fund Administration Agreement with Franklin Templeton Services, Inc. ("FT Services"), which replaced TFAC in 1998 as administrator, and FT Services subcontracts certain services to TFAC. FT Services also serves as administrator to all series of the VIP Trust. TFAC and FT Services provide certain administrative facilities and services for the VIP and Templeton Trusts. 3. On November 16, 1993, the Commission issued an order granting exemptive relief to permit shares of the Templeton Trust to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies (Investment Company Act Release No. 19879, File No. 812-8546) (the "Original Order"). Applicants incorporate by reference into the application the Application for the Original Order and each amendment thereto, the Notice of Application for the Original Order, and the Original Order, to the extent necessary, to supplement the representations made in the application in support of the requested relief. 27 Applicants represent that all of the facts asserted in the Application for the Original Order and any amendments thereto remain true and accurate in all material respects to the extent that such facts are relevant to any relief on which Applicants continue to rely. The Original Order allows the Templeton Trust to offer its shares to insurance companies as the investment vehicle for their separate accounts supporting variable annuity contracts and variable life insurance contracts (collectively, the "Variable Contracts"). Applicants state that the Original Order does not (i) include the VIP Trust or Future Funds as parties, nor (ii) expressly address the sale of shares of the Funds or any Future Funds to qualified pension and retirement plans outside the separate account context including, without limitation, those trusts, plans, accounts, contracts or annuities described in Sections 401(a), 403(a), 403(b), 408(b), 408(k), 414(d), 457(b), 501(c)(18) of the Internal Revenue Code of 1986, as amended (the "Code"), and any other trust, plan, contract, account or annuity that is determined to be within the scope of Treasury Regulation 1.817.5(f)(3)(iii) ("Qualified Plans"). 4. Separate accounts owning shares of the Funds and their insurance company depositors are referred to in the application as "Participating Separate Accounts" and "Participating Insurance Companies," respectively. The use of a common management investment company as the underlying investment medium for both variable annuity and variable life insurance separate accounts of a single insurance company (or of two or more affiliated insurance companies) is referred to as "mixed funding." The use of a common management investment company as the underlying investment medium for variable annuity and/or variable life insurance separate accounts of unaffiliated insurance companies is referred to as "shared funding." Applicants' Legal Analysis: 1. Applicants request that the Commission issue an amended order pursuant to Section 6(c) of the 1940 Act, adding the VIP Trust and Future Funds to the Original Order and exempting scheduled premium variable life insurance separate accounts and flexible premium variable life insurance separate accounts of Participating Insurance Companies (and, to the extent necessary, any principal underwriter and depositor of such an account) and the Applicants from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) (and any comparable rule) thereunder, respectively, to the extent necessary to permit shares of the Funds and any Future Funds to be sold to and held by Qualified Plans. Applicants submit that the exemptions requested are appropriate in the public interest, consistent with the protection of investors, and consistent with the purposes fairly intended by the policy and provisions of the 1940 Act. 2. The Original Order does not include the VIP Trust or Future Funds as parties nor expressly address the sale of shares of the Funds or any Future Funds to Qualified Plans. Applicants propose that the VIP Trust and Future Funds be added as parties to the Original Order and the Funds and any Future Funds be permitted to offer and sell their shares to Qualified Plans. 3. Section 6(c) of the 1940 Act provides, in part, that the Commission, by order upon application, may conditionally or unconditionally exempt any person, security or transaction, or any class or classes of persons, securities or transactions from any provisions of the 1940 Act or the rules or regulations thereunder, if and to the extent that such exemption is necessary or appropriate 28 in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the 1940 Act. 4. In connection with the funding of scheduled premium variable life insurance contracts issued through a separate account registered under the 1940 Act as a unit investment trust ("UIT"), Rule 6e-2(b)(15) provides partial exemptions from various provisions of the 1940 Act, including the following: (1) Section 9(a), which makes it unlawful for certain individuals to act in the capacity of employee, officer, or director for a UIT, by limiting the application of the eligibility restrictions in Section 9(a) to affiliated persons directly participating in the management of a registered management investment company; and (2) Sections 13(a), 15(a) and 15(b) of the 1940 Act to the extent that those sections might be deemed to require "pass-through" voting with respect to an underlying fund's shares, by allowing an insurance company to disregard the voting instructions of contractowners in certain circumstances. 5. These exemptions are available, however, only where the management investment company underlying the separate account (the "underlying fund") offers its shares "exclusively to variable life insurance separate accounts of the life insurer, or of any affiliated life insurance company." Therefore, Rule 6e-2 does not permit either mixed funding or shared funding because the relief granted by Rule 6e-2(b)(15) is not available with respect to a scheduled premium variable life insurance separate account that owns shares of an underlying fund that also offers its shares to a variable annuity or a flexible premium variable life insurance separate account of the same company or of any affiliated life insurance company. Rule 6e-2(b)(15) also does not permit the sale of shares of the underlying fund to Qualified Plans. 6. In connection with flexible premium variable life insurance contracts issued through a separate account registered under the 1940 Act as a UIT, Rule 6e-3(T)(b)(15) also provides partial exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act. These exemptions, however, are available only where the separate account's underlying fund offers its shares "exclusively to separate accounts of the life insurer, or of any affiliated life insurance company, offering either scheduled contracts or flexible contracts, or both; or which also offer their shares to variable annuity separate accounts of the life insurer or of an affiliated life insurance company." Therefore, Rule 6e-3(T) permits mixed funding but does not permit shared funding and also does not permit the sale of shares of the underlying fund to Qualified Plans. As noted above, the Original Order granted the Templeton Trust exemptive relief to permit mixed and shared funding, but did not expressly address the sale of its shares to Qualified Plans. 7. Applicants note that if the Funds were to sell their shares only to Qualified Plans, exemptive relief under Rule 6e-2 and Rule 6e-3(T) would not be necessary. Applicants state that the relief provided for under Rule 6e-2(b)(15) and Rule 6e-3(T)(b)(15) does not relate to qualified pension and retirement plans or to a registered investment company's ability to sell its shares to such plans. 8. Applicants state that changes in the federal tax law have created the opportunity for each of the Funds to increase its asset base through the sale of its shares to Qualified Plans. Applicants state that Section 817(h) of the Internal Revenue Code of 1986, as amended (the "Code"), imposes certain diversification standards on the assets underlying Variable Contracts. Treasury 29 Regulations generally require that, to meet the diversification requirements, all of the beneficial interests in the underlying investment company must be held by the segregated asset accounts of one or more life insurance companies. Notwithstanding this, Applicants note that the Treasury Regulations also contain an exception to this requirement that permits trustees of a Qualified Plan to hold shares of an investment company, the shares of which are also held by insurance company segregated asset accounts, without adversely affecting the status of the investment company as an adequately diversified underlying investment of Variable Contracts issued through such segregated asset accounts (Treas. Reg. 1.817-5(f)(3)(iii)). 9. Applicants state that the promulgation of Rules 6e-2(b)(15) and 6e-3(T)(b)(15) under the 1940 Act preceded the issuance of these Treasury Regulations. Thus, Applicants assert that the sale of shares of the same investment company to both separate accounts and Qualified Plans was not contemplated at the time of the adoption of Rules 6e-2(b)(15) and 6e-3(T)(b)(15). 10. Section 9(a) provides that it is unlawful for any company to serve as investment adviser or principal underwriter of any registered open-end investment company if an affiliated person of that company is subject to a disqualification enumerated in Section 9(a)(1) or (2). Rules 6e-2(b)(15) and 6e-3(T)(b)(15) provide exemptions from Section 9(a) under certain circumstances, subject to the limitations on mixed and shared funding. These exemptions limit the application of the eligibility restrictions to affiliated individuals or companies that directly participate in the management of the underlying portfolio investment company. 11. Applicants state that the relief granted in Rule 6e-2(b)(15) and 6e-3(T)(b)(15) from the requirements of Section 9 limits, in effect, the amount of monitoring of an insurer's personnel that would otherwise be necessary to ensure compliance with Section 9 to that which is appropriate in light of the policy and purposes of Section 9. Applicants submit that those Rules recognize that it is not necessary for the protection of investors or the purposes fairly intended by the policy and provisions of the 1940 Act to apply the provisions of Section 9(a) to the many individuals involved in an insurance company complex, most of whom typically will have no involvement in matters pertaining to investment companies funding the separate accounts. 12. Applicants to the Original Order previously requested and received relief from Section 9(a) and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) to the extent necessary to permit mixed and shared funding. Applicants maintain that the relief previously granted from Section 9(a) will in no way be affected by the proposed sale of shares of the Funds to Qualified Plans. Those individuals who participate in the management or administration of the Funds will remain the same regardless of which Qualified Plans use such Funds. Applicants maintain that more broadly applying the requirements of Section 9(a) because of investment by Qualified Plans would not serve any regulatory purpose. Moreover, Qualified Plans, unlike separate accounts, are not themselves investment companies and therefore are not subject to Section 9 of the 1940 Act. 13. Applicants state that Rules 6e-2(b)(15)(iii) and 6e-3(T)(b)(15)(iii) provide exemptions from the pass-through voting requirement with respect to several significant matters, assuming the limitations on mixed and shared funding are observed. Rules 6e-2(b)(15)(iii)(A) and 6e-3(T)(b)(15)(iii)(A) provide that the insurance company may disregard the voting instructions of its 30 contractowners with respect to the investments of an underlying fund or any contract between a fund and its investment adviser, when required to do so by an insurance regulatory authority (subject to the provisions of paragraphs (b)(5)(i) and (b)(7)(ii)(A) of the Rules). Rules 6e-2(b)(15)(iii)(B) and 6e-3(T)(b)(15)(iii)(A)(2) provide that the insurance company may disregard contractowners' voting instructions if the contractowners initiate any change in such company's investment policies, principal underwriter, or any investment adviser (provided that disregarding such voting instructions is reasonable and subject to the other provisions of paragraphs (b)(5)(ii) and (b)(7)(ii)(B) and (C) of the Rules). 14. Applicants assert that Qualified Plans, which are not registered as investment companies under the 1940 Act, have no requirement to pass-through the voting rights to plan participants. Applicants state that applicable law expressly reserves voting rights to certain specified persons. Under Section 403(a) of the Employment Retirement Income Security Act ("ERISA"), shares of a fund sold to a Qualified Plan must be held by the trustees of the Qualified Plan. Section 403(a) also provides that the trustee(s) must have exclusive authority and discretion to manage and control the Qualified Plan with two exceptions: (1) when the Qualified Plan expressly provides that the trustee(s) are subject to the direction of a named fiduciary who is not a trustee, in which case the trustees are subject to proper directions made in accordance with the terms of the Qualified Plan and not contrary to ERISA; and (2) when the authority to manage, acquire or dispose of assets of the Qualified Plan is delegated to one or more investment managers pursuant to Section 402(c)(3) of ERISA. Unless one of the two above exceptions stated in Section 403(a) applies, Qualified Plan trustees have the exclusive authority and responsibility for voting proxies. Where a named fiduciary to a Qualified Plan appoints an investment manager, the investment manager has the responsibility to vote the shares held unless the right to vote such shares is reserved to the trustees or the named fiduciary. Where a Qualified Plan does not provide participants with the right to give voting instructions, Applicants do not see any potential for material irreconcilable conflicts of interest between or among variable contract holders and Qualified Plan investors with respect to voting of the respective Fund's shares. Accordingly, Applicants state that, unlike the case with insurance company separate accounts, the issue of the resolution of material irreconcilable conflicts with respect to voting is not present with respect to such Qualified Plans since the Qualified Plans are not entitled to pass-through voting privileges. 15. Even if a Qualified Plan were to hold a controlling interest in one of the Funds, Applicants believe that such control would not disadvantage other investors in such Fund to any greater extent than is the case when any institutional shareholder holds a majority of the voting securities of any open-end management investment company. In this regard, Applicants submit that investment in a Fund by a Qualified Plan will not create any of the voting complications occasioned by mixed funding or shared funding. Unlike mixed or shared funding, Qualified Plan investor voting rights cannot be frustrated by veto rights of insurers or state regulators. 16. Applicants state that some of the Qualified Plans, however, may provide for the trustee(s), an investment adviser (or advisers), or another named fiduciary to exercise voting rights in accordance with instructions from participants. Where a Qualified Plan provides participants with the right to give voting instructions, Applicants see no reason to believe that participants in Qualified Plans generally or those in a particular Qualified Plan, either as a single group or in combination with participants in other Qualified Plans, 31 would vote in a manner that would disadvantage Variable Contract holders. In sum, Applicants maintain that the purchase of shares of the Funds by Qualified Plans that provide voting rights does not present any complications not otherwise occasioned by mixed or shared funding. 17. Applicants do not believe that the sale of the shares of the Funds to Qualified Plans will increase the potential for material irreconcilable conflicts of interest between or among different types of investors. In particular, Applicants see very little potential for such conflicts beyond that which would otherwise exist between variable annuity and variable life insurance contractowners. 18. As noted above, Section 817(h) of the Code imposes certain diversification standards on the underlying assets of variable contracts held in an underlying mutual fund. The Code provides that a variable contract shall not be treated as an annuity contract or life insurance, as applicable, for any period (and any subsequent period) for which the investments are not, in accordance with regulations prescribed by the Treasury Department, adequately diversified. 19. Treasury Department Regulations issued under Section 817(h) provide that, in order to meet the statutory diversification requirements, all of the beneficial interests in the investment company must be held by the segregated asset accounts of one or more insurance companies. However, the Regulations contain certain exceptions to this requirement, one of which allows shares in an underlying mutual fund to be held by the trustees of a qualified pension or retirement plan without adversely affecting the ability of shares in the underlying fund also to be held by separate accounts of insurance companies in connection with their variable contracts (Treas. Reg. 1.817-5(f)(3)(iii)). Thus, Applicants believe that the Treasury Regulations specifically permit "qualified pension or retirement plans" and separate accounts to invest in the same underlying fund. For this reason, Applicants have concluded that neither the Code nor the Treasury Regulations or revenue rulings thereunder presents any inherent conflict of interest. 20. Applicants note that while there are differences in the manner in which distributions from Variable Contracts and Qualified Plans are taxed, these differences will have no impact on the Funds. When distributions are to be made, and a Separate Account or Qualified Plan is unable to net purchase payments to make the distributions, the Separate Account and Qualified Plan will redeem shares of the Funds at their respective net asset value in conformity with Rule 22c-1 under the 1940 Act (without the imposition of any sales charge) to provide proceeds to meet distribution needs. A Qualified Plan will make distributions in accordance with the terms of the Qualified Plan. 21. Applicants maintain that it is possible to provide an equitable means of giving voting rights to Participating Separate Account contractowners and to Qualified Plans. In connection with any meeting of shareholders, the Funds will inform each shareholder, including each Participating Insurance Company and Qualified Plan, of information necessary for the meeting, including their respective share of ownership in the relevant Fund. Each Participating Insurance Company will then solicit voting instructions in accordance with Rules 6e-2 and 6e-3(T), as applicable, and its participation agreement with the relevant Fund. Shares held by Qualified Plans will be voted in accordance with applicable law. The voting rights provided to Qualified Plans with respect to shares of the 32 Funds would be no different from the voting rights that are provided to Qualified Plans with respect to shares of funds sold to the general public. 22. Applicants have concluded that even if there should arise issues with respect to a state insurance commissioner's veto powers over investment objectives where the interests of contractowners and the interests of Qualified Plans are in conflict, the issues can be almost immediately resolved since the trustees of (or participants in) the Qualified Plans can, on their own, redeem the shares out of the Funds. Applicants note that state insurance commissioners have been given the veto power in recognition of the fact that insurance companies usually cannot simply redeem their separate accounts out of one fund and invest in another. Generally, time-consuming, complex transactions must be undertaken to accomplish such redemptions and transfers. Conversely, the trustees of Qualified Plans or the participants in participant-directed Qualified Plans can make the decision quickly and redeem their interest in the Funds and reinvest in another funding vehicle without the same regulatory impediments faced by separate accounts or, as is the case with most Qualified Plans, even hold cash pending suitable investment. 23. Applicants also state that they do not see any greater potential for material irreconcilable conflicts arising between the interests of participants under Qualified Plans and contractowners of Participating Separate Accounts from possible future changes in the federal tax laws than that which already exist between variable annuity contractowners and variable life insurance contractowners. 24. Applicants state that the sale of shares of the Funds to Qualified Plans in addition to separate accounts of Participating Insurance Companies will result in an increased amount of assets available for investment by the Funds. This may benefit variable contractowners by promoting economies of scale, by permitting increased safety of investments through greater diversification, and by making the addition of new portfolios more feasible. 25. Applicants assert that, regardless of the type of shareholders in each Fund, each Fund's Investment Manager is or would be contractually and otherwise obligated to manage the Fund solely and exclusively in accordance with that Fund's investment objectives, policies and restrictions as well as any guidelines established by the Board of Trustees of such Fund (the "Board"). The Investment Manager works with a pool of money and (except in a few instances where this may be required in order to comply with state insurance laws) does not take into account the identity of the shareholders. Thus, each Fund will be managed in the same manner as any other mutual fund. Applicants therefore see no significant legal impediment to permitting the sale of shares of the Funds to Qualified Plans. 26. Applicants state that the Commission has permitted the amendment of a substantially similar original order for the purpose of adding a party to the original order and has permitted open-end management investment companies to offer their shares directly to Qualified Plan in addition to separate accounts of affiliated or unaffiliated insurance companies which issue either or both variable annuity contracts or variable life insurance contracts. Applicants state that the amended order sought in the application is identical to precedent with respect to the conditions Applicants propose should be imposed on Qualified Plans in connection with investment in the Funds. 33 Applicants' Conditions: If the requested amended order is granted, Applicants consent to the following conditions: 1. A majority of the Board of each Fund shall consist of persons who are not "interested persons" thereof, as defined by Section 2(a)(19) of the 1940 Act, and the rules thereunder and as modified by any applicable orders of the Commission, except that if this condition is not met by reason of the death, disqualification or bona fide resignation of any Board Member or Members, then the operation of this condition shall be suspended: (a) for a period of 45 days if the vacancy or vacancies may be filled by the remaining Board Members; (b) for a period of 60 days if a vote of shareholders is required to fill the vacancy or vacancies; or (c) for such longer period as the Commission may prescribe by order upon application. 2. The Board will monitor their respective Fund for the existence of any material irreconcilable conflict among the interests of the Variable Contract owners of all Separate Accounts investing in the Funds and of the Qualified Plan participants investing in the Funds. The Board will determine what action, if any, shall be taken in response to such conflicts. A material irreconcilable conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretive letter, or any similar action by insurance, tax or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of the Funds are being managed; (e) a difference in voting instructions given by variable annuity contract owners, variable life insurance contract owners, and trustees of Qualified Plans; (f) a decision by an insurer to disregard the voting instructions of Variable Contract owners; or (g) if applicable, a decision by a Qualified Plan to disregard the voting instructions of Qualified Plan participants. 3. Participating Insurance Companies, the Investment Managers, and any Qualified Plan that executes a fund participation agreement upon becoming an owner of 10 percent or more of the assets of an Fund (a "Participating Qualified Plan"), will report any potential or existing conflicts of which it becomes aware to the Board of any relevant Fund. Participating Insurance Companies, the Investment Managers and the Participating Qualified Plans will be responsible for assisting the Board in carrying out its responsibilities under these conditions by providing the Board with all information reasonably necessary for the Board to consider any issues raised. This responsibility includes, but is not limited to, an obligation by each Participating Insurance Company to inform the Board whenever voting instructions of Contract owners are disregarded and, if pass-through voting is applicable, an obligation by each Participating Qualified Plan to inform the Board whenever it has determined to disregard Qualified Plan participant voting instructions. The responsibility to report such information and conflicts, and to assist the Board, will be contractual obligations of all Participating Insurance Companies investing in the Funds under their agreements governing participation in the Funds, and such agreements shall provide that these responsibilities will be carried out with a view only to the interests of the Variable Contract owners. The responsibility to report such information and conflicts, and to assist the Board, will be contractual obligations of all Participating Qualified Plans under their agreements governing participation in the Funds, and such agreements will provide that 34 their responsibilities will be carried out with a view only to the interests of Qualified Plan participants. 4. If it is determined by a majority of the Board of a Fund, or by a majority of the disinterested Board Members, that a material irreconcilable conflict exists, the relevant Participating Insurance Companies and Participating Qualified Plans will, at their own expense and to the extent reasonably practicable as determined by a majority of the disinterested Board Members, take whatever steps are necessary to remedy or eliminate the material irreconcilable conflict, which steps could include: (a) in the case of Participating Insurance Companies, withdrawing the assets allocable to some or all of the Separate Account s from the Fund or any portfolio thereof and reinvesting such assets in a different investment medium, including another portfolio of an Fund or another Fund, or submitting the question as to whether such segregation should be implemented to a vote of all affected Variable Contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., variable annuity contract owners or variable life insurance contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Variable Contract owners the option of making such a change; (b) in the case of Participating Qualified Plans, withdrawing the assets allocable to some or all of the Qualified Plans from the Fund and reinvesting such assets in a different investment medium; and (c) establishing a new registered management investment company or managed Separate Account. If a material irreconcilable conflict arises because of a decision by a Participating Insurance Company to disregard Variable Contract owner voting instructions, and that decision represents a minority position or would preclude a majority vote, then the insurer may be required, at the Fund's election, to withdraw the insurer's Separate Account investment in such Fund, and no charge or penalty will be imposed as a result of such withdrawal. If a material irreconcilable conflict arises because of a Participating Qualified Plan's decision to disregard Qualified Plan participant voting instructions, if applicable, and that decision represents minority position or would preclude a majority vote, the Participating Qualified Plan may be required, at the Fund's election, to withdraw its investment in such Fund, and no charge or penalty will be imposed as a result of such withdrawal. The responsibility to take remedial action in the event of a determination by a Board of a material irreconcilable conflict and to bear the cost of such remedial action will be a contractual obligation of all Participating Insurance Companies and Participating Qualified Plans under their agreements governing participation in the Funds, and these responsibilities will be carried out with a view only to the interest of Variable Contract owners and Qualified Plan participants. 5. For purposes of Condition 4, a majority of the disinterested Board Members of the applicable Board will determine whether or not any proposed action adequately remedies any material irreconcilable conflict, but in no event will the relevant Fund or the Investment Managers be required to establish a new funding medium for any Contract. No Participating Insurance Company shall be required by Condition 4 to establish a new funding medium for any Variable Contract if any offer to do so has been declined by vote of a majority of the Variable Contract owners materially and adversely affected by the material irreconcilable conflict. Further, no Participating Qualified Plan shall be required by Condition 4 to establish a new funding medium for any Participating Qualified Plan if (a) a majority of Qualified Plan participants materially and adversely affected by the irreconcilable material conflict vote to decline such offer, or (b) pursuant to governing Qualified Plan documents and applicable law, 35 the Participating Qualified Plan makes such decision without a Qualified Plan participant vote. 6. The determination of the Board of the existence of a material irreconcilable conflict and its implications will be made known in writing promptly to all Participating Insurance Companies and Participating Qualified Plans. 7. Participating Insurance Companies will provide pass-through voting privileges to Variable Contract owners who invest in registered Separate Accounts so long as and to the extent that the Commission continues to interpret the 1940 Act as requiring pass-through voting privileges for Variable Contract owners. As to Variable Contracts issued by unregistered Separate Accounts, pass-through voting privileges will be extended to participants to the extent granted by issuing insurance companies. Each Participating Insurance Company will also vote shares of the Funds held in its Separate Accounts for which no voting instructions from Contract owners are timely received, as well as shares of the Funds which the Participating Insurance Company itself owns, in the same proportion as those shares of the Funds for which voting instructions from contract owners are timely received. Participating Insurance Companies will be responsible for assuring that each of their registered Separate Accounts participating in the Funds calculates voting privileges in a manner consistent with other Participating Insurance Companies. The obligation to calculate voting privileges in a manner consistent with all other registered Separate Accounts investing in the Funds will be a contractual obligation of all Participating Insurance Companies under their agreements governing their participation in the Funds. Each Participating Qualified Plan will vote as required by applicable law and governing Qualified Plan documents. 8. All reports of potential or existing conflicts received by the Board of a Fund and all action by such Board with regard to determining the existence of a conflict, notifying Participating Insurance Companies and Participating Qualified Plans of a conflict, and determining whether any proposed action adequately remedies a conflict, will be properly recorded in the minutes of the meetings of such Board or other appropriate records, and such minutes or other records shall be made available to the Commission upon request. 9. Each Fund will notify all Participating Insurance Companies that separate disclosure in their respective Separate Account prospectuses may be appropriate to advise accounts regarding the potential risks of mixed and shared funding. Each Fund shall disclose in its prospectus that (a) the Fund is intended to be a funding vehicle for variable annuity and variable life insurance contracts offered by various insurance companies and for qualified pension and retirement plans; (b) due to differences of tax treatment and other considerations, the interests of various Contract owners participating in the Fund and/or the interests of Qualified Plans investing in the Fund may at some time be in conflict; and (c) the Board of such Fund will monitor events in order to identify the existence of any material irreconcilable conflicts and to determine what action, if any, should be taken in response to any such conflict. 10. Each Fund will comply with all provisions of the 1940 Act requiring voting by shareholders (which, for these purposes, will be the persons having a voting interest in the shares of the Funds), and, in particular, the Funds will either provide for annual shareholder meetings (except insofar as the Commission 36 may interpret Section 16 of the 1940 Act not to require such meetings) or comply with Section 16(c) of the 1940 Act, although the Funds are not the type of trust described in Section 16(c) of the 1940 Act, as well as with Section 16(a) of the 1940 Act and, if and when applicable, Section 16(b) of the 1940 Act. Further, each Fund will act in accordance with the Commission's interpretation of the requirements of Section 16(a) with respect to periodic elections of Board Members and with whatever rules the Commission may promulgate with respect thereto. 11. If and to the extent Rules 6e-2 or 6e-3(T) under the 1940 Act is amended, or proposed Rule 6e-3 under the 1940 Act is adopted, to provide exemptive relief from any provision of the 1940 Act or the rules promulgated thereunder, with respect to mixed or shared funding on terms and conditions materially different from any exemptions granted in the order requested in the application, then the Funds and/or Participating Insurance Companies and Participating Qualified Plans, as appropriate, shall take such steps as may be necessary to comply with such Rules 6e-2 and 6e-3(T), as amended, or proposed Rule 6e-3, as adopted, to the extent that such Rules are applicable. 12. The Participating Insurance Companies and Participating Qualified Plans and/or the Investment Managers, at least annually, will submit to the Board such reports, materials or data as the Board may reasonably request so that the Board may fully carry out obligations imposed upon it by the conditions contained in the application. Such reports, materials and data will be submitted more frequently if deemed appropriate by the Board. The obligations of the Participating Insurance Companies and Participating Qualified Plans to provide these reports, materials and data to the Board, when the Board so reasonably requests, shall be a contractual obligation of all Participating Insurance Companies and Participating Qualified Plans under their agreements governing participation in the Funds. 13. If a Qualified Plan should ever become a holder of ten percent or more of the assets of a Fund, such Qualified Plan will execute a participation agreement with the Fund that includes the conditions set forth herein to the extent applicable. A Qualified Plan will execute an application containing an acknowledgment of this condition upon such Qualified Plan's initial purchase of the shares of any Fund. Conclusion: Applicants assert that, for the reasons summarized above, the requested exemptions are appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the 1940 Act. For the Commission, by the Division of Investment Management, pursuant to delegated authority. 37 Templeton Variable Products Series Fund, et al. File No. 812-11698 SECURITIES AND EXCHANGE COMMISSION Release No. IC-24079 1999 SEC LEXIS 2177 October 13, 1999 ACTION: Order Granting Exemptions TEXT: Templeton Variable Products Series Fund ("Templeton Trust"), Franklin Templeton Variable Insurance Products Trust ("VIP Trust"), Templeton Funds Annuity Company ("TFAC") or any successor to TFAC, and any future open-end investment company for which TFAC or any affiliate is the administrator, sub-administrator, investment manager, adviser, principal underwriter, or sponsor ("Future Funds") filed an application on July 14, 1999, and an amendment on September 17, 1999 seeking an amended order of the Commission pursuant to Section 6(c) of the Investment Company Act of 1940 ("1940 Act") exempting them from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15). The prior order (Rel. No. IC-19879) granted exemptive relief to permit shares of the Templeton Trust to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies. The proposed relief would amend the prior order to add as parties to that order the VIP Trust and any Future Funds and to permit shares of the Templeton Trust, the VIP Trust, and Future Funds to be issued to and held by qualified pension and retirement plans outside the separate account context. A notice of the filing of the application was issued on September 17, 1999 (Rel. No.IC-24018). The notice gave interested persons an opportunity to request a hearing and stated that an order granting the application would be issued unless a hearing should be ordered. No request for a hearing has been filed, and the Commission has not ordered a hearing. The matter has been considered, and it is found that granting the requested exemptions is appropriate in the public interest and consistent with the protection of investors and the purposes intended by the policy and provisions of the 1940 Act. Accordingly, IT IS ORDERED, pursuant to Section 6(c) of the 1940 Act, that the requested exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, be, and hereby are, granted, effective forthwith. For the Commission, by the Division of Investment Management, pursuant to delegated authority. EX-10.50 7 0007.txt KOREA AGREEMENT - -------------------------------------------------------------------------------- STOCK PURCHASE AGREEMENT - -------------------------------------------------------------------------------- BY AND BETWEEN GOOD MORNING SECURITIES CO., LTD. AND TEMPLETON INVESTMENT COUNSEL, INC. DATED: 29th JUNE, 2000 STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of 29th June, 2000 by and between Good Morning Securities Co., Ltd., a corporation incorporated under the 1aws of Republic of Korea and having its principal place of business at Good Morning Tower, 23-2, Youido-dong, Yongdungpo-gu, Seoul, Korea 150-712 (the "Seller") and Templeton Investment Counsel, Inc., a corporation incorporated under the laws of the state of Florida, United States of America and having its principal place of business at 500 East Broward Blvd. Suite 2100, Fort Lauderdale, Florida 33394, (the "Buyer"). Seller and Buyer are hereinafter referred to collectively as the "Parties" and individually as a "Party." WITNESSETH WHEREAS, the Seller is the owner of 3,207,000 shares of common stock (the Sale Shares") of Templeton Investment Trust Management Company Limited, a corporation duly organized and validly existing under the laws of Korea (the "Company"); and WHEREAS, the Seller desires to sell to the Buyer, and the Buyer desires to purchase from Seller, the Sale Shares under the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual premises and covenants and agreements contained herein below, and intending to be legally bound hereby, the Parties hereby agree as follows: ARTICLE 1. SALE AND PURCHASE OF THE SHARES 1.1 SALE AND PURCHASE OF THE SALE SHARES. Subject to the terms and conditions set forth on this Agreement, the Seller agrees to sell the Buyer, and the Buyer agree to purchase the from the Seller, the Sale Shares. The total price to be paid by the Buyer for the Sale Shares shale be aggregate of KRW 21,151,730,000 less any adjustments to the Purchase Price as agreed to by the Parties (the "Purchase Price"). ARTICLE 2. CLOSING 2.1 CLOSING DATE. The purchase and sale of the Sale Shares contemplated by this Agreement shall be consummated at a closing (the "Closing) to be held on 31st July, 2000, at the principal place of business of the Company or at such other time as the Parties to this Agreement may agree (such date and time being herein referred to as the "Closing Date"). 2.2 CLOSING DELIVERIES OF THE SELLER. At or as of the Closing, the Seller shall deliver, or have delivered, to the Buyer the stock certificates representing the Sale Shares, duly endorsed for transfer to the Buyer. 2.3 CLOSING DELIVERIES OF THE BUYER. At or as of the Closing, the Buyer shall deliver, or have delivered, to the Buyer an instrument evidencing that the Purchase Price has been paid by means of wire transfer of immediately available funds to the bank account designated by the Seller. ARTICLE 3. TERMINATION 3.1 TERMINATION. The obligation of the Parties hereto to consummate the purchase and the sale contemplated hereby may be terminated and abandoned at any time on or before the Closing Date by the mutual agreement of the Parties. ARTICLE 4. MISCELLANEOUS 4.1 ARBITRATION. Any disagreement, dispute, controversy or claim arising out of relating to this Agreement or in the interpretation hereof or any arrangements relating hereto or contemplated herein or the breach, termination or invalidity hereof shall be settled exclusively and finally by arbitration. The arbitration shall be conducted pursuant to the Rules of Arbitration of the International Chamber of Commerce (the "ICC Rules"). The arbitrage triennial shall consist of a single arbitrator appointed in accordance with the ICC Rules. The arbitration shall be conducted in Korea unless otherwise mutually agreed by the Parties. The language used in the arbitration shall be the English Language. Any decision or award of the arbitral tribunal shall be final and binding upon the Parties to the arbitration proceeding. 4.2 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of Korea. 4.3 ASSIGNMENT. Neither Party may assign any of its rights or delegate any of its duties under this Agreement without obtaining the prior written consent of the other Party, provided, however, that Buyer may assign to an affiliate or other designee the right to purchase all or part of the Sale Shares. IN WITNESS WHEREOF, the Parties executed this agreement as of the date first above written. GOOD MORNING SECURITIES TEMPLETON INVESTMENT CO., LTD COUNSEL, INC. By: /s/ K. K. Doh By: /s/ Michael Reed -------------------- ------------------------ Name: K. K. Doh Name: Michael Reed Title: President & CEO Title: Attorney in Fact EX-10.51 8 0008.txt SOUTH AFRICA MERGER AGREEMENTS A G R E E M E N T entered into between NEDCOR INVESTMENT BANK HOLDINGS LIMITED --------------------------------------- (a company duly incorporated in the Republic of South Africa with its principal place of business at 1 Newtown Avenue, Killarney) (Registration No. 1963/003972/06) and NEDCOR INVESTMENT BANK LIMITED ------------------------------ (a company duly incorporated in the Republic of South Africa with its principal place of business at 1 Newtown Avenue, Killarney) (Registration No. 1955/003181/06) and TEMPLETON INTERNATIONAL, INC. ----------------------------- (a company incorporated in accordance with the laws of the State of Delaware with its principal place of business at Suite 2100, 500 East Broward Boulevard Fort Lauderdale, Florida, 33394) (Corporate File No. 230 9185) and FRANKLIN TEMPLETON ASSET MANAGEMENT (PROPRIETARY) LIMITED --------------------------------------------------------- (a company incorporated in accordance with the laws of the Republic of South Africa with its principal place of business at Harrow Court, Isle of Houghton, Boundary Road, Parktown) (Registration No. 1997/009637/07) and TEMPLETON GLOBAL ADVISORS LIMITED --------------------------------- (a company incorporated in accordance with the laws of the Commonwealth of the Bahamas with its principal place of business at Lyford Cay, Nassau, Bahamas) (Reference No. 38,984) TABLE OF CONTENTS CLAUSE NO. DESCRIPTION PAGE PART I - PRELIMINARY.........................................1 1. INTERPRETATION.........................................1 2. PREAMBLE...............................................9 3. CONDITION PRECEDENT...................................10 4. DUE DILIGENCE INVESTIGATIONS..........................11 PART II - SALE OF THE SOLD SHARES, SOLD CLAIMS AND THE BUSINESS................................12 5. SALE OF THE SOLD SHARES AND THE SOLD CLAIMS...........12 6. SALE OF THE BUSINESS..................................12 7. PURCHASE PRICE........................................14 8. PAYMENT OF THE PURCHASE PRICE.........................14 9. THE DESIGNATED ACCOUNTS AND THE EFFECTIVE DATE ACCOUNTS16 10. IMPLEMENTATION........................................18 11. WARRANTIES AND REPRESENTATIONS........................20 12. RELEASE FROM GUARANTEES...............................22 13. SALE..................................................24 14. PURCHASE PRICE........................................25 15. PAYMENT OF THE PURCHASE PRICE.........................25 PART IV - GENERAL...........................................27 16. SHAREHOLDERS AGREEMENT................................27 17. PRE-IMPLEMENTATION DATE MATTERS.......................27 18. POST IMPLEMENTATION DATE MATTERS......................29 19. PUBLICITY.............................................31 CLAUSE NO. DESCRIPTION PAGE 20. ARBITRATION...........................................31 21. WHOLE AGREEMENT, NO AMENDMENT.........................34 22. NOTICES...............................................36 23. NO CESSION OR ASSIGNMENT..............................39 24. INTEREST ON OVERDUE AMOUNTS...........................39 25. COSTS.................................................39 26. INDIVISIBILITY........................................40 27. GOVERNING LAW.........................................40 ANNEXURE A - FAM DESIGNATED ACCOUNTS.........................1 ANNEXURE B - NIBAM DESIGNATED ACCOUNTS.......................1 ANNEXURE C - SHAREHOLDERS AGREEMENT..........................1 ANNEXURE D - THE BUSINESS....................................1 ANNEXURE E - PROVISIONS OF PAYMENT OF PURCHASE PRICE.........1 ANNEXURE F - SCHEDULE OF WARRANTIES GIVEN BY THE SELLER......1 ANNEXURE G - SCHEDULE OF WARRANTIES GIVEN BY TII.............1 ANNEXURE H - FORM OF UNDERTAKING TO THE FINANCIAL SERVICES BOARD........................1 WHEREBY IT IS AGREED AS FOLLOWS : - ------------------------------------ PART I - PRELIMINARY 1. INTERPRETATION The headings of the clauses in this agreement are for the purpose of convenience and reference only and shall not be used in the interpretation of nor modify nor amplify the terms of this agreement nor any clause hereof. Unless a contrary intention clearly appears - 1.1. words importing - 1.1.1. any one gender include the other two genders; 1.1.2. the singular include the plural and VICE VERSA; and 1.1.3. natural persons include created entities (corporate or unincorporate) and the state and VICE VERSA; 1.2. the following terms shall have the meanings assigned to them hereunder and cognate expressions shall have corresponding meanings, namely - 1.2.1. "Act" means the Companies Act No 61 of 1973; Page 2 1.2.2. "business" means the asset management business and related activities presently conducted by the NIBAM group referred to in clause 6.1; 1.2.3. "Competition Commission" means the Competition Commission established under the Competition Act, 1998; 1.2.4. "condition precedent" means the condition precedent in clause 3.1; 1.2.5. "conversion rate" means, in converting from US dollars to South African Rands, the mid spot rate of exchange quoted by the treasury division of NEDCOR INVESTMENT BANK LIMITED at 11h00 (South African time) on the implementation date; 1.2.6. "effective date" means 1 August 2000, provided that if the condition precedent has not been fulfilled by 31 August 2000, the effective date shall be the first day of the calendar month during which the condition precedent is fulfilled; 1.2.7. "FAM designated accounts" means the unaudited draft financial statements of the companies comprising the FAM group as at the close of business on 30 June 2000 which are annexed hereto marked ANNEXURE A; Page 3 1.2.8. "FAM effective date accounts" means the audited financial statements of the companies comprising the FAM group as at the close of business on the date preceding the effective date; 1.2.9. "FAM group" means collectively:- 1.2.9.1. the purchaser; 1.2.9.2. FRANKLIN TEMPLETON MANAGEMENT COMPANY LIMITED; 1.2.10. "implementation date" means the later of:- 1.2.10.1. 1 August 2000; and 1.2.10.2. the business day following that upon which the condition precedent is fulfilled; 1.2.11. "liabilities" means, in respect of the members of the NIBAM group and the members of the FAM group, any liability of any member of the relevant group, whether actual or contingent, which arose prior to the effective date including without limiting the generality of the aforegoing, any claims or liabilities (including claims or liabilities for consequential loss) as a result of any breach of contract or legislation or any delict occurring Page 4 prior to the effective date, and any liability of any member of the relevant group for taxation arising from or out of the profits or income or activities of any member of the relevant group for any period prior to the effective date; 1.2.12. "merger" means the merger of the asset management businesses conducted by each of the members of the NIBAM group and the members of the FAM group as contemplated by this agreement; 1.2.13. "NIBAM" means NIB ASSET MANAGEMENT LIMITED; 1.2.14. "NIBAM companies" means collectively:- 1.2.14.1. NIBAM; 1.2.14.2. NIB MANAGEMENT COMPANY LIMITED; 1.2.15. "NIBAM designated accounts" means the unaudited draft financial statements of each of the companies and the business comprising the NIBAM group as at the close of business on 30 June 2000, which are annexed hereto as ANNEXURE B; 1.2.16. "NIBAM effective date accounts" means the audited financial statements of each of the companies and the business Page 5 comprising the NIBAM group as at the close of business on the day preceding the effective date; 1.2.17. "NIBAM group" means collectively:- 1.2.17.1. the NIBAM companies; and 1.2.17.2. the business; 1.2.18. "NIBF" means NIB INTERNATIONAL FINANCE LIMITED (a company incorporated in the Isle of Man, having its principal place of business at Nedcor House, 29 - 33 Bucks Road, Douglas, Isle of Man, 1M1 3DD (Registration No. 096059C)); 1.2.19. "purchaser" means FRANKLIN TEMPLETON ASSET MANAGEMENT (PROPRIETARY) LIMITED; 1.2.20. "seller" means NEDCOR INVESTMENT BANK HOLDINGS LIMITED; 1.2.21. "shareholders agreement" means the agreement to be entered into between the seller, the purchaser, TGAL and TII in the form of the draft agreement which is ANNEXURE C hereto, which will be signed simultaneously with this agreement, regulating their relationship INTER SE as shareholders of the purchaser; Page 6 1.2.22. "sold claims" means all claims of whatsoever nature and from whatsoever cause arising, if any, which the seller may have against each of the NIBAM companies on the implementation date; 1.2.23. "sold shares" means collectively the entire issued share capital of each of the NIBAM companies; 1.2.24. "taxation" shall include:- 1.2.24.1. levies payable to government authorities; 1.2.24.2. income tax; 1.2.24.3. sales tax; 1.2.24.4. value-added tax; 1.2.24.5. any taxation arising from new assessments of taxation and/or the reopening of any taxation assessments for any period prior to the effective date; 1.2.24.6. donations tax; Page 7 1.2.24.7. customs duty; 1.2.24.8. stamp duty; 1.2.24.9. all other forms of taxation, other than deferred tax benefits; 1.2.24.10. any penalties or interest on any of the aforegoing; 1.2.24.11. regional services levies; 1.2.25. "TGAL" means TEMPLETON GLOBAL ADVISORS LIMITED; 1.2.26. "TII" means TEMPLETON INTERNATIONAL, INC.; 1.3. any reference in this agreement to "date of signature hereof" shall be read as meaning a reference to the date of the last signature of this agreement; 1.4. any reference to an enactment is to that enactment as at the date of signature hereof and as amended or re-enacted from time to time; 1.5. if any provision in a definition is a substantive provision conferring rights or imposing obligations on any party, notwithstanding that it Page 8 is only in the definition clause, effect shall be given to it as if it were a substantive provision in the body of the agreement; 1.6. when any number of days is prescribed in this agreement,same shall be reckoned exclusively of the first and inclusively of the last day unless the last day falls on a Saturday, Sunday or public holiday, in which case the last day shall be the next succeeding day which is not a Saturday, Sunday or public holiday; 1.7. where figures are referred to in numerals and in words, if there is any conflict between the two, the words shall prevail; 1.8. expressions defined in this agreement shall bear the same meanings in schedules or annexures to this agreement which do not themselves contain their own conflicting definitions; 1.9. the use of any expression in this agreement covering a process available under South African law such as a winding-up (without limitation EIUSDEM GENERIS) shall, if any of the parties to this agreement is subject to the law of any other jurisdiction, be construed as including any equivalent or analogous proceedings under the law of such jurisdiction; 1.10. where any term is defined within the context of any particular clause in this agreement, the term so defined, unless it is clear from the clause in question that the term so defined has limited application Page 9 to the relevant clause, shall bear the meaning ascribed to it for all purposes in terms of this agreement, notwithstanding that that term has not been defined in this interpretation clause; 1.11. the expiration or termination of this agreement shall not affect such of the provisions of this agreement as expressly provide that they will operate after any such expiration or termination or which of necessity must continue to have effect after such expiration or termination, notwithstanding that the clauses themselves do not expressly provide for this; 1.12. the rule of construction that the contract shall be interpreted against the party responsible for the drafting or preparation of the agreement, shall not apply. 2. PREAMBLE It is recorded that:- 2.1. each of:- 2.1.1. the seller, through the NIBAM group; 2.1.2. the purchaser, through the FAM group, provides asset management and related services; Page 10 2.2. it has been agreed to merge the aforementioned asset management activities and conduct those activities through the vehicle of the purchaser; 2.3. the parties have reached agreement as to the terms and conditions of the merger and on the basis upon which the relationship between the seller and TII, as shareholders of the purchaser, will be governed; 2.4. the parties wish to record the terms of the agreement in writing. 3. CONDITION PRECEDENT 3.1. This agreement, save for the provisions of this clause 3 and clauses 19, 20, 21, 22, 23, 24 and 25 which shall be of immediate force and effect, is subject to the following suspensive condition, namely the approval, insofar as and to the extent required, of:- 3.1.1. the Registrar of Banks; 3.1.2. the Financial Services Board; 3.1.3. the Exchange Control Department of the South African Reserve Bank; and 3.1.4. the Competition Commission, Page 11 to the conclusion and implementation of this agreement. 3.2. Forthwith after signature of this agreement, the seller shall use its best endeavours to procure the fulfilment, at the purchaser's cost, of the condition referred to in clause 3.1. To this end:- 3.2.1. the purchaser and TII undertake to give whatever assistance to and as may be required by the seller, including, but without limitation, the information and documentation applicable to the FAM group necessary for the filing with the Competition Commission; 3.2.2. the seller and TII shall sign and send to the Executive Officer of the Financial Services Board an undertaking in the form of the draft undertaking attached hereto as ANNEXURE H. 3.3. Unless the condition is fulfilled by not later than 31 December 2000, or such later date as may be agreed to by the parties in writing, the provisions of this clause 3 and clauses 19, 20, 21, 22, 23, 24 and 25 shall continue to be of force or effect, but the remainder of this agreement shall never become effective. 4. DUE DILIGENCE INVESTIGATIONS It is recorded that:- Page 12 4.1. the seller has conducted a due diligence investigation into the business and affairs of the FAM group; and 4.2. TII has conducted a due diligence investigation into the business and affairs of the NIBAM group. PART II - SALE OF THE SOLD SHARES, SOLD CLAIMS AND THE BUSINESS 5. SALE OF THE SOLD SHARES AND THE SOLD CLAIMS 5.1. The seller sells to the purchaser, which purchases as one indivisible transaction, the sold shares and the sold claims. 5.2. Notwithstanding the date upon which this agreement is signed and the date upon which the sold shares and sold claims are delivered to the purchaser, the sold shares and sold claims are sold with effect on and as from the effective date, from which date all risk in and benefits attaching to them shall be deemed to have passed to the purchaser. 6. SALE OF THE BUSINESS 6.1. The seller sells, transfers and cedes to the purchaser as a going concern, with effect from the effective date from which date the risk in and the benefit to the business shall vest in the purchaser, the business described in ANNEXURE D hereto and comprising the assets and liabilities as reflected in the NIBAM effective date accounts applicable to the business. Page 13 6.2. The parties agree that Section 197(2) of the Labour Relations Act, 1995 is applicable to the seller in terms of this agreement and that accordingly the employment of each employee of the seller, employed in regard to the business, will continue in force with the purchaser as the "new employer". The parties agree that no agreements contemplated in terms of section 197(3) of that Act will be concluded. 6.3. This transaction shall not be advertised as contemplated by Section 34 of the Insolvency Act, 1936. The seller hereby indemnifies the purchaser against any loss or damage which may be sustained or incurred by the purchaser as a result of the provisions of section 34 of the Insolvency Act, 1936, being invoked by any creditor in respect of the business. 6.4. The seller and the purchaser agree that the business is disposed of as a going concern and for the purposes of Section 11(1)(e) of the Value- Added Tax Act, 1991, agree that the business will be an income earning activity on the effective date and the implementation date and that the assets which are necessary for carrying on the business have been disposed of by the seller to the purchaser in terms hereof. If, notwithstanding the aforegoing, value-added tax is payable in respect of any of the assets sold in terms hereof, the same shall be borne and paid by the purchaser. Page 14 7. PURCHASE PRICE 7.1. The aggregate purchase price of the sold shares, the sold claims and the business is the South African Rand equivalent of US $54 000 000,00 (fifty four million US dollars) converted at the conversion rate. 7.2. Of the purchase price:- 7.2.1. so much as does not exceed the face value of the sold claims shall be allocated in respect of the sold claims; 7.2.2. the South African Rand equivalent of US $ 2 628 570,00 (two million six hundred and twenty eight thousand five hundred and seventy US dollars) converted at the conversion rate, less the amount referred to in clause 7.2.1, shall be allocated in respect of the sold shares; and 7.2.3. the balance shall be allocated in respect of the business. 8. PAYMENT OF THE PURCHASE PRICE 8.1. The purchase price shall be payable by the purchaser to the seller as follows - 8.1.1. as to an amount equal to the equivalent amount in South African Rands of US $9 000 000,00 (nine million US dollars), converted at the conversion rate, by the allotment and issue to the seller or its nominee, on the implementation date and Page 15 against compliance by the seller of its obligations in terms of clause 10, of 100 (one hundred) ordinary shares of R1,00 (one rand) each in the capital of the purchaser ranking PARI PASSU with the remaining issued ordinary shares in the capital of the purchaser, at the appropriate premium. Of the shares to be allotted and issued to the seller or its nominee as aforesaid, 50% (fifty per cent) thereof shall be allotted in renounceable form so as to facilitate the sale contemplated by clause 13. The balance of such shares shall be allotted and issued to and registered in the name of the seller. The purchaser and the seller hereby record and agree that payment in terms of this clause 8.1.1 constitutes a full and proper discharge of the purchase price of the sold shares and the sold claims, and a partial discharge of the purchase price of the business; 8.1.2. the balance of the purchase price of the business, being an amount equal to the equivalent amount in South African Rands of US $45 000 000,00 (forty five million US dollars), converted at the conversion rate, shall constitute a claim on loan account in favour of the seller against the purchaser and, save as may otherwise be provided herein, the relevant provisions of the shareholders agreement governing the terms and conditions of shareholder claims on loan account against the purchaser applying to such claim. Page 16 8.2. Unless the effective date occurs on or prior to Friday 4 August 2000, the purchase price shall bear interest at the 3 (three) month LIBOR rate quoted by Chase from 5 August 2000 to the implementation date, both days inclusive. Such interest, if payable in accordance with the aforegoing provisions, shall be paid to the seller on the implementation date against compliance by the seller of its obligations in terms of clause 10. 9. THE DESIGNATED ACCOUNTS AND THE EFFECTIVE DATE ACCOUNTS 9.1. The seller warrants in favour of the purchaser in regard to the NIBAM designated accounts that, save as disclosed and/or noted- 9.1.1. they have been prepared in accordance with the provisions of the Act and any other applicable legislation; 9.1.2. they fairly present the state of affairs of the NIBAM group as at 30 June 2000; 9.1.3. there has in the preparation thereof been taken into account good and generally accepted accounting principles and practice; and 9.1.4. all actual liabilities shall be reflected as actual liabilities and all contingent liabilities and future commitments will have been provided for or noted. Page 17 9.2. TII warrants in favour of the seller in regard to the FAM designated accounts that, save as disclosed and/or noted:- 9.2.1. they have been prepared in accordance with the provisions of the Act and any other applicable legislation; 9.2.2. they fairly present the state of affairs of the FAM group as at 30 June 2000; 9.2.3. there has in the preparation thereof been taken into account good and generally accepted accounting principles and practice; and 9.2.4. all actual liabilities shall be reflected as actual liabilities and all contingent liabilities and future commitments will have been provided for or noted. 9.3. As soon as practicable after the effective date, the seller shall cause the NIBAM effective date accounts to be prepared and completed and a copy delivered to TII. The seller gives to the purchaser the same warranties MUTATIS MUTANDIS in regard to the NIBAM effective date accounts as those set out in clauses 9.1.1 to 9.1.4 and in addition warrants that the same accounting methods and bases as were used in the preparation of the NIBAM designated accounts will be employed in the preparation thereof. Page 18 9.4. As soon as practicable after the effective date, TII shall cause the FAM effective date accounts to be prepared and completed and a copy delivered to the seller. TII gives to the seller the same warranties MUTATIS MUTANDIS in regard to the FAM effective date accounts as those set out in clauses 9.2.1 to 9.2.4 and in addition warrants that the same accounting methods and bases as were used in the preparation of the FAM designated accounts will be employed in the preparation thereof. 10. IMPLEMENTATION On the implementation date, representatives of the parties shall meet at the offices of the seller. At that meeting the seller shall deliver to the purchaser against compliance by the purchaser with its obligations in terms of clauses 8.1.1, 8.2 and 15:- 10.1. as regards the sold shares and the sold claims:- 10.1.1. the share certificates in respect of the sold shares, together with declarations for the transfer thereof in blank as to transferee, duly signed by the seller/registered holders on a date not being more than 14 (fourteen) days before the date of delivery and otherwise complying with the provisions of the company's articles of association and the Stamp Duties Act, 1968; Page 19 10.1.2. a certified copy of a resolution passed by the directors of each of the NIBAM companies - 10.1.2.1. approving of the transfer of the sold shares to the purchaser; 10.1.2.2. noting the cession of the sold claims; 10.1.3. such other documents as are necessary in order to enable the purchaser to procure the registration of the sold shares into its name; 10.1.4. the books, licences, registers, records, title deeds, leases and other documents of whatsoever nature of each of the NIBAM companies. 10.2. as regards the business:- 10.2.1. the delivery of all assets forming part of the business; 10.2.2. such documentation as may be necessary in order to enable ownership of the assets comprising the business to be transferred to, and where applicable registered in, the name of the purchaser. Page 20 11. WARRANTIES AND REPRESENTATIONS 11.1. The seller gives to the purchaser all the warranties in respect of the NIBAM group set out in ANNEXURE F hereto as read with any disclosure schedule attached hereto by the seller when it signs. 11.2. The purchaser shall not be entitled to cancel this agreement as a consequence of a breach by the seller of any warranty referred to in clauses 9.1, 9.3 or in ANNEXURE F, unless the breach is incapable of being remedied by being caused to cease or by the payment of compensation or otherwise or, if it is capable of so being remedied, the seller fails so to remedy the breach within 30 (thirty) days (or such longer period as may be reasonably necessary in the circumstances) of the receipt of written notice calling upon it to do so. 11.3. Save for the warranties referred to in clauses 9.1, 9.3 and 11.5, and in ANNEXURE F hereto, the seller has not given and accordingly shall not be bound by any warranties or representations of whatsoever nature, whether express or implied, in respect of the NIBAM group. 11.4. Notwithstanding anything to the contrary hereinbefore contained, the purchaser shall not have any claim against the seller in respect of any action arising from a breach of any warranty unless the aggregate of amounts payable as a result of all such breaches exceeds R100 000,00 (one hundred thousand rand). Any such claim shall be limited to the amount in excess of R100 000,00 (one hundred thousand rand). Page 21 11.5. The seller gives to TII the same warranties as it gives to the purchaser in clauses 9.1, 9.3 and in ANNEXURE F hereto provided that TII shall only be entitled to exercise its rights pursuant to a breach of warranty if the purchaser is precluded, through any act or omission on the part of the seller, from instituting proceedings against the seller for a breach of the warranty in question given in its favour, in which event the purchaser shall not be entitled to exercise its rights pursuant to a breach of the relevant warranty given in its favour. 11.6. TII gives to the seller all the warranties in respect of the FAM group set out in ANNEXURE G hereto as read with any disclosure schedule attached hereto by TII when it signs. 11.7. The seller shall not be entitled to cancel this agreement as a consequence of a breach by TII of any warranty referred to in clauses 9.2, 9.4 or in ANNEXURE G, unless the breach is incapable of remedied by being caused to cease or by the payment of compensation or otherwise or, if it is capable of so being remedied, TII fails so to remedy the breach within 30 (thirty) days (or such longer period as may be reasonably necessary in the circumstances) of the receipt of written notice calling upon it to do so. 11.8. Save for the warranties referred to in clauses 9.2, 9.4 and in ANNEXURE G hereto, TII has not given and accordingly shall not be bound by any warranties or representations of whatsoever nature, whether express or implied, in respect of the FAM group. Page 22 11.9. Notwithstanding anything to the contrary herein before contained, the seller shall not have any claim against the purchaser in respect of any action arising from a breach of any warranty unless the aggregate of amounts payable as a result of all such breaches exceeds R100 000,00 (one hundred thousand rand) . Any such claim shall be limited to the amounts in excess of R100 000,00 (one hundred thousand rand). 12. RELEASE FROM GUARANTEES 12.1. TII shall use its best endeavours to procure the release of the seller from 50% (fifty per cent) of any liability which the seller may have from causes arising after the effective date under all guarantees, suretyships or indemnities which have been given by the seller for the obligations of the NIBAM group; provided that TII shall - 12.1.1. not be obliged to discharge any principal obligation or agree to any variation of the terms of any such guarantee, suretyship or indemnity nor shall it be obliged to cause the company to discharge the principal debt; 12.1.2. tender its own guarantee, suretyship or indemnity if that is necessary, to procure any such release. Page 23 12.2. Until the release of the seller is procured, TII indemnifies the seller against 50% (fifty per cent) of any liability referred to in clause 12.1. TII shall be obliged to make payment under this indemnity as soon as the seller becomes obliged to make payment in respect of any such liability. 12.3. The seller shall use its best endeavours to procure the release of TII from 50% (fifty per cent) of any liability which TII may have from causes arising after the effective date under all guarantees, suretyships or indemnities which have been given by TII for the obligations of the FAM group; provided that the seller shall:- 12.3.1. not be obliged to discharge any principal obligation or agree to any variation of the terms of any such guarantee, suretyship or indemnity nor shall it be obliged to cause the company to discharge the principal debt; 12.3.2. be obliged to tender its own guarantee, suretyship or indemnity if that is necessary, to procure any such release. 12.4. Until the release of TII is procured, the seller indemnifies TII against 50% (fifty per cent) of any liability referred to in clause 12.3. The seller shall be obliged to make payment in respect of any such liabilities as soon as TII becomes obliged to make payment in respect of any such liability. Page 24 PART III - SALE OF PORTION OF THE SELLER'S SHARES IN AND CLAIMS AGAINST THE PURCHASER 13. SALE 13.1. The seller hereby cedes and sells, with effect from the effective date but immediately following the implementation of clause 8.1:- 13.1.1. to TII, 50% (fifty per cent) of the shares to be allotted and issued to the seller or its nominee in terms of clause 8.1.1 (namely the shares to be allotted in renounceable form), the transfer of such shares (hereinafter referred to as "the specified TII shares") to be effected by way of a renunciation by the seller in favour of TII; and 13.1.2. to TGAL, 50% (fifty per cent) of the loan account referred to in clause 8.1.2 (such loan account being hereinafter referred to as "the specified loan account"). 13.2. Notwithstanding the date upon which this agreement is signed, the specified TII shares and the specified loan account are ceded and sold with effect on and as from the effective date, from which date all risk in and benefits attaching thereto shall be deemed to have passed to TII and TGAL respectively. Page 25 14. PURCHASE PRICE The purchase price of the specified TII shares and the specified loan account is:- 14.1. in respect of the specified TII shares, an amount equal to the equivalent in South African Rands of US $4 500 000,00 (four million five hundred thousand US dollars), converted at the conversion rate; 14.2. in respect of the specified loan account, an amount equal to the equivalent in South African Rands of US $22 500 000,00 (twenty two million five hundred thousand US dollars) , converted at the conversion rate. 15. PAYMENT OF THE PURCHASE PRICE The purchase price of the specified TII shares and the specified loan account shall be payable to the seller as follows:- 15.1. an amount of US $4 500 000,00 (four million five hundred thousand US dollars) shall be discharged by TII paying such amount, on the implementation date and in cash, to NIBF as payment and collection agent for and behalf of the seller and such payment shall constitute a full and proper discharge by TII of the purchase price of the specified TII shares; 15.2. an amount of US $9 000 000,00 (nine million US dollars) shall be discharged by TGAL paying such amount, on the implementation date and Page 26 in cash, to NIBF as payment and collection agent for and behalf of the seller and such payment shall constitute a full and proper discharge by TGAL of such portion of the purchase price of the specified loan account; 15.3. the balance of the purchase price shall be paid to the seller in South African Rands on the fifth anniversary of the implementation date. In this regard:- 15.3.1. the balance of the purchase price, for the aforegoing purpose, shall be converted into South African Rands at the conversion rate; 15.3.2. an amount of US $13 500 000,00 (thirteen million five hundred thousand US dollars), being the US dollar equivalent on the implementation date of the Rand amount referred to in clause 15.3.1, shall, on the implementation date, be paid by TGAL to NIBF to be held by NIBF (as security agent on behalf of the seller) as security for the due and proper discharge by the purchaser of its obligations to pay the balance of the purchase price, it being recorded that an agreement governing the terms of this security will be entered into between the parties concerned. Page 27 All payments to be effected by the purchaser to the seller/NIBF in terms of this Part III shall be effected in accordance with the provisions of ANNEXURE E hereto. By its signature hereto, TII binds itself in favour of the seller as surety for and co-principal debtor IN SOLIDUM with TGAL for the due and punctual performance by TGAL of its obligations hereunder. PART IV - GENERAL 16. SHAREHOLDERS AGREEMENT Simultaneously with signature of this agreement, the parties shall sign the shareholders agreement. 17. PRE-IMPLEMENTATION DATE MATTERS TII undertakes to procure that:- 17.1. all its shares in and claims against FRANKLIN TEMPLETON MANAGEMENT COMPANY LIMITED ("FTManco) are sold to and registered in the name of the purchaser for a purchase consideration of R2 322 651,00 (two million three hundred and twenty two thousand six hundred and fifty one rand) such that, prior to the implementation date but with effect from the effective date, FTManco will be a wholly owned subsidiary of the purchaser. The purchase price shall constitute a claim on loan account in favour of TII which shall be repaid by the purchaser as soon as possible after the implementation date but which claim on loan account shall not be subject to the provisions of clause 19.2 of Page 28 the shareholders' agreement relating to the PRO RATA provision of loan accounts; 17.2. the aggregate of its claims on loan account against the purchaser as at the effective date are (other than the claim of R2 322 651,00 (two million three hundred and twenty two thousand six hundred and fifty one rand) arising pursuant to the implementation of clause 17.1), prior to the implementation date, applied in subscribing for one new share in the capital of the company at an appropriate premium, thus effectively capitalising such claims; 17.3. the authorised share capital of the purchaser will be such as to facilitate the implementation of this agreement; 17.4. the seller will subscribe for 101 (one hundred and one) ordinary shares of R1,00 (one rand) each in the share capital of the purchaser, at par, which shares shall be issued to the seller upon payment, on the implementation date, of the subscription price of R101,00 (one hundred and one rand) and which shall, upon issue, rank pari passu in all respects with the then issued share capital of the purchaser; 17.5. the employment contracts of the employees of FTManco will, prior to the implementation date but with effect from the effective date, be assigned to the purchaser. Page 29 It is recorded that the parties are in the course of concluding employment contracts, embodying, INTER ALIA, restraint of trade provisions, with key personnel who will be employed, or continue to be employed, by the purchaser. 18. POST IMPLEMENTATION DATE MATTERS 18.1. It is recorded that the following agreements/matters have been or are currently in the course of being concluded/undertaken, namely:- 18.1.1. an agreement of lease between the purchaser (as tenant) and the seller (as landlord) in respect of premises from which the Cape Town operations of the merged business will be conducted with effect from the implementation date, it being recorded that any on-going liability in respect of premises currently occupied by the NIBAM group and the FAM group in respect of their business operations in Cape Town shall be borne and paid by the purchaser; 18.1.2. an agreement between NIBAM and FinSource (PROPRIETARY) LIMITED (Registration No. 1998/004065/07) (which will incorporate appropriate provisions to enable the agreement to be assigned to the purchaser) relating to the outsourcing of certain functions; Page 30 18.1.3. service level agreements between NEDCOR INVESTMENT BANK LIMITED and the purchaser; 18.1.4. a sub-distributor agreement between TGAL and the purchaser regulating the distribution of off-shore business; 18.1.5. the completion and filing of all taxation (including provisional tax) returns of the purchaser by no later than 31 August 2000. The parties shall liaise and consult with each other in regard to the finalisation of these agreements. 18.2. It is agreed that unutilised asset swap capacity of or available to the merged business will, insofar as legally permissible, be applied, within 3 (three) months of the date of signature hereof, to off-shore funds nominated by TII provided that such funds are reasonably acceptable to the seller taking cognisance of client mandates and client interests. 18.3. It is intended that NIBAM will continue to operate on the same basis and in the same manner as hitherto. 18.4. The parties undertake to procure, as soon as reasonably possible after the implementation date, that the articles of association of Page 31 the purchaser are amended so as to permit share buy-backs, buy-ins and payments to shareholders as contemplated by sections 85 - 90 of the Act. 19. PUBLICITY No party shall publish to any third party the fact of or any information concerning the conclusion of this agreement or the terms hereof without the consent of the others, which consent shall not be unreasonably withheld, save for any publication required by the Johannesburg Stock Exchange and/or as required by law. 20. ARBITRATION 20.1. Save in respect of those provisions of the agreement which provide for their own remedies which would be incompatible with arbitration, a dispute which arises in regard to - 20.1.1. the interpretation of; or 20.1.2. the carrying into effect of; or 20.1.3. any of the parties' rights and obligations arising from; or 20.1.4. the termination or purported termination of or arising from the termination of; or 20.1.5. the rectification or proposed rectification of Page 32 this agreement, or out of or pursuant to this agreement or on any matter which in terms of this agreement requires agreement by the parties, (other than where an interdict is sought or urgent relief may be obtained from a court of competent jurisdiction), shall be submitted to and decided by arbitration. 20.2. That arbitration shall be held - 20.2.1. with only the parties and their representatives present thereat; 20.2.2. at Sandton. It is the intention that the arbitration shall, where possible, be held and concluded in 21 (twenty one) working days after it has been demanded. The parties shall use their best endeavours to procure the expeditious completion of the arbitration. The arbitrator shall determine his own rules of procedure and the parties shall be bound thereby. 20.3. The arbitration shall not be subject to the arbitration legislation for the time being in force in the Republic of South Africa. 20.4. The arbitrator shall be, if the matter in dispute is principally - Page 33 20.4.1. a legal matter, a practising senior advocate of not less than 5 (five) years standing as such and practising at the Johannesburg or Sandton Bar's, or a senior lawyer (whether or not an attorney as contemplated by the Attorneys Act, No 53 of 1979) of not less than 15 (fifteen) years standing, in either case specialising in commercial law; 20.4.2. an accounting matter, a practising chartered accountant of not less than 15 (fifteen) years standing; 20.4.3. any other matter, an independent person agreed upon between the parties. If the parties fail to agree on an arbitrator within 7 (seven) days after the arbitration has been demanded, the arbitrator shall be nominated by the President for the time being of the Law Society of the Transvaal (or its successor-in-Gauteng). If the parties fail to agree whether the dispute is of a legal, accounting or other nature within the said 7 (seven) day period, it shall be considered a matter referred to in clause 20.4.3. 20.5. The parties shall keep the evidence in the arbitration proceedings and any order made by any arbitrator confidential unless otherwise contemplated herein. Page 34 20.6. The arbitrator shall be obliged to give his award in writing fully supported by reasons. The arbitrator shall make an award as to costs which shall be paid accordingly, it being agreed that the arbitrator shall, in making any costs award in favour of TII, take cognisance of the costs that may necessarily have been incurred by TII in arranging for non-South African residents to be present in South Africa so as to attend the arbitration proceedings and/or prepare therefor. 20.7. The provisions of this clause are severable from the rest of this agreement and shall remain in effect even if this agreement is terminated for any reason. 20.8. The arbitrator shall have the power to give default judgment if any party fails to make submissions on due date and/or fails to appear at the arbitration. 21. WHOLE AGREEMENT, NO AMENDMENT 21.1.This agreement constitutes the whole agreement between the parties relating to the subject matter hereof. 21.2. No amendment or consensual cancellation of this agreement or any provision or term hereof or of any agreement, bill of exchange or other document issued or executed pursuant to or in terms of this agreement and no settlement of any disputes arising under this agreement and no extension of time, waiver or relaxation or suspension of or agreement not to enforce or to suspend or postpone Page 35 the enforcement of any of the provisions or terms of this agreement or of any agreement, bill of exchange or other document issued pursuant to or in terms of this agreement shall be binding unless recorded in a written document signed by the parties (or in the case of an extension of time, waiver or relaxation or suspension, signed by the party granting such extension, waiver or relaxation). Any such extension, waiver or relaxation or suspension which is so given or made shall be strictly construed as relating strictly to the matter in respect whereof it was made or given. 21.3. No extension of time or waiver or relaxation of any of the provisions or terms of this agreement or any agreement, bill of exchange or other document issued or executed pursuant to or in terms of this agreement, shall operate as an estoppel against any party in respect of its rights under this agreement, nor shall it operate so as to preclude such party thereafter from exercising its rights strictly in accordance with this agreement. 21.4. To the extent permissible by law no party shall be bound by any express or implied term, representation, warranty, promise or the like not recorded herein, whether it induced the contract and/or whether it was negligent or not. Page 36 22. NOTICES 22.1. The parties choose for all purposes under this agreement, whether in respect of court process, notices or other documents or communications of whatsoever nature, the following addresses : 22.1.1. NEDCOR INVESTMENT BANK HOLDINGS LIMITED Physical: 1 Newtown Avenue Killarney 2193 Postal: P O Box 582 Johannesburg 2000 Telefax: (011) 480-1779/80 22.1.2. NEDCOR INVESTMENT BANK LIMITED Physical: 1 Newtown Avenue Killarney 2193 Postal: P O Box 582 Johannesburg 2000 Telefax: (011) 480-1779/80 22.1.3. TEMPLETON INTERNATIONAL, INC. Physical: c/o Templeton Asset Management Limited Harrow Court II Isle of Houghton Boundary Road Parktown 2193 Page 37 Postal: P O Box 87587 Houghton 2041 Telefax: (011) 643-1366 US Telefax: (091) 954 847-2229 22.1.4. FRANKLIN TEMPLETON ASSET MANAGEMENT (PROPRIETARY) LIMITED Physical: c/o Templeton Asset Management Limited Harrow Court II Isle of Houghton Boundary Road Parktown 2193 Postal: P O Box 87587 Houghton 2041 Telefax: (011) 643-1366 22.1.5. TEMPLETON GLOBAL ADVISORS LIMITED Physical: c/o Templeton Asset Management Limited Harrow Court II Isle of Houghton Boundary Road Parktown 2193 Postal: P O Box 87587 Houghton 2041 Telefax: (011) 643-1366 22.2. Any notice or communication required or permitted to be given in terms of this agreement shall be valid and effective only :- 22.2.1. if delivered or given by telefax; Page 38 22.2.2. in the case of a notice or communication to the purchaser, if a copy thereof is also delivered or given by telefax both to the seller and TII (in the case of TII, by telefax transmission to its US telefax, the number of which appears in clause 22.1.3). 22.3. Any party may by notice to any other party change its' address to another physical address in South Africa or its telefax number, provided that the change shall become effective VIS-A-VIS that addressee on the 10th (tenth) business day from the receipt of the notice by the addressee. 22.4. Any notice to a party - 22.4.1. delivered by hand to a responsible person during ordinary business hours at its chosen physical address shall be deemed to have been received on the day of delivery; or 22.4.2. sent by telefax to its chosen telefax number stipulated in clause 22.1, shall be deemed to have been received on the date of despatch (unless the contrary is proved). 22.5. Notwithstanding anything to the contrary herein contained a written notice or communication actually received by a party shall be an Page 39 adequate written notice or communication to it notwithstanding that it was not sent by telefax to or delivered at its chosen address. 23. NO CESSION OR ASSIGNMENT Save as otherwise expressly provided in this agreement, neither the seller on the one hand nor the purchaser nor TII on the other shall be entitled to cede their rights or assign their rights and obligations hereunder to any third party without the prior consent of the other of them, which consent shall not be withheld unreasonably. 24. INTEREST ON OVERDUE AMOUNTS Any amount falling due for payment by any party to any other in terms of or pursuant to this agreement and not paid on due date, including any amount which may be payable as damages, shall bear interest at Standard Bank's prime overdraft rate compounded monthly in arrear. Damages for the breach of any warranty or representation as to a stipulated state of affairs shall be deemed to have been sustained on the date to which such warranty or representation relates. In the case of a dispute as to Standard Bank's prime overdraft rate, a certificate in writing by a manager or accountant of Standard Bank shall be PRIMA FACIE evidence thereof. 25. COSTS 25.1. The seller shall pay the costs of preparing the NIBAM designated accounts and the NIBAM effective date accounts. 25.2. TII shall pay the costs of preparing the FAM designated accounts and the FAM effective date accounts. Page 41 25.3.The purchaser shall pay all other costs of and incidental to the implementation of this agreement including, but without limitation :- 25.3.1. the stamp duty in respect of:- 25.3.1.1. the registration of transfer of the sold shares into the purchaser's name; 25.3.1.2. the creation, allotment and issue of the new shares in the capital of the purchaser to be allotted and issued as contemplated by clause 8.1.1; 25.3.1.3. all stamp duty and other costs relating to the implementation of the provisions of clause 17; 25.3.2. labour related costs, lease cancellation costs, relocation costs and the like. If and to the extent permitted, such costs shall be written off against the company's share premium account. 26. INDIVISIBILITY The transactions recorded in this agreement are indivisible. 27. GOVERNING LAW 27.1. This agreement shall be governed by and interpreted in accordance with the substantive laws of the Republic of South Africa. 27.2. Save as otherwise provided herein, the parties submit to the exclusive jurisdiction of the High Court of South Africa. SIGNED by the parties and witnessed on the following dates and at the following places respectively: DATE PLACE WITNESS SIGNATURE - ---- ----- ------- --------- For: NEDCOR INVESTMENT BANK HOLDINGS LIMITED 1. /s/ Izak Botha ----------------- 2. For: NEDCOR INVESTMENT BANK LIMITED 1. /s/ Izak Botha ----------------- 2. For: TEMPLETON INTERNATIONAL, INC. 1. /s/ Charles E. Johnson ---------------------- 2. For: FRANKLIN TEMPLETON ASSET MANAGEMENT (PROPRIETARY) LIMITED 1. /s/ Charles E. Johnson ---------------------- 2. DATE PLACE WITNESS SIGNATURE For: TEMPLETON GLOBAL ADVISORS LIMITED 1. /s/ Charles E. Johnson ---------------------- 2. ANNEXURE A - FAM DESIGNATED ACCOUNTS ANNEXURE B - NIBAM DESIGNATED ACCOUNTS ANNEXURE C - SHAREHOLDERS AGREEMENT ANNEXURE D - THE BUSINESS The business comprises the management of assets in terms of the mandates received by NIB Asset Management Limited from institutional and private clients. Such mandates are fulfilled principally on an active judgemental basis by portfolio managers. 0 ANNEXURE E - PROVISIONS OF PAYMENT OF PURCHASE PRICE ANNEXURE F - SCHEDULE OF WARRANTIES GIVEN BY THE SELLER 1. In this annexure - 1.1. the "agreement" means the agreement to which this annexure is attached; 1.2. a reference to "the company" is a reference to each of the NIBAM companies; 1.3. a reference to "employees" is a reference to each employee listed in ANNEXURE F1 hereto; 1.4. a reference to "SYFRETS" means SYFRETS LIMITED, a subsidiary of NIBH; 1.5. a reference to "marks" means any registered or unregistered trademarks, trade names or other devices used by the company; 1.6. to the extent that at signature of the agreement, the effective date may already have passed, and accordingly the use of any tense may be inappropriate, the warranties shall be read in the appropriate tense; 1.7. the warranties will be qualified by any disclosure made by the seller in the attached disclosure schedule. Page 2 2. On the effective date and on the implementation date - 2.1. the company will be regularly incorporated as a company with limited liability according to the laws of the Republic of South Africa; 2.2. no steps will have been taken in respect of the company in terms of section 73 of the Act; 2.3. neither the company nor its directors will be under any obligation (whether contingently upon the exercise of any right or otherwise) to increase or reduce or otherwise alter its authorised or issued share capital; 2.4. the seller will be entitled and able to give free and unencumbered title to the sold shares and sold claims to the purchaser; 2.5. no person will have any right (including any option or right of first refusal) to acquire any of the sold shares or the sold claims or to subscribe for, take up or acquire any of the unissued shares in the capital of the company, present or future; 2.6. no resolution will have been passed, nor will the company be obliged, to alter any of the rights attaching to any of the shares in the capital of the company or to alter the memorandum or articles of association of the company or to create or to issue any debentures; Page 3 2.7. no person will have any right to obtain an order for the rectification of the register of members of the company; 2.8. the company's books and records will have been properly maintained according to law and will in all material respects accurately reflect, in accordance with generally accepted and sound accounting principles and standards, all of the transactions entered into by the company or to which it is a party; 2.9. no resolutions will have been passed by the directors or members of the company which will not be reflected in the minute books of the company or which have been submitted to the purchaser for inspection; 2.10.as regards the business, the seller will be able to give to the purchaser free and unencumbered title of the assets forming part of the business and the business itself; 2.11.the business and its assets will be insured against the risks to which they are subject for amounts which accord with sound business practice for a period terminating not earlier than 60 days after the implementation date, all premiums due in respect of that insurance will have been paid and the seller will have complied with all of the conditions to which liability of the insurers under those policies is subject; Page 4 2.12.SYFRETS and the company will not be in breach of any of their material statutory or other legal obligations in respect of the business; 2.13.there are at the date of signature of this agreement by the seller no disputes or pending litigation, arbitration, criminal, review or expropriation proceedings in respect of the business or the company which are material to this transaction (including without limitation in respect of the assets of the business) and neither the seller, SYFRETS nor the company is aware of any circumstances which may lead to any dispute or proceedings; 2.14.no person other than the purchaser will have any right (including any option or right of first refusal) to purchase any of the assets of the business or the company, other than in the ordinary course of business; 2.15.the use of the marks used by SYFRETS or the company does not infringe the rights of any third party; 2.16.neither NEDCOR, SYFRETS nor the company is a party to any proceedings under the Labour Relations Act of 1995, as amended, in respect of the employees; Page 5 2.17.no material transaction will have been entered into in connection with the business since 30 June 2000 save in the ordinary and regular course of conduct of the business; 2.18.none of the seller, SYFRETS nor the company, will have done or omitted to do anything which would:- 2.18.1. materially prejudice the continued goodwill of the business; 2.18.2. materially reduce the scope of the business; 2.18.3. result in any business associate ceasing to a material extent to transact business with the company or to vary the terms upon which it transacts business with the company (but this sub-clause 2.18.3 shall not apply in respect of the contracts constituting the institutional client portfolio or the private client direct portfolio of the business, as they are set out in ANNEXURES F2 AND F3 respectively); 2.19.none of the seller, SYFRETS or the company is aware of any facts, matters or circumstances which may give rise to:- Page 6 2.19.1. any of the licences, consents, permits, approvals or other authorities required for the operation of the business being cancelled or not being renewed in the future or only being renewed subject to the imposition of onerous terms; or 2.19.2. the cancellation of any of the contracts the rights to which the purchaser is acquiring in terms of this agreement, whether as a result of any breach thereof by SYFRETS or the company or otherwise; 2.20.this transaction does not constitute a breach of any of the material contractual obligations of the seller, SYFRETS or the company in respect of the business, nor will it entitle any person to terminate any contract to which the purchaser is acquiring rights to under this agreement; 2.21.no person other than the seller and its subsidiaries is entitled to an order requiring the company to cease using any of the marks which it uses; 2.22.none of the liabilities in the NIBAM designated accounts arose other than in the ordinary course of conduct of business; Page 7 2.23.no person other than the shareholders of the purchaser or employees of the company (in the latter case in respect only of their participation in a profit sharing scheme approved by the seller's remuneration committee for the current financial year, up to the effective date) will, on or after the implementation date, have any right to participate in any revenues or profits generated by the business; 2.24.no resolution will have been passed by the members of the seller, SYFRETS or the company for its winding-up, and, as far as the seller is aware, no application for that winding-up will have been presented by any creditor or member of the seller at the closing date; 2.25.neither the seller, SYFRETS, any company nor any member, agent, employee or other person authorised to act on its behalf has:- 2.25.1. established or maintained any unlawful or unrecorded fund or corporate monies or other corporate assets; or 2.25.2. made or promised to make any bribe, kick-back, pay-off, or other unlawful payment of a similar or comparable nature, to any person or entity, private or public, regardless of form, whether in money, property or services with regard to the business; Page 8 2.26.all the employees of the NIBAM group are listed in ANNEXURE F1 hereto; 2.27.none of the employees is entitled to any exceptional leave privilege, accumulated leave, payment IN LIEU of leave, pension or the like, and, during the period of 12 (twelve) months ending immediately prior to the effective date, the terms of employment or remuneration payable to any such employees will not have been varied and compensation or other benefits payable on or in connection with the termination of or retirement from employment or office of any of those person will not have been agreed, except for:- 2.27.1. normal salary and other remuneration reviews in the ordinary course; 2.27.2. changes arising from changes in the employment status of any of those persons (for instance, promotions and transfers) all of which have been in the ordinary course of the business; and 2.27.3. the employees referred to in ANNEXURE F1 whose names are marked with asterisks, and whose terms and conditions of employment have been amended as disclosed to representatives of TII; Page 9 2.28.without limiting clause 2.27, no employee will be entitled to accumulated or accrued leave in excess of fifty working days; 2.29.subject to the provisions of the Labour Relations Act, 1995, and with the exception of the employees referred to in clause 2.27.3 of this Annexure, the purchaser will, after the effective date, be legally entitled to terminate the employment of any of the employees on one month's notice; 2.30.subject to the provisions of the Labour Relations Act, 1995, if any of the employees is retrenched by the purchaser after the effective date, that employee will not be contractually entitled to receive any compensation in excess of that provided for in section 196 of the Labour Relations Act, 1995 (which provides for payment of one week's pay for every completed year of service); 2.31.no employee will be entitled to more than thirty six working days' leave for each 12 (twelve) months of completed service; 2.32.no employee will on the effective date be entitled to participate in any employee share incentive or participation scheme, other than the NIBH Share Incentive Scheme, or the profit sharing scheme referred to in sub-clause 2.23; Page 10 2.33.no employee will on the effective date have any claims for any bonuses, gratuities, share of profits or the like, other than through their participation in the profit sharing scheme referred to in sub-clause 2.23; 2.34.the company has no obligations to contribute on behalf of any employee to any pension/provident fund scheme other than the Nedcor Group scheme in which the employees participate; 2.35.neither NEDCOR INVESTMENT BANK LIMITED nor the company has unusual obligations to any of its employees arising from their employment contracts (and for purposes of this warranty any term which is not a "standard" term applicable to all employees or all employees of that particular class or category shall be considered as unusual). 3. Between the date of signature of the agreement and the implementation date, save as disclosed in the attached disclosure schedule - 3.1. the company will continue to carry on its business in the ordinary, normal and regular course thereof and will not incur any liability or obligation or enter into any transaction or sell or alienate any of its assets otherwise than in the ordinary, normal and regular course of business; Page 11 3.2. the company will continue to trade in accordance with the trading style presently adopted by it; 3.3. there will be no material adverse change in the company's financial position; 3.4. no transaction will be entered into and no assets will be acquired or disposed of and no liabilities will be incurred otherwise than in the normal, ordinary and regular course of the business. 4. At the effective date the company will have no liabilities other than those disclosed in the NIBAM effective date accounts, and at the implementation date the company will have no liabilities other than those disclosed in the NIBAM effective date accounts and other than those incurred between the effective date and the implementation date in the ordinary, normal and regular course of the company's business. 5. Save as disclosed in the schedule hereto, the NIBAM effective date accounts will reflect a financial position not materially worse than the financial position reflected in the NIBAM designated accounts. 6. All income tax and other statutory returns of the company which were due on or before the effective date have been submitted to the revenue or other competent statutory or regulatory authorities. Page 12 7. The institutional client portfolio list which is ANNEXURE F2 and the private client direct portfolio which is ANNEXURE F3, each accurately reflects the clients of the business constituting that portfolio as at the date set forth in that annexure and the values of the investments in each of the client portfolios at that date, and the unit trust portfolio list which is ANNEXURE F4 accurately reflects the unit trusts constituting that portfolio as at the date set forth in that annexure and the values of the portfolios in each of those unit trusts at that date. 8. The memorandum by Peter Brown dated 31 July 2000 accurately reflects the unutilized asset swap capacity in the portfolios in ANNEXURES F2, F3 AND F4 at 31 July 2000. 9. The execution, delivery and performance of this agreement by the seller and NEDCOR INVESTMENT BANK LIMITED does not and will not violate or result in the breach of any material provision of, or require the consent or approval of any person (other than as contemplated in clause 3 of the agreement) under - 9.1. any statute or government or regulatory authority regulation or rule; 9.2. judgment or order of any court, or aware of any arbitration or equivalent tribunal; 9.3. the memorandum or articles of association of the company. Page 13 10. The payment of any amounts under the agreement of NIBF will not cause TII or TGAL to breach or violate any South African law, regulation or rule. ANNEXURE G - SCHEDULE OF WARRANTIES GIVEN BY TII 1. In this annexure - 1.1. the "agreement" means the agreement to which this annexure is attached; 1.2. the "business" means the asset management business and related activities presently conducted by the FAM group; 1.3. a reference to "the company" is a reference to each of the members of the FAM group; 1.4. a reference to "employees" is a reference to each employee listed in ANNEXURE G1 hereto; 1.5. a reference to "marks" means any registered or unregistered trademarks, trade names or other devices used by the company; 1.6. to the extent that at signature of the agreement, the effective date may already have passed, and accordingly the use of any tense may be inappropriate, the warranties shall be read in the appropriate tense; 1.7. the warranties will be qualified by any disclosure made by TII in the attached disclosure schedule; Page 2 1.8. to the extent that the agreement requires TII and/or the company to perform certain action(s) contrary to any warranty recorded herein, such warranty shall be subject to the relevant clause(s) of the agreement that require the performance of such action(s) to the extent necessary to facilitate the implementation of the agreement. 2. On the effective date and on the implementation date - 2.1. the company will be regularly incorporated as a company with limited liability according to the laws of the Republic of South Africa; 2.2. no steps will have been taken in respect of the company in terms of section 73 of the Act; 2.3. neither the company nor its directors will be under any obligation (whether contingently upon the exercise of any right or otherwise) to increase or reduce or otherwise alter its authorised or issued share capital; 2.4. TII will be entitled and able to give free and unencumbered title to the shares referred to clause 17.4 of the agreement; Page 3 2.5. no person will have any right (including any option or right of first refusal) to acquire any of the shares or the claims or to subscribe for, take up or acquire any of the unissued shares in the capital of the company, present or future; 2.6. no resolution will have been passed, nor will the company be obliged, to alter any of the rights attaching to any of the shares in the capital of the company or to alter the memorandum or articles of association of the company or to create or to issue any debentures; 2.7. no person will have any right to obtain an order for the rectification of the register of members of the company; 2.8. the company's books and records will have been properly maintained according to law and will in all material respects accurately reflect, in accordance with generally accepted and sound accounting principles and standards, all of the transactions entered into by the company or to which it is a party; 2.9. no resolutions will have been passed by the directors or members of the company which will not be reflected in the minute books of the company or which have been submitted to the purchaser for inspection; 2.10.as regards the business, TII will be able to give to the purchaser free and unencumbered title of the assets forming part of the business and the business itself; Page 4 2.11.the business and its assets will be insured against the risks to which they are subject for amounts which accord with sound business practice for a period terminating not earlier than 60 days after the implementation date, all premiums due in respect of that insurance will have been paid and TII will have complied with all of the conditions to which liability of the insurers under those policies is subject; 2.12.the company will not be in breach of any of its material statutory or other legal obligations in respect of the business; 2.13.there are at the date of signature of this agreement by TII no disputes or pending litigation, arbitration, criminal, review or expropriation proceedings in respect of the company which are material to this transaction and neither TII nor the company is aware of any circumstances which may lead to any dispute or proceedings; 2.14.no person other than the shareholders of the purchaser will have any rights in and to the assets of the business or the company; 2.15.the use of the marks by the company does not infringe the rights of any third party; 2.16.the company is a not a party to any proceedings under the Labour Relations Act of 1995, as amended, in respect of the employees; Page 5 2.17.no material transaction will have been entered into in connection with the business since 30 June 2000 save in the ordinary and regular course of conduct of the business; 2.18.the company will not have done or omitted to have done anything which would:- 2.18.1. materially prejudice the continued goodwill of the business; 2.18.2. materially reduce the scope of the business; 2.18.3. result in any business associate ceasing to a material extent to transact business with the company or to vary the terms upon which it transacts business with the company (but this sub-clause 2.18.3 shall not apply in respect of the contracts constituting the institutional client portfolio or the private client direct portfolio of the business, as they are set out in ANNEXURE G2); 2.19.the company is not aware of any facts, matters or circumstances which may give rise to:- Page 6 2.19.1. any of the licences, consents, permits, approvals or other authorities required for the operation of the business being cancelled or not being renewed in the future or only being renewed subject to the imposition of onerous terms; or 2.19.2. the cancellation of any of the contracts the rights to which the seller is acquiring in terms of this agreement, whether as a result of any breach thereof by TII, the company or otherwise; 2.20.this transaction does not constitute a breach of any of the material contractual obligations of TII or the company in respect of the business, nor will it entitle any person to terminate any contract to which the seller is acquiring rights to under this agreement; 2.21.no person other than TII or a member of the TII group (as defined in the Shareholders Agreement, attached to the agreement as ANNEXURE C) is entitled to an order requiring the company to cease using any of the marks which it uses; 2.22.none of the liabilities in the FAM designated accounts arose other than in the ordinary course of conduct of business; 2.23.no resolution will have been passed by the company for its winding-up, and, as far as TII is aware, no application for that winding-up will have been presented by any creditor or member of the company at the closing date; Page 7 2.24.neither TII, the company, any other company nor any member, agent, employee or other person authorised to act on its behalf has:- 2.24.1. established or maintained any unlawful or unrecorded fund or corporate monies or other corporate assets; or 2.24.2. made or promised to make any bribe, kick-back, pay-off, or other unlawful payment of a similar or comparable nature, to any person or entity, private or public, regardless of form, whether in money, property or services with regard to the business; 2.25.all the employees of the FAM group are listed in ANNEXURE G1 hereto; 2.26.none of the employees is entitled to any exceptional leave privilege, payment IN LIEU of leave, pension or the like, and, during the period of 12 (twelve) months ending immediately prior to the effective date, the terms of employment or remuneration payable to any such employees will not have been varied and compensation or other benefits payable on or in connection with the termination of or retirement from employment or office of any of those person will not have been agreed, except for:- 2.26.1. normal salary and other remuneration reviews in the ordinary course; Page 8 2.26.2. changes arising from changes in the employment status of any of those persons (for instance, promotions and transfers) all of which have been in the ordinary course of the business; and 2.26.3. the employees referred to in ANNEXURE G1 whose names are marked with asterisks, and whose terms and conditions of employment have been amended as disclosed to representatives of the seller; 2.27.without limiting clause 26, no employee will be entitled to accumulated or accrued leave in excess of fifty working days; 2.28.subject to the provisions of the Labour Relations Act, 1995, and with the exception of the employees referred to in clause 2.26.3 of this Annexure, the purchaser will, after the effective date, be legally entitled to terminate the employment of any of the employees on one month's notice; 2.29.subject to the provisions of the Labour Relations Act, 1995, if any of the employees is retrenched by the purchaser after the effective date, that purchaser will not be contractually entitled to receive any compensation in excess of that provided for in section 196 of the Labour Relations Act, 1995 (which provides for payment of one week's pay for every completed year of service); Page 9 2.30.no employee will be entitled to more than thirty six working days' leave for each 12 (twelve) months completed service; 2.31.no employee will on the effective date be entitled to participate in any employee share incentive or participation scheme, other than the Franklin Resources Inc. Restricted Stock Bonus Plan and the 1998 Stock Option Plan; 2.32.no employees will on the effective date have any claims for any bonuses, gratuities, share of profits or the like, other than through their participation in the profit sharing scheme referred to in sub-clause 2.31; 2.33.the company has no obligations to contribute on behalf of any employee to any pension/provident fund scheme other than the ................. scheme in which the employees participate; 2.34.the company has no unusual obligations to any of its employees arising from their employment contracts (and for purposes of this warranty any term which is not a "standard" term applicable to all employees or all employees of that particular class or category shall be considered as unusual). 3. Between the date of signature of the agreement and the implementation date, save as disclosed in the attached disclosure schedule :- Page 10 3.1. the company will continue to carry on its business in the ordinary, normal and regular course thereof and will not incur any liability or obligation or enter into any transaction or sell or alienate any of its assets otherwise than in the ordinary, normal and regular course of business; 3.2. the company will continue to trade in accordance with the trading style presently adopted by it; 3.3. there will be no material adverse change in the company's financial position; 3.4. no transaction will be entered into and no assets will be acquired or disposed of and no liabilities will be incurred otherwise than in the normal, ordinary and regulator course of the business. 4. At the effective date the company will have no liabilities other than those disclosed in the FAM effective date accounts, and at the implementation date the company will have no liabilities other than those disclosed in the FAM effective date accounts and other than those incurred between the effective date and the implementation date in the ordinary, normal and regular course of the company's business. 5. Save as disclosed in the schedule hereto, the FAM effective date accounts will reflect a financial position not materially worse than the financial position reflected in the FAM designated accounts. Page 11 6. All income tax and other statutory returns of the company which were due on or before the effective date will have been submitted to the revenue or other competent statutory or regulatory authorities no later than the implementation date. 7. The institutional client, private client direct portfolio and the unit trust portfolio list which is ANNEXURE G2, accurately reflects the clients of the business constituting those portfolios and the values of the investments in each of those portfolios as at the date set forth in that annexure. 8. The executive, delivery and performance of this agreement by TII and the company does not and will not violate or result in the breach of any material provision of, or require the consent or approval of any person (other than as contemplated in clause 3 of the agreement) under - 8.1. any statute or government or regulatory authority regulatory or rule; 8.2. judgment or order of any court, or aware of any arbitration or equivalent tribunal; 8.3. the memorandum or articles of association of the company. 9. The Net Asset Value of FT Manco as at the effective date shall equal or exceed the amount of R2 300 000,00 (two million three hundred thousand rand). Page 12 10. As regards the leases in respect of the following premises :- 10.1. Harrow Court 2, Isle of Houghton Boundary Road, Parktown Johannesburg; and 10.2. Letterstedt House, Fedsure on Main, Main Road, Claremont Cape Town; and 10.3. Suite 6, 9 Frosterly, Frosterly Park La Lucia Ridge the landlord, insofar as may be required, will prior to the implementation date, have approved the change of shareholding in the purchaser and the landlord will approve thereto.. ANNEXURE H - FORM OF UNDERTAKING TO THE FINANCIAL SERVICES BOARD ANNEXURE C A G R E E M E N T entered into between TEMPLETON INTERNATIONAL, INC. (a company incorporated in accordance with the laws of the State of Delaware with its principal place of business at Suite 2100, 500 East Broward Boulevard Fort Lauderdale, Florida, 33394) (Corporate File No. 230 9185) and NEDCOR INVESTMENT BANK HOLDINGS LIMITED --------------------------------------- (a company duly incorporated in the Republic of South Africa with its principal place of business at 1 Newtown Avenue, Killarney) (Registration No. 1963/003972/06) and FRANKLIN TEMPLETON ASSET MANAGEMENT (PROPRIETARY) LIMITED (a company incorporated in accordance with the laws of the Republic of South Africa with its principal place of business at Harrow Court, Isle of Houghton, Boundary Road, Parktown) (Registration No. 1997/009637/07) and TEMPLETON GLOBAL ADVISORS LIMITED (acompany incorporated in accordance with the laws of the Commonwealth of the Bahamas with its principal place of business at Lyford Cay, Nassau, Bahamas) (Reference No. 38,984) TABLE OF CONTENTS CLAUSE NO. DESCRIPTION PAGE 1. INTERPRETATION AND PRELIMINARY.........................1 2. CONFLICTS WITH MEMORANDUM AND/OR ARTICLES OF ASSOCIATION................................7 3. ISSUE OF SHARES........................................8 4. APPOINTMENT OF DIRECTORS...............................8 5. QUORUM FOR DIRECTORS' MEETINGS.........................9 6. QUORUM FOR SHAREHOLDERS' MEETINGS.....................10 7. OFFICERS..............................................10 8. RESOLUTIONS...........................................12 9. GOVERNANCE AND MANAGEMENT.............................14 10. GENERAL PROVISIONS RELATING TO TRANSFERS OF SHARES....16 11. PUT...................................................23 12. CALL..................................................27 13. DISPOSALS OF SHARES...................................30 14. NAME OF THE PURCHASER AND BRANDING....................37 15. EXCLUSIVITY...........................................38 16. EMPOWERMENT ASSET MANAGEMENT COMPANY..................41 17. RESTRUCTURING AND OTHER CHARGES.......................41 18. LODGING OF SHARES.....................................41 19. CAPITAL AND LOAN ACCOUNTS.............................42 20. GOOD FAITH............................................44 21. RIGHT OF MEMBERS TO INSPECT BOOKS OF THE COMPANY......44 22. APPLICATION OF THE SHAREHOLDERS' AGREEMENT TO SUBSIDIARIES OF THE COMPANY...........................44 CLAUSE NO. DESCRIPTION PAGE 23. WHOLE AGREEMENT, NO AMENDMENT.........................44 24. OPERATIONAL ISSUES....................................46 25. NOTICES...............................................46 26. COSTS.................................................49 27. GOVERNING LAW.........................................49 28. ARBITRATION...........................................49 ANNEXURE A - TII GROUP NAMES.................................1 ANNEXURE B - NIBH GROUP NAMES................................1 ANNEXURE C - CATEGORIES OF SERVICES..........................1 WHEREBY IT IS AGREED AS FOLLOWS : - ------------------------------- 1. INTERPRETATION AND PRELIMINARY The headings of the clauses in this agreement are for the purpose of convenience and reference only and shall not be used in the interpretation of nor modify nor amplify the terms of this agreement nor any clause hereof. Unless a contrary intention clearly appears - 1.1. words importing - 1.1.1. any one gender include the other two genders; 1.1.2. the singular include the plural and VICE VERSA; and 1.1.3. natural persons include created entities (corporate or unincorporate) and the state and VICE VERSA; 1.2. the following terms shall have the meanings assigned to them hereunder and cognate expressions shall have corresponding meanings, namely - 1.2.1. "business" means the provision of asset management and related services; 1.2.2. "company" means FRANKLIN TEMPLETON ASSET MANAGEMENT (PROPRIETARY) LIMITED; Page 2 1.2.3. "FR" means FRANKLIN RESOURCES INC; 1.2.4. "implementation date" means the implementation date as defined in the merger agreement; 1.2.5. "initial period" means the period of 21 (twenty one) months reckoned from midnight on the last day of the calendar month during which the implementation date occurs; 1.2.6. "merger agreement" means the agreement to which this agreement is attached as ANNEXURE C; 1.2.7. "NEDCOR" means NEDCOR LIMITED; 1.2.8. "NIBH" means NEDCOR INVESTMENT BANK HOLDINGS LIMITED and a reference to NIBH embraces a reference to any permitted successor-in-title; 1.2.9. "NIBH group" means NIBH and its subsidiaries and NEDCOR and NEDCOR's subsidiaries from time to time; 1.2.10. "QUANTS" means QUANTITATIVE ASSET MANAGEMENT (PROPRIETARY) LIMITED; Page 3 1.2.11. "shareholders" means the registered shareholders in the company from time to time; 1.2.12. "strike price" for the purposes of clauses 11 and 12 means the price determined by applying the following formula:- x = a [1,2% * b) + (2,45% * c)] where:- x = strike price; a = the percentage equivalent to the TII group's percentage shareholding in the company as at the relevant effective date; b = the average of the company's audited month-end institutional funds under management over the 6 (six) month period ending on the last day of the calendar month preceding the month during which the relevant effective date occurs; c = the average of the company's audited month-end non-institutional funds under Page 4 management over the 6 (six) month period ending on the last day of the calendar month preceding the month during which the relevant effective date occurs; 1.2.13. "subsidiary" means a subsidiary as defined in and contemplated by the South African Companies Act, Act No 61 of 1973; 1.2.14. "territory" means the countries comprising the South African Development Community; 1.2.15. "TGAL" means TEMPLETON GLOBAL ADVISERS LIMITED; 1.2.16. "TII" means TEMPLETON INTERNATIONAL, INC. and a reference to TII embraces a reference to any permitted successor-in-title; 1.2.17. "TII group" means TII and its subsidiaries and FR and FR's subsidiaries from time to time; 1.2.18. "trigger event" shall mean:- 1.2.18.1. NIBH ceasing to be a subsidiary of NEDCOR; and/or 1.2.18.2. TII ceasing to be a subsidiary of FR; and/or Page 5 1.2.18.3. a third party (excluding a trust for the benefit of the disposing shareholders and/or their descendants but only for so long as the trust is for the benefit of those persons) acquiring beneficially, whether directly or indirectly, more than 25% (twenty five per cent) of the issued share capital of NIBH; and/or 1.2.18.4. a third party (excluding a trust for the benefit of the disposing shareholders and/or their descendants but only for so long as the trust is for the benefit of those persons) acquiring beneficially, whether directly or indirectly more than 25% (twenty five per cent) of the issued share capital of TII; 1.2.18.5. a meeting of directors or shareholders is adjourned for the third (or more) successive occasion for want of a quorum; 1.3. any reference in this agreement to "date of signature hereof" shall be read as meaning a reference to the date of the last signature of this agreement; 1.4. any reference to an enactment is to that enactment as at the date of signature hereof and as amended or re-enacted from time to time; Page 6 1.5. if any provision in a definition is a substantive provision conferring rights or imposing obligations on any party, notwithstanding that it is only in the definition clause, effect shall be given to it as if it were a substantive provision in the body of the agreement; 1.6. when any number of days is prescribed in this agreement, same shall be reckoned exclusively of the first and inclusively of the last day unless the last day falls on a Saturday, Sunday or public holiday, in which case the last day shall be the next succeeding day which is not a Saturday, Sunday or public holiday; 1.7. where figures are referred to in numerals and in words, if there is any conflict between the two, the words shall prevail; 1.8. expressions defined in this agreement shall bear the same meanings in schedules or annexures to this agreement which do not themselves contain their own conflicting definitions; 1.9. the use of any expression in this agreement covering a process available under South African law such as a winding-up (without limitation EIUSDEM GENERIS) shall, if any of the parties to this agreement is subject to the law of any other jurisdiction, be construed as including any equivalent or analogous proceedings under the law of such jurisdiction; Page 7 1.10. where any term is defined within the context of any particular clause in this agreement, the term so defined, unless it is clear from the clause in question that the term so defined has limited application to the relevant clause, shall bear the meaning ascribed to it for all purposes in terms of this agreement, notwithstanding that that term has not been defined in this interpretation clause; 1.11. the expiration or termination of this agreement shall not affect such of the provisions of this agreement as expressly provide that they will operate after any such expiration or termination or which of necessity must continue to have effect after such expiration or termination, notwithstanding that the clauses themselves do not expressly provide for this; 1.12. the rule of construction that the contract shall be interpreted against the party responsible for the drafting or preparation of the agreement, shall not apply. 2. CONFLICTS WITH MEMORANDUM AND/OR ARTICLES OF ASSOCIATION 2.1. If there is any conflict between the provisions of this agreement and the memorandum and articles of association of the company at any time, the provisions of this agreement shall prevail. 2.2. If required by any of the shareholders, the shareholders and the company undertake to take all such steps and do all such things as Page 8 may be necessary to alter (promptly after a notice of such request is given to the company) the memorandum and articles of association of the company so as to reflect, insofar as may be appropriate, the provisions of this agreement. 3. ISSUE OF SHARES After the implementation date, no shares in the capital of the company shall be issued other than by way of a PRO RATA rights offer to the shareholders at the time. If any shareholder does not personally follow its rights, it shall be deemed to have renounced same to the other shareholders who do follow their rights in the same proportions as they follow their rights. 4. APPOINTMENT OF DIRECTORS 4.1. TII shall be entitled by written notice to the company to appoint 5 (five) directors of the company. TII shall be entitled to remove any such directors appointed and to replace any such director who is so removed or who ceases for any reason other than pursuant to clause 4.2 to be a director of the company. NIBH shall be entitled by written notice to the company to appoint 5 (five) directors of the company. NIBH shall be entitled to remove any such directors appointed and to replace any such director who is so removed or who ceases for any reason other than pursuant to clause 4.2 to be a director of the company. Each of TII and NIBH is entitled to appoint alternate directors. Page 9 4.2. If TII or NIBH disposes of all of its shares, it shall, unless the remaining shareholder agrees otherwise, remove any directors of the company appointed by it as directors of the company without any claims for compensation - 4.2.1. if such shares are acquired by other existing shareholders in the company, on payment in full of the purchase price by those purchasing shareholders; or 4.2.2. if such shares are to be acquired by a third party, on the implementation of the sale agreement with the third party and the shareholder which appointed such directors indemnifies the company if the directors fail or refuse to resign. 5. QUORUM FOR DIRECTORS' MEETINGS A meeting of directors shall be convened on not less than 14 (fourteen) days written notice. It is intended that directors' meetings will be convened quarterly. The quorum for any directors' meetings of the company shall be 2 (two) non-executive directors appointed by TII and 2 (two) non-executive directors appointed by NIBH or the alternate(s) of any such director, provided that if, within 30 (thirty) minutes from the time appointed for a meeting, a quorum is not present, the meeting shall stand adjourned to the same day in the next week, at the same time and place or, if that day be a public holiday, a Saturday or a Sunday, to the next succeeding day other than a public holiday, a Saturday or a Sunday, Page 10 provided that if within 30 (thirty) minutes from the time appointed for the meeting a quorum is not present, the meeting shall again stand adjourned as aforesaid and this procedure shall continue until a quorum is present. 6. QUORUM FOR SHAREHOLDERS' MEETINGS A shareholders' meeting shall be convened on not less than 14 (fourteen) days written notice. The quorum for shareholders' meetings of the company shall be TII and NIBH present in person or by proxy, provided that if, within 30 (thirty) minutes from the time appointed for a meeting, a quorum is not present, the meeting shall stand adjourned to the same day in the next week, at the same time and place or, if that day be a public holiday, a Saturday or a Sunday, to the next succeeding day other than a public holiday, a Saturday or a Sunday, provided that if within 30 (thirty) minutes from the time appointed for the meeting a quorum is not present, the meeting shall again stand adjourned as aforesaid and this procedure shall continue until a quorum is present. 7. OFFICERS 7.1. NIBH shall appoint the person to preside as the Chairperson of any:- 7.1.1. shareholders' meeting; 7.1.2. directors' meeting from amongst the directors on the board, Page 11 during the first year of this agreement and thereafter such Chairpersons shall be appointed in respect of each succeeding year in rotation by NIBH and TII. Such Chairpersons shall not have a casting vote. 7.2. TII shall appoint the chief operating officer of the company whose appointment shall be subject to the prior written approval of NIBH which approval shall not be withheld unreasonably. To the extent that the remuneration package payable from time to time to the chief operating officer exceeds, in cost to the company, the package that would in the ordinary and normal course be paid to such an officer employed by another company of comparable size engaged in the business of asset management in South Africa, such excess portion shall not be paid by the company but shall be the responsibility of TII and shall be paid by TII or a party nominated by TII. 7.3. NIBH shall appoint the chief executive officer of the company whose appointment shall be subject to the prior written approval of TII which approval shall not be withheld unreasonably. To the extent that the remuneration package payable from time to time to the chief executive officer exceeds, in cost to the company, the package that would in the ordinary and normal course be paid to such an officer employed by another company of comparable size engaged in the business of asset management in South Africa, such excess portion shall not be paid by the company but shall be the responsibility of and shall be paid by NIBH. Page 12 7.4. It is recorded that each of the shareholders shall bear the costs of reasonable travel expenses incurred by directors appointed by it in attending meetings of the board. 8. RESOLUTIONS 8.1. Resolutions of directors of the company in order to be of force and effect must be approved unanimously by the directors (or their alternates) present at a meeting. 8.2. In circumstances where there is a failure to achieve unanimity on a resolution at a directors' meeting, the resolution in question shall be referred for determination to the shareholders. 8.3. Resolutions of shareholders of the company in order to be of force and effect must be approved unanimously by the shareholders of the company present at any meeting in person or by proxy. In circumstances where there is a failure to achieve unanimity on a resolution at a shareholders' meeting, the resolution in question shall fail. 8.4. Resolutions signed in writing by all the directors or shareholders (as the case may be) shall be as valid and effectual as if passed at a meeting of directors or shareholders, as the case may be. 8.5. In the case of matters requiring urgent resolution or, if for any reason it is impracticable to meet or pass a resolution as contemplated by the Articles of Association of the company, Page 14 proceedings may be conducted by utilising telephone or video conference facilities, provided that the required quorum is met. A resolution agreed to unanimously by the directors or shareholders, as the case may be, participating during the course of such proceedings shall be as valid and effectual as if it had been passed at a meeting of the directors or shareholders, as the case may be, duly called and constituted. The secretary of the company shall as soon as is reasonably possible after such meeting has been held, be notified thereof by the relevant parties to the meeting, and the secretary shall prepare a written minute thereof. 8.6. If any resolution of the company is proposed that the company institute any legal proceedings against any shareholder or any member of a group of which the shareholder forms part or any director of the company, such resolution shall be deemed to be within the shareholders' domain not the directors' domain. If any shareholder vetos any such resolution, and as a result the requisite majority to pass the resolution cannot be obtained then, provided that the remaining shareholders furnish an indemnity to the company against all costs, losses or damages of whatsoever nature which the company may sustain in bringing any such legal proceedings, such vetoing shareholder shall be deemed to have voted in favour of the resolution. Page 14 9. GOVERNANCE AND MANAGEMENT 9.1. As soon as reasonably possible after the merger agreement becomes unconditional, the shareholders will procure that structures are put into place to ensure that:- 9.1.1. the company is managed and its affairs conducted in accordance with the highest standards of corporate governance; and 9.1.2. the business and affairs of the company will be managed and conducted professionally and efficiently within such corporate governance structures. 9.2. To this end, the shareholders shall procure that, as soon as reasonably possible after the implementation date:- 9.2.1. appropriate corporate governance principles are formulated and adopted. This will include, INTER ALIA the appointment of an audit committee and a remuneration committee which will report to the board of directors of the company; 9.2.2. formulate a "household policy document" which will incorporate principles, policies, guidelines and directives regarding the implementation of the merger and the ongoing management of the business including, INTER ALIA:- Page 15 9.2.2.1. the appointment of management and the establishment of a management committee which representatives of the shareholders shall be entitled to attend; 9.2.2.2. the basis upon which authority is delegated by the board to management and the levels of authority so delegated including, but without limitation, authority regarding capital expenditure, borrowings and signing powers; 9.2.2.3. reporting procedures applicable to management and to the executive members of the board, it being recorded in this regard that (a) the chief executive officer will report to a director designated by the board and (b) the chief operating officer will report to the board in relation to those issues designated by the board from time to time and to the chief executive officer in relation to all other matters; 9.2.2.4. risk and compliance procedures and accounting practices and standards. Page 16 9.3. It is recorded that the board of NIBH has, at a duly convened meeting confirmed its intention to make Messrs I Botha and J Bestbier available, subject to their agreement, to devote sufficient time to the business and affairs of the company, over and above their duties and functions as non-executive directors of the company and within the parameters of the structures contemplated by clauses 9.1 and 9.2, so as to assist in ensuring the growth and success of the company and the maximisation of shareholder value. 10. GENERAL PROVISIONS RELATING TO TRANSFERS OF SHARES 10.1. Unless otherwise agreed in writing by all the shareholders of the company but subject to the provisions of clause 10.2, a shareholder may sell or otherwise dispose of or transfer (including but not limited to EJUSDEM GENERIS by way of donation or dividend) the shares held by it in the company only in terms of the provisions of this agreement specifically providing for disposal, and only if, in one and the same transaction, it likewise sells, disposes of or alienates a PRO RATA share of its claim against the company on loan account ("loan account"). Accordingly, all references in this agreement and in the lien, transmission and forfeiture provisions of the articles of association of the company to the offer, sale, disposal, alienation, transfer or transmission of a share in the company shall, unless the context otherwise requires, be deemed to apply also to the PRO RATA share of the loan account of the holder of such share and to any rights offers or allotments. Page 17 10.2. 10.2.1. It is recorded that notwithstanding the provisions of clause 10.1, an exception has been made in regard to TII such that TII's claims on loan account against the company will pursuant to the merger agreement be acquired and held by TGAL and/or one or more other TII group companies nominated by TII. Similarly it is agreed that any additional funding that shareholders may be obliged to provide to the company from time to time in accordance with the provisions of clause 19 will, in the case of TII, be contributed by TGAL and/or one or more other TII group companies nominated by TII. For the purposes of this clause 10, the holder/s of all such claims on loan account shall hereinafter be referred to as "the designated loan account holder". 10.2.2. Notwithstanding the aforegoing, the company and NIBH shall be entitled to regard TII and not the designated loan account holder as the loan account creditor as if it and not the designated loan account holder was the actual loan account creditor, and as regards any obligations imposed on a shareholder VIS-A-VIS its claim on loan account against the company, the company and NIBH shall be entitled to enforce compliance of those obligations by TII and TII shall be obliged to procure that the designated loan account holder complies with such obligations. Page 18 10.2.3.For the avoidance of doubt and by way of example only:- 10.2.3.1. to the extent that a shareholder is obliged to capitalise its claim on loan account against the company in terms of this agreement or any other agreement between the shareholders of the company, TII shall be obliged to subscribe for the appropriate number of additional shares in the capital of the company, at the appropriate subscription price, and the proceeds will be utilised to repay the relevant portion of the designated loan account holder's claim against the company; 10.2.3.2. if TII disposes of its shares in the capital of the company, the designated loan account holder shall be obliged, as provided for in clause 10.1, to dispose of its claims on loan account against the company to the purchaser of TII's shares and TII shall be obliged to procure that the designated loan account holder complies with such obligations. 10.3. Subject to clause 10.7- 10.3.1. all (and not part only of) the shares held by TII may, provided that the transferee is approved by NIBH in writing which approval it may not withhold unreasonably, be Page 19 transferred by TII to any other member of the TII group and VICE VERSA and from any member of the TII group to any other member of the TII group (provided that if it ceases to be a member of the TII group, it shall transfer same to any other member of the TII group within 30 (thirty) days of such cessation failing which TII shall be deemed to have offered all its shares to NIBH at the strike price and the provisions of clauses 13.1.2 (save in relation to the identity of a third party purchaser), 13.1.3 (excluding 13.1.3.1) and 13.1.4 shall apply MUTATIS MUTANDIS on the basis that the offer will be deemed to have been received by NIBH when NIBH becomes aware that transfer to any other member of the TII group did not occur within the said 30 (thirty) day period following such cessation); 10.3.2. all (and not part only of) the shares held by NIBH may , provided that the transferee is approved by TII in writing which approval it may not withhold unreasonably, be transferred by NIBH to any other member of the NIBH group and VICE VERSA and from any member of the NIBH group to any other member of the NIBH group (provided that if it ceases to be a member of the NIBH group, it shall transfer same to any other member of the NIBH group within 30 (thirty)days of such cessation failing which NIBH shall be deemed to have offered all its shares to TII at the strike price and the Page 20 provisions of clauses 13.2.2 (save in relation to the identity of a third party purchaser), 13.2.3 (excluding 13.2.3.1) and 13.2.4 shall apply MUTATIS MUTANDIS on the basis that the offer will be deemed to have been received by TII when TII becomes aware that transfer to any other member of the NIBH group did not occur within the said 30 (thirty) day period following such cessation), provided however that: 10.3.3. TII, by its signature hereto, binds itself as surety for and co-principal debtor IN SOLIDUM with any transferee contemplated by clause 10.3.1 for the due and punctual fulfilment and performance by the transferee of all its obligations hereunder; 10.3.4. NIBH, by its signature hereto, binds itself as surety for and co-principal debtor IN SOLIDUM with any transferee contemplated by clause 10.3.2 for the due and punctual fulfilment and performance by the transferee of all its obligations hereunder. 10.4. Any disposal of shares to any non-shareholder of the company (including as contemplated by clauses 10.3.1 and 10.3.2) shall be subject to the condition that the transferee shall undertake in writing not, whilst it is a shareholder, to operate in competition to Page 21 the business of the company by providing asset management services in the territory that are substantially the same as those provided by the company. 10.5. Subject to clause 10.7, transfer of any shares acquired in terms of the provisions of this agreement, shall be given to the person so acquiring them. 10.6. Except as provided in any express provision of this agreement, or in any written agreement in force between all the shareholders, no share may be disposed of, pledged or transferred without the written consent of all shareholders, which consent shall not be withheld unreasonably. 10.7. Notwithstanding anything to the contrary herein contained, no shares shall be transferred to a non-shareholder unless:- 10.7.1. the shares constitute all (and not fewer) of the shares in the company held by the transferor; 10.7.2. the non-shareholder agrees to be bound by any written agreement in force between the company and its shareholders and/or between the shareholders governing their relationship as shareholders in the company and nominates an address for the purposes of clause 25. Page 22 10.8. Any shareholder which disposes of its shares as contemplated by clause 13 shall be entitled to stipulate as a condition of such sale that - 10.8.1. the disposing shareholder shall be released as a surety or guarantor or indemnitor on behalf of the company,subject to the purchaser of the shares in question binding itself as surety or guarantor or indemnitor in its stead; or 10.8.2. if the release contemplated in clause 10.8.1 cannot be achieved, or pending such release being implemented, the disposing shareholder shall be indemnified by the purchaser of the shares against any claims made against the disposing shareholder by reason of such suretyship, guarantee or indemnity. Such purchaser shall be liable for any amount payable in terms hereof together with value-added tax thereon. 10.9. The transferee of any shares and loan accounts acquired in terms of this agreement, shall pay the stamp duty and any other similar duties payable thereon. 10.10. The company will be entitled, with effect from the effective date of a sale pursuant to the exercise of a put or call as contemplated by clauses 11 and 12, to the benefit of all ongoing income, of the Page 23 type received by it prior to the effective date, flowing from transactions concluded prior to the effective date. 10.11. For the purposes of this clause 10, any transfer and/or disposal of shares among members of the TII group or among members of the NIBH group shall be treated as a transfer or disposal to a shareholder of the company. 11. PUT 11.1. TII shall be entitled (a) at any time after the initial period; (b) within the initial period or at any time thereafter if pursuant to the occurrence of a trigger event, by giving written notice to this effect, to put all (but not a portion only) of the TII group's shares in and claims on loan account against the company to NIBH (provided that in the event of the put being exercised pursuant to the occurrence of a trigger event, such written notice shall be given within (but not after) 60 (sixty) days after the date upon which the occurrence of the relevant trigger event comes to the attention of TII) in which event a sale of such shares and claims shall be deemed to have been concluded on the following terms and conditions:- Page 24 11.1.1. the shares and claims shall be acquired with effect from the date on which the notice was given ("the effective date") from which date all risk in and benefits attaching to the shares and claims shall pass to NIBH; 11.1.2. the purchase price of the shares and claims shall be:- 11.1.2.1. an amount equal to the strike price less 12,5% (twelve comma five per cent) thereof; provided that 11.1.2.2. if the put was exercised by TII pursuant to the occurrence of a trigger event, the purchase price of the shares and claims shall be an amount equal to the strike price unless the trigger event was that contemplated by clause 1.2.18.5 and TII's appointees on the board or TII itself, as the case may be, was responsible for the failure to achieve a quorum on each occasion, in which event the purchase price of the shares and claims shall be an amount equal to the strike price less 12,5% (twelve comma five per cent); 11.1.3. the purchase price shall be payable on the later of:- Page 25 11.1.3.1. the expiry of 90 (ninety) days reckoned from the effective date; and 11.1.3.2. the date upon which the sale becomes unconditional; and 11.1.3.3. in the event of:- (a) a dispute as contemplated by clause 11.2; and (b) it being determined that the put was exercised pursuant to a trigger event, the date of such determination. 11.1.4. the sale shall be subject to a suspensive condition, namely the approval, to the extent necessary, of all regulatory and other competent authorities (including the Competition Commission) provided that if the suspensive condition has not been fulfilled within 180 (one hundred and eighty) days of the effective date (or such later date as the parties may agree to in writing) by reason of the disapproval of the transaction by the Competition Commission or any other competent regulatory authority, the sale shall never become effective; Page 26 11.1.5. if the sale does not become effective by reason of the disapproval of the transaction by the Competition Commission or any other competent regulatory authority, TII shall not, until the lapse of a period of 12 (twelve) months reckoned from the failure of the suspensive condition, be entitled again to exercise its rights under this clause 11. Thereafter, in the event of a sale not becoming effective by virtue of the disapproval of the transaction by the Competition Commission or any other competent regulatory authority pursuant to a subsequent exercise of the put, the put may be exercised only once in each successive 12 (twelve) month cycle; 11.1.6. TII and NIBH undertake to use their best endeavours to procure the fulfilment of the suspensive condition referred to in clause 11.1.4. 11.2. If there is a dispute between the parties as to whether or not the put was exercised pursuant to the occurrence of a trigger event, such dispute shall be determined in accordance with the provisions of clause 28. Page 27 12. CALL 12.1. NIBH shall be entitled (a) at any time after the initial period; (b) within the initial period or at any time thereafter if pursuant to the occurrence of a trigger event, by giving written notice to this effect, to call upon TII to sell to it all (but not a portion only) of the TII group's shares in and claims on loan account against the company to NIBH (provided that in the event of the call being exercised pursuant to the occurrence of a trigger event, such written notice shall be given within (but not after) 60 (sixty) days after the date upon which the occurrence of the relevant trigger event comes to the attention of NIBH) in which event a sale of such shares and claim shall be deemed to have been concluded on the following terms and conditions:- 12.1.1. the shares and claims shall be acquired with effect from the date on which the notice was given ("the effective date") from which date all risk in and benefits attaching to the shares and claims shall pass to NIBH; 12.1.2. the purchase price of the shares and claims shall be, Page 28 12.1.2.1. an amount equal to the strike price plus 12,5% (twelve comma five per cent) thereof; provided that 12.1.2.2. if the call was exercised by NIBH pursuant to the occurrence of a trigger event, the purchase price of the shares and claims shall be an amount equal to the strike price unless the trigger event was that contemplated by clause 1.2.18.5 and NIBH's appointees on the board or NIBH itself, as the case may be, was responsible for the failure to achieve a quorum on each occasion, in which event the purchase price of the shares and claims shall be an amount equal to the strike price plus 12,5% (twelve comma five per cent); 12.1.3. the purchase price shall be payable on the later of:- 12.1.3.1. the expiry of 90 (ninety) days reckoned from the effective date; and 12.1.3.2. the date upon which the sale becomes unconditional; and 12.1.3.3. in the event of:- Page 29 (a) a dispute as contemplated by clause 12.2; and (b) it being determined that the call was exercised pursuant to the occurrence of a trigger event, the date of such determination. 12.1.4. the sale shall be subject to a suspensive condition namely the approval, to the extent necessary, of all regulatory and other competent authorities (including the Competition Commission), provided that if the suspensive condition has not been fulfilled within 180 (one hundred eighty) days of the effective date (or such later date as the parties may agree to in writing) by reason of the disapproval of the transaction by the Competition Commission or any other competent regulatory authority, the sale shall never become effective; 12.1.5. if the sale does not become effective by reason of the disapproval of the transaction by the Competition Commission or any other competent regulatory authority, NIBH shall not, until the lapse of a period of 12 Page 30 (twelve) months reckoned from the failure of the suspensive condition, be entitled again to exercise its rights under this clause 12. Thereafter, in the event of a sale not becoming effective by virtue of the disapproval of the transaction by the Competition Commission or any other competent regulatory authority pursuant to a subsequent exercise of the call, the call may be exercised only once in each successive 12 (twelve) month cycle; 12.1.6. TII and NIBH undertake to use their best endeavours to procure the fulfilment of the suspensive condition referred to in clause 12.1.4. 12.2. If there is a dispute between the parties as to whether or not the call was exercised pursuant to the occurrence of the trigger event, such dispute shall be determined MUTATIS MUTANDIS in accordance with the provisions of clause 28. 13. DISPOSALS OF SHARES 13.1. DISPOSAL BY TII 13.1.1. The provisions of this clause 13.1 shall apply only in the event of TII having exercised its put in terms of clause 11 but the sale not becoming effective by virtue of the non-fulfilment of the suspensive condition. Page 31 13.1.2. When it is intended by TII to dispose of its shares (other than in terms of clause 11) TII shall, in writing, offer all (and not a portion only) of its shares to NIBH ("the offer"), stating the price (which shall sound in money in South African currency) and the terms of payment required by it and no other terms shall be stipulated save for that contemplated in clauses 10.7.2 and 10.8 and if it intends selling or otherwise disposing or transferring all its shares to a particular third party if the offer is not accepted by the other shareholders, it shall disclose the name of such third party. 13.1.3. If, within 90 (ninety) days after the receipt of the offer during which period the offer shall be irrevocable ("the offer period"), it is not accepted in writing in respect of all the shares offered, by NIBH, then if - 13.1.3.1. a third party was named in the offer, TII may within a further 90 (ninety) days or such extended period as the parties may agree in writing, but not thereafter without again making an offer to NIBH in terms of clause 13.1, dispose of the shares offered (but not fewer) to the third party only, at a price not lower and on terms not more favourable to such person than the price at and terms on Page 32 which NIBH was entitled to purchase them; 13.1.3.2. a third party was not named in the offer, TII shall notify NIBH in writing of the proposed third party acquirer after finding a third party acquirer (but if no such notice is received by NIBH within 60 (sixty) days after the expiry of the offer period, TII shall if it wishes to dispose of the shares, be obliged to recommence entirely the procedure in this clause 13.1) and the offer shall be deemed to have been made to NIBH for a period of 48 (forty-eight) hours from such notification on the same terms (during which it shall be irrevocable). If it is not accepted by NIBH in writing within 48 (forty-eight) hours in respect of all the shares offered, by NIBH, TII may dispose of the shares offered (but not fewer) to such third party (provided such disposal occurs within 30 (thirty) days of the expiry of the 48 (forty eight) hour period referred to above, but not thereafter without again making an offer to NIBH in terms of this Page 33 clause 13.1), to such named third party at a price not lower and on terms not more favourable to such person than the price and terms at and on which was entitled to purchase them. 13.1.4. The fact that TII gives any third party such warranties as would be usual for transactions of such a nature, such shall not constitute terms more favourable than those given to NIBH who will not be given any warranties; save that TII shall be deemed to have warranted in favour of NIBH that it will be the registered and beneficial owner of its shares which will constitute all of the issued shares in the capital of the company held by it and will be able to give free and unencumbered title thereof to NIBH or its nominee. 13.1.5. It is recorded for the sake of clarity and the avoidance of doubt that a reference in this clause 13.1 to a third party is a reference to one third party only and as such for this purpose the singular does not include the plural. 13.2. DISPOSAL BY NIBH 13.2.1. The provisions of this clause 13.2 shall apply only in the event of NIBH having exercised its call in terms of clause Page 34 04515MAM.ACF ACF/gl/13d/0e/04122000 NEDC6093-078 SHAREHOLDERS AGREEMENT 13.2.1. 12 but the sale not becoming effective by virtue of the non-fulfilment of the suspensive condition. 13.2.2. When it is intended by NIBH to dispose of its shares (other than in terms of clause 12 NIBH shall, in writing, offer all (and not a portion only) of its shares to TII ("the offer"), stating the price (which shall sound in money in South African currency) and the terms of payment required by it and no other terms shall be stipulated save for that contemplated in clauses 10.7.2 and 10.8 and if it intends selling or otherwise disposing or transferring all its shares to a particular third party if the offer is not accepted by the other shareholders, it shall disclose the name of such third party. 13.2.3. If, within 90 (ninety) days after the receipt of the offer during which period the offer shall be irrevocable ("the offer period"), it is not accepted in writing in respect of all the shares offered, by TII, then if - 13.2.3.1. a third party was named in the offer, NIBH may within a further 90 (ninety) days or such extended period as the parties may agree in writing, but not thereafter without again making an offer to TII in terms of clause 13.2, Page 35 dispose of the shares offered (but not fewer) to the third party only, at a price not lower and on terms not more favourable to such person than the price at and terms on which TII was entitled to purchase them; 13.2.3.2. a third party was not named in the offer, NIBH shall notify TII in writing of the proposed third party acquirer after finding a third party acquirer (but if no such notice is received by TII within 60 (sixty) days after the expiry of the offer period, NIBH shall if it wishes to dispose of the shares, be obliged to recommence entirely the procedure in this clause 13.2) and the offer shall be deemed to have been made to TII for a period of 48 (forty-eight) hours from such notification on the same terms (during which it shall be irrevocable). If it is not accepted by TII in writing within 48 (forty-eight) hours in respect of all the shares offered, NIBH may dispose of the shares offered (but not fewer) to such third party (provided such disposal occurs within 30 (thirty) days of the expiry of Page 36 the 48 (forty eight) hour period referred to above, but not thereafter without again making an offer to TII in terms of this clause 13.2), to such named third party at a price not lower and on terms not more favourable to such person than the price and terms at and on which it was entitled to purchase them. 13.2.4. The fact that NIBH gives any third party such warranties as would be usual for transactions of such a nature, such shall not constitute terms more favourable than those given to TII who will not be given any warranties; save that NIBH shall be deemed to have warranted in favour of TII that it will be the registered and beneficial owner of its shares which will constitute all of the issued shares in the capital of the company held by it and will be able to give free and unencumbered title thereof to TII or its nominee. 13.2.5. It is recorded for the sake of clarity and the avoidance of doubt that a reference in this clause 13.2 to a third party is a reference to one third party only and as such for this purpose the singular does not include the plural. Page 37 14. NAME OF THE PURCHASER AND BRANDING 14.1. The name of the company will, as soon as reasonably possible after signature hereof, be changed to "FRANKLIN TEMPLETON NIB ASSET MANAGEMENT (PROPRIETARY) LIMITED" and the business of the company will be conducted under such name and style as is determined by the board. 14.2. It is intended that the names of existing FAM group and NIBAM group (as defined in the merger agreement) investment products will remain unchanged for a period of 6 (six) months (or such extended period as may be necessary so as to obtain all relevant regulatory approvals) during which time the board of the company will determine the branding that will apply with effect from the expiry of such 6 (six) month period. 14.3. If the company or any of its subsidiaries bears or uses any distinctive part of the name or uses any trademarks or trade names or similar devices of the TII group or the NIBH group ("the marks"), and TII or NIBH, as the case may be, disposes of its shares in the company or if any subsidiary ceases to be a subsidiary, it shall be entitled but not obliged to require the company and/or the relevant subsidiary to change its name or cease using the marks within 120 (one hundred and twenty) days of the giving by the shareholder of written notice to that effect to the company (or such extended period as may be necessary so as to obtain all relevant regulatory approvals) and the company shall comply and procure compliance therewith. Page 38 14.4. If any investment products marketed by the company or any of its subsidiaries from time to time bears any distinctive part of the name of the TII group or the NIBH group or bears any of the names reflected in ANNEXURE A hereto (in relation to TII) or ANNEXURE B hereto (in relation to NIBH) or any derivation thereof which resembles such name or employs the marks of or associated with the TII group or the NIBH group, and TII or NIBH, as the case may be, disposes of its shares in the company or if any subsidiary ceases to be a subsidiary, TII or NIBH, as the case may be, shall be entitled but not obliged to require the company and/or the relevant subsidiary to change the name of the relevant investment products and to cease using such marks within 120 (one hundred and twenty) days of the giving of written notice to this effect to the company (or such extended period as may reasonable and necessary in the circumstances) and the company shall comply and procure compliance therewith. 15. EXCLUSIVITY 15.1. Subject to clauses 15.2 and 15.3, each of NIBH and TII undertake not, within the territory, whether directly or indirectly, to compete with the business of the company, it being recorded that the TII group will market all its products intended for South African residents through the company. TII undertakes to procure that FR binds itself to the provisions of this clause 15.1. The provisions hereof shall endure for so long as NIBH and TII hold shares in the capital of the company unless agreed otherwise. Notwithstanding the aforegoing the Page 39 parties agree that should the company decide not to market such products during the term of this agreement, any FR subsidiary will be entitled to market such products in South Africa. 15.2. It is recorded that NIBH:- 15.2.1. through QUANTS and otherwise, conducts an asset management business utilising quantitative analyses and hedge fund techniques to manage its funds; 15.2.2. through its subsidiary companies and other equity investments conducts or may in the future conduct an asset management business through a multi-manager approach where third party asset managers manage the relevant funds; 15.2.3. has an equity interest in COMMUNITY GROWTH ASSET MANAGEMENT COMPANY (PROPRIETARY) LIMITED, which is a client of NIBAM. Nothing herein contained shall be construed as limiting NIBH from:- 15.2.4. conducting the businesses referred to in clauses 15.2.1 and 15.2.2; Page 40 15.2.5. continuing to hold the equity interest referred to in clause 15.2.3; and 15.2.6. acquiring and/or continuing to hold equity and other interests, whether directly or indirectly, in companies (other than those of which it is a holding company as contemplated by the South African Companies Act, Act No. 61 of 1973) which do not at the time of acquisition provide asset management services as part of their business but which subsequently undertake the business of asset management. In such circumstances however NIBH will use reasonable efforts to procure that the assets of the companies in question are placed under management of the company in terms of a service level agreement. 15.3. It is recorded that TEMPLETON ASSET MANAGEMENT LIMITED ("TAML"), through one or more representative offices, undertakes research activities within the territory. Nothing herein contained shall be construed as limiting TAML from continuing to undertake such research activities within the territory. 15.4. It is recorded that subsidiaries of FR currently manages non-South African domiciled funds and accounts that invest in South African securities. Nothing herein contained shall be construed as limiting any FR subsidiary from investing in South Africa Securities. Page 41 16. EMPOWERMENT ASSET MANAGEMENT COMPANY It is recorded that NIBH has undertaken to introduce an empowerment company to market asset management services, and will use reasonable efforts to ensure that the relevant assets will be managed by the company in terms of a service level agreement. 17. RESTRUCTURING AND OTHER CHARGES 17.1. NIBH will fund appropriate loyalty and performance bonuses to certain personnel currently employed by NEDCOR INVESTMENT BANK LIMITED and the company in respect of the business which are estimated to amount to approximately R14 000 000,00 (fourteen million rand) in the aggregate. 17.2. TII shall bear the costs of termination of any existing employment contract of an employee of the company if such employee had been seconded by the TII group. 17.3. The company will be responsible for all other costs and charges of and arising from any restructuring that may be undertaken by the company pursuant to the implementation of the merger contemplated by the merger agreement. 18. LODGING OF SHARES In order to ensure compliance with the provisions of this agreement, each shareholder shall be obliged to lodge the share certificates in respect of Page 42 its shares with KPMG, one of the initial joint auditors of the company, in trust. 19. CAPITAL AND LOAN ACCOUNTS 19.1. The amount of funding required from time to time by the company shall be determined by the board of directors of the company but in no event shall the borrowings of the company exceed a debt to equity ratio of 3:1 as determined in accordance with Practice Note 2 issued by SARS on 14 May 1996. 19.2. All funding required from time to time as determined in accordance with the provisions of clause 19.1, after having regard to such funding as is made available to the company from outside sources, shall be provided on loan account by the shareholders PRO RATA to their respective shareholdings. 19.3. Save as may be, unanimously otherwise determined in writing by shareholders of the company, shareholders' loan accounts against the company shall be subject to the following terms and conditions, namely - 19.3.1. subject to clause 19.4, they shall bear interest at Standard Bank's prime lending rate, compounded monthly in arrear. Such interest shall be due and payable monthly in arrear; Page 43 19.3.2. subject to clauses 19.3.3 and 19.3.4 and subject to the availability of funds of the company, they shall be repaid as may unanimously be agreed from time to time between the company and its shareholders; 19.3.3. they shall in any event be repaid on the granting of any order (whether provisional or final) placing the company under judicial management or in liquidation or on the granting of any final judgement against the company if the company does not satisfy the judgement within 30 (thirty) days after it becomes final; 19.3.4. all repayments by the company to the shareholders shall be made PRO RATA to their respective loan accounts but to the extent that any shareholder's loan account exceeds its PRO RATA share based on its shareholding in the company such excess shall first be repaid. 19.4. For so long as funding required by the company as contemplated in this clause 19 is not provided by the shareholders PRO RATA to their respective shareholdings, interest shall accrue and be payable monthly in arrears on the amount by which any shareholder's loan account exceeds such shareholder's PRO RATA share of all loan accounts of shareholders, at the publicly quoted basic rate per annum ruling from time to time at which Standard Bank lends on overdraft plus 2% (two per cent) per annum, compounded monthly in arrear. Page 44 19.5. Nothing herein shall be construed as precluding the NIBH group from providing funding and/or facilities to the company on an arms-length basis which are not and which will not be treated as shareholder claims on loan account against the company. 20. GOOD FAITH Shareholders shall owe to each other a duty of good faith at all times. 21. RIGHT OF MEMBERS TO INSPECT BOOKS OF THE COMPANY The books of account and other books and documents of the company shall be kept at the registered office of the company and, subject to the reasonable restrictions as to the time and manner of inspecting same that may be imposed by a resolution of the members of the company in general meeting, shall be open to inspection of the members during the hours of business. 22. APPLICATION OF THE SHAREHOLDERS' AGREEMENT TO SUBSIDIARIES OF THE COMPANY All provisions of this shareholders' agreement shall apply MUTATIS MUTANDIS to any subsidiaries of the company from time to time. 23. WHOLE AGREEMENT, NO AMENDMENT 23.1. This agreement constitutes the whole agreement between the parties relating to the subject matter hereof. 23.2. No amendment or consensual cancellation of this agreement or any provision or term hereof or of any agreement, bill of exchange or Page 45 04515MAM.ACF ACF/gl/13d/0e/04122000 NEDC6093-078 SHAREHOLDERS AGREEMENT other document issued or executed pursuant to or in terms of this agreement and no settlement of any disputes arising under this agreement and no extension of time, waiver or relaxation or suspension of or agreement not to enforce or to suspend or postpone the enforcement of any of the provisions or terms of this agreement or of any agreement, bill of exchange or other document issued pursuant to or in terms of this agreement shall be binding unless recorded in a written document signed by the parties (or in the case of an extension of time, waiver or relaxation or suspension, signed by the party granting such extension, waiver or relaxation). Any such extension, waiver or relaxation or suspension which is so given or made shall be strictly construed as relating strictly to the matter in respect whereof it was made or given. 23.3. No extension of time or waiver or relaxation of any of the provisions or terms of this agreement or any agreement, bill of exchange or other document issued or executed pursuant to or in terms of this agreement, shall operate as an estoppel against any party in respect of its rights under this agreement, nor shall it operate so as to preclude such party thereafter from exercising its rights strictly in accordance with this agreement. 23.4. To the extent permissible by law no party shall be bound by any express or implied term, representation, warranty, promise or the like not recorded herein, whether it induced the contract and/or whether it was negligent or not. Page 46 24. OPERATIONAL ISSUES Simultaneously with or as soon as reasonably possible or convenient after signature of this agreement, arrangements shall be concluded between the company and each of TII and NIBH regulating the terms and conditions applicable to the supply of value added services by each of TII and NIBH to the company. Set out in ANNEXURE C hereto are the categories of services that it is intended will be provided by each of TII and NIBH, it being recorded that the provision of such value added services which will involve skills and knowledge transfer is essential to the success of the merged business. 25. NOTICES 25.1. The parties choose for all purposes under this agreement, whether in respect of court process, notices or other documents or communications of whatsoever nature, the following addresses : 25.1.1. TII Physical: c/o Templeton Asset Management Limited Harrow Court II Isle of Houghton Boundary Road Parktown 2193 Postal: P O Box 87587 Houghton 2041 Telefax: (011) 643-1366 US Telefax: (091) 954 847-2229 Page 47 25.1.2. NIBH Physical: 1 Newtown Avenue Killarney 2193 Postal: P O Box 582 Johannesburg 2000 Telefax: (011) 480-1779/80 25.1.3. FRANKLIN TEMPLETON ASSET MANAGEMENT (PROPRIETARY) LIMITED Physical: c/o Templeton Asset Management Limited Harrow Court II Isle of Houghton Boundary Road Parktown 2193 Postal: P O Box 87587 Houghton 2041 Telefax: (011) 643-1366 25.1.4. TEMPLETON GLOBAL ADVISORS LIMITED Physical: c/o Templeton Asset Management Limited Harrow Court II Isle of Houghton Boundary Road Parktown 2193 Postal: P O Box 87587 Houghton 2041 Telefax: (011) 643-1366 Page 48 25.2. Any notice or communication required or permitted to be given in terms of this agreement shall be valid and effective only :- 25.2.1. if delivered or given by telefax; 25.2.2. in the case of a notice or communication to the company, if a copy thereof is also delivered or given by telefax both to NIBH and TII (in the case of TII, by telefax transmission to its US telefax, the number of which appears in clause 25.1.1). 25.3. Any party may by notice to any other party change it's address to another physical address in South Africa or its telefax number, provided that the change shall become effective VIS-A-VIS that addressee on the 10th (tenth) business day from the receipt of the notice by the addressee. 25.4. Any notice to a party - 25.4.1. delivered by hand to a responsible person during ordinary business hours at its chosen physical address shall be deemed to have been received on the day of delivery; or 25.4.2. sent by telefax to its chosen telefax number stipulated in clause 25.1, shall be deemed to have been received on the date of despatch (unless the contrary is proved). Page 49 25.5. Notwithstanding anything to the contrary herein contained a written notice or communication actually received by a party shall be an adequate written notice or communication to it notwithstanding that it was not sent by telefax to or delivered at its chosen address. 26. COSTS The company will pay the costs of and incidental to the preparation of this agreement. 27. GOVERNING LAW 27.1. This agreement shall be governed by and interpreted in accordance with the substantive laws of the Republic of South Africa. 27.2. Save as otherwise provided herein, the parties submit to the exclusive jurisdiction of the High Court of South Africa. 28. ARBITRATION 28.1. Save in respect of those provisions of the agreement which provide for their own remedies which would be incompatible with arbitration, a dispute which arises in regard to - 28.1.1. the interpretation of; or 28.1.2. the carrying into effect of; or 28.1.3. any of the parties' rights and obligations arising from; or Page 50 28.1.4. the termination or purported termination of or arising from the termination of; or 28.1.5. the rectification or proposed rectification of this agreement, or out of or pursuant to this agreement or on any matter which in terms of this agreement requires agreement by the parties, (other than where an interdict is sought or urgent relief may be obtained from a court of competent jurisdiction), shall be submitted to and decided by arbitration. 28.2. That arbitration shall be held - 28.2.1. with only the parties and their representatives present thereat; 28.2.2. at Sandton. It is the intention that the arbitration shall, where possible, be held and concluded in 21 (twenty one) working days after it has been demanded. The parties shall use their best endeavours to procure the expeditious completion of the arbitration. The arbitrator shall determine his own rules of procedure and the parties shall be bound thereby. 28.3. The arbitration shall not be subject to the arbitration legislation for the time being in force in the Republic of South Africa. Page 51 28.4. The arbitrator shall be, if the matter in dispute is principally - 28.4.1. a legal matter, a practising senior advocate of not less than 5 (five) years standing as such and practising at the Johannesburg or Sandton Bar's, or a senior lawyer (whether or not an attorney as contemplated by the Attorneys Act, No 53 of 1979) of not less than 15 (fifteen) years standing, in either case specialising in commercial law; 28.4.2. an accounting matter, a practising chartered accountant of not less than 15 (fifteen) years standing; 28.4.3. any other matter, an independent person agreed upon between the parties. If the parties fail to agree on an arbitrator within 7 (seven) days after the arbitration has been demanded, the arbitrator shall be nominated by the President for the time being of the Law Society of the Transvaal (or its successor-in-Gauteng). If the parties fail to agree whether the dispute is of a legal, accounting or other nature within the said 7 (seven) day period, it shall be considered a matter referred to in clause 28.4.3. 28.5. The parties shall keep the evidence in the arbitration proceedings and any order made by any arbitrator confidential unless otherwise contemplated herein. 28.6. The arbitrator shall be obliged to give his award in writing fully supported by reasons. The arbitrator shall make an award as to costs which shall be paid accordingly, it being agreed that the arbitrator shall, in making any costs award in favour of the TII group, take cognisance of the costs that may necessarily have been incurred by the TII group in non-South African residents attending the arbitration proceedings and/or the preparation therefor. 28.7. The provisions of this clause are severable from the rest of this agreement and shall remain in effect even if this agreement is terminated for any reason. 28.8. The arbitrator shall have the power to give default judgment if any party fails to make submissions on due date and/or fails to appear at the arbitration. SIGNED by the parties and witnessed on the following dates and at the following places respectively: DATE PLACE WITNESS SIGNATURE For: TEMPLETON INTERNATIONAL, INC. 1. August 2000 Johannesburg /s/ Charles E. Johnson ---------------------- 2. Page 2 DATE PLACE WITNESS SIGNATURE For: NEDCOR INVESTMENT BANK HOLDINGS LIMITED 1. August 2000 Johannesburg /s/ Izak Botha 2. --------------- For: FRANKLIN TEMPLETON ASSET MANAGEMENT (PROPRIETARY) LIMITED 1. August 2000 Johannesburg /s/ Charles E. Johnson ----------------------- 2. For: TEMPLETON GLOBAL ADVISERS LIMITED August 2000 Johannesburg /s/ Charles E. Johnson ----------------------- 1. 2. ANNEXURE A - TII GROUP NAMES ANNEXURE B - NIBH GROUP NAMES 1. Nedcor 2. NIB 3. NIBH 4. Life Time Wealth Creator 5. Prime Select 6. Quants 7. Woolworths (Trust Fund) ANNEXURE C - CATEGORIES OF SERVICES EX-10.52 9 0009.txt DISTRIBUTION AGREEMENT FRANKLIN GROWTH AND INCOME FUND 777 Mariners Island Blvd. San Mateo, California 94404 Franklin/Templeton Distributors, Inc. 777 Mariners Island Blvd. San Mateo, California 94404 Re: Distribution Agreement Gentlemen: We (the "Fund") are a business trust operating as an open-end management investment company or "mutual fund", which is registered under the Investment Company Act of 1940, as amended (the "1940 Act") and whose shares are registered under the Securities Act of 1933, as amended (the "1933 Act"). We desire to issue one or more series or classes of our authorized but unissued shares of capital stock or beneficial interest (the "Shares") to authorized persons in accordance with applicable Federal and State securities laws. The Fund's Shares may be made available in one or more separate series, each of which may have one or more classes. You have informed us that your company is registered as a broker-dealer under the provisions of the Securities Exchange Act of 1934, as amended and that your company is a member of the National Association of Securities Dealers, Inc. You have indicated your desire to act as the exclusive selling agent and distributor for the Shares. We have been authorized to execute and deliver this Distribution Agreement ("Agreement") to you by a resolution of our Board of Trustees ("Board") passed at a meeting at which a majority of Board members, including a majority who are not otherwise interested persons of the Fund and who are not interested persons of our investment adviser, its related organizations or with you or your related organizations, were present and voted in favor of the said resolution approving this Agreement. 1 1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in consideration of the agreements on your part herein expressed and upon the terms and conditions set forth herein, we hereby appoint you as the exclusive sales agent for our Shares and agree that we will deliver such Shares as you may sell. You agree to use your best efforts to promote the sale of Shares, but are not obligated to sell any specific number of Shares. However, the Fund and each series retain the right to make direct sales of its Shares without sales charges consistent with the terms of the then current prospectus and applicable law, and to engage in other legally authorized transactions in its Shares which do not involve the sale of Shares to the general public. Such other transactions may include, without limitation, transactions between the Fund or any series or class and its shareholders only, transactions involving the reorganization of the Fund or any series, and transactions involving the merger or combination of the Fund or any series with another corporation or trust. 2. INDEPENDENT CONTRACTOR. You will undertake and discharge your obligations hereunder as an independent contractor and shall have no authority or power to obligate or bind us by your actions, conduct or contracts except that you are authorized to promote the sale of Shares. You may appoint sub-agents or distribute through dealers or otherwise as you may determine from time to time, but this Agreement shall not be construed as authorizing any dealer or other person to accept orders for sale or repurchase on our behalf or otherwise act as our agent for any purpose. 3. OFFERING PRICE. Shares shall be offered for sale at a price equivalent to the net asset value per share of that series and class plus any applicable percentage of the public offering price as sales commission or as otherwise set forth in our then current prospectus. On each business day on which the New York Stock Exchange is open for business, we will furnish you with the net asset value of the Shares of each available series and class which shall be determined in accordance with our then effective prospectus. All Shares will be sold in the manner set forth in our then effective prospectus and statement of additional information, and in compliance with applicable law. 4. COMPENSATION. ------------- A. SALES COMMISSION. You shall be entitled to charge a sales commission on the sale or redemption, as appropriate, of each series and class 2 of each Fund's Shares in the amount of any initial, deferred or contingent deferred sales charge as set forth in our then effective prospectus. You may allow any sub-agents or dealers such commissions or discounts from and not exceeding the total sales commission as you shall deem advisable, so long as any such commissions or discounts are set forth in our current prospectus to the extent required by the applicable Federal and State securities laws. You may also make payments to sub-agents or dealers from your own resources, subject to the following conditions: (a) any such payments shall not create any obligation for or recourse against the Fund or any series or class, and (b) the terms and conditions of any such payments are consistent with our prospectus and applicable federal and state securities laws and are disclosed in our prospectus or statement of additional information to the extent such laws may require. B. DISTRIBUTION PLANS. You shall also be entitled to compensation for your services as provided in any Distribution Plan adopted as to any series and class of any Fund's Shares pursuant to Rule 12b-1 under the 1940 Act. The compensation provided in the Class B Distribution Plan applicable to Class B Shares (the "Class B Plan") is divided into a distribution fee and a service fee, each of which fees is in compensation for different services to be rendered to the Fund. Subject to the termination provisions in the Class B Plan, the distribution fee with respect to the sale of a Class B Share shall be earned when such Class B Share is sold and shall be payable from time to time as provided in the Class B Plan. The distribution fee payable to you as provided in the Class B Plan shall be payable without offset, defense or counterclaim (it being understood by the parties hereto that nothing in this sentence shall be deemed a waiver by the Fund of any claim the Fund may have against you). You may direct the Fund to cause our custodian to pay such distribution fee to Lightning Finance Company Limited ("LFL") or other persons providing funds to you to cover expenses referred to in Section 2(a) of the Class B Plan and to cause our custodian to pay the service fee to you for payment to dealers or others or directly to others to cover expenses referred to in Section 2(b) of the Class B Plan. We understand that you intend to assign your right to receive certain distribution fees with respect to Class B Shares to LFL in exchange for funds that you will use to cover expenses referred to in Section 2(a) of the Class B Plan. In recognition that we will benefit from your arrangement with LFL, we agree that, in addition to the provisions of Section 7 (iii) of the Class B Plan, we will not pay to any person or entity, other than LFL, any such assigned distribution fees related to Class B Shares sold by you prior to the termination 3 of either the Agreement or the Class B Plan. We agree that the preceding sentence shall survive termination of the Agreement. C. With respect to the sales commission on the redemption of Shares of each series and class of the Fund as provided in Subsection 4.A. above, we will cause our shareholder services agent (the "Transfer Agent") to withhold from redemption proceeds payable to holders of the Shares all contingent deferred sales charges properly payable by such holders in accordance with the terms of our then current prospectuses and statements of additional information (each such sales charge, a "CDSC"). Upon receipt of an order for redemption, the Transfer Agent shall direct our custodian to transfer such redemption proceeds to a general trust account. We shall then cause the Transfer Agent to pay over to you or your assigns from the general trust account such CDSCs properly payable by such holders as promptly as possible after the settlement date for each such redemption of Shares. CDSCs shall be payable without offset, defense or counterclaim (it being understood that nothing in this sentence shall be deemed a waiver by us of any claim we may have against you.) You may direct that the CDSCs payable to you be paid to any other person. 5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale only in those jurisdictions where they have been properly registered or are exempt from registration, and only to those groups of people which the Board may from time to time determine to be eligible to purchase such shares. 6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed to the Fund's shareholder services agent, for acceptance on behalf of the Fund. At or prior to the time of delivery of any of our Shares you will pay or cause to be paid to the custodian of the Fund's assets, for our account, an amount in cash equal to the net asset value of such Shares. Sales of Shares shall be deemed to be made when and where accepted by the Fund's shareholder services agent. The Fund's custodian and shareholder services agent shall be identified in its prospectus. 7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase our Shares for your own account for purposes of resale to the public, but you may purchase Shares for your own investment account upon your written assurance that the purchase is for investment purposes and that the Shares will not be resold except through redemption by us. 4 8. SALE OF SHARES TO AFFILIATES. You may sell our Shares at net asset value to certain of your and our affiliated persons pursuant to the applicable provisions of the federal securities statutes and rules or regulations thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940 Act, as amended from time to time. 9. ALLOCATION OF EXPENSES. We will pay the expenses: (a) Of the preparation of the audited and certified financial statements of our company to be included in any Post-Effective Amendments ("Amendments") to our Registration Statement under the 1933 Act or 1940 Act, including the prospectus and statement of additional information included therein; (b) Of the preparation, including legal fees, and printing of all Amendments or supplements filed with the Securities and Exchange Commission, including the copies of the prospectuses included in the Amendments and the first 10 copies of the definitive prospectuses or supplements thereto, other than those necessitated by your (including your "Parent's") activities or Rules and Regulations related to your activities where such Amendments or supplements result in expenses which we would not otherwise have incurred; (c) Of the preparation, printing and distribution of any reports or communications which we send to our existing shareholders; and (d) Of filing and other fees to Federal and State securities regulatory authorities necessary to continue offering our Shares. You will pay the expenses: (a) Of printing the copies of the prospectuses and any supplements thereto and statements of additional information which are necessary to continue to offer our Shares; (b) Of the preparation, excluding legal fees, and printing of all Amendments and supplements to our prospectuses and statements of additional information if the Amendment or supplement arises from your (including your "Parent's") activities or 5 Rules and Regulations related to your activities and those expenses would not otherwise have been incurred by us; (c) Of printing additional copies, for use by you as sales literature, of reports or other communications which we have prepared for distribution to our existing shareholders; and (d) Incurred by you in advertising, promoting and selling our Shares. 10. FURNISHING OF INFORMATION. We will furnish to you such information with respect to each series and class of Shares, in such form and signed by such of our officers as you may reasonably request, and we warrant that the statements therein contained, when so signed, will be true and correct. We will also furnish you with such information and will take such action as you may reasonably request in order to qualify our Shares for sale to the public under the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will furnish you with annual audited financial statements of our books and accounts certified by independent public accountants, with semi-annual financial statements prepared by us, with registration statements and, from time to time, with such additional information regarding our financial condition as you may reasonably request. 11. CONDUCT OF BUSINESS. Other than our currently effective prospectus, you will not issue any sales material or statements except literature or advertising which conforms to the requirements of Federal and State securities laws and regulations and which have been filed, where necessary, with the appropriate regulatory authorities. You will furnish us with copies of all such materials prior to their use and no such material shall be published if we shall reasonably and promptly object. You shall comply with the applicable Federal and State laws and regulations where our Shares are offered for sale and conduct your affairs with us and with dealers, brokers or investors in accordance with the Conduct Rules of the National Association of Securities Dealers, Inc. 6 12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered to us for redemption or repurchase by us within seven business days after your acceptance of the original purchase order for such Shares, you will immediately refund to us the full sales commission (net of allowances to dealers or brokers) allowed to you on the original sale, and will promptly, upon receipt thereof, pay to us any refunds from dealers or brokers of the balance of sales commissions reallowed by you. We shall notify you of such tender for redemption within 10 days of the day on which notice of such tender for redemption is received by us. 13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall not be deemed to be exclusive, and you may render similar services and act as an underwriter, distributor or dealer for other investment companies in the offering of their shares. 14. TERM OF AGREEMENT. This Agreement shall become effective on the date of its execution, and shall remain in effect for a period of two (2) years. The Agreement is renewable annually thereafter, with respect to the Fund or, if the Fund has more than one series, with respect to each series, for successive periods not to exceed one year (i) by a vote of (a) a majority of the outstanding voting securities of the Fund or, if the Fund has more than one series, of each series, or (b) by a vote of the Board, AND (ii) by a vote of a majority of the members of the Board who are not parties to the Agreement or interested persons of any parties to the Agreement (other than as members of the Board), cast in person at a meeting called for the purpose of voting on the Agreement. This Agreement may at any time be terminated by the Fund or by any series without the payment of any penalty, (i) either by vote of the Board or by vote of a majority of the outstanding voting securities of the Fund or any series on 90 days' written notice to you; or (ii) by you on 90 days' written notice to the Fund; and shall immediately terminate with respect to the Fund and each series in the event of its assignment. 15. SUSPENSION OF SALES. We reserve the right at all times to suspend or limit the public offering of Shares upon two days' written notice to you. 16. MISCELLANEOUS. This Agreement shall be subject to the laws of the State of California and shall be interpreted and construed to further promote the operation of the Fund as an open-end investment company. This Agreement shall supersede all Distribution Agreements and Amendments previously in effect 7 between the parties. As used herein, the terms "net asset value," "offering price," "investment company," "open-end investment company," "principal underwriter," "interested person," "Parent," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings set forth in the 1933 Act or the 1940 Act and the Rules and Regulations thereunder. The term "assignment" shall have the meanings set forth only in the 1940 Act and the Rules and Regulations thereunder. Nothing herein shall be deemed to protect you against any liability to us or to our securities holders to which you would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of your duties hereunder, or by reason of your reckless disregard of your obligations and duties hereunder. 8 If the foregoing meets with your approval, please acknowledge your acceptance by signing the enclosed copy, whereupon this will become a binding agreement as of the date set forth below. Very truly yours, FRANKLIN GROWTH AND INCOME FUND By: /s/ David P. Goss ____________________________ David P. Goss Vice President & Assistant Secretary Accepted: Franklin/Templeton Distributors, Inc. By: /s/ Harmon E. Burns _____________________________ Harmon E. Burns Executive Vice President DATED: August 10, 2000 EX-12 10 0010.txt COMPUTATION OF RATIOS OF EARNINGS
EXHIBIT 12 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES FOR THE YEARS ENDED SEPTEMBER 30 (Dollars in thousands) 2000 1999 1998 - -------------------------------------------------------------------------------- Income before taxes $739,591 $574,084 $676,284 Add fixed charges: Interest expense 25,322 30,611 40,349 Interest factor on rent 19,170 12,953 12,416 - -------------------------------------------------------------------------------- Total fixed charges $ 44,492 43,564 52,765 Earnings before fixed charges and taxes on income $784,083 $617,648 $729,049 - -------------------------------------------------------------------------------- Ratio of earnings to fixed charges 17.6 14.2 13.8
EX-21 11 0011.txt LIST OF PRINCIPAL SUBSIDIARIES EXHIBIT 21 FRANKLIN RESOURCES, INC. LIST OF PRINCIPAL SUBSIDIARIES* FOR FISCAL YEAR ENDED SEPTEMBER 30, 2000 STATE OR NATION OF NAME INCORPORATION - -------------------------------------------------------------------------------- CLOSED JOINT-STOCK COMPANY TEMPLETON RUSSIA CONTINENTAL PROPERTY MANAGEMENT COMPANY CALIFORNIA FCC RECEIVABLES CORP. DELAWARE FRANKLIN ADVISERS, INC. CALIFORNIA FRANKLIN ADVISORY SERVICES, LLC DELAWARE FRANKLIN AGENCY, INC. CALIFORNIA FRANKLIN CAPITAL CORPORATION UTAH FRANKLIN INVESTMENT ADVISORY SERVICES, INC. DELAWARE FRANKLIN MANAGEMENT, INC. CALIFORNIA FRANKLIN MUTUAL ADVISERS, LLC DELAWARE FRANKLIN PROPERTIES, INC. CALIFORNIA FRANKLIN RECEIVABLES , LLC DELAWARE FRANKLIN TEMPLETON NIB ASSET MANAGEMENT (PTY) LTD SOUTH AFRICA FRANKLIN TEMPLETON BANK & TRUST, F.S.B. UNITED STATES FRANKLIN TEMPLETON COMPANIES, INC. DELAWARE FRANKLIN TEMPLETON FRANCE S.A. FRANCE FRANKLIN TEMPLETON HOLDING LIMITED MAURITIUS FRANKLIN TEMPLETON INVESTMENT MANAGEMENT LIMITED UNITED KINGDOM FRANKLIN TEMPLETON INVESTMENT (ASIA) LIMITED HONG KONG FRANKLIN TEMPLETON INVESTMENT SERVICES GMBH GERMANY FRANKLIN TEMPLETON INVESTMENTS CORP. CANADA FRANKLIN TEMPLETON INVESTMENTS JAPAN LIMITED JAPAN FRANKLIN TEMPLETON INVESTMENT TRUST MANAGEMENT COMPANY, LTD. SOUTH KOREA FRANKLIN TEMPLETON GLOBAL INVESTORS LIMITED UNITED KINGDOM FRANKLIN TEMPLETON MANAGEMENT COMPANY LIMITED SOUTH AFRICA FRANKLIN TEMPLETON MANAGEMENT LUXEMBOURG SA LUXEMBOURG FRANKLIN TEMPLETON SERVICES, INC. DELAWARE FRANKLIN TEMPLETON SERVICES LIMITED IRELAND FRANKLIN/TEMPLETON DISTRIBUTORS, INC. NEW YORK FRANKLIN/TEMPLETON INVESTOR SERVICES, INC. CALIFORNIA FRANKLIN/TEMPLETON TRAVEL, INC. CALIFORNIA FS CAPITAL GROUP CALIFORNIA FS PROPERTIES, INC. CALIFORNIA FTTRUST COMPANY FLORIDA HAPPY DRAGON HOLDINGS LTD. BRITISH VIRGIN ISLANDS PROPERTY RESOURCES, INC. CALIFORNIA T.G.H. HOLDINGS LTD. BAHAMAS TEMPLETON ASSET MANAGEMENT LTD. SINGAPORE TEMPLETON ASSET MANAGEMENT (INDIA) PVT. LTD. INDIA TEMPLETON ASIAN DIRECT INVESTMENTS LIMITED HONG KONG TEMPLETON CHINA RESEARCH LIMITED HONG KONG TEMPLETON DO BRASIL LTDA. BRAZIL TEMPLETON FRANKLIN GLOBAL DISTRIBUTORS LTD. BERMUDA TEMPLETON FRANKLIN INVESTMENT SERVICES (ASIA) LIMITED HONG KONG TEMPLETON/FRANKLIN INVESTMENT SERVICES, INC. DELAWARE TEMPLETON FUNDS ANNUITY COMPANY FLORIDA TEMPLETON GLOBAL ADVISORS LIMITED BAHAMAS TEMPLETON GLOBAL STRATEGIC SERVICES S.A. LUXEMBOURG TEMPLETON HERITAGE LIMITED CANADA TEMPLETON INTERNATIONAL, INC. DELAWARE TEMPLETON INVESTMENT COUNSEL, INC. FLORIDA TEMPLETON INVESTMENT HOLDINGS (CYPRUS) LIMITED CYPRUS TEMPLETON INVESTMENT MANAGEMENT (AUSTRALIA) LIMITED AUSTRALIA TEMPLETON ITALIA SIM SPA ITALY TEMPLETON RESEARCH AND MANAGEMENT VENEZUELA, C.A. VENEZUELA TEMPLETON RESEARCH POLAND SP.Z.O.O. POLAND TEMPLETON (SWITZERLAND) LTD. SWITZERLAND TEMPLETON TRUST SERVICES PVT. LTD. INDIA TEMPLETON UNIT TRUST MANAGERS LIMITED UNITED KINGDOM TEMPLETON WORLDWIDE, INC. DELAWARE *ALL SUBSIDIARIES CURRENTLY DO BUSINESS PRINCIPALLY UNDER THEIR CORPORATE NAME EXCEPT FOR TEMPLETON INVESTMENT COUNSEL, INC. WHICH ALSO OPERATES UNDER THE NAME "TEMPLETON GLOBAL BOND MANAGERS"; AND TEMPLETON/FRANKLIN INVESTMENT SERVICES, INC. WHICH ALSO OPERATES UNDER THE ASSUMED NAME, "TEMPLETON PORTFOLIO ADVISORY." SOME TEMPLETON SUBSIDIARIES ALSO ON OCCASION USE THE NAME TEMPLETON WORLDWIDE. A MORE DETAILED DESCRIPTION OF SOME OF OUR MORE IMPORTANT SUBSIDIARIES IS SET FORTH BELOW. FRANKLIN ADVISERS, INC. Franklin Advisers, Inc. ("FAV") is a California corporation formed in 1985 and is based in San Mateo, California. FAV is registered as an investment adviser with the SEC under the Investment Advisers Act of 1940 (the "Advisers Act") and provides investment advisory, portfolio management and administrative services under management agreements with most of the Franklin Templeton group of funds. FRANKLIN ADVISORY SERVICES, LLC Franklin Advisory Services, LLC ("FASI") is a Delaware limited liability company formed in 1999 and is based in Fort Lee, New Jersey. FASI is registered as an investment adviser with the SEC under the Advisers Act. FASI provides investment advisory and portfolio management services under management agreements with certain of the Franklin Templeton group of funds and also provides sub-advisory services to non-affiliated entities. FRANKLIN AGENCY, INC. Franklin Agency, Inc. ("FAI") is a California corporation organized in 1971, which provides variable insurance product development for the Franklin Templeton group of funds. FRANKLIN CAPITAL CORPORATION Franklin Capital Corporation ("FCC") is a Utah corporation formed in 1993 to expand Franklin Templeton Investments' lending activities related to primarily to the purchase, securitization and servicing of retail installment sales contracts ("automobile contracts") originated by independent automobile dealerships. FCC conducts its business primarily in the Western region of the United States. FRANKLIN INVESTMENT ADVISORY SERVICES, INC. Franklin Investment Advisory Services, Inc. ("FIAS") is a Delaware corporation formed in 1996 and is based in Norwalk, Connecticut. FIAS is registered as an investment adviser with the SEC under the Advisers Act and provides investment management services to an investment company. FRANKLIN MANAGEMENT, INC. Franklin Management, Inc. ("FMI"), a California corporation organized in 1978, is registered as an investment adviser with the SEC under the Advisers Act and provides investment management services to private accounts. FMI also provides advisory services to third party broker/dealer wrap fee programs. FRANKLIN MUTUAL ADVISERS, LLC Franklin Mutual Advisers, LLC ("FMAI") is a Delaware limited liability company formed in 1999 as a successor in interest to Franklin Mutual Advisers, Inc. and is based in Short Hills, New Jersey. FMAI is registered as an investment adviser with the SEC under the Advisers Act. FMAI provides investment management and portfolio management services under various agreements with Mutual Series. FMAI principally serves as the investment manager to the Mutual Series funds. FRANKLIN PROPERTIES, INC. Franklin Properties, Inc. ("FPI") is a real estate investment management company organized in California in 1988, which manages a publicly-traded real estate investment trust. Franklin Select Realty Trust, Inc. is managed by FPI under an advisory agreement. Property Resources, Inc. ("PRI"), a California corporation organized in 1967 and acquired by Franklin Templeton Investments in December 1985, serves as general partner, property manager or adviser for certain other real estate investment programs. FRANKLIN TEMPLETON BANK & TRUST, F.S.B. Franklin Templeton Bank & Trust (the "Bank"), a wholly-owned subsidiary of Franklin Resources, Inc., is chartered by the Office of Thrift Supervision as a federal savings bank. The Bank, formerly known as "Franklin Bank", was formed in 1974 and was acquired by Franklin Templeton Investments in December 1985. The Bank, with total assets of $117.9 Million as of September 30, 2000, provides consumer banking products and services such as credit cards, auto loans and deposit accounts. The Bank converted its charter from a California state chartered bank to a federal savings bank in May 2000. Immediately following this conversion, Franklin Templeton Trust Company, a California chartered trust company organized in 1983, merged into the Bank and continues to carry out activities as a division of the Bank. These activities include, primarily, serving as custodian for Individual Retirement Accounts and business retirement plans whose assets are invested in the Franklin Templeton funds, and as trustee or fiduciary of private trusts and retirement plans. FRANKLIN TEMPLETON COMPANIES, INC. Franklin Templeton Companies, Inc. ("FTCS") is a Delaware corporation formed in 1998. Based in San Mateo, California, FTCS is the principal contracting and corporate services subsidiary of Franklin Templeton Investments through which property management, human resources, information systems and technology, legal, accounting, treasury, payroll, employment, purchasing, contracting, tax and similar functions are conducted. FTCS does not manage any assets. FRANKLIN TEMPLETON INVESTMENT MANAGEMENT LIMITED Franklin Templeton Investment Management Limited ("FTIML"), is a corporation organized in 1985 under the laws of England and is based in Edinburgh, Scotland. FTIML is registered as the foreign equivalent of an investment adviser with the Investment Management Regulatory Organization and the Financial Services Authority of the United Kingdom and is also registered with the SEC under the Advisers Act. FTIML provides both equity and fixed-income investment advisory services and serves as an investment adviser to various Franklin Templeton Investments investment companies registered in foreign jurisdictions. FRANKLIN TEMPLETON INVESTMENT TRUST MANAGEMENT COMPANY, LTD. Franklin Templeton Investment Trust Management Company, Ltd. ("FTITML") is a corporation organized under the laws of, and is based in South Korea. FTITML provides investment trust management services in South Korea. FRANKLIN TEMPLETON INVESTMENTS CORP. Franklin Templeton Investments Corp. ("FTIC") is an Ontario corporation formed in November 1987. FTIC is registered in the province of Ontario, Canada with the Ontario Securities Commission in the categories of Investment Counsel, Portfolio Manager and Mutual Fund Dealer. FTIC provides investment advisory, portfolio management, distribution and administrative services for Canadian mutual funds, commingled trusts and private and institutional accounts under various management agreements. FRANKLIN TEMPLETON INVESTMENTS (ASIA) LIMITED Franklin Templeton Investments (Asia) Limited ("FTILHK") is a corporation organized under the laws of, and is based in Hong Kong. FTILHK was formed in late 1993 to distribute and service Franklin Templeton Investments' financial products in Asia. FRANKLIN TEMPLETON SERVICES, INC. Franklin Templeton Services, Inc. ("FTSI") is a Delaware corporation formed in 1996 and is based in San Mateo, California. FTSI provides business management services, including fund accounting, securities pricing, trading, compliance and other related administrative activities under various management agreements to most of the U.S. Franklin Templeton funds. FRANKLIN/TEMPLETON DISTRIBUTORS, INC. Franklin/Templeton Distributors, Inc. ("FTDI") is a New York corporation formed in 1947. FTDI is registered with the SEC as a broker/dealer and is a member of the National Association of Securities Dealers, Inc. (the "NASD"). As the principal underwriter of the shares of most of the Franklin Templeton funds, FTDI earns underwriting commissions on the distribution of shares of the funds. FRANKLIN/TEMPLETON INVESTOR SERVICES, INC. Franklin/Templeton Investor Services, Inc. ("FTISI"), is a California corporation formed in 1981. FTISI is registered with the SEC as a transfer agent under the '34 Act. FTISI provides shareholder record keeping services and acts as transfer agent and dividend-paying agent for the Franklin Templeton group of funds. FTTRUST COMPANY FTTrust Company ("FTTC"), a Florida corporation formed in 1985, is a trust company licensed by the Florida Department of Banking and Finance. FTTC serves as trustee of commingled trusts for qualified retirement plans. TEMPLETON ASSET MANAGEMENT LTD. Templeton Asset Management Ltd. ("TAML") is a corporation organized under the laws of, and is based in, Singapore. TAML is registered as an investment adviser in Singapore with the Monetary Authority of Singapore, in Hong Kong with the Securities and Futures Commission and is also registered with the SEC under the Advisers Act. TAML provides investment advisory and related services to certain Templeton funds and portfolios. TAML is principally an investment adviser to emerging market equity portfolios. TEMPLETON FUNDS ANNUITY COMPANY Templeton Funds Annuity Company ("TFAC") is a Florida corporation formed in 1984, which offers variable annuity and variable life insurance products. TFAC is principally regulated by the Florida Department of Insurance and Florida's Treasurer. TEMPLETON/FRANKLIN INVESTMENT SERVICES, INC. Templeton/Franklin Investment Services, Inc. ("TFIS") is a Delaware corporation formed in 1987, and is registered with the SEC as a broker/dealer and an investment adviser and is a member of the NASD. Its principal business activities include: (i) through its Templeton Portfolio Advisory division, serving as a sponsor of a comprehensive fee (wrap account) program, in which it provides investment advisory and broker/dealer services, as well as serving as investment adviser in other broker/dealer wrap account programs and directly as an adviser for separate accounts; and (ii) serving as a direct marketing broker/dealer for institutional investors in the Franklin Templeton group of funds. TEMPLETON GLOBAL ADVISORS LIMITED Templeton Global Advisors Limited ("TGAL") is a Bahamian corporation located in Nassau, Bahamas. TGAL is registered as an investment adviser with the SEC under the Advisers Act. TGAL provides investment advisory, portfolio, management, and administrative services under various agreements with certain of the Templeton funds and other sponsored investment products. TEMPLETON INTERNATIONAL, INC. Templeton International, Inc. ("TII") is a Delaware corporation organized in 1992 and acts as the holding company for a number of the Templeton international subsidiaries. This organization is responsible for the development and operation of businesses outside of North America. TEMPLETON INVESTMENT COUNSEL, INC. Templeton Investment Counsel, Inc. ("TICI") is a Florida corporation formed in 1979. Based in Ft. Lauderdale, Florida, TICI is the principal investment adviser to managed and institutional accounts. In addition, it provides investment advisory portfolio management services to certain of the Templeton funds and subadvisory services to certain of the Franklin funds. TEMPLETON WORLDWIDE, INC. Templeton Worldwide, Inc. ("TWW") is a Delaware corporation organized in July 1992 as the parent holding company for all of the Templeton companies. EX-23 12 0012.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference of our report dated October 25, 2000, on our audits of the consolidated financial statements of Franklin Resources, Inc. and subsidiaries as of September 30, 2000 and 1999 and for the years ended September 30, 2000, 1999, and 1998, which report is included in this Annual Report on Form 10-K, in the following registration statements of Franklin Resources, Inc. . Form S-3 dated October 9, 1996 for the issuance of medium term notes, . Form S-3 filed September 30, 1994 for the registration of shares of common stock, . Forms S-8 for the Franklin Resources, Inc. 1998 Universal Stock Incentive Plan, . Form S-8 for Franklin Resources, Inc. United Kingdom Stock Option Plan, . Form S-8 for the Canada Stock Option Plan, as amended, . Form S-8 for the 1998 Employee Stock Investment Plan, PricewaterhouseCoopers LLP San Francisco, California December 5, 2000 EX-27 13 0013.txt
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR THE YEAR ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS SEP-30-2000 SEP-30-2000 734,071 635,819 268,387 0 0 1,656,294 444,694 0 4,042,443 489,559 0 0 0 24,373 2,941,120 4,042,443 0 2,340,140 0 1,676,697 0 0 13,960 739,591 177,502 0 0 0 0 562,089 2.28 2.28
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